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 September 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 November 4, 2013 there were 120,191,933 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)
 
 
September 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
162,457

 
$
87,886

Accounts and notes receivable, net of allowance for bad debts of $11,156 and $8,117 at September 30, 2013 and December 31, 2012
249,623

 
168,562

Rig materials and supplies
40,202

 
28,860

Deferred costs
13,583

 
1,089

Deferred income taxes
13,473

 
8,742

Other tax assets
18,433

 
33,524

Assets held for sale
7,485

 
6,800

Other current assets
20,906

 
12,821

Total current assets
526,162

 
348,284

Property, plant and equipment less accumulated depreciation and amortization of $1,087,279 and $1,029,712 at September 30, 2013 and December 31, 2012
858,672

 
789,123

Deferred income taxes
107,763

 
95,295

Other noncurrent assets
42,783

 
23,031

Total assets
$
1,535,380

 
$
1,255,733

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

 
$
10,000

Accounts payable and accrued liabilities
191,229

 
137,746

Accrued income taxes
7,261

 
4,120

Total current liabilities
198,490

 
151,866

Long-term debt
653,968

 
469,205

Other long-term liabilities
24,048

 
23,182

Long-term deferred tax liability
39,084

 
20,847

Contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Common stock
20,050

 
19,818

Capital in excess of par value
654,750

 
646,217

Accumulated other comprehensive income
957

 

Accumulated deficit
(57,788
)
 
(74,631
)
Total controlling interest stockholders’ equity
617,969

 
591,404

Noncontrolling interest
1,821

 
(771
)
Total equity
619,790

 
590,633

Total liabilities and stockholders’ equity
$
1,535,380

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
237,762

 
$
165,301

 
$
630,918

 
$
520,795

Expenses:
 
 
 
 
 
 
 
Operating expenses
153,741

 
101,484

 
414,336

 
300,942

Depreciation and amortization
35,882

 
29,779

 
97,674

 
85,357

 
189,623

 
131,263

 
512,010

 
386,299

Total operating gross margin
48,139

 
34,038

 
118,908

 
134,496

General and administration expense
(14,188
)
 
(8,905
)
 
(49,449
)
 
(21,822
)
Gain on disposition of assets, net
1,094

 
606

 
2,759

 
2,466

Total operating income
35,045

 
25,739

 
72,218

 
115,140

Other income and (expense):
 
 
 
 
 
 
 
Interest expense
(13,127
)
 
(8,171
)
 
(33,874
)
 
(25,133
)
Interest income
130

 
30

 
2,392

 
109

Loss on extinguishment of debt
(5,218
)
 
(117
)
 
(5,218
)
 
(1,766
)
Change in fair value of derivative positions

 
19

 
54

 
8

Other
400

 
26

 
333

 
62

Total other expense
(17,815
)
 
(8,213
)
 
(36,313
)
 
(26,720
)
Income before income taxes
17,230

 
17,526

 
35,905

 
88,420

Income tax expense
9,112

 
6,695

 
18,841

 
31,155

Net income
8,118

 
10,831

 
17,064

 
57,265

Less: Net income (loss) attributable to noncontrolling interest
148

 
(105
)
 
221

 
(146
)
Net income attributable to controlling interest
$
7,970

 
$
10,936

 
$
16,843

 
$
57,411

Basic earnings per share
$
0.07

 
$
0.09

 
$
0.14

 
$
0.49

Diluted earnings per share
$
0.07

 
$
0.09

 
$
0.14

 
$
0.48

 
 
 
 
 
 
 
 
Number of common shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
119,990,196

 
118,109,214

 
119,443,260

 
117,458,365

Diluted
121,674,591

 
119,201,019

 
121,693,781

 
118,810,195


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
8,118

 
$
10,831

 
$
17,064

 
$
57,265

Other comprehensive gain, net of tax:
 
 
 
 
 
 
 
Currency translation difference on related borrowings
(577
)
 

 
(1,542
)
 

Currency translation difference on foreign currency net investments
2,098

 

 
2,499

 

Total other comprehensive gain, net of tax:
1,521

 

 
957

 

Comprehensive income
9,639

 
10,831

 
18,021

 
57,265

Comprehensive (income) attributable to noncontrolling interest
(53
)
 

 
(83
)
 

Comprehensive income attributable to controlling interest
$
9,586

 
$
10,831

 
$
17,938

 
$
57,265


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)
 
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
17,064

 
$
57,265

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
97,674

 
85,357

Loss on extinguishment of debt
5,218

 
1,766

Gain on disposition of assets
(2,759
)
 
(2,466
)
Deferred income tax expense
12,872

 
8,403

Expenses not requiring cash
9,928

 
15,724

Changes in current assets and liabilities, net of effects of acquisition
 
 
 
Change in accounts receivable
(28,605
)
 
24,648

Change in other assets
(1,346
)
 
564

Change in accrued income taxes
2,877

 
(3,049
)
Change in liabilities
12,412

 
(10,185
)
Net cash provided by operating activities
125,335

 
178,027

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(102,856
)
 
(147,658
)
Proceeds from the sale of assets
5,533

 
3,496

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

Net cash used in investing activities
(215,314
)
 
(144,162
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
350,000

 
130,000

Repayments of long term debt
(125,000
)
 
(125,000
)
Repayments of term loan
(50,000
)
 
(18,000
)
Payments of debt issuance costs
(10,981
)
 
(3,516
)
Payments of debt extinguishment costs

 
(519
)
Excess tax benefit from stock based compensation
531

 
(572
)
Net cash provided by (used in) financing activities
164,550

 
(17,607
)
 
 
 
 
Net increase in cash and cash equivalents
74,571

 
16,258

Cash and cash equivalents, beginning of year
87,886

 
97,869

Cash and cash equivalents, end of period
$
162,457

 
$
114,127

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
22,845

 
$
17,492

Income taxes paid
$
11,238

 
$
36,498


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, or the Company), 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 September 30, 2013 and December 31, 2012, (2) Parker Drilling’s results of operations for the three and nine month periods ended September 30, 2013 and 2012, (3) Parker Drilling’s consolidated condensed statement of comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, and (4) Parker Drilling's cash flows for the nine month periods ended September 30, 2013 and 2012. Results for the nine month period ended September 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 a rental tools and drilling services 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 rental tools providers and drilling contractors 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 drilling geologically difficult wells and managing the logistical and technological challenges of operating in remote, harsh and ecologically sensitive areas. We believe we are industry leaders in quality, health, safety and environmental practices. We own and operate our own drilling rigs as well as perform drilling-related services for operators who own drilling rigs and who choose to utilize our drilling experience and technical expertise on a contracted basis, typically referred to as Operations & Maintenance (O&M) work. We also provide other project management services (e.g., labor, maintenance, and logistics).
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’s 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 regions.
Within our U.S. drilling business we operate 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. Additionally in our U.S. drilling business, we have two Arctic-class rigs operating on the North Slope of Alaska and one O&M contract for offshore platform operations located in California. 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 in service consistently. As of September 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 5 rigs held for sale or currently not marketed as of September 30, 2013. Our Technical Services business is our engineering expertise center, which provides services to our customers as well as to our ongoing drilling business. Services provided include 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.
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 and report net income (loss) attributable to controlling interest and to noncontrolling interest separately on the consolidated statements of operations.

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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 relate 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 — Revenues from rental activities are recognized ratably over the rental term, which is generally less than six months. 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.
Reimbursable Costs — Within certain contractual arrangements, we may procure, 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 $16.2 million and $12.1 million during the third quarters of 2013 and 2012, respectively and $46.5 million and $29.8 million for the nine months ended September 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 September 30, 2013 and December 31, 2012, we had deposits in domestic banks in excess of federally insured limits of approximately $117.1 million and $12.2 million, respectively. The increase 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 September 30, 2013 and December 31, 2012, we had uninsured deposits in foreign banks of $51.8 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, constituted 14.3% of our total year-to-date revenues as of September 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 nine months ended September 30, 2013, we capitalized interest costs of $0.7 million and $1.7 million, respectively, which were primarily related to a new enterprise resource planning system. During the three and nine months ended September 30, 2012 we capitalized $2.5 million and $7.9 million, respectively, of interest costs primarily related to the two Arctic-class rigs in Alaska.
 
2.
Acquisition of ITS    
On April 22, 2013 we acquired International Tubular Services Limited and certain of its affiliates (collectively, ITS) and other related assets (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 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.
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. We estimate that the entire $5.0 million in escrow will be paid to the seller, and therefore, the estimated fair value of the consideration in escrow related to these liabilities is $5.0 million. We do not expect to receive any amount back from escrow, and therefore did not record a receivable from the escrow. Any changes to the fair value of the contingent consideration in the future of less than $5.0 million will result in recording a receivable from escrow. The receivable will be recorded at fair value. As of September 30, 2013, the fair value of the receivable is $0.0 million.
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, compliance, legal, accounting, valuation and other professional or consulting fees totaling $4.8 million and $19.2 million for the three and nine month periods ended September 30, 2013, respectively, 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

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million term loan, fully funded by Goldman Sachs Bank USA as Sole Lead Arranger and Administrative Agent (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 (see Note 9 - Long-Term Debt, for further discussion), and the unamortized deferred costs of $5.2 million were expensed during the third quarter of 2013.

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 $58.5 million and net income of approximately $4.4 million to Parker Drilling for the period from the closing of the ITS Acquisition (April 22, 2013) through September 30, 2013.
The following unaudited supplemental pro forma results present consolidated information for the nine months ended September 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 Goldman Term Loan 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.

 
Nine Months Ended September 30,
 
2013
 
2012
 
(Dollars in thousands, except per share data)
 
 
 
 
Revenue
$
671,738

 
$
614,679

Net income
$
33,081

 
$
54,927

Net income attributable to Parker Drilling
$
32,629

 
$
55,073

Earnings per share - basic
$
0.27

 
$
0.47

Earnings per share - diluted
$
0.27

 
$
0.46

 
 
 
 
Basic number of shares
119,443,260

 
117,458,365

Diluted number of shares
121,693,781

 
118,810,195










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3. Earnings per share (EPS)
 
 
Three Months Ended September 30, 2013
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
7,970,000

 
119,990,196

 
$
0.07

Effect of dilutive securities:
 
 
 
 
 
Restricted stock

 
1,684,395

 

Diluted EPS
$
7,970,000

 
121,674,591

 
$
0.07

 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
 
 
 
 
 
 
Basic EPS
$
16,843,000

 
119,443,260

 
$
0.14

Effect of dilutive securities:
 
 
 
 
 
Restricted stock

 
2,250,521

 

Diluted EPS
$
16,843,000

 
121,693,781

 
$
0.14

 
 
 
 
 
 
 
Three Months Ended September 30, 2012
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
10,936,000

 
118,109,214

 
$
0.09

Effect of dilutive securities:
 
 
 
 
 
Restricted stock

 
1,091,805

 

Diluted EPS
$
10,936,000

 
119,201,019

 
$
0.09

 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
57,411,000

 
117,458,365

 
$
0.49

Effect of dilutive securities:
 
 
 
 
 
Restricted stock

 
1,351,830

 
(0.01
)
Diluted EPS
$
57,411,000

 
118,810,195

 
$
0.48


4. Accumulated Other Comprehensive Income    

Accumulated other comprehensive loss consisted of the following:

 
Foreign Currency Items
 
(in thousands)
December 31, 2012
$

Current period other comprehensive income
957

September 30, 2013
$
957


No amounts were reclassified out of accumulated other comprehensive income for the nine months ended September
30, 2013.


5.
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. We eliminate inter-segment revenues and expenses. The results of operations for ITS, acquired on April 22, 2013, are included in our Rental Tools segment.

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The following table represents the results of operations by reportable segment:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Operations by Reportable Industry Segment
2013
 
2012
 
2013
 
2012
 
(Dollars in Thousands)
 
(Dollars in Thousands)
Revenues:
 
 
 
 
 
Rental Tools
$
89,614

 
$
59,947

 
$
228,718

 
$
191,233

U.S. Barge Drilling
33,919

 
33,142

 
102,085

 
94,269

U.S. Drilling
18,693

 

 
48,238

 

International Drilling(1)
88,562

 
68,503

 
236,394

 
224,176

Technical Services
6,974

 
3,709

 
15,483

 
11,117

Total revenues
237,762

 
165,301

 
630,918

 
520,795

Operating gross margin(2):
 
 
 
 
 
 
 
Rental Tools
25,816

 
27,032

 
72,470

 
91,885

U.S. Barge Drilling
12,236

 
11,042

 
37,657

 
29,215

U.S. Drilling
103

 
(4,712
)
 
(4,618
)
 
(7,881
)
International Drilling
9,831

 
783

 
12,815

 
21,395

Technical Services
153

 
(107
)
 
584

 
(118
)
Total operating gross margin
48,139

 
34,038

 
118,908

 
134,496

General and administrative expense
(14,188
)
 
(8,905
)
 
(49,449
)
 
(21,822
)
Gain on disposition of assets, net
1,094

 
606

 
2,759

 
2,466

Total operating income
35,045

 
25,739

 
72,218

 
115,140

Interest expense
(13,127
)
 
(8,171
)
 
(33,874
)
 
(25,133
)
Interest income
130

 
30

 
2,392

 
109

Loss on extinguishment of debt
(5,218
)
 
(117
)
 
(5,218
)
 
(1,766
)
Changes in fair value of derivative positions

 
19

 
54

 
8

Other
400

 
26

 
333

 
62

Income before income taxes
$
17,230

 
$
17,526

 
$
35,905

 
$
88,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
Identifiable assets:
(Dollars in Thousands)
 
 
 
 
Rental Tools
$
375,900

 
$
194,600

 
 
 
 
U.S. Barge Drilling
84,402

 
99,409

 
 
 
 
U.S. Drilling
367,020

 
374,794

 
 
 
 
International Drilling
466,356

 
414,546

 
 
 
 
Total identifiable assets
1,293,678

 
1,083,349

 
 
 
 
Corporate assets (3)
241,702

 
172,384

 
 
 
 
Total assets
$
1,535,380

 
$
1,255,733

 
 
 
 
 
(1)
For the nine months ended September 30, 2013, our largest customer, Exxon Neftegas Limited, constituted 14.3% of our total consolidated revenues and approximately 36.9% of our International Drilling segment. For the nine months ended September 30, 2012, our two largest customers, Exxon Neftegas Limited (ENL) and Schlumberger, constituted approximately 10.6% and 10.2%, respectively, of our total consolidated revenues and approximately 32.0% and 24.0%, respectively, of our International Drilling segments.
(2)
Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

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(3)
This category includes corporate assets as well as minimal assets for our Technical Services segment primarily related to office furniture and fixtures.

6.
Assets Held for Sale
Assets held for sale of $7.5 million as of September 30, 2013 is 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. Subsequent to placing the barge rig and inventory located in Mexico into assets held for sale, management determined that the carrying value of the assets would not be recovered through the sale of the assets. Therefore, during the third quarter of 2013 we recorded a non-cash charge of $0.9 million to write-down the value of the assets to estimated scrap value. 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 held for sale as of September 30, 2013 will be recoverable through sale of the assets. On October 8, 2013 we completed the sale of the building located in Tulsa, OK. As a result of the completed sale, during the 2013 third quarter, we reversed a reserve previously recorded against the carrying value of the asset. We will recognize a gain of $0.1 million on the transaction during the 2013 fourth quarter.
During the 2013 second quarter, 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 these assets 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 category was $0.7 million.

7.
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 September 30, 2013, we had a liability for unrecognized tax benefits of $10.5 million (which includes $3.8 million of benefits which would favorably impact our effective tax rate upon recognition) primarily related to foreign operations. As of September 30, 2012, we had a liability for unrecognized tax benefits of $12.0 million ($5.2 million of which, if recognized, would favorably impact our effective tax rate). In addition, we recognize interest and penalties that could be applied to uncertain tax positions in periodic income tax expense. As of September 30, 2013 and December 31, 2012, we had approximately $7.7 million and $7.0 million, respectively, of accrued interest and penalties related to uncertain tax positions.
 
8.
Income Tax Benefit/Expense
Income tax expense was $9.1 million for the third quarter of 2013 as compared to $6.7 million for the third quarter of 2012. The increase in current period income tax expense is primarily due to a shift in the mix of our foreign and domestic operation's pre-tax earnings for the 2013 third quarter compared to the 2012 third quarter. This shift resulted in an increase in our estimated effective tax rate during the 2013 third quarter.
During the nine months ended September 30, 2013, we received income tax refunds from the IRS of $22.4 million. In addition to the refund payments, we received interest of $2.2 million, which was recorded in the consolidated condensed statement of operations as interest income.
 


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9.
Long-Term Debt
The following table illustrates our debt portfolio as of September 30, 2013 and December 31, 2012:
 
 
September 30,
2013
 
December 31,
2012
 
(Dollars in Thousands)
7.50% Senior Notes, due August 2020
$
225,000

 
$

9.125% Senior Notes, due April 2018
428,968

 
429,205

Term Note, due December 2017

 
50,000

Total debt
653,968

 
479,205

Less current portion

 
10,000

Total long-term debt
$
653,968

 
$
469,205


7.50% Senior Notes, due August 2020
On July 30, 2013, we issued $225.0 million aggregate principal amount of 7.50% Senior Notes (7.50% 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 7.50% Notes offering were primarily used to repay the $125.0 million aggregate principal amount of the Goldman Term Loan, to repay $45.0 million of Term Loan borrowings under our Credit Agreement and for general corporate purposes.
The 7.50% 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 7.50% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under our senior secured credit facility. Interest on the 7.50% Notes is payable on February 1 and August 1 of each year, beginning February 1, 2014. Debt issuance costs related to the 7.50% Notes were $5.3 million ($5.2 million, net of amortization as of September 30, 2013) and will be amortized over the term of the notes using the effective interest rate method.
At any time prior to August 1, 2016, we may redeem up to 35 percent of the aggregate principal amount of the 7.50% Notes at a redemption price of 107.50 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 August 1, 2016, we may redeem all or a part of the 7.50% Notes upon appropriate notice, at a redemption price of 103.750 percent of the principal amount, and at redemption prices decreasing each year thereafter to par beginning August 1, 2018. If we experience certain changes in control, we must offer to repurchase the 7.50% 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.
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). The premium related to the $125.0 million of 9.125% Notes of approximately $5.0 million

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($4.0 million, net of amortization as of September 30, 2013) is being amortized over the term of the notes using the effective interest rate method.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 subsidiaries that guarantee indebtedness under our senior secured credit facility. 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 ($8.1 million, net of amortization as of September 30, 2013) are being amortized over the term of the notes using the effective interest rate method.
At any time 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 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. In connection with the repayment of the Goldman Term Loan we incurred debt extinguishment costs of $5.2 million.
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 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 loans pursuant to the Credit Agreement, the 9.125% Notes, and the 7.50% Notes are guaranteed by substantially all of our direct and indirect domestic subsidiaries other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, 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 September 30, 2013 and December 31, 2012. The Credit Agreement matures on December 14, 2017.
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

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ending March 31, 2014, such that the reborrowing availability on September 30, 2013 would be $42.5 million and on April 30, 2014 would be $37.5 million.
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 September 30, 2013 and December 31, 2012. Letters of credit outstanding against the Revolver as of September 30, 2013 and December 31, 2012 totaled $3.8 million and $4.5 million, respectively.
Term Loan
The Term Loan originated at $50.0 million on December 14, 2012 and required 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 September 30, 2013 and December 31, 2012 was zero and $50.0 million, respectively.

10.
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 did not apply hedge accounting to the agreements and, accordingly, mark-to-market change in the fair value of the interest rate swaps were recognized in earnings. As of December 31, 2012, the fair value of the interest rate swap was a liability of less than $0.1 million and was recorded in accrued liabilities in our consolidated balance sheets. There was no impact to the quarter ended September 30, 2013, as the swap agreement expired during the 2013 second quarter.
 
11.
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.
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. As of 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.


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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:
 
  
September 30, 2013
 
December 31, 2012
 
Carrying Amount
 
Fair Value
 
Carrying  Amount
 
Fair Value
 
(in thousands)
Long-term Debt
 
 
 
 
 
 
 
7.50% Notes
$
225,000

 
$
225,000

 
$

 
$

9.125% Notes
425,000

 
454,750

 
425,000

 
453,688

Total
$
650,000

 
$
679,750

 
$
425,000

 
$
453,688


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 nine months ended September 30, 2013.
 
12.
Commitments and 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 resulting from exposure to asbestos on drilling rigs and associated facilities. At September 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 States of Illinois and 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 September 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 September 30, 2013, the Company had made certain participating payments and had accrued $0.9 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
We previously announced we reached a settlement in connection with 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. On April 16, 2013, the Company and the DOJ 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

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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. The Company also settled a related civil complaint filed by the SEC in a United States District Court.

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 have and will continue our review of ITS' activities to further identify potential violations of applicable international trade and anti-corruption laws and have and will continue to 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 have and 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.

13.
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

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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.
In July 2013, the FASB issued an update to existing guidance on presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. It is effective prospectively for our first quarter in fiscal 2014. We do not expect the adoption of this update to have an impact on our condensed consolidated financial statements.

14.
Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements
Set forth on the following pages are the consolidating condensed financial statements of Parker Drilling. Our loans pursuant to the Credit Agreement, the 9.125% Notes, and the 7.50% Notes are guaranteed by substantially all of our direct and indirect domestic subsidiaries other than immaterial subsidiaries and 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 September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012. The consolidating condensed financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.







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PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
September 30, 2013
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
89,516

 
$
21,273

 
$
51,668

 
$

 
$
162,457

Accounts and notes receivable, net
290,856

 
113,873

 
386,521

 
(541,627
)
 
249,623

Rig materials and supplies

 
2,364

 
37,838

 

 
40,202

Deferred costs

 
32

 
13,551

 

 
13,583

Deferred income taxes

 
12,363

 
1,110

 

 
13,473

Other tax assets
43,171

 
(46,939
)
 
22,201

 

 
18,433

Assets held for sale

 
1,183

 
6,302

 

 
7,485

Other current assets

 
14,238

 
6,668

 

 
20,906

Total current assets
423,543

 
118,387

 
525,859

 
(541,627
)
 
526,162

Property, plant and equipment, net
60

 
559,885

 
298,727

 

 
858,672

Investment in subsidiaries and intercompany advances
944,584

 
(220,110
)
 
1,593,743

 
(2,318,217
)
 

Other noncurrent assets
52,147

 
60,002

 
38,397

 

 
150,546

Total assets
$
1,420,334

 
$
518,164

 
$
2,456,726

 
$
(2,859,844
)
 
$
1,535,380

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

 
$

 
$

 
$

 
$

Accounts payable and accrued liabilities
81,524

 
101,207

 
263,709

 
(255,211
)
 
191,229

Accrued income taxes

 
529

 
6,732

 

 
7,261

Total current liabilities
81,524

 
101,736

 
270,441

 
(255,211
)
 
198,490

Long-term debt
653,968

 

 

 

 
653,968

Other long-term liabilities
4,289

 
5,806

 
13,953

 

 
24,048

Long-term deferred tax liability

 
47,684

 
(8,600
)
 

 
39,084

Intercompany payables
62,584

 
43,669

 
359,106

 
(465,359
)
 

Contingencies

 

 

 

 

Stockholders’ equity:
 
 
 
 
 
 
 
 
 
Common stock
20,050

 
18,049

 
43,003

 
(61,052
)
 
20,050

Capital in excess of par value
654,750

 
733,899

 
1,579,458

 
(2,313,357
)
 
654,750

Accumulated other comprehensive income

 

 
957

 

 
957

Retained earnings (accumulated deficit)
(56,831
)
 
(432,679
)
 
196,587

 
235,135

 
(57,788
)
Total controlling interest stockholders’ equity
617,969

 
319,269

 
1,820,005

 
(2,139,274
)
 
617,969

Noncontrolling interest

 

 
1,821

 

 
1,821

Total equity
617,969

 
319,269

 
1,821,826

 
(2,139,274
)
 
619,790

Total liabilities and stockholders’ equity
$
1,420,334

 
$
518,164

 
$
2,456,726

 
$
(2,859,844
)
 
$
1,535,380



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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






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Table of Contents

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

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

 
$
119,223

 
$
170,609

 
$
(52,070
)
 
$
237,762

Operating expenses

 
64,297

 
141,514

 
(52,070
)
 
153,741

Depreciation and amortization

 
19,956

 
15,926

 

 
35,882

Total operating gross margin

 
34,970

 
13,169

 

 
48,139

General and administration expense (1)
(47
)
 
(14,028
)
 
(113
)
 

 
(14,188
)
Gain on disposition of assets, net

 
(34
)
 
1,128

 

 
1,094

Total operating income (loss)
(47
)
 
20,908

 
14,184

 

 
35,045

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(14,035
)
 
(107
)
 
(2,198
)
 
3,213

 
(13,127
)
Interest income
360

 
250

 
2,733

 
(3,213
)
 
130

Extinguishment of debt
(5,218
)
 

 

 

 
(5,218
)
Changes in fair value of derivative positions

 

 

 

 

Other
(1
)
 
(11
)
 
412

 

 
400

Equity in net earnings of subsidiaries
22,322

 

 

 
(22,322
)
 

Total other income (expense)
3,428

 
132

 
947

 
(22,322
)
 
(17,815
)
Income (benefit) before income taxes
3,381

 
21,040

 
15,131

 
(22,322
)
 
17,230

Total income tax expense (benefit)
(4,589
)
 
10,223

 
3,478

 

 
9,112

Net income (loss)
7,970

 
10,817

 
11,653

 
(22,322
)
 
8,118

Less: Net income (loss) attributable to noncontrolling interest

 

 
148

 

 
148

Net income (loss) attributable to controlling interest
$
7,970

 
$
10,817

 
$
11,505

 
$
(22,322
)
 
$
7,970


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






















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Table of Contents



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

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

 
$
98,969

 
$
94,749

 
$
(28,417
)
 
$
165,301

Operating expenses

 
45,850

 
84,051

 
(28,417
)
 
101,484

Depreciation and amortization

 
17,866

 
11,913

 

 
29,779

Total operating gross margin

 
35,253

 
(1,215
)
 

 
34,038

General and administration expense (1)
(47
)
 
(8,823
)
 
(35
)
 

 
(8,905
)
Gain on disposition of assets, net

 
553

 
53

 

 
606

Total operating income (loss)
(47
)
 
26,983

 
(1,197
)
 

 
25,739

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(9,105
)
 
(43
)
 
(1,840
)
 
2,817

 
(8,171
)
Interest income
95

 
179

 
2,573

 
(2,817
)
 
30

Changes in fair value of derivative positions
19

 

 

 

 
19

Loss on extinguishment of debt
(117
)
 

 

 

 
(117
)
Other

 
26

 

 

 
26

Equity in net earnings of subsidiaries
10,596

 

 

 
(10,596
)
 

Total other income (expense)
1,488

 
162

 
733

 
(10,596
)
 
(8,213
)
Income (loss) before income taxes
1,441

 
27,145

 
(464
)
 
(10,596
)
 
17,526

Income tax expense (benefit)
(9,495
)
 
10,451

 
5,739

 

 
6,695

Net income (loss)
10,936

 
16,694

 
(6,203
)
 
(10,596
)
 
10,831

Less: Net income (loss) attributable to noncontrolling interest

 

 
(105
)
 

 
(105
)
Net income (loss) attributable to controlling interest
$
10,936

 
$
16,694

 
$
(6,098
)
 
$
(10,596
)
 
$
10,936


(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)

 
Nine Months Ended September 30, 2013
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Total revenues
$

 
$
345,434

 
$
388,912

 
$
(103,428
)
 
$
630,918

Operating expenses

 
186,708

 
331,056

 
(103,428
)
 
414,336

Depreciation and amortization

 
57,335

 
40,339

 

 
97,674

Total operating gross margin

 
101,391

 
17,517

 

 
118,908

General and administration expense (1)
(140
)
 
(48,942
)
 
(367
)
 

 
(49,449
)
Gain on disposition of assets, net

 
1,917

 
842

 

 
2,759

Total operating income (loss)
(140
)
 
54,366

 
17,992

 

 
72,218

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(36,734
)
 
(167
)
 
(9,494
)
 
12,521

 
(33,874
)
Interest income
3,366

 
1,584

 
9,963

 
(12,521
)
 
2,392

Extinguishment of debt
(5,218
)