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 June 30, 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 August 1, 2017 there were 138,255,177 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) 
 
June 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
146,234

 
$
119,691

Accounts and Notes Receivable, net of allowance for bad debts of $7,912 at June 30, 2017 and $8,259 at December 31, 2016.
120,070

 
113,231

Rig materials and supplies
35,270

 
32,354

Other current assets
25,708

 
21,042

Total current assets
327,282

 
286,318

Property, plant and equipment, net of accumulated depreciation of $1,312,421 at June 30, 2017 and $1,320,644 at December 31, 2016.
667,042

 
693,439

Goodwill
6,708

 
6,708

Intangible assets, net
8,470

 
9,928

Deferred income taxes
79,152

 
70,309

Other noncurrent assets
33,452

 
36,849

Total assets
$
1,122,106

 
$
1,103,551

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
106,303

 
98,841

Accrued income taxes
5,136

 
4,080

Total current liabilities
111,439

 
102,921

Long-term debt, net of unamortized debt issuance costs of $7,867 at June 30, 2017 and $8,674 at December 31, 2016.
577,133

 
576,326

Other long-term liabilities
12,518

 
15,836

Deferred tax liability
77,221

 
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; 138,251,008 shares issued and outstanding (125,118,365 shares in 2016)

23,026

 
20,837

Capital in excess of par value
745,145

 
675,194

Accumulated deficit
(419,749
)
 
(350,052
)
Accumulated other comprehensive income (loss)
(5,127
)
 
(6,844
)
Total stockholders’ equity
343,795

 
339,135

Total liabilities and stockholders’ equity
$
1,122,106

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
109,607

 
$
105,287

 
$
207,878

 
$
235,790

Expenses:
 
 
 
 
 
 
 
Operating expenses
89,641

 
89,195

 
175,455

 
197,312

Depreciation and amortization
30,982

 
36,317

 
63,184

 
72,131

 
120,623

 
125,512

 
238,639

 
269,443

Total operating gross margin (loss)
(11,016
)
 
(20,225
)
 
(30,761
)
 
(33,653
)
General and administrative expense
(6,503
)
 
(7,995
)
 
(13,543
)
 
(17,776
)
Gain (loss) on disposition of assets, net
(113
)
 
(2
)
 
(465
)
 
(62
)
Total operating income (loss)
(17,632
)
 
(28,222
)
 
(44,769
)
 
(51,491
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(11,095
)
 
(12,187
)
 
(21,965
)
 
(23,749
)
Interest income
22

 
32

 
32

 
39

Other
560

 
(358
)
 
1,090

 
2,127

Total other income (expense)
(10,513
)
 
(12,513
)
 
(20,843
)
 
(21,583
)
Income (loss) before income taxes
(28,145
)
 
(40,735
)
 
(65,612
)
 
(73,074
)
Income tax expense (benefit)
1,743

 
(913
)
 
4,085

 
62,583

Net income (loss)
(29,888
)
 
(39,822
)
 
(69,697
)
 
(135,657
)
Less: Mandatory convertible preferred stock dividend
1,239

 
—

 
1,239

 
—

Net income (loss) available to common stockholders
$
(31,127
)
 
$
(39,822
)
 
$
(70,936
)
 
$
(135,657
)
 
 
 
 
 
 
 
 
Basic income (loss) per common share
$
(0.23
)
 
$
(0.32
)
 
$
(0.53
)
 
$
(1.10
)
Diluted income (loss) per common share
$
(0.23
)
 
$
(0.32
)
 
$
(0.53
)
 
$
(1.10
)
 
 
 
 
 
 
 
 
Number of common shares used in computing earnings per share:
 
 
 
 
 
 
Basic
137,833,318

 
124,101,349

 
134,009,168

 
123,595,793

Diluted
137,833,318

 
124,101,349

 
134,009,168

 
123,595,793


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(29,888
)
 
$
(39,822
)
 
$
(69,697
)
 
$
(135,657
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation difference on related borrowings
185

 
(307
)
 
268

 
195

Currency translation difference on foreign currency net investments
686

 
(2,228
)
 
1,449

 
(3,766
)
Total other comprehensive income (loss), net of tax:
871

 
(2,535
)
 
1,717

 
(3,571
)
Comprehensive income (loss)
(29,017
)
 
(42,357
)
 
(67,980
)
 
(139,228
)

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)

 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(69,697
)
 
$
(135,657
)
Adjustments to reconcile net income (loss)
 
 
 
Depreciation and amortization
63,184

 
72,131

Accretion of contingent consideration
—

 
419

(Gain) loss on debt modification
—

 
1,088

(Gain) loss on disposition of assets
465

 
62

Deferred income tax expense (benefit)
(934
)
 
59,305

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

 
(1,617
)
Expenses not requiring cash
4,948

 
(4,409
)
Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(6,853
)
 
22,319

Other assets
(1,722
)
 
(2,992
)
Accounts payable and accrued liabilities
(8,235
)
 
(6,862
)
Accrued income taxes
1,276

 
(3,985
)
Net cash provided by (used in) operating activities
(17,568
)
 
(198
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(26,559
)
 
(16,257
)
Proceeds from the sale of assets
185

 
1,387

Net cash provided by (used in) investing activities
(26,374
)
 
(14,870
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payment for noncontrolling interest
—

 
(3,375
)
Payments of contingent consideration
—

 
(6,000
)
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
(2,864
)
 
—

Mandatory convertible preferred stock dividend
(1,239
)
 
—

Shares surrendered in lieu of tax
(612
)
 
(817
)
Net cash provided by (used in) financing activities
70,485

 
(10,192
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
26,543

 
(25,260
)
Cash and cash equivalents, beginning of year
119,691

 
134,294

Cash and cash equivalents, end of period
$
146,234

 
$
109,034

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
20,588

 
$
20,588

Income taxes paid
$
4,262

 
$
9,672

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
1,133

 
—

 
189

 
—

 
(864
)
 
—

 
—

 
(675
)
Amortization of stock-based awards
—

 
—

 
—

 
—

 
2,218

 
—

 
—

 
2,218

Issuance of common stock
12,000

 
—

 
2,000

 
—

 
22,059

 
—

 
—

 
24,059

Issuance of mandatory convertible preferred stock
500

 
500

 
—

 
—

 
47,777

 
—

 
—

 
48,277

Mandatory convertible preferred stock dividend
—

 
—

 
—

 
—

 
(1,239
)
 
—

 
—

 
(1,239
)
Comprehensive Income:
 
 
—

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
—

 
—

 
—

 
(69,697
)
 
—

 
(69,697
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
—

 
1,717

 
1,717

Balances, June 30, 2017
138,751

 
$
500

 
$
23,196

 
$
(170
)
 
$
745,145

 
$
(419,749
)
 
$
(5,127
)
 
$
343,795

See accompanying notes to the unaudited 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 June 30, 2017 and for the three and six months ended June 30, 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 $15.2 million and $18.9 million for the three months ended June 30, 2017 and 2016, respectively, and $30.5 million and $37.9 million for the six months ended June 30, 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 34.0 percent of our consolidated revenues for the six months ended June 30, 2017. Excluding reimbursable revenues of $27.0 million, ENL constituted approximately 24.6 percent of our total consolidated revenues for the six months ended June 30, 2017. Our second largest customer, BP Exploration Alaska, Inc. (BP), constituted approximately 10.5 percent of our consolidated revenues for the six months ended June 30, 2017.
At June 30, 2017 and December 31, 2016, we had deposits in domestic banks in excess of federally insured limits of approximately $106.3 million and $81.4 million, respectively. In addition, we had uninsured deposits in foreign banks as of June 30, 2017 and December 31, 2016 of $40.4 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 June 30, 2017 is as follows:
Dollars in thousands
Goodwill
Balance at December 31, 2016
$
6,708

Additions
—

Balance at June 30, 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 June 30, 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

 
$
—

 
$
(4,362
)
 
$
7,268

Customer relationships
3
5,400

 
(264
)
 
(5,136
)
 
—

Trade names
5
4,940

 
(332
)
 
(3,406
)
 
1,202

Total amortized intangible assets
 
$
21,970

 
$
(596
)
 
$
(12,904
)
 
$
8,470

Amortization expense was $1.5 million and $2.0 million for the six months ended June 30, 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
$
1,343

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 and six months ended June 30, 2017 and 2016, respectively:

11


 
 
Three Months Ended June 30, 2017
 
Net Income (Loss)
Available to Common Stockholders (Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic earnings (loss) per common share
$
(31,127,000
)
 
137,833,318

 
$
(0.23
)
Effect of dilutive securities:
 
 
 
 
 
Restricted stock units (1)
—

 
—

 
—

Mandatory convertible preferred stock (2)
—

 
—

 
—

Diluted earnings (loss) per common share
$
(31,127,000
)
 
137,833,318

 
$
(0.23
)
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Income/(Loss)
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic earnings (loss) per common share
$
(70,936,000
)
 
134,009,168

 
$
(0.53
)
Effect of dilutive securities:
 
 
 
 
 
Restricted stock units (1)
—

 
—

 
—

Mandatory convertible preferred stock (2)
—

 
—

 
—

Diluted earnings (loss) per common share
$
(70,936,000
)
 
134,009,168

 
$
(0.53
)
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
Net Income (Loss)
Available to Common Stockholders (Numerator)

 
Shares
(Denominator)
 
Per-Share
Amount
Basic earnings (loss) per common share
$
(39,822,000
)
 
124,101,349

 
$
(0.32
)
Effect of dilutive securities:
 
 
 
 
 
Restricted stock units (1)
—

 
—

 
—

Diluted earnings (loss) per common share
$
(39,822,000
)
 
124,101,349

 
$
(0.32
)
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
Income/(Loss)
(Numerator)
 
Shares
(Denominator)
 
Per-Share
Amount
Basic earnings (loss) per common share
$
(135,657,000
)
 
123,595,793

 
$
(1.10
)
Effect of dilutive securities:
 
 
 
 
 
Restricted stock units (1)
—

 
—

 
—

Diluted earnings (loss) per common share
$
(135,657,000
)
 
123,595,793

 
$
(1.10
)
 
 
 
 
 
 
(1)    For the three and six months ended June 30, 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.
On May 9, 2017, our board of directors declared a cash dividend of $2.4771 per share of our Convertible Preferred Stock for the period from and including February 22, 2017 through and including June 29, 2017, which was paid on June 30, 2017 to mandatory convertible preferred shareholders of record as of June 15, 2017. On August 3, 2017, the Audit Committee, on behalf of our board of directors, declared a cash dividend of $1.8125 per share of our Convertible Preferred Stock for the period from and including June 30, 2017 through and including September 29, 2017, which is scheduled to be paid on September 30, 2017 to mandatory convertible preferred shareholders of record as of September 15, 2017.

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)
1,717

June 30, 2017
$
(5,127
)
There were no amounts reclassified out of accumulated other comprehensive loss for the three months ended June 30, 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.

13


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.
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) Drilling-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.

14


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.
The following table represents the results of operations by reportable segment:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Dollars in thousands
2017
 
2016
 
2017
 
2016
Revenues: (1)
 
 
 
 
 
 
 
Drilling Services:
 
 
 
 
 
 
 
U.S. (Lower 48) Drilling
$
5,042

 
$
1,065

 
$
6,257

 
$
3,150

International & Alaska Drilling
60,669

 
71,926

 
123,881

 
160,545

Total Drilling Services
65,711

 
72,991

 
130,138

 
163,695

Rental Tools Services:
 
 
 
 
 
 
 
U.S. Rental Tools
29,704

 
17,961

 
49,936

 
40,516

International Rental Tools
14,192

 
14,335

 
27,804

 
31,579

Total Rental Tools Services
43,896

 
32,296

 
77,740

 
72,095

Total revenues
109,607

 
105,287

 
207,878

 
235,790

Operating gross margin: (2)
 
 
 
 
 
 
 
Drilling Services:
 
 
 
 
 
 
 
U.S. (Lower 48) Drilling
(4,528
)
 
(9,011
)
 
(11,761
)
 
(17,571
)
International & Alaska Drilling
(2,788
)
 
3,196

 
(4,555
)
 
8,274

Total Drilling Services
(7,316
)
 
(5,815
)
 
(16,316
)
 
(9,297
)
Rental Tools Services:
 
 
 
 
 
 
 
U.S. Rental Tools
2,988

 
(5,472
)
 
(798
)
 
(9,422
)
International Rental Tools
(6,688
)
 
(8,938
)
 
(13,647
)
 
(14,934
)
Total Rental Tools Services
(3,700
)

(14,410
)
 
(14,445
)
 
(24,356
)
Total operating gross margin
(11,016
)
 
(20,225
)
 
(30,761
)
 
(33,653
)
General and administrative expense
(6,503
)
 
(7,995
)
 
(13,543
)
 
(17,776
)
Gain (loss) on disposition of assets, net
(113
)
 
(2
)
 
(465
)
 
(62
)
Total operating income (loss)
(17,632
)
 
(28,222
)
 
(44,769
)
 
(51,491
)
Interest expense
(11,095
)
 
(12,187
)
 
(21,965
)
 
(23,749
)
Interest income
22

 
32

 
32

 
39

Other income (loss)
560

 
(358
)
 
1,090

 
2,127

Income (loss) from continuing operations before income taxes
$
(28,145
)
 
$
(40,735
)
 
$
(65,612
)
 
$
(73,074
)
 
(1)For the six months ended June 30, 2017, our largest customer, ENL, constituted approximately 34.0 percent of our total consolidated revenues and approximately 57.0 percent of our International & Alaska Drilling segment revenues. Excluding reimbursable revenues of $27.0 million, ENL constituted approximately 24.6 percent of our total consolidated revenues and approximately 46.7 percent of our International & Alaska Drilling segment revenues. Our second largest customer, BP, constituted 10.5 percent of our total consolidated revenues and approximately 17.6 percent of our International & Alaska Drilling segment revenues.
For the six months ended June 30, 2016, our largest customer, ENL, constituted approximately 39.8 percent of our total consolidated revenues and approximately 58.4 percent of our International & Alaska Drilling segment revenues. Excluding reimbursable revenues of $36.9 million, ENL constituted approximately 28.7 percent of our total consolidated revenues and approximately 46.4 percent of our International & Alaska Drilling segment revenues.

15


(2)Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.
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 June 30, 2017, we had a liability for unrecognized tax benefits of $5.2 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 June 30, 2017 and December 31, 2016, we had approximately $2.1 million and $1.9 million, respectively, of accrued interest and penalties related to uncertain tax positions.
Note 8 - Income Tax Expense (Benefit)
During the second quarter of 2017, we had income tax expense of $1.7 million compared with income tax benefit of $0.9 million during the second quarter of 2016. Despite the pre-tax loss for the second 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.
Note 9 - Long-Term Debt
The following table illustrates the Company’s current debt portfolio as of June 30, 2017 and December 31, 2016:
Dollars in thousands
June 30,
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
(7,867
)
 
(8,674
)
Total long-term debt
$
577,133

 
$
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. 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 ($5.0 million net of amortization as of June 30, 2017) are being amortized over the term of the notes using the effective interest rate method.
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.

16


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. 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 ($2.8 million, net of amortization as of June 30, 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 June 30, 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. 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 2.20:1.00 for the fiscal quarter ending June 30, 2017, decreases 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 covenant, 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 June 30, 2017 were $1.0 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 June 30, 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 $82.3 million due to $5.8 million in letters of credit outstanding and $11.9 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

17


of eligible domestic accounts receivable. Letters of credit outstanding against the Revolver as of June 30, 2017 totaled $5.8 million. There were no amounts drawn on the Revolver as of June 30, 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:     
  
June 30, 2017
 
December 31, 2016
Dollars in thousands
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt
 
 
 
 
 
 
 
6.75% Notes
$
360,000

 
$
274,500

 
$
360,000

 
$
311,400

7.50% Notes
225,000

 
196,313

 
225,000

 
201,375

Total principal
$
585,000

 
$
470,813

 
$
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 six months ended June 30, 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 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.

18


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 $1.6 million for the six month period ended June 30, 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 six-month period ended June 30, 2016, we have reclassified $0.8 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 June 30, 2017 and December 31, 2016 and for the six months ended June 30, 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)
 
 
June 30, 2017
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
89,006

 
$
16,558

 
$
40,670

 
$
—

 
$
146,234

Accounts and notes receivable, net
—

 
29,544

 
90,526

 
—

 
120,070

Rig materials and supplies
—

 
(4,813
)
 
40,083

 
—

 
35,270

Other current assets
—

 
8,723

 
16,985

 
—

 
25,708

Total current assets
89,006

 
50,012

 
188,264

 
—

 
327,282

Property, plant and equipment, net
(19
)
 
454,594

 
212,467

 
—

 
667,042

Goodwill
—

 
6,708

 
—

 
—

 
6,708

Intangible assets, net
—

 
8,281

 
189

 
—

 
8,470

Investment in subsidiaries and intercompany advances
2,950,669

 
2,947,916

 
3,804,358

 
(9,702,943
)
 
—

Other noncurrent assets
(168,681
)
 
222,237

 
539,876

 
(480,828
)
 
112,604

Total assets
$
2,870,975

 
$
3,689,748

 
$
4,745,154

 
$
(10,183,771
)
 
$
1,122,106

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
(47,834
)
 
$
190,474

 
$
581,140

 
$
(617,477
)
 
$
106,303

Accrued income taxes
69,506

 
(49,988
)
 
(14,382
)
 
—

 
5,136

Total current liabilities
21,672

 
140,486

 
566,758

 
(617,477
)
 
111,439

Long-term debt, net
577,133

 
—

 
—

 
—

 
577,133

Other long-term liabilities
2,867

 
5,779

 
3,872

 
—

 
12,518

Deferred tax liability
77,221

 
—

 
—

 
—

 
77,221

Intercompany payables
1,846,121

 
1,452,085

 
2,281,438

 
(5,579,644
)
 
—

Total liabilities
2,525,014

 
1,598,350

 
2,852,068

 
(6,197,121
)
 
778,311

Total equity
345,961

 
2,091,398

 
1,893,086

 
(3,986,650
)
 
343,795

Total liabilities and stockholders’ equity
$
2,870,975

 
$
3,689,748

 
$
4,745,154

 
$
(10,183,771
)
 
$
1,122,106


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 June 30, 2017
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues
$
—

 
$
41,490

 
$
85,028

 
$
(16,911
)
 
$
109,607

Operating expenses
—

 
25,327

 
81,225

 
(16,911
)
 
89,641

Depreciation and amortization
—

 
20,270

 
10,712

 
—

 
30,982

Total operating gross margin (loss)
—

 
(4,107
)
 
(6,909
)
 
—

 
(11,016
)
General and administrative expense (1)
(69
)
 
(6,303
)
 
(131
)
 
—

 
(6,503
)
Gain (loss) on disposition of assets, net
—

 
(26
)
 
(87
)
 
—

 
(113
)
Total operating income (loss)
(69
)
 
(10,436
)
 
(7,127
)
 
—

 
(17,632
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(11,809
)
 
(41
)
 
(2,070
)
 
2,825

 
(11,095
)
Interest income
184

 
179

 
2,484

 
(2,825
)
 
22

Other
—

 
15

 
545

 
—

 
560

Equity in net earnings of subsidiaries
(15,823
)
 
—

 
—

 
15,823

 
—

Total other income (expense)
(27,448
)
 
153

 
959

 
15,823

 
(10,513
)
Income (loss) before income taxes
(27,517
)
 
(10,283
)
 
(6,168
)
 
15,823

 
(28,145
)
Total income tax expense (benefit)
2,371

 
(1,585
)
 
957

 
—

 
1,743

Net income (loss)
$
(29,888
)
 
$
(8,698
)
 
$
(7,125
)
 
$
15,823

 
$
(29,888
)
Less: Mandatory convertible preferred stock dividend
$
1,239

 
$
—

 
$
—

 
$
—

 
$
1,239

Net income (loss) available to common stockholders
$
(31,127
)
 
$
(8,698
)
 
$
(7,125
)
 
$
15,823

 
$
(31,127
)

(1) General and administrative 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 June 30, 2016
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues
$
—

 
$
34,586

 
$
88,895

 
$
(18,194
)
 
$
105,287

Operating expenses
—

 
25,577

 
81,812

 
(18,194
)
 
89,195

Depreciation and amortization
—

 
23,314

 
13,003

 
—

 
36,317

Total operating gross margin (loss)
—

 
(14,305
)
 
(5,920
)
 
—

 
(20,225
)
General and administrative expense (1)
(113
)
 
(7,828
)
 
(54
)
 
—

 
(7,995
)
Gain (loss) on disposition of assets, net
—

 
209

 
(211
)
 
—

 
(2
)
Total operating income (loss)
(113
)
 
(21,924
)
 
(6,185
)
 
—

 
(28,222
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(12,896
)
 
(44
)
 
(2,290
)
 
3,043

 
(12,187
)
Interest income
191

 
180

 
2,704

 
(3,043
)
 
32

Other
—

 
(11
)
 
(347
)
 
—

 
(358
)
Equity in net earnings of subsidiaries
(24,568
)
 
—

 
—

 
24,568

 
—

Total other income (expense)
(37,273
)
 
125

 
67

 
24,568

 
(12,513
)
Income (loss) before income taxes
(37,386
)
 
(21,799
)
 
(6,118
)
 
24,568

 
(40,735
)
Income tax expense (benefit)
2,438

 
(5,297
)
 
1,946

 
—

 
(913
)
Net income (loss)
(39,824
)
 
(16,502
)
 
(8,064
)
 
24,568

 
(39,822
)

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




























25


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

 
Six Months Ended June 30, 2017
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues
$
—

 
$
69,383

 
$
173,265

 
$
(34,770
)
 
$
207,878

Operating expenses
—

 
46,277

 
163,948

 
(34,770
)
 
175,455

Depreciation and amortization
—

 
41,458

 
21,726

 
—

 
63,184

Total operating gross margin (loss)
—

 
(18,352
)
 
(12,409
)
 
—

 
(30,761
)
General and administrative expense (1)
(147
)
 
(13,173
)
 
(223
)
 
—

 
(13,543
)
Gain (loss) on disposition of assets, net
—

 
(242
)
 
(223
)
 
—

 
(465
)
Total operating income (loss)
(147
)
 
(31,767
)
 
(12,855
)
 
—

 
(44,769
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(23,478
)
 
(85
)
 
(4,013
)
 
5,611

 
(21,965
)
Interest income
332

 
357

 
4,954

 
(5,611
)
 
32

Other
—

 
47

 
1,043

 
—

 
1,090

Equity in net earnings of subsidiaries
(37,602
)
 
—

 
—

 
37,602

 
—

Total other income (expense)
(60,748
)
 
319

 
1,984

 
37,602

 
(20,843
)
Income (loss) before income taxes
(60,895
)
 
(31,448
)
 
(10,871
)
 
37,602

 
(65,612
)
Total income tax expense (benefit)
8,801

 
(7,161
)
 
2,445

 
—

 
4,085

Net income (loss)
(69,696
)
 
(24,287
)
 
(13,316
)
 
37,602

 
(69,697
)
Less: Mandatory convertible preferred stock dividend
1,239

 
—

 
—

 
—

 
1,239

Net income (loss) available to common stockholders
$
(70,935
)
 
$
(24,287
)
 
$
(13,316
)
 
$
37,602

 
$
(70,936
)

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





























26


PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
 
Six Months Ended June 30, 2016
 
Parent
 
Guarantor
 
Non-Guarantor
 
Eliminations
 
Consolidated
Total revenues
$
—

 
$
81,968

 
$
195,372

 
$
(41,550
)
 
$
235,790

Operating expenses
—

 
58,413

 
180,449

 
(41,550
)
 
197,312

Depreciation and amortization
—

 
46,439

 
25,692

 
—

 
72,131

Total operating gross margin (loss)
—

 
(22,884
)
 
(10,769
)
 
—

 
(33,653
)
General and administrative expense (1)
(200
)
 
(17,440
)
 
(136
)
 
—

 
(17,776
)
Gain (loss) on disposition of assets, net
—

 
153

 
(215
)
 
—

 
(62
)
Total operating income (loss)
(200
)
 
(40,171
)
 
(11,120
)
 
—

 
(51,491
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(24,752
)
 
(481
)
 
(5,150
)
 
6,634

 
(23,749
)
Interest income
395

 
359

 
5,919

 
(6,634
)
 
39

Other
—

 
473

 
1,654

 
—

 
2,127

Equity in net earnings of subsidiaries
(40,793
)
 
—

 
—

 
40,793

 
—

Total other income (expense)
(65,150
)
 
351

 
2,423

 
40,793

 
(21,583
)
Income (loss) before income taxes
(65,350
)
 
(39,820
)
 
(8,697
)