Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2013
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 1-7573 
PARKER DRILLING COMPANY
(Exact name of registrant as specified in its charter) 
Delaware
 
73-0618660
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
5 Greenway Plaza, Suite 100,
Houston, Texas
 
77046
(Address of principal executive offices)
 
(Zip code)
(281) 406-2000
(Registrant’s telephone number, including area code) 
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x    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. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
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  x
As of July 31, 2013 there were 120,858,787 common shares outstanding.



Table of Contents

TABLE OF CONTENTS
 
 
Page
 
 


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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
 
 
June 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
69,608

 
$
87,886

Accounts and notes receivable, net of allowance for bad debts of $12,642 and $8,117 at June 30, 2013 and December 31, 2012
251,440

 
168,562

Rig materials and supplies
39,229

 
28,860

Deferred costs
10,822

 
1,089

Deferred income taxes
16,411

 
8,742

Other tax assets
13,722

 
33,524

Assets held for sale
8,656

 
6,800

Other current assets
19,818

 
12,821

Total current assets
429,706

 
348,284

Property, plant and equipment less accumulated depreciation and amortization of $1,061,845 and $1,029,712 at June 30, 2013 and December 31, 2012
852,813

 
789,123

Deferred income taxes
107,957

 
95,295

Other noncurrent assets
46,061

 
23,031

Total assets
$
1,436,537

 
$
1,255,733

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
10,000

 
$
10,000

Accounts payable and accrued liabilities
169,130

 
137,746

Accrued income taxes
6,975

 
4,120

Total current liabilities
186,105

 
151,866

Long-term debt
589,147

 
469,205

Other long-term liabilities
22,743

 
23,182

Long-term deferred tax liability
31,306

 
20,847

Contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Common stock
19,995

 
19,818

Capital in excess of par value
651,535

 
646,217

Accumulated other comprehensive income
(564
)
 

Accumulated deficit
(65,740
)
 
(74,631
)
Total controlling interest stockholders’ equity
605,226

 
591,404

Noncontrolling interest
2,010

 
(771
)
Total equity
607,236

 
590,633

Total liabilities and stockholders’ equity
$
1,436,537

 
$
1,255,733

See accompanying notes to the unaudited consolidated condensed financial statements.


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PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share and Weighted Average Shares Outstanding)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
226,001

 
$
178,925

 
$
393,156

 
$
355,494

Expenses:
 
 
 
 
 
 
 
Operating expenses
143,549

 
104,526

 
260,595

 
199,458

Depreciation and amortization
32,280

 
27,959

 
61,792

 
55,578

 
175,829

 
132,485

 
322,387

 
255,036

Total operating gross margin
50,172

 
46,440

 
70,769

 
100,458

General and administration expense
(22,378
)
 
(7,420
)
 
(35,261
)
 
(12,917
)
Gain on disposition of assets, net
517

 
1,368

 
1,665

 
1,860

Total operating income
28,311

 
40,388

 
37,173

 
89,401

Other income and (expense):
 
 
 
 
 
 
 
Interest expense
(10,741
)
 
(8,925
)
 
(20,747
)
 
(16,962
)
Change in fair value of derivative positions
17

 
38

 
54

 
(11
)
Interest income
2,203

 
53

 
2,251

 
79

Loss on extinguishment of debt

 
(1,649
)
 

 
(1,649
)
Other
(183
)
 
20

 
(56
)
 
36

Total other expense
(8,704
)
 
(10,463
)
 
(18,498
)
 
(18,507
)
Income before income taxes
19,607

 
29,925

 
18,675

 
70,894

Income tax expense
11,233

 
9,817

 
9,729

 
24,460

Net income
8,374

 
20,108

 
8,946

 
46,434

Less: Net income (loss) attributable to noncontrolling interest
93

 
25

 
73

 
(41
)
Net income attributable to controlling interest
$
8,281

 
$
20,083

 
$
8,873

 
$
46,475

Basic earnings per share
$
0.07

 
$
0.17

 
$
0.07

 
$
0.40

Diluted earnings per share
$
0.07

 
$
0.17

 
$
0.07

 
$
0.39

 
 
 
 
 
 
 
 
Number of common shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
119,483,780

 
117,410,212

 
119,177,431

 
117,129,364

Diluted
121,860,011

 
118,526,879

 
121,498,223

 
118,623,037


See accompanying notes to the unaudited consolidated condensed financial statements.


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PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income
$
8,281

 
$
20,083

 
$
8,873

 
$
46,475

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Foreign exchange translation losses and other
(564
)
 

 
(564
)
 

Total other comprehensive loss, net of tax:
(564
)
 

 
(564
)
 

Comprehensive income
7,717

 
20,083

 
8,309

 
46,475

Comprehensive (income)/loss attributable to noncontrolling interest
(30
)
 

 
(30
)
 

Comprehensive income attributable to controlling interest
$
7,687

 
$
20,083

 
$
8,279

 
$
46,475


See accompanying notes to the unaudited consolidated condensed financial statements.


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PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
8,946

 
$
46,434

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
61,792

 
55,578

Loss on extinguishment of debt

 
1,649

Gain on disposition of assets
(1,665
)
 
(1,860
)
Deferred income tax expense
1,800

 
10,432

Expenses not requiring cash
7,989

 
11,789

Changes in current assets and liabilities
 
 
 
Change in accounts receivable
(32,285
)
 
9,161

Change in other assets
6,711

 
(7,138
)
Change in accrued income taxes
2,179

 
923

Change in liabilities
(9,543
)
 
(31,437
)
Net cash provided by operating activities
45,924

 
95,531

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(63,537
)
 
(109,531
)
Proceeds from the sale of assets
2,901

 
2,340

Acquisition of ITS, net of cash acquired
(117,991
)
 

Net cash used in investing activities
(178,627
)
 
(107,191
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
125,000

 
130,000

Repayments of senior notes

 
(122,852
)
Repayments of term loan
(5,000
)
 
(12,000
)
Payments of debt issuance costs
(5,386
)
 
(3,537
)
Payments of debt extinguishment costs

 
(402
)
Excess tax benefit from stock based compensation
(189
)
 
49

Net cash provided by (used in) financing activities
114,425

 
(8,742
)
 
 
 
 
Net decrease in cash and cash equivalents
(18,278
)
 
(20,402
)
Cash and cash equivalents, beginning of year
87,886

 
97,869

Cash and cash equivalents, end of period
$
69,608

 
$
77,467

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
21,823

 
$
16,989

Income taxes paid
$
8,585

 
$
28,307


See accompanying notes to the unaudited consolidated condensed financial statements.


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PARKER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
1.
General
In the opinion of the management of Parker Drilling Company (Parker Drilling), the accompanying unaudited consolidated condensed financial statements reflect all adjustments normally recurring which we believe are necessary for a fair presentation of: (1) Parker Drilling’s financial position as of June 30, 2013 and December 31, 2012, (2) Parker Drilling’s results of operations for the three and six month periods ended June 30, 2013 and 2012, (3) Parker Drilling’s consolidated condensed statement of comprehensive income for the three and six month periods ended June 30, 2013 and 2012, and (4) Parker Drilling's cash flows for the six month periods ended June 30, 2013 and 2012. Results for the six month period ended June 30, 2013 are not necessarily indicative of the results that will be realized for the year ending December 31, 2013. The financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012.
Nature of Operations — Parker Drilling, together with its subsidiaries (the Company or Parker), is an international drilling services and rental tools provider. We have operated in over 50 foreign countries and the United States since beginning operations in 1934, making us among the most geographically experienced drilling contractors and rental tools providers in the world. During 2012, we operated in 12 countries, and in 2013, we acquired an international rental tools business with operations in 10 additional countries. We have extensive experience and expertise in drilling geologically difficult wells and in managing the logistical and technological challenges of operating in remote, harsh and ecologically sensitive areas. We believe our quality, health, safety and environmental practices are leaders in our industry. Our rental tools business specializes in providing high-quality, reliable equipment and services for oil and natural gas drilling, workover and production applications. This includes drill pipe, heavy-weight drill pipe, tubing, high-torque connections, blow-out preventers (BOPs), drill collars, casing running systems, fishing services and more.
On April 22, 2013 we acquired International Tubular Services Limited and certain of its affiliates (collectively, ITS) and other related assets (the ITS Acquisition - see also Note 2). ITS’ principal activities include the rental of drilling equipment and pressure control systems, provision of casing running systems and fishing services, together with machine shop support. ITS serves an extensive customer base of exploration and production (E&P) companies, drilling contractors and service companies from 21 operating facilities primarily located in the Middle East, Latin America, U.K. and Europe, and the Asia-Pacific region.
Our U.S. barge drilling business operates barge rigs that drill for natural gas, oil, and a combination of oil and natural gas in the shallow waters in and along the inland waterways of Louisiana, Alabama, and Texas. Our international drilling business includes operations related to Parker-owned and operated rigs as well as customer-owned rigs. We strive to deploy our fleet of Parker-owned rigs in markets where we expect to have opportunities to keep the rigs consistently in service. In addition, we perform drilling-related activities for operators who own drilling rigs and who choose to utilize our drilling experience and technical expertise to perform services on a contracted basis, including Operations and Maintenance (O&M) work, and other project management services (e.g., labor, maintenance, and logistics). On June 30, 2013, our marketable rig fleet consisted of 13 barge drilling rigs and 23 land rigs located in the United States, Latin America and the Eastern Hemisphere regions. We have 8 rigs held for sale or currently not marketed as of June 30, 2013. Our Technical Services business includes engineering and related project services during the concept development, pre-FEED (Front End Engineering Design), and FEED phases of our customer owned drilling facility projects. During the Engineering, Procurement, Construction and Installation (EPCI) phase, we focus primarily on the drilling systems engineering, procurement, commissioning and installation, and we typically provide customer support during construction. Our Technical Services business is also the Company's engineering expertise center and provides our ongoing drilling businesses with services similar to those provided to our external customers; including engineering design, retrofitting of existing rigs, modification, upgrades and other technology-related advancements.
Consolidation — The consolidated condensed financial statements include the accounts of Parker Drilling and subsidiaries over which we exercise control or have a controlling financial interest, including entities, if any, in which the Company is allocated a majority of the entity’s losses or returns, regardless of ownership percentage. If a subsidiary of Parker Drilling has a 50 percent interest in an entity but Parker Drilling’s interest in the subsidiary or the entity does not meet the consolidation criteria described above, then that interest is accounted for under the equity method.
Noncontrolling Interest — We apply the accounting standards related to noncontrolling interests for ownership interests in our subsidiaries held by parties other than Parker Drilling. The entities that comprise the noncontrolling interest include Parker SMNG Drilling Limited Liability Company, Primorsky Drill Rig Services B.V., ITS Arabia Limited, and International Tubular Services - Egypt SAE. We report noncontrolling interest as equity on the consolidated balance sheets

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and report net income (loss) attributable to controlling interest and to noncontrolling interest separately on the consolidated statements of operations.

Reclassifications — Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not have a material effect on our consolidated condensed statements of operations, consolidated condensed balance sheets, condensed statement of comprehensive income or consolidated condensed statements of cash flows.
Use of Estimates — The preparation of financial statements in accordance with accounting policies generally accepted in the United States (U.S. GAAP) requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities at the date of the financial statements, and our revenue and expenses during the periods reported. Estimates are typically used when accounting for certain significant items, such as allowance for doubtful accounts, legal or contractual liability accruals, mobilization and deferred mobilization, revenue and cost accounting for projects that follow the percentage of completion method, self-insured medical/dental plans, income taxes and valuation allowance, and other items requiring the use of estimates. Estimates are based on a number of variables which may include third party valuations, historical experience and assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ from management estimates.
Acquisitions-purchase price allocation — We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values at the transaction date. Transaction and integration costs associated with an acquisition are expensed as incurred. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. We engage third-party appraisal firms to assist in fair value determination of inventories, identifiable intangible assets, and any other significant assets or liabilities when appropriate. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
Intangible AssetsUpon the ITS Acquisition, we recorded $10.0 million and $0.2 million, respectively, to recognize the fair values of definite and indefinite lived intangible assets. (see Note 2 - Acquisition of ITS). Definite lived intangible assets recorded in connection with the ITS Acquisition primarily relate to trade names, customer relationships, and developed technology and will be amortized over a weighted average period of approximately 3 years. With regard to indefinite lived intangible assets, which relates to our development of technology, we will conduct impairment tests annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired.
Revenue Recognition — Contract drilling revenues and expenses, comprised of daywork drilling contracts and engineering and related project service contracts, are recognized as services are performed and collection is reasonably assured. For certain contracts, we receive payments contractually designated for the mobilization of rigs and other drilling equipment. Mobilization payments received, and direct costs incurred for the mobilization, are deferred and recognized over the term of the related drilling contract; however, costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. Reimbursements received for out-of-pocket expenses are recorded as both revenues and direct costs. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met. Revenues from rental activities are recognized ratably over the rental term which is generally less than six months.
Reimbursable Costs — Within certain contractual arrangements, we may procure and take title, and risk of loss, for certain equipment or make certain expenditures on behalf of our customers. We typically receive fees for these services, which we record as revenues. We recognize reimbursements received for out-of-pocket expenditures as revenues and account for out-of-pocket expenditures as direct operating costs. Such amounts totaled $15.4 million and $10.1 million during the second quarters of 2013 and 2012, respectively and $30.3 million and $17.7 million for the six months ended June 30, 2013 and 2012, respectively.
Concentrations of Credit Risk — Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of trade receivables. We generally do not require collateral on our trade receivables.
At June 30, 2013 and December 31, 2012, we had deposits in domestic banks in excess of federally insured limits of approximately $32.6 million and $12.2 million, respectively. The change is primarily because as of January 1, 2013, all regular checking account deposits are only guaranteed up to $250,000 at each institution while prior to January 1, 2013, all regular checking account deposits were guaranteed, except investments. In addition, as of June 30, 2013 and December 31, 2012, we had uninsured deposits in foreign banks of $48.6 million and $34.5 million, respectively.

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Our customer base consists primarily of major, independent, national and international oil and gas companies and integrated service providers. We depend on a limited number of customers. Our largest customer, Exxon Neftegas Limited (ENL), constituted 14.3 percent of our total year-to-date revenues as of June 30, 2013. Each of our segments depends on a limited number of key customers and the loss of any one or more key customers could have a material adverse effect on a segment.

Capitalized Interest — Interest from external borrowings is capitalized on major projects until the assets are ready for their intended use. Capitalized interest is added to the cost of the underlying assets and is amortized over the useful lives of the assets in the same manner as the underlying assets. Capitalized interest reduces net interest expense in the consolidated condensed statements of operations. During the three and six months ended June 30, 2013, we capitalized interest costs of $0.5 million and $1.0 million, respectively, which were primarily related to a new enterprise resource planning system. During the second quarter of 2012 we capitalized $3.0 million of interest costs primarily related to the two Arctic Alaska Drilling Unit (AADU) rigs in Alaska and $5.4 million for the six month period ended June 30, 2012.
 
2.
Acquisition of ITS    
On April 22, 2013 we entered into a Sale and Purchase Agreement (the Agreement) with ITS Tubular Services (Holdings) Limited, a company organized under the laws of Scotland and in administration proceedings under the laws thereof (the Seller) and others. Pursuant to the Agreement, we acquired International Tubular Services Limited and certain of its affiliates (collectively, ITS) and other related assets held by the Seller (the ITS Acquisition) for an initial purchase price of $101.0 million paid at the closing of the ITS Acquisition. An additional $24.0 million was deposited into an escrow account, which will either be paid to the Seller as additional purchase price when certain consents are obtained or, in certain circumstances, released to either the Seller or to us, as the case may be, in accordance with the Agreement. The ITS Acquisition closed simultaneously with the execution of the Agreement on April 22, 2013.
ITS’ principal activities include the rental of drilling equipment and pressure control systems, and the provision of casing running systems and fishing services, together with machine shop support. ITS serves an extensive customer base of E&P companies, drilling contractors and service companies from 21 operating facilities primarily located in the Middle East, Latin America, U.K. and Europe, and the Asia-Pacific region. The entire operations related to ITS and the related assets acquired and liabilities assumed will fall under our Rental Tools segment.
Fair value of Consideration Transferred
  
The following details the fair value of the consideration transferred to effect the ITS Acquisition (dollars in thousands).

Cash paid to, or on behalf of, ITS and its equity holders
$
101,000

Cash deposited in escrow
19,000

Fair value of contingent consideration deposited in escrow for assets not acquired (1)
5,000

Total fair value of the consideration transferred
$
125,000

(1)    Based on the terms of the Agreement, $5.0 million of the $24.0 million in escrow to be paid to the Seller is contingent upon certain future liabilities that could become due by ITS in certain jurisdictions. Any payments in relation to these liabilities will be deducted from the $5.0 million escrow amount and the net balance of the escrow will be paid to the Seller. The estimated fair value of the consideration in escrow related to these liabilities is $5.0 million. Although not expected, we could be responsible for these liabilities should they be greater than the $5.0 million in escrow.
Preliminary Allocation of Consideration Transferred to Net Assets Acquired
The following amounts represent the preliminary estimates of fair value of identifiable assets acquired and liabilities assumed in the ITS Acquisition and are based on management’s estimates, judgments and assumptions. These estimates, judgments and assumptions are subject to change upon final valuation and should be treated as preliminary values. Management estimated that the fair value of the net assets acquired less noncontrolling interest equals consideration paid. Therefore, there was no goodwill recorded.
The final allocation of consideration will include changes in (1) amounts deposited in escrow, (2) estimated fair values of property and equipment, (3) allocations to intangible assets and liabilities, (4) changes in contingent consideration, and (5) other assets and liabilities. These amounts will be finalized as soon as possible, but no later than one year from the acquisition date.

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April 22, 2013
 
(In thousands)
 
 
Cash and cash equivalents
$
7,009

Accounts and notes receivable, net (1) 
48,795

Other current assets
1,803

Accounts payable and accrued liabilities
(39,156
)
Accrued income taxes
(1,251
)
Working capital excluding Rig materials and supplies
17,200

Rig materials and supplies
11,514

Property, plant and equipment, net (2) 
70,339

Investment in joint venture
4,134

Other noncurrent assets
2,818

Total tangible assets
106,005

Deferred income tax assets - current
222

Deferred income tax assets - noncurrent (3) 
14,153

Intangible Assets (4)
 
Trade name, developed technology, and customer relationship
10,000

Indefinite-lived intangible assets
200

Total assets acquired
130,580

Other long-term liabilities
(211
)
Long-term deferred tax liability
(2,661
)
Net assets acquired
127,708

Less: Noncontrolling interest (5)
(2,708
)
Total consideration transferred
$
125,000

    
(1) Gross contractual amounts receivable totaled $54.7 million as of the acquisition date.
(2) We recorded an adjustment of $43.7 million to reduce the historical carrying value of the acquired property, plant and equipment to its estimated fair value.
(3) In connection with the ITS Acquisition, we recorded a $7.7 million adjustment to increase deferred income tax assets primarily related to the differences between acquisition date estimated fair value and tax basis of acquired property, plant and equipment.
(4) We recorded $10.0 million and $0.2 million to reflect the estimated fair values of definite and indefinite lived intangible assets, respectively, recognized in connection with the ITS Acquisition. Our depreciation and amortization expense will reflect this valuation adjustment as the definite lived intangible assets are amortized in future periods. Definite lived intangible assets recorded in connection with the ITS Acquisition, which primarily relate to trade names, customer relationships, and developed technology will be amortized over a weighted average period of approximately 3.4 years.
(5) We recorded an adjustment of $1.0 million to write-down the noncontrolling interest to its estimated fair value. The estimated fair value of the noncontrolling interest was calculated as a percentage of the net assets acquired related to certain subsidiaries in which ITS holds less than a 100 percent controlling interest. The fair value of the net assets of these subsidiaries was primarily based on the income approach valuation model.

Acquisition Related Costs

Acquisition-related transaction costs consisted of various advisory, legal, accounting, valuation and other professional or consulting fees totaling $11.4 million and $14.4 million, respectively for the three and six month periods ended June 30, 2013, and were expensed as incurred and included in general and administrative expense on our condensed consolidated statement of operations.  Debt issuance costs of $5.4 million associated with our $125 million

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term loan (the Goldman Term Loan) issued on April 18, 2013 were deferred to be amortized to interest expense over the life of the term loan. However, the Goldman Term Loan was repaid on July 30, 2013 with net proceeds from the issuance of $225.0 million aggregate principal amount of 7.5% Senior Notes due August 1, 2020, and the deferred costs will be expensed during the third quarter of 2013 (see Note 14 - Subsequent Events).

Supplemental Pro forma Results
ITS’ results of operations have been included in our financial statements for periods subsequent to April 22, 2013, the effective date of the ITS Acquisition. ITS contributed revenues of $24.2 million and net income of approximately $0.7 million to Parker Drilling for the period from the closing of the ITS Acquisition (April 22, 2013) through June 30, 2013.
The following unaudited supplemental pro forma results present consolidated information for the six months ended June 30, 2013 as if the ITS Acquisition had been completed on January 1, 2012.  The pro forma results have been calculated after applying our accounting policies and include, among others, (i) the amortization associated with the fair value of the acquired intangible assets, (ii) interest expense associated with the term loan issued to fund the ITS Acquisition and (iii) the impact of certain fair value adjustments such as a decrease in depreciation expense related to the write-down in property, plant and equipment. The pro forma results do not include any potential synergies, non-recurring charges which result directly from the ITS Acquisition, cost savings or other expected benefits of the ITS Acquisition. The pro forma financial information does not necessarily represent what would have occurred if the transaction had taken place at the beginning of the period presented and should not be taken as representative of our future consolidated results of operations. We have not concluded our integration work. Accordingly, this pro forma information does not include all costs related to the integration nor the benefits we expect to realize from operating synergies, such as consolidating procurement activities.

 
Six Months Ended June 30,
 
2013
 
2012
 
(Dollars in thousands, except per share data)
 
 
 
 
Revenue
$
433,976

 
$
418,362

Net income
$
20,558

 
$
45,905

Net income attributable to Parker Drilling
$
20,255

 
$
45,946

Earnings per share - basic
$
0.17

 
$
0.39

Earnings per share - diluted
$
0.17

 
$
0.39

 
 
 
 
Basic number of shares
119,177,431

 
117,129,364

Diluted number of shares
121,498,223

 
118,623,037




3.
Earnings per share (EPS)

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Three Months Ended June 30, 2013
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
8,281,000

 
119,483,780

 
$
0.07

Effect of dilutive securities:
 
 
 
 
 
Restricted stock

 
2,376,231

 

Diluted EPS
$
8,281,000

 
121,860,011

 
$
0.07

 
 
 
 
 
 
 
Six Months Ended June 30, 2013
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount

 
 
 
 
 
Basic EPS
$
8,873,000

 
119,177,431

 
$
0.07

Effect of dilutive securities:
 
 
 
 
 
Restricted stock

 
2,320,792

 

Diluted EPS
$
8,873,000

 
121,498,223

 
$
0.07

 
 
 
 
 
 
 
Three Months Ended June 30, 2012
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
20,083,000

 
117,410,212

 
$
0.17

Effect of dilutive securities:
 
 
 
 
 
Stock options and restricted stock

 
1,116,667

 

Diluted EPS
$
20,083,000

 
118,526,879

 
$
0.17

 
 
 
 
 
 
 
Six Months Ended June 30, 2012
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
46,475,000

 
117,129,364

 
$
0.40

Effect of dilutive securities:
 
 
 
 
 
Stock options and restricted stock

 
1,493,673

 
(0.01
)
Diluted EPS
$
46,475,000

 
118,623,037

 
$
0.39


4.
Reportable Segments
We report our business activities in five business segments: (1) Rental Tools, (2) U.S. Barge Drilling, (3) U.S. Drilling, (4) International Drilling, and (5)Technical Services. As of December 31, 2012, we had a sixth business segment, Construction Contract, for which there was no activity during the three and six months ended June 30, 2013 or the comparable period in 2012. We eliminate inter-segment revenues and expenses. As of and for the three months ended June 30, 2013, the results of operations for ITS, acquired on April 22, 2013, are included in our Rental Tools segment.

The following table represents the results of operations by reportable segment:

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Three Months Ended June 30,
 
Six Months Ended June 30,
Operations by Reportable Industry Segment
2013
 
2012
 
2013
 
2012
 
(Dollars in Thousands)
 
(Dollars in Thousands)
Revenues:
 
 
 
 
 
Rental Tools
$
82,022

 
$
65,002

 
$
139,105

 
$
131,286

U.S. Barge Drilling
38,301

 
33,292

 
68,165

 
61,127

U.S. Drilling
17,910

 

 
29,545

 

International Drilling(1)
83,182

 
76,923

 
147,832

 
155,673

Technical Services
4,586

 
3,708

 
8,509

 
7,408

Total revenues
226,001

 
178,925

 
393,156

 
355,494

Operating gross margin:
 
 
 
 
 
 
 
Rental Tools(2)
25,149

 
31,251

 
46,656

 
64,853

U.S. Barge Drilling(2)
16,660

 
11,014

 
25,417

 
18,171

U.S. Drilling(2)
(666
)
 
(1,623
)
 
(4,719
)
 
(3,170
)
International Drilling(2)
8,925

 
6,056

 
2,983

 
20,615

Technical Services(2)
104

 
(258
)
 
432

 
(11
)
Total operating gross margin
50,172

 
46,440

 
70,769

 
100,458

General and administrative expense
(22,378
)
 
(7,420
)
 
(35,261
)
 
(12,917
)
Gain on disposition of assets, net
517

 
1,368

 
1,665

 
1,860

Total operating income
28,311

 
40,388

 
37,173

 
89,401

Interest expense
(10,741
)
 
(8,925
)
 
(20,747
)
 
(16,962
)
Changes in fair value of derivative positions
17

 
38

 
54

 
(11
)
Interest income
2,203

 
53

 
2,251

 
79

Loss on extinguishment of debt

 
(1,649
)
 

 
(1,649
)
Other
(183
)
 
20

 
(56
)
 
36

Income before income taxes
$
19,607

 
$
29,925

 
$
18,675

 
$
70,894

 
 
 
 
 
 
 
 
Operations by Reportable Industry Segment
 
 
 
 
 
 
 
 
June 30, 2013
 
December 31, 2012
 
 
 
 
Identifiable assets:
 
 
 
 
 
 
 
Rental Tools
$
368,371

 
$
194,600

 
 
 
 
U.S. Barge Drilling
111,711

 
99,409

 
 
 
 
U.S. Drilling
340,773

 
374,794

 
 
 
 
International Drilling
487,005

 
414,546

 
 
 
 
Total identifiable assets
1,307,860

 
1,083,349

 
 
 
 
Corporate assets (3)
128,677

 
172,384

 
 
 
 
Total assets
$
1,436,537

 
$
1,255,733

 
 
 
 
 
(1)
In the second quarter of 2013, our largest customer, Exxon Neftegas Limited (ENL), constituted 13.9% of our total consolidated revenues and approximately 37.7% of our International Drilling segment. In the second quarter of 2012, no single customer contributed 10% or more of our year-to-date consolidated revenues.
(2)
Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.
(3)
This category includes corporate assets as well as minimal assets for our Technical Services segment primarily related to office furniture and fixtures.

    



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5.
Assets Held for Sale
Assets held for sale of $8.7 million as of June 30, 2013 was comprised of the net book value of two land rigs and related inventory located in Kazakhstan, one barge rig and related inventory located in Mexico, and a building located in Tulsa, OK. Management expects to sell the barge rig located in Mexico within one year. The barge rig was in the Latin America rig fleet and has historically been included in the international drilling segment. We believe the carrying amount of the assets will be recoverable through sale of the assets.
As of June 30, 2013, for three rigs which had previously been recorded as assets held for sale as of December 31, 2010, management concluded the current facts and circumstances underlying the sale indicate it is no longer probable that a sale will be consummated within a reasonable time period. As a result, we reclassified assets previously recorded in the category as assets held for sale to assets held and used. The assets were reclassified at their carrying amount before the assets were classified as held for sale, adjusted for depreciation expense that would have been recognized had the assets been continuously classified as held and used. We believe the updated carrying value approximates the market value for these assets. The amount of additional depreciation recorded during the quarter ended June 30, 2013 to place the assets in held and used categorization was $0.7 million.

6.
Accounting for Uncertainty in Income Taxes
We apply the accounting guidance related to accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. At June 30, 2013, we had a liability for unrecognized tax benefits of $10.1 million (which includes $3.3 million of benefits which would favorably impact our effective tax rate upon recognition) primarily related to foreign operations. As of June 30, 2012, we had a liability for unrecognized tax benefits of $14.8 million ($6.9 million of which, if recognized, would favorably impact our effective tax rate) primarily related to foreign operations. In addition, we recognize interest and penalties that could be applied to uncertain tax positions in periodic income tax expense. As of June 30, 2013 and December 31, 2012, we had approximately $7.6 million and $7.0 million, respectively, of accrued interest and penalties related to uncertain tax positions.
 
7.
Income Tax Benefit/Expense
Income tax expense was $11.2 million for the second quarter of 2013 as compared to $9.8 million for the second quarter of 2012. The increase in current period tax expense is primarily due to a shift in the mix of our foreign and domestic operation's pre-tax earnings from $29.9 million in the 2012 second quarter and $19.6 million in the 2013 second quarter. In addition, our tax expense was $1.9 million higher during the second quarter due to non-deductible acquisition-related transaction costs and recorded expenses of $0.6 million related to prior period returns filed during the quarter.
During the quarter-ended June 30, 2013, we received income tax refunds from the IRS of $21.3 million. In addition to the refund payments, the Company received interest of $2.2 million, which was recorded in the consolidated condensed statement of operations as interest income.
 
8.
Long-Term Debt
The following table illustrates the Company’s debt portfolio as of June 30, 2013 and December 31, 2012:
 
 
June 30,
2013
 
December 31,
2012
 
(Dollars in Thousands)
9.125% Senior Notes, due April 2018
$
429,147

 
$
429,205

Goldman Term Loan, due April 2018
125,000

 

Term Note, due December 2017
45,000

 
50,000

Total debt
599,147

 
479,205

Less current portion
10,000

 
10,000

Total long-term debt
$
589,147

 
$
469,205



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9.125% Senior Notes, due April 2018
On March 22, 2010, we issued $300.0 million aggregate principal amount of 9.125% Senior Notes (9.125% Notes) pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 9.125% Notes offering were primarily used to redeem the $225.0 million aggregate principal amount of our 9.625% Senior Notes due 2013 and to repay $42.0 million of borrowings under our senior secured revolving credit facility (Revolver).
On April 25, 2012, we issued an additional $125.0 million aggregate principal amount of 9.125% Notes under the same indenture at a price of 104.0% of par, resulting in gross proceeds of $130.0 million. Net proceeds from the offering were utilized to refinance $125.0 million aggregate principal amount of the 2.125% Convertible Senior Notes due July 2012 (2.125% Notes). We repurchased $122.9 million aggregate principal amount of the 2.125% Notes tendered pursuant to a tender offer on May 9, 2012 and paid off the remaining $2.1 million at their stated maturity on July 15, 2012.
The 9.125% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 9.125% Notes are jointly and severally guaranteed by substantially all of our direct and indirect domestic subsidiaries other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States. Interest on the 9.125% Notes is payable on April 1 and October 1 of each year. Debt issuance costs related to the 9.125% Notes of approximately $11.6 million ($8.4 million, net of amortization as of June 30, 2013) are being amortized over the term of the notes using the effective interest rate method.
At any time prior to April 1, 2013, we could have redeemed up to 35 percent of the aggregate principal amount of the 9.125% Notes at a redemption price of 109.125 percent of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings by us. On and after April 1, 2014, we may redeem all or a part of the 9.125% Notes upon appropriate notice, at a redemption price of 104.563 percent of the principal amount, and at redemption prices decreasing each year thereafter to par beginning April 1, 2016. If we experience certain changes in control, we must offer to repurchase the 9.125% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
The Indenture restricts our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness; (v) create or incur liens; (vi) enter into sale and leaseback transactions; (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.
Goldman Term Loan
In connection with the ITS Acquisition described in Note 2 on April 18, 2013, we entered into a $125 million Term Loan, fully funded by Goldman Sachs Bank USA as Sole Lead Arranger and Administrative Agent (the Goldman Term Loan). The Goldman Term Loan bears interest on the outstanding principal amount at a rate per annum equal to (a) for the period from April 18, 2013 to June 30, 2013 (or May 9, 2013, in the event certain marketing materials have not been provided by May 9, 2013) (the Initial Step-Up Date), 6.5%, (b) for the period from the Initial Step-Up Date to April 15, 2014, 7.5%, and (c) from April 15, 2014 to maturity, 8.5%. Quarterly interest payments are due on the last business day of each March, June, September, and December. In addition, a Duration Fee of 1.00% is payable on June 30, 2013 for the aggregate principal amount of the the Goldman Term Loan outstanding on such date. The Goldman Term Loan is senior unsecured debt of the Company and has a maturity of April 18, 2018.
Subsequent to the end of the second quarter, we entered into the first amendment to the Goldman Term Loan on July 19, 2013. The amendment revised the effective date for both the Initial Step-Up Date and the Duration Fee to August 15, 2013. The Goldman Term Loan of $125 million was repaid on July 30, 2013 with net proceeds from the issuance of $225.0 million aggregate principal amount of 7.50% Senior Notes due August 1, 2020 (see Note 14 - Subsequent Events).
Amended and Restated Credit Agreement
On December 14, 2012, we entered into an Amended and Restated Credit Agreement (Credit Agreement) consisting of a senior secured $80.0 million revolving facility (Revolver) and a senior secured term loan facility (Term Loan) of $50.0 million. The Credit Agreement provides that, subject to certain conditions, including the approval of the Administrative Agent and the lenders’ acceptance (or additional lenders being joined as new lenders), the amount of the

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Term Loan or Revolver can be increased by an additional $50.0 million, so long as after giving effect to such increase, the aggregate commitments are not in excess of $180.0 million.
Our obligations under the Credit Agreement are guaranteed by substantially all of our domestic subsidiaries, each of which have executed guaranty agreements; and are secured by first priority liens on our accounts receivable, specified barge rigs and rental equipment. The Credit Agreement contains customary affirmative and negative covenants with which we were in compliance as of June 30, 2013 and December 31, 2012. The Credit Agreement matures on December 14, 2017.
Revolver
Our Revolver is available for general corporate purposes and to support letters of credit. Interest on Revolver loans accrues at a Base Rate plus an Applicable Rate or LIBOR plus an Applicable Rate. Under the Credit Agreement, the Applicable Rate varies from a rate per annum ranging from 2.50 percent to 3.00 percent for LIBOR rate loans and 1.50 percent to 2.00 percent for base rate loans, determined by reference to the consolidated leverage ratio (as defined in the Credit Agreement). Revolving loans are available subject to a borrowing base calculation based on a percentage of eligible accounts receivable, certain specified barge drilling rigs and rental equipment of the Company and its subsidiary guarantors. There were no revolving loans outstanding at June 30, 2013 and December 31, 2012. Letters of credit outstanding as of June 30, 2013 and December 31, 2012 totaled $2.1 million and $4.5 million, respectively.
Term Loan
The Term Loan originated at $50.0 million on December 14, 2012 and requires quarterly principal payments
of $2.5 million, which began March 31, 2013. Interest on the Term Loan accrues at a Base Rate plus 2.00 percent or LIBOR plus 3.00 percent. The outstanding balance on the Term Loan at June 30, 2013 and December 31, 2012 was $45.0 million and $50.0 million, respectively.

On July 19, 2013, we entered into an amendment to our Credit Agreement which, among other things, permits us or any of our subsidiaries (other than certain immaterial subsidiaries) to incur indebtedness pursuant to additional unsecured senior notes in an aggregate principal amount not to exceed $250.0 million at any one time outstanding; provided that any such notes shall (x) have a scheduled maturity occurring after the maturity date of our senior secured credit facility, (y) contain terms (including covenants and events of default) no more restrictive, taken as a whole, to us and our subsidiaries than those contained in our senior secured credit facility and (z) have no scheduled amortization, no sinking fund requirements and no maintenance financial covenants. In addition, pursuant to the amendment, and subject to the terms and conditions set forth in the Credit Agreement, to the extent we repay the principal amount of Term Loans outstanding under our senior secured credit facility, until April 30, 2014 we may reborrow, in the form of additional term loans, up to $45 million of the principal amount of such outstanding term loans we have repaid, provided that such $45 million reborrowing amount will decrease by $2.5 million at the end of each quarter beginning September 30, 2013 and ending March 31, 2014, such that the reborrowing availability on April 30, 2014 would be $37.5 million. The Term Loan was repaid on July 30, 2013 with net proceeds from the issuance of $225.0 million aggregate principal of 7.50% Senior Notes due August 1, 2020. (See Note 14 - Subsequent Events).

9.
Derivative Financial Instruments
The Company entered into two variable-to-fixed interest rate swap agreements as a strategy to manage the floating rate risk on the Term Loan borrowings under the Credit Agreement. The two agreements fixed the interest rate on a notional amount of $73.0 million of borrowings at 3.878% for the period beginning June 27, 2011 and terminating May 14, 2013. The notional amount of the swap agreements decreased correspondingly with amortization of the Term Loan under the Existing Credit Agreement. We do not apply hedge accounting to the agreements and, accordingly, mark-to-market change in the fair value of the interest rate swaps are recognized in earnings. As of June 30, 2013 the swap agreements had expired and as of December 31, 2012, the fair value of the interest rate swap was a liability of less than $0.1 million and is recorded in accrued liabilities in our consolidated balance sheets. For the quarters ended June 30, 2013 and 2012, we recognized in earnings a nominal gain and a nominal loss, respectively, relating to these contracts.
 
10.
Fair Value of Financial Instruments
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. For purposes of recording fair value adjustments for certain financial and non-financial assets and liabilities, and determining fair value disclosures, we estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.

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The fair value measurement and disclosure requirements of FASB Accounting Standards Codification Topic No. 820, Fair Value Measurement and Disclosures (ASC 820) requires inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows:

Level 1 — Unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 — Direct or indirect observable inputs, including quoted prices or other market data, for similar
assets or liabilities in active markets or identical assets or liabilities in less active markets;
Level 3 — Unobservable inputs that require significant judgment for which there is little or no market data.
When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the entire measurement even though we may also have utilized significant inputs that are more readily observable. The amounts reported in our consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. The carrying amount of our interest rate swap agreements represents the estimated fair value, measured using Level 2 inputs. At June 30, 2013 the swap agreements had expired and as of December 31, 2012, the carrying amount of our interest rate swap agreements was a liability of less than $0.1 million, recorded in accrued liabilities on our consolidated balance sheets.

Fair value of our debt instruments is determined using Level 2 inputs. Fair values and related carrying values of our debt instruments were as follows for the periods indicated:
 
  
June 30, 2013
 
December 31, 2012
 
Carrying Amount
 
Fair Value
 
Carrying  Amount
 
Fair Value
 
(in thousands)
Long-term Debt
 
 
 
 
 
 
 
9.125% Notes
$
425,000

 
$
449,438

 
$
425,000

 
$
453,688

Total
$
425,000

 
$
449,438

 
$
425,000

 
$
453,688

The following table summarizes information regarding our financial liabilities that are measured at fair value on a recurring basis as of June 30, 2013, segregated by level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
Liabilities:
Level 1

Level 2

Level 3

Total
Deposits in escrow
$


$


$
5,000


$
5,000

Total Liabilities
$


$


$
5,000


$
5,000

The table above includes contingent consideration deposited in escrow for assets not acquired in the ITS Acquisition. The fair value is contingent upon certain future liabilities that could become due by ITS in certain jurisdictions. Any payments in relation to these liabilities will be deducted from the $5.0 million escrow amount and the net balance of the escrow will be paid to the Seller. The fair value measurement of the contingent consideration is based on inputs that are not observable in the market and therefore represent level 3 inputs.
The table above excludes assets and liabilities measured on a one-time non-recurring basis that were acquired as part of the ITS Acquisition. See Note 2 - Acquisition of ITS, for more information. The assets acquired and liabilities assumed in the ITS Acquisition were recorded at fair value in accordance with U.S. GAAP. Acquisition date fair values represent either Level 2 fair value measurements (current assets and liabilities, property, plant and equipment) or Level 3 fair value measurements (intangible assets).
Market conditions could cause an instrument to be reclassified from Level 1 to Level 2, or Level 2 to Level 3. There were no transfers between levels of the fair value hierarchy or any changes in the valuation techniques used during the six months ended June 30, 2013.
 
11.
Contingencies
Asbestos-Related Claims
We are from time to time a party to various lawsuits in the ordinary course that are incidental to our operations in which the claimants seek an unspecified amount of monetary damages for personal injury, including injuries purportedly

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resulting from exposure to asbestos on drilling rigs and associated facilities. At June 30, 2013, there were approximately 15 of these lawsuits in which we are one of many defendants. These lawsuits have been filed in the United States in the State of Mississippi.
We intend to defend ourselves vigorously and, based on the information available to us at this time, we do not expect the outcome to have a material adverse effect on our financial condition, results of operations or cash flows. However, we are unable to predict the ultimate outcome of these lawsuits. No amounts were accrued at June 30, 2013.
Gulfco Site
In 2003, we received an information request under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) designating Parker Drilling Offshore Corporation, a subsidiary of Parker Drilling, as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). We responded to this request and in January 2008 received an administrative order to participate in an investigation of the site and a study of the remediation needs and alternatives. The EPA alleges that our subsidiary is a successor to a party who owned the Gulfco site during the time when chemical releases took place there. In December 2010, we entered into an agreement with two other potentially responsible parties, pursuant to which we agreed to pay 20 percent of past and future costs to study and remediate the site. The EPA also issued notice letters to several other parties who may also participate in funding the site remediation costs. On March 20, 2013 we received a Notice of Completion from the EPA confirming that all required activity for removal and remediation has been completed, except for ongoing monitoring costs. As of June 30, 2013, the Company had made certain participating payments and had accrued $0.7 million for our portion of certain unreimbursed past costs and the estimated future cost of monitoring.
Customs Agent and Foreign Corrupt Practices Act (FCPA) Settlement
On April 16, 2013, we announced that we had reached a settlement in connection with previously reported investigations by the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC) regarding possible violations of U.S. law, including the FCPA, by us. Our cooperation and the thoroughness of our investigation were noted by both agencies.

Under the terms of the resolution with the DOJ, the Company entered into a deferred prosecution agreement (DPA), under which the DOJ will defer for three years prosecuting the Company for criminal violations of the anti-bribery provisions of the FCPA relating to the Company's retention and use of an individual agent in Nigeria with respect to certain customs-related issues, in return for: (i) the Company's acceptance of responsibility for, and agreement not to contest or contradict the truthfulness of, the statement of facts and allegations that have been filed in a United States District Court concurrently with the DPA; (ii) the Company's payment of an approximately $11.76 million fine; (iii) the Company's reaffirming its commitment to compliance with the FCPA and other applicable anti-corruption laws in connection with the Company's operations, and continuing cooperation with domestic and foreign authorities in connection with the matters that are the subject of the DPA; (iv) the Company's commitment to continue to address any identified areas for improvement in the Company's internal controls, policies and procedures relating to compliance with the FCPA and other applicable anti-corruption laws if, and to the extent, not already addressed; and (v) the Company's agreement to report to the DOJ in writing annually during the term of the DPA regarding remediation of the matters that are the subject of the DPA, implementation of any enhanced internal controls, and any evidence of improper payments the Company may have discovered during the term of the agreement. If the Company remains in compliance with the terms of the DPA throughout its effective period, the charge against the Company will be dismissed with prejudice.
Under the terms of the resolution with the SEC, the Commission approved a settlement with the Company, pursuant to which the SEC filed a civil complaint in a United States District Court charging the Company with violations of the anti-bribery, books and records and internal control provisions of the FCPA, and the Company consented to the entry of a final judgment of permanent injunction barring future violations of the anti-bribery, books and records and internal controls provisions of the FCPA. The Company also agreed to the payment of disgorgement of approximately $3.05 million and prejudgment interest of approximately $1.04 million, for a total of approximately $4.09 million. The agreement with the SEC does not require the payment of a civil monetary fine, and neither the proposed agreement with the DOJ nor the proposed agreement with the SEC requires the appointment of a monitor to oversee the Company's activities or compliance with applicable laws. The final judgment has been approved by the court.
As previously disclosed, we have taken and continue to take certain steps to enhance our existing anti-bribery compliance efforts, including retaining a full-time Chief Compliance Officer who reports to the Chief Executive Officer and Audit Committee and full-time staff to assist him; adopting revised FCPA policies, procedures, and controls; increasing training and testing requirements; strengthening contractual provisions for our service providers that interface with foreign

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government officials; improving due diligence and continuing oversight procedures for the review and selection of such service providers; and implementing a compliance awareness improvement initiative that includes issuance of periodic anti-bribery compliance alerts. We will continue to emphasize the importance of compliance and ethical business conduct.

The Company was required to pay $15.85 million to settle these matters, which is the amount previously announced and recorded as a charge for the fourth quarter of 2012.

Demand Letter and Derivative Litigation

In April 2010, we received a demand letter from a law firm representing Ernest Maresca. The letter states that Mr. Maresca is one of our stockholders and that he believes that certain of our current and former officers and directors violated their fiduciary duties related to the issues described above under “Customs Agent and Foreign Corrupt Practices Act (FCPA) Settlement.” The letter requests that our Board of Directors take action against the individuals in question. In response to this letter, the Board formed a special committee to investigate the issues raised in the letter and recommend a course of action for the Company.  The special committee engaged its own counsel for the investigation and evaluated potential claims against all individuals identified in the demand letter.  The special committee considered whether pursuing each of the individuals named in the demand letter was in the best interests of the Company based upon a variety of factors, including among others, whether the Company had a potential cause of action against the individual, the defenses the individual might offer to such a claim, the ability of the individual to satisfy any judgment the Company might secure as a result of a claim asserted, and other risks to the Company of pursuing the claims.  After taking various factors into account, on July 29, 2013, the special committee recommended to the Board that the Company not pursue any action against the current and former officers and directors named in the demand letter, and the Board accepted such recommendation.

 ITS Internal Controls
Our due diligence process with respect to the ITS Acquisition identified certain transactions that suggest that ITS' internal controls may have failed to prevent violations of potentially applicable international trade and anti-corruption laws, including those of the United Kingdom. As part of the integration process with respect to ITS, we will continue our review of ITS' activities to further identify potential violations of applicable international trade and anti-corruption laws and will promptly apply our developed systems of internal controls, Code of Conduct, policies and procedures to the acquired businesses to help ensure prevention of potential future violations. As appropriate, we will make any identified violations known to relevant authorities, cooperate with any resulting investigations and take proper remediation measures (including seeking any necessary government authorizations). While it is possible that matters may arise where a contingency may require further accounting considerations, we do not believe that as a result of these matters a loss is probable nor is a loss estimable at this time.

12.
Recent Accounting Pronouncements
Effective January 1, 2012, we adopted the accounting standards update that changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments included in this update are intended to clarify the applications of existing fair value measurement requirements. The update was effective for annual periods beginning after December 15, 2011. Our adoption did not have a material effect on the disclosures contained in our notes to the consolidated financial statements.
In July 2012, the FASB issued an update to existing guidance on the impairment assessment of indefinite-lived intangibles. This update simplifies the impairment assessment of indefinite-lived intangibles by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount before performing the two step impairment review process. The adoption of this update did not have an impact on our condensed consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires that companies present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. This accounting guidance is effective for our first quarter in fiscal 2014 and is only expected to impact the presentation of our consolidated financial statements and related notes.




19

Table of Contents

13.
Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements
Set forth on the following pages are the consolidating condensed financial statements of Parker Drilling. The Company’s 9.125% Notes are guaranteed by substantially all of its direct and indirect domestic subsidiaries other than immaterial subsidiaries generating revenues primarily outside the United States. There are currently no restrictions on the ability of the guarantor to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries. Separate financial statements for each guarantor company are not provided as the Company complies with the exception to Rule 3-10(a)(1) of Regulation S-X, set forth in sub-paragraph (f) of such rule. All guarantor subsidiaries are owned 100 percent by Parker Drilling, all guarantees are full and unconditional and all guarantees are joint and several.
We are providing consolidating condensed financial information of Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012. The consolidating condensed financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.








20

Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
June 30, 2013
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,706

 
$
5,043

 
$
49,859

 
$

 
$
69,608

Accounts and notes receivable, net
415,294

 
127,661

 
368,236

 
(659,751
)
 
251,440

Rig materials and supplies

 
2,514

 
36,715

 

 
39,229

Deferred costs

 
65

 
10,757

 

 
10,822

Deferred income taxes

 
11,950

 
4,461

 

 
16,411

Other tax assets
1,152

 
(783
)
 
13,353

 

 
13,722

Assets held for sale

 
1,771

 
6,885

 

 
8,656

Other current assets

 
11,343

 
8,475

 

 
19,818

Total current assets
431,152

 
159,564

 
498,741

 
(659,751
)
 
429,706

Property, plant and equipment, net
60

 
557,331

 
295,422

 

 
852,813

Investment in subsidiaries and intercompany advances
818,597

 
(241,693
)
 
1,705,099

 
(2,282,003
)
 

Other noncurrent assets
53,989

 
54,771

 
45,258

 

 
154,018

Total assets
$
1,303,798

 
$
529,973

 
$
2,544,520

 
$
(2,941,754
)
 
$
1,436,537

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
10,000

 
$

 
$

 
$

 
$
10,000

Accounts payable and accrued liabilities
68,206

 
90,012

 
373,142

 
(362,230
)
 
169,130

Accrued income taxes
(35,299
)
 
41,885

 
389

 

 
6,975

Total current liabilities
42,907

 
131,897

 
373,531

 
(362,230
)
 
186,105

Long-term debt
589,147

 

 

 

 
589,147

Other long-term liabilities
3,933

 
5,075

 
13,735

 

 
22,743

Long-term deferred tax liability


 
40,892

 
(9,586
)
 

 
31,306

Intercompany payables
62,584

 
43,657

 
356,331

 
(462,572
)
 

Contingencies

 

 

 

 

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Common stock
19,995

 
18,049

 
43,003

 
(61,052
)
 
19,995

Capital in excess of par value
651,535

 
733,899

 
1,579,458

 
(2,313,357
)
 
651,535

Accumulated other comprehensive income

 

 
(564
)
 

 
(564
)
Retained earnings (accumulated deficit)
(66,303
)
 
(443,496
)
 
186,602

 
257,457

 
(65,740
)
Total controlling interest stockholders’ equity
605,227

 
308,452

 
1,808,499

 
(2,116,952
)
 
605,226

Noncontrolling interest

 

 
2,010

 

 
2,010

Total equity
605,227

 
308,452

 
1,810,509

 
(2,116,952
)
 
607,236

Total liabilities and stockholders’ equity
$
1,303,798

 
$
529,973

 
$
2,544,520

 
$
(2,941,754
)
 
$
1,436,537



21

Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
December 31, 2012
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
42,251

 
$
11,023

 
$
34,612

 
$

 
$
87,886

Accounts and notes receivable, net
289,957

 
98,747

 
292,644

 
(512,786
)
 
168,562

Rig materials and supplies

 
2,834

 
26,026

 

 
28,860

Deferred costs

 

 
1,089

 

 
1,089

Deferred income taxes

 
7,615

 
1,127

 

 
8,742

Other tax assets
46,249

 
(31,136
)
 
18,411

 

 
33,524

Assets held for sale

 

 
6,800

 

 
6,800

Other current assets

 
8,675

 
4,146

 

 
12,821

Total current assets
378,457

 
97,758

 
384,855

 
(512,786
)
 
348,284

Property, plant and equipment, net
60

 
548,794

 
240,269

 

 
789,123

Investment in subsidiaries and intercompany advances
780,878

 
(233,388
)
 
1,467,429

 
(2,014,919
)
 

Other noncurrent assets
43,569

 
59,541

 
15,216

 

 
118,326

Total assets
$
1,202,964

 
$
472,705

 
$
2,107,769

 
$
(2,527,705
)
 
$
1,255,733

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
10,000

 
$

 
$

 
$

 
$
10,000

Accounts payable and accrued liabilities
65,839

 
93,243

 
205,864

 
(227,200
)
 
137,746

Accrued income taxes

 
612

 
3,508

 

 
4,120

Total current liabilities
75,839

 
93,855

 
209,372

 
(227,200
)
 
151,866

Long-term debt
469,205

 

 

 

 
469,205

Other long-term liabilities
3,933

 
6,129

 
13,120

 

 
23,182

Long-term deferred tax liability

 
36,894

 
(16,047
)
 

 
20,847

Intercompany payables
62,583

 
43,657

 
216,320

 
(322,560
)
 

Contingencies

 

 

 

 

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Common stock
19,818

 
18,049

 
43,003

 
(61,052
)
 
19,818

Capital in excess of par value
646,217

 
733,112

 
1,455,246

 
(2,188,358
)
 
646,217

Accumulated other comprehensive income

 

 

 

 

Retained earnings (accumulated deficit)
(74,631
)
 
(458,991
)
 
187,526

 
271,465

 
(74,631
)
Total controlling interest stockholders’ equity
591,404

 
292,170

 
1,685,775

 
(1,977,945
)
 
591,404

Noncontrolling interest

 

 
(771
)
 

 
(771
)
Total Equity
591,404

 
292,170

 
1,685,004

 
(1,977,945
)
 
590,633

Total liabilities and stockholders’ equity
$
1,202,964

 
$
472,705

 
$
2,107,769

 
$
(2,527,705
)
 
$
1,255,733






22

Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

 
Three months ended June 30, 2013
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Total revenues
$

 
$
121,848

 
$
133,057

 
$
(28,904
)
 
$
226,001

Operating expenses

 
63,833

 
108,620

 
(28,904
)
 
143,549

Depreciation and amortization

 
18,721

 
13,559

 

 
32,280

Total operating gross margin

 
39,294

 
10,878

 

 
50,172

General and administration expense (1)
(46
)
 
(22,160
)
 
(172
)
 

 
(22,378
)
Gain on disposition of assets, net

 
843

 
(326
)
 

 
517

Total operating income (loss)
(46
)
 
17,977

 
10,380

 

 
28,311

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(11,719
)
 
(35
)
 
(2,765
)
 
3,778

 
(10,741
)
Changes in fair value of derivative positions
17

 

 

 

 
17

Interest income
1,437

 
1,144

 
3,400

 
(3,778
)
 
2,203

Other

 
(269
)
 
86

 

 
(183
)
Equity in net earnings of subsidiaries
13,828

 

 

 
(13,828
)
 

Total other income (expense)
3,563

 
840

 
721

 
(13,828
)
 
(8,704
)
Income (benefit) before income taxes
3,517

 
18,817

 
11,101

 
(13,828
)
 
19,607

Total income tax expense (benefit)
(4,764
)
 
12,182

 
3,815

 

 
11,233

Net income (loss)
8,281

 
6,635

 
7,286

 
(13,828
)
 
8,374

Less: Net income (loss) attributable to noncontrolling interest

 

 
93

 

 
93

Net income (loss) attributable to controlling interest
$
8,281

 
$
6,635

 
$
7,193

 
$
(13,828
)
 
$
8,281


(1) General and administration expenses for field operations are included in operating expenses.
























23

Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

 
Three Months Ended June 30, 2012
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Total revenues
$

 
$
104,767

 
$
98,036

 
$
(23,878
)
 
$
178,925

Operating expenses

 
47,632

 
80,772

 
(23,878
)
 
104,526

Depreciation and amortization

 
15,665

 
12,294

 

 
27,959

Total operating gross margin

 
41,470

 
4,970

 

 
46,440

General and administration expense (1)
(44
)
 
(7,078
)
 
(298
)
 

 
(7,420
)
Gain on disposition of assets, net

 
197

 
1,171

 

 
1,368

Total operating income (loss)
(44
)
 
34,589

 
5,843

 

 
40,388

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(9,817
)
 
(35
)
 
(2,023
)
 
2,950

 
(8,925
)
Changes in fair value of derivative positions
38

 

 

 

 
38

Interest income
8,504

 
4,537

 
34,070

 
(47,058
)
 
53

Loss on extinguishment of debt
(1,649
)
 

 

 

 
(1,649
)
Other

 
23

 
(3
)
 

 
20

Equity in net earnings of subsidiaries
19,057

 

 

 
(19,057
)
 

Total other income (expense)
16,133

 
4,525

 
32,044

 
(63,165
)
 
(10,463
)
Income (loss) before income taxes
16,089

 
39,114

 
37,887

 
(63,165
)
 
29,925

Income tax expense (benefit)
(3,994
)
 
13,668

 
143

 

 
9,817

Net income (loss)
20,083

 
25,446

 
37,744

 
(63,165
)
 
20,108

Less: Net income (loss) attributable to noncontrolling interest

 

 
25

 

 
25

Net income (loss) attributable to controlling interest
$
20,083

 
$
25,446

 
$
37,719

 
$
(63,165
)
 
$
20,083


(1) General and administration expenses for field operations are included in operating expenses.






















24

Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

 
Six Months Ended June 30, 2013
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Total revenues
$

 
$
226,210

 
$
219,357

 
$
(52,411
)
 
$
393,156

Operating expenses

 
122,411

 
190,595

 
(52,411
)
 
260,595

Depreciation and amortization

 
37,380

 
24,412

 

 
61,792

Total operating gross margin

 
66,419

 
4,350

 

 
70,769

General and administration expense (1)
(91
)
 
(34,914
)
 
(256
)
 

 
(35,261
)
Gain on disposition of assets, net

 
1,952

 
(287
)
 

 
1,665

Total operating income (loss)
(91
)
 
33,457

 
3,807

 

 
37,173

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(22,699
)
 
(59
)
 
(6,182
)
 
8,193

 
(20,747
)
Changes in fair value of derivative positions
54

 

 

 

 
54

Interest income
3,006

 
1,334

 
6,104

 
(8,193
)
 
2,251

Other

 
(167
)
 
111