================================================================================ 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, 2005 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 (I.R.S. Employer Identification No.) incorporation or organization) 1401 Enclave Parkway, Suite 600, Houston, Texas 77077 ----------------------------------------------------- (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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of April 29, 2005, 95,736,265 common shares were outstanding. ================================================================================ PARKER DRILLING COMPANY INDEX
Page No. ------------- Part I. Financial Information Item 1. Financial Statements 2 Consolidated Condensed Balance Sheets (Unaudited) March 31, 2005 and December 31, 2004 2 Consolidated Condensed Statements of Operations (Unaudited) Three Months Ended March 31, 2005 and 2004 3 Consolidated Condensed Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2005 and 2004 4 Notes to the Unaudited Consolidated Condensed Financial Statements 5 - 16 Report of Independent Registered Public Accounting Firm 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 26 Item 4. Controls and Procedures 26 Part II. Other Information 27 Item 1. Legal Proceedings 27 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 28 Item 6. Exhibits 28 Signatures 29 Officer Certifications
1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
March 31, December 31, 2005 2004 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 66,265 $ 44,267 Accounts and notes receivable, net 104,545 99,315 Rig materials and supplies 20,210 19,206 Deferred costs 11,297 13,546 Other current assets 12,572 9,818 ------------ ------------ Total current assets 214,889 186,152 ------------ ------------ Property, plant and equipment less accumulated depreciation and amortization of $618,232 at March 31, 2005 and $610,485 at December 31, 2004 377,457 382,824 Assets held for sale 2,322 23,665 Goodwill 107,606 107,606 Other noncurrent assets 24,207 26,343 ------------ ------------ Total assets $ 726,481 $ 726,590 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ - $ 24 Accounts payable and accrued liabilities 93,155 72,625 Accrued income taxes 15,891 14,704 ------------ ------------ Total current liabilities 109,046 87,353 ------------ ------------ Long-term debt 455,951 481,039 Other long-term liabilities 6,013 9,281 Contingency (Note 8) - - Stockholders' equity: Common stock 15,942 15,833 Capital in excess of par value 443,233 441,085 Unamortized restricted stock plan compensation (350) (718) Accumulated deficit (303,354) (307,283) ------------ ------------ Total stockholders' equity 155,471 148,917 ------------ ------------ Total liabilities and stockholders' equity $ 726,481 $ 726,590 ============ ============ See accompanying notes to the unaudited consolidated condensed financial statements.
2 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 March 31, -------------------------------- 2005 2004 ------------ ------------ Drilling and rental revenues: U.S. drilling $ 27,117 $ 19,759 International drilling 72,172 56,037 Rental tools 20,954 15,103 ------------ ------------ Total drilling and rental revenues 120,243 90,899 ------------ ------------ Drilling and rental operating expenses: U.S. drilling 14,388 12,691 International drilling 55,803 39,891 Rental tools 8,185 6,613 Depreciation and amortization 16,876 16,249 ------------ ------------ Total drilling and rental operating expenses 95,252 75,444 ------------ ------------ Drilling and rental operating income 24,991 15,455 ------------ ------------ General and administration expense (6,976) (6,042) Gain on disposition of assets, net 552 723 ------------ ------------ Total operating income 18,567 10,136 ------------ ------------ Other income and (expense): Interest expense (11,056) (13,407) Changes in fair value of derivative positions 1,607 - Interest income 238 249 Loss on extinguishment of debt (1,429) (316) Minority interest 769 (290) Other (6) 83 ------------ ------------ Total other income and (expense) (9,877) (13,681) ------------ ------------ Income (loss) before income taxes 8,690 (3,545) Income tax expense 4,852 4,049 ------------ ------------ Income (loss) from continuing operations 3,838 (7,594) Discontinued operations 91 2,730 ------------ ------------ Net income (loss) $ 3,929 $ (4,864) ============ ============ Basic earnings (loss) per share: Income (loss) from continuing operations $ 0.04 $ (0.08) Discontinued operations $ - $ 0.03 Net income (loss) $ 0.04 $ (0.05) Diluted earnings (loss) per share: Income (loss) from continuing operations $ 0.04 $ (0.08) Discontinued operations $ - $ 0.03 Net income (loss) $ 0.04 $ (0.05) Number of common shares used in computing earnings per share: Basic 94,948,637 93,594,900 Diluted 96,145,661 93,594,900 See accompanying notes to the unaudited consolidated condensed financial statements.
3 PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Three Months Ended March 31, -------------------------------- 2005 2004 ------------ ------------ Cash flows from operating activities: Net income (loss) $ 3,929 $ (4,864) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 16,876 16,249 Gain on disposition of assets (552) (723) Expenses not requiring cash 1,523 2,197 Discontinued operations 14 (879) Change in operating assets and liabilities 12,893 8,687 ------------ ------------ Net cash provided by operating activities 34,683 20,667 ------------ ------------ Cash flows from investing activities: Capital expenditures (12,606) (5,323) Proceeds from the sale of assets 22,991 1,310 Proceeds from insurance settlement - 24,300 ------------ ------------ Net cash provided by investing activities 10,385 20,287 ------------ ------------ Cash flows from financing activities: Principal payments under debt obligations (25,024) (15,423) Proceeds from stock options exercised 1,954 250 ------------ ------------ Net cash used in financing activities (23,070) (15,173) ------------ ------------ Net increase in cash and cash equivalents 21,998 25,781 Cash and cash equivalents at beginning of year 44,267 67,765 ------------ ------------ Cash and cash equivalents at end of period $ 66,265 $ 93,546 ============ ============ Supplemental cash flow information: Interest paid $ 3,258 $ 4,402 Income taxes paid $ 2,899 $ 1,607 Supplemental noncash investing activity: Net unrealized loss on investments available for sale $ - $ (156) See accompanying notes to the unaudited consolidated condensed financial statements.
4 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 (the "Company"), the accompanying unaudited consolidated condensed financial statements reflect all adjustments (of a normally recurring nature) which are necessary for a fair presentation of (1) the financial position as of March 31, 2005 and December 31, 2004, (2) the results of operations for the three months ended March 31, 2005 and 2004, and (3) cash flows for the three months ended March 31, 2005 and 2004. Results for the three months ended March 31, 2005 are not necessarily indicative of the results that will be realized for the year ending December 31, 2005. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2004. Our independent registered public accounting firm has performed a review of these interim financial statements in accordance with standards established by the Public Company Accounting Oversight Board (United States). Pursuant to Rule 436(c) under the Securities Act of 1933, their independent registered public accounting firm's report of that review should not be considered a report within the meaning of Section 7 and 11 of that Act, and the independent registered public accounting firm's liability under Section 11 does not extend to it. Stock-Based Compensation - Our stock-based employee compensation plans are accounted for under the recognition and measurement principles of the Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost related to stock options granted is reflected in net income (loss), as all options granted under the plan had an exercise price equal to or greater than the fair market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and net income (loss) per share if we had applied the fair value recognition provisions of the Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS No. 123 to eliminate the alternative under the original statement to account for share-based employee compensation using APB Opinion No. 25 and set the effective date for interim periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission ("SEC") approved a new rule for public companies that defers the effective date of SFAS No. 123R to annual periods beginning after June 15, 2005. We plan to adopt the provisions of the Statement on January 1, 2006 using the modified prospective method.
Three Months Ended March 31, ------------------------------------------------ 2005 2004 -------------------- -------------------- (Dollars in Thousands, Except Per Share Amounts) Net income (loss) as reported $ 3,929 $ (4,864) Stock-based compensation expense included in net income (loss) as reported 876 979 Stock-based compensation expense determined under fair value method, net of tax (956) (1,236) -------------------- -------------------- Net income (loss) pro forma $ 3,849 $ (5,121) ==================== ==================== Basic and diluted loss per share: Net income (loss) as reported $ 0.04 $ (0.05) Net income (loss) pro forma $ 0.04 $ (0.05)
Expected volatility 51.1% March 31, 2005 Expected volatility 59.1% March 31, 2004 Risk free rate 3.38% in 2005 Risk free rate 2.74% in 2004 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions noted above for the three months ended March 31, 2005 and 2004. We assume no dividend yield and that the expected lives of the options range from three to seven years. 5 NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) 2. Earnings Per Share ("EPS")
For the Three Months Ended March 31, 2005 ----------------------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount --------------- --------------- --------------- Basic EPS: Income from continuing operations $ 3,838,000 94,948,637 $ 0.04 Discontinued operations 91,000 - --------------- --------------- Net income $ 3,929,000 $ 0.04 =============== =============== Effect of dilutive securities: Stock options - 1,197,024 - Diluted EPS: Income from continuing operations $ 3,838,000 96,145,661 $ 0.04 Discontinued operations 91,000 - --------------- --------------- Net income $ 3,929,000 $ 0.04 =============== ===============
For the Three Months Ended March 31, 2004 ----------------------------------------------------------- Income (Loss) Shares Per-Share (Numerator) (Denominator) Amount --------------- --------------- --------------- Basic EPS: Loss from continuing operations $ (7,594,000) 93,594,900 $ (0.08) Discontinued operations 2,730,000 0.03 --------------- --------------- Net loss $ (4,864,000) $ (0.05) =============== =============== Diluted EPS: Loss from continuing operations $ (7,594,000) 93,594,900 $ (0.08) Discontinued operations 2,730,000 0.03 --------------- --------------- Net loss $ (4,864,000) $ (0.05) =============== ===============
Options to purchase 4,285,300 shares of common stock with exercise prices ranging from $5.35 to $12.19 per share, were outstanding during the three months ended March 31, 2005, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. For the three months ended March 31, 2004, options to purchase 9,866,091 shares of common stock at prices ranging from $1.96 to $12.19 per share were outstanding but not included in the computation of diluted EPS because the assumed exercise of the options would have had an anti-dilutive effect on EPS due to the net loss incurred during the period. As of March 31, 2004, we had outstanding $94,669,000 of 5.5% Convertible Subordinated Notes which were convertible into 6,151,332 shares of common stock at $15.39 per share. The notes were outstanding since their issuance in July 1997 but were not included in the computation of diluted EPS because the assumed conversion of the notes would have had an anti-dilutive effect on EPS. The 5.5% Convertible Subordinated Notes were paid off on August 2, 2004. 6 NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) 3. Business Segments - The primary services we provide are as follows: U.S. drilling, international drilling and rental tools. Information regarding our operations by industry segment for the three months ended March 31, 2005 and 2004 is as follows:
Three Months Ended March 31, -------------------------------------- 2005 2004 --------------- --------------- (Dollars in Thousands) Drilling and rental revenues: U.S. drilling $ 27,117 $ 19,759 International drilling 72,172 56,037 Rental tools 20,954 15,103 --------------- --------------- Total drilling and rental revenues $ 120,243 $ 90,899 =============== =============== Drilling and rental operating income: U.S. drilling $ 8,093 $ 2,312 International drilling 7,882 8,144 Rental tools 9,016 4,999 --------------- --------------- Total drilling and rental operating income 24,991 15,455 General and administrative expense (6,976) (6,042) Gain on disposition of assets, net 552 723 --------------- --------------- Total operating income 18,567 10,136 Interest expense (11,056) (13,407) Changes in fair value of derivative positions 1,607 - Loss on extinguishment of debt (1,429) (316) Other 1,001 42 --------------- --------------- Income (loss) before income taxes $ 8,690 $ (3,545) =============== ===============
4. Discontinued Operations - Discontinued operations in the first quarter of 2004 include results of operations for U.S. Gulf of Mexico offshore assets consisting of seven jackup rigs and four platform rigs. Under a plan approved by our board of directors in June 2003, nine of the rigs were sold in the third quarter of 2004 and one was sold in January 2005. Jackup rig 14 was damaged in September 2003 when it malfunctioned and became partially submerged. We received a total loss settlement of $27.0 million, of which $24.3 million was received in March 2004. The remaining $2.7 million was received in April 2004. The cost incurred to tow the rig to the port and pay for the damage assessment approximated $4.0 million resulting in net insurance proceeds of approximately $23.0 million. The net book value of jackup rig 14 was $17.7 million at March 31, 2004. In compliance with Generally Accepted Accounting Principles ("GAAP"), we were required to recognize the gain on insurance proceeds in excess of the net book value of the asset. When considered separately from the other U.S. Gulf of Mexico offshore disposal group, this resulted in a gain of approximately $5.3 million from the damage to the rig. After considering the impact of the gain, we determined that the overall valuation of the U.S. Gulf of Mexico offshore group was unchanged from the fair value assessment at June 30, 2003. As a result, we recognized an additional impairment of $5.3 million which, along with the gain, was reported in discontinued operations during the first quarter of 2004. The three months ended March 31, 2005, include the operations of the last jackup rig prior to its sale on January 3, 2005. 7 NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) Analysis of Discontinued Operations
Three Months Ended March 31, ------------------------------------- 2005 2004 --------------- --------------- (Dollars in Thousands) U.S. jackup and platform drilling revenues $ 193 $ 12,399 =============== =============== Income from discontinued operations $ 91 $ 2,730 =============== ===============
5. Income Tax Expense - Income tax expense from operations consists of $4.9 million foreign tax expense for the first quarter of 2005, as compared to foreign tax expense of $4.0 million for the first quarter of 2004. The $0.9 million increase was primarily due to operations in Mexico which began in July 2004, offset by decreased taxes in Nigeria and Kazakhstan. For the first quarter of 2005, we reported net income and for the first quarter of 2004, we reported a net loss. However, no additional deferred tax benefit was recognized since the sum of our deferred tax assets, principally the net operating loss carryforwards, exceeds the deferred tax liabilities, principally the excess of tax depreciation over book depreciation. 6. Long-Term Debt
March 31, 2005 December 31, 2004 ------------------ ------------------ (Dollars in Thousands) Senior Notes: Interest rate 10.125%, due 2009 $ 130,951 $ 156,039 Interest rate floating (LIBOR + 4.75%), due 2010 150,000 150,000 Interest rate 9.625%, due 2013 175,000 175,000 Capital Lease - 24 ------------------ ------------------ Total debt 455,951 481,063 Less current portion - 24 ------------------ ------------------ Total long-term debt $ 455,951 $ 481,039 ================== ==================
On February 7, 2005, we retired an additional $25.0 million face value of our 10.125% Senior Notes pursuant to a redemption notice dated January 6, 2005 at the redemption price of 105.0625 percent. Proceeds from the sale of jackup rig 25 and cash on hand were used to fund the redemption. Our current $40.0 million credit facility is available for general corporate purposes and to fund reimbursement obligations of letters of credit the banks issue on our behalf pursuant to the terms of the credit facility. Availability under the revolving credit facility is subject to a borrowing base limitation of 85 percent of eligible receivables plus a value for eligible rental tools equipment. The credit facility calls for a borrowing base calculation only when the credit facility has outstanding loans or letters of credit totaling at least $25.0 million. As of March 31, 2005, there were $10.3 million letters of credit outstanding and no loans. On April 21, 2005, we issued an additional $50.0 million in aggregate principal amount of our 9.625% Senior Notes due 2013 at a premium. The offering price of 111 percent of the principal amount resulted in gross proceeds of $55.5 million. The additional notes were issued under an indenture, dated as of October 10, 2003, under which $175.0 million in aggregate principal amount of notes of the same series were previously issued. On April 21, 2005, we issued a redemption notice to retire $65.0 million of our 10.125% Senior Notes at the redemption price of 105.0625 percent. The redemption will close on May 21, 2005 and will be funded by the net proceeds of the $50.0 million additional 9.625% Senior Notes and cash on hand. 8 NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) 7. Derivative Instruments - We use derivative instruments to manage risks associated with interest rate fluctuations in connection with our $150.0 million Senior Floating Rate Notes. Derivative instruments, which consist of variable-to-fixed interest rate swaps, do not meet the hedge criteria in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and are therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings. As of March 31, 2005, we had the following derivative instruments outstanding related to our interest rate swaps, which are included in "Other noncurrent assets":
Swap Effective Termination Notional Floating Fixed Fair Agreement Date Date Amount Rate Rate Value --------- ----------------- ----------------- -------- --------------------- ----- ----- (Dollars in Thousands) 1 September 1, 2005 September 2, 2008 $ 50,000 Three-month LIBOR 8.83% $ 332 plus 475 basis points 1 September 1, 2005 September 4, 2007 $ 50,000 Three-month LIBOR 8.48% 480 plus 475 basis points ----- $ 812 =====
8. Contingency - As previously reported, the Kazakhstan branch ("PKD Kazakhstan") of Parker Drilling Company International Limited ("PDCIL") prevailed on its appeal arising out of an audit assessment of approximately $29.0 million by the Ministry of State Revenues of Kazakhstan ("MSR") based on payments PDCIL received from the operator to upgrade barge rig 257. The MSR did not appeal this ruling within the time required for a supervisory appeal, but in February 2005 filed an application for re-hearing based on new evidence. PKD Kazakhstan has filed an objection to this application for rehearing. The Supreme Court of Kazakhstan issued an order on April 12, 2005, declining the Ministry of Finance of Kazakhstan's ("MinFin") application for re-hearing. In a related matter, based on its interpretation of the initial ruling of the Kazakhstan Supreme Court, MinFin made a claim on March 10, 2003 for corporate income taxes based primarily on the disallowance of depreciation of the full value of barge rig 257 in the income tax returns of PKD Kazakhstan for the years 1999-2001. PKD Kazakhstan instituted legal proceedings to challenge the validity of these claims by MinFin, which ultimately resulted in the Supreme Court confirming the decision of the Astana City Court, which earlier had ruled that approximately $7.7 million of the claims of MinFin all of which have been expensed in prior periods are valid and payable upon receipt of the re-issuance of the corrected notice from the relevant taxing authority. MinFin has not issued a corrected notice; however, PKD Kazakhstan's available credits were reduced by approximately $7.1 million leaving a remaining balance due of $0.6 million. While the Supreme Court disallowed depreciation for the years 1999-2001, the judgment does allow PKD Kazakhstan to depreciate the full value of barge rig 257 on its tax returns beginning in 2002, which will reduce taxable income and taxes to be paid in the future. We continue to pursue our petition with the U.S. Treasury Department for Competent Authority review, which is a tax treaty procedure to resolve disputes as to which country may tax income covered under the treaty. The U.S. Treasury Department has granted our petition and has initiated proceedings with the MSR which are ongoing. 9 NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued) 9. Subsequent Event - On May 6, 2005 we entered into definitive agreements with affiliates of Saxon Energy Services, Inc. ("Saxon") to sell our seven remaining land rigs and related assets in Colombia and Peru. The total purchase price is $34 million. One of the agreements closed simultaneously with the execution of the definitive agreement, resulting in receipt of approximately $4 million. We anticipate closing the remaining transactions within the next 30 days, subject to obtaining contractual related consents and various third party approvals. Proceeds from the sale will be used to retire debt. 10. Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements - Set forth on the following pages are the unaudited consolidating condensed financial statements of (i) Parker Drilling, (ii) our restricted subsidiaries that are guarantors of the Senior Notes and (iii) our restricted and unrestricted subsidiaries that are not guarantors of the Senior Notes. All of our Senior Notes are guaranteed by substantially all of the restricted subsidiaries of Parker Drilling. 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. AralParker (a Kazakhstan closed joint stock company, owned 50 percent by Parker Drilling (Kazakstan) Ltd. and 50 percent by Aralnedra, CJSC), Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria), Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., Parker TNK, PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, Inc.) and Universal Rig Leasing B.V. are all non-guarantor subsidiaries. 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, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and 2004. The condensed consolidating financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting. 10 PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATING CONDENSED BALANCE SHEET (Dollars in Thousands)
March 31, 2005 ---------------------------------------------------------------------- Parent Guarantor Non-Guarantor Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 39,804 $ 7,305 $ 19,156 $ - $ 66,265 Accounts and notes receivable, net 178,073 105,487 39,309 (218,324) 104,545 Rig materials and supplies - 15,440 4,770 - 20,210 Deferred costs - 5,010 6,287 - 11,297 Other current assets 3,725 8,315 432 100 12,572 ----------- ----------- ----------- ----------- ----------- Total current assets 221,602 141,557 69,954 (218,224) 214,889 ----------- ----------- ----------- ----------- ----------- Property, plant and equipment, net 134 410,178 37,659 (70,514) 377,457 Assets held for sale - 1,609 713 - 2,322 Goodwill - 107,606 - - 107,606 Investment in subsidiaries and intercompany advances 453,258 820,016 34,382 (1,307,656) - Other noncurrent assets 14,004 9,461 781 (39) 24,207 ----------- ----------- ----------- ----------- ----------- Total assets $ 688,998 $ 1,490,427 $ 143,489 $(1,596,433) $ 726,481 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 43,366 $ 235,785 $ 44,677 $ (230,673) $ 93,155 Accrued income taxes 1,306 13,362 1,223 - 15,891 ----------- ----------- ----------- ----------- ----------- Total current liabilities 44,672 249,147 45,900 (230,673) 109,046 ----------- ----------- ----------- ----------- ----------- Long-term debt 455,951 - - - 455,951 Other long-term liabilities (41,679) 47,658 34 - 6,013 Intercompany payables 74,583 593,674 27,598 (695,855) - Stockholders' equity: Common stock 15,942 39,899 21,251 (61,150) 15,942 Capital in excess of par value 443,233 977,562 33,783 (1,011,345) 443,233 Unamortized restricted stock plan compensation (350) - - - (350) Retained earnings (accumulated deficit) (303,354) (417,513) 14,923 402,590 (303,354) ----------- ----------- ----------- ----------- ----------- Total stockholders' equity 155,471 599,948 69,957 (669,905) 155,471 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity $ 688,998 $ 1,490,427 $ 143,489 $(1,596,433) $ 726,481 =========== =========== =========== =========== ===========
11 PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATING CONDENSED BALANCE SHEET (Dollars in Thousands)
December 31, 2004 ---------------------------------------------------------------------- Parent Guarantor Non-Guarantor Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 16,677 $ 7,938 $ 19,652 $ - $ 44,267 Accounts and notes receivable, net 176,548 101,445 38,213 (216,891) 99,315 Rig materials and supplies - 13,593 5,613 - 19,206 Deferred costs - 5,266 8,280 - 13,546 Other current assets 3,894 4,885 950 89 9,818 ----------- ----------- ----------- ----------- ----------- Total current assets 197,119 133,127 72,708 (216,802) 186,152 ----------- ----------- ----------- ----------- ----------- Property, plant and equipment, net 134 415,027 38,177 (70,514) 382,824 Assets held for sale - 22,952 713 - 23,665 Goodwill - 107,606 - - 107,606 Investment in subsidiaries and intercompany advances 489,143 771,475 35,422 (1,296,040) - Other noncurrent assets 14,005 11,007 1,331 - 26,343 ----------- ----------- ----------- ----------- ----------- Total assets $ 700,401 $ 1,461,194 $ 148,351 $(1,583,356) $ 726,590 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 24 $ - $ - $ - $ 24 Accounts payable and accrued liabilities 34,772 215,852 42,156 (220,155) 72,625 Accrued income taxes 1,677 12,726 301 - 14,704 ----------- ----------- ----------- ----------- ----------- Total current liabilities 36,473 228,578 42,457 (220,155) 87,353 ----------- ----------- ----------- ----------- ----------- Long-term debt 481,039 - - - 481,039 Other long-term liabilities (40,611) 48,578 1,275 39 9,281 Intercompany payables 74,583 593,674 29,695 (697,952) - Stockholders' equity: Common stock 15,833 39,899 21,251 (61,150) 15,833 Capital in excess of par value 441,085 977,563 33,783 (1,011,346) 441,085 Unamortized restricted stock plan compensation (718) - - - (718) Retained earnings (accumulated deficit) (307,283) (427,098) 19,890 407,208 (307,283) ----------- ----------- ----------- ----------- ----------- Total stockholders' equity 148,917 590,364 74,924 (665,288) 148,917 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity $ 700,401 $ 1,461,194 $ 148,351 $(1,583,356) $ 726,590 =========== =========== =========== =========== ===========
12 PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (Dollars in Thousands)
Three Months Ended March 31, 2005 ----------------------------------------------------------------------- Parent Guarantor Non-Guarantor Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ Drilling and rental revenues $ - $ 89,144 $ 34,943 $ (3,844) $ 120,243 Drilling and rental operating expenses - 47,908 34,323 (3,855) 78,376 Depreciation and amortization - 15,911 965 - 16,876 ----------- ----------- ----------- ----------- ----------- Drilling and rental operating income (loss) - 25,325 (345) 11 24,991 ----------- ----------- ----------- ----------- ----------- General and administration expense(1) (42) (6,934) - - (6,976) Gain on disposition of assets, net - 347 205 - 552 ----------- ----------- ----------- ----------- ----------- Total operating income (loss) (42) 18,738 (140) 11 18,567 ----------- ----------- ----------- ----------- ----------- Other income and (expense): Interest expense (12,248) (12,287) (755) 14,234 (11,056) Changes in fair value of derivative positions 1,607 - - - 1,607 Interest income 11,639 2,123 710 (14,234) 238 Loss on extinguishment of debt (1,429) - - - (1,429) Minority interest - - 769 - 769 Other - (6) 11 (11) (6) Equity in net earnings of subsidiaries 4,608 - - (4,608) - ----------- ----------- ----------- ----------- ----------- Total other income and (expense) 4,177 (10,170) 735 (4,619) (9,877) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes 4,135 8,568 595 (4,608) 8,690 Income tax expense 206 2,831 1,815 - 4,852 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations 3,929 5,737 (1,220) (4,608) 3,838 Discontinued operations - 91 - - 91 ----------- ----------- ----------- ----------- ----------- Net income (loss) $ 3,929 $ 5,828 $ (1,220) $ (4,608) $ 3,929 =========== =========== =========== =========== ===========
(1) All field operations general and administration expenses are included in operating expenses. 13 PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS (Dollars in Thousands)
Three Months Ended March 31, 2004 ----------------------------------------------------------------------- Parent Guarantor Non-Guarantor Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ Drilling and rental revenues $ - $ 76,845 $ 14,591 $ (537) $ 90,899 Drilling and rental operating expenses - 47,808 11,878 (491) 59,195 Depreciation and amortization - 15,023 1,226 - 16,249 ----------- ----------- ----------- ----------- ----------- Drilling and rental operating income - 14,014 1,487 (46) 15,455 ----------- ----------- ----------- ----------- ----------- General and administration expense(1) 179 (6,221) - - (6,042) Gain on disposition of assets, net - 723 - - 723 ----------- ----------- ----------- ----------- ----------- Total operating income 179 8,516 1,487 (46) 10,136 ----------- ----------- ----------- ----------- ----------- Other income and (expense): Interest expense (14,599) (11,536) (914) 13,642 (13,407) Interest income 12,321 1,140 430 (13,642) 249 Loss on extinguishment of debt (316) - - - (316) Minority interest - - (290) - (290) Other - 83 (46) 46 83 Equity in net losses of subsidiaries (2,205) - - 2,205 - ----------- ----------- ----------- ----------- ----------- Total other income and (expense) (4,799) (10,313) (820) 2,251 (13,681) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes (4,620) (1,797) 667 2,205 (3,545) Income tax expense 244 3,805 - - 4,049 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations (4,864) (5,602) 667 2,205 (7,594) Discontinued operations - 2,730 - - 2,730 ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (4,864) $ (2,872) $ 667 $ 2,205 $ (4,864) =========== =========== =========== =========== ===========
(1) All field operations general and administration expenses are included in operating expenses. 14 PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (Dollars in Thousands)
Three Months Ended March 31, 2005 ----------------------------------------------------------------------- Parent Guarantor Non-Guarantor Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ Cash flows from operating activities: Net income (loss) $ 3,929 $ 5,828 $ (1,220) $ (4,608) $ 3,929 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization - 15,911 965 - 16,876 Gain on disposition of assets - (347) (205) - (552) Expenses not requiring cash 1,135 388 - - 1,523 Equity in net earnings of subsidiaries 4,608 - - (4,608) - Discontinued operations - 14 - - 14 Change in operating assets and liabilities 5,248 (2,766) 1,195 9,216 12,893 ----------- ----------- ----------- ----------- ----------- Net cash provided by operating activities 14,920 19,028 735 - 34,683 ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures - (11,850) (756) - (12,606) Proceeds from the sale of assets - 22,409 582 - 22,991 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities - 10,559 (174) - 10,385 ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Principal payments under debt obligations (25,024) - - - (25,024) Proceeds from stock options exercised 1,954 - - - 1,954 Intercompany advances, net 31,277 (30,220) (1,057) - - ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 8,207 (30,220) (1,057) - (23,070) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 23,127 (633) (496) - 21,998 Cash and cash equivalents at beginning of year 16,677 7,938 19,652 - 44,267 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 39,804 $ 7,305 $ 19,156 $ - $ 66,265 =========== =========== =========== =========== ===========
15 PARKER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (Dollars in Thousands)
Three Months Ended March 31, 2004 ----------------------------------------------------------------------- Parent Guarantor Non-Guarantor Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ Cash flows from operating activities: Net income (loss) $ (4,864) $ (2,872) $ 667 $ 2,205 $ (4,864) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization - 15,023 1,226 - 16,249 Gain on disposition of assets - (723) - - (723) Expenses not requiring cash 1,522 680 (5) - 2,197 Equity in net losses of subsidiaries (2,205) - - 2,205 - Discontinued operations - (879) - - (879) Change in operating assets and liabilities (767) 7,159 6,705 (4,410) 8,687 ----------- ----------- ----------- ----------- ----------- Net cash (used in) provided by operating activities (6,314) 18,388 8,593 - 20,667 ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures - (5,321) (2) - (5,323) Proceeds from the sale of assets - 1,310 - - 1,310 Proceeds from insurance settlement - 24,300 - - 24,300 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities - 20,289 (2) - 20,287 ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Principal payments under debt obligations (15,556) 133 - - (15,423) Proceeds from stock options exercised 250 - - - 250 Intercompany advances, net 44,938 (33,252) (11,686) - - ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 29,632 (33,119) (11,686) - (15,173) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 23,318 5,558 (3,095) - 25,781 Cash and cash equivalents at beginning of year 53,055 7,806 6,904 - 67,765 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 76,373 $ 13,364 $ 3,809 $ - $ 93,546 =========== =========== =========== =========== ===========
16 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders Parker Drilling Company We have reviewed the accompanying consolidated condensed balance sheet of Parker Drilling Company and subsidiaries as of March 31, 2005 and the related consolidated condensed statements of operations for the three month periods ended March 31, 2005 and 2004 and the consolidated condensed statements of cash flows for the three month periods ended March 31, 2005 and 2004. These interim financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated condensed interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 and the effectiveness of the Company's internal control over financial reporting as of December 31, 2004; and in our report (which contains an explanatory paragraph for a change in accounting for goodwill), dated March 15, 2005, we expressed unqualified opinions thereon. The consolidated financial statements and management's assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2004, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/PricewaterhouseCoopers LLP ----------------------------- PricewaterhouseCoopers LLP Houston, Texas May 6, 2005 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this Quarterly Report on Form 10-Q, the terms "Parker Drilling," "we," "us" and "our" refer to Parker Drilling Company, its subsidiaries and the consolidated joint ventures, unless the context requires otherwise. 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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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: o prices and demand for oil and natural gas; o levels of oil and natural gas exploration and production activities; o demand for contract drilling and drilling-related services and demand for rental tools; o our future operating results; o our future rig utilization, rig dayrates and rental tools activity; o our future capital expenditures and investments in the acquisition and refurbishment of rigs and equipment; o our future liquidity; o availability and sources of funds to reduce our debt and expectations of when debt will be reduced; o future sales of our assets; o the outcome of pending and future legal proceedings; o our recovery of insurance proceeds in respect to our damaged rig in Nigeria; o compliance with covenants under our credit facilities; and o expansion and growth of our operations. In some cases, you can identify these statements by words that indicate future events 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. The following factors, as well as any other cautionary language in this Form 10-Q and other documents referenced herein, 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: o worldwide economic and business conditions that adversely affect market conditions and/or the cost of doing business; o the U.S. economy and the demand for natural gas; o fluctuations in the market prices of oil and gas; o imposition of unanticipated trade restrictions; o unanticipated operating hazards and uninsured risks; o political instability, terrorism or war; o governmental regulations, including changes in tax laws or ability to remit funds to the U.S., that adversely affect the cost of doing business; o adverse environmental events; o adverse weather conditions; o changes in the concentration of customer and supplier relationships; o unexpected cost increases for upgrade and refurbishment projects; o delays in obtaining components for capital projects; o shortages of skilled labor; o unanticipated cancellation of contracts by operators without cause; o breakdown of equipment and other operational problems; o changes in competition; and o other similar factors (some of which are discussed in documents referred to in this Form 10-Q). 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 above and elsewhere in this Form 10-Q could have a material adverse effect on our business, results of operations and financial condition. 18 OUTLOOK AND OVERVIEW As anticipated in our annual report, we returned to profitability in the first quarter of 2005. Favorable market conditions continued to positively impact utilization and dayrates for most segments of our drilling operations and rental tools business during the first quarter. Robust demand and uncertainty over possible disruptions in supply have kept oil and gas prices strong and absent any material change in these market forces, we believe that these conditions will continue through 2005. Our outlook for all regions is positive. Our eight-rig operation in Mexico, which achieved 100 percent operating status late in the third quarter of 2004, continued to operate at 100 percent during the first quarter. These rigs are under contracts with Petroleos Mexicanos S.A. ("Pemex") and Halliburton de Mexico ("Halliburton") through the first quarter of 2006 and the contracts include options for extensions beyond the initial period. We entered into definitive agreements to sell our remaining seven rigs in Colombia and Peru on May 6, 2005. We expect to recognize a gain on the disposition of these assets, and, by using the proceeds to retire debt, on-going earnings and cash flow will not be impaired. In Kazakhstan, utilization of our five land rigs remains at 80 percent and barge rig 257, which operates in the north Caspian Sea, began drilling at the end of December under a two-well contract which the operator has the right to extend for up to four additional wells. Rig 236 is in route from its last operating location in Usinsk, Russia to Turkmenistan, which will bring the total to three rigs we will have working under contract with Calik Enerji, A.S. ("Calik"). In Indonesia, two rigs that had been stacked are now under contract with the potential for a third rig to return to work. In addition, we anticipate that in June, we will begin earning revenue pursuant to a five-year contract to provide operations and maintenance for a second rig in Sakhalin Island, Russia. Barge rigs 73 and 75 in Nigeria continue to operate under multiple year contracts. In the U.S., barge rig 72, which began its move from Nigeria to the U.S. Gulf of Mexico region in late 2004, arrived in February and began a multi-well contract in late April. Heightened demand for drilling in this area has continued to cause dayrates to increase. As of March 31, 2005, we had approximately $96.0 million of liquidity. This liquidity was comprised of $66.3 million of cash on hand and $29.7 million of availability under our revolving credit facility. As of March 31, 2005, we have reduced our debt by $134.0 million since the beginning of 2003, $25.0 million of which has occurred during 2005, and our outstanding debt balance is currently $456.0 million, compared to the balance as of December 31, 2004, of $481.0 million and a balance of $590.0 million when we established our goal of reducing debt by $200 million. The debt reduction has resulted in a $2.4 reduction in interest expense in the first quarter of 2005 as compared to the first quarter of 2004. In our first quarter earnings release conference call, we reaffirmed our previously announced guidance of net income per share of $0.05 to $0.14 for 2005, though based on the results in the first quarter we would expect to be more toward the mid to high end of the range. This guidance includes approximately $0.04 per share expense related to the call premium on the $65.0 million debt redemption discussed in Note 6 in the notes to the unaudited consolidated condensed financial statements. RESULTS OF OPERATIONS Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004 We recorded net income of $3.9 million for the three months ended March 31, 2005, including income of $0.1 million attributable to discontinued operations, as compared to a net loss of $4.9 million for the three months ended March 31, 2004, including income of $2.7 million attributable to discontinued operations. Our income from continuing operations for the current quarter was $3.8 million compared to a loss of $7.6 million from continuing operations for the three months ended March 31, 2004. As of March 31, 2005 we have achieved 67 percent of our goal of $200 million of debt reduction. We anticipate that additional asset sales should enable us to achieve 100 percent of the goal by the end of 2005. As discussed above, we have already achieved our goal of returning to profitability. 19 RESULTS OF OPERATIONS (continued) The analysis below begins with a breakdown of the continuing operations followed by a discussion of discontinued operations.
Three Months Ended March 31, ------------------------------------------------------------ 2005 2004 ---------------------------- --------------------------- (Dollars in Thousands) Drilling and rental revenues: U.S. drilling $ 27,117 23% $ 19,759 22% International drilling 72,172 60% 56,037 61% Rental tools 20,954 17% 15,103 17% ------------ ------------ ------------ ------------ Total drilling and rental revenues $ 120,243 100% $ 90,899 100% ============ ============ ============ ============ Drilling and rental operating income: U.S. drilling gross margin(1) $ 12,729 47% $ 7,068 36% International drilling gross margin(1) 16,369 23% 16,146 29% Rental tools gross margin(1) 12,769 61% 8,490 56% Depreciation and amortization (16,876) (16,249) ------------ ------------ Total drilling and rental operating income(2) 24,991 15,455 General and administration expense (6,976) (6,042) Gain on disposition of assets, net 552 723 ------------ ------------ Total operating income $ 18,567 $ 10,136 ============ ============
(1) Drilling and rental gross margins are computed as drilling and rental revenues less direct drilling and rental operating expenses, excluding depreciation and amortization expense; drilling and rental gross margin percentages are computed as drilling and rental gross margin as a percent of drilling and rental revenues. The gross margin amounts and gross margin percentages should not be used as a substitute for those amounts reported under GAAP. However, we monitor our business segments based on several criteria, including drilling and rental gross margin. Management believes that this information is useful to our investors because it more closely tracks cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows:
International U.S. Drilling Drilling Rental Tools ------------- ------------- ------------ (Dollars in Thousands) Three Months Ended March 31, 2005 ---------------------------------------- Drilling and rental operating income(2) $ 8,093 $ 7,882 $ 9,016 Depreciation and amortization 4,636 8,487 3,753 ------------ ------------ ------------ Drilling and rental gross margin $ 12,729 $ 16,369 $ 12,769 ============ ============ ============ Three Months Ended March 31, 2004 ---------------------------------------- Drilling and rental operating income(2) $ 2,312 $ 8,144 $ 4,999 Depreciation and amortization 4,756 8,002 3,491 ------------ ------------ ------------ Drilling and rental gross margin $ 7,068 $ 16,146 $ 8,490 ============ ============ ============
(2) Drilling and rental operating income - drilling and rental revenues less direct drilling and rental operating expenses, including depreciation and amortization expense. U.S. Drilling Segment The U.S. drilling segment, consisting of 19 barge rigs, experienced increases in both rig utilization and dayrates during the first quarter of 2005. As a result, revenues increased $7.4 million to $27.1 million as compared to the first quarter of 2004. The increased revenues were primarily due to the operation of barge rigs 26 and 20 which were reactivated in the fourth quarter of 2004 and high utilization for all rigs during the quarter until late in the quarter when barge rig 12 came off contract. Barge rig utilization increased from 62 percent during the first quarter of 2004 to 77 percent in the current quarter and dayrates increased approximately 24 percent. In February, barge rig 72 was relocated to the U.S. Gulf of Mexico region from Nigeria and renovations began. After the move of this rig, we have nine deep drilling barges, four intermediate drilling barges and six workover rigs in the U.S. Gulf of Mexico market. Rig 72 began a multi-well contract in late April 2005. 20 RESULTS OF OPERATIONS (continued) U.S. Drilling Segment (continued) As a result of approximately 24 percent higher dayrates and increased utilization as compared to the first quarter of 2004, gross margins in the U.S. drilling segment increased $5.7 million to $12.7 million. Gross margins increased primarily due to higher dayrates. Gross margin percentage increased from 36 percent during the first quarter of 2004 to 47 percent during the first quarter of 2005. International Drilling Segment International drilling revenues increased $16.1 million to $72.2 million during the current quarter as compared to the first quarter of 2004. International land drilling revenues increased $12.0 million on utilization of 67 percent compared to 46 percent in the first quarter of 2004. International offshore revenues increased by $4.1 million. The international land drilling revenues increase is primarily attributable to drilling operations in Mexico, where seven land rigs began operating in the third quarter of 2004. There were also increased revenues in Papua New Guinea, New Zealand and Turkmenistan, which were offset by decreased revenues in Russia, Peru, and Tengizchevroil ("TCO"). The increase in Papua New Guinea is the result of both rigs operating the entire quarter and two additional rigs under labor contract during 2005 as opposed to one rig operating during the quarter and one rig under labor contract in March 2004; in New Zealand, is the result of all three rigs working the entire quarter of 2005, compared to two rigs working in the first quarter of 2004; and in Turkmenistan, where both rigs worked the entire first quarter of 2005, compared to last year when the second rig operated only during March. The decline of revenues in Russia is due to rig 236 operating in the first quarter of 2004, before being released in June 2004; in Peru, where rig 228 was on standby rate in the first quarter of 2005 as opposed to full dayrate during the comparable period in 2004, and revenue declines from operations under our TCO contract, due to one of the TCO-owned rigs being stacked in 2005 and lower dayrates on other rigs. Operating expenses for the international land operations increased at a slightly higher rate than the increase in revenues. The majority of the increase in operating expense was due to the drilling operations in Mexico, however, there were also increased labor costs in Papua New Guinea, New Zealand and at our TCO operation. While our operations in Mexico contributed $3.2 million to our gross margin, margin percentages in this region are lower than in our other international land regions. These lower average gross margins associated with the Mexican operations and the declining margins in Papua New Guinea, New Zealand and TCO related to the increased expenses have caused the gross margin percentages for international land operations to decrease by eight percent to 25 percent in the quarter ended March 31, 2005 as compared to the first quarter of 2004. International offshore revenues increased $4.1 million to $15.6 million during the first quarter of 2005 as compared to the first quarter of 2004. Our Caspian Sea operation revenues increased by $7.0 million as we operated rig 257 at full dayrate for the first quarter of 2005, compared to 2004 when the rig was stacked. Barge rig 53 in Mexico, which was not operational until the second quarter of 2004, contributed another $2.2 million in revenues. These increases were partially offset by lower revenues in Nigeria, where we operated only two rigs at reduced dayrates in the first quarter of 2005 as compared to three rigs generating revenues in the first quarter of 2004. Rig 74 was on a force majeure rate of 45 percent in Nigeria for most of the first quarter of 2004, but was removed from our marketable rig count in December 2004. In addition, barge rigs 73 and 75 operated at lower dayrates in 2005 as compared to 2004. International offshore gross margins improved by $0.7 million due to Caspian Sea operations and Mexico offshore rig increases which were partially offset by rig count and dayrate declines in Nigeria. 21 RESULTS OF OPERATIONS (continued) Rental Tools Segment Rental tools revenues increased $5.8 million to $20.9 million during the first quarter of 2005 as compared to the first quarter of 2004. Revenues increased at our Wyoming and Texas locations. We also had revenues from international sources in the first quarter of 2005, as we continued to expand our rental tools business in international locales. The revenues increased primarily due to higher demand and higher rental rates. The increased revenues in our Texas locations have been driven by increased activity with new customers, generally small independents. Rental tools gross margins increased $4.3 million to $12.8 million for the current quarter as compared to the first quarter of 2004. Gross margin percentage increased from 56 percent to 61 percent due primarily to the 39 percent increase in revenues combined with only a 24 percent increase in operating costs. Other Financial Data General and administration expense increased approximately $0.9 million to $7.0 million during the first quarter of 2005. The increase is attributable to higher professional and consulting fees. In 2004, we entered into two variable-to-fixed interest rate swap agreements, which are still outstanding. The swap agreements do not qualify for hedge accounting and accordingly, we are reporting the mark-to-market change in the fair value of the interest rate derivatives currently in earnings. For the three months ended March 31, 2005, we recognized a $1.6 million increase in the fair value of the derivative positions. For additional information see Note 7 in the notes to the unaudited consolidated condensed financial statements. In February 2005, we repurchased $25.0 million of our 10.125% Senior Notes with proceeds we had received in January 2005 from the sale of jackup rig 25. Total charges expensed during the quarter were $1.4 million consisting of the 105.0625 percent premium on the repurchase of the 10.125% Senior Notes and the write-off of the previously capitalized debt issuance costs associated with the 10.125% Senior Notes. The $1.4 million charge was recorded as a loss on extinguishment of debt in the statement of operations. Income tax expense from operations consists of $4.9 million foreign tax expense for the first quarter of 2005 as compared to foreign tax expense of $4.0 million for the first quarter of 2004. The $0.9 million increase in taxes during the current three-month period was primarily due to operations in Mexico in 2005 that did not begin until the second quarter of 2004, offset by decreased taxes in Nigeria and Kazakhstan. For the first quarter of 2005 we reported net income and for the first quarter of 2004, we reported a net loss. However, no additional deferred tax benefit was recognized since the sum of our deferred tax assets, principally the net operating loss carryforwards, exceeds the deferred tax liabilities, principally the excess of tax depreciation over book depreciation. 22 RESULTS OF OPERATIONS (continued) Analysis of Discontinued Operations
Three Months Ended March 31, ---------------------------------- 2005 2004 --------------- --------------- (Dollars in Thousands) U.S. jackup and platform drilling revenues $ 193 $ 12,399 =============== =============== U.S. jackup and platform drilling gross margin(1) $ 105 $ 2,730 Gain (loss) on disposition of assets, net of impairment (14) - --------------- --------------- Income from discontinued operations $ 91 $ 2,730 =============== ===============
(1) Drilling gross margin is computed as drilling revenues less direct drilling operating expenses, excluding depreciation and amortization expense. The gross margin amounts and gross margin percentages should not be used as a substitute for those amounts reported under GAAP. However, we monitor our business segments based on several criteria, including drilling gross margin. Management believes that this information is useful to our investors because it more closely tracks cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows:
Three Months Ended March 31, --------------------------------- 2005 2004 --------------- --------------- (Dollars in Thousands) U.S. jackup and platform drilling revenues $ 193 $ 12,399 =============== =============== Income from discontinued operations $ 91 $ 2,730 =============== ===============
U. S. jackup and platform drilling revenues decreased $12.2 million to $0.2 million during the current quarter as compared to the first quarter of 2004. Revenues decreased as a result of the sale of all but one jackup rig in early August 2004. Jackup rig 25 worked the first few days of 2005 until its sale on January 3, 2005. LIQUIDITY AND CAPITAL RESOURCES Operating Cash Flows As of March 31, 2005, we had cash and cash equivalents of $66.3 million, an increase of $22.0 million from December 31, 2004. The primary sources of cash for the three-month period as reflected on the consolidated condensed statements of cash flows were $34.7 million provided by operating activities and $23.0 million of proceeds from the disposition of assets. The primary uses of cash for the three-month period ended March 31, 2005 were $12.6 million for capital expenditures and $23.1 million for financing activities. Major capital expenditures for the period included $5.2 million for tubulars and other rental tools. Our financing activities include a net reduction in debt of $25.0 million, net of premium and are further detailed in a subsequent paragraph. As of March 31, 2004, we had cash and cash equivalents of $93.5 million, an increase of $25.8 million from December 31, 2003. The primary sources of cash for the three-month period as reflected on the consolidated condensed statements of cash flows were $20.7 million provided by operating activities, $24.3 million of insurance proceeds, and $1.3 million proceeds from the disposition of equipment. The remaining $2.7 million of insurance proceeds on jackup rig 14 were collected in early April 2004. The primary uses of cash for the three-month period ended March 31, 2004 were $5.3 million for capital expenditures and $15.4 million for reduction of debt. Major capital expenditures for the period included $1.5 million to refurbish barge rig 53 for an upcoming contract in Mexico. The major components of our debt reduction were the purchases of $10.5 million face value of our outstanding 5.5% Convertible Subordinated Notes on the open market, $9.5 million in January 2004 at a price of 100.625 percent and $1.0 million in March 2004 at a price of 100.25 percent. In addition, we paid off $5.1 million of a secured promissory note to Boeing Capital Corporation at a premium. 23 LIQUIDITY AND CAPITAL RESOURCES (continued) Financing Activity Our current $40.0 million credit facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to this facility. Availability under the revolving credit facility is subject to a borrowing base limitation based on 85 percent of eligible receivables plus a value for eligible rental tools equipment. The credit facility calls for a borrowing base calculation only when the credit facility has outstanding loans or letters of credit totaling at least $25.0 million. As of March 31, 2005, there were $10.3 million letters of credit outstanding and no loans. On February 7, 2005, we purchased an additional $25.0 million face value of our 10.125% Senior Notes pursuant to a redemption notice dated January 6, 2005 at the redemption price of 105.0625 percent. Proceeds from the sale of jackup rig 25 and cash on hand were used to fund the redemption. On April 21, 2005, we issued an additional $50.0 million in aggregate principal amount of our 9.625% Senior Notes due 2013 at a premium. The offering price of 111 percent of the principal amount resulted in gross proceeds of $55.5 million. The $5.5 million premium will be reflected as long-term debt and amortized over the term of the notes. The additional notes were issued under an indenture, dated as of October 10, 2003, under which $175.0 million in aggregate principal amount of notes of the same series were previously issued. On the same date that we issued the $50.0 million additional 9.625% Senior Notes (April 21, 2005), we issued a redemption notice for $65.0 million of our 10.125% Senior Notes at the redemption price of 105.0625 percent. The redemption will close on May 21, 2005, and will be funded by the net proceeds of the $50.0 million additional 9.625% Senior Notes and cash on hand. We had total long-term debt of $456.0 million as of March 31, 2005. The long-term debt included: o $131.0 million aggregate principal amount of 10.125% Senior Notes, which are due November 15, 2009; o $150.0 million aggregate principal amount of Senior Floating Rate Notes bearing interest at a rate of LIBOR plus 4.75%, which are due September 1, 2010; and o $175.0 million aggregate principal amount of 9.625% Senior Notes, which are due October 1, 2013. 24 LIQUIDITY AND CAPITAL RESOURCES (continued) Financing Activity (continued) As of March 31, 2005, we had approximately $96.0 million of liquidity. This liquidity was comprised of $66.3 million of cash and cash equivalents on hand and $29.7 million of availability under the revolving credit facility. The following table summarizes our future contractual cash obligations.
Less than More than Total 1 Year Years 2 - 3 Years 4 - 5 5 Years ------------ ------------ ------------ ------------ ------------ (Dollars in Thousands) Contractual cash obligations: Long-term debt - principal(1) $ 455,608 $ - $ - $ 130,608 $ 325,000 Long-term debt - interest(1) 286,168 41,630 82,494 80,801 81,243 Operating leases(2) 14,681 5,103 5,361 3,179 1,038 ------------ ------------ ------------ ------------ ------------ Total contractual obligations $ 756,457 $ 46,733 $ 87,855 $ 214,588 $ 407,281 ============ ============ ============ ============ ============ Commercial commitments: Revolving credit facility(3) $ - $ - $ - $ - $ - Standby letters of credit(3) 10,310 10,310 - - - ------------ ------------ ------------ ------------ ------------ Total commercial commitments(4) $ 10,310 $ 10,310 $ - $ - $ - ============ ============ ============ ============ ============
(1) Long-term debt includes the principal and interest cash obligations of the 9.625% Senior Notes, the 10.125% Senior Notes and the Senior Floating Rate Notes. The unamortized premiums of $0.3 million at March 31, 2005 related to the 10.125% Senior Notes are not included in the contractual cash obligations schedule. Some of the interest on the Senior Floating Rate Notes has been hedged through variable-to-fixed interest rate swap agreements. The issuer (Bank of America, N.A.) of each swap has the option to extend each swap for an additional two years at the termination of the initial swap period. For this table, the highest interest rate currently hedged is used in calculating the interest on future floating rate periods. (2) Operating leases consist of lease agreements in excess of one year for office space, equipment, vehicles and personal property. (3) We have a $40.0 million revolving credit facility. As of March 31, 2005 there was no draw down on the credit facility, but $10.3 million of availability has been used to support letters of credit that have been issued, resulting in an estimated $29.7 million availability. The revolving credit facility expires in December 2007. 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. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We use derivative instruments to manage risks associated with interest rate fluctuations in connection with our $150.0 million Senior Floating Rate Notes. Derivative instruments, which consist of two variable-to-fixed interest rate swaps, do not meet the hedge criteria in SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and are therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings. As of March 31, 2005, we had the following derivative instruments outstanding related to our interest rate swaps, which are included in "Other noncurrent assets":
Swap Effective Termination Notional Floating Fixed Fair Agreement Date Date Amount Rate Rate Value - --------- ----------------- ----------------- -------- --------------------- ----- ----- (Dollars in Thousands) 1 September 1, 2005 September 2, 2008 $ 50,000 Three-month LIBOR 8.83% $ 332 plus 475 basis points 1 September 1, 2005 September 4, 2007 $ 50,000 Three-month LIBOR 8.48% 480 plus 475 basis points ----- $ 812 =====
ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures - We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. We perform evaluations under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at March 31, 2005. Changes in Internal Control Over Financial Reporting - There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2005 covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES On March 11, 2005, we purchased 78,049 shares of our stock at a price per share of $5.77 from executives resulting from the vesting of a portion of a restricted stock grant issued in July 2003. Upon vesting of the restricted shares a tax withholding obligation to us from the executives was satisfied by delivering back some of the shares on which the restrictions had lapsed.
Total Number Maximum Number of Shares Purchased of Shares That May as Part of Publicly Yet be Purchased Total Number of Average Price Announced Plans Under the Plans Date Shares Purchased Paid Per Share or Programs or Programs - -------------- -------------------- -------------------- -------------------- ------------------ March 11, 2005 78,049 $ 5.77 - -
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on April 27, 2005, there were represented in person or by proxy, 85,152,957 shares out of 95,464,865 entitled to vote as of March 10, 2005, the record date, constituting a quorum. The three matters voted upon at the Annual Meeting were: 1. Election of Directors: The Stockholders elected three Class III directors to the board of directors of Parker Drilling Company to serve for a three-year term, until 2008: Robert L. Parker Votes cast in favor: 75,108,467 Votes withheld: 10,044,490 Robert L. Parker Jr. Votes cast in favor: 75,237,765 Votes withheld: 9,915,192 Roger B. Plank Votes cast in favor: 75,447,257 Votes withheld: 9,705,700 2. Approval of the Parker Drilling Company 2005 Long-Term Incentive Plan: Votes cast in favor: 40,235,908 Votes against: 17,619,298 Votes withheld: 289,290 3. Election of independent accountants: PricewaterhouseCoopers LLP was approved as the independent accountants for 2005 with: Votes cast in favor: 83,615,298 Votes against: 1,104,023 Votes withheld: 433,636 27 PART II. OTHER INFORMATION (continued) ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS (a) Exhibits: The following exhibits are filed as a part of this report:
Exhibit Number Description ------------ --------------------------------------------------------------------------------- 10.1 Parker Drilling Company 2005 Long-Term Incentive Plan (incorporated herein by reference to Annex E of the Company's 2005 Proxy Statement filed March 25, 2005) 10.2 Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's 8-K filed May 3, 2005) 10.3 Form of Performance-Based Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.3 to the Company's 8-K filed May 3, 2005) 15 Letter re Unaudited Interim Financial Information 31.1 Section 302 Certification - Chief Executive Officer 31.2 Section 302 Certification - Chief Financial Officer 32.1 Section 906 Certification - Chief Executive Officer 32.2 Section 906 Certification - Chief Financial Officer
28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Parker Drilling Company ----------------------- Registrant Date: May 6, 2005 By: /s/ James W. Whalen -------------------------------------- James W. Whalen Senior Vice President and Chief Financial Officer By: /s/ W. Kirk Brassfield -------------------------------------- W. Kirk Brassfield Vice President, Finance and Accounting 29 INDEX TO EXHIBITS
Exhibit Number Description - -------------- ------------------------------------------------------------------------------------------ 10.1 Parker Drilling Company 2005 Long-Term Incentive Plan (incorporated herein by reference to Annex E of the Company's 2005 Proxy Statement filed March 25, 2005) 10.2 Form of Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.2 to the Company's 8-K filed May 3, 2005) 10.3 Form of Performance-Based Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.3 to the Company's 8-K filed May 3, 2005) 15 Letter re Unaudited Interim Financial Information 31.1 Section 302 Certification - Chief Executive Officer 31.2 Section 302 Certification - Chief Financial Officer 32.1 Section 906 Certification - Chief Executive Officer 32.2 Section 906 Certification - Chief Financial Officer