10-Q 1 h87144e10-q.txt ROWAN COMPANIES, INC. - 3/31/01 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_____TO_____ ROWAN COMPANIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Delaware 1-5491 75-0759420 ------------------------------- --------------- ------------------- (State or other jurisdiction of Commission File (I.R.S. Employer incorporation or organization) Number Identification No.) 2800 Post Oak Boulevard, Suite 5450 Houston, Texas 77056-6127 --------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (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 X No ----- ----- The number of shares of common stock, $.125 par value, outstanding at April 30, 2001 was 94,341,204. 2 ROWAN COMPANIES, INC. INDEX
Page No. -------- PART I. Financial Information: Item 1. Financial Statements: Consolidated Balance Sheet -- March 31, 2001 and December 31, 2000........................2 Consolidated Statement of Income -- Three Months Ended March 31, 2001 and 2000....................................................4 Consolidated Statement of Cash Flows -- Three Months Ended March 31, 2001 and 2000....................................................5 Notes to Consolidated Financial Statements..................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................................8 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................11 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders........................................12 Item 6. Exhibits and Reports on Form 8-K...........................12
3 PART I. FINANCIAL INFORMATION Item 1. Financial statements ROWAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31, 2001 2000 ---------- ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents ....................... $ 211,685 $ 192,828 Receivables - trade and other ................... 145,368 154,541 Inventories - at cost: Raw materials and supplies .................... 108,658 103,352 Work-in-progress .............................. 18,107 22,456 Finished goods ................................ 3,668 3,084 Prepaid expenses ................................ 5,973 3,397 Deferred tax assets - net ....................... 2,516 3,699 ---------- ---------- Total current assets ................ 495,975 483,357 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - at cost: Drilling equipment .............................. 1,571,514 1,553,849 Aircraft and related equipment .................. 239,367 236,760 Manufacturing plant and equipment ............... 95,043 94,077 Construction in progress ........................ 189,901 157,314 Other property and equipment .................... 125,851 121,997 ---------- ---------- Total ............................... 2,221,676 2,163,997 Less accumulated depreciation and amortization .. 996,134 981,217 ---------- ---------- Property, plant and equipment - net 1,225,542 1,182,780 ---------- ---------- OTHER ASSETS AND DEFERRED CHARGES ................. 12,410 12,289 ---------- ---------- TOTAL ............................... $1,733,927 $1,678,426 ========== ==========
See Notes to Consolidated Financial Statements. -2- 4
March 31, December 31, 2001 2000 ---------- ------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt ...................................... $ 28,008 $ 28,008 Accounts payable - trade .................................................. 29,941 24,769 Other current liabilities ................................................. 52,819 51,577 ---------- ---------- Total current liabilities ......................................... 110,768 104,354 ---------- ---------- LONG-TERM DEBT - less current maturities ...................................... 381,323 372,212 ---------- ---------- OTHER LIABILITIES ............................................................. 53,943 57,713 ---------- ---------- DEFERRED INCOME TAXES - net ................................................... 100,988 91,390 ---------- ---------- STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value: Authorized 5,000,000 shares issuable in series: Series III Preferred Stock, authorized 10,300 shares, none outstanding Series A Preferred Stock, authorized 4,800 shares, none outstanding Series B Preferred Stock, authorized 4,800 shares, none outstanding Series C Preferred Stock, authorized 9,606 shares, none outstanding Series A Junior Preferred Stock, authorized 1,500,000 shares, none issued Common stock, $.125 par value: Authorized 150,000,000 shares; issued 94,465,729 shares at March 31, 2001 and 94,384,704 shares at December 31, 2000 ............... 11,808 11,798 Additional paid-in capital ................................................ 628,731 626,309 Retained earnings ......................................................... 449,474 417,758 Less cost of 150,000 treasury shares ...................................... 3,108 3,108 ---------- ---------- Total stockholders' equity ........................................ 1,086,905 1,052,757 ---------- ---------- TOTAL ............................................................. $1,733,927 $1,678,426 ========== ==========
See Notes to Consolidated Financial Statements. -3- 5 ROWAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For The Three Months Ended March 31, ------------------------ 2001 2000 --------- --------- (Unaudited) REVENUES: Drilling services ...................... $ 140,466 $ 81,924 Manufacturing sales and services ....... 26,615 23,929 Aviation services ...................... 26,433 21,877 --------- --------- Total .......................... 193,514 127,730 --------- --------- COSTS AND EXPENSES: Drilling services ...................... 70,534 55,765 Manufacturing sales and services ....... 25,348 20,570 Aviation services ...................... 24,516 23,576 Depreciation and amortization .......... 16,194 12,766 General and administrative ............. 6,389 4,848 --------- --------- Total .......................... 142,981 117,525 --------- --------- INCOME FROM OPERATIONS ..................... 50,533 10,205 --------- --------- OTHER INCOME (EXPENSE): Interest expense ....................... (6,688) (6,520) Less interest capitalized .............. 2,631 4,178 Interest income ........................ 2,986 1,811 Other - net ............................ 95 66 --------- --------- Other income (expense) - net ... (976) (465) --------- --------- INCOME BEFORE INCOME TAXES ................. 49,557 9,740 Provision for income taxes ............. 17,841 3,636 --------- --------- NET INCOME ................................. $ 31,716 $ 6,104 ========= ========= EARNINGS PER SHARE OF COMMON STOCK (Note 5): Basic .................................. $ .34 $ .07 ========= ========= Diluted ................................ $ .33 $ .07 ========= =========
See Notes to Consolidated Financial Statements. -4- 6 ROWAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
For The Three Months Ended March 31, ------------------------ 2001 2000 --------- --------- (Unaudited) CASH PROVIDED BY (USED IN): Operations: Net income ............................................................... $ 31,716 $ 6,104 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization ......................................... 16,194 12,766 Deferred income taxes ................................................. 10,781 3,199 Compensation expense .................................................. 1,811 1,507 Provision for pension and postretirement benefits ..................... 752 2,251 Gain on disposals of property, plant and equipment .................... (1,050) (613) Other - net ........................................................... (489) Changes in current assets and liabilities: Receivables- trade and other .......................................... 9,173 6,745 Inventories ........................................................... (1,541) 12,784 Other current assets .................................................. (2,576) 751 Current liabilities ................................................... 2,398 (17,052) Net changes in other noncurrent assets and liabilities ................... (794) (127) --------- --------- Net cash provided by operations ............................................. 66,864 27,826 --------- --------- Investing activities: Property, plant and equipment additions .................................. (59,570) (72,706) Proceeds from disposals of property, plant and equipment ................ 1,831 840 Purchase of pump companies, net of cash acquired ......................... (7,245) --------- --------- Net cash used in investing activities ....................................... (57,739) (79,111) --------- --------- Financing activities: Proceeds from borrowings ................................................ 23,615 30,321 Repayments of borrowings ................................................. (14,504) (116,378) Proceeds from stock option and convertible debenture plans ............... 621 1,014 Proceeds from common stock offering, net of issue costs .................. 246,760 --------- --------- Net cash provided by financing activities ................................... 9,732 161,717 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 18,857 110,432 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 192,828 87,055 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 211,685 $ 197,487 ========= =========
See Notes to Consolidated Financial Statements. -5- 7 ROWAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements of Rowan included in this Form 10-Q have been prepared without audit in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission. Certain information and notes have been condensed or omitted as permitted by those rules and regulations. We believe that the disclosures included herein are adequate, but suggest that you read these consolidated financial statements in conjunction with the financial statements and related notes included in our 2000 Annual Report to Stockholders,which are incorporated by reference in our Form 10-K for the year ended December 31, 2000. 2. We believe the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly Rowan's financial position as of March 31, 2001 and December 31, 2000, and the results of its operations for the three months ended March 31, 2001 and 2000 and its cash flows for the three months ended March 31, 2001 and 2000. 3. Rowan's results of operations and cash flows for the three months ended March 31, 2001 are not necessarily indicative of results to be expected for the full year. 4. Rowan has three principal operating segments: contract drilling of oil and gas wells, both onshore and offshore ("Drilling"), helicopter and fixed-wing aircraft services ("Aviation") and the manufacture and sale of heavy equipment for the mining, timber and transportation industries, alloy steel and steel plate and drilling equipment ("Manufacturing"). The following table presents certain financial information of Rowan by operating segment as of March 31, 2001 and 2000 and for the three month periods then ended (in thousands).
2001 Drilling Manufacturing Aviation Consolidated --------------------- --------------- -------------- --------------- ----------------- Total Assets $ 1,388,870 $ 202,633 $ 142,424 $ 1,733,927 Revenues 140,466 26,615 26,433 193,514 Operating Profit (Loss)(1) 59,127 (649) (1,556) 56,922 2000 Drilling Manufacturing Aviation Consolidated --------------------- --------------- -------------- --------------- ----------------- Total Assets $ 1,200,781 $ 183,697 $ 131,919 $ 1,516,397 Revenues 81,924 23,929 21,877 127,730 Operating Profit (Loss)(1) 18,459 1,661 (5,067) 15,053
(1) Income (loss) from operations before deducting general and administrative expenses. Excluded from the preceding table are the effects of transactions between segments. During the three months ended March 31, 2001 and 2000, Rowan's manufacturing division provided approximately $19 million and $34 million, respectively, of products and services to its drilling division and Rowan's aviation division provided approximately $250,000 and $364,000, respectively, of flight services to its drilling division. -6- 8 5. Computation of basic and diluted earnings per share is as follows (in thousands, except per share amounts):
For The Three Months Ended March 31, -------------------- 2001 2000 -------- -------- Weighted average shares of common stock outstanding ............................. 94,282 87,589 Stock options and related (treasury stock method) 927 927 Shares issuable from assumed conversion of floating rate subordinated debentures ...... 1,070 1,053 ------- ------- Weighted average shares for diluted earnings per share calculation ................ 96,279 89,569 ======= ======= Net income for basic and diluted calculation .... $31,716 $ 6,104 ======= ======= Earnings per share: Basic ......................................... $ .34 $ .07 ======= ======= Diluted ....................................... $ .33 $ .07 ======= =======
6. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities", as amended by Statements 137 and 138, generally requires recognition of derivative financial instruments as assets or liabilities, measured at fair value. Rowan's adoption of Statement No. 133, as amended, effective January 1, 2001, did not materially impact our financial position or results of operations. -7- 9 ROWAN COMPANIES, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 Rowan achieved net income of $31.7 million in the first quarter of 2001 compared to $6.1 million in the same period of 2000. The improved results were attained largely through an increase in drilling activity and day rates between periods, primarily in the Gulf of Mexico, in addition to an enhanced contribution from our aviation division. Improving supply and demand fundamentals for oil and natural gas have yielded a favorable price environment for these commodities for most of the past 18 months, driving an increase in demand for drilling services. A comparison of the revenues and operating profit (loss) from drilling, manufacturing, aviation and consolidated operations for the first quarters of 2001 and 2000, respectively, is reflected below (dollars in thousands):
Drilling Manufacturing Aviation Consolidated ------------------ ------------------- ------------------- --------------------- 2001 2000 2001 2000 2001 2000 2001 2000 -------- ------- ------- ------- ------- ------- -------- -------- Revenues $140,466 $81,924 $26,615 $23,929 $26,433 $21,877 $193,514 $127,730 Percent of Consolidated Revenues 72% 64% 14% 19% 14% 17% 100% 100% Operating Profit (Loss)(1) $ 59,127 $18,459 $ (649) $ 1,661 $(1,556) $(5,067) $ 56,922 $ 15,053
----------------------------- (1) Income (loss) from operations before deducting general and administrative expenses. As reflected above, Rowan's consolidated operating results increased by $41.9 million or 278% when comparing the first quarters of 2001 and 2000. Drilling revenues increased by $58.5 million or 71% as our offshore fleet of 22 jack-ups and one semi-submersible was 97% utilized during the first quarter of 2001, compared to 86% in the first quarter of 2000, and achieved a 37% increase in average day rates between periods. Rowan's fleet of 14 land rigs was 76% utilized during the first quarter of 2001, compared to 38% in the first quarter of 2000, and achieved a 37% increase in average day rates between periods. Drilling expenses increased by $14.8 million, primarily due to the expansion of our AHTS (anchor-handling, towing and supply) vessel operations, the costs of which were more than offset by outside revenues, increased land rig activity and the addition to the offshore fleet, in late June 2000, of Rowan Gorilla VI. The $2.3 million decrease shown above in Rowan's manufacturing results between periods reflects decreased contributions from each of the division's equipment, steel, marine and pump groups. Manufacturing operations exclude approximately $19.3 million of products and services provided to the drilling division during the first quarter of 2001, most of which was attributable to construction progress on Rowan Gorilla VII, compared to $34.2 million in the same period of 2000, which included Gorillas VI and VII. The division's external backlog was $13.7 million at March 31, 2001. -8- 10 Rowan's aviation operating results in the first quarter of 2001 were significantly improved over the prior-year quarter, due largely to a 29% increase in energy-related flying, primarily in the Gulf of Mexico, although both periods reflect the normal seasonal slowdown in helicopter flying activity in Alaska. Perceptible trends in the offshore drilling markets in which we are currently operating and the number of Rowan-operated rigs in each of those markets are as follows:
AREA RIGS PERCEPTIBLE INDUSTRY TRENDS --------------------------- ------------- ------------------------------------------------------------ Gulf of Mexico 22 Moderately improving exploration and development activity Eastern Canada 1 Moderately improving demand for harsh environment equipment
Demand for jack-ups in the North Sea has increased, but we believe present day rates are inadequate to justify moving rigs from the more favorable Gulf of Mexico market. We are responding to bid requests for our Super Gorilla Class rigs for work commencing in late 2001 and early 2002 and remain confident in the long-term viability of the North Sea jack-up drilling market. Perceptible trends in the principal aviation markets in which we are currently operating and the number of Rowan-operated aircraft based in each of those markets are as follows:
AREA AIRCRAFT PERCEPTIBLE INDUSTRY TRENDS ------------------------ ------------------- ---------------------------------------------------- Alaska 68 Normal seasonal improvement Gulf of Mexico 45 Moderately improving levels of flight support activity
The drilling and aviation markets in which Rowan competes frequently experience significant changes in supply and demand. Offshore drilling utilization and day rates are primarily a function of the demand for drilling services, as measured by the level of exploration and development expenditures, and the supply of capable drilling equipment. These expenditures, in turn, are affected by many factors such as oil and natural gas reserves, political and regulatory policies, seasonal weather patterns, contractual requirements under leases or concessions, and, probably most influential, oil and natural gas prices. Rowan's aviation operations are also affected by such factors, as flying in support of offshore energy operations remains a major source of business and Alaska operations are hampered by weather each winter. The volatile nature of such factors prevents us from being able to accurately predict whether existing market conditions or the perceptible market trends reflected in the preceding tables will continue. In response to fluctuating market conditions, we can relocate our drilling rigs and aircraft from one geographic area to another, but only when we believe such moves are economically justified. At current levels, Rowan's drilling operations are profitable, but there can be no assurance that existing and anticipated market conditions will be sustained. Though considerably less volatile than its drilling and aviation operations, Rowan's manufacturing operations have been adversely impacted by a prolonged period of unfavorable world commodity prices; in particular, prices for copper, iron ore, coal, gold and diamonds. Rowan's external manufacturing backlog remains at a depressed level. As a result, we cannot accurately predict whether or not our manufacturing operations will return to profitability during the remainder of 2001. -9- 11 LIQUIDITY AND CAPITAL RESOURCES A comparison of key balance sheet figures and ratios as of March 31, 2001 and December 31, 2000 is as follows (dollars in thousands):
March 31, December 31, 2001 2000 --------- ------------ Cash and cash equivalents $ 211,685 $ 192,828 Current assets $ 495,975 $ 483,357 Current liabilities $ 110,768 $ 104,354 Current ratio 4.48 4.63 Long-term debt $ 381,323 $ 372,212 Stockholders' equity $1,086,905 $1,052,757 Long-term debt/total capitalization .26 .26
Reflected in the comparison above are the effects in the first quarter of 2001 of net cash provided by operations of $66.9 million, proceeds from borrowings of $23.6 million, capital expenditures of $59.6 million and debt payments of $14.5 million. Capital expenditures during the first quarter were primarily related to the construction of Rowan Gorilla VII and Rowan Gorilla VIII and the reactivation of our land drilling division. The construction of Rowan Gorilla VII, a Super Gorilla Class jack-up like Rowan Gorilla V and Rowan Gorilla VI featuring a combination drilling and production capability, continues on schedule at Rowan's Vicksburg, Mississippi shipyard and should be completed by year-end 2001. We are financing up to $185 million of the cost of Gorilla VII through a 12-year bank loan guaranteed by the U. S. Department of Transportation's Maritime Administration ("MARAD") under its Title XI Program. The notes require semiannual payments in each April and October and Gorilla VII secures the government guarantee. At March 31, 2001, we had drawn down about $129 million under this facility, which bore interest at floating rates averaging approximately 5.6%. Rowan Gorilla VIII is an enhanced version of our Super Gorilla Class jack-up and is designated as a Super Gorilla XL. Gorilla VIII will be outfitted with 708 feet of leg, 134 feet more than Gorillas V, VI or VII, and have 30% larger spud cans enabling operation in the Gulf of Mexico in water depths up to 550 feet. Gorilla VIII will also be able to operate in water depths up to 400 feet in the hostile environments offshore eastern Canada and in the North Sea. Gorilla VIII is being constructed at Vicksburg, Mississippi with delivery expected during the third quarter of 2003. Rowan has secured Title XI government-guaranteed financing for up to $187 million of the cost of Gorilla VIII on terms and conditions similar to those in effect for Gorilla VII. Rowan estimates remaining 2001 capital expenditures will be between $160 million and $190 million, including approximately $100-125 million for Gorillas VII and VIII. We may also spend amounts to acquire additional aircraft as market conditions justify and to upgrade existing offshore rigs and manufacturing facilities. During March 2001, Rowan completed the refinancing of its $156.8 million of outstanding floating-rate Gorilla VI debt through the issuance of a 5.88% fixed-rate note maturing in 2012. The fixed-rate note is U. S. Government-guaranteed under MARAD's Title XI Program and Gorilla VI secures the government guarantee. -10- 12 Based upon current operating levels and the previously discussed market trends, we believe that 2001 operations, together with existing working capital and available financial resources, will generate sufficient cash flow to sustain planned capital expenditures and debt service requirements at least through the remainder of 2001. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", generally requires recognition of derivative financial instruments as assets or liabilities, measured at fair value. Statement No. 133, as amended by Statements No. 137 and 138, is effective for fiscal years beginning after June 15, 2000. Rowan's adoption of Statement No. 133, as amended, effective January 1, 2001, did not materially impact our financial position or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk Rowan believes that its exposure to risk of earnings loss due to changes in interest rates is not significant. This report contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements as to the expectations, beliefs and future expected financial performance of the Company that are based on current expectations and are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected by the Company. Among the factors that could cause actual results to differ materially are the following: oil, natural gas and other commodity prices; the level of offshore expenditures by energy companies; the general economy, including inflation; weather conditions in the Company's principal operating areas; and environmental and other laws and regulations. Other relevant factors have been disclosed in the Company's filings with the U. S. Securities and Exchange Commission. -11- 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders on April 27, 2001, stockholders elected the three nominees for Class I Director as set forth in Rowan's Proxy Statement relating to the meeting. With respect to such election, proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934 and there was no solicitation in opposition to such nominees. Of Rowan's 94,291,354 shares of record, 83,264,327 were voted at the meeting by proxy. The following numbers of votes were cast as to the Class I Director nominees: Hans M. Brinkhorst, 82,214,209 votes for and 1,050,118 votes withheld; William T. Fox III, 80,963,650 votes for and 2,300,677 votes withheld; and H. E. Lentz, 78,285,000 votes for and 4,979,327 votes withheld. Item 6. Exhibits and Reports on Form 8-K (a) The following is a list of Exhibits filed with this Form 10-Q: 3a Amendment dated April 27, 2001, to the Bylaws, as Amended 3b Bylaws, as Amended, as of April 27, 2001 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the first quarter of fiscal year 2001. -12- 14 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, INC. (Registrant) Date: May 14, 2001 /s/ E. E. Thiele -------------------------------------- E. E. Thiele Senior Vice President- Finance, Administration and Treasurer (Chief Financial Officer) Date: May 14, 2001 /s/ W. H. Wells -------------------------------------- W. H. Wells Controller (Chief Accounting Officer) -13- 15 EXHIBIT INDEX EXHIBIT DESCRIPTION ------- ----------- 3a Amendment dated April 27, 2001, to the Bylaws, as Amended 3b Bylaws, as Amended, as of April 27, 2001