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, 2002
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 No.)
1401 Enclave Parkway, Suite 600, Houston, Texas 77077
-----------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (281) 406-2000
-----------------------------------------------------------------
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
---
As of April 30, 2002, 92,319,820 common shares were outstanding.
PARKER DRILLING COMPANY
INDEX
<Table>
<Caption>
Page No.
Part I. Financial Information 2
Item 1. Financial Statements 2
Consolidated Condensed Balance Sheets (Unaudited)
March 31, 2002 and December 31, 2001 2
Consolidated Condensed Statements of Operations (Unaudited)
Three Months Ended March 31, 2002 and 2001 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2002 and 2001 4
Notes to Unaudited Consolidated Condensed
Financial Statements 5 - 9
Report of Independent Accountants 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II. Other Information 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities or Dividend Arrearages 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</Table>
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<Table>
<Caption>
March 31, December 31,
2002 2001
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 60,919 $ 60,400
Other short-term investments 12 12
Accounts and notes receivable, net 101,130 99,874
Rig materials and supplies 20,635 22,200
Other current assets 11,321 8,966
----------- -----------
Total current assets 194,017 191,452
----------- -----------
Property, plant and equipment less
accumulated depreciation and amortization of
$541,243 at March 31, 2002 and $520,645 at
December 31, 2001 684,186 695,529
Goodwill, net of accumulated amortization of
$35,268 at March 31, 2002 and December 31,
2001 189,127 189,127
Other noncurrent assets 28,617 29,669
----------- -----------
Total assets $ 1,095,947 $ 1,105,777
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 5,130 $ 5,007
Accounts payable and accrued liabilities 71,875 71,673
Accrued income taxes 13,500 7,054
----------- -----------
Total current liabilities 90,505 83,734
----------- -----------
Long-term debt 584,043 587,165
Deferred income tax 10,962 16,152
Other long-term liabilities 8,469 6,583
Commitments and contingencies -- --
Stockholders' equity:
Common stock 15,420 15,342
Capital in excess of par value 433,642 432,845
Accumulated other comprehensive income - net
unrealized gain on investments available
for sale (net of taxes $237 at March 31,
2002 and $227 at December 31, 2001) 422 403
Accumulated deficit (47,516) (36,447)
----------- -----------
Total stockholders' equity 401,968 412,143
----------- -----------
Total liabilities and stockholders' equity $ 1,095,947 $ 1,105,777
=========== ===========
</Table>
See accompanying notes to consolidated condensed financial statements.
2
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<Table>
<Caption>
Three Months Ended March 31,
-----------------------------------
2002 2001
------------ ------------
Drilling and rental revenues:
U.S. drilling $ 21,784 $ 49,756
International drilling 62,330 51,421
Rental tools 12,111 13,697
------------ ------------
Total drilling and rental revenues 96,225 114,874
------------ ------------
Drilling and rental operating expenses:
U.S. drilling 19,325 27,615
International drilling 39,224 37,158
Rental tools 5,609 4,743
Depreciation and amortization 23,599 22,878
------------ ------------
Total drilling and rental operating expenses 87,757 92,394
------------ ------------
Drilling and rental operating income 8,468 22,480
------------ ------------
Construction contract revenue 17,652 --
Construction contract expense 16,398 --
------------ ------------
Net construction contract operating
income (Note 4) 1,254 --
------------ ------------
General and administrative expense 6,913 4,871
------------ ------------
Total operating income 2,809 17,609
------------ ------------
Other income and (expense):
Interest expense (12,460) (13,522)
Interest income 352 934
Gain on disposition of assets 923 1,075
Other income (loss) - net (142) 386
------------ ------------
Total other income and (expense) (11,327) (11,127)
------------ ------------
Income (loss) before income taxes (8,518) 6,482
Income tax expense (benefit):
Current 7,751 2,708
Deferred (5,200) 2,250
------------ ------------
Income tax expense 2,551 4,958
------------ ------------
Net income (loss) $ (11,069) $ 1,524
============ ============
Earnings (loss) per share:
Basic $ (0.12) $ 0.02
Diluted $ (0.12) $ 0.02
Number of common shares used in
computing earnings per share:
Basic 92,227,213 91,773,338
Diluted 92,227,213 92,808,509
</Table>
See accompanying notes to consolidated condensed financial statements.
3
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<Table>
<Caption>
Three Months
Ended March 31,
---------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss) $(11,069) $ 1,524
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 23,599 22,878
Gain on disposition of assets (923) (1,075)
Expenses not requiring cash 1,976 1,259
Deferred income taxes (5,200) 2,250
Change in operating assets and liabilities 3,843 (632)
-------- --------
Net cash provided by operating activities 12,226 26,204
-------- --------
Cash flows from investing activities:
Capital expenditures (12,706) (34,729)
Proceeds from the sale of equipment 2,275 955
-------- --------
Net cash used in investing activities (10,431) (33,774)
-------- --------
Cash flows from financing activities:
Principal payments under debt obligations (1,209) (1,200)
Other (67) 238
-------- --------
Net cash used in financing activities (1,276) (962)
-------- --------
Net change in cash and cash equivalents 519 (8,532)
Cash and cash equivalents at beginning of period 60,400 62,480
-------- --------
Cash and cash equivalents at end of period $ 60,919 $ 53,948
======== ========
Supplemental cash flow information:
Interest paid $ 5,111 $ 4,497
Income taxes paid $ 1,302 $ 5,315
Supplemental noncash investing activity:
Net unrealized gain (loss) on investments
available for sale (net of taxes $(10)
in 2002 and $0 in 2001) $ (19) $ 13
Change in fair value of interest rate swap $ 1,685 $ --
</Table>
See accompanying notes to consolidated condensed financial statements.
4
PARKER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. General - In the opinion of 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, 2002 and December 31, 2001, (2)
the results of operations for the three months ended March 31, 2002 and
2001, and (3) cash flows for the three months ended March 31, 2002 and 2001.
Results for the three months ended March 31, 2002 are not necessarily
indicative of the results, which will be realized for the year ending
December 31, 2002. The financial statements should be read in conjunction
with the Company's Form 10-K for the year ended December 31, 2001.
Our independent accountants have performed a review of these interim
financial statements in accordance with standards established by the
American Institute of Certified Public Accountants. Pursuant to Rule 436(c)
under the Securities Act of 1933, their report of that review should not be
considered a report within the meaning of Section 7 and 11 of that Act, and
the independent accountants liability under Section 11 does not extend to
it.
2. Earnings Per Share -
RECONCILIATION OF INCOME AND NUMBER OF SHARES USED
TO CALCULATE BASIC AND DILUTED EARNINGS PER SHARE (EPS)
<Table>
<Caption>
For the Three Months Ended March 31, 2002
----------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ------------
Basic EPS:
Loss available to common stockholders $(11,069,000) 92,227,213 $ (0.12)
Effect of Dilutive Securities:
Stock options and grants -- -- --
Diluted EPS:
Loss available to common stockholders
plus assumed conversions $(11,069,000) 92,227,213 $ (0.12)
============ ========== ===========
</Table>
<Table>
<Caption>
For the Three Months Ended March 31, 2001
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ------------
Basic EPS:
Income available to common stockholders $ 1,524,000 91,773,338 0.02
Effect of Dilutive Securities:
Stock options and grants -- 1,035,171 --
Diluted EPS:
Income available to common stockholders
plus assumed conversions $ 1,524,000 92,808,509 0.02
============ ========== ===========
</Table>
5
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
2. Earnings Per Share (continued) -
The Company has outstanding $124,509,000 of 5.5% Convertible Subordinated
Notes which are convertible into 8,090,254 shares of common stock at $15.39
per share. The notes have been 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. For
the three months ended March 31, 2002, options to purchase 8,463,810 shares
of common stock at prices ranging from $2.25 to $12.1875, 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 months ended March
31, 2001, options to purchase 4,649,000 shares of common stock at prices
ranging from $6.125 to $12.1875 were outstanding but not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of common shares for the quarter.
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-months
ended March 31, 2002 and 2001 is as follows (dollars in thousands):
<Table>
<Caption>
Three Months Ended March 31,
-------------------------------
2002 2001
---------- ----------
Drilling and rental revenues:
U.S. drilling $ 21,784 $ 49,756
International drilling 62,330 51,421
Rental tools 12,111 13,697
---------- ----------
Total drilling and rental revenues 96,225 114,874
---------- ----------
Operating income (loss):
U.S. drilling (7,584) 10,896
International drilling 12,555 5,508
Rental tools 3,497 6,076
---------- ----------
Total operating income by segment(1) 8,468 22,480
Net construction contract operating income 1,254 --
General and administrative expense (6,913) (4,871)
---------- ----------
Total operating income 2,809 17,609
Interest expense (12,460) (13,522)
Other income - net 1,133 2,395
---------- ----------
Income (loss) before income taxes $ (8,518) $ 6,482
========== ==========
</Table>
(1) Operating income by segment is calculated by excluding net construction
contract operating income and general and administrative expense from
operating income, as reported in the consolidated condensed statements
of operations.
6
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
4. Construction Contract - The Company 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 and mobilize a
specialized drilling rig to drill extended reach wells to offshore targets
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. After
consultation with its outside auditors the Company determined that GAAP
requires that revenues received and costs incurred related to this contract
should be accounted for and reported on a gross basis and income for the
related fees should be recognized on a percentage of completion basis.
Because this contract is not a part of the Company's historical or normal
operations, the revenues and costs related to this contract have been shown
as a separate component in the statement of operations.
5. Legal Proceeding - Two subsidiaries of Parker Drilling Company
("Subsidiaries") were named defendants in a lawsuit, Verdin vs. R & B Falcon
Drilling USA, Inc., et. al., Civil Action No. G-00-488, in the U.S. District
Court for the Southern District of Texas, Houston Division. The plaintiff is
a former employee of a drilling contractor engaged in offshore drilling
operations in the Gulf of Mexico. The defendants are various drilling
contractors, including the Subsidiaries, who conduct drilling operations in
the Gulf of Mexico. Plaintiff alleged that the defendants violated federal
and state antitrust laws by agreeing with each other to depress wages and
benefits paid to employees working for said defendants.
Plaintiff sought to bring this case as a "class action", i.e., on behalf of
himself and a proposed class of other similarly situated employees of the
defendants that have allegedly suffered similar damages from the alleged
actions of defendants. The Subsidiaries and certain of the other defendants
entered into a stipulation of settlement with the plaintiff, pursuant to
which the subsidiaries will pay $625,000 for a full and complete release of
all claims brought in the case. The Court issued its final approval of the
settlement on April 18, 2002. The settlement amount and related fees were
accrued during the third quarter 2001 and are payable within thirty days of
the settlement date.
6. Contingency - On July 6, 2001, the Ministry of State Revenues of Kazakhstan
("MSR") issued an Act of Audit to the Kazakhstan branch ("PKD Kazakhstan")
of Parker Drilling Company International Limited ("PDCIL"), a wholly owned
subsidiary of the Company, assessing additional taxes in the amount of
approximately $29.0 million for the years 1998-2000. The assessment
consisted primarily of adjustments in corporate income tax based on a
determination by the Kazakhstan tax authorities that payments by Offshore
Kazakhstan International Operating Company, ("OKIOC"), to PDCIL of $99.0
million, in reimbursement of costs for modifications to Rig 257, performed
by PDCIL prior to the importation of the drilling rig into Kazakhstan, where
it is currently working under contract to OKIOC, are income to PKD
Kazakhstan, and therefore, taxable to PKD Kazakhstan. PKD Kazakhstan filed
an Act of Non-Agreement that such reimbursements should not be taxable and
requested that the Act of Audit be revised accordingly. In November 2001,
the MSR rejected PKD Kazakhstan's Act of Non-Agreement, prompting PKD
Kazakhstan to seek judicial review of the assessment. On December 28, 2001,
the Astana City Court issued a judgment in favor of PKD Kazakhstan, finding
that the reimbursements to PDCIL were not income to PKD Kazakhstan and not
otherwise subject to tax based on the U.S.-Kazakhstan Tax Treaty. The MSR
appealed the decision of the Astana City Court to the Supreme Court, which
recently confirmed the decision of the Astana City Court that the
reimbursements were not income to PKD Kazakhstan. Although the court agreed
with the MSR's position on certain minor issues, no additional taxes will be
payable as a result of this assessment. The MSR has up to one year to appeal
this decision to a special panel of the Supreme Court of Kazakhstan.
7
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
7. Recent Accounting Pronouncements - In 2002, Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", became effective and as a result, the Company ceased to amortize
$189.1 million of goodwill. The Company had recorded $7.4 million of
goodwill amortization in 2001 and would have recorded $7.4 million of
goodwill amortization during 2002. In lieu of amortization, the Company is
required to perform an initial impairment review of goodwill in 2002 and an
annual impairment review thereafter.
The Company is currently reviewing its operations and has identified the
reporting units, including identification of the related operating assets,
goodwill, and liabilities. The Company will estimate the fair value of the
reporting units, deduct the estimated fair value of the tangible net assets
and compare the residual to the recorded goodwill attributable to the
reporting unit to determine if the recorded goodwill has been impaired. The
Company expects to complete the initial review during the second quarter of
2002.
The following is a summary of net income and earnings per share for the
three months ended March 31, 2001 as adjusted to remove the amortization of
goodwill (dollars in thousands, except per share amounts):
<Table>
Net income - as reported $ 1,524
Goodwill amortization 1,870
Income tax impact(1) (283)
-----------
Net income - as adjusted $ 3,111
===========
Basic earnings per share:
Net income - as reported $ 0.02
Goodwill amortization 0.02
Income tax impact(1) (0.01)
-----------
Net income - as adjusted $ 0.03
===========
Diluted earnings per share:
Net income - as reported $ 0.02
Goodwill amortization 0.02
Income tax impact(1) (0.01)
-----------
Net income - as adjusted $ 0.03
===========
</Table>
(1) Certain goodwill amounts are non-deductible for tax purposes; therefore,
the income tax impact reflects only the deductible goodwill
amortization.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
effective January 2003. The Company does not believe the adoption of SFAS
No. 143 will have a material impact on its financial position or results of
operations. In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS
No. 121 and amends Accounting Principles Board ("APB") No. 30 for the
accounting and reporting for discontinued operations as it relates to
long-lived assets. SFAS No. 144 became effective January 2002.
The Company has adopted the provisions of SFAS No. 144 and there was no
resulting impact on its financial position or results of operations.
8. Derivative Financial Instruments - The Company is exposed to interest rate
risk from its fixed-rate debt. The Company has hedged against the risk of
changes in fair value associated with its $450.0 million 9.75% Senior Notes
by entering into three fixed-to-variable interest rate swap agreements with
a total notional amount of $150.0 million. The Company assumes no
ineffectiveness as each interest rate swap meets the short-cut method
requirements under SFAS No. 133 for fair value hedges of debt instruments.
As a result, changes in the fair value of the interest rate swaps are offset
by changes in the fair value of the debt and no net gain or loss is
recognized in earnings. At March 31, 2002, the Company recorded derivative
liabilities of $1.7 million with an offsetting amount recorded as a
reduction in the carrying value of the related debt instrument. Also, during
the first quarter of 2002, the interest rate swap reduced interest expense
by $1.1 million.
8
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
9. Subsequent Events - On May 2, 2002, the Company announced it had
successfully completed the exchange of $235.6 million in principal amount of
new 10.125% Senior Notes due 2009 ("New Notes") for a like amount of its
9.75% Senior Notes due 2006 ("Outstanding Notes"), pursuant to an Offering
Circular dated April 1, 2002 (the "Exchange Offer"). The consummation of the
Exchange Offer was effected without registration, in reliance on the
registration exemption provided by Section 4(2) of the Securities Act of
1933, as amended, which applies to offers and sales of securities that do
not involve a public offering, and Regulation D promulgated under that act
to a limited number of existing holders of the Outstanding Notes that are
institutional accredited investors. The Company has agreed to file a
registration statement with respect to an offer to exchange the New Notes
for notes of the Company having substantially identical terms in all
material respects as the New Notes (the "Exchange Notes"), within 60 days
after the date of original issuance of the New Notes. The New Notes and
Exchange Notes will be governed by the terms of the indenture executed by
the Company, the Subsidiary Guarantors and the trustee dated May 2, 2002,
the terms of which are substantially in accordance with the terms of the
1998 Indenture, as amended by the Fourth Supplemental Indenture, as
described below.
In connection with the Exchange Offer, the Company solicited consents to
certain amendments to the definitions and covenants in the indenture under
which the Outstanding Notes were issued, which all participants in the
Exchange Offer were deemed to have accepted. As a result of the
participation in the Exchange Offer of more than 50% of the holders of the
Outstanding Notes, the amendments to the 1998 Indenture were agreed, and
which amendments have been effected by the execution of the Fourth
Supplemental Indenture by the Company, the Subsidiary Guarantors and the
trustee filed herewith (as amended, the "1998 Indenture"). As a result of
the Exchange Offer, the Company incurred fees of approximately $3.5 million,
which will be expensed in the second quarter of 2002.
9
Report of Independent Accountants
To the Board of Directors and Shareholders
Parker Drilling Company
We have reviewed the consolidated condensed balance sheet of Parker
Drilling Company and subsidiaries as of March 31, 2002 and the related
consolidated condensed statements of operations and cash flows for the
three-month periods ended March 31, 2002 and 2001. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, 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 consolidated condensed financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report, dated January 29, 2002, 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, 2001, 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
Tulsa, Oklahoma
April 22, 2002
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain 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. These
statements may be made in this document, or may be "incorporated by reference,"
which means the statements are contained in other documents filed by the Company
with the Securities and Exchange Commission. All statements included in this
document, other than statements of historical facts, that address activities,
events or developments that the Company expects, projects, believes or
anticipates will or may occur in the future are "forward-looking statements,"
including without limitation:
*future operating results,
*future rig utilization, dayrates and rental tool activity,
*future capital expenditures and investments in the acquisition and
refurbishment of rigs and equipment,
*repayment of debt,
*maintenance of the Company's revolver borrowing base, and
*expansion and growth of operations.
Forward-looking statements are based on certain assumptions and
analyses made by the management of the Company in light of their experience and
perception of historical trends, current conditions, expected future
developments and other factors it believes are relevant. Although management of
the Company believes that its assumptions are reasonable based on current
information available, they are subject to certain risks and uncertainties, many
of which are outside the control of the Company. These risks and uncertainties
include:
*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,
*governmental regulations that adversely affect the cost of doing
business,
*adverse environmental events,
*adverse weather conditions,
*changes in concentration of customer and supplier relationships,
*unexpected cost increases for upgrade and refurbishment projects,
*changes in competition, and
*other similar factors (some of which are discussed in documents
referred to in this Form 10-Q).
Because the forward-looking statements are subject to risks and
uncertainties, the actual results of operations and actions taken by the Company
may differ materially from those expressed or implied by such forward-looking
statements. These risks and uncertainties are referenced in connection with
forward-looking statements that are included from time to time in this document.
Each forward-looking statement speaks only as of the date of this Form 10-Q, and
the Company undertakes no obligation to publicly update or revise any
forward-looking statement.
11
INTRODUCTION AND OUTLOOK
- ------------------------
The $11.1 million loss recognized for the three months ended March 31,
2002 reflects the continued weakness in the Gulf of Mexico market which began to
soften at the end of the third quarter of 2001 due primarily to a reduction in
drilling activity by operators in response to declining demand and prices for
natural gas. The decline in demand is attributed to the economic recession in
the United States. This reduction in drilling activity was particularly
significant in regards to the seven jackup rigs. The jackup rigs average dayrate
and utilization for the first quarter of 2002 was $17,300 and 53%, respectively,
as compared to $31,700 and 93% for the first quarter of 2001. The barge rigs
utilization decreased from 82% during the first quarter of 2001 to 43% during
the first quarter of 2002. The weakness in the Gulf of Mexico market was
somewhat offset by increased utilization of international land rigs. Since the
first quarter of 2001, four additional land rigs have begun working primarily in
Kazakhstan, Russia, and Indonesia.
In the Company's first quarter conference call with investors,
management stated that the level of revenues that the Company will generate in
2002 would be in a range between $425.0 million and $480.0 million depending to
a large extent on the pace of recovery in drilling activity and dayrates in the
Gulf of Mexico market. Based on the current trend, management believes that
utilization of the Company's Gulf of Mexico fleet will show a modest increase in
the second quarter and larger increases in the second half of the year.
Significant increases in the barge and jackup dayrates will not occur until
utilization reaches higher levels. International utilization and dayrates are
projected to increase slightly for the remainder of 2002, in spite of two
Nigerian barge rigs projected to be down for American Bureau of Shipping ("ABS")
inspection modifications and repairs during the second quarter of 2002.
Three Months Ended March 31, 2002 Compared with Three Months Ended
March 31, 2001
- ------------------------------------------------------------------
The Company recorded a net loss of $11.1 million for the three months
ended March 31, 2002 compared to net income of $1.5 million recorded for the
three months ended March 31, 2001. The net loss in the first quarter of 2002 is
reflective of lower utilization and dayrates principally in the U.S. Gulf Coast
drilling operations and reduced revenues in the Company's rental tool operations
that began in the fourth quarter of 2001.
<Table>
<Caption>
Three Months Ended March 31,
-----------------------------------------------
2002 2001
----------------- -------------------
Drilling and rental revenues: (Dollars in Thousands)
U.S. drilling $ 21,784 23% $ 49,756 43%
International drilling 62,330 64% 51,421 45%
Rental tools 12,111 13% 13,697 12%
-------- --- -------- ---
Total drilling and rental revenues $ 96,225 100% $114,874 100%
======== === ======== ===
</Table>
12
RESULTS OF OPERATIONS (continued)
- ---------------------
The Company's drilling and rental revenues decreased $18.7 million to
$96.2 million in the current quarter as compared to the first quarter of 2001.
U.S. drilling revenues decreased $28.0 million due to declining dayrates and
utilization in the Company's Gulf Coast drilling operations. Total barge rig
revenues decreased $12.6 million in the current quarter, as a result of a 39%
decrease in utilization as compared to the first quarter of 2001. Jackup rig
revenues decreased $12.7 million in the current quarter as compared to the first
quarter of 2001 due to a 45% decrease in dayrates and a 40% decrease in
utilization. Platform rig utilization and dayrates decreased 34% and 39%,
respectively, resulting in a $2.6 million decrease in revenues.
International drilling revenues increased $10.9 million to $62.3
million in the current quarter as compared to the first quarter of 2001.
International land drilling revenues increased $8.4 million while international
offshore drilling revenues increased $2.5 million. Primarily responsible for the
improvement in international land drilling revenues was increased rig activity
in the CIS region that includes Kazakhstan and Russia resulting in additional
revenues of $6.4 million. Land drilling revenues increased $4.2 million in the
Asia Pacific region primarily attributed to increased utilization in Papua New
Guinea and New Zealand. Revenues declined $2.2 million in Latin America.
Increased revenues in Colombia and Ecuador were offset by decreased utilization
in Bolivia.
The increase of $2.5 million in international offshore drilling
revenues was due primarily to the four barge rigs in Nigeria being on full
dayrates with an average utilization of 97% for the first quarter of 2002.
During the first quarter of 2001, Barge Rig 72 was down due to ABS inspections
for approximately six weeks resulting in decreased revenues of approximately
$1.9 million for the first quarter of 2001.
Rental tool revenues decreased $1.6 million as Quail Tools reported
revenues in the current quarter of $12.1 million. Quail Tools was negatively
impacted by the reduced drilling activity in the Gulf Coast and in the U.S. land
drilling market. Revenues decreased $0.3 million from the New Iberia, Louisiana
operations, $1.1 million from the Victoria, Texas operations and $0.2 million
from the Odessa, Texas operations.
<Table>
<Caption>
Three Months Ended March 31,
--------------------------------------------------
2002 2001
--------------------- -------------------
Drilling and rental profit margin: (Dollars in Thousands)
U.S. drilling $ 2,459 11% $22,141 44%
International drilling 23,106 37% 14,263 28%
Rental tools 6,502 54% 8,954 65%
-------- -------
Total drilling and rental profit margin 32,067 33% 45,358 39%
-------- -------
Depreciation and amortization (23,599) (22,878)
Net construction contract
operating income 1,254 --
General and administration (6,913) (4,871)
-------- -------
Total operating income $ 2,809 $17,609
======== =======
</Table>
(Drilling and rental profit margin - drilling and rental revenues less direct
drilling and rental operating expenses; drilling and rental profit margin
percentages - drilling and rental profit margin as a percent of drilling and
rental revenues.)
13
RESULTS OF OPERATIONS (continued)
- ---------------------
Drilling and rental profit margin of $32.1 million in the current
quarter reflected a decrease of $13.3 million from the first quarter of 2001. In
the U.S. drilling market, profit margin decreased $19.7 million. U.S. profit
margin was negatively impacted during the current quarter by lower utilization
and dayrates in the Gulf of Mexico from the jackup rigs and decreased
utilization from the barge rigs as previously discussed. Average dayrates for
the jackup rigs decreased approximately 45% in the current quarter when compared
to the first quarter of 2001. The increase in barge rig labor (rate change in
April 2001), and insurance rates for the jackup and barge rigs contributed to
the decline in profit margin for the first quarter of 2002.
International drilling profit margin increased $8.8 million in the
current quarter as compared to the first quarter of 2001. International land
drilling profit margin increased $7.7 million to $16.1 million during the
current quarter due primarily to increased utilization in the Company's land
drilling operations as previously discussed. The international offshore drilling
profit margin increased $1.1 million to $7.0 million in the current quarter.
This increase is primarily attributed to the ABS inspection and repairs in the
first quarter of 2001 for a barge rig in Nigeria as previously mentioned.
Rental tool profit margin decreased $2.4 million to $6.5 million during
the current quarter as compared to the first quarter of 2001. Profit margin
percentage decreased to 54% during the current quarter as compared to 65% for
the first quarter of 2001 due to increasing costs in conjunction with the
decrease in revenues. The increase in operating expenses during the first
quarter of 2002 is primarily attributed to two factors: (1) wage and salary
market increases during the third quarter of 2001, and (2) increased inspection
and cleaning costs of rental tools.
Depreciation and amortization expense increased $0.7 million to $23.6
million in the current quarter. Depreciation expense increased due to capital
additions, principally from two newly built land rigs and major rig upgrades
during 2001.
During the first quarter of 2002 the Company announced two new
contracts to build and operate a rig to drill extended reach wells to offshore
targets from a land-based location on Sakhalin Island, Russia for an
international consortium. A subsidiary of the Company is currently designing and
building the rig. The revenue and expense for the project are recognized as
construction contract revenue and expense, with the engineering fee calculated
on a percentage of completion basis.
General and Administrative expense increased $2.0 million to $6.9
million in the current quarter as compared to the first quarter of 2001. This
increase is primarily attributed to increased rent expense for the new corporate
office in Houston and the new office in Tulsa, unscheduled maintenance on the
former corporate headquarters in Tulsa, currently held for sale, and legal and
professional fees.
Interest expense decreased $1.1 million due primarily to lower interest
rates associated with the three $50.0 million swap agreements signed in December
2001 and January 2002.
Income tax expense consists of foreign tax expense of $7.8 million and
a deferred tax benefit of $5.2 million. Foreign taxes increased $5.0 million due
primarily to $3.1 in additional taxes paid in Colombia, some of which was
attributable to prior years. The remainder of the increase is due to increased
international drilling activity resulting in increased taxes during the first
quarter of 2002 primarily in Kazakhstan and the Asia Pacific region. The
deferred tax benefit was recognized due to the loss generated during the first
quarter of 2002.
14
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of March 31, 2002, the Company had cash, cash equivalents and other
short-term investments of $60.9 million, an increase of $0.5 million from
December 31, 2001. The primary sources of cash for the three-month period as
reflected on the Consolidated Condensed Statement of Cash Flows were $12.2
million provided by operating activities and $2.3 million from the disposition
of equipment.
The primary uses of cash for the three-month period ended March 31,
2002 were $12.7 million for capital expenditures and $1.2 million for repayment
of debt. Major projects during the current three-month period included
expenditures on Rig 228 scheduled to begin work in Peru and completion of
spending on two rigs in the CIS region.
The Company has total long-term debt, including the current portion, of
$589.2 million at March 31, 2002. The Company has a $50.0 million revolving
credit facility with a group of banks led by Bank of America. This facility is
available for working capital requirements, general corporate purposes and to
support letters of credit. The revolver is collateralized by accounts
receivable, inventory and certain barge rigs located in the Gulf of Mexico. The
facility contains customary affirmative and negative covenants. Availability
under the revolving credit facility is subject to certain borrowing base
limitations based on 80 percent of eligible receivables plus 50 percent of
supplies in inventory. Currently, the borrowing base is $46.4 million, of which
none has been drawn down, and $16.2 million in letters of credit have been
issued. The revolver terminates on October 22, 2003.
See Note 9 of the Notes to Unaudited Consolidated Condensed Financial
Statements for information regarding the Company's Exchange Offer which was
completed May 2, 2002.
The Company anticipates that working capital needs and funds required
for capital spending in 2002 will be met from existing cash, other short-term
investments and cash provided by operations. The Company anticipates cash
requirements for capital spending will be approximately $50.0 million in 2002.
Should new opportunities requiring additional capital arise, the Company may
utilize the revolving credit facility. In addition, the Company may seek project
financing or equity participation from outside alliance partners or customers.
The Company cannot predict whether such financing or equity participation would
be available on terms acceptable to the Company.
The Company is exposed to interest rate risk from its fixed-rate debt.
The Company has hedged against the risk of changes in the fair value associated
with its $450.0 million 9.75% Senior Notes by entering into three
fixed-to-variable interest rate swap agreements with a total notional amount of
$150.0 million. The Company assumes no ineffectiveness as each interest rate
swap meets the short-cut method requirements under SFAS No. 133 or fair value
hedges of debt instruments. As a result, changes in the fair value of the
interest rate swaps are offset by changes in the fair value of the debt and no
net gain or loss is recognized in earnings. At March 31, 2002, the Company
recorded derivative liabilities of $1.7 million with an offsetting amount
recorded as a reduction in the carrying value of the related debt instrument.
During the first quarter of 2002, the interest rate swap reduced interest
expense by $1.1 million.
15
OTHER MATTERS
- -------------
Recent Accounting Pronouncements
- --------------------------------
In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets", became
effective and as a result, the Company ceased to amortize $189.1 million of
goodwill. The Company had recorded $7.4 million of goodwill amortization in 2001
and would have recorded $7.4 million of goodwill amortization during 2002. In
lieu of amortization, the Company is required to perform an initial impairment
review of goodwill in 2002 and an annual impairment review thereafter.
The Company is currently reviewing its operations and has identified
the reporting units, including identification of the related operating assets,
goodwill, and liabilities. The Company will estimate the fair value of the
reporting units, deduct the estimated fair value of the tangible net assets and
compare the residual to the recorded goodwill attributable to the reporting unit
to determine if the recorded goodwill has been impaired. The Company expects to
complete the initial review during the second quarter of 2002.
In June 2001, FASB issued SFAS No. 143. SFAS No. 143, "Accounting for
Asset Retirement Obligations", requires the capitalization and accrual of the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 will be effective January 2003. The Company does not believe the
adoption of SFAS No. 143 will have a material impact on its financial position
or results of operations. In August 2001 the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
supersedes SFAS No. 121 and amends APB No. 30 for the accounting and reporting
for discontinued operations as it relates to long-lived assets. SFAS No. 144
became effective January 2002.
The Company has adopted the provisions of SFAS No. 144 and there was no
resulting impact on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
- ------------------
In December 2001 the Company began to utilize hedging strategies to
manage fixed-rate interest exposure by entering into one swap agreement. In
January 2002, the Company entered into two additional swap agreements. The terms
of the swap agreements are as follows:
<Table>
<Caption>
Months Notional Amount Fixed Rate Floating Rate
- ----------------------------- --------------- ---------- -----------------------
(Dollars in Thousands)
December 2001 - November 2006 $ 50,000 9.75% Three-month LIBOR
plus 446 basis points
January 2002 - November 2006 $ 50,000 9.75% Three-month LIBOR
plus 475 basis points
January 2002 - November 2006 $ 50,000 9.75% Three-month LIBOR
plus 482 basis points
</Table>
If the floating rate is less than the fixed rate, the counter party
will pay the Company accordingly. If the floating rate exceeds the fixed rate,
the Company will pay the counter party. The fair values of the swap agreements
at March 31, 2002 were $1.7 million. The change in the fair values of the swap
agreements will be offset by the change in the fair value of the related debt.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Two subsidiaries of Parker Drilling Company ("Subsidiaries") were named
defendants in a lawsuit, Verdin vs. R & B Falcon Drilling USA, Inc., et. al.,
Civil Action No. G-00-488, in the U.S. District Court for the Southern District
of Texas, Houston Division. The plaintiff is a former employee of a drilling
contractor engaged in offshore drilling operations in the Gulf of Mexico. The
defendants are various drilling contractors, including the Subsidiaries, who
conduct drilling operations in the Gulf of Mexico. Plaintiff alleged that the
defendants violated federal and state antitrust laws by agreeing with each other
to depress wages and benefits paid to employees working for said defendants.
Plaintiff sought to bring this case as a "class action", i.e., on
behalf of himself and a proposed class of other similarly situated employees of
the defendants that have allegedly suffered similar damages from the alleged
actions of defendants. The Subsidiaries and certain of the other defendants
entered into a stipulation of settlement with the plaintiff, pursuant to which
the subsidiaries will pay $625,000 for a full and complete release of all claims
brought in the case. The Court issued its final approval of the settlement on
April 18, 2002. The settlement amount and related fees were accrued during the
third quarter 2001 and are payable within thirty days of the settlement date.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 2, 2002 the Company announced it had successfully completed the
exchange of $235.6 million in principal amount of new 10.125% Senior Notes due
2009 ("New Notes") for a like amount of its 9.75% Senior Notes due 2006
("Outstanding Notes"), pursuant to an Offering Circular dated April 1, 2002 (the
"Exchange Offer"). The consummation of the Exchange Offer was effected without
registration, in reliance on the registration exemption provided by Section 4(2)
of the Securities Act of 1933, as amended, which applies to offers and sales of
securities that do not involve a public offering, and Regulation D promulgated
under that act to a limited number of existing holders of the Outstanding Notes
that are institutional accredited investors. The Company has agreed to file a
registration statement with respect to an offer to exchange the New Notes for
notes of the Company having substantially identical terms in all material
respects as the New Notes (the "Exchange Notes"), within 60 days after the date
of original issuance of the New Notes. The New Notes and Exchange Notes will be
governed by the terms of the indenture executed by the Company, the Subsidiary
Guarantors and the trustee dated May 2, 2002, the terms of which are
substantially in accordance with the terms of the 1998 Indenture, as amended
by the Fourth Supplemental Indenture, as described below.
In connection with the Exchange Offer, the Company solicited consents
to certain amendments to the definitions and covenants in the indenture under
which the Outstanding Notes were issued, to which all participants in the
Exchange Offer were deemed to have accepted. As a result of the participation in
the Exchange Offer of more than 50% of the holders of the Outstanding Notes, the
amendments to the 1998 Indenture were agreed, and which amendments have been
effected by the execution of the Fourth Supplemental Indenture by the Company,
the Subsidiary Guarantors and the trustee filed herewith (as amended, the "1998
Indenture").
ITEM 3. DEFAULTS UPON SENIOR SECURITIES OR DIVIDEND ARREARAGES
None
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on April 25, 2002 there were
represented in person or by proxy 79,012,601 shares out of 92,238,473 entitled
to vote as of the record date, constituting a quorum. The two matters voted upon
at the Annual Meeting were:
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 2005:
<Table>
Robert L. Parker
Votes cast in favor: 75,057,240
Votes withheld: 3,955,361
Robert L. Parker Jr
Votes cast in favor: 75,034,292
Votes withheld: 3,978,309
Simon G. Kukes
Votes cast in favor: 69,109,836
Votes withheld: 9,902,765
</Table>
Election of independent accountants: PricewaterhouseCoopers LLP was
approved as the independent accountants for 2002 with:
<Table>
Votes cast in favor: 77,769,036
Votes withheld: 1,243,565
</Table>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed as a part of this report:
Exhibit
Number Description
------- -----------
4.1 Third Supplemental Indenture dated as of April 30, 2002, among
the Company, as Issuer, certain Subsidiary Guarantors (as
defined therein) and JPMorgan Chase Bank, as Trustee,
respecting 9 3/4% Senior Notes Due 2006, Series D
4.2 Fourth Supplemental Indenture dated as of May 2, 2002, among
the Company, as Issuer, certain Subsidiary Guarantors (as
defined therein) and JPMorgan Chase Bank, as Trustee,
respecting 9 3/4% Senior Notes Due 2006, Series D
15 Letter re Unaudited Interim Financial Information
(b) Reports on Form 8-K:
The Company filed a Form 8-K on April 1, 2002 announcing that the
Supreme Court of Kazakhstan ruled in favor of a subsidiary of the
Company on all significant issues which were the basis of an
additional tax assessment of $29.0 million.
18
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 15, 2002
By: /s/ James J. Davis
----------------------------------
James J. Davis
Senior Vice President-Finance and
Chief Financial Officer
By: /s/ W. Kirk Brassfield
----------------------------------
W. Kirk Brassfield
Vice President and Controller
19
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.1 Third Supplemental Indenture dated as of April 30, 2002, among
the Company, as Issuer, certain Subsidiary Guarantors (as
defined therein) and JPMorgan Chase Bank, as Trustee,
respecting 9 3/4% Senior Notes Due 2006, Series D
4.2 Fourth Supplemental Indenture dated as of May 2, 2002, among
the Company, as Issuer, certain Subsidiary Guarantors (as
defined therein) and JPMorgan Chase Bank, as Trustee,
respecting 9 3/4% Senior Notes Due 2006, Series D
15 Letter re Unaudited Interim Financial Information
</Table>
20