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Parker Drilling Company 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
e10vq
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended SEPTEMBER 30, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-7573
PARKER DRILLING COMPANY
(Exact name of registrant as specified in its charter)
     
Delaware   73-0618660
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
1401 Enclave Parkway, Suite 600, Houston, Texas 77077
(Address of principal executive offices) (Zip code)
(281) 406-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ    Accelerated filer o    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller reporting company o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of October 31, 2008, 113,310,906 common shares were outstanding.
 
 

 


 

TABLE OF CONTENTS
                 
            Page
Part I.  
Financial Information
    3  
       
 
       
       
Item 1. Financial Statements
    3  
       
 
       
       
Consolidated Condensed Balance Sheets (Unaudited) September 30, 2008 and December 31, 2007
    3  
       
 
       
       
Consolidated Condensed Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2008 and 2007
    4  
       
 
       
       
Consolidated Condensed Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2008 and 2007
    5  
       
 
       
       
Notes to the Unaudited Consolidated Condensed Financial Statements
    6  
       
 
       
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    24  
       
 
       
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk
    35  
       
 
       
       
Item 4. Controls and Procedures
    36  
       
 
       
Part II.  
Other Information
    36  
       
 
       
       
Item 1. Legal Proceedings
    36  
       
 
       
       
Item 1A. Risk Factors
    36  
       
 
       
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    37  
       
 
       
       
Item 3. Defaults Upon Senior Securities
    37  
       
 
       
       
Item 4. Submission of Matters to a Vote of Security Holders
    37  
       
 
       
       
Item 5. Other Information
    37  
       
 
       
       
Item 6. Exhibits
    37  
       
 
       
       
Signatures
    38  
       
 
       
       
Officer Certifications
       

2


 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
                 
    September 30,     December 31,  
    2008     2007  
    (Unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 75,277     $ 60,124  
Accounts and notes receivable, net
    217,104       166,706  
Rig materials and supplies
    29,914       24,264  
Deferred costs
    8,528       7,795  
Deferred income taxes
    9,424       9,423  
Other tax assets
    18,084       32,532  
Other current assets
    22,787       22,339  
 
           
 
Total current assets
    381,118       323,183  
 
           
Property, plant and equipment less accumulated depreciation and amortization of $682,933 at September 30, 2008 and $628,079 at December 31, 2007
    653,119       585,888  
Goodwill
    100,315       100,315  
Investment in and advances to unconsolidated joint venture
          (4,353 )
Deferred income taxes
    11,838       40,121  
Other noncurrent assets
    31,753       31,833  
 
           
 
Total assets
  $ 1,178,143     $ 1,076,987  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 3,000     $ 20,000  
Accounts payable and accrued liabilities
    116,467       87,352  
Accrued income taxes
    11,295       16,828  
 
           
 
Total current liabilities
    130,762       124,180  
 
           
Long-term debt
    410,235       353,721  
Other long-term liabilities
    20,820       56,318  
Long-term deferred tax liability
    8,506       8,044  
Contingencies (Note 11)
           
 
               
Stockholders’ equity:
               
Common stock
    18,883       18,653  
Capital in excess of par value
    601,697       593,866  
Accumulated deficit
    (12,760 )     (77,795 )
 
           
 
Total stockholders’ equity
    607,820       534,724  
 
           
 
Total liabilities and stockholders’ equity
  $ 1,178,143     $ 1,076,987  
 
           
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 and Weighted Average Shares Outstanding)
(Unaudited)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007     2008     2007  
Revenues:
                               
U.S. drilling
  $ 44,743     $ 56,918     $ 139,999     $ 174,375  
International drilling
    92,226       58,857       238,885       143,834  
Project management and engineering services
    24,089       20,922       72,219       58,633  
Construction contract
    20,421             40,501        
Rental tools
    45,975       35,500       125,858       96,905  
 
                       
 
Total revenues
    227,454       172,197       617,462       473,747  
 
                       
Operating expenses:
                               
U.S. drilling
    21,850       23,208       65,502       74,101  
International drilling
    63,682       37,288       172,915       101,853  
Project management and engineering services
    21,451       16,685       61,819       49,004  
Construction contract
    19,323             38,373        
Rental tools
    18,166       14,579       50,014       38,263  
Depreciation and amortization
    30,663       23,043       84,995       60,744  
 
                       
 
Total operating expenses
    175,135       114,803       473,618       323,965  
 
                       
 
Total operating gross margin
    52,319       57,394       143,844       149,782  
 
                       
General and administration expense
    (9,271 )     (6,246 )     (24,420 )     (18,380 )
Provision for reduction in carrying value of certain assets
          (1,091 )           (1,091 )
Gain on disposition of assets, net
    799       543       2,014       17,216  
 
                       
 
Total operating income
    43,847       50,600       121,438       147,527  
 
                       
Other income and (expense):
                               
 
Interest expense
    (5,820 )     (7,576 )     (17,386 )     (19,891 )
Changes in fair value of derivative positions
          (262 )           (671 )
Interest income
    383       2,080       1,121       5,576  
Loss on extinguishment of debt
          (2,396 )           (2,396 )
Equity in loss of unconsolidated joint venture and related charges, net of tax
          (1,123 )     (1,105 )     (1,123 )
Minority interest
                      (1,000 )
Other
    299       510       503       587  
 
                       
 
Total other income and (expense)
    (5,138 )     (8,767 )     (16,867 )     (18,918 )
 
                       
Income before income taxes
    38,709       41,833       104,571       128,609  
Income tax expense:
                               
Current
    14,179       14,598       13,024       43,223  
Deferred
    5,979       4,582       26,512       15,879  
 
                       
 
Total income tax expense
    20,158       19,180       39,536       59,102  
 
                       
 
Net income
  $ 18,551     $ 22,653     $ 65,035     $ 69,507  
 
                       
 
                               
Basic earnings per share:
                               
Net income
  $ 0.17     $ 0.21     $ 0.58     $ 0.64  
 
                               
Diluted earnings per share:
                               
Net income
  $ 0.16     $ 0.20     $ 0.58     $ 0.63  
 
                               
Number of common shares used in computing earnings per share
                               
Basic
    111,756,322       110,270,207       111,243,745       109,269,867  
Diluted
    112,647,450       111,278,430       112,324,566       110,522,914  
See accompanying notes to the unaudited consolidated condensed financial statements.

4


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
                 
    Nine Months Ended September 30,  
    2008     2007  
Cash flows from operating activities:
               
Net income
  $ 65,035     $ 69,507  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    84,995       60,744  
Gain on disposition of assets
    (2,014 )     (17,216 )
Equity loss in unconsolidated joint venture and related charges, net of tax
    1,105       1,123  
Provision for reduction in carrying value of certain assets
          1,091  
Deferred income tax expense
    26,512       15,879  
Expenses not requiring cash
    8,258       11,008  
Change in accounts receivable
    (46,903 )     (48,524 )
Change in other assets
    7,627       (28,579 )
Change in liabilities
    (11,887 )     (12,979 )
 
           
 
Net cash provided by operating activities
    132,728       52,054  
 
           
 
Cash flows from investing activities:
               
Capital expenditures
    (157,313 )     (191,381 )
Proceeds from the sale of assets
    3,284       23,243  
Proceeds from insurance settlements
    951        
Investment in unconsolidated joint venture
    (5,000 )      
Purchase of marketable securities
          (101,075 )
Proceeds from sale of marketable securities
          163,995  
 
           
 
Net cash used in investing activities
    (158,078 )     (105,218 )
 
           
 
Cash flows from financing activities:
               
Proceeds from issuance of debt
          125,000  
Proceeds payments under debt obligations
          (100,000 )
Purchase of call options
          (31,475 )
Proceeds from sale of common stock warrants
          20,250  
Proceeds from draw on term note facility
    50,000        
Paydown on revolver credit facility
    (35,000 )      
Proceeds from draw on revolver credit facility
    25,000        
Payments of debt issuance costs
    (1,846 )     (3,563 )
Proceeds from stock options exercised
    1,970       15,791  
Excess tax benefit from stock based compensation
    379       1,912  
 
           
 
Net cash provided by financing activities
    40,503       27,915  
 
           
 
Net increase (decrease) in cash and cash equivalents
    15,153       (25,249 )
 
Cash and cash equivalents at beginning of year
    60,124       92,203  
 
           
 
Cash and cash equivalents at end of period
  $ 75,277     $ 66,954  
 
           
 
               
Supplemental cash flow information:
               
Interest paid
  $ 16,364     $ 16,370  
Income taxes paid
  $ 32,158     $ 44,270  
See accompanying notes to the unaudited consolidated condensed financial statements.

5


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1.   General – In the opinion of the management of Parker Drilling Company, the accompanying unaudited consolidated condensed financial statements reflect all adjustments (of a normally recurring nature) which are necessary for a fair presentation of (1) the financial position as of September 30, 2008 and December 31, 2007, (2) the results of operations for the three and nine months ended September 30, 2008 and 2007, and (3) cash flows for the nine months ended September 30, 2008 and 2007. Results for the nine months ended September 30, 2008 are not necessarily indicative of the results that will be realized for the year ending December 31, 2008. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2007.
 
    Stock-Based Compensation – Total stock-based compensation expense recognized under SFAS No. 123R for the three and nine month periods ended September 30, 2008 and for the three and nine month periods ended September 30, 2007 was $2.7 million and $6.5 million and $2.2 million and $6.3 million, respectively, all of which was related to restricted stock plan expense. Stock-based compensation expense is included in our consolidated condensed income statement in both “General and administration expense” and “operating expense.” There were no unvested stock options at September 30, 2008. The Company had 290,300 outstanding and exercisable stock options as of September 30, 2008, the aggregate intrinsic value of which was $1.5 million, with a weighted average exercise price of $2.88. Unvested restricted stock awards at December 31, 2007 and September 30, 2008 were 1,502,592 shares and 1,473,849 shares, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was $5.1 million as of December 31, 2007 and $5.3 million as of September 30, 2008. There were 24,700 and 890,274 restricted shares granted to certain officers and key employees during the three and nine month periods ended September 30, 2008. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year.
 
    The excess tax benefit realized for the tax deductions from options exercised and restricted stock vesting totaled $0.4 million for the nine months ended September 30, 2008, which has been reported as a financing cash inflow in the consolidated condensed statement of cash flows.
 
    Construction Contract – Historically the Company has primarily constructed drilling rigs for its own use. In some instances, however, the Company enters into contracts to design, construct, deliver and commission a rig for a major customer. In 2008, we were awarded a cost reimbursable, fixed fee contract to construct, deliver and commission a rig for extended reach drilling work in Alaska. In 2006, the Company entered into a separate contract for the front end engineering design of the rig. Total cost of the construction phase is currently expected to be approximately $212 million. The Company recognizes revenues received and costs incurred related to its construction contract on a gross basis and income for the related fees on a percentage of completion basis using the cost-to-cost method. Construction costs in excess of funds received from the customer are accumulated and reported as part of other current assets. At September 30, 2008, a net receivable (construction costs less progress payments) of $1.6 million is included in other current assets.
 
    Cash and Cash Equivalents – For purposes of the balance sheet and the statement of cash flows, the Company considers cash equivalents to be all highly liquid debt instruments that have a remaining maturity of three months or less at the date of purchase.

6


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
2.   Earnings Per Share (“EPS”)
                         
    Three Months Ended September 30, 2008  
    Income     Shares     Per-Share  
    (Numerator)     (Denominator)     Amount  
Basic EPS:
                       
Net income
  $ 18,551,000       111,756,322     $ 0.17  
 
                   
 
                       
Effect of dilutive securities:
                       
Stock options and restricted stock
            891,128     $ (0.01 )
 
                       
Diluted EPS:
                       
Net income
  $ 18,551,000       112,647,450     $ 0.16  
 
                   
                         
    Nine Months Ended September 30, 2008  
    Income     Shares     Per-Share  
    (Numerator)     (Denominator)     Amount  
Basic EPS:
                       
Net income
  $ 65,035,000       111,243,745     $ 0.58  
 
                   
 
                       
Effect of dilutive securities:
                       
Stock options and restricted stock
            1,080,821     $  
 
                       
Diluted EPS:
                       
Net income
  $ 65,035,000       112,324,566     $ 0.58  
 
                   
                         
    Three Months Ended September 30, 2007  
    Income     Shares     Per-Share  
    (Numerator)     (Denominator)     Amount  
Basic EPS:
                       
Net income
  $ 22,653,000       110,270,207     $ 0.21  
 
                   
 
                       
Effect of dilutive securities:
                       
Stock options and restricted stock
            1,008,223     $ (0.01 )
 
                       
Diluted EPS:
                       
Net income
  $ 22,653,000       111,278,430     $ 0.20  
 
                   
                         
    Nine Months Ended September 30, 2007  
    Income     Shares     Per-Share  
    (Numerator)     (Denominator)     Amount  
Basic EPS:
                       
Net income
  $ 69,507,000       109,269,867     $ 0.64  
 
                   
 
                       
Effect of dilutive securities:
                       
Stock options and restricted stock
            1,253,047     $ (0.01 )
 
                       
Diluted EPS:
                       
Net income
  $ 69,507,000       110,522,914     $ 0.63  
 
                   

7


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
2.   Earnings Per Share (“EPS”) (continued)
 
    All stock options outstanding during the three and nine months ended September 30, 2008, were included in the computation of diluted EPS as the options’ exercise prices were less than the average market price of the common shares. Options to purchase 325,000 shares of common stock with exercise prices ranging from $10.81 to $12.19 per share were outstanding during the three and nine months ended September 30, 2007, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares and would have been anti-dilutive.
 
3.   Business Segments – The five primary services we provide are as follows: U.S. drilling, International drilling, Project management and engineering services, Construction contracts and Rental tools. In the first quarter of 2008, the Company created a new segment called Project management and engineering services by combining our labor, operations and maintenance and engineering services contracts which had been previously reported in our U.S. drilling or International drilling segments. The new segment was created in anticipation of the significant expansion of these projects and services and senior management’s resultant separate performance assessment and resource allocation for this segment. The new segment operations, unlike our U.S. and International drilling and Rental tools operations, generally require little or no capital expenditures, and therefore have different performance assessment and resource needs. The Company anticipates further growth of this segment of our business and reviews and assesses its performance separately. Financial information for reportable segments for 2007 has been restated below to reflect this change. In the second quarter of 2008, the Company created a new segment called Construction contracts to reflect the Company’s Engineering, Procurement, Construction and Installation contract (“EPCI”). The Construction contract segment income (fees) is accounted for on a percentage of completion basis using the cost-to-cost method. Revenues received and costs incurred related to the contract are recorded on a gross basis.

8


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
3.   Business Segments (continued)
 
    Information regarding our operations by industry segment for the three and nine months ended September 30, 2008 and 2007 is as follows:
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007     2008     2007  
    (Dollars in Thousands)     (Dollars in Thousands)  
Revenues:
                               
U.S. drilling
  $ 44,743     $ 56,918     $ 139,999     $ 174,375  
International drilling
    92,226       58,857       238,885       143,834  
Project management and engineering services
    24,089       20,922       72,219       58,633  
Construction contract
    20,421             40,501        
Rental tools
    45,975       35,500       125,858       96,905  
 
                       
 
                               
Total revenues
  $ 227,454     $ 172,197     $ 617,462     $ 473,747  
 
                       
 
                               
Operating gross margin:
                               
U.S. drilling
  $ 14,166     $ 24,918     $ 48,475     $ 76,365  
International drilling
    14,241       13,869       29,029       22,391  
Project management and engineering services
    2,638       4,237       10,400       9,629  
Construction contract
    1,098             2,128        
Rental tools
    20,176       14,370       53,812       41,397  
 
                       
 
                               
Total operating gross margin
    52,319       57,394       143,844       149,782  
 
                               
General and administration expense
    (9,271 )     (6,246 )     (24,420 )     (18,380 )
Provision for reduction in carrying value of certain assets
          (1,091 )             (1,091 )
Gain on disposition of assets, net
    799       543       2,014       17,216  
 
                       
 
                               
Total operating income
    43,847       50,600       121,438       147,527  
 
                               
Interest expense
    (5,820 )     (7,576 )     (17,386 )     (19,891 )
Changes in fair value of derivative positions
          (262 )           (671 )
Loss on extinguishment of debt
          (2,396 )           (2,396 )
Other
    682       1,467       519       4,040  
 
                       
 
                               
Income before income taxes
  $ 38,709     $ 41,833     $ 104,571     $ 128,609  
 
                       
4.   Disposition of Assets – Asset dispositions in the first nine months of 2008 included the sale of Rig 206 in Indonesia, for which we recorded no gain or loss, and miscellaneous equipment that resulted in a recognized gain of $2.0 million. In the first nine months of 2007 asset dispositions consisted primarily of the sale of workover barge Rigs 9 and 26 for proceeds of approximately $20.5 million, resulting in a recognized gain of $15.1 million.
 
5.   Accounting for Uncertainty in Income Taxes – FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions 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. During March 2008, the Company resolved the pending tax case with the Kazakhstan Ministry of Finance by paying the reduced interest assessment related to tax payments made in 2007 (see Note 8 - Kazakhstan Tax Case), and we accordingly reduced the previously recorded accruals based on the final resolution of this matter. In addition, for the third quarter of 2008, the Company recognized $2.4 million of expense related to certain intercompany transactions between our US companies and foreign affiliates. As of September 30, 2008, the Company had a remaining liability for unrecognized tax benefits of $14.7 million primarily related to foreign operations.

9


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
6.   Income Tax Expense – Income tax expense was $20.2 million for the third quarter of 2008 and includes a charge of $2.4 million related to FIN 48 as compared to income tax expense of $19.2 million for the third quarter of 2007.
 
7.   Saudi Arabia Joint Venture – On April 9, 2008, a subsidiary of Parker executed an agreement (“Sale Agreement”) to sell its 50 percent share interest in Al-Rushaid Parker Drilling Co. Ltd. (“ARPD”) to an affiliate of the Al Rushaid subsidiary that owns the remaining 50 percent interest. The terms of the Sale Agreement provided for a $2.0 million payment to Parker’s subsidiary as consideration for the 50 percent share interest of the Parker subsidiary and partial repayment of investments and advances of the Parker subsidiary to ARPD, including a $5.0 million advance in January 2008. During the first quarter of 2008, the Parker subsidiary made the decision to terminate any future funding to ARPD, and accordingly, the Company did not record equity in losses of ARPD in the first quarter of 2008. We recognized a $1.1 million loss, net of income taxes, in the first quarter of 2008 primarily as a result of nonrecoverable costs, as per the terms of the Sale Agreement, incurred by the Parker affiliate to support ARPD operations during the current quarter. The Parker subsidiary received the $2.0 million on April 15, 2008 in full settlement of the Company’s investment in and advances to ARPD.
 
    The Sale Agreement obligates the resulting Saudi shareholders to indemnify the Parker subsidiary and its affiliates from claims arising out of or related to the operations of ARPD, including the drilling contracts between ARPD and Saudi Aramco, ARPD’s bank loans and vendors providing goods or services to ARPD. Each party has agreed to waive any claims that it may have against the other party arising out of the business of ARPD on or before the closing date, and subject to the formal transfer of the shares the Parker subsidiary has agreed to disclaim any remaining rights with respect to the unpaid portion of shareholder loans and payables owed by ARPD to the Parker subsidiary. The formal transfer of shares was approved by the Saudi Arabian authorities in July 2008.
 
    The agreement also provides that there are no restrictions on Parker or any of its affiliates with regard to competing with ARPD in the future, including in Saudi Arabia.
 
8.   Kazakhstan Tax Case - On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of Parker Drilling’s subsidiary, Parker Drilling Company International Limited (“PDCIL”), received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (“MinFin”) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $125.8 million). Approximately KZT7.5 billion or $63.3 million was assessed for import Value Added Tax (“VAT”), administrative fines and interest on equipment imported to perform the drilling contracts (the “VAT Assessment”) and approximately KZT7.4 billion or $62.5 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received by PDCIL from a client for the upgrade of Barge Rig 257 and other issues related to PKD Kazakhstan’s operations in the Republic of Kazakhstan (the “Income Tax Assessment”).
 
    On May 24, 2006, the Supreme Court of the Republic of Kazakhstan (“SCK”) issued a decision upholding the VAT Assessment. Consistent with its contractual obligations, on November 20, 2006, the client advanced the actual amount of the VAT Assessment and this amount has been remitted to MinFin. The administrative fines related to the VAT Assessment are being appealed by the client who is contractually responsible to reimburse PKD Kazakhstan for any administrative fines ultimately assessed. The client has also contractually agreed to reimburse PKD Kazakhstan for any incremental income taxes that PKD Kazakhstan incurs from the reimbursement of this VAT Assessment.

10


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
8.   Kazakhstan Tax Case (continued)
 
    After multiple appeals to the SCK and two meetings of the U.S. Competent Authorities under the Mutual Agreement Procedure of the U.S.- Kazakhstan Tax Treaty, the SCK ultimately upheld the Income Tax Assessment and on December 12, 2007, PKD Kazakhstan paid the principal tax portion of the Income Tax Assessment, net of estimated taxes previously paid. After a further appeal against the interest portion of the notice of assessment, on February 25, 2008, the Atyrau Economic Court issued a ruling that interest on the income tax assessed should accrue from the October 12, 2005 assessment date as opposed to the original assessment in 2001, which resulted in a revised interest assessment by the Atyrau Tax Committee of approximately US$13 million, which was paid by PKD Kazakhstan on March 14, 2008, in final resolution of this matter. Income tax for the first nine months of 2008 includes a benefit of $13.4 million of FIN 48 interest and foreign currency exchange rate fluctuations related to this final resolution.
 
9.   Long-Term Debt
                 
    September 30, 2008     December 31, 2007  
    (Dollars in Thousands)  
Senior Notes:
               
Interest rate 2.125% convertible due 2012
  $ 125,000     $ 125,000  
Interest rate 9.625%, due 2012
    228,235       228,721  
Revolver
    10,000       20,000  
Term loan
    50,000        
 
           
 
               
Total debt
    413,235       373,721  
Less current portion
    3,000       20,000  
 
           
 
               
Total long-term debt
  $ 410,235     $ 353,721  
 
           
    On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Senior Notes due July 15, 2012. Interest is payable semiannually on July 15th and January 15th. The initial conversion price is approximately $13.85 per share and is subject to adjustment for the occurrence of certain events stated within the indenture. Simultaneously, we entered into a call spread convertible note hedge consisting of a call option purchased by the Company for $31.5 million and sold warrants for $20.2 million, the net cost of which is included in our consolidated condensed balance sheet in “Capital in excess of par value”. Proceeds from the transaction were used to call our outstanding Senior Floating Rate notes, to pay the net cost of hedge and warrant transactions, and for general corporate purposes. The call strike price at $13.85 mirrors the note conversion price and the warrant strike price is $18.29, which effectively, increase the conversion price to approximately $18.29 per share.
 
    On September 20, 2007, we replaced our existing $40.0 million Credit Agreement with a new $60.0 million credit facility pursuant to an Amended and Restated Credit Agreement (the “2007 Credit Facility”), which expires in September 2012. The 2007 Credit Facility was secured by rental tools equipment, accounts receivable and the stock of substantially all of our domestic subsidiaries, other than domestic subsidiaries owned by a foreign subsidiary, and contained customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.

11


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
9.   Long-Term Debt (continued)
 
    On May 15, 2008 we entered into a new Credit Agreement (“2008 Credit Facility”) with a five year senior secured $80.0 million revolving credit facility (“Revolving Credit Facility) and a senior secured term loan facility (“Term Loan Facility”) of up to $50.0 million. The obligations of the Company under the 2008 Credit Facility are guaranteed by substantially all of the Company’s domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed a guaranty. The 2008 Credit Facility contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage. On July 9, 2008, the Company drew down the remaining $15.0 million available on the Term Loan Facility, bringing the total amount outstanding to $50.0 million. The Term Loan will begin amortizing on September 30, 2009 at equal installments of $3.0 million per quarter. On September 12, 2008, we drew down $10.0 million on the Revolving Credit Facility. Subsequent to quarter end we drew down an additional $48.0 million resulting in total draws under the Revolving Credit Facility of $58.0 million as of October 17, 2008. The amount drawn represents 94 percent of the capacity of the Revolving Credit Facility. The Company expects to use the additional drawn amounts over the next twelve months to fund construction of two new rigs to perform an anticipated five year contract in Alaska based on the executed letter of intent.
 
10.   Derivative Instruments – We used derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes, which were fully redeemed on September 27, 2007. These derivative instruments, which consisted of variable-to-fixed interest rate swaps, did not meet the hedge criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and were therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps was recognized in earnings.
 
    On July 17, 2007, we terminated one swap scheduled to expire in September 2008 and received $0.7 million. On September 4, 2007, our one remaining swap expired.
 
11.   Contingencies
 
    Bangladesh Claim
 
    In September 2005, a subsidiary of the Company was served with a lawsuit filed in the 152nd District Court of Harris County State of Texas on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries (none involving loss of life) arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. The court dismissed the case on the basis that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs have appealed this dismissal; however, the Company believes the plaintiffs’ prospects of being successful on appeal are remote. No amounts were accrued at September 30, 2008.
 
    Asbestos-Related Claims
 
    In August 2004, the Company was notified that certain of its subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with the Company, including companies that allegedly manufactured drilling- related products containing asbestos that are the subject of the complaints.

12


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
11.   Contingencies (continued)
 
    Asbestos-Related Claims (continued)
 
    The complaints allege that the Company’s subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act and that the plaintiffs are entitled to monetary damages. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker Drilling has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of Parker Drilling. Out of 668 amended single-plaintiff complaints filed to date, sixteen (16) plaintiffs have identified Parker Drilling or one of its affiliates as a defendant. Discovery is proceeding in groups of 60 and none of the plaintiff complaints naming Parker are included in the first 60 (Group I). The initial discovery of Group I resulted in certain dismissals with prejudice, two dismissals without prejudice and two withdraws from Group I, leaving only 40 plaintiffs remaining in Group I. Selection of Discovery Group II was completed on April 21, 2008. Out of the 60 plaintiffs selected, Parker Drilling was named in one suit.
 
    The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome to have a material adverse effect on its financial condition, results of operations or cash flows; however, the Company is unable to predict the ultimate outcome of these lawsuits. No amounts were accrued at September 30, 2008.
 
    Gulfco Site
 
    Several years ago the Company received an information request under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) designating Parker Drilling Offshore Corporation, a subsidiary of Parker Drilling as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). The subsidiary responded to this request in 2003 with documents. In January, 2008 the subsidiary received an administrative order to participate in an investigation of the site and a study of the remediation needs and alternatives. The EPA alleges that the subsidiary is successor to a party who owned the Gulfco site during the time when chemical releases took place there. Two other parties have been performing that work since mid-2005 under an earlier version of the same order. The subsidiary believes that it has a sufficient cause to decline participation under the order and has notified the EPA of that decision. Non-compliance with an EPA order absent sufficient cause for doing so can result in substantial penalties under CERCLA. The subsidiary is continuing to evaluate its relationship to the site and has conferred with the EPA and the other parties in an effort to resolve the matter. The Company has not yet estimated the amount or impact on our operations, financial position or cash flows of any costs related to the site. The EPA and the other two parties have spent over $2.7 million studying and conducting initial remediation of the site, and it is anticipated that an additional $1.3 million will be required to complete the remediation. Other costs (not yet quantified) such as interest and administrative overhead could be added to any claim against the Company. The Company does not believe it has any obligation with respect to the remediation of the property, and accordingly no accrual was made as of September 30, 2008.

13


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
11.   Contingencies (continued)
 
    Customs Agent Investigation
 
    As previously disclosed, the Company received requests from the United States Department of Justice (“DOJ”) in July 2007 and the United States Securities and Exchange Commission (SEC”) in January 2008 relating to the Company’s utilization of the services of a customs agent. In response to those requests, the Company is conducting an internal investigation. The DOJ and the SEC are conducting parallel investigations into possible violations of U.S. law by the Company, including the Foreign Corrupt Practices Act (the “FCPA”). In particular, the DOJ and the SEC are investigating the Company’s use of customs agents in certain countries in which the Company currently operates or formerly operated, including Kazakhstan and Nigeria. The Company is fully cooperating with the DOJ and SEC investigations. At this point, we are unable to predict the duration, scope or result of the DOJ or the SEC investigation or whether either agency will commence any legal action. If we are not in compliance with the FCPA and other laws governing the conduct of business with foreign government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
 
    Economic Sanctions Compliance
 
    Our international operations are subject to economic sanctions laws and regulations restricting certain activities involving countries, entities and persons on which the U.S. has imposed economic sanctions. Pursuant to a recent internal review, we have preliminarily identified certain shipments of equipment and supplies that were routed through Iran. In addition, we have engaged in drilling wells in the Korpedje Field in Turkmenistan, from where natural gas may be exported by pipeline to Iran. We are currently reviewing these shipments and drilling activities to determine whether the timing, nature and extent of such shipments or drilling activities may have given rise to violations of these laws and regulations. Although we are unable to predict the scope or result of this internal review or its ultimate outcome, we have initiated a voluntary disclosure of these potential compliance issues to the appropriate U.S. government agency. If we are not in compliance with export restrictions and U.S. economic sanctions, we may be subject to civil or criminal penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
 
12.   Recent Accounting Pronouncements – In May 2008, the FASB issued FSP Accounting Principles Board (APB) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP clarifies that convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We will adopt the provisions of FSP AAPB 14-1 on January 1, 2009 and will be required to retroactively apply its provisions, which means we will restate our consolidated financial statements for prior periods. We have not yet determined the impact of this FSP on our consolidated financial statements.

14


 

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
13.   Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements – Set forth on the following pages are the consolidating condensed financial statements of (i) Parker Drilling, (ii) its restricted subsidiaries that are guarantors of the Senior Notes, and Convertible Senior Notes (“the Notes”) and (iii) the restricted and unrestricted subsidiaries that are not guarantors of the Notes. The Notes are guaranteed by substantially all of the domestic restricted subsidiaries of Parker Drilling. There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries. Separate financial statements for each guarantor company are not provided as the company complies with the exception to Rule 3-10(a)(1) of Regulation S-X, set forth in sub-paragraph (f) of such rule. All guarantor subsidiaries are directly or indirectly owned 100% by the parent company, all guarantees are full and unconditional and all guarantees are joint and several.
 
    AralParker (a Kazakhstan joint stock company, owned 100 percent by Parker Drilling (Kazakstan), LLC, Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Argentine Holdings, Ltd., Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria) Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, LLC), Parker Drilling Kazakhstan B.V., Parker Drilling AME Limited, Parker Drilling Asia Pacific, LLC, PD International Holdings C.V.,PD Dutch Holdings C.V., PD Selective Holdings C.V., PD Offshore Holdings C.V., Parker Drilling Netherlands B.V., Parker Drilling Dutch B.V., Parker Hungary Rig Holdings Limited Liability Company, Parker Drilling Spain Rig Services, S L, Parker 3Source, LLC, Parker 5272, LLC, Parker Central Europe Rig Holdings Limited Liability Company, Parker Cyprus Leasing Limited, Parker Cyprus Ventures Limited, Parker Drilling International B.V., Parker Drilling Offshore B.V., Parker Drilling Offshore International, Inc., Parker Drilling Overseas B.V., Parker Drilling Russia B.V., Parker Drillsource, LLC, PD Labor Services, Ltd., PD Labor Sourcing, Ltd., and Parker Enex, LLC are all non-guarantor subsidiaries. The Company is providing consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of September 30, 2008 and December 31, 2007 and for the three and nine months ended September 30, 2008 and 2007. The consolidating condensed financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.

15


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
(Unaudited)
                                         
    September 30, 2008  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 26,654     $ 7,947     $ 40,676     $     $ 75,277  
Accounts and notes receivable, net
    59,270       215,897       146,897       (204,960 )     217,104  
Rig materials and supplies
          11,936       17,978             29,914  
Deferred costs
          2,114       6,414             8,528  
Deferred income taxes
    9,424                         9,424  
Other tax assets
    58,816       (38,951 )     (1,781 )           18,084  
Other current assets
    548       18,700       3,539             22,787  
 
                             
 
                                       
Total current assets
    154,712       217,643       213,723       (204,960 )     381,118  
 
                             
 
                                       
Property, plant and equipment, net
    79       482,303       170,615       122       653,119  
 
                                       
Goodwill
          100,315                   100,315  
 
                                       
Investment in subsidiaries and intercompany advances
    960,202       963,543       (84,940 )     (1,838,805 )      
 
                                       
Investment in and advances to unconsolidated joint venture
          4,620       (4,620 )            
 
                                       
Other noncurrent assets
    19,647       15,031       8,913             43,591  
 
                             
 
                                       
Total assets
  $ 1,134,640     $ 1,783,455     $ 303,691     $ (2,043,643 )   $ 1,178,143  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Current liabilities:
                                       
Current portion of long-term debt
  $ 3,000     $     $     $     $ 3,000  
Accounts payable and accrued liabilities
    50,381       288,119       101,470       (323,503 )     116,467  
Accrued income taxes
    263       4,610       6,422             11,295  
 
                             
 
                                       
Total current liabilities
    53,644       292,729       107,892       (323,503 )     130,762  
 
                             
 
                                       
Long-term debt
    410,235                         410,235  
Other long-term liabilities
    358       12,594       7,868             20,820  
Long-term deferred tax liability
          1,237       7,269             8,506  
Intercompany payables
    62,583       576,746       36,830       (676,159 )      
Contingencies (Note 11)
                             
 
                                       
Stockholders’ equity:
                                       
Common stock
    18,883       39,899       21,153       (61,052 )     18,883  
Capital in excess of par value
    601,697       1,045,727       122,268       (1,167,995 )     601,697  
Retained earnings (accumulated deficit)
    (12,760 )     (185,477 )     411       185,066       (12,760 )
 
                             
 
                                       
Total stockholders’ equity
    607,820       900,149       143,832       (1,043,981 )     607,820  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 1,134,640     $ 1,783,455     $ 303,691     $ (2,043,643 )   $ 1,178,143  
 
                             

16


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)
                                         
    December 31, 2007  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 31,326     $ 8,314     $ 20,484     $     $ 60,124  
Accounts and notes receivable, net
    79,688       187,663       80,139       (180,784 )     166,706  
Rig materials and supplies
          10,667       13,597             24,264  
Deferred costs
          1,553       6,242             7,795  
Deferred income taxes
    9,423                         9,423  
Other tax assets
    59,673       (23,395 )     (3,746 )           32,532  
Other current assets
    174       10,578       11,587             22,339  
 
                             
 
                                       
Total current assets
    180,284       195,380       128,303       (180,784 )     323,183  
 
                             
 
                                       
Property, plant and equipment, net
    79       423,652       162,035       122       585,888  
 
                                       
Goodwill
          100,315                   100,315  
 
                                       
Investment in subsidiaries and intercompany advances
    813,248       963,269       (58,320 )     (1,718,197 )      
 
                                       
Investment in and advances to unconsolidated joint venture
          267       (4,620 )           (4,353 )
 
                                       
Other noncurrent assets
    40,113       20,805       11,036             71,954  
 
                             
 
                                       
Total assets
  $ 1,033,724     $ 1,703,688     $ 238,434     $ (1,898,859 )   $ 1,076,987  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Current liabilities:
                                       
Current debt
  $ 20,000     $     $     $     $ 20,000  
Accounts payable and accrued liabilities
    48,820       221,363       64,577       (247,408 )     87,352  
Accrued income taxes
    1,765       10,790       4,273             16,828  
 
                             
 
                                       
Total current liabilities
    70,585       232,153       68,850       (247,408 )     124,180  
 
                             
 
                                       
Long-term debt
    353,721                         353,721  
Other long-term liabilities
    110       48,174       8,034             56,318  
Long-term deferred tax liability
    1       1,237       6,806             8,044  
Intercompany payables
    74,583       576,746       38,074       (689,403 )      
Contingencies (Note 11)
                             
 
                                       
Stockholders’ equity:
                                       
Common stock
    18,653       39,900       21,152       (61,052 )     18,653  
Capital in excess of par value
    593,866       1,045,732       115,765       (1,161,497 )     593,866  
Retained earnings (accumulated deficit)
    (77,795 )     (240,254 )     (20,247 )     260,501       (77,795 )
 
                             
 
                                       
Total stockholders’ equity
    534,724       845,378       116,670       (962,048 )     534,724  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 1,033,724     $ 1,703,688     $ 238,434     $ (1,898,859 )   $ 1,076,987  
 
                             

17


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
                                         
    Three months ended September 30, 2008  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
Total revenues
  $     $ 171,597     $ 81,945     $ (26,088 )   $ 227,454  
 
                                       
Operating expenses
    5       104,648       65,907       (26,088 )     144,472  
Depreciation and amortization
          21,745       8,918             30,663  
 
                             
 
                                       
Total operating gross margin
    (5 )     45,204       7,120             52,319  
 
                             
 
                                       
General and administration expense (1)
    (42 )     (9,221 )     (8 )           (9,271 )
Gain on disposition of assets, net
          461       338             799  
 
                             
 
                                       
Total operating income (loss)
    (47 )     36,444       7,450             43,847  
 
                             
 
                                       
Other income and (expense):
                                       
Interest expense
    (6,981 )     (11,814 )     (62 )     13,037       (5,820 )
Interest income
    10,655       1,890       875       (13,037 )     383  
Equity in loss of unconsolidated joint venture, net of taxes
                             
Other
    2       296       1             299  
Equity in net earnings of subsidiaries
    28,048                   (28,048 )      
 
                             
 
                                       
Total other income and (expense)
    31,724       (9,628 )     814       (28,048 )     (5,138 )
 
                             
 
                                       
Income (loss) before income taxes
    31,677       26,816       8,264       (28,048 )     38,709  
 
                                       
Income tax (benefit) expense:
                                       
Current
    12,013       2,372       (206 )           14,179  
Deferred
    1,113       4,897       (31 )           5,979  
 
                             
 
                                       
Total income tax (benefit) expense
    13,126       7,269       (237 )           20,158  
 
                             
 
                                       
Net income (loss)
  $ 18,551     $ 19,547     $ 8,501     $ (28,048 )   $ 18,551  
 
                             
 
(1)   All field operations general and administration expenses are included in operating expenses.

18


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
                                         
    Three months ended September 30, 2007  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
Drilling and rental revenues
  $     $ 150,950     $ 41,899     $ (20,652 )   $ 172,197  
 
                                       
Drilling and rental operating expenses
          77,437       34,971       (20,648 )     91,760  
Depreciation and amortization
          20,026       3,017             23,043  
 
                             
 
                                       
Drilling and rental operating income
          53,487       3,911       (4 )     57,394  
 
                             
 
                                       
General and administration expense (1)
    (42 )     (6,253 )     49             (6,246 )
Provision for reduction in carrying value of certain assets
          (1,091 )                 (1,091 )
Gain (loss) on disposition of assets, net
          556       (13 )           543  
 
                             
 
                                       
Total operating income (loss)
    (42 )     46,699       3,947       (4 )     50,600  
 
                             
 
                                       
Other income and (expense):
                                       
Interest expense
    (8,766 )     (11,795 )     (88 )     13,073       (7,576 )
Changes in fair value of derivative positions
    (262 )                       (262 )
Interest income
    12,169       2,166       819       (13,074 )     2,080  
Loss on extinguishment of debt
    (2,396 )                       (2,396 )
Equity in loss of unconsolidated joint venture, net of taxes
                (1,123 )           (1,123 )
Other
    3       510       (2 )     (1 )     510  
Equity in net earnings of subsidiaries
    35,643                   (35,643 )      
 
                             
 
                                       
Total other income and (expense)
    36,391       (9,119 )     (394 )     (35,645 )     (8,767 )
 
                             
 
                                       
Income (loss) before income taxes
    36,349       37,580       3,553       (35,649 )     41,833  
 
                                       
Income tax expense:
                                       
Current
    11,251       2,586       761             14,598  
Deferred
    2,445       1,198       939             4,582  
 
                             
 
                                       
Income tax expense
    13,696       3,784       1,700             19,180  
 
                             
 
                                       
Net income (loss)
  $ 22,653     $ 33,796     $ 1,853     $ (35,649 )   $ 22,653  
 
                             
 
(1)   All field operations general and administration expenses are included in operating expenses.

19


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
                                         
    Nine months ended September 30, 2008  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
Total revenues
  $     $ 464,000     $ 226,148     $ (72,686 )   $ 617,462  
 
                                       
Operating expenses
    2       281,697       179,610       (72,686 )     388,623  
Depreciation and amortization
          63,283       21,712             84,995  
 
                             
 
                                       
Total operating gross margin
    (2 )     119,020       24,826             143,844  
 
                             
 
                                       
General and administration expense (1)
    (163 )     (24,217 )     (40 )           (24,420 )
Gain on disposition of assets, net
          1,393       621             2,014  
 
                             
 
                                       
Total operating income (loss)
    (165 )     96,196       25,407             121,438  
 
                             
 
                                       
Other income and (expense):
                                       
Interest expense
    (20,918 )     (35,392 )     (208 )     39,132       (17,386 )
Changes in fair value of derivative positions
                             
Interest income
    31,916       5,700       2,637       (39,132 )     1,121  
Equity in loss of unconsolidated joint venture, net of taxes
          (1,105 )                 (1,105 )
Other
    4       302       197             503  
Equity in net earnings of subsidiaries
    75,435                   (75,435 )      
 
                             
 
                                       
Total other income and (expense)
    86,437       (30,495 )     2,626       (75,435 )     (16,867 )
 
                             
 
                                       
Income (loss) before income taxes
    86,272       65,701       28,033       (75,435 )     104,571  
 
                                       
Income tax expense:
                                       
Current
    4,748       1,363       6,913             13,024  
Deferred
    16,489       9,561       462             26,512  
 
                             
 
                                       
Total income tax expense
    21,237       10,924       7,375             39,536  
 
                             
 
                                       
Net income (loss)
  $ 65,035     $ 54,777     $ 20,658     $ (75,435 )   $ 65,035  
 
                             
 
(1)   All field operations general and administration expenses are included in operating expenses.

20


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
                                         
    Nine months ended September 30, 2007  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
Drilling and rental revenues
  $     $ 425,656     $ 83,777     $ (35,686 )   $ 473,747  
 
                                       
Drilling and rental operating expenses
    1       226,908       71,999       (35,687 )     263,221  
Depreciation and amortization
          55,531       5,213             60,744  
 
                             
 
                                       
Drilling and rental operating income
    (1 )     143,217       6,565       1       149,782  
 
                             
 
                                       
General and administration expense (1)
    (125 )     (18,216 )     (39 )           (18,380 )
Provision for reduction in carrying value of certain assets
          (1,091 )                 (1,091 )
Gain (loss) on disposition of assets, net
          17,233       (17 )           17,216  
 
                             
 
                                       
Total operating income (loss)
    (126 )     141,143       6,509       1       147,527  
 
                             
 
                                       
Other income and (expense):
                                       
Interest expense
    (23,462 )     (35,386 )     (489 )     39,446       (19,891 )
Changes in fair value of derivative positions
    (671 )                       (671 )
Interest income
    36,280       6,323       2,420       (39,447 )     5,576  
Loss on extinguishment of debt
    (2,396 )                       (2,396 )
Equity in loss of unconsolidated joint venture, net of taxes
                (1,123 )           (1,123 )
Minority interest
                (1,000 )           (1,000 )
Other
    8       574       11       (6 )     587  
Equity in net earnings of subsidiaries
    93,924                   (93,924 )      
 
                             
 
                                       
Total other income and (expense)
    103,683       (28,489 )     (181 )     (93,931 )     (18,918 )
 
                             
 
                                       
Income (loss) before income taxes
    103,557       112,654       6,328       (93,930 )     128,609  
 
                                       
Income tax expense:
                                       
Current
    28,404       12,054       2,765             43,223  
Deferred
    5,646       8,739       1,494             15,879  
 
                             
 
                                       
Income tax expense
    34,050       20,793       4,259             59,102  
 
                             
 
                                       
Net income (loss)
  $ 69,507     $ 91,861     $ 2,069     $ (93,930 )   $ 69,507  
 
                             
 
(1)   All field operations general and administration expenses are included in operating expenses.

21


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
                                         
    Nine months ending September 30, 2008  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
Cash flows from operating activities:
                                       
Net income (loss)
  $ 65,035     $ 54,777     $ 20,658     $ (75,435 )   $ 65,035  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                       
Depreciation and amortization
          63,283       21,712             84,995  
Gain on disposition of assets
          (1,393 )     (621 )           (2,014 )
Equity in loss of unconsolidated joint venture
          1,105                   1,105  
Deferred income tax expense
    16,489       9,561       462             26,512  
Expenses not requiring cash
    5,341       2,917                   8,258  
Equity in net earnings of subsidiaries
    (75,435 )                 75,435        
Change in accounts receivable
    20,418       752       (68,073 )           (46,903 )
Change in other assets
    8,039       (4,065 )     3,653             7,627  
Change in liabilities
    (1,542 )     (48,426 )     38,081             (11,887 )
 
                             
 
                                       
Net cash provided by operating activities
    38,345       78,511       15,872             132,728  
 
                             
 
                                       
Cash flows from investing activities:
                                       
Capital expenditures
          (128,803 )     (28,510 )           (157,313 )
Proceeds from the sale of assets
          3,284       0             3,284  
Proceeds from insurance claims
                951             951  
Investment in unconslidated joint venture
          (5,000 )                 (5,000 )
 
                             
 
                                       
Net cash used in investing activities
          (130,519 )     (27,559 )           (158,078 )
 
                             
 
                                       
Cash flows from financing activities:
                                       
Proceeds from draw on term note facility
    50,000                         50,000  
Paydown on revolver credit facility
    (35,000 )                       (35,000 )
Proceeds from draw on revolver credit facility
    25,000                         25,000  
Payment of debt issuance costs
    (1,846 )                       (1,846 )
Proceeds from stock options exercised
    1,970                         1,970  
Excess tax benefit from stock based compensation
    379                         379  
Intercompany advances, net
    (83,520 )     51,641       31,879              
 
                             
 
                                       
Net cash provided by (used in) financing activities
    (43,017 )     51,641       31,879             40,503  
 
                             
 
                                       
Net increase (decrease) in cash and cash equivalents
    (4,672 )     (367 )     20,192             15,153  
 
                                       
Cash and cash equivalents at beginning of year
    31,326       8,314       20,484             60,124  
 
                             
 
                                       
Cash and cash equivalents at end of period
  $ 26,654     $ 7,947     $ 40,676     $     $ 75,277  
 
                             

22


 

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
                                         
    Nine months ended September 30, 2007  
    Parent     Guarantor     Non-Guarantor     Eliminations     Consolidated  
Cash flows from operating activities:
                                       
Net income (loss)
  $ 69,507     $ 91,861     $ 2,069     $ (93,930 )   $ 69,507  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                                       
Depreciation and amortization
          55,531       5,213             60,744  
Loss/(gain) on disposition of assets
          (17,233 )     17             (17,216 )
Deferred income tax expense
    5,646       8,739       1,494             15,879  
Equity in loss of unconsolidated joint venture, net of tax
                    1,123             1,123  
Provision for reduction in carrying value of certain assets
          1,091                   1,091  
Expenses not requiring cash
    10,408       600                   11,008  
Equity in net earnings of subsidiaries
    (93,924 )                 93,924        
Change in accounts receivable
    (28,713 )     14,437       (34,248 )           (48,524 )
Change in other assets
    (9,459 )     (49,080 )     29,960             (28,579 )
Change in liabilities
    (625 )     (28,070 )     15,710       6       (12,979 )
 
                             
 
                                       
Net cash provided by (used in) operating activities
    (47,160 )     77,876       21,338             52,054  
 
                             
 
                                       
Cash flows from investing activities:
                                       
Capital expenditures
          (161,846 )     (29,535 )           (191,381 )
Proceeds from the sale of assets
    54       22,162       1,027             23,243  
Purchase of marketable securities
    (101,075 )                       (101,075 )
Proceeds from sale of marketable securities
    161,995       2,000                   163,995  
 
                             
 
                                       
Net cash (used in) investing activities
    60,974       (137,684 )     (28,508 )           (105,218 )
 
                             
 
                                       
Cash flows from financing activities:
                                       
Proceeds from issuance of debt
    125,000                         125,000  
Principal payments under debt obligations
    (100,000 )                       (100,000 )
Purchase of call options
    (31,475 )                       (31,475 )
Proceeds from sale of common stock warrants
    20,250                         20,250  
Payment of debt issuance costs
    (3,563 )                       (3,563 )
Proceeds from stock options exercised
    15,791                         15,791  
Excess tax benefit from stock based compensation
    1,912                         1,912  
Intercompany advances, net
    (63,748 )     58,527       5,221              
 
                             
 
                                       
Net cash provided by (used in) financing activities
    (35,833 )     58,527       5,221             27,915  
 
                             
 
                                       
Net decrease in cash and cash equivalents
    (22,019 )     (1,281 )     (1,949 )           (25,249 )
 
                                       
Cash and cash equivalents at beginning of year
    60,029       14,367       17,807             92,203  
 
                             
 
                                       
Cash and cash equivalents at end of period
  $ 38,010     $ 13,086     $ 15,858     $     $ 66,954  
 
                             

23


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS
     This Form 10-Q contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements contained in this Form 10-Q, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:
    stability of prices and demand for oil and natural gas;
 
    levels of oil and natural gas exploration and production activities;
 
    demand for contract drilling and drilling related services and demand for rental tools;
 
    our future operating results and profitability;
 
    our future rig utilization, dayrates and rental tools activity;
 
    entering into new, or extending existing, drilling contracts and our expectations concerning when our rigs will commence operations under such contracts;
 
    growth through acquisitions of companies or assets;
 
    construction or upgrades of rigs and expectations regarding when these rigs will commence operations;
 
    capital expenditures for acquisition of rigs, construction of new rigs or major upgrades to existing rigs;
 
    entering into joint venture agreements;
 
    our future liquidity;
 
    availability and sources of funds to reduce our debt and expectations of when debt will be reduced;
 
    the outcome of pending or future legal proceedings, tax assessments and other claims;
 
    the availability of insurance coverage for pending or future claims;
 
    the enforceability of contractual indemnification in relation to pending or future claims;
 
    compliance with covenants under our senior credit facility and indentures for our senior notes; and
 
    organic growth of our operations.
     In some cases, you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by our management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors they believe are relevant. Although our management believes that their assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as any other cautionary language included in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our “forward-looking statements:”
    worldwide economic and business conditions that adversely affect market conditions and/or the cost of doing business;
 
    inability of the Company to access the credit markets;
 
    the U.S. economy and the demand for natural gas;
 
    worldwide demand for oil;
 
    fluctuations in the market prices of oil and natural gas;
 
    imposition of unanticipated trade restrictions;
 
    unanticipated operating hazards and uninsured risks;
 
    political instability, terrorism or war;
 
    governmental regulations, including changes in accounting rules or tax laws or ability to remit funds to the U.S., that adversely affect the cost of doing business;
 
    the outcome of our investigation and the parallel investigations by the Securities and Exchange Commission and the Department of Justice into possible violations of U.S. law, including the Foreign Corrupt Practices Act;

24


 

DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS (continued)
    adverse environmental events;
 
    adverse weather conditions;
 
    changes in the concentration of customer and supplier relationships;
 
    ability of our customers and suppliers to obtain financing for their operations;
 
    unexpected cost increases for new construction and upgrade and refurbishment projects;
 
    delays in obtaining components for capital projects and in ongoing operational maintenance;
 
    shortages of skilled labor;
 
    unanticipated cancellation of contracts by operators;
 
    breakdown of equipment;
 
    other operational problems including delays in start-up of operations;
 
    changes in competition;
 
    the effect of litigation and contingencies; and
 
    other similar factors (some of which are discussed in documents referred to in this Form 10-Q, including the risk factors described in our 2007 Annual Report on Form 10-K and our other reports and filings with the Securities and Exchange Commission).
     Each “forward-looking statement” speaks only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Before you decide to invest in our securities, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-Q could have a material adverse effect on our business, results of operations, financial condition and cash flows.
OVERVIEW AND OUTLOOK
     Our business segments were able to achieve solid results for the third quarter. Although the ongoing credit crisis and resulting volatility in oil and natural gas prices will have an effect on the Company’s business for the foreseeable future we anticipate that this will primarily be limited to our Gulf of Mexico (“GOM”) barge drilling business. Utilization and dayrates in our U.S. Gulf of Mexico (“GOM”) barge business have recently declined and we expect this decline to continue through the end of 2008.
     The rate at which the world economy will slow down due to the credit crisis is uncertain, as is the nature and extent of any reduction in worldwide demand for drilling as a consequence of a worldwide economic recession. Due to the high utilization of our international rigs under long-term contracts and the continued overall strength of markets in which we provide rental tools, we anticipate these operations will remain stable through the fourth quarter and into 2009, although operators may curtail or delay projects that are dependent upon financing and may experience an inability to pay suppliers and/or service companies, including our Company.
Overview
     Overall, gross margin increased $2.3 million to $52.3 million in the quarter ended September 30, 2008 as compared to $50.0 million in the quarter ended June 30, 2008. Gross margin for our international drilling operations increased 59 percent to $14.2 million in the third quarter of 2008 as compared to $9.0 million in the second quarter of 2008, primarily as a result of a rate increase for our barge rig operating in the Caspian Sea, commencement of operations for rig 269 in Kazakhstan on August 5, 2008, and increased utilization in our Indonesian operations. Reduced operating expenses in our Algeria and Colombia operations also contributed to the international drilling gross margin improvement.
     Rental tools gross margin increased 18 percent in the third quarter of 2008, as compared to the second quarter of 2008 as a result of a $5.6 million increase in revenues relating to new locations opened in the past year and additional capital invested over the past two years.

25


 

OVERVIEW AND OUTLOOK (continued)
Overview (continued)
     Our U.S. GOM gross margin declined $4.5 million to $14.2 million for the three months ended September 30, 2008 as compared to the three months ended June 30, 2008 as utilization declined from 87 percent at the end of the second quarter of 2008 to 73 percent at the end of the third quarter of 2008, and as a result of lower dayrates, including reductions related to Hurricane Gustav and Ike.
     Capital expenditures through the end of September 30, 2008 totaled $157.3 million, including $47.0 million of maintenance and drill pipe expenditures.
Outlook
     We expect higher earnings from our international operations in the fourth quarter and continuing into 2009 as we will have full quarter operations for Rig 269 in Kazakhstan, which spud the first week of August 2008, and for Rig 121 in Mexico, which spud on September 24, 2008. Current international utilization is 84% and of the five rigs currently not contracted, two are being marketed for sale and one requires substantial investment to return to work. In effect, only two marketable rigs are currently not contracted. Our outlook for international utilization remains strong throughout 2009.
     Our rental tools operations should remain strong as we anticipate many of our major oil company customers will continue to operate at current levels, primarily in deepwater E&P projects. In addition, we expect the development of unconventional resource plays to continue through 2009.
     We also expect solid results from our project management and engineering services segment. In addition, we expect increased earnings from our construction contract segment in 2009 as we toward the targeted first quarter 2010 completion date on our BP Liberty construction contract.
     Current U.S. GOM barge utilization is 67% and expected to decline for the remainder of 2008 as several of our customers will suspend their 2008 drilling programs once current wells are completed. We anticipate certain deep drilling barges will return to work in the first quarter of 2009 as customers begin work under 2009 budgets, but there are no assurances given the current economic environment (see Risk Factors in Section II, Item 1A). Because the utilization of our barges has recently exceeded the industry average as our investments over the last several years in upgrades and refurbishments are reflected in our rigs being preferred by key customers, we are encouraged that our rigs will be the first to return to work
     Capital expenditures are projected to be $45-$60 million for the remainder of 2008.
     On September 12, 2008 we drew down $10.0 million on our revolving credit facility, and on October 16 and 17, 2008, drew down an additional aggregate amount of $48.0 million. The funds will be used over the next 12 months to fund the construction of two new-build rigs for use under the anticipated five year drilling contract in Alaska based on the executed letter of intent.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
     We recorded net income of $18.6 million for the three months ended September 30, 2008, as compared to net income of $22.7 million for the three months ended September 30, 2007. Gross margin was $52.3 million for the three months ended September 30, 2008 as compared to $57.4 million for the three months ended September 30, 2007.

26


 

RESULTS OF OPERATIONS (continued)
     In the first quarter of 2008, we began separate presentation of our project management and engineering services segment. As part of our long-term strategic growth plan, we have begun to separately monitor the results of this non-capital intensive group of operations. Prior to 2008, these results were included in the U.S. and international drilling segments, and as such, 2007 segment information has been restated to conform to the new presentation. We also created a new segment in the second quarter of 2008 to separately reflect results of our extended-reach rig construction contract.
     The following is an analysis of our operating results for the comparable quarters:
                                 
    Three Months Ended September 30,  
    2008     2007  
    (Dollars in Thousands)  
Revenues:
                               
U.S. drilling
  $ 44,743       20 %   $ 56,918       33 %
International drilling
    92,226       40 %     58,857       34 %
Project management and engineering services
    24,089       11 %     20,922       12 %
Construction contract
    20,421       9 %           0 %
Rental tools
    45,975       20 %     35,500       21 %
 
                       
 
                               
Total revenues
  $ 227,454       100 %   $ 172,197       100 %
 
                       
 
                               
Operating gross margin:
                               
U.S. drilling gross margin excluding depreciation and amortization (1)
  $ 22,893       51 %   $ 33,710       59 %
International drilling gross margin excluding depreciation and amortization (1)
    28,544       31 %     21,569       37 %
Project management and engineering services gross margin
    2,638       11 %     4,237       20 %
Construction contract gross margin
    1,098       5 %            
Rental tools gross margin excluding depreciation and amortization (1)
    27,809       60 %     20,921       59 %
Depreciation and amortization
    (30,663 )             (23,043 )        
 
                           
Total operating gross margin:
    52,319               57,394          
 
                               
General and administration expense
    (9,271 )             (6,246 )        
Provision for reduction in carrying value of certain assets
                  (1,091 )        
Gain on disposition of assets, net
    799               543          
 
                           
 
                               
Total operating income
  $ 43,847             $ 50,600          
 
                           
 
(1)   Gross margins, excluding depreciation and amortization, are computed as revenues less direct operating expenses, excluding depreciation and amortization expense; gross margin percentages are computed as gross margin, excluding depreciation and amortization, as a percent of revenues. The gross margin amounts, excluding depreciation and amortization, and gross margin percentages should not be used as a substitute for those amounts reported under accounting principles generally accepted in the United States (“GAAP”). However, we monitor our business segments based on several criteria, including gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows:
                                         
                    Project              
                    Management and              
            International     Engineering     Construction        
    U.S. Drilling     Drilling     Services     Contract     Rental Tools  
    (Dollars in Thousands)  
Three Months Ended September 30, 2008
                                       
Operating gross margin (2)
  $ 14,166     $ 14,241     $ 2,638     $ 1,098     $ 20,176  
Depreciation and amortization
    8,727       14,303                   7,633  
 
                             
Operating gross margin excluding depreciation and amortization
  $ 22,893     $ 28,544     $ 2,638     $ 1,098     $ 27,809  
 
                             
 
                                       
Three Months Ended September 30, 2007
                                       
Operating gross margin (2)
  $ 24,918     $ 13,869     $ 4,237     $     $ 14,370  
Depreciation and amortization
    8,792       7,700                   6,551  
 
                             
Operating gross margin excluding depreciation and amortization
  $ 33,710     $ 21,569     $ 4,237     $     $ 20,921  
 
                             
 
(2)   Gross margin (operating) — revenues less direct operating expenses, including depreciation and amortization expense.

27


 

RESULTS OF OPERATIONS (continued)
U.S. Drilling Segment
     Revenues for the U.S. drilling segment decreased $12.2 million to $44.7 million for the quarter ended September 30, 2008 as compared to the quarter ended September 30, 2007. The decrease in revenues was primarily due to a $10.7 million decrease for our barge drilling operations as average dayrates for our deep drilling barges fell approximately $3,600 per day. Utilization for US barges was 79 percent for the third quarter of 2008 as compared 83 percent in the same period in 2007. Also in the third quarter of 2007 we had one land rig drilling in the U.S. that historically operates in our international land segment. This rig contributed $1.5 million in revenues in the third quarter of 2007, but by the end of 2007 had returned to international operations.
     As a result of the above mentioned factors, gross margins, excluding depreciation and amortization, decreased $10.8 million to $23.0 million as compared to the third quarter of 2007.
International Drilling Segment
     International drilling revenues increased $33.4 million to $92.2 million during the third quarter of 2008 as compared to the third quarter of 2007. Of this increase, $26.1 million is related to international land drilling revenues and $7.3 million from offshore operations.
     Land revenues in Mexico increased by $14.1 million, as rigs 122, 266 and 267 contributed an additional $12.1 million in revenues during the current period as compared to the third quarter at 2007. Revenues in the CIS region increased by $15.3 million primarily attributable to a $7.3 million increase in the Karachaganak area of Kazakhstan as a result of the addition of Rigs 249 and 258 to existing operations of Rigs 107 and 216 and an $8.2 million increase in Western Kazakhstan due to the addition of rigs 247 and 269 to the ongoing operation of rig 236. These increases were offset by a decrease of $4.6 million in Colombia as one of two rigs operated this quarter, whereas both rigs operated during the third quarter of 2007.
     In our Asia Pacific region, land revenues remained unchanged in the third quarter of 2008 as compared to the third quarter of 2007 with lower utilization (50%) in Papua New Guinea ($3.2 million) being offset by a $1.7 million increase in New Zealand due to increased dayrates and operating days and a $1.5 million increase in our Indonesia operations, as three rigs operated in the third quarter of 2008 as compared to one in the third quarter of 2007.
     International offshore revenues increased $7.3 million to $17.3 million during the third quarter of 2008 as compared to the third quarter of 2007. This increase was due primarily to higher revenues for Barge Rig 257 ($7.2 million) in the Caspian Sea as a result of a higher dayrate.
     International operating gross margin, excluding depreciation and amortization, increased $6.9 million to $ 28.5 million during the third quarter of 2008 as compared to the third quarter of 2007. Of the $28.5 million for the current period, $17.4 million is related to international land drilling operations and $11.1 million from offshore operations.
     Operating gross margin, excluding depreciation and amortization, for international land operations was $17.4 million in the third quarter of 2008 as compared to $18.2 million in the third quarter of 2007, due primarily to a favorable increase in our operations in Mexico ($4.2 million) being offset by a decrease in Colombia ($3.7 million) and our Africa / Middle East Operations ($1.4 million). The increase in Mexico is attributable to six rigs operating the entire quarter compared to minimal operations during the third quarter of 2007. In Colombia, only one of two rigs operated in the third quarter compared to both rigs operating in the third quarter of 2007.
Operating gross margins, excluding depreciation and amortization, for international offshore operations increased $7.8 million to $11.2 million primarily as a result of the higher dayrate discussed above.
Project Management and Engineering Services Segment
     Revenues for this segment increased $3.2 million during the third quarter of 2008 as compared to the third quarter of 2007. This increase was the result of higher revenues for our Kuwait project management operations ($4.7 million, of which $4.0 million was for reimbursables) being partially offset by a decrease of $1.9 million for engineering services for our BP Liberty project. Margins were down $2.4 million in our Sakhalin operations due to higher labor costs. In November 2008, we negotiated a rate increase retroactive to June 2008 that will more than offset the higher labor costs. Project management and engineering services do not incur depreciation and amortization, and as such, operating gross margin for this segment decreased $1.6 million in the current period as compared to the prior period.

28


 

RESULTS OF OPERATIONS (continued)
Construction Contract Segment
     Revenues from the construction of the extended-reach drilling rig for use in the Alaskan Beaufort Sea were $20.4 million for the third quarter of 2008. This project is a cost plus fixed fee contract. Operating gross margin for the EPCI project was $1.1 million based on the percentage of completion of the contract.
Rental Tools Segment
     Rental tools revenues increased $10.5 million to $46.0 million during the third quarter of 2008 as compared to the third quarter of 2007. The increase was due primarily to an increase in rental revenues of $2.1 million at our Texarkana, Texas facility, $1.7 million at our New Iberia, Louisiana facility, $0.3 million from our Evanston, Wyoming facility, $5.3 million from our newest location in Williston, North Dakota and $1.0 million and $0.9 million from our Victoria and Odessa, Texas locations, respectively, partially offset by a decline of $0.8 million at our international operations. Revenues increased as a result of our expansion efforts in Texarkana, Texas and Williston, North Dakota.
     Rental tools operating gross margins, excluding depreciation and amortization, increased $6.9 million to $27.8 million for the current quarter as compared to the third quarter of 2007. The gross margin increase relate directly to the increase in revenues at the locations mentioned above.
Other Financial Data
     Gain on asset dispositions for the third quarter of 2008 and 2007 was $0.8 million and $0.5 million, respectively, as a result of minor asset sales during each period. Interest expense decreased $1.8 million in the third quarter of 2008 as compared to the third quarter of 2007, due to a lower average interest rate on our outstanding debt. Interest income decreased $1.7 million due to lower cash balances available for investments in the third quarter of 2008 as compared to 2007. General and administration expense increased $3.0 million as compared to the third quarter of 2007 due primarily to higher legal and professional fees associated with the ongoing Department of Justice (‘DOJ”) and SEC investigations into the customs agent discussed in Note 11 in the notes to the unaudited consolidated condensed financial statements.
     In 2004, we entered into two variable-to-fixed interest rate swap agreements. We reported the mark-to-market change in the fair value of the interest rate derivatives in earnings. For the third quarter of 2008 we had no swaps outstanding and therefore reported no charge or benefit related to these two swaps, as compared to the comparable period in 2007 where the fair value of the derivative positions remained relatively unchanged. For additional information see Note 10 in the notes to the unaudited consolidated condensed financial statements.
     Income tax expense was $20.2 million for the third quarter of 2008 and includes the charge of $2.4 million related to FIN 48, as compared to income tax expense of $19.2 million for the third quarter of 2007.
Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007
     We recorded net income of $65.0 million for the nine months ended September 30, 2008, as compared to net income of $69.5 million for the nine months ended September 30, 2007. Operating gross margin was $143.8 million for the nine months ended September 30, 2008 which consists of increases in international drilling operations, project management and engineering services, construction contract and rental tools of $44.1 million offset by a decrease of $25.8 million in U.S. drilling and a $24.3 million increase in depreciation expense as compared to the nine months ended September 30, 2007.

29


 

RESULTS OF OPERATIONS (continued)
     In the first quarter of 2008, we began separate presentation of our project management and engineering services segment which is presented below. This segment is a focus of our long-term strategic growth plan, which we have begun to separately monitor. Prior to 2008, these results were included in the U.S. and International drilling segments, and as such, 2007 segment information has been restated to conform to the new presentation. We also created a new segment in the second quarter of 2008 to separately reflect results of our extended-reach rig construction contract.
     The following is an analysis of our operating results for the comparable periods:
                                 
    Nine Months Ended September 30,  
    2008     2007  
    (Dollars in Thousands)  
Revenues:
                               
U.S. drilling
  $ 139,999       22 %   $ 174,375       37 %
International drilling
    238,885       39 %     143,834       31 %
Project management and engineering services
    72,219       12 %     58,633       12 %
Construction contract
    40,501       7 %            
Rental tools
    125,858       20 %     96,905       20 %
 
                       
 
                               
Total revenues
  $ 617,462       100 %   $ 473,747       100 %
 
                       
 
                               
Operating gross margin:
                               
U.S. drilling gross margin excluding depreciation and amortization (1)
  $ 74,497       53 %   $ 100,274       58 %
International drilling gross margin excluding depreciation and amortization (1)
    65,970       28 %     41,981       29 %
Project management and engineering services gross margin
    10,400       14 %     9,629       16 %
Construction contract gross margin
    2,128       5 %            
Rental tools gross margin excluding depreciation and amortization (1)
    75,844       60 %     58,642       61 %
Depreciation and amortization
    (84,995 )             (60,744 )        
 
                       
Total operating gross margin:
    143,844               149,782          
 
                               
General and administration expense
    (24,420 )             (18,380 )        
Provision for reduction in carrying value of certain assets
                  (1,091 )        
Gain on disposition of assets, net
    2,014               17,216          
 
                       
 
                               
Total operating income
  $ 121,438             $ 147,527          
 
                       
 
(1)   Gross margins, excluding depreciation and amortization, are computed as revenues less direct operating expenses, excluding depreciation and amortization expense; gross margin percentages are computed as gross margin, excluding depreciation and amortization, as a percent of revenues. The gross margin amounts, excluding depreciation and amortization, and gross margin percentages should not be used as a substitute for those amounts reported under accounting principles generally accepted in the United States (“GAAP”). However, we monitor our business segments based on several criteria, including gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such gross margin amounts are reconciled to our most comparable GAAP measure as follows:
                                         
                    Project              
                    Management and              
            International     Engineering     Construction        
    U.S. Drilling     Drilling     Services     Contract     Rental Tools  
    (Dollars in Thousands)  
Nine Months Ended September 30, 2008
                                       
Operating gross margin (2)
  $ 48,475     $ 29,029     $ 10,400     $ 2,128     $ 53,812  
Depreciation and amortization
    26,022       36,941                   22,032  
 
                             
Operating gross margin excluding depreciation and amortization
  $ 74,497     $ 65,970     $ 10,400     $ 2,128     $ 75,844  
 
                             
 
                                       
Nine Months Ended September 30, 2007
                                       
Operating gross margin (2)
  $ 76,365     $ 22,391     $ 9,629     $     $ 41,397  
Depreciation and amortization
    23,909       19,590                   17,245  
 
                             
Operating gross margin excluding depreciation and amortization
  $ 100,274     $ 41,981     $ 9,629     $     $ 58,642  
 
                             
 
(2)   Gross margin — drilling and rental revenues less direct drilling and rental operating expenses, including depreciation and amortization expense.

30


 

RESULTS OF OPERATIONS (continued)
U.S. Drilling Segment
     Revenues for the U.S drilling segment decreased $34.4 million to $140.0 million for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. The decreased revenues were primarily due to a $23.0 million decrease for our barge drilling operations as average dayrates for our deep drilling barges fell approximately $6,200 per day, although utilization for U.S. barges was higher for the first nine months of 2008 due to fewer rigs in the rig count as compared to the same period in 2007. Also in the first nine months of 2007 we had two land rigs drilling in the U.S. that historically operate in our international land segment. These rigs contributed $11.4 million in revenues as compared to no revenues in the same period for 2008 as the two rigs were relocated to our Mexico operations during 2007.
     As a result of the above mentioned factors, gross margins, excluding depreciation and amortization, decreased $25.8 million to $74.5 million as compared to the same period of 2007.
International Drilling Segment
     International drilling revenues increased $95.1 million to $238.9 million for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. Of this increase, $80.8 million is related to international land drilling revenues and $14.3 million to offshore operations.
     Land revenues in Mexico, Algeria and Turkmenistan increased by $52.0 million, $11.2 million and $3.9 million, respectively, as there were minimal drilling operations in these countries during the first nine months of 2007. Revenues in the CIS region increased by $40.0 million primarily attributable to a $25.2 million increase in the Karachaganak area of Kazakhstan as a result of the addition of Rigs 249 and 258 to existing operations of Rigs 107 and 216, and the above mentioned Turkmenistan revenues. These increases were offset by lower utilization of our two rigs in Colombia in 2008, resulting in a decrease of $17.1 million as compared to 2007.
     In our Asia Pacific region, revenues decreased $5.6 million due mainly to completion of our contract within Bangladesh for Rig 225 in March 2007 ($3.5 million), lower utilization (50%) in Papua New Guinea ($12.2 million) being partially offset by a $6.6 million increase in New Zealand due to increased dayrates and operating days and a $3.5 million increase in our Indonesia operations.
     International offshore revenues increased $14.3 million to $41.0 million during the first nine months of 2008 as compared to the first nine months of 2007. This increase was due primarily to higher dayrates for both of our barge rigs.
     International operating gross margin, excluding depreciation and amortization, increased $24,0 million to $66.0 million during the first nine months of 2008 as compared to the first nine months of 2007. Of the $24.0 million increase, $11.0 million is attributable to our international land operations and $13.0 million from our offshore operations.
     Gross margin, excluding depreciation and amortization, for international land operations increased $11.0 million, due primarily to favorable increases in our operations in Mexico ($18.9 million) and the CIS region ($8.2 million), offset by decreases in Colombia ($11.6 million) and our Asia Pacific region ($3.0 million). The increase in Mexico is attributable to four rigs operating the entire period in 2008 and two rigs commencing operations in February in 2008 as we were in the start up phase for these operations in the third quarter of 2007. In the CIS region, increased utilization in the Karachaganak area of Kazakhstan and operation of Rig 230 in Turkmenistan were the main drivers of the $8.2 million increase. In Colombia, the completion of our contracts in late 2007 and late February 2008 were the cause of the decrease, although Rig 268 began a one year contract in mid-May 2008. Our Asia Pacific region decline of $3.0 million was a result of Rig 225 in Bangladesh not operating in 2008 as compared to 2007 and Papua New Guinea incurring lower utilization when compared to the same period of 2007, with these declines being partially offset by increases in our New Zealand and Indonesia operations.
Gross margins, excluding depreciation and amortization, for international offshore operations increased $13.0 million as a result of the higher dayrates discussed above.

31


 

RESULTS OF OPERATIONS (continued)
Project Management and Engineering Services Segment
     Revenues for this segment increased $13.6 million during the first nine months of 2008 as compared to the first nine months of 2007. This increase was the result of higher revenues for our operations in Sakhalin Island ($1.2 million) and Kuwait ($11.4 million of which $9.5 million was reimbursables) partially offset by a decrease of $1.9 million in our Papua New Guinea project management contracts that ceased operations during 2007. Project management and engineering services do not incur depreciation and amortization, and as such, gross margin for this segment increased $0.8 million in the current period as compared to the prior period. Gross margin does not include the retroactive labor rate increases negotiated in November 2008 for our Sakhalin Island operations.
Construction Contract Segment
     Revenues from the construction of the extended-reach drilling rig for use in the Alaskan Beaufort Sea were $40.5 million for the second and third quarters of 2008. This project is a cost plus fixed fee contract. Gross margin for the EPCI project was $2.1 million based on the percentage of completion of the contract, using the cost-to-cost method.
Rental Tools Segment
     Rental tools revenues increased $29.0 million to $125.9 million during the first nine months of 2008 as compared to the first nine months of 2007. The increase was due primarily to an increase in rental revenues of $11.7 million at our Texarkana, Texas facility, $5.4 million at our New Iberia, Louisiana facility, $0.9 million from our Evanston, Wyoming facility, $14.1 million from our newest location in Williston, North Dakota and $1.2 million from our Victoria, Texas location, partially offset by declines of $1.2 million and $3.2 million at our international operations and Odessa, Texas location, respectively. Revenues increased as a result of our expansion efforts in Texarkana, Texas and Williston, North Dakota.
     Rental tools gross margins, excluding depreciation and amortization, increased $17.2 million to $75.8 million for the current period as compared to the comparable period of 2007. The 2006 and 2007 expansion of Quail has been completed as equipment has been delivered and Quail’s new facility in Texarkana, Texas opened in April 2007. The new facility provides increased coverage of the Barnett, Fayetteville, Woodford and Haynesville shale areas in East Texas, Southwest Arkansas, Southeast Oklahoma and Northwest Louisiana.
Other Financial Data
     Gain on asset dispositions was $2.0 million, a decrease of $15.2 million as a result of minor asset sales in the first nine months ended September 30, 2008 as compared to a gain of $17.2 million during the same period in 2007 as we sold two workover barge rigs in January 2007 for a recognized gain of $15.1 million. Interest expense declined $2.5 million in the first half of 2008 as compared to the same period of 2007 due to a lower average interest rate on our outstanding debt. Interest income for the current period decreased $4.5 million due to lower cash balances available for investments as compared to the same period for 2007. General and administration expense increased $6.0 million as compared to the first nine months of 2007, due primarily to higher legal and professional fees associated with the ongoing DOJ and SEC investigations into the customs agent discussed in Note 11 in the notes to the unaudited consolidated financial statements. These fees included upgrades to our compliance process and code of conduct.
     In 2004, we entered into two variable-to-fixed interest rate swap agreements. The swap agreements did not qualify for hedge accounting and accordingly, we reported the mark-to-market change in the fair value of the interest rate derivatives in earnings. For the nine months ended September 30, 2008 we had no swaps outstanding and therefore reported no charge or benefit related to these two swaps, as compared to the nine months ended September 30, 2007 where we recognized a $0.7 million decrease in the fair value of the derivative positions. For additional information see Note 10 in the notes to the unaudited consolidated condensed financial statements.

32


 

RESULTS OF OPERATIONS (continued)
Other Financial Data (continued)
     Income tax expense was $39.5 million for the first nine months of 2008, as compared to income tax expense of $59.1 million for 2007. Income tax expense for the first nine months of 2008 includes a benefit of $13.4 million of FIN 48 interest and foreign currency exchange rate fluctuations related to our settlement of interest related to our Kazakhstan tax case (see Note 8 - Kazakhstan Tax Case), the establishment of a valuation allowance of $4.1 million related to a Papua New Guinea deferred tax asset, the reversal of a $3.1 million reserve relating to 2007 foreign tax credits and a charge of $2.4 million accounted for under FIN 48 related to certain intercompany transactions between our US companies and foreign affiliates. Based on the level of projected future taxable income over the periods for which the deferred tax asset is deductible in Papua New Guinea, management believes that it is more likely than not that our subsidiary will not realize the benefit of this deduction in Papua New Guinea.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
     As of September 30, 2008, we had cash and cash equivalents of $75.3 million, an increase of $15.1 million from December 31, 2007. The primary sources of cash for the nine-month period ended September 30, 2008 as reflected on the consolidated condensed statements of cash flows were $132.7 million provided by operating activities, net proceeds of $40.0 million from draws on our credit facilities and net proceeds of $3.3 million from the sale of assets and insurance proceeds. The primary uses of cash were $157.3 million for capital expenditures and a $5.0 million investment in our unconsolidated joint venture. Major capital expenditures for the period included $31.8 million on construction of new international land rigs, $29.0 million on the construction of two new Alaska rigs and $33.4 million for tubulars and other rental tools for Quail Tools.
     As of September 30, 2007, we had cash, cash equivalents and marketable securities of $67.0 million, a decrease of $88.2 million from December 31, 2006. The primary sources of cash for the nine-month period as reflected on the consolidated condensed statements of cash flows were $52.1 million provided by operating activities, $110.2 million from the issuance of convertible debt, net of issuance costs and hedge and warrant transactions and $15.8 million from stock options exercised. The primary use of cash was $105.2 million used in investing activities, including $191.4 million for capital expenditures, net proceeds of $20.5 million from the sale of two workover barge rigs and $62.9 million in net proceeds from the sale and purchase of marketable securities and a $100.0 million reduction in debt. Major capital expenditures for the period included $55.9 million on construction of new land rigs and $57.2 million for tubulars and other rental tools for the expansion of Quail Tools.
Financing Activity
     On July 5, 2007, we issued $125.0 million aggregate principal amount of 2.125 percent Convertible Senior Notes due July 15, 2012. Interest is payable semiannually on July 15th and January 15th. The initial conversion price is approximately $13.85 per share and is subject to adjustment for the occurrence of certain events stated within the indenture. Proceeds from the transaction were used to call our outstanding Senior Floating Rate notes, to pay the net cost of hedge and warrant transactions, and for general corporate purposes. Effectively, the hedge and warrant transactions increase the conversion price to approximately $18.29 per share.
     On September 20, 2007, we replaced our existing $40.0 million Credit Agreement with a new $60.0 million Amended and Restated Credit Agreement (“2007 Credit Facility”) which expires in September 2012. The 2007 Credit Facility was secured by rental tools equipment, accounts receivable and the stock of substantially all of our domestic subsidiaries, other than domestic subsidiaries owned by a foreign subsidiary, and contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.

33


 

LIQUIDITY AND CAPITAL RESOURCES (continued)
Financing Activity (continued)
     On May 15, 2008 we entered into a new Credit Agreement (“2008 Credit Facility”) with a five year senior secured $80.0 million revolving credit facility (“Revolving Credit Facility) and a senior secured term loan facility (“Term Loan Facility”) of up to $50.0 million. The obligations of the Company under the 2008 Credit Facility are guaranteed by substantially all of the Company’s domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed a guaranty. The 2008 Credit Facility contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.
     The 2008 Credit Facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to this facility. Revolving loans are available under the 2008 Credit Facility subject to a borrowing base calculation based on a percentage of eligible accounts receivable, certain specified barge drilling rigs and eligible rental equipment of the Company and its subsidiary guarantors. As of September 30, 2008, there were $13.1 million in letters of credit outstanding, $50.0 million outstanding on the Term Loan Facility and $10.0 million outstanding on the Revolving Credit Facility. On July 9, 2008, we drew down the remaining $15.0 million available on the Term Loan Facility, bringing the total amount outstanding to $50.0 million. The Term Loan will begin amortizing on September 30, 2009 at equal installments of $3.0 million per quarter. On September 12, 2008, we drew down $10.0 million on the Revolving Credit Facility. Subsequent to quarter end we drew down an additional $48.0 million resulting in total draws under the Revolving Credit Facility $58.0 million as of October 17, 2008. As of October 17, 2008, the amount drawn represents 94 percent of the capacity of the Revolving Credit Facility (which also reflects a $4.4 million reduction in available borrowing resulting from the bankruptcy filing of Lehman Brothers Holdings, Inc., the parent corporation of Lehman Commercial Paper, Inc., which had a $6.2 million lending commitment). The Company expects to use the additional drawn amounts over the next twelve months to fund construction of two new rigs to perform an anticipated five year contract in Alaska based on the executed letter of of intent. Although the credit crisis may affect certain customers’ ability to pay, the Company anticipates it has sufficient liquidity to meet its expected capital expenditures and manage any delays in collection of receivables.
     On September 27, 2007, we redeemed $100.0 million face value of our Senior Floating Rate Notes pursuant to a redemption notice dated August 17, 2007 at the redemption price of 101.0 percent. A portion of the proceeds from the sale of our 2.125 percent Convertible Senior Notes were used to fund the redemption.
     We had total long-term debt, including current portion, of $410.0 million as of September 30, 2008, which consists of:
    $125.0 million aggregate principal amount of Convertible Senior Notes bearing interest at a rate of 2.125 percent, which are due July 15, 2012;
 
    $225.0 million aggregate principal amount of 9.625 percent Senior Notes, which are due October 1, 2013 plus an associated $3.2 million in unamortized debt premium; and,
 
    $60.0 million drawn against our 2008 Credit Facility, including $10.0 million on our Revolving Credit Facility and $50.0 million on our Term Loan Facility, $3.0 million of which is classified as short term.
     As of September 30, 2008, we had approximately $132.2 million of liquidity. This liquidity was comprised of $75.3 million of cash and cash equivalents on hand and $56.9 million of availability under the credit facility. We do not have any unconsolidated special-purpose entities, off-balance sheet financing arrangements nor guarantees of third-party financial obligations. We have no energy or commodity contracts.
     On May 6, 2008, we announced our re-entry into the Alaska market with a letter of intent from BP for five-year drilling contracts that will require a subsidiary to construct and operate two new rigs for development drilling on the North Slope of Alaska. The cost of construction of the two new rigs will be funded partially by our 2008 Credit Facility.

34


 

LIQUIDITY AND CAPITAL RESOURCES (continued)
Financing Activity (continued)
     The following table summarizes our future contractual cash obligations as of September 30, 2008:
                                         
            Less than                     More than  
    Total     1 Year     Years 2 - 3     Years 4 - 5     5 Years  
    (Dollars in Thousands)  
Contractual cash obligations:
                                       
Long-term debt — principal (1)
  $ 410,000     $ 3,000     $ 34,000     $ 148,000     $ 225,000  
Long-term debt — interest (1)
    130,398       28,613       54,593       47,192        
Operating leases (2)
    12,001       6,073       3,695       2,217       16  
Purchase commitments (3)
    32,179       32,179                    
 
                             
 
                                       
Total contractual obligations
  $ 584,578     $ 69,865     $ 92,288     $ 197,409     $ 225,016  
 
                             
 
                                       
Commercial commitments:
                                       
Long-term debt -
                                       
Revolving credit facility (4)
  $ 10,000     $     $ 10,000     $     $  
Standby letters of credit (4)
    13,119       13,119                    
 
                             
 
                                       
Total commercial commitments
  $ 23,119     $ 13,119     $ 10,000     $     $  
 
                             
 
(1)   Long-term debt includes the principal and interest cash obligations of the 9.625 percent Senior Notes and the 2.125 percent Convertible Senior Notes as well as $50.0 million of term loans drawn on our new Credit Facility. The remaining unamortized premium of $3.2 million is not included in the contractual cash obligations schedule.
 
(2)   Operating leases consist of lease agreements in excess of one year for office space, equipment, vehicles and personal property.
 
(3)   We have purchase commitments outstanding as of September 30, 2008, related to rig upgrade projects and new rig construction.
 
(4)   We have a $130 million credit agreement of which $80.0 million is a revolving credit facility. As of September 30, 2008, we had drawn down $10.0 million under the revolving credit facility and $13.1 million of availability has been used to support letters of credit that have been issued, resulting in an estimated $56.9 million of availability. The revolving credit facility expires September 20, 2012.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     There have been no material changes in market risk faced by us from those reported in our 2007 Annual Report on Form 10-K filed with the SEC. For more information on market risk, see Part II, Items 7 and 7A in our 2007 Annual Report on Form 10-K.

35


 

ITEM 4. CONTROLS AND PROCEDURES
     Evaluation of Disclosure Controls and Procedures – We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. We performed evaluations under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2008.
     Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2008 covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     For information regarding legal proceedings, see Note 11, “Contingencies,” in Item 1 of Part I of this quarterly report on Form 10-Q, which information is incorporated herein by reference into this item.
ITEM 1A. RISK FACTORS
     There have been no material changes in risk factors involving the Company or its subsidiaries from those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as supplemented by the Form 10-Q for the quarter ended June 30, 2008, other than those described below:
     Due to the ongoing credit crisis and the volatility of oil and natural gas prices, we are unable to anticipate whether or not our customers will curtail drilling programs or vendors will fulfill their commitments. The global economic conditions may result in a decrease in demand for our drilling rigs and rental tools business, which conditions could have a material adverse affect on our drilling and rental tool businesses.
     Our business depends to a significant extent on the level of international onshore drilling activity and offshore drilling activity for natural gas in the Gulf of Mexico. The adverse effect of the credit crisis on the global economy has resulted in a substantial reduction in oil and natural gas prices. If oil and natural gas prices continue to decline this could cause oil and gas companies to further decrease spending on drilling activity, which in turn could result in a reduction in dayrates and utilization. In addition, operators who depend on financing for their drilling projects may be forced to curtail or delay these projects and may also experience an inability to pay suppliers and service providers, including the Company. We are unable to predict the nature and extent that this volatility in oil and natural gas prices and credit crisis may have on our business and financial results.

36


 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                 
    Issuer Purchases of Equity Securities
    Total Number of   Average Price
Date   Shares Purchased   Paid Per Share
August 7, 2008
    661     $ 8.18  
September 17, 2008
    163     $ 8.23  
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     None
ITEM 5. OTHER INFORMATION
     None.
ITEM 6. EXHIBITS
     (a) Exhibits: The following exhibits are filed or furnished as a part of this report:
     
Exhibit    
Number   Description
 
   
31.1
  Section 302 Certification — Chairman and Chief Executive Officer
 
   
31.2
  Section 302 Certification — Senior Vice President and Chief Financial Officer
 
   
32.1
  Section 906 Certification — Chairman and Chief Executive Officer
 
   
32.2
  Section 906 Certification — Senior Vice President and Chief Financial Officer

37


 

SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  PARKER DRILLING COMPANY
 
 
Date: November 10, 2008  By:   /s/ Robert L. Parker Jr.    
    Robert L. Parker Jr.   
    Chairman and Chief Executive Officer   
 
     
  By:   /s/ W. Kirk Brassfield    
    W. Kirk Brassfield   
    Senior Vice President and Chief Financial Officer   
 

38


 

INDEX TO EXHIBITS
     
Exhibit    
Number   Description
 
   
31.1
  Section 302 Certification – Chairman and Chief Executive Officer
 
   
31.2
  Section 302 Certification – Senior Vice President and Chief Financial Officer
 
   
32.1
  Section 906 Certification — Chairman and Chief Executive Officer
 
   
32.2
  Section 906 Certification — Senior Vice President and Chief Financial Officer

39

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