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RDC > SEC Filings for RDC > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for ROWAN COMPANIES PLC


8-Nov-2012

Quarterly Report


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

SUMMARY

Operating results from continuing operations for the three and nine months ended September 30, 2012, benefited from the addition of seven newly constructed high-specification jack-up rigs, including three EXL-class rigs and three N-class rigs in 2011, and the Joe Douglas 240-C class rig in 2012. We have continued to maintain a high level of utilization for our high-specification rigs, as oil and gas companies have increasingly sought more capable equipment to meet more demanding drilling requirements. The market for our less capable rigs, however, continues to be softer, and our conventional jack-up rigs have experienced extended periods of idle time. Utilization of our high-specification jack-ups for the quarter ended September 30, 2012, was 86%, compared to 65% and 33% 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.

Net income from continuing operations decreased to $26.4 million in the third quarter of 2012 from $31.4 million in the third quarter of 2011. For the nine months ended September 30, 2012, net income from continuing operations increased to $132.8 million from $102.6 million in the comparable prior-year period. Included in earnings for the three and nine months ended September 30, 2012, was a pretax loss on debt extinguishment of $10.5 million ($6.8 million after tax) and $22.2 million ($14.4 million after tax), respectively.

For the three and nine months ended September 30, 2012, we recognized income tax expense of $8.5 million and $2.9 million, respectively, on income from continuing operations as compared to benefits of $3.9 million and $1.0 million, respectively, for the comparable prior-year periods. The low effective income tax rates in 2012 (relative to the 35% U.S. and 24% U.K. statutory rates) and the recognition of income tax benefits in 2011 were primarily due to the amortization of benefits related to outbounding certain rigs to our non-U.S. subsidiaries in prior years. Also impacting taxes in each period were the removal of the Company's manufacturing and land drilling operations, whose earnings were subject to a 35% U.S. statutory rate, and a significant proportion of income earned in lower-tax jurisdictions.

In September 2012, the Company exercised its option with Hyundai for the construction of a fourth ultra-deepwater drillship at its Ulsan, South Korea, shipyard scheduled for delivery in March 2015. See "Liquidity and Capital Resources - Financing Activities."

As previously reported, on May 2, 2012, as the EXL I was being towed toward a shipyard in south Texas in preparation for its mobilization to Indonesia, a passing tanker lost power and collided with the rig. All personnel aboard the rig were evacuated safely, but the port side of the rig sustained substantial damage. The cost to repair the rig is currently estimated at approximately $14.1 million, which is being recognized as the costs are incurred. As of September 30, 2012, we had incurred repair costs totaling $8.9 million, which are classified within material charges on the statement of income. Repairs were completed in mid-October, and the EXL I is currently operating in Indonesia.

As of October 31, we had six jack-ups in the North Sea, eleven in the Middle East, seven in the U.S. Gulf of Mexico, two in each of Trinidad and Malaysia, and one each in Egypt and Indonesia. Additionally, another jack-up is mobilizing to Malaysia from Vietnam for potential work in Malaysia. As of October 31, three of our rigs had drilling contracts estimated to complete in 2012, nine had contracts estimated to complete in 2013, eleven had contracts estimated to complete in 2014, five had contracts estimated to complete in 2015 through 2017, and three were available. Additionally, the Rowan Renaissance, our ultra-deepwater drillship which is under construction and scheduled for delivery in late 2013, has a three-year contract for initial work in West Africa expected to run through 2017.



Table of Contents

KEY PERFORMANCE MEASURES

The following table presents certain key performance measures for our fleet:



                                             Three months ended September 30,            Nine months ended September 30,
                                                2012                   2011                2012                   2011

Revenues (in thousands):
Northern Europe                             $    136,627           $     95,816       $      386,227         $      198,799
Middle East(1)                                   103,941                 63,218              293,597                196,309
U.S. Gulf of Mexico                               33,226                 54,758              155,727                202,027
Southeast Asia                                    34,577                      -               88,170                      -
Other international                               35,655                 19,192               88,427                 59,550
Subtotal - Day-rate revenues                     344,026                232,984            1,012,148                656,685
Other revenues(2)                                  9,884                  1,714               26,257                  7,476
Total                                       $    353,910           $    234,698       $    1,038,405         $      664,161

Revenue producing days:
Northern Europe                                      546                    426                1,626                    970
Middle East(1)                                       804                    504                2,186                  1,559
U.S. Gulf of Mexico                                  276                    473                1,309                  1,716
Southeast Asia                                       266                      -                  685                      -
Other international                                  238                    166                  629                    469
Total                                              2,130                  1,569                6,435                  4,714

Average day rate:(3)
Northern Europe                             $    250,233           $    224,920       $      237,532         $      204,947
Middle East(1)                              $    129,280           $    125,433       $      134,308         $      125,920
U.S. Gulf of Mexico                         $    120,384           $    115,767       $      118,966         $      117,731
Southeast Asia                              $    129,989                      -       $      128,715                      -
Other international                         $    149,811           $    115,614       $      140,583         $      126,972
Total                                       $    161,515           $    148,492       $      157,288         $      139,305

Utilization (by location):(4)
Northern Europe                                       99 %                   93 %                 99 %                   95 %
Middle East(1)                                        79 %                   50 %                 73 %                   55 %
U.S. Gulf of Mexico                                   43 %                   72 %                 59 %                   70 %
Southeast Asia                                        72 %                    -                   77 %                    -
Other international                                   86 %                   37 %                 94 %                   50 %
Total                                                 75 %                   61 %                 76 %                   65 %

Utilization (by classification):(4)
High-specification jack-up(5)                         86 %                   78 %                 91 %                   81 %
Premium jack-up(6)                                    65 %                   39 %                 59 %                   51 %
Conventional jack-up                                  33 %                   33 %                 33 %                   28 %

(1) Our rigs operating in the Middle East are located in Saudi Arabia and Qatar. We also have a rig operating in Egypt, which is included in "other international."
(2) Other revenues, which are primarily revenues received for contract reimbursable costs, are excluded from the computation of average day rate.
(3) Average day rate is computed by dividing revenues by the number of revenue-producing days.
(4) Utilization is the number of revenue-producing days divided by the aggregate number of days rigs were available to work.
(5) We define high-specification jack-ups as those that have hook load capacity of at least two million pounds.
(6) We define premium jack-ups as those cantilevered rigs capable of operating in water depths of 300 feet or more.



Table of Contents

RESULTS OF OPERATIONS

Three months ended September 30, 2012, compared to three months ended September
30, 2011

Our operating results for the three months ended September 30, 2012 and 2011 are
highlighted below (dollars in millions):


                                                 Three months ended September 30,       Three months ended September 30,
                                                               2012                                   2011
                                                  Amount            % of Revenues        Amount            % of Revenues

Revenues                                        $     353.9                    100 %   $     234.7                    100 %
Operating costs                                      (188.1 )                  -53 %        (129.8 )                  -55 %
Depreciation expense                                  (63.0 )                  -18 %         (50.3 )                  -21 %
Selling, general and administrative expenses          (25.8 )                   -7 %         (22.6 )                  -10 %
Net gain on property disposals                          0.5                      0 %             -                      0 %
Material charges and other operating expenses         (18.2 )                   -5 %             -                      0 %
Operating income                                $      59.3                     17 %   $      32.0                     14 %

Revenues for the three months ended September 30, 2012, increased by $119.2 million or 51% compared to the three months ended September 30, 2011, as a result of the following (in millions):

                                                  Increase
                                                 (Decrease)

Rig additions                                    $      51.9
Higher utilization of existing rigs                     42.6
Higher average day rates for existing rigs              16.5
Revenues for reimbursable costs and other, net           8.2
Net increase                                     $     119.2

During the period from October 2011 through the first quarter of 2012, operations commenced for three newly constructed rigs, including two in 2011 and one in 2012. These three rigs contributed 274 incremental revenue-producing days in the third quarter of 2012 (13% of total revenue-producing days) compared to the third quarter of 2011.

Operating costs for the three months ended September 30, 2012, increased by $58.3 million or 45% compared to the three months ended September 30, 2011, as a result of the following (in millions):

                                                                       Increase
                                                                      (Decrease)

Operating costs attributable to fleet additions                       $      18.1
Higher operating costs of rigs previously in shipyard or in transit          20.2
Expansion of foreign shorebases                                               9.4
Reimbursable expenses                                                         8.2
Other, net                                                                    2.4
Net increase                                                          $      58.3

Our operating margin (revenues in excess of operating costs, other than depreciation, selling, general and administrative expenses and material charges) was approximately 47% of revenues in the third quarter of 2012 compared to 45% in the third quarter of 2011. Depreciation increased by $12.7 million or 25% compared to the third quarter of 2011 due to rig additions. Selling, general and administrative expenses increased by $3.2 million or 14% due primarily to increases in personnel and related costs and professional fees.

Material charges in the third quarter of 2012 consisted of $8.9 million of repair costs for the EXL I, $5.1 million of pension settlement costs in connection with lump sum pension payments to employees of the Company's former manufacturing subsidiary, $2.3 million of incremental share-based compensation cost in connection with the retirement of an employee and $1.9 million of legal and consulting fees incurred in connection with the Company's redomestication.



Table of Contents

Nine months ended September 30, 2012, compared to nine months ended September 30, 2011

Our operating results for the nine months ended September 30, 2012 and 2011 are highlighted below (dollars in millions):

                                                  Nine months ended September 30,        Nine months ended September 30,
                                                               2012                                    2011
                                                  Amount             % of Revenues        Amount            % of Revenues

Revenues                                        $   1,038.4                     100 %   $     664.2                    100 %
Operating costs                                      (558.4 )                   -54 %        (345.6 )                  -52 %
Depreciation expense                                 (183.3 )                   -18 %        (129.3 )                  -19 %
Selling, general and administrative expenses          (73.9 )                    -7 %         (65.2 )                  -10 %
Net gain on property disposals                          2.6                       0 %           1.4                      0 %
Material charges and other operating expenses         (30.9 )                    -3 %          (6.1 )                   -1 %
Operating income                                $     194.5                      19 %   $     119.4                     18 %

Revenues for the nine months ended September 30, 2012, increased by $374.2 million or 56% compared to the comparable prior-year period as a result of the following (in millions):

                                                  Increase
                                                 (Decrease)

Rig additions                                    $     238.7
Higher utilization of existing rigs                     83.9
Higher average day rates for existing rigs              32.9
Revenues for reimbursable costs and other, net          18.7
Net increase                                     $     374.2

During the period from January 2011 through the first quarter of 2012, operations commenced for seven newly constructed rigs, including three EXL-class rigs and the Rowan Viking, Rowan Stavanger, and Rowan Norway in 2011, and the Joe Douglas in 2012. These seven rigs contributed 1,093 incremental revenue-producing days in the first nine months of 2012 (17% of total revenue-producing days) over the comparable prior-year period.

Operating costs for the nine months ended September 30, 2012, increased by $212.8 million or 62% compared to the comparable prior-year period as a result of the following (in millions):

                                                                       Increase
                                                                      (Decrease)

Operating costs attributable to fleet additions                       $      99.5
Higher operating costs of rigs previously in shipyard or in transit          58.6
Expansion of foreign shorebases                                              27.3
Reimbursable expenses                                                        19.1
Other, net                                                                    8.3
Net increase                                                          $     212.8

Our operating margin (revenues in excess of operating costs, other than depreciation, selling, general and administrative expenses and material charges) was approximately 46% of revenues in the first nine months of 2012 compared to 48% in the first nine months of 2011. Margins for the 2012 period were negatively impacted by higher rig personnel and maintenance costs, increased shorebase costs associated with expanded international operations and the impact of rigs in shipyards or in transit. Depreciation increased by $54.0 million or 42% over the 2011 period due to the rig additions. Selling, general and administrative expenses increased by $8.7 million or 13% due primarily to increases in personnel and related costs and professional fees.

Material charges for the first nine months of 2012 consisted of $11.7 million of legal and consulting fees incurred in connection with the Company's redomestication, $8.9 million of repair costs for the EXL I, $5.1 million of pension settlement costs in connection with lump sum pension payments to employees of the Company's former manufacturing subsidiary, a $2.9 million impairment charge for the carrying value of steel to reflect the price to be received by the Company under a sale contract and $2.3 million of incremental share-based compensation cost in connection with the retirement of an employee.



Table of Contents

Material charges for the first nine months of 2011 consisted of a $6.1 million charge for the settlement of litigation in connection with the 2005 loss of the Rowan Halifax.

Outlook

Our backlog by geographic area as of October 31, 2012, and February 27, 2012 (as
presented in our 2011 Form 10-K), is set forth below (in millions):


                       October 31, 2012       February 27, 2012

Northern Europe       $            1,693     $             1,646
Middle East                          774                     949
Southeast Asia                       203                      57
U.S. Gulf of Mexico                  168                     109
Other international                  917                     304
                      $            3,755     $             3,065

We estimate our backlog will be realized as follows (in millions):

2012   $   249
2013     1,189
2014     1,029
2015       670
2016       500
2017       118
       $ 3,755

About 79% and 59% of our remaining available rig days in 2012 and 2013, respectively, were under contract or commitment as of October 31, 2012.

Our collective shipyard, transit and inspection time rose to approximately 14% of our available rig days in the third quarter of 2012, as compared to 11% in the second quarter. We currently expect shipyard, transit and inspection time to approximate 8% in the fourth quarter of 2012, down from our previous estimate of 20%. Our previous fourth quarter estimate of shipyard time assumed our three Tarzan-class rigs working in Saudi Arabia would be in the shipyard for the entire quarter for customer-required well-control equipment upgrades; however, we are now projecting these upgrades will be deferred into 2013. We now expect shipyard, transit and inspection time to consume approximately 9% of our available rig days in 2013, compared to 11% projected for 2012.

LIQUIDITY AND CAPITAL RESOURCES

A comparison of key balance sheet amounts and ratios follows. Balances have been
adjusted to exclude assets and liabilities of discontinued operations (dollars
in millions):


                                                                September       December
                                                                30, 2012        31, 2011

Cash and cash equivalents                                      $     328.3     $     438.9
Current assets (excluding assets of discontinued operations)   $     839.5     $     794.1
Current liabilities (excluding liabilities of discontinued
operations)                                                    $     228.4     $     323.4
Current ratio (excluding assets and liabilities of
discontinued operations)                                              3.68            2.46
Current maturities of long-term debt                           $         -     $      45.0
Long-term debt, less current maturities                        $   1,393.2     $   1,089.3
Shareholders' equity                                           $   4,478.3     $   4,326.0
Long-term debt/total capitalization                                   0.24            0.20


Table of Contents

Sources and uses of cash and cash equivalents are set forth below and include sources and uses from continuing and discontinued operations (in millions):

                                                                       Nine months ended Sept. 30,
                                                                        2012                2011

Net cash provided by operating activities                           $      189.5       $         128.0
Proceeds from borrowings, net of issue costs                               492.6                     -
Proceeds from disposals of property and equipment                           10.6                   5.5
Proceeds from employee stock option exercises                                0.2                  15.1
Proceeds from sales of manufacturing and land drilling operations              -               1,560.5
Capital expenditures                                                      (566.1 )            (1,155.1 )
Repayments of borrowings                                                  (238.5 )               (38.4 )
Payments to acquire treasury shares                                            -                 (80.9 )
Decrease in restricted cash                                                    -                  15.3
Other                                                                        1.1                   5.1
  Total net source (use)                                            $     (110.6 )     $         455.1

Operating Cash Flows

Cash flows from operations increased to approximately $190 million in the first nine months of 2012 from $128 million in the comparable period of 2011. Cash flows from operations for the 2011 period include those attributable to our former manufacturing and land drilling businesses, which we sold in June and September of 2011, respectively. As discussed in Note 1 of Notes to Condensed Consolidated Financial Statements, the Company has chosen not to separately disclose cash flows pertaining to discontinued operations in its statement of cash flows, as permitted under US GAAP. Operating cash flows for the 2012 period were positively impacted by the addition of seven newbuild rigs to the fleet in 2011 and 2012.

We do not provide deferred taxes on the undistributed non-U.S. earnings of Rowan Delaware or its non-U.S. subsidiaries because our policy and intention is to reinvest such earnings outside the U.S. indefinitely or until such time that such undistributed earnings can be distributed in a tax-efficient manner. Should Rowan Delaware make a distribution of such earnings in the form of a dividend or otherwise, we may be subject to additional income taxes. Both our U.S. and non-U.S. subsidiaries have significant net assets, liquidity, contract backlog and/or other financial resources available to meet their operational and capital investment requirements and otherwise allow us to continue to maintain our policy of reinvesting such undistributed earnings outside the U.S. indefinitely.

The Moving Ahead for Progress in the 21st Century Act, which became effective in July 2012, includes a provision that increases the interest rates used to determine plan sponsors' pension contributions for required funding purposes. Although the new rates will reduce our minimum pension contributions for the remainder of 2012 and for the years 2013 through 2016, the amount of the Company's actual contributions will be at the discretion of management.

Investing Activities

In September 2012, the Company exercised its option with Hyundai for the construction of a fourth ultra-deepwater drillship at its Ulsan, South Korea, shipyard scheduled for delivery in March 2015. The agreement with Hyundai also includes an option for a similar fifth drillship exercisable in the fourth quarter of 2012, for delivery in the third quarter of 2015.

Reference should be made to Note 6 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q for the status of our newbuild rig projects.

Capital expenditures totaled $566.1 million for the first nine months of 2012 and included the following:

$105.1 million towards construction of the ultra-deepwater drillships Rowan Renaissance, Rowan Resolute and Rowan Reliance;

$167.3 million towards construction of the fourth drillship;

$16.5 million for completion of construction of the Joe Douglas;

$237.8 million for improvements to the existing fleet, including contractually required modifications; and

$39.4 million for rig equipment inventory and other.



Table of Contents

For the remainder of 2012, we expect our capital expenditures to be approximately $224 million, including $50 million related to the construction of our four ultra-deepwater drillships, $96 million related to upgrades to existing rigs, shorebase facilities and spare drilling equipment, $75 million related to contractual requirements that will be partially reimbursed by customers, and $3 million for other items.

We expect to fund our newbuild drillship program and other capital expenditures from available cash, cash flows from operations, amounts available under the Company's revolving credit facility and other potential financing transactions, if required. We will periodically review and adjust our capital budgets as appropriate based upon current and forecasted cash flows and liquidity, anticipated market conditions in our drilling business and alternative uses of capital to enhance shareholder value.

Financing Activities

. . .

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