10-Q 1 q1-3312017x10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                         
Commission File Number 1-7573 
PARKER DRILLING COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
73-0618660
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
5 Greenway Plaza, Suite 100,
Houston, Texas
 
77046
(Address of principal executive offices)
 
(Zip code)
(281) 406-2000
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of May 1, 2017 there were 137,830,679 common shares outstanding.    



TABLE OF CONTENTS
 
 
Page
 
 
 
 


2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands) 
 
March 31,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
149,688

 
$
119,691

Accounts and Notes Receivable, net of allowance for bad debts of $8,019 at March 31, 2017 and $8,259 at December 31, 2016.
118,114

 
113,231

Rig materials and supplies
35,053

 
32,354

Other current assets
23,092

 
21,042

Total current assets
325,947

 
286,318

Property, plant and equipment, net of accumulated depreciation of $1,286,705 at March 31, 2017 and $1,320,644 at December 31, 2016.
676,881

 
693,439

Goodwill
6,708

 
6,708

Intangible assets, net
9,200

 
9,928

Deferred income taxes
74,416

 
70,309

Other noncurrent assets
36,403

 
36,849

Total assets
$
1,129,555

 
$
1,103,551

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
88,199

 
98,841

Accrued income taxes
5,510

 
4,080

Total current liabilities
93,709

 
102,921

Long-term debt, net of unamortized debt issuance costs of $8,272 at March 31, 2017 and $8,674 at December 31, 2016.
576,728

 
576,326

Other long-term liabilities
12,828

 
15,836

Deferred tax liability
72,849

 
69,333

Commitments and contingencies (Note 11)
 
 
 
Stockholders’ equity:
 
 
 
Preferred Stock, $1.00 par value, 1,942,000 shares authorized, 7.25% Series A Mandatory Convertible, 500,000 shares issued and outstanding (none in 2016)
500

 
—

Common Stock, $0.16 2/3 par value, 280,000,000 shares authorized; 137,578,742 shares issued and outstanding (125,118,365 shares in 2016)

22,914

 
20,837

Capital in excess of par value
745,886

 
675,194

Accumulated deficit
(389,861
)
 
(350,052
)
Accumulated other comprehensive income (loss)
(5,998
)
 
(6,844
)
Total stockholders’ equity
373,441

 
339,135

Total liabilities and stockholders’ equity
$
1,129,555

 
$
1,103,551

See accompanying notes to the unaudited consolidated condensed financial statements.

3


PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Revenues
$
98,271

 
$
130,503

Expenses:
 
 
 
Operating expenses
85,814

 
108,117

Depreciation and amortization
32,202

 
35,814

 
118,016

 
143,931

Total operating gross margin (loss)
(19,745
)
 
(13,428
)
General and administration expense
(7,040
)
 
(9,781
)
Gain (loss) on disposition of assets, net
(352
)
 
(60
)
Total operating income (loss)
(27,137
)
 
(23,269
)
Other income (expense):
 
 
 
Interest expense
(10,870
)
 
(11,562
)
Interest income
10

 
7

Other
530

 
2,485

Total other income (expense)
(10,330
)
 
(9,070
)
Income (loss) before income taxes
(37,467
)
 
(32,339
)
Income tax expense (benefit)
2,342

 
63,496

Net income (loss)
(39,809
)
 
(95,835
)
Mandatory convertible preferred stock dividend
—

 
—

Net income (loss) available to common stockholders
$
(39,809
)
 
$
(95,835
)
 
 
 
 
Basic income (loss) per common share
$
(0.31
)
 
$
(0.78
)
Diluted income (loss) per common share
$
(0.31
)
 
$
(0.78
)
 
 
 
 
Number of common shares used in computing earnings per share:
 
 
 
Basic
130,142,527

 
123,090,238

Diluted
130,142,527

 
123,090,238


See accompanying notes to the unaudited consolidated condensed financial statements.


4


PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Comprehensive income (loss):
 
 
 
Net income (loss)
$
(39,809
)
 
$
(95,835
)
Other comprehensive income (loss), net of tax:
 
 
 
Currency translation difference on related borrowings
83

 
502

Currency translation difference on foreign currency net investments
763

 
(1,538
)
Total other comprehensive income (loss), net of tax:
846

 
(1,036
)
Comprehensive income (loss)
(38,963
)
 
(96,871
)

See accompanying notes to the unaudited consolidated condensed financial statements.


5


PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(39,809
)
 
$
(95,835
)
Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
32,202

 
35,814

Accretion of contingent consideration
—

 
419

(Gain) loss on disposition of assets
352

 
60

Deferred income tax expense (benefit)
(642
)
 
63,411

Excess tax benefit (expense) from stock-based compensation
—

 
(753
)
Expenses not requiring cash
2,150

 
(109
)
Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(4,874
)
 
(381
)
Other assets
(2,692
)
 
(304
)
Accounts payable and accrued liabilities
(15,937
)
 
(14,437
)
Accrued income taxes
1,665

 
(3,600
)
Net cash provided by (used in) operating activities
(27,585
)
 
(15,715
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(14,451
)
 
(7,889
)
Proceeds from the sale of assets
46

 
54

Net cash provided by (used in) investing activities
(14,405
)
 
(7,835
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payments of contingent consideration
—

 
(2,000
)
Proceeds from the issuance of common stock
25,200

 
—

Proceeds from the issuance of mandatory convertible preferred stock
50,000

 
—

Payment of equity issuance costs
(2,861
)
 
—

Shares surrendered in lieu of tax
(352
)
 
(317
)
Net cash provided by (used in) financing activities
71,987

 
(2,317
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
29,997

 
(25,867
)
Cash and cash equivalents, beginning of year
119,691

 
134,294

Cash and cash equivalents, end of period
$
149,688

 
$
108,427

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
20,588

 
$
20,588

Income taxes paid
$
1,551

 
$
4,734

See accompanying notes to the unaudited consolidated condensed financial statements.


6


PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars and Shares in Thousands)
(Unaudited)

 
Shares
 
Preferred Stock
 
Common
Stock
 
Treasury Stock
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
Balances, December 31, 2016
125,118

 
$
—

 
$
21,007

 
$
(170
)
 
$
675,194

 
$
(350,052
)
 
$
(6,844
)
 
$
339,135

Activity in employees’ stock plans
461

 
—

 
77

 
—

 
(479
)
 
—

 
—

 
(402
)
Amortization of stock-based awards
—

 
—

 
—

 
—

 
1,332

 
—

 
—

 
1,332

Issuance of common stock
12,000

 
—

 
2,000

 
—

 
22,060

 
—

 
—

 
24,060

Issuance of mandatory convertible preferred stock
500

 
500

 
—

 
—

 
47,779

 
—

 
—

 
48,279

Preferred stock dividend
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Comprehensive Income:
 
 
—

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
—

 
—

 
—

 
(39,809
)
 
—

 
(39,809
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
846

 
846

Balances, March 31, 2017
138,079

 
$
500

 
$
23,084

 
$
(170
)
 
$
745,886

 
$
(389,861
)
 
$
(5,998
)
 
$
373,441

See accompanying notes to the consolidated condensed financial statements.


7


PARKER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - General
The Consolidated Condensed Financial Statements as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 are unaudited. In the opinion of Parker Drilling Company (Parker Drilling or the Company), these financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows, and stockholders’ equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in connection with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Nature of Operations — Our business is comprised of two business lines: (1) Drilling Services and (2) Rental Tools Services. We report our Drilling Services business as two reportable segments: (1) U.S. (Lower 48) Drilling and (2) International & Alaska Drilling. We report our Rental Tools Services business as two reportable segments: (1) U.S. Rental Tools and (2) International Rental Tools.
In our Drilling Services business, we drill oil, natural gas and geothermal wells for customers in both the U.S. and international markets. We provide this service with both Company-owned rigs and customer-owned rigs. We refer to the provision of drilling services with customer-owned rigs as our operations and management (O&M) service in which operators own their own drilling rigs but choose Parker Drilling to operate and manage the rigs for them. The nature and scope of activities involved in drilling an oil and natural gas well is similar whether it is drilled with a Company-owned rig (as part of a traditional drilling contract) or a customer-owned rig (as part of an O&M contract). In addition, we provide project-related services, such as engineering, procurement, project management and commissioning of customer-owned drilling facility projects. We have extensive experience and expertise in drilling geologically difficult wells and in managing the logistical and technological challenges of operating in remote, harsh and ecologically sensitive areas.
    In our Rental Tools Services business, we provide premium rental equipment and services to exploration and production (E&P) companies, drilling contractors and service companies on land and offshore in the U.S. and international markets. Tools we provide include standard and heavy-weight drill pipe, all of which are available with standard or high-torque connections, tubing, drill collars, pressure control equipment, including blow-out preventers (BOPs), and more. We also provide well construction services, which include tubular running services and downhole tool rentals, and well intervention services, which include whipstock, fishing and related services, as well as inspection and machine shop support. Rental tools are used during drilling and/or workover programs and are requested by the customer when they are needed, requiring us to keep a broad inventory of rental tools in stock. Rental tools are usually rented on a daily or monthly basis.
Consolidation — The consolidated financial statements include the accounts of the Company and subsidiaries in which we exercise control or have a controlling financial interest, including entities, if any, in which the Company is allocated a majority of the entity’s losses or returns, regardless of ownership percentage. If a subsidiary of Parker Drilling has a 50 percent interest in an entity but Parker Drilling’s interest in the subsidiary or the entity does not meet the consolidation criteria described above, then that interest is accounted for under the equity method.
Noncontrolling Interest — We apply accounting standards related to noncontrolling interests for ownership interests in our subsidiaries held by parties other than Parker Drilling. We report noncontrolling interest as equity on the consolidated balance sheets and report net income (loss) attributable to controlling interest and to noncontrolling interest separately on the consolidated condensed statements of operations.
Reclassifications — Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not materially affect our consolidated financial results.
Revenue Recognition — Drilling revenues and expenses, comprised of daywork drilling contracts, call-outs against master service agreements and engineering and related project service contracts, are recognized as services are performed and collection is reasonably assured. For certain contracts, we receive payments contractually designated for the mobilization of rigs and other drilling equipment. Mobilization payments received, and direct costs incurred for the mobilization, are deferred and recognized over the primary term of the related drilling contract; however, costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met. Revenues from rental activities are recognized ratably over the rental term, which is generally less than six months. Our project-related services

8


contracts include engineering, consulting, and project management scopes of work and revenue is typically recognized on a time and materials basis.
Reimbursable Revenues — The Company recognizes reimbursements received for out-of-pocket expenses incurred as revenues and accounts for out-of-pocket expenses as direct operating costs. Such amounts totaled $15.3 million and $19.0 million for the three months ended March 31, 2017 and 2016, respectively. Additionally, the Company typically receives a nominal handling fee, which is recognized as earned in revenues in our consolidated statement of operations.
Use of Estimates — The preparation of financial statements in accordance with accounting policies generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities at the date of the financial statements, and our revenues and expenses during the periods reported. Estimates are typically used when accounting for certain significant items such as legal or contractual liability accruals, mobilization and deferred mobilization, self-insured medical/dental plans, income taxes and valuation allowance, and other items requiring the use of estimates. Estimates are based on a number of variables which may include third party valuations, historical experience, where applicable, and assumptions that we believe are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ from management estimates.
Purchase Price Allocation — We allocate the purchase price of an acquired business to its identifiable assets and liabilities in accordance with the acquisition method based on estimated fair values at the transaction date. Transaction and integration costs associated with an acquisition are expensed as incurred. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. We typically engage third-party appraisal firms to assist in fair value determination of inventories, identifiable intangible assets, and any other significant assets or liabilities. Judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
Goodwill — We perform our annual goodwill impairment review during the fourth quarter, as of October 1, and more frequently if negative conditions or other triggering events arise. The quantitative impairment test we perform for goodwill utilizes certain assumptions, including forecasted revenues and costs assumptions. See Note 2 - Goodwill and Intangible Assets for further discussion.    
Intangible Assets — Our intangible assets are related to trade names, customer relationships, and developed technology, which were acquired through acquisition and are classified as definite lived intangibles, that are generally amortized over a weighted average period of approximately three to six years. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss. See Note 2 - Goodwill and Intangible Assets for further discussion.
Impairment — We evaluate the carrying amounts of long-lived assets for potential impairment when events occur or circumstances change that indicate the carrying values of such assets may not be recoverable. We evaluate recoverability by determining the undiscounted estimated future net cash flows for the respective asset groups identified. If the sum of the estimated undiscounted cash flows is less than the carrying value of the asset group, we measure the impairment as the amount by which the assets’ carrying value exceeds the fair value of such assets. Management considers a number of factors such as estimated future cash flows from the assets, appraisals and current market value analysis in determining fair value. Assets are written down to fair value if the final estimate of current fair value is below the net carrying value. The assumptions used in the impairment evaluation are inherently uncertain and require management judgment.    
Concentrations of Credit Risk — Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables with a variety of national and international oil and natural gas companies. We generally do not require collateral on our trade receivables. We depend on a limited number of significant customers. Our largest customer, Exxon Neftegas Limited (ENL), constituted approximately 34.9 percent of our consolidated revenues for the three months ended March 31, 2017. Excluding reimbursable revenues of $13.0 million, ENL constituted approximately 25.7 percent of our total consolidated revenues for the three months ended March 31, 2017. Our second largest customer, BP Exploration Alaska, Inc. (BP), constituted approximately 11.3 percent of our consolidated revenues for the three months ended March 31, 2017.
At March 31, 2017 and December 31, 2016, we had deposits in domestic banks in excess of federally insured limits of approximately $110.4 million and $81.4 million, respectively. In addition, we had uninsured deposits in foreign banks as of March 31, 2017 and December 31, 2016 of $39.4 million and $39.7 million, respectively.    

9


Income Taxes — Income taxes are accounted for under the asset and liability method and have been provided for based upon tax laws and rates in effect in the countries in which operations are conducted and income or losses are generated. There is little or no expected relationship between the provision for or benefit from income taxes and income or loss before income taxes as the countries in which we operate have taxation regimes that vary not only with respect to nominal rate, but also in terms of the availability of deductions, credits, and other benefits. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled and the effect of changes in tax rates is recognized in income in the period in which the change is enacted. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In order to determine the amount of deferred tax assets or liabilities, as well as the valuation allowances, we must make estimates and assumptions regarding future taxable income, where rigs will be deployed and other matters. Changes in these estimates and assumptions, including changes in tax laws and other changes impacting our ability to recognize the underlying deferred tax assets, could require us to adjust the valuation allowances.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized and changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Earnings (Loss) Per Share (EPS) —Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. The effects of dilutive securities, stock options, unvested restricted stock, convertible debt and equity are included in the diluted EPS calculation, when applicable.
Legal and Investigation Matters — We accrue estimates of the probable and estimable costs for the resolution of certain legal and investigation matters. We do not accrue any amounts for other matters for which the liability is not probable and reasonably estimable.  Generally, the estimate of probable costs related to these matters is developed in consultation with our legal advisors. The estimates take into consideration factors such as the complexity of the issues, litigation risks and settlement costs. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, our future financial results may be adversely affected.
Note 2 - Goodwill and Intangible Assets    
We account for business combinations using the acquisition method of accounting. Under this method, assets and liabilities, including any remaining noncontrolling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed, plus the value of any noncontrolling interests, is recognized as goodwill. We perform our annual goodwill impairment review during the fourth quarter, as of October 1, and more frequently if negative conditions or other triggering events arise. Should current market conditions worsen or persist for an extended period of time, an impairment of the carrying value of our goodwill could occur.
All of the Company’s goodwill and intangible assets are allocated to the International Rental Tools segment.
Goodwill
The change in the carrying amount of goodwill for the period ended March 31, 2017 is as follows:
Dollars in thousands
Goodwill
Balance at December 31, 2016
$
6,708

Additions
—

Balance at March 31, 2017
$
6,708

Of the total amount of goodwill recognized, zero is expected to be deductible for income tax purposes.

10


Intangible Assets
Intangible Assets consist of the following:
 
 
Balance at March 31, 2017
Dollars in thousands
Estimated Useful Life (Years)
Gross Carrying Amount
 
Write-off Due to Disposal
 
Accumulated Amortization
 
Net Carrying Amount
Amortized intangible assets:
 
 
 
 
 
 
 
 
Developed technology
6
$
11,630

 
$
—

 
$
(3,877
)
 
$
7,753

Customer relationships
3
5,400

 
(264
)
 
(5,136
)
 
—

Trade names
5
4,940

 
(332
)
 
(3,161
)
 
1,447

Total amortized intangible assets
 
$
21,970

 
$
(596
)
 
$
(12,174
)
 
$
9,200

Amortization expense was $0.7 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively.
Our remaining intangibles amortization expense for the next five years is presented below:
Dollars in thousands
Expected future intangible amortization expense
2017
$
2,073

2018
$
2,306

2019
$
2,306

2020
$
2,030

2021
$
485

Note 3 - Earnings (Loss) Per Share (EPS)
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. The effects of dilutive securities, stock options, unvested restricted stock, convertible debt and equity are included in the diluted EPS calculation, when applicable.
The following table represents the computation of earnings per share for the three months ended March 31, 2017 and 2016, respectively:

11


 
 
Three Months Ended March 31, 2017
 
Net Income (Loss)
Available to Common Stockholders (Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic earnings (loss) per common share
$
(39,809,000
)
 
130,142,527

 
$
(0.31
)
Effect of dilutive securities:
 
 
 
 
 
Restricted stock units (1)
—

 
—

 
—

Mandatory convertible preferred stock (2)
$
—

 
—

 
—

Diluted earnings (loss) per common share
$
(39,809,000
)
 
130,142,527

 
$
(0.31
)
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
 
Net Income (Loss)
Available to Common Stockholders (Numerator)

 
Shares
(Denominator)
 
Per-Share
Amount
Basic earnings (loss) per common share
$
(95,835,000
)
 
123,090,238

 
$
(0.78
)
Effect of dilutive securities:
 
 
 
 
 
Restricted stock units (1)
—

 
—

 
—

Mandatory convertible preferred stock (2)
$
—

 
—

 
—

Diluted earnings (loss) per common share
$
(95,835,000
)
 
123,090,238

 
$
(0.78
)
 
 
 
 
 
 
(1)    For the three months ended March 31, 2017 and 2016, respectively, all common shares potentially issuable in connection with outstanding restricted stock unit awards have been excluded from the calculation of diluted EPS as the company incurred losses during the periods, therefore, inclusion of such potential common shares would be anti-dilutive.

(2)     Weighted average common shares issuable upon the assumed conversion of our Mandatory Convertible Preferred Stock totaling 23,809,500 shares were excluded from the computation of diluted EPS as such shares would be anti-dilutive.


12


Note 4 - Common and Preferred Stock Issuances
In February 2017, we issued 12,000,000 shares of common stock, par value $0.16 2/3 per share, at the public offering price of $2.10 per share, and 500,000 shares of 7.25% Series A Mandatory Convertible Preferred Stock (Convertible Preferred Stock), par value $1.00 per share, with a liquidation preference of $100 per share, for total net proceeds of $72.3 million, after underwriting discount and offering expenses.
The dividends on our Convertible Preferred Stock will be payable on a cumulative basis when, as and if declared by our board of directors, or an authorized committee of our board of directors, at an annual rate of 7.25 percent of the liquidation preference of $100 per share. We may pay declared dividends in cash or, subject to certain limitations, in shares of our common stock, or in any combination of cash and shares of our common stock on March 31, June 30, September 30 and December 31 of each year, commencing on June 30, 2017 and ending on, and including, March 31, 2020.
Unless converted earlier, each share of our Convertible Preferred Stock will automatically convert into between  41.4079 and 47.6190 shares of our common stock (respectively, the “minimum conversion rate” and “maximum conversion rate”), subject to anti-dilution adjustments. The number of shares of our common stock issuable on conversion will be determined based on the volume weighted-average price, of our common stock over the 20 consecutive trading day period beginning on, and including, the 23rd scheduled trading day immediately preceding March 31, 2020. Except in limited circumstances, at any time prior to March 31, 2020, a holder may convert Convertible Preferred Stock into shares of our common stock at the minimum conversion rate of 41.4079 shares of common stock per share of Convertible Preferred Stock, subject to anti-dilution adjustments.
Note 5 - Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive loss consisted of the following:
Dollars in thousands
Foreign Currency Items
December 31, 2016
$
(6,844
)
Current period other comprehensive income (loss)
846

March 31, 2017
$
(5,998
)
There were no amounts reclassified out of accumulated other comprehensive loss for the three months ended March 31, 2017.
Note 6 - Reportable Segments
Our business is comprised of two business lines: (1) Drilling Services and (2) Rental Tools Services. We report our Drilling Services business as two reportable segments: (1) U.S. (Lower 48) Drilling and (2) International & Alaska Drilling. We report our Rental Tools Services business as two reportable segments: (1) U.S. Rental Tools and (2) International Rental Tools.
Within the four reportable segments, we have aggregated our Arctic, Eastern Hemisphere and Latin America business units under International & Alaska Drilling, one business unit under U.S. (Lower 48) Drilling, one business unit under U.S. Rental Tools and one business unit under International Rental Tools, for a total of six business units. The Company has aggregated each of its business units in one of the four reporting segments based on the guidelines of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic No. 280, Segment Reporting. We eliminate inter-segment revenues and expenses. We disclose revenues under the four reportable segments based on the similarity of the use and markets for the groups of products and services within each segment.
Drilling Services Business
In our Drilling Services business, we drill oil, natural gas and geothermal wells for customers in both the U.S. and international markets. We provide this service with both Company-owned rigs and customer-owned rigs. We refer to the provision of drilling services with customer-owned rigs as our O&M service in which operators own their own drilling rigs but choose Parker Drilling to operate and manage the rigs for them. The nature and scope of activities involved in drilling an oil and natural gas well is similar whether it is drilled with a Company-owned rig (as part of a traditional drilling contract) or a customer-owned rig (as part of an O&M contract). In addition, we provide project-related services, such as engineering, procurement, project management and commissioning of customer-owned drilling facility projects. We have extensive experience and expertise in drilling geologically difficult wells and in managing the logistical and technological challenges of operating in remote, harsh and ecologically sensitive areas.

13


U.S. (Lower 48) Drilling
Our U.S. (Lower 48) Drilling segment provides drilling services with our Gulf of Mexico (GOM) barge drilling rig fleet, and markets our U.S. (Lower 48) based O&M services. Our GOM barge drilling fleet operates barge rigs that drill for oil and natural gas in shallow waters in and along the inland waterways and coasts of Louisiana, Alabama and Texas. The majority of these wells are drilled in shallow water depths ranging from 6 to 12 feet. Our rigs are suitable for a variety of drilling programs, from inland coastal waters requiring shallow draft barges, to open water drilling on both state and federal water projects requiring more robust capabilities. The barge drilling industry in the GOM is characterized by cyclical activity where utilization and dayrates are typically driven by oil and natural gas prices and our customers’ access to project financing. Contract terms typically consist of well-to-well and multi-well programs, most commonly ranging from 20 to 180 days.
International & Alaska Drilling
Our International & Alaska Drilling segment provides drilling services, using both Company-owned rigs and O&M contracts, and project-related services. The drilling markets in which this segment operates have one or more of the following characteristics:
•
customers that typically are major, independent or national oil and natural gas companies or integrated service providers;
•
drilling programs in remote locations with little infrastructure, requiring a large inventory of spare parts and other ancillary equipment and self-supported service capabilities;
•
complex wells and/or harsh environments (such as high pressures, deep depths, hazardous or geologically challenging conditions and sensitive environments) requiring specialized equipment and considerable experience to drill; and
•
drilling and O&M contracts that generally cover periods of one year or more.
Rental Tools Services Business
In our Rental Tools Services business, we provide premium rental equipment and services to E&P companies, drilling contractors and service companies on land and offshore in the U.S. and select international markets. Tools we provide include standard and heavy-weight drill pipe, all of which are available with standard or high-torque connections, tubing, drill collars, pressure control equipment, including BOPs and more. We also provide well construction services, which include tubular running services and downhole tool rentals, and well intervention services, which include whipstock, fishing and related services, as well as inspection and machine shop support. Rental tools are used during drilling and/or workover programs and are requested by the customer when they are needed, requiring us to keep a broad inventory of rental tools in stock. Rental tools are usually rented on a daily or monthly basis.
U.S. Rental Tools

Our U.S. rental tools segment is headquartered in New Iberia, Louisiana. We maintain an inventory of rental tools for deepwater, drilling, completion, workover, and production applications at facilities in Louisiana, Texas, Oklahoma, Wyoming, North Dakota and West Virginia.
Our largest single market for rental tools is U.S. land drilling, a cyclical market driven primarily by oil and natural gas prices and our customers' access to project financing. A portion of our U.S. rental tools business is supplying tubular goods and other equipment to offshore GOM customers.
International Rental Tools
Our international rental tools segment is headquartered in Dubai, United Arab Emirates. We maintain an inventory of rental tools and provide well construction, well intervention, and surface and tubular services to our customers in the Middle East, Latin America, United Kingdom, Europe, and Asia-Pacific regions.

14


The following table represents the results of operations by reportable segment:
 
Three Months Ended 
 March 31,
Dollars in thousands
2017
 
2016
Revenues: (1)
 
 
 
Drilling Services:
 
 
 
U.S. (Lower 48) Drilling
$
1,215

 
$
2,085

International & Alaska Drilling
63,213

 
88,619

Total Drilling Services
64,428

 
90,704

Rental Tools Services:
 
 
 
U.S. Rental Tools
20,231

 
22,555

International Rental Tools
13,612

 
17,244

Total Rental Tools Services
33,843

 
39,799

Total revenues
98,271

 
130,503

Operating gross margin: (2)
 
 
 
Drilling Services:
 
 
 
U.S. (Lower 48) Drilling
(7,226
)
 
(8,558
)
International & Alaska Drilling
(1,785
)
 
5,077

Total Drilling Services
(9,011
)
 
(3,481
)
Rental Tools Services:
 
 
 
U.S. Rental Tools
(3,773
)
 
(3,949
)
International Rental Tools
(6,961
)
 
(5,998
)
Total Rental Tools Services
(10,734
)

(9,947
)
Total operating gross margin
(19,745
)
 
(13,428
)
General and administrative expense
(7,040
)
 
(9,781
)
Gain (loss) on disposition of assets, net
(352
)
 
(60
)
Total operating income (loss)
(27,137
)
 
(23,269
)
Interest expense
(10,870
)
 
(11,562
)
Interest income
10

 
7

Other income (loss)
530

 
2,485

Income (loss) from continuing operations before income taxes
$
(37,467
)
 
$
(32,339
)
 
(1)For the three months ended March 31, 2017, our largest customer, ENL, constituted approximately 34.9 percent of our total consolidated revenues and approximately 54.3 percent of our International & Alaska Drilling segment revenues. Excluding reimbursable revenues of $13.0 million, ENL constituted approximately 25.7 percent of our total consolidated revenues and approximately 44.4 percent of our International & Alaska Drilling segment revenues. Our second largest customer, BP, constituted 11.3 percent of our total consolidated revenues and approximately 17.6 percent of our International & Alaska Drilling segment revenues.
For the three months ended March 31, 2016, our largest customer, ENL, constituted approximately 39.2 percent of our total consolidated revenues and approximately 57.8 percent of our International & Alaska Drilling segment revenues. Excluding reimbursable revenues of $18.3 million, ENL constituted approximately 29.5 percent of our total consolidated revenues and approximately 47.2 percent of our International & Alaska Drilling segment revenues.
(2)Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

15


Note 7 - Accounting for Uncertainty in Income Taxes
We apply the accounting guidance related to accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. At March 31, 2017, we had a liability for unrecognized tax benefits of $4.9 million, primarily related to foreign operations, $4.7 million of which would favorably impact our effective tax rate upon recognition. At December 31, 2016, we had a liability for unrecognized tax benefits of $4.6 million, all of which would favorably impact our effective tax rate upon recognition, and for which no payments were made in 2016. In addition, we recognize interest and penalties that could be applied to uncertain tax positions in periodic income tax expense. As of March 31, 2017 and December 31, 2016, we had approximately $2.0 million and $1.9 million, respectively, of accrued interest and penalties related to uncertain tax positions.
Note 8 - Income Tax Expense (Benefit)
During the first quarter of 2017, we had income tax expense of $2.3 million compared with income tax expense of $63.5 million during the first quarter of 2016. Despite the pre-tax loss for the first quarter of 2017, we recognized income tax expense due to the jurisdictional mix of income and loss during the quarter, along with our continued inability to recognize the benefits associated with certain losses as a result of valuation allowances. During the 2016 first quarter, we recognized income tax expense as a result of recording a valuation allowance of $73.1 million against our U.S. domestic deferred tax assets, which primarily consist of U.S. federal net operating losses.
Note 9 - Long-Term Debt
The following table illustrates the Company’s current debt portfolio as of March 31, 2017 and December 31, 2016:
Dollars in thousands
March 31,
2017
 
December 31,
2016
6.75% Senior Notes, due July 2022
$
360,000

 
$
360,000

7.50% Senior Notes, due August 2020
225,000

 
225,000

Total principal
585,000

 
585,000

Less: unamortized debt issuance costs
(8,272
)
 
(8,674
)
Total long-term debt
$
576,728

 
$
576,326

6.75% Senior Notes, due July 2022
On January 22, 2014, we issued $360.0 million aggregate principal amount of 6.75% Senior Notes due July 2022 (6.75% Notes) pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 6.75% Notes offering plus a $40.0 million term loan draw under the Amended and Restated Senior Secured Credit Agreement (2012 Secured Credit Agreement) and cash on hand were utilized to purchase $416.2 million aggregate principal amount of our outstanding 9.125% Senior Notes due 2018 pursuant to a tender and consent solicitation offer commenced on January 7, 2014.
The 6.75% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 6.75% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under the Second Amended and Restated Senior Secured Credit Agreement, as amended from time-to-time (2015 Secured Credit Agreement) and our 7.50% Senior Notes, due August 2020 (7.50% Notes, and collectively with the 6.75% Notes, the Senior Notes). Interest on the 6.75% Notes is payable on January 15 and July 15 of each year, beginning July 15, 2014. Debt issuance costs related to the 6.75% Notes of approximately $7.6 million ($5.3 million net of amortization as of March 31, 2017) are being amortized over the term of the notes using the effective interest rate method.
At any time prior to January 15, 2017, we were able to redeem up to 35 percent of the aggregate principal amount of the 6.75% Notes at a redemption price of 106.75 percent of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings by us. No redemptions were made utilizing this provision. On and after January 15, 2018, we may redeem all or a part of the 6.75% Notes upon appropriate notice, at a redemption price of 103.375 percent of the principal amount, and at redemption prices decreasing each year thereafter to par beginning January 15, 2020. If we experience certain changes in control, we must offer to repurchase the 6.75% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
The Indenture limits our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur

16


or guarantee additional indebtedness, (v) create or incur liens, (vi) enter into sale and leaseback transactions, (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.
7.50% Senior Notes, due August 2020
On July 30, 2013, we issued $225.0 million aggregate principal amount of the 7.50% Notes pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 7.50% Notes offering were primarily used to repay the $125.0 million aggregate principal amount of a term loan used to initially finance the acquisition of ITS in April, 2013, to repay $45.0 million of term loan borrowings under the 2012 Secured Credit Agreement, and for general corporate purposes.
The 7.50% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 7.50% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under the 2015 Secured Credit Agreement and the 6.75% Notes. Interest on the 7.50% Notes is payable on February 1 and August 1 of each year, beginning February 1, 2014. Debt issuance costs related to the 7.50% Notes of approximately $5.6 million ($3.0 million, net of amortization as of March 31, 2017) are being amortized over the term of the notes using the effective interest rate method.
We may redeem all or a part of the 7.50% Notes upon appropriate notice, at redemption prices decreasing each year after August 1, 2016 to par beginning August 1, 2018. As of March 31, 2017, the redemption price is 103.75 percent and we have not made any redemptions to date. If we experience certain changes in control, we must offer to repurchase the 7.50% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
The Indenture limits our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness, (v) create or incur liens, (vi) enter into sale and leaseback transactions, (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.
2015 Secured Credit Agreement
On January 26, 2015 we entered into the 2015 Secured Credit Agreement, which amended and restated the 2012 Secured Credit Agreement. The 2015 Secured Credit Agreement was originally comprised of a $200.0 million revolving credit facility (Revolver) set to mature on January 26, 2020. Four amendments to the 2015 Secured Credit Agreement have been executed, which have, among other things, reduced the size of the revolver to $100 million, suspended the Leverage Ratio, Consolidated Interest Coverage Ratio, Senior Secured Leverage Ratio, and Asset Coverage Ratio covenants during specific time periods, increased the Applicable Rate for certain higher levels of consolidated leverage to a maximum of 4.00 percent per annum for Eurodollar Rate loans and to a maximum of 3.00 percent per annum for Base Rate loans, established anti-hoarding language restricting our ability to retain more than $50 million in U.S. bank accounts when there are outstanding borrowings under the Revolver, and established a $75 million Junior Lien Debt capacity.
The maximum permitted Senior Secured Leverage Ratio was 2.80:1.00 for the fiscal quarter ending March 31, 2017, decreases to 2.20:1.00 in the second quarter of 2017, to 1.75:1.00 in the third quarter of 2017, and to 1.50:1.00 in the fourth quarter of 2017 and remains at 1.50:1.00 thereafter. The Asset Coverage Ratio, currently at 1.10:1.00, increases to 1.25: 1.00 in the fourth quarter of 2017 and remains at 1.25:1.00 thereafter. The Consolidated Interest Coverage Ratio covenant will be reinstated in the fourth quarter of 2017 with the ratio established at 1.00:1.00, which increases by 0.25 each subsequent quarter until reaching 2.00:1.00 in the fourth quarter of 2018, and remains at 2.00:1.00 thereafter. The Leverage Ratio covenant will be reinstated in the fourth quarter of 2018 with the ratio established at 4.25:1.00.
On February 21, 2017, we executed the fourth amendment to the 2015 Secured Credit Agreement which, among other things, permits the sale and issuance of certain equity interests of the Company, including the Convertible Preferred Stock, and permits the Company to pay dividends on the Convertible Preferred Stock, up to certain aggregate amounts specified therein. The debt issuance costs incurred relating to the fourth amendment were nominal. Debt issuance costs remaining as of March 31, 2017 were $1.1 million which are being amortized through January 2020 on a straight line basis.

17


Our obligations under the 2015 Secured Credit Agreement are guaranteed by substantially all of our direct and indirect domestic subsidiaries, other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, each of which has executed guaranty agreements, and are secured by first priority liens on our accounts receivable, specified rigs including barge rigs in the GOM and land rigs in Alaska, certain U.S.-based rental equipment of the Company and its subsidiary guarantors and the equity interests of certain of the Company’s subsidiaries. The 2015 Secured Credit Agreement contains customary affirmative and negative covenants, such as limitations on indebtedness, liens, restrictions on entry into certain affiliate transactions and payments (including payment of dividends) and maintenance of certain ratios and coverage tests. As of March 31, 2017, we were in compliance with all covenants contained in the 2015 Secured Credit Agreement though our ability to access the full $100 million of the Revolver was restricted to $92.8 million due to $5.8 million in letters of credit outstanding and $1.4 million related to a cap imposed by our Senior Secured Leverage Ratio covenant calculation.
Our Revolver is available for general corporate purposes and to support letters of credit. Interest on Revolver loans accrues at a Base Rate plus an Applicable Rate or LIBOR plus an Applicable Rate. Revolving loans are available subject to a quarterly asset coverage ratio calculation based on the Orderly Liquidation Value of certain specified rigs including barge rigs in the GOM and land rigs in Alaska, and certain U.S.-based rental equipment of the Company and its subsidiary guarantors and a percentage of eligible domestic accounts receivable. Letters of credit outstanding against the Revolver as of March 31, 2017 totaled $5.8 million. There were no amounts drawn on the Revolver as of March 31, 2017.    
Note 10 - Fair Value of Financial Instruments
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. For purposes of recording fair value adjustments for certain financial and non-financial assets and liabilities, and determining fair value disclosures, we estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.
The fair value measurement and disclosure requirements of FASB ASC Topic No. 820, Fair Value Measurement and Disclosures requires inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows:
•
Level 1 — Unadjusted quoted prices for identical assets or liabilities in active markets;
•
Level 2 — Direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets; and
•
Level 3 — Unobservable inputs that require significant judgment for which there is little or no market data.
When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the entire measurement even though we may also have utilized significant inputs that are more readily observable. The amounts reported in our consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value.
Fair value of our debt instruments is determined using Level 2 inputs. Fair values and related carrying values of our debt instruments were as follows for the periods indicated:     
  
March 31, 2017
 
December 31, 2016
Dollars in thousands
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt
 
 
 
 
 
 
 
6.75% Notes
$
360,000

 
$
320,400

 
$
360,000

 
$
311,400

7.50% Notes
225,000

 
210,375

 
225,000

 
201,375

Total principal
$
585,000

 
$
530,775

 
$
585,000

 
$
512,775

Market conditions could cause an instrument to be reclassified from Level 1 to Level 2, or Level 2 to Level 3. There were no transfers between levels of the fair value hierarchy or any changes in the valuation techniques used during the three months ended March 31, 2017.  
Note 11 - Commitments and Contingencies
We are a party to various lawsuits and claims arising out of the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount or range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best

18


estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ significantly from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operations for a particular reporting period.
Note 12 - Recent Accounting Pronouncements    
In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Effective January 1, 2017, we adopted ASU 2017-04 and it did not have a material impact on our consolidated statements of financial position, results of operations, cash flows, and on the disclosures contained in our notes to the consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. The ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The standard becomes effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, but only at the beginning of the annual period for which no financial statements have been issued or been made available for issuance. Effective January 1, 2017, we adopted ASU 2016-16 prospectively and it did not have a material impact on our consolidated statements of financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU is intended to reduce diversity in current practice regarding the manner in which certain cash receipts and cash payments are presented and classified in the cash flow statement. The standard becomes effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Effective January 1, 2017, we adopted ASU 2016-15 retrospectively and it did not have a material impact on our statement of cash flows.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718).  The objective of this update is to simplify several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The standard became effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  Effective January 1, 2017, we adopted ASU 2016-09. The adoption did not have a material impact on our consolidated statements of financial position, results of operations or cash flows. In accordance with the ASU requirements, we adopted certain aspects of the ASU as follows:
•
Accounting for excess tax benefits and certain tax deficiencies - The guidance requires all excess tax benefits, and certain tax deficiencies to be recorded through the income statement instead of additional paid in capital, where the activity was historically recorded. We adopted this change prospectively.  There is no cumulative effect of the adoption as we have no unrecognized excess tax benefits or minimum withholding requirements that impact the income statement and, accordingly, prior periods have not been adjusted.
•
Cash flow presentation of excess tax benefits and certain tax deficiencies - We adopted this change retrospectively. Tax related cash flows from share based payments are to be presented as operating activities in the statement of cash flows. Consequently, activity of $0.8 million for the three month period ended March 31, 2016, recorded through equity, has been reclassified from financing activities to operating activities in the statement of cash flows.
•
Accounting for forfeitures - We have made an entity-wide accounting policy election to continue to estimate forfeitures and adjust the estimate when it is likely to change. This election does not change our current policy and, accordingly, there is no impact on our consolidated statements of financial position, results of operations or cash flows.
•
Cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation - We adopted this change retrospectively. The activity is now required to be presented as financing activities in the statement of cash flows. For the three-month period ended March 31, 2016, we have reclassified $0.3 million from operating activities to financing activities.

19


In March 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Effective no later than January 1, 2019, we will adopt this accounting standards update that (a) requires lessees to recognize a right to use asset and a lease liability for virtually all leases, and (b) updates previous accounting standards for lessors to align certain requirements with the updates to lessee accounting standards and the revenue recognition accounting standards. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, although early adoption is permitted. This update establishes a new lease accounting model for lessees. Upon adoption, a modified retrospective approach is required for leases that exist, or are entered into, after the beginning of the earliest comparative period presented. Under the updated accounting standard, we have determined that our drilling contracts may contain a lease component; therefore, our adoption of the standard could require that we separately recognize revenues associated with the lease and service components. Given the interaction between this update and the accounting standards update to revenue contracts with customers, we expect to adopt the updates concurrently, effective January 1, 2018, and we expect to apply the modified retrospective approach. Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract-specific facts and circumstances, and such effect could introduce variability to the timing of our revenue recognition relative to current accounting standards. We are evaluating the requirements to determine the effect such requirements may have on our consolidated statements of financial position, results of operations, cash flows and on the disclosures contained in our notes to the consolidated financial statements upon the adoption of ASU 2016-02. Depending on the results of the evaluation our ultimate conclusions may vary.    
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. ASU 2014-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. At this time we expect to apply the modified retrospective approach; however, we are evaluating the requirements to determine the effect such requirements may have on our consolidated statements of financial position, results of operations, cash flows and on the disclosures contained in our notes to the consolidated financial statements upon the adoption of ASU 2014-09. Depending on the results of the evaluation our ultimate conclusions may vary.            
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The objective of this update is to provide guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and provide footnote disclosures. The amendments in this update become effective for public companies for the annual period after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. Effective January 1, 2017, we adopted ASU 2014-15 prospectively and it did not have a material impact on our consolidated statements of financial position, results of operations, cash flows, and on the disclosures contained in our notes to the consolidated financial statements.

20


Note 13 - Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements
Set forth on the following pages are the consolidating condensed financial statements of Parker Drilling. The 2015 Secured Credit Agreement and Senior Notes are fully and unconditionally guaranteed by substantially all of our direct and indirect domestic subsidiaries, other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, subject to the following customary release provisions:
•
in connection with any sale or other disposition of all or substantially all of the assets of that guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) a subsidiary of the Company;
•
in connection with any sale of such amount of capital stock as would result in such guarantor no longer being a subsidiary to a person that is not (either before or after giving effect to such transaction) a subsidiary of the Company;
•
if the Company designates any restricted subsidiary that is a guarantor as an unrestricted subsidiary;
•
if the guarantee by a guarantor of all other indebtedness of the Company or any other guarantor is released, terminated or discharged, except by, or as a result of, payment under such guarantee; or
•
upon legal defeasance or covenant defeasance (satisfaction and discharge of the indenture).
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. Separate financial statements for each guarantor company are not provided as the Company complies with Rule 3-10(f) of Regulation S-X. All guarantor subsidiaries are owned 100 percent by the parent company.
We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016, respectively. The consolidating condensed financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.


21


  
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
March 31, 2017
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
96,539

 
$
13,035

 
$
40,114

 
$
—

 
$
149,688

Accounts and notes receivable, net
—

 
19,442

 
98,672

 
—

 
118,114

Rig materials and supplies
—

 
(4,957
)
 
40,010

 
—

 
35,053

Other current assets
(68,300
)
 
59,147

 
32,245

 
—

 
23,092

Total current assets
28,239

 
86,667

 
211,041

 
—

 
325,947

Property, plant and equipment, net
(19
)
 
458,497

 
218,403

 
—

 
676,881

Goodwill
—

 
6,708

 
—

 
—

 
6,708

Intangible assets, net
—

 
8,857

 
343

 
—

 
9,200

Investment in subsidiaries and intercompany advances
2,963,194

 
2,943,361

 
3,728,142

 
(9,634,697
)
 
—

Other noncurrent assets
(248,095
)
 
299,529

 
540,245

 
(480,860
)
 
110,819

Total assets
$
2,743,319

 
$
3,803,619

 
$
4,698,174

 
$
(10,115,557
)
 
$
1,129,555

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
(44,947
)
 
$
167,258

 
$
583,421

 
$
(617,533
)
 
$
88,199

Accrued income taxes
(5,783
)
 
8,631

 
2,662

 
—

 
5,510

Total current liabilities
(50,730
)
 
175,889

 
586,083

 
(617,533
)
 
93,709

Long-term debt, net
576,728

 
—

 
—

 
—

 
576,728

Other long-term liabilities
2,867

 
6,145

 
3,816

 
—

 
12,828

Deferred tax liability
(8
)
 
75,920

 
(3,063
)
 
—

 
72,849

Intercompany payables
1,837,985

 
1,445,569

 
2,211,999

 
(5,495,553
)
 
—

Total liabilities
2,366,842

 
1,703,523

 
2,798,835

 
(6,113,086
)
 
756,114

Total equity
376,477

 
2,100,096

 
1,899,339

 
(4,002,471
)
 
373,441

Total liabilities and stockholders’ equity
$
2,743,319

 
$
3,803,619

 
$
4,698,174

 
$
(10,115,557
)
 
$
1,129,555


22



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
 
 
December 31, 2016
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
65,000

 
$
14,365

 
$
40,326

 
$
—

 
$
119,691

Accounts and notes receivable, net
—

 
15,749

 
97,482

 
—

 
113,231

Rig materials and supplies
—

 
(5,369
)
 
37,723

 
—

 
32,354

Other current assets
(50,296
)
 
41,304

 
30,034

 
—

 
21,042

Total current assets
14,704

 
66,049

 
205,565

 
—

 
286,318

Property, plant and equipment, net
(19
)
 
469,927

 
223,531

 
—

 
693,439

Goodwill
—

 
6,708

 
—

 
—

 
6,708

Intangible assets, net
—

 
9,434

 
494

 
—

 
9,928

Investment in subsidiaries and intercompany advances
2,979,413

 
2,932,375

 
3,676,402

 
(9,588,190
)
 
—

Other noncurrent assets
(253,679
)
 
301,771

 
539,877

 
(480,811
)
 
107,158

Total assets
$
2,740,419

 
$
3,786,264

 
$
4,645,869

 
$
(10,069,001
)
 
$
1,103,551

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
(10,080
)
 
$
149,210

 
$
577,188

 
$
(617,477
)
 
$
98,841

Accrued income taxes
—

 
1,576

 
2,504

 
—

 
4,080

Total current liabilities
(10,080
)
 
150,786

 
579,692

 
(617,477
)
 
102,921

Long-term debt, net
576,326

 
—

 
—

 
—

 
576,326

Other long-term liabilities
2,867

 
9,338

 
3,631

 
—

 
15,836

Deferred tax liability
(28
)
 
73,039

 
(3,678
)
 
—

 
69,333

Intercompany payables
1,828,317

 
1,437,417

 
2,161,864

 
(5,427,598
)
 
—

Total liabilities
2,397,402

 
1,670,580

 
2,741,509

 
(6,045,075
)
 
764,416

Total equity
343,017

 
2,115,684

 
1,904,360

 
(4,023,926
)
 
339,135

Total liabilities and stockholders’ equity
$
2,740,419

 
$
3,786,264

 
$
4,645,869

 
$
(10,069,001
)
 
$
1,103,551



23



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)

 
Three Months Ended March 31, 2017
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues
$
—

 
$
27,893

 
$
88,237

 
$
(17,859
)
 
$
98,271

Operating expenses
—

 
20,950

 
82,723

 
(17,859
)
 
85,814

Depreciation and amortization
—

 
21,188

 
11,014

 
—

 
32,202

Total operating gross margin (loss)
—

 
(14,245
)
 
(5,500
)
 
—

 
(19,745
)
General and administration expense (1)
(78
)
 
(6,870
)
 
(92
)
 
—

 
(7,040
)
Gain (loss) on disposition of assets, net
—

 
(216
)
 
(136
)
 
—

 
(352
)
Total operating income (loss)
(78
)
 
(21,331
)
 
(5,728
)
 
—

 
(27,137
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(11,669
)
 
(45
)
 
(1,942
)
 
2,786

 
(10,870
)
Interest income
149

 
179

 
2,468

 
(2,786
)
 
10

Other
—

 
32

 
498

 
—

 
530

Equity in net earnings of subsidiaries
(21,780
)
 
—

 
—

 
21,780

 
—

Total other income (expense)
(33,300
)
 
166

 
1,024

 
21,780

 
(10,330
)
Income (loss) before income taxes
(33,378
)
 
(21,165
)
 
(4,704
)
 
21,780

 
(37,467
)
Total income tax expense (benefit)
6,430

 
(5,577
)
 
1,489

 
—

 
2,342

Net income (loss)
$
(39,808
)
 
$
(15,588
)
 
$
(6,193
)
 
$
21,780

 
$
(39,809
)
Mandatory convertible preferred stock dividend
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Net income (loss) available to common stockholders
$
(39,808
)
 
$
(15,588
)
 
$
(6,193
)
 
$
21,780

 
$
(39,809
)

(1) General and administration expenses for field operations are included in operating expenses.

24



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended March 31, 2016
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues
$
—

 
$
47,382

 
$
106,477

 
$
(23,356
)
 
$
130,503

Operating expenses
—

 
32,835

 
98,638

 
(23,356
)
 
108,117

Depreciation and amortization
—

 
23,125

 
12,689

 
—

 
35,814

Total operating gross margin (loss)
—

 
(8,578
)
 
(4,850
)
 
—

 
(13,428
)
General and administration expense (1)
(87
)
 
(9,613
)
 
(81
)
 
—

 
(9,781
)
Gain (loss) on disposition of assets, net
—

 
(56
)
 
(4
)
 
—

 
(60
)
Total operating income (loss)
(87
)
 
(18,247
)
 
(4,935
)
 
—

 
(23,269
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(11,857
)
 
(437
)
 
(2,859
)
 
3,591

 
(11,562
)
Interest income
204

 
179

 
3,215

 
(3,591
)
 
7

Other
—

 
485

 
2,000

 
—

 
2,485

Equity in net earnings of subsidiaries
(16,225
)
 
—

 
—

 
16,225

 
—

Total other income (expense)
(27,878
)
 
227

 
2,356

 
16,225

 
(9,070
)
Income (loss) before income taxes
(27,965
)
 
(18,020
)
 
(2,579
)
 
16,225

 
(32,339
)
Income tax expense (benefit)
67,870

 
(3,707
)
 
(667
)
 
—

 
63,496

Net income (loss)
(95,835
)
 
(14,313
)
 
(1,912
)
 
16,225

 
(95,835
)

(1) General and administration expenses for field operations are included in operating expenses.
























25



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)

 
Three Months Ended March 31, 2017
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(39,808
)
 
$
(15,588
)
 
$
(6,193
)
 
$
21,780

 
$
(39,809
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Currency translation difference on related borrowings
—

 
—

 
83

 
—

 
83

Currency translation difference on foreign currency net investments
—

 
—

 
763

 
—

 
763

Total other comprehensive income (loss), net of tax:
—

 
—

 
846

 
—

 
846

Comprehensive income (loss)
$
(39,808
)
 
$
(15,588
)
 
$
(5,347
)
 
$
21,780

 
$
(38,963
)



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)

 
Three Months Ended March 31, 2016
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(95,835
)
 
$
(14,313
)
 
$
(1,912
)
 
$
16,225

 
$
(95,835
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Currency translation difference on related borrowings
—

 
—

 
502

 
—

 
502

Currency translation difference on foreign currency net investments
—

 
—

 
(1,538
)
 
—

 
(1,538
)
Total other comprehensive income (loss), net of tax:
—

 
—

 
(1,036
)
 
—

 
(1,036
)
Comprehensive income (loss)
(95,835
)
 
(14,313
)
 
(2,948
)
 
16,225

 
(96,871
)











26



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
                    
 
Three Months Ended March 31, 2017
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(39,808
)
 
$
(15,588
)
 
$
(6,193
)
 
$
21,780

 
$
(39,809
)
Adjustments to reconcile net income (loss):
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
21,188

 
11,014

 
—

 
32,202

(Gain) loss on disposition of assets
—

 
216

 
136

 
—

 
352

Deferred income tax expense (benefit)
(5,641
)
 
5,165

 
(166
)
 
—

 
(642
)
Excess tax benefit from stock-based compensation
—

 
—

 
—

 
—

 
—

Expenses not requiring cash
1,781

 
91

 
278

 
—

 
2,150

Equity in net earnings of subsidiaries
21,780

 
—

 
—

 
(21,780
)
 
—

Change in assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts and notes receivable
—

 
(3,668
)
 
(1,206
)
 
—

 
(4,874
)
Other assets
17,984

 
(18,296
)
 
(2,380
)
 
—

 
(2,692
)
Accounts payable and accrued liabilities
(34,867
)
 
15,591

 
3,339

 
—

 
(15,937
)
Accrued income taxes
(5,783
)
 
7,055

 
393

 
—

 
1,665

Net cash provided by (used in) operating activities
(44,554
)
 
11,754

 
5,215

 
—

 
(27,585
)
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(10,994
)
 
(3,457
)
 
—

 
(14,451
)
Proceeds from the sale of assets
—

 
—

 
46

 
—

 
46

Net cash provided by (used in) investing activities
—

 
(10,994
)
 
(3,411
)
 
—

 
(14,405
)
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from the issuance of common stock
25,200

 
—

 
—

 
—

 
25,200

Proceeds from the issuance of mandatory convertible preferred stock
50,000

 
—

 
—

 
—

 
50,000

Payment of equity issuance costs
(2,861
)
 
—

 
—

 
—

 
(2,861
)
Shares surrendered in lieu of tax
(352
)
 
—

 
—

 
—

 
(352
)
Intercompany advances, net
4,106

 
(2,090
)
 
(2,016
)
 
—

 
—

Net cash provided by (used in) financing activities
76,093

 
(2,090
)
 
(2,016
)
 
—

 
71,987

 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
31,539

 
(1,330
)
 
(212
)
 
—

 
29,997

Cash and cash equivalents at beginning of year
65,000

 
14,365

 
40,326

 
—

 
119,691

Cash and cash equivalents at end of year
$
96,539

 
$
13,035

 
$
40,114

 
$
—

 
$
149,688




27



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
 
Three Months Ended March 31, 2016
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(95,835
)
 
$
(14,313
)
 
$
(1,912
)
 
$
16,225

 
$
(95,835
)
Adjustments to reconcile net income (loss)
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
23,125

 
12,689

 
—

 
35,814

Accretion of contingent consideration
—

 
419

 
—

 
—

 
419

(Gain) loss on disposition of assets
—

 
56

 
4

 
—

 
60

Deferred income tax expense (benefit)
57,677

 
5,185

 
549

 
—

 
63,411

Excess tax benefit from stock-based compensation
(753
)
 
—

 
—

 
—

 
(753
)
Expenses not requiring cash
2,057

 
33

 
(2,199
)
 
—

 
(109
)
Equity in net earnings of subsidiaries
16,225

 
—

 
—

 
(16,225
)
 
—

Change in assets and liabilities:
 
 
 
 
 
 
 
 
 
Accounts and notes receivable
—

 
(6,637
)
 
6,256

 
—

 
(381
)
Other assets
(37,191
)
 
33,904

 
2,983

 
—

 
(304
)
Accounts payable and accrued liabilities
(9,521
)
 
(799
)
 
(4,117
)
 
—

 
(14,437
)
Accrued income taxes
10,680

 
(8,905
)
 
(5,375
)
 
—

 
(3,600
)
Net cash provided by (used in) operating activities
(56,661
)
 
32,068

 
8,878

 
—

 
(15,715
)
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(3,521
)
 
(4,368
)
 
—

 
(7,889
)
Proceeds from the sale of assets
—

 
28

 
26

 
—

 
54

Net cash provided by (used in) investing activities
—

 
(3,493
)
 
(4,342
)
 
—

 
(7,835
)
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Payment of contingent consideration
—

 
(2,000
)
 
—

 
—

 
(2,000
)
Shares surrendered in lieu of tax
(317
)
 
—

 
—

 
—

 
(317
)
Intercompany advances, net
28,815

 
(27,187
)
 
(1,628
)
 
—

 
—

Net cash provided by (used in) financing activities
28,498

 
(29,187
)
 
(1,628
)
 
—

 
(2,317
)
 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
(28,163
)
 
(612
)
 
2,908

 
—

 
(25,867
)
Cash and cash equivalents at beginning of year
73,985

 
13,854

 
46,455

 
—

 
134,294

Cash and cash equivalents at end of year
$
45,822

 
$
13,242

 
$
49,363

 
$
—

 
$
108,427




28


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis should be read in conjunction with Item 1. Financial Statements of this quarterly report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Form 10-K).
Executive Summary
The oil and natural gas industry is highly cyclical. Activity levels are driven by traditional energy industry activity indicators, which include current and expected commodity prices, drilling rig counts, footage drilled, well counts, and our customers’ spending levels allocated to exploratory and development drilling.
Historical market indicators are listed below:
 
 
Three Months Ended March 31,
 
 
 
 
 
2017
 
2016
 
% Change
 
Worldwide Rig Count (1)
 
 
 
 
 
 
 
U.S. (land and offshore)
 
739

 
555

 
33
 %
 
International (2)
 
939

 
1,016

 
(8
)%
 
Commodity Prices (3)
 
 
 
 
 

 
Crude Oil (United Kingdom Brent)
 
$
54.57

 
35.21

 
55
 %
 
Crude Oil (West Texas Intermediate)
 
$
51.78

 
33.63

 
54
 %
 
Natural Gas (Henry Hub)
 
$
3.06

 
1.98

 
55
 %
 
(1) Estimate of drilling activity measured by the average active rig count for the periods indicated - Source: Baker Hughes Incorporated Rig Count.
(2) Excludes Canadian Rig Count.
(3) Average daily commodity prices for the periods indicated based on NYMEX front-month composite energy prices.
Financial Results
Our revenues for the 2017 first quarter decreased 24.7 percent to $98.3 million from $130.5 for the 2016 first quarter. Operating gross margin excluding depreciation and amortization decreased 44.2 percent to $12.5 million from $22.4 million. Although our overall revenues and operating gross margin excluding depreciation and amortization came in lower for the 2017 first quarter when compared with the 2016 first quarter, our 2017 first quarter results were in line with our expectations and we are seeing positive indicators that market improvement is beginning to take hold.
The largest decline in both our revenues and gross margin was in our International & Alaska Drilling segment where revenues declined 28.7 percent and operating gross margin excluding depreciation and amortization declined 41.8 percent, due primarily to a decline in utilization for Company-owned rigs and a reduction in project services activities. For our U.S. (Lower 48) Drilling segment, while revenues declined to $1.2 million from $2.1 million, primarily due to a decrease in utilization, our operating gross margin excluding depreciation and amortization showed improvement as we continued to benefit from cost savings initiatives. In our U.S. Rental Tools segment, revenues decreased 10.6 percent and operating gross margin excluding depreciation and amortization decreased 9.3 percent. The declines were largely driven by a reduction in customer activity and pricing pressures impacting offshore rentals; however, we did see an increase in revenues from U.S. land activity which partially offset the decline in offshore rentals, and our operating gross margin excluding depreciation and amortization benefited from cost reduction efforts. Revenues for our International Rental Tools segment declined 20.9 percent as both activity and pricing were down for onshore and offshore rentals. The declines in activity and pricing also drove a decrease in the segment’s operating gross margin excluding depreciation and amortization to a loss of $2.4 million from a loss of $0.6 million.
Outlook
We are encouraged by the positive direction of our business and the positive indicators we are seeing across all our business lines. While the pace of recovery varies across our business and uncertainty still exists, we believe we are through the downturn’s trough and that our financial performance will improve as we move into the second quarter and beyond.
    

29


In our U.S. (Lower 48) Drilling segment, we expect to see increased utilization in the near term as we mobilized one barge rig during the quarter and began operating two additional barge rigs in April. We are also in ongoing discussions to place up to two additional barge rigs into service by the middle of this year. For our International and Alaska segment, we believe that activity is at, or close to the bottom. We continue to see opportunities for drilling projects with anticipated start-ups in late 2017 and into 2018.
In our U.S. Rental Tools segment, we expect further activity increases as the U.S. land rig count increases and longer lateral wells get drilled which require more joints of pipe. In our International Rental Tools segment, the startup of several new well construction contracts in the second quarter should positively impact activity going forward.
In February of 2017, we completed $75.2 million concurrent common stock and mandatory convertible preferred stock equity offerings that position us to prepare for improved market conditions and better capitalize on growth opportunities, including potential acquisitions. We ended the first quarter with $242.5 million in liquidity, up from $210.0 million at the end of the 2016, including $149.7 million in cash and $92.8 million available on our undrawn revolver.
Results of Operations
Our business is comprised of two business lines: (1) Drilling Services and (2) Rental Tools Services. We report our Drilling Services business as two reportable segments: (1) U.S. (Lower 48) Drilling and (2) International & Alaska Drilling. We report our Rental Tools Services business as two reportable segments: (1) U.S. Rental Tools and (2) International Rental Tools. We eliminate inter-segment revenues and expenses.
We analyze financial results for each of our reportable segments. The reportable segments presented are consistent with our reportable segments discussed in Note 6 to our consolidated condensed financial statements. We monitor our reporting segments based on several criteria, including operating gross margin and operating gross margin excluding depreciation and amortization. Operating gross margin excluding depreciation and amortization is computed as revenues less direct operating expenses, and excludes depreciation and amortization expense, where applicable. Operating gross margin percentages are computed as operating gross margin as a percent of revenues. The operating gross margin excluding depreciation and amortization amounts and percentages should not be used as a substitute for those amounts reported under accounting policies generally accepted in the United States (U.S. GAAP), but should be viewed in addition to the Company’s reported results prepared in accordance with U.S. GAAP. Management believes this information provides valuable insight into the information management considers important in managing the business.
Three Months Ended March 31, 2017 Compared with Three Months Ended March 31, 2016
Revenues decreased $32.2 million, or 24.7 percent, to $98.3 million for the three months ended March 31, 2017 as compared with revenues of $130.5 million for the three months ended March 31, 2016. Operating gross margin decreased $6.3 million to a loss of $19.7 million for the three months ended March 31, 2017 as compared with a loss of $13.4 million for the three months ended March 31, 2016.
    The following is an analysis of our operating results for the comparable periods by reportable segment:

30


 
Three Months Ended March 31,
Dollars in Thousands
2017
 
2016
 
 
Revenues:
 
Drilling Services:
 
 
 
 
 
 
 
U.S. (Lower 48) Drilling
$
1,215

 
1
 %
 
$
2,085

 
2
 %
International & Alaska Drilling
63,213

 
64
 %
 
88,619

 
68
 %
Total Drilling Services
64,428

 
65
 %
 
90,704

 
70
 %
Rental Tools Services:
 
 
 
 
 
 
 
U.S. Rental Tools
20,231

 
21
 %
 
22,555

 
17
 %
International Rental Tools
13,612

 
14
 %
 
17,244

 
13
 %
Total Rental Tools Services
33,843

 
35
 %
 
39,799

 
30
 %
Total revenues
98,271

 
100
 %
 
130,503

 
100
 %
Operating gross margin (loss) excluding depreciation and amortization:
 
 
 
 
 
 
 
Drilling Services:
 
 
 
 
 
 
 
U.S. (Lower 48) Drilling
(2,985
)
 
(246
)%
 
(3,337
)
 
(160
)%
International & Alaska Drilling
11,029

 
17
 %
 
18,894

 
21
 %
Total Drilling Services
8,044

 
12
 %
 
15,557

 
17
 %
Rental Tools Services:
 
 
 
 
 
 
 
U.S. Rental Tools
6,776

 
33
 %
 
7,453

 
33
 %
International Rental Tools
(2,363
)
 
(17
)%
 
(624
)
 
(4
)%
Total Rental Tools Services
4,413

 
13
 %
 
6,829

 
17
 %
Total operating gross margin (loss) excluding depreciation and amortization
12,457

 
13
 %
 
22,386

 
17
 %
Depreciation and amortization
(32,202
)
 
 
 
(35,814
)
 
 
Total operating gross margin (loss)
(19,745
)
 
 
 
(13,428
)
 
 
General and administrative expense
(7,040
)
 
 
 
(9,781
)
 
 
Gain (loss) on disposition of assets, net
(352
)
 
 
 
(60
)
 
 
Total operating income (loss)
$
(27,137
)
 
 
 
$
(23,269
)
 
 
Operating gross margin amounts are reconciled to our most comparable U.S. GAAP measure as follows:
Dollars in Thousands
U.S. (Lower 48)
Drilling
 
International & Alaska Drilling
 
U.S. Rental Tools
 
International Rental
Tools
 
Total
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
Operating gross margin (loss) (1)
$
(7,226
)
 
$
(1,785
)
 
$
(3,773
)
 
$
(6,961
)
 
$
(19,745
)
Depreciation and amortization
4,241

 
12,814

 
10,549

 
4,598

 
32,202

Operating gross margin (loss) excluding depreciation and amortization
$
(2,985
)
 
$
11,029

 
$
6,776

 
$
(2,363
)
 
$
12,457

Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
Operating gross margin (loss) (1)
$
(8,558
)
 
$
5,077

 
$
(3,949
)
 
$
(5,998
)
 
$
(13,428
)
Depreciation and amortization
5,221

 
13,817

 
11,402

 
5,374

 
35,814

Operating gross margin (loss) excluding depreciation and amortization
$
(3,337
)
 
$
18,894

 
$
7,453

 
$
(624
)
 
$
22,386

(1)
Operating gross margin (loss) is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

31


The following table presents our average utilization rates and rigs available for service for the three months ended March 31, 2017 and 2016, respectively:
 
Three Months Ended March 31,
 
2017
 
2016
U.S. (Lower 48) Drilling
 
 
 
Rigs available for service (1)
13.0

 
13.0

Utilization rate of rigs available for service (2)
4
%
 
7
%
International & Alaska Drilling
 
 
 
Eastern Hemisphere
 
 
 
Rigs available for service (1)
13.0

 
13.0

Utilization rate of rigs available for service (2)
31
%
 
48
%
Latin America Region
 
 
 
Rigs available for service (1)
7.0

 
7.0

Utilization rate of rigs available for service (2)
14
%
 
29
%
Alaska
 
 
 
Rigs available for service (1)
2.0

 
2.0

Utilization rate of rigs available for service (2)
100
%
 
100
%
Total International & Alaska Drilling
 
 
 
Rigs available for service (1)
22.0

 
22.0

Utilization rate of rigs available for service (2)
32
%
 
46
%
(1)
The number of rigs available for service is determined by calculating the number of days each rig was in our fleet and was under contract or available for contract. For example, a rig under contract or available for contract for six months of a year is 0.5 rigs available for service during such year. Our method of computation of rigs available for service may not be comparable to other similarly titled measures of other companies.
(2)
Rig utilization rates are based on a weighted average basis assuming total days availability for all rigs available for service. Rigs acquired or disposed of are treated as added to or removed from the rig fleet as of the date of acquisition or disposal. Rigs that are in operation or fully or partially staffed and on a revenue-producing standby status are considered to be utilized. Rigs under contract that generate revenues during moves between locations or during mobilization or demobilization are also considered to be utilized. Our method of computation of rig utilization may not be comparable to other similarly titled measures of other companies.
Drilling Services Business
U.S. (Lower 48) Drilling
U.S. (Lower 48) Drilling segment revenues decreased $0.9 million, or 42.9 percent, to $1.2 million for the first quarter of 2017 compared with revenues of $2.1 million for the first quarter of 2016. The decrease was primarily driven by reduced utilization. Utilization declined to 4.0 percent for the quarter ended March 31, 2017 from 7.0 percent for the quarter ended March 31, 2016.
U.S. (Lower 48) Drilling segment operating gross margin excluding depreciation and amortization increased $0.3 million to a loss of $3.0 million for the first quarter of 2017 compared with a loss of $3.3 million for the first quarter of 2016. The increase was primarily due to a reduction in operating cost.
International & Alaska Drilling
International & Alaska Drilling segment revenues decreased $25.4 million, or 28.7 percent, to $63.2 million for the first quarter of 2017 compared with $88.6 million for the first quarter of 2016.
The decrease in revenues was primarily due to the following:
•
a decrease of $13.2 million in revenues related to our project services activities;

32


•
a decrease of $6.0 million, excluding revenue from reimbursable costs (“reimbursable revenues”), resulting from decreased utilization for Company-owned rigs. Utilization for the segment decreased to 32.0 percent for the quarter ended March 31, 2017 from 46.0 percent for the quarter ended March 31, 2016. The decline in utilization was primarily due to the decline in oil prices which led to reduced customer activity;
•
a decrease of $3.6 million in reimbursable revenue, which decreased revenues but had a minimal impact on operating margins; and
•
a decrease of $3.4 million driven by a decline in average revenue per day primarily resulting from certain Company owned rigs being in standby mode during the first quarter of 2017 compared with operating mode during the first quarter of 2016.
The decrease in revenues was partially offset by an increase of $3.8 million primarily driven by O&M activities associated with the Hibernia platform located off the Atlantic Coast of Canada.
International & Alaska Drilling segment operating gross margin excluding depreciation and amortization decreased $7.9 million, or 41.8 percent, to $11.0 million for the first quarter of 2017 compared with $18.9 million for the first quarter of 2016. The decrease in operating gross margin excluding depreciation and amortization was primarily due to the decrease in our project services activities discussed above as well as the impact of decreased utilization for Company-owned rigs.
Rental Tools Services Business
U.S. Rental Tools
U.S. Rental Tools segment revenues decreased $2.4 million, or 10.6 percent, to $20.2 million for the first quarter of 2017 compared with $22.6 million for the first quarter of 2016. The decrease was primarily driven by reduction in customer activity and pricing pressures impacting offshore GOM rentals, partially offset by an increase in U.S. land rental activity.
U.S. Rental Tools segment operating gross margin excluding depreciation and amortization decreased $0.7 million, or 9.3 percent, to $6.8 million in the first quarter of 2017 compared with $7.5 million for the first quarter of 2016. The decrease was due to the decline in revenues discussed above, partially offset by lower operating costs resulting from cost reduction efforts.
International Rental Tools
International Rental Tools segment revenues decreased $3.6 million, or 20.9 percent, to $13.6 million for the first quarter of 2017 compared with $17.2 million for the first quarter of 2016. The decrease was primarily attributable to reduced customer activity and price erosion impacting both onshore and offshore rental revenue.
International Rental Tools segment operating gross margin excluding depreciation and amortization decreased $1.8 million, or 300.0 percent, to a loss of $2.4 million in the first quarter of 2017 compared with a loss of $0.6 million for the first quarter of 2016. The decrease was due to the declines in customer activity discussed above, partially offset by lower operating costs resulting from cost reduction efforts.
Other Financial Data
General and administrative expense
General and administration expense decreased $2.8 million to $7.0 million for the first quarter of 2017, compared with $9.8 million for the first quarter of 2016 primarily due to a reduction in incentive compensation and reduced overhead costs resulting from cost savings initiatives.
Gain (loss) on disposition of assets
Net losses recognized on asset dispositions were $0.4 million for the first quarter of 2017 compared with $0.1 million for the first quarter of 2016. We periodically sell equipment deemed to be excess, obsolete, or not currently required for operations.
Interest income and expense
Interest expense decreased $0.7 million to $10.9 million for the first quarter of 2017 compared with $11.6 million for the first quarter of 2016. This decrease in interest expense is primarily a result of the accretion of the contingent consideration related to the acquisition of a business in April, 2015, which was fully paid prior to the end of the 2016 second quarter. Interest income during each of the 2017 and 2016 first quarters was nominal.

33


Other income and expense
Other income was $0.5 million and $2.5 million for the first quarters of 2017 and 2016, respectively. Other income for the first quarters of 2017 and 2016 included the impact of foreign currency fluctuations. Additionally, other income for the first quarter of 2016 included a reclassification of $1.9 million of realized foreign currency translation gains from accumulated other comprehensive income.
Income tax expense (benefit)
During the first quarter of 2017, we had income tax expense of $2.3 million compared with income tax expense of $63.5 million during the first quarter of 2016. Despite the pre-tax loss for the first quarter of 2017, we recognized income tax expense due to the jurisdictional mix of income and loss during the quarter, along with our continued inability to recognize the benefits associated with certain losses as a result of valuation allowances. During the 2016 first quarter, we recognized income tax expense as a result of recording a valuation allowance of $73.1 million against our U.S. domestic deferred tax assets, which primarily consist of U.S. federal net operating losses.
Backlog
Backlog is our estimate of the dollar amount of revenues we expect to realize in the future as a result of executing awarded drilling contracts. The Company’s backlog of firm orders was approximately $323 million at March 31, 2017 and $228 million at March 31, 2016, and is primarily attributable to the International & Alaska segment of our Drilling Services business. We estimate that, as of March 31, 2017, 38 percent of our backlog will be recognized as revenues within the fiscal year.
The amount of actual revenues earned and the actual periods during which revenues are earned could be different from amounts disclosed in our backlog calculations due to a lack of predictability of various factors, including unscheduled repairs, maintenance requirements, weather delays, contract terminations or renegotiations, new contracts and other factors. See “Our backlog of contracted revenue may not be fully realized and may reduce significantly in the future, which may have a material adverse effect on our financial position, results of operations or cash flows” in Item 1A. Risk Factors of our 2016 Form 10-K. 
LIQUIDITY AND CAPITAL RESOURCES
We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of expansion plans, debt service requirements, and other operational cash needs. To meet our short term liquidity requirements we primarily rely on our cash from operations. We also have access to cash through the Revolver, subject to our compliance with the covenants contained in the 2015 Secured Credit Agreement. We expect that these sources of liquidity will be sufficient to provide us the ability to fund our current operations and required capital expenditures. We may need to fund expansion capital expenditures, acquisitions, debt principal payments, or pursuits of business opportunities that support our strategy, through additional borrowings or the issuance of additional common stock or other forms of equity. We do not pay dividends on our common stock.
In February 2017, we issued 12,000,000 shares of common stock, par value $0.16 2/3 per share, at the public offering price of $2.10 per share and 500,000 shares of 7.25% Series A Mandatory Convertible Preferred Stock (Convertible Preferred Stock), par value $1.00 per share, with a liquidation preference of $100 per share, for total net proceeds of $72.3 million, after underwriting discount and offering expenses.
Dividends on our Convertible Preferred Stock will be payable on a cumulative basis when, as and if declared by our board of directors, or an authorized committee of our board of directors, at an annual rate of 7.25 percent of the liquidation preference of $100 per share. We may pay declared dividends in cash or, subject to certain limitations, in shares of our common stock, or in any combination of cash and shares of our common stock on March 31, June 30, September 30 and December 31 of each year, commencing on June 30, 2017 and ending on, and including, March 31, 2020.

We intend to use the net proceeds of the offerings for general corporate purposes, which may include, without limitation, working capital, capital expenditures, acquisitions or the repayment, redemption or refinancing of a portion of our indebtedness.

34


Liquidity
The following table provides a summary of our total liquidity:
 
March 31, 2017
Dollars in thousands
 
Cash and cash equivalents on hand (1)
$
149,688

Availability under Revolver (2)
92,834

Total liquidity
$
242,522

(1) As of March 31, 2017, approximately $39.4 million of the $149.7 million of cash and equivalents was held by our foreign subsidiaries.
(2) Availability under the undrawn $100 million Revolver was reduced by $7.2 million comprised of $5.8 million of letters of credit outstanding and $1.4 million of reduced availability due to our Senior Secured Leverage Ratio covenant. As of March 31, 2017, we were in compliance with all covenants contained in the 2015 Secured Credit Agreement.
The earnings of foreign subsidiaries as of March 31, 2017 were reinvested to fund our international operations.  If in the future we decide to repatriate earnings to the United States, the Company may be required to pay taxes on these amounts based on applicable United States tax law, which could reduce the liquidity of the Company at that time.
We do not have any unconsolidated special-purpose entities, off-balance sheet financing arrangements or guarantees of third-party financial obligations. As of March 31, 2017, we have no energy, commodity, or foreign currency derivative contracts.
Cash Flow Activity
As of March 31, 2017, we had cash and cash equivalents of $149.7 million, an increase of $30.0 million from cash and cash equivalents of $119.7 million at December 31, 2016. The following table provides a summary of our cash flow activity:
 
Three Months Ended March 31,
Dollars in thousands
2017
 
2016
Operating activities
$
(27,585
)
 
$
(15,715
)
Investing activities
(14,405
)
 
(7,835
)
Financing activities
71,987

 
(2,317
)
Net change in cash and cash equivalents
$
29,997

 
$
(25,867
)
Operating Activities
Cash flows from operating activities were a use of $27.6 million for the three months ended March 31, 2017 compared with a use of $15.7 million for the three months ended March 31, 2016. Cash flows from operating activities in each period were largely impacted by our earnings and changes in working capital. Changes in working capital were a use of cash of $21.8 million for the three months ended March 31, 2017 compared with a use of cash of $18.7 million for the three months ended March 31, 2016. In addition to the impact of earnings and working capital changes cash flows from operating activities in each period were impacted by non-cash charges such as depreciation expense, losses on asset sales, deferred tax expenses and benefits, stock-based awards activity, and amortization of debt issuance costs.
Historically, we have reinvested a substantial portion of our operating cash flows to enhance our fleet of drilling rigs and our rental tools equipment inventory. It is our long term intention to utilize our operating cash flows to fund maintenance and growth of our rental tool assets and drilling rigs; however, given the decline in demand in the oil and natural gas services market over the past few years, our short-term focus is to preserve liquidity by managing our costs and capital expenditures. While our 2017 first quarter results reflect the impact of the industry downturn, we are beginning to see recovery in the market that is expected to shift working capital into a use of cash and drive increased capital spending as we pursue attractive investment opportunities.
Investing Activities
Cash flows from investing activities were a use of $14.4 million for the three months ended March 31, 2017 compared with a use of $7.8 million for the three months ended March 31, 2016. Our primary use of cash during the three months ended March 31, 2017 and 2016 was $14.5 million and $7.9 million, respectively, for capital expenditures. Capital expenditures in each period were primarily for tubular and other products for our Rental Tools Services business and rig-related maintenance.

35


Financing Activities
Cash flows from financing activities were a source of $72.0 million for the three months ended March 31, 2017, primarily related to the issuances of common and Convertible Preferred Stock, which yielded combined proceeds of $72.3 million, net of underwriting discount and offering expenses. For the 2016 comparable period, cash flows from financing activities were a use of $2.3 million primarily due to payment of $2.0 million of the contingent consideration related to the acquisition of a business in April 2015.
Long-Term Debt Summary
Our principal amount of long-term debt, including current portion, was $576.7 million as of March 31, 2017 which consisted of:
•$360.0 million aggregate principal amount of 6.75% Notes; and
•$225.0 million aggregate principal amount of 7.50% Notes; less
•$8.3 million of unamortized debt issuance costs
6.75% Senior Notes, due July 2022
On January 22, 2014, we issued $360.0 million aggregate principal amount of 6.75% Senior Notes, due July 2022 (6.75% Notes) pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 6.75% Notes offering plus a $40.0 million term loan draw under the Amended and Restated Senior Secured Credit Agreement (2012 Secured Credit Agreement) and cash on hand were utilized to purchase $416.2 million aggregate principal amount of our outstanding 9.125% Senior Notes due 2018 pursuant to a tender and consent solicitation offer commenced on January 7, 2014.
The 6.75% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 6.75% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under the Second Amended and Restated Senior Secured Credit Agreement, as amended from time-to-time (2015 Secured Credit Agreement) and our 7.50% Senior Notes due August 2020 (7.50% Notes, and collectively with the 6.75% Notes, the Senior Notes). Interest on the 6.75% Notes is payable on January 15 and July 15 of each year, beginning July 15, 2014. Debt issuance costs related to the 6.75% Notes of approximately $7.6 million ($5.3 million net of amortization as of March 31, 2017) are being amortized over the term of the notes using the effective interest rate method.
At any time prior to January 15, 2017, we were able to redeem up to 35 percent of the aggregate principal amount of the 6.75% Notes at a redemption price of 106.75 percent of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings by us. We have not made any redemptions to date. On and after January 15, 2018, we may redeem all or a part of the 6.75% Notes upon appropriate notice, at a redemption price of 103.375 percent of the principal amount, and at redemption prices decreasing each year thereafter to par beginning January 15, 2020. If we experience certain changes in control, we must offer to repurchase the 6.75% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
The Indenture limits our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness, (v) create or incur liens, (vi) enter into sale and leaseback transactions, (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.
7.50% Senior Notes, due August 2020
On July 30, 2013, we issued $225.0 million aggregate principal amount of the 7.50% Notes pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Net proceeds from the 7.50% Notes offering were primarily used to repay the $125.0 million aggregate principal amount of a term loan used to initially finance the acquisition of ITS in April. 2013, to repay $45.0 million of term loan borrowings under the 2012 Secured Credit Agreement, and for general corporate purposes.
The 7.50% Notes are general unsecured obligations of the Company and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 7.50% Notes are jointly and severally guaranteed by all of our subsidiaries that guarantee indebtedness under the 2015 Secured Credit Agreement and the 6.75% Notes. Interest on the 7.50% Notes is payable on February 1 and August 1 of each year, beginning February 1, 2014. Debt issuance costs related to the 7.50% Notes of

36


approximately $5.6 million ($3.0 million, net of amortization as of March 31, 2017) are being amortized over the term of the notes using the effective interest rate method.
We may redeem all or a part of the 7.50% Notes upon appropriate notice, at redemption prices decreasing each year after August 1, 2016 to par beginning August 1, 2018. As of March 31, 2017, the redemption price is 103.75 percent and we have not made any redemptions to date. If we experience certain changes in control, we must offer to repurchase the 7.50% Notes at 101.0 percent of the aggregate principal amount, plus accrued and unpaid interest and additional interest, if any, to the date of repurchase.
The Indenture limits our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness, (v) create or incur liens, (vi) enter into sale and leaseback transactions, (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.
2015 Secured Credit Agreement
On January 26, 2015 we entered into the 2015 Secured Credit Agreement, which amended and restated the 2012 Secured Credit Agreement. The 2015 Secured Credit Agreement was originally comprised of a $200.0 million revolving credit facility (Revolver) set to mature on January 26, 2020. Four amendments to the 2015 Secured Credit Agreement have been executed, which have, among other things, reduced the size of the revolver to $100 million, suspended the Leverage Ratio, Consolidated Interest Coverage Ratio, Senior Secured Leverage Ratio, and Asset Coverage Ratio covenants during specific time periods, increased the Applicable Rate for certain higher levels of consolidated leverage to a maximum of 4.00 percent per annum for Eurodollar Rate loans and to a maximum of 3.00 percent per annum for Base Rate loans, established anti-hoarding language restricting our ability to retain more than $50 million in U.S. bank accounts when there are outstanding borrowings under the Revolver, and established a $75 million Junior Lien Debt capacity.
The maximum permitted Senior Secured Leverage Ratio was 2.80:1.00 for the fiscal quarter ending March 31, 2017, decreases to 2.20:1.00 in the second quarter of 2017, to 1.75:1.00 in the third quarter of 2017, and to 1.50:1.00 in the fourth quarter of 2017 and remains at 1.50:1.00 thereafter. The Asset Coverage Ratio, currently at 1.10:1.00, increases to 1.25: 1.00 in the fourth quarter of 2017 and remains at 1.25:1.00 thereafter. The Consolidated Interest Coverage Ratio covenant will be reinstated in the fourth quarter of 2017 with the ratio established at 1.00:1.00, which increases by 0.25 each subsequent quarter until reaching 2.00:1.00 in the fourth quarter of 2018, and remains at 2.00:1.00 thereafter. The Leverage Ratio covenant will be reinstated in the fourth quarter of 2018 with the ratio established at 4.25:1.00.
On February 21, 2017, we executed the fourth Amendment to the 2015 Secured Credit Agreement (the Fourth Amendment) which, among other things, permits the sale and issuance of certain equity interests of the Company, including the Convertible Preferred Stock, and permits the Company to pay dividends on the Convertible Preferred Stock, up to certain aggregate amounts specified therein. The debt issuance costs incurred relating to the fourth amendment were nominal. Debt issuance costs remaining as of March 31, 2017 were $1.1 million which are being amortized through January 2020, on a straight line basis.
Our obligations under the 2015 Secured Credit Agreement are guaranteed by substantially all of our direct and indirect domestic subsidiaries, other than immaterial subsidiaries and subsidiaries generating revenues primarily outside the United States, each of which has executed guaranty agreements, and are secured by first priority liens on our accounts receivable, specified rigs including barge rigs in the GOM and land rigs in Alaska, certain U.S.-based rental equipment of the Company and its subsidiary guarantors and the equity interests of certain of the Company’s subsidiaries. The 2015 Secured Credit Agreement contains customary affirmative and negative covenants, such as limitations on indebtedness , liens, restrictions on entry into certain affiliate transactions and payments (including payment of dividends) and maintenance of certain ratios and coverage tests. As of March 31, 2017, we were in compliance with all covenants contained in the 2015 Secured Credit Agreement though our ability to access the full $100 million of the Revolver was restricted to $92.8 million due to $5.8 million in letters of credit outstanding and $1.4 million related to a cap imposed by our Senior Secured Leverage Ratio covenant calculation.
Our Revolver is available for general corporate purposes and to support letters of credit. Interest on Revolver loans accrues at a Base Rate plus an Applicable Rate or LIBOR plus an Applicable Rate. Revolving loans are available subject to a quarterly asset coverage ratio calculation based on the Orderly Liquidation Value of certain specified rigs including barge rigs in the GOM and land rigs in Alaska, and certain U.S.-based rental equipment of the Company and its subsidiary guarantors and a percentage of eligible domestic accounts receivable. Letters of credit outstanding against the Revolver as of March 31, 2017 totaled $5.8 million. There were no amounts drawn on the Revolver as of March 31, 2017.    


37


FORWARD-LOOKING STATEMENTS
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 (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended, (the Exchange Act). All statements contained in this Form 10-Q, other than statements of historical facts, are forward-looking statements for purposes of these provisions. In some cases, you can identify these statements by forward-looking words 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 we make in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are relevant. Although we believe that our 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. 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 in these risk factors and elsewhere in this Form 10-Q could have a material adverse effect on our business, results of operations, financial condition and cash flows.
    

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the market risk faced by us from that reported in our 2016 Form 10-K. For more information on market risk, see Part II, Item 7A in our 2016 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of March 31, 2017, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



39


PART II. OTHER INFORMATION 
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 11, “Commitments and Contingencies,” in Item 1 of Part I of this quarterly report on Form 10-Q, which information is incorporated into this item by reference. 
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors of our 2016 Form 10-K. 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company currently has no active share repurchase programs.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.

40


Item 6. Exhibits
The following exhibits are filed or furnished as a part of this report:
Exhibit
Number
 
  
 
Description
 
 
 
 
 
3.1
 
—
 
Restated Certificate of Incorporation of Parker Drilling Company, as amended on May 16, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on November 9, 2007).
 
 
 
 
 
3.2
 
—
 
By-laws of Parker Drilling Company, as amended and restated as of March 9, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017).
 
 
 
 
 
3.3
 
—
 
Certificate of Designations of 7.25% Series A Mandatory Convertible Preferred Stock of Parker Drilling Company, dated February 27, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 27, 2017).
 
 
 
 
 
4.1
 
—
 
Form of Certificate for the 7.25% Series A Mandatory Convertible Preferred Stock (included as Exhibit A to Exhibit 3.3).
 
 
 
 
 
10.1
 
—
 
Fourth Amendment to the Second Amended and Restated Credit Agreement, dated February 21, 2017, among Parker Drilling Company, as Borrower, Bank of America, N.A., as Administrative Agent and L/C Issuer, Wells Fargo Bank, National Association, as Syndication Agent, Barclays Bank PLC, as Documentation Agent, and the other lenders and L/C issuers from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current report on Form 8-K filed on February 27, 2017).
 
 
 
 
 
12.1
 
—
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
 
 
 
31.1
 
—
 
Gary G. Rich, Chairman, President and Chief Executive Officer, Rule 13a-14(a)/15d-14(a) Certification.
 
 
 
 
 
31.2
 
—
 
Christopher T. Weber, Senior Vice President and Chief Financial Officer, Rule 13a-14(a)/15d-14(a) Certification.
 
 
 
 
 
32.1
 
—
 
Gary G. Rich, Chairman, President and Chief Executive Officer, Section 1350 Certification.
 
 
 
 
 
32.2
 
—
 
Christopher T. Weber, Senior Vice President and Chief Financial Officer, Section 1350 Certification.
 
 
 
 
 
101.INS
 
—
 
XBRL Instance Document.
 
 
 
 
 
101.SCH
 
—
 
XBRL Taxonomy Schema Document.
 
 
 
 
 
101.CAL
 
—
 
XBRL Calculation Linkbase Document.
 
 
 
 
 
101.LAB
 
—
 
XBRL Label Linkbase Document.
 
 
 
 
 
101.PRE
 
—
 
XBRL Presentation Linkbase Document.
 
 
 
 
 
101.DEF
 
—
 
XBRL Definition Linkbase Document.



41


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
 
 
 
 
 
Date:
May 4, 2017
By:
 
/s/ Gary G. Rich
 
 
 
 
Gary G. Rich
Chairman, President and Chief Executive Officer
 
 
 
 
 
 
 
By:
 
/s/ Christopher T. Weber
 
 
 
 
Christopher T. Weber
Senior Vice President and Chief Financial Officer


42


INDEX TO EXHIBITS
 
Exhibit
Number
 
  
 
Description
 
 
 
 
 
3.1
 
—
 
Restated Certificate of Incorporation of Parker Drilling Company, as amended on May 16, 2007 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on November 9, 2007).
 
 
 
 
 
3.2
 
—
 
By-laws of Parker Drilling Company, as amended and restated as of March 9, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 14, 2017).
 
 
 
 
 
3.3
 
—
 
Certificate of Designations of 7.25% Series A Mandatory Convertible Preferred Stock of Parker Drilling Company, dated February 27, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 27, 2017).
 
 
 
 
 
4.1
 
—
 
Form of Certificate for the 7.25% Series A Mandatory Convertible Preferred Stock (included as Exhibit A to Exhibit 3.3).
 
 
 
 
 
10.1
 
—
 
Fourth Amendment to the Second Amended and Restated Credit Agreement, dated February 21, 2017, among Parker Drilling Company, as Borrower, Bank of America, N.A., as Administrative Agent and L/C Issuer, Wells Fargo Bank, National Association, as Syndication Agent, Barclays Bank PLC, as Documentation Agent, and the other lenders and L/C issuers from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current report on Form 8-K filed on February 27, 2017).
 
 
 
 
 
12.1
 
—
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
 
 
 
31.1
 
—
 
Gary G. Rich, Chairman, President and Chief Executive Officer, Rule 13a-14(a)/15d-14(a) Certification.
 
 
 
 
 
31.2
 
—
 
Christopher T. Weber, Senior Vice President and Chief Financial Officer, Rule 13a-14(a)/15d-14(a) Certification.
 
 
 
 
 
32.1
 
—
 
Gary G. Rich, Chairman, President and Chief Executive Officer, Section 1350 Certification.
 
 
 
 
 
32.2
 
—
 
Christopher T. Weber, Senior Vice President and Chief Financial Officer, Section 1350 Certification.
 
 
 
 
 
101.INS
 
—
 
XBRL Instance Document.
 
 
 
 
 
101.SCH
 
—
 
XBRL Taxonomy Schema Document.
 
 
 
 
 
101.CAL
 
—
 
XBRL Calculation Linkbase Document.
 
 
 
 
 
101.LAB
 
—
 
XBRL Label Linkbase Document.
 
 
 
 
 
101.PRE
 
—
 
XBRL Presentation Linkbase Document.
 
 
 
 
 
101.DEF
 
—
 
XBRL Definition Linkbase Document.


43