Add
RDC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| RDC > SEC Filings for RDC > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
RESULTS OF OPERATIONS
The following table highlights Rowan's operating results for the first quarters
of 2009 and 2008 (dollars in millions):
Increase (decrease)
2009 2008 Amount %
Revenues:
Drilling $ 380.4 $ 340.4 $ 40.0 12 %
Manufacturing:
Drilling Products and Systems 71.1 91.1 (20.0 ) -22 %
Mining, Forestry and Steel Products 43.3 54.0 (10.7 ) -20 %
Total Manufacturing 114.4 145.1 (30.7 ) -21 %
Total revenues $ 494.8 $ 485.5 $ 9.3 2 %
Costs and expenses:
Drilling $ 193.3 $ 196.8 $ (3.5 ) -2 %
Manufacturing:
Drilling Products and Systems 65.1 89.4 (24.3 ) -27 %
Mining, Forestry and Steel Products 38.2 51.6 (13.4 ) -26 %
Total Manufacturing 103.3 141.0 (37.7 ) -27 %
Total costs and expenses $ 296.6 $ 337.8 $ (41.2 ) -12 %
Operating income:
Drilling $ 187.1 $ 143.6 $ 43.5 30 %
Manufacturing:
Drilling Products and Systems 6.0 1.7 4.3 253 %
Mining, Forestry and Steel Products 5.1 2.4 2.7 113 %
Total Manufacturing 11.1 4.1 7.0 171 %
Total operating income $ 198.2 $ 147.7 $ 50.5 34 %
Net income $ 131.7 $ 98.6 $ 33.1 34 %
|
As indicated in the preceding table, our consolidated operating income increased by $50.5 million or 34%, when comparing the first quarters of 2009 and 2008, on a $9.3 million or 2% increase in revenues and a $41.2 million or 12% reduction in costs. See further discussion under segments below.
Net income includes income tax expenses of $67.9 million (34%) and $51.8 million (35%) for the first quarters of 2009 and 2008, respectively.
Drilling operations
The following table highlights the performance of our Drilling segment for the first quarters of 2009 and 2008 (dollars in millions):
2009 2008
Amount % of Revenues Amount % of Revenues
Revenues $ 380.4 100 % $ 340.4 100 %
Operating costs (145.4 ) -38 % (156.5 ) -46 %
Depreciation expense (36.8 ) -10 % (29.2 ) -9 %
Selling, general and administrative expenses (15.8 ) -4 % (16.5 ) -5 %
Net gain on property disposals 4.7 1 % 5.4 2 %
Operating income $ 187.1 49 % $ 143.6 42 %
|
Our drilling operations generated a $40.0 million or 12% increase in revenues between periods. Our average offshore day rate was $173,600 during the first quarter of 2009, compared to $159,700 in the first quarter of 2008. Our offshore fleet was 93% utilized during the first quarter of 2009, compared to 91% in the first quarter of 2008, with much of the downtime in each period associated with rigs that were being prepared for long-term assignments. We realized 96 or 6% more revenue-producing days between periods primarily due to the addition of newbuild jack-ups Rowan-Mississippi and J.P. Bussell in November 2008, and foreign operations contributed 53% of the total revenues during the first quarter of 2009, down from 61% in the first quarter of 2008.
Our fleet of 31 land rigs was 74% utilized during the first quarter of 2009, compared to 89% in the first quarter of 2008. Revenue-producing days decreased by 303, or 13%, despite the net addition of two rigs between periods (three new rig additions less one rig sale). Our land fleet average day rate was $25,500 during the first quarter of 2009, compared to $23,200 in the first quarter of 2008.
Drilling expenses during the first quarter of 2009 decreased by $11.1 million, or 7%, from the first quarter of 2008 due primarily to lower labor and related fringe benefit costs, repair and maintenance and insurance costs. Drilling depreciation expense increased by $7.6 million or 26% between periods due primarily to the rig additions discussed above. Selling, general and administrative expenses incurred by our Drilling segment decreased by $0.7 million or 4% between periods due primarily to lower incentive-based compensation expense.
Our Drilling operations included a $4.7 million net gain on property and equipment disposals during the first quarter of 2009, compared to $5.4 million during the first quarter of 2008. Both amounts relate primarily to the sale of non-core facilities.
Thus, our Drilling operations yielded a $43.5 million or 30% improvement in operating income between periods.
Drilling Products and Systems
The following table highlights the performance of our Drilling Products and
Systems segment for the first quarters of 2009 and 2008 (dollars in millions):
2009 2008
Amount % of Revenues Amount % of Revenues
Revenues $ 71.1 100 % $ 91.1 100 %
Operating costs (58.8 ) -83 % (80.8 ) -89 %
Depreciation expense (2.2 ) -3 % (2.4 ) -3 %
Selling, general and administrative expenses (4.1 ) -6 % (6.2 ) -7 %
Operating income $ 6.0 8 % $ 1.7 2 %
|
Revenues from Drilling Products and Systems decreased by $20.0 million, or 22%, between periods due primarily to the following:
· A decrease of $16.5 million attributable to $26.1 million of revenues recognized on three offshore rig kit projects in 2009, as compared to $42.6 million recognized on six projects in 2008;
· A decrease of $14.1 million attributable to $5.6 million recognized on shipments of land rigs and component packages in 2009, down from $19.7 million in 2008;
· An increase of $9.0 million attributable to $14.9 million recognized on 18 mud pumps shipped in 2009, up from $5.9 million on nine pumps in 2008.
Revenues from Drilling Products and Systems include revenues recognized under the percentage-of-completion method of accounting as well as at the time of shipment. Our product revenues are therefore influenced by progress on long-term projects in process and the timing of shipments, and profitability is highly impacted by the mix of product sales. Original equipment sales, for example, have traditionally yielded lower margins than the related after-market parts sales. Our average margin on operating costs increased to 17% of revenues in 2009 from 11% in 2008. Higher margins in 2009 were attributable, in part, to higher prices received for mud pumps and higher contract values on offshore kits.
Selling, general and administrative costs declined by $2.1 million or 34% between periods due primarily to lower compensation and related fringe benefit costs associated with reduced employment levels.
Our Drilling Products and Systems operating results for the 2009 first quarter excludes $73 million of revenues and $53 million of expenses in connection with sales of products and services to our Drilling segment, most of which was attributable to construction of the newbuild jack-up, Ralph Coffman. Drilling Products and Systems operating results for the comparable quarter of 2008 excludes $79 million of revenues and $66 million of expenses, primarily for construction of the J.P. Bussell, Rowan-Mississippi and Ralph Coffman.
Mining, Forestry and Steel Products
The following table highlights the performance of our Mining, Forestry and Steel
Products segment for the first quarters of 2009 and 2008 (dollars in millions):
2009 2008
Amount % of Revenues Amount % of Revenues
Revenues $ 43.3 100 % $ 54.0 100 %
Operating costs (32.0 ) -74 % (45.4 ) -84 %
Depreciation expense (1.5 ) -3 % (1.5 ) -3 %
Selling, general and administrative expenses (4.7 ) -11 % (4.7 ) -9 %
Operating income $ 5.1 12 % $ 2.4 4 %
|
As indicated in the preceding table, revenues from Mining, Forestry and Steel Products decreased by $10.7 million or 20% between periods. Most of the decrease was attributable to lower equipment sales. Shipments of front-end mining loaders and log stackers totaled three units during the first quarter of 2009, compared to five units in the first quarter of 2008. Parts sales increased by $0.9 million or 5% between periods to $18.3 million during the first quarter of 2009. Revenues from steel plate sales totaled $12.2 million during the first quarter of 2009, down by $3.0 million or 20% between periods.
Our average margin on operating costs increased to 26% of revenues in the first quarter of 2009 from 16% in the comparable quarter of 2008. The higher margins were primarily attributable to higher prices for steel plate and a greater share of parts sales.
Outlook
The dramatic declines in oil and natural gas prices beginning in mid-2008 coupled with the weakness in global capital markets have increased our customers' efforts to preserve liquidity and have adversely affected the economics of certain drilling projects. Most oil and gas producers, in fact, have significantly reduced their 2009 drilling budgets, which has rapidly impacted the global jack-up market, reducing rig utilization, increasing competition among available rigs for fewer drilling assignments and pressuring day rates downward. Limitations on the availability of capital, or higher costs of capital, may cause energy companies to make additional budget reductions in the future even if oil and natural gas prices rebound. Any such reductions would probably accelerate the decline in rig utilization and day rates.
Evidence of weakening global jack-up markets includes the following:
· Worldwide jack-up utilization is currently 81%, down from about 90% at year-end 2008;
· Total jack-up demand is currently at 358 rigs, off 9% from the September 2008 peak;
· Premium jack-up demand is currently at 259, off 5% from the peak set in December 2008;
· There are 71 jack-ups currently under construction or on order for completion by 2011, most of which do not have drilling contracts in place.
Our backlog of drilling contracts currently exceeds $1.7 billion and extends into 2011. About two-thirds of our remaining available offshore rig days in 2009 are currently under contract, and most of our drilling contracts have termination penalties. Facing reduced liquidity, certain of our customers have sought to modify existing contracts, and we have begun to experience slower collections. Should market conditions worsen, they may seek to further delay payments or cancel drilling commitments. Though we intend to enforce our drilling contracts and will vigorously defend our rights thereunder, any such disputes may adversely impact our results of operations and cash flows to the extent that collections are delayed and administrative costs are increased.
Hurricanes have caused tremendous damage to drilling and production equipment and facilities throughout the Gulf Coast in recent years. Rowan suffered a significant loss of prospective revenues from the total destruction of one rig in 2002, four rigs in 2005, and another rig in September 2008. This has severely impacted the availability and affordability of windstorm insurance in the Gulf of Mexico, which remains significantly more expensive than it was before the 2005 hurricanes, despite reductions in coverage and our retention of significantly more risk for windstorm losses. Our relocation of rigs from the Gulf of Mexico has helped to offset the increase in insurance rates since 2005. The damage experienced during the 2008 hurricane season has significantly reduced the availability and increased the cost of windstorm insurance again in 2009. As a result, we have assumed significantly more of the risk of windstorm losses and have no such coverage on some of our older, lower-specification rigs.
Over the past few years, there have been notable declines in demand for available drilling equipment that coincided with the onset of hurricane season each June. This has periodically forced many jack-up contractors, including Rowan, to accept reduced rates in certain cases in order to keep such rigs fully utilized. We expect that this pattern of reduced Gulf of Mexico drilling opportunities during hurricane season will continue.
Our Drilling operations are currently benefitting from contracted backlog obtained during the predominantly favorable market conditions of the past few years and are profitable. As noted above, however, market conditions have dramatically worsened over the past several months and could continue to worsen. As our rigs roll off existing contracts, we have, in certain cases, been forced to accept reduced rates in order to preserve utilization, and have experienced extended idle periods between contracts. We may need to move our rigs between geographic areas in order to obtain work and may be unable to recover the cost of such mobilizations. We can provide no assurance, in fact, that utilization of our available rigs can be preserved, that spot day rates will remain above breakeven levels or that our Drilling operations will remain profitable. Should we cold-stack idle rigs, we could be exposed to higher severance costs and potential impairment charges from reductions in the fair value of our equipment.
As previously reported, we have six jack-up rigs currently under construction or on order for delivery during 2009-2011. These projects will require approximately an additional $754 million to complete, which may exceed our operating cash flows during this period and currently available borrowing capacity. With the prospect of reduced operating cash flows and uncertain access to additional capital, we have suspended further construction of the third 240C rig, the Joe Douglas, at our shipyard. We have also asked the outside shipyard to suspend activity on the fourth Rowan EXL rig pending a decision in the coming months about whether to go forward with that rig. (See Liquidity and Capital Resources - Capital Expenditures, for a discussion of the factors to be considered in making such a decision.)
Our Manufacturing operations, like our Drilling operations, are impacted by world commodities prices. Our Drilling Products and Systems operations are closely tied to the condition of the overall drilling industry and its demand for equipment, parts and services which, as discussed above, is heavily influenced by oil and natural gas prices. In addition, the prospects for our Mining, Forestry and Steel Products segment are affected by prices for copper, iron ore, coal and timber. Over the past several months, many commodity prices have declined by 50% or more from their 2008 peaks due to the worldwide recession. This trend, combined with the weakness in global capital markets, has forced many of our customers to preserve liquidity, and we have begun to experience reduced demand for certain products and services. We cannot accurately predict the duration of current business conditions or quantify the impact on our operations. Our Manufacturing operations will be adversely affected if conditions remain weak or deteriorate further.
Our external manufacturing backlog, which consists of executed contracts and customer commitments, was approximately $593 million at March 31, 2009, compared to $562 million at December 31, 2008, and included $285 million related to land rig projects, $169 million related to offshore rig projects, $40 million of mining and forestry equipment and another $60 million of ad-hoc drilling equipment. We expect that about two-thirds of our external backlog at March 31, 2009 will be realized as revenue in 2009.
Facing reduced liquidity, certain of our customers have sought to modify existing orders by delaying deliveries and related payments. Others are attempting to reduce or cancel orders altogether. Though we fully intend to enforce our contractual rights, such actions could adversely impact our results of operations and cash flows to the extent that collections are delayed, administrative costs are increased, and we are otherwise unable to fully recover the in-process cost attributable to such orders. We estimate that as much as $115 million, or 19% of our March 31, 2009 backlog, is at risk of being delayed or canceled. Should market conditions worsen, these actions may intensify, though we cannot assess that likelihood or the resulting impact on our results of operations or cash flows.
In November 2008, we announced that recent capital markets and commodity price weakness had adversely affected opportunities for monetizing our investment in our manufacturing operations, for what we believe to be adequate value for our stockholders, and that we are not pursuing any further negotiations with potential partners. We will continue to review all strategic options, including a spin-off of LTI to our stockholders, but do not anticipate that a transaction, if any, would be completed until capital markets conditions improve significantly.
LIQUIDITY AND CAPITAL RESOURCES
A comparison of key balance sheet amounts and ratios as of March 31, 2009 and
December 31, 2008 follows (dollars in millions):
March 31, December 31,
2009 2008
Cash and cash equivalents $ 192.8 $ 222.4
Current assets $ 1,297.8 $ 1,369.2
Current liabilities $ 620.3 $ 744.6
Current ratio 2.09 1.84
Current maturities of long-term debt $ 64.9 $ 64.9
Long-term debt $ 336.9 $ 355.6
Stockholders' equity $ 2,794.3 $ 2,659.8
Long-term debt/total capitalization 0.11 0.12
|
Reflected in the comparison above are the effects of the following sources and uses of cash and cash equivalents during the first quarter of 2009, with amounts shown for the comparable period of 2008 (in millions):
2009 2008
Net operating cash flows $ 77.3 $ 108.6
Net change in restricted cash balance - 50.0
Net proceeds from asset disposals 5.3 16.7
Proceeds from equity compensation and debenture plans and other 0.1 15.1
Capital expenditures (93.6 ) (156.2 )
Debt repayments (18.7 ) (18.7 )
Cash dividend payments - (11.1 )
Total sources (uses) $ (29.6 ) $ 4.4
|
Operating Cash Flows
Operating cash flows during the first quarter of 2009 included reconciling adjustments to our net income totaling $67.3 million, less a net investment in working capital of $120.9 million. Such reconciling adjustments included depreciation expense of $40.5 million, deferred income taxes of $25.0 million, net retirement plan expenses in excess of funding of $3.5 million and compensation expense of $3.0 million, partially offset by a net gain on asset disposals of $4.7 million. Significant changes in working capital items included a $36.2 million decrease in receivables, offset by a $114.2 million decrease in accounts payables, both of which were attributable primarily to lower manufacturing sales and services.
Capital Expenditures
Capital expenditures for the first quarter of 2009 included the following:
· $47.4 million towards construction of four EXL class rigs (see discussion below)
· $19.2 million towards construction of two 240C class rigs, comprised of $15.6 million for the Ralph Coffman and $3.6 million for the Joe Douglas (see discussion below)
· $10.3 million for improvements to the existing offshore fleet
· $3.8 million related to construction of two land rigs, one of which was completed in the first quarter of 2009 with the other expected to be delivered in late May 2009
In late 2007, we announced plans to construct our third and fourth 240C class jack-up rigs, the Joe Douglas and Rig 240C #4, to be financed from available cash flows and delivered in 2010 and 2011, respectively. (These two rigs were in addition to the Rowan-Mississippi, our first 240C class jack-up, which was delivered and commenced operations in November 2008, and the Ralph Coffman, which is currently under construction and is expected to be delivered near year-end 2009.) With the prospect of reduced operating cash flows and uncertain access to additional capital, we announced in January 2009 that we were cancelling Rig 240C #4 and suspending construction of the Joe Douglas until at least mid-year 2009. A portion of amounts expended toward Rig 240C #4 were applied to other projects. In the fourth quarter of 2008, we recorded an $11.8 million impairment charge for the estimated unrecoverable cost of amounts committed toward Rig 240C #4. We have commitments outstanding and are subject to cancellation fees on the Joe Douglas totaling approximately $18 million. Should our cash flows and available borrowing capacity be insufficient, if we are unable to obtain alternative financing, or if market conditions continue to deteriorate, we may elect to cancel construction of the Joe Douglas. We expect to make a decision regarding the rig by early July. Should we elect to cancel construction of the Joe Douglas, we would probably incur an impairment charge for a substantial portion of the approximately $85 million of expenditures made and to be made. Pending the decision on the Joe Douglas, we may decide to close the Vicksburg shipyard, which could result in up to a $26 million charge at that time.
In late 2007, we signed contracts with Keppel AmFELS, Inc. ("Keppel") to have four EXL class jack-up rigs constructed at its Brownsville, Texas, shipyard, to be financed from available cash flows and delivered in 2010 and 2011. Each rig is expected to cost from $185 to $190 million, with more than one-third of the amount attributable to the design, kit components, and drilling equipment to be provided by our Manufacturing division. With the prospect of reduced operating cash flows and uncertain access to additional capital, we have suspended activity on the fourth rig pending a decision in the coming months about whether to go forward with that rig. We have commitments outstanding of about $9 million and are subject to a $21 million cancellation fee on the fourth rig. Should our cash flows be insufficient, we could be forced to accept unfavorable financing terms in order to complete construction of and avoid penalties on the first three EXL rigs. Should we cancel construction of the fourth EXL rig, we would probably incur an impairment charge for a significant portion of the $60 million of expenditures made and to be made.
For the remainder of 2009, we expect our capital expenditures to range from $425 to $435 million, including $71 million toward construction of the Ralph Coffman, $186 million toward construction of the first three EXL class rigs, and $60 million for existing rigs, including contractually required upgrades. Such amounts give effect to the suspension of construction activities on the Joe Douglas and fourth EXL rig. We will periodically review and adjust the capital budget as necessary based upon current and forecasted cash flows and liquidity, anticipated market conditions in our drilling and manufacturing businesses, the availability of financing sources, and alternative uses of capital to enhance shareholder value. Any such adjustments, including those that may result from a decision to resume construction of the two suspended rigs, would require Board approval.
Long-Term Debt
Our debt agreements contain provisions that require minimum levels of working capital and stockholders' equity and limit the amount of long-term debt and, in the event of noncompliance, restrict investment activities, asset purchases and sales, lease obligations, borrowings and mergers or acquisitions. Our debt agreements also specify the minimum insurance coverage for our financed rigs. The extent of hurricane damage sustained throughout the Gulf Coast area in recent years has dramatically increased the cost and reduced the availability of insurance coverage for windstorm losses. During our April 2006 policy renewal, we determined that windstorm coverage meeting the requirements of our existing debt agreements was cost-prohibitive. We obtained from MARAD a waiver of the original insurance requirements in return for providing additional security, including restricted and unrestricted cash balances. In 2008, the additional security provisions were modified and our restricted cash requirement was eliminated. In addition, our unrestricted cash requirement was reduced from $31 million to $25 million. We remain subject to restrictions on the use of certain insurance proceeds should we experience further losses. Each of these security provisions will be released by MARAD if we are able to obtain windstorm coverage that satisfies the original terms of our debt agreements.
We were in compliance with each of our debt covenants at March 31, 2009 and, based on current projections, we do not expect to encounter difficulty complying in the following twelve-month period. Our most onerous financial covenant is the . . .
|
|