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:  March 31, 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: 1-4221

 

HELMERICH & PAYNE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

73-0679879

(State or other jurisdiction of

 

(I.R.S. Employer I.D. Number)

incorporation or organization)

 

 

 

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, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 (Do not check if a smaller reporting company)

 

 

 

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 April 30, 2008

 

Common Stock, $0.10 par value

 

104,328,568

 

 

 

 

 

 

 

Total Number of Pages - 33

 

 

 



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART  I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Condensed Balance Sheets as of March 31, 2008 and September 30, 2007

3

 

 

 

 

Consolidated Condensed Statements of Income for the Three and Six Months Ended March 31, 2008 and 2007

4

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 2008 and 2007

5

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Six Months Ended March 31, 2008

6

 

 

 

 

Notes to Consolidated Condensed Financial Statements

7-20

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21-30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

32

 

 

 

Item 6.

Exhibits

32

 

 

 

Signatures

33

 

2



 

PART I. FINANCIAL INFORMATION

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

March 31,

 

September 30,

 

 

 

2008

 

2007

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

90,736

 

$

89,215

 

Accounts receivable, less reserve of $3,641 at March 31, 2008 and $2,957 at September 30, 2007

 

361,253

 

339,819

 

Inventories

 

33,499

 

29,145

 

Deferred income tax

 

17,534

 

11,559

 

Prepaid expenses and other

 

40,963

 

29,226

 

Total current assets

 

543,985

 

498,964

 

 

 

 

 

 

 

Investments

 

205,660

 

223,360

 

Property, plant and equipment, net

 

2,395,862

 

2,152,616

 

Other assets

 

10,611

 

10,429

 

 

 

 

 

 

 

Total assets

 

$

3,156,118

 

$

2,885,369

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

110,865

 

$

124,556

 

Accrued liabilities

 

100,131

 

102,056

 

Total current liabilities

 

210,996

 

226,612

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term notes payable

 

480,000

 

445,000

 

Deferred income taxes

 

404,534

 

363,534

 

Other

 

46,508

 

34,707

 

Total noncurrent liabilities

 

931,042

 

843,241

 

 

 

 

 

 

 

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

 

152,040

 

143,146

 

Retained earnings

 

1,841,218

 

1,645,766

 

Accumulated other comprehensive income

 

58,695

 

75,885

 

Treasury stock, at cost

 

(48,579

)

(59,987

)

Total shareholders’ equity

 

2,014,080

 

1,815,516

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

3,156,118

 

$

2,885,369

 

 

The accompanying notes are an integral part of these statements.

 

3



 

 HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Drilling – U.S. Land

 

$

365,263

 

$

269,145

 

$

712,907

 

$

539,045

 

Drilling – Offshore

 

29,789

 

28,703

 

57,070

 

64,457

 

Drilling – International Land

 

75,757

 

71,950

 

154,359

 

149,796

 

Real Estate

 

2,835

 

2,738

 

5,971

 

5,637

 

 

 

473,644

 

372,536

 

930,307

 

758,935

 

 

 

 

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

 

 

 

 

Operating costs, excluding depreciation

 

253,958

 

199,456

 

489,753

 

398,923

 

Depreciation

 

51,872

 

32,952

 

95,856

 

63,103

 

General and administrative

 

14,090

 

13,350

 

27,993

 

23,963

 

Gain from involuntary conversion of long-lived assets

 

 

(5,170

)

(4,810

)

(5,170

)

Income from asset sales

 

(1,946

)

(32,336

)

(2,788

)

(32,822

)

 

 

317,974

 

208,252

 

606,004

 

447,997

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

155,670

 

164,284

 

324,303

 

310,938

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

1,220

 

1,034

 

2,335

 

2,278

 

Interest expense

 

(4,773

)

(1,913

)

(9,604

)

(2,832

)

Gain on sale of investment securities

 

5,476

 

177

 

5,606

 

26,514

 

Other

 

180

 

66

 

(436

)

130

 

 

 

2,103

 

(636

)

(2,099

)

26,090

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity in income of affiliate

 

157,773

 

163,648

 

322,204

 

337,028

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

58,784

 

59,338

 

118,930

 

123,436

 

Equity in income of affiliate net of income taxes

 

3,065

 

2,551

 

6,610

 

4,055

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

102,054

 

$

106,861

 

$

209,884

 

$

217,647

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.98

 

$

1.04

 

$

2.02

 

$

2.11

 

Diluted

 

$

.96

 

$

1.02

 

$

1.98

 

$

2.08

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

103,883

 

103,239

 

103,695

 

103,276

 

Diluted

 

106,090

 

104,832

 

105,740

 

104,841

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.0450

 

$

0.0450

 

$

0.0900

 

$

0.0900

 

 

The accompanying notes are an integral part of these statements.

 

4



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2008

 

2007

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

209,884

 

$

217,647

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

95,856

 

63,103

 

Provision for bad debt

 

688

 

99

 

Equity in income of affiliate before income taxes

 

(10,662

)

(6,540

)

Stock-based compensation

 

3,712

 

3,560

 

Gain on sale of investment securities

 

(5,476

)

(26,376

)

Gain from involuntary conversion of long-lived assets

 

(4,810

)

(5,170

)

Income from sale of assets

 

(2,788

)

(32,822

)

Deferred income tax expense

 

42,029

 

27,354

 

Change in assets and liabilities-

 

 

 

 

 

Accounts receivable

 

(25,809

)

(21,115

)

Inventories

 

(4,354

)

140

 

Prepaid expenses and other

 

(11,919

)

(18,566

)

Accounts payable

 

(31,994

)

34,920

 

Accrued liabilities

 

(1,195

)

8,792

 

Deferred income taxes

 

4,244

 

2,416

 

Other noncurrent liabilities

 

5,849

 

(1,577

)

 

 

 

 

 

 

Net cash provided by operating activities

 

263,255

 

245,865

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(321,711

)

(433,900

)

Insurance proceeds from involuntary conversion

 

8,500

 

5,170

 

Proceeds from sale of investments

 

7,769

 

84,812

 

Proceeds from asset sales

 

3,668

 

37,947

 

Other

 

 

214

 

Net cash used in investing activities

 

(301,774

)

(305,757

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Repurchase of common stock

 

 

(17,621

)

Decrease in notes payable

 

 

(3,721

)

Proceeds from line of credit

 

1,710,000

 

305,000

 

Payments on line of credit

 

(1,675,000

)

(150,000

)

Decrease in bank overdraft

 

 

(10,195

)

Dividends paid

 

(9,354

)

(9,311

)

Proceeds from exercise of stock options

 

8,284

 

872

 

Excess tax benefit from stock-based compensation

 

6,110

 

155

 

Net cash provided by financing activities

 

40,040

 

115,179

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

1,521

 

55,287

 

Cash and cash equivalents, beginning of period

 

89,215

 

33,853

 

Cash and cash equivalents, end of period

 

$

90,736

 

$

89,140

 

 

The accompanying notes are an integral part of these statements.

 

5



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED MARCH 31, 2008

(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, 2007

 

107,058

 

$

10,706

 

$

143,146

 

$

1,645,766

 

$

75,885

 

3,573

 

$

(59,987

)

$

1,815,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment to initially apply FASB Interpretation No. 48

 

 

 

 

 

 

 

(5,048

)

 

 

 

 

 

 

(5,048

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

209,884

 

 

 

 

 

 

 

209,884

 

Other comprehensive income,
Unrealized losses on available-for-sale securities (net of $8,402 income tax), net of realized gains included in net income of $3,476

 

 

 

 

 

 

 

 

 

(17,186 

)

 

 

 

 

(17,186 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net periodic benefit costs-net actuarial gain (net of $2 income tax)

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

(4

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

192,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital adjustment of equity investee

 

 

 

 

 

1,441

 

 

 

 

 

 

 

 

 

1,441

 

Cash dividends ($0.090 per share)

 

 

 

 

 

 

 

(9,384

)

 

 

 

 

 

 

(9,384

)

Exercise of stock options

 

 

 

 

 

(3,068

)

 

 

 

 

(677

)

11,352

 

8,284

 

Tax benefit of stock-based awards, including excess tax benefits of $6,110

 

 

 

 

 

6,865

 

 

 

 

 

 

 

 

 

6,865

 

Treasury stock issued for vested restricted stock

 

 

 

 

 

(56

)

 

 

 

 

(3

)

56

 

 

Stock-based compensation

 

 

 

 

 

3,712

 

 

 

 

 

 

 

 

 

3,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2008

 

107,058

 

$

10,706

 

$

152,040

 

$

1,841,218

 

$

58,695

 

2,893

 

$

(48,579

)

$

2,014,080

 

 

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 2007 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.

 

Certain amounts in the accompanying consolidated financial statements for prior periods have been reclassified to conform to current year presentation.  Specifically, fiscal year 2007 operating revenues for Drilling-Offshore and for Drilling-International Land have been restated to reflect a reclassification between those two segments.

 

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

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares

 

103,883

 

103,239

 

103,695

 

103,276

 

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

2,207

 

1,593

 

2,045

 

1,565

 

Diluted weighted average shares

 

106,090

 

104,832

 

105,740

 

104,841

 

 

For the three and six months ended March 31, 2008, options to purchase 710,000 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 March 31, 2007, options to purchase 605,511 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 six months ended March 31, 2007, options to purchase 1,332,036 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.

 

3.              Inventories

 

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

 

7



 

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.

 

 

 

 

 

Gross

 

Gross

 

Est.

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Equity Securities 03/31/08

 

$

9,035

 

$

89,927

 

$

 

$

98,962

 

Equity Securities 09/30/07

 

$

11,329

 

$

117,646

 

$

 

$

128,975

 

 

The investment in the limited partnership carried at cost was $12.4 million at March 31, 2008 and September 30, 2007.  The estimated fair value of the investments carried at cost was $20.2 million and $22.3 million at March 31, 2008 and September 30, 2007, respectively.  The assets held in the Non-qualified Supplemental Savings Plan are valued at fair market which totaled $7.1 million at March 31, 2008 and $7.8 million at September 30, 2007.  The recorded amounts for investments accounted for under the equity method are $87.2 million and $74.2 million at March 31, 2008 and September 30, 2007, respectively.  During the six months ended March 31, 2008, the Company increased the equity investment $2.3 million ($1.4 million, net of tax) to account for capital transactions of the equity investee.

 

5.            Comprehensive Income

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net Income

 

$

102,054

 

$

106,861

 

$

209,884

 

$

217,647

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) on securities

 

(13,719

)

10,402

 

(22,112

)

10,550

 

Income taxes

 

5,213

 

(3,952

)

8,402

 

(4,008

)

 

 

(8,506

)

6,450

 

(13,710

)

6,542

 

Reclassification of realized gains in net income

 

(5,476

)

(177

)

(5,606

)

(26,514

)

Income taxes

 

2,081

 

67

 

2,130

 

10,075

 

 

 

(3,395

)

(110

)

(3,476

)

(16,439

)

Minimum pension liability adjustments

 

(3

)

 

(6

)

 

Income taxes

 

1

 

 

2

 

 

 

 

(2

)

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

90,151

 

$

113,201

 

$

192,694

 

$

207,750

 

 

8



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

March 31,

 

September 30,

 

 

 

2008

 

2007

 

Unrealized appreciation on securities, net

 

$

55,755

 

$

72,941

 

Minimum pension liability

 

2,940

 

2,944

 

Accumulated other comprehensive income

 

$

58,695

 

$

75,885

 

 

6.              Financial Instruments

 

During the six months ended March 31, 2007, the Company liquidated its position in auction rate securities with no realized gains or losses.  The proceeds of $48.3 million were included in the sale of investments under investing activities on the Consolidated Condensed Statements of Cash Flows.  There were no purchases or sales of auction rate securities in the six months ended March 31, 2008.

 

7.              Cash Dividends

 

The $0.045 cash dividend declared December 4, 2007, was paid March 3, 2008. On March 5, 2008, a cash dividend of $0.045 per share was declared for shareholders of record on May 15, 2008, payable June 2, 2008.

 

8.              Stock-Based Compensation

 

The Company has one plan providing for common-stock based awards to employees and to non-employee Directors.  The plan permits 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 the grant date.  Vesting requirements are determined by the Human Resources Committee of the Company’s Board of Directors.  Readers should refer to Note 5 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 for additional information related to stock-based compensation.

 

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



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

During the six months ended March 31, 2007, the Company repurchased 681,900 shares of its common stock at an aggregate cost of $15.9 million.  The Company has not repurchased any common stock during fiscal 2008 but may repurchase additional shares 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):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

Compensation expense

 

 

 

 

 

 

 

 

 

Stock options

 

$

1,468

 

$

1,382

 

$

3,165

 

$

2,890

 

Restricted stock

 

185

 

343

 

547

 

670

 

 

 

$

1,653

 

$

1,725

 

$

3,712

 

$

3,560

 

 

 

 

 

 

 

 

 

 

 

After-tax stock based compensation

 

$

1,025

 

$

1,069

 

$

2,302

 

$

2,207

 

 

 

 

 

 

 

 

 

 

 

Per basic share

 

$

.01

 

$

.01

 

$

.02

 

$

.02

 

Per diluted share

 

$

.01

 

$

.01

 

$

.02

 

$

.02

 

 

 

 

 

 

 

 

 

 

 

Cash received from exercise of stock options

 

$

6,919

 

$

401

 

$

8,284

 

$

872

 

 

STOCK OPTIONS

 

The following summarizes the weighted-average assumptions utilized in determining the fair value of options granted during the six months ended March 31, 2008 and 2007:

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Risk-free interest rate

 

3.3

%

4.6

%

Expected stock volatility

 

31.1

%

35.9

%

Dividend yield

 

.5

%

.7

%

Expected term (in years)

 

4.8

 

5.5

 

 

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 volatility is 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



 

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 March 31, 2008 and 2007 is presented in the following tables:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

March 31, 2008

 

Shares

 

Exercise

 

Contractual

 

Value

 

Options

 

(in thousands)

 

Price

 

Term

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2008

 

6,657

 

$

18.02

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(560

)

12.36

 

 

 

 

 

Forfeited/Expired

 

(77

)

26.42

 

 

 

 

 

Outstanding at March 31, 2008

 

6,020

 

$

18.44

 

5.70

 

$

171,134

 

Vested and expected to vest at March 31, 2008

 

5,988

 

$

18.37

 

5.68

 

$

170,686

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2008

 

4,375

 

$

14.16

 

4.56

 

$

143,135

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

March 31, 2007

 

Shares

 

Exercise

 

Contractual

 

Value

 

Options

 

(in thousands)

 

Price

 

Term

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2007

 

6,307

 

$

15.72

 

 

 

 

 

Granted

 

2

 

27.45

 

 

 

 

 

Exercised

 

(33

)

12.02

 

 

 

 

 

Forfeited/Expired

 

(5

)

28.90

 

 

 

 

 

Outstanding at March 31, 2007

 

6,271

 

$

15.74

 

5.98

 

$

91,551

 

Vested and expected to vest at March 31, 2007

 

6,208

 

$

15.63

 

5.95

 

$

91,322

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2007

 

4,560

 

$

12.73

 

4.98

 

$

80,304

 

 

A summary of stock option activity under the Plan for the six months ended March 31, 2008 and 2007 is presented in the following table:

 

 

 

Six months ended March 31,

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

 

Shares

 

Average

 

Shares

 

Average

 

 

 

 

(in

 

Exercise

 

(in

 

Exercise

 

 

 

 

thousands)

 

Price

 

thousands)

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at October 1,

 

6,032

 

$

15.80

 

5,619

 

$

14.24

 

 

Granted

 

742

 

35.11

 

731

 

26.90

 

 

Exercised

 

(677

)

12.25

 

(74

)

10.62

 

 

Forfeited/Expired

 

(77

)

26.42

 

(5

)

28.90

 

 

Outstanding at March 31,

 

6,020

 

$

18.44

 

6,271

 

$

15.72

 

 

 

The weighted-average fair value of options granted in the first quarter of fiscal 2008 was $10.81.  No options were granted in the second quarter of fiscal 2008.  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.

 

11



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

The total intrinsic value of options exercised during the three and six months ended March 31, 2008 was $17.3 and $20.2 million respectively. The total intrinsic value of options exercised during the three and six months ended March 31, 2007 was $0.5 million and $1.0 million, respectively.

 

As of March 31, 2008, the unrecognized compensation cost related to the stock options was $14.9 million.  That cost is expected to be recognized over a weighted-average period of 2.8 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 six months ended March 31, 2008 and 2007 was $35.19 and $26.90, respectively.

 

A summary of the status of the Company’s restricted stock awards as of March 31, 2008 and 2007, and changes during the six months then ended is presented below:

 

 

 

Six months ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

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,

 

240

 

$

29.27

 

213

 

$

29.57

 

Granted

 

22

 

35.19

 

27

 

26.90

 

Vested

 

(3

)

16.01

 

 

 

Forfeited

 

(14

)

30.24

 

 

 

Unvested at March 31,

 

245

 

$

29.92

 

240

 

$

29.27

 

 

As of March 31, 2008, there was $4.4 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 3.0 years.

 

9.              Notes Payable and Long-term Debt

 

At March 31, 2008, the Company had the following unsecured long-term debt outstanding:

 

Maturity Date

 

Interest Rate

 

 

 

Fixed rate debt:

 

 

 

 

 

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

 

2.95%-3.44%

 

305,000,000

 

 

 

 

 

$

480,000,000

 

 

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

 

12



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has an agreement with a multi-bank syndicate for a $400 million senior unsecured credit facility which matures December 2011.  While the Company has the option to borrow at the prime rate for maturities of less than 30 days, 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 pays a commitment fee based on the unused balance of the facility.  The spread over LIBOR as well as the commitment fee is determined according to a scale based on a ratio of the Company’s total debt to total capitalization.  The LIBOR spread ranges from .30 percent to ..45 percent depending on the ratios.  At March 31, 2008, 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 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 March 31, 2008, the Company had three letters of credit totaling $25.9 million under the facility and had $305 million borrowed against the facility with $69.1 million available to borrow. The advances bear interest ranging from 2.95 percent to 3.44 percent.

 

The Company also has an agreement with a single bank for an unsecured line of credit for $5 million.  Pricing on the 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 March 31, 2008, the Company had no outstanding borrowings against this line.

 

The Company maintains a $5 million unsecured credit facility with a financial institution which it uses to issue letters of credit in order to obtain surety bonds for its international operations.  At March 31, 2008, the letters of credit outstanding totaled $4.4 million.

 

10.       Income Taxes

 

The Company’s effective tax rate for the first six months of fiscal 2008 and 2007 was 36.9 percent and 36.6 percent, respectively.  The effective tax rate for the three months ended March 31, 2008 and 2007 was 37.3 percent and 36.3 percent, respectively.  The effective rate differs from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign taxes.

 

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”) on October 1, 2007. FIN 48 clarifies the accounting and disclosure requirements for uncertainty in tax positions.  FIN 48 requires a two-step approach to evaluate tax positions and determine if they should be recognized.  The first step is recognition based on a determination of whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority having full knowledge of all relevant information.  The second step is to measure a tax position that meets the more-likely-than-not threshold.  The tax position is measured as the largest amount of benefit, determined on a cumulative probability basis, that is greater than 50 percent likely of being realized upon ultimate settlement.  The cumulative effect of initially applying the Interpretation must be reported as an adjustment to the opening balance of retained earnings in the year of adoption.

 

13



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

The net impact to the Company of the cumulative effect of adopting FIN 48 was a decrease of approximately $5.0 million in retained earnings.

 

At October 1, 2007, the Company’s liability for unrecognized tax benefits, after the adoption of FIN 48, was $4.6 million, of which $4.3 million represents tax benefits that, if recognized, would favorably impact the effective tax rate.  Unrecognized tax benefits increased to $5.1 million at March 31, 2008, mainly due to increases occurring in the first six months related to tax positions taken during the current year.  Included in this balance is $4.8 million which, if recognized, would affect our effective tax rate.

 

The Company recognizes accrued interest related to unrecognized tax benefits in interest expense, and penalties in other expense in the consolidated statements of income.  At October 1, 2007 and March 31, 2008, the Company had accrued interest and penalties of $2.0 million.

 

The Company files a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions.  The tax years that remain open to examination by U.S. federal and state jurisdictions include fiscal years 2003 to 2007.  Audits in foreign jurisdictions are generally complete through fiscal year 2001.

 

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions will increase or decrease during the next 12 months; however, the Company does not expect the change to have a material effect on results of operations or financial position.

 

11.       Contingent Liabilities and Commitments

 

In conjunction with the Company’s current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $131.1 million are outstanding at March 31, 2008.

 

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.

 

12.       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, Offshore, and International Land.  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 and other South American countries.  The International Land 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 Land 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.

 

14



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 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.

 

In the fourth quarter of fiscal 2007, the Company began mobilizing an offshore rig from the U.S. to an international location.  Because an offshore rig requires different technology and marketing strategies, the chief operating decision-maker’s evaluation of performance and resource allocation for this rig is more appropriately aligned with the Offshore segment.  Therefore the Company will continue to include the operations of this rig in the Offshore operating segment. Additionally, the Company determined that a management contract for a customer-owned platform rig located offshore in West Africa was more appropriately aligned with the Offshore segment for purposes of evaluating performance and resource allocation.  Therefore, this management contract has been reclassified from the International segment to the Offshore segment for the quarter and year-to-date periods ending March 31, 2007.  As a result, the International segment was renamed to International Land. Financial information for reportable segments for fiscal 2007 has been restated to reflect this change.

 

Summarized financial information of the Company’s reportable segments for the six months ended March 31, 2008, and 2007, is shown in the following tables:

 

15



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income

 

March 31, 2008

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

712,907

 

$

 

$

712,907

 

$

287,581

 

Offshore

 

57,070

 

 

57,070

 

7,717

 

International Land

 

154,359

 

 

154,359

 

33,908

 

 

 

924,336

 

 

924,336

 

329,206

 

Real Estate

 

5,971

 

437

 

6,408

 

2,825

 

 

 

930,307

 

437

 

930,744

 

332,031

 

Eliminations

 

 

(437

)

(437

)

 

Total

 

$

930,307

 

$

 

$

930,307

 

$

332,031

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income

 

March 31, 2007

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

539,045

 

$

 

$

539,045

 

$

228,190

 

Offshore

 

64,457

 

 

64,457

 

11,185

 

International Land

 

149,796

 

 

149,796

 

43,948

 

 

 

753,298

 

 

753,298

 

283,323

 

Real Estate

 

5,637

 

405

 

6,042

 

2,428

 

 

 

758,935

 

405

 

759,340

 

285,751

 

Eliminations

 

 

(405

)

(405

)

 

Total

 

$

758,935

 

$

 

$

758,935

 

$

285,751

 

 

Summarized financial information of the Company’s reportable segments for the three months ended March 31, 2008, and 2007, is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income

 

March 31, 2008

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

365,263

 

$

 

$

365,263

 

$

143,740

 

Offshore

 

29,789

 

 

29,789

 

3,603

 

International Land

 

75,757

 

 

75,757

 

12,752

 

 

 

470,809

 

 

470,809

 

160,095

 

Real Estate

 

2,835

 

224

 

3,059

 

1,301

 

 

 

473,644

 

224

 

473,868

 

161,396

 

Eliminations

 

 

(224

)

(224

)

 

Total

 

$

473,644

 

$

 

$

473,644

 

$

161,396

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income

 

March 31, 2007

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

269,145

 

$

 

$

269,145

 

$

109,782

 

Offshore

 

28,703

 

 

28,703

 

3,805

 

International Land

 

71,950

 

 

71,950

 

19,874

 

 

 

369,798

 

 

369,798

 

133,461

 

Real Estate

 

2,738

 

207

 

2,738

 

961

 

 

 

372,536

 

207

 

372,536

 

134,422

 

Eliminations

 

 

(207

)

(207

)

 

Total

 

$

372,536

 

$

 

$

372,536

 

$

134,422

 

 

16



 

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
March 31,

 

Six Months Ended
March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Segment operating income

 

$

161,396

 

$

134,422

 

$

332,031

 

$

285,751

 

Gain from involuntary conversion of long-lived assets

 

 

5,170

 

4,810

 

5,170

 

Income from asset sales

 

1,946

 

32,336

 

2,788

 

32,822

 

Corporate general and administrative costs and corporate depreciation

 

(7,672

)

(7,644

)

(15,326

)

(12,805

)

Operating income

 

155,670

 

164,284

 

324,303

 

310,938

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

1,220

 

1,034

 

2,335

 

2,278

 

Interest expense

 

(4,773

)

(1,913

)

(9,604

)

(2,832

)

Gain on sale of investment securities

 

5,476

 

177

 

5,606

 

26,514

 

Other

 

180

 

66

 

(436

)

130

 

Total other income (expense)

 

2,103

 

(636

)

(2,099

)

26,090

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity in income of affiliate

 

$

157,773

 

$

163,648

 

$

322,204

 

$

337,028

 

 

 

 

 

 

 

 

March 31,

 

September 30,

 

 

 

 

 

 

 

2008

 

2007

 

 

 

 

 

 

 

(in thousands)

 

Total Assets

 

 

 

 

 

 

 

 

 

U.S. Land

 

 

 

 

 

$

2,307,092

 

$

2,073,015

 

Offshore

 

 

 

 

 

154,895

 

124,014

 

International Land

 

 

 

 

 

335,124

 

314,625

 

 

 

 

 

 

 

2,797,111

 

2,511,654

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

29,823

 

30,351

 

Other

 

 

 

 

 

329,184

 

343,364

 

 

 

 

 

 

 

$

3,156,118

 

$

2,885,369

 

 

The following table presents revenues from external customers by country based on the location of service provided.

 

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(in thousands)

 

Operating revenues

 

 

 

 

 

 

 

 

 

United States

 

$

396,899

 

$

295,945

 

$

774,451

 

$

599,730

 

Venezuela

 

38,050

 

22,832

 

79,705

 

46,732

 

Ecuador

 

14,225

 

25,597

 

33,517

 

52,545

 

Other Foreign

 

24,470

 

28,162

 

42,634

 

59,928

 

Total

 

$

473,644

 

$

372,536

 

$

930,307

 

$

758,935

 

 

17



 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

13.     Pensions and Other Post-retirement Benefits

 

The following provides information at March 31, 2008 and 2007 related to the Company-sponsored domestic defined benefit pension plan.

 

Components of Net Periodic Benefit Cost

 

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Service Cost

 

$

 

$

 

$

 

$

 

Interest Cost

 

1,189

 

1,216

 

2,379

 

2,432

 

Expected return on plan assets

 

(1,458

)

(1,281

)

(2,916

)

(2,562

)

Recognized net actuarial loss

 

(3

)

35

 

(6

)

70

 

Net pension expense

 

$

(272

)

$

(30

)

$

(543

)

$

(60

)

 

Plan Assets

 

The weighted-average asset allocations for the pension plan by asset category follow:

 

At March 31,

 

2008

 

2007

 

 

 

 

 

 

 

Asset Category

 

 

 

 

 

Equity Securities

 

75.7

%

77.2

%

Debt Securities

 

22.9

%

20.5

%

Real Estate and Other

 

1.4

%

2.3

%

Total

 

100.0

%