XNYS:RDC Rowan Companies PLC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012

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 Companies plc
(Exact name of registrant as specified in its charter)

England and Wales
98-1023315
(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

Rowan Companies, Inc.
(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 Class A ordinary shares, $0.125 par value, outstanding at July 31, 2012, was 124,195,890.


 
 

 

ROWAN COMPANIES PLC

TABLE OF CONTENTS

 
 
Page
PART I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited):
 
     
 
Condensed Consolidated Balance Sheets – June 30, 2012, and December 31, 2011
1
     
 
Condensed Consolidated Statements of Income – Three and six months ended June 30, 2012 and 2011
3
     
 
Condensed Consolidated Statements of Comprehensive Income – Three and six months ended June 30, 2012 and 2011
4
     
 
Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2012 and 2011
5
     
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity – Six months ended June 30, 2012 and 2011
6
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
     
Item 4.
Controls and Procedures
33
     
PART II
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
33
     
Item 1A.
Risk Factors
34
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
36
     
Item 6.
Exhibits
37
     
 
SIGNATURES
38


 
 

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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


   
June 30,
   
December 31,
 
   
2012
   
2011
 
 ASSETS
   
           
CURRENT ASSETS:
         
Cash and cash equivalents
  $ 665,637     $ 438,853  
Restricted cash
    9,449       -  
Receivables - trade and other
    330,096       283,592  
Prepaid expenses and other current assets
    62,644       44,586  
Deferred tax assets - net
    22,903       27,023  
Assets of discontinued operations
    26,696       27,661  
Total current assets
    1,117,425       821,715  
                 
PROPERTY, PLANT AND EQUIPMENT - at cost:
               
Drilling equipment
    6,589,114       6,179,587  
Construction in progress
    551,768       711,558  
Other property and equipment
    133,119       138,177  
Property, plant and equipment - gross
    7,274,001       7,029,322  
Less accumulated depreciation and amortization
    1,465,025       1,350,609  
Property, plant  and equipment - net
    5,808,976       5,678,713  
                 
Other assets
    100,790       97,417  
                 
TOTAL ASSETS
  $ 7,027,191     $ 6,597,845  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
1

 

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


   
June 30,
   
December 31,
 
   
2012
   
2011
 
LIABILITIES AND EQUITY
           
             
CURRENT LIABILITIES:
           
Current maturities of long-term debt
  $ 98,844     $ 45,023  
Accounts payable - trade
    74,020       111,082  
Deferred revenues
    35,997       36,220  
Accrued pension and other postretirement benefits
    23,858       55,244  
Accrued compensation and related employee costs
    35,272       31,205  
Accrued income taxes
    6,585       9,878  
Accrued interest
    27,965       25,477  
Other current liabilities
    16,621       9,237  
Liabilities of discontinued operations
    21,262       25,005  
Total current liabilities
    340,424       348,371  
                 
Long-term debt - less current maturities
    1,392,914       1,089,335  
Other liabilities
    376,461       357,709  
Deferred income taxes - net
    477,116       476,443  
Commitments and contingent liabilities (Note 6)
    -       -  
                 
SHAREHOLDERS' EQUITY:
               
Class A Ordinary Shares, $0.125 par value, 124,734,407 shares issued at June 30, 2012
    15,592       -  
Common stock, $0.125 par value, 150,000,000 shares authorized and
               
127,577,530 shares issued at December 31, 2011
    -       15,947  
Additional paid-in capital
    1,359,753       1,478,233  
Retained earnings
    3,285,314       3,186,362  
Cost of 549,473 and 3,996,465 treasury shares, respectively
    (1,489 )     (128,884 )
Accumulated other comprehensive loss
    (218,894 )     (225,671 )
Total shareholders' equity
    4,440,276       4,325,987  
                 
TOTAL LIABILITIES AND EQUITY
  $ 7,027,191     $ 6,597,845  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
2

 

ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)


   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
REVENUES
  $ 351,018     $ 223,497     $ 684,495     $ 429,463  
                                 
COSTS AND EXPENSES:
                               
Direct operating costs (excluding items below)
    188,114       104,517       370,253       215,791  
Depreciation and amortization
    61,330       40,807       120,296       78,961  
Selling, general and administrative
    25,098       21,729       48,154       42,543  
Gain on disposals of  property and equipment
    (2,063 )     (1,391 )     (2,119 )     (1,422 )
Material charges and other operating expenses
    8,126       6,100       12,697       6,100  
Total costs and expenses
    280,605       171,762       549,281       341,973  
                                 
INCOME FROM OPERATIONS
    70,413       51,735       135,214       87,490  
                                 
OTHER INCOME (EXPENSE):
                               
Interest expense, net of interest capitalized
    (12,993 )     (7,449 )     (24,250 )     (12,768 )
Loss on extinguishment of debt
    (11,767 )     -       (11,767 )     -  
Interest income
    146       32       260       61  
Other - net
    (122 )     365       1,215       (719 )
Total other income (expense) - net
    (24,736 )     (7,052 )     (34,542 )     (13,426 )
                                 
INCOME FROM CONTINUING OPERATIONS
                               
BEFORE INCOME TAXES
    45,677       44,683       100,672       74,064  
Provision (benefit) for income taxes
    (5,171 )     280       (5,675 )     2,866  
                                 
NET INCOME FROM CONTINUING OPERATIONS
    50,848       44,403       106,347       71,198  
                                 
DISCONTINUED OPERATIONS
                               
Income (loss) from discontinued operations, net of tax
    (1,413 )     (3,017 )     (7,395 )     2,260  
Gain on sale of discontinued operations, net of tax
    -       424,473       -       424,473  
      (1,413 )     421,456       (7,395 )     426,733  
                                 
NET INCOME
  $ 49,435     $ 465,859     $ 98,952     $ 497,931  
                                 
INCOME (LOSS) PER SHARE - BASIC:
                               
Income from continuing operations
  $ 0.41     $ 0.35     $ 0.87     $ 0.57  
Discontinued operations
  $ (0.01 )   $ 3.34     $ (0.06 )   $ 3.39  
Net income
  $ 0.40     $ 3.69     $ 0.81     $ 3.96  
                                 
INCOME (LOSS) PER SHARE - DILUTED:
                               
Income from continuing operations
  $ 0.41     $ 0.35     $ 0.86     $ 0.56  
Discontinued operations
  $ (0.01 )   $ 3.30     $ (0.06 )   $ 3.35  
Net income
  $ 0.40     $ 3.65     $ 0.80     $ 3.91  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
3

 

ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)



   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
NET INCOME
  $ 49,435     $ 465,859     $ 98,952     $ 497,931  
                                 
Other comprehensive income, net of tax:
                               
Pension and other postretirement benefit adjustments, net of income taxes of $1,825 and $3,650, respectively:
                               
Amortization of net loss
    4,087       -       8,174       -  
Amortization of transition obligation
    77       -       154       -  
Amortization of prior service cost
    (776 )     -       (1,551 )     -  
                                 
OTHER COMPREHENSIVE INCOME
    3,388       -       6,777       -  
                                 
COMPREHENSIVE INCOME
  $ 52,823     $ 465,859     $ 105,729     $ 497,931  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
4

 

ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Six months ended June 30,
 
   
2012
   
2011
 
             
CASH PROVIDED BY (USED IN) OPERATIONS:
           
Net income
  $ 98,952     $ 497,931  
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation and amortization
    120,296       99,930  
Deferred income taxes
    4,793       70,692  
Provision for pension and postretirement benefits
    16,457       16,664  
Stock-based compensation expense
    11,767       10,999  
Gain on disposals of property, plant and equipment
    (2,119 )     (3,896 )
Gain on sale of manufacturing operations
    -       (660,877 )
Postretirement benefit claims paid
    (2,069 )     (1,388 )
Contributions to pension plans
    (32,099 )     (35,837 )
Asset impairment charges
    2,896       -  
Changes in current assets and liabilities:
               
Receivables - trade and other
    (42,504 )     9,962  
Inventories
    -       (104,468 )
Prepaid expenses and other current assets
    (18,058 )     1,511  
Accounts payable
    (14,543 )     44,820  
Accrued income taxes
    (3,293 )     130,210  
Deferred revenues
    (223 )     27,603  
Billings in excess of costs and estimated profits on uncompleted contracts
    -       29,493  
Other current liabilities
    10,483       4,461  
Net changes in other noncurrent assets and liabilities
    12,075       8,089  
Net cash provided by operations
    162,811       145,899  
                 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
               
Capital expenditures
    (290,773 )     (930,978 )
Proceeds from sale of manufacturing operations
    -       1,044,541  
(Increase) decrease in restricted cash
    (9,449 )     15,265  
Proceeds from disposals of property, plant and equipment
    9,247       4,057  
Net cash provided by (used in) investing activities
    (290,975 )     132,885  
                 
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
               
Proceeds from borrowings
    493,415       -  
Repayments of borrowings
    (139,609 )     (26,083 )
Excess tax benefits from stock-based compensation
    1,142       4,664  
Proceeds from stock options and other
    -       16,483  
Net cash provided by (used in) financing activities
    354,948       (4,936 )
                 
INCREASE IN CASH AND CASH EQUIVALENTS
    226,784       273,848  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    438,853       437,479  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 665,637     $ 711,327  


See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
5

 

ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)




   
Shares outstanding
   
Class A ordinary shares/ Common stock
   
Additional paid-in capital
   
Retained earnings
   
Treasury shares
   
Accumulated other comprehensive income (loss)
   
Total shareholders' equity
 
                                           
Balance, January 1, 2011
    126,294     $ 15,794     $ 1,433,999     $ 2,449,521     $ (1,509 )   $ (145,495 )   $ 3,752,310  
Shares issued under share-based compensation plans
    1,111       146       17,815       -       (3,132 )     -       14,829  
Share-based compensation
    -       -       8,941       -       -       -       8,941  
Excess tax benefit from share-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  
                                                         
Balance, January 1, 2012
    123,581     $ 15,947     $ 1,478,233     $ 3,186,362     $ (128,884 )   $ (225,671 )   $ 4,325,987  
Shares issued under share-based compensation plans
    552       64       (21,428 )     -       17,908       -       (3,456 )
Share-based compensation
    -       -       10,874       -       -       -       10,874  
Excess tax benefit from share-based compensation plans
    -       -       1,142       -       -       -       1,142  
Retirement benefit adjustments, net of taxes of $3,650
    -       -       -       -       -       6,777       6,777  
Cancelation of treasury shares
    -       (419 )     (109,068 )     -       109,487       -       -  
Other
    52       -       -       -       -       -       -  
Net income
    -       -       -       98,952       -       -       98,952  
Balance, June 30, 2012
    124,185     $ 15,592     $ 1,359,753     $ 3,285,314     $ (1,489 )   $ (218,894 )   $ 4,440,276  



See Notes to Unaudited Condensed Consolidated Financial Statements.

 

 
6

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1 – Nature of Operations and Basis of Presentation

On May 4, 2012, Rowan Companies plc, a public limited company incorporated under the laws of England and Wales (“Rowan UK”), became the successor issuer to Rowan Companies, Inc. (“Rowan Delaware”) pursuant to an agreement and plan of merger and reorganization (the “redomestication”) approved by the stockholders of Rowan Delaware on April 16, 2012.  As a result of the redomestication, Rowan UK became the parent company of the Rowan group of companies and our place of incorporation was effectively changed from Delaware to the United Kingdom.  We remain subject to the Securities and Exchange Commission reporting requirements, the mandates of the Sarbanes-Oxley Act and the applicable corporate governance rules of the NYSE, and we will continue to report our consolidated financial results in U.S. dollars and in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).  We also must comply with additional reporting requirements of English law.  The redomestication was accounted for as an internal reorganization of entities under common control; therefore, for purposes of these consolidated financial statements, the carrying values of assets and liabilities of the merged entities were carried forward without adjustment. Unless the context otherwise requires, the terms “Company,” “we,” “us” and “our” are used to refer to Rowan UK (or Rowan Delaware for periods prior to the redomestication) and its consolidated subsidiaries.

The Company is a major provider of international and domestic offshore oil and gas contract drilling services and provides its services utilizing a fleet of 31 self-elevating mobile offshore “jack-up” drilling units.  The Company’s primary focus is on high-specification and premium jack-up rigs, which its customers use for exploratory and development drilling and, in certain areas, well workover operations.  Additionally, the Company has three ultra-deepwater drillships under construction, the first of which is scheduled for delivery in late 2013.

The Company conducts offshore drilling operations in various markets throughout the world including the North Sea, Middle East, Southeast Asia and U.S. Gulf of Mexico, among others.

The financial statements included in this Form 10-Q are presented in U.S. dollars and include the accounts of the Company and its subsidiaries, all of which are wholly owned.  Intercompany balances and transactions are eliminated in consolidation.

The financial statements included in this Form 10-Q have been prepared without audit in accordance with US GAAP for interim financial information 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.  Management believes the accompanying 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.  The Company’s results of operations and cash flows for the interim periods are not necessarily indicative of results to be expected for the full year.  The accompanying 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, 2011, as amended by Form 8-K filed with the Securities and Exchange Commission on May 16, 2012.

In June and September 2011, the Company completed the sales of its manufacturing subsidiary, LeTourneau Technologies, Inc (“LeTourneau”) and its land drilling operations, respectively.  Manufacturing operations were previously reported as the “Drilling Products and Systems” and the “Mining, Forestry and Steel Products” segments, and land drilling operations were previously reported as a component of the “Drilling Services” segment.  The Company does not currently segment its continuing offshore drilling business for reporting purposes.  Results of manufacturing and land drilling operations have been reclassified to discontinued operations for all periods presented (see Note 2, “Discontinued Operations”).  As permitted under US GAAP, the Company has chosen not to separately disclose cash flows pertaining to discontinued operations in the Condensed Consolidated Statement of Cash Flows.
 
The financial information as of December 31, 2011, presented in this report does not constitute the Company's statutory accounts for that year within the meaning of the U.K. Companies Act 2006.  Statutory accounts as required by the Companies Act 2006 for the year ended December 31, 2011 have been delivered to the Registrar of Companies in the U.K. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under s498(2) or (3) Companies Act 2006.
 

 
7

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Note 2 – Discontinued Operations

The following table sets forth the components of “Discontinued operations, net of tax” (in thousands):


   
2012
   
2011
 
   
Manufacturing
   
Drilling
   
Total
   
Manufacturing
   
Drilling
   
Total
 
Three months ended June 30:
                                   
Revenues
  $ -     $ -     $ -     $ 110,242     $ 48,445     $ 158,687  
                                                 
Pretax income (loss)
  $ (1,370 )   $ (804 )   $ (2,174 )   $ (3,113 )   $ 3,770     $ 657  
Provision (benefit) for
                                               
taxes on income
    (480 )     (281 )     (761 )     2,295       1,379       3,674  
Income (loss) from discontinued
                                               
operations, net of tax
    (890 )     (523 )     (1,413 )     (5,408 )     2,391       (3,017 )
                                                 
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
  $ (890 )   $ (523 )   $ (1,413 )   $ 419,065     $ 2,391     $ 421,456  
                                                 
Six months ended June 30:
                                               
Revenues
  $ -     $ -     $ -     $ 224,488     $ 92,514     $ 317,002  
                                                 
Pretax income (loss)
  $ (3,980 )   $ (3,440 )   $ (7,420 )   $ (950 )   $ 9,654     $ 8,704  
Provision (benefit) for
                                               
taxes on income
    1,179       (1,204 )     (25 )     3,006       3,438       6,444  
Income (loss) from discontinued
                                               
operations, net of tax
    (5,159 )     (2,236 )     (7,395 )     (3,956 )     6,216       2,260  
                                                 
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
  $ (5,159 )   $ (2,236 )   $ (7,395 )   $ 420,517     $ 6,216     $ 426,733  


 
8

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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, in the table below (in thousands):


   
June 30, 2012
   
December 31, 2011
 
   
Manufacturing
   
Drilling
   
Total
   
Manufacturing
   
Drilling
   
Total
 
                                     
Receivables - trade and other
  $ -     $ -     $ -     $ -     $ 4,000     $ 4,000  
Other assets
    26,696       -       26,696       23,661       -       23,661  
Assets of discontinued operations
  $ 26,696     $ -     $ 26,696     $ 23,661     $ 4,000     $ 27,661  
                                                 
Deferred revenues
  $ 20,122     $ -     $ 20,122     $ 20,122     $ -     $ 20,122  
Other current liabilities
    1,140       -       1,140       1,183       3,700       4,883  
Liabilities of discontinued operations
  $ 21,262     $ -     $ 21,262     $ 21,305     $ 3,700     $ 25,005  


Note 3 – Earnings Per Share

A reconciliation of basic and diluted shares follows (in thousands):


   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Average common shares outstanding - basic
    123,033       126,252       122,891       125,793  
Effect of dilutive securities - share-based compensation
    728       1,331       836       1,516  
Average common shares - diluted
    123,761       127,583       123,727       127,309  

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

Share options and appreciation rights granted under share-based compensation plans are antidilutive and excluded from diluted earnings per share when their exercise or strike price exceeds the average stock market price during the period.  The following table sets forth antidilutive shares excluded from diluted earnings per share.  Such securities could potentially dilute earnings per share in the future (in thousands):


   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Employee and director share options
    42       42       42       42  
Restricted shares
    821       -       -       -  
Share appreciation rights
    616       313       616       218  
Total potentially dilutive shares
    1,479       355       658       260  



 
9

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Note 4 – Pension and Other Postretirement Benefits

The Company sponsors defined benefit pension plans covering substantially all of its employees, and provides health care and life insurance benefits upon retirement for certain employees.

Net periodic pension cost recognized included the following components (in thousands):


   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Service cost
  $ 2,721     $ 3,107     $ 5,442     $ 6,181  
Interest cost
    7,569       7,718       15,138       15,350  
Expected return on plan assets
    (9,367 )     (8,352 )     (18,734 )     (16,613 )
Recognized actuarial loss
    7,559       5,774       13,804       11,515  
Amortization of prior service cost
    (1,158 )     (1,665 )     (2,317 )     (3,312 )
Total net pension cost
  $ 7,324     $ 6,582     $ 13,333     $ 13,121  
Less: Discontinued operations
    1,424       2,247       1,424       4,595  
Continuing operations
  $ 5,900     $ 4,335     $ 11,909     $ 8,526  


Other postretirement benefit cost recognized included the following components (in thousands):


   
Three months ended June 30,
   
Six months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Service cost
  $ 457     $ 541     $ 915     $ 1,076  
Interest cost
    942       1,053       1,884       2,094  
Recognized actuarial loss
    80       73       161       146  
Amortization of transition obligation
    119       165       237       328  
Amortization of prior service cost
    (36 )     (51 )     (73 )     (101 )
Total other postretirement benefit cost
  $ 1,562     $ 1,781     $ 3,124     $ 3,543  
Less: Discontinued operations
    -       599       -       1,220  
Continuing operations
  $ 1,562     $ 1,182     $ 3,124     $ 2,323  

During the six months ended June 30, 2012, the Company contributed $34.2 million to its pension and other postretirement benefit plans and expects to make additional contributions to such plans totaling approximately $20.9 million during the remainder of 2012.

Under the terms of the sales of the Company’s manufacturing and land drilling operations, the Company retained pension assets and liabilities related to employees of the former operations.  As a result, 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.


 
10

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Note 5 – Long-term Debt

Long-term debt consisted of the following (in thousands):

   
June 30,
   
December 31,
 
   
2012
   
2011
 
             
3.158% Title XI note payable, due July 2012, secured by the Bob Palmer
  $ 98,844     $ 104,047  
5.88% Title XI note payable, due March 2012, secured by the Gorilla VI
    -       7,109  
2.80% Title XI note payable, due October 2013, secured by the Gorilla VII
    -       30,898  
5% Senior Notes, due September 2017, net of discount (5.1% effective rate)
    398,535       398,394  
4.33% Title XI note payable, due May 2019, secured by the Scooter Yeargain
    -       45,598  
7.875% Senior Notes, due August 2019, net of discount (8.0% effective rate)
    497,676       497,511  
3.525% Title XI note payable, due May 2020, secured by the Bob Keller
    -       50,801  
4.875% Senior Notes, due June 2022, net of discount (5.0% effective rate)
    496,703       -  
Total long-term debt
    1,491,758       1,134,358  
Less: Current maturities
    (98,844 )     (45,023 )
Long-term debt, excluding current maturities
  $ 1,392,914     $ 1,089,335  

In April 2012, the U.S. Department of Transportation Maritime Administration (“MarAd”), which had previously guaranteed certain of the Company’s debt securities under the Title XI Federal Ship Financing Program (the “Title XI Notes”), denied the Company’s request for consent with respect to the redomestication.  As a result, the Company redeemed $127.3 million aggregate principal amount of the Title XI Notes in the second quarter of 2012 for $141.1 million in cash, including principal, make-whole premiums and accrued interest, and recognized a pretax loss on debt extinguishment of $11.8 million, including $0.3 million of noncash deferred financing costs.  In July 2012, the Company redeemed the remaining Title XI Note in the principal amount of $98.8 million for $110.4 million in cash, including principal, make-whole premium and accrued interest, and will recognize a pretax loss on debt extinguishment of $10.5 million in the third quarter.

In connection with the redomestication, on May 4, 2012, Rowan UK became a party to and a borrower and guarantor under the credit facility, dated September 16, 2010, among Rowan Delaware, Wells Fargo Bank, National Association, as administrative agent and lender, and certain other lenders.  Rowan UK entered into a guaranty in favor of the administrative agent for the benefit of the lenders whereby Rowan UK fully and unconditionally guarantees the obligations of Rowan Delaware under the credit facility.

Additionally, on May 4, 2012, Rowan UK and Rowan Delaware entered into a third supplemental indenture to the indenture dated as of July 21, 2009, between Rowan Delaware and U.S. Bank National Association, as indenture trustee, providing for unconditional and irrevocable guarantee by Rowan UK of Rowan Delaware’s 5% Senior Notes due 2017 and 7.875% Senior Notes due 2019, which had an aggregate outstanding principal balance as of June 30, 2012 of $900 million.  The Rowan UK guarantee provides for the unconditional and irrevocable guarantee of the prompt payment, when due, of any amount owed to the holders of the notes.

On May 21, 2012, Rowan UK, as guarantor, and its wholly owned subsidiary, Rowan Delaware, as issuer, completed the issuance and sale in a public offering of $500 million aggregate principal amount of 4.875% Senior Notes due 2022 (the “4.875% Notes”), at a price to the public of 99.333% of the principal amount.  Net proceeds were approximately $493 million, which were used, in part, to replenish cash used to redeem the Title XI Notes in the second and third quarters of 2012.  The 4.875% Notes will mature on June 1, 2022.  Interest on the 4.875% Notes is payable semi-annually on June 1 and December 1 of each year, commencing December 1, 2012.
 
The 4.875% Notes are Rowan Delaware’s senior unsecured obligations and rank senior in right of payment to all of its subordinated indebtedness and pari passu in right of payment with any of Rowan Delaware’s existing and future senior indebtedness, including its 5% Senior Notes due 2017, 7.875% Senior Notes due 2019, and any indebtedness under Rowan Delaware’s senior revolving credit facility.  The 4.875% Notes rank effectively junior to Rowan Delaware’s existing and future secured indebtedness, if any, to the extent of the value of its assets constituting collateral securing that indebtedness and to all existing and future indebtedness of its subsidiaries (other than indebtedness and liabilities owed to Rowan Delaware).  The 4.875% Notes are fully and unconditionally guaranteed on a senior unsecured basis by Rowan UK.

 
11

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


 
All or part of the 4.875% Notes may be redeemed at any time prior to March 1, 2022, for an amount equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest to the redemption date, and, at any time after March 1, 2022, for an amount equal to 100% of the principal amount plus accrued and unpaid interest to the redemption date.
 
The indenture governing the 4.875% Notes contains covenants that, among other things, limit the ability of Rowan Delaware or its subsidiaries to create liens that secure debt or engage in sale and leaseback transactions.

At June 30, 2012, debt maturities over the next five years were $98.8 million in July 2012 and $400 million in September 2017.

Note 6 – Commitments and Contingent Liabilities

The following table presents the status of the Company’s rig construction program as of June 30, 2012.  Amounts include capitalized interest and an estimate for project contingencies (in millions):


 
Expected delivery date
 
Total estimated project costs
   
Total costs incurred through June 30, 2012
   
Projected costs for the remainder of 2012
   
Projected costs in 2013
   
Projected costs in 2014
   
Total future costs
 
                                       
Rowan Renaissance
Dec-13
  $ 749     $ 188     $ 62     $ 483     $ 16     $ 561  
Rowan Resolute
Jun-14
    743       181       39       154       370       562  
Rowan Reliance
Oct-14
    729       181       12       88       447       548  
      $ 2,221     $ 550     $ 113     $ 725     $ 833     $ 1,671  

In July 2012 Hyundai Heavy Industries Co., Ltd, the builder of the three drillships currently under construction, extended the Company’s option for construction of a fourth ultra-deepwater drillship to September 7, 2012.

The Company 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 $128.3 million at June 30, 2012.

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 unharmed, but the port side of the rig sustained substantial damage.  The cost to repair the rig is currently estimated at approximately $29 million, which will be recognized as the costs are incurred.  Costs incurred through June 30, 2012, were not significant.  The Company has filed suit against who it believes are the tanker’s owners and operators and seeks damages primarily for repairs to and loss of use of the rig.  The tanker owners have sought relief under the Limitation of a Shipowner’s Liability Act, claiming that damages be limited to the post-accident value of the tanker plus freight, which value is currently estimated to be less than the expected repair costs.  At this time, both suits are in the preliminary stages of litigation.  In the event the tanker owners are successful in their limitation, we have put our insurers on notice of a potential claim for physical damage to the rig.  However, our insurance claim is being deferred pending the outcome of the litigation.  Any such claim is subject to a $25 million deductible.  Management believes its claims are legally and factually strong; however, it cannot presently predict the ultimate outcome of the litigation.

On March 25, 2012, a gas leak occurred on a platform operated by Total E&P UK Limited (“Total”), where the Rowan Viking was working.  The platform is in the Elgin Field located off the coast of Aberdeen, Scotland.  All Company, Total and third-party personnel were safely evacuated from the platform and rig without incident. Total has since regained control over the leak, the Company has re-boarded the Rowan Viking and operations have resumed.  Damage to the Rowan Viking was minimal and management believes resolution of the incident had no material impact on the Company’s financial position, results of operations or cash flows.

In 2009, the Company recognized a $25.4 million tax benefit as a result of applying the facts of a third-party tax case to the Company’s situation.  That case provided a more favorable tax treatment for certain foreign contracts entered into in prior years.  In

 
12

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


2011, the IRS issued an assessment contesting our claim.  The Company plans to vigorously defend its position and continues to believe it is more likely than not that the Company will prevail.

We are from time to time a party to various lawsuits filed by current or former employees that are incidental to our operations in which the claimants seek an unspecified amount of monetary damages for personal injury, including injuries purportedly resulting from exposure to asbestos on our drilling rigs.  At June 30, 2012, there were approximately 21 asbestos related lawsuits in which we are one of many defendants.  These lawsuits have been filed in the state courts of Louisiana, Mississippi and Texas.  We intend to vigorously defend against the litigation.  We are unable to predict the ultimate outcome of these lawsuits; however, we do not believe the ultimate resolution of these matters will have a material adverse effect on our financial position, results of operations or cash flows.  No amounts were accrued at June 30, 2012, for these asbestos related lawsuits.
 
The Company is involved in various other legal proceedings incidental to its businesses and is vigorously defending its position in all such matters.  Management believes that there are no known contingencies, claims or lawsuits that could have a material effect on its financial position, results of operations or cash flows.

Note 7 – Share-Based Compensation

On March 7, 2012, the Company granted restricted shares and share appreciation rights with a grant-date fair value aggregating $26.4 million.  The awards vest in one-third annual increments over a three-year service period.  The aggregate fair value, net of estimated forfeitures, was $24.9 million, which will be amortized on a straight-line basis over three years from the grant date.

Additionally, on March 7, 2012, the Company granted performance units (“PUs”) with a grant-date fair value of $3.2 million.  The amount ultimately payable will depend on the Company’s total shareholder return (“TSR”) ranking compared to a group of peer companies over a maximum three-year performance period and could range from zero to $7.7 million.  The awards cliff vest at the end of three years and may be settled in cash or ordinary shares of the Company.  The Company has accounted for the award as a liability. Compensation is recognized on a straight-line basis over three years from the grant date and is remeasured to fair value at each quarterly report date.

At June 30, 2012, the Company had approximately $40.1 million of estimated unrecognized future share-based compensation, which is expected to be recognized as compensation expense over a remaining weighted-average period of 2.3 years.

Note 8 – Other Financial Statement Disclosures

Fair Values of Financial Instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy prescribed by GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The three levels of inputs that may be used to measure fair value are:

·  
Level 1 – Quoted prices for identical instruments in active markets,
·  
Level 2 – Quoted market prices for similar instruments in active markets; quoted prices for identical instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets and
·  
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as those used in pricing models or discounted cash flow methodologies, for example.

The carrying amounts of the Company’s cash and cash equivalents, trade receivables and trade payables approximate their fair values due to their short maturities.  As of June 30, 2012, the fair values of the Company’s debt, which had an aggregate carrying value of $1.492 billion, approximated $1.645 billion.  Fair values of the Company’s debt were estimated using “significant other observable inputs,” which are considered Level 2 inputs in the fair value hierarchy, including the terms and credit spreads applicable to the instruments.

Supplemental Cash Flow Information – Accrued capital expenditures, which are excluded from capital expenditures in the Condensed Consolidated Statements of Cash Flows until settlement, totaled $39.6 million and $25.0 million at June 30, 2012 and 2011,

 
13

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


respectively.  Interest capitalized in connection with rig construction projects totaled $7.3 million and $14.1 million in three and six months ended June 30, 2012, as compared to $12.1 million and $25.7 million, respectively, in the comparable periods of the prior year.

Income Taxes – Rowan Delaware, our predecessor company, was domiciled in the U.S. and subject to a statutory rate of 35% through May 4, 2012, the effective date of the redomestication.  Effective May 4, 2012, the Company has been subject to the U.K. statutory rate of 24%.

Historically, Rowan Delaware has conducted its foreign operations through its U.S. subsidiaries, which resulted in income tax at or near the U.S. statutory rate of 35%.  In late 2009, Rowan Delaware began operating many of its foreign-based rigs through its non-U.S. subsidiaries.  We do not provide deferred taxes on the undistributed 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 undistributed earnings of Rowan Delaware can be distributed in a tax-efficient manner.  Furthermore, 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 the undistributed earnings of these entities indefinitely.

In accordance with generally accepted accounting principles 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.  For the three and six months ended June 30, 2012, we recognized income tax benefits of $5.2 million and $5.7 million, respectively, primarily due to the amortization of tax benefit related to outbounding certain rigs into our non-U.S. subsidiaries in prior years.  For the three and six months ended June 30, 2011, we recorded tax provisions of less than 1% and 3.9%, respectively.  The effective tax rates for continuing operations for 2011 were substantially lower than the 35% U.S. statutory rate primarily due to amortization of tax benefit related to outbounding rigs into non-U.S. subsidiaries in prior years, the 2011 sales 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.

Material Charges and Other Operating Expenses – Material charges for the three and six months ended June 30, 2012, included $8.1 million and $9.8 million, respectively, of legal and consulting fees incurred in connection with the Company’s redomestication.  Material charges for the first six months of 2012 also included a $2.9 million impairment charge for the carrying value of steel that was sold during the period.

Material charges for the three and six months ended June 30, 2011, consisted of $6.1 million incurred in connection with the settlement of the Textron litigation relating to the loss of the Rowan Halifax in 2005.

Note 9 – Guarantees of Registered Securities

On May 4, 2012, the effective date of the Company’s redomestication, Rowan UK and Rowan Delaware entered into the third supplemental indenture to the indenture dated as of July 21, 2009, as amended and supplemented, among Rowan UK, Rowan Delaware and U.S. Bank National Association, as trustee, providing for, among other things, the unconditional and irrevocable guarantee by Rowan UK of the prompt payment, when due, of any amount owed to the holders of Rowan Delaware's 5% Senior Notes due 2017 and 7.875% Senior Notes due 2019.

The following condensed consolidating financial information is being provided in accordance with Rule 3-10 of Regulation S-X in connection with Rowan Delaware’s 4.875% Senior Notes due 2022, which were issued in May 2012 and guaranteed by Rowan UK.


 
14

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


 
Rowan Companies plc and Subsidiaries
 
Condensed Consolidating Balance Sheets
 
June 30, 2012
 
(in thousands)
 
(unaudited)
 
                               
   
Rowan UK
   
Rowan Delaware
   
Other non-guarantor subsidiaries
   
Consolidating adjustments
   
Consolidated
 
                               
CURRENT ASSETS:
                             
Cash and cash equivalents
  $ 15,975     $ 445,444     $ 204,218     $ -     $ 665,637  
Restricted cash
    -       9,449       -       -       9,449  
Receivables - trade and other
    -       49,301       282,666       (1,871 )     330,096  
Other current assets
    673       62,623       22,251       -       85,547  
Assets of discontinued operations
    -       26,696       -       -       26,696  
Total current assets
    16,648       593,513       509,135       (1,871 )     1,117,425  
                                         
Property, plant and equipment - gross
    -       1,324,628       5,949,373       -       7,274,001  
Less accumulated depreciation and amortization
    -       464,789       1,000,236       -       1,465,025  
Property, plant  and equipment - net
    -       859,839       4,949,137       -       5,808,976  
                                         
Investments in subsidiaries
    4,457,060       2,439,264       -       (6,896,324 )     -  
Due from affiliates
    -       2,575,183       1,648,874       (4,224,057 )     -  
Other assets
    -       32,314       68,476       -       100,790  
                                         
    $ 4,473,708     $ 6,500,113     $ 7,175,622     $ (11,122,252 )   $ 7,027,191  
                                         
CURRENT LIABILITIES:
                                       
Current maturities of long-term debt
  $ -     $ 98,844     $ -     $ -     $ 98,844  
Accounts payable - trade
    1,463       21,347       51,210       -       74,020  
Deferred revenues
    -       -       35,997       -       35,997  
Accrued liabilities
    -       65,368       46,804       (1,871 )     110,301  
Liabilities of discontinued operations
    -       21,262       -       -       21,262  
Total current liabilities
    1,463       206,821       134,011       (1,871 )     340,424  
                                         
Long-term debt - less current maturities
    -       1,392,914       -       -       1,392,914  
Due to affiliates
    31,969       -       4,192,088       (4,224,057 )     -  
Other liabilities
    -       307,729       68,732       -       376,461  
Deferred income taxes - net
    -       135,589       341,527       -       477,116  
Shareholders' equity
    4,440,276       4,457,060       2,439,264       (6,896,324 )     4,440,276  
                                         
    $ 4,473,708     $ 6,500,113     $ 7,175,622     $ (11,122,252 )   $ 7,027,191  



 
15

 
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


 
 
Rowan Companies plc and Subsidiaries
 
Condensed Consolidating Balance Sheets
 
December 31, 2011
 
(in thousands)
 
                               
   
Rowan UK
   
Rowan Delaware
   
Other non-guarantor subsidiaries
   
Consolidating adjustments
   
Consolidated
 
                               
CURRENT ASSETS:
                             
Cash and cash equivalents
  $ 21,472     $ 184,677     $ 232,704     $ -     $ 438,853  
Receivables - trade and other
    -       33,380       250,212       -       283,592  
Other current assets
    -       46,137       25,472       -       71,609  
Assets of discontinued operations
    -       27,661       -       -       27,661  
Total current assets
    21,472       291,855       508,388       -       821,715  
                                         
Property, plant and equipment - gross
    -       1,290,526       5,738,796       -       7,029,322  
Less accumulated depreciation and amortization
    -       441,949       908,660       -       1,350,609  
Property, plant  and equipment - net
    -       848,577       4,830,136       -       5,678,713  
                                         
Investments in subsidiaries
    -       1,121,573       -       (1,121,573 )     -  
Due from affiliates
    -       3,732,488       333,357       (4,065,845 )     -  
Other assets
    -       30,581       66,836       -       97,417  
                                         
    $ 21,472     $ 6,025,074     $ 5,738,717     $ (5,187,418 )   $ 6,597,845  
                                         
CURRENT LIABILITIES:
                                       
Current maturities of long-term debt
  $ -     $ 22,464     $ 22,559     $ -     $ 45,023  
Accounts payable - trade
    730       43,091       67,261       -       111,082  
Deferred revenues
    -       -       36,220       -       36,220  
Accrued liabilities
    -       102,785       28,256       -       131,041  
Liabilities of discontinued operations
    -       25,005       -       -       25,005  
Total current liabilities
    730       193,345       154,296       -       348,371