Table of Contents

 

 

 

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, 2010

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No 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.

 

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 July 31, 2010

Common Stock, $0.10 par value

 

105,813,661

 

 

 



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART  I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Condensed Balance Sheets as of June 30, 2010 and September 30, 2009

3

 

 

 

 

Consolidated Condensed Statements of Operations for the Three and Nine Months Ended June 30, 2010 and 2009

4

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 2010 and 2009

5

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2010

6

 

 

 

 

Notes to Consolidated Condensed Financial Statements

7-23

 

 

 

Item 2.

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

24-34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 6.

Exhibits

37

 

 

 

Signatures

38

 

2



Table of Contents

 

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

 

 

 

June 30,

 

September 30,

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

77,717

 

$

96,142

 

Short-term investments

 

 

12,500

 

Accounts receivable, less reserve of $629 at June 30, 2010 and $659 at September 30, 2009

 

335,000

 

233,949

 

Inventories

 

43,505

 

39,544

 

Deferred income taxes

 

17,480

 

6,373

 

Assets held for sale

 

 

1,023

 

Prepaid expenses and other

 

66,041

 

52,495

 

Current assets of discontinued operations

 

9,507

 

80,906

 

Total current assets

 

549,250

 

522,932

 

 

 

 

 

 

 

Investments

 

274,620

 

356,404

 

Property, plant and equipment, net

 

3,235,863

 

3,194,273

 

Non-current assets of discontinued operations

 

 

71,634

 

Other assets

 

13,921

 

15,781

 

 

 

 

 

 

 

Total assets

 

$

4,073,654

 

$

4,161,024

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

54,137

 

$

68,173

 

Accrued liabilities

 

149,153

 

111,750

 

Short-term debt

 

 

105,000

 

Current liabilities of discontinued operations

 

7,688

 

16,983

 

Total current liabilities

 

210,978

 

301,906

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt

 

390,000

 

420,000

 

Deferred income taxes

 

692,103

 

672,358

 

Other

 

73,227

 

73,546

 

Non-current liabilities of discontinued operations

 

1,819

 

10,205

 

Total noncurrent liabilities

 

1,157,149

 

1,176,109

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.10 par value, 160,000,000 shares authorized,107,057,904 shares issued as of June 30, 2010 and September 30, 2009 and 105,811,476 and 105,486,218 shares outstanding as of June 30, 2010 and September 30, 2009, respectively

 

10,706

 

10,706

 

Preferred stock, no par value, 1,000,000 shares authorized, no shares issued

 

 

 

Additional paid-in capital

 

188,786

 

176,039

 

Retained earnings

 

2,471,238

 

2,414,942

 

Accumulated other comprehensive income

 

62,130

 

112,451

 

Treasury stock, at cost

 

(27,333

)

(31,129

)

Total shareholders’ equity

 

2,705,527

 

2,683,009

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,073,654

 

$

4,161,024

 

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Drilling — U.S. Land

 

$

366,989

 

$

282,358

 

$

976,497

 

$

1,172,076

 

Drilling — Offshore

 

53,131

 

55,605

 

153,186

 

157,424

 

Drilling — International Land

 

60,045

 

43,882

 

177,377

 

147,940

 

Other

 

3,219

 

2,514

 

9,145

 

8,024

 

 

 

483,384

 

384,359

 

1,316,205

 

1,485,464

 

 

 

 

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

 

 

 

 

Operating costs, excluding depreciation

 

285,583

 

204,523

 

742,761

 

754,098

 

Depreciation

 

65,208

 

58,737

 

189,418

 

166,082

 

General and administrative

 

20,114

 

14,172

 

61,296

 

45,481

 

Research and development

 

3,254

 

2,777

 

8,411

 

6,630

 

Gain from involuntary conversion of long-lived assets

 

 

(264

)

 

(541

)

Income from asset sales

 

(2,249

)

(1,741

)

(4,245

)

(4,706

)

 

 

371,910

 

278,204

 

997,641

 

967,044

 

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations

 

111,474

 

106,155

 

318,564

 

518,420

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

940

 

199

 

1,536

 

2,362

 

Interest expense

 

(3,961

)

(2,893

)

(12,693

)

(9,147

)

Other

 

215

 

(49

)

253

 

51

 

 

 

(2,806

)

(2,743

)

(10,904

)

(6,734

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes and equity in income of affiliate

 

108,668

 

103,412

 

307,660

 

511,686

 

Income tax provision

 

43,785

 

35,391

 

104,870

 

196,227

 

Equity in income of affiliate net of income taxes

 

 

 

 

10,111

 

Income from continuing operations

 

64,883

 

68,021

 

202,790

 

325,570

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

(101,548

)

(13,717

)

(127,160

)

(18,451

)

Income tax provision

 

50

 

1,260

 

2,363

 

5,062

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(101,598

)

(14,977

)

(129,523

)

(23,513

)

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(36,715

)

$

53,044

 

$

73,267

 

$

302,057

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.61

 

$

0.64

 

$

1.92

 

$

3.08

 

Loss from discontinued operations

 

$

(0.96

)

$

(0.14

)

$

(1.23

)

$

(0.22

)

Net income (loss)

 

$

(0.35

)

$

0.50

 

$

0.69

 

$

2.86

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.61

 

$

0.64

 

$

1.89

 

$

3.05

 

Loss from discontinued operations

 

$

(0.95

)

$

(0.14

)

$

(1.21

)

$

(0.22

)

Net income (loss)

 

$

(0.34

)

$

0.50

 

$

0.68

 

$

2.83

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

105,743

 

105,425

 

105,676

 

105,330

 

Diluted

 

107,444

 

106,695

 

107,400

 

106,381

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.060

 

$

0.050

 

$

0.160

 

$

0.150

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

73,267

 

$

302,057

 

Adjustment for loss from discontinued operations

 

129,523

 

23,513

 

Income from continuing operations

 

202,790

 

325,570

 

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

 

 

 

 

 

Depreciation

 

189,418

 

166,082

 

Provision for bad debt

 

4

 

580

 

Equity in income of affiliate before income taxes

 

 

(16,308

)

Stock-based compensation

 

12,874

 

6,292

 

Other

 

79

 

394

 

Gain from involuntary conversion of long-lived assets

 

 

(541

)

Income from asset sales

 

(4,245

)

(4,706

)

Deferred income tax expense

 

36,714

 

153,997

 

Change in assets and liabilities-

 

 

 

 

 

Accounts receivable

 

(101,055

)

144,804

 

Inventories

 

(3,961

)

(11,882

)

Prepaid expenses and other

 

(11,739

)

(11,675

)

Accounts payable

 

(6,785

)

(14,948

)

Accrued liabilities

 

20,025

 

(8,311

)

Deferred income taxes

 

(527

)

8,245

 

Other noncurrent liabilities

 

952

 

(3,540

)

Net cash provided by operating activities from continuing operations

 

334,544

 

734,053

 

Net cash provided by (used in) operating activities from discontinued operations

 

(1,507

)

402

 

Net cash provided by operating activities

 

333,037

 

734,455

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(220,200

)

(734,506

)

Insurance proceeds from involuntary conversion

 

 

541

 

Proceeds from sale of short-term investments

 

12,516

 

 

Proceeds from asset sales

 

6,297

 

6,658

 

Purchase of short-term investments

 

(16

)

(12,500

)

Other

 

 

(16

)

Net cash used in investing activities from continuing operations

 

(201,403

)

(739,823

)

Net cash used in investing activities from discontinued operations

 

(55

)

(3,857

)

Net cash used in investing activities

 

(201,458

)

(743,680

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Decrease in notes payable

 

 

(1,733

)

Proceeds from line of credit

 

835,000

 

3,185,000

 

Payments on line of credit

 

(970,000

)

(3,125,000

)

Increase (decrease) in bank overdraft

 

(2,038

)

8,992

 

Dividends paid

 

(15,891

)

(15,829

)

Exercise of stock options

 

(391

)

710

 

Excess tax benefit from stock-based compensation

 

3,316

 

1,189

 

Net cash provided by (used in) financing activities

 

(150,004

)

53,329

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(18,425

)

44,104

 

Cash and cash equivalents, beginning of period

 

96,142

 

77,549

 

Cash and cash equivalents, end of period

 

$

77,717

 

$

121,653

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED JUNE 30, 2010

(Unaudited)

(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, 2009

 

107,058

 

$

10,706

 

$

176,039

 

$

2,414,942

 

$

112,451

 

1,572

 

$

(31,129

)

$

2,683,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

73,267

 

 

 

 

 

 

 

73,267

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in value on available-for-sale securities

 

 

 

 

 

 

 

 

 

(51,326

)

 

 

 

 

(51,326

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net periodic benefit costs-net of actuarial gain

 

 

 

 

 

 

 

 

 

1,005

 

 

 

 

 

1,005

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends ($.16 per share)

 

 

 

 

 

 

 

(16,971

)

 

 

 

 

 

 

(16,971

)

Exercise of stock options

 

 

 

 

 

(2,742

)

 

 

 

 

(256

)

2,351

 

(391

)

Tax benefit of stock-based awards, including excess tax benefits of $3.3 million

 

 

 

 

 

4,060

 

 

 

 

 

 

 

 

 

4,060

 

Treasury stock issued for vested restricted stock

 

 

 

 

 

(1,445

)

 

 

 

 

(70

)

1,445

 

 

Stock-based compensation

 

 

 

 

 

12,874

 

 

 

 

 

 

 

 

 

12,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2010

 

107,058

 

$

10,706

 

$

188,786

 

$

2,471,238

 

$

62,130

 

1,246

 

$

(27,333

)

$

2,705,527

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.               Basis of Presentation

 

Unless the context otherwise requires, the use of the terms “the Company,” “we,” “us” and “our” in these Notes to Consolidated Condensed Financial Statements refers to Helmerich & Payne, Inc. and its consolidated subsidiaries.

 

The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) 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 GAAP for complete financial statements and, therefore, should be read in conjunction with the Consolidated Financial Statements and notes thereto in our 2009 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.

 

We classified the Venezuelan operation, an operating segment within the International Land Segment, as a discontinued operation in the third quarter of fiscal 2010, as more fully described in Note 2. Accordingly, the assets and liabilities of this business, along with its results of operations, have been reclassified for all periods presented. Unless indicated otherwise, the information in the Notes to the Consolidated Condensed Financial Statements relates only to our continuing operations.

 

The adoption of the guidance contained in Accounting Standards Codification (“ASC”) 260-10-45, Earnings per Share, discussed below in Note 2 changed the calculation of basic earnings per share requiring restricted stock grants that have previously been included in our diluted weighted-average shares to be included in basic weighted-average shares. Earnings per share for the three and nine months ended June 30, 2009 has been recalculated to conform to the current year presentation.

 

As more fully described in our 2009 Annual Report on Form 10-K, our contract drilling revenues are comprised of daywork drilling contracts for which the related revenues and expenses are recognized as services are performed. For contracts that are terminated by customers prior to the expirations of their fixed term, contractual provisions customarily require early termination amounts to be paid to us. Revenues from early terminated contracts are recognized when all contractual requirements have been met.

 

2.               Discontinued Operations

 

On June 30, 2010, the Official Gazette of Venezuela published the Decree of Venezuelan President Hugo Chavez, which authorized the “forceful acquisition” of eleven rigs owned by our Venezuelan subsidiary. The Decree also authorized the seizure of “all the personal and real property and other improvements” used by our Venezuelan subsidiary in its drilling operations. The seizing of our assets became effective June 30, 2010 and meets the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements. Therefore, as of June 30, 2010, operations from the Venezuelan subsidiary, an operating segment within the International Land Segment, have been classified as discontinued operations in our Consolidated Condensed Financial Statements. All historical statements have been reclassified to conform to this presentation.

 

7



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

Our revenue in Venezuela was from providing drilling services to Petroleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned petroleum company. We determined, as of the beginning of the second quarter of fiscal 2009 and forward, that the revenue recognition criteria in Venezuela was no longer met as collectability of revenue was not reasonably assured, primarily due to the uncertainty of the timing of collectability. However, up until the time of the seizing of our assets, we continued to receive payments from PDVSA and were in discussions with PDVSA officials regarding payments and the possibility of contract negotiations to put our rigs back to work.

 

As a result of the seizing of our assets in the third quarter of fiscal 2010, we have derecognized our Venezuela property and equipment, $65.0 million, and warehouse inventory, $5.1 million, resulting in a loss of approximately $70.1 million. Accounts receivable, payables and other deferred charges and credits, netting to approximately $10.7 million, were also written off because the related future cash inflows and outflows associated with them are no longer expected to occur. At June 30, 2010, we had approximately $31.3 million (U.S. currency equivalent) cash balances in Venezuela. We have, since July 22, 2008, had an outstanding application with the Venezuelan government requesting approval to convert bolivar fuerte (Bsf) cash balances to U.S. dollars. If approval is ever received, our Venezuelan subsidiary would remit approximately $14.2 million as a dividend to its U.S. based parent. Because of the seizure of our assets by the Venezuelan government and our inability to obtain approval of the dividend, we also impaired approximately $21.8 million cash as of June 30, 2010. The remaining cash was classified as restricted cash, a current asset from discontinued operations, to meet remaining current obligations.

 

Summarized operating results from discontinued operations are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,787

 

$

3,408

 

$

13,534

 

$

46,357

 

Loss before income taxes

 

(101,548

)

(13,717

)

(127,160

)

(18,451

)

Income tax expense

 

(50

)

(1,260

)

(2,363

)

(5,062

)

Loss from discontinued operations

 

$

(101,598

)

$

(14,977

)

$

(129,523

)

$

(23,513

)

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

Significant categories of assets and liabilities from discontinued operations are as follows:

 

 

 

June 30,

 

September 30,

 

 

 

2010

 

2009

 

Cash and cash equivalents

 

$

 

$

45,344

 

Accounts receivable

 

 

12,841

 

Other current assets

 

9,507

 

22,721

 

Total current assets

 

9,507

 

80,906

 

Property, plant and equipment, net

 

 

71,634

 

Total assets

 

$

9,507

 

$

152,540

 

 

 

 

 

 

 

Total current liabilities

 

$

7,688

 

$

16,983

 

Total noncurrent liabilities

 

1,819

 

10,205

 

Total liabilities

 

$

9,507

 

$

27,188

 

 

Liabilities consist of municipal and income taxes payable and social obligations due within the country of Venezuela.

 

On January 8, 2010, the Venezuelan government devalued its currency. The official exchange rate was devalued from 2.15 Bsf to each U.S. dollar to 4.30 Bsf. As a result of the devaluation, we recorded an exchange loss of approximately $19.7 million during the second quarter of fiscal 2010. The devaluation is included in discontinued operations.

 

Effective January 1, 2010, Venezuela was designated hyper-inflationary, which is defined as cumulative inflation rates exceeding 100 percent in the most recent three-year period.  All of our foreign subsidiaries use the U.S. dollar as the functional currency and local currency monetary assets are remeasured into U.S. dollars with gains and losses resulting from foreign currency transactions included in current results of operations.  As such, the designation of Venezuela as hyper-inflationary had no impact on our Consolidated Financial Statements.

 

3.               Earnings per Share

 

Effective October 1, 2009, we adopted the guidance contained in ASC 260-10-45, Earnings per Share. ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in ASC 260-10-45. ASC 260-10-45 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. We have granted and expect to continue to grant restricted stock grants to employees and non-employee directors that contain non-forfeitable rights to dividend. Such grants are considered participating securities under ASC 260-10-45. As such, we are required to include these grants in the calculation of our basic earnings per share and will need to calculate basic earnings per share using the two-class method. Restricted stock grants have previously been included in our dilutive earnings per share calculation using the treasury stock method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.  Since the adoption of ASC 260-10-45 is to be applied retrospectively, the earnings per share have been recalculated for prior periods to conform to the current year presentation. As a result, the number of shares used to compute earnings per share changed. For the nine months ended June 30, 2009, basic and diluted earnings per share decreased $0.01 due to the adoption.

 

Basic net income per share is computed utilizing the two-class method and is calculated based on weighted-average number of common shares outstanding during the periods presented.

 

Diluted net income per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options and nonvested restricted stock.

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

64,883

 

$

68,021

 

$

202,790

 

$

325,570

 

Loss from discontinued operations

 

(101,598

)

(14,977

)

(129,523

)

(23,513

)

Net income (loss)

 

(36,715

)

53,044

 

73,267

 

302,057

 

Adjustment for basic earnings per share:

 

 

 

 

 

 

 

 

 

Earnings allocated to unvested shareholders

 

99

 

(89

)

(188

)

(492

)

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

64,982

 

67,932

 

202,602

 

325,078

 

From discontinued operations

 

(101,598

)

(14,977

)

(129,523

)

(23,513

)

 

 

(36,616

)

52,955

 

73,079

 

301,565

 

Adjustment for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Effect of reallocating undistributed earnings of unvested shareholders

 

(2

)

1

 

2

 

4

 

Numerator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

64,980

 

67,933

 

202,604

 

325,082

 

From discontinued operations

 

(101,598

)

(14,977

)

(129,523

)

(23,513

)

 

 

$

(36,618

)

$

52,956

 

$

73,081

 

$

301,569

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - weighted-average shares

 

105,743

 

105,425

 

105,676

 

105,330

 

Effect of dilutive shares from stock options and restricted stock

 

1,701

 

1,270

 

1,724

 

1,051

 

Denominator for diluted earnings per share - adjusted weighted-average shares

 

107,444

 

106,695

 

107,400

 

106,381

 

Basic earnings per common shares:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.61

 

$

0.64

 

$

1.92

 

$

3.08

 

Loss from discontinued operations

 

(0.96

)

(0.14

)

(1.23

)

(0.22

)

Net income (loss)

 

$

(0.35

)

$

0.50

 

$

0.69

 

$

2.86

 

Diluted earnings per common shares:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.61

 

$

0.64

 

$

1.89

 

$

3.05

 

Loss from discontinued operations

 

(0.95

)

(0.14

)

(1.21

)

(0.22

)

Net income (loss)

 

$

(0.34

)

$

0.50

 

$

0.68

 

$

2.83

 

 

10



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

The following shares attributable to outstanding equity awards were excluded from the calculation of diluted earnings per shares because their inclusion would have been anti-dilutive (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Shares excluded from calculation of diluted earnings per share

 

554

 

718

 

568

 

1,215

 

Weighted-average price per share

 

$

38.015

 

$

35.105

 

$

38.015

 

$

33.110

 

 

4.               Inventories

 

Inventories consist primarily of replacement parts and supplies held for use in our drilling operations.

 

5.               Financial Instruments and Fair Value Measurement

 

The estimated fair value of our available-for-sale securities is primarily based on market quotes. The following is a summary of available-for-sale securities, which excludes investments in limited partnerships carried at cost and assets held in a Non-qualified Supplemental Savings Plan:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Equity securities 06/30/10

 

$

129,183

 

$

128,518

 

$

 

$

257,701

 

Equity securities 09/30/09

 

$

129,183

 

$

210,640

 

$

 

$

339,823

 

 

On an on-going basis, we evaluate the marketable equity securities to determine if any decline in fair market below original cost is other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis established. We review several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer, and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities used in determining realized gains and losses is based on the average cost basis of the security sold. We had no sales of marketable equity available-for-sale securities during the first nine months of fiscal 2010 and 2009.

 

Investments in limited partnerships carried at cost were approximately $12.4 million at June 30, 2010 and September 30, 2009. The estimated fair value of the limited partnerships was $19.8 million and $19.7 million at June 30, 2010 and September 30, 2009, respectively. The estimated fair value exceeded the cost of investments at June 30, 2010 and September 30, 2009 and, as such, the investments were not impaired.

 

Assets held in the Non-qualified Supplemental Savings Plan are carried at fair market value which totaled $4.5 million at June 30, 2010 and $4.2 million at September 30, 2009, respectively.

 

The majority of cash equivalents are invested in taxable and non-taxable money-market mutual funds. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those investments.

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

During the second quarter of fiscal 2010, a $12.5 million bank certificate of deposit with an original maturity greater than three months matured. Interest earned is included in interest and dividend income on the Consolidated Condensed Statements of Operations.

 

On October 1, 2009, we implemented the previously deferred provisions of ASC 820, Fair Value Measurements and Disclosures, for nonfinancial assets and liabilities recorded at fair value, as required. Additionally, we adopted Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value (ASU 2009-05), which provided amendments to ASC 820 for the fair value measurements of liabilities when a quoted price in an active market is not available. On December 15, 2009, we adopted the disclosure requirements in ASU 2009-06, Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures about Fair Value Measurements, requiring that information be provided about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy discussed below. The adoption of these pronouncements had no impact on these Consolidated Condensed Financial Statements.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the fair value hierarchy established in ASC 820-10 to measure fair value to prioritize the inputs:

 

·                  Level 1 — Observable inputs that reflect quoted prices in active markets for identical assets or liabilities in active markets.

 

·                  Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                  Level 3 — Valuations based on inputs that are unobservable and not corroborated by market data.

 

At June 30, 2010, our financial instruments utilizing Level 1 inputs include cash equivalents, equity securities with active markets, and money market funds we have elected to classify as restricted assets that are included in other current assets and other assets. Also included is cash denominated in a foreign currency we have elected to classify as restricted that is included in current assets of discontinued operations and limited to remaining liabilities of discontinued operations. For these items, quoted current market prices are readily available.

 

At June 30, 2010, financial instruments utilizing level 2 inputs include bank certificates of deposit included in other current assets.

 

Currently, we do not have any financial instruments utilizing Level 3 inputs.

 

The following table summarizes our assets measured at fair value on a recurring basis presented in our Consolidated Condensed Balance Sheet as of June 30, 2010:

 

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Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

Total

 

in Active

 

Significant

 

 

 

 

 

Measure

 

Markets for

 

Other

 

Significant

 

 

 

at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

77,717

 

$

77,717

 

$

 

$

 

Equity securities

 

257,701

 

257,701

 

 

 

Other current assets

 

20,986

 

20,736

 

250

 

 

Other assets

 

2,000

 

2,000

 

 

 

Total assets measured at fair value

 

$

358,404

 

$

358,154

 

$

250

 

$

 

 

The following information presents the supplemental fair value information about long-term fixed-rate debt at June 30, 2010 and September 30, 2009:

 

 

 

June 30,

 

September 30,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

 

 

 

 

 

 

Carrying value of long-term fixed-rate debt

 

$

350.0

 

$

350.0

 

Fair value of long-term fixed-rate debt

 

$

371.9

 

$

380.9

 

 

The fair value for fixed-rate debt was estimated using discounted cash flows and interest rates currently being offered on credits with similar maturities and credit profiles. The outstanding line of credit and short-term debt bear interest at market rates and the cost of borrowings, if any, would approximate fair value. The debt was valued using a level 2 input.

 

6.               Comprehensive Income

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net Income (loss)

 

$

(36,715

)

$

53,044

 

$

73,267

 

$

302,057

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized depreciation on securities

 

(80,736

)

90,833

 

(82,121

)

54,581

 

Income taxes

 

30,276

 

(34,516

)

30,795

 

(20,741

)

 

 

(50,460

)

56,317

 

(51,326

)

33,840

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustments

 

536

 

 

1,608

 

 

Income taxes

 

(201

)

 

(603

)

 

 

 

335

 

 

1,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

(86,840

)

$

109,361

 

$

22,946

 

$

335,897

 

 

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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):

 

 

 

June 30,

 

September 30,

 

 

 

2010

 

2009

 

Unrealized appreciation on securities

 

$

79,271

 

$

130,597

 

Unrecognized actuarial loss and prior service cost

 

(17,141

)

(18,146

)

Accumulated other comprehensive income

 

$

62,130

 

$

112,451

 

 

7.               Derivative Financial Instruments

 

We are exposed to market risk in the normal course of business operations due to ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. ASC 815, Derivatives and Hedging, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We have not historically entered into derivative financial instruments for trading purposes or for speculation. For further information regarding our disclosures of an interest rate swap that expired in January 2010, refer to Note 10, Debt, of these Consolidated Condensed Financial Statements.

 

8.               Cash Dividends

 

The $0.05 cash dividend declared March 3, 2010, was paid June 1, 2010. On June 2, 2010, a cash dividend of $0.06 per share was declared for shareholders of record on August 13, 2010, payable September 1, 2010. The dividend payable is included in accounts payable in the Consolidated Condensed Balance Sheet.

 

9.               Stock-Based Compensation

 

We have 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. 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 the 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 our Board of Directors. Readers should refer to Note 5 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 for additional information related to stock-based compensation.

 

We use 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. We have the right to satisfy option exercises from treasury shares and from authorized but unissued shares.

 

On December 1, 2009, the plan was amended to provide for continued vesting (and accelerated vesting upon death) of restricted stock and stock options effective upon a participant becoming retirement eligible. A participant meets the definition of retirement eligible if the participant attains age 55 and has 15 or more years of continuous service as a full-time employee. The plan amendments apply retroactively. As a result of the continued vesting provisions, we incurred additional compensation cost of approximately $4.7 million for the nine months ended June 30, 2010.

 

14



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of compensation cost for stock-based payment arrangements recognized in general and administrative expense is as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Compensation expense

 

 

 

 

 

 

 

 

 

Stock options

 

$

1,933

 

$

1,691

 

$

9,521

 

$

5,205

 

Restricted stock

 

1,016

 

363

 

3,353

 

1,087

 

 

 

$

2,949

 

$

2,054

 

$

12,874

 

$

6,292

 

 

STOCK OPTIONS

 

The following summarizes the weighted-average assumptions utilized in determining the fair value of options granted during the nine months ended June 30, 2010 and 2009:

 

 

2010

 

2009

 

 

 

 

 

 

 

Risk-free interest rate

 

2.3

%

1.7

%

Expected stock volatility

 

49.9

%

43.4

%

Dividend yield

 

.5

%

.9

%

Expected term (in years)

 

5.8

 

5.8

 

 

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 our 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 our current dividend yield.

 

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

 

A summary of stock option activity under the Plan for the three and nine months ended June 30, 2010 is presented in the following tables:

 

 

 

Three Months Ended June 30, 2010

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual

 

Value

 

Options

 

(in thousands)

 

Price

 

Term

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at April 1, 2010

 

5,745

 

$

22.56

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(163

)

13.40

 

 

 

 

 

Forfeited/Expired

 

(2

)

38.02

 

 

 

 

 

Outstanding at June 30, 2010

 

5,580

 

$

22.83

 

5.6

 

$

76.4

 

Vested and expected to vest at June 30, 2010

 

5,503

 

$

22.74

 

5.5

 

$

75.8

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2010

 

3,896

 

$

19.69

 

4.4

 

$

65.6

 

 

15



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

June 30, 2010

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Exercise

 

Options

 

(in thousands)

 

Price

 

 

 

 

 

 

 

Outstanding at October 1, 2009

 

5,401

 

$

20.55

 

Granted

 

570

 

38.02

 

Exercised

 

(389

)

13.41

 

Forfeited/Expired

 

(2

)

38.02

 

Outstanding at June 30, 2010

 

5,580

 

$

22.83

 

 

The weighted-average fair value of options granted in the first quarter of fiscal 2010 was $17.64.  No options were granted in the second and third quarters of fiscal 2010.

 

The total intrinsic value of options exercised during the three and nine months ended June 30, 2010 was $4.7 million and $11.2 million, respectively.

 

As of June 30, 2010, the unrecognized compensation cost related to the stock options was $11.9 million.  That cost is expected to be recognized over a weighted-average period of 2.8 years.

 

RESTRICTED STOCK

 

Restricted stock grants consist of our common stock and are time vested over three to five years.  Compensation expense is recognized 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 our shares on the grant date.

 

A summary of the status of the Company’s restricted stock awards as of June 30, 2010 and changes during the nine months then ended is presented below:

 

 

 

Nine Months Ended

 

 

 

June 30, 2010

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Restricted Stock Awards

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at October 1,

 

177

 

$

30.06

 

Granted

 

182

 

38.02

 

Vested

 

(70

)

29.36

 

Forfeited

 

 

 

Unvested at June 30,

 

289

 

$

35.23

 

 

As of June 30, 2010, there was $5.8 million of total unrecognized compensation cost related to restricted stock granted under the Plan.  That cost is expected to be recognized over a weighted-average period of 2.0 years.

 

16



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

10.         Debt

 

At June 30, 2010 and September 30, 2009, we had the following unsecured long-term debt outstanding (in thousands):

 

 

 

June 30,

 

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Unsecured intermediate debt issued August 15, 2002:

 

 

 

 

 

Series C, due August 15, 2012, 6.46%

 

$

75,000

 

$

75,000

 

Series D, due August 15, 2014, 6.56%

 

75,000

 

75,000

 

Unsecured senior notes issued July 21, 2009:

 

 

 

 

 

Due July 21, 2012, 6.10%

 

40,000

 

40,000

 

Due July 21, 2013, 6.10%

 

40,000

 

40,000

 

Due July 21, 2014, 6.10%

 

40,000

 

40,000

 

Due July 21, 2015, 6.10%

 

40,000

 

40,000

 

Due July 21, 2016, 6.10%

 

40,000

 

40,000

 

Unsecured senior credit facility due December 18, 2011, .70%-.71%

 

40,000

 

70,000

 

 

 

$

390,000

 

$

420,000

 

Less long-term debt due within one year

 

 

 

Long-term debt

 

$

390,000

 

$

420,000

 

 

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

 

We have $200 million senior unsecured fixed-rate notes that mature over a period from July 2012 to July 2016.  Interest on the notes will be paid semi-annually based on an annual rate of 6.10 percent.  We will make five equal annual principal repayments of $40 million starting on July 21, 2012.  Financial covenants require us to maintain a funded leverage ratio of less than 55 percent and an interest coverage ratio (as defined) of not less than 2.50 to 1.00.  The note purchase agreement also contains additional terms, conditions, and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.

 

We have an agreement with a multi-bank syndicate for a $400 million senior unsecured credit facility maturing December 2011.  While we have the option to borrow at the prime rate for maturities of less than 30 days, we anticipate that

the majority of all of the borrowings over the life of the facility will accrue interest at a spread over the London Interbank Bank Offered Rate (LIBOR).  We pay 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 our total debt to total capitalization.  The LIBOR spread ranges from .30 percent to .45 percent over LIBOR depending on the ratios.  At June 30, 2010, the LIBOR spread on borrowings was .35 percent and the commitment fee was .075 percent per annum.  At June 30, 2010, we had two letters of credit totaling $21.9 million under the facility and had $40 million borrowed against the facility with $338.1 million available to borrow. The advances bore interest at an average rate of .70 percent at June 30, 2010.  Subsequent to June 30, 2010, we reduced the debt by a net $10 million and currently have $348.1 million available to borrow.

 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

Financial covenants in the facility require we 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 we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.  At June 30, 2010, we were in compliance with all debt covenants.

 

In January 2010, a $105 million unsecured line of credit that matured was paid in full using operating cash flow and borrowings under the $400 million facility.  At the same time, an interest rate swap with the same maturity and a notional amount of $105 million expired.

 

11.   Income Taxes

 

Our effective tax rate from continuing operations for the first nine months of fiscal 2010 and 2009 was 34.1 percent and 38.3 percent, respectively.  The Company’s effective tax rate from continuing operations for the three months ended June 30, 2010 and 2009 was 40.3 percent and 34.2 percent, respectively.  The effective rate differs from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign taxes.

 

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, we do not expect the change to have a material effect on results of operations or financial position.

 

12.   Commitments and Contingencies

 

In conjunction with our current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $46.9 million are outstanding at June 30, 2010.

 

A lawsuit has been filed against us by a former customer for whom we performed drilling services with five rigs under term drilling contracts.  The suit alleges, among other things, that we failed to perform drilling operations in accordance with good oilfield practice, breached express performance warranties, and made certain fraudulent representations regarding drilling performance.  As a consequence, Plaintiff has prayed for actual and punitive damages.  We have and will continue to vigorously defend this lawsuit.  The outcome of this case remains uncertain and a loss estimate cannot be made.  If we are unsuccessful in this litigation, then the amount of damages awarded could have a material adverse effect on our financial condition and results of operations.  This case has been set for trial in late August 2010.

 

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

 

We are contingently liable to sureties in respect of bonds issued by the sureties in connection with certain commitments entered into by us in the normal course of business.  We have agreed to indemnify the sureties for any payments made by them in respect of such bonds.

 

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

During the ordinary course of our business, contingencies arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible gain contingency.  We account for gain contingencies in accordance with the provisions of ASC 450, Contingencies, and, therefore, we do not record gain contingencies and recognize income until realized.  As discussed in Note 2, Discontinued Operations, property and equipment of our Venezuelan subsidiary was seized by the Venezuelan government on June 30, 2010.  We are currently evaluating various remedies, including any recourse we may have against PDVSA or related parties, any remuneration or reimbursement that we might collect from PDVSA or related parties, and any other sources of recovery for our losses.  While there exists the possibility of realizing a recovery, we are currently unable to determine the timing or amounts we may receive, if any, or the likelihood of recovery.  No gain contingencies are recognized in our Consolidated Condensed Financial Statements.

 

13.         Segment Information

 

We operate principally in the contract drilling industry. Our 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 large oil and gas exploration companies.  Our primary international areas of operation include Colombia, Ecuador, Argentina, Mexico, Tunisia 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, we have aggregated our International Land operations into one reportable segment.  Our Venezuelan operation, which was historically an operating segment within the International Land Segment, was discontinued in the third quarter of fiscal 2010.  Consequently, its operating results are excluded from the segment data tables below for all periods presented.  Each reportable segment is a strategic business unit which is managed separately. Other includes non-reportable operating segments.

 

We evaluate 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 we believe to be a reasonable reflection of the utilization of services provided.

 

Segment operating income is a non-GAAP financial measure of our performance, as it excludes general and administrative expenses, corporate depreciation, income from asset sales and other corporate income and expense.  We consider segment operating income to be an important supplemental measure of operating performance by presenting trends in our core businesses.  We use this measure to facilitate period-to-period comparisons in operating performance of our reportable segments in the aggregate by eliminating items that affect comparability between periods.

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

We believe that segment operating income is useful to investors because it provides a means to evaluate the operating performance of the segments 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 our operating performance in future periods.

 

Summarized financial information of our reportable segments for the nine months ended June 30, 2010, and 2009, is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

June 30, 2010

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

976,497

 

$

 

$

976,497

 

$

285,384

 

Offshore

 

153,186

 

 

153,186

 

39,962

 

International Land

 

177,377

 

 

177,377

 

32,786

 

 

 

1,307,060

 

 

1,307,060

 

358,132

 

Other

 

9,145

 

(612

)

8,533

 

(5,020

)

 

 

1,316,205

 

(612

)

1,315,593

 

353,112

 

Eliminations

 

 

612

 

612

 

 

Total

 

$

1,316,205

 

$

 

$

1,316,205

 

$

353,112

 

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

June 30, 2009

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

1,172,076

 

$

 

$

1,172,076

 

$

483,571

 

Offshore

 

157,424

 

 

157,424

 

43,270

 

International Land

 

147,940

 

 

147,940

 

20,466

 

 

 

1,477,440

 

 

1,477,440

 

547,307

 

Other

 

8,024

 

630

 

8,654

 

(4,656

)

 

 

1,485,464

 

630

 

1,486,094

 

542,651

 

Eliminations

 

 

(630

)

(630

)

 

Total

 

$

1,485,464

 

$

 

$

1,485,464

 

$

542,651

 

 

Summarized financial information of our reportable segments for the three months ended June 30, 2010, and 2009, is shown in the following tables:

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income(Loss)

 

June 30, 2010

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

366,989

 

$

 

$

366,989

 

$

103,138

 

Offshore

 

53,131

 

 

53,131

 

11,231

 

International Land

 

60,045

 

 

60,045

 

9,893

 

 

 

480,165

 

 

480,165

 

124,262

 

Other

 

3,219

 

(202

)

3,017

 

(1,803

)

 

 

483,384

 

(202

)

483,182

 

122,459

 

Eliminations

 

 

202

 

202

 

 

Total

 

$

483,384

 

$

 

$

483,384

 

$

122,459

 

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income(Loss)

 

June 30, 2009

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

282,358

 

$

 

$

282,358

 

$

96,593

 

Offshore

 

55,605