UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
 
(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, 2014
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, 2014 there were 122,022,093 common shares outstanding.    




EXPLANATORY NOTE

This Amendment No. 1 (the Amendment) to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 (the Form 10-Q), originally filed by Parker Drilling Company on November 6, 2014, is being filed solely for the purpose of including the corrected Signature Page and the corrected Exhibits 31.1, 31.2, 32.1, and 32.2, each of which inadvertently omitted the conformed signature. Except as described above, no other changes have been made to the Form 10-Q.  This Amendment does not amend, update or change the financial statements or disclosures in the Form 10-Q and does not reflect events occurring after the filing of the Form 10-Q.





TABLE OF CONTENTS
 
 
Page
 
 
 
 


2



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
 
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
78,311

 
$
148,689

Accounts and Notes Receivable, net of allowance for bad debts of $10,470 in 2014 and $12,853 in 2013
264,803

 
257,889

Rig materials and supplies
45,774

 
41,781

Deferred costs
6,857

 
13,682

Deferred income taxes
8,015

 
9,940

Other tax assets
18,122

 
24,079

Other current assets
23,484

 
23,223

Total current assets
445,366

 
519,283

Property, plant and equipment less accumulated depreciation and amortization of $1,208,221 at September 30, 2014 and $1,136,024 at December 31, 2013
912,853

 
871,356

Debt issuance costs
12,876

 
14,208

Deferred income taxes
126,100

 
102,420

Other noncurrent assets
23,818

 
27,489

Total assets
$
1,521,013

 
$
1,534,756

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

 
$
25,000

Accounts payable and accrued liabilities
160,711

 
174,886

Accrued income taxes
11,753

 
7,266

Total current liabilities
182,464

 
207,152

Long-term debt
607,500

 
628,781

Other long-term liabilities
17,907

 
26,914

Long-term deferred tax liability
54,540

 
38,767

Contingencies (Note 10)

 

Stockholders’ equity:
 
 
 
Common stock
20,316

 
20,075

Capital in excess of par value
665,805

 
657,349

Accumulated deficit
(31,918
)
 
(47,616
)
Accumulated other comprehensive income
766

 
1,888

Total controlling interest stockholders’ equity
654,969

 
631,696

Noncontrolling interest
3,633

 
1,446

Total equity
658,602

 
633,142

Total liabilities and stockholders’ equity
$
1,521,013

 
$
1,534,756

See accompanying notes to the unaudited consolidated condensed financial statements.

3



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
242,012

 
$
237,762

 
$
725,471

 
$
630,851

Expenses:
 
 
 
 
 
 
 
Operating expenses
160,797

 
153,147

 
501,391

 
413,294

Depreciation and amortization
36,149

 
35,882

 
106,666

 
97,674

 
196,946

 
189,029

 
608,057

 
510,968

Total operating gross margin
45,066

 
48,733

 
117,414

 
119,883

General and administration expense
(9,370
)
 
(14,238
)
 
(25,341
)
 
(49,286
)
Gain (loss) on disposition of assets, net
(457
)
 
1,094

 
433

 
2,759

Total operating income
35,239

 
35,589

 
92,506

 
73,356

Other income and (expense):
 
 
 
 
 
 
 
Interest expense
(10,848
)
 
(13,127
)
 
(33,486
)
 
(33,874
)
Interest income
36

 
130

 
156

 
2,392

Loss on extinguishment of debt

 
(5,218
)
 
(30,152
)
 
(5,218
)
Change in fair value of derivative positions

 

 

 
54

Other
(536
)
 
(144
)
 
1,391

 
(805
)
Total other expense
(11,348
)
 
(18,359
)
 
(62,091
)
 
(37,451
)
Income before income taxes
23,891

 
17,230

 
30,415

 
35,905

Income tax expense
11,014

 
9,112

 
14,093

 
18,841

Net income
12,877

 
8,118

 
16,322

 
17,064

Less: Net income attributable to noncontrolling interest
311

 
148

 
624

 
221

Net income attributable to controlling interest
$
12,566

 
$
7,970

 
$
15,698

 
$
16,843

Basic earnings per share
$
0.10

 
$
0.07

 
$
0.13

 
$
0.14

Diluted earnings per share
$
0.10

 
$
0.07

 
$
0.13

 
$
0.14

 
 
 
 
 
 
 
 
Number of common shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
121,523,674

 
119,990,196

 
120,994,728

 
119,443,260

Diluted
123,177,753

 
121,674,591

 
122,972,014

 
121,693,781


See accompanying notes to the unaudited consolidated condensed financial statements.


4



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,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
12,877

 
8,118

 
16,322

 
17,064

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation difference on related borrowings
(1,780
)
 
(577
)
 
(2,248
)
 
(1,542
)
Currency translation difference on foreign currency net investments
615

 
2,098

 
1,126

 
2,499

Total other comprehensive income (loss), net of tax:
(1,165
)
 
1,521

 
(1,122
)
 
957

Comprehensive income
11,712

 
9,639

 
15,200

 
18,021

Comprehensive (income) attributable to noncontrolling interest
(289
)
 
(53
)
 
(523
)
 
(83
)
Comprehensive income attributable to controlling interest
$
11,423

 
$
9,586

 
$
14,677

 
$
17,938


See accompanying notes to the unaudited consolidated condensed financial statements.


5



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
16,322

 
$
17,064

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
106,666

 
97,674

Loss on extinguishment of debt
30,152

 
5,218

Gain on disposition of assets
(433
)
 
(2,759
)
Deferred income tax benefit
73

 
12,872

Expenses not requiring cash
10,141

 
9,928

Change in accounts receivable
(5,188
)
 
(28,605
)
Change in other assets
7,554

 
(1,346
)
Change in accrued income taxes
(10,397
)
 
2,877

Change in liabilities
(10,539
)
 
12,412

Net cash provided by operating activities
144,351

 
125,335

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(151,109
)
 
(102,856
)
Proceeds from the sale of assets
2,294

 
5,533

Acquisition of ITS, net of cash acquired

 
(117,991
)
Net cash (used in) investing activities
(148,815
)
 
(215,314
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
400,000

 
350,000

Repayments of long term debt
(425,000
)
 
(125,000
)
Repayments of term loan
(7,500
)
 
(50,000
)
Payments of debt issuance costs
(7,630
)
 
(10,981
)
Payments of debt extinguishment costs
(26,214
)
 

Excess tax benefit from stock based compensation
430

 
531

Net cash provided by (used in) financing activities
(65,914
)
 
164,550

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(70,378
)
 
74,571

Cash and cash equivalents, beginning of year
148,689

 
87,886

Cash and cash equivalents, end of period
$
78,311

 
$
162,457

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
41,558

 
$
22,845

Income taxes paid
$
15,787

 
$
11,238


See accompanying notes to the unaudited consolidated condensed financial statements.


6



PARKER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
Note 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, 2014 and December 31, 2013, (2) Parker Drilling’s results of operations for the three and nine month periods ended September 30, 2014 and 2013, (3) Parker Drilling’s consolidated condensed statement of comprehensive income for the three and nine month periods ended September 30, 2014 and 2013, and (4) Parker Drilling's cash flows for the nine month periods ended September 30, 2014 and 2013. Results for the nine month period ended September 30, 2014 are not necessarily indicative of the results that will be realized for the year ending December 31, 2014. The financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013.
Nature of Operations — Parker Drilling, together with its subsidiaries, is an international provider of contract drilling and drilling-related services and rental tools. We have operated in over 50 countries since beginning operations in 1934, making us among the most geographically experienced drilling contractors and rental tools providers in the world. We currently have operations in 24 countries. We own and operate drilling rigs and drilling-related equipment and also perform drilling-related services, referred to as operations and maintenance (O&M) services, for customer-owned drilling rigs on a contracted basis. 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. Our rental tools business supplies premium equipment to operators on land and offshore in the United States (U.S.) and select international markets. We have significant knowledge of the equipment needs of drilling operators and the logistical and product quality requirements of an effective global rental tools supplier. We believe we are industry leaders in quality, health, safety and environmental practices.
Our business is currently comprised of five operating segments: Rental Tools, U.S. Barge Drilling, U.S. Drilling, International Drilling, and Technical Services. Our rental tools business provides premium rental tools and services for land and offshore oil and natural gas drilling, workover and production applications. Tools we provide include drill collars, standard and heavy-weight drill pipe, tubing, standard and high-torque connections, pressure control equipment including blow-out preventers, and equipment for fishing services. In addition, we also provide services including fishing, tubular running, inspection and machine shop. Our U.S. barge drilling business operates barge rigs that drill for oil and natural gas in the shallow waters in and along the inland waterways and coasts of Louisiana, Alabama, and Texas. Our U.S. drilling business primarily consists of two new-design arctic-class drilling rigs in Alaska designed to address the challenges presented by the remote location, harsh climate and sensitive environment that characterize the Alaskan North Slope. Additionally, the U.S. drilling business provides O&M work in support of a customer's offshore platform operations located in the Channel Islands region of California. Our international drilling business includes operations related to Parker-owned and customer-owned rigs. We provide O&M and other project management services, such as labor, maintenance, and logistics for operators who own their own drilling rigs, but choose Parker Drilling to operate the rigs for them. Our Technical Services business includes engineering and related project services during concept development, pre-FEED (Front End Engineering Design) and FEED phases of customer-owned drilling facility projects. During the engineering, procurement, construction, installation and commissioning phases of these projects, we provide project management and procurement services focusing primarily on drilling equipment and drilling systems.
In May of 2014 we acquired a 1500 horsepower posted barge rig for our Gulf of Mexico drilling fleet for a purchase price of $12.25 million using cash on hand. At September 30, 2014, our marketable rig fleet consisted of 14 barge drilling rigs, including the recently acquired rig, and 23 land rigs located in the United States, Latin America and the Europe, Middle East, and Asia regions.
Consolidation — The consolidated condensed financial statements include the accounts of the Company and subsidiaries in 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.
Reclassifications — Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not materially affect our consolidated financial results.
Noncontrolling Interest — We apply 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 ITS

7



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.
Revenue Recognition — Contract drilling revenues and expenses, comprised of daywork drilling contracts, call-outs against master service agreements 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 primary 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. For contracts accounted for under the milestone method of revenue recognition, revenues are recognized on achievement of specified procurement coordination and delivery events. 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 — The Company recognizes reimbursements received for out-of-pocket expenses incurred as revenues and accounts for out-of-pocket expenses as direct operating costs. Such amounts totaled $19.3 million and $16.2 million during the third quarters of 2014 and 2013, respectively and $57.5 million and $46.5 million for the nine months ended September 30, 2014, and 2013, respectively. Additionally, the Company typically receives a nominal handling fee, which is recognized as earned revenues in our consolidated statement of operations.
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 revenues and expenses during the periods reported. Estimates are typically used when accounting for certain significant items such as legal or contractual liability accruals, mobilization and deferred mobilization, 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, where applicable, 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.
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 typically engage third-party appraisal firms to assist in fair value determination of inventories, identifiable intangible assets, and any other significant assets or liabilities. 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 AssetsDefinite-lived intangible assets acquired and recorded in the acquisition of International Tubular Services Limited and certain of its affiliates (collectively, ITS) and other related assets (the ITS Acquisition) in 2013 primarily relate to trade names, customer relationships, and developed technology. Our intangibles are being amortized over a weighted average period of approximately three years. See Note 2 - Acquisition of ITS for further discussion of the ITS Acquisition and fair value estimates.
Concentrations of Credit Risk — Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables with a variety of national and international oil and gas companies. We generally do not require collateral on our trade receivables.
At September 30, 2014 and December 31, 2013, we had deposits in domestic banks in excess of federally insured limits of approximately $44.3 million and $104.3 million, respectively. In addition, as of September 30, 2014 and December 31, 2013, we had deposits in foreign banks, which were not insured of $40.5 million and $50.1 million, respectively.
Our customer base primarily consists of major, independent, national and international oil and gas companies and integrated service providers. We depend on a limited number of significant customers. Our largest customer, Exxon Neftegas Limited (ENL), constituted approximately 20.0% of our revenues for the nine months ended September 30, 2014. 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.

8




Note 2 - Acquisition of ITS    
On April 22, 2013 we acquired ITS for an initial purchase price of $101 million paid at the closing of the ITS Acquisition. An additional $24 million was deposited into an escrow account, which is payable to the seller or to us, as the case may be, in accordance with the ITS Acquisition agreement (the Acquisition Agreement). As of September 30, 2014, $10.5 million of the cash deposited in escrow has been released to the seller. Additionally, we received $1.25 million and $2.75 million from escrow related to the ITS Acquisition to reimburse the Company for certain post-acquisition expenditures during the three and nine months ended September 30, 2014, respectively. The reimbursements were recorded as a reduction to general and administrative expense on our consolidated condensed statement of operations.
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 Acquisition Agreement, $5 million of the $24 million in escrow to be paid to the seller was contingent upon certain future liabilities that could become due by ITS in certain jurisdictions. Any payments in relation to these liabilities would be deducted from the $5 million escrow amount and the net balance of the escrow would be paid to the seller. During the third quarter of 2014, we released $2 million to the seller, leaving $3 million remaining in escrow. We estimate that the entire $3 million remaining in escrow will be paid to the seller, and therefore, the estimated fair value of the consideration in escrow related to these liabilities is $3 million. Any changes to the fair value of the contingent consideration in the future of less than $3 million will result in recording a receivable from escrow which will be recorded at fair value. We do not expect to recover any amount from escrow related to the contingent consideration; therefore, as of September 30, 2014, the fair value of the receivable was zero.
Allocation of Consideration Transferred to Net Assets Acquired
We have finalized the determination of the fair values of the assets acquired and liabilities assumed as set forth below. The acquired assets and assumed liabilities were subject to adjustment during a one-year measurement period subsequent to the ITS Acquisition as permitted under GAAP. The estimated fair values of certain assets and liabilities, primarily receivables, intangible assets, property, plant and equipment, taxes, contingencies and noncontrolling interests required judgments and assumptions that resulted in adjustments made to these estimates during the measurement period. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the ITS Acquisition and did not result from subsequent intervening events.

9



The following details the allocation of consideration transferred to net assets acquired in the ITS Acquisition:
Dollars in thousands
April 22, 2013
Cash and cash equivalents
$
7,009

Accounts and notes receivable, net (1) 
48,184

Other current assets
1,803

Accounts payable and accrued liabilities (2)
(35,156
)
Accrued income taxes
(1,251
)
Working capital excluding rig materials and supplies
20,589

Rig materials and supplies
11,514

Property, plant and equipment, net (3) 
72,935

Investment in joint venture
4,134

Other noncurrent assets
2,818

Total tangible assets
111,990

Deferred income tax assets - current (4)
222

Deferred income tax assets - noncurrent (4) 
11,640

Intangible assets (5)
8,500

Total assets acquired
132,352

Other long-term liabilities
(211
)
Long-term deferred tax liability
(2,796
)
Net assets acquired
129,345

Less: Noncontrolling interest (6)
(4,345
)
Total consideration transferred
$
125,000

    
(1) Our provisional allocation included $54.7 million of gross contractual accounts receivable. During the 2013 fourth quarter, adjustments of $1.2 million were recorded as of December 31, 2013 resulting in final fair value of gross accounts receivable of $55.9 million. These adjustments were recorded to reflect recognition of receivables for revenue earned prior to the acquisition date. Additionally, the initial allocation included $5.9 million of allowance for doubtful accounts. During the 2014 first quarter, we recorded an additional $1.9 million allowance to reserve against receivables that existed as of the acquisition date and were deemed to be uncollectible based on new information obtained during the measurement period that existed at the time of acquisition.     
(2) Our provisional allocation included $39.2 million of accounts payable and accrued liabilities. During the 2013 third quarter we recorded a reclassification of $4.0 million to reclassify reserves to property, plant, and equipment. This reclassification was reflected in our December 31, 2013 consolidated balance sheet but was not included in our disclosure of the Allocation of Consideration Transferred to Net Assets Acquired as of December 31, 2013. We have corrected this as of March 31, 2014 and do not believe the reclassification is material to our previously reported disclosure.
(3) Management determined that the fair value of the net assets acquired less noncontrolling interest equaled consideration paid; therefore, no goodwill was recorded. Our provisional allocation included an adjustment of $40.2 million to reduce the historical carrying value of the acquired property, plant and equipment to its estimated fair value at the date of acquisition. The measurement period adjustments to receivables, deferred income taxes, intangibles, and noncontrolling interests directly impacted the determination of the final fair value of the acquired property, plant and equipment, resulting in measurement period adjustments totaling $2.6 million to increase the fair value of property, plant and equipment.
(4) Our provisional allocation included $14.4 million of deferred tax assets. During the measurement period, adjustments of ($2.9) million and $0.4 million were recorded as of December 31, 2013 and March 31, 2014, respectively, resulting in final fair value of deferred tax assets of $11.9 million. Adjustments to deferred income tax assets primarily related to the differences between the final acquisition date fair value and tax basis of acquired property, plant and equipment.

10



(5) Our provisional allocation included $10.0 million and $0.2 million to reflect the estimated fair values of definite- and indefinite-lived intangible assets, respectively, for the ITS Acquisition. During the 2013 fourth quarter we recorded adjustments of $1.5 million and $0.2 million to reduce the value of the definite- and indefinite-lived intangible assets down to $8.5 million and zero respectively. Our depreciation and amortization expense for the year ended December 31, 2013 reflects this valuation adjustment. Definite-lived intangible assets recorded in connection with the ITS Acquisition, which primarily relate to trade names, customer relationships, and developed technology are being amortized over a weighted average period of approximately 3.4 years.
(6) Our provisional allocation included noncontrolling interest of $2.7 million. 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. During the 2014 first quarter, we obtained new information about the acquired subsidiaries that existed at the date of acquisition which resulted in an increase in the acquisition date fair value of $1.6 million, resulting in a final fair value of the noncontrolling interest of $4.3 million.
The impacts to our December 31, 2013 consolidated balance sheet for the revisions to the provisional allocation made during the 2014 first quarter are as follows:
Dollars in Thousands
Increase/(Decrease)
Accounts and notes receivable, net
$
(1,859
)
Total current assets
(1,859
)
Property, plant and equipment
3,072

Deferred income tax assets - noncurrent
391

Total non-current assets
3,463

Total assets
$
1,604

 
 
Long-term deferred tax liabilities
(60
)
Total non-current liabilities
(60
)
Total liabilities
$
(60
)
 
 
Noncontrolling interest
$
1,664

Total liabilities and stockholder's equity
$
1,604

The impact of the revisions to the provisional allocation recorded during the 2014 first quarter, including the impact to depreciation expense related to the increase in property, plant and equipment, are not material to our historical consolidated financial statements or disclosures.
Acquisition Related Costs
Acquisition-related transaction costs, consisting of various advisory, compliance, legal, accounting, valuation and other professional or consulting fees, were nominal for the nine month period ended September 30, 2014 and were $22.5 million for the year ended December 31, 2013. These costs were expensed as incurred and included in general and administrative expense on our consolidated condensed statement of operations. Debt issuance costs of $5.4 million associated with our $125 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 initially 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 7.50% Senior Notes due August 1, 2020, and the unamortized deferred costs of $5.2 million were expensed during the third quarter of 2013.

11



Note 3 - Earnings per share (EPS)  
 
Three Months Ended September 30, 2014
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
12,566,000

 
121,523,674

 
$
0.10

Effect of dilutive securities:
 
 
 
 
 
Restricted stock units

 
1,654,079

 

Diluted EPS
$
12,566,000

 
123,177,753

 
$
0.10

 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
15,698,000

 
120,994,728

 
$
0.13

Effect of dilutive securities:
 
 
 
 
 
Restricted stock units

 
1,977,286

 

Diluted EPS
$
15,698,000

 
122,972,014

 
$
0.13

 
 
 
 
 
 
 
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 units

 
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 units

 
2,250,521

 

Diluted EPS
$
16,843,000

 
121,693,781

 
$
0.14

 
 
 
 
 
 
For the three and nine months ended September 30, 2014 and 2013 weighted-average shares outstanding used in our computation of diluted EPS includes the dilutive effect of common shares potentially issuable in connection with outstanding restricted stock unit awards.
Note 4 - Accumulated Other Comprehensive Income    
Accumulated other comprehensive income consisted of the following:
Dollars in thousands
Foreign Currency
 Items
December 31, 2013
$
1,888

Current period other comprehensive income (loss)
(1,122
)
September 30, 2014
$
766

Amounts reclassified out of accumulated other comprehensive income were $0.2 million for the nine months ended September 30, 2014. These amounts represent foreign currency translation losses from the sale of our equity method investment in an ITS entity acquired during 2013.

12



Note 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 following table represents the results of operations by reportable segment:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Dollars in thousands
2014
 
2013
 
2014
 
2013
Revenues: (1)
 
 
 
 
 
Rental Tools
$
87,711

 
$
89,614

 
$
255,387

 
$
228,717

U.S. Barge Drilling
39,630

 
33,919

 
110,408

 
102,085

U.S. Drilling
19,687

 
18,693

 
59,143

 
48,238

International Drilling
88,173

 
88,562

 
265,396

 
236,394

Technical Services
6,811

 
6,974

 
35,137

 
15,417

Total revenues
242,012

 
237,762

 
725,471

 
630,851

Operating gross margin: (2)
 
 
 
 
 
 
 
Rental Tools
19,652

 
25,816

 
50,761

 
72,469

U.S. Barge Drilling
15,284

 
12,236

 
39,655

 
37,656

U.S. Drilling
1,307

 
103

 
4,072

 
(4,618
)
International Drilling
7,810

 
10,425

 
20,395

 
13,858

Technical Services
1,013

 
153

 
2,531

 
518

Total operating gross margin
45,066

 
48,733

 
117,414

 
119,883

General and administrative expense
(9,370
)
 
(14,238
)
 
(25,341
)
 
(49,286
)
Gain (loss) on disposition of assets, net
(457
)
 
1,094

 
433

 
2,759

Total operating income
35,239

 
35,589

 
92,506

 
73,356

Interest expense
(10,848
)
 
(13,127
)
 
(33,486
)
 
(33,874
)
Interest income
36

 
130

 
156

 
2,392

Loss on extinguishment of debt

 
(5,218
)
 
(30,152
)
 
(5,218
)
Changes in fair value of derivative positions

 

 

 
54

Other
(536
)
 
(144
)
 
1,391

 
(805
)
Income from continuing operations before income taxes
$
23,891

 
$
17,230

 
$
30,415

 
$
35,905

 
(1)For the nine months ended September 30, 2014, our largest customer, ENL, constituted approximately 20.0% of our total consolidated revenues and approximately 3.5% of our Rental Tools segment revenues, 43.0% of our International Drilling segment revenues, and 68.0% of our Technical Services segment revenues. For the nine months ended September 30, 2013, our largest customer, ENL, constituted approximately 14.3% of our total consolidated revenues.
(2)Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

13



Note 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 September 30, 2014, we had a liability for unrecognized tax benefits of $8.2 million (which includes $3.6 million of benefits which would favorably impact our effective tax rate upon recognition), primarily related to foreign operations. As of September 30, 2013, we had a liability for unrecognized tax benefits of $10.5 million ($3.8 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, 2014 and December 31, 2013, we had approximately $3.1 million and $7.9 million, respectively, of accrued interest and penalties related to uncertain tax positions.
During the nine months ended September 30, 2014, we paid approximately $6.1 million in settlement of notices of assessment in Kazakhstan that were previously reserved in the liability for unrecognized tax benefits.  Management believes that the Company is properly reserved with respect to accounting for uncertainty in income taxes.
Note 7 - Income Tax Benefit/Expense
During the third quarter of 2014 we had an income tax expense of $11.0 million compared to $9.1 million for the third quarter of 2013. The increase in current period income tax expense is primarily due to higher pre-tax earnings and the mix of operations in the third quarter of 2014 when compared with pre-tax earnings and the mix of operations reported for the third quarter of 2013.
Note 8 - Long-Term Debt
The following table illustrates our debt portfolio as of September 30, 2014 and December 31, 2013:
Dollars in thousands
September 30,
2014
 
December 31,
2013
6.75% Senior Notes, due July 2022
$
360,000

 
$

7.50% Senior Notes, due August 2020
225,000

 
225,000

9.125% Senior Notes, due April 2018

 
428,781

Term Note, due December 2017
32,500

 

Total debt
617,500

 
653,781

Less current portion
10,000

 
25,000

Total long-term debt
$
607,500

 
$
628,781

6.75% Senior Notes, due July 2022
On January 22, 2014, we issued $360.0 million aggregate principal amount of 6.75% Senior Notes due 2022 (6.75% 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 6.75% Notes offering plus a $40.0 million draw under our Amended and Restated Credit Agreement (Secured Credit Agreement) and cash on hand, were utilized to redeem $416.2 million aggregate principal amount of our outstanding 9.125% Senior Notes due 2018 (9.125% Notes) pursuant to a tender and consent solicitation offer commenced on January 7, 2014. See further discussion of the tender and consent solicitation offer below entitled "9.125% Senior Notes, due April 2018".
The 6.75% 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 6.75% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under our Secured Credit Agreement or our 7.50% Senior Notes due 2020 (7.50% Notes, and collectively with the 6.75% Notes, the Senior Notes). Interest on the 6.75% Notes is payable on January 15 and July 15 of each year, beginning July 15, 2014. Debt issuance costs related to the 6.75% Notes of approximately $7.6 million ($7.1 million net of amortization as of September 30, 2014) are being amortized over the term of the notes using the effective interest rate method.
At any time prior to January 15, 2017, we may redeem up to 35 percent of the aggregate principal amount of the 6.75% Notes at a redemption price of 106.75 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 January 15, 2018, we may redeem all or a part of the 6.75% Notes upon appropriate notice, at a redemption price of 103.375 percent of the principal amount, and at redemption prices decreasing each year thereafter to par beginning January 15, 2020. If we experience certain changes in control, we must offer to

14



repurchase the 6.75% 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.
7.50% Senior Notes, due August 2020
On July 30, 2013, we issued $225.0 million aggregate principal amount of the 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 Secured 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 Secured Credit Agreement or the 6.75% Notes. 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 of approximately $5.6 million ($4.8 million, net of amortization as of September 30, 2014) are being 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% 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.
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 percent 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.
On January 7, 2014, we commenced a tender and consent solicitation with respect to the 9.125% Notes. The tender offer price was $1,061.98, inclusive of a $30.00 consent payment, for each $1,000 principal amount of 9.125% Notes, plus accrued and unpaid interest. On January 22, 2014, we paid $453.7 million for the tendered 9.125% Notes, comprised of $416.2 million of aggregate principal amount of the 9.125% Notes, $25.8 million of tender and consent premiums and $11.7 million of accrued interest. On April 1, 2014, we redeemed the remaining $8.8 million aggregate principal amount of the outstanding 9.125% Notes for a purchase price of $9.6 million, inclusive of a $0.4 million call premium and $0.4 million interest. During the nine months ended September 30, 2014, we recorded a loss on extinguishment of debt of approximately $30.2 million, which included the tender and consent premiums of $25.8 million, the call premium of $0.4 million and the write-off of unamortized debt issuance costs of $7.7 million, offset by the write-off of the remaining unamortized debt issuance premium of $3.8 million.

15



Amended and Restated Credit Agreement
On December 14, 2012, we entered into the Secured Credit Agreement consisting of a senior secured $80.0 million revolving facility (Revolver) and a senior secured term loan facility (Term Loan). In July 2013, the Secured Credit Agreement was amended to permit re-borrowing in the form of additional term loans, of up to $45.0 million, decreasing by $2.5 million at the end of each quarter beginning September 30, 2013 and ending March 31, 2014. In January 2014 we re-borrowed $40 million of the Term Loan pursuant to the amendment.
Our obligations under the Secured Credit Agreement 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 has executed guaranty agreements, and are secured by first priority liens on our accounts receivable, specified barge rigs and rental equipment. The Secured Credit Agreement contains customary affirmative and negative covenants with which we were in compliance as of September 30, 2014 and December 31, 2013. The Secured 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 Secured 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 Secured 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, 2014 and December 31, 2013. Letters of credit outstanding against the Revolver as of September 30, 2014 and December 31, 2013 totaled $6.4 million and $4.6 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 December 31, 2013 was zero. In January 2014 we re-borrowed $40 million of the Term Loan and used the proceeds, along with the proceeds from the issuance of the 6.75% Notes, to repurchase our 9.125% Notes. As of September 30, 2014 the remaining balance on the Term Loan was $32.5 million. We are no longer able to re-borrow amounts under the Term Loan.
Note 9 - 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.

16



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, 2014
 
December 31, 2013
Dollars in thousands
Carrying Amount
 
Fair Value
 
Carrying  Amount
 
Fair Value
Long-term Debt
 
 
 
 
 
 
 
6.75% Notes
$
360,000

 
$
364,500

 
$

 
$

7.50% Notes
225,000

 
235,688

 
225,000

 
236,250

9.125% Notes

 

 
425,000

 
446,250

Total
$
585,000

 
$
600,188

 
$
650,000

 
$
682,500

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, 2014.  
Note 10 - Commitments and Contingencies
Customs Agent and Foreign Corrupt Practices Act (FCPA) Settlement
On April 16, 2013, the Company and the Department of Justice (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 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 evaluate the issues raised by the letter and determine 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.

17



On July 31, 2014, Fuchs Family Trust, a purported stockholder of the Company, filed a complaint under Section 220 of the Delaware Code seeking to inspect the Company’s books and records.  The action is styled Fuchs Family Trust v. Parker Drilling Company, Case No. 9986-VCN, and was filed in the Court of Chancery of the State of Delaware.  The complaint alleges that the inspection of records is intended to investigate purported corporate wrongdoing and mismanagement related to the Company’s 2013 resolutions of investigations by the U.S. Department of Justice and the Securities and Exchange Commission into certain violations of the Foreign Corrupt Practices Act by Company employees.  Plaintiff seeks to compel the records inspection and requests costs, expenses, and attorneys’ fees in the event inspection is permitted. We do not believe a liability is probable and estimable at this time.
ITS Pre-Acquisition Internal Controls
Our due diligence process with respect to the ITS Acquisition identified certain transactions that suggest that ITS' pre-acquisition internal controls may have failed to prevent violations of potentially applicable international trade and anti-corruption laws, including those of the United Kingdom. We have investigated such violations and have and will, as appropriate, 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 believe that any resolution will not have a material impact on our consolidated financial statements.
Note 11 - Recent Accounting Pronouncements    
On May 28, 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We are in the process of assessing the impact of the adoption of ASU 2014-09 on our financial position, results of operations and cash flows. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): 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. This accounting guidance is effective for our first quarter in fiscal 2014 and does not have a material impact on our condensed consolidated financial statements.    

18



Note 12 - 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 Secured Credit Agreement and Senior Notes are fully and unconditionally guaranteed by substantially all of our direct and indirect domestic subsidiaries other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, subject to the following customary release provisions:

in connection with any sale or other disposition of all or substantially all of the assets of that guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) a subsidiary of the Company;
in connection with any sale of such amount of capital stock as would result in such guarantor no longer being a subsidiary to a person that is not (either before or after giving effect to such transaction) a subsidiary of the Company;
if the Company designates any restricted subsidiary that is a guarantor as an unrestricted subsidiary;
if the guarantee by a guarantor of all other indebtedness of the Company or any other guarantor is released, terminated or discharged, except by, or as a result of, payment under such guarantee; or
upon legal defeasance or covenant defeasance (satisfaction and discharge of the indenture).

There are currently no restrictions on the ability of the restricted subsidiaries 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 the parent company.
We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013. The consolidating condensed financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.

19




PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
September 30, 2014
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
23,577

 
$
12,515

 
$
42,219

 
$

 
$
78,311

Accounts and notes receivable, net
(1
)
 
108,637

 
156,167

 

 
264,803

Rig materials and supplies

 
727

 
45,047

 

 
45,774

Deferred costs

 

 
6,857

 

 
6,857

Deferred income taxes

 
6,843

 
1,172

 

 
8,015

Other tax assets
55,782

 
(56,829
)
 
19,169

 

 
18,122

Other current assets

 
11,754

 
11,730

 

 
23,484

Total current assets
79,358

 
83,647

 
282,361

 

 
445,366

Property, plant and equipment, net
(19
)
 
599,251

 
313,621

 

 
912,853

Investment in subsidiaries and intercompany advances
2,822,265

 
1,232,241

 
2,273,328

 
(6,327,834
)
 

Other noncurrent assets
(482,689
)
 
533,446

 
233,349

 
(121,312
)
 
162,794

Total assets
$
2,418,915

 
$
2,448,585

 
$
3,102,659

 
$
(6,449,146
)
 
$
1,521,013

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

 
$

 
$

 
$

 
$
10,000

Accounts payable and accrued liabilities
67,053

 
83,258

 
268,575

 
(258,175
)
 
160,711

Accrued income taxes
(5,548
)
 
11,327

 
5,974

 

 
11,753

Total current liabilities
71,505

 
94,585

 
274,549

 
(258,175
)
 
182,464

Long-term debt
607,500

 

 

 

 
607,500

Other long-term liabilities
2,866

 
6,636

 
8,405

 

 
17,907

Long-term deferred tax liability
(29
)
 
60,314

 
(5,745
)
 

 
54,540

Intercompany payables
1,082,870

 
1,017,037

 
999,057

 
(3,098,964
)
 

Total liabilities
1,764,712

 
1,178,572

 
1,276,266

 
(3,357,139
)
 
862,411

Total equity
654,203

 
1,270,013

 
1,826,393

 
(3,092,007
)
 
658,602

Total liabilities and stockholders’ equity
$
2,418,915

 
$
2,448,585

 
$
3,102,659

 
$
(6,449,146
)
 
$
1,521,013


20




PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
December 31, 2013
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
88,697

 
$
8,310

 
$
51,682

 
$

 
$
148,689

Accounts and notes receivable, net

 
101,299

 
156,590

 

 
257,889

Rig materials and supplies

 
3,002

 
38,779

 

 
41,781

Deferred costs

 

 
13,682

 

 
13,682

Deferred income taxes
(57
)
 
8,435

 
1,562

 

 
9,940

Other tax assets
54,524

 
(46,770
)
 
16,325

 

 
24,079

Other current assets

 
9,089

 
14,134

 

 
23,223

Total current assets
143,164

 
83,365

 
292,754

 

 
519,283

Property, plant and equipment, net
60

 
562,148

 
309,148

 

 
871,356

Investment in subsidiaries and intercompany advances
1,906,128

 
(336,570
)
 
1,667,937

 
(3,237,495
)
 

Other noncurrent assets
(457,954
)
 
468,864

 
250,983

 
(117,776
)
 
144,117

Total assets
$
1,591,398

 
$
777,807

 
$
2,520,822

 
$
(3,355,271
)
 
$
1,534,756

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
25,000

 
$

 
$

 
$

 
$
25,000

Accounts payable and accrued liabilities
75,268

 
92,546

 
261,436

 
(254,364
)
 
174,886

Accrued income taxes

 
725

 
6,541

 

 
7,266

Total current liabilities
100,268

 
93,271

 
267,977

 
(254,364
)
 
207,152

Long-term debt
628,781

 

 

 

 
628,781

Other long-term liabilities
5,037

 
6,743

 
15,134

 

 
26,914

Long-term deferred tax liability

 
51,747

 
(12,980
)
 

 
38,767

Intercompany payables
227,504

 
291,783

 
422,645

 
(941,932
)
 

Total liabilities
961,590

 
443,544

 
692,776

 
(1,196,296
)
 
901,614

Total equity
629,808

 
334,263

 
1,828,046

 
(2,158,975
)
 
633,142

Total liabilities and stockholders’ equity
$
1,591,398

 
$
777,807

 
$
2,520,822

 
$
(3,355,271
)
 
$
1,534,756






21




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

 
Three months ended September 30, 2014
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Total revenues

 
$
129,935

 
$
156,495

 
$
(44,418
)
 
$
242,012

Operating expenses

 
65,369

 
139,846

 
(44,418
)
 
160,797

Depreciation and amortization

 
22,168

 
13,981

 

 
36,149

Total operating gross margin

 
42,398

 
2,668

 

 
45,066

General and administration expense (1)
110

 
(8,988
)
 
(492
)
 

 
(9,370
)
Gain (loss) on disposition of assets, net

 
91

 
(548
)
 

 
(457
)
Total operating income
110

 
33,501

 
1,628

 

 
35,239

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(11,529
)
 
(35
)
 
(1,943
)
 
2,659

 
(10,848
)
Interest income
98

 
176

 
2,421

 
(2,659
)
 
36

Other

 
675

 
(1,211
)
 

 
(536
)
Equity in net earnings of subsidiaries
19,442

 

 

 
(19,442
)
 

Total other income (expense)
8,011

 
816

 
(733
)
 
(19,442
)
 
(11,348
)
Income (benefit) before income taxes
8,121

 
34,317

 
895

 
(19,442
)
 
23,891

Total income tax expense (benefit)
(4,445
)
 
14,337

 
1,122

 

 
11,014

Net income (loss)
12,566

 
19,980

 
(227
)
 
(19,442
)
 
12,877

Less: Net income attributable to noncontrolling interest

 

 
311

 

 
311

Net income (loss) attributable to controlling interest
$
12,566

 
$
19,980

 
$
(538
)
 
$
(19,442
)
 
$
12,566


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


22




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

 
140,920

 
(52,070
)
 
153,147

Depreciation and amortization

 
19,956

 
15,926

 

 
35,882

Total operating gross margin

 
34,970

 
13,763

 

 
48,733

General and administration expense (1)
(47
)
 
(14,103
)
 
(88
)
 

 
(14,238
)
Gain (loss) on disposition of assets, net

 
(34
)
 
1,128

 

 
1,094

Total operating income (loss)
(47
)
 
20,833

 
14,803

 

 
35,589

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

 
(13,127
)
Interest income
360

 
250

 
2,733

 
(3,213
)
 
130

Loss on extinguishment of debt
(5,218
)
 

 

 

 
(5,218
)
Other
(1
)
 
64

 
(207
)
 

 
(144
)
Equity in net earnings of subsidiaries
22,322

 

 

 
(22,322
)
 

Total other income (expense)
3,428

 
207

 
328

 
(22,322
)
 
(18,359
)
Income (loss) before income taxes
3,381

 
21,040

 
15,131

 
(22,322
)
 
17,230

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 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.






















23



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

 
Nine Months Ended September 30, 2014
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Total revenues
$

 
396,536

 
461,460

 
(132,525
)
 
$
725,471

Operating expenses

 
222,846

 
411,070

 
(132,525
)
 
501,391

Depreciation and amortization

 
63,343

 
43,323

 

 
106,666

Total operating gross margin

 
110,347

 
7,067

 

 
117,414

General and administration expense (1)
(195
)
 
(23,806
)
 
(1,340
)
 

 
(25,341
)
Gain (loss) on disposition of assets, net
(79
)
 
522

 
(10
)
 

 
433

Total operating income (loss)
(274
)
 
87,063

 
5,717

 

 
92,506

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(35,542
)
 
(120
)
 
(6,356
)
 
8,532

 
(33,486
)
Interest income
632

 
553

 
7,503

 
(8,532
)
 
156

Loss on extinguishment of debt
(30,152
)
 

 

 

 
(30,152
)
Other

 
860

 
531

 

 
1,391

Equity in net earnings of subsidiaries
50,591

 

 

 
(50,591
)
 

Total other income (expense)
(14,471
)
 
1,293

 
1,678

 
(50,591
)
 
(62,091
)
Income (loss) before income taxes
(14,745
)
 
88,356

 
7,395

 
(50,591
)
 
30,415

Total Income tax expense (benefit)
(30,443
)
 
34,187

 
10,349

 

 
14,093

Net income (loss)
15,698

 
54,169

 
(2,954
)
 
(50,591
)
 
16,322

Less: Net income attributable to noncontrolling interest

 

 
624

 

 
624

Net income (loss) attributable to controlling interest
$
15,698

 
$
54,169

 
$
(3,578
)
 
$
(50,591
)
 
$
15,698


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





















24




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
$

 
$
345,367

 
$
388,912

 
$
(103,428
)
 
$
630,851

Operating expenses

 
186,708

 
330,014

 
(103,428
)
 
413,294

Depreciation and amortization

 
57,335

 
40,339

 

 
97,674

Total operating gross margin

 
101,324

 
18,559

 

 
119,883

General and administration expense (1)
(140
)
 
(48,861
)
 
(285
)
 

 
(49,286
)
Gain on disposition of assets, net

 
1,917

 
842

 

 
2,759

Total operating income (loss)
(140
)
 
54,380

 
19,116

 

 
73,356

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

Loss on extinguishment of debt
(5,218
)
 

 

 

 
(5,218
)
Changes in fair value of derivative positions
54

 

 

 

 
54

Other

 
(192
)
 
(613
)
 

 
(805
)
Equity in net earnings of subsidiaries
36,330

 

 

 
(36,330
)
 

Total other income (expense)
(2,202
)
 
1,225

 
(144
)
 
(36,330
)
 
(37,451
)
Income (loss) before income taxes
(2,342
)
 
55,605

 
18,972

 
(36,330
)
 
35,905

Income tax expense (benefit)
(19,185
)
 
27,993

 
10,033

 

 
18,841

Net income (loss)
16,843

 
27,612

 
8,939

 
(36,330
)
 
17,064

Less: Net income attributable to noncontrolling interest

 

 
221

 

 
221

Net income (loss) attributable to controlling interest
$
16,843

 
$
27,612

 
$
8,718

 
$
(36,330
)
 
$
16,843


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
















25



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)

 
Three Months Ended September 30, 2014
 
Parent
 
Guarantor