Company Quick10K Filing
Quick10K
Ensco
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.14 198 $2,400
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-31 Other Events
8-K 2019-07-31 Earnings, Exhibits
8-K 2019-07-29 Other Events, Exhibits
8-K 2019-07-25 Regulation FD, Exhibits
8-K 2019-07-24 Officers
8-K 2019-07-12 Enter Agreement, Shareholder Rights, Exhibits
8-K 2019-06-07 Enter Agreement, Shareholder Rights, Exhibits
8-K 2019-05-20 Shareholder Vote
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-04-29 Regulation FD, Exhibits
8-K 2019-04-09 Enter Agreement, M&A, Off-BS Arrangement, Sale of Shares, Officers, Regulation FD, Other Events, Exhibits
8-K 2019-03-06 Officers, Exhibits
8-K 2019-02-21 Shareholder Vote, Regulation FD, Exhibits
8-K 2019-02-20 Regulation FD, Exhibits
8-K 2019-01-28 Enter Agreement, Regulation FD, Exhibits
8-K 2019-01-02 Regulation FD, Exhibits
8-K 2018-10-29 Regulation FD, Exhibits
8-K 2018-10-29 Earnings, Other Events, Exhibits
8-K 2018-10-23 Other Events, Exhibits
8-K 2018-10-07 Enter Agreement, Officers, Regulation FD, Other Events, Exhibits
8-K 2018-09-04 Other Events
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-07-19 Regulation FD, Exhibits
8-K 2018-05-21 Officers, Shareholder Vote, Exhibits
8-K 2018-04-23 Regulation FD, Exhibits
8-K 2018-02-22 Other Events
8-K 2018-02-20 Officers, Exhibits
8-K 2018-02-08 Other Events, Exhibits
8-K 2018-01-26 Other Events, Exhibits
8-K 2018-01-25 Other Events, Exhibits
8-K 2018-01-11 Other Events, Exhibits
8-K 2018-01-10 Other Events, Exhibits
MGP MGM Growth Properties 9,390
MDB Mongodb 7,420
PBI Pitney Bowes 974
CODA Coda Octopus Group 159
AREC American Resources 82
GTXI GTx 28
FKWL Franklin Wireless 0
BTCS BTCS 0
CICN Cicero 0
FFKT Farmers Capital Bank 0
ESV 2019-06-30
Part I - Financial Information
Item 1.Financial Statements
Note 1 -Unaudited Condensed Consolidated Financial Statements
Note 2 -Revenue From Contracts with Customers
Note 3 -Rowan Transaction
Note 4 -Equity Method Investment in Aro
Note 5 -Fair Value Measurements
Note 6 -Pension and Other Post-Retirement Benefits
Note 7 -Derivative Instruments
Note 8 -Noncontrolling Interests
Note 9 - Earnings per Share
Note 10 -Debt
Note 11 - Shareholders' Equity
Note 12 -Income Taxes
Note 13 -Contingencies
Note 14 -Leases
Note 15 -Segment Information
Note 16 -Supplemental Financial Information
Note 17 -Guarantee of Registered Securities
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-15.1 val-6302019xexhibit151.htm
EX-31.1 val-6302019xexhibit311.htm
EX-31.2 val-6302019xexhibit312.htm
EX-32.1 val-6302019xexhibit321.htm
EX-32.2 val-6302019xexhibit322.htm

Ensco Earnings 2019-06-30

ESV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
     Washington, D.C. 20549     
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________

Commission File Number 1-8097
 Valaris plc
(Exact name of registrant as specified in its charter)
England and Wales
 
98-0635229
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
6 Chesterfield Gardens
 
 
London,
England
 
 
W1J 5BQ
(Address of principal executive offices)
 
(Zip Code)
 Registrant's telephone number, including area code:  44 (0) 20 7659 4660
  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Ticker Symbol(s)
 
Name of each exchange on which on which registered
Class A ordinary shares, U.S. $0.40 par value
 
VAL
 
New York Stock Exchange
4.70% Senior Notes due 2021
 
VAL21
 
New York Stock Exchange
4.50% Senior Notes due 2024
 
VAL24
 
New York Stock Exchange
8.00% Senior Notes due 2024
 
VAL24A
 
New York Stock Exchange
5.20% Senior Notes due 2025
 
VAL25A
 
New York Stock Exchange
7.75% Senior Notes due 2026
 
VAL26
 
New York Stock Exchange
5.75% Senior Notes due 2044
 
VAL44
 
New York Stock Exchange

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   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes         No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.




Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-Accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging-growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes        No  



As of July 26, 2019, there were 197,872,156 Class A ordinary shares of the registrant issued and outstanding.




VALARIS PLC
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




FORWARD-LOOKING STATEMENTS
  
Statements contained in this report 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," "likely," "plan," "project," "could," "may," "might," "should," "will" and similar words and specifically include statements regarding expected financial performance; dividends; expected utilization, day rates, revenues, operating expenses, cash flow, contract terms, contract backlog, capital expenditures, insurance, financing and funding; expected work commitments, awards and contracts; the timing of availability, delivery, mobilization, contract commencement or relocation or other movement of rigs and the timing thereof; future rig construction (including work in progress and completion thereof), enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; the offshore drilling market, including supply and demand, customer drilling programs, stacking of rigs, effects of new rigs on the market and effects of declines in commodity prices; performance of our joint venture with Saudi Aramco; expected divestitures of assets; general market, business and industry conditions, trends and outlook; future operations; the impact of increasing regulatory complexity; our program to high-grade the rig fleet by investing in new equipment and divesting selected assets and underutilized rigs; expense management; and the likely outcome of litigation, legal proceedings, investigations or insurance or other claims or contract disputes and the timing thereof.

Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:
our ability to successfully integrate the business, operations and employees of Rowan Companies Limited (formerly named Rowan Companies plc) ("Rowan") and the Company to realize synergies and cost savings in connection with the Rowan Transaction (as defined herein);
changes in future levels of drilling activity and capital expenditures by our customers, whether as a result of global capital markets and liquidity, prices of oil and natural gas or otherwise;
changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs;
downtime and other risks associated with offshore rig operations, including rig or equipment failure, damage and other unplanned repairs, the limited availability of transport vessels, hazards, self-imposed drilling limitations and other delays due to severe storms and hurricanes and the limited availability or high cost of insurance coverage for certain offshore perils, such as hurricanes in the Gulf of Mexico or associated removal of wreckage or debris;
governmental action, terrorism, piracy, military action and political and economic uncertainties, including uncertainty or instability resulting from civil unrest, political demonstrations, mass strikes, or an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East, North Africa, West Africa or other geographic areas, which may result in expropriation, nationalization, confiscation, deprivation or destruction of our assets, suspension and/or termination of contracts based on force majeure events or adverse environmental safety events;
risks inherent to shipyard rig construction, repair, modification or upgrades, unexpected delays in equipment delivery, engineering, design or commissioning issues following delivery, or changes in the commencement, completion or service dates;
possible cancellation, suspension, renegotiation or termination (with or without cause) of drilling contracts as a result of general and industry-specific economic conditions, mechanical difficulties, performance or other reasons;
our ability to enter into, and the terms of, future drilling contracts, including contracts for our newbuild units and acquired rigs, for rigs currently idled and for rigs whose contracts are expiring;
any failure to execute definitive contracts following announcements of letters of intent, letters of award or other expected work commitments;

1



the outcome of litigation, legal proceedings, investigations or other claims or contract disputes, including any inability to collect receivables or resolve significant contractual or day rate disputes, any renegotiation, nullification, cancellation or breach of contracts with customers or other parties and any failure to execute definitive contracts following announcements of letters of intent;
governmental regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations (such as the Gulf of Mexico during hurricane season);
new and future regulatory, legislative or permitting requirements, future lease sales, changes in laws, rules and regulations that have or may impose increased financial responsibility, additional oil spill abatement contingency plan capability requirements and other governmental actions that may result in claims of force majeure or otherwise adversely affect our existing drilling contracts, operations or financial results;
our ability to attract and retain skilled personnel on commercially reasonable terms, whether due to labor regulations, unionization or otherwise;
environmental or other liabilities, risks, damages or losses, whether related to storms or hurricanes (including wreckage or debris removal), collisions, groundings, blowouts, fires, explosions, other accidents, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable;
our ability to obtain financing, service our indebtedness and pursue other business opportunities may be limited by our debt levels, debt agreement restrictions and the credit ratings assigned to our debt by independent credit rating agencies;
the adequacy of sources of liquidity for us and our customers;
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;
our ability to realize the expected benefits of our joint venture with Saudi Aramco, including our ability to fund any required capital contributions;
delays in contract commencement dates or the cancellation of drilling programs by operators;
economic volatility and political, legal and tax uncertainties following the June 23, 2016, vote in the U.K. to exit from the European Union ("Brexit");
the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems, including our rig operating systems;
adverse changes in foreign currency exchange rates, including their effect on the fair value measurement of our derivative instruments; and
potential long-lived asset impairments.
In addition to the numerous risks, uncertainties and assumptions described above, you should also carefully read and consider "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I and "Item 1A. Risk Factors" in Part II of this report and "Item 1A. Risk Factors" in Part I and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our annual report on Form 10-K for the year ended December 31, 2018, which is available on the U.S. Securities and Exchange Commission website at www.sec.gov. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward looking statements, except as required by law.

2




PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Valaris plc:
 
Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Valaris plc and subsidiaries (the Company, formerly known as Ensco Rowan plc and Ensco plc) as of June 30, 2019, the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2019 and 2018, the related condensed consolidated statements of cash flows for the six-month periods ended June 30, 2019 and 2018, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
/s/ KPMG LLP
 
Houston, Texas
August 1, 2019

3



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended
June 30,
 
2019
 
2018
OPERATING REVENUES
$
583.9


$
458.5

OPERATING EXPENSES


 
Contract drilling (exclusive of depreciation)
500.3


344.3

Loss on impairment
2.5

 

Depreciation
157.9


120.7

General and administrative
81.2


26.1

Total operating expenses
741.9


491.1

EQUITY IN EARNINGS OF ARO
.6

 

OPERATING LOSS
(157.4
)

(32.6
)
OTHER INCOME (EXPENSE)
 
 
 
Interest income
11.9


3.9

Interest expense, net
(118.3
)

(75.7
)
Other, net
703.7


(13.0
)
 
597.3


(84.8
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
439.9


(117.4
)
PROVISION FOR INCOME TAXES
 
 
 
Current income tax expense
21.2

 
20.1

Deferred income tax expense
11.4

 
4.6

 
32.6


24.7

INCOME (LOSS) FROM CONTINUING OPERATIONS
407.3


(142.1
)
LOSS FROM DISCONTINUED OPERATIONS, NET


(8.0
)
NET INCOME (LOSS)
407.3


(150.1
)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(1.8
)

(.9
)
NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS
$
405.5


$
(151.0
)
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
 
 
 
Continuing operations
$
2.09


$
(1.31
)
Discontinued operations


(0.08
)
 
$
2.09


$
(1.39
)
WEIGHTED-AVERAGE SHARES OUTSTANDING
 
 
 
Basic and Diluted
188.6


108.5

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
OPERATING REVENUES
$
989.8


$
875.5

OPERATING EXPENSES
 

 
Contract drilling (exclusive of depreciation)
832.9


669.5

Loss on impairment
2.5

 

Depreciation
282.9


235.9

General and administrative
110.8


54.0

Total operating expenses
1,229.1


959.4

EQUITY IN EARNINGS OF ARO
.6

 

OPERATING LOSS
(238.7
)

(83.9
)
OTHER INCOME (EXPENSE)
 

 
 

Interest income
15.4


6.9

Interest expense, net
(199.3
)

(141.3
)
Other, net
706.0


(21.1
)
 
522.1


(155.5
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
283.4


(239.4
)
PROVISION FOR INCOME TAXES
 
 
 
Current income tax expense
46.8

 
27.2

Deferred income tax expense
17.3

 
15.9

 
64.1


43.1

INCOME (LOSS) FROM CONTINUING OPERATIONS
219.3


(282.5
)
LOSS FROM DISCONTINUED OPERATIONS, NET


(8.1
)
NET INCOME (LOSS)
219.3


(290.6
)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(4.2
)

(.5
)
NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS
$
215.1


$
(291.1
)
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
 
 
 
Continuing operations
$
1.40


$
(2.61
)
Discontinued operations


(0.08
)
 
$
1.40


$
(2.69
)
WEIGHTED-AVERAGE SHARES OUTSTANDING
 
 
 
Basic and Diluted
148.9


108.5

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
Three Months Ended
June 30,
 
2019
 
2018
NET INCOME (LOSS)
$
407.3

 
$
(150.1
)
OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 
 
Net change in derivative fair value
(1.6
)
 
(7.6
)
Reclassification of net (gains) losses on derivative instruments from other comprehensive income (loss) into net income (loss)
1.8

 
(.7
)
Other

 
(.2
)
NET OTHER COMPREHENSIVE INCOME (LOSS)
.2

 
(8.5
)
COMPREHENSIVE INCOME (LOSS)
407.5

 
(158.6
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(1.8
)
 
(.9
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS
$
405.7

 
$
(159.5
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
NET INCOME (LOSS)
$
219.3

 
$
(290.6
)
OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 
 
Net change in derivative fair value
(1.6
)
 
(5.7
)
Reclassification of net (gains) losses on derivative instruments from other comprehensive income (loss) into net income (loss)
3.4

 
(2.9
)
Other
(.1
)
 
(.3
)
NET OTHER COMPREHENSIVE INCOME (LOSS)
1.7

 
(8.9
)
COMPREHENSIVE INCOME (LOSS)
221.0

 
(299.5
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(4.2
)
 
(.5
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS
$
216.8

 
$
(300.0
)

The accompanying notes are an integral part of these condensed consolidated financial statements.


7



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts)
 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
CURRENT ASSETS
 
 
 
    Cash and cash equivalents
$
959.1


$
275.1

    Short-term investments
135.0


329.0

    Accounts receivable, net
628.7


344.7

    Other current assets
499.7


360.9

Total current assets
2,222.5


1,309.7

PROPERTY AND EQUIPMENT, AT COST
18,472.8


15,517.0

    Less accumulated depreciation
3,017.1


2,900.8

       Property and equipment, net
15,455.7


12,616.2

LONG-TERM NOTES RECEIVABLE FROM ARO
453.1

 

INVESTMENT IN ARO
139.4

 

OTHER ASSETS
169.4


97.8

 
$
18,440.1


$
14,023.7

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable - trade
$
335.2


$
210.5

Accrued liabilities and other
438.3


318.0

Current maturities of long-term debt
1,125.3



Total current liabilities
1,898.8


528.5

LONG-TERM DEBT
6,020.1


5,010.4

OTHER LIABILITIES
799.0


396.0

COMMITMENTS AND CONTINGENCIES





VALARIS SHAREHOLDERS' EQUITY
 

 
 

Class A ordinary shares, U.S. $.40 par value, 205.8 million and 115.2 million shares issued as of June 30, 2019 and December 31, 2018
82.4


46.1

Class B ordinary shares, £1 par value, 50,000 shares authorized and issued as of June 30, 2019 and December 31, 2018
.1


.1

Additional paid-in capital
8,608.4


7,225.0

Retained earnings
1,084.8


874.2

Accumulated other comprehensive income
19.9


18.2

Treasury shares, at cost, 8.1 million and 5.9 million shares as of June 30, 2019 and December 31, 2018
(75.0
)

(72.2
)
Total Valaris shareholders' equity
9,720.6


8,091.4

NONCONTROLLING INTERESTS
1.6


(2.6
)
Total equity
9,722.2


8,088.8

 
$
18,440.1


$
14,023.7

The accompanying notes are an integral part of these condensed consolidated financial statements.

8



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
OPERATING ACTIVITIES
 

 
 

Net income (loss)
$
219.3


$
(290.6
)
Adjustments to reconcile net income (loss) to net cash used in operating activities of continuing operations:
 
 
 
Gain on bargain purchase
(712.8
)
 
(8.3
)
Depreciation expense
282.9


235.9

Share-based compensation expense
19.2

 
14.8

Amortization, net
(17.3
)
 
(24.4
)
Deferred income tax expense
17.3

 
15.9

Contributions to pension plans
(4.0
)
 

Loss on impairment
2.5

 

Equity in earnings of ARO
(0.6
)
 

Loss on debt extinguishment

 
19.0

Loss from discontinued operations, net

 
8.1

Other
4.9


(2.1
)
Changes in operating assets and liabilities
(104.8
)

13.7

Net cash used in operating activities of continuing operations
(293.4
)

(18.0
)
INVESTING ACTIVITIES
 
 
 
Rowan cash acquired
931.9

 

Maturities of short-term investments
339.0


599.0

Purchases of short-term investments
(145.0
)

(414.0
)
Additions to property and equipment
(134.8
)

(331.9
)
Other 
4.5


2.9

Net cash provided by (used in) investing activities of continuing operations
995.6


(144.0
)
FINANCING ACTIVITIES
 
 
 
Debt solicitation fees
(8.7
)
 

Cash dividends paid
(4.5
)

(9.0
)
Proceeds from issuance of senior notes

 
1,000.0

Reduction of long-term borrowings

 
(771.2
)
Debt issuance costs

 
(17.0
)
Repurchase of common stock
(4.2
)
 
(2.0
)
Other
(0.5
)

(0.5
)
Net cash provided by (used in) financing activities
(17.9
)

200.3

Net cash provided by discontinued operations


2.5

Effect of exchange rate changes on cash and cash equivalents
(.3
)

(.7
)
INCREASE IN CASH AND CASH EQUIVALENTS
684.0


40.1

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
275.1


445.4

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
959.1


$
485.5


The accompanying notes are an integral part of these condensed consolidated financial statements.

9



VALARIS PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 -Unaudited Condensed Consolidated Financial Statements
 
On April 11, 2019, we completed our combination with Rowan Companies Limited (formerly named Rowan Companies plc) ("Rowan") and effected a four-to-one share consolidation (being a reverse stock split under English law or the "Reverse Stock Split") and changed our name to Ensco Rowan plc. On July 30, 2019, we changed our name to Valaris plc. All share and per-share amounts in these financial statements have been retrospectively adjusted to reflect the Reverse Stock Split.

We prepared the accompanying condensed consolidated financial statements of Valaris plc and subsidiaries (the "Company," "Valaris," "our," "we" or "us") in accordance with accounting principles generally accepted in the United States of America ("GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included in this report is unaudited but, in our opinion, includes all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The December 31, 2018 condensed consolidated balance sheet data was derived from our 2018 audited consolidated financial statements, but does not include all disclosures required by GAAP. The preparation of our condensed consolidated financial statements requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
 
The financial data for the quarters ended June 30, 2019 and 2018 included herein have been subjected to a limited review by KPMG LLP, our independent registered public accounting firm. The accompanying independent registered public accounting firm's review report is not a report within the meaning of Sections 7 and 11 of the Securities Act, and the independent registered public accounting firm's liability under Section 11 does not extend to it.
 
Results of operations for the quarter ended June 30, 2019 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2019. We recommend these condensed consolidated financial statements be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019.

New Accounting Pronouncements

Recently adopted accounting standards
    
Derivatives and Hedging - In August 2017, the FASB issued Update 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("Update 2017-12"), which makes more hedging strategies eligible for hedge accounting, amends presentation and disclosure requirements and changes how companies assess effectiveness, including the elimination of separate measurement and recognition of ineffectiveness on designated hedging instruments. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. We adopted Updated 2017-12 effective January 1, 2019. As a result, beginning on the effective date, we will no longer separately measure and recognize ineffectiveness on our designated cash flow hedges. Update 2017-02 requires a modified retrospective adoption approach whereby amounts previously recorded to earnings for hedge ineffectiveness on hedging relationships that exist as of the adoption date are recorded as a cumulative effect adjustment to opening retained earnings. As of our adoption date, we had no amounts previously recorded for ineffectiveness for hedging relationships that existed as of our adoption date and therefore no cumulative effect adjustment to retained earnings was recorded.

Leases - During 2016, the FASB issued Update 2016-02, Leases (Topic 842) ("Update 2016-02"), which requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key qualitative and

10



quantitative information about the entity's leasing arrangements. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. During our evaluation of Update 2016-02, we concluded that our drilling contracts contain a lease component. In July 2018, the FASB issued Accounting Standard Update 2018-11, Leases (Topic 842), Targeted Improvements, which (1) provided for a new transition method whereby entities could elect to adopt the Update using a prospective with cumulative catch-up approach (the "effective date method") and (2) provided lessors with a practical expedient, by class of underlying asset, to not separate lease and non-lease components and account for the combined component under Topic 606 when the non-lease component is the predominant element of the combined component. The lessor practical expedient is limited to circumstances in which the lease, if accounted for separately, would be classified as an operating lease under Topic 842. We adopted ASU 2016-02, effective January 1, 2019, using the effective date method.

With respect to our drilling contracts, which contain a lease component, we elected to apply the practical expedient to not separate the lease and non-lease components and account for the combined component under Topic 606. With respect to all of our drilling contracts that existed on the adoption date, we concluded that the criteria to elect the lessor practical expedient had been met. As a result, we will continue to recognize the revenue associated with our drilling contracts under Topic 606. Therefore, we do not expect any change in our revenue recognition patterns or disclosures as a result of our adoption of Topic 842.

With respect to leases whereby we are the lessee, we elected several practical expedients afforded under Topic 842. We elected the package of practical expedients permitted under the transition guidance of Topic 842, including the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. We also elected the practical expedient to not separate lease components from non-lease components for all asset classes, with the exception of office space. Furthermore, we also elected the practical expedient that permits entities not to apply the recognition requirements for leases with a term of 12 months or less. Upon adoption of ASU 2016-02 on January 1, 2019, we recognized lease liabilities and right-of-use assets of $64.6 million and $53.7 million, respectively. See Note 14 for additional information.

Defined Benefit Plans - In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. We will be required to adopt the amended guidance in annual and interim reports beginning January 1, 2021, with early adoption permitted. Adoption is required to be applied on a retrospective basis to all periods presented. We are in the process of evaluating the impact this amendment will have on our condensed consolidated financial statements.

Note 2 -Revenue from Contracts with Customers
 
Our drilling contracts with customers provide a drilling rig and drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig.

We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.

Our integrated drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigs that are not distinct within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.

11




The amount estimated for variable consideration is only recognized as revenue to the extent that it is probable that a significant reversal will not occur during the contract term. We have applied the optional exemption afforded in Update 2014-09 and have not disclosed the variable consideration related to our estimated future day rate revenues. The remaining duration of our drilling contracts based on those in place as of June 30, 2019 was between approximately one month and four years.

Day Rate Drilling Revenue

Our drilling contracts provide for payment on a day rate basis and include a rate schedule with higher rates for periods when the drilling unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The day rate invoiced to the customer is determined based on the varying rates applicable to specific activities performed on an hourly or other time increment basis. Day rate consideration is allocated to the distinct hourly or other time increment to which it relates within the contract term and is generally recognized consistent with the contractual rate invoiced for the services provided during the respective period. Invoices are typically billed to our customers on a monthly basis and payment terms on customer invoices typically range 30 - 45 days.

Certain of our contracts contain performance incentives whereby we may earn a bonus based on pre-established performance criteria. Such incentives are generally based on our performance over individual monthly or other time periods or individual wells. Consideration related to performance bonus is generally recognized in the specific time period to which the performance criteria was attributed.

We may receive termination fees if certain drilling contracts are terminated by the customer prior to the end of the contractual term. Such compensation is recognized as revenues whereby our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
 
Mobilization / Demobilization Revenue

In connection with certain contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to the commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in operating revenues. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in contract drilling expense.

Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the contract term. In some cases, demobilization fees may be contingent upon the occurrence or non-occurrence of a future event. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term.
 
Capital Upgrade / Contract Preparation Revenue

In connection with certain contracts, we receive lump-sum fees or similar compensation for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received are recorded as a contract liability and amortized on a straight-line basis over the contract term to operating revenues. Costs incurred for capital upgrades are capitalized and depreciated over the useful life of the asset.


12



Contract Assets and Liabilities

Contract assets and liabilities are presented net on our condensed consolidated balance sheet on a contract-by-contract basis. Current contract assets and liabilities are included in other current assets and accrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in other assets and other liabilities, respectively, on our condensed consolidated balance sheets.

Contract assets represent amounts previously recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable. Contract liabilities generally represent fees received for mobilization or capital upgrades.

The following table summarizes our contract assets and contract liabilities (in millions):
 
June 30, 2019
 
December 31, 2018
Current contract assets
$
12.8

 
$
4.0

Current contract liabilities (deferred revenue)
$
46.2

 
$
56.9

Noncurrent contract liabilities (deferred revenue)
$
14.8

 
$
20.5

Significant changes in contract assets and liabilities during the period are as follows (in millions):
 
Contract Assets
 
Contract Liabilities
Balance as of December 31, 2018
$
4.0

 
$
77.4

Contract assets acquired and liabilities assumed in the Rowan Transaction
8.4

 
5.3

Revenue recognized in advance of right to bill customer
2.3

 

Increase due to cash received

 
34.3

Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance

 
(40.2
)
Decrease due to amortization of deferred revenue that was added during the period

 
(15.8
)
Decrease due to transfer to receivables during the period
(1.9
)
 

Balance as of June 30, 2019
$
12.8

 
$
61.0


Deferred Contract Costs

Costs incurred for upfront rig mobilizations and certain contract preparation are attributable to our future performance obligation under each respective drilling contract. Such costs are deferred and amortized on a straight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. Deferred contract costs were included in other current assets and other assets on our condensed consolidated balance sheets and totaled $45.1 million and $23.5 million as of June 30, 2019 and December 31, 2018, respectively. During the three-month and six-month periods ended June 30, 2019, amortization of such costs totaled $14.7 million and $21.1 million, respectively. During the three-month and six-month periods ended June 30, 2018, amortization of such costs totaled $9.1 million and $15.9 million, respectively.

Deferred Certification Costs

We must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work

13



and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. Deferred regulatory certification and compliance costs were included in other current assets and other assets on our condensed consolidated balance sheets and totaled $12.1 million and $13.6 million as of June 30, 2019 and December 31, 2018, respectively. During the three-month and six-month periods ended June 30, 2019, amortization of such costs totaled $2.8 million and $5.7 million, respectively. During the three-month and six-month periods ended June 30, 2018, amortization of such costs totaled $3.2 million and $6.3 million, respectively.    

Expected Future Amortization of Contract Liabilities and Deferred Costs

Our contract liabilities and deferred costs are amortized on a straight-line basis over the contract term or corresponding certification period to operating revenues and contract drilling expense, respectively. Expected future amortization of our contract liabilities and deferred costs recorded as of June 30, 2019 is set forth in the table below (in millions):
 
Remaining 2019
 
2020
 
2021
 
2022 and Thereafter
 
 Total
Amortization of contract liabilities
$
39.0

 
$
11.7

 
$
7.6

 
$
2.7

 
$
61.0

Amortization of deferred costs
$
39.7

 
$
13.3

 
$
2.8

 
$
1.4

 
$
57.2


Note 3 -Rowan Transaction

On October 7, 2018, we entered into a transaction agreement (the "Transaction Agreement") with Rowan. On April 11, 2019 (the "Transaction Date"), we completed our combination with Rowan pursuant to the Transaction Agreement (the "Rowan Transaction"). Rowan's financial results are included in our consolidated results beginning on the Transaction Date.

Prior to the Rowan Transaction, Rowan and Saudi Aramco formed a 50/50 joint venture to own, manage and operate drilling rigs offshore Saudi Arabia ("Saudi Aramco Rowan Offshore Drilling Company" or "ARO"). ARO currently owns a fleet of seven jackup rigs, leases another nine jackup rigs from us (two of which are expected to commence drilling operations during the third quarter of 2019) and has plans to order up to 20 newbuild jackup rigs over the next 10 years. See Note 4 for additional information on ARO.

The Rowan Transaction is expected to enhance the market leadership of the combined company with a fleet of high-specification floaters and jackups and position us well to meet increasing and evolving customer demand. The increased scale, diversification and financial strength of the combined company will provide us advantages to better serve our customers. Exclusive of two older jackup rigs marked for retirement, Rowan’s offshore rig fleet as of the Transaction Date consisted of four ultra-deepwater drillships and 19 jackup rigs.

Consideration

As a result of the Rowan Transaction, Rowan shareholders received 2.750 Valaris Class A ordinary shares for each Rowan Class A ordinary share, representing a value of $43.67 per Rowan share based on a closing price of $15.88 per Valaris share on April 10, 2019, the last trading day before the Transaction Date. Total consideration delivered in the Rowan Transaction consisted of 88.3 million Valaris shares with an aggregate value of $1.4 billion, inclusive of $2.6 million for the estimated fair value of replacement employee equity awards. Upon closing of the Rowan Transaction, we effected a consolidation (being a reverse stock split under English law) where every four existing Class A ordinary shares, each with a nominal value of $0.10, were consolidated into one Class A ordinary share, each with a nominal value of $0.40. All share and per share data included in this report have been retroactively adjusted to reflect the Reverse Stock Split.


14



Assets Acquired and Liabilities Assumed
    
Under U.S. GAAP, Valaris is considered to be the acquirer for accounting purposes. As a result, Rowan's assets acquired and liabilities assumed in the Rowan Transaction were recorded at their estimated fair values as of the Transaction Date under the acquisition method of accounting. When the fair value of the net assets acquired exceeds the consideration transferred in an acquisition, the difference is recorded as a bargain purchase gain in the period in which the transaction occurs. We have not finalized the fair values of assets acquired and liabilities assumed; therefore, the fair value estimates set forth below are subject to adjustment during a one-year measurement period subsequent to the Transaction Date. The estimated fair values of certain assets and liabilities including materials and supplies, long-lived assets, contingencies and unrecognized tax benefits require judgments and assumptions that increase the likelihood that adjustments may be made to these estimates during the measurement period, and those adjustments could be material.

The provisional amounts for assets acquired and liabilities assumed are based on preliminary estimates of their fair values as of the Transaction Date and are as follows (in millions):
 
Estimated Fair Value
Assets:
 
Cash and cash equivalents
$
931.9

Accounts receivable(1)
207.1

Other current assets
101.6

Long-term notes receivable from ARO
454.5

Investment in ARO
138.8

Property and equipment
2,989.8

Other assets
41.7

Liabilities:
 
Accounts payable and accrued liabilities
259.4

Current portion of long-term debt
203.2

Long-term debt
1,910.9

Other liabilities
376.3

Net assets acquired
2,115.6

Less: Transaction consideration
(1,402.8
)
Estimated bargain purchase gain
$
712.8


(1) 
Gross contractual amounts receivable totaled $208.3 million as of the Transaction Date.

Bargain Purchase Gain

The estimated fair values assigned to assets acquired net of liabilities assumed exceeded the consideration transferred, resulting in a bargain purchase gain primarily driven by the decline in our share price from $33.92 to $15.88 between the last trading day prior to the announcement of the Rowan Transaction and the Transaction Date. The estimated bargain purchase gain of $712.8 million was reflected in other, net, in our condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2019.

Transaction-Related Costs

Transaction-related costs were expensed as incurred and consisted of various advisory, legal, accounting, valuation and other professional or consulting fees totaling $15.0 million and $17.8 million for the three-month and six-month periods ended June 30, 2019. These costs were included in general and administrative expense in our condensed consolidated statements of operations.

15



  
Materials and Supplies

We recorded materials and supplies at an estimated fair value of $83.0 million. Materials and supplies consist of consumable parts and supplies maintained on drilling rigs and in shore-based warehouse locations for use in operations and is generally comprised of items of low per unit cost and high reorder frequency. We estimated the fair value of Rowan's materials and supplies primarily using a market approach.

Equity Method Investment in ARO

The equity method investment in ARO was recorded at its estimated fair value as of the Transaction Date. See Note 4 for addition information on ARO. We estimated the fair value of the equity investment primarily by applying an income approach, using projected discounted cash flows of the underlying assets, a risk-adjusted discount rate and an estimated effective income tax rate.

Property and Equipment

Property and equipment acquired in connection with the Rowan Transaction consisted primarily of drilling rigs and related equipment, including four drillships and 19 jackup rigs (exclusive of two jackups marked for retirement).  We recorded property and equipment at its estimated fair value of $3.0 billion. We estimated the fair value of the rigs and equipment by applying an income approach, using projected discounted cash flows, a risk-adjusted discount rate and an estimated effective income tax rate. The estimated remaining useful lives for Rowan's drilling rigs ranged from 16 to 35 years based on original estimated useful lives of 30 to 35 years.

Intangible Assets and Liabilities

We recorded intangible assets and liabilities of $16.2 million and $2.1 million, respectively, representing the estimated fair value of Rowan's firm contracts in place at the Transaction Date with favorable or unfavorable contract terms compared to then-market day rates for comparable drilling rigs. The various factors considered in the determination of these fair values were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the Transaction Date. The intangible assets and liabilities were calculated based on the present value of the difference in cash flows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated then-current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate.

Operating revenues were reduced by $1.1 million for net asset amortization during the period from the Transaction Date through June 30, 2019. The remaining balance of intangible assets and liabilities of $14.9 million and $1.9 million, respectively, was included in other assets and other liabilities, respectively, on our condensed consolidated balance sheet as of June 30, 2019. These balances will be amortized to operating revenues over the respective remaining contract terms on a straight-line basis. As of June 30, 2019, the remaining terms of the underlying contracts is approximately 2.5 years. Amortization of these intangibles is expected to result in a reduction to revenue of $2.6 million, $5.1 million and $5.4 million for 2019, 2020 and 2021, respectively.

Long-term Debt

We recorded Rowan's long-term debt at its estimated fair value as of the Transaction Date, which were based on quoted market prices for Rowan's publicly traded debt as of April 10, 2019.


16



Deferred Taxes

The Rowan Transaction was executed through the acquisition of Rowan's outstanding ordinary shares and, therefore, the historical tax bases of the acquired assets and assumed liabilities, net operating losses and other tax attributes of Rowan, were assumed as of the Transaction Date.  However, adjustments were recorded to recognize deferred tax assets and liabilities for the tax effects of differences between acquisition date fair values and tax bases of assets acquired and liabilities assumed. Additionally, the interaction of our and Rowan's tax attributes that impacted the deferred taxes of the combined entity were also recognized as part of acquisition accounting. As of the Transaction Date, an increase of $10.0 million and a decrease of $98.0 million to Rowan's historical net deferred tax liabilities and deferred tax assets, respectively, was recognized.     

Deferred tax assets and liabilities recognized in connection with the Rowan Transaction were measured at rates enacted as of the Transaction Date.  Tax rate changes, or any deferred tax adjustments for new tax legislation, following the Transaction Date will be reflected in our operating results in the period in which the change in tax laws or rate is enacted.

Uncertain Tax Positions

Uncertain tax positions assumed in a business combination are measured at the largest amount of the tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. As of the Transaction Date, Rowan had previously recognized net liabilities for uncertain tax positions totaling $50.4 million. Subsequent to the Transaction Date, we received tax assessments related to certain filing positions taken by Rowan in prior years totaling approximately $159.0 million. We continue to evaluate these and other Rowan filing positions and have recognized additional liabilities of $52.0 million, which reflects the amount of the Rowan filing positions that we have preliminarily concluded we will not more-likely-than-not sustain. Our continuing evaluation of the relevant facts and circumstances surrounding these positions may result in revisions to this estimate, which could be material.
    
Revenue and Earnings of Rowan

Our condensed consolidated statements of operations for the three-month and six-month periods end June 30, 2019 include revenues of $147.2 million and a net loss of $95.3 million associated with Rowan's operations from the Transaction Date through June 30, 2019.


17



Unaudited Pro Forma Impact of the Rowan Transaction

The following unaudited supplemental pro forma results present consolidated information as if the Rowan Transaction was completed on January 1, 2018. The pro forma results include, among others, (i) the amortization associated with acquired intangible assets and liabilities (ii) a reduction in depreciation expense for adjustments to property and equipment (iii) the amortization of premiums and discounts recorded on Rowan's debt (iv) removal of the historical amortization of unrealized gains and losses related to Rowan's pension plans and (v) the amortization of basis differences in assets and liabilities of ARO. The pro forma results do not include any potential synergies or non-recurring charges that may result directly from the Rowan Transaction.
(in millions, except per share amounts)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019(1)
 
2018
 
2019(1)
 
2018
Revenues
$
599.0

 
$
699.8

 
$
1,179.5

 
$
1,328.0

Net loss
$
(264.9
)
 
$
(172.6
)
 
$
(596.4
)
 
$
(373.5
)
Loss per share - basic and diluted
$
(1.35
)
 
$
(0.88
)
 
$
(3.04
)
 
$
(1.90
)
(1) 
Pro forma net loss and loss per share were adjusted to exclude an aggregate of $71.5 million and $80.8 million of transaction-related and integration costs incurred for the three-month and six-month periods ended June 30, 2019, respectively, and the estimated $712.8 million bargain purchase gain.

Note 4 -Equity Method Investment in ARO

Background
    
During 2016, Rowan and Saudi Aramco entered into an agreement to create a 50/50 joint venture (the "Shareholders' Agreement") to own, manage and operate offshore drilling rigs in Saudi Arabia. The new entity, ARO, was formed in May 2017 with each of Rowan and Saudi Aramco contributing $25 million to be used for working capital needs.
In October 2017, Rowan sold rigs Bob Keller, J.P. Bussell and Gilbert Rowe to ARO and Saudi Aramco sold SAR 201 and related assets to ARO in each case for cash. Upon completion of the rig sales, ARO was deemed to have commenced operations. Saudi Aramco subsequently sold another rig, SAR 202, to ARO in December 2017 for cash and in October 2018, Rowan sold two additional jackup rigs, the Scooter Yeargain and the Hank Boswell, to ARO for cash. As a result of these rig sales, ARO owns seven jackup rigs as of June 30, 2019.

During 2017 and 2018, Rowan contributed cash to ARO in exchange for 10-year shareholder notes receivable at a stated interest rate of LIBOR plus two percent. As of June 30, 2019, the carrying amount of the long-term notes receivable from ARO was $453.1 million. The Shareholders’ Agreement prohibits the sale or transfer of the shareholder note to a third party, except in certain limited circumstances.

Rigs purchased by ARO will receive contracts from Saudi Aramco for an aggregate 15 years, renewed and re-priced every three years, provided that the rigs meet the technical and operational requirements of Saudi Aramco. Each of the seven rigs owned by ARO is currently operating under its initial three-year contract.

Additionally, prior to the Rowan Transaction, Rowan entered into agreements with ARO to lease nine rigs to ARO (the "Lease Agreements"). The rigs are leased to ARO through bareboat charter arrangements whereby substantially all operating costs are incurred by ARO. All nine leased rigs are under three-year drilling contracts with Saudi Aramco. As of June 30, 2019, seven of the rigs were operating under their contracts and two rigs, the Bess Brants and Earnest Dees, were undergoing shipyard projects prior to commencing their contracts with Saudi Aramco. The Bess Brants and Earnest Dees are expected to commence drilling operations in August and September 2019, respectively.

18




Rowan and Saudi Aramco have agreed to take all steps necessary to ensure that ARO purchases at least 20 newbuild jackup rigs ratably over 10 years. The partners intend for the newbuild jackup rigs to be financed out of available cash from ARO's operations and/or funds available from third-party debt financing. In the event ARO has insufficient cash from operations or is unable to obtain third party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion to fund the newbuild program. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, on a proportionate basis. The partners agreed that Saudi Aramco as a customer will provide drilling contracts to ARO in connection with the acquisition of the newbuild rigs. The initial contracts provided by Saudi Aramco for each of the newbuild rigs will be for an eight-year term. The day rate for the initial contracts for each newbuild rig will be determined using a pricing mechanism that targets a defined payback period for construction costs on an EBITDA basis. The initial eight-year contracts will be followed by a minimum of another eight years of term, re-priced in three-year intervals based on a market pricing mechanism.

Upon establishment of ARO, Rowan also entered into (1) an agreement to provide certain back-office services for a period of time until ARO develops its own infrastructure (the "Transition Services Agreement"), and (2) an agreement to provide certain Rowan employees through secondment arrangements to assist with various onshore and offshore services for the benefit of ARO (the "Secondment Agreement"). These agreements remain in place subsequent to the Rowan Transaction. Pursuant to these agreements, we or our seconded employees provide various services to ARO, and in return, are provided remuneration for those services. From time to time, we may also sell equipment or supplies to ARO.

The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the seven ARO-owned jackup rigs and the seven rigs leased from us that operated during the period from the Transaction Date through June 30, 2019.

The contract drilling expenses, depreciation and general and administrative expenses presented below are also for the period from the Transaction Date through June 30, 2019. Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. Cost incurred under the Secondment Agreement are included in both contract drilling expense and general and administrative, depending on the function to which the seconded employee's service relates. Substantially all costs incurred under the Transition Services Agreement are included in general and administrative. See additional discussion below regarding these related-party transactions.

We account for our interest in ARO using the equity method of accounting and only recognize our portion of ARO's net income, adjusted for basis differences as discussed below, which is included in equity in earnings of ARO in our condensed consolidated statements of operations. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO. Judgments regarding our level of influence over ARO included considering key factors such as: each partner's ownership interest, representation on the board of managers of ARO and ability to direct activities that most significantly impact ARO's economic performance, including the ability to influence policy-making decisions.

19



Summarized Financial Information

Summarized financial information for ARO is as follows (in millions):
 
April 11 - June 30, 2019
Revenues
$
123.8

Operating expenses
 
Contract drilling (exclusive of depreciation)
78.9

Depreciation
12.4

General and administrative
5.3

Operating income
27.2

Other expense, net
8.7

Provision for income taxes
1.7

Net income
$
16.8

 
June 30, 2019
Current assets
$
434.9

Non-current assets
898.6

Total assets
$
1,333.5

 
 
Current liabilities
$
227.4

Non-current liabilities
1,030.6

Total liabilities
$
1,258.0

Equity in Earnings of ARO
As a result of the Rowan Transaction, we recorded our equity method investment in ARO at its estimated fair value on the Transaction Date. Additionally, we computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's GAAP financial statements ("basis differences"). The basis differences primarily relate to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were determined to have favorable terms as of the Transaction Date. The basis differences are amortized over the remaining life of the assets or liabilities to which they relate and are recognized as an adjustment to the equity in earnings of ARO in our condensed consolidated statements of operations. The amortization of those basis differences are combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):
 
April 11 - June 30, 2019
50% interest in ARO net income
$
8.4

Amortization of basis differences
(7.8
)
Equity in earnings of ARO
$
0.6



20



Related-Party Transactions

Revenues recognized by us related to the Lease Agreements, Transition Services Agreement and Secondment Agreement are as follows (in millions):
 
April 11 - June 30, 2019
Lease revenue
$
18.3

Secondment revenue
15.6

Transition Services revenue
5.2

Total revenue from ARO (1)
$
39.1

(1) 
All of the revenues presented above are included in our Other segment in our segment disclosures. See Note 15 for additional information.
We also have an agreement between us and ARO, pursuant to which ARO will reimburse us for certain capital expenditures related to the shipyard upgrade projects for the Bess Brants and Earnest Dees. As of June 30, 2019, $14.3 million related to reimbursement of these expenditures is included in accounts receivable, net, on our condensed consolidated balance sheet.
Amounts receivable from ARO related to the above items totaled $63.6 million as of June 30, 2019 and are included in accounts receivable, net, on our condensed consolidated balance sheet. Accounts payable to ARO totaled $2.8 million as of June 30, 2019.
During 2017 and 2018, Rowan contributed cash to ARO in exchange for 10-year shareholder notes receivable at a stated interest rate of LIBOR plus two percent. Interest is recognized as interest income in our condensed consolidated statement of operations and totaled $5.1 million for the period from the Transaction Date through June 30, 2019. As of June 30, 2019, we had interest receivable from ARO of $11.5 million, which is included in other current assets on our condensed consolidated balance sheet.
The following summarizes the total assets and liabilities as reflected in our condensed consolidated balance sheet as well as our maximum exposure to loss related to ARO (in millions). Generally, our maximum exposure to loss is limited to (1) our equity investment in ARO; (2) the outstanding balance on our shareholder notes receivable; and (3) other receivables for services provided to ARO, partially offset by payables for services received.
 
June 30, 2019
Total assets
$
667.6

Less: total liabilities
2.8

Maximum exposure to loss
$
664.8



21



Note 5 -Fair Value Measurements
 
The following fair value hierarchy table categorizes information regarding our financial assets and liabilities measured at fair value on a recurring basis (in millions):
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
As of June 30, 2019
 
 
 

 
 

 
 

Supplemental executive retirement plan assets 
$
26.2

 
$

 
$

 
$
26.2

Total financial assets
$
26.2

 
$

 
$

 
$
26.2

Derivatives, net
$

 
$
(4.3
)
 
$

 
$
(4.3
)
Total financial liabilities
$

 
$
(4.3
)
 
$

 
$
(4.3
)
 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 

 
 

 
 

Supplemental executive retirement plan assets
$
27.2

 
$

 
$

 
$
27.2

Total financial assets
$
27.2

 
$

 
$

 
$
27.2

Derivatives, net 
$

 
$
(10.7
)
 
$

 
$
(10.7
)
Total financial liabilities
$

 
$
(10.7
)
 
$

 
$
(10.7
)


Supplemental Executive Retirement Plan Assets
 
Our supplemental executive retirement plans (the "SERP") are non-qualified plans that provide eligible employees an opportunity to defer a portion of their compensation for use after retirement. Assets held in the SERP were marketable securities measured at fair value on a recurring basis using Level 1 inputs and were included in other assets on our condensed consolidated balance sheets. The fair value measurement of assets held in the SERP was based on quoted market prices.

Derivatives
 
Our derivatives are measured at fair value on a recurring basis using Level 2 inputs. See Note 7 for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurement of our derivatives was based on market prices that are generally observable for similar assets or liabilities at commonly-quoted intervals.
 

22



Other Financial Instruments
 
The carrying values and estimated fair values of our long-term debt instruments were as follows (in millions):