Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

FORM 10-Q

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

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)

Inapplicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   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 þ 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 þ

The number of Class A ordinary shares, $0.125 par value, outstanding at Monday, July 25, 2016, was 125,420,778, which excludes 553,939 shares held by an affiliated employee benefit trust.

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ROWAN COMPANIES PLC

TABLE OF CONTENTS

 
 
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FORWARD-LOOKING STATEMENTS

Statements contained in this report regarding future financial performance, results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements include words or phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “could,” “may,” “might,” “should,” “will,” “forecast,” “potential,” "outlook," “scheduled,” “predict,” “will be,” “will continue,” “will likely result,” and similar words and specifically include statements regarding expected financial performance; dividend and share repurchases or debt retirement; growth strategies; expected utilization, day rates, revenues, operating expenses, contract terms, contract backlog, capital expenditures, tax rates and positions, insurance coverages, access to financing and funding sources; the availability, delivery, mobilization, contract commencement, relocation or other movement of rigs and the timing thereof; future rig construction (including construction in progress and completion thereof), enhancement, upgrade or repair and costs and timing thereof; the suitability of rigs for future contracts; general market, business and industry conditions, trends and outlook; rig demand; future operations; the impact of increasing regulatory requirements and complexity; expected contributions from our new rigs and our entry into the ultra-deepwater market; divestiture of selected assets; expense management; the likely outcome of legal proceedings or insurance or other claims and the timing thereof; activity levels in the offshore drilling market; customer drilling programs; and commodity prices. Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:

•
prices of oil and natural gas and industry expectations about future prices and impacts of global financial or economic downturns;

•
changes in the offshore drilling market, including fluctuations in worldwide rig supply and demand, competition or technology;

•
variable levels of drilling activity and expenditures, whether as a result of actions by OPEC, global capital markets and liquidity, prices of oil and natural gas or otherwise, which may result in decreased demand and cause us to idle or stack additional rigs;

•
drilling permit and operations delays, moratoria or suspensions, new and future regulatory, legislative or permitting requirements (including requirements related to certification and testing of blowout preventers and other equipment or otherwise impacting operations), future lease sales, changes in laws, rules and regulations that have or may impose increased financial responsibility, additional oil spill contingency plan requirements and other governmental actions that may result in claims of force majeure or otherwise adversely affect our existing drilling contracts;

•
governmental regulatory, legislative and permitting requirements affecting drilling operations or compliance obligations in the areas in which our rigs operate;

•
tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes;

•
economic volatility and political uncertainties following the vote in the U.K. to exit the European Union ("Brexit") and any subsequent referendum in Scotland to seek independence from the U.K.;

•
downtime, lost revenue and other risks associated with drilling operations, operating hazards, or rig relocations and transportation, including rig or equipment failure, collisions, damage and other unplanned repairs, the limited availability of transport vessels, hazards, self-imposed drilling limitations and other delays due to weather conditions or otherwise, and the limited availability or high cost of insurance coverage for certain offshore perils or associated removal of wreckage or debris and other losses;

•
access to spare parts, equipment and personnel to maintain, upgrade and service our fleet;

•
possible cancellation, suspension or renegotiation of drilling contracts as a result of economic conditions in the industry, distressed financial condition of our customers, force majeure, mechanical difficulties, delays, performance or other reasons;

•
potential cost overruns and other risks inherent to construction, repair, upgrades, inspections or enhancement of drilling units, unexpected delays in rig and equipment delivery and engineering or design issues following shipyard delivery,

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delays in acceptance by our customers, or delays in the dates our drilling units will enter a shipyard, be transported and delivered, enter service or return to service;

•
changes or delays in actual contract commencement dates; contract terminations, contract option exercises, contract revenues, contract awards; the termination of contracts or renegotiation of contract terms by customers or payment or operational delays by our customers; or restructuring or insolvency of significant customers;

•
operating hazards, including environmental or other liabilities, risks, expenses or losses, whether related to well-control issues, or storm or hurricane damage, losses or liabilities (including wreckage or debris removal), collisions, or otherwise;

•
our ability to retain highly skilled personnel on commercially reasonable terms, whether due to competition from other contract drillers, labor regulations or otherwise; our ability to seek and receive visas for our personnel to work in our areas of operation in a timely manner;

•
governmental action and political and economic uncertainties, including uncertainty or instability resulting from civil unrest, political demonstrations, strikes, or outbreak or escalation of armed hostilities or other crises in oil or natural gas producing areas in which we operate, which may result in extended business interruptions, suspended operations, or claims by our customers of a force majeure situation and payment disputes;

•
terrorism, piracy, cyber-breaches, outbreaks of any disease or epidemic and other related travel restrictions, political instability, hostilities, acts of war, nationalization, expropriation, confiscation or deprivation of our assets or military action impacting our operations, assets or financial performance in any of our areas of operations;

•
the outcome of legal proceedings, or other claims or contract disputes, including any inability to collect receivables or resolve significant contractual or day rate disputes, any purported renegotiation, nullification, cancellation or breach of contracts with customers or other parties;

•
potential for asset impairments;

•
impacts of any global financial or economic downturn;

•
volatility in currency exchange rates and limitations on our ability to use or convert illiquid currencies;

•
effects of accounting changes and adoption of accounting policies;


•
potential unplanned expenditures and funding requirements, including investments in pension plans and other benefit plans; and

•
other important factors described from time to time in the reports filed by us with the Securities and Exchange Commission and the New York Stock Exchange.

Such risks and uncertainties are beyond our ability to control, and in many cases we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements. Should one or more of these risks or uncertainties materialize or should our underlying assumptions prove incorrect, actual results may vary materially from those indicated. You should not place undue reliance on forward-looking statements. In addition to the risks, uncertainties and assumptions described above, you should also carefully read and consider the risk factors and forward-looking statement disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2015. We disclaim any obligation to update or revise any forward-looking statements except as required by applicable law or regulation.


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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares and par value)
(Unaudited)
 
June 30, 2016
 
December 31, 2015

 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
761,423

 
$
484,228

Receivables - trade and other
550,416

 
410,519

Prepaid expenses and other current assets
30,294

 
26,528

Total current assets
1,342,133

 
921,275

 
 
 
 
PROPERTY AND EQUIPMENT:
 

 
 

Drilling equipment
8,961,689

 
8,930,434

Other property and equipment
137,680

 
137,659

Property and equipment - gross
9,099,369

 
9,068,093

Less accumulated depreciation and amortization
1,844,436

 
1,662,261

Property and equipment - net
7,254,933

 
7,405,832

 
 
 
 
Other assets
22,595

 
20,160

 
 
 
 
TOTAL ASSETS
$
8,619,661

 
$
8,347,267

 
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable - trade
$
109,644

 
$
109,574

Deferred revenues
23,619

 
33,062

Accrued liabilities
174,883

 
186,035

Total current liabilities
308,146

 
328,671

 
 
 
 
Long-term debt, less current portion
2,645,367

 
2,692,419

Other liabilities
348,676

 
357,923

Deferred income taxes - net
190,680

 
195,795

Commitments and contingent liabilities (Note 4)


 


 
 
 
 
SHAREHOLDERS' EQUITY:
 

 
 

Class A Ordinary Shares, $0.125 par value, 125,974,717 and 125,947,424 shares issued at June 30, 2016, and December 31, 2015
15,747

 
15,743

Additional paid-in capital
1,463,297

 
1,458,532

Retained earnings
3,849,354

 
3,509,792

Cost of 556,139 and 1,129,440 treasury shares at June 30, 2016, and December 31, 2015, respectively
(7,251
)
 
(12,223
)
Accumulated other comprehensive loss
(194,355
)
 
(199,385
)
Total shareholders' equity
5,126,792

 
4,772,459

 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
8,619,661

 
$
8,347,267


See Notes to Unaudited Condensed Consolidated Financial Statements.

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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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
REVENUES
$
611,861

 
$
508,736

 
$
1,112,041

 
$
1,055,775

 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 
 
 
Direct operating costs (excluding items below)
207,485

 
253,944

 
412,317

 
509,678

Depreciation and amortization
100,141

 
95,390

 
198,993

 
185,080

Selling, general and administrative
26,111

 
31,158

 
53,041

 
58,744

Loss (gain) on disposals of property and equipment
1,938

 
338

 
4,115

 
(175
)
Material charges and other operating expenses
—

 
5,000

 
—

 
5,000

Total costs and expenses
335,675

 
385,830

 
668,466

 
758,327

 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
276,186

 
122,906

 
443,575

 
297,448

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 
 
 
Interest expense, net of interest capitalized
(38,249
)
 
(30,840
)
 
(77,173
)
 
(63,586
)
Gain on extinguishment of debt
1,787

 
—

 
2,364

 
—

Interest income
449

 
435

 
893

 
590

Other - net
(644
)
 
(80
)
 
(3,221
)
 
(1,121
)
Total other income (expense) - net
(36,657
)
 
(30,485
)
 
(77,137
)
 
(64,117
)
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
239,529

 
92,421

 
366,438

 
233,331

Provision for income taxes
22,800

 
7,686

 
26,910

 
24,927

 
 
 
 
 
 
 
 
NET INCOME
$
216,729

 
$
84,735

 
$
339,528

 
$
208,404

 
 
 
 
 
 
 
 
NET INCOME PER SHARE - BASIC
$
1.73

 
$
0.68

 
$
2.71

 
$
1.67

 
 
 
 
 
 
 
 
NET INCOME PER SHARE - DILUTED
$
1.72

 
$
0.68

 
$
2.70

 
$
1.67

 
 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER SHARE
$
—

 
$
0.10

 
$
—

 
$
0.20



See Notes to Unaudited Condensed Consolidated Financial Statements.


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

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
NET INCOME
$
216,729

 
$
84,735

 
$
339,528

 
$
208,404

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 
 
 
Net reclassification adjustment for amounts recognized in net income as a component of net periodic benefit cost, net of income tax expense of $1,349 and $1,840 for the three months ended June 30, 2016 and 2015, and $2,698 and $3,648 for the six months ended June 30, 2016 and 2015, respectively
2,515

 
3,413

 
5,030

 
6,799

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
$
219,244

 
$
88,148

 
$
344,558

 
$
215,203



See Notes to Unaudited Condensed Consolidated Financial Statements.


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ROWAN COMPANIES PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six months ended June 30,
 
2016
 
2015
CASH PROVIDED BY OPERATIONS:
 
 
 
Net income
$
339,528

 
$
208,404

Adjustments to reconcile net income to net cash provided by operations:
 

 
 

Depreciation and amortization
198,993

 
185,241

Deferred income taxes
(5,211
)
 
(12,571
)
Provision for pension and other postretirement benefits
9,513

 
15,776

Share-based compensation expense
17,523

 
16,370

Loss (gain) on disposals of property and equipment
4,115

 
(175
)
Other postretirement benefit claims paid
(4,856
)
 
(2,358
)
Contributions to pension plans
(8,154
)
 
(4,698
)
Noncash loss on debt extinguishment
261

 
—

Contingent payment derivative
(6,382
)
 
—

Changes in current assets and liabilities:
 

 
 

Receivables - trade and other
(139,897
)
 
47,292

Prepaid expenses and other current assets
(3,766
)
 
(10,710
)
Accounts payable
11,174

 
14,681

Accrued income taxes
14,929

 
3,809

Deferred revenues
(9,443
)
 
4,913

Other current liabilities
(22,802
)
 
(14,769
)
Net changes in other noncurrent assets and liabilities
(7,155
)
 
(2,485
)
Net cash provided by operations
388,370

 
448,720

 
 
 
 
CASH USED IN INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(64,395
)
 
(616,398
)
Proceeds from disposals of property and equipment
1,082

 
2,298

Net cash used in investing activities
(63,313
)
 
(614,100
)
 
 
 
 
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
 

 
 

Proceeds from borrowings
—

 
220,000

Reductions of long-term debt
(47,862
)
 
(170,000
)
Dividends paid
—

 
(25,220
)
Net cash provided by (used in) financing activities
(47,862
)
 
24,780

 
 
 
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
277,195

 
(140,600
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
484,228

 
339,154

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
761,423

 
$
198,554



See Notes to Unaudited Condensed Consolidated Financial Statements.


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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, 2015
124,564

 
$
15,604

 
$
1,436,910

 
$
3,466,993

 
$
(7,990
)
 
$
(220,118
)
 
$
4,691,399

Net shares issued (acquired) under share-based compensation plans
222

 
139

 
397

 
—

 
(3,702
)
 
—

 
(3,166
)
Share-based compensation
—

 
—

 
12,227

 
—

 
—

 
—

 
12,227

Excess tax benefit (deficit) from share-based compensation plans
—

 
—

 
(2,322
)
 
—

 
—

 
—

 
(2,322
)
Retirement benefit adjustments, net of taxes of $3,648
—

 
—

 
—

 
—

 
—

 
6,799

 
6,799

Dividends
—

 
—

 
—

 
(25,220
)
 
—

 
—

 
(25,220
)
Net income
—

 
—

 
—

 
208,404

 
—

 
—

 
208,404

Balance, June 30, 2015
124,786

 
$
15,743

 
$
1,447,212

 
$
3,650,177

 
$
(11,692
)
 
$
(213,319
)
 
$
4,888,121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
124,818

 
$
15,743

 
$
1,458,532

 
$
3,509,792

 
$
(12,223
)
 
$
(199,385
)
 
$
4,772,459

Net shares issued (acquired) under share-based compensation plans
600

 
4

 
(9,250
)
 
—

 
4,972

 
—

 
(4,274
)
Share-based compensation
—

 
—

 
11,413

 
—

 
—

 
—

 
11,413

Excess tax benefit (deficit) from share-based compensation plans
—

 
—

 
2,602

 
—

 
—

 
—

 
2,602

Retirement benefit adjustments, net of taxes of $2,698
—

 
—

 
—

 
—

 
—

 
5,030

 
5,030

Dividends
—

 
—

 
—

 
34

 
—

 
—

 
34

Net income
—

 
—

 
—

 
339,528

 
—

 
—

 
339,528

Balance, June 30, 2016
125,418

 
$
15,747

 
$
1,463,297

 
$
3,849,354

 
$
(7,251
)
 
$
(194,355
)
 
$
5,126,792


See Notes to Unaudited Condensed Consolidated Financial Statements.

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ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1 – Nature of Operations and Basis of Presentation

Rowan Companies plc, a public limited company incorporated under the laws of England and Wales, is a global provider of offshore contract drilling services to the international oil and gas industry. Our fleet currently consists of 31 mobile offshore drilling units, including 27 self-elevating jack-up drilling units and four ultra-deepwater drillships. We contract our drilling rigs, related equipment and work crews primarily on a day-rate basis in markets throughout the world, currently including the United States Gulf of Mexico (US GOM), the United Kingdom (U.K.) and Norwegian sectors of the North Sea, the Middle East, Trinidad and Suriname.

The financial statements included in this Form 10-Q are presented in United States (U.S.) dollars and include the accounts of Rowan Companies plc (“Rowan plc”) and its direct and indirect subsidiaries.  Unless the context otherwise requires, the terms “Rowan,” “Company,” “we,” “us” and “our” are used to refer to Rowan plc and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

The financial statements included in this Form 10-Q have been prepared without audit in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and the applicable rules and regulations of the U.S. Securities and Exchange Commission (SEC).  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.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Customer Contract Termination and Settlement

On May 23, 2016, the Company reached an agreement with Freeport-McMoRan Oil and Gas LLC ("FMOG") and its parent company, Freeport-McMoRan Inc. ("FCX") in connection with the drilling contract for the drillship Rowan Relentless ("FMOG Agreement"), which was scheduled to terminate in June 2017. The FMOG Agreement provided that the drilling contract be terminated immediately, and that FCX will pay the Company $215 million in cash over a period of 90 days to settle outstanding receivables and early termination of the contract, of which $85 million has been received through June 30, 2016 and the remaining $130 million, which is included in Receivables - trade and other on the Condensed Consolidated Balance Sheet as of June 30, 2016, is due to be paid on or before August 21, 2016. In addition, the Company may also receive two additional contingent payments from FCX, payable on September 30, 2017, of $10 million and $20 million depending on the average price of West Texas Intermediate ("WTI") crude oil over a 12-month period beginning June 30, 2016. The $10 million payment will be due if the average price over the period is greater than $50 per barrel and the additional $20 million payment will be due if the average price over the period is greater than $65 per barrel ("FMOG Provision") (See Note 6). The Company warm-stacked the Rowan Relentless in order to reduce costs. During the quarter ended June 30, 2016, the Company recognized $173.2 million in revenue for the Rowan Relentless, including $130.9 million for the cancelled contract value, $6.2 million for the fair value of the derivative associated with the FMOG Provision (See Note 6), $5.6 million for previously deferred revenue related to the contract, and $30.5 million for operations through May 22, 2016.

Day Rate Concessions

On June 1, 2016, the Company executed a contract extension for the Rowan Viking of 270 days for $275,000 per day following the primary term of the original contract in exchange for day rate concessions reducing the day rate for the primary term from $345,528 per day to $275,000 per day. This reduced day rate was applied to January 1, 2016 through November 6, 2017, and as a result, the Company recorded a reduction to revenue for amounts earned under this contract during the period from January 1, 2016 through March 31, 2016 of $6.3 million in the second quarter of 2016.

New Accounting Pronouncements

Revenue Recognition – In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which sets forth a global standard for revenue recognition and replaces most existing industry-specific guidance. We will be required to adopt the new standard in annual and interim periods beginning January 1, 2018. The amendments may be applied using a retrospective, modified retrospective or prospective with a

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ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

cumulative catch-up approach. We are evaluating the standard and have not yet determined our implementation method upon adoption or what impact adoption will have on our financial statements.

Presentation of Deferred Taxes – In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities to present deferred tax assets and deferred tax liabilities in balance sheets as noncurrent. We will be required to adopt the new standard in annual and interim periods beginning January 1, 2017. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We are evaluating the standard and have not yet determined our implementation method.

Lease Accounting – In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires the balance sheet recognition of lease assets and lease liabilities by lessees for leases previously classified as operating leases under prior GAAP. We will be required to adopt the new standard in annual and interim periods beginning January 1, 2019. Lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients that entities may elect to apply. We have not yet evaluated the standard nor determined our implementation method upon adoption or what impact adoption will have on our financial statements.

Stock Compensation – In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, which simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, withholding taxes and forfeitures, as well as classification on the statement of cash flows. We will be required to adopt the amended guidance in annual and interim reports beginning January 1, 2017, with early adoption permitted. We are in the process of determining the method of adoption and the impact this amendment will have on our consolidated financial statements.

Financial Instruments – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the FASB's guidance on the impairment of financial instruments. The ASU adds to US GAAP an impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. We will be required to adopt the amended guidance in annual and interim reports beginning January 1, 2020, with early adoption permitted for fiscal years beginning after December 15, 2018. We are in the process of evaluating the impact this amendment will have on our consolidated financial statements.
Note 2 – Earnings Per Share

The following table sets forth a reconciliation of basic and diluted shares (in thousands):

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Average common shares outstanding
125,375

 
124,734

 
125,183

 
124,432

Effect of dilutive securities - share-based compensation
969

 
669

 
672

 
642

Average shares for diluted computations
126,344

 
125,403

 
125,855

 
125,074


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

Share options, share appreciation rights and restricted share units granted under share-based compensation plans are anti-dilutive and excluded from diluted earnings per share when the hypothetical number of shares that could be repurchased under the treasury stock method exceeds the number of shares that can be exercised, or when the Company reports a net loss from continuing operations. Anti-dilutive shares, which could potentially dilute earnings per share in the future, are set forth below (in thousands):


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Share options and appreciation rights
1,589

 
1,399

 
1,589

 
1,399

Restricted share units
741

 
603

 
1,876

 
1,475

Total potentially dilutive shares
2,330

 
2,002

 
3,465

 
2,874


Note 3 – Pension and Other Postretirement Benefits

The Company provides defined-benefit pension, health care and life insurance benefits upon retirement for certain full-time employees.

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

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Service cost
$
3,760

 
$
4,235

 
$
7,541

 
$
8,424

Interest cost
6,466

 
7,948

 
12,968

 
15,808

Expected return on plan assets
(9,860
)
 
(10,530
)
 
(19,775
)
 
(20,944
)
Amortization of net loss
5,102

 
6,378

 
10,210

 
12,689

Amortization of prior service credit
(1,238
)
 
(1,126
)
 
(2,483
)
 
(2,241
)
Total net pension cost
$
4,230

 
$
6,905

 
$
8,461

 
$
13,736


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

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Service cost
$
114

 
$
324

 
$
228

 
$
644

Interest cost
506

 
703

 
1,015

 
1,398

Amortization of net loss
2

 
—

 
1

 
(2
)
Amortization of prior service credit
(96
)
 
—

 
(192
)
 
—

Total other postretirement benefit cost
$
526

 
$
1,027

 
$
1,052

 
$
2,040


During the six months ended June 30, 2016, the Company contributed $13.0 million to its pension and other postretirement benefit plans and expects to make additional contributions to such plans totaling approximately $16.9 million for the remainder of 2016.

Note 4 – Commitments and Contingent Liabilities

Uncertain tax positions – We have been advised by the U.S. Internal Revenue Service of proposed unfavorable tax adjustments for the open tax years 2009 through 2012. The unfavorable tax adjustments including applicable penalties and interest
primarily relate to the following items; 2009 tax benefits recognized as a result of applying the facts of a third-party tax case that provided favorable tax treatment for certain foreign contracts entered into in prior years to the company’s situation; transfer pricing; and domestic production activity deduction. We have submitted a formal protest in response to these unfavorable proposed tax adjustments. In years subsequent to 2012, we have similar positions that could be subject to similar adjustments for the open years. We have provided for amounts that we believe will be ultimately payable under the proposed adjustments and intend to vigorously

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

defend our positions; however, if we determine the provisions for these matters to be inadequate due to new information or we are required to pay a significant amount of additional U.S. taxes and applicable penalties and interest in excess of amounts that have been provided for these matters, our consolidated results of operations and cash flows could be materially and adversely affected.

Letters of credit – We periodically employ letters of credit in the normal course of our business, and had outstanding letters of credit of approximately $10.7 million at June 30, 2016.

We are involved in various other legal proceedings incidental to our business and are vigorously defending our position in all such matters.  Although the outcome of such proceedings cannot be predicted with certainty, we do not expect resolution of these matters to have a material effect on our financial position, results of operations or cash flows.

Note 5 – Share-Based Compensation

On February 25, 2016, the Company granted restricted share units ("RSUs") to employees for annual incentive awards pursuant to our long-term incentive plan with a grant-date fair value aggregating $19.3 million.  The awards vest ratably over three years except to the extent they may vest earlier under our retirement policy. The aggregate grant-date fair value, net of estimated forfeitures, was $18.2 million, which will be recognized as compensation expense over a weighted-average period of 2.6 years from the grant date.  

Additionally, on February 25, 2016, the Company granted to certain members of management performance units ("P-Units") that have a target value of $100 per unit.  The amount ultimately earned with respect to the P-Units will depend on the Company’s total shareholder return ("TSR") relative to a group of peer companies over a three-year period ending December 31, 2018, and could range from zero to $200 per unit depending on performance.  Twenty-five percent of the P-Units’ value is determined by the Company’s relative TSR ranking for each one-year period ended December 31, 2016, 2017, and 2018, respectively, and 25% of the P-Units’ value is determined by the relative TSR ranking for the three-year period ending December 31, 2018.  The P-Units cliff vest on the third anniversary following the grant date. Settlement may be in cash or shares at the Board's discretion.

The grant-date fair value of the P-Units was estimated to be $8.6 million.  Fair value was estimated using a Monte Carlo simulation model, which considers the probabilities of the Company’s TSR ranking at the end of each performance period and the amount of the payout at each rank to determine the probability-weighted expected payout.  The Company uses liability accounting to account for the P-Units.  Compensation is recognized on a straight-line basis over a maximum period of three years from the grant date and is adjusted for changes in fair value through the vesting date. 

Estimated liabilities for P-Units as of June 30, 2016, included $8.6 million and $7.9 million classified as short- and long-term, respectively, compared to $7.6 million and $11.4 million, respectively, at December 31, 2015.

At June 30, 2016, estimated unrecognized share-based compensation totaled approximately $44.3 million, which is expected to be recognized as compensation expense over a remaining weighted-average period of 1.9 years.


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 6 – Derivatives

The Company determined that the FMOG Provision of the FMOG Agreement is a freestanding financial instrument and that it met the criteria of a derivative instrument ("Contingent Payment Derivative"). The Contingent Payment Derivative was initially recorded to revenue at a fair value of $6.2 million on May 23, 2016, and will be revalued at each reporting date with changes in the fair value reported as non-operating income or expense. The fair value of the Contingent Payment Derivative was determined using a Monte Carlo simulation (See Note 7).

The following table provides the fair value of the Company’s derivative as reflected in the Condensed Consolidated Balance Sheet (in thousands):

 
Fair Value
Balance Sheet Classification
June 30, 2016
 
 
Derivative:
 
Contingent Payment Derivative
 
Other Assets
$
6,382


The following table provides the effect of the Company’s derivative on the Condensed Consolidated Statements of Income (in thousands):

 
 
Three months ended June 30, 2016
 
Six months ended June 30, 2016
Derivative
I.
II.
 
 
 
Contingent Payment Derivative
Other Income (Expense)
$
157

 
$
157

I. Classification of Gain (Loss) Recognized in Income (Loss) on Derivative
II. Amount of Gain (Loss) Recognized in Income (Loss) on Derivative

Note 7 – Fair Value Measurements

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 US 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 applicable level within the fair value hierarchy is the lowest level of any input that is significant to the fair value measurement.
Derivative
The fair value of the Contingent Payment Derivative (Level 3) was estimated using a Monte Carlo simulation model, which calculates the probabilities of the daily closing WTI spot price exceeding the $50 price target and the $65 price target ("Price Targets"), respectively, on a daily averaging basis during the 12-month payment measurement period ending on June 30, 2017.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The probabilities are applied to the payout at each Price Target to calculate the probability-weighted expected payout. The following are the significant inputs used in the valuation of the Contingent Payment Derivative: the WTI Spot Price on the valuation date, the expected volatility, and the risk-free interest rate, and the slope of the WTI forward curve, which were $47.48, 37.5%, 0.765% and 5.5% at May 23, 2016, respectively and $48.33, 34.35%, 0.482%, and 8% at June 30, 2016, respectively. The expected volatility was estimated from the implied volatility rates of WTI Crude Futures. The risk-free rate was based on yields of U.S. Treasury securities commensurate with the remaining term of the Contingent Payment derivative.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

 
 
 
Estimated fair value measurements
 
Carrying value
 
Quoted prices in active markets (Level 1)
 
Significant other observable inputs (Level 2)
 
Significant other unobservable inputs (Level 3)
June 30, 2016:
 
 
 
 
 
 
 
Assets - cash equivalents
$
747,692

 
$
747,692

 
$
—

 
$
—

Other assets
16,164

 
9,782

 
—

 
6,382

 
 
 
 
 
 
 
 
December 31, 2015:
 
 
 
 
 
 
 
Assets - cash equivalents
$
465,388

 
$
465,388

 
$
—

 
$
—

Other assets
13,508

 
13,508

 
—

 
—


At June 30, 2016 and December 31, 2015, we held Egyptian pounds in the amount of $9.8 million and $13.5 million, respectively, which are classified as Other Assets on the Condensed Consolidated Balance Sheets. We ceased drilling operations in Egypt in 2014, and are currently working to obtain access to the funds for use outside Egypt to the extent they are not utilized. We can provide no assurance we will be able to convert or utilize such funds in the future.

At June 30, 2016, the Company held a Contingent Payment derivative in the amount of $6.4 million, which is classified as Other Assets on the Condensed Consolidated Balance Sheet.

Trade receivables and trade payables, which are required to be measured at fair value, have carrying values that approximate their fair values due to their short maturities.

Other Fair Value Measurements

Financial instruments not required to be measured at fair value consist of the Company’s publicly traded debt securities.  Our publicly traded debt securities had a carrying value of $2.645 billion at June 30, 2016, and an estimated fair value at that date aggregating $2.217 billion, compared to a carrying and fair value of $2.692 billion and $2.072 billion, respectively, at December 31, 2015. Fair values of our publicly traded debt securities were provided by a broker who makes a market in such securities and were measured using a market-approach valuation technique, which is a Level 2 fair value measurement.


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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 8 – Shareholders' Equity

Reclassifications from Accumulated Other Comprehensive Loss – The following table sets forth the significant amounts reclassified out of each component of accumulated other comprehensive loss and the effect on net income for the period (in thousands):

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Amounts recognized as a component of net periodic pension and other postretirement benefit cost:
 
 
 
 
 
 
 
Amortization of net loss
$
(5,105
)
 
$
(6,379
)
 
$
(10,210
)
 
$
(12,688
)
Amortization of prior service credit
1,241

 
1,126

 
2,482

 
2,241

Total before income taxes
(3,864
)
 
(5,253
)
 
(7,728
)
 
(10,447
)
Income tax benefit
1,349

 
1,840

 
2,698

 
3,648

Total reclassifications for the period, net of income taxes
$
(2,515
)
 
$
(3,413
)
 
$
(5,030
)
 
$
(6,799
)

Note 9 – Other Financial Statement Disclosures

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

 
June 30, 2016
 
December 31, 2015
 
 
 
 
Trade (1)
$
532,208

 
$
395,694

Income tax
9,092

 
4,463

Other
9,116

 
10,362

Total receivables - trade and other
$
550,416

 
$
410,519


(1) June 30, 2016 balance includes $130 million due from FCX under the Rowan Relentless contract termination settlement (see note 1).

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

 
June 30, 2016
 
December 31, 2015
 
 
 
 
Pension and other postretirement benefits
$
21,228

 
$
31,389

Compensation and related employee costs
58,629

 
73,628

Interest
42,420

 
44,338

Income taxes
38,856

 
23,927

Other
13,750

 
12,753

Total accrued liabilities
$
174,883

 
$
186,035



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ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

 
June 30, 2016
 
December 31, 2015
5% Senior Notes, due September 2017 ($357.7 million and $366.6 million principal amount, respectively; 5.2% effective rate)
$
356,953

 
$
365,494

7.875% Senior Notes, due August 2019 ($396.5 million and $435.5 million principal amount, respectively; 8.0% effective rate)
394,492

 
432,870

4.875% Senior Notes, due June 2022 ($700 million principal amount; 4.7% effective rate)
705,753

 
706,236

4.75% Senior Notes, due January 2024 ($400 million principal amount; 4.8% effective rate)
397,250

 
397,069

5.4% Senior Notes, due December 2042 ($400 million principal amount; 5.4% effective rate)
394,818

 
394,720

5.85% Senior Notes, due January 2044 ($400 million principal amount; 5.9% effective rate)
396,101

 
396,030

Total carrying value
$
2,645,367

 
$
2,692,419


In the first quarter of 2016, we paid $15.9 million in cash to retire $16.5 million aggregate principal amount of the 5% Senior Notes due 2017 and 7.875% Senior Notes due 2019, plus accrued interest, and recognized a $0.6 million gain on early extinguishment of debt.

Also during the first quarter, we repurchased an additional $21.4 million aggregate principal amount of the 5% and 7.875% Senior Notes, which settled in April 2016 and resulted in a $1.2 million gain on early extinguishment of debt in the second quarter of 2016.

In April 2016, we repurchased $10.0 million aggregate principal amount of the 7.875% Senior Notes which resulted in a $0.6 million gain on early extinguishment of debt in the second quarter of 2016.

Supplemental Cash Flow Information – Accrued capital expenditures, which are excluded from capital expenditures in the Condensed Consolidated Statements of Cash Flows until settlement, totaled $21.1 million and $41.4 million at June 30, 2016 and 2015, respectively.  Interest capitalized in connection with rig construction projects totaled $8.7 million and $16.2 million in the three and six months ended June 30, 2015. We did not capitalize any interest for the three and six months ended June 30, 2016.

Income Taxes – In accordance with US GAAP for interim reporting, the Company estimates its full-year effective tax rate and applies this rate to its year-to-date pretax income.  In addition, the Company separately calculates the tax impact of unusual items, if any. We provide for income taxes based upon the tax laws and rates in effect in the countries in which we conduct operations. The amounts of our provisions are impacted by such laws and rates and the availability of deductions, credits and other benefits in each of the various jurisdictions. Our overall effective tax rate may therefore vary considerably from quarter to quarter and from year to year based on the actual or projected location of operations, levels of income, our consolidated effective income tax rate, deferred intercompany gains or losses, and other factors.

Our effective tax rate was 9.5% and 7.3%, respectively, for the three and six months ended June 30, 2016, compared to 8.3% and 10.7%, respectively, for the comparable prior-year periods. The higher effective tax rate for the three months ended June 30, 2016 is primarily due to the recognition of unfavorable discrete items in the current quarter, partially offset by the change in the geographic mix of earnings. The lower effective tax rate for the six months ended June 30, 2016, was primarily attributable to the change in the geographic mix of earnings.

The Company has not provided for deferred income taxes on undistributed earnings of its non-U.K. subsidiaries, including non-U.S. entities under Rowan Companies, Inc. (RCI).  It is the Company’s policy and intention to permanently reinvest outside the U.S. the earnings of non-U.S. entities directly or indirectly owned by RCI.  Generally, earnings of non-U.K. entities in which RCI does not have a direct or indirect ownership interest can be distributed to the Company without imposition of either U.K. or local country tax.


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ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Material Charges and Other Operating Expenses –Material charges for the three months ended June 30, 2015, included a $5.0 million adjustment to an estimated liability for the termination of a contract in connection with refurbishment work on the Rowan Gorilla III. This matter was settled during the third quarter of 2015.

Note 10 – Segment Information

We operate in two principal operating segments – deepwater, which consists of our drillship operations, and jack-ups. Both segments provide one service – contract drilling. The Company evaluates performance primarily based on income from operations.

Depreciation and amortization and selling, general and administrative expenses related to our corporate and other administrative offices have not been allocated to our operating segments for purposes of measuring segment operating income and are included in the column "Unallocated costs and other." "Other operating items" consists of gains and losses on equipment sales and litigation.

Segment information for the three and six months ended June 30, 2016 and 2015 is set forth below (in thousands):

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ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Deepwater
 
Jack-ups
 
Segment total
 
Unallocated costs and other
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2016:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
341,389

 
$
270,472

 
$
611,861

 
$
—

 
$
611,861

Operating expenses:
 
 
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
56,029

 
151,456

 
207,485

 
—

 
207,485

Depreciation and amortization
29,891

 
71,131

 
101,022

 
(881
)
 
100,141

Selling, general and administrative
—

 
—

 
—

 
26,111

 
26,111

Other operating items
1

 
1,840

 
1,841

 
97

 
1,938

Income (loss) from operations
$
255,468

 
$
46,045

 
$
301,513

 
$
(25,327
)
 
$
276,186

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
563,923

 
$
548,118

 
$
1,112,041

 
$
—

 
$
1,112,041

Operating expenses:
 
 
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
123,011

 
289,306

 
412,317

 
—

 
412,317

Depreciation and amortization
57,239

 
139,485

 
196,724

 
2,269

 
198,993

Selling, general and administrative
—

 
—

 
—

 
53,041

 
53,041

Other operating items
298

 
3,736

 
4,034

 
81

 
4,115

Income (loss) from operations
$
383,375

 
$
115,591

 
$
498,966

 
$
(55,391
)
 
$
443,575

 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2015:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
161,889

 
$
346,847

 
$
508,736

 
$
—

 
$
508,736

Operating expenses:
 
 
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
70,430

 
183,514

 
253,944

 
—

 
253,944

Depreciation and amortization
21,150

 
70,925

 
92,075

 
3,315

 
95,390

Selling, general and administrative
—

 
—

 
—

 
31,158

 
31,158

Other operating items
—

 
5,000

 
5,000

 
338

 
5,338

Income (loss) from operations
$
70,309

 
$
87,408

 
$
157,717

 
$
(34,811
)
 
$
122,906

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
308,760

 
$
747,015

 
$
1,055,775

 
$
—

 
$
1,055,775

Operating expenses:
 
 
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
129,457

 
380,221

 
509,678

 
—

 
509,678

Depreciation and amortization
38,813

 
139,958

 
178,771

 
6,309

 
185,080

Selling, general and administrative
—

 
—

 
—

 
58,744

 
58,744

Other operating items
—

 
5,000

 
5,000

 
(175
)
 
4,825

Income (loss) from operations
$
140,490

 
$
221,836

 
$
362,326

 
$
(64,878
)
 
$
297,448


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ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 11 – Guarantees of Registered Securities

RCI, a 100%-owned Delaware subsidiary of Rowan plc, is the issuer of all of our publicly traded debt securities consisting of the following series: 5% Senior Notes due 2017; 7.875% Senior Notes due 2019; 4.875% Senior Notes due 2022; 4.75% Senior Notes due 2024; 5.4% Senior Notes due 2042; and 5.85% Senior Notes due 2044 (the “Senior Notes”). The Senior Notes and amounts outstanding under our revolving credit facility are guaranteed by Rowan plc on a full, unconditional and irrevocable basis.

The condensed consolidating financial information that follows is presented on the equity method of accounting in accordance with Rule 3-10 of Regulation S-X in connection with Rowan plc’s guarantee of the Senior Notes.

Rowan Companies plc and Subsidiaries
Condensed Consolidating Balance Sheets
June 30, 2016
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
CURRENT ASSETS:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
7,849

 
$
148,161

 
$
605,413

 
$
—

 
$
761,423

Receivables - trade and other
110

 
3,438

 
546,868

 
—

 
550,416

Other current assets
—

 
23,484

 
6,810

 
—

 
30,294

Total current assets
7,959

 
175,083

 
1,159,091

 
—

 
1,342,133

 
 
 
 
 
 
 
 
 
 
Property and equipment - gross
—

 
610,407

 
8,488,962

 
—

 
9,099,369

Less accumulated depreciation and amortization
—

 
258,901

 
1,585,535

 
—

 
1,844,436

Property and equipment - net
—

 
351,506

 
6,903,427

 
—

 
7,254,933

 
 
 
 
 
 
 
 
 
 
Investments in subsidiaries
5,125,250

 
6,327,992

 
—

 
(11,453,242
)
 
—

Due from affiliates
251

 
831,567

 
25,650

 
(857,468
)
 
—

Other assets
—

 
5,182

 
17,413

 
—

 
22,595

 
$
5,133,460

 
$
7,691,330

 
$
8,105,581

 
$
(12,310,710
)
 
$
8,619,661

 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

Current portion of long-term debt
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Accounts payable - trade
426

 
32,921

 
76,297

 
—

 
109,644

Deferred revenues
—

 
—

 
23,619

 
—

 
23,619

Accrued liabilities
317

 
102,376

 
72,190

 
—

 
174,883

Total current liabilities
743

 
135,297

 
172,106

 
—

 
308,146

 
 
 
 
 
 
 
 
 
 
Long-term debt, less current portion
—

 
2,645,367

 
—

 
—

 
2,645,367

Due to affiliates
1,529

 
25,693

 
830,246

 
(857,468
)
 
—

Other liabilities
4,396

 
304,574

 
39,706

 
—

 
348,676

Deferred income taxes - net
—

 
538,035

 
148,169

 
(495,524
)
 
190,680

Shareholders' equity
5,126,792

 
4,042,364

 
6,915,354

 
(10,957,718
)
 
5,126,792

 
$
5,133,460

 
$
7,691,330

 
$
8,105,581

 
$
(12,310,710
)
 
$
8,619,661


18
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ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Balance Sheets
December 31, 2015
(in thousands)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
17,297

 
$
9,506

 
$
457,425

 
$
—

 
$
484,228

Receivables - trade and other
110

 
1,369

 
409,040

 
—

 
410,519

Other current assets
394

 
19,230

 
6,904

 
—

 
26,528

Total current assets
17,801

 
30,105

 
873,369

 
—

 
921,275

 
 
 
 
 
 
 
 
 
 
Property and equipment - gross
—

 
592,809

 
8,475,284

 
—

 
9,068,093

Less accumulated depreciation and amortization
—

 
242,665

 
1,419,596

 
—

 
1,662,261

Property and equipment - net
—

 
350,144

 
7,055,688

 
—

 
7,405,832

 
 
 
 
 
 
 
 
 
 
Investments in subsidiaries
4,763,306

 
6,028,242

 
—

 
(10,791,548
)
 
—

Due from affiliates
629

 
1,218,233

 
55,751

 
(1,274,613
)
 
—

Other assets
—

 
4,999

 
15,161

 
—

 
20,160

 
$
4,781,736

 
$
7,631,723

 
$
7,999,969

 
$
(12,066,161
)
 
$
8,347,267

 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 

 
 

 
 

 
 

 
 

Accounts payable - trade
$
960

 
$
19,111

 
$
89,503

 
$
—

 
$
109,574

Deferred revenues
—

 
6

 
33,056

 
—

 
33,062

Accrued liabilities
778

 
119,388

 
65,869

 
—

 
186,035

Total current liabilities
1,738

 
138,505

 
188,428

 
—

 
328,671

 
 
 
 
 
 
 
 
 
 
Long-term debt
—

 
2,692,419

 
—

 
—

 
2,692,419

Due to affiliates
2,880

 
55,750

 
1,215,983

 
(1,274,613
)
 
—

Other liabilities
4,659

 
304,709

 
48,555

 
—

 
357,923

Deferred income taxes - net
—

 
522,927

 
150,822

 
(477,954
)
 
195,795

Shareholders' equity
4,772,459

 
3,917,413

 
6,396,181

 
(10,313,594
)
 
4,772,459

 
$
4,781,736

 
$
7,631,723

 
$
7,999,969

 
$
(12,066,161
)
 
$
8,347,267



19
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Income Statements
Three months ended June 30, 2016
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
REVENUES
$
—

 
$
15,070

 
$
610,108

 
$
(13,317
)
 
$
611,861

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)
—

 
6,244

 
213,305

 
(12,064
)
 
207,485

Depreciation and amortization
—

 
4,487

 
95,455

 
199

 
100,141

Selling, general and administrative
6,811

 
—

 
20,752

 
(1,452
)
 
26,111

Loss on disposals of property and equipment
—

 
60

 
1,878

 
—

 
1,938

Total costs and expenses
6,811

 
10,791

 
331,390

 
(13,317
)
 
335,675

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(6,811
)
 
4,279

 
278,718

 
—

 
276,186

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense, net of interest capitalized
—

 
(38,249
)
 
(1,130
)
 
1,130

 
(38,249
)
Interest income
9

 
1,226

 
344

 
(1,130
)
 
449

Gain on extinguishment of debt
—

 
1,787

 
—

 
—

 
1,787

Other - net
5,111

 
(5,091
)
 
(664
)
 
—

 
(644
)
Total other income (expense) - net
5,120

 
(40,327
)
 
(1,450
)
 
—

 
(36,657
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
(1,691
)
 
(36,048
)
 
277,268

 
—

 
239,529

Provision (benefit) for income taxes
—

 
10,706

 
20,030

 
(7,936
)
 
22,800

Equity in earnings of subsidiaries, net of tax
218,420

 
162,264

 
—

 
(380,684
)
 
—

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
216,729

 
$
115,510

 
$
257,238

 
$
(372,748
)
 
$
216,729








20
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Income Statements
Three months ended June 30, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
REVENUES
$
—

 
$
18,290

 
$
509,095

 
$
(18,649
)
 
$
508,736

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)
—

 
3,173

 
268,259

 
(17,488
)
 
253,944

Depreciation and amortization
—

 
3,388

 
91,538

 
464

 
95,390

Selling, general and administrative
7,006

 
1,423

 
24,354

 
(1,625
)
 
31,158

Gain on disposals of property and equipment
—

 
346

 
(8
)
 
—

 
338

Material charges and other operating expenses
—

 
—

 
5,000

 
—

 
5,000

Total costs and expenses
7,006

 
8,330

 
389,143

 
(18,649
)
 
385,830

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(7,006
)
 
9,960

 
119,952

 
—

 
122,906

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense, net of interest capitalized
—

 
(30,840
)
 
(4,092
)
 
4,092

 
(30,840
)
Interest income
124

 
4,100

 
303

 
(4,092
)
 
435

Other - net
5,601

 
(5,595
)
 
(86
)
 
—

 
(80
)
Total other income (expense) - net
5,725

 
(32,335
)
 
(3,875
)
 
—

 
(30,485
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
(1,281
)
 
(22,375
)
 
116,077

 
—

 
92,421

Provision (benefit) for income taxes
—

 
2,017

 
13,467

 
(7,798
)
 
7,686

Equity in earnings of subsidiaries, net of tax
86,016

 
1,429

 
—

 
(87,445
)
 
—

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
84,735

 
$
(22,963
)
 
$
102,610

 
$
(79,647
)
 
$
84,735




21
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Income Statements
Six months ended June 30, 2016
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
REVENUES
$
—

 
$
35,858

 
$
1,109,519

 
$
(33,336
)
 
$
1,112,041

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)
—

 
7,220

 
435,663

 
(30,566
)
 
412,317

Depreciation and amortization
—

 
8,682

 
189,794

 
517

 
198,993

Selling, general and administrative
13,838

 
—

 
42,490

 
(3,287
)
 
53,041

Loss on disposals of property and equipment
—

 
70

 
4,045

 
—

 
4,115

Total costs and expenses
13,838

 
15,972

 
671,992

 
(33,336
)
 
668,466

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(13,838
)
 
19,886

 
437,527

 
—

 
443,575

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense, net of interest capitalized
—

 
(77,173
)
 
(3,072
)
 
3,072

 
(77,173
)
Interest income
24

 
3,201

 
740

 
(3,072
)
 
893

Gain on extinguishment of debt
—

 
2,364

 
—

 
—

 
2,364

Other - net
10,468

 
(10,424
)
 
(3,265
)
 
—

 
(3,221
)
Total other income (expense) - net
10,492

 
(82,032
)
 
(5,597
)
 
—

 
(77,137
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
(3,346
)
 
(62,146
)
 
431,930

 
—

 
366,438

(Benefit) Provision for income taxes
—

 
22,183

 
22,502

 
(17,775
)
 
26,910

Equity in earnings of subsidiaries, net of tax
342,874

 
188,858

 
—

 
(531,732
)
 
—

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
339,528

 
104,529

 
409,428

 
(513,957
)
 
339,528



22
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Condensed Consolidating Income Statements
Six months ended June 30, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
REVENUES
$
—

 
$
33,336

 
$
1,056,446

 
$
(34,007
)
 
$
1,055,775

 
 
 
 
 
 
 
 
 
 
COSTS AND EXPENSES:
 

 
 

 
 

 
 

 
 

Direct operating costs (excluding items below)
—

 
4,870

 
536,550

 
(31,742
)
 
509,678

Depreciation and amortization
—

 
7,968

 
176,399

 
713

 
185,080

Selling, general and administrative
11,218

 
2,065

 
48,439

 
(2,978
)
 
58,744

Loss (gain) on disposals of property and equipment
—

 
4

 
(179
)
 
—

 
(175
)
Material charges and other operating expenses
—

 
—

 
5,000

 
—

 
5,000

Total costs and expenses
11,218

 
14,907

 
766,209

 
(34,007
)
 
758,327

 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(11,218
)
 
18,429

 
290,237

 
—

 
297,448

 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 

 
 

 
 

Interest expense, net of interest capitalized
—

 
(63,586
)
 
(6,541
)
 
6,541

 
(63,586
)
Interest income
258

 
6,567

 
306

 
(6,541
)
 
590

Other - net
11,205

 
(11,118
)
 
(1,208
)
 
—

 
(1,121
)
Total other income (expense) - net
11,463

 
(68,137
)
 
(7,443
)
 
—

 
(64,117
)
 
 
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
245

 
(49,708
)
 
282,794

 
—

 
233,331

Provision for income taxes
—

 
2,407

 
42,216

 
(19,696
)
 
24,927

Equity in earnings of subsidiaries, net of tax
208,159

 
23,507

 
—

 
(231,666
)
 
—

 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
208,404

 
(28,608
)
 
240,578

 
(211,970
)
 
208,404





23
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income
Three months ended June 30, 2016
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
216,729

 
$
115,510

 
$
257,238

 
$
(372,748
)
 
$
216,729

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income as a component of net periodic benefit cost, net of income taxes
2,515

 
2,515

 
—

 
(2,515
)
 
2,515

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
219,244

 
$
118,025

 
$
257,238

 
$
(375,263
)
 
$
219,244




Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income
Three months ended June 30, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
84,735

 
$
(22,963
)
 
$
102,610

 
$
(79,647
)
 
$
84,735

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income as a component of net periodic benefit cost, net of income taxes
3,413

 
3,413

 
—

 
(3,413
)
 
3,413

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
88,148

 
$
(19,550
)
 
$
102,610

 
$
(83,060
)
 
$
88,148




24
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income
Six months ended June 30, 2016
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
339,528

 
$
104,529

 
$
409,428

 
$
(513,957
)
 
$
339,528

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income as a component of net periodic benefit cost, net of income taxes
5,030

 
5,030

 
—

 
(5,030
)
 
5,030

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
344,558

 
$
109,559

 
$
409,428

 
$
(518,987
)
 
$
344,558




Rowan Companies plc and Subsidiaries
Statements of Comprehensive Income
Six months ended June 30, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
208,404

 
$
(28,608
)
 
$
240,578

 
$
(211,970
)
 
$
208,404

 
 
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

 
 

 
 

Net reclassification adjustments for amount recognized in net income as a component of net periodic benefit cost, net of income taxes
6,799

 
6,799

 
—

 
(6,799
)
 
6,799

 
 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
215,203

 
$
(21,809
)
 
$
240,578

 
$
(218,769
)
 
$
215,203








25
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Consolidating Statements of Cash Flows
Six months ended June 30, 2016
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
$
(8,274
)
 
$
(49,243
)
 
$
445,165

 
$
722

 
$
388,370

 
 
 
 
 
 
 
 
 
 
INVESTING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Capital expenditures
—

 
(23,399
)
 
(40,996
)
 
—

 
(64,395
)
Proceeds from disposals of property and equipment
—

 
410

 
672

 
—

 
1,082

Collections on subsidiary notes receivables
—

 
357,795

 
—

 
(357,795
)
 
—

Investments in consolidated subsidiaries
(200
)
 
(109,126
)
 
—

 
109,326

 
—

 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities
(200
)
 
225,680

 
(40,324
)
 
(248,469
)
 
(63,313
)
 
 
 
 
 
 
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Advances (to) from affiliates
(974
)
 
10,080

 
(8,384
)
 
(722
)
 
—

Contributions from parent
—

 
—

 
109,326

 
(109,326
)
 
—

Reductions of long-term debt
—

 
(47,862
)
 
(357,795
)
 
357,795

 
(47,862
)
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
(974
)
 
(37,782
)
 
(256,853
)
 
247,747

 
(47,862
)
 
 
 
 
 
 
 
 
 
 
(DECREASE) INCREASE IN  CASH AND CASH EQUIVALENTS
(9,448
)
 
138,655

 
147,988

 
—

 
277,195

CASH AND CASH EQUIVALENTS,   BEGINNING OF PERIOD
17,297

 
9,506

 
457,425

 
—

 
484,228

 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
7,849

 
$
148,161

 
$
605,413

 
$
—

 
$
761,423


26
Table of Contents
ROWAN COMPANIES PLC AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Rowan Companies plc and Subsidiaries
Consolidating Statements of Cash Flows
Six months ended June 30, 2015
(in thousands)
(unaudited)
 
Rowan plc (Parent)
 
RCI (Issuer)
 
Non-guarantor subsidiaries
 
Consolidating adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
$
(3,758
)
 
$
6,654

 
$
474,316

 
$
(28,492
)
 
$
448,720

 
 
 
 
 
 
 
 
 
 
INVESTING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Capital expenditures
—

 
(7,113
)
 
(609,285
)
 
—

 
(616,398
)
Proceeds  from  disposals  of  property,   plant  and  equipment
—

 
1,704

 
594

 
—

 
2,298

 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
—

 
(5,409
)
 
(608,691
)
 
—

 
(614,100
)
 
 
 
 
 
 
 
 
 
 
FINANCING ACTIVITIES:
 

 
 

 
 

 
 

 
 

Advances (to) from affiliates
(16,323
)
 
(74,952
)
 
92,783

 
(1,508
)
 
—

Proceeds from borrowings
—

 
220,000

 
—

 
—

 
220,000

Reductions of long-term debt
—

 
(170,000
)
 
—

 
—

 
(170,000
)
Dividends paid
(25,220
)
 
—

 
(30,000
)
 
30,000

 
(25,220
)
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing  activities
(41,543
)
 
(24,952
)
 
62,783

 
28,492

 
24,780

 
 
 
 
 
 
 
 
 
 
DECREASE IN CASH AND CASH EQUIVALENTS
(45,301
)
 
(23,707
)
 
(71,592
)
 
—

 
(140,600
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
45,909

 
48,580

 
244,665

 
—

 
339,154

 
 
 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
608

 
$
24,873

 
$
173,073

 
$
—

 
$
198,554





27
Table of Contents

ROWAN COMPANIES PLC AND SUBSIDIARIES

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

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2016, included in this Form 10-Q and with our annual report on Form 10-K for the year ended December 31, 2015. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report, as may be updated in our subsequent quarterly reports. See “Forward-Looking Statements.”

OVERVIEW

Rowan plc is a global provider of offshore contract drilling services to the international oil and gas industry, with a focus on high-specification and premium jack-up rigs and ultra-deepwater drillships. Our fleet currently consists of 31 mobile offshore drilling units, including 27 self-elevating jack-up rigs and four ultra-deepwater drillships. Our fleet operates worldwide, including the United States Gulf of Mexico ("US GOM"), the United Kingdom ("U.K.") and Norwegian sectors of the North Sea, the Middle East, Trinidad and Suriname.

As of July 1, 2016, the date of our most recent Fleet Status Report, three of our four drillships were under contract in the US GOM. Additionally, we had four jack-up rigs under contract in the North Sea, ten under contract in the Middle East, two in Trinidad and one in Suriname, and one under contract in the US GOM. We had an additional six marketed jack-up rigs, three cold-stacked jack-up rigs and one drillship without a contract.

We contract our drilling rigs, related equipment and work crews primarily on a "day rate" basis. Under day rate contracts, we generally receive a fixed amount per day for each day we are performing drilling or related services. In addition, our customers may pay all or a portion of the cost of moving our equipment and personnel to and from the well site. Contracts can range in duration from one month to multiple years.

Customer Contract Termination and Settlement

On May 23, 2016, we reached an agreement with Freeport-McMoRan Oil and Gas LLC ("FMOG") and its parent company, Freeport-McMoRan Inc. ("FCX") in connection with the drilling contract for the drillship Rowan Relentless ("FMOG Agreement"), which was scheduled to terminate in June 2017. The FMOG Agreement provided that the drilling contract be terminated immediately, and that FCX will pay us $215 million in cash over a period of 90 days to settle outstanding receivables and early termination of the contract, of which $85 million has been received through June 30, 2016 and the remaining $130 million, which is included in Receivables - trade and other on the Condensed Consolidated Balance Sheet as of June 30, 2016, is due to be paid on or before August 21, 2016. In addition, we may also receive two additional contingent payments from FCX, payable on September 30, 2017, of $10 million and $20 million depending on the average price of West Texas Intermediate ("WTI") crude oil over a 12-month period beginning June 30, 2016. The $10 million payment will be due if the average price over the period is greater than $50 per barrel and the additional $20 million payment will be due if the average price over the period is greater than $65 per barrel ("FMOG Provision"). We warm-stacked the Rowan Relentless in order to reduce costs. During the quarter ended June 30, 2016, we recognized $173.2 million in revenue for the Rowan Relentless, including $130.9 million for the cancelled contract value, $6.2 million for the fair value of the derivative associated with the FMOG Provision, $5.6 million for previously deferred revenue related to the contract, and $ 30.5 million for operations through May 22, 2016.

Day Rate Concessions

On June 1, 2016, we executed a contract extension for the Rowan Viking of 270 days for $275,000 per day following the primary term of the original contract in exchange for day rate concessions reducing the day rate for the primary term from $345,528 per day to $275,000 per day. This reduced day rate was applied to January 1, 2016 through November 6, 2017, and as a result, we recorded a reduction to revenue for amounts earned under this contract during the period from January 1, 2016 through March 31, 2016 of $6.3 million in the second quarter of 2016.

CURRENT BUSINESS ENVIRONMENT

The business environment for offshore drillers continues to be challenging as demand for drilling services remains low being overwhelmed by the substantial supply of offshore drilling units. As a result capital expenditures by operators worldwide has

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declined dramatically during 2015 and 2016. The resulting cancellation and/or postponement of drilling programs has resulted in reduced demand for offshore drilling services globally, downward pressure on day rates and rig utilization, and the cold-stacking and retirement of rigs in the worldwide fleet.

In response to market conditions, we have reduced day rates on certain drilling contracts (some in exchange for extended contract duration), warm-stacked six of our modern jack-ups, sold three of our oldest jack-ups, and cold-stacked three other jack-ups. Further, as a result of one of our customers choosing to exit the offshore market, a drillship contract was terminated, though we reached a settlement to receive a substantial portion of the remaining backlog. Given the current outlook, we expect day rates and utilization to remain depressed over the short and medium term. Additionally, customers may continue to seek to renegotiate or terminate existing contracts. As market and credit conditions continue to deteriorate in the oil and gas industry, there is an increased risk of customer defaults, customer restructurings or insolvency and further termination of contracts.

A significant contributing factor to the softness in the offshore drilling market has been the influx of 220 newbuild jack-ups and 156 newbuild floaters delivered since the beginning of the current newbuild cycle in early 2006. The addition of newbuild units, combined with numerous rigs that have rolled off contracts in past quarters without securing follow-on work, has continued to increase competitive supply, putting additional downward pressure on day rates and utilization. Further, as of July 11, 2016, there were approximately 119 additional jack-up rigs on order or under construction worldwide for delivery through 2020 (38% of the currently contracted jack-up fleet of approximately 314 rigs), and approximately 67 floaters on order or under construction worldwide for delivery through 2020 (40% of the currently contracted floater fleet of approximately 166 rigs). Only thirteen jack-ups and thirty-two floaters currently on order or under construction have contracts.
We expect the business environment for the remainder of 2016 to remain challenging and, in the absence of a more substantial and sustained recovery in commodity prices, it may deteriorate further. However, we believe that we are well-positioned strategically given our status as a strong and stable financial counter-party to our customers, current backlog of $2.7 billion as of July 1, 2016, solid operational reputation, and a modern fleet of high-specification jack-ups and state-of-the-art ultra-deepwater drillships. While challenging market conditions persist, we continue to focus on operating and cost efficiencies, which could include cold-stacking or retiring additional drilling rigs.
In addition, as a U.K. domiciled company with operations in the U.K., and particularly in the North Sea and Aberdeen, our business, tax structure and results of operations may be negatively affected by economic and political uncertainties resulting from the U.K.'s decision to depart from the European Union and any subsequent referendum in Scotland to seek independence from the U.K.



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Table of Contents

RESULTS OF OPERATIONS

The following table presents certain key performance indicators by rig classification:

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues (in thousands):
 
 
 
 
 
 
 
Deepwater
$
339,993

 
$
155,494

 
$
561,311

 
$
298,169

Jack-ups
264,657

 
339,939

 
537,590

 
733,795

Subtotal - Day rate revenues
604,650

 
495,433

 
1,098,901

 
1,031,964

Other revenues(1)
7,211

 
13,303

 
13,140

 
23,811

Total revenues
611,861

 
$
508,736

 
$
1,112,041

 
$
1,055,775

 
 
 
 
 
 
 
 
Revenue-producing days:
 
 
 

 
 

 
 

Deepwater
325

 
251

 
686

 
477

Jack-ups
1,605

 
1,987

 
3,101

 
4,172

Total revenue-producing days
1,930

 
2,238

 
3,788

 
4,649

 
 
 
 
 
 
 
 
Available days: (2)
 
 
 

 
 

 
 

Deepwater
364

 
288

 
728

 
527

Jack-ups
2,184

 
2,457

 
4,368

 
4,897

Total available days
2,548

 
2,745

 
5,096

 
5,424

 
 
 
 
 
 
 
 
Average day rate: (3)
 
 
 

 
 

 
 

Deepwater (4)
$
607,014

 
$
620,156

 
$
609,846

 
$
625,743

Jack-ups
$
164,941

 
$
171,075

 
$
173,341

 
$
175,871

Total fleet (4)
$
239,388

 
$
221,391

 
$
252,436

 
$
221,983

 
 
 
 
 
 
 
 
Utilization: (5)
 
 
 

 
 

 
 

Deepwater
89
%
 
87
%
 
94
%
 
90
%
Jack-ups
73
%
 
81
%
 
71
%
 
85
%
Total fleet
76
%
 
82
%
 
74
%
 
86
%
 
 
 
 
 
 
 
 
(1) Other revenues, which are primarily revenues received for contract reimbursable costs, are excluded from the computation of average day rate.
(2) Available days are defined as the aggregate number of calendar days (excluding days for which a rig is cold-stacked) in the period, or, with respect to new rigs entering service, the number of calendar days in the period from the date the rig was placed in service.
(3) Average day rate is computed by dividing day rate revenues by the number of revenue-producing days, including fractional days. Day rate revenues include the contractual rates and amounts received in lump sum, such as for rig mobilization or capital improvements, which are amortized over the initial term of the contract. Revenues attributable to reimbursable expenses are excluded from average day rates.
(4) Average day rate for the three and six months ended June 30, 2016 includes operating days for the Rowan Relentless up to the contract termination which was 52 days and 143 days for the three and six months ended June 30, 2016, respectively.
(5) Utilization is the number of revenue-producing days, including fractional days, divided by the number of available days.

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Three months ended June 30, 2016 compared to three months ended June 30, 2015

A summary of our consolidated results of operations follows (in thousands):

 
Three months ended June 30,
 
Change
 
% Change
 
2016
 
2015
 
 
 
 
Deepwater:
 
 
 
 
 
 
 
Revenues from external customers
$
341,389

 
$
161,889

 
$
179,500

 
111
 %
Operating expenses:
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
56,029

 
70,430

 
(14,401
)
 
(20
)%
Depreciation and amortization
29,891

 
21,150

 
8,741

 
41
 %
Selling, general and administrative
—

 
—

 
—

 
n/m

Other operating items
1

 
—

 
1

 
n/m

Income (loss) from operations
$
255,468

 
$
70,309

 
$
185,159

 
263
 %
 
 
 
 
 
 
 
 
Jack-ups:
 
 
 
 
 
 
 
Revenues from external customers
$
270,472

 
$
346,847

 
$
(76,375
)
 
(22
)%
Operating expenses:
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
151,456

 
183,514

 
(32,058
)
 
(17
)%
Depreciation and amortization
71,131

 
70,925

 
206

 
—
 %
Selling, general and administrative
—

 
—

 
—

 
n/m

Other operating items
1,840

 
5,000

 
(3,160
)
 
(63
)%
Income (loss) from operations
$
46,045

 
$
87,408

 
$
(41,363
)
 
(47
)%
 
 
 
 
 
 
 
 
Unallocated costs and other:
 
 
 
 
 
 
 
Revenues from external customers
$
—

 
$
—

 
$
—

 
n/m

Operating expenses:
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
—

 
—

 
—

 
n/m

Depreciation and amortization
(881
)
 
3,315

 
(4,196
)
 
n/m

Selling, general and administrative
26,111

 
31,158

 
(5,047
)
 
(16
)%
Other operating items
97

 
338

 
(241
)
 
(71
)%
Income (loss) from operations
$
(25,327
)
 
$
(34,811
)
 
$
9,484

 
(27
)%
 
 
 
 
 
 
 
 
Total company:
 
 
 
 
 
 
 
Revenues
$
611,861

 
$
508,736

 
$
103,125

 
20
 %
Direct operating costs (excluding items below)
207,485

 
253,944

 
(46,459
)
 
(18
)%
Depreciation and amortization
100,141

 
95,390

 
4,751

 
5
 %
Selling, general and administrative
26,111

 
31,158

 
(5,047
)
 
(16
)%
Other operating items
1,938

 
5,338

 
(3,400
)
 
(64
)%
Income from operations
276,186

 
122,906

 
153,280

 
125
 %
Other income (expense), net
(36,657
)
 
(30,485
)
 
(6,172
)
 
20
 %
Income before income taxes
239,529

 
92,421

 
147,108

 
159
 %
Provision for income taxes
22,800

 
7,686

 
15,114

 
197
 %
Net income
$
216,729

 
$
84,735

 
$
131,994

 
156
 %
 
 
 
 
 
 
 
 
"n/m" means not meaningful.
 
 
 
 
 
 
 



31
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Revenues
Consolidated. The increase in consolidated revenue is described below.
Deepwater. An analysis of the net changes in revenues for the three months ended June 30, 2016, compared to three months ended June 30, 2015, are set forth below (in millions):

 
Increase (decrease)
Contract Termination for Rowan Relentless and related items
$
142.7

Addition of the Rowan Relentless in June 2015
21.6

Higher drillship utilization
22.9

Lower drillship day rates
(2.7
)
Lower reimbursable revenues
(5.0
)
Net increase
$
179.5


Jack-ups. An analysis of the net changes in revenues for the three months ended June 30, 2016, compared to three months ended June 30, 2015, are set forth below (in millions):

 
Increase (decrease)
Lower jack-up utilization
$
(65.4
)
Lower jack-up day rates
(9.8
)
Lower reimbursable revenues
(1.7
)
Higher other revenue
0.5

Net decrease
$
(76.4
)

Direct operating costs

Consolidated. The decrease in consolidated direct operating costs is described below.
Deepwater. An analysis of the net changes in direct operating costs for the three months ended June 30, 2016, compared to three months ended June 30, 2015, are set forth below (in millions):
 
Increase (decrease)
Addition of the Rowan Relentless
$
6.9

Reduction in drillship operating expense
(10.5
)
Reduction in shore base costs and other
(5.8
)
Lower reimbursable costs
(5.0
)
Net decrease
$
(14.4
)


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Table of Contents

Jack-ups. An analysis of the net changes in direct operating costs for the three months ended June 30, 2016, compared to three months ended June 30, 2015, are set forth below (in millions):


 
Increase (decrease)
Decrease due to idle or cold-stacked rigs
$
(20.7
)
Reduction in shore base costs and other
(3.5
)
Lower reimbursable costs
(1.7
)
Reduction in jack-up operating expense
(6.2
)
Net decrease
$
(32.1
)

Depreciation and amortization

Depreciation and amortization for the second quarter of 2016 increased largely due to the addition of the Rowan Relentless.

Selling, general and administrative

Selling, general and administrative expenses for the second quarter of 2016 decreased primarily as a result of lower labor costs, largely due to reductions in headcount and lower share-based compensation.

Other operating items

Material charges for the three months ended June 30, 2015 included a $5.0 million adjustment to an estimated liability for the termination of a contract in connection with refurbishment work on the Rowan Gorilla III. This matter was settled during the third quarter of 2015. Losses on disposals of property and equipment increased $1.6 million in the second quarter of 2016 as compared to the same period in 2015.

Other expense, net

Other non-operating expense, net, increased primarily due to $8.7 million of interest capitalization in the second quarter of 2015. There was no interest capitalization in the second quarter of 2016 as the drillship construction program was completed in 2015. Additionally, we recognized a gain of $1.8 million on the early extinguishment of debt in the second quarter of 2016.

Provision for income taxes

The effective tax rate increased to 9.5% in the second quarter of 2016 compared to an effective tax rate of 8.3% in the second quarter of 2015. The higher effective tax rate for the three months ended June 30, 2016 is primarily due to the recognition of unfavorable discrete items in the current quarter, partially offset by the change in the geographic mix of earnings.

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Table of Contents

Six months ended June 30, 2016 compared to six months ended June 30, 2015

A summary of our consolidated results of operations follows (in thousands):

 
Six months ended June 30,
 
Change
 
% Change
 
2016
 
2015
 
 
 
 
Deepwater:
 
 
 
 
 
 
 
Revenues from external customers
$
563,923

 
$
308,760

 
$
255,163

 
83
 %
Operating expenses:
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
123,011

 
129,457

 
(6,446
)
 
(5
)%
Depreciation and amortization
57,239

 
38,813

 
18,426

 
47
 %
Selling, general and administrative
—

 
—

 
—

 
n/m

Other operating items
298

 
—

 
298

 
n/m

Income (loss) from operations
$
383,375

 
$
140,490

 
$
242,885

 
173
 %
 
 
 
 
 
 
 
 
Jack-ups:
 
 
 
 
 
 
 
Revenues from external customers
$
548,118

 
$
747,015

 
$
(198,897
)
 
(27
)%
Operating expenses:
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
289,306

 
380,221

 
(90,915
)
 
(24
)%
Depreciation and amortization
139,485

 
139,958

 
(473
)
 
—
 %
Selling, general and administrative
—

 
—

 
—

 
n/m

Other operating items
3,736

 
5,000

 
(1,264
)
 
(25
)%
Income (loss) from operations
$
115,591

 
$
221,836

 
$
(106,245
)
 
(48
)%
 
 
 
 
 
 
 
 
Unallocated costs and other:
 
 
 
 
 
 
 
Revenues from external customers
$
—

 
$
—

 
$
—

 
n/m

Operating expenses:
 
 
 
 
 
 
 
Direct operating costs (excluding items below)
—

 
—

 
—

 
n/m

Depreciation and amortization
2,269

 
6,309

 
(4,040
)
 
(64
)%
Selling, general and administrative
53,041

 
58,744

 
(5,703
)
 
(10
)%
Other operating items
81

 
(175
)
 
256

 
n/m

Income (loss) from operations
$
(55,391
)
 
$
(64,878
)
 
$
9,487

 
(15
)%
 
 
 
 
 
 
 
 
Total company:
 
 
 
 
 
 
 
Revenues
$
1,112,041

 
$
1,055,775

 
$
56,266

 
5
 %
Direct operating costs (excluding items below)
412,317

 
509,678

 
(97,361
)
 
(19
)%
Depreciation and amortization
198,993

 
185,080

 
13,913

 
8
 %
Selling, general and administrative
53,041

 
58,744

 
(5,703
)
 
(10
)%
Other operating items
4,115

 
4,825

 
(710
)
 
(15
)%
Income from Operations
443,575

 
297,448

 
146,127

 
49
 %
Other income (expense), net
(77,137
)
 
(64,117
)
 
(13,020
)
 
20
 %
Income before income taxes
366,438

 
233,331

 
133,107

 
57
 %
Provision for income taxes
26,910

 
24,927

 
1,983

 
8
 %
Net income
$
339,528

 
$
208,404

 
$
131,124

 
63
 %
 
 
 
 
 
 
 
 
"n/m" means not meaningful.
 
 
 
 
 
 
 



34
Table of Contents


Revenues
Consolidated. The increase in consolidated revenue is described below.
Deepwater. An analysis of the net changes in revenues for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, are set forth below (in millions):

 
Increase (decrease)
Contract Termination for Rowan Relentless and related items
$
142.7

Addition of the Rowan Reliance and Rowan Relentless in February and June of 2015, respectively
119.0

Higher drillship utilization
2.3

Lower reimbursable revenues
(8.0
)
Lower drillship average day rates
(0.8
)
Net increase
$
255.2


Jack-ups. An analysis of the net changes in revenues for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, are set forth below (in millions):

 
Increase (Decrease)
Lower jack-up utilization
(186.9
)
Lower jack-up average day rates
(8.6
)
Lower reimbursable revenues
(4.4
)
Impact of jack-up sold in 2015
(0.7
)
Higher other revenue
1.7

Net decrease
$
(198.9
)

Direct operating costs

Consolidated. The decrease in consolidated direct operating costs is described below.
Deepwater. An analysis of the net changes in direct operating costs for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, are set forth below (in millions):

 
Increase (decrease)
Addition of the Rowan Reliance and Rowan Relentless
$
19.7

Reduction in drillship operating expense
(17.0
)
Lower Reimbursable costs
(8.0
)
Reduction in shore base costs and other
(1.1
)
Net decrease
$
(6.4
)

Jack-ups. An analysis of the net changes in direct operating costs for the six months ended June 30, 2016, compared to the six months ended June 30, 2015, are set forth below (in millions):

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Table of Contents

 
Increase (decrease)
Decrease due to idle or cold-stacked rigs
$
(50.1
)
Reduction in jack-up direct operating expense
(21.7
)
Reduction in shore base costs and other
(14.7
)
Lower reimbursable costs
(4.4
)
Net decrease
$
(90.9
)

Depreciation and amortization

Depreciation and amortization for the six months ended June 30, 2016, increased largely due to the addition of the Rowan Reliance and Rowan Relentless in 2015.

Selling, general and administrative

Selling, general and administrative expenses for the six months ended June 30, 2016 declined primarily as a result of lower labor costs, largely due to reductions in headcount.

Other operating items

Material charges for the six months ended June 30, 2015, included a $5.0 million adjustment to an estimated liability for the termination of a contract in connection with refurbishment work on the Rowan Gorilla III. This matter was settled during the third quarter of 2015. Losses, net on disposals of property and equipment increased $4.3 million in the six months ended June 30, 2016 as compared to the same period in 2015.

Other expense, net

Other non-operating expense, net, increased primarily due to $16.2 million of interest capitalization in the six months ended June 30, 2015. There was no interest capitalization in the six months ended June 30, 2016 as the drillship construction program was completed in 2015. Additionally, we recognized a gain of $2.4 million on the early extinguishment of debt in the six months ended June 30, 2016.

Provision for income taxes

The effective tax rate decreased to 7.3% in the six months ended June 30, 2016 compared to an effective tax rate of 10.7% in the six months ended June 30, 2015. The lower rate in 2016 was attributable to the change in the geographic mix of earnings.

Rig Utilization

The following table sets forth an analysis of time that our rigs were idle or out-of-service as a percentage of available days (which excludes cold-stacked rigs) and time that our rigs experience operational downtime and are off-rate as a percentage of revenue-producing days:


36
Table of Contents

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Deepwater:
 
 
 
 
 
 
 
Idle
10.7
%
 
—

 
5.4
%
 
—

Out-of-service
—

 
—

 
0.3
%
 
—

Operational downtime
—

 
12.8
%
 
0.1
%
 
9.5
%
 
 
 
 
 
 
 
 
Jack-up:
 
 
 
 
 
 
 
Idle
21.7
%
 
15.2
%
 
23.1
%
 
10.5
%
Out-of-service
3.4
%
 
2.8
%
 
5.0
%
 
3.1
%
Operational downtime
1.9
%
 
1.4
%
 
1.3
%
 
1.5
%

Idle Days – We define idle days as the time a rig is not under contract and available to work. Idle days exclude cold-stacked rigs, which are not marketed.

Out-of-Service Days – We define out-of-service days as those days when a rig is (or is planned to be) out of service and is not able to earn revenue. The Company may be compensated for certain out-of-service days, such as for shipyard stays or for rig transit periods preceding a contract; however, recognition of any such compensation is deferred and recognized over the primary term of the drilling contract.

Operational Downtime – We define operational downtime as the unbillable time when a rig is under contract and unable to conduct planned operations due to equipment breakdowns or procedural failures.

LIQUIDITY AND CAPITAL RESOURCES

A comparison of key balance sheet amounts and ratios follows (dollars in millions):
 
June 30, 2016
 
December 31, 2015
Cash and cash equivalents
$
761.4

 
$
484.2

Current assets
$
1,342.1

 
$
921.3

Current liabilities
$
308.1

 
$
328.7

Current ratio
4.36

 
2.80

Long-term debt, less current portion
$
2,645.4

 
$
2,692.4

Shareholders' equity
$
5,126.8

 
$
4,772.5

Debt-to-capitalization ratio
34
%
 
36
%

Sources and uses of cash and cash equivalents were as follows (in millions):
 
Six months ended June 30,
 
2016
 
2015
Net cash provided by operating activities
$
388.4

 
$
448.7

Capital expenditures
(64.4
)
 
(616.4
)
Net borrowings (reductions) of debt
(47.9
)
 
50.0

Payment of cash dividends
—

 
(25.2
)
Proceeds from disposals of property and equipment
1.1

 
2.3

Total net source (use)
$
277.2

 
$
(140.6
)

Operating Cash Flows

Cash flows from operations declined to approximately $388 million in 2016 from $449 million in the comparable prior-year period, primarily as a result of the timing of collections on trade receivables.


37
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The Company has not provided deferred income taxes on undistributed earnings of its non-U.K. subsidiaries, including RCI's non-U.S. subsidiaries.  It is the Company’s policy and intention to permanently reinvest earnings of non-U.S. subsidiaries of RCI outside the U.S.  Generally, earnings of non-U.K. subsidiaries in which RCI does not have a direct or indirect ownership interest can be distributed to the Company without imposition of either U.K. or local country tax.

As of December 31, 2015, RCI's portion of the unremitted earnings of its non-U.S. subsidiaries that could be includable in taxable income of RCI, if distributed, was approximately $336.8 million.  Should the non-U.S. subsidiaries of RCI make a distribution from these earnings, we may be subject to additional U.S. income taxes.  It is not practicable to estimate the amount of deferred tax liability related to the undistributed earnings, and RCI's non-U.S. subsidiaries have no plan to distribute earnings in a manner that would cause them to be subject to U.S., U.K. or other local country taxation.

At June 30, 2016 RCI’s non-U.S. subsidiaries held approximately $189 million of the $761 million of consolidated cash and cash equivalents.   Management believes the Company has significant net assets, liquidity, contract backlog and/or other financial resources available to meet its operational and capital investment requirements and otherwise allow the Company to continue to maintain its policy of reinvesting such undistributed earnings outside the U.K. and U.S. indefinitely.

Backlog

Our backlog by geographic area as of the date of our most recent Fleet Status Report is presented below (in thousands):

 
July 1, 2016
 
Jack-ups
 
Deepwater
 
Total
US GOM
$
13,267

 
$
886,500

 
$
899,767

Middle East
1,211,610

 
—

 
1,211,610

North Sea
394,052

 
—

 
394,052

Central and South America
148,813

 
—

 
148,813

 Total backlog
$
1,767,742

 
$
886,500

 
$
2,654,242


We estimate our backlog will be realized as follows (in thousands):
 
July 1, 2016
 
Jack-ups
 
Deepwater
 
Total
2016
$
430,747

 
$
257,729

 
$
688,476

2017
681,207

 
496,451

 
1,177,658

2018
306,730

 
132,320

 
439,050

2019
64,970

 
—

 
64,970

2020 and later years
284,088

 
—

 
284,088

 Total backlog
$
1,767,742

 
$
886,500

 
$
2,654,242


Our contract backlog represents remaining contractual terms and may not reflect actual revenue due to a number renegotiations or factors such as rig downtime, estimated contract durations, customer concessions or contract cancellations.

About 65% of our remaining available rig days in 2016 and 46% of available rig days in 2017 were under contract or commitment as of July 1, 2016, excluding cold-stacked rigs. As of that date, we had three jack-ups that were cold-stacked and six that were available.

In 2014 and 2015, we recognized asset impairment charges on several of our jack-up drilling units as a result of the decline in market conditions and the expectation of future demand and day rates. If market conditions deteriorate further, we could be required to recognize additional impairment charges in future periods.

Investing Activities

Capital expenditures for the six months ended June 30, 2016, totaled $64.4 million and included the following:


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•$40.6 million for improvements to the existing fleet, including contractually required modifications; and
•$23.8 million for rig equipment and other.

We currently estimate our 2016 capital expenditures to range from approximately $145-$155 million, primarily for fleet maintenance, rig equipment, spares and other. This amount excludes any contractual modifications that may arise due to our securing additional work.

We expect to fund our 2016 capital expenditures using available cash and cash flows from operations.

The capital budget reflects an appropriation of money that we may or may not spend, and the timing of such expenditures may change.  We will periodically review and adjust the capital budget as necessary based upon current and forecast cash flows and liquidity, anticipated market conditions in our business, the availability of financial resources, and alternative uses of capital to enhance shareholder value.

Financing Activities

During the six months ended June 30, 2016, we paid $45.8 million in cash to retire $47.9 million aggregate principal amount of the 5% Notes due 2017 and 7.875% Notes due 2019, plus accrued interest, and recognized a $2.4 million gain on early extinguishment of debt.

As of June 30, 2016, we had $2.7 billion principal amount of outstanding long-term debt consisting of $357.7 million principal amount of 5% Senior Notes due September 2017; $396.5 million principal amount of 7.875% Senior Notes due 2019; $700 million principal amount of 4.875% Senior Notes due 2022; $400 million aggregate principal amount of 4.75% Senior Notes due 2024; $400 million principal amount of 5.4% Senior Notes due 2042; and $400 million aggregate principal amount of 5.85% Senior Notes due 2044 (together, the “Senior Notes”).  The Senior Notes are fully and unconditionally guaranteed on a senior and unsecured basis by Rowan plc.

Interest payments on the Senior Notes currently approximate $150 million annually, after giving effect to the repurchases made to date. No principal payments are required until each series’ final maturity date, although we may make additional repurchases depending on market prices and the availability of cash.  Management believes that cash flows from operating activities, existing cash balances, and amounts available under the revolving credit facility will be sufficient to satisfy the Company’s cash requirements for the following twelve months.

Restrictive provisions in the Company’s bank credit facility agreement limit consolidated debt to 60% of book capitalization.  Our consolidated debt to total capitalization ratio at June 30, 2016 was 34%.

Other provisions of our debt agreements limit the ability of the Company to create liens that secure debt, engage in sale and leaseback transactions, merge or consolidate with another company and, in the event of noncompliance, restrict investment activities and asset purchases and sales, among other things.  The Company was in compliance with its debt covenants at June 30, 2016, and expects to remain in compliance over the following twelve months.

Letters of credit

We periodically employ letters of credit in the normal course of our business, and had outstanding letters of credit of approximately $10.7 million at June 30, 2016.

CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES

The Company’s significant accounting policies are presented in Note 2 of “Notes to Consolidated Financial Statements” in Item 8 of our 2015 Form 10-K.  These policies, and management judgments, assumptions and estimates made in their application underlie reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. We believe that our most critical accounting policies and management estimates involve carrying values of long-lived assets, pension and other postretirement benefit liabilities and costs (specifically, assumptions used in actuarial calculations), and income taxes (particularly our estimated reserves for uncertain tax positions). Changes in such policies and/or estimates would produce significantly different amounts from those reported herein.

During the quarter ended June 30, 2016, there were no material changes to the judgments, assumptions or policies upon which our critical accounting estimates were based.

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Recent Accounting Pronouncements

See Note 1 of the “Notes to Unaudited Condensed Consolidated Financial Statements” in Item 1 of PART I of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk – Our outstanding debt at June 30, 2016, consisted entirely of fixed-rate debt with a carrying value of $2.645 billion and a weighted-average annual interest rate of 5.6%.  Due to the fixed-rate nature of our debt, management believes the risk of loss due to changes in market interest rates is not material.

Currency exchange rate risk – A substantial majority of our revenues are received in U.S. dollars, which is our functional currency. However, in certain countries in which we operate, local laws or contracts may require us to receive some payment in the local currency.  We are exposed to foreign currency exchange risk to the extent the amount of our monetary assets denominated in the foreign currency differs from our obligations in that foreign currency. In order to mitigate the effect of exchange rate risk, we attempt to limit foreign currency holdings to the extent they are needed to pay liabilities in the local currency. In the past, we have entered into spot purchases or short-term derivative transactions, such as forward exchange contracts, with one-month durations. We did not enter into such transactions for the purpose of speculation, trading or investing in the market and we believe that our use of forward exchange contracts has not exposed us to material credit risk or other material market risk. Although our risk policy allows us to enter into such forward exchange contracts, we do not currently anticipate entering into such transactions in the future and had no such contracts outstanding as of June 30, 2016.

Commodity price risk – Fluctuating commodity prices affect our future earnings materially to the extent that they influence demand for our products and services.

Fair Value Derivative Asset – At June 30, 2016, the fair value of the Contingent Payment Derivative was $6.4 million. We estimate the fair value of this instrument using Monte Carlo simulation which takes into account a variety of factors including the Price Targets, the WTI Spot price, the expected volatility, the risk-free interest rate, the slope of the WTI forward curve, and the remaining contractual term of the FMOG Provision. We are required to revalue this asset each quarter. We believe that the assumptions that have the greatest impact on the determination of fair value is the WTI Spot Price on the valuation date and the expected volatility. The following table illustrates the potential effect on the fair value of the derivative asset at June 30, 2016 from changes in the assumptions made which would lower the fair value (in thousands):

 
Decrease in Asset Value
10% decrease in WTI spot price
$
3,017

10% decrease in expected volatility
$
290


Item 4. Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on that evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2016.

There have been no changes to our internal controls over financial reporting during the quarter ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

There were no new material legal proceedings filed during the quarter, nor any material developments to proceedings reported in prior periods.

Item 1A.  Risk Factors

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There are numerous factors that affect our business and results of operations, many of which are beyond our control. Security holders and potential investors in our securities should carefully consider the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015, in addition to other information in such annual report and in our Quarterly Reports on Form 10-Q.  These risk factors are important factors that could cause our actual results to differ materially from those currently anticipated or expected.

The United Kingdom’s referendum to exit from the European Union will have uncertain effects and could adversely impact our business, results of operations and financial condition.

On June 23, 2016, the U.K. voted to exit from the E.U. (commonly referred to as “Brexit”). The terms of Brexit and the resulting U.K./E.U. relationship are uncertain for companies doing business both in the U.K. and the overall global economy. In addition, our business and operations may be impacted by any subsequent vote in Scotland to seek independence from the U.K. The U.K. vote has impacted global markets, including currencies, and resulted in a sharp decline in the value of the British pound, as compared to the U.S. dollar and other currencies. Volatility in the securities markets and in currency exchange rates may continue as the U.K. negotiates its exit from the E.U. In the longer term, any impact from Brexit on our business and operations will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations. Approximately 7.6% and 5.7% of our total revenues were generated in the U.K. for the year ended December 31, 2015 and the six months ended June 30, 2016, respectively. Risks related to Brexit that we may encounter include:
•
adverse impact on macroeconomic growth and oil and gas demand resulting from the strength of the U.S. dollar;
•
continued volatility in currencies including the British pound and U.S. dollar that may impact our financial results;
•
reduced demand for our services in the U.K. and globally;
•
increased costs of doing business in the U.K. and in the North Sea;
•
increased regulatory costs and challenges for operating our business in the North Sea;
•
volatile capital and debt markets, and access to other sources of capital;
•
risks related to our global tax structure and the tax treaties upon which we rely;
•
business uncertainty resulting from prolonged political negotiations; and
•
uncertain stability of the E.U. and global economy if other countries exit the E.U.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table presents information with respect to acquisitions of our shares for the second quarter of 2016:

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Month ended
 
Total number of shares acquired 1
 
Average price paid per share 1
 
Total number of shares purchased as part of publicly announced plans or programs 2
 
Approximate dollar value of shares that may yet be purchased under the plans or programs 2
Balance forward
 
 
 
 
 
 
 
$
—

April 30, 2016
 
45,690

 
$16.54
 
—

 
—

May 31, 2016
 
61,483

 
19.17

 
—

 
—

June 30, 2016
 
—

 
—

 
—

 
—

Total
 
107,173

 
$18.05
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 The total number of shares acquired reflects shares acquired from employees by an affiliated employee benefit trust (EBT) upon forfeiture of nonvested awards or in satisfaction of tax withholding requirements. The price paid for shares acquired as a result of forfeitures is the par value of $0.125 per share. The price paid for shares acquired in satisfaction of withholding taxes is the share price on the date of the transaction. In February 2015, we issued 1.1 million shares to the EBT, which shares were acquired at a price equal to the par value of $0.125 per share. There were no shares repurchased under any share repurchase program during the second quarter of 2016.
2 The ability to make share repurchases is subject to the discretion of the Board of Directors and the limitations set forth in the Companies Act, which generally provide that share repurchases may only be made out of distributable reserves. In addition, U.K. law also generally prohibits a company from repurchasing its own shares through “off market purchases” without the prior approval of shareholders, which approval is valid for a maximum period of five years. Prior to and in connection with the redomestication, we obtained approval to purchase our own shares. To effect such repurchases, we entered into a purchase agreement with a specified dealer in July 2012, pursuant to which we may purchase up to a maximum of 50,000,000 shares over a five-year period, subject to an annual cap of 10% of the shares outstanding at the beginning of each applicable year. Subject to Board approval, share repurchases may be commenced or suspended from time to time without prior notice and, in accordance with the shareholder approval and U.K. law, any shares repurchased by us will be cancelled. This authority to repurchase shares terminates in April 2017 unless otherwise reapproved by our shareholders prior to that time. U.K. law prohibits us from conducting “on market purchases” because our shares are not traded on a recognized investment exchange in the U.K.


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Item 6.  Exhibits

The following is a list of exhibits filed with this Form 10-Q:
31.1*
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.

__________________
* Filed or furnished herewith.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
ROWAN COMPANIES PLC
 
 
(Registrant)
 
 
 
 
 
 
Date: August 2, 2016
 
/s/ STEPHEN M. BUTZ                                    
 
 
Stephen M. Butz
 
 
Executive Vice President,
 
 
Chief Financial Officer
 
 
 
 
 
 
Date: August 2, 2016
 
/s/ DENNIS S. BALDWIN
 
 
Dennis S. Baldwin
 
 
Chief Accounting Officer

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