þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 73-0618660 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1401 Enclave Parkway, Suite 600, Houston, Texas | 77077 | |
(Address of principal executive offices) | (Zip code) |
1
June 30, | December 31, | |||||||
2006 | 2005 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 162,682 | $ | 60,176 | ||||
Marketable securities |
27,570 | 18,000 | ||||||
Accounts and notes receivable, net |
119,143 | 104,681 | ||||||
Rig materials and supplies |
13,286 | 18,179 | ||||||
Deferred costs |
1,948 | 4,223 | ||||||
Deferred income taxes |
14,841 | 12,018 | ||||||
Other current assets |
53,703 | 64,058 | ||||||
Total current assets |
393,173 | 281,335 | ||||||
Property, plant and equipment less
accumulated depreciation and amortization of $567,119 at June 30, 2006 and $586,168 at December 31, 2005 |
366,085 | 355,397 | ||||||
Assets held for sale |
45,283 | | ||||||
Goodwill |
100,314 | 107,606 | ||||||
Other noncurrent assets |
34,901 | 57,282 | ||||||
Total assets |
$ | 939,756 | $ | 801,620 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 138,631 | $ | 140,977 | ||||
Accrued income taxes |
10,745 | 9,778 | ||||||
Total current liabilities |
149,376 | 150,755 | ||||||
Long-term debt |
379,691 | 380,015 | ||||||
Other long-term liabilities |
13,371 | 11,021 | ||||||
Contingencies (Note 10) |
| | ||||||
Stockholders equity: |
||||||||
Common stock |
18,131 | 16,306 | ||||||
Capital in excess of par value |
562,368 | 456,135 | ||||||
Unamortized restricted stock plan compensation |
| (4,212 | ) | |||||
Accumulated deficit |
(183,181 | ) | (208,400 | ) | ||||
Total stockholders equity |
397,318 | 259,829 | ||||||
Total liabilities and stockholders equity |
$ | 939,756 | $ | 801,620 | ||||
2
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Drilling and rental revenues: |
||||||||||||||||
U.S. drilling |
$ | 42,697 | $ | 31,110 | $ | 82,950 | $ | 58,227 | ||||||||
International drilling |
72,972 | 78,301 | 152,802 | 150,473 | ||||||||||||
Rental tools |
30,319 | 24,543 | 57,570 | 45,497 | ||||||||||||
Total drilling and rental revenues |
145,988 | 133,954 | 293,322 | 254,197 | ||||||||||||
Drilling and rental operating expenses: |
||||||||||||||||
U.S. drilling |
19,814 | 18,838 | 37,284 | 33,226 | ||||||||||||
International drilling |
57,854 | 59,697 | 119,226 | 115,500 | ||||||||||||
Rental tools |
10,969 | 8,951 | 21,439 | 17,136 | ||||||||||||
Depreciation and amortization |
17,715 | 17,146 | 34,672 | 34,022 | ||||||||||||
Total drilling and rental operating expenses |
106,352 | 104,632 | 212,621 | 199,884 | ||||||||||||
Drilling and rental operating income |
39,636 | 29,322 | 80,701 | 54,313 | ||||||||||||
General and administration expense |
(7,575 | ) | (6,400 | ) | (15,269 | ) | (13,376 | ) | ||||||||
Gain on disposition of assets, net |
2,125 | 15,898 | 2,573 | 16,450 | ||||||||||||
Total operating income |
34,186 | 38,820 | 68,005 | 57,387 | ||||||||||||
Other income and (expense): |
||||||||||||||||
Interest expense |
(8,199 | ) | (10,759 | ) | (17,300 | ) | (21,815 | ) | ||||||||
Changes in fair value of derivative positions |
382 | (1,538 | ) | 1,195 | 69 | |||||||||||
Interest income |
2,039 | 550 | 3,445 | 788 | ||||||||||||
Loss on extinguishment of debt |
| (3,298 | ) | (2 | ) | (4,727 | ) | |||||||||
Minority interest |
44 | 521 | (920 | ) | 1,290 | |||||||||||
Other |
3 | (616 | ) | (14 | ) | (622 | ) | |||||||||
Total other income and (expense) |
(5,731 | ) | (15,140 | ) | (13,596 | ) | (25,017 | ) | ||||||||
Income before income taxes |
28,455 | 23,680 | 54,409 | 32,370 | ||||||||||||
Income tax expense: |
||||||||||||||||
Current |
3,963 | 3,486 | 9,526 | 8,338 | ||||||||||||
Deferred |
10,731 | | 19,664 | | ||||||||||||
Total income tax expense |
14,694 | 3,486 | 29,190 | 8,338 | ||||||||||||
Income from continuing operations |
13,761 | 20,194 | 25,219 | 24,032 | ||||||||||||
Discontinued operations |
| (14 | ) | | 77 | |||||||||||
Net income |
$ | 13,761 | $ | 20,180 | $ | 25,219 | $ | 24,109 | ||||||||
Basic earnings per share: |
||||||||||||||||
Income from continuing operations |
$ | 0.13 | $ | 0.21 | $ | 0.24 | $ | 0.25 | ||||||||
Discontinued operations |
$ | | $ | | $ | | $ | | ||||||||
Net income |
$ | 0.13 | $ | 0.21 | $ | 0.24 | $ | 0.25 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Income from continuing operations |
$ | 0.13 | $ | 0.21 | $ | 0.24 | $ | 0.25 | ||||||||
Discontinued operations |
$ | | $ | | $ | | $ | | ||||||||
Net income |
$ | 0.13 | $ | 0.21 | $ | 0.24 | $ | 0.25 | ||||||||
Number of common shares used in computing
earnings per share: |
||||||||||||||||
Basic |
107,082,784 | 95,691,205 | 105,783,424 | 95,321,850 | ||||||||||||
Diluted |
108,363,036 | 96,935,113 | 107,283,318 | 96,516,790 |
3
Six Months Ended June 30, | ||||||||
2006 | 2005 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 25,219 | $ | 24,109 | ||||
Adjustments to reconcile net income to
net cash provided by operating activities: |
||||||||
Depreciation and amortization |
34,672 | 34,022 | ||||||
Gain on disposition of assets |
(2,573 | ) | (16,425 | ) | ||||
Deferred income tax expense |
19,664 | | ||||||
Expenses not requiring cash |
5,828 | 2,700 | ||||||
Change in operating assets and liabilities |
(3,767 | ) | 4,976 | |||||
Net cash provided by operating activities |
79,043 | 49,382 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(80,242 | ) | (32,641 | ) | ||||
Proceeds from the sale of assets |
2,123 | 41,543 | ||||||
Proceeds from insurance settlements |
2,501 | | ||||||
Purchase of marketable securities |
(136,120 | ) | | |||||
Proceeds from sale of marketable securities |
126,550 | | ||||||
Net cash provided by (used in) investing activities |
(85,188 | ) | 8,902 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of debt |
| 55,500 | ||||||
Principal payments under debt obligations |
| (90,025 | ) | |||||
Proceeds from common stock offering |
99,947 | | ||||||
Proceeds from stock options exercised |
6,641 | 2,958 | ||||||
Excess tax benefit from stock-based compensation |
2,063 | | ||||||
Net cash provided by (used in) financing activities |
108,651 | (31,567 | ) | |||||
Net increase in cash and cash equivalents |
102,506 | 26,717 | ||||||
Cash and cash equivalents at beginning of year |
60,176 | 44,267 | ||||||
Cash and cash equivalents at end of period |
$ | 162,682 | $ | 70,984 | ||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 17,577 | $ | 21,337 | ||||
Income taxes paid |
$ | 6,753 | $ | 7,454 | ||||
Discontinued operations: |
||||||||
Loss on disposition of assets |
$ | | $ | 25 |
4
1. | General In the opinion of the management of Parker Drilling 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 June 30, 2006 and December 31, 2005, (2) the results of operations for the three and six months ended June 30, 2006 and 2005, and (3) cash flows for the six months ended June 30, 2006 and 2005. Results for the six months ended June 30, 2006 are not necessarily indicative of the results that will be realized for the year ending December 31, 2006. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2005. | |
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, the independent registered public accounting firms 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 firms liability under Section 11 does not extend to it. | ||
Stock-Based Compensation On January 1, 2006 we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment which requires that we include an estimate of the fair value of stock-based compensation costs related to stock options in net income. We elected the modified prospective transition method as permitted by SFAS No. 123R. Under this transition method, stock-based compensation expense includes (1) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original pro forma provisions of SFAS No. 123, Accounting for Stock-Based Compensation and (2) compensation expense for all stock-based compensation awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. As a result of adopting this standard, we were required to estimate forfeitures, and, if material, record a one-time cumulative effect of a change in accounting principal adjustment. As a result of our estimates, the adoption of this standard did not have a significant effect on our consolidated condensed financial statements and, as such, no adjustment was recorded. Also, in accordance with the modified prospective transition method, our consolidated condensed financial statements for prior periods have not been restated, and do not include the impact of SFAS No. 123R. | ||
Under SFAS No. 123R, we continue to use the Black-Scholes option-pricing model to estimate the fair value of our stock options. Expected volatility is determined by using historical volatilities based on historical stock prices for a period that matches the expected term. The expected term of options represents the period of time that options granted are expected to be outstanding and typically falls between the options vesting and contractual expiration dates. The expected term assumption is developed by using historical exercise data adjusted as appropriate for future expectations. The risk-free rate is based on the yield at the date of grant of a zero-coupon U.S. Treasury bond whose maturity period equals the options expected term. The fair value of each option is estimated on the date of grant. The following is a summary of valuation assumptions for grants during the six months ended June 30, 2006 and 2005: |
Grants during the Six | ||||||||
Months Ended June 30, | ||||||||
Valuation Assumptions (1) | 2006 (SFAS 123R) | 2005 (SFAS 123) | ||||||
Expected volatility |
16.9 | % | 51.1 | % | ||||
Expected term |
0.25 | years | 3-7 | years | ||||
Risk-free interest rate |
4.23 | % | 3.38 | % | ||||
Expected dividend yield |
0.0 | % | 0.0 | % |
(1) | The stock option granted during the first quarter of 2006 was a discounted option that was made to provide the recipient with the same value as a grant which he had been advised that he would receive in 1999 but was not awarded at that time due to an oversight. The option was vested at the grant date and had an April 14, 2006 expiration date. Accordingly, the volatility and expected term assumptions in 2006 are not comparable with those calculated for 2005. |
5
Stock-Based Compensation (continued) | ||
Total stock-based compensation expense recognized under SFAS No. 123R for the three and six month periods ended June 30, 2006, was $1.9 million and $3.1 million respectively, of which $1.9 million and $3.0 million, respectively, was related to restricted stock plan expense, which we had previously been recognizing. Stock-based compensation expense is included in our consolidated condensed income statement in General and administration expense. Unvested stock options at December 31, 2005 and June 30, 2006 were 86,417 and 25,934, respectively. Total unrecognized compensation cost related to stock options granted under our plans was approximately $32,000 at December 31, 2005 and approximately $13,000 at June 30, 2006, which will be amortized over a remaining weighted-average vesting period of one and one half years. Unvested restricted stock awards at December 31, 2005 and June 30, 2006 were 1,105,000 shares and 1,556,843 shares, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was $4.2 million as of December 31, 2005 and $8.4 million as of June 30, 2006. There were 620,800 and 711,010 restricted shares granted (net of forfeitures) to certain officers and key employees during the three and six month periods ended June 30, 2006, respectively. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year. | ||
In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated condensed statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R. We have elected to adopt the transition method described in FSP 123(R)-3. The tax benefit realized for the tax deductions from option exercises and restricted stock vesting totaled $2.1 million for the six months ended June 30, 2006 which has been reported as a financing cash inflow in the consolidated condensed statement of cash flows. Cash received from option exercises for the six months ended June 30, 2006 was $6.6 million. |
For periods prior to 2006, we accounted for stock based compensation plans using the recognition and measurement principles of the Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees, and related interpretations. Under these principles no stock-based employee compensation cost related to stock options granted was reflected in net income, as all options granted under the various plans had exercise prices equal to or greater than the fair market value of the underlying common stock on the date of the grants. In accordance with the provisions of SFAS No. 123R, our deferred compensation (contra-equity accounts) related to restricted stock awards granted prior to the adoption of SFAS No. 123R were eliminated against the appropriate equity accounts (additional paid-in capital) upon adoption. The following table illustrates the effect on net income and net income per share as if we had applied the fair value based provisions of SFAS No. 123R for the three and six month periods ended June 30, 2005: |
Three Months Ended | Six Months Ended | |||||||
June 30, 2005 | June 30, 2005 | |||||||
(Dollars in Thousands, Except Per Share Amounts) | ||||||||
Net income as reported |
$ | 20,180 | $ | 24,109 | ||||
Stock-based compensation expense included
in net income as reported |
437 | 1,313 | ||||||
Stock-based compensation expense
determined under fair value method |
(499 | ) | (1,455 | ) | ||||
Net income pro forma |
$ | 20,118 | $ | 23,967 | ||||
Basic earnings per share: |
||||||||
Net income as reported |
$ | 0.21 | $ | 0.25 | ||||
Net income pro forma |
$ | 0.21 | $ | 0.25 | ||||
Diluted earnings per share: |
||||||||
Net income as reported |
$ | 0.21 | $ | 0.25 | ||||
Net income pro forma |
$ | 0.21 | $ | 0.25 |
Disclosures for the three and six month periods ended June 30, 2006 are not presented as the amounts are recognized in the consolidated condensed financial statements. |
2. | Common Stock Offering In January 2006, we issued 8,900,000 shares of common stock pursuant to a Free Writing Prospectus dated January 17, 2006 and a Prospectus Supplement dated January 18, 2006. On January 23, 2006, we realized $11.23 per share or a total of $99.9 million of net proceeds before expenses, but after underwriter discount, from the offering. |
6
3. | Earnings Per Share (EPS) |
Three Months Ended June 30, 2006 | ||||||||||||
Income | Shares | Per-Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Basic EPS: |
||||||||||||
Income from continuing operations |
$ | 13,761,000 | 107,082,784 | $ | 0.13 | |||||||
Discontinued operations |
| | ||||||||||
Net income |
$ | 13,761,000 | $ | 0.13 | ||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 1,280,252 | | |||||||||
Diluted EPS: |
||||||||||||
Income from continuing operations |
$ | 13,761,000 | 108,363,036 | $ | 0.13 | |||||||
Discontinued operations |
| | ||||||||||
Net income |
$ | 13,761,000 | $ | 0.13 | ||||||||
Six Months Ended June 30, 2006 | ||||||||||||
Income | Shares | Per-Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Basic EPS: |
||||||||||||
Income from continuing operations |
$ | 25,219,000 | 105,783,424 | $ | 0.24 | |||||||
Discontinued operations |
| | ||||||||||
Net income |
$ | 25,219,000 | $ | 0.24 | ||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 1,499,894 | | |||||||||
Diluted EPS: |
||||||||||||
Income from continuing operations |
$ | 25,219,000 | 107,283,318 | $ | 0.24 | |||||||
Discontinued operations |
| | ||||||||||
Net income |
$ | 25,219,000 | $ | 0.24 | ||||||||
7
3. | Earnings Per Share (EPS) (continued) |
Three Months Ended June 30, 2005 | ||||||||||||
Income (Loss) | Shares | Per-Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Basic EPS: |
||||||||||||
Income from continuing operations |
$ | 20,194,000 | 95,691,205 | $ | 0.21 | |||||||
Discontinued operations |
(14,000 | ) | | |||||||||
Net income |
$ | 20,180,000 | $ | 0.21 | ||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 1,243,908 | | |||||||||
Diluted EPS: |
||||||||||||
Income from continuing operations |
$ | 20,194,000 | 96,935,113 | $ | 0.21 | |||||||
Discontinued operations |
(14,000 | ) | | |||||||||
Net income |
$ | 20,180,000 | $ | 0.21 | ||||||||
Six Months Ended June 30, 2005 | ||||||||||||
Income | Shares | Per-Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Basic EPS: |
||||||||||||
Income from continuing operations |
$ | 24,032,000 | 95,321,850 | $ | 0.25 | |||||||
Discontinued operations |
77,000 | | ||||||||||
Net income |
$ | 24,109,000 | $ | 0.25 | ||||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 1,194,940 | | |||||||||
Diluted EPS: |
||||||||||||
Income from continuing operations |
$ | 24,032,000 | 96,516,790 | $ | 0.25 | |||||||
Discontinued operations |
77,000 | | ||||||||||
Net income |
$ | 24,109,000 | $ | 0.25 | ||||||||
Options to purchase 2,277,000 shares of common stock with exercise prices ranging from $8.88 to $12.19 per share, were outstanding during the three months ended June 30, 2006, and options to purchase 517,000 shares of common stock with exercise prices ranging from $9.31 to $12.19 per share were outstanding during the six months ended June 30, 2006, but were not included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common shares. Options to purchase 3,080,500 shares of common stock with exercise prices ranging from $6.07 to $12.19 per share were outstanding during the three months ended June 30, 2005, and options to purchase 4,071,977 shares of common stock with exercise prices ranging from $5.58 to $12.19 per share were outstanding during the six months ended June 30, 2005, but were not included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common shares. |
8
4. | Business Segments The primary services we provide are as follows: U.S. drilling, international drilling and rental tools. Information regarding our operations by industry segment for the three and six months ended June 30, 2006 and 2005 is as follows: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Drilling and rental revenues: |
||||||||||||||||
U.S. drilling |
$ | 42,697 | $ | 31,110 | $ | 82,950 | $ | 58,227 | ||||||||
International drilling |
72,972 | 78,301 | 152,802 | 150,473 | ||||||||||||
Rental tools |
30,319 | 24,543 | 57,570 | 45,497 | ||||||||||||
Total drilling and rental revenues |
$ | 145,988 | $ | 133,954 | $ | 293,322 | $ | 254,197 | ||||||||
Drilling and rental operating income: |
||||||||||||||||
U.S. drilling |
$ | 17,341 | $ | 7,269 | $ | 35,067 | $ | 15,362 | ||||||||
International drilling |
7,827 | 10,556 | 18,980 | 18,438 | ||||||||||||
Rental tools |
14,468 | 11,497 | 26,654 | 20,513 | ||||||||||||
Total drilling and rental operating income |
39,636 | 29,322 | 80,701 | 54,313 | ||||||||||||
General and administration expense |
(7,575 | ) | (6,400 | ) | (15,269 | ) | (13,376 | ) | ||||||||
Gain on disposition of assets, net |
2,125 | 15,898 | 2,573 | 16,450 | ||||||||||||
Total operating income |
34,186 | 38,820 | 68,005 | 57,387 | ||||||||||||
Interest expense |
(8,199 | ) | (10,759 | ) | (17,300 | ) | (21,815 | ) | ||||||||
Changes in fair value of derivative positions |
382 | (1,538 | ) | 1,195 | 69 | |||||||||||
Loss on extinguishment of debt |
| (3,298 | ) | (2 | ) | (4,727 | ) | |||||||||
Other |
2,086 | 455 | 2,511 | 1,456 | ||||||||||||
Income before income taxes |
$ | 28,455 | $ | 23,680 | $ | 54,409 | $ | 32,370 | ||||||||
5. | Assets Held For Sale In June 2006, we announced that our wholly-owned subsidiary, Parker Drilling Offshore International, Inc., had entered into an Asset Purchase Agreement (the Asset Purchase Agreement) which provides for the sale by such subsidiary of Nigeria Barge Rigs 73 and 75, including related inventory, spare parts and other miscellaneous equipment, for a total purchase price of $46.0 million. In connection with the Asset Purchase Agreement, Parker Drilling Offshore International, Inc. agreed to indemnify the purchaser for certain specified liabilities and other matters. These assets have been classified as Assets held for sale in our consolidated condensed balance sheet as of June 30, 2006, in the amount of $45.3 million, which is comprised of $33.0 million of property, plant and equipment net of accumulated depreciation, goodwill of $7.3 million, materials and supplies of $1.7 million and $3.3 million of other assets. | |
The transaction closed on August 1, 2006 and funded on August 3, 2006. |
6. | Disposition of Assets During the second quarter of 2006, we sold the remaining salvageable assets in connection with the loss of Rig 255 in Bangladesh discussed below. The asset sales resulted in a gain of $1.4 million during the period. In addition, we realized a gain of $0.7 million in connection with the disposition of certain other equipment during the second quarter of 2006. | |
During the second quarter of 2005, we sold four of our seven rigs and related assets in Colombia and Peru and recognized a gain of $6.7 million. The remaining three rigs were classified as Assets held for sale in June 2005 and were sold in the third quarter of 2005. |
9
6. | Disposition of Assets (continued) | |
Also in June 2005, a well control incident occurred on Rig 255 while operating under contract in Bangladesh, resulting in the total loss of the drilling unit. Net insurance proceeds received in excess of the book value of assets destroyed resulted in a gain of $8.2 million, which was recognized in the second quarter of 2005. | ||
7. | Income Tax Expense Income tax expense was $14.7 million for the second quarter of 2006, as compared to income tax expense of $3.5 million for the second quarter of 2005. The $11.2 million increase in taxes was due primarily to the impact of deferred taxes. Net deferred tax expense was not reported during the second quarter of 2005 as the expense from utilizing the net operating loss (NOL) carryforward was offset by the release of the NOL valuation allowance. During the fourth quarter of 2005, we recognized a deferred tax benefit in earnings that fully eliminated our valuation allowance for our federal NOL carryforward. As a result of this accounting treatment, we recognized deferred tax expense in 2006 as the federal NOL carryforward was utilized. Current foreign tax expense for the second quarter of 2006 was $3.9 million, as compared to current foreign tax expense of $3.5 million for the second quarter of 2005. As of June 30, 2006, we have a deferred tax asset related to state NOL carryforward of $18.1 million that has a full valuation allowance as management does not currently believe it is more likely than not to be realized. | |
8. | Long-Term Debt |
June 30, 2006 | December 31, 2005 | |||||||
(Dollars in Thousands) | ||||||||
Senior Notes: |
||||||||
Interest rate floating (LIBOR + 4.75%), due 2010 |
$ | 150,000 | $ | 150,000 | ||||
Interest rate 9.625%, due 2013 |
229,691 | 230,015 | ||||||
Total debt |
379,691 | 380,015 | ||||||
Less current portion |
| | ||||||
Total long-term debt |
$ | 379,691 | $ | 380,015 | ||||
Our current $40.0 million credit facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to this facility. Availability under the revolving credit facility is subject to a borrowing base limitation based on 85 percent of eligible receivables plus a value for eligible rental tools equipment. The credit facility calls for a borrowing base calculation only when the credit facility has outstanding loans, including letters of credit, totaling at least $25.0 million. As of June 30, 2006, there were $9.2 million in letters of credit outstanding and no loans. On March 1, 2006, an amendment was signed to eliminate the $25.0 million sub-limit for letters of credit and to give us the ability to prepay outstanding Senior Notes and Senior Floating Rate Notes without limitation concerning commitments under the credit facility. |
On August 8, 2006, we gave notice of partial redemption for $50.0 million of our Floating Rates Notes on the redemption date of September 8, 2006. | ||
9. | Derivative Instruments We use derivative instruments to manage risks associated with interest rate fluctuations in connection with our $150.0 million Senior Floating Rate Notes. These derivative instruments, which consist of variable-to-fixed interest rate swaps, do not meet the hedge criteria in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and are therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings. |
10
9. | Derivative Instruments (continued) | |
As of June 30, 2006, we had the following derivative instruments outstanding related to our interest rate swaps, which are included in Other noncurrent assets: |
Effective | Termination | Notional | Floating | Fixed | Fair | |||||||||||||||
Date | Date | Amount | Rate | Rate | Value | |||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
September 1, 2005 |
September 2, 2008 | $ | 50,000 | Three-month LIBOR plus 475 basis points |
8.83 | % | $ | 1,407 | ||||||||||||
September 1, 2005 |
September 4, 2007 | $ | 50,000 | Three-month LIBOR plus 475 basis points |
8.48 | % | 1,069 | |||||||||||||
$ | 2,476 | |||||||||||||||||||
10. | Contingencies Kazakhstan Tax Claims |
|
On October 12, 2005, the Kazakhstan Branch (PKD Kazakhstan) of Parker Drilling Company International Limited (PDCIL) received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (MinFin) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $125.5 million). Approximately KZT 7.5 billion or $63.6 million was assessed for import Value Added Tax (VAT), administrative fines and interest on equipment imported to perform the drilling contracts (the VAT Assessment). The VAT Assessment is based on an interpretation by MinFin that resolutions of the Government of the Republic of Kazakhstan and MinFin removing import VAT exemptions should be applied retroactively. The client of PKD Kazakhstan has agreed to advance PKD Kazakhstan the ultimate amount of any VAT Assessment which PKD Kazakhstan is required to pay, prior to the date such payment is due, and to reimburse PKD Kazakhstan for any increased income taxes arising out of such payment. | ||
In addition to the VAT Assessment, MinFin also assessed approximately KZT 7.4 billion or $61.9 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received from the client for the upgrade of barge Rig 257 and other issues (the Income Tax Assessment). The Income Tax Assessment is substantially based on the same reimbursement issue on which PKD Kazakhstan has prevailed in the Supreme Court on two previous occasions. Both of these assessments were appealed to the Astana City Court and on April 6, 2006, the Astana City Court issued an opinion in favor of PKD Kazakhstan on the Income Tax Assessment and in favor of MinFin on the VAT Assessment, but reduced the amount of the VAT Assessment. MinFin and PKD Kazakhstan appealed the decision of the Astana City Court to the Civil Panel of the Supreme Court of Kazakhstan and on May 24, 2006, the Civil Panel of the Supreme Court issued a decision upholding the ruling of the Astana City Court on the VAT Assessment with minor revisions, but reversed the ruling of the Astana City Court on the Income Tax Assessment. | ||
PKD Kazakhstan immediately made application for a stay of execution of the decision relating to the Income Tax Assessment, based on the fact that the Supreme Court has decided this issue in favor of PKD Kazakhstan on two previous occasions and because the decision is inconsistent with the US-Kazakhstan tax treaty, and also requested that the five-member supervisory panel of the Supreme Court grant a supervisory review of the decision. On May 30, 2006, the Supreme Court granted a stay of execution of the decision pending a determination of the five-member panel of the Supreme Court whether or not to grant supervisory review of the decision. Because the execution of the decision has been stayed by the Supreme Court and there is substantial basis to conclude that the decision will not be upheld, the Company has not recognized any accounting effect for this decision relating to the Income Tax Assessment. | ||
Based on the revision to the VAT Assessment, the VAT Assessment that is reflected in Accounts payable and accrued liabilities is currently $42.9 million in the consolidated condensed balance sheet and the corresponding receivable from our client of $42.9 million for the reimbursement of this amount is reported in Other current assets. Interest included is calculated only through October 8, 2005 and both the interest and penalty assessed, if any, will be revised based on the date of the final assessment. |
11
10. | Contingencies (continued) | |
Kazakhstan Tax Claims (continued) | ||
The Company continues to pursue its petition with the U.S. Internal Revenue Service, Treaty Division 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. IRS Treaty Division has granted the Companys petition, and meetings between the U.S. IRS Treaty Division and MinFin are scheduled during August 2006. | ||
Bangladesh Claim | ||
In September 2005, a subsidiary of the Company was served with a lawsuit filed on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. The case is in the very early stages of discovery and, accordingly, the ultimate outcome cannot presently be determined. In any event, the Company believes that the outcome of this lawsuit will not have a material adverse impact on the financial condition of the Company due to insurance coverage and contractual indemnities. | ||
Asbestos-Related Claims | ||
On January 13, 2006, one of our subsidiaries was served with a petition filed in the District Court for the Parish of Jefferson in Louisiana against more than 200 defendants by 88 plaintiffs complaining of exposure to asbestos, chemicals, noise, and metals during their work as Jones Act seamen. This case is in the early stages of discovery to determine whether or not any of the plaintiffs were employed by us or otherwise have any connection with our operations during the relevant period. Although we have not yet received any employer affidavits from plaintiffs that identify Parker Drilling, one Plaintiffs social security earnings statement indicates that he was employed by our subsidiary in 1971-72. As discovery is ongoing, it remains unclear how many of the plaintiffs will ultimately identify Parker Drilling. The plaintiffs in these cases seek, among other things, awards of unspecified compensatory and punitive damages. | ||
In August 2004, we were notified that certain of our subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with us, including companies that allegedly manufactured drilling related products containing asbestos that are the subject of the complaints. | ||
The complaints allege that our subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of the Company. Out of 355 amended complaints received to date, only one plaintiff has identified Parker as an employer. | ||
The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome of these lawsuits to have a material adverse effect on our financial condition, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these lawsuits. | ||
11. | Recent Accounting Pronouncements FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FAS 109, was issued in June 2006 and calls for an initial determination that a tax position is more likely than not to be sustained. The provisions of this statement are effective for years beginning after December 15, 2006. While the Company does not anticipate any significant impact as a result of adopting this standard, the impact on the Companys financial statements is currently being evaluated. |
12
'
12. | Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements Set forth on the following pages are the unaudited consolidating condensed financial statements of (i) Parker Drilling, (ii) our restricted subsidiaries that are guarantors of the Senior Notes and (iii) our restricted and unrestricted subsidiaries that are not guarantors of the Senior Notes. All of our Senior Notes are guaranteed by substantially all of the restricted subsidiaries of Parker Drilling. There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries. | |
The non-guarantor subsidiaries are AralParker (a Kazakhstan closed joint stock company, owned 50 percent by Parker Drilling (Kazakstan) Ltd. and 50 percent by Aralnedra, CJSC), Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria), Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., Parker-TNK-Drilling, PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, Inc.), Parker Drilling Asia Pacific, LLC, Universal Rig Leasing B.V., Parker Drilling AME Limited, Parker Drillex, LLC, Parker Drillserv, LLC, Parker Drilltech, LLC, Parker Drillsource, LLC, Parker 3source, LLC, Parker Enex, LLC, and Parker Hungary Rig Holdings, LLC. We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of June 30, 2006 and December 31, 2005 and for the three and six months ended June 30, 2006 and 2005. The condensed consolidating financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting. | ||
In addition, the consolidating condensed balance sheet as of December 31, 2005 reflects adjustments in the amount of $65.0 million in the guarantor column and $7.2 million in the non-guarantor column to reduce the amount of the property, plant and equipment balance from that which was previously reported to correct an overstatement of step-up in basis of assets that were transferred between wholly-owned subsidiaries in prior years. Retained earnings (accumulated deficit) in the guarantor and non-guarantor columns was adjusted by the same amounts, reflecting the reduction of the associated accumulated gains that were reported in 2004 and prior years. Adjustments were also made to reduce the corresponding amounts in the Eliminations Column. These adjustments had no impact on the consolidated totals. The Company will correct the presentation of the 2004 Statement of Operations to eliminate the gain in the guarantor and non-guarantor columns in that period in their 2006 Annual Report on Form 10-K. |
13
June 30, 2006 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 127,344 | $ | 10,555 | $ | 24,783 | $ | | $ | 162,682 | ||||||||||
Marketable securities |
25,570 | 2,000 | | | 27,570 | |||||||||||||||
Accounts and notes receivable, net |
53,958 | 140,634 | 44,862 | (120,311 | ) | 119,143 | ||||||||||||||
Rig materials and supplies |
| 5,202 | 8,084 | | 13,286 | |||||||||||||||
Deferred costs |
| 1,741 | 207 | | 1,948 | |||||||||||||||
Other current assets |
14,838 | 53,094 | 600 | 12 | 68,544 | |||||||||||||||
Total current assets |
221,710 | 213,226 | 78,536 | (120,299 | ) | 393,173 | ||||||||||||||
Property, plant and equipment, net |
134 | 335,860 | 29,969 | 122 | 366,085 | |||||||||||||||
Assets held for sale |
| 45,283 | | | 45,283 | |||||||||||||||
Goodwill |
| 100,314 | | | 100,314 | |||||||||||||||
Investment in subsidiaries and intercompany advances |
650,235 | 751,523 | 25,093 | (1,426,851 | ) | | ||||||||||||||
Other noncurrent assets |
23,451 | 12,211 | (722 | ) | (39 | ) | 34,901 | |||||||||||||
Total assets |
$ | 895,530 | $ | 1,458,417 | $ | 132,876 | $ | (1,547,067 | ) | $ | 939,756 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 43,283 | $ | 180,112 | $ | 64,728 | $ | (149,492 | ) | $ | 138,631 | |||||||||
Accrued income taxes |
(2,598 | ) | 13,275 | 68 | | 10,745 | ||||||||||||||
Total current liabilities |
40,685 | 193,387 | 64,796 | (149,492 | ) | 149,376 | ||||||||||||||
Long-term debt |
379,691 | | | | 379,691 | |||||||||||||||
Other long-term liabilities |
3,254 | 8,623 | 1,494 | | 13,371 | |||||||||||||||
Intercompany payables |
74,582 | 572,521 | 7,256 | (654,359 | ) | | ||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
18,131 | 39,899 | 21,251 | (61,150 | ) | 18,131 | ||||||||||||||
Capital in excess of par value |
562,368 | 977,588 | 33,950 | (1,011,538 | ) | 562,368 | ||||||||||||||
Retained earnings (accumulated deficit) |
(183,181 | ) | (333,601 | ) | 4,129 | 329,472 | (183,181 | ) | ||||||||||||
Total stockholders equity |
397,318 | 683,886 | 59,330 | (743,216 | ) | 397,318 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 895,530 | $ | 1,458,417 | $ | 132,876 | $ | (1,547,067 | ) | $ | 939,756 | |||||||||
14
December 31, 2005 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 31,978 | $ | 11,145 | $ | 17,053 | $ | | $ | 60,176 | ||||||||||
Marketable securities |
16,000 | 2,000 | | | 18,000 | |||||||||||||||
Accounts and notes receivable, net |
41,965 | 112,888 | 41,637 | (91,809 | ) | 104,681 | ||||||||||||||
Rig materials and supplies |
| 10,830 | 7,349 | | 18,179 | |||||||||||||||
Deferred costs |
| 2,791 | 1,432 | | 4,223 | |||||||||||||||
Other current assets |
12,024 | 63,312 | 740 | | 76,076 | |||||||||||||||
Total current assets |
101,967 | 202,966 | 68,211 | (91,809 | ) | 281,335 | ||||||||||||||
Property, plant and equipment, net |
134 | 324,637 | 30,504 | 122 | 355,397 | |||||||||||||||
Goodwill |
| 107,606 | | | 107,606 | |||||||||||||||
Investment in subsidiaries and intercompany advances |
606,711 | 740,140 | 35,403 | (1,382,254 | ) | | ||||||||||||||
Other noncurrent assets |
46,080 | 10,997 | 244 | (39 | ) | 57,282 | ||||||||||||||
Total assets |
$ | 754,892 | $ | 1,386,346 | $ | 134,362 | $ | (1,473,980 | ) | $ | 801,620 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 38,802 | $ | 163,414 | $ | 50,446 | $ | (111,685 | ) | $ | 140,977 | |||||||||
Accrued income taxes |
609 | 9,885 | (716 | ) | | 9,778 | ||||||||||||||
Total current liabilities |
39,411 | 173,299 | 49,730 | (111,685 | ) | 150,755 | ||||||||||||||
Long-term debt |
380,015 | | | | 380,015 | |||||||||||||||
Other long-term liabilities |
1,054 | 8,242 | 1,725 | | 11,021 | |||||||||||||||
Intercompany payables |
74,583 | 567,434 | 17,195 | (659,212 | ) | | ||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
16,306 | 39,899 | 21,251 | (61,150 | ) | 16,306 | ||||||||||||||
Capital in excess of par value |
456,135 | 977,559 | 33,950 | (1,011,509 | ) | 456,135 | ||||||||||||||
Unamortized restricted stock plan compensation |
(4,212 | ) | | | | (4,212 | ) | |||||||||||||
Retained earnings (accumulated deficit) |
(208,400 | ) | (380,087 | ) | 10,511 | 369,576 | (208,400 | ) | ||||||||||||
Total stockholders equity |
259,829 | 637,371 | 65,712 | (703,083 | ) | 259,829 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 754,892 | $ | 1,386,346 | $ | 134,362 | $ | (1,473,980 | ) | $ | 801,620 | |||||||||
15
Three Months Ended June 30, 2006 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Drilling and rental revenues |
$ | | $ | 130,444 | $ | 28,621 | $ | (13,077 | ) | $ | 145,988 | |||||||||
Drilling and rental operating expenses |
| 69,377 | 32,337 | (13,077 | ) | 88,637 | ||||||||||||||
Depreciation and amortization |
| 16,725 | 990 | | 17,715 | |||||||||||||||
Drilling and rental operating income (loss) |
| 44,342 | (4,706 | ) | | 39,636 | ||||||||||||||
General and administration expense (1) |
(27 | ) | (7,547 | ) | (1 | ) | | (7,575 | ) | |||||||||||
Gain (loss) on disposition of assets, net |
(6 | ) | 2,115 | 16 | | 2,125 | ||||||||||||||
Total operating income (loss) |
(33 | ) | 38,910 | (4,691 | ) | | 34,186 | |||||||||||||
Other income and (expense): |
||||||||||||||||||||
Interest expense |
(9,378 | ) | (11,803 | ) | (445 | ) | 13,427 | (8,199 | ) | |||||||||||
Changes in fair value of derivative positions |
382 | | | | 382 | |||||||||||||||
Interest income |
12,594 | 2,012 | 860 | (13,427 | ) | 2,039 | ||||||||||||||
Loss on extinguishment of debt |
| | | | | |||||||||||||||
Minority interest |
| | 44 | | 44 | |||||||||||||||
Other |
11 | (89 | ) | 81 | | 3 | ||||||||||||||
Equity in net earnings of subsidiaries |
21,161 | | | (21,161 | ) | | ||||||||||||||
Total other income and (expense) |
24,770 | (9,880 | ) | 540 | (21,161 | ) | (5,731 | ) | ||||||||||||
Income (loss) before income taxes |
24,737 | 29,030 | (4,151 | ) | (21,161 | ) | 28,455 | |||||||||||||
Income tax expense (benefit) |
||||||||||||||||||||
Current |
279 | 3,590 | 94 | | 3,963 | |||||||||||||||
Deferred |
10,697 | (172 | ) | 206 | | 10,731 | ||||||||||||||
Income tax expense |
10,976 | 3,418 | 300 | | 14,694 | |||||||||||||||
Net income (loss) |
$ | 13,761 | $ | 25,612 | $ | (4,451 | ) | $ | (21,161 | ) | $ | 13,761 | ||||||||
(1) | All field operations general and administration expenses are included in operating expenses. |
16
Three Months Ended June 30, 2005 | ||||||||||||||||||||
Parent | Guarantor | Non Guarantor | Eliminations | Consolidated | ||||||||||||||||
Drilling and rental revenues |
$ | | $ | 100,298 | $ | 36,540 | $ | (2,884 | ) | $ | 133,954 | |||||||||
Drilling and rental operating expenses |
| 56,305 | 34,065 | (2,884 | ) | 87,486 | ||||||||||||||
Depreciation and amortization |
| 16,177 | 969 | | 17,146 | |||||||||||||||
Drilling and rental operating income |
| 27,816 | 1,506 | | 29,322 | |||||||||||||||
General and administration expense (1) |
(42 | ) | (6,358 | ) | | | (6,400 | ) | ||||||||||||
Gain on disposition of assets, net |
| 15,595 | 303 | | 15,898 | |||||||||||||||
Total operating income (loss) |
(42 | ) | 37,053 | 1,809 | | 38,820 | ||||||||||||||
Other income and (expense): |
||||||||||||||||||||
Interest expense |
(11,950 | ) | (12,340 | ) | (697 | ) | 14,228 | (10,759 | ) | |||||||||||
Changes in fair value of derivative positions |
(1,538 | ) | | | | (1,538 | ) | |||||||||||||
Interest
income |
11,844 | 2,147 | 787 | (14,228 | ) | 550 | ||||||||||||||
Loss on extinguishment of debt |
(3,298 | ) | | | | (3,298 | ) | |||||||||||||
Minority
interest |
| | 521 | | 521 | |||||||||||||||
Other |
(621 | ) | (8 | ) | 13 | | (616 | ) | ||||||||||||
Equity in net earnings of subsidiaries |
26,001 | | | (26,001 | ) | | ||||||||||||||
Total other income and (expense) |
20,438 | (10,201 | ) | 624 | (26,001 | ) | (15,140 | ) | ||||||||||||
Income (loss) before income taxes |
20,396 | 26,852 | 2,433 | (26,001 | ) | 23,680 | ||||||||||||||
Income tax expense |
216 | 2,653 | 617 | | 3,486 | |||||||||||||||
Income (loss) from continuing operations |
20,180 | 24,199 | 1,816 | (26,001 | ) | 20,194 | ||||||||||||||
Discontinued operations |
| (14 | ) | | | (14 | ) | |||||||||||||
Net income (loss) |
$ | 20,180 | $ | 24,185 | $ | 1,816 | $ | (26,001 | ) | $ | 20,180 | |||||||||
(1) | All field operations general and administration expenses are included in operating expenses. |
17
Six Months Ended June 30, 2006 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Drilling and rental revenues |
$ | | $ | 248,190 | $ | 71,301 | $ | (26,169 | ) | $ | 293,322 | |||||||||
Drilling and rental operating expenses |
| 130,566 | 73,552 | (26,169 | ) | 177,949 | ||||||||||||||
Depreciation and amortization |
| 32,662 | 2,010 | | 34,672 | |||||||||||||||
Drilling and rental operating income |
| 84,962 | (4,261 | ) | | 80,701 | ||||||||||||||
General and administration expense (1) |
(82 | ) | (15,177 | ) | (10 | ) | | (15,269 | ) | |||||||||||
Gain (loss) on disposition of assets, net |
(6 | ) | 2,516 | 63 | | 2,573 | ||||||||||||||
Total operating income (loss) |
(88 | ) | 72,301 | (4,208 | ) | | 68,005 | |||||||||||||
Other income and (expense): |
||||||||||||||||||||
Interest expense |
(19,665 | ) | (23,599 | ) | (955 | ) | 26,919 | (17,300 | ) | |||||||||||
Changes in fair value of derivative positions |
1,195 | | | | 1,195 | |||||||||||||||
Interest income |
24,668 | 4,029 | 1,667 | (26,919 | ) | 3,445 | ||||||||||||||
Loss on extinguishment of debt |
(2 | ) | | | | (2 | ) | |||||||||||||
Minority interest |
| | (920 | ) | | (920 | ) | |||||||||||||
Other |
11 | (106 | ) | 81 | | (14 | ) | |||||||||||||
Equity in net earnings of subsidiaries |
40,104 | | | (40,104 | ) | | ||||||||||||||
Total other income and (expense) |
46,311 | (19,676 | ) | (127 | ) | (40,104 | ) | (13,596 | ) | |||||||||||
Income (loss) before income taxes |
46,223 | 52,625 | (4,335 | ) | (40,104 | ) | 54,409 | |||||||||||||
Income tax expense (benefit): |
||||||||||||||||||||
Current |
1,023 | 6,601 | 1,902 | | 9,526 | |||||||||||||||
Deferred |
19,981 | (462 | ) | 145 | | 19,664 | ||||||||||||||
Income tax expense |
21,004 | 6,139 | 2,047 | | 29,190 | |||||||||||||||
Net income (loss) |
$ | 25,219 | $ | 46,486 | $ | (6,382 | ) | $ | (40,104 | ) | $ | 25,219 | ||||||||
(1) | All field operations general and administration expenses are included in operating expenses. |
18
Six Months Ended June 30, 2005 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Drilling and rental revenues |
$ | | $ | 189,442 | $ | 71,483 | $ | (6,728 | ) | $ | 254,197 | |||||||||
Drilling and rental operating expenses |
| 104,213 | 68,388 | (6,739 | ) | 165,862 | ||||||||||||||
Depreciation and amortization |
| 32,088 | 1,934 | | 34,022 | |||||||||||||||
Drilling and rental operating income |
| 53,141 | 1,161 | 11 | 54,313 | |||||||||||||||
General and administration expense (1) |
(84 | ) | (13,292 | ) | | | (13,376 | ) | ||||||||||||
Gain on disposition of assets, net |
| 15,942 | 508 | | 16,450 | |||||||||||||||
Total operating income (loss) |
(84 | ) | 55,791 | 1,669 | 11 | 57,387 | ||||||||||||||
Other income and (expense): |
||||||||||||||||||||
Interest expense |
(24,198 | ) | (24,627 | ) | (1,452 | ) | 28,462 | (21,815 | ) | |||||||||||
Changes in fair value of derivative positions |
69 | | | | 69 | |||||||||||||||
Interest
income |
23,483 | 4,270 | 1,497 | (28,462 | ) | 788 | ||||||||||||||
Loss on extinguishment of debt |
(4,727 | ) | | | | (4,727 | ) | |||||||||||||
Minority
interest |
| | 1,290 | | 1,290 | |||||||||||||||
Other |
(621 | ) | (14 | ) | 24 | (11 | ) | (622 | ) | |||||||||||
Equity in net earnings of subsidiaries |
30,609 | | | (30,609 | ) | | ||||||||||||||
Total other income and (expense) |
24,615 | (20,371 | ) | 1,359 | (30,620 | ) | (25,017 | ) | ||||||||||||
Income (loss) before income taxes |
24,531 | 35,420 | 3,028 | (30,609 | ) | 32,370 | ||||||||||||||
Income tax expense |
422 | 5,484 | 2,432 | | 8,338 | |||||||||||||||
Income (loss) from continuing operations |
24,109 | 29,936 | 596 | (30,609 | ) | 24,032 | ||||||||||||||
Discontinued operations |
| 77 | | | 77 | |||||||||||||||
Net income (loss) |
$ | 24,109 | $ | 30,013 | $ | 596 | $ | (30,609 | ) | $ | 24,109 | |||||||||
(1) | All field operations general and administration expenses are included in operating expenses. |
19
Six Months Ended June 30, 2006 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 25,219 | $ | 46,486 | $ | (6,382 | ) | $ | (40,104 | ) | $ | 25,219 | ||||||||
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 32,662 | 2,010 | | 34,672 | |||||||||||||||
(Gain) loss on disposition of assets |
6 | (2,516 | ) | (63 | ) | | (2,573 | ) | ||||||||||||
Deferred tax expense (benefit) |
19,981 | (462 | ) | 145 | | 19,664 | ||||||||||||||
Expenses not requiring cash |
5,228 | 600 | | | 5,828 | |||||||||||||||
Equity in net earnings of subsidiaries |
(40,104 | ) | | | 40,104 | | ||||||||||||||
Change in operating assets and liabilities |
(10,618 | ) | (6,210 | ) | 13,061 | | (3,767 | ) | ||||||||||||
Net cash
provided by (used in) operating activities |
(288 | ) | 70,560 | 8,771 | | 79,043 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures |
| (78,096 | ) | (2,146 | ) | | (80,242 | ) | ||||||||||||
Proceeds from the sale of assets |
(6 | ) | 1,395 | 734 | | 2,123 | ||||||||||||||
Proceeds from insurance settlements |
| 2,501 | | | 2,501 | |||||||||||||||
Purchase of marketable securities |
(136,120 | ) | | | | (136,120 | ) | |||||||||||||
Proceeds from sale of marketable securities |
126,550 | | | | 126,550 | |||||||||||||||
Net cash used in investing activities |
(9,576 | ) | (74,200 | ) | (1,412 | ) | | (85,188 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from common stock offering |
99,947 | | | | 99,947 | |||||||||||||||
Proceeds from stock options exercised |
6,641 | | | | 6,641 | |||||||||||||||
Excess tax benefit from stock-based compensation |
2,063 | | | | 2,063 | |||||||||||||||
Intercompany advances, net |
(3,421 | ) | 3,050 | 371 | | | ||||||||||||||
Net cash provided by financing activities |
105,230 | 3,050 | 371 | | 108,651 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents |
95,366 | (590 | ) | 7,730 | | 102,506 | ||||||||||||||
Cash and cash equivalents at beginning of year |
31,978 | 11,145 | 17,053 | | 60,176 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 127,344 | $ | 10,555 | $ | 24,783 | $ | | $ | 162,682 | ||||||||||
20
Six Months Ended June 30, 2005 | ||||||||||||||||||||
Parent | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 24,109 | $ | 30,013 | $ | 596 | $ | (30,609 | ) | $ | 24,109 | |||||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 32,088 | 1,934 | | 34,022 | |||||||||||||||
Gain on disposition of assets |
| (15,917 | ) | (508 | ) | | (16,425 | ) | ||||||||||||
Expenses not requiring cash |
2,100 | 600 | | | 2,700 | |||||||||||||||
Equity in net earnings of subsidiaries |
(30,609 | ) | | | 30,609 | | ||||||||||||||
Change in operating assets and liabilities |
(8,463 | ) | 12,713 | 726 | | 4,976 | ||||||||||||||
Net cash provided by (used in) operating activities |
(12,863 | ) | 59,497 | 2,748 | | 49,382 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Capital expenditures |
| (29,416 | ) | (3,225 | ) | | (32,641 | ) | ||||||||||||
Proceeds from the sale of assets |
| 40,119 | 1,424 | | 41,543 | |||||||||||||||
Net cash provided by (used in) investing activities |
| 10,703 | (1,801 | ) | | 8,902 | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from issuance of debt |
55,500 | | | | 55,500 | |||||||||||||||
Principal payments under debt obligations |
(90,025 | ) | | | | (90,025 | ) | |||||||||||||
Proceeds from stock options exercised |
2,958 | | | | 2,958 | |||||||||||||||
Intercompany advances, net |
74,364 | (71,879 | ) | (2,485 | ) | | | |||||||||||||
Net cash provided by (used in) financing activities |
42,797 | (71,879 | ) | (2,485 | ) | | (31,567 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
29,934 | (1,679 | ) | (1,538 | ) | | 26,717 | |||||||||||||
Cash and cash equivalents at beginning of year |
16,677 | 7,938 | 19,652 | | 44,267 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 46,611 | $ | 6,259 | $ | 18,114 | $ | | $ | 70,984 | ||||||||||
21
/s/PricewaterhouseCoopers LLP | ||||
PricewaterhouseCoopers LLP | ||||
Houston, Texas |
||||
August 9, 2006 |
22
| stability of 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; | ||
| our future operating results and profitability; | ||
| our future rig utilization, dayrates and rental tools activity; | ||
| entering into new, or extending existing, drilling contracts and our expectations concerning when our rigs will commence operations under such contracts; | ||
| growth of the Company through acquisitions of companies or assets; | ||
| entering into joint venture agreements with local companies; | ||
| our future capital expenditures and investments in the acquisition and refurbishment of rigs and equipment; | ||
| our future liquidity; | ||
| availability and sources of funds to reduce our debt and expectations of when debt will be reduced; | ||
| the outcome of pending and future legal proceedings, tax assessments and other claims; | ||
| our recovery of insurance proceeds with respect to any damages to our assets; | ||
| the availability of insurance coverage for pending or future claims; | ||
| the enforceability of contractual indemnification in relation to pending or future claims; | ||
| compliance with covenants under our senior credit facility and indentures for our senior notes; and | ||
| expansion and growth of our operations. |
| worldwide economic and business conditions that adversely affect market conditions and/or the cost of doing business; | ||
| the U.S. economy and the demand for natural gas; | ||
| fluctuations in the market prices of oil and gas; | ||
| imposition of unanticipated trade restrictions; | ||
| unanticipated 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; | ||
| changes in the concentration of customer and supplier relationships; | ||
| unexpected cost increases for upgrade and refurbishment projects; | ||
| delays in obtaining components for capital projects; | ||
| shortages of skilled labor; | ||
| unanticipated cancellation of contracts by operators without cause; | ||
| breakdown of equipment and other operational problems; | ||
| changes in competition; | ||
| risk factors discussed in our 2005 Form 10-K and listed from time to time in our filings with the Securities and Exchange Commission; and | ||
| other similar factors (some of which are discussed in documents referred to in this Form 10-Q). |
23
24
25
Three Months Ended June 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Drilling and rental revenues: |
||||||||||||||||
U.S. drilling |
$ | 42,697 | 29 | % | $ | 31,110 | 23 | % | ||||||||
International drilling |
72,972 | 50 | % | 78,301 | 59 | % | ||||||||||
Rental tools |
30,319 | 21 | % | 24,543 | 18 | % | ||||||||||
Total drilling and rental revenues |
$ | 145,988 | 100 | % | $ | 133,954 | 100 | % | ||||||||
Drilling and rental operating income: |
||||||||||||||||
U.S. drilling gross margin (1) |
$ | 22,883 | 54 | % | $ | 12,272 | 39 | % | ||||||||
International drilling gross margin (1) |
15,118 | 21 | % | 18,604 | 24 | % | ||||||||||
Rental tools gross margin (1) |
19,350 | 64 | % | 15,592 | 64 | % | ||||||||||
Depreciation and amortization |
(17,715 | ) | (17,146 | ) | ||||||||||||
Total drilling and rental operating income (2) |
39,636 | 29,322 | ||||||||||||||
General and administration expense |
(7,575 | ) | (6,400 | ) | ||||||||||||
Gain on disposition of assets, net |
2,125 | 15,898 | ||||||||||||||
Total operating income |
$ | 34,186 | $ | 38,820 | ||||||||||||
(1) | Drilling and rental gross margins are computed as drilling and rental revenues less direct drilling and rental operating expenses, excluding depreciation and amortization expense; drilling and rental gross margin percentages are computed as drilling and rental gross margin as a percent of drilling and rental revenues. The gross margin amounts and gross margin percentages should not be used as a substitute for those amounts reported under GAAP. However, we monitor our business segments based on several criteria, including drilling and rental gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows: |
International | ||||||||||||
U.S. Drilling | Drilling | Rental Tools | ||||||||||
(Dollars in Thousands) | ||||||||||||
Three Months Ended June 30, 2006 |
||||||||||||
Drilling and rental operating income (2) |
$ | 17,341 | $ | 7,827 | $ | 14,468 | ||||||
Depreciation and amortization |
5,542 | 7,291 | 4,882 | |||||||||
Drilling and rental gross margin |
$ | 22,883 | $ | 15,118 | $ | 19,350 | ||||||
Three Months Ended June 30, 2005 |
||||||||||||
Drilling and rental operating income (2) |
$ | 7,269 | $ | 10,556 | $ | 11,497 | ||||||
Depreciation and amortization |
5,003 | 8,048 | 4,095 | |||||||||
Drilling and rental gross margin |
$ | 12,272 | $ | 18,604 | $ | 15,592 | ||||||
(2) | Drilling and rental operating income drilling and rental revenues less direct drilling and rental operating expenses, including depreciation and amortization expense. |
26
27
28
Six Months Ended June 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Drilling and rental revenues: |
||||||||||||||||
U.S. drilling |
$ | 82,950 | 28 | % | $ | 58,227 | 23 | % | ||||||||
International drilling |
152,802 | 52 | % | 150,473 | 59 | % | ||||||||||
Rental tools |
57,570 | 20 | % | 45,497 | 18 | % | ||||||||||
Total drilling and rental revenues |
$ | 293,322 | 100 | % | $ | 254,197 | 100 | % | ||||||||
Drilling and rental operating income: |
||||||||||||||||
U.S. drilling gross margin (1) |
$ | 45,666 | 55 | % | $ | 25,001 | 43 | % | ||||||||
International drilling gross margin (1) |
33,576 | 22 | % | 34,973 | 23 | % | ||||||||||
Rental tools gross margin (1) |
36,131 | 63 | % | 28,361 | 62 | % | ||||||||||
Depreciation and amortization |
(34,672 | ) | (34,022 | ) | ||||||||||||
Total drilling and rental operating income (2) |
80,701 | 54,313 | ||||||||||||||
General and administration expense |
(15,269 | ) | (13,376 | ) | ||||||||||||
Gain on disposition of assets, net |
2,573 | 16,450 | ||||||||||||||
Total operating income |
$ | 68,005 | $ | 57,387 | ||||||||||||
(1) | Drilling and rental gross margins are computed as drilling and rental revenues less direct drilling and rental operating expenses, excluding depreciation and amortization expense; drilling and rental gross margin percentages are computed as drilling and rental gross margin as a percent of drilling and rental revenues. The gross margin amounts and gross margin percentages should not be used as a substitute for those amounts reported under GAAP. However, we monitor our business segments based on several criteria, including drilling and rental gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows: |
International | ||||||||||||
U.S. Drilling | Drilling | Rental Tools | ||||||||||
(Dollars in Thousands) | ||||||||||||
Six Months Ended June 30, 2006 |
||||||||||||
Drilling and rental operating income (2) |
$ | 35,067 | $ | 18,980 | $ | 26,654 | ||||||
Depreciation and amortization |
10,599 | 14,596 | 9,477 | |||||||||
Drilling and rental gross margin |
$ | 45,666 | $ | 33,576 | $ | 36,131 | ||||||
Six Months Ended June 30, 2005 |
||||||||||||
Drilling and rental operating income (2) |
$ | 15,362 | $ | 18,438 | $ | 20,513 | ||||||
Depreciation and amortization |
9,639 | 16,535 | 7,848 | |||||||||
Drilling and rental gross margin |
$ | 25,001 | $ | 34,973 | $ | 28,361 | ||||||
(2) | Drilling and rental operating income drilling and rental revenues less direct drilling and rental operating expenses, including depreciation and amortization expense. |
29
30
31
32
| $150.0 million aggregate principal amount of Senior Floating Rate Notes bearing interest at a rate of LIBOR plus 4.75%, which are due September 1, 2010; and | ||
| $225.0 million aggregate principal amount of 9.625% Senior Notes, which are due October 1, 2013 plus an associated $4.7 million in unamortized debt premium. |
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) |
$ | 375,000 | $ | | $ | | $ | 150,000 | $ | 225,000 | ||||||||||
Long-term debt interest (1) |
213,864 | 35,302 | 70,603 | 59,232 | 48,727 | |||||||||||||||
Operating leases (2) |
11,868 | 5,036 | 5,063 | 1,380 | 389 | |||||||||||||||
Purchase commitments (3) |
55,403 | 55,403 | | | | |||||||||||||||
Total
contractual obligations (5) |
$ | 656,135 | $ | 95,741 | $ | 75,666 | $ | 210,612 | $ | 274,116 | ||||||||||
Commercial commitments: |
||||||||||||||||||||
Revolving credit facility (4) |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Standby letters of credit (4) |
9,178 | 9,178 | | | | |||||||||||||||
Total commercial commitments |
$ | 9,178 | $ | 9,178 | $ | | $ | | $ | | ||||||||||
(1) | Long-term debt includes the principal and interest cash obligations of the 9.625% Senior Notes but the remaining unamortized premium of $4.7 million is not included in the contractual cash obligations schedule. A portion of the interest on the Senior Floating Rate Notes has been fixed through variable-to-fixed interest rate swap agreements. The issuer (Bank of America, N.A.) of each swap has the option to extend each swap for an additional two years at the termination of the initial swap period. For the purpose of 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 purchase commitments outstanding as of June 30, 2006, related to rig upgrade projects and new rig construction. | |
(4) | We have a $40.0 million revolving credit facility. As of June 30, 2006, no amounts have been drawn down, but $9.2 million of availability has been used to support letters of credit that have been issued, resulting in an estimated $30.8 million availability. The revolving credit facility expires in December 2007. | |
(5) | On August 8, 2006 we gave notice of partial redemption for $50.0 million of our Floating Rate Notes on the redemption date of September 8, 2006. |
33
Effective | Termination | Notional | Floating | Fixed | Fair | ||||||||||||
Date | Date | Amount | Rate | Rate | Value | ||||||||||||
(Dollars in Thousands) | |||||||||||||||||
September 1, 2005 |
September 2, 2008 | $ | 50,000 | Three-month LIBOR plus 475 basis points | 8.83 | % | $ | 1,407 | |||||||||
September 1, 2005 |
September 4, 2007 | $ | 50,000 | Three-month LIBOR plus 475 basis points | 8.48 | % | 1,069 | ||||||||||
$ | 2,476 | ||||||||||||||||
34
Total Number | Maximum Number | |||||||||||||||
of Shares Purchased | of Shares That May | |||||||||||||||
as Part of Publicly | Yet be Purchased | |||||||||||||||
Total Number of | Average Price | Announced Plans | Under the Plans | |||||||||||||
Date | Shares Purchased | Paid Per Share | or Programs | or Programs | ||||||||||||
May 6, 2006 |
42,948 | $ | 8.74 | | | |||||||||||
June 19, 2006 |
4,409 | $ | 6.32 | | |
Exhibit | ||
Number | Description | |
10.1
|
Consulting Agreement between Robert L. Parker and the Company dated April 12, 2006 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated April 12, 2006). | |
10.2
|
Termination of Split Dollar Life Insurance Agreement among Robert L. Parker, The Robert L. Parker, Sr. and Catherine M. Parker Family Trust Under Indenture Dated the 23rd Day of July, 1993, and the Company dated April 12, 2006 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K dated April 12, 2006). | |
10.3
|
Asset Purchase Agreement by and between The Shell Petroleum Development Company of Nigeria Limited and Parker Drilling offshore International Inc., dated June 8, 2006 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated June 15, 2006). | |
15
|
Letter re Unaudited Interim Financial Information | |
31.1
|
Section 302 Certification Chairman, President and Chief Executive Officer | |
31.2
|
Section 302 Certification Senior Vice President and Chief Financial Officer | |
32.1
|
Section 906 Certification Chairman, President and Chief Executive Officer | |
32.2
|
Section 906 Certification Senior Vice President and Chief Financial Officer |
35
PARKER DRILLING COMPANY | ||||||
Date: August 7, 2006 | Registrant | |||||
By: | /s/ Robert L. Parker Jr. | |||||
Robert L. Parker Jr. | ||||||
Chairman, President and Chief Executive Officer | ||||||
By: | /s/ W. Kirk Brassfield | |||||
W. Kirk Brassfield | ||||||
Senior Vice President and Chief Financial Officer |
36
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 |
37