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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(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
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(Exact name of registrant as specified in its charter)
Delaware 73-0618660
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification of No.)
1401 Enclave Parkway, Suite 600, Houston, Texas 77077
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(Address of principal executive offices) (Zip code)
(281) 406-2000
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(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.
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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:
<Table>
<Caption>
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)
=======
</Table>
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)
<Table>
<Caption>
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
============= ============= ============= ============= =============
</Table>
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
============== ============== ==============
Three Months Ended September 30, 2003
- -------------------------------------
Drilling and rental operating income (loss) $ (3,299) $ 8,845 $ 4,713
Depreciation and amortization 5,207 8,762 3,481
-------------- -------------- --------------
Drilling and rental gross margin $ 1,908 $ 17,607 $ 8,194
============== ============== ==============
(2) Drilling and rental operating income - drilling and rental revenues less
direct drilling and rental operating expenses, including depreciation and
amortization expense.
25
RESULTS OF OPERATIONS (continued)
U.S. Drilling Segment
The U.S. drilling segment, consisting of 20 barge rigs, experienced increases
in both rig utilization and dayrates during the third quarter of 2004. As a
result, revenues increased $8.9 million to $22.8 million as compared to the
third quarter of 2003, despite the fact that barge rig 18 was destroyed by a
blowout during the fourth quarter of 2003 and barge rig 53 was mobilized to
Mexico during the second quarter of 2004 to perform a contract for Pemex. In
addition, in August 2004, deep barge rig 76 was brought into port for necessary
power upgrades that will allow the barge to drill deep wells up to 30,000 feet,
in shallow waters. The upgrades have been completed and the barge rig is on
location and under contract as of October 27, 2004. Barge rig utilization
increased from 40 percent during the third quarter of 2003 to 66 percent in the
current quarter and dayrates increased approximately 12 percent. As noted above,
during the second quarter of 2004 we moved one deep drilling barge rig to the
Mexican drilling market to drill in the Macuspana Basin pursuant to a two-year
contract with Pemex. After the move of this rig, we have eight deep drilling
barges, five intermediate drilling barges and seven workover rigs in the U.S.
Gulf of Mexico market.
As a result of higher dayrates and utilization, our gross margins in the U.S.
drilling segment increased $7.5 million to $9.4 million. Gross margins were
positively impacted by higher utilization and dayrates. We have continued to
maintain tight control over our expenses and as a result operating expenses
increased at a slower rate than revenues which positively impacted gross
margins. Gross margin percentage increased from 14 percent during the third
quarter of 2003 to 41 percent during the current quarter.
International Drilling Segment
International drilling revenues decreased $5.3 million to $49.7 million
during the current quarter as compared to the third quarter of 2003. The $8.8
million increase in our international land drilling revenues was more than
offset by a decrease of $14.1 million in our international offshore drilling
operations. The international land drilling increase is primarily attributed to
new drilling operations in Mexico, where seven land rigs began operating
throughout the quarter; Turkmenistan, where the second rig of a two-rig contract
commenced operations in March 2004; and Bangladesh, where rig 255 operated
throughout most of the third quarter, completing its contract in October; all of
which contributed to a $12.3 million increase in revenues. In addition, our
third rig in New Zealand returned to drilling operations during the third
quarter, contributing additional revenues of $1.5 million. Offsetting these
increases during the third quarter was a $4.4 million decrease in revenues from
our operations in Latin America, excluding Mexico, primarily attributable to no
rigs working in Bolivia during 2004, and our rig under contract in Peru
receiving a reduced standby rate as of April 1, 2004. We expect the rig in Peru
to remain on the standby rate through the remainder of 2004 and return to a full
operating dayrate in mid 2005. One Tengizchevroil ("TCO")-owned rig, the
operation of which had been suspended in late 2002, resumed operations in late
2003 and continues to operate. Another TCO-owned rig was stacked in June 2004
and is not expected to operate for the remainder of the year. Operating expenses
for the international land operations increased at a higher rate than the
increase in revenues. This was due primarily to the commencement of operations
in Mexico which incurred higher expenses during the startup phase of the
operation. Gross margin percentage for the quarter ended September 30, 2004
decreased to 27 percent from 33 percent as compared to the third quarter of
2003.
26
RESULTS OF OPERATIONS (continued)
International Drilling Segment (continued)
International offshore revenues decreased $14.1 million to $3.8 million
during the third quarter of 2004 as compared to the third quarter of 2003. The
decrease in revenues was attributable to our Caspian Sea operation, $6.3 million
decrease, and our operations in Nigeria, $10.0 million decrease, which was
partially offset by increased revenues of $2.2 million from our barge rig now
operating in Mexico. In the Caspian Sea, our arctic-class barge rig 257
completed its initial four-year contract in November 2003 and was then
demobilized to the Caspian Sea port of Bautino in February 2004, where it is
presently stacked pending operations. We have recently received confirmation of
a new contract for up to two years and we anticipate that drilling operations
could resume late in the fourth quarter. Our barge operations in Nigeria have
been negatively impacted by continued community unrest. Barge rig 74 has been
evacuated since sustaining substantial damage due to community unrest in March
2003 and received a standby rate approximating 45 percent of the full dayrate
until early March 2004. For the third quarter of 2004 only barge rig 75 earned
revenue as compared to two barge rigs on full dayrate during the third quarter
of 2003. Barge rig 75 returned to work under a new three-year contract during
the last week of September 2004. As previously noted, a deep drilling barge rig
was moved from the U.S. Gulf of Mexico market to the Mexican market to drill in
the Macuspana Basin. The barge rig began operations in June 2004 and contributed
revenues of $2.2 million during the third quarter of 2004. The significant
decrease in international offshore revenues resulted in negative gross margins
for the current quarter as compared to 31 percent gross margins for the third
quarter of 2003. 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 ABS inspections. Costs to maintain barge rig 257 in the Caspian while
stacked in Bautino approximate $1.0 million per quarter. In addition, we
recently settled our case with the Mangistau Customs Control in connection with
the temporary import status of barge rig 257, resulting in a charge of $2.1
million accrued in the third quarter. The cash impact of the settlement was $3.9
million, but we expect to recapture approximately $1.8 million of that amount
through reduced VAT payments over the next six months.
Rental Tools Segment
Rental tools revenues increased $1.4 million to $15.5 million during the
third quarter of 2004 as compared to the third quarter of 2003. Revenues
decreased $0.7 million from the New Iberia, Louisiana operations, increased $0.5
million from the Victoria, Texas operations, increased $1.6 million from the
Odessa, Texas operations and increased $0.03 million from operations in
Evanston, Wyoming. The revenues decrease in New Iberia was primarily the result
of customer downtime due to Hurricane Ivan. The increased revenues in Victoria
and Odessa have been driven by increased activity with new customers, generally
small independents. Segment-wide rental tools utilization increased to an
average of 35 percent for the third quarter of 2004 as compared to 32 percent
for the third quarter of 2003. Rental tools gross margins increased $0.7 million
to $8.9 million for the current quarter as compared to the third quarter of
2003. Gross margin percentage remained unchanged at 58 percent when comparing
the two quarters.
Other Financial Data
General and administrative expense increased approximately $0.8 million to
$4.9 million during the third quarter of 2004. Approximately $0.6 million of the
increase relates to documentation and testing of internal controls as required
by section 404 of the Sarbanes-Oxley Act ("SOX").
In August and September of 2004, we entered into three variable-to-fixed
interest rate swap agreements. The swap agreements did not qualify for hedge
accounting and accordingly, we are reporting the mark-to-market change in the
fair value of the interest rate derivatives currently in earnings. For the three
months ended September 30, 2004 we recognized a non-cash charge for a decrease
in the fair value of the derivative positions of $1.4 million. For additional
information see Note 8 in the notes to the unaudited consolidated condensed
financial statements.
On September 2, 2004, we issued $150.0 million of Senior Floating Rate Notes
and concurrently repurchased $80.0 million of our 10.125% Senior Notes at a
premium. Total charges expensed during the quarter were $8.2 million consisting
of the 6.54 percent premium on the repurchase of the 10.125% Senior Notes, the
write-off of the previously capitalized debt issuance costs associated with the
repurchase of the 10.125% Senior Notes and the repayment of the delay draw Term
Loan, and for legal and other fees. The $8.2 million charge was recorded as
extinguishment of debt in the statement of operations.
27
RESULTS OF OPERATIONS (continued)
Other Financial Data (continued)
Income tax expense from operations consists of foreign tax expense of $4.5
million for the third quarter of 2004 as compared to foreign tax expense of $2.9
million for the third quarter of 2003. The increase in taxes was primarily due
to a decrease in tax deductible expenses for Papua New Guinea in current and
prior years. For the third quarter 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.
Analysis of Discontinued Operations
Three Months Ended September 30,
----------------------------------
2004 2003
--------------- ---------------
(Dollars in Thousands)
U.S. jackup and platform drilling revenues $ 7,187 $ 13,108
=============== ===============
U.S. jackup and platform drilling gross margin (1) $ 1,416 $ 2,047
Depreciation and amortization (2) -- 80
Loss on disposition of assets, net of impairment (57) --
--------------- ---------------
Income (loss) from discontinued operations $ 1,359 $ 2,127
=============== ===============
(1) Drilling gross margin is computed as drilling revenues less direct drilling
operating expenses, excluding depreciation and amortization expense. The
gross margin amounts and gross margin percentages should not be used as a
substitute to those amounts reported under GAAP. However, we monitor our
business segments based on several criteria, including drilling gross
margin. Management believes that this information is useful to our
investors because it more closely tracks cash generated by segment. Such
gross margin amounts are reconciled to our most comparable GAAP measure as
follows:
Three Months Ended September 30,
--------------------------------
2004 2003
-------------- --------------
U.S. Jackup and Platform Drilling (Dollars in Thousands)
- ---------------------------------
Operating income $ 1,416 $ 2,127
Depreciation and amortization -- (80)
-------------- --------------
Drilling gross margin $ 1,416 $ 2,047
============== ==============
(2) Depreciation and amortization - in accordance with SFAS No. 144, we ceased
to record depreciation expense related to the discontinued operations
effective June 30, 2003.
On August 2, 2004, we sold five jackup rigs and four platform rigs for net
proceeds of $39.3 million. No gain or loss was recorded on the sale. Jackup rig
25 was excluded from the sale. See the Outlook and Overview and Note 4 in the
notes to unaudited consolidated condensed financial statements.
U. S. jackup and platform drilling revenues decreased $5.9 million to $7.2
million during the current quarter as compared to the third quarter of 2003.
Revenues decreased as a result of the sale of all but one jackup rig in early
August as noted above. Jackup rig 25 worked throughout the third quarter and has
experienced an increase in dayrates. As of October 31, 2004, jackup rig 25 is on
a dayrate approximating $30,000.
28
RESULTS OF OPERATIONS (continued)
Nine Months Ended September 30, 2004 Compared with the Nine Months Ended
September 30, 2003
We recorded a net loss of $41.8 million for the nine months ended
September 30, 2004, including income of $6.6 million attributed to discontinued
operations, as compared to a net loss of $97.3 million for the nine months ended
September 30, 2003 which includes a loss of $60.0 million attributed to
discontinued operations. The loss from continuing operations for the current
nine month period was $48.4 million compared to a loss of $37.3 million for the
nine months ended September 30, 2003.
The net loss of $41.8 million for the nine months ended September 30, 2004
is $1.4 million more than the $40.5 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 a re-classification of these assets to
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 this contract and 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.
29
RESULTS OF OPERATIONS (continued)
The analysis below reflects these reclassifications, beginning with an
analysis of the continuing operations followed by a discussion of discontinued
operations.
Nine Months Ended September 30,
------------------------------------------------------------
2004 2003
---------------------------- ---------------------------
Drilling and rental revenues: (Dollars in Thousands)
U.S. drilling $ 63,209 23% $ 49,593 20%
International drilling 156,238 59% 157,094 64%
Rental tools 47,278 18% 40,366 16%
------------ ------------ ------------ ------------
Total drilling and rental revenues $ 266,725 100% $ 247,053 100%
============ ============ ============ ============
Drilling and rental operating income:
U.S. drilling gross margin (1) $ 24,613 39% $ 12,127 24%
International drilling gross margin (1) 34,020 22% 45,696 29%
Rental tools gross margin (1) 27,395 58% 23,498 58%
Depreciation and amortization (50,599) (56,580)
------------ ------------
Total drilling and rental operating income (2) 35,429 24,741
Net construction contract operating income -- 2,000
General and administrative expense (17,958) (14,485)
Provision for reduction in carrying value of certain assets (6,558) --
Gain on disposition of assets, net 1,402 1,344
------------ ------------
Total operating income $ 12,315 $ 13,600
============ ============
(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
--------------- --------------- ---------------
Nine Months Ended September 30, 2004 (Dollars in Thousands)
- ---------------------------------------
Drilling and rental operating income $ 10,594 $ 7,963 $ 16,872
Depreciation and amortization 14,019 26,057 10,523
--------------- --------------- ---------------
Drilling and rental gross margin $ 24,613 $ 34,020 $ 27,395
=============== =============== ===============
Nine Months Ended September 30, 2003
- ----------------------------------------
Drilling and rental operating income (loss) $ (2,840) $ 14,141 $ 13,440
Depreciation and amortization 14,967 31,555 10,058
--------------- --------------- ---------------
Drilling and rental gross margin $ 12,127 $ 45,696 $ 23,498
=============== =============== ===============
(2) Drilling and rental operating income - drilling and rental revenues less
direct drilling and rental operating expenses, including depreciation and
amortization expense.
U.S. Drilling Segment
The U.S. drilling segment, consisting of 20 barge rigs, experienced
increases in both rig utilization and dayrates during the first nine months of
2004. As a result, revenues increased $13.6 million to $63.2 million during 2004
as compared to 2003 despite the reduction of two barge rigs from the U.S. Gulf
of Mexico market. Barge rig utilization increased from 49 percent to 61 percent
and dayrates increased approximately 10 percent.
Gross margins in the U.S. drilling segment increased $12.5 million to
$24.6 million. Gross margins were positively impacted by the increased
utilization and dayrates. We have continued to maintain tight control over our
expenses and as a result expenses increased at a slower rate than revenues
positively impacting gross margin. Gross margin percentage increased from 24
percent during the first nine months of 2003 to 39 percent during 2004.
30
RESULTS OF OPERATIONS (continued)
International Drilling Segment
International drilling revenues decreased $0.9 million to $156.2 million
during the current nine month period as compared to 2003. Our international land
drilling revenues increased $33.6 million offset by a decrease of $34.5 million
in our international offshore drilling operations. The international land
drilling increase is primarily attributed to new drilling operations in
Turkmenistan, where the second rig of a two-rig contract commenced operations in
March 2004; Bangladesh, where rig 255 earned revenue through the end of October
2004; Sakhalin Island, where we continue to provide drilling services under a
labor and management contract; and Mexico, where all seven rigs which began
mobilizing during the second quarter and were working as of the end of the third
quarter, all of which contributed a $34.4 million increase in revenues during
the first nine months of 2004. In addition, our third rig in New Zealand
returned to drilling operations and one TCO-owned rig resumed operations in late
2003 and worked through June 25, 2004, which together, contributed $7.6 million
to the increase in revenues. Latin America revenues declined $7.7 million
primarily attributable to Bolivia where, no rigs worked during 2004, and Peru,
where rig 228 received a standby rate beginning in the second quarter of 2004.
Rig 228 is expected to remain on standby through the remainder of 2004 and
return to a full dayrate in mid 2005. Operating expenses for the international
land operations were consistent with the increase in revenues. Gross margin
percentage for the nine months ended September 30, 2004 increased to 32 percent
from 30 percent as compared to the first nine months of 2003.
International offshore revenues decreased $34.5 million during the nine
months ended 2004 as compared to 2003. The decrease in revenues is attributed to
our Caspian Sea operation and our operations in Nigeria. In the Caspian Sea, our
arctic-class barge rig 257 completed its initial four-year contract in November
2003, and was then demobilized to the Caspian Sea port of Bautino in February
2004 where it is presently stacked pending further operations. We have recently
received confirmation of a new contract for up to two years, and we anticipate
that drilling operations could resume late in the fourth quarter. Our barge
operations in Nigeria have been negatively impacted by continued community
unrest. Barge rig 74 has been evacuated since sustaining substantial damage due
to community unrest in March 2003. Rig 74 was on a standby rate, approximating
45 percent of the full dayrate, from April 2003 through early March 2004. For
the nine month period of 2004, two of the four barge rigs were on dayrates
through May as compared to three barge rigs on full dayrate during the first
nine months of 2003. We signed a new three-year contract for rig 75 which
re-commenced drilling operations during the last week in September. During the
second quarter of 2004, a deep drilling barge rig was moved from the U.S. Gulf
of Mexico market to the international Mexico market to drill in Macuspana Basin.
The barge rig began operations in June 2004 and contributed revenues of $2.8
million for the current nine month period. The significant decrease in
international offshore revenues, resulted in negative gross margins for the
current period. In addition, during the second quarter Nigerian tax authorities
assessed our Nigerian subsidiary additional VAT, resulting in an accrual of $2.3
million during the second quarter. In October 2004, the Kazakhstan courts
confirmed the settlement for duties and taxes assessed by the Mangistau Customs
Control in connection with the temporary import status of barge rig 257,
resulting in a charge of $2.1 million which was accrued in September. The cash
impact of the settlement was $3.9 million, but we expect that approximately $1.8
million of that amount will be recaptured through reduced VAT payments over the
next six months. The settlement will release all claims of the Kazakhstan
customs authorities over rig 257 and our bank accounts. Gross margin percentage
for the first nine months of 2004 was negative as compared to 28 percent for the
nine months ended September 30, 2003. In addition to the reduction in revenues,
the costs to stack barge rig 257 and retain limited personnel to maintain the
rig approximate $1.0 million per quarter.
Rental Tools Segment
Rental tools revenues increased $6.9 million to $47.3 million during the
first nine months of 2004 as compared to 2003. Revenues increased $1.1 million
from the New Iberia, Louisiana operations, increased $1.3 million from the
Victoria, Texas operations, increased $2.8 million from the Odessa, Texas
operations and increased $1.7 million from its operations in Evanston, Wyoming.
All locations experienced increased customer demand and an expansion in the
customer base. Revenues were negatively impacted during the third quarter of
2004 by approximately $0.5 million as the result of lost revenues from Hurricane
Ivan. Rental tools gross margins increased $3.9 million to $27.4 million for the
current nine month period as compared to 2003. Gross margin percentage remained
stable between the periods at 58 percent, as both revenues and operating
expenses increased approximately 18 percent.
31
RESULTS OF OPERATIONS (continued)
Other Financial Data
Depreciation and amortization expense decreased $6.0 million in 2004 as
compared to 2003. The decrease is primarily attributable to the classification
of the Latin America land rigs and the U.S. jackup and platform drilling
operations as discontinued operations beginning in July 2003. While the rigs
were classified as discontinued operations no depreciation was recorded. Seven
of these Latin America rigs were moved to continuing operations in May 2004 at
which time we resumed recording depreciation. The remaining nine land rigs were
moved to continuing operations effective June 30, 2004 and we resumed
depreciation in July 2004. All 16 Latin America land rigs and the U.S. jackup
and platform drilling operations recorded depreciation during the six months
ended June 30, 2003.
During the second quarter of 2004, we recognized $6.6 million in provision
for reduction in carrying value of certain assets. Of this provision, $5.1
million is the result of valuing the Latin America land rigs at the lower of net
book value or fair value. GAAP requires that an operation reclassified from
discontinued operations to continuing operations shall be measured at the lower
of its (a) carrying amount before the asset was classified as held for sale,
adjusted for any depreciation expense that would have been recognized had the
asset been continuously classified as held and used, or (b) fair value at the
date of the subsequent decision not to sell. The $5.1 million represents the
depreciation that would have been recognized had the assets been continuously
classified as held and used. In addition, we reserved $1.5 million for an asset
representing premiums paid in prior years on two split dollar life insurance
policies for Robert L. Parker. The value of the asset was reduced to the cash
surrender value of the insurance policies.
General and administrative expense increased approximately $3.5 million to
$18.0 million for the nine months ended September 30, 2004. Approximately $1.4
million of the increase relates to severance costs agreement for our former
chief operating officer. We accrued, during the second quarter, $1.1 million in
severance pay and the remainder related to the expensing of outstanding stock
options and other benefits. During the first quarter of 2004, we incurred an
expense of $1.0 million related to the vesting of restricted shares and our
portion of the FICA tax expense on those restricted shares. The restricted
shares were granted in July 2003 and were scheduled to vest over seven years,
but included an accelerated vesting feature based on stock performance goals. In
accordance with the accelerated vesting feature, 50 percent of the grant vested
in March 2004 based on meeting the initial stock performance goal of $3.50 per
share for 30 consecutive days. The remaining 50 percent of the grant will vest
when our stock price has equaled or exceeded $5.00 per share for 30 consecutive
days, or at the end of the seven-year period. During the current year, we have
incurred approximately $1.5 million related to the documentation and testing for
compliance with SOX.
In August and September of 2004, we entered into three variable-to-fixed
interest rate swap agreements. The swap agreements did not qualify for hedge
accounting and accordingly, we are reporting the mark-to-market change in the
fair value of the interest rate derivatives in current earnings. For the nine
months ended September 30, 2004 we recognized a non-cash decrease in the fair
value of the derivative positions of $1.4 million. For additional information
see Note 8 in the notes to the unaudited consolidated condensed financial
statements.
Loss on extinguishment of debt increased $8.7 million during 2004 as
compared to 2003. On September 2, 2004 we issued $150.0 million of Senior
Floating Rate Notes. Concurrent with the issuance we repurchased $80.0 million
of our 10.125% Senior Notes at a premium. Total charges expensed during the
quarter were $8.2 million consisting of the 6.54 percent premium on the
repurchase, the write-off of the debt issuance costs associated with the debt
paid down, and for legal and other fees. The $8.2 million charge was recorded as
extinguishment of debt in the statement of operations. During the second quarter
of 2004, we repurchased $30.3 million of our 5.5% Convertible Subordinated Notes
at a premium of $0.3 million. In conjunction with our refinancing of a portion
of our debt in 2003, we incurred and recognized $5.3 million of costs during the
fourth quarter of 2003 related to the retirement of our 9.75% Senior Notes.
During the first quarter of 2004, an additional $0.3 million was recognized as
loss on extinguishment of debt related to this retirement of debt.
Income tax expense from operations consists of foreign tax expense of $12.0
million for the current nine month period as compared to foreign tax expense of
$11.7 million for the nine months ended September 30, 2003. The increase in
foreign taxes was due to a decrease in tax deductible expenses for Papua New
Guinea in current and prior years offset by a reduction in taxes due to a tax
rate change in China, a change in our operating structure in Kuwait along with a
decrease in the barge operations in Nigeria. For the first 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 first
nine months of 2004 and 2003.
32
RESULTS OF OPERATIONS (continued)
Analysis of Discontinued Operations
Nine Months Ended September 30,
--------------------------------------
2004 2003
---------------- --------------
(Dollars in Thousands)
U.S. jackup and platform drilling revenues $ 31,445 $ 35,428
================ ==============
U.S. jackup and platform drilling gross margin (1) $ 6,694 $ 3,586
Depreciation and amortization (2) -- (9,817)
Loss on disposition of assets, net of impairment (108) (53,768)
---------------- --------------
Income (loss) from discontinued operations $ 6,586 $ (59,999)
================ ==============
(1) Drilling gross margin is computed as drilling revenues less direct drilling
operating expenses, excluding depreciation and amortization expense. The
gross margin amounts and gross margin percentages should not be used as a
substitute to those amounts reported under GAAP. However, we monitor our
business segments based on several criteria, including drilling gross
margin. Management believes that this information is useful to our
investors because it more closely tracks cash generated by segment. Such
gross margin amounts are reconciled to our most comparable GAAP measure as
follows:
Nine Months Ended September 30,
--------------------------------------
2004 2003
---------------- --------------
U.S. Jackup and Platform Drilling (Dollars in Thousands)
- ----------------------------------------------------
Operating income (loss) $ 6,694 $ (6,231)
Depreciation and amortization -- 9,817
---------------- --------------
Drilling gross margin $ 6,694 $ 3,586
================ ==============
(2) Depreciation and amortization - in accordance with SFAS No. 144, we ceased
to record depreciation expense related to the discontinued operations
effective June 30, 2003.
On August 2, 2004, we sold five jackup rigs and four platform rigs for net
proceeds of $39.3 million. No gain or loss was recorded on the sale. Jackup rig
25 was excluded from the sale. See Note 4 in the notes to unaudited consolidated
condensed financial statements.
Jackup and platform drilling rig revenues decreased $4.0 million to $31.4
million for the nine months ended September 30, 2004 as compared to 2003.
Revenues and gross margins were negatively impacted by the sale of the five
jackups and four platforms during the third quarter as noted above. Jackup rig
25 continues to operate pending its ultimate disposition.
On September 11, 2003, a malfunction of jackup rig 14 resulted in
significant damage to the rig and the drilling equipment, but there were no
fatalities. We received a total loss settlement of $27.0 million from insurance
underwriters during March and early April 2004. The cost incurred to tow the rig
to the port and pay for the damage assessment approximated $4.0 million
resulting in net insurance proceeds of approximately $23.0 million. The net book
value of jackup rig 14 was $17.7 million at March 31, 2004. In compliance with
GAAP, we recognized the gain from the insurance proceeds in excess of the net
book value of the asset. When considered separately from the original U.S. Gulf
of Mexico offshore disposal group, this resulted in a gain of approximately $5.3
million from the involuntary conversion of the jackup rig. Considering the
impact of the gain, we determined that the overall valuation of the U.S. Gulf of
Mexico offshore group remained unchanged from that determined on June 30, 2003,
as previously discussed. As a result, we recognized an additional impairment of
$5.3 million which, along with the gain, was reported in discontinued operations
during the first quarter of 2004.
33
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had cash and cash equivalents of $38.8
million, a decrease of $29.0 million from December 31, 2003. The primary sources
of cash for the nine month period as reflected on the consolidated condensed
statements of cash flows were $18.3 million provided by operating activities,
$27.0 million of insurance proceeds, and $50.0 million of proceeds from the
disposition of assets and marketable securities. The primary uses of cash for
the nine month period ended September 30, 2004 were $34.8 million for capital
expenditures and $89.5 million for financing activities. Major capital
expenditures for the period included $9.4 million to refurbish rigs for work in
Mexico, $1.8 million to refurbish barge rig 76 for ultra-deep drilling in the
shallow waters of the Gulf of Mexico and $9.4 million for tubulars and other
rental tools for Quail Tools. Our financing activities include a reduction in
debt of $90.2 million, net of premium and are further detailed in a subsequent
paragraph.
As of September 30, 2003, we had cash and cash equivalents of $81.4
million, an increase of $29.4 million from December 31, 2002. The primary
sources of cash for the nine-month period as reflected on the consolidated
condensed statement of cash flows were $68.2 million provided by operating
activities and $5.1 million from the disposition of equipment. The primary uses
of cash for the nine-month period ended September 30, 2003 were $23.8 million
for capital expenditures and $20.1 million for repayment of debt. We used $14.5
million cash to purchase $14.8 million face value of its outstanding convertible
subordinated notes on the open market in May 2003. Major capital expenditures
during the nine-month period included purchases of drill pipe and tubulars by
Quail Tools.
In October 2003, we refinanced a portion of our then existing debt by
issuing $175.0 million of new 9.625% Senior Notes due 2013 and replaced our
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. We redeemed the remaining 9.75% Senior Notes on November 15, 2003
at a redemption price of 101.625 percent.
On July 30, 2004 we borrowed the remaining $50.0 million on our delay draw
Term Loan portion of our credit facility. Those funds, along with existing cash,
were used to retire the existing $64.4 million of our 5.5% Convertible
Subordinated Notes on August 2, 2004. On the same day, August 2, 2004, we
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, we
paid an additional $5.0 million on the delay draw Term Loan with proceeds from
the sale of our New Iberia facilities, leaving an outstanding balance of $70.0
million on the delay draw Term Loan.
In September 2004, we refinanced a portion of our 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 our 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 tendered 10.125% Senior Notes, as well as
underwriting, legal and other fees associated with the issuance of $150.0
million Senior Floating Rate Notes.
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.
34
LIQUIDITY AND CAPITAL RESOURCES (continued)
We had total long-term debt of $481.1 million, including the current
portion, as of September 30, 2004. The long-term debt included:
o $156.0 million aggregate principal amount of 10.125% Senior Notes, which
are due November 15, 2009;
o $150.0 million aggregate principal amount of Senior Floating Rate Notes
bearing interest at a rate of LIBOR plus 4.75%, which are due September
1, 2010;
o $175.0 million aggregate principal amount of 9.625% Senior Notes, which
are due October 1, 2013; and
o $0.1 million capital lease.
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.
The following table summarizes our future contractual cash obligations as
of September 30, 2004.
Less than More than
Total 1 Year Years 2 - 3 Years 4 - 5 5 Years
---------- ---------- ----------- ----------- ----------
(Dollars in Thousands)
Contractual cash obligations:
Long-term debt - principal (1) $ 480,608 $ -- $ -- $ -- $ 480,608
Long-term debt - interest (1) 306,841 42,944 90,723 91,688 81,486
Operating and capital leases (2) 17,383 6,658 7,589 3,136 --
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 804,832 $ 49,602 $ 98,312 $ 94,824 $ 562,094
========== ========== ========== ========== ==========
Commercial commitments:
Revolving credit facility (3) $ -- $ -- $ -- $ -- $ --
Standby letters of credit (3) 15,310 15,310 -- -- --
---------- ---------- ---------- ---------- ----------
Total commercial commitments $ 15,310 $ 15,310 $ -- $ -- $ --
========== ========== ========== ========== ==========
(1) Long-term debt includes the principal and interest cash obligations of the
9.625% Senior Notes, the 10.125% Senior Notes, the Senior Floating Rate
Notes and the capital leases. The unamortized premiums of $0.4 million at
September 30, 2004 related to the 10.125% Senior Notes are not included in
the contractual cash obligations schedule. All interest on the Senior
Floating Rate Notes has been hedged through the first two years resulting
in an average interest rate of 7.6%. Beginning September 1, 2006, one-third
of the principal balance will become floating and in each of the following
two years another one-third of the principal balance becomes floating. For
this table, the highest interest rate currently hedged is used in
calculating the interest on future floating rate periods
(2) Operating leases consist of lease agreements in excess of one year for
office space, equipment, vehicles and personal property.
(3) We have a $50.0 million revolving credit facility. As of September 30, 2004
we had a borrowing base of $48.3 million, of which none has been drawn
down, but $15.3 million of availability has been used to support letters of
credit that have been issued, resulting in $33.0 million availability. The
revolving credit facility expires in October 2006.
We do not have any unconsolidated special-purpose entities,
off-balance-sheet financing arrangements or guarantees of third-party financial
obligations. We have no energy or commodity contracts.
OTHER MATTERS
Critical Accounting Policies
We follow SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
established accounting and disclosure requirements for most derivative
instruments and hedge transactions involving derivatives. SFAS No. 133 also
requires formal documentation procedures for hedging relationships and
effectiveness testing when hedge accounting is to be applied.
In August and September 2004, we entered into three variable-to-fixed
interest rate swap agreements to reduce our cash flow exposure to increases in
interest rates on our floating rate debt. The interest rate swap agreements
provide us with interest rate protection on the $150.0 million Senior Floating
Rate Notes due 2010.
35
OTHER MATTERS (continued)
Critical Accounting Policies (continued)
We did not elect to pursue hedge accounting for the interest rate swap
agreements, which were executed to provide the economic hedge against cash flow
variability on the floating rate notes. We assessed the key characteristics of
the interest rate swap agreements and the notes and determined that the hedging
relationship would not be highly effective. This ineffectiveness is caused by
the existence of embedded written call options in the interest rate swap
agreements and not in the notes. Accordingly, we will recognize the volatility
of the swap agreements on a mark-to-market basis in the statement of operations.
For the three months ended September 30, 2004, we recognized a non-cash decrease
in fair value of the interest rate derivatives of $1.4 million. This non-cash
expense is reported in the statements of operations as "Changes in fair value of
derivative positions". The non-cash decrease in fair value is reported in the
balance sheets as "Other long-term liabilities". For additional information see
Note 8 in the notes to the unaudited consolidated condensed financial
statements.
The fair market value adjustment of these swap agreements will generally
fluctuate based on the implied forward interest rate curve for the 3-month
LIBOR. If the implied forward interest rate curve decreases, the fair market
value of the interest swap agreements will decrease and we will record an
additional charge. If the implied forward interest rate curve increases, the
fair market value of the interest swap agreements will increase, and we will
record income. We will analyze the position of the swap agreements on a
quarterly basis and record the mark-to-market impact based on the analysis.
Corporate Governance and Internal Controls Reporting Requirements
We are required to comply with new corporate governance requirements under
the Sarbanes-Oxley Act of 2002, as well as new rules and regulations adopted by
the Securities and Exchange Commission, the Public Company Accounting Oversight
Board, and the New York Stock Exchange. As a part of these requirements, we must
include management and auditor reports on the effectiveness of our internal
control over financial reporting in our annual report on Form 10-K for the year
ended December 31, 2004, pursuant to Section 404 of the Sarbanes-Oxley Act of
2002. We are in the process of evaluating our control structure to ensure that
it will be able to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
Our independent registered public accounting firm has been reviewing
management's on-going assessment of internal controls and testing the design and
operating effectiveness of our internal control over financial reporting. We
have not identified any material weakness in internal control over financial
reporting based on our progress to date. However, until completion of
management's assessment and final testing by our independent registered public
accounting firm at year-end, assurance to that effect cannot be provided.
Identification of any material weakness could materially affect our financial
condition and the value of our securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 three 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:
<Table>
<Caption>
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)
=======
</Table>
At September 30, 2004, the Company had derivative liabilities of $1.4
million, which are included in other long-term liabilities.
36
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures - The Company's management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
quarterly report. Based on such evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act.
Internal Control Over Financial Reporting - There have not been any changes
in our internal control over financial reporting (as such term is defined in
Rules 13a-15(f) under the Exchange Act) during the third quarter ended September
30, 2004 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
38
PART II. OTHER INFORMATION (continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PENDING UPDATE
(a) Exhibits:
The following exhibits are filed as a part of this report:
Exhibit
Number Description
------------ ---------------------------------------------------------
15 Letter re Unaudited Interim Financial Information
31.1 Section 302 Certification - Chief Executive Officer
31.2 Section 302 Certification - Chief Financial Officer
32.1 Section 906 Certification - Chief Executive Officer
32.2 Section 906 Certification - Chief Financial Officer
(b) Reports on Form 8-K:
We filed a Form 8-K on August 6, 2004, announcing our
intent to pursue a private offering of Senior Notes.
We filed a Form 8-K on August 13, 2004, filing our press
release announcing our proposed private offering of
$150.0 million of Senior Floating Rate Notes.
We filed a Form 8-K on August 13, 2004, restating our
consolidated financial statements for each of the three
years in the period ended December 31, 2003 to reflect
the reclassification of our Latin America assets from
discontinued operations to continuing operations.
We filed a Form 8-K on August 18, 2004, announcing the
sale of $150.0 million Senior Floating Rate Notes due
2010.
We filed a Form 8-K on September 2, 2004, giving
notification that certain subsidiaries of the Company
were named in several lawsuits along with numerous other
defendants alleging claims involving asbestos.
We filed a Form 8-K on September 8, 2004, announcing the
signing of an indenture agreement and a registration
rights agreement.
We filed a Form 8-K on October 22, 2004, announcing our
third quarter September 30, 2004 conference call and
third quarter earnings guidance.
We filed a Form 8-K on November 2, 2004, announcing our
operating results for the quarter ended September 30,
2004.
39
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: November 8, 2004
By: /s/ James W. Whalen
--------------------------------
James W. Whalen
Senior Vice President and
Chief Financial Officer
By: /s/ W. Kirk Brassfield
--------------------------------
W. Kirk Brassfield
Vice President and Controller
40
INDEX TO EXHIBITS
Exhibit
Number
Description
- -------------- -------------------------------------------------------
15 Letter re Unaudited Interim Financial Information
31.1 Section 302 Certification - Chief Executive Officer
31.2 Section 302 Certification - Chief Financial Officer
32.1 Section 906 Certification - Chief Executive Officer
32.2 Section 906 Certification - Chief Financial Officer