Valaris(US:VAL)2019-10-31 13:26PART I - FINANCIAL INFORMATION Financial Statements The company's Q3 2019 net loss widened due to higher expenses and impairment charges, though year-to-date results show net income driven by a large acquisition gain Condensed Consolidated Statements of Operations Increased revenues from the Rowan acquisition were offset by higher operating expenses, though a significant bargain purchase gain boosted nine-month income Three Months Ended September 30 (in millions) | Financial Metric | 2019 | 2018 | | :--- | :--- | :--- | | Operating Revenues | $551.3 | $430.9 | | Total operating expenses | $783.8 | $472.8 | | Operating Loss | $(236.2) | $(41.9) | | Net Loss | $(197.5) | $(142.9) | | Net Loss Attributable to Valaris | $(197.1) | $(145.0) | | Loss Per Share (Basic & Diluted) | $(1.00) | $(1.34) | Nine Months Ended September 30 (in millions) | Financial Metric | 2019 | 2018 | | :--- | :--- | :--- | | Operating Revenues | $1,541.1 | $1,306.4 | | Total operating expenses | $2,012.9 | $1,432.2 | | Operating Loss | $(474.9) | $(125.8) | | Net Income (Loss) | $21.8 | $(433.5) | | Net Income (Loss) Attributable to Valaris | $18.0 | $(436.1) | | Earnings (Loss) Per Share (Basic & Diluted) | $0.10 | $(4.02) | Condensed Consolidated Balance Sheets Total assets and liabilities grew significantly due to the Rowan acquisition, strengthening the company's equity position Balance Sheet Highlights (in millions) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $1,184.0 | $1,309.7 | | Property and equipment, net | $15,250.7 | $12,616.2 | | Total Assets | $17,230.6 | $14,023.7 | | Total Current Liabilities | $859.6 | $528.5 | | Long-Term Debt | $6,042.3 | $5,010.4 | | Total Liabilities | $7,690.1 | $5,934.9 | | Total Valaris shareholders' equity | $9,531.4 | $8,091.4 | Condensed Consolidated Statements of Cash Flows Operating cash outflow increased, while investing activities provided cash from the Rowan acquisition and financing activities used cash for debt reduction Nine Months Ended September 30 (in millions) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(427.5) | $(82.2) | | Net cash provided by (used in) investing activities | $1,091.6 | $(362.7) | | Net cash provided by (used in) financing activities | $(809.1) | $193.7 | | Decrease in Cash and Cash Equivalents | $(145.6) | $(249.4) | Notes to Condensed Consolidated Financial Statements Notes detail the Rowan acquisition's accounting treatment, joint venture formation, asset impairments, and significant debt extinguishment activities - On April 11, 2019, the company completed its combination with Rowan Companies, changed its name, and effected a four-to-one reverse stock split29 - The Rowan Transaction was accounted for under the acquisition method, resulting in an estimated bargain purchase gain of $659.8 million, primarily due to the decline in the company's share price between the announcement and closing dates616365 - The company accounts for its 50/50 joint venture with Saudi Aramco, ARO, using the equity method and recognized a loss of $3.7 million for Q3 2019589396 - In Q3 2019, the company recognized a pre-tax, non-cash impairment charge of $88.2 million after deciding to retire the VALARIS 5006 rig and reclassifying it to held-for-sale128 - In July 2019, the company repurchased $951.8 million in aggregate principal of its senior notes through tender offers, resulting in a pre-tax gain from debt extinguishment of $194.1 million137138 Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the strategic impact of the Rowan acquisition, a gradual market recovery, and the company's liquidity and capital management Executive Summary The company highlights its post-merger strategic position, joint venture with Saudi Aramco, and strong liquidity despite a challenging market - The company completed its combination with Rowan on April 11, 2019, acquiring a fleet including four ultra-deepwater drillships and 19 jackup rigs, and assuming debt211214216 - The company's 50/50 joint venture with Saudi Aramco, ARO, owns seven jackup rigs and leases nine more from Valaris, with plans to purchase up to 20 newbuilds over 10 years213 - As of September 30, 2019, the company had $129.5 million in cash and $1.5 billion of undrawn capacity under its credit facility225 - Contract backlog stood at $2.3 billion as of September 30, 2019, an increase from $2.2 billion at year-end 2018, mainly due to the Rowan Transaction229 Business Environment The offshore drilling market shows a gradual recovery, with improvements in the jackup segment outpacing the still-challenged floater market - The floater market recovery is gradual, with contracts remaining short-term and pricing depressed, despite increased tendering activity220232 - The jackup market has improved, with increased contracting activity leading to slight improvements in day rates238 - The company is actively managing its fleet by divesting non-core assets, scrapping two jackups (ENSCO 97, Gorilla IV) and classifying three more rigs for sale (VALARIS 5006, JU-68, JU-42) in 2019247 Results of Operations Quarterly and nine-month revenues increased due to the Rowan acquisition, with significant gains from debt extinguishment and the bargain purchase - Q3 2019 revenues increased by $120.4 million (28%) YoY, mainly from $138.9 million in revenue from acquired Rowan rigs250 - Other income for Q3 2019 included a $194.1 million pre-tax gain on debt extinguishment from tender offers, partially offset by a $53.0 million reduction in the bargain purchase gain from measurement period adjustments257295 - For the nine months ended Sep 30, 2019, other income included a $659.8 million gain on bargain purchase from the Rowan Transaction258296 Segment Operating Loss (in millions) | Segment | Q3 2019 | Q3 2018 | | :--- | :--- | :--- | | Floaters | $(166.8) | $(11.6) | | Jackups | $(54.7) | $(2.4) | Liquidity and Capital Resources The company maintains strong liquidity through its credit facility and proactive debt management, despite ongoing capital expenditures and tax assessments - The company repurchased $951.8 million in aggregate principal of notes in July 2019 through cash tender offers319 - The credit facility requires maintaining a total debt to total capitalization ratio below 60%; the ratio was 41.2% as of September 30, 2019317324 - The company has two ultra-deepwater drillships under construction (VALARIS DS-13 and DS-14) with remaining payments of $248.9 million, scheduled for delivery in 2021 and 2022311312 Liquidity Position (in millions) | Component | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $129.5 | $275.1 | | Short-term investments | $— | $329.0 | | Available credit facility | $1,481.6 | $2,000.0 | | Total liquidity | $1,611.1 | $2,604.1 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exposure, which it manages through derivative hedging instruments - The company uses foreign currency forward contracts to hedge against fluctuations in earnings and cash flows from non-U.S. dollar transactions337 - As of September 30, 2019, the company held cash flow hedges for forecasted transactions totaling $212.6 million and fair value hedges for recognized assets/liabilities totaling $27.1 million338339 Controls and Procedures Management affirmed the effectiveness of disclosure controls while noting the ongoing integration of Rowan's internal controls - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of September 30, 2019349 - The company is integrating Rowan's operations and internal controls, and Rowan will be excluded from the scope of the 2019 assessment of internal control over financial reporting351 PART II - OTHER INFORMATION Legal Proceedings The company is managing a shareholder lawsuit, an arbitration award appeal, and ongoing inquiries related to legacy FCPA matters - A shareholder class action lawsuit was filed on August 20, 2019, alleging false or misleading statements regarding the performance of the ultra-deepwater segment between April and July 2019353 - In its dispute with Samsung Heavy Industries (SHI) over the ENSCO DS-5 contract, an arbitration tribunal awarded Valaris $180.0 million in damages in May 2019. The award is currently subject to appeal applications from both parties357 - The company is subject to inquiries from foreign governments related to a 2010 Foreign Corrupt Practices Act (FCPA) investigation involving legacy Pride International358359 Risk Factors No material changes to previously disclosed risk factors were reported during the period - No material changes from the risks previously disclosed in the 2018 Form 10-K and prior 2019 Form 10-Q reports were reported365 Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased a small number of shares from employees for tax purposes but made no repurchases under its public buyback program - In Q3 2019, 28,852 equity securities were repurchased from employees and directors to cover tax withholding on vested share awards367369 - No shares have been repurchased under the publicly announced $500 million share repurchase program, which terminates in May 2023370 Exhibits This section lists all exhibits filed with the report, including agreements and required officer certifications