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 March 31, 2015
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
 
x
  
Accelerated filer
 
¨
 
 
 
 
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 May 4, 2015 there were 122,284,611 common shares outstanding.    




TABLE OF CONTENTS
 
 
Page
 
 
 
 


2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
 
 
March 31,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
113,199

 
$
108,456

Accounts and Notes Receivable, net of allowance for bad debts of $9,289 at March 31, 2015 and $11,188 at December 31, 2014.
279,420

 
270,952

Rig materials and supplies
50,336

 
47,943

Deferred costs
6,432

 
5,673

Deferred income taxes
5,648

 
7,476

Other tax assets
9,200

 
10,723

Other current assets
19,018

 
18,556

Total current assets
483,253

 
469,779

Property, plant and equipment, net of accumulated depreciation of $1,223,119 at March 31, 2015 and $1,201,058 at December 31, 2014.
885,233

 
895,940

Debt issuance costs
13,434

 
12,526

Deferred income taxes
135,820

 
122,689

Other noncurrent assets
22,575

 
19,725

Total assets
$
1,540,315

 
$
1,520,659

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

 
$
10,000

Accounts payable and accrued liabilities
193,932

 
154,479

Accrued income taxes
15,467

 
14,186

Total current liabilities
209,399

 
178,665

Long-term debt
585,000

 
605,000

Other long-term liabilities
18,559

 
18,665

Long-term deferred tax liability
58,312

 
52,115

Contingencies (Note 10)
 
 
 
Stockholders’ equity:
 
 
 
Common stock
20,342

 
20,325

Capital in excess of par value
668,324

 
666,769

Accumulated deficit
(20,943
)
 
(24,165
)
Accumulated other comprehensive income
(2,855
)
 
(498
)
Total controlling interest stockholders’ equity
664,868

 
662,431

Noncontrolling interest
4,177

 
3,783

Total equity
669,045

 
666,214

Total liabilities and stockholders’ equity
$
1,540,315

 
$
1,520,659

See accompanying notes to the unaudited consolidated condensed financial statements.

3



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
2015
 
2014
Revenues
$
204,076

 
$
229,225

Expenses:
 
 
 
Operating expenses
139,270

 
166,025

Depreciation and amortization
40,539

 
34,337

 
179,809

 
200,362

Total operating gross margin
24,267

 
28,863

General and administration expense
(10,837
)
 
(8,964
)
Gain (loss) on disposition of assets, net
2,441

 
(129
)
Total operating income
15,871

 
19,770

Other income and (expense):
 
 
 
Interest expense
(11,078
)
 
(12,039
)
Interest income
183

 
32

Loss on extinguishment of debt

 
(29,673
)
Other
(1,380
)
 
895

Total other expense
(12,275
)
 
(40,785
)
Income (loss) before income taxes
3,596

 
(21,015
)
Income tax (benefit)
(182
)
 
(8,623
)
Net income (loss)
3,778

 
(12,392
)
Less: Net income attributable to noncontrolling interest
556

 
157

Net income (loss) attributable to controlling interest
$
3,222

 
$
(12,549
)
Basic earnings per share
$
0.03

 
$
(0.10
)
Diluted earnings per share
$
0.03

 
$
(0.10
)
 
 
 
 
Number of common shares used in computing earnings per share:
 
 
 
Basic
121,887,072

 
120,368,650

Diluted
123,708,623

 
120,368,650


See accompanying notes to the unaudited consolidated condensed financial statements.


4



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
 
Comprehensive income:
 
 
 
 
Net income (loss)
$
3,778

 
$
(12,392
)
 
Other comprehensive income (loss), net of tax:
 
 
 
 
Currency translation difference on related borrowings
(1,670
)
 
(804
)
 
Currency translation difference on foreign currency net investments
(849
)
 
699

 
Total other comprehensive income (loss), net of tax:
(2,519
)
 
(105
)
 
Comprehensive income (loss)
1,259

 
(12,497
)
 
Comprehensive (income) attributable to noncontrolling interest
(394
)
 
(154
)
 
Comprehensive income (loss) attributable to controlling interest
$
865

 
$
(12,651
)
 

See accompanying notes to the unaudited consolidated condensed financial statements.


5



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
3,778

 
$
(12,392
)
Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
40,539

 
34,337

Loss on extinguishment of debt

 
29,673

(Gain) loss on disposition of assets
(2,441
)
 
129

Deferred income tax benefit
(6,304
)
 
(12,292
)
Expenses not requiring cash
1,737

 
6,844

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(6,650
)
 
(6,226
)
Other assets
(20,087
)
 
(394
)
Accounts payable and accrued liabilities
54,045

 
(8,205
)
Accrued income taxes
2,614

 
150

Net cash provided by operating activities
67,231

 
31,624

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(33,455
)
 
(37,445
)
Proceeds from the sale of assets
246

 
1,626

Proceeds from insurance settlements
2,500

 

Net cash (used in) investing activities
(30,709
)
 
(35,819
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt

 
400,000

Repayments of long-term debt
(30,000
)
 
(418,699
)
Payments of debt issuance costs
(1,359
)
 
(7,273
)
Payments of debt extinguishment costs

 
(25,796
)
Excess tax benefit (expense) from stock based compensation
(420
)
 
335

Net cash (used in) financing activities
(31,779
)
 
(51,433
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
4,743

 
(55,628
)
Cash and cash equivalents, beginning of year
108,456

 
148,689

Cash and cash equivalents, end of period
$
113,199

 
$
93,061

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
20,805

 
$
20,443

Income taxes paid
$
4,601

 
$
4,131


See accompanying notes to the unaudited consolidated condensed financial statements.


6



PARKER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
Note 1 - General
In the opinion of the management of Parker Drilling Company (Parker Drilling or the Company), the accompanying unaudited consolidated condensed financial statements reflect all adjustments normally recurring which we believe are necessary for a fair presentation of: (1) Parker Drilling’s financial position as of March 31, 2015 and December 31, 2014, (2) Parker Drilling’s results of operations for the three month periods ended March 31, 2015 and 2014, (3) Parker Drilling’s consolidated condensed statement of comprehensive income for the three month periods ended March 31, 2015 and 2014, and (4) Parker Drilling’s cash flows for the three month periods ended March 31, 2015 and 2014. Results for the three month period ended March 31, 2015 are not necessarily indicative of the results that will be realized for the year ending December 31, 2015. The financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014.
Nature of Operations — We are an international provider of drilling services and rental tools. We have operated in over 50 countries since beginning operations in 1934, making us among the most geographically experienced drilling contractors and rental tools providers in the world. We currently have operations in 23 countries. We believe we are an industry leader in quality, health, safety and environmental practices.
Our business is comprised of two business lines: (1) Drilling Services and (2) Rental Tools Services. We have completed a business review and as a result have aligned our reportable segments with our two core business lines and our current internal organizational structure. We continue to report our Rental Tools Services business as one reportable segment (Rental Tools); however, effective with the first quarter of 2015, the Company is reporting its Drilling Services business as two segments: (1) U.S. (Lower 48) Drilling and (2) International & Alaska Drilling.
In our Drilling Services business, we own and operate drilling rigs and drilling-related equipment and also perform drilling-related services, referred to as operations and maintenance (O&M) services, for customer-owned drilling rigs on a contracted basis. In addition, we provide engineering and related services during concept development, pre-FEED (Front End Engineering Design) and FEED phases of customer-owned drilling facility projects. We have extensive experience and expertise in drilling geologically difficult wells and in managing the logistical and technological challenges of operating in remote, harsh and ecologically sensitive areas. Our U.S. (Lower 48) Drilling segment includes our Gulf of Mexico (GOM) barge drilling fleet and O&M services. Our GOM barge drilling fleet operates barge rigs that drill for oil and natural gas in shallow waters in and along the inland waterways and coasts of Louisiana, Alabama, and Texas. The majority of these wells are drilled in water depths of 6 to 12 feet. Our International & Alaska Drilling segment includes operations related to Parker-owned and customer-owned rigs as well as project related services. We provide O&M and other project management services, such as labor, maintenance, technical and logistics support for operators who own their own drilling rigs, but choose Parker Drilling to operate the rigs for them.
In our Rental Tools Services business, we provide premium rental equipment and services to exploration and production companies, drilling contractors and service companies on land and offshore in the United States (U.S.) and select international markets. Tools we provide include drill collars, standard and heavy-weight drill pipe, all of which are available with standard or high-torque connections, tubing, and pressure control equipment including blow-out preventers (BOPs). We also provide well construction services which include tubular running services and downhole tools and well intervention services which include whip stock, fishing products and services, as well as inspection and machine shop support.
Consolidation — The consolidated financial statements include the accounts of the Company and subsidiaries in which we exercise control or have a controlling financial interest, including entities, if any, in which the Company is allocated a majority of the entity’s losses or returns, regardless of ownership percentage. If a subsidiary of Parker Drilling has a 50 percent interest in an entity but Parker Drilling’s interest in the subsidiary or the entity does not meet the consolidation criteria described above, then that interest is accounted for under the equity method.
Noncontrolling Interest — We apply accounting standards related to noncontrolling interests for ownership interests in our subsidiaries held by parties other than Parker Drilling. The entities that comprise the noncontrolling interest include ITS Arabia Limited and ITS Egypt SAE. We report noncontrolling interest as equity on the consolidated balance sheets and report net income (loss) attributable to controlling interest and to noncontrolling interest separately on the consolidated statements of operations.
Reclassifications — Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not materially affect our consolidated financial results.

7



Revenue Recognition — Drilling revenues and expenses, comprised of daywork drilling contracts, call-outs against master service agreements and engineering and related project service contracts, are recognized as services are performed and collection is reasonably assured. For certain contracts, we receive payments contractually designated for the mobilization of rigs and other drilling equipment. Mobilization payments received, and direct costs incurred for the mobilization, are deferred and recognized over the primary term of the related drilling contract; however, costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. Reimbursements received for out-of-pocket expenses are recorded as both revenues and direct costs. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met. Revenues from rental activities are recognized ratably over the rental term which is generally less than six months. Our project related services contracts include engineering, consulting, and project management scopes of work and revenue is typically recognized on a time and materials basis.
Reimbursable Costs — The Company recognizes reimbursements received for out-of-pocket expenses incurred as revenues and accounts for out-of-pocket expenses as direct operating costs. Such amounts totaled $19.7 million and $16.4 million during the first quarters of 2015 and 2014, respectively. Additionally, the Company typically receives a nominal handling fee, which is recognized as earned revenues in our consolidated statement of operations.
Use of Estimates — The preparation of financial statements in accordance with accounting policies generally accepted in the United States (U.S. GAAP) requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities at the date of the financial statements, and our revenues and expenses during the periods reported. Estimates are typically used when accounting for certain significant items such as legal or contractual liability accruals, mobilization and deferred mobilization, self-insured medical/dental plans, income taxes and valuation allowance, and other items requiring the use of estimates. Estimates are based on a number of variables which may include third party valuations, historical experience, where applicable, and assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ from management estimates.
Purchase price allocation — We allocate the purchase price of an acquired business to its identifiable assets and liabilities in accordance with the acquisition method based on estimated fair values at the transaction date. Transaction and integration costs associated with an acquisition are expensed as incurred. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. We typically engage third-party appraisal firms to assist in fair value determination of inventories, identifiable intangible assets, and any other significant assets or liabilities. Judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
Intangible Assets – Our intangible assets are related to trade names, customer relationships, and developed technology, which are associated with a previous acquisition and are generally amortized over a weighted average period of approximately three years. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss.
Concentrations of Credit Risk — Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables with a variety of major, independent, national and international oil and gas companies and integrated service providers. We generally do not require collateral on our trade receivables.
At March 31, 2015 and December 31, 2014, we had deposits in domestic banks in excess of federally insured limits of approximately $47.1 million and $59.3 million, respectively. In addition, as of March 31, 2015 and December 31, 2014, we had deposits in foreign banks, which were not insured of $66.1 million and $54.4 million, respectively.
Our customer base primarily consists of major, independent, national and international oil and gas companies and integrated service providers. We depend on a limited number of significant customers. Our largest customer, Exxon Neftegas Limited (ENL), constituted approximately 22.9% of our revenues for the three months ended March 31, 2015. Each of our segments depends on a limited number of key customers and the loss of any one or more key customers could have a material adverse effect on a segment.

8



Note 2 - Acquisition of ITS    
On April 22, 2013 we acquired International Tubular Services Limited (ITS) and related assets (the ITS Acquisition) for an initial purchase price of $101.0 million paid at the closing of the ITS Acquisition. An additional $24.0 million was deposited into an escrow account, to be payable to the seller or to us, as the case may be, in accordance with the ITS Acquisition agreement (the Acquisition Agreement). As of March 31, 2015, $10.8 million of the cash deposited in escrow has been released to the seller and $3.2 million has been released to us. Based on the terms of the Acquisition Agreement, we estimate that the entire $10.0 million remaining in escrow will be paid to the seller (or to third parties on behalf of the seller).        
Note 3 - Earnings per share (EPS)  
 
Three Months Ended March 31, 2015
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
3,222,000

 
121,887,072

 
$
0.03

Effect of dilutive securities:
 
 
 
 
 
Restricted stock units

 
1,821,551

 

Diluted EPS
$
3,222,000

 
123,708,623

 
$
0.03

 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic EPS
$
(12,549,000
)
 
120,368,650

 
$
(0.10
)
Effect of dilutive securities:
 
 
 
 
 
Restricted stock units

 

 

Diluted EPS
$
(12,549,000
)
 
120,368,650

 
$
(0.10
)
For the three months ended March 31, 2015, weighted-average shares outstanding used in our computation of diluted EPS includes the dilutive effect of common shares potentially issuable in connection with outstanding restricted stock unit awards.
For the three months ended March 31, 2014, all common shares potentially issuable in connection with outstanding restricted stock unit awards have been excluded from the calculation of diluted EPS as the company incurred a loss during the quarter, and therefore, inclusion of such potential common shares in the calculation would be anti-dilutive.
Note 4 - Accumulated Other Comprehensive Income    
Accumulated other comprehensive income consisted of the following:
Dollars in thousands
Foreign Currency Items
December 31, 2014
$
(498
)
Current period other comprehensive income (loss)
(2,357
)
March 31, 2015
$
(2,855
)
No amounts were reclassified out of accumulated other comprehensive income for the three months ended March 31, 2015. The other comprehensive income for the current period includes an increase in the exchange rate on related borrowings primarily in Colombia.
 

9



Note 5 - Reportable Segments
Our business is comprised of two business lines: (1) Drilling Services and (2) Rental Tools Services. We have completed a business review and as a result have aligned our reportable segments with our two core business lines and our current internal organizational structure. We continue to report our Rental Tools Services business as one reportable segment (Rental Tools); however, effective with the first quarter of 2015, the Company is reporting its Drilling Services business as two segments: (1) U.S. (Lower 48) Drilling and (2) International & Alaska Drilling. We eliminate inter-segment revenue and expenses.
The following table represents the results of operations by reportable segment:
 
Three Months Ended March 31,
Dollars in thousands
2015
 
2014
Revenues: (1)
 
U.S. (Lower 48) Drilling
$
14,097

 
$
35,787

International & Alaska Drilling
113,921

 
112,932

Rental Tools
76,058

 
80,506

Total revenues
204,076

 
229,225

Operating gross margin: (2)
 
 
 
U.S. (Lower 48) Drilling
(5,717
)
 
8,742

International & Alaska Drilling
17,354

 
6,776

Rental Tools
12,630

 
13,345

Total operating gross margin
24,267

 
28,863

General and administrative expense
(10,837
)
 
(8,964
)
Gain (loss) on disposition of assets, net
2,441

 
(129
)
Total operating income
15,871

 
19,770

Interest expense
(11,078
)
 
(12,039
)
Interest income
183

 
32

Loss on extinguishment of debt

 
(29,673
)
Other income (loss)
(1,380
)
 
895

Income (loss) from continuing operations before income taxes
$
3,596

 
$
(21,015
)
 
(1)For the three months ended March 31, 2015, our largest customer, Exxon Neftegas Limited (ENL), constituted approximately 22.9% of our total consolidated revenues and approximately 41.0% of our International & Alaska Drilling segment revenues. For the three months ended March 31, 2014, our largest customer, ENL, constituted approximately 17.1% of our total consolidated revenues and approximately 39.6% of our International & Alaska Drilling segment revenues.
(2)Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

10



Note 6 - Accounting for Uncertainty in Income Taxes
We apply the accounting guidance related to accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. At March 31, 2015, we had a liability for unrecognized tax benefits of $8.2 million (which includes $3.6 million of benefits which would favorably impact our effective tax rate upon recognition), primarily related to foreign operations. As of March 31, 2014, we had a liability for unrecognized tax benefits of $12.4 million ($5.6 million of which, if recognized, would favorably impact our effective tax rate). In addition, we recognize interest and penalties that could be applied to uncertain tax positions in periodic income tax expense. As of March 31, 2015 and December 31, 2014, we had approximately $3.4 million and $3.3 million, respectively, of accrued interest and penalties related to uncertain tax positions. Management believes that the Company is properly reserved with respect to accounting for uncertainty in income taxes.
Note 7 - Income Tax Benefit/Expense
During the first quarter of 2015 we had an income tax benefit of $0.2 million compared to a benefit of $8.6 million for the first quarter of 2014. The current period income tax benefit is primarily a result of changes in the carrying value of certain deferred tax assets due to changes in tax law and taxing jurisdictions during the first quarter of 2015. The income tax benefit in the first quarter of 2014 was primarily due to a reduction of pre-tax earnings primarily driven by the debt extinguishment costs recorded during the first quarter of 2014.
Note 8 - Long-Term Debt
The following table illustrates our debt portfolio as of March 31, 2015 and December 31, 2014:
Dollars in thousands
March 31,
2015
 
December 31,
2014
6.75% Senior Notes, due July 2022
$
360,000

 
$
360,000

7.50% Senior Notes, due August 2020
225,000

 
225,000

Term Note, due December 2017

 
30,000

Total debt
585,000

 
615,000

Less current portion (1)

 
10,000

Total long-term debt
$
585,000

 
$
605,000

(1) Current portion of the Term Loan.
6.75% Senior Notes, due July 2022
On January 22, 2014, we issued $360.0 million aggregate principal amount of 6.75% Senior Notes due 2022 (6.75% Notes) pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 6.75% Notes offering plus a $40.0 million Term Loan draw under the Amended and Restated Senior Secured Credit Agreement (2012 Secured Credit Agreement) and cash on hand were utilized to purchase $416.2 million aggregate principal amount of our outstanding 9.125% Senior Notes due 2018 (9.125% Notes) pursuant to a tender and consent solicitation offer commenced on January 7, 2014. See further discussion of the tender and consent solicitation offer below entitled "9.125% Senior Notes, due April 2018".
The 6.75% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 6.75% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under the Second Amended and Restated Senior Secured Credit Agreement (2015 Secured Credit Agreement) and our 7.50% Senior Notes due 2020 (7.50% Notes, and collectively with the 6.75% Notes, the Senior Notes). Interest on the 6.75% Notes is payable on January 15 and July 15 of each year, beginning July 15, 2014. Debt issuance costs related to the 6.75% Notes of approximately $7.6 million ($6.8 million net of amortization as of March 31, 2015) are being amortized over the term of the notes using the effective interest rate method.
At any time prior to January 15, 2017, we may redeem up to 35 percent of the aggregate principal amount of the 6.75% Notes at a redemption price of 106.75 percent of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings by us. On and after January 15, 2018, we may redeem all or a part of the 6.75% Notes upon appropriate notice, at a redemption price of 103.375 percent of the principal amount, and at redemption prices

11



decreasing each year thereafter to par beginning January 15, 2020. If we experience certain changes in control, we must offer to repurchase the 6.75% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
The Indenture restricts our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness, (v) create or incur liens, (vi) enter into sale and leaseback transactions, (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.
7.50% Senior Notes, due August 2020
On July 30, 2013, we issued $225.0 million aggregate principal amount of the 7.50% Notes pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 7.50% Notes offering were primarily used to repay the $125.0 million aggregate principal amount of a term loan used to initially finance the ITS Acquisition, to repay $45.0 million of Term Loan borrowings under the 2012 Secured Credit Agreement and for general corporate purposes.
The 7.50% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 7.50% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under the 2015 Secured Credit Agreement and the 6.75% Notes. Interest on the 7.50% Notes is payable on February 1 and August 1 of each year, beginning February 1, 2014. Debt issuance costs related to the 7.50% Notes of approximately $5.6 million ($4.5 million, net of amortization as of March 31, 2015) are being amortized over the term of the notes using the effective interest rate method.
At any time prior to August 1, 2016, we may redeem up to 35 percent of the aggregate principal amount of the 7.50% Notes at a redemption price of 107.50 percent of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings by us. On and after August 1, 2016, we may redeem all or a part of the 7.50% Notes upon appropriate notice, at a redemption price of 103.750 percent of the principal amount, and at redemption prices decreasing each year thereafter to par beginning August 1, 2018. If we experience certain changes in control, we must offer to repurchase the 7.50% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
The Indenture restricts our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness, (v) create or incur liens, (vi) enter into sale and leaseback transactions, (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.
9.125% Senior Notes, due April 2018
On March 22, 2010, we issued $300.0 million aggregate principal amount of the 9.125% Notes and on April 25, 2012, we issued an additional $125.0 million aggregate principal amount of 9.125% Notes.
On January 7, 2014, we commenced a tender and consent solicitation with respect to the 9.125% Notes. The tender offer price was $1,061.98, inclusive of a $30.00 consent payment for each $1,000 principal amount of 9.125% Notes, plus accrued and unpaid interest. On January 22, 2014, we paid $453.7 million for the tendered 9.125% Notes, comprised of $416.2 million of aggregate principal amount of the 9.125% Notes, $25.8 million of tender and consent premiums and $11.7 million of accrued interest. On April 1, 2014, we redeemed the remaining $8.8 million aggregate principal amount of the outstanding 9.125% Notes for a purchase price of $9.6 million, inclusive of a $0.4 million call premium and $0.4 million interest. During the year ended December 31, 2014, we recorded a loss on extinguishment of debt of approximately $30.2 million, which included the tender and consent premiums of $25.8 million, the call premium of $0.4 million and the write-off of unamortized debt issuance costs of $7.7 million, offset by the write-off of the remaining unamortized debt issuance premium of $3.8 million.

12



2015 Secured Credit Agreement
On January 26, 2015 we entered into the 2015 Secured Credit Agreement, which amended and restated the 2012 Secured Credit Agreement. The 2015 Secured Credit Agreement is comprised of a $200.0 million revolving credit facility (2015 Revolver) and matures on January 26, 2020. At the closing of the 2015 Secured Credit Agreement, we repaid the outstanding $30.0 million of Term Loan borrowings under the 2012 Secured Credit Agreement with a $30.0 million draw under the 2015 Revolver. We incurred debt issuance costs related to the 2015 Secured Credit Agreement of approximately $1.4 million and had approximately $0.8 million of remaining debt issuance costs for the 2012 Secured Credit agreement. The total debt issuance costs of $2.2 million ($2.2 million, net of amortization as of March 31, 2015) are being amortized over the term of the amended credit agreement on a straight line basis.
Our obligations under the 2015 Secured Credit Agreement are guaranteed by substantially all of our direct and indirect domestic subsidiaries, other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, each of which has executed guaranty agreements, and are secured by first priority liens on our accounts receivable, specified rigs including barge rigs in the GOM and land rigs in Alaska, and rental equipment of the Company and its subsidiary guarantors. The 2015 Secured Credit Agreement contains customary affirmative and negative covenants, such as limitations on indebtedness, liens, restrictions on entry into certain affiliate transactions and payments (including payment of dividends) and maintenance of certain ratios and coverage tests (including a minimum asset coverage ratio of 1.25:1.00 at each quarter end). We were in compliance with all such covenants as of March 31, 2015.
Our 2015 Revolver is available for general corporate purposes and to support letters of credit. Interest on 2015 Revolver loans accrues at a Base Rate plus an Applicable Rate or LIBOR plus an Applicable Rate. The Applicable Rate ranges from 2.50 percent to 3.00 percent per annum for LIBOR rate loans and from 1.50 percent to 2.00 percent per annum for base rate loans, determined by reference to the consolidated leverage ratio (as defined in the 2015 Secured Credit Agreement). Revolving loans are available subject to a quarterly Asset Coverage Ratio calculation based on the Orderly Liquidation Value of certain specified rigs including barge rigs in the GOM and land rigs in Alaska, and rental equipment of the Company and its subsidiary guarantors and a percentage of eligible domestic accounts receivable. The $30.0 million draw at the closing of the 2015 Secured Credit Agreement was repaid in full during the first quarter of 2015 with cash on-hand. Letters of credit outstanding against the 2015 Revolver as of March 31, 2015 totaled $11.8 million.
2012 Secured Credit Agreement
The 2012 Secured Credit Agreement consisted of an $80.0 million revolving credit facility (2012 Revolver) and a $50.0 million term loan (Term Loan). Our obligations under the 2012 Secured Credit Agreement were guaranteed by substantially all of our direct and indirect domestic subsidiaries other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, each of which had executed guaranty agreements, and were secured by first priority liens on our accounts receivable, specified barge rigs and rental equipment. The 2012 Secured Credit Agreement contained customary affirmative and negative covenants and would have matured on December 14, 2017.
2012 Revolver
Our 2012 Revolver was available for general corporate purposes and to support letters of credit. Interest on 2012 Revolver loans accrued at a Base Rate plus an Applicable Rate or LIBOR plus an Applicable Rate. Under the 2012 Secured Credit Agreement, the Applicable Rate ranged from 2.50 percent to 3.00 percent per annum for LIBOR rate loans and from 1.50 percent to 2.00 percent per annum for base rate loans, determined by reference to the consolidated leverage ratio (as defined in the 2012 Secured Credit Agreement). Revolving loans were 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 December 31, 2014. Letters of credit outstanding against the 2012 Revolver as of December 31, 2014 totaled $11.0 million.
Term Loan
The Term Loan originated at $50.0 million on December 14, 2012 and required quarterly principal payments of $2.5 million, which began March 31, 2013. Interest on the Term Loan accrued at a Base Rate plus 2.00 percent or LIBOR plus 3.00 percent. In July 2013, we repaid the outstanding balance of $45.0 million of the Term Loan and amended the 2012 Secured Credit Agreement to permit re-borrowing of up to $45.0 million of the Term Loan, decreasing by $2.5 million at the end of each quarter beginning September 30, 2013 and ending March 31, 2014. In January 2014 we re-borrowed $40.0 million of the Term Loan. The outstanding balance on the Term Loan at December 31, 2014 was $30.0 million. At the closing of the 2015 Secured Credit Agreement, we repaid the Term Loan with a $30.0 million draw under the 2015 Revolver.

13



Note 9 - Fair Value of Financial Instruments
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. For purposes of recording fair value adjustments for certain financial and non-financial assets and liabilities, and determining fair value disclosures, we estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.
The fair value measurement and disclosure requirements of FASB Accounting Standards Codification Topic No. 820, Fair Value Measurement and Disclosures (ASC 820) requires inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows:
Level 1 — Unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 — Direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets;
Level 3 — Unobservable inputs that require significant judgment for which there is little or no market data.
When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the entire measurement even though we may also have utilized significant inputs that are more readily observable. The amounts reported in our consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value.
Fair value of our debt instruments is determined using Level 2 inputs. Fair values and related carrying values of our debt instruments were as follows for the periods indicated: 
  
March 31, 2015
 
December 31, 2014
Dollars in thousands
Carrying Amount
 
Fair Value
 
Carrying  Amount
 
Fair Value
Long-term Debt
 
 
 
 
 
 
 
6.75% Notes
$
360,000

 
$
285,300

 
$
360,000

 
$
270,000

7.50% Notes
225,000

 
180,000

 
225,000

 
180,000

Total
$
585,000

 
$
465,300

 
$
585,000

 
$
450,000

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 March 31, 2015.  
Note 10 - Commitments and Contingencies
We are a party to various lawsuits and claims arising out of the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount or range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ significantly from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.
Customs Agent and Foreign Corrupt Practices Act (FCPA) Settlement
On April 16, 2013, the Company and the Department of Justice (DOJ) entered into a deferred prosecution agreement (DPA), under which the DOJ will defer for three years prosecuting the Company for criminal violations of the anti-bribery provisions of the FCPA relating to the Company’s retention and use of an individual agent in Nigeria with respect to certain customs-related issues, in return for: (i) the Company’s acceptance of responsibility for, and agreement not to contest or contradict the truthfulness of, the statement of facts and allegations that have been filed in a United States District Court concurrently with the DPA; (ii) the Company’s payment of an approximately $11.76 million fine; (iii) the Company’s reaffirming its commitment to compliance with the FCPA and other applicable anti-corruption laws in connection with the Company’s operations, and continuing cooperation with domestic and foreign authorities in connection with the matters that are the subject of the DPA; (iv) the Company’s commitment

14



to continue to address any identified areas for improvement in the Company’s internal controls, policies and procedures relating to compliance with the FCPA and other applicable anti-corruption laws if, and to the extent, not already addressed; and (v) the Company’s agreement to report to the DOJ in writing annually during the term of the DPA regarding remediation of the matters that are the subject of the DPA, implementation of any enhanced internal controls, and any evidence of improper payments the Company may have discovered during the term of the agreement. If the Company remains in compliance with the terms of the DPA throughout its effective period, the charge against the Company will be dismissed with prejudice. The Company also settled a related civil complaint filed by the Securities and Exchange Commission (SEC) in a United States District Court.
Demand Letter and Derivative Litigation
In April 2010, we received a demand letter from a law firm representing Ernest Maresca. The letter states that Mr. Maresca is one of our stockholders and that he believes that certain of our current and former officers and directors violated their fiduciary duties related to the issues described above under “Customs Agent and Foreign Corrupt Practices Act (FCPA) Settlement.” The letter requests that our Board of Directors take action against the individuals in question. In response to this letter, the Board formed a special committee to evaluate the issues raised by the letter and determine a course of action for the Company. The special committee engaged its own counsel for the investigation and evaluated potential claims against all individuals identified in the demand letter. The special committee considered whether pursuing each of the individuals named in the demand letter was in the best interests of the Company based upon a variety of factors, including among others, whether the Company had a potential cause of action against the individual, the defenses the individual might offer to such a claim, the ability of the individual to satisfy any judgment the Company might secure as a result of a claim asserted, and other risks to the Company of pursuing the claims. After taking various factors into account, on July 29, 2013, the special committee recommended to the Board that the Company not pursue any action against the current and former officers and directors named in the demand letter, and the Board accepted such recommendation.
On March 4, 2015 the Delaware Chancery Court ruled in the Company’s favor in Fuchs Family Trust v. Parker Drilling Company, Case No. 9986-VCN. The case centered on the plaintiff’s demand to inspect records related to the Company’s 2013 resolutions of investigations by the DOJ and the SEC into certain violations of the FCPA by Company employees. The plaintiff additionally sought costs, expenses, and attorneys’ fees.  The Court determined that plaintiff could not demand inspection of the company’s books and records and denied all other relief requested by the plaintiff.
Note 11 - Recent Accounting Pronouncements    
On April 7, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. Early adoption is permitted. Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. We plan to adopt the standard on a retrospective basis effective January 1, 2016 and expect that it will result in the netting of our deferred financing costs against long-term debt balances on the consolidated balance sheets for the periods presented, and related disclosure. There will be no impact to the manner in which deferred financing costs are amortized in our consolidated financial statements.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. ASU 2014-09 was initially scheduled to be effective for the first quarter of 2017, however, on April 1, 2015, the FASB proposed to defer the effective date by one year.  It is expected the proposal to defer the effective date will be finalized during the second quarter of 2015. We are in the process of assessing the impact of the adoption of ASU 2014-09 on our financial position, results of operations and cash flows. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when: (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. This accounting guidance was effective for our first quarter in fiscal 2014 and did not have a material impact on our condensed consolidated financial statements.    

15



Note 12 - Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements
Set forth on the following pages are the consolidating condensed financial statements of Parker Drilling. The 2015 Secured Credit Agreement and Senior Notes are fully and unconditionally guaranteed by substantially all of our direct and indirect domestic subsidiaries, other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, subject to the following customary release provisions:
in connection with any sale or other disposition of all or substantially all of the assets of that guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) a subsidiary of the Company;
in connection with any sale of such amount of capital stock as would result in such guarantor no longer being a subsidiary to a person that is not (either before or after giving effect to such transaction) a subsidiary of the Company;
if the Company designates any restricted subsidiary that is a guarantor as an unrestricted subsidiary;
if the guarantee by a guarantor of all other indebtedness of the Company or any other guarantor is released, terminated or discharged, except by, or as a result of, payment under such guarantee; or
upon legal defeasance or covenant defeasance (satisfaction and discharge of the indenture).
There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries. Separate financial statements for each guarantor company are not provided as the Company complies with the exception to Rule 3-10(a)(1) of Regulation S-X, set forth in sub-paragraph (f) of such rule. All guarantor subsidiaries are owned 100 percent by the parent company.
We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014, respectively. The consolidating condensed financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.

16




PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
March 31, 2015
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
31,704

 
$
10,944

 
$
70,551

 
$

 
$
113,199

Accounts and notes receivable, net
(52
)
 
110,172

 
169,300

 

 
279,420

Rig materials and supplies

 
(3,551
)
 
53,887

 

 
50,336

Deferred costs

 

 
6,432

 

 
6,432

Deferred income taxes

 
3,963

 
1,685

 

 
5,648

Other tax assets

 
270

 
8,930

 

 
9,200

Other current assets

 
5,762

 
13,256

 

 
19,018

Total current assets
31,652

 
127,560

 
324,041

 

 
483,253

Property, plant and equipment, net
(19
)
 
587,126

 
298,126

 

 
885,233

Investment in subsidiaries and intercompany advances
3,126,778

 
2,520,407

 
2,691,390

 
(8,338,575
)
 

Other noncurrent assets
(438,614
)
 
524,232

 
268,297

 
(182,086
)
 
171,829

Total assets
$
2,719,797

 
$
3,759,325

 
$
3,581,854

 
$
(8,520,661
)
 
$
1,540,315

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

 
$

 
$

 
$

 
$

Accounts payable and accrued liabilities
67,054

 
119,414

 
326,166

 
(318,702
)
 
193,932

Accrued income taxes
(16,195
)
 
25,438

 
6,224

 

 
15,467

Total current liabilities
50,859

 
144,852

 
332,390

 
(318,702
)
 
209,399

Long-term debt
585,000

 

 

 

 
585,000

Other long-term liabilities
2,869

 
5,864

 
9,826

 

 
18,559

Long-term deferred tax liability

 
62,296

 
(3,984
)
 

 
58,312

Intercompany payables
1,413,346

 
1,375,184

 
1,412,566

 
(4,201,096
)
 

Total liabilities
2,052,074

 
1,588,196

 
1,750,798

 
(4,519,798
)
 
871,270

Total equity
667,723

 
2,171,129

 
1,831,056

 
(4,000,863
)
 
669,045

Total liabilities and stockholders’ equity
$
2,719,797

 
$
3,759,325

 
$
3,581,854

 
$
(8,520,661
)
 
$
1,540,315


17




PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
December 31, 2014
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
36,728

 
$
13,546

 
$
58,182

 
$

 
$
108,456

Accounts and notes receivable, net
(33
)
 
96,100

 
174,885

 

 
270,952

Rig materials and supplies

 
(1,473
)
 
49,416

 

 
47,943

Deferred costs

 

 
5,673

 

 
5,673

Deferred income taxes

 
6,131

 
1,345

 

 
7,476

Other tax assets
19,885

 
(18,273
)
 
9,111

 

 
10,723

Other current assets

 
7,999

 
10,557

 

 
18,556

Total current assets
56,580

 
104,030

 
309,169

 

 
469,779

Property, plant and equipment, net
(19
)
 
589,055

 
306,904

 

 
895,940

Investment in subsidiaries and intercompany advances
3,060,867

 
2,441,527

 
2,464,502

 
(7,966,896
)
 

Other noncurrent assets
(440,918
)
 
490,597

 
272,823

 
(167,562
)
 
154,940

Total assets
$
2,676,510

 
$
3,625,209

 
$
3,353,398

 
$
(8,134,458
)
 
$
1,520,659

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

 
$

 
$

 
$

 
$
10,000

Accounts payable and accrued liabilities
77,603

 
71,645

 
309,344

 
(304,113
)
 
154,479

Accrued income taxes
(4,061
)
 
10,109

 
8,138

 

 
14,186

Total current liabilities
83,542

 
81,754

 
317,482

 
(304,113
)
 
178,665

Long-term debt
605,000

 

 

 

 
605,000

Other long-term liabilities
2,867

 
7,135

 
8,663

 

 
18,665

Long-term deferred tax liability

 
56,105

 
(3,990
)
 

 
52,115

Intercompany payables
1,322,172

 
1,311,405

 
1,204,768

 
(3,838,345
)
 

Total liabilities
2,013,581

 
1,456,399

 
1,526,923

 
(4,142,458
)
 
854,445

Total equity
662,929

 
2,168,810

 
1,826,475

 
(3,992,000
)
 
666,214

Total liabilities and stockholders’ equity
$
2,676,510

 
$
3,625,209

 
$
3,353,398

 
$
(8,134,458
)
 
$
1,520,659






18




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

 
Three months ended March 31, 2015
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues

 
$
79,395

 
$
150,931

 
$
(26,250
)
 
$
204,076

Operating expenses

 
44,145

 
121,375

 
(26,250
)
 
139,270

Depreciation and amortization

 
23,311

 
17,228

 

 
40,539

Total operating gross margin

 
11,939

 
12,328

 

 
24,267

General and administration expense (1)
(112
)
 
(10,115
)
 
(610
)
 

 
(10,837
)
Gain (loss) on disposition of assets, net

 
52

 
2,389

 

 
2,441

Total operating income (loss)
(112
)
 
1,876

 
14,107

 

 
15,871

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(11,059
)
 
(17
)
 
(328
)
 
326

 
(11,078
)
Interest income
417

 
3

 
89

 
(326
)
 
183

Other

 
10

 
(1,390
)
 

 
(1,380
)
Equity in net earnings of subsidiaries
8,988

 

 

 
(8,988
)
 

Total other income (expense)
(1,654
)
 
(4
)
 
(1,629
)
 
(8,988
)
 
(12,275
)
Income (benefit) before income taxes
(1,766
)
 
1,872

 
12,478

 
(8,988
)
 
3,596

Total income tax expense (benefit)
(4,988
)
 
(447
)
 
5,253

 

 
(182
)
Net income (loss)
3,222

 
2,319

 
7,225

 
(8,988
)
 
3,778

Less: Net income attributable to noncontrolling interest

 

 
556

 

 
556

Net income (loss) attributable to controlling interest
$
3,222

 
$
2,319

 
$
6,669

 
$
(8,988
)
 
$
3,222


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


19




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

 
Three Months Ended March 31, 2014
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues
$

 
$
123,431

 
$
149,132

 
$
(43,338
)
 
$
229,225

Operating expenses

 
76,548

 
132,815

 
(43,338
)
 
166,025

Depreciation and amortization

 
20,168

 
14,169

 

 
34,337

Total operating gross margin

 
26,715

 
2,148

 

 
28,863

General and administration expense (1)
(70
)
 
(8,464
)
 
(430
)
 

 
(8,964
)
Gain (loss) on disposition of assets, net
(79
)
 
(81
)
 
31

 

 
(129
)
Total operating income (loss)
(149
)
 
18,170

 
1,749

 

 
19,770

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(12,715
)
 
(50
)
 
(2,499
)
 
3,225

 
(12,039
)
Interest income
439

 
176

 
2,642

 
(3,225
)
 
32

Loss on extinguishment of debt
(29,673
)
 

 

 

 
(29,673
)
Other

 
128

 
767

 

 
895

Equity in net earnings of subsidiaries
10,489

 

 

 
(10,489
)
 

Total other income (expense)
(31,460
)
 
254

 
910

 
(10,489
)
 
(40,785
)
Income (loss) before income taxes
(31,609
)
 
18,424

 
2,659

 
(10,489
)
 
(21,015
)
Income tax expense (benefit)
(19,060
)
 
6,384

 
4,053

 

 
(8,623
)
Net income (loss)
(12,549
)
 
12,040

 
(1,394
)
 
(10,489
)
 
(12,392
)
Less: Net income attributable to noncontrolling interest

 

 
157

 

 
157

Net income (loss) attributable to controlling interest
$
(12,549
)
 
$
12,040

 
$
(1,551
)
 
$
(10,489
)
 
$
(12,549
)

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






















20



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

 
Three Months Ended March 31, 2015
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
3,222

 
$
2,319

 
$
7,225

 
$
(8,988
)
 
$
3,778

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Currency translation difference on related borrowings

 

 
(1,670
)
 

 
(1,670
)
Currency translation difference on foreign currency net investments

 

 
(849
)
 

 
(849
)
Total other comprehensive income (loss), net of tax:

 

 
(2,519
)
 

 
(2,519
)
Comprehensive income (loss)
3,222

 
2,319

 
4,706

 
(8,988
)
 
1,259

Comprehensive (income) attributable to noncontrolling interest

 

 
(394
)
 

 
(394
)
Comprehensive income (loss) attributable to controlling interest
$
3,222

 
$
2,319

 
$
4,312

 
$
(8,988
)
 
$
865



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

 
Three Months Ended March 31, 2014
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(12,549
)
 
$
12,040

 
$
(1,394
)
 
$
(10,489
)
 
$
(12,392
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Currency translation difference on related borrowings

 

 
(804
)
 

 
(804
)
Currency translation difference on foreign currency net investments

 

 
699

 

 
$
699

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

 

 
(105
)
 

 
(105
)
Comprehensive income (loss)
(12,549
)
 
12,040

 
(1,499
)
 
(10,489
)
 
(12,497
)
Comprehensive (income) attributable to noncontrolling interest

 

 
(154
)
 

 
(154
)
Comprehensive income (loss) attributable to controlling interest
$
(12,549
)
 
$
12,040

 
$
(1,653
)
 
$
(10,489
)
 
$
(12,651
)


21




PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
 
Three Months Ended March 31, 2015
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
3,222

 
$
2,319

 
$
7,225

 
$
(8,988
)
 
$
3,778

Adjustments to reconcile net income (loss):
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
23,311

 
17,228

 

 
40,539

Gain on disposition of assets

 
(52
)
 
(2,389
)
 

 
(2,441
)
Deferred income tax expense
(7,932
)
 
3,117

 
(1,489
)
 

 
(6,304
)
Expenses not requiring cash
2,443

 
436

 
(1,142
)
 

 
1,737

Equity in net earnings of subsidiaries
(8,988
)
 

 

 
8,988

 

Change in assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts and notes receivable
19

 
(12,289
)
 
5,620

 

 
(6,650
)
Other assets
25,016

 
(41,216
)
 
(3,887
)
 

 
(20,087
)
Accounts payable and accrued liabilities
(10,549
)
 
47,058

 
17,536

 

 
54,045

Accrued income taxes
(10,727
)
 
13,922

 
(581
)
 

 
2,614

Net cash provided by (used in) operating activities
(7,496
)
 
36,606

 
38,121

 

 
67,231

 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(24,418
)
 
(9,037
)
 

 
(33,455
)
Proceeds from the sale of assets

 
50

 
196

 

 
246

Proceeds from insurance settlements

 

 
2,500

 

 
2,500

Net cash (used in) investing activities

 
(24,368
)
 
(6,341
)
 

 
(30,709
)
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Repayments of long-term debt
(30,000
)
 

 

 

 
(30,000
)
Payment of debt issuance costs
(1,359
)
 

 

 

 
(1,359
)
Excess tax benefit from stock-based compensation
(420
)
 

 

 

 
(420
)
Intercompany advances, net
34,251

 
(14,840
)
 
(19,411
)
 

 

Net cash provided by (used in) financing activities
2,472

 
(14,840
)
 
(19,411
)
 

 
(31,779
)
 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
(5,024
)
 
(2,602
)
 
12,369

 

 
4,743

Cash and cash equivalents at beginning of year
36,728

 
13,546

 
58,182

 

 
108,456

Cash and cash equivalents at end of year
$
31,704

 
$
10,944

 
$
70,551

 
$

 
$
113,199




22




PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended March 31, 2014
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(12,549
)
 
$
12,040

 
$
(1,394
)
 
$
(10,489
)
 
$
(12,392
)
Adjustments to reconcile net income (loss)
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
20,168

 
14,169

 

 
34,337

Loss on extinguishment of debt
29,673

 

 

 

 
29,673

Gain on disposition of assets
79

 
81

 
(31
)
 

 
129

Deferred income tax expense
(17,472
)
 
3,891

 
1,289

 

 
(12,292
)
Expenses not requiring cash
4,180

 
129

 
2,535

 

 
6,844

Equity in net earnings of subsidiaries
(10,489
)
 

 

 
10,489

 

Change in assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts and notes receivable
11

 
(18,803
)
 
12,566

 

 
(6,226
)
Other assets
12,746

 
(14,180
)
 
1,040

 

 
(394
)
Accounts payable and accrued liabilities
(8,476
)
 
(34
)
 
305

 

 
(8,205
)
Accrued income taxes
(4,420
)
 
7,206

 
(2,636
)
 

 
150

Net cash provided by (used in) operating activities
(6,717
)
 
10,498

 
27,843

 

 
31,624

 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(25,523
)
 
(11,922
)
 

 
(37,445
)
Proceeds from the sale of assets

 
472

 
1,154

 

 
1,626

Net cash (used in) investing activities

 
(25,051
)
 
(10,768
)
 

 
(35,819
)
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from debt issuance
400,000

 

 

 

 
400,000

Repayments of long-term debt
(418,699
)
 

 

 

 
(418,699
)
Payment of debt issuance costs
(7,273
)
 

 

 

 
(7,273
)
Payment of debt extinguishment costs
(25,796
)
 

 

 

 
(25,796
)
Excess tax benefit from stock-based compensation
335

 

 

 

 
335

Intercompany advances, net
102

 
22,159

 
(22,261
)
 

 

Net cash provided by (used in) financing activities
(51,331
)
 
22,159

 
(22,261
)
 

 
(51,433
)
 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
(58,048
)
 
7,606

 
(5,186
)
 

 
(55,628
)
Cash and cash equivalents at beginning of year
88,697

 
8,310

 
51,682

 

 
148,689

Cash and cash equivalents at end of year
$
30,649

 
$
15,916

 
$
46,496

 
$

 
$
93,061




23



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis (MD&A) should be read in conjunction with Item 1. Financial Statements.
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 (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the 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 or volatility of prices and demand for oil and natural gas;
levels of oil and natural gas exploration and production activities;
demand for drilling and drilling-related services and demand for rental tools and related services;
our future operating results and profitability;
our future rig utilization, dayrates and rental tools activity;
entering into new, or extending existing, drilling or rental contracts and our expectations concerning when operations will commence under such contracts;
continuation of existing contracts for drilling and rental tools services for their stated duration and rate.
entry into new markets or potential exit from existing markets;
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 rental tools, rigs, construction of new rigs or major upgrades to existing rigs;
entering into joint venture agreements;
our future liquidity;
the sale or potential sale of assets or references to assets held for sale;
availability and sources of funds to refinance our debt and expectations of when debt will be reduced;
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; 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 we make in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are relevant. Although we believe that our 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. The following factors, as well as 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:
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;
worldwide economic and business conditions that adversely affect market conditions and/or the cost of doing business, including potential currency devaluations or collapses;
our inability to access the credit markets and U.S. credit market volatility;
the U.S. economy and the demand for oil and natural gas;

24



low U.S. oil and natural gas prices that could adversely affect our U.S. drilling services, barge rig and U.S. rental tools services businesses;
worldwide demand for oil;
imposition of trade restrictions, including additional economic sanctions and export/re-export controls affecting our business operations in Russia;
unanticipated operating hazards and uninsured risks;
political instability, terrorism or war;
governmental regulations, including changes in accounting rules or tax laws that adversely affect the cost of doing business or our ability to remit funds to the U.S.;
changes in the tax laws that would allow double taxation on foreign sourced income;
the outcome of investigations into possible violations of laws;
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;
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;
inability to obtain, or delays in obtaining, licenses and permits necessary to operate, move or transport our rigs, rig components, rental tools and related equipment;
inability to access or restrictions on access to our rigs, field locations and other facilities;
changes in competition;
any failure to realize expected benefits from acquisitions;
the effect of litigation and contingencies; and
other similar factors, some of which are discussed in documents referred to or incorporated by reference into this Form 10-Q and our other reports and filings with the SEC.
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. 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.


25



Overview and Outlook

Executive Overview
Since the first quarter of 2014, we have experienced significant declines in our U.S. markets for rental tools and barge drilling services following the sharp drop in oil prices in late 2014. As a result, our rental tools U.S. tubular goods utilization index declined to 75.0 for the 2015 first quarter, from 86.3 for the 2014 first quarter; and our U.S. (Lower 48) Drilling barge rig fleet utilization declined to 21 percent for the 2015 first quarter, from 74 percent for the 2014 first quarter.
While we reported lower rig fleet utilization in our International & Alaska Drilling segment, compared with the prior year’s first quarter, we benefited from growth in our international O&M (operations and maintenance) and project services, including the addition of a two-rig extended reach drilling project and a procurement and project management services contract.
Cost reductions throughout the business tempered the impact of the reduced rental tools and drilling activity.
In January, 2015, we increased the capacity of our revolving credit facility, and extended its maturity and paid off a $30.0 million term loan with a draw on the expanded revolver. Solid cash flow from operations during the 2015 first quarter allowed us to repay the $30.0 million drawn on the Revolver and close the quarter with a strong cash position.
Executive Outlook
We believe overall energy market conditions will remain weak. We expect our Rental Tools Services business to continue to be impacted by the severe downturn in U.S. land and shallow water offshore drilling markets, with lower utilization and continued price pressure. However, we expect improved results from our international rental tools business in 2015, compared with 2014, due to our large presence in the Middle East and improving operating performance. Similarly, we expect our Drilling Services business will continue to be impacted by the sharp decline in U.S. drilling, due to continued low barge rig fleet utilization at current commodity prices. We expect this to be tempered by more resilient activity in our International & Alaska Drilling segment. While we have international rigs that have or are expected to come off contract in the months ahead, resulting in lower utilization, we expect steady activity from international O&M services and our drilling operations in Alaska.
In response to market conditions, we are focused on lowering our cost base, sustaining our utilization, managing our cash and liquidity, and preserving our ability to respond when conditions improve. We are prepared to make further adjustments to our business to address changing market conditions and take advantage of opportunities as they occur.








26



Results of Operations
Our business is comprised of two business lines: (1) Drilling Services and (2) Rental Tools Services. We have completed a business review and as a result have aligned our reportable segments with our two core business lines and our current internal organizational structure. We continue to report our Rental Tools Services business as one reportable segment (Rental Tools); however, effective with the first quarter of 2015, the Company is reporting its Drilling Services business as two segments: (1) U.S. (Lower 48) Drilling and (2) International & Alaska Drilling.
We analyze financial results for each of our reportable segments. The reportable segments presented are consistent with our reportable segments discussed in Note 5 to our condensed consolidated financial statements.
We monitor our reporting segments based on several criteria, including operating gross margin and operating gross margin excluding depreciation and amortization. Operating gross margin excluding depreciation and amortization is computed as revenues less direct operating expenses, and excludes depreciation and amortization expense, where applicable. Operating gross margin percentages are computed as operating gross margin as a percent of revenues. The operating gross margin excluding depreciation and amortization amounts and percentages should not be used as a substitute for those amounts reported under U.S. GAAP. Management believes this information is useful to our investors as it more accurately reflects the cash flow from operations generated by each segment.     
Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014
Revenues of $204.1 million for the three months ended March 31, 2015 decreased $25.1 million, or 11.0 percent, compared with $229.2 million for the three months ended March 31, 2014. Operating gross margin decreased $4.6 million, or 15.9 percent, to $24.3 million, for the three months ended March 31, 2015 compared with $28.9 million for the three months ended March 31, 2014.
    The following is an analysis of our operating results for the comparable periods by reportable segment:
 
Three Months Ended March 31,
Dollars in Thousands
2015
 
2014
Revenues:
 
Drilling Services:
 
 
 
 
 
 
 
U.S. (Lower 48) Drilling
$
14,097

 
7
%
 
$
35,787

 
16
%
International & Alaska Drilling
113,921

 
56
%
 
112,932

 
49
%
Total Drilling Services
128,018

 
63
%
 
148,719

 
65
%
Rental Tools
76,058

 
37
%
 
80,506

 
35
%
Total revenues
204,076

 
100
%
 
229,225

 
100
%
Operating gross margin excluding depreciation and amortization:
 
 
 
 
 
 
 
Drilling Services:
 
 
 
 
 
 
 
U.S. (Lower 48) Drilling
115

 
1
%
 
12,792