Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended SEPTEMBER 30, 2004
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
incorporation or organization) Identification of No.)
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 October 29, 2004, 94,830,631 common shares were outstanding.
================================================================================
PARKER DRILLING COMPANY
INDEX
Page No.
-------------
Part I. Financial Information
Item 1. Financial Statements 2
Consolidated Condensed Balance Sheets (Unaudited)
September 30, 2004 and December 31, 2003 2
Consolidated Condensed Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2004 and 2003 3
Consolidated Condensed Statements of Cash Flows (Unaudited) 4
Nine Months Ended September 30, 2004 and 2003
Notes to the Unaudited Consolidated Condensed 5 - 20
Financial Statements
Report of Independent Registered Public Accounting Firm 21
Item 2. Management's Discussion and Analysis of Financial 22 - 35
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 37
Part II. Other Information 38
Item 1. Legal Proceedings 38
Item 2. Changes in Securities and Use of Proceeds 38
Item 3. Defaults Upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 5. Other Information 38
Item 6. Exhibits and Reports on Form 8-K 39
Signatures 40
Officer Certifications
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2004 2003
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 38,757 $ 67,765
Accounts and notes receivable, net 90,001 89,050
Rig materials and supplies 15,769 13,627
Other current assets 15,258 2,466
---------------- ----------------
Total current assets 159,785 172,908
---------------- ----------------
Property, plant and equipment less
accumulated depreciation and amortization of $594,807
at September 30, 2004 and $414,665 at December 31, 2003 405,623 387,664
Assets held for sale 27,428 150,370
Goodwill 114,398 114,398
Other noncurrent assets 33,869 22,292
---------------- ----------------
Total assets $ 741,103 $ 847,632
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 60 $ 60,225
Accounts payable and accrued liabilities 82,357 54,595
Accrued income taxes 14,233 13,809
---------------- ----------------
Total current liabilities 96,650 128,629
---------------- ----------------
Long-term debt 481,062 511,400
Discontinued operations 1,035 6,421
Other long-term liabilities 9,353 8,379
Contingency (Note 10) -- --
Stockholders' equity:
Common stock 15,785 15,696
Capital in excess of par value 440,133 438,311
Unamortized restricted stock plan compensation (883) (1,885)
Accumulated other comprehensive income - net unrealized
gain on investments available for sale -- 881
Accumulated deficit (302,032) (260,200)
---------------- ----------------
Total stockholders' equity 153,003 192,803
---------------- ----------------
Total liabilities and stockholders' equity $ 741,103 $ 847,632
================ ================
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 September 30, Nine Months Ended September 30,
---------------------------------- -----------------------------------
2004 2003 2004 2003
-------------- ------------ ------------- -------------
Drilling and rental revenues:
U.S. drilling $ 22,788 $ 13,872 $ 63,209 $ 49,593
International drilling 49,686 54,950 156,238 157,094
Rental tools 15,471 14,054 47,278 40,366
------------- ------------ ------------- -------------
Total drilling and rental revenues 87,945 82,876 266,725 247,053
------------- ------------ ------------- -------------
Drilling and rental operating expenses:
U.S. drilling 13,399 11,964 38,596 37,466
International drilling 43,824 37,343 122,218 111,398
Rental tools 6,558 5,860 19,883 16,868
Depreciation and amortization 17,806 17,450 50,599 56,580
------------- ------------ ------------- -------------
Total drilling and rental operating expenses 81,587 72,617 231,296 222,312
------------- ------------ ------------- -------------
Drilling and rental operating income 6,358 10,259 35,429 24,741
------------- ------------ ------------- -------------
Construction contract revenue -- 1,061 -- 7,030
Construction contract expense -- 61 -- 5,030
------------- ------------ ------------- -------------
Construction contract operating income (Note 5) -- 1,000 -- 2,000
------------- ------------ ------------- -------------
General and administration expense (4,924) (4,079) (17,958) (14,485)
Provision for reduction in carrying
value of certain assets -- -- (6,558) --
Gain on disposition of assets, net 333 533 1,402 1,344
------------- ------------ ------------- -------------
Total operating income 1,767 7,713 12,315 13,600
------------- ------------ ------------- -------------
Other income and (expense):
Interest expense (12,202) (13,152) (39,077) (39,901)
Changes in fair value of derivative positions (1,380) -- (1,380) --
Interest income 206 233 638 720
Loss on extinguishment of debt (8,151) -- (8,729) --
Minority interest (434) 148 (949) 507
Other (66) (811) 772 (524)
------------- ------------ ------------- -------------
Total other income and (expense) (22,027) (13,582) (48,725) (39,198)
------------- ------------ ------------- -------------
Loss before income taxes (20,260) (5,869) (36,410) (25,598)
Income tax expense 4,542 2,914 12,008 11,668
------------- ------------ ------------- -------------
Loss from continuing operations (24,802) (8,783) (48,418) (37,266)
Discontinued operations, net of taxes 1,359 2,127 6,586 (59,999)
------------- ------------ ------------- -------------
Net loss $ (23,443) $ (6,656) $ (41,832) $ (97,265)
============= ============ ============= =============
Basic and diluted earnings (loss) per share:
Loss from continuing operations $ (0.26) $ (0.09) $ (0.52) $ (0.40)
Discontinued operations, net of taxes $ 0.01 $ 0.02 $ 0.07 $ (0.64)
Net loss $ (0.25) $ (0.07) $ (0.45) $ (1.04)
Number of common shares used in computing
earnings per share:
Basic and diluted 94,196,255 93,728,825 93,944,927 93,198,996
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)
Nine Months Ended September 30,
----------------------------------
2004 2003
------------- -------------
Cash flows from operating activities:
Net loss $ (41,832) $ (97,265)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 50,599 56,580
Gain on disposition of assets (1,402) (1,344)
Gain on sale of marketable securities (762) --
Provision for reduction in carrying value of certain assets 6,558 --
Expenses not requiring cash 9,740 3,807
Discontinued operations 108 63,585
Change in operating assets and liabilities (4,721) 42,878
------------- -------------
Net cash provided by operating activities 18,288 68,241
------------- -------------
Cash flows from investing activities:
Capital expenditures (34,773) (23,843)
Proceeds from the sale of assets 48,602 5,092
Proceeds from insurance settlement 27,000 --
Proceeds from sale of marketable securities 1,377 --
------------- -------------
Net cash provided by (used in) investing activities 42,206 (18,751)
------------- -------------
Cash flows from financing activities:
Principal payments under debt obligations (290,169) (20,063)
Proceeds from issuance of debt 200,000 --
Proceeds from stock options exercised 667 --
------------- -------------
Net cash used in financing activities (89,502) (20,063)
------------- -------------
Net change in cash and cash equivalents (29,008) 29,427
Cash and cash equivalents at beginning of period 67,765 51,982
------------- -------------
Cash and cash equivalents at end of period $ 38,757 $ 81,409
============= =============
Supplemental cash flow information:
Interest paid $ 30,402 $ 30,607
Income taxes paid $ 11,438 $ 13,799
Supplemental noncash investing activity:
Net unrealized loss on investments available for sale $ -- $ (59)
Capital lease obligation $ -- $ 1,004
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
September 30, 2004 and December 31, 2003, (2) the results of operations for
the three and nine months ended September 30, 2004 and 2003, and (3) cash
flows for the nine months ended September 30, 2004 and 2003. Results for
the nine months ended September 30, 2004 are not necessarily indicative of
the results that will be realized for the year ending December 31, 2004.
The financial statements should be read in conjunction with the Company's
Form 10-K for the year ended December 31, 2003.
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 - The Company's 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 loss, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share
if the Company 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.
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
Net loss as reported $ (23,443) $ (6,656) $ (41,832) $ (97,265)
Stock-based compensation expense
included in net loss as reported 46 -- 1,359 --
Stock-based compensation expense
determined under fair value method,
net of tax (174) (272) (1,868) (1,011)
----------- ----------- ----------- -----------
Net loss pro forma $ (23,571) $ (6,928) $ (42,341) $ (98,276)
=========== =========== =========== ===========
Basic and diluted loss per share:
Net loss as reported $ (0.25) $ (0.07) $ (0.45) $ (1.04)
Net loss pro forma $ (0.25) $ (0.07) $ (0.45) $ (1.05)
Expected volatility 60.0% September 30, 2004
Expected volatility 52.5% September 30, 2003
Risk free rate 1.95% to 3.89% in 2004
Risk free rate 2.94% to 2.96% in 2003
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option pricing model with the weighted-average assumptions
noted above for the three and nine months ended September 30, 2004 and
2003; no dividend yield and expected lives of options, five to seven years.
5
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
2. Earnings Per Share -
Three Months Ended September 30, 2004
---------------------------------------------------
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- ------------
Basic and diluted EPS:
Loss from continuing operations $ (24,802,000) 94,196,255 $ (0.26)
Discontinued operations, net of taxes 1,359,000 0.01
------------- ------------
Net loss $ (23,443,000) $ (0.25)
============= ============
Nine Months Ended September 30, 2004
---------------------------------------------------
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- ------------
Basic and diluted EPS:
Loss from continuing operations $ (48,418,000) 93,944,927 $ (0.52)
Discontinued operations, net of taxes 6,586,000 0.07
------------- -----------
Net loss $ (41,832,000) $ (0.45)
============= ===========
Three Months Ended September 30, 2003
--------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- ------------
Basic and diluted EPS:
Loss from continuing operations $ (8,783,000) 93,728,825 $ (0.09)
Discontinued operations, net of taxes 2,127,000 0.02
------------ ------------
Net loss $ (6,656,000) $ (0.07)
============ ============
Nine Months Ended September 30, 2003
--------------------------------------------------
Loss Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- ------------
Basic and diluted EPS:
Loss from continuing operations $(37,266,000) 93,198,996 $ (0.40)
Discontinued operations, net of taxes (59,999,000) (0.64)
------------ ------------
Net loss $(97,265,000) $ (1.04)
============ ============
6
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
2. Earnings Per Share (continued)
For the three and nine months ended September 30, 2004, options to purchase
9,086,904 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. For the three
and nine months ended September 30, 2003, options to purchase 9,902,809
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 September 30,
2003, the Company had outstanding $109,706,000 of 5.5% Convertible
Subordinated Notes which were convertible into 7,128,395 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.
3. Business Segments - The primary services the Company provides are as
follows: U.S. drilling, international drilling and rental tools.
Information regarding the Company's operations by industry segment for the
three and nine months ended September 30, 2004 and 2003 is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Dollars in Thousands)
Drilling and rental revenues:
U.S. drilling $ 22,788 $ 13,872 $ 63,209 $ 49,593
International drilling 49,686 54,950 156,238 157,094
Rental tools 15,471 14,054 47,278 40,366
----------- ----------- ----------- -----------
Total drilling and rental revenues $ 87,945 $ 82,876 $ 266,725 $ 247,053
=========== =========== =========== ===========
Drilling and rental operating income:
U.S. drilling $ 4,851 $ (3,299) $ 10,594 $ (2,840)
International drilling (3,833) 8,845 7,963 14,141
Rental tools 5,340 4,713 16,872 13,440
----------- ----------- ----------- -----------
Total drilling and rental operating income 6,358 10,259 35,429 24,741
Net construction contract operating income -- 1,000 -- 2,000
General and administrative expense (4,924) (4,079) (17,958) (14,485)
Provision for reduction in carrying
value of certain assets -- -- (6,558) --
Gain on disposition of assets, net 333 533 1,402 1,344
----------- ----------- ----------- -----------
Total operating income 1,767 7,713 12,315 13,600
Interest expense (12,202) (13,152) (39,077) (39,901)
Changes in fair value of derivative positions (1,380) -- (1,380) --
Loss on extinguishment of debt (8,151) -- (8,729) --
Other income, net (294) (430) 461 703
----------- ----------- ----------- -----------
Loss before income taxes $ (20,260) $ (5,869) $ (36,410) $ (25,598)
=========== =========== =========== ===========
7
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
4. Discontinued Operations - In June 2003, the Company's board of directors
approved a plan to sell its Latin America assets consisting of 17 land rigs
and related inventory and spare parts and its U.S. Gulf of Mexico offshore
assets consisting of seven jackup rigs and four platform rigs. One Latin
America land rig was sold in July 2003. At June 30, 2003, the net book
value of the assets to be sold exceeded the estimated fair value and as a
result an impairment charge including estimated sales expenses was
recognized in the amount of $54.0 million. At the time the board of
directors approved this plan, the Latin America land and U.S. Gulf of
Mexico offshore operations, whose assets are the subject of this plan of
disposition, met the requirements of discontinued operations under the
provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." As a result, the consolidated financial statements were
reclassified in June 2003 to present the Latin America operations and the
U.S. jackup and platform drilling operations as discontinued operations.
In early 2004, the board of directors concurred with the Company's plan to
actively market certain of the Latin America land rigs in Mexico. In early
May 2004, a subsidiary of the Company was awarded two contracts in Mexico
that will utilize seven Latin America land rigs. Based on these contracts,
the seven land rigs were moved to Mexico and were reclassified from
discontinued operations to continuing operations effective May 2004. The
nine land rigs remaining in Latin America were reclassified from
discontinued operations to continuing operations effective June 30, 2004 as
required by SFAS No. 144. The reclassification was made based on the
application of SFAS No. 144, which requires that unless assets classified
as discontinued operations are either sold or have a firm commitment for
sale within a one-year period, such assets should be reclassified to
continuing operations. SFAS No. 144 further requires that assets returned
to continuing operations be recorded at the lower of net book value or fair
value, and that net book value be adjusted by the depreciation that would
have been recognized as if the asset had remained classified as continuing
operations. Based on the foregoing, the Company recognized an impairment of
$5.1 million as a provision for reduction in carrying value of assets for
the 16 Latin America land rigs in the second quarter of 2004.
On September 11, 2003, a malfunction caused one side of jackup rig 14 to
become partially submerged resulting in significant damage to the rig and
the drilling equipment, but there were no fatalities. The Company received
from its insurance underwriters a total loss settlement of $27.0 million,
of which $24.3 million was received in March 2004 with the remaining $2.7
million received on April 8, 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"), the Company was
required to recognize the gain from the 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, the Company determined that the overall valuation
of the U.S. Gulf of Mexico offshore group was unchanged from that
determined on June 30, 2003, as previously discussed. As a result, the
Company recognized an additional impairment of $5.3 million which, along
with the gain, was reported in discontinued operations during the first
quarter of 2004.
On August 2, 2004, the Company closed on the sale of five jackups and four
platform rigs, realizing net proceeds of $39.3 million. No gain or loss was
recorded on the sale. The proceeds were used to pay down debt. Jackup rig
25 was excluded from this sale, though the purchaser obtained the exclusive
right to purchase jackup rig 25 from the period of September 1, 2004
through October 31, 2004. The purchaser did not exercise the option;
however, we are in negotiations with them and other interested parties to
sell jackup rig 25. As a result, jackup rig 25 remains in discontinued
operations and assets held for sale.
8
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
4. Discontinued Operations (continued)
Analysis of Discontinued Operations
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
(Dollars in Thousands)
U.S. jackup and platform drilling revenues $ 7,187 $ 13,108 $ 31,445 $ 35,428
============= ============= ============= =============
Income (loss) from discontinued operations $ 1,359 $ 2,127 $ 6,586 $ (59,999)
============= ============= ============= =============
Assets Held for Sale - During the third quarter of 2004, the Company closed
on the sale of the land and buildings in New Iberia, Louisiana for a net
sales price of $6.4 million. The sales price of the land and buildings
resulted in an impairment of $3.4 million, which was recognized in the
December 31, 2003 consolidated financial statements. No gain or loss was
recognized upon closing of this transaction. The Company has leased back a
portion of the land and office building under a two-year operating lease
agreement.
5. Construction Contract - The Company has historically only constructed
drilling rigs for its own use. At the request of one of its significant
customers, the Company entered into a contract to design, construct,
mobilize and sell a specialized drilling rig to drill extended reach wells
to offshore producing zones from a land-based location on Sakhalin Island,
Russia, for an international consortium of oil and gas companies. The
Company also entered into a contract to subsequently operate the rig on
behalf of the consortium. The construction project was completed during the
third quarter of 2003 and the Company is currently operating the rig for
the customer. The total profit recognized under the design, construction,
mobilization and rig-up contract was $4.5 million, of which $2.0 million
was recognized in 2003 and $2.5 million during 2002.
6. Income Tax Expense - Income tax expense from operations consists of foreign
tax expense of $4.5 million and $12.0 million for the three and nine months
ended September 30, 2004, respectively as compared to foreign tax expense
of $2.9 million and $11.7 million for the three and nine months ended
September 30, 2003, respectively. The $1.6 million increase in taxes during
the current three month period was primarily due to a decrease in tax
deductible expenses for Papua New Guinea in current and prior years. Income
tax expense increased $0.4 million during the current nine month period as
compared to 2003. The increase was due to a decrease in tax deductible
expenses for Papua New Guinea related to current and prior years, offset by
a reduction in taxes due to a tax rate change in China and a change in our
operating structure in Kuwait along with a decrease in the barge operations
in Nigeria. For the three months and nine months of 2004 and 2003, we
incurred 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. This
additional deferred tax asset was fully reserved through a valuation
allowance in both the third quarter of 2004 and 2003.
7. Long Term Debt -
September 30, 2004 December 31, 2003
------------------ -----------------
(Dollars in Thousands)
Senior Notes:
Interest rate 10.125%, due 2009 $ 156,062 $ 236,400
Interest rate floating, due 2010 150,000 --
Interest rate 9.625%, due 2013 175,000 175,000
Term Loan, due 2007 -- 50,000
Convertible Subordinated Notes, due 2004 -- 105,169
Secured Promissory Note -- 5,056
Capital Lease 60 --
---------------- ----------------
Total debt 481,122 571,625
Less current portion 60 60,225
---------------- ----------------
Total long term debt $ 481,062 $ 511,400
================ ================
9
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
7. Long-Term Debt (continued)
In October 2003, the Company refinanced a portion of its then existing debt
by issuing $175.0 million of new 9.625% Senior Notes due 2013 and replaced
its senior credit facility with a $150.0 million senior credit agreement.
The senior credit agreement consists of a four-year $100.0 million delayed
draw Term Loan facility and a three-year $50.0 million revolving credit
facility that are secured by certain drilling rigs, rental tools equipment,
accounts receivable and substantially all of the stock of the subsidiaries,
and contains customary affirmative and negative covenants. The proceeds of
the new 9.625% Senior Notes, plus an initial draw of $50.0 million under
the Term Loan facility, were used to retire $184.3 million of the 9.75%
Senior Notes due 2006 that had been tendered pursuant to a tender offer
dated September 24, 2003. The balance of the proceeds from the new Senior
Notes and the initial draw down under the Term Loan facility were used to
retire the remaining $29.9 million of 9.75% Senior Notes that were not
tendered. The Company redeemed the remaining 9.75% Senior Notes on November
15, 2003 at a redemption price of 101.625 percent.
On July 30, 2004 the Company borrowed the remaining $50.0 million on its
delay draw Term Loan portion of its credit facility. Those funds, along
with existing cash, were used to retire the outstanding $64.4 million of
our 5.5% Convertible Subordinated Notes on August 2, 2004. On the same day,
August 2, 2004, the Company received proceeds from the sale of our five
jackup rigs and four platform rigs and paid down $25.0 million of the delay
draw Term Loan. On August 5, 2004, the Company paid an additional $5.0
million on the delay draw Term Loan with proceeds from the sale of its New
Iberia facilities, leaving an outstanding balance of $70.0 million on the
delay draw Term Loan.
In September 2004, the Company refinanced a portion of its existing debt by
issuing $150.0 million of Senior Floating Rate Notes due 2010. Proceeds
were used to pay off the $70.0 million outstanding balance of the Company's
delay draw Term Loan and to retire $80.0 million of the 10.125% Senior
Notes due 2009 that were purchased pursuant to a tender offer dated August
6, 2004. Cash costs associated with the transaction totaled $9.7 million
and were paid from existing cash. Cash costs included an early tender
premium of 2.0 percent and a tender offer consideration of 104.54 percent
on the $80.0 million of 10.125% Senior Notes repurchased, as well as
underwriting, legal and other fees associated with the issuance of $150.0
million Senior Floating Rate Notes. An expense reported as "Loss on
extinguishment of debt" totaling $8.2 million was recognized in the third
quarter of 2004 as a result of these transactions. The expense was
comprised of $5.6 million relating to the tender offer and $2.6 million
relating to the write off of previously capitalized debt issuance cost.
The revolving credit facility is available for working capital
requirements, general corporate purposes and to support letters of credit.
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. As of September 30, 2004, the
borrowing base was $48.3 million, of which none had been drawn down, and
$15.3 million had been reserved for letters of credit, resulting in
available revolving credit of $33.0 million.
8. Derivative Instruments - The Company uses derivative instruments to manage
risks associated with interest rate fluctuations in connection with its
$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 in
earnings.
As of September 30, 2004, the Company had the following derivative
instruments outstanding related to its interest rate swaps:
Swap Effective Termination Notional Floating Fixed Fair
Agreement Date Date Amount Rate Rate Value
- --------- ----------------- ------------------ ------------ --------------------- ---------- -----------
(Dollars in Thousands)
1 December 1, 2004 March 1, 2005 $ 150,000 Three-month LIBOR 6.54% $ 4
plus 475 basis points
1 March 1, 2005 September 1, 2005 $ 100,000 Three-month LIBOR 7.08% --
plus 475 basis points
1 March 1, 2005 September 1, 2006 $ 50,000 Three-month LIBOR 7.60% --
plus 475 basis points
2 September 1, 2005 September 2, 2008 $ 50,000 Three-month LIBOR 8.83% (837)
plus 475 basis points
3 September 1, 2005 September 4, 2007 $ 50,000 Three-month LIBOR 8.48% (547)
plus 475 basis points -------
$(1,380)
=======
At September 30, 2004, the Company had derivative liabilities of $1.4
million, which are included in other long-term liabilities.
10
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
9. Related Party - On February 27, 1995, the Company entered into a Split
Dollar Life Insurance Agreement with Robert L. Parker and the Robert L.
Parker and Catherine M. Parker Family Trust ("Trust") pursuant to which the
Company agreed to provide life insurance for Mr. and Mrs. Robert L. Parker
in the event of the death of Mr. and Mrs. Parker (the "Agreement"). The
initial Agreement provided that the Trust would acquire and own a life
insurance policy with a face amount of $13.2 million and that the Company
would pay the premiums, with the Trust having the obligation to reimburse
the Company from the proceeds of the policy, with interest from and after
January 1, 2000, at the one-year Treasury bill rate. The repayment of the
premiums was secured by an Assignment of Life Insurance Policy as
Collateral of same date as the Agreement. On October 14, 1996, the
Agreement was amended to provide that the interest accrual would be
deferred until February 28, 2003, in consideration for the Company's
termination of a separate life insurance policy on the life of Robert L.
Parker. On April 19, 2000, the Agreement was amended and restated to
replace the previous policy with two policies, one for $8.0 million on the
life of Robert L. Parker and one for $7.7 million on the lives of both Mr.
and Mrs. Parker. Mr. Robert L. Parker Jr., the Company's CEO and son of
Robert L. Parker is a one-third beneficiary of the Trust.
Due to the passage of the Sarbanes-Oxley Act of 2002 ("SOX"), additional
loans to executive officers and directors may be prohibited, although
continuance of loans in existence as of July 30, 2002, are allowed;
provided there is no modification to such loans. Because the advancement of
additional annual premiums by the Company may be considered a prohibited
loan under SOX, the Company elected to not advance the $0.6 million premium
that was due in December 2002 and 2003 pending further clarification from
the Securities and Exchange Commission ("SEC") as to whether or not split
dollar loans were intended to be prohibited by SOX. As of September 30,
2004, the accrued amount of premiums by the Company was $4.7 million.
As of September 30, 2004, there has been no clarification from the SEC and
none is anticipated at this time. Because an analysis of the policies by a
financial consultant has indicated that there is no reasonable certainty
that the value of the policies will be adequate for the Company to recoup
the full amount of premiums paid, during the second quarter of 2004, the
Company reduced the value of its asset by $1.5 million to $3.2 million,
which approximates the cash surrender value of the two policies.
10. Contingency - As previously reported, although 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 PKD Kazakhstan received from the operator to upgrade rig 257,
the Ministry of Finance of Kazakhstan ("MinFin") subsequently made a claim
for corporate income taxes based primarily on the disallowance of
depreciation of the full value of rig 257 in the income tax returns of PKD
Kazakhstan in 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 are valid and payable upon receipt of the re-issuance of the
corrected notice from the relevant taxing authority. The actual amount
which PKD Kazakhstan will ultimately be required to pay, which was expensed
in prior periods, will be offset by available credits. While the Supreme
Court disallowed depreciation for the years 1999-2001, the judgment does
allow PKD Kazakhstan to depreciate the full value of rig 257 on its tax
returns beginning in 2002, which will reduce taxable income and taxes to be
paid in the future. In addition, the Company continues to pursue its
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 proceedings with the MSR are ongoing.
As previously reported, PKD Kazakhstan received a notice of an assessment
of duties, taxes and penalties in the amount of $6.0 million for failure to
submit monthly duties and taxes under the temporary import license for rig
257 from November 2003 through February 2004, based on the allegation of
the Customs Control in Mangistau that rig 257 was no longer under contract,
exempting it from such duties and taxes. On October 26, 2004 the Mangistau
Oblast Court of Kazakhstan confirmed an earlier settlement which PKD
Kazakhstan had reached with the Customs Control in Mangistau in connection
with this matter. The settlement resulted in a charge of $2.1 million
during the third quarter of 2004. The short-term cash impact of the
settlement was $3.9 million, however, we expect that approximately $1.8
million of this amount will be recaptured through reduced Value Added Tax
("VAT") payments over the next six months. The settlement releases all
claims of the Kazakhstan customs authorities over rig 257 and PKD
Kazakhstan bank accounts.
11
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
11. 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)
the Company's restricted subsidiaries that are guarantors of the Senior
Notes and (iii) the Company's restricted and unrestricted subsidiaries that
are not guarantors of the Senior Notes. All of the Company's 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 International Limited 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
Siberia, 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,
Universal Rig Leasing B.V. are all non-guarantor subsidiaries. The Company
is providing unaudited consolidating condensed financial information of the
parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor
subsidiaries as of September 30, 2004 and December 31, 2003 and for the
three and nine months ended September 30, 2004 and 2003.
12
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
September 30, 2004
-----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,160 $ 5,710 $ 7,887 $ -- $ 38,757
Accounts and notes receivable, net 158,786 82,606 52,242 (203,633) 90,001
Rig materials and supplies -- 9,181 6,588 -- 15,769
Other current assets 157 10,175 4,855 71 15,258
----------- ----------- ----------- ----------- -----------
Total current assets 184,103 107,672 71,572 (203,562) 159,785
----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net 134 430,294 45,709 (70,514) 405,623
Assets held for sale -- 27,428 -- -- 27,428
Goodwill -- 114,398 -- -- 114,398
Investment in subsidiaries and intercompany advances 509,353 786,849 29,053 (1,325,255) --
Other noncurrent assets 14,212 18,014 1,643 -- 33,869
----------- ----------- ----------- ----------- -----------
Total assets $ 707,802 $ 1,484,655 $ 147,977 $(1,599,331) $ 741,103
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 60 $ -- $ -- $ -- $ 60
Accounts payable and accrued liabilities 43,014 233,447 34,674 (214,545) 96,590
----------- ----------- ----------- ----------- -----------
Total current liabilities 43,074 233,447 34,674 (214,545) 96,650
----------- ----------- ----------- ----------- -----------
Long-term debt 481,062 -- -- -- 481,062
Deferred income taxes (45,300) 45,300 -- -- --
Discontinued operations -- 1,035 -- -- 1,035
Other long-term liabilities 1,380 5,712 2,222 39 9,353
Intercompany payables 74,583 602,674 31,737 (708,994) --
Stockholders' equity:
Common stock and capital in excess of par value 455,035 1,023,464 55,057 (1,078,521) 455,035
Accumulated deficit (302,032) (426,977) 24,287 402,690 (302,032)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 153,003 596,487 79,344 (675,831) 153,003
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 707,802 $ 1,484,655 $ 147,977 $(1,599,331) $ 741,103
=========== =========== =========== =========== ===========
13
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
December 31, 2003
-----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 53,055 $ 7,806 $ 6,904 $ -- $ 67,765
Accounts and notes receivable, net 141,397 92,936 20,724 (166,007) 89,050
Rig materials and supplies -- 13,627 -- -- 13,627
Other current assets 9 2,394 13 50 2,466
----------- ----------- ----------- ----------- -----------
Total current assets 194,461 116,763 27,641 (165,957) 172,908
----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net 133 366,389 34,736 (13,594) 387,664
Assets held for sale -- 150,370 -- -- 150,370
Goodwill -- 114,398 -- -- 114,398
Investment in subsidiaries and intercompany advances 615,598 661,847 15,399 (1,292,844) --
Other noncurrent assets 17,436 4,359 536 (39) 22,292
----------- ----------- ----------- ----------- -----------
Total assets $ 827,628 $ 1,414,126 $ 78,312 $(1,472,434) $ 847,632
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 60,225 $ -- $ -- $ -- $ 60,225
Accounts payable and accrued liabilities 33,917 198,393 11,516 (175,422) 68,404
----------- ----------- ----------- ----------- -----------
Total current liabilities 94,142 198,393 11,516 (175,422) 128,629
----------- ----------- ----------- ----------- -----------
Long-term debt 511,400 -- -- -- 511,400
Deferred income taxes (45,300) 45,300 -- -- --
Discontinued operations -- 6,421 -- -- 6,421
Other long-term liabilities -- 8,552 -- (173) 8,379
Intercompany payables 74,583 540,844 33,512 (648,939) --
Stockholders' equity:
Common stock and capital in excess of par value 452,122 1,073,028 5,456 (1,078,484) 452,122
Accumulated other comprehensive income 881 -- -- -- 881
Accumulated deficit (260,200) (458,412) 27,828 430,584 (260,200)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 192,803 614,616 33,284 (647,900) 192,803
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 827,628 $ 1,414,126 $ 78,312 $(1,472,434) $ 847,632
=========== =========== =========== =========== ===========
14
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended September 30, 2004
------------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
Drilling and rental revenues $ -- $ 63,281 $ 28,124 $ (3,460) $ 87,945
Drilling and rental operating expenses -- 38,632 28,609 (3,460) 63,781
Depreciation and amortization -- 16,629 1,177 -- 17,806
----------- ----------- ----------- ----------- ------------
Drilling and rental operating income -- 8,020 (1,662) -- 6,358
----------- ----------- ----------- ----------- ------------
General and administrative expense (1) (42) (4,882) -- -- (4,924)
Provision for reduction in carrying
value of certain assets -- -- -- -- --
Gain on disposition of assets, net -- (18,999) 9,670 9,662 333
----------- ----------- ----------- ----------- ------------
Total operating income (loss) (42) (15,861) 8,008 9,662 1,767
----------- ----------- ----------- ----------- ------------
Other income and (expense):
Interest expense (13,395) (12,654) (867) 14,714 (12,202)
Changes in fair value of derivative
positions (1,380) -- -- -- (1,380)
Loss on extinguishment of debt (8,151) -- -- -- (8,151)
Other 11,932 2,207 302 (14,735) (294)
Equity in net earnings of subsidiaries (12,174) -- -- 12,174 --
----------- ----------- ----------- ----------- ------------
Total other income and (expense) (23,168) (10,447) (565) 12,153 (22,027)
----------- ----------- ----------- ----------- ------------
Income (loss) before income taxes (23,210) (26,308) 7,443 21,815 (20,260)
Income tax expense 233 3,957 352 -- 4,542
----------- ----------- ----------- ----------- ------------
Income (loss) from continuing operations (23,443) (30,265) 7,091 21,815 (24,802)
Discontinued operations, net of taxes -- 1,359 -- -- 1,359
----------- ----------- ----------- ----------- ------------
Net income (loss) $ (23,443) $ (28,906) $ 7,091 $ 21,815 $ (23,443)
=========== =========== =========== =========== ============
(1) All field operations general and administrative expenses are included in operating expenses.
15
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Three Months Ended September 30, 2003
-----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
Drilling and rental revenues $ -- $ 70,332 $ 13,142 $ (598) $ 82,876
Drilling and rental operating expenses -- 44,927 10,838 (598) 55,167
Depreciation and amortization -- 15,885 1,565 -- 17,450
----------- ----------- ----------- ----------- -----------
Drilling and rental operating income -- 9,520 739 -- 10,259
----------- ----------- ----------- ----------- -----------
Construction contract revenue -- 1,061 -- -- 1,061
Construction contract expense -- 61 -- -- 61
----------- ----------- ----------- ----------- -----------
Construction contract operating income -- 1,000 -- -- 1,000
----------- ----------- ----------- ----------- -----------
General and administrative expense (1) (38) (4,041) -- -- (4,079)
Gain on disposition of assets, net -- 554 (21) -- 533
----------- ----------- ----------- ----------- -----------
Total operating income (loss) (38) 7,033 718 -- 7,713
----------- ----------- ----------- ----------- -----------
Other income and (expense):
Interest expense (14,345) (11,611) (1,015) 13,819 (13,152)
Other 12,704 116 569 (13,819) (430)
Equity in net earnings of subsidiaries (4,724) -- -- 4,724 --
----------- ----------- ----------- ----------- -----------
Total other income and (expense) (6,365) (11,495) (446) 4,724 (13,582)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (6,403) (4,462) 272 4,724 (5,869)
Income tax expense 253 2,661 -- -- 2,914
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations (6,656) (7,123) 272 4,724 (8,783)
Discontinued operations, net of taxes -- 2,127 -- -- 2,127
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (6,656) $ (4,996) $ 272 $ 4,724 $ (6,656)
=========== =========== =========== =========== ===========
(1) All field operations general and administrative expenses are included in operating expenses.
16
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2004
------------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
Drilling and rental revenues $ -- $ 201,524 $ 69,671 $ (4,470) $ 266,725
Drilling and rental operating expenses -- 119,244 65,923 (4,470) 180,697
Depreciation and amortization -- 46,659 3,940 -- 50,599
----------- ----------- ----------- ----------- -----------
Drilling and rental operating income -- 35,621 (192) -- 35,429
----------- ----------- ----------- ----------- -----------
General and administrative expense (1) 94 (18,052) -- -- (17,958)
Provision for reduction in carrying
value of certain assets -- (5,446) (1,112) -- (6,558)
Gain on disposition of assets, net -- (65,256) 9,738 56,920 1,402
----------- ----------- ----------- ----------- -----------
Total operating income (loss) 94 (53,133) 8,434 56,920 12,315
----------- ----------- ----------- ----------- -----------
Other income and (expense):
Interest expense (42,205) (36,020) (2,937) 42,085 (39,077)
Changes in fair value of derivative
positions (1,380) -- -- -- (1,380)
Loss on extinguishment of debt (8,729) -- -- -- (8,729)
Other 37,243 4,623 709 (42,114) 461
Equity in net earnings of subsidiaries (26,142) -- -- 26,142 --
----------- ----------- ----------- ----------- -----------
Total other income and (expense) (41,213) (31,397) (2,228) 26,113 (48,725)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (41,119) (84,530) 6,206 83,033 (36,410)
Income tax expense 713 10,895 400 -- 12,008
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations (41,832) (95,425) 5,806 83,033 (48,418)
Discontinued operations, net of taxes -- 6,586 -- -- 6,586
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (41,832) $ (88,839) $ 5,806 $ 83,033 $ (41,832)
=========== =========== =========== =========== ===========
(1) All field operations general and administrative expenses are included in operating expenses.
17
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2003
----------------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
------------ ------------ ------------- ------------ ------------
Drilling and rental revenues $ -- $ 209,696 $ 39,177 $ (1,820) $ 247,053
Drilling and rental operating expenses -- 135,285 32,279 (1,832) 165,732
Depreciation and amortization -- 51,879 4,701 -- 56,580
------------ ------------ ------------ ------------ ------------
Drilling and rental operating income -- 22,532 2,197 12 24,741
------------ ------------ ------------ ------------ ------------
Construction contract revenue -- 7,030 -- -- 7,030
Construction contract expense -- 5,030 -- -- 5,030
------------ ------------ ------------ ------------ ------------
Construction contract operating income -- 2,000 -- -- 2,000
------------ ------------ ------------ ------------ ------------
General and administrative expense (1) (113) (14,372) -- -- (14,485)
Gain on disposition of assets, net -- 1,368 (24) -- 1,344
------------ ------------ ------------ ------------ ------------
Total operating income (loss) (113) 11,528 2,173 12 13,600
------------ ------------ ------------ ------------ ------------
Other income and (expense):
Interest expense (43,480) (41,018) (3,188) 47,785 (39,901)
Other 44,718 2,000 1,782 (47,797) 703
Equity in net earnings of subsidiaries (97,006) -- -- 97,006 --
------------ ------------ ------------ ------------ ------------
Total other income and (expense) (95,768) (39,018) (1,406) 96,994 (39,198)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (95,881) (27,490) 767 97,006 (25,598)
Income tax expense 1,384 10,284 -- -- 11,668
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations (97,265) (37,774) 767 97,006 (37,266)
Discontinued operations, net of taxes -- (59,999) -- -- (59,999)
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (97,265) $ (97,773) $ 767 $ 97,006 $ (97,265)
============ ============ ============ ============ ============
(1) All field operations general and administrative expenses are included in operating expenses.
18
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2004
---------------------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (41,832) $ (88,839) $ 5,806 $ 83,033 $ (41,832)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization -- 46,659 3,940 -- 50,599
Gain on disposition of assets -- 65,256 (9,738) (56,920) (1,402)
Gain on sale of marketable securities (762) -- -- -- (762)
Provision for reduction in carrying
value of certain assets -- 5,446 1,112 -- 6,558
Expenses not requiring cash 7,684 2,017 39 -- 9,740
Equity in net earnings of subsidiaries (26,142) -- -- 26,142 --
Discontinued operations -- 108 -- -- 108
Change in operating assets and liabilities (11,106) 56,015 2,625 (52,255) (4,721)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities (72,158) 86,662 3,784 -- 18,288
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures -- (28,033) (6,740) -- (34,773)
Proceeds from the sale of assets -- 48,530 72 -- 48,602
Proceeds from insurance settlement -- 27,000 -- -- 27,000
Proceeds from sale of marketable securities 1,377 -- -- -- 1,377
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities 1,377 47,497 (6,668) -- 42,206
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Principal payments under debt obligations (290,169) -- -- -- (290,169)
Proceeds from issuance of debt 200,000 -- -- -- 200,000
Proceeds from stock options exercised 667 -- -- -- 667
Intercompany advances, net 132,388 (132,059) (329) -- --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities 42,886 (132,059) (329) -- (89,502)
------------- ------------- ------------- ------------- -------------
Net change in cash and cash equivalents (27,895) 2,100 (3,213) -- (29,008)
Cash and cash equivalents at beginning of year 53,055 3,610 11,100 -- 67,765
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 25,160 $ 5,710 $ 7,887 $ -- $ 38,757
============= ============= ============= ============= =============
19
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended September 30, 2003
-----------------------------------------------------------------------
Parent Guarantor Non-Guarantor Eliminations Consolidated
----------- ----------- -------------- ------------- ------------
Cash flows from operating activities:
Net income (loss) $ (97,265) $ (97,773) $ 767 $ 97,006 $ (97,265)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization -- 51,879 4,701 -- 56,580
Gain on disposition of assets -- (1,368) 24 -- (1,344)
Expenses not requiring cash 1,776 2,125 -- (94) 3,807
Equity in net earnings of subsidiaries 97,006 -- -- (97,006) --
Discontinued operations -- 63,585 -- -- 63,585
Change in operating assets and liabilities (40,229) 63,828 5,213 14,066 42,878
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (38,712) 82,276 10,705 13,972 68,241
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures -- (23,868) 25 -- (23,843)
Proceeds from the sale of assets -- 5,092 -- -- 5,092
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities -- (18,776) 25 -- (18,751)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Principal payments under debt obligations (19,145) (918) -- -- (20,063)
Intercompany advances, net 82,976 (59,845) (9,159) (13,972) --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 63,831 (60,763) (9,159) (13,972) (20,063)
----------- ----------- ----------- ----------- -----------
Net change in cash and cash equivalents 25,119 2,737 1,571 -- 29,427
Cash and cash equivalents at beginning of year 43,254 6,218 2,510 -- 51,982
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 68,373 $ 8,955 $ 4,081 $ -- $ 81,409
=========== =========== =========== =========== ===========
20
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 September 30, 2004 and the
related consolidated condensed statements of operations for the three month and
nine month periods ended September 30, 2004 and 2003 and the consolidated
condensed statements of cash flows for the nine month periods ended September
30, 2004 and 2003. 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, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report (which contains an explanatory paragraph for a change
in accounting for goodwill and an explanatory paragraph for the revision of the
2002 and 2001 statements of operations related to reimbursable costs), dated
February 6, 2004, except for Note 17 as to which the date is March 5, 2004 and
except for Note 2 as to which the date is August 6, 2004, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of December 31, 2003, 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
November 8, 2004
21
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 venture, 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:
* prices and demand for oil and natural gas,
* levels of oil and natural gas exploration and production activities,
* demand for contract drilling and drilling related services and demand
for rental tools,
* operating results, including our efforts to reduce costs and our
projected net loss from continuing operations,
* rig utilization, dayrates and rental tools activity,
* capital expenditures and investments in the acquisition and
refurbishment of rigs and equipment and availability of funds for
capital expenditures,
* reducing our debt, including our liquidity and the sources and
availability of funds to reduce our debt,
* sales of assets,
* formation of alliances with operators,
* the outcome of pending and future legal proceedings,
* recovery of insurance proceeds,
* maintenance of the borrowing base under our revolving credit facility,
and
* 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:
* worldwide economic and business conditions that adversely affect market
conditions and/or the cost of doing business,
* the pace of recovery in the U.S. economy and the demand for natural gas,
* fluctuations in the market prices of oil and gas,
* imposition of unanticipated trade restrictions and political instability,
* operating hazards and uninsured risks,
* political instability, terrorism or war,
* governmental regulations, including changes in tax laws or ability to
remit funds to the U.S., that adversely affect the cost of doing
business,
* adverse environmental events,
* adverse weather conditions,
* loss of a significant customer or changes in concentration of customer
and supplier relationships,
* unexpected cost increases for upgrade and refurbishment projects,
* unanticipated cancellation of contracts by operators,
* breakdown of equipment and other operational problems,
* changes in competition, and
* 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.
22
OUTLOOK AND OVERVIEW
As anticipated in our second quarter report, favorable market conditions
continued to positively impact utilization and dayrates for most segments of our
drilling operations during the third quarter. Strong demand and uncertainty over
possible disruptions in supply have increased oil and gas prices and absent any
material change in these market forces, which seems unlikely, we believe that
these conditions will continue through 2005. We also anticipate that our rental
tools business will continue to benefit from these market conditions.
Although we anticipated that the continuation of favorable market conditions
would result in our return to profitability during the third quarter, the
improvement in utilization and dayrates were more than offset primarily by the
following three factors: first, the consequences of community unrest in Nigeria
has delayed the return of our barge rigs to revenue-generating status. While two
of our Nigerian barge rigs were idle, we incurred $4.5 million in costs,
including some expense related to the completion of the five year American
Bureau of Shipping ("ABS") inspections. Rig 75 began operating under a new
contract during the last week of September and we anticipate that rig 73 will
also begin operations during the fourth quarter of 2004 or first quarter of
2005. Second, extended contract negotiations with the operator of the North
Caspian Sea has delayed re-commencement of operations for rig 257. Drilling
operations for rig 257 could commence late in the fourth quarter. Subsequent to
completing its last drilling assignment in November 2003 rig 257 was demobilized
to the port in Bautino, during which time we incurred $1.0 million per quarter
in maintenance costs and during which time it was assessed duties and taxes of
$6.0 million by the customs authorities in Kazakhstan. We reached a settlement
agreement with the customs authorities that has resulted in a cash payment of
$3.9 million in October. The charge in the third quarter was $2.1 million, and
we expect approximately $1.8 million will be offset by Value Added Tax ("VAT")
payments over the next six months. Third, we paid off our 5.5% Convertible
Subordinated Notes as well as our Term Loan and repurchased $80.0 million of our
10.125% Senior Notes. In addition, we issued $150.0 million Senior Floating Rate
Notes on September 2, 2004. The financing, which will reduce interest costs and
provide additional financial flexibility, resulted in charges of $8.2 million
for premiums for the purchase of $80.0 million of the Company's 10.125% Senior
Notes and for the write-off of previously capitalized debt issuance costs
associated with the debt paid down in addition to legal and other fees.
While the above factors have delayed our return to profitability, we
anticipate that it will occur in 2005. As noted above, rig 75 re-commenced
operations in late September 2004 and rig 257 could re-commence operations late
in the fourth quarter. We also anticipate that Nigerian barge rig 73 will
re-commence operations in late 2004 or early 2005 and are encouraged about the
contractual prospects for Nigerian barge rig 72 to return to work during 2005 as
well. In addition, all seven land rigs and one barge rig are now earning
dayrates in Mexico pursuant to three contracts signed with Pemex and Halliburton
earlier this year, our third rig in New Zealand has returned to operating status
and we believe that our international land drilling utilization will continue to
increase during the fourth quarter. Further, the upgrades on barge rig 76,
enabling it to drill deep wells up to 30,000 feet, have been completed and this
barge rig is on location earning a significantly higher dayrate. Though the
anticipated increase in drilling activity due to high commodity pricing has been
slower than expected, we are encouraged by the continuation of firm natural gas
pricing fundamentals and steady interest in shallow-water prospects of our U.S.
barge operations. We anticipate that these factors coupled with the continued
improvement in our rental tools business could be sufficient to achieve
profitability.
As previously reported, on August 2, 2004 we closed on the sale of five
jackup rigs and four platform rigs, which had been classified as discontinued
operations since June 30, 2003, realizing net proceeds of $39.3 million. All
proceeds were used to pay down debt. Jackup rig 25 was not included in the sale,
although we are encouraged by interest in this rig and are working towards a
sale. We are continuing our efforts to sell our remaining nine land rigs in
Latin America and other assets however we will continue to utilize these assets
until sold. We also expect during the fourth quarter to receive insurance
proceeds for barge rig 74 in Nigeria. Barge rig 74 has been evacuated since
sustaining substantial damage due to community unrest in March 2003.
As of September 30, 2004, we had approximately $71.8 million of liquidity.
This liquidity was comprised of $38.8 million of cash on hand and $33.0 million
of availability under the revolving credit facility.
As of September 30, 2004, we have reduced our debt by $108.8 million since
the beginning of 2003, $90.5 million of which has occurred during 2004, and our
outstanding debt balance is currently $481.1 million, compared to the balance as
of December 31, 2003, of $571.6 million and a balance of $589.9 million when we
established our goal of reducing debt by $200 million.
23
OUTLOOK AND OVERVIEW (continued)
The consummation of the sale of jackup rig 25 and the settlement of our
insurance claim on rig 74 would enable us to achieve 75 percent of our goal of
$200 million of debt reduction by the end of 2004. We are committed to raising
the additional funds necessary to achieve the debt reduction goal as soon as
possible. As noted in our recent press release, we anticipate our fourth quarter
results will reflect a loss of $0.05 - $0.10 per share. While debt reduction is
our principal goal, a very close second goal is achieving profitability through
increased utilization and dayrates.
We are actively recruiting for a new chief operating officer to assist us in
executing our strategic plan, including growth of key markets. We also had a
managerial change in that John Gass, our Vice President of Operations, submitted
his resignation effective October 31, 2004.
Three Months Ended September 30, 2004 Compared with Three Months Ended
September 30, 2003
We recorded a net loss of $23.4 million for the three months ended September
30, 2004, including income of $1.4 million attributed to discontinued
operations, as compared to a net loss of $6.7 million for the three months ended
September 30, 2003, which includes income of $2.1 million attributed to
discontinued operations. The loss from continuing operations for the current
quarter was $24.8 million compared to a loss of $8.8 million for the three
months ended September 30, 2003.
The net loss of $23.4 million for the three months ended September 30, 2004
is $1.4 million more than the $22.1 million net loss reported in our earnings
release dated November 2, 2004. Subsequent to the earnings release it was
determined that we had a mark-to-market decrease in the fair value of certain
interest rate swap agreements. For additional information see Note 8 in the
notes to the unaudited consolidated condensed financial statements.
As explained in detail in Note 4 in the notes to unaudited consolidated
condensed financial statements, in June 2003, the board of directors approved a
plan to sell the U.S. jackup and platform drilling operations and the Latin
America operations which resulted in the re-classification of these assets as
discontinued operations at the time. After management determined to market the
Latin American assets in Mexico we were awarded a five-rig contract and a
two-rig contract in Mexico. As a result of these contracts and Generally
Accepted Accounting Principles ("GAAP") requirements, the seven land rigs
contracted in Mexico and the remaining nine land rigs in the Latin America
region were reclassified from discontinued operations to continuing operations
effective May 1, 2004 and June 30, 2004, respectively. Reclassifications have
been made to reflect the Latin America operations from discontinued operations
to continuing operations for the three and nine months ended September 30, 2004
and 2003. With respect to the U.S. jackup and platform drilling operations, five
jackup and four platform drilling rigs were sold on August 2, 2004, for net
proceeds of $39.3 million. No gain or loss was recorded on the sale. As of
September 30, 2004, only one rig remains in discontinued operations, jackup rig
25, which is the subject of pending negotiations.
24
RESULTS OF OPERATIONS
The analysis below reflects these reclassifications, beginning with an
analysis of the continuing operations followed by a discussion of discontinued
operations.
Three Months Ended September 30,
----------------------------------------------
2004 2003
-------------------- ---------------------
Drilling and rental revenues: (Dollars in Thousands)
U.S. drilling $ 22,788 26% $ 13,872 17%
International drilling 49,686 56% 54,950 66%
Rental tools 15,471 18% 14,054 17%
-------- ----- -------- ------
Total drilling and rental revenues $ 87,945 100% $ 82,876 100%
======== ===== ======== =====
Drilling and rental operating income:
U.S. drilling gross margin (1) $ 9,389 41% $ 1,908 14%
International drilling gross margin (1) 5,862 12% 17,607 32%
Rental tools gross margin (1) 8,913 58% 8,194 58%
Depreciation and amortization (17,806) (17,450)
-------- --------
Total drilling and rental operating income (2) 6,358 10,259
Net construction contract operating income -- 1,000
General and administrative expense (4,924) (4,079)
Gain on disposition of assets, net 333 533
-------- --------
Total operating income $ 1,767 $ 7,713
======== ========
(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 to 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
-------------- -------------- --------------
Three Months Ended September 30, 2004 (Dollars in Thousands)
- -------------------------------------
Drilling and rental operating income (loss) $ 4,851 $ (3,833) $ 5,340
Depreciation and amortization 4,538 9,695 3,573
-------------- -------------- --------------
Drilling and rental gross margin $ 9,389 $ 5,862 $ 8,913
============== ============== =====