UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For quarterly period ended:  June 30, 2007

OR

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

For the transition period from                  to                 

Commission File Number: 1-4221

HELMERICH & PAYNE, INC.

(Exact name of registrant as specified in its charter)

 

1437 South Boulder Avenue, Tulsa, Oklahoma, 74119

(Address of principal executive office)(Zip Code)

(918) 742-5531

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

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

Large accelerated filer  x

Accelerated filer  o

Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

CLASS		OUTSTANDING AT July 31, 2007
Common Stock, $0.10 par value		103,474,003
		Total Number of Pages - 32

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page No.
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Condensed Balance Sheets as of June 30, 2007 and September 30, 2006	3
	Consolidated Condensed Statements of Income for the Three Months and Nine Months Ended June 30, 2007 and 2006	4
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 2007 and 2006	5
	Consolidated Condensed Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2007	6
	Notes to Consolidated Condensed Financial Statements	7-20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION	31
Item 6.	Exhibits	31
Signatures		32

 

2

PART I. FINANCIAL INFORMATION

HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

ITEM 1. FINANCIAL STATEMENTS

		Unaudited
		June 30,			September 30,
		2007			2006
ASSETS
Current assets:
Cash and cash equivalents		$	70,562		$	33,853
Short term investments		396			48,673
Accounts receivable, less reserve of $1,950 at June 30, 2007 and $2,007 at September 30, 2006		320,547			289,479
Inventories		28,398			26,165
Deferred income tax		13,638			10,168
Assets held for sale		633			4,234
Prepaid expenses and other		29,453			16,119
Total current assets		463,627			428,691
Investments		206,437			218,309
Property, plant and equipment, net		2,009,182			1,483,134
Other assets		8,076			4,578
Total assets		$	2,687,322		$	2,134,712
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	—		$	3,721
Accounts payable		126,429			138,750
Accrued liabilities		102,581			97,077
Long-term debt due within one year		25,000			25,000
Total current liabilities		254,010			264,548
NonCurrent liabilities:
Long-term notes payable		380,000			175,000
Deferred income taxes		322,481			269,919
Other		46,308			43,353
Total noncurrent liabilities		748,789			488,272
Shareholders’ equity:
Common stock, $.10 par value, 160,000,000 shares authorized, 107,057,904 shares issued		10,706			10,706
Preferred stock, no par value, 1,000,000 shares authorized, no shares issued		—			—
Additional paid-in capital		141,279			135,500
Retained earnings		1,534,025			1,215,127
Accumulated other comprehensive income		59,137			69,645
Treasury stock, at cost		(60,624		)	(49,086		)
Total shareholders’ equity		1,684,523			1,381,892
Total liabilities and shareholders’ equity		$	2,687,322		$	2,134,712

 

The accompanying notes are an integral part of these statements.

3

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2007			2006			2007			2006
Operating revenues:
Drilling – U.S. Land		$	303,514		$	214,864		$	842,559		$	581,286
Drilling – U.S. Offshore		24,910			34,568			79,958			97,791
Drilling – International		90,073			67,831			249,278			179,205
Real Estate		2,777			2,533			8,414			7,732
		421,274			319,796			1,180,209			866,014
Operating costs and other:
Operating costs, excluding depreciation		229,025			169,429			627,948			466,825
Depreciation		38,125			25,076			101,228			71,384
General and administrative		11,538			13,049			35,501			38,944
Gain from involuntary conversion of long-lived assets		(5,900		)	—			(11,070		)	—
Income from asset sales		(6,186		)	(1,895		)	(39,008		)	(6,431		)
		266,602			205,659			714,599			570,722
Operating income		154,672			114,137			465,610			295,292
Other income (expense):
Interest and dividend income		962			2,633			3,240			7,619
Interest expense		(3,260		)	(1,281		)	(6,092		)	(5,807		)
Gain on sale of investment securities		25,298			9,390			51,812			12,110
Other		120			1,085			250			599
		23,120			11,827			49,210			14,521
Income before income taxes and equity in income of affiliate		177,792			125,964			514,820			309,813
Income tax provision		64,960			47,636			188,396			118,678
Equity in income of affiliate net of income taxes		2,372			1,647			6,427			4,227
NET INCOME		$	115,204		$	79,975		$	332,851		$	195,362
Earnings per common share:
Basic		$	1.11		$	0.76		$	3.22		$	1.87
Diluted		$	1.09		$	0.75		$	3.17		$	1.84
Weighted average shares outstanding:
Basic		103,323			105,019			103,292			104,542
Diluted		105,313			106,419			104,990			105,987
Dividends declared per common share		$	0.0450		$	0.0450		$	0.1350		$	0.1275

 

The accompanying notes are an integral part of these statements.

4

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

		Nine Months Ended
		June 30,
		2007			2006
OPERATING ACTIVITIES:
Net income		$	332,851		$	195,362
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		101,228			71,384
Non-cash charges, net		23			—
Equity in income of affiliate before income taxes		(10,367		)	(6,817		)
Stock-based compensation		5,279			8,131
Gain on sale of investment securities		(51,674		)	(11,974		)
Gain from involuntary conversion of long-lived assets		(11,070		)	—
Gain on sale of assets		(39,008		)	(6,431		)
Other-net		—			(769		)
Deferred income tax expense		51,768			11,581
Change in assets and liabilities- Accounts receivable		(37,184		)	(78,155		)
Inventories		(2,233		)	(3,129		)
Prepaid expenses and other		(16,832		)	700
Accounts payable		51,707			4,162
Accrued liabilities		5,794			26,938
Deferred income taxes		3,765			5,309
Other noncurrent liabilities		1,352			1,623
Net cash provided by operating activities		385,399			217,915
INVESTING ACTIVITIES:
Capital expenditures		(681,149		)	(322,573		)
Purchase of investments		—			(115,077		)
Insurance proceeds from involuntary conversion		11,070			—
Proceeds from sale of investments		112,938			23,336
Proceeds from asset sales		45,526			10,022
Net cash used in investing activities		(511,615		)	(404,292		)
FINANCING ACTIVITIES:
Repurchase of common stock		(17,621		)	—
Increase (decrease) in notes payable		(3,721		)	2,326
Increase in long-term debt		205,000			—
Decrease in bank overdraft		(11,293		)	—
Dividends paid		(13,971		)	(12,960		)
Proceeds from exercise of stock options		3,277			12,341
Excess tax benefit from stock-based compensation		1,254			10,019
Net cash provided by financing activities		162,925			11,726
Net increase (decrease) in cash and cash equivalents		36,709			(174,651		)
Cash and cash equivalents, beginning of period		33,853			288,752
Cash and cash equivalents, end of period		$	70,562		$	114,101

 

The accompanying notes are an integral part of these statements.

5

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

													Accumulated
							Additional						Other								Total
		Common Stock					Paid-In			Retained			Comprehensive			Treasury Stock					Shareholders’
		Shares		Amount			Capital			Earnings			Income			Shares		Amount			Equity
Balance, September 30, 2006		107,058		$	10,706		$	135,500		$	1,215,127		$	69,645		3,189		$	(49,086	)	$	1,381,892
Comprehensive Income:
Net Income										332,851											332,851
Other comprehensive income,
Unrealized losses on available-for-sale securities, net of realized gains included in net income of $32,123 (net of $19,689 income tax)													(10,508		)						(10,508		)
Total comprehensive income																					322,343
Cash dividends ($0.135 per share)										(13,953		)									(13,953		)
Exercise of stock options							(1,044		)							(260	)	4,321			3,277
Tax benefit of stock-based awards, including excess tax benefits of $1,254							1,544														1,544
Repurchase of common stock																682		(15,859		)	(15,859		)
Stock-based compensation							5,279														5,279
Balance, June 30, 2007		107,058		$	10,706		$	141,279		$	1,534,025		$	59,137		3,611		$	(60,624	)	$	1,684,523

 

The accompanying notes are an integral part of these statements.

6

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.     Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information.  Accordingly, these interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements and, therefore should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s 2006 Annual Report on Form 10-K and other current filings with the Commission.  In the opinion of management, all adjustments, consisting of those of a normal recurring nature, necessary to present fairly the results of the periods presented have been included. The results of operations for the interim periods presented may not necessarily be indicative of the results to be expected for the full year.

2.     Earnings per Share

Basic earnings per share is based on the weighted-average number of common shares outstanding during the period.  Diluted earnings per share includes the dilutive effect of stock options and restricted stock.

A reconciliation of the weighted-average common shares outstanding on a basic and diluted basis is as follows (in thousands):

		Three Months Ended				Nine Months Ended
		June 30,				June 30,
		2007		2006		2007		2006
Basic weighted average shares		103,323		105,019		103,292		104,542
Effect of dilutive shares:
Stock options and restricted stock		1,990		1,400		1,698		1,445
Diluted weighted average shares		105,313		106,419		104,990		105,987

 

For the nine months ended June 30, 2007, options to purchase 597,950 shares of common stock were outstanding but were not included in the computation of diluted earnings per share.  Inclusion of these shares would be antidilutive.

For the three months ended June 30, 2007 and 2006, and for the nine months ended June 30, 2006, all options outstanding were included in the computation of diluted earnings per share.

3.     Inventories

Inventories consist primarily of replacement parts and supplies held for use in the Company’s drilling operations.

7

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

4.     Investments

The following is a summary of available-for-sale securities, which excludes those accounted for under the equity method of accounting, investments in limited partnerships carried at cost and assets held in a Non-qualified Supplemental Savings Plan.  The investment in the limited partnership carried at cost was $12.4 million at June 30, 2007 and September 30, 2006.  The estimated fair value of the investments carried at cost was $18.6 million and $14.5 million at June 30, 2007 and September 30, 2006, respectively.  The assets held in the Non-qualified Supplemental Savings Plan are valued at fair market which totaled $7.5 million at June 30, 2007 and $5.9 million at September 30, 2006.  The recorded amounts for investments accounted for under the equity method are $68.6 million and $58.3 million at June 30, 2007 and September 30, 2006, respectively.

					Gross			Gross			Est.
					Unrealized			Unrealized			Fair
		Cost			Gains			Losses			Value
		(in thousands)
Equity Securities 06/30/07		$	12,520		$	105,425		$	—		$	117,945
Equity Securities 09/30/06		$	19,413		$	122,490		$	(115	)	$	141,788

 

5.     Sale of Investment Securities

Net income includes after-tax gains from the sale of available-for-sale securities as follows (in thousands, except per share amounts):

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2007			2006			2007			2006
After-tax gain (loss)		$	15,502		$	5,782		$	31,795		$	7,503
Earnings per diluted share		$	0.15		$	0.05		$	0.30		$	0.07

 

6.     Comprehensive Income

Comprehensive income, net of related tax, is as follows (in thousands):

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2007			2006			2007			2006
Net Income		$	115,204		$	79,975		$	332,851		$	195,362
Other comprehensive income:
Net unrealized gain (loss) on securities		(611		)	(4,194		)	(10,508		)	27,062
Total comprehensive income		$	114,593		$	75,781		$	322,343		$	222,424

 

The components of accumulated other comprehensive income, net of related taxes, are as follows (in thousands):

		June 30,			September 30,
		2007			2006
Unrealized gain on securities, net		$	65,363		$	75,871
Minimum pension liability		(6,226		)	(6,226		)
Accumulated other comprehensive income		$	59,137		$	69,645

 

8

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

7.     Financial Instruments

At September 30, 2006, the Company’s short-term investments consisted primarily of auction rate securities classified as available-for-sale.  During the nine months ended June 30, 2007, the Company sold $48.3 million in auction rate securities with no realized gains or losses.  There were no sales of auction rate securities in the third quarter of fiscal 2007.  The proceeds of those sales are included in the sale of investments under investing activities on the Consolidated Condensed Statements of Cash Flows.

8.     Derivative Financial Instruments

The Company’s objective with a written option is to optimize earnings from the Company’s portfolio of available-for-sale securities.  An amount equal to the premium received by the Company for the option is recorded as a liability and is subsequently marked-to-market at the end of each accounting period with the results included in net income.  Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Company has realized a gain or loss.  As the writer of an option, the Company bears the market risk of an unfavorable change in the price of the security underlying the written option.

During the nine months ended June 30, 2007, the Company entered into two written option transactions which expired May 19, 2007.  The Company received a premium of approximately $0.2 million in the second quarter of fiscal 2007.  The option was exercised in the third quarter and the Company included the premium in the proceeds from the sale of available-for-sale securities.

9.     Cash Dividends

The $0.045 cash dividend declared March 7, 2007, was paid June 1, 2007. On June 6, 2007, a cash dividend of $0.045 per share was declared for shareholders of record on August 15, 2007, payable September 4, 2007.

10.   Stock-Based Compensation

The Company has two plans providing for common-stock based awards to employees and to non-employee Directors.  The plans permit the granting of various types of awards including stock options and restricted stock awards.  Restricted stock may be granted for no consideration other than prior and future services.  The purchase price per share for stock options may not be less than market price of the underlying stock on the date of grant.  Stock options expire ten years after grant.  Vesting requirements are determined by the Human Resources Committee of the Company’s Board of Directors.  Readers should refer to Note 6 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006 for additional information related to these stock-based compensation plans.

In October 2005, the Company adopted SFAS 123(R) “Share-Based Payment” using a modified prospective application.  The Company uses the Black-Scholes formula to estimate the value of stock options granted.  The fair value of the options is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods. The Company has the right to satisfy option exercises from treasury shares and from authorized but unissued shares.

9

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

During the nine months ended June 30, 2007, the Company repurchased 681,900 shares of its common stock at an aggregate cost of $15.9 million.  The Company may repurchase additional shares of its common stock during fiscal 2007 if the share price is favorable.

A summary of compensation cost for stock-based payment arrangements recognized in general and administrative expense and cash received from the exercise of stock options is as follows (in thousands, except per share amounts):

 

In December 2005, the Company accelerated the vesting of share options held by a senior executive who retired.  As a result of that modification, the Company recognized additional compensation expense of $2.9 million for the nine months ended June 30, 2006.

STOCK OPTIONS

The following summarizes the weighted-average assumptions utilized in the model for the three and nine months ended June 30, 2007 and 2006:

		2007		2006
Risk-free interest rate		4.6	%	4.5	%
Expected stock volatility		35.9	%	36.9	%
Dividend yield		.7	%	.5	%
Expected term (in years)		5.5		5.2

 

Risk-Free Interest Rate.  The risk-free interest rate is based on U.S. Treasury securities for the expected term of the option.

Expected Volatility Rate.  Expected volatilities are based on the daily closing price of the Company’s stock based upon historical experience over a period which approximates the expected term of the option.

Dividend Yield.  The expected dividend yield is based on the Company’s current dividend yield.

Expected Term.  The expected term of the options granted represents the period of time that they are expected to be outstanding.  The Company estimates the expected term of options granted based on historical experience with grants and exercises.

10

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

A summary of stock option activity under the Plan for the three months ended June 30, 2007 and 2006 is presented in the following tables:

June 30, 2007 Options		Shares (in thousands)		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)
Outstanding at April 1, 2007		6,271		$	15.74
Granted		—		—
Exercised		(186	)	12.94
Forfeited/Expired		(7	)	28.81
Outstanding at June 30, 2007		6,078		$	15.81		5.77		$	119,183
Vested and expected to vest at June 30, 2007		6,021		$	15.71		5.75		$	118,677
Exercisable at June 30, 2007		4,373		$	12.71		4.75		$	99,314

 

June 30, 2006 Options		Shares (in thousands)		Weighted- Average Exercise Price			Average Remaining Contractual Term		Weighted- Aggregate Intrinsic Value (in thousands)
Outstanding at April 1, 2006		6,137		$	14.14
Granted		—		—
Exercised		(492	)	12.75
Forfeited/Expired		(17	)	17.25
Outstanding at June 30, 2006		5,628		$	14.25		6.23		$	89,369
Vested and expected to vest at June 30, 2006		5,602		$	14.18		6.22		$	89,346
Exercisable at June 30, 2006		3,851		$	11.74		5.28		$	70,813

 

A summary of stock option activity under the Plan for the nine months ended June 30, 2007 and 2006 is presented in the following table:

		Nine Months Ended June 30,
		2007					2006
		Shares (in thousands)		Weighted- Average Exercise Price			Shares (in thousands)		Weighted- Average Exercise Price
Outstanding at October 1,		5,619		$	14.24		6,488		$	12.29
Granted		731		26.90			640		29.68
Exercised		(260	)	12.62			(1,479	)	12.26
Forfeited/Expired		(12	)	28.84			(21	)	16.53
Outstanding on June 30,		6,078		$	15.81		5,628		$	14.25

 

11

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The weighted-average fair value of options granted in the first quarter of fiscal 2007 was $10.36 and the weighted-average fair value of options granted in the second quarter of fiscal 2007 was $9.11.  The weighted-average fair value of options granted in the first quarter of fiscal 2006 was $11.62.  No options were granted in the second quarter of fiscal 2006 or in the third quarters of fiscal 2007 and 2006.

The total intrinsic value of options exercised during the three and nine months ended June 30, 2007 was $4.0 million and $5.0 million, respectively.  The total intrinsic value of options exercised during the three and nine months ended June 30, 2006 was $12.4 million and $34.8 million, respectively.

As of June 30, 2007, the unrecognized compensation cost related to the stock options was $12.0 million.  That cost is expected to be recognized over a weighted-average period of 2.7 years.

RESTRICTED STOCK

Restricted stock awards consist of the Company’s common stock and are time vested over 3-5 years.  The Company recognizes compensation expense on a straight-line basis over the vesting period.  The fair value of restricted stock awards is determined based on the closing trading price of the Company’s shares on the grant date.  The weighted-average grant-date fair value of shares granted for the nine months ended June 30, 2007 and 2006 was $26.90 and $30.24, respectively.

A summary of the status of the Company’s restricted stock awards as of June 30, 2007 and 2006, and changes during the nine months then ended are presented below:

		Nine months ended June 30,
		2007					2006
				Weighted-					Weighted-
				Average					Average
		Shares		Grant-Date			Shares		Grant-Date
Restricted Stock Awards		(in thousands)		Fair Value			(in thousands)		Fair Value
Unvested at October 1,		213		$	29.57		10		$	16.01
Granted		27		26.90			203		30.24
Vested		—		—			—		—
Forfeited		—		—			—		—
Unvested at June 30,		240		$	29.27		213		$	29.57

 

All grants of restricted stock awards shown in the table above were in the first quarter of that fiscal year.

As of June 30, 2007, there was $4.9 million of total unrecognized compensation cost related to unvested restricted stock options granted under the Plan.  That cost is expected to be recognized over a weighted-average period of 3.6 years.

12

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

11.   Notes Payable and Long-term Debt

At June 30, 2007, the Company had the following unsecured long-term debt outstanding:

Maturity Date		Interest Rate
Fixed rate debt:
August 15, 2007		5.51%		$	25,000,000
August 15, 2009		5.91%		25,000,000
August 15, 2012		6.46%		75,000,000
August 15, 2014		6.56%		75,000,000
Senior credit facility:
December 18, 2011		5.67%		205,000,000
				$	405,000,000
less long-term debt due within one year				(25,000,000		)
Long-term debt				$	380,000,000

 

The terms of the fixed rate debt obligations require the Company to maintain a minimum ratio of debt to total capitalization.

On December 18, 2006, the Company entered into an agreement with a multi-bank syndicate for a five-year, $400 million senior unsecured credit facility.  The Company anticipates that the majority of all of the borrowings over the life of the facility will accrue interest at a spread over LIBOR.  The Company will also pay a commitment fee based on the unused balance of the facility.  The spread over LIBOR as well as the commitment fee will be determined according to a scale based on a ratio of the Company’s total debt to total capitalization.  The LIBOR spread will range from .30 percent to .45 percent depending on the ratios.  At June 30, 2007, the LIBOR spread on borrowings was .35 percent and the commitment fee was .075 percent per annum.

Financial covenants in the facility require the Company to maintain a funded leverage ratio (as defined) of less than 50 percent and an interest coverage ratio (as defined) of not less than 3.00 to 1.00.  The new facility contains additional terms, conditions, and restrictions that the Company believes are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.  At closing, the Company transferred two letters of credit totaling $20.9 million to the facility that remained outstanding at June 30, 2007.  As of June 30, 2007, the Company had $205 million borrowed against the facility. The advance bears interest at 5.67 percent.  Subsequent to June 30, 2007, the outstanding borrowing’s were reduced by $5 million.

In conjunction with the $400 million senior unsecured credit facility, the Company entered into an agreement with a single bank to amend and restate the previous unsecured line of credit from $50 million to $5 million.  Pricing on the amended line of credit is prime minus 1.75 percent.  The covenants and other terms and conditions are similar to the aforementioned senior credit facility except that there is no commitment fee.  At June 30, 2007, the Company had no outstanding borrowings against this line.

13

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

12.   Income Taxes

The Company’s effective tax rate was 36.6 percent in the first nine months of fiscal 2007, compared to 38.3 percent in the first nine months of fiscal 2006. The effective tax rate for the three months ended June 30, 2007 and 2006 was 36.5 percent and 37.8 percent, respectively.  The effective rate differs from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign taxes.

13.   Contingent Liabilities and Commitments

In conjunction with the Company’s current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $130.9 million are outstanding at June 30, 2007.

Various legal actions, the majority of which arise in the ordinary course of business, are pending.  The Company maintains insurance against certain business risks subject to certain deductibles.  None of these legal actions are expected to have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

The Company is contingently liable to sureties in respect of bonds issued by the sureties in connection with certain commitments entered into by the Company in the normal course of business.  The Company has agreed to indemnify the sureties for any payments made by them in respect of such bonds.

14.   Segment Information

The Company operates principally in the contract drilling industry. The Company’s contract drilling business includes the following reportable operating segments:  U.S. Land, U.S. Offshore, and International.  The contract drilling operations consist mainly of contracting Company-owned drilling equipment primarily to major oil and gas exploration companies.  The Company’s primary international areas of operation include Venezuela, Colombia, Ecuador, other South American countries and Africa.  The International operations have similar services, have similar types of customers, operate in a consistent manner and have similar economic and regulatory characteristics.  Therefore, the Company has aggregated its International operations into one reportable segment.  The Company also has a Real Estate segment whose operations are conducted exclusively in the metropolitan area of Tulsa, Oklahoma.  The key areas of operation include a shopping center and several multi-tenant warehouses.  Each reportable segment is a strategic business unit which is managed separately. Other includes investments and corporate operations.

The Company evaluates segment performance based on income or loss from operations (segment operating income) before income taxes which includes:

·      revenues from external and internal customers

·      direct operating costs

·      depreciation and

·      allocated general and administrative costs

but excludes corporate costs for other depreciation, income from asset sales and other corporate income and expense.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

General and administrative costs are allocated to the segments based primarily on specific identification and, to the extent that such identification is not practical, on other methods which the Company believes to be a reasonable reflection of the utilization of services provided.

Segment operating income for all segments is a non-GAAP financial measure of the Company’s performance, as it excludes general and administrative expenses, corporate depreciation, income from asset sales and other corporate income and expense.

The Company considers segment operating income to be an important supplemental measure of operating performance by presenting trends in the Company’s core businesses.  This measure is used by the Company to facilitate period-to-period comparisons in operating performance of the Company’s reportable segments in the aggregate by eliminating items that affect comparability between periods.  The Company believes that segment operating income is useful to investors because it provides a means to evaluate the operating performance of the segments and the Company on an ongoing basis using criteria that are used by our internal decision makers.  Additionally, it highlights operating trends and aids analytical comparisons.  However, segment operating income has limitations and should not be used as an alternative to operating income or loss, a performance measure determined in accordance with GAAP, as it excludes certain costs that may affect the Company’s operating performance in future periods.

Summarized financial information of the Company’s reportable segments for the nine months ended June 30, 2007, and 2006, is shown in the following tables:

											Segment
		External			Inter-			Total			Operating
(in thousands)		Sales			Segment			Sales			Income
June 30, 2007
Contract Drilling:
U.S. Land		$	842,559		$	—		$	842,559		$	342,809
U.S. Offshore		79,958			—			79,958			10,902
International		249,278			—			249,278			77,657
		1,171,795			—			1,171,795			431,368
Real Estate		8,414			617			9,031			3,713
		1,180,209			617			1,180,826			435,081
Eliminations		—			(617		)	(617		)	—
Total		$	1,180,209		$	—		$	1,180,209		$	435,081

 

											Segment
		External			Inter-			Total			Operating
(in thousands)		Sales			Segment			Sales			Income
June 30, 2006
Contract Drilling:
U.S. Land		$	581,286		$	—		$	581,286		$	247,576
U.S. Offshore		97,791			—			97,791			20,115
International		179,205			—			179,205			40,099
		858,282			—			858,282			307,790
Real Estate		7,732			588			8,320			3,271
		866,014			588			866,602			311,061
Eliminations		—			(588		)	(588		)	—
Total		$	866,014		$	—		$	866,014		$	311,061

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Summarized financial information of the Company’s reportable segments for the three months ended June 30, 2007, and 2006, is shown in the following tables:

											Segment
		External			Inter-			Total			Operating
(in thousands)		Sales			Segment			Sales			Income
June 30, 2007
Contract Drilling:
U.S. Land		$	303,514		$	—		$	303,514		$	114,619
U.S. Offshore		24,910			—			24,910			3,013
International		90,073			—			90,073			30,413
		418,497			—			418,497			148,045
Real Estate		2,777			212			2,989			1,285
		421,274			212			421,486			149,330
Eliminations		—			(212		)	(212		)	—
Total		$	421,274		$	—		$	421,274		$	149,330

 

											Segment
		External			Inter-			Total			Operating
(in thousands)		Sales			Segment			Sales			Income
June 30, 2006
Contract Drilling:
U.S. Land		$	214,864		$	—		$	214,864		$	93,708
U.S. Offshore		34,568			—			34,568			7,635
International		67,831			—			67,831			17,685
		317,263			—			317,263			119,028
Real Estate		2,533			194			2,727			1,092
		319,796			194			319,990			120,120
Eliminations		—			(194		)	(194		)	—
Total		$	319,796		$	—		$	319,796		$	120,120

 

16

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following table reconciles segment operating income per the table above to income before income taxes and equity in income of affiliate as reported on the Consolidated Condensed Statements of Income.

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2007			2006			2007			2006
		(in thousands)
Segment operating income		$	149,330		$	120,120		$	435,081		$	311,061
Gain from involuntary conversion of long-lived assets		5,900			—			11,070			—
Income from asset sales		6,186			1,895			39,008			6,431
Corporate general and administrative costs and corporate depreciation		(6,744)			(7,878		)	(19,549		)	(22,200		)
Operating income		154,672			114,137			465,610			295,292
Other income (expense):
Interest and dividend income		962			2,633			3,240			7,619
Interest expense		(3,260)			(1,281)			(6,092)			(5,807)
Gain on sale of investment securities		25,298			9,390			51,812			12,110
Other		120			1,085			250			599
Total other income		23,120			11,827			49,210			14,521
Income before income taxes and equity in income ofaffiliate		$	177,792		$	125,964		$	514,820		$	309,813

 

		June 30,			September 30,
		2007			2006
		(in thousands)
Total Assets
U.S. Land		$	1,917,072		$	1,356,817
U.S. Offshore		118,440			110,192
International		311,362			311,605
		2,346,874			1,778,614
Real Estate		29,770			30,626
Other		310,678			325,472
		$	2,687,322		$	2,134,712

 

17