Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

For The Quarterly Period Ended September 30, 2018



¨	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 and zip code)

(281) 406-2000 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

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 every Interactive Data File required to be submitted 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 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.



Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller reporting company	x

		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 November 1, 2018 there were 9,381,601 common shares outstanding.

Table of Contents

TABLE OF CONTENTS



	Page
Part I. Financial Information
Item 1. Financial Statements	3
Consolidated Condensed Balance Sheets	3
Consolidated Condensed Statements of Operations	4
Consolidated Condensed Statements of Comprehensive Income (Loss)	5
Consolidated Condensed Statements of Cash Flows	6
Consolidated Condensed Statement of Stockholders’ Equity	7
Notes to the Unaudited Consolidated Condensed Financial Statements	11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3. Quantitative and Qualitative Disclosures about Market Risk	55
Item 4. Controls and Procedures	55

Part II. Other Information
Item 1. Legal Proceedings	56
Item 1A. Risk Factors	56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3. Defaults Upon Senior Securities	59
Item 4. Mine Safety Disclosures	59
Item 5. Other Information	59
Item 6. Exhibits	60
Signatures	62

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)



	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	81,728		$	141,549
Accounts and notes receivable, net of allowance for bad debts of $7,547 at September 30, 2018 and $7,564 at December 31, 2017	137,901			122,511
Rig materials and supplies	34,498			31,415
Other current assets	27,673			22,361
Total current assets	281,800			317,836
Property, plant and equipment, net of accumulated depreciation of $973,002 at September 30, 2018 and $1,343,105 at December 31, 2017	550,469			625,771
Goodwill (Note 3)	6,708			6,708
Intangible assets, net (Note 3)	5,398			7,128
Deferred income taxes	1,811			1,284
Other noncurrent assets	22,995			31,552
Total assets	$	869,181		$	990,279
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	103,241		$	99,246
Accrued income taxes	4,212			4,430
Total current liabilities	107,453			103,676
Long-term debt, net of unamortized debt issuance costs of $5,711 at September 30, 2018 and $7,029 at December 31, 2017 (Note 4)	579,289			577,971
Other long-term liabilities	12,208			12,433
Long-term deferred tax liability	60			78
Commitments and contingencies (Note 7)
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	500			500
Common Stock, $0.16 ²/₃ par value, authorized 18,666,667 shares, issued and outstanding, 9,381,316 shares (9,262,382 shares in 2017) ⁽¹⁾	1,397			1,378
Capital in excess of par value ⁽¹⁾	765,863			766,508
Accumulated deficit	(591,377		)	(468,753		)
Accumulated other comprehensive income (loss)	(6,212		)	(3,512		)
Total stockholders’ equity	170,171			296,121
Total liabilities and stockholders’ equity	$	869,181		$	990,279


(1)	See Note 8 - Stockholders’ Equity for details regarding the 1-for-15 reverse stock split.

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues	$	123,395		$	118,308		$	351,673		$	326,186
Expenses:
Operating expenses	93,943			88,120			277,111			263,575
Depreciation and amortization	27,520			30,067			83,205			93,251
	121,463			118,187			360,316			356,826
Total operating gross margin (loss)	1,932			121			(8,643		)	(30,640		)
General and administrative expense	(14,495		)	(7,033		)	(28,984		)	(20,576		)
Loss on impairment	(43,990		)	—			(43,990		)	—
Gain (loss) on disposition of assets, net	9			97			(126		)	(368		)
Total operating income (loss)	(56,544		)	(6,815		)	(81,743		)	(51,584		)
Other income (expense):
Interest expense	(11,350		)	(11,067		)	(33,787		)	(33,032		)
Interest income	23			128			76			160
Other	(709		)	(638		)	(1,609		)	452
Total other income (expense)	(12,036		)	(11,577		)	(35,320		)	(32,420		)
Income (loss) before income taxes	(68,580		)	(18,392		)	(117,063		)	(84,004		)
Income tax expense (benefit)	2,371			1,919			5,561			6,004
Net income (loss)	(70,951		)	(20,311		)	(122,624		)	(90,008		)
Less: Convertible preferred stock dividend	906			906			2,719			2,145
Net income (loss) available to common stockholders	$	(71,857	)	$	(21,217	)	$	(125,343	)	$	(92,153	)
Basic earnings (loss) per common share: ⁽¹⁾	$	(7.70	)	$	(2.30	)	$	(13.49	)	$	(10.20	)
Diluted earnings (loss) per common share: ⁽¹⁾	$	(7.70	)	$	(2.30	)	$	(13.49	)	$	(10.20	)
Number of common shares used in computing earnings per share:
Basic ⁽¹⁾	9,334,390			9,220,001			9,292,858			9,030,345
Diluted ⁽¹⁾	9,334,390			9,220,001			9,292,858			9,030,345


(1)	See Note 8 - Stockholders’ Equity for details regarding the 1-for-15 reverse stock split.

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in Thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net income (loss)	$	(70,951	)	$	(20,311	)	$	(122,624	)	$	(90,008	)
Other comprehensive income (loss), net of tax:
Currency translation difference on related borrowings	(315		)	170			(484		)	438
Currency translation difference on foreign currency net investments	162			1,217			(2,216		)	2,666
Total other comprehensive income (loss), net of tax:	(153		)	1,387			(2,700		)	3,104
Comprehensive income (loss)	$	(71,104	)	$	(18,924	)	$	(125,324	)	$	(86,904	)

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income (loss)	$	(122,624	)	$	(90,008	)
Adjustments to reconcile net income (loss):
Depreciation and amortization	83,205			93,251
(Gain) loss on disposition of assets, net	126			368
Deferred tax expense (benefit)	(546		)	(594		)
Loss on impairment	43,990			—
Expenses not requiring cash	4,491			5,899
Change in assets and liabilities:
Accounts and notes receivable	(15,646		)	(14,908		)
Other assets	7,678			(325		)
Accounts payable and accrued liabilities	(3,866		)	(18,520		)
Accrued income taxes	(324		)	431
Net cash provided by (used in) operating activities	(3,516		)	(24,406		)

Cash flows from investing activities:
Capital expenditures	(52,020		)	(44,836		)
Proceeds from the sale of assets	1,031			322
Net cash provided by (used in) investing activities	(50,989		)	(44,514		)

Cash flows from financing activities:
Convertible preferred stock dividend	(3,625		)	(1,239		)
Payments of debt issuance costs	(1,443		)	—
Shares surrendered in lieu of tax	(248		)	(829		)
Proceeds from the issuance of common stock	—			25,200
Proceeds from the issuance of convertible preferred stock	—			50,000
Payment of equity issuance costs	—			(2,864		)
Net cash provided by (used in) financing activities	(5,316		)	70,268

Net increase (decrease) in cash and cash equivalents	(59,821		)	1,348
Cash and cash equivalents at beginning of period	141,549			119,691
Cash and cash equivalents at end of period	$	81,728		$	121,039

Supplemental cash flow information:
Interest paid	$	41,175		$	41,175
Income taxes paid	$	7,000		$	7,223

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars and Shares in Thousands)

(Unaudited)



	Shares ⁽¹⁾	Convertible Preferred Stock		Common Stock ⁽¹⁾		Treasury Stock			Capital in Excess of Par Value ⁽¹⁾			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances, December 31, 2016	8,341	$	—	$	1,394	$	(170	)	$	694,807		$	(350,052	)	$	(6,844	)	$	339,135
Activity in employees’ stock plans	31	—		5		—			(407		)	—			—			(402		)
Amortization of stock-based awards	—	—		—		—			1,332			—			—			1,332
Issuance of common stock	800	—		133		—			23,927			—			—			24,060
Issuance of mandatory convertible preferred stock	500	500		—		—			47,779			—			—			48,279
Comprehensive Income:
Net income (loss)	—	—		—		—			—			(39,809		)	—			(39,809		)
Other comprehensive income (loss)	—	—		—		—			—			—			846			846
Balances, March 31, 2017	9,672	500		1,532		(170		)	767,438			(389,861		)	(5,998		)	373,441
Activity in employees’ stock plans	45	—		7		—			(280		)	—			—			(273		)
Amortization of stock-based awards	—	—		—		—			886			—			—			886
Issuance of common stock	—	—		—		—			(1		)	—			—			(1		)
Issuance of mandatory convertible preferred stock	—	—		—		—			(2		)	—			—			(2		)
Convertible preferred stock dividend	—	—		—		—			(1,239		)	—			—			(1,239		)
Comprehensive Income:
Net income (loss)	—	—		—		—			—			(29,888		)	—			(29,888		)
Other comprehensive income (loss)	—	—		—		—			—			—			871			871
Balances, June 30, 2017	9,717	$	500	$	1,539	$	(170	)	$	766,802		$	(419,749	)	$	(5,127	)	$	343,795


(1)	See Note 8 - Stockholders’ Equity for details regarding the 1-for-15 reverse stock split.

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars and Shares in Thousands)

(Unaudited)



	Shares ⁽¹⁾	Convertible Preferred Stock		Common Stock ⁽¹⁾		Treasury Stock			Capital in Excess of Par Value ⁽¹⁾			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances, June 30, 2017	9,717	$	500	$	1,539	$	(170	)	$	766,802		$	(419,749	)	$	(5,127	)	$	343,795
Activity in employees’ stock plans	43	—		7		—			(260		)	—			—			(253		)
Amortization of stock-based awards	—	—		—		—			844			—			—			844
Convertible preferred stock dividend	—	—		—		—			(906		)	—			—			(906		)
Comprehensive Income:
Net income (loss)	—	—		—		—			—			(20,311		)	—			(20,311		)
Other comprehensive income (loss)	—	—		—		—			—			—			1,387			1,387
Balances, September 30, 2017	9,760	$	500	$	1,546	$	(170	)	$	766,480		$	(440,060	)	$	(3,740	)	$	324,556


(1)	See Note 8 - Stockholders’ Equity for details regarding the 1-for-15 reverse stock split.

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars and Shares in Thousands)

(Unaudited)



	Shares ⁽¹⁾	Convertible Preferred Stock		Common Stock ⁽¹⁾		Treasury Stock			Capital in Excess of Par Value ⁽¹⁾			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances, December 31, 2017	9,762	$	500	$	1,548	$	(170	)	$	766,508		$	(468,753	)	$	(3,512	)	$	296,121
Activity in employees’ stock plans	21	—		3		—			(126		)	—			—			(123		)
Amortization of stock-based awards	—	—		—		—			979			—			—			979
Convertible preferred stock dividend	—	—		—		—			(906		)	—			—			(906		)
Comprehensive Income:
Net income (loss)	—	—		—		—			—			(28,796		)	—			(28,796		)
Other comprehensive income (loss)	—	—		—		—			—			—			(300		)	(300		)
Balances, March 31, 2018	9,783	500		1,551		(170		)	766,455			(497,549		)	(3,812		)	266,975
Activity in employees’ stock plans	37	—		6		—			(53		)	—			—			(47		)
Amortization of stock-based awards	—	—		—		—			833			—			—			833
Convertible preferred stock dividend	—	—		—		—			(907		)	—			—			(907		)
Comprehensive Income:
Net income (loss)	—	—		—		—			—			(22,877		)	—			(22,877		)
Other comprehensive income (loss)	—	—		—		—			—			—			(2,247		)	(2,247		)
Balances, June 30, 2018	9,820	$	500	$	1,557	$	(170	)	$	766,328		$	(520,426	)	$	(6,059	)	$	241,730


(1)	See Note 8 - Stockholders’ Equity for details regarding the 1-for-15 reverse stock split.

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars and Shares in Thousands)

(Unaudited)



	Shares ⁽¹⁾	Convertible Preferred Stock		Common Stock ⁽¹⁾		Treasury Stock			Capital in Excess of Par Value ⁽¹⁾			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balances, June 30, 2018	9,820	$	500	$	1,557	$	(170	)	$	766,328		$	(520,426	)	$	(6,059	)	$	241,730
Activity in employees’ stock plans	61	—		10		—			(91		)	—			—			(81		)
Amortization of stock-based awards	—	—		—		—			532			—			—			532
Convertible preferred stock dividend	—	—		—		—			(906		)	—			—			(906		)
Comprehensive Income:
Net income (loss)	—	—		—		—			—			(70,951		)	—			(70,951		)
Other comprehensive income (loss)	—	—		—		—			—			—			(153		)	(153		)
Balances, September 30, 2018	9,881	$	500	$	1,567	$	(170	)	$	765,863		$	(591,377	)	$	(6,212	)	$	170,171


(1)	See Note 8 - Stockholders’ Equity for details regarding the 1-for-15 reverse stock split.

See accompanying notes to the unaudited consolidated condensed financial statements.

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PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation — The Consolidated Condensed Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are unaudited. In the opinion of Parker Drilling Company (“Parker Drilling” or the “Company”), these consolidated condensed financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for their fair presentation for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The consolidated condensed financial statements presented herein should be read in connection with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Consolidation — The consolidated condensed 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.

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.

Use of Estimates — The preparation of our consolidated condensed financial statements in accordance with 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 consolidated condensed 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, self-insured medical/dental plans, impairment, 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 3 - Goodwill and Intangible Assets for further discussion.

Intangible Assets — Our intangible assets are related to developed technology and trade names, 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 3 - 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.

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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 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 affecting 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 stockholders by the weighted average number of common shares outstanding during the period. The effects of dilutive securities, stock options, unvested restricted stock, assumed conversion of convertible stock and convertible debt are included in the diluted EPS calculation, when applicable.

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 25.7 percent of our consolidated revenues for the nine months ended September 30, 2018. Excluding revenues from reimbursable costs (“reimbursable revenues”) of $34.6 million, ENL constituted approximately 17.9 percent of our total consolidated revenues for the nine months ended September 30, 2018.

We had deposits in domestic banks in excess of federally insured limits of approximately $41.3 million and $97.6 million, as of September 30, 2018 and December 31, 2017, respectively. In addition, we had uninsured deposits in foreign banks of $42.4 million and $45.6 million as of September 30, 2018 and December 31, 2017, respectively.

Legal and Investigative Matters — We accrue estimates of the probable and estimable costs for the resolution of certain legal and investigative 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.

Reverse Stock Split — On July 27, 2018, the Company’s 1-for-15 reverse stock split of its common stock became effective. Unless otherwise indicated, all common share and per common share data have been retroactively restated for all periods presented. The reverse stock split did not affect the par value of the common stock. Shareholders who otherwise would have been entitled to receive a fractional share of common stock as a result of the reverse stock split received cash in lieu of such fractional share. The Company’s 7.25% Series A Mandatory Convertible Preferred Stock (“Convertible Preferred Stock”) was not subject to the reverse stock split, as proportionate adjustments were made to the minimum and maximum conversion rates of the Convertible Preferred Stock.

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Note 2 - Property, Plant and Equipment Impairment

Historically, our barge rig utilization has trended closely with oil prices in periods of both decline and recovery. During the third quarter of 2018, management determined the divergence between oil prices and utilization for our Gulf of Mexico inland barge and International barge asset groups necessitated performance of a recoverability analysis for these two asset groups. Average quarterly oil prices have increased sequentially beginning in the third quarter of 2017, reaching an average quarterly 3-year high in the third quarter of 2018, while our utilization remained flat for the nine months ending September 30, 2018 as compared to the year ended December 31, 2018.

Based upon our recoverability analysis, where the carrying values exceeded both estimated future undiscounted cash flows and a subsequent aggregate fair value determination based upon a cost approach method, we determined the Gulf of Mexico inland barge and International barge asset groups were impaired. The significant unobservable inputs to the cost approach method included replacement costs and remaining economic life. See also Note 5 - Fair Value of Measurements.

We estimated the fair values to be $19.7 million and $3.4 million for the Gulf of Mexico inland barge asset group and the International barge asset group, respectively, as of September 30, 2018. We recognized a pretax impairment loss of approximately $44.0 million in total, or $34.2 million and $9.8 million for the Gulf of Mexico inland barge asset group and the International barge asset group, respectively, for the three months ended September 30, 2018. The Gulf of Mexico inland barge asset group is reported as part of the U.S. (Lower 48) Drilling segment and the International barge asset group is reported as part of the International & Alaska Drilling segment.

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Note 3 - 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 U.S. Rental Tools segment.

Goodwill — The change in the carrying amount of goodwill for the period ended September 30, 2018 is as follows:



Dollars in thousands	Goodwill
Balance at December 31, 2017	$	6,708
Additions	—
Balance at September 30, 2018	$	6,708

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

Intangible Assets — Intangible Assets consist of the following:



		Balance at September 30, 2018
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	$	—		$	(6,784	)	$	4,846
Trade names	5	4,940		(332		)	(4,056		)	552
Total amortized intangible assets		$	16,570	$	(332	)	$	(10,840	)	$	5,398

Amortization expense was $1.7 million and $2.2 million for the nine months ended September 30, 2018 and 2017, respectively.

Our remaining intangibles amortization expense for the next five years is presented below:



Dollars in thousands	Expected future intangible amortization expense
2018	$	577
2019	$	2,306
2020	$	2,030
2021	$	485
Beyond 2021	$	—

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Note 4 - Long-term Debt

The following table illustrates the Company’s current debt portfolio as of September 30, 2018 and December 31, 2017:



Dollars in thousands	September 30, 2018			December 31, 2017
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	(5,711		)	(7,029		)
Total long-term debt	$	579,289		$	577,971

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 (the “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 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 ($3.9 million net of amortization as of September 30, 2018) are being amortized over the term of the notes using the effective interest rate method.

We may redeem all or a part of the 6.75% Notes upon appropriate notice, at redemption prices decreasing each year after January 15, 2018 to par beginning January 15, 2020. As of September 30, 2018, the redemption price is 103.375 percent and we have not made any redemptions to date. 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.

We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address our capital structure, including the maturity of our Senior Notes. Certain strategic and refinancing alternatives to restructure our balance sheet in the near term could, if implemented, have a material adverse impact on our statements of financial position, results of operations and cash flows.

The Indenture limits our ability and the ability of certain subsidiaries to: (i) sell assets, (ii) pay dividends or make other distributions on capital stock or redeem or repurchase capital stock or subordinated indebtedness, (iii) make investments, (iv) incur or guarantee additional indebtedness, (v) create or incur liens, (vi) enter into sale and leaseback transactions, (vii) incur dividend or other payment restrictions affecting subsidiaries, (viii) merge or consolidate with other entities, (ix) enter into transactions with affiliates, and (x) engage in certain business activities. Additionally, the Indenture contains certain restrictive covenants designating certain events as Events of Default. These covenants are subject to a number of important exceptions and qualifications.

7.50% Senior Notes, due August 2020

On July 30, 2013, we issued $225.0 million aggregate principal amount of the 7.50% Notes pursuant to an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. 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 ($1.8 million, net of amortization as of September 30, 2018) are being amortized over the term of the notes using the effective interest rate method.

Beginning August 1, 2018 ,we may redeem all or a part of the 7.50% Notes upon appropriate notice, at par. 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.

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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 (the “Revolver”). The 2015 Secured Credit Agreement formerly included financial maintenance covenants, including a Leverage Ratio, Consolidated Interest Coverage Ratio, Senior Secured Leverage Ratio, and Asset Coverage Ratio, many of which were suspended beginning in September 2015. We executed various amendments prior to February 14, 2018, which reduced the size of the Revolver from $200.0 million to $100.0 million.

On February 14, 2018, we executed the Fifth Amendment to the 2015 Secured Credit Agreement (the “Fifth Amendment”) which modified the credit facility to an Asset-Based Lending structure and reduced the size of the Revolver from $100.0 million to $80.0 million. The Fifth Amendment eliminated the financial maintenance covenants previously in effect and replaced them with a liquidity covenant of $30.0 million and a monthly borrowing base calculation based on eligible rental equipment and eligible domestic accounts receivable. The liquidity covenant requires the Company to maintain a minimum of $30.0 million of liquidity (defined as availability under the borrowing base and cash on hand), of which $15.0 million is restricted, resulting in a maximum availability at any one time of the lesser of (a) an amount equal to our borrowing base minus $15.0 million, or (b) $65.0 million. Our ability to borrow under the 2015 Secured Credit Agreement is determined by reference to our borrowing base. The Fifth Amendment also allows for refinancing our existing Senior Notes with either secured or unsecured debt, adds the ability for the Company to designate certain of its subsidiaries as “Designated Borrowers” and removes our availability to make certain restricted payments. The debt issuance costs incurred relating to the Fifth Amendment were $1.4 million. The remaining debt issuance costs including all amendments as of September 30, 2018 were $1.4 million which are being amortized through January 2020 on a straight line basis.

On July 12, 2018, we executed the Sixth Amendment to the 2015 Secured Credit Agreement (the “Sixth Amendment”) which permits the Company to make Restricted Payments (as defined in the 2015 Secured Credit Agreement) in the form of certain Equity Interests (as defined in the 2015 Secured Credit Agreement).

On October 25, 2018, we entered into a Consent Agreement and a Cash Collateral Agreement, whereby we may open bank accounts not subject to the 2015 Secured Credit Agreement for the purpose of depositing cash to secure certain Letters of Credit.

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. In addition to the liquidity covenant and borrowing base requirements, the 2015 Secured Credit Agreement contains customary affirmative and negative covenants, such as limitations on indebtedness and liens, and restrictions on entry into certain affiliate transactions and payments (including certain payments of dividends). As of September 30, 2018, we were in compliance with all covenants contained in the 2015 Secured Credit Agreement.

Our Revolver is available for general corporate purposes and to support letters of credit. Interest on Revolver loans accrues at either:


•	Base Rate plus an Applicable Rate or


•	LIBOR plus an Applicable Rate.

Revolver loans are available subject to a monthly borrowing base calculation. As of September 30, 2018, the borrowing base under the $80.0 million Revolver was $79.9 million, which was further reduced by $15.0 million of restricted liquidity and $6.3 million in supporting letters of credit outstanding, resulting in availability under the Revolver of $58.6 million. There were no amounts drawn on the Revolver as of September 30, 2018. Subsequently, on October 30, 2018, we deposited $10.0 million into a cash collateral account to support the letters of credit outstanding, increasing our availability under the Revolver by $10.0 million.

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Note 5 - Fair Value of Measurements

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 condensed 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:



	September 30, 2018				December 31, 2017
Dollars in thousands	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt
6.75% Notes	$	360,000	$	282,600	$	360,000	$	296,100
7.50% Notes	225,000		200,250		225,000		206,438
Total	$	585,000	$	482,850	$	585,000	$	502,538

During the third quarter of 2018, Property, Plant and Equipment for the Gulf of Mexico inland barge and International barge asset groups was impaired and written down to their estimated fair values. The estimated fair value was determined using Level 3 inputs. See Note 2 - Property, Plant and Equipment Impairment for further details.

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 nine months ended September 30, 2018.

Note 6 - 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 September 30, 2018, we had a liability for unrecognized tax benefits of $6.0 million, primarily related to foreign operations, (all of which, if recognized, would favorably impact our effective tax rate.). At December 31, 2017, we had a liability for unrecognized tax benefits of $5.4 million, all of which would favorably impact our effective tax rate upon recognition. In addition, we recognize interest and penalties that could be applied to uncertain tax positions in periodic income tax expense. As of September 30, 2018 and December 31, 2017, we had approximately $2.1 million and $2.1 million, respectively, of accrued interest and penalties related to uncertain tax positions.

Income tax expense was $2.4 million and $1.9 million for the three months ended September 30, 2018 and 2017, respectively. Despite the pre-tax loss for the third quarter of 2018, 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.

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Note 7 - 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 condensed balance sheets or statements of cash flows, although they could have a material adverse effect on our consolidated condensed statements of operations for a particular reporting period.

Note 8 - Stockholders’ Equity

Stock Issuance — In February 2017, we issued 800,000 shares (on a post-split basis or 12,000,000 shares on pre-split basis) 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 the 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.

Unless converted earlier, each share of our Convertible Preferred Stock will automatically convert into between 2.7605 and 3.1746 shares (on a post-split basis) 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 2.7605 shares (on a post-split basis) of common stock per share of Convertible Preferred Stock, subject to anti-dilution adjustments.

Dividends — The dividends on our Convertible Preferred Stock are 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.

On August 23, 2018, the Company declared a cash dividend of $1.8125 per share of our Convertible Preferred Stock for the period beginning on June 30, 2018 and ending on September 29, 2018, which was paid on September 28, 2018 to holders of record of the Convertible Preferred Stock as of September 15, 2018.

Rights agreement — On July 12, 2018, the Board of Directors of the Company declared a dividend of one right (“Right”) for each outstanding share of common stock to common stockholders of record at the close of business on July 27, 2018, which was amended by the Board of Directors on August 23, 2018 (the “Rights Plan”). On August 23, 2018, our Board of Directors approved an amendment and restatement of the Rights Agreement, dated as of July 12, 2018, between the Company and Equiniti Trust Company, as Rights Agent (as amended and restated, the “Section 382 Rights Agreement”). The purpose of the Section 382 Rights Agreement is to protect value by preserving the Company’s ability to use its net operating losses and foreign tax credits (“Tax Benefits”).

Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share (a “Fractional Share”) of Series A Junior Participating Preferred Stock, par value $1.00 per share, at a purchase price of $52.50 per Fractional Share, subject to adjustment. Initially, the Rights are attached to all outstanding shares of common stock. The Rights will separate from the common stock and a “Distribution Date” will occur, with certain exceptions, upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 4.9% or more of the outstanding shares of common stock, or (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person’s becoming an Acquiring Person. Each person or group of affiliated or associated persons that was a beneficial owner of 4.9% or more of the outstanding shares of common stock at the time of the adoption of the Section 382 Rights Agreement was grandfathered in at its then-current ownership level, but the Rights will become exercisable if at any time after the adoption of the Section 382 Rights Agreement, such person or group increases its ownership of common stock by one share or more. Any person or group of affiliated or associated persons who proposes to acquire