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, 2012

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 October 31, 2012, there were 118,272,379 common shares outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Part I. Financial Information

     3   

Item 1. Financial Statements

     3   

Consolidated Condensed Balance Sheets September 30, 2012 (Unaudited) and December 31, 2011

     3   

Consolidated Condensed Statements of Operations (Unaudited) Three and Nine Months Ended September  30, 2012 and 2011

     4   

Consolidated Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September  30, 2012 and 2011

     5   

Notes to the Unaudited Consolidated Condensed Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     41   

Item 4. Controls and Procedures

     42   

Part II. Other Information

     43   

Item 1. Legal Proceedings

     43   

Item 1A. Risk Factors

     43   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 6. Exhibits

     44   

Signatures

     45   

EX-10.1

  

EX-10.2

  

EX-31.1

  

EX-31.2

  

EX-32.1

  

EX-32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

 

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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,     December 31,  
     2012     2011  
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 114,127      $ 97,869   

Accounts and notes receivable, net of allowance for bad debts of $4,152 and $1,544 at September 30, 2012 and December 31, 2011

     160,449        183,923   

Rig materials and supplies

     22,934        29,947   

Deferred costs

     1,209        3,249   

Deferred income taxes

     6,615        6,650   

Other tax assets

     29,016        25,358   

Assets held for sale

     11,656        5,315   

Other current assets

     12,199        15,302   
  

 

 

   

 

 

 

Total current assets

     358,205        367,613   

Property, plant and equipment less accumulated depreciation and amortization of $998,389 and $970,276 at September 30, 2012 and December 31, 2011

     773,244        719,809   

Deferred income taxes

     99,586        108,311   

Other noncurrent assets

     25,854        20,513   
  

 

 

   

 

 

 

Total assets

   $ 1,256,889      $ 1,216,246   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 43,000      $ 145,723   

Accounts payable and accrued liabilities

     129,712        135,250   

Accrued income taxes

     5,242        4,837   
  

 

 

   

 

 

 

Total current liabilities

     177,954        285,810   

Long-term debt

     429,462        337,000   

Other long-term liabilities

     25,270        33,452   

Long-term deferred tax liability

     15,578        15,934   

Contingencies (Note 11)

     —          —     

Stockholders' equity:

    

Common stock

     19,753        19,508   

Capital in excess of par value

     644,107        637,042   

Accumulated deficit

     (54,533     (111,944
  

 

 

   

 

 

 

Total controlling interest stockholders' equity

     609,327        544,606   

Noncontrolling interest

     (702     (556
  

 

 

   

 

 

 

Total equity

     608,625        544,050   
  

 

 

   

 

 

 

Total liabilities and stockholders' equity

   $ 1,256,889      $ 1,216,246   
  

 

 

   

 

 

 

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,  
     2012     2011     2012     2011  

Revenues

   $ 165,301      $ 176,589      $ 520,795      $ 505,580   

Expenses:

        

Operating expenses

     101,484        99,042        300,942        311,100   

Depreciation and amortization

     29,779        27,581        85,357        82,511   
  

 

 

   

 

 

   

 

 

   

 

 

 
     131,263        126,623        386,299        393,611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating gross margin

     34,038        49,966        134,496        111,969   
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administration expense

     (8,905     (8,630     (21,822     (23,384

Gain on disposition of assets, net

     606        623        2,466        1,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     25,739        41,959        115,140        90,578   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expense):

        

Interest expense

     (8,171     (5,591     (25,133     (17,208

Interest income

     30        29        109        208   

Loss on extinguishment of debt

     (117     —          (1,766     —     

Change in fair value of derivative positions

     19        (49     8        (186

Other

     26        (657     62        (522
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (8,213     (6,268     (26,720     (17,708
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     17,526        35,691        88,420        72,870   

Income tax expense

     6,695        15,042        31,155        33,345   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     10,831        20,649        57,265        39,525   

Less: Net loss attributable to noncontrolling interest

     (105     (76     (146     (202
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to controlling interest

   $ 10,936      $ 20,725      $ 57,411      $ 39,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.09      $ 0.18      $ 0.49      $ 0.34   

Diluted earnings per share

   $ 0.09      $ 0.18      $ 0.48      $ 0.34   

Number of common shares used in computing earnings per share:

        

Basic

     118,109,214        116,416,011        117,458,365        115,899,959   

Diluted

     119,201,019        117,425,764        118,810,195        116,912,367   

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,  
             2012                     2011          

Cash flows from operating activities:

    

Net income

   $ 57,265      $ 39,525   

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation and amortization

     85,357        82,511   

Loss on extinguishment of debt

     1,766        —     

Gain on disposition of assets

     (2,466     (1,993

Deferred income tax expense

     8,403        19,736   

Expenses not requiring cash

     15,724        11,074   

Change in accounts receivable

     24,648        (4,476

Change in other assets

     564        48,869   

Change in accrued income taxes

     (3,049     —     

Change in liabilities

     (10,185     (16,531
  

 

 

   

 

 

 

Net cash provided by operating activities

     178,027        178,715   
  

 

 

   

 

 

 
    

Cash flows from investing activities:

    

Capital expenditures

     (147,658     (141,841

Proceeds from the sale of assets

     3,496        3,425   

Proceeds from insurance settlements

     —          250   
  

 

 

   

 

 

 

Net cash used in investing activities

     (144,162     (138,166
  

 

 

   

 

 

 
    

Cash flows from financing activities:

    

Proceeds from issuance of debt

     130,000        50,000   

Repayment of senior notes

     (125,000     —     

Repayments of term loan

     (18,000     (15,000

Repayments of revolver

     —          (25,000

Payments of debt issuance costs

     (3,516     (504

Payments of debt extinguishment costs

     (519     —     

Proceeds from stock options exercised

     —          183   

Excess tax benefit from stock based compensation

     (572     1,424   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (17,607     11,103   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     16,258        51,652   

Cash and cash equivalents, beginning of year

     97,869        51,431   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 114,127      $ 103,083   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 17,492      $ 18,416   

Income taxes paid

   $ 36,498      $ 6,140   

See accompanying notes to the unaudited consolidated condensed financial statements.

 

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PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. General

In the opinion of the management of Parker Drilling Company (Parker Drilling), the accompanying unaudited consolidated condensed financial statements reflect all adjustments of a normally recurring nature which are necessary for a fair presentation of: (1) Parker Drilling’s financial position as of September 30, 2012 and December 31, 2011, (2) Parker Drilling’s results of operations for the three and nine-month periods ended September 30, 2012 and 2011, and (3) Parker Drilling’s cash flows for the nine-month periods ended September 30, 2012 and 2011. Results for the nine-month period ended September 30, 2012 are not necessarily indicative of the results that will be realized for the year ending December 31, 2012. The financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011.

Nature of Operations Parker Drilling, together with its subsidiaries (the Company), is a provider of contract drilling and drilling-related services. Additionally, our rental tools business specializes in providing equipment such as drill pipe, tubing, high-torque connections, blowout preventers (BOPs) and drill collars for use in drilling, work-over and production applications within the drilling sector of the energy industry.

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 both in the U.S. and internationally. Additionally, our international drilling business provides operations and 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. At September 30, 2012, our combined U.S. and international marketable rig fleet consisted of 15 barge drilling rigs and 24 land rigs located in the United States and countries in Latin America and the Eastern Hemisphere. Our Technical Services business includes engineering and related project services during the concept development, pre-FEED (Front End Engineering and Design), and FEED phases of customer-owned drilling facility projects. As these projects mature, we strive to continue providing the same services during the Engineering, Procurement, Construction and Installation (EPCI) phase.

Segment Reporting — As of December 31, 2011, we re-aligned our reporting segments to be consistent with changes made within our organization. We have six operating segments:

 

   

Rental Tools

 

   

U.S. Barge Drilling

 

   

U.S. Drilling

 

   

International Drilling

 

   

Technical Services

 

   

Construction Contract

As of December 31, 2011, we added the U.S. Drilling segment, represented primarily by our two Arctic Alaska Drilling Units (AADU) rigs in Alaska. Our U.S. Barge Drilling segment, previously referred to as the U.S. Drilling segment, represents our U.S. Gulf of Mexico barge business and remains unchanged. We aligned our international operations more closely with the management structure. Our previous three international geographic regions (Americas, CIS/AME, and Asia Pacific) are now two – Latin America and Eastern Hemisphere. Each region includes all drilling-related operations, whether conducted using a Parker-owned rig or a customer-owned rig pursuant to an Operations and Maintenance (O&M) contract. Our technical services activities, which primarily include our engagement in engineering support initiatives, pre-FEED, FEED and EPCI projects that have the potential to evolve into future O&M opportunities, are

 

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now reported as an individual segment. Our Rental Tools and Construction Contract segments remain unchanged. Certain amounts presented in this Form 10-Q for the three and nine-month periods ended September 30, 2011 have been revised to conform to the current period presentation.

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.

Reclassifications — Certain reclassifications have been made to prior period amounts to conform with the current period presentation. These reclassifications did not have a material effect on our consolidated condensed statements of operations, consolidated condensed balance sheets 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.

Revenue Recognition — We recognize revenues and expenses on dayrate contracts as drilling progresses. Revenues from rental activities are recognized ratably over the rental term. Mobilization fees received and related mobilization costs incurred are deferred and amortized over the term of the contract period. Construction contract revenues and costs are recognized on a percentage of completion basis utilizing the cost-to-cost method.

Reimbursable Costs — We recognize reimbursements received for out-of-pocket expenses as revenues and account for out-of-pocket expenses as direct operating costs. Such amounts totaled $12.1 million, and $11.9 million during the third quarters of 2012 and 2011, respectively, and $29.8 million and $46.9 million for the nine months ended September 30, 2012 and 2011, 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, 2012 and December 31, 2011, we had deposits in domestic banks in excess of federally insured limits of approximately $10.8 million and $10.2 million, respectively. In addition, as of September 30, 2012 and December 31, 2011, we had uninsured deposits in foreign banks of $31.9 million and $38.4 million, respectively.

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 two largest customers constituted 10.6 percent and 10.2 percent, respectively, of our total year-to-date revenues as of September 30, 2012. 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.

 

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Construction Contract For the periods reported, our construction contract business included only the Liberty drilling rig construction project for BP. In November 2010, BP informed us that it was suspending construction on the project to review the rig’s engineering and design, including its safety systems. The Liberty rig construction contract was a fixed fee and reimbursable contract accounted for on a percentage of completion basis. As of December 31, 2011, we had recognized $335.5 million in revenues and $11.7 million of margin on the contract.

The Liberty rig construction contract expired on February 8, 2011 prior to completion of the rig. Before expiration of the construction contract, BP identified several areas of concern relating to design, construction and invoicing for which it asked us to provide explanations and documentation, and we did so. Although we provided BP with the requested information, we do not know when or how these issues will be resolved with our client.

After expiration of the construction contract, the Company and BP continued activities to preserve and maintain the rig under the “pre-operations” phase of our operations contract, which was entered into in August 2009 and expired on July 1, 2011. A consulting services agreement was reached between us and BP effective July 1, 2011. Under the consulting services agreement, we assisted BP with technical support in a review of the rig’s design, the creation of a new statement of requirements for the rig, and the transition of documentation and materials to BP. All work under the consulting agreement has been completed and we are engaged with BP on construction contract close-out resolution. In June 2012, BP publicly announced that it had made the decision to suspend the Liberty project indefinitely. We do not know whether or how that decision may impact our discussions with BP related to contract close-out.

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. We capitalized interest costs primarily related to the construction of the two new AADU rigs of $2.5 million and $5.0 million during the third quarters of 2012 and 2011, respectively, and $7.9 million and $14.1 million for the nine months ended September 30, 2012 and 2011, respectively.

 

2. Asset Impairment

During the fourth quarter of 2011, we evaluated the present value of the future cash flows related to our AADU rigs in accordance with the impairment or disposal of long-lived assets subsections of ASC 360-10, Property, Plant and Equipment. As a result, we recorded a non-cash pre-tax impairment charge of $170.0 million ($109.1 million after tax) due to the extended construction and commissioning schedule and related costs. The AADU rigs are reported as part of the U.S. Drilling segment.

 

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3. Earnings per share (EPS)

 

     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   
     Three Months Ended September 30, 2011  
     Income
(Numerator)
     Shares
(Denominator)
     Per-Share
Amount
 

Basic EPS

   $ 20,725,000         116,416,011       $ 0.18   

Effect of dilutive securities:

        

Stock options and restricted stock

        1,009,753       $ —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 20,725,000         117,425,764       $ 0.18   
     Nine Months Ended September 30, 2011  
     Income
(Numerator)
     Shares
(Denominator)
     Per-Share
Amount
 

Basic EPS

   $ 39,727,000         115,899,959       $ 0.34   

Effect of dilutive securities:

        

Stock options and restricted stock

        1,012,408       $ —     
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 39,727,000         116,912,367       $ 0.34   

There were no options outstanding during the three and nine month periods ended September 30, 2012. All options outstanding during the three and nine months ended September 30, 2011 were included in the computation of diluted EPS as the options’ exercise prices were less than the average market price of the common shares.

 

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4. Reportable Segments

We report our business activities in six business segments: (1) Rental Tools, (2) U.S. Barge Drilling, (3) U.S. Drilling, (4) International Drilling, (5) Technical Services, and (6) Construction Contract. 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,
 

Operations by Reportable Industry Segment

   2012     2011     2012     2011  
     (Dollars in Thousands)     (Dollars in Thousands)  

Revenues:

    

Rental Tools

   $ 59,947      $ 62,388      $ 191,233      $ 173,197   

U.S. Barge Drilling

     33,142        28,895        94,269        70,876   

U.S. Drilling(2)

     —          —          —          —     

International Drilling

     68,503        79,591        224,176        229,250   

Technical Services

     3,709        5,715        11,117        22,619   

Construction Contract

     —          —          —          9,638   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     165,301        176,589        520,795        505,580   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating gross margin:

        

Rental Tools(1)

     27,032        33,389        91,885        88,052   

U.S. Barge Drilling(1)

     11,042        6,732        29,215        8,502   

U.S. Drilling(1)

     (4,712     (1,334     (7,881     (2,015

International Drilling(1)

     783        10,017        21,395        12,141   

Technical Services(1)

     (107     1,162        (118     4,518   

Construction Contract(1)

     —          —          —          771   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating gross margin

     34,038        49,966        134,496        111,969   

General and administrative expense

     (8,905     (8,630     (21,822     (23,384

Gain on disposition of assets, net

     606        623        2,466        1,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     25,739        41,959        115,140        90,578   

Interest expense

     (8,171     (5,591     (25,133     (17,208

Interest income

     30        29        109        208   

Changes in fair value of derivative positions

     19        (49     8        (186

Loss on extinguishment of debt

     (117     —          (1,766     —     

Other

     26        (657     62        (522
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 17,526      $ 35,691      $ 88,420      $ 72,870   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.
  (2) As of September 30, 2012, this segment had not begun generating revenue.

 

5. Assets Held for Sale

Assets held for sale of $11.7 million as of September 30, 2012 was comprised of the net book value of five land rigs and related inventory. For three rigs comprising $5.3 million of the assets held for sale balance, we have received $1.4 million in down payment and deposits on these assets and associated inventories. The sale of these assets is expected to be finalized in 2013. Prior to being classified as assets held for sale, were included in the International Drilling segment. We expect the carrying amount of the assets, less costs to sell, will be fully recoverable through sale of the assets.

Additionally, during the third quarter of 2012, we determined that two of our rigs located in Kazakhstan met the criteria for classification as assets held for sale. As of September 30, 2012, we

 

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reclassified the $6.4 million net book value of these assets and associated inventories to assets held for sale. Prior to being classified as assets held for sale, were included in the international drilling segment. We expect the carrying amount of the assets, less costs to sell, will be fully recoverable through sale of the assets.

 

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, 2012, we had a liability for unrecognized tax benefits of $12.0 million (which includes $5.2 million of benefits which would favorably impact our effective tax rate upon recognition). As of September 30, 2011, we had a liability for unrecognized tax benefits of $15.4 million ($8.5 million of which, if recognized, would favorably impact our effective tax rate) primarily related to foreign operations. In addition, we recognize interest and penalties that could be applied to uncertain tax positions in periodic income tax expense. As of September 30, 2012 and December 31, 2011, we had approximately $7.0 million and $8.4 million, respectively, of accrued interest and penalties related to uncertain tax positions.

 

7. Income Tax Benefit/Expense

Income tax expense was $6.7 million for the third quarter of 2012 as compared to $15.0 million for the third quarter of 2011. The decrease was driven primarily by a reduction in pre-tax earnings to $17.5 million for the third quarter of 2012 as compared to $35.7 million for the third quarter of 2011 and differences in the mix of our domestic and international pre-tax earnings and losses, as well as the mix of international tax jurisdictions in which we operate.

 

8. Long-Term Debt

The following table illustrates the Company’s debt portfolio as of September 30, 2012 and December 31, 2011:

 

      September 30,
2012
     December 31,
2011
 
     (Dollars in Thousands)  

9.125% Senior Notes, due April 2018 (Issued March 22, 2010)

   $ 300,000       $ 300,000   

9.125% Senior Notes, due April 2018 (Issued April 25, 2012)

     129,462         —     

2.125% Convertible Senior Notes, due July 2012

     —           121,723   

Term Note

     43,000         61,000   
  

 

 

    

 

 

 

Total debt

     472,462         482,723   

Less current portion

     43,000         145,723   
  

 

 

    

 

 

 

Total long-term debt

   $ 429,462       $ 337,000   
  

 

 

    

 

 

 

9.125% Senior Notes, due April 2018

On March 22, 2010, we issued $300.0 million aggregate principal amount of 9.125% Senior Notes (9.125% Notes) pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 9.125% Notes offering were primarily used to redeem the $225.0 million aggregate principal amount of our 9.625% Senior Notes due 2013 and to repay $42.0 million of borrowings under our senior secured revolving credit facility (Revolver).

On April 25, 2012, we issued an additional $125.0 million aggregate principal amount of 9.125% Notes under the same indenture at a price of 104.0% of par, resulting in gross proceeds of $130.0 million. Net proceeds from the offering were utilized to refinance $125.0 million aggregate principal amount of the 2.125% Convertible Senior Notes due July 2012 (2.125% Notes). We repurchased $122.9 million aggregate

 

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principal amount of the 2.125% Notes tendered pursuant to a tender offer on May 9, 2012 and paid off the remaining $2.1 million at their stated maturity on July 15, 2012.

The 9.125% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 9.125% Notes are jointly and severally guaranteed by substantially all of our direct and indirect domestic subsidiaries other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States. Interest on the 9.125% Notes is payable on April 1 and October 1 of each year. Debt issuance costs related to the 9.125% Notes of approximately $11.5 million ($8.0 million, net of amortization) are being amortized over the term of the notes using the effective interest rate method.

At any time prior to April 1, 2013, we may redeem up to 35 percent of the aggregate principal amount of the 9.125% Notes at a redemption price of 109.125 percent of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings by us. On and after April 1, 2014, we may redeem all or a part of the 9.125% Notes upon appropriate notice, at a redemption price of 104.563 percent of the principal amount, and at redemption prices decreasing each year thereafter to par beginning April 1, 2016. If we experience certain changes in control, we must offer to repurchase the 9.125% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.

The Indenture restricts our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness; (v) create or incur liens; (vi) enter into sale and leaseback transactions; (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.

2.125% Convertible Senior Notes, due July 2012

On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125% Notes. As noted above, on May 9, 2012, we repurchased $122.9 million aggregate principal amount of the 2.125% Notes pursuant to a tender offer. The tender offer price was $1,003.27 for each $1,000 principal amount of 2.125% Notes, plus accrued and unpaid interest. This repurchase resulted in the recording of debt extinguishment costs of $1.8 million related to the accelerated amortization of both the unamortized debt issuance costs and debt discount associated with the 2.125% Notes. The remaining $2.1 million aggregate principal amount of non-tendered 2.125% Notes was subsequently paid off at their stated maturity on July 15, 2012.

Concurrently with the issuance of the 2.125% Notes, we purchased a convertible note hedge (note hedge) and sold warrants in private transactions with counterparties that were different than the ultimate holders of the 2.125% Notes. The note hedge allowed us to receive shares of our common stock from the counterparties to the transaction equal to the amount of common stock related to the excess conversion value that we would issue and/or pay to the holders of the 2.125% Notes upon conversion. The warrants allow us to sell 9,027,713 common shares at a strike price of $18.29 per share. The note hedge expired on July 15, 2012, the maturity date of the 2.125% Notes. The warrants expire ratably from October 15, 2012 to February 22, 2013.

Because we had the choice of settling the call options and the warrants in cash or shares of our common stock and these contracts met all of the applicable criteria for equity classification, the cost of the call options and proceeds from the sale of the warrants were classified in stockholders’ equity in the

 

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consolidated condensed balance sheets. In addition, because both of these contracts are classified in stockholders’ equity and were indexed solely to our common stock, they were not accounted for as derivatives.

Debt issuance costs related to the 2.125% Notes of approximately $3.6 million were amortized over the five year term of the 2.125% Notes using the effective interest method.

Credit Agreement:

On May 15, 2008, we entered into a credit agreement (Credit Agreement) consisting of the Revolver of $80.0 million and senior secured term loan facility (Term Loan) of up to $50.0 million. On April 1, 2011, the Company entered into an amendment to the Credit Agreement that increased the Aggregate Commitments under the Credit Agreement to $159.0 million, and borrowed an additional $50.0 million in a Term Loan. When the facility was increased, all other terms of the Credit Agreement remained the same, including covenants and Applicable Rates (as defined in the Credit Agreement).

Our obligations under the Credit Agreement are guaranteed by substantially all of our domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed guaranty agreements. The Credit Agreement contains customary affirmative and negative covenants with which we were in compliance as of September 30, 2012 and December 31, 2011. The Credit Agreement terminates and must be repaid on May 14, 2013. All associated obligations related to the Credit Agreement have been recorded as current liabilities in our financial statements as of September 30, 2012. Based on the current amortization schedule, the balance of the Term Loan to be repaid at maturity would be $31.0 million. Although, we believe we could repay the Term Loan at the time of maturity utilizing existing cash and cash generated from operations, it is our intention to enter into a new Credit Agreement prior to maturity.

Revolver:

Our Revolver is available for general corporate purposes and to support letters of credit. Interest on Revolver loans accrues at a Base Rate (as defined in the Credit Agreement) plus an Applicable Rate or LIBOR plus an Applicable Rate. The Applicable Rate varies from a rate per annum ranging from 2.75 percent to 3.25 percent for LIBOR rate loans and 1.75 percent to 2.25 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, 2012 or December 31, 2011. Letters of credit outstanding totaled $2.5 million and $2.7 million as of September 30, 2012 and December 31, 2011, respectively.

Term Loan:

The Term Loan originated at $50.0 million. On April 1, 2011, the Company expanded its Term Loan by $50.0 million. Funding was provided by certain current lenders and Barclays Bank PLC, which joined as a lender under the Credit Agreement. We used the proceeds from the additional Term Loan to repay the $25.0 million outstanding on the Revolver, purchase additional rental tool inventory, and for general corporate purposes. Interest on the Term Loan accrues at either a Base Rate plus 2.25 percent or LIBOR plus 3.25 percent. The Term Loan requires quarterly principal payments of $6.0 million per quarter with the remaining loan balance payable upon maturity. The outstanding balance on the Term Loan at September 30, 2012 and December 31, 2011 was $43.0 million and $61.0 million, respectively.

 

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9. Derivative Financial Instruments

We 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 fix 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 will decrease correspondingly with amortization of the Term Loan. We do not apply hedge accounting to the agreements and, accordingly, we report the mark-to-market change in the fair value of the interest rate swaps in earnings. For the three and nine months ended September 30, 2012, we recognized in earnings a nominal gain relating to these agreements compared to a nominal loss for the quarter ended September 30, 2011 and a $0.2 million loss for the nine months ended September 30, 2011.

 

10. Fair Value of Financial Instruments

Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. For purposes of recording fair value adjustments for certain financial and non-financial assets and liabilities, and determining fair value disclosures, we estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.

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 have also utilized significant inputs that are more readily observable.

The amounts reported in our consolidated condensed balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. Fair values and related carrying values of our debt instruments are as follows:

 

      September 30, 2012      December 31, 2011  
     Carrying Amount      Fair Value      Carrying Amount      Fair Value  
     (in thousands)  
Long-term Debt            

9.125% Notes

   $ 300,000       $ 323,250       $ 300,000       $ 315,000   

9.125% Notes

     125,000         134,688         —           —     

2.125% Notes

     —           —           125,000         123,204   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 425,000       $ 457,938       $ 425,000       $ 438,204   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying amount of our interest rate swap agreements represents the estimated fair value, measured using Level 2 inputs. The carrying amount of our interest rate swap agreements was $0.1 million as of both September 30, 2012 and December 31, 2011. As of September 30, 2012, the carrying amount of the agreements is classified as current and is recorded in accounts payable and accrued liabilities. As of December 31, 2011, the agreements were classified as long-term and recorded in other long-term liabilities on our consolidated condensed balance sheets.

 

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As discussed in Note 2, in accordance with the impairment or disposal of long-lived assets subsections of ASC 360-10, Property, Plant and Equipment, during the fourth quarter of 2011, we recorded a non-cash pre-tax impairment charge of $170.0 million ($109.1 million, after tax) related to the AADU rigs in order to record them at their fair value of $169.5 million. The fair value of the AADU rigs was based on expected future cash flows using Level 3 inputs discounted at a 10 percent rate of interest.

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 three months ended September 30, 2012.

 

11. Contingencies

Asbestos-Related Claims

We are from time to time a party to various lawsuits in the ordinary course that are incidental to our operations in which the claimants seek an unspecified amount of monetary damages for personal injury, including injuries purportedly resulting from exposure to asbestos on drilling rigs and associated facilities. At September 30, 2012, there were approximately 15 of these lawsuits in which we are one of many defendants. These lawsuits have been filed in the United States in the State of Mississippi.

The subsidiaries named in these asbestos-related lawsuits intend to defend themselves 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, 2012.

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. To date, we believe that all required activity for removal and remediation has been completed, except for ongoing monitoring costs, and we are awaiting a Notice of Completion from the EPA. The EPA has issued notice letters to several other parties who may also participate in funding the site remediation costs. As of September 30, 2012, the Company had made certain participating payments and had accrued $0.6 million for our portion of certain unreimbursed past costs and the estimated future cost of remediation.

Customs Agent and Foreign Corrupt Practices Act (FCPA) Investigation

As previously disclosed, we received requests from the United States Department of Justice (DOJ) in July 2007 and the United States Securities and Exchange Commission (SEC) in January 2008 relating to our utilization of the services of a customs agent. The DOJ and the SEC are conducting parallel investigations into possible violations of U.S. law, including the FCPA, by us. In particular, the DOJ and the SEC are investigating certain of our operations relating to countries in which we currently operate or formerly operated, including Kazakhstan and Nigeria. We are fully cooperating with the DOJ and SEC investigations and conducted an internal investigation into potential customs and other issues in Kazakhstan and Nigeria. The internal investigation has identified issues relating to potential non-compliance with applicable laws and regulations, including the FCPA, with respect to operations in Kazakhstan and Nigeria. At this point, we are unable to predict the duration, scope or result of the DOJ or the SEC investigation or whether either

 

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agency will commence any legal action. We are currently in continuing discussions with the DOJ and SEC regarding a potential settlement of this matter, but no agreement has been reached with either agency. We cannot predict or estimate whether or when a resolution with each will occur, or the terms, conditions, or other parameters of any such resolution (including the size of any monetary penalties or disgorgement). Therefore, we have not made any accrual in our consolidated financial statements as of September 30, 2012, with respect to the investigations.

The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations, which they may seek to impose against corporations and individuals in appropriate circumstances including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications to business practices and compliance programs. These authorities have entered into agreements with, and obtained a range of sanctions against, several public corporations and individuals arising from allegations of improper payments and deficiencies in books and records and internal controls, whereby civil and criminal penalties were imposed. Recent civil and criminal settlements have included multi-million dollar fines, deferred prosecution agreements, guilty pleas, and other sanctions, including the requirement that the relevant corporation retain a monitor to oversee its compliance with the FCPA. In addition, corporations may have to end or modify existing business relationships. Any of these remedial measures, if applicable to us, could have a material adverse impact on our business, results of operations, financial condition and liquidity.

We have taken certain steps to enhance our anti-bribery compliance efforts, including retaining a full-time Chief Compliance Officer who reports to the Chief Executive Officer and Audit Committee; adopting revised FCPA policies, procedures, and controls; increasing training and testing requirements; strengthening contractual provisions for our service providers that interface with foreign government officials; improving due diligence and continuing oversight procedures for the review and selection of such service providers; and implementing a compliance awareness improvement initiative that includes issuance of periodic anti-bribery compliance alerts.

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) Investigation.” 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, and such committee’s work is ongoing.

On August 31, 2010, Douglas Freuler, a purported stockholder of the Company, filed a derivative action in the United States District Court for the Southern District of Texas against our current directors, select officers, and the Company as a nominal defendant. The lawsuit alleges that the individuals breached their fiduciary duties to the Company related to the issues described above under “Customs Agent and Foreign Corrupt Practices Act (FCPA) Investigation,” as well as abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. The damages sought included both compensatory and exemplary damages in an unspecified amount, along with various other forms of relief and an award of attorney fees, other costs, and expenses to the plaintiffs. Defendants’ motions to dismiss the amended complaint were granted on June 30, 2011, and plaintiff was given thirty days to replead. Mr. Freuler filed his second amended complaint on July 20, 2011. Defendants’ motions to dismiss the second amended complaint were granted on March 14, 2012. The matter is now on appeal at the U.S. Court of Appeals for the Fifth Circuit.

 

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12. Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (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

On January 1, 2012, we adopted an update issued by the FASB to existing guidance on the presentation of comprehensive income. The update eliminates the option to present the components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity. Public entities are required to comply with the new reporting requirements for fiscal years beginning after December 15, 2011 and interim periods within those years. Calendar year-end companies must adopt the requirements for the quarter ended March 31, 2012. The adoption of this update did not have a material impact on our financial position, results of operations, cash flows, or disclosures.

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 is 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.

 

13. Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements

Set forth on the following pages are the consolidating condensed financial statements of Parker Drilling. Our 9.125% Notes are guaranteed by substantially all of its direct and indirect domestic subsidiaries other than immaterial subsidiaries generating revenues primarily outside the United States. There are currently no restrictions on the ability of the guarantor 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 we comply 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 the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011. 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, 2012  
     Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 77,468      $ 7,907      $ 28,752      $ —        $ 114,127   

Accounts and notes receivable, net

     289,803        97,085        287,958        (514,397     160,449   

Rig materials and supplies

     —          (796     23,730        —          22,934   

Deferred costs

     —          —          1,209        —          1,209   

Deferred income taxes

     —          5,540        1,075        —          6,615   

Other tax assets

     81,077        (55,655     3,594        —          29,016   

Assets held for sale

     —          —          11,656        —          11,656   

Other current assets

     525        4,091        7,583        —          12,199   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     448,873        58,172        365,557        (514,397     358,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     60        531,448        241,736        —          773,244   

Investment in subsidiaries and intercompany advances

     733,876        (199,435     1,382,500        (1,916,941     —     

Other noncurrent assets

     41,336        68,415        15,689        —          125,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,224,145      $ 458,600      $ 2,005,482      $ (2,431,338   $ 1,256,889   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

          

Current liabilities:

          

Current portion of long-term debt

   $ 43,000      $ —        $ —        $ —        $ 43,000   

Accounts payable and accrued liabilities

     74,494        75,832        208,112        (228,726     129,712   

Accrued income taxes

     (1,014     2,227        4,029        —          5,242   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     116,480        78,059        212,141        (228,726     177,954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     429,462        —          —          —          429,462   

Other long-term liabilities

     3,933        6,287        15,050        —          25,270   

Long-term deferred tax liability

     2,359        29,945        (16,726     —          15,578   

Intercompany payables

     62,583        43,657        103,625        (209,865     —     

Contingencies

     —          —          —          —          —     

Stockholders' equity:

          

Common stock

     19,753        18,049        43,003        (61,052     19,753   

Capital in excess of par value

     644,108        733,111        1,452,440        (2,185,552     644,107   

Retained earnings (accumulated deficit)

     (54,533     (450,508     196,651        253,857        (54,533
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total controlling interest stockholders' equity

     609,328        300,652        1,692,094        (1,992,747     609,327   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interest

     —          —          (702     —          (702
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity

     609,328        300,652        1,691,392        (1,992,747     608,625   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders' equity

   $ 1,224,145      $ 458,600      $ 2,005,482      $ (2,431,338   $ 1,256,889   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATING CONDENSED BALANCE SHEET

(Dollars in Thousands)

(Unaudited)

 

     December 31, 2011  
     Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 55,670      $ 4,212      $ 37,987      $ —        $ 97,869   

Accounts and notes receivable, net

     289,512        94,748        285,326        (485,663     183,923   

Rig materials and supplies

     —          762        29,185        —          29,947   

Deferred costs

     —          —          3,249        —          3,249   

Deferred income taxes

     —          5,311        853        486        6,650   

Other tax assets

     47,834        (25,218     2,742        —          25,358   

Assets held for sale

     —          —          5,315        —          5,315   

Other current assets

     788        6,381        8,133        —          15,302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     393,804        86,196        372,790        (485,177     367,613   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

     79        474,942        244,787        1        719,809   

Investment in subsidiaries and intercompany advances

     720,214        (212,883     1,347,719        (1,855,050     —     

Other noncurrent assets

     44,962        66,660        16,839        363        128,824   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,159,059      $ 414,915      $ 1,982,135      $ (2,339,863   $ 1,216,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

          

Current liabilities:

          

Current portion of long-term debt

   $ 145,723      $ —        $ —        $ —        $ 145,723   

Accounts payable and accrued liabilities

     60,120        94,056        181,010        (199,936     135,250   

Accrued income taxes

     (205     921        4,121        —          4,837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     205,638        94,977        185,131        (199,936     285,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     337,000        —          —          —          337,000   

Other long-term liabilities

     8,081        9,474        15,897        —          33,452   

Long-term deferred tax liability

     1,151        25,232        (11,296     847        15,934   

Intercompany payables

     62,583        43,657        111,619        (217,859     —     

Contingencies

     —          —          —          —          —     

Stockholders' equity:

          

Common stock

     19,508        18,049        43,003        (61,052     19,508   

Capital in excess of par value

     637,042        733,120        1,444,091        (2,177,211     637,042   

Retained earnings (accumulated deficit)

     (111,944     (509,594     194,246        315,348        (111,944
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total controlling interest stockholders' equity

     544,606        241,575        1,681,340        (1,922,915     544,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interest

     —          —          (556     —          (556
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity

     544,606        241,575        1,680,784        (1,922,915     544,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders' equity

   $ 1,159,059      $ 414,915      $ 1,982,135      $ (2,339,863   $ 1,216,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


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

Changes in fair value of derivative positions

     19        —          —          —          19   

Interest income

     95        179        2,573        (2,817     30   

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 (benefit) 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 (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.

 

20


Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

 

     Three months ended September 30, 2011  
     Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Total revenues

   $ —        $ 98,687      $ 105,807      $ (27,905   $ 176,589   

Operating expenses

     —          41,823        85,124        (27,905     99,042   

Depreciation and amortization

     —          16,124        11,457        —          27,581   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating gross margin

     —          40,740        9,226        —          49,966   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administration expense (1)

     (45     (8,454     (131     —          (8,630

Gain on disposition of assets, net

     —          233        390        —          623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

     (45     32,519        9,485        —          41,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expense):

          

Interest expense

     (6,709     (35     (3,051     4,204        (5,591

Interest income

     124        188        3,921        (4,204     29   

Gain (Loss) on fair value of derivative contracts

     (49     —          —          —          (49

Other

     —          (657     —          —          (657

Equity in net earnings of subsidiaries

     25,361        —          —          (25,361     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     18,727        (504     870        (25,361     (6,268
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (benefit) before income taxes

     18,682        32,015        10,355        (25,361     35,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax expense (benefit)

     (2,043     12,490        4,595        —          15,042   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     20,725        19,525        5,760        (25,361     20,649   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

     —          —          (76     —          (76
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) attributable to controlling interest

   $ 20,725      $ 19,525      $ 5,836      $ (25,361   $ 20,725   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

21


Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

 

     Nine months ended September 30, 2012  
     Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Total revenues

   $ —        $ 302,892      $ 295,811      $ (77,908   $ 520,795   

Operating expenses

     —          136,849        242,001        (77,908     300,942   

Depreciation and amortization

     —          49,127        36,230        —          85,357   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating gross margin

     —          116,916        17,580        —          134,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administration expense (1)

     (137     (21,273     (412     —          (21,822

Gain on disposition of assets, net

     —          1,168        1,298        —          2,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

     (137     96,811        18,466        —          115,140   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expense):

          

Interest expense

     (27,923     (115     (5,811     8,716        (25,133

Changes in fair value of derivative positions

     8        —          —          —          8   

Interest income

     8,695        4,894        39,345        (52,825     109   

Loss on extinguishment of debt

     (1,766     —          —          —          (1,766

Other

     —          64        (2     —          62   

Equity in net earnings of subsidiaries

     61,553        —          —          (61,553     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     40,567        4,843        33,532        (105,662     (26,720
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (benefit) before income taxes

     40,430        101,654        51,998        (105,662     88,420   

Income tax expense (benefit)

     (16,981     38,149        9,987        —          31,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     57,411        63,505        42,011        (105,662     57,265   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net (loss) attributable to noncontrolling interest

     —          —          (146     —          (146
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to controlling interest

   $ 57,411      $ 63,505      $ 42,157      $ (105,662   $ 57,411   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

22


Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

 

     Nine months ended September 30, 2011  
     Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Total revenues

   $ —        $ 281,527      $ 314,221      $ (90,168   $ 505,580   

Operating expenses

     —          133,451        267,817        (90,168     311,100   

Depreciation and amortization

     —          46,721        35,790        —          82,511   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating gross margin

     —          101,355        10,614        —          111,969   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administration expense (1)

     (173     (22,949     (262     —          (23,384

Gain on disposition of assets, net

     —          1,137        856        —          1,993   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income (loss)

     (173     79,543        11,208        —          90,578   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expense):

          

Interest expense

     (20,307     (17,854     (6,939     27,892        (17,208

Interest income

     18,065        568        9,467        (27,892     208   

Gain (Loss) on fair value of derivative contracts

     (186     —          —          —          (186

Other

     —          (536     14        —          (522

Equity in net earnings of subsidiaries

     66,120        —          —          (66,120     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     63,692        (17,822     2,542        (66,120     (17,708
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (benefit) before income taxes

     63,519        61,721        13,750        (66,120     72,870   

Total income tax expense (benefit)

     23,792        20,543        (10,990     —          33,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     39,727        41,178        24,740        (66,120     39,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

     —          —          (202     —          (202
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) attributable to controlling interest

   $ 39,727      $ 41,178      $ 24,942      $ (66,120   $ 39,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

23


Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

     Year Ended September 30, 2012  
     Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ 57,411      $ 63,505      $ 42,011      $ (105,662   $ 57,265   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

     —          49,127        36,230        —          85,357   

Loss on extinguishment of debt

     1,766        —          —          —          1,766   

Gain on disposition of assets

     —          (1,168     (1,298     —          (2,466

Deferred income tax expense

     5,940        4,868        (2,405     —          8,403   

Expenses not requiring cash

     13,264        689        1,770        1        15,724   

Equity in net earnings of subsidiaries

     (61,553     —          —          61,553        —     

Change in accounts receivable

     (291     766        24,173        —          24,648   

Change in other assets

     (32,874     61,320        (27,882     —          564   

Change in accrued income taxes

     (5,068     1,832        187        —          (3,049

Change in liabilities

     12,917        (21,430     (1,672     —          (10,185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (8,488     159,509        71,114        (44,108     178,027   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures

     —          (139,618     (8,040     —          (147,658

Proceeds from the sale of assets

     —          1,667        1,829        —          3,496   

Proceeds from insurance settlements

     —          —          —          —          —     

Intercompany dividend payment

     (8,387     (4,357     (31,364     44,108        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) investing activities

     (8,387     (142,308     (37,575     44,108        (144,162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from debt issuance

     130,000        —          —          —          130,000   

Proceeds from draw on revolver credit facility

     —          —          —          —          —     

Paydown on senior notes

     (125,000     —          —          —          (125,000

Paydown on term note

     (18,000     —          —          —          (18,000

Paydown on revolver credit facility

     —          —          —          —          —     

Payment of debt issuance costs

     (3,516     —          —          —          (3,516

Payment of debt extinguishment costs

     (519     —          —          —          (519

Proceeds from stock options exercised

     —          —          —          —          —     

Excess tax benefit from stock-based compensation

     (572     —          —          —          (572

Intercompany advances, net

     56,280        (13,507     (42,773     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     38,673        (13,507     (42,773     —          (17,607
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     21,798        3,694        (9,234     —          16,258   

Cash and cash equivalents at beginning of year

     55,670        4,212        37,987        —          97,869   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 77,468      $ 7,907      $ 28,752      $ —        $ 114,127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

     Nine Months Ended September 30, 2011  
     Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ 39,727      $ 41,178      $ 24,740      $ (66,120   $ 39,525   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

     —          46,721        35,790        —          82,511   

Gain on disposition of assets

     —          (1,137     (856     —          (1,993

Deferred income tax expense

     45,765        (65     (25,964     —          19,736   

Expenses not requiring cash

     12,666        —          (1,592     —          11,074   

Equity in net earnings of subsidiaries

     (66,120     —          —          66,120        —     

Change in accounts receivable

     (2,591     65,716        (67,601     —          (4,476

Change in other assets

     53,150        2,071        (6,352     —          48,869   

Change in liabilities

     (4,887     (79,082     67,438        —          (16,531
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     77,710        75,402        25,603        —          178,715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Capital expenditures

     —          (132,287     (9,554     —          (141,841

Proceeds from the sale of assets

     —          3,073        352        —          3,425   

Proceeds from insurance settlements

     —          250        —          —          250   

Intercompany dividend payment

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (128,964     (9,202     —          (138,166
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from issuance of debt

     50,000        —          —          —          50,000   

Repayments of term loan

     (15,000     —          —          —          (15,000

Repayments on revolver

     (25,000     —          —          —          (25,000

Payment of debt issuance costs

     (504     —          —          —          (504

Proceeds from stock options exercised

     183        —          —          —          183   

Excess tax benefit from stock-based compensation

     1,424        —          —          —          1,424   

Intercompany advances, net

     (41,920     68,844        (26,924     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (30,817     68,844        (26,924     —          11,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     46,893        15,282        (10,523     —          51,652   

Cash and cash equivalents at beginning of period

     13,835        2,317        35,279        —          51,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 60,728      $ 17,599      $ 24,756      $ —        $ 103,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

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14. Subsequent Events

On September 17, 2012, the Company’s Board of Directors elected Gary Rich as President and Chief Executive Officer and as a member of the Board of Directors of the Company, effective October 1, 2012. Effective October 1, 2012, Robert L. Parker will no longer serve as President and Chief Executive Officer of the Company but will continue to serve as the Company’s Executive Chairman of the Board of Directors.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). All statements contained in this Form 10-Q, other than statements of historical facts, are forward-looking statements for purposes of these provisions, including any statements regarding:

 

   

stability of prices and demand for oil and natural gas;

 

   

levels of oil and natural gas exploration and production activities;

 

   

demand for contract drilling and drilling-related services and demand for rental tools;

 

   

our future operating results and profitability;

 

   

our future rig utilization, dayrates and rental tools activity;

 

   

entering into new, or extending existing, drilling contracts and our expectations concerning when our rigs will commence operations under such contracts;

 

   

growth through acquisitions of companies or assets;

 

   

organic growth of our operations;

 

   

construction or upgrades of rigs and expectations regarding when these rigs will commence operations;

 

   

capital expenditures for acquisition of rigs, construction of new rigs or major upgrades to existing rigs;

 

   

scheduled delivery, commissioning and subsequent operation of our AADU rigs under the terms of our agreement with BP Exploration (Alaska) Inc.;

 

   

entering into joint venture agreements;

 

   

the outcome of pending or future legal proceedings, investigations, tax assessments and other claims;

 

   

the availability of insurance coverage for pending or future claims;

 

   

the enforceability of contractual indemnification in relation to pending or future claims;

 

   

our future liquidity;

 

   

availability and sources of funds to refinance our debt and expectations of when debt will be reduced; and

 

   

compliance with covenants under our debt agreements.

In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by our management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors they believe are relevant. Although our management believes that their assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control.

 

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The following factors, as well as those factors set forth in Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2011, and any other cautionary language included in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements:

 

   

worldwide economic and business conditions that adversely affect market conditions and/or the cost of doing business including Euro country failures and downgrades;

 

   

our inability to access the credit or bond markets;

 

   

U.S. credit market volatility resulting from the U.S. national debt and potential further downgrades of the U.S. credit rating;

 

   

the U.S. economy and the demand for natural gas;

 

   

low U.S. natural gas prices could adversely affect U.S. drilling and our barge rig and rental tools businesses;

 

   

worldwide demand for oil;

 

   

fluctuations in the market prices of oil and natural gas, including the inability or unwillingness of our customers to fund drilling programs in low price cycles;

 

   

imposition of unanticipated trade restrictions;

 

   

unanticipated operating hazards and uninsured risks;

 

   

political instability, terrorism or war;

 

   

governmental regulations, including changes in accounting rules or tax laws that may impact our ability to remit funds to the U.S., that adversely affect the cost of doing business;

 

   

changes in the tax laws that would allow double taxation on foreign sourced income;

 

   

the outcome of our investigation and the parallel investigations by the SEC and DOJ into possible violations of U.S. law, including the FCPA;

 

   

adverse environmental events;

 

   

adverse weather conditions;

 

   

global health concerns;

 

   

changes in the concentration of customer and supplier relationships;

 

   

ability of our customers and suppliers to obtain financing for their operations;

 

   

ability of our customers to fund drilling plans with low commodity prices;

 

   

unexpected cost increases for new construction and upgrade and refurbishment projects;

 

   

delays in obtaining components for capital projects and in ongoing operational maintenance and equipment certifications;

 

   

shortages of skilled labor;

 

   

unanticipated cancellation of contracts by customers or operators;

 

   

breakdown of equipment;

 

   

other operational problems including delays in start-up or commissioning of rigs;

 

   

changes in competition;

 

   

the effect of litigation and contingencies; and

 

   

other similar factors, some of which are discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and in our other reports and filings with the SEC.

 

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Each forward-looking statement speaks only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Before you decide to invest in our securities, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-Q could have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

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OVERVIEW AND OUTLOOK

Overview

Parker’s operating results for the 2012 third quarter demonstrate the effects of our complementary business mix and geographic range. The continued growth in drilling activity in the Gulf of Mexico (GOM) benefitted both our U.S. Barge Drilling and Rental Tools segments, nearly offsetting the impact on the Rental Tools segment of the slowdown in U.S. land drilling. Similarly, while the overall utilization of our international rig fleet declined, the decline was moderated by increases in Mexico and Algeria offsetting lower utilization in Kazakhstan and Colombia.

As a result of slowing U.S. land activity and suppliers’ additions of previously ordered drill pipe, our Rental Tools segment experienced more competitive pricing and lower utilization. It responded to the change in market conditions and remains a profitable business. The U.S. Barge Drilling segment increased revenues and gross margin as a result of strong fleet utilization and a higher average dayrate.

As expected, our international drilling operations experienced lower utilization for the Parker-owned rig fleet, while O&M contracts produced lower segment earnings on higher revenues, primarily due to the transition of contracts in Sakhalin Island, Russia. Combined, these led to reduced revenues and segment earnings for our International Drilling segment.

Preparation for the commencement of operations for our two Arctic Alaska Drilling Unit (AADU) rigs resulted in a gross margin loss for the U.S. Drilling segment. Though revenues will not be generated until each rig is operating, we have been incurring operating costs as we prepare the rigs for the customer. Additionally, since early in the third quarter of 2012, we began incurring depreciation expense and ceased capitalizing interest costs related to one rig when we presented it for acceptance testing early in the third quarter.

Outlook

The recent trend in U.S. land drilling is expected to lead to further reductions in demand for rental tools. Having cut back our purchases of tubular goods, we expect our inventory of rental tools, and that of the industry, will adjust to market conditions and this business will sustain its traditionally strong earnings and cash flow. In addition, we believe the growing fleet of deepwater drilling vessels in the GOM will continue to create additional business opportunities for our Rental Tools segment.

There is solid demand for drilling in the shallow waters of the U.S. GOM. We believe current and forecast prices for oil and natural gas liquids will continue to support demand in the GOM barge drilling market around current levels. Further development of deep gas plays in this area would provide additional growth opportunities.

Current contract terms and market conditions specific to our international markets are expected to result in further near-term declines in utilization for our international rig fleet and reduced levels of revenues and earnings from our O&M contract portfolio. While deployment opportunities for our international rig fleet take time to develop, our business development team has been working on a selection of rig tenders that could provide operational momentum for 2013 and later. In addition, we expect to make adjustments in the deployment of underutilized rigs in our international rig fleet to better reflect their long-term opportunities. Our O&M contracts on Sakhalin Island, Russia expired in the third quarter. We were successful in winning a new contract that adds a third rig management project to the two projects we managed previously under the expired contracts. The new consolidated contract replaces a significant portion, but not all, of the financial contribution of the expired contracts.

The U.S. Drilling segment is expected to report a gross margin loss during the remainder of 2012. While revenues are expected to be generated when each of our two AADU rigs begins operation, we have been incurring operating costs as we prepare the rigs for the customer. Additionally, we began incurring depreciation expense and cease capitalizing interest costs related to each rig as it is presented to the customer to begin the acceptance testing process.

 

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

Revenues decreased $11.3 million, or 6.4%, to $165.3 million for the three months ended September 30, 2012 compared with revenues of $176.6 million for the comparable 2011 period. Operating gross margin decreased $16.0 million, or 31.8%, to $34.0 million for the three months ended September 30, 2012 compared with operating gross margin of $50.0 million for the three months ended September 30, 2011. We recorded net income attributable to controlling interest of $10.9 million for the three months ended September 30, 2012 compared with $20.7 million for the three months ended September 30, 2011.

The following is an analysis of our operating results for the comparable quarters:

 

     Three Months Ended September 30,  
     2012     2011  
     (Dollars in Thousands)  

Revenues:

  

Rental Tools

   $ 59,947        36   $ 62,388        35

U.S. Barge Drilling

     33,142        20     28,895        17

U.S. Drilling

     —          0     —          0

International Drilling

     68,503        42     79,591        45

Technical Services

     3,709        2     5,715        3

Construction Contract

     —          0     —          0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     165,301        100     176,589        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating gross margin:

  

Rental Tools gross margin excluding depreciation and amortization

     38,068        64     43,706        70

U.S Barge Drilling gross margin excluding depreciation and amortization

     15,885        48     11,361        39

U.S. Drilling gross margin excluding depreciation and amortization

     (2,641     n/a        (601     n/a   

International Drilling gross margin excluding depreciation and amortization

     12,584        18     21,919        28

Technical Services gross margin

     (79     n/a        1,162        20

Construction Contract gross margin

     —          n/a        —          n/a   
  

 

 

     

 

 

   

Total operating gross margin excluding depreciation and amortization

     63,817        39     77,547        44
  

 

 

     

 

 

   

Depreciation and amortization

     (29,779       (27,581  
  

 

 

     

 

 

   

Total operating gross margin

     34,038          49,966     

General and administrative expense

     (8,905       (8,630  

Gain on disposition of assets, net

     606          623     
  

 

 

     

 

 

   

Total operating income

   $ 25,739        $ 41,959     
  

 

 

     

 

 

   

 

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Segment operating gross margins excluding depreciation and amortization, are computed as revenues less direct operating expenses, excluding depreciation and amortization expense, where applicable; segment operating gross margin percentages are computed as operating gross margin as a percent of revenues. The operating gross margin amounts and operating gross margin percentages should not be used as a substitute for those amounts reported under U.S. GAAP. However, we monitor our business segments based on several criteria, including operating gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such operating gross margin amounts are reconciled to our most comparable U.S. GAAP measure as follows:

 

      Rental
Tools
     U.S.
Barge
Drilling
     U.S.
Drilling
    International
Drilling
     Technical
Services
    Construction
Contract (2)
 

Three Months Ended September, 2012

   (Dollars in Thousands)  

Operating gross margin (1)

   $ 27,032       $ 11,042       $ (4,712   $ 783       $ (107   $ —     

Depreciation and amortization

     11,036         4,843         2,071        11,801         28        —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating gross margin excluding depreciation and amortization

   $ 38,068       $ 15,885       $ (2,641   $ 12,584       $ (79   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Three Months Ended September 30, 2011

                                       

Operating gross margin (1)

   $ 33,389       $ 6,732       $ (1,334   $ 10,017       $ 1,162      $ —     

Depreciation and amortization

     10,317         4,629         733        11,902         —          —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating gross margin excluding depreciation and amortization

   $ 43,706       $ 11,361       $ (601   $ 21,919       $ 1,162      $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

 

(2) The Construction Contract segment does not incur depreciation and amortization.

Rental Tools

Rental Tools segment revenues decreased $2.5 million, or 4.0%, to $59.9 million for the third quarter of 2012 compared with $62.4 million for the third quarter of 2011. The decrease was driven primarily by a decrease in utilization and an increase in average discount rates resulting from the slowing U.S. land activity, and increased competition in certain key locations.

Rental Tools segment operating gross margin, excluding depreciation and amortization, decreased $5.6 million, or 12.8%, to $38.1 million for the third quarter of 2012 compared with $43.7 million for the third quarter of 2011. This was primarily due to the decrease in utilization and increase in discounts described above. Additionally, as utilization decreases length of time tools remain on each job has shortened, we experience an increase in costs of servicing and handling tools.

U.S. Barge Drilling

U.S. Barge Drilling segment revenues increased $4.2 million, or 14.5%, to $33.1 million for the third quarter of 2012 compared with $28.9 million for the third quarter of 2011. The increase in revenues was primarily due to a higher average dayrate for the U.S. barge rig fleet. Our dayrates benefit from our ability to renegotiate day rates during multi-well contracts.

The U.S. Barge Drilling segment’s operating gross margin, excluding depreciation and amortization, increased $4.5 million, or 39.5%, to $15.9 million for the third quarter of 2012 compared with $11.4 million for the third quarter of 2011. The increase in operating gross margin was mostly driven by the increase in average dayrates for the U.S. barge rig fleet as described above along with cost management, resulting in improved overhead costs.

 

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U.S. Drilling

As of September 30, 2012, the U.S. Drilling segment had not begun generating revenues. While revenues are expected to be generated when each of the two AADU rigs begins operation, we have been incurring operating costs as we prepare the rigs to go to work for the customer. Additionally, we began incurring depreciation expense and ceased capitalizing interest costs related to one of the rigs when it was presented to the customer to begin the acceptance testing process early in the third quarter.

Operating gross margin, excluding depreciation and amortization, was a loss of $2.6 million and $0.6 million for the three-month periods ended September 30, 2012 and 2011, respectively, and includes expenditures associated with re-entering the Alaskan market. The start-up costs include salaries and employee hiring-related expenditures, training and rental of facilities in Alaska to support our operations.

International Drilling

International Drilling segment revenues decreased $11.1 million, or 13.9%, to $68.5 million for the third quarter of 2012 compared with $79.6 million for the third quarter of 2011. The lower revenues are primarily due to a decline in drilling revenue generated by the operation of rigs that we own, partially offset by an increase in revenues from O&M contracts.

Revenues related to Parker-owned rigs decreased $12.1 million, or 23.5%, to $39.3 million for the third quarter of 2012 compared with $51.4 million for the third quarter of 2011. This was primarily due to lower rig utilization in our Eastern Hemisphere region where our arctic-class barge rig located in the Caspian Sea is at a zero standby rate, as well as lower utilization for our rigs located in the Latin America region. This was partially offset by the reactivation earlier this year of two previously idle rigs in the Eastern Hemisphere region.

O&M revenues increased $1.0 million, or 3.5%, to $29.2 million for the third quarter of 2012 compared with $28.2 million for the third quarter of 2011, primarily due to an increase in reimbursable costs resulting from the preparation of a rig for drilling and increased revenues related to a labor contract that commenced earlier this year. The increase in revenues was partially offset by a decrease in reimbursable costs related to a drilling rig relocation project in Sakhalin Island, Russia which commenced during the first quarter of 2011 and was completed prior to December 31, 2011. O&M projects included approximately $8.9 million and $8.8 million of reimbursable costs for the three-month periods ended September 30, 2012 and 2011, respectively, which added to revenues, but had little impact on operating margins.

International Drilling operating gross margin, excluding depreciation and amortization, decreased $9.3 million, or 42.5%, to $12.6 million during the third quarter of 2012 compared with $21.9 million for the third quarter of 2011. The decrease in operating gross margin was primarily due to the completion of a drilling rig relocation project discussed above, as well as lower utilization on Parker-owned rigs in the Eastern Hemisphere. This was partially offset by increases in margins in the Latin America region resulting from the rental of rig equipment, increased rig utilization, and lower operating costs.

Technical Services

Technical Services segment revenues decreased $2.0 million, or 35.1%, to $3.7 million for the third quarter of 2012 compared with $5.7 million for the third quarter of 2011. The decrease is primarily due to the completion of a pre-FEED project at the end of the second quarter of 2012, resulting in no revenue during the third quarter of 2012 compared to a full quarter of revenue during the third quarter of 2011 and transition of the Berkut platform project from its engineering phase to a less revenue-intensive construction oversight and assistance phase. Offsetting the revenue decrease was the recognition of revenue on a low margin pre-FEED contract that was completed at the beginning of the third quarter of 2012 and was accounted for under the completed contract method of revenue recognition.

 

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Operating gross margin for this segment was a nominal loss for the third quarter of 2012 compared with income of $1.2 million for the third quarter of 2011. The decrease is primarily the result of decreased operating gross margins on the construction oversight and assistance phase of the Berkut platform project and completion of a reimbursable pre-FEED engineering effort as described above. The Technical Services segment incurs minimal depreciation and amortization primarily related to office furniture and fixtures.

Other Financial Data

Gains on asset dispositions for both the third quarter of 2012 and 2011 was $0.6 million and was primarily the result of net gains on various asset sales during each period. We periodically sell equipment deemed to be excess, obsolete, or not currently required for operations.

Interest expense increased $2.6 million for the third quarter of 2012 compared with the third quarter of 2011 due to higher interest on the additional $125.0 million of 9.125% Notes, which have a higher interest rate than our 2.125% Notes that were repaid during the second and third quarters of 2012, and a $2.4 million decrease in interest capitalized on major projects, primarily resulting from a reduction in the value of the AADU rigs following an impairment charge recorded during the fourth quarter of 2011. The net increase is partially offset by a decrease in amortization of debt discount on the 2.125% Notes as they were tendered or matured during the second and third quarters of 2012 and an increase in the amortization of the debt premium related to the additional $125.0 million of 9.125% Notes. Interest income was not significant during each quarter.

We experienced a nominal increase in general and administration expense for the third quarter of 2012 compared with the third quarter of 2011.

Income tax expense was $6.7 million for the third quarter of 2012 as compared to $15.0 million for the third quarter of 2011. The decrease was driven primarily by a reduction in pre-tax earnings of $17.5 million for the third quarter of 2012 as compared to $35.7 million for the third quarter of 2011 and differences in the mix of our domestic and international pre-tax earnings and losses, as well as the mix of international tax jurisdictions in which we operate.

 

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Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

Revenues increased $15.2 million, or 3.0%, to $520.8 million for the nine months ended September 30, 2012 compared with revenues of $505.6 million for the comparable 2011 period. Operating gross margin increased $22.5 million, or 20.1%, to $134.5 million for the nine months ended September 30, 2012 compared with operating gross margin of $112.0 million for the comparable 2011 period. We recorded net income attributable to controlling interest of $57.4 million for the nine months ended September 30, 2012 as compared with $39.7 million for the nine months ended September 30, 2011.

The following is an analysis of our operating results for the comparable periods:

 

     Nine Months Ended September 30,  
     2012     2011  
     (Dollars in Thousands)  

Revenues:

        

Rental Tools

   $ 191,233        37   $ 173,197        34

U.S. Barge Drilling

     94,269        18     70,876        14

U.S. Drilling

     —          0     —          0

International Drilling

     224,176        43     229,250        45

Technical Services

     11,117        2     22,619        5

Construction Contract

     —          0     9,638        2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     520,795        100     505,580        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating gross margin:

  

Rental Tools gross margin excluding depreciation and amortization

     125,172        65     118,658        69

U.S Barge Drilling gross margin excluding depreciation and amortization

     41,081        44     22,236        31

U.S. Drilling gross margin excluding depreciation and amortization

     (3,639     n/a        (1,026     n/a   

International Drilling gross margin excluding depreciation and amortization

     57,329        26     49,323        22

Technical Services gross margin

     (90     n/a        4,518        20

Construction Contract gross margin

     —          n/a        771        8
  

 

 

     

 

 

   

Total operating gross margin excluding depreciation and amortization

     219,853        42     194,480        38
  

 

 

     

 

 

   

Depreciation and amortization

     (85,357       (82,511  
  

 

 

     

 

 

   

Total operating gross margin

     134,496          111,969     

General and administrative expense

     (21,822       (23,384  

Gain on disposition of assets, net

     2,466          1,993     
  

 

 

     

 

 

   

Total operating income

   $ 115,140        $ 90,578     
  

 

 

     

 

 

   

 

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Segment gross margins, excluding depreciation and amortization, are computed as revenues less direct operating expenses, and less depreciation and amortization expense, where applicable; segment operating gross margin percentages are computed as operating gross margin as a percent of revenues. The operating gross margin amounts and operating gross margin percentages should not be used as a substitute for those amounts reported under U.S. GAAP. However, we monitor our business segments based on several criteria, including operating gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such operating gross margin amounts are reconciled to our most comparable U.S. GAAP measure as follows:

 

      Rental
Tools
     U.S.
Barge
Drilling
     U.S.
Drilling
    International
Drilling
     Technical
Services
    Construction
Contract (2)
 

Nine Months Ended September 30, 2012

   (Dollars in Thousands)  

Operating gross margin (1)

   $ 91,885       $ 29,215       $ (7,881   $ 21,395       $ (118   $ —     

Depreciation and amortization

     33,287         11,866         4,242        35,934         28        —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating gross margin excluding depreciation and amortization

   $ 125,172       $ 41,081       $ (3,639   $ 57,329       $ (90   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Nine Months Ended September 30, 2011

                                       

Operating gross margin (1)

   $ 88,052       $ 8,502       $ (2,015   $ 12,141       $ 4,518      $ 771   

Depreciation and amortization

     30,606         13,734         989        37,182         —          —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating gross margin excluding depreciation and amortization

   $ 118,658       $ 22,236       $ (1,026   $ 49,323       $ 4,518      $ 771   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

 

(2) The Construction Contract segment does not incur depreciation and amortization.

Rental Tools

Rental Tools segment revenues increased $18.0 million, or 10.4%, to $191.2 million during the nine months ended September 30, 2012 compared with $173.2 million for the nine months ended September 30, 2011. The increase was primarily due to the increased demand for rental tools and higher utilization as U.S. land operators expanded the use of lateral drilling and more complex well designs in the U.S. land market and from renewed growth in Gulf of Mexico drilling.

Rental Tools segment operating gross margin, excluding depreciation and amortization, increased $6.5 million, or 5.5%, to $125.2 million during the nine months ended September 30, 2012 compared with $118.7 million for the nine months ended September 30, 2011, primarily due to higher revenues and cost management.

U.S. Barge Drilling

U.S. Barge Drilling segment revenues increased $23.4 million, or 33.0%, to $94.3 million for the nine months ended September 30, 2012 compared with $70.9 million for the nine months ended September 30, 2011. The increase in revenues was primarily due to overall increased utilization and a higher average dayrate for the U.S. barge rig fleet. Our dayrates benefit from our ability to renegotiate day rates during multi-well contracts.

U.S. Barge Drilling segment operating gross margin, excluding depreciation and amortization, increased $18.9 million, or 85.1%, to $41.1 million for the nine months ended September 30, 2012 compared with $22.2 million for the nine months ended September 30, 2011, primarily due to the increase in utilization and average dayrates mentioned above in addition to improved overhead costs.

 

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U.S. Drilling

As of September 30, 2012, the U.S. Drilling segment had not begun generating revenues. While revenues are expected to be generated when each of the two AADU rigs begins operation, we have been incurring operating costs as we prepare the rigs to go to work for the customer. Additionally, we began incurring depreciation expense and ceased capitalizing interest costs related to one of the rigs when it was presented to the customer to begin the acceptance testing process early in the third quarter.

Operating gross margin, excluding depreciation and amortization, was a loss of $3.6 million and $1.0 million for the nine-month periods ended September 30, 2012 and 2011, respectively, and includes expenditures associated with re-entering the Alaskan market. The start-up costs include salaries and employee hiring-related expenditures, training and rental of facilities in Alaska to support our operations.

International Drilling

International Drilling segment revenues decreased $5.1 million, or 2.2%, to $224.2 million for the nine-months ended September 30, 2012 compared with $229.3 million for the nine-months ended September 30, 2011. The decrease in revenues is primarily due to a decline in reimbursable revenues from O&M contracts, partially offset by an increase in revenues generated by the operation of rigs that we own.

O&M revenues decreased $17.5 million, or 18.8%, to $75.6 million for the nine-months ended September 30, 2012 compared with $93.1 million for the nine-months ended September 30, 2011. The decrease in revenues from our O&M contracts was primarily due to a decrease in reimbursable costs related to a drilling rig relocation project in Sakhalin Island, Russia that commenced during the first quarter of 2011 and was completed prior to December 31, 2011. The decrease in revenues was partially offset by an increase in revenues for an O&M contract related to a shipyard refurbishment project that was on standby or operational rate during the first nine months of 2012 where it had generated minimal revenues during the 2011 comparable period, as well as the increase in reimbursable revenues resulting from the preparation of a rig for drilling and increase in revenues related to a labor contract that commenced during the first quarter of 2012. O&M projects included approximately $19.4 million and $37.5 million of reimbursable costs for the nine-month periods ended September 30, 2012 and 2011, respectively, which added to revenues, but had little impact on operating margins.

Revenues related to Parker-owned rigs increased $12.5 million, or 9.2%, to $148.6 million for the nine-months ended September 30, 2012 compared with $136.1 million for the nine-months ended September 30, 2011 due to an increase in revenue in the Latin America region, primarily resulting from increased utilization. The region had rigs active during the nine months ended September 30, 2012 that had been idle for some or all of the comparable period in 2011. Revenues in the Eastern Hemisphere were flat compared with the comparable period of 2011 as a result of increased utilization of rigs that were idle in 2011, partially offset by lower rig utilization for our arctic-class barge rig in the Caspian Sea.

International Drilling operating gross margin, excluding depreciation and amortization, increased $8.0 million, or 16.2%, to $57.3 million during the nine-months ended September 30, 2012 compared with $49.3 million for the nine-months ended September 30, 2011. The increase in operating gross margin for the nine-months ended September 30, 2012 was partially due to increased utilization and demobilization revenues with minimal demobilization costs in Latin America. In addition, results for the first nine months of 2011 included $3.6 million of expense related to a non-cash charge to write-off certain VAT assets in the Eastern Hemisphere region, and $1.9 million of expense related to equity tax assessments in Latin America. The increase in operating gross margin excluding depreciation and amortization was partially offset by lower drilling revenues resulting from decreased utilization of our arctic-class barge rig located in the Caspian Sea.

 

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Technical Services

Technical Services segment revenues decreased $11.5 million, or 50.9%, to $11.1 million for the nine months ended September 30, 2012 compared with $22.6 million for the nine months ended September 30, 2011. The majority of the decrease was due to expiration of the “pre-operations” phase of the Liberty project at the end of the second quarter of 2011. In addition, revenues declined as a result of transition of the Berkut platform project from its engineering phase to a less revenue-intensive construction oversight and assistance phase.

Operating gross margin for this segment was a nominal loss for the nine-months ended September 30, 2012 compared with income of $4.5 million for the nine-months ended September 30, 2011. The decrease is primarily the result of decreased operating gross margins on the Berkut platform project and completion of a pre-FEED project at the end of the second quarter of 2012, resulting in no revenue during the third quarter of 2012 compared to a full quarter of revenue during the third quarter of 2011. The Technical Services segment incurs minimal depreciation and amortization primarily related to office furniture and fixtures.

Construction Contract

This segment includes only the Liberty extended-reach drilling rig construction project. Construction Contract segment revenues were zero for the nine months ended September 30, 2012 compared with $9.6 million for the nine-months ended September 30, 2011. This segment reported zero and $0.8 million operating gross margin for the nine months ended September 30, 2012 and 2011, respectively. The operating gross margin generated during the nine-months ended September 30, 2011 was due to the preliminary close-out of the Liberty project and recognition of percentage of completion revenues. The Construction Contract segment does not incur depreciation and amortization.

The Liberty rig construction contract was a fixed fee and reimbursable contract accounted for on a percentage of completion basis. As of December 31, 2011, we had recognized $335.5 million in project-to-date revenues. Over the life of the contract, we recognized $11.7 million of margin on the contract.

In November 2010, BP informed us that it was suspending construction on the project to review the rig’s engineering and design, including its safety systems. The Liberty rig construction contract expired on February 8, 2011 prior to completion of the rig. Before expiration of the construction contract, BP identified several areas of concern relating to design, construction and invoicing for which it asked us to provide explanations and documentation, and we did so. Although we provided BP with the requested information, we do not know when or how these issues will be resolved with our client.

After expiration of the construction contract, the Company and BP continued activities to preserve and maintain the rig under the “pre-operations” phase of an O&M contract, which was entered into in August 2009 and expired on July 1, 2011. A new consulting services agreement was reached between the Company and BP effective July 1, 2011. Under the consulting services agreement, we assisted BP in a review of the rig’s design, the creation of a new statement of requirements for the rig, and the transition of documentation and materials to BP. All work under the consulting agreement has been completed and we are engaged with BP on construction contract close-out resolution. In June 2012, BP publicly announced that it had made the decision to suspend the Liberty project indefinitely. We do not know whether or how that decision may impact our discussions with BP related to contract close-out.

Other Financial Data

Gain on asset dispositions for the nine months ended September 30, 2012 and 2011 was $2.5 million and $2.0 million, respectively, and was primarily a result of net gains on various asset sales during each period. We periodically sell equipment deemed to be excess, obsolete, or not currently required for operations.

 

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Interest expense increased $7.9 million for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 due to an increase in debt-related interest expense of $3.4 million, resulting from higher interest on the additional $125.0 million of 9.125% Notes, which have a higher interest rate than our 2.125% Notes that were repaid during the second and third quarters of 2012, and a $6.2 million decrease in capitalized interest on major projects, primarily resulting from a reduction in the value of the AADU rigs following an impairment charge recorded during the fourth quarter of 2011. The net increase is partially offset by a decrease in amortization of the debt discount on the 2.125% Notes as they were tendered or matured during the second and third quarters of 2012. Interest income was minimal in each period.

We incurred a loss on extinguishment of debt of $1.8 million during the nine months ended September 30, 2012. This loss resulted from the repurchase of $122.9 million of the 2.125% Notes pursuant to a tender offer on May 9, 2012. The loss included $1.2 million of accelerated amortization of the related debt discount and debt issuance costs and a $0.4 million premium paid to repurchase the 2.125% Notes prior to maturity.

General and administration expense decreased $1.6 million for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 due primarily to a decrease in legal fees associated with the SEC and DOJ investigations (see further discussion in Note 11 in the Notes to the Company’s financial statements) partially offset by an increase in incentive compensation and severance costs.

Income tax expense was $31.2 million for the nine months ended September 30, 2012 as compared to $33.3 million for the nine months ended September 30, 2011. The decrease in 2012 tax expense is driven primarily by utilization of net operating losses that were not present during 2011 and differences in the mix of our domestic and international pre-tax earnings and losses, as well as the mix of international tax jurisdictions in which we operate.

LIQUIDITY AND CAPITAL RESOURCES

We periodically evaluate our liability requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operational cash needs. To meet our short and long term liquidity requirements, including payment of operating expenses and repaying debt, we rely primarily on cash from operations. However, we have recently, as well as in the past sought, and may in the future seek, to raise additional capital. We expect that, for the foreseeable future, cash generated from operations will be sufficient to provide us the ability to fund our operations, provide the working capital necessary to support our strategy, and fund planned capital expenditures.

Our Credit Facility matures on May 14, 2013. As a result, the $43.0 million Term Loan borrowed under the facility is classified as a current obligation on our consolidated balance sheet at September 30, 2012. Based on the current amortization schedule, the balance of the Term Loan to be repaid at maturity would be $31.0 million. Although, we believe we could repay the Term Loan at the time of maturity utilizing existing cash and cash generated from operations, it is our intention to enter into a new Credit Facility prior to maturity.

On April 25, 2012, we issued an additional $125.0 million aggregate principal amount of our existing 9.125% Notes at a price of 104.0% of par, resulting in gross proceeds of $130.0 million. Substantially all of the net proceeds from the offering of $124.1 million were utilized to repurchase $122.9 million aggregate principal amount of 2.125% Notes pursuant to a tender offer on May 9, 2012. The tender offer price was $1,003.27 for each $1,000 principal amount of 2.125% Notes, plus accrued and unpaid interest. As a result of the repurchase, we recorded debt extinguishment costs of $1.8 million during the nine months ended September 30, 2012. The $2.1 million aggregate principal amount of remaining non-tendered 2.125% Notes were paid off at their stated maturity on July 15, 2012.

 

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Cash Flows

As of September 30, 2012, we had cash and cash equivalents of $114.1 million, an increase of $16.2 million from December 31, 2011. The primary uses of cash for the nine-month period ended September 30, 2012 as reflected on the consolidated condensed statements of cash flows were $125.0 million for the repurchase of 2.125% Notes, $147.7 million for capital expenditures, a $18.0 million payment on our Term Loan, and $3.5 million of debt issuance costs attributable to the issuance of an additional $125.0 million of 9.125% Notes in April 2012. Major capital expenditures for the first nine months of 2012 included $69.9 million on the construction of two new rigs for work in Alaska and $49.6 million for tubular and other rental tools for our Rental Tools segment. The primary source of cash for the nine-months ended September 30, 2012 was $130.0 million from the issuance of $125.0 million additional 9.125% Notes at 104.0% of par and $178.0 million from operating activities.

As of September 30, 2011, we had cash and cash equivalents of $103.1 million, an increase of $51.7 million from December 31, 2010. The primary sources of cash for the nine-month period ended September 30, 2011 as reflected on the consolidated condensed statements of cash flows was $178.7 million from operating activities and $11.1 million from financing activities, which included a $50.0 million draw on the accordion feature of our Credit Agreement in the form of a Term Loan, offset by the repayment of the $25.0 million outstanding balance on our Revolver and $15.0 million payments against our Term Loans. The primary use of cash was $141.8 million for capital expenditures. Major capital expenditures for the first nine months of 2011 included $69.0 million on the construction of two new rigs for work in Alaska and $54.3 million for tubulars and other rental tools for our Rental Tools segment.

Financing Activity

On May 15, 2008, we entered into the Credit Agreement with a five-year senior secured $80.0 million Revolver and a Term Loan of up to $50.0 million. Our obligations under the Credit Agreement are guaranteed by substantially all of our domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed a guaranty. The Credit Agreement contains customary affirmative and negative covenants, such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage, which we were in compliance at September 30, 2012 and December 31, 2011.

Borrowings under the Credit Agreement are available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to this facility. Loans are available under the Revolver subject to a borrowing base calculation based on a percentage of eligible accounts receivable, certain specified barge drilling rigs and eligible rental equipment of the Company and its subsidiary guarantors.

On April 1, 2011, we exercised the accordion feature under the Credit Agreement and entered into an amendment to the Credit Agreement that increased the aggregate current commitment under the Credit Agreement to $159.0 million, and borrowed an additional $50.0 million under a Term Loan. Funding was provided by certain current lenders and Barclays Bank PLC, which joined as a lender under the Credit Agreement. Use of proceeds included repayment of the $25.0 million outstanding on the Revolver, purchases of additional rental tool inventory and general corporate purposes. The Term Loan requires quarterly principal amortization of $6.0 million with the remaining loan balance payable upon maturity.

As of September 30, 2012, there was $43.0 million outstanding on the Term Loan and $2.5 million in letters of credit outstanding. There were no amounts outstanding under the Revolver. Our Credit Facility matures on May 14, 2013 and it is our intention to enter into a new Credit Facility prior to maturity.

On March 22, 2010, we issued $300.0 million aggregate principal amount of 9.125% Notes, and on April 25, 2012, we issued an additional $125.0 million aggregate principal amount of 9.125% Notes. Interest is payable on the 9.125% Notes on April 1 and October 1.

 

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We had total long-term debt, including the current portion, of $472.5 million as of September 30, 2012, which consisted of:

 

   

$425.0 million aggregate principal amount of 9.125% Notes, plus an associated $4.5 million in unamortized debt premium; and

 

   

$43.0 million drawn against our 2008 credit facility, consisting of no borrowings under our Revolver and $43.0 million under our Term Loan, all of which is classified as current.

As of September 30, 2012, we had approximately $191.6 million of liquidity, which consisted of $114.1 million of cash and cash equivalents on hand and $77.5 million of availability under our Revolver.

Contractual Obligations

The following table summarizes our future contractual cash obligations as of September 30, 2012:

 

     Total      Less than
1 Year
     Years
1-3
     Years
3-5
     More than
5 Years
 
     (Dollars in Thousands)  

Contractual cash obligations:

              

Long-term debt — principal (1)

   $ 468,000       $ 43,000       $ —         $ —         $ 425,000   

Long-term debt — interest (1)

     233,627         39,720         77,563         77,563         38,781   

Operating leases (2)

     28,687         7,033         7,721         5,075         8,858   

Purchase commitments (3)

     13,042         13,042         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 743,356       $ 102,795       $ 85,284       $ 82,638       $ 472,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial commitments:

              

Long-term debt — standby Revolving credit facility

   $ —         $ —         $ —         $ —         $ —     

Standby letters of credit (4)

     2,520         2,520         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial commitments

   $ 2,520       $ 2,520       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Long-term debt includes the principal and interest cash obligations of the 9.125% Notes, and the Term Loan. The remaining unamortized premium of $4.5 million on the 9.125% Notes is not included in the contractual cash obligations schedule.
  (2) Operating leases consist of lease agreements in excess of one year for office space, equipment, vehicles and personal property.
  (3) Purchase commitments outstanding as of September 30, 2012 are primarily related to rig upgrade projects and new rig construction.
  (4) We have an $80.0 million revolving credit facility. As of September 30, 2012, we had no borrowings under the Revolver and $2.5 million of availability has been used to support letters of credit that have been issued, resulting in $77.5 million of availability. The Revolver expires May 14, 2013.

Off-Balance Sheet Arrangements

We do not have any unconsolidated special-purpose entities, off-balance sheet financing arrangements or guarantees of third-party financial obligations. We have no energy or commodity contracts.

 

  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the market risk faced by us from that reported in our 2011 Annual Report on Form 10-K filed with the SEC on March 6, 2012. For more information on market risk, see Part II, Item 7A in our 2011 Annual Report on Form 10-K.

 

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  ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures — In accordance with the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as defined in the Exchange Act Rules 13a-15 and 15d-15, were effective, as of September 30, 2012, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is (1) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

  ITEM 1. LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 11, “Contingencies,” in Item 1 of Part I of this quarterly report on Form 10-Q, which information is incorporated herein by reference into this item.

 

  ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of our annual report on Form 10-K for the year ended December 31, 2011, and our Quarterly Report of Form 10-Q for the quarter ended June 30, 2012.

 

  ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company currently has no active share repurchase programs. Periodically, the Company purchases shares on the open market to meet our employer matching requirements under our 401 (k) Retirement Savings Plan (former