UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended SEPTEMBER 30, 2007

OR

o		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.)

1401 Enclave Parkway, Suite 600, Houston, Texas 77077

(Address of principal executive offices) (Zip code)

(281) 406-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   þ         No   o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   þ         No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Exchange Act Rule 12b-2.

Large accelerated filer   þ         Accelerated filer   o         Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o         No   þ

As of October 31, 2007, 111,843,152 common shares were outstanding.

 

 

TABLE OF CONTENTS

		Page
Part I. Financial Information
Item 1. Financial Statements			3
Consolidated Condensed Balance Sheets (Unaudited) September 30, 2007 and December 31, 2006			3
Consolidated Condensed Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2007 and 2006			4
Consolidated Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2007 and 2006			5
Notes to the Unaudited Consolidated Condensed Financial Statements			6-21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			33
Part II. Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			33
Item 3. Defaults Upon Senior Securities			34
Item 4. Submission of Matters to a Vote of Security Holders			34
Item 5. Other Information			34
Item 6. Exhibits			35
Signatures			36
Officer Certifications
Restated Certificate of Incorporation, as amended
Certification of Chairman & CEO Pursuant to Section 302
Certification of VP & CFO Pursuant to Section 302
Certification of Chairman & CEO Pursuant to Section 906
Certification of VP & CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

See accompanying notes to the unaudited consolidated condensed financial statements.

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

3.		Earnings Per Share (“EPS”) (continued)
		Options to purchase 325,500 shares of common stock with exercise prices ranging from $10.81 to $12.19 per share were outstanding during the three and nine months ended September 30, 2007, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 2,187,000 shares of common stock with exercise prices ranging from $8.87 to $12.19 per share were outstanding during the three and nine months ended September 30, 2006, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.
4.		Business Segments — The primary services we provide are as follows: U.S. drilling, international drilling and rental tools. Information regarding our operations by industry segment for the three and nine months ended September 30, 2007 and 2006 is as follows:

5.		Disposition of Assets Asset dispositions in 2007 consist primarily of the sale of workover barge Rigs 9 and 26 for proceeds of approximately $20.5 million resulting in a recognized gain of $15.1 million. These two rigs were classified as assets held for sale as of December 31, 2006. In 2006, asset dispositions resulted in a gain of $6.9 million that included the sale of Nigerian Barge rigs 73 and 75 ($1.8 million), gains on insurance proceeds relating to assets damaged ($1.9 million) and other miscellaneous asset sales ($3.2 million).
6.		Accounting for Uncertainty in Income Taxes — In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This accounting statement prescribes financial statement recognition threshold and measurement criteria for tax positions taken or expected to be taken in tax returns.
		In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This accounting statement prescribes financial statement recognition threshold and measurement criteria for tax positions taken or expected to be taken in tax returns.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

6.		Accounting for Uncertainty in Income Taxes (continued)
		The Company adopted FIN 48 effective January 1, 2007. As a result, the Company has increased its liability by $54.5 million for unrecognized tax amounts related to various federal, state and international tax matters. Included in this amount is $35.1 million of tax positions that, if recognized, would have impacted the Company’s effective tax rate. The recognition of this liability is required under FIN 48 because of the uncertainty regarding the ultimate outcome of certain tax positions. The Company has accounted for the entire $54.5 million as a reduction to the January 1, 2007 balance of retained earnings.
		Of the $54.5 million increase referred to above, $49 million is attributable to tax positions in Kazakhstan. As of September 30, 2007, we have a total liability of $90.6 million accrued for tax positions in Kazakhstan before the recognition of U.S. tax benefits. This liability has been classified as non-current in our balance sheet. For a complete overview of this issue, see Kazakhstan Tax Claims in Note 11.
		The Company has classified foreign currency exchange rate fluctuations, interest and penalties as a component of tax expense. On January 1, 2007, we recorded approximately $41.3 million for interest and penalties. During the nine months ended September 30, 2007, the Company recognized an additional liability of approximately $5.5 million, comprising of foreign currency exchange rate fluctuations, interest and a release of previously recognized liabilities. The Company does not expect that the unrecognized tax amounts will change significantly within the next twelve months.
		The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business our returns are subject to examination by taxing authorities throughout the world.
7.		Income Tax Expense — Income tax expense was $19.2 million for the third quarter of 2007, as compared to income tax expense of $13.2 million for the third quarter of 2006. Income tax for the third quarter of 2007 includes a benefit of $0.5 million of interest and foreign currency exchange rate fluctuations related to our FIN 48 calculation.
8.		Saudi Arabia Joint Venture – A subsidiary of Parker Drilling Company is a 50 percent shareholder of Al-Rushaid Parker Drilling, a Saudi Arabia limited liability company (“ARPD”), which has a six rig drilling contract with Saudi Aramco (“SA Contract”). ARPD has obtained bank financing for $160 million of the cost of the six rigs, which loan is secured by assignment of proceeds of the SA contract and personal guarantee of the Chairman of Abdullah Rasheed Al-Rushaid Company for Drilling Oil and Gas Limited, our Saudi partner (“AR”). Our subsidiary and AR have each advanced $15 million in shareholder loans to fund construction costs for the rigs as of October 31, 2007. Due to construction delays and cost overruns, including remedial work to correct problems with construction, integration of components and rig specifications, ARPD expects to incur approximately $40 to $50 million in additional construction costs over the next six to nine months, although the total cost of the six rigs has not been determined at this time. The Company’s subsidiary anticipates contributing up to 50 percent of the additional construction costs for the six rigs. The first rig began drilling operations on April 21, 2007 the second rig commenced drilling on July 17, 2007 and the third rig began drilling on October 8, 2007. It is anticipated that Rig 4 will commence operations during the fourth quarter 2007 and the remaining two rigs will begin drilling in the first quarter of 2008.
		During the quarter ended September 30, 2007, the Company recorded two adjustments primarily related to prior 2007 quarters. One adjustment eliminates $2.8 million ($1.8 million after-tax) of previously recognized costs advanced by Parker Drilling on behalf of ARPD which was billed to ARPD during the fourth quarter of 2007. The other offsetting adjustment records the Company’s share of equity losses, net of taxes, from ARPD through September 30, 2007 ($1.1 million). We do not believe these adjustments to be material.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

8.		Saudi Arabia Joint Venture (continued)
		ARPD may be liable for liquidated damages as a result of delays in the commencement of drilling operations under the SA Contract. See “Contingencies” (Note 11). Continuing losses are anticipated for operations related to the SA Contract through 2008 and will continue until operating expenses can be reduced. However, there is no assurance that costs can be sufficiently reduced to avoid further losses, in which case future profitability will be contingent upon an increase in dayrates through negotiation of a contract extension with Saudi Aramco.
9.		Long-Term Debt

		On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Notes due July 15, 2012 pursuant to a prospectus dated June 28, 2007. Interest is payable semiannually on July 15th and January 15th. The initial conversion price is approximately $13.85 per share and is subject to adjustment for the occurrence of certain events stated within the indenture. Proceeds from the transaction were used to call our outstanding Floating Rate notes, to pay the net cost of hedge and warrant transactions, and for general corporate purposes. Effectively, the hedge and warrant transactions increase the conversion price to approximately $18.29 per share.
		On September 20, 2007, we replaced our existing $40.0 million credit facility with a new $60.0 million credit facility pursuant to an Amended and Restated Credit Agreement, which expires in September 2012 (the “2007 Credit Facility”). The 2007 Credit Facility is secured by rental tools equipment, accounts receivable and the stock of substantially all of our domestic subsidiaries, other than domestic subsidiaries owned by a foreign subsidiary, and contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.
		The 2007 Credit Facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to the 2007 Credit Facility. Revolving loans are available under the 2007 Credit Facility subject to a borrowing base limitation based on 85 percent of eligible receivables plus a value for eligible rental tools equipment. The 2007 Credit Facility calls for a borrowing base calculation only when the 2007 Credit Facility has outstanding loans, including letters of credit, totaling at least $40.0 million. As of September 30, 2007, there were $13.5 million in letters of credit outstanding and no loans.
10.		Derivative Instruments — We have used derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes which were fully redeemed on September 27, 2007. These derivative instruments, which consisted of variable-to-fixed interest rate swaps, did not meet the hedge criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and were therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings.
		On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. On September 4, 2007, our one remaining swap expired.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.		Contingencies
		Kazakhstan Tax Claims
		On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of our subsidiary, Parker Drilling Company International Limited (“PDCIL”) received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (“MinFin”) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $126.1 million). Approximately KZT 7.5 billion or $63.5 million was assessed for import Value Added Tax (“VAT”), administrative fines and interest on equipment imported to perform the drilling contracts (the “VAT Assessment”) and approximately KZT 7.4 billion or $62.6 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received by PDCIL from a client for the upgrade of Barge Rig 257 and other issues related to PKD Kazakhstan’s operations in the Republic of Kazakhstan (the “Income Tax Assessment”).
		On May 24, 2006, the Supreme Court of the Republic of Kazakhstan (“SCK”) issued a decision upholding the VAT Assessment. Consistent with its contractual obligations, on November 20, 2006, the client advanced the actual amount of the VAT Assessment and this amount has been remitted to MinFin. The client has also contractually agreed to reimburse PKD Kazakhstan for any incremental income taxes that PKD Kazakhstan incurs from the reimbursement of this VAT Assessment
		Contrary to two previous rulings on this precise issue, the May 24, 2006, ruling of the SCK affirmed the Income Tax Assessment. The SCK stayed enforcement and supervisory review to allow the Competent Authorities from the U.S. and the Republic of Kazakhstan to address this matter under the Mutual Agreement Procedure (“MAP”) of the U.S.-Kazakhstan Tax Treaty (the “Tax Treaty”), but when the Competent Authorities met on March 20-22, 2007, they were unable to achieve mutual agreement as to which country may tax the income in issue under the Tax Treaty.
		On July 30, 2007, the supervisory panel of the SCK affirmed the May 24, 2006 ruling upholding the income tax assessment of MinFin and on August 7, 2007, MinFin issued a notice of assessment of corporate income taxes of approximately $40 million and interest of approximately $33 million. A liability associated with this claim has been fully accrued as described in Note 6. PKD Kazakhstan immediately filed a Complaint Against the Notice (“Complaint”) and MinFin acknowledged receipt of this Complaint and that no enforcement action would occur pending resolution of the Complaint pursuant to the MAP of the Tax Treaty. The Competent Authorities re-convened on October 8-11, 2007, to address the double taxation issue, but no decision has been announced and PKD Kazakhstan has no assurance as to the ultimate resolution of the double taxation issue.
		Bangladesh Claim
		In September 2005, a subsidiary of the Company was served with a lawsuit filed in the 152nd District Court of Harris County State of Texas on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries (none involving loss of life) arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. This case was dismissed against the subsidiary of the Company based on forum non conveniens , a legal defense raised by the subsidiary claiming that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs have appealed this dismissal; however the Company believes the plaintiffs’ prospects of being successful on appeal are remote.
		Asbestos-Related Claims
		In August 2004, the Company was notified that certain of its subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with the Company, including companies that allegedly manufactured drilling related products containing asbestos that are the subject of the complaints.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.		Contingencies (continued)
		Asbestos-Related Claims (continued)
		The complaints allege that the Company’s subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act and that the Plaintiffs are entitled to monetary damages. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of the Company. Out of 528 amended single-plaintiff complaints filed to date, twelve plaintiffs have identified Parker Drilling or one of its affiliates as a defendant. Discovery is proceeding in groups of 60 based on selection of six by plaintiff’s counsel, six by defense counsel and 48 by random selection of the special master.
		The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome to have a material adverse effect on its financial condition, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these lawsuits.
		Gulfco Site
		In 2003 the Company received an information request under CERCLA designating a subsidiary of the Company as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). We responded to this request in 2003 and have been in contact with EPA regarding the response. In July 2005, EPA issued a Unilateral Administrative Order for remedial investigation to five potentially responsible parties. The EPA order did not name us. According to EPA, three of the potentially responsible parties who received the order are currently performing a remedial investigation of the site to define the nature and extent of the contamination there. Based on the currently available information, we do not believe we have responsibility for the Gulfco Marine Site. Among other reasons, our subsidiary, Parker Drilling Offshore Company neither owned nor operated the site during the relevant time period, and is not otherwise connected to the site. If a claim were to be brought against us in the future by the United States or the parties performing the work, we would defend that action vigorously. The amount of any such future claim cannot be estimated with accuracy until after the remedial investigation is completed, but it is not expected to be material to our business or financial condition.
		Freight Forwarding and Customs Agent Request
		During the third quarter of 2007, the U.S. Department of Justice requested us to provide information regarding our utilization of the services of a freight forwarding and customs agent during the past five years to verify if the services provided by this freight forwarding and customs agent were in compliance with the Foreign Corrupt Practices Act. It is our understanding that a similar request was sent to several other service contractors. We are fully cooperating with the request for information.
		Saudi Arabia Joint Venture
		A subsidiary of Parker Drilling Company is a 50 percent shareholder of Al-Rushaid Parker Drilling, a Saudi Arabia limited liability company (“ARPD”), which has a six rig drilling contract with Saudi Aramco (“SA Contract”). As previously discussed in Note 8, the construction, delivery and commissioning for each of these rigs is delayed. Under the terms of the SA Contract, Saudi Aramco has the ability to reduce future day rates by 50 percent for each day of delay per rig, which over the duration of the SA Contract term would aggregate to approximately $23.0 million, creating a contingent liability of approximately $11.5 million (50 percent of the ARPD exposure) for Parker’s subsidiary.

      NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

11.		Contingencies (continued)
		Saudi Arabia Joint Venture (continued)
		We believe these delays are substantially caused by circumstances beyond the reasonable control of ARPD. At the request of ARPD, Saudi Aramco has deferred imposing any liquidated damages for at least six months and ARPD anticipates continued discussions with Saudi Aramco to obtain a waiver of all or substantially all of the liquidated damages based on the delays being beyond the reasonable control of ARPD.
12.		Recent Accounting Pronouncements — In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities-Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 allows certain financial assets and liabilities to be recognized, at the Company’s election, at fair market value, with any gains or losses for the period recorded in the statement of income. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the impact on its Consolidated Financial Statements, if any, of the adoption of SFAS No. 159.
13.		Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements — Set forth on the following pages are the unaudited consolidating condensed financial statements of (i) Parker Drilling, (ii) our restricted subsidiaries that are guarantors of the Senior Notes and (iii) our restricted and unrestricted subsidiaries that are not guarantors of the Senior Notes. All of our Senior Notes are guaranteed by substantially all of the restricted subsidiaries of Parker Drilling. There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries.
		The non-guarantor subsidiaries are AralParker (a Kazakhstan closed joint stock company, owned 80 percent by Parker Drilling (Kazakstan), LLC and 20 percent by Aralnedra, CJSC), Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria) Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico, S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, LLC), Parker Drilling Asia Pacific, LLC, Parker Drilling Kazakhstan B.V., Parker Drilling Netherlands B.V., Parker Drilling International B.V., Parker Drilling Offshore B.V., Parker Drilling Overseas B.V., Parker Drilling Russia B.V., Parker Drilling Dutch B.V., Parker Drilling AME Limited, Parker Drillsource, LLC, Parker 3source, LLC, Parker Enex, LLC, Parker Hungary Rig Holdings Limited Liability Company, Parker 5272, LLC, Parker Drilling Spain Rig Services S.L., Parker Cyprus Leasing Limited, Parker Cyprus Ventures Limited, PD International Holdings C.V., PD Dutch Holdings C.V., PD Offshore Holdings C.V., PD Selective Holdings, C.V., PD Labor Services, Ltd., and PD Labor Sourcing, Ltd. We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of September 30, 2007 and December 31, 2006 and for the three and nine months ended September 30, 2007 and 2006. The condensed consolidating financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.