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EX-32.1 - EX-32.1 - PATTERSON UTI ENERGY INCpten-ex321_7.htm
EX-31.2 - EX-31.2 - PATTERSON UTI ENERGY INCpten-ex312_10.htm
EX-31.1 - EX-31.1 - PATTERSON UTI ENERGY INCpten-ex311_8.htm
EX-10.2 - EX-10.2 - PATTERSON UTI ENERGY INCpten-ex102_563.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

R

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

For the quarterly period ended June 30, 2016

or

¨

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 0-22664

 

Patterson-UTI Energy, Inc.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

75-2504748

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

450 GEARS ROAD, SUITE 500

HOUSTON, TEXAS

 

77067

(Address of principal executive offices)

 

(Zip Code)

(281) 765-7100

(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 R     No ¨

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 (section 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 R    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

R

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

  

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 £    No R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

147,732,339 shares of common stock, $0.01 par value, as of July 28, 2016

 

 

 

 

 


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Page

ITEM 1.

 

Financial Statements

  

 

 

 

Unaudited condensed consolidated balance sheets

  

3

 

 

Unaudited condensed consolidated statements of operations

  

4

 

 

Unaudited condensed consolidated statements of comprehensive income

  

5

 

 

Unaudited condensed consolidated statement of changes in stockholders’ equity

  

6

 

 

Unaudited condensed consolidated statements of cash flows

  

7

 

 

Notes to unaudited condensed consolidated financial statements

  

8

ITEM 2.

 

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

  

22

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

35

ITEM 4.

 

Controls and Procedures

  

35

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

36

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

36

ITEM 5

 

Other Information

 

36

ITEM 6.

 

Exhibits

  

38

Signature  

 

 

  

39

 

 

 

 


PART I  — FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

The following unaudited condensed consolidated financial statements include all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented.

PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)

 

 

June 30,

 

 

December 31,

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

209,627

 

 

$

113,346

 

Accounts receivable, net of allowance for doubtful accounts of $3,191 and $3,545

   at June 30, 2016 and December 31, 2015, respectively

 

128,551

 

 

 

219,672

 

Federal and state income taxes receivable

 

36,671

 

 

 

33,454

 

Inventory

 

11,532

 

 

 

14,716

 

Deferred tax assets, net

 

28,487

 

 

 

65,121

 

Other

 

40,855

 

 

 

40,227

 

Total current assets

 

455,723

 

 

 

486,536

 

Property and equipment, net

 

3,640,894

 

 

 

3,920,708

 

Goodwill and intangible assets

 

90,788

 

 

 

92,609

 

Deposits on equipment purchases

 

17,970

 

 

 

22,367

 

Other

 

6,096

 

 

 

7,264

 

Total assets

$

4,211,471

 

 

$

4,529,484

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

66,343

 

 

$

82,771

 

Accrued expenses

 

139,922

 

 

 

161,611

 

Current portion of long-term debt, net of debt issuance cost of $529 and $483 at

   June 30, 2016 and December 31, 2015, respectively

 

85,721

 

 

 

63,267

 

Total current liabilities

 

291,986

 

 

 

307,649

 

Long-term debt, net of debt issuance cost of $2,581 and $3,350 at June 30, 2016

   and December 31, 2015, respectively

 

741,169

 

 

 

787,900

 

Deferred tax liabilities, net

 

768,556

 

 

 

863,833

 

Other

 

7,930

 

 

 

8,971

 

Total liabilities

 

1,809,641

 

 

 

1,968,353

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, par value $.01; authorized 1,000,000 shares, no shares issued

 

 

 

 

 

Common stock, par value $.01; authorized 300,000,000 shares with 191,112,033

   and 190,374,801 issued and 147,735,741 and 147,167,561 outstanding at

   June 30, 2016 and December 31, 2015, respectively

 

1,911

 

 

 

1,904

 

Additional paid-in capital

 

1,023,001

 

 

 

1,011,811

 

Retained earnings

 

2,284,520

 

 

 

2,458,554

 

Accumulated other comprehensive income (loss)

 

3,054

 

 

 

(4,093

)

Treasury stock, at cost, 43,376,292 and 43,207,240 shares at June 30, 2016 and

   December 31, 2015, respectively

 

(910,656

)

 

 

(907,045

)

Total stockholders' equity

 

2,401,830

 

 

 

2,561,131

 

Total liabilities and stockholders' equity

$

4,211,471

 

 

$

4,529,484

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling

$

115,235

 

 

$

288,321

 

 

$

283,894

 

 

$

689,799

 

Pressure pumping

 

73,950

 

 

 

176,624

 

 

 

170,263

 

 

 

426,345

 

Oil and natural gas

 

4,722

 

 

 

7,816

 

 

 

8,689

 

 

 

14,316

 

Total operating revenues

 

193,907

 

 

 

472,761

 

 

 

462,846

 

 

 

1,130,460

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling

 

63,803

 

 

 

153,848

 

 

 

144,701

 

 

 

366,658

 

Pressure pumping

 

69,546

 

 

 

142,756

 

 

 

157,359

 

 

 

355,481

 

Oil and natural gas

 

1,650

 

 

 

2,779

 

 

 

3,740

 

 

 

5,577

 

Depreciation, depletion, amortization and impairment

 

170,975

 

 

 

181,924

 

 

 

347,745

 

 

 

357,306

 

Selling, general and administrative

 

17,087

 

 

 

19,216

 

 

 

35,059

 

 

 

39,753

 

Other operating (income) expense, net

 

(4,822

)

 

 

(2,998

)

 

 

(6,167

)

 

 

6,346

 

Total operating costs and expenses

 

318,239

 

 

 

497,525

 

 

 

682,437

 

 

 

1,131,121

 

Operating loss

 

(124,332

)

 

 

(24,764

)

 

 

(219,591

)

 

 

(661

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

100

 

 

 

318

 

 

 

210

 

 

 

601

 

Interest expense, net of amount capitalized

 

(10,678

)

 

 

(9,249

)

 

 

(21,478

)

 

 

(17,790

)

Other

 

17

 

 

 

-

 

 

 

33

 

 

 

-

 

Total other expense

 

(10,561

)

 

 

(8,931

)

 

 

(21,235

)

 

 

(17,189

)

Loss before income taxes

 

(134,893

)

 

 

(33,695

)

 

 

(240,826

)

 

 

(17,850

)

Income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

(2,000

)

 

 

1,705

 

 

 

(25,814

)

 

 

32,225

 

Deferred

 

(47,027

)

 

 

(16,425

)

 

 

(58,643

)

 

 

(40,225

)

Total income tax benefit

 

(49,027

)

 

 

(14,720

)

 

 

(84,457

)

 

 

(8,000

)

Net loss

$

(85,866

)

 

$

(18,975

)

 

$

(156,369

)

 

$

(9,850

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.58

)

 

$

(0.13

)

 

$

(1.06

)

 

$

(0.07

)

Diluted

$

(0.58

)

 

$

(0.13

)

 

$

(1.06

)

 

$

(0.07

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

145,944

 

 

 

145,300

 

 

 

145,857

 

 

 

145,142

 

Diluted

 

145,944

 

 

 

145,300

 

 

 

145,857

 

 

 

145,142

 

Cash dividends per common share

$

0.02

 

 

$

0.10

 

 

$

0.12

 

 

$

0.20

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

4


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

$

(85,866

)

 

$

(18,975

)

 

$

(156,369

)

 

$

(9,850

)

Other comprehensive income (loss), net of taxes of $0 for all periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

469

 

 

 

3,033

 

 

 

7,147

 

 

 

(5,545

)

Total comprehensive loss

$

(85,397

)

 

$

(15,942

)

 

$

(149,222

)

 

$

(15,395

)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

5


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance, December 31, 2015

 

190,375

 

 

$

1,904

 

 

$

1,011,811

 

 

$

2,458,554

 

 

$

(4,093

)

 

$

(907,045

)

 

 

2,561,131

 

Net loss

 

 

 

 

 

 

 

 

 

 

(156,369

)

 

 

 

 

 

 

 

 

(156,369

)

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

7,147

 

 

 

 

 

 

7,147

 

Issuance of restricted stock

 

749

 

 

 

7

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock units

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures of restricted stock

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

14,192

 

 

 

 

 

 

 

 

 

 

 

 

14,192

 

Tax expense related to stock-

   based compensation

 

 

 

 

 

 

 

(2,995

)

 

 

 

 

 

 

 

 

 

 

 

(2,995

)

Payment of cash dividends

 

 

 

 

 

 

 

 

 

 

(17,665

)

 

 

 

 

 

 

 

 

(17,665

)

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,611

)

 

 

(3,611

)

Balance, June 30, 2016

 

191,112

 

 

$

1,911

 

 

$

1,023,001

 

 

$

2,284,520

 

 

$

3,054

 

 

$

(910,656

)

 

$

2,401,830

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

6


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

Six Months Ended

 

 

June 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(156,369

)

 

$

(9,850

)

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

 

 

 

 

 

 

 

Depreciation, depletion, amortization and impairment

 

347,745

 

 

 

357,306

 

Dry holes and abandonments

 

 

 

 

114

 

Deferred income tax benefit

 

(58,643

)

 

 

(40,225

)

Stock-based compensation expense

 

14,192

 

 

 

13,831

 

Net gain on asset disposals

 

(7,267

)

 

 

(5,914

)

Tax expense on stock-based compensation

 

(2,995

)

 

 

 

Amortization of debt issuance costs

 

723

 

 

 

522

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

91,559

 

 

 

330,176

 

Income taxes receivable/payable

 

(2,329

)

 

 

93,527

 

Inventory and other assets

 

3,795

 

 

 

11,555

 

Accounts payable

 

(25,738

)

 

 

(108,424

)

Accrued expenses

 

(21,658

)

 

 

(1,894

)

Other liabilities

 

(1,088

)

 

 

(63

)

Net cash provided by operating activities

 

181,927

 

 

 

640,661

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(51,834

)

 

 

(463,633

)

Proceeds from disposal of assets

 

12,350

 

 

 

10,728

 

Net cash used in investing activities

 

(39,484

)

 

 

(452,905

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Purchases of treasury stock

 

(3,611

)

 

 

(8,010

)

Dividends paid

 

(17,665

)

 

 

(29,352

)

Tax benefit related to stock-based compensation

 

 

 

 

1,129

 

Debt issuance costs

 

 

 

 

(1,979

)

Proceeds from long-term debt

 

 

 

 

200,000

 

Repayment of long-term debt

 

(25,000

)

 

 

(10,000

)

Proceeds from borrowings under revolving credit facility

 

 

 

 

54,000

 

Repayment of borrowings under revolving credit facility

 

 

 

 

(357,000

)

Net cash used in financing activities

 

(46,276

)

 

 

(151,212

)

Effect of foreign exchange rate changes on cash

 

114

 

 

 

(3,050

)

Net increase in cash and cash equivalents

 

96,281

 

 

 

33,494

 

Cash and cash equivalents at beginning of period

 

113,346

 

 

 

43,012

 

Cash and cash equivalents at end of period

$

209,627

 

 

$

76,506

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Net cash (paid) received during the period for:

 

 

 

 

 

 

 

Interest, net of capitalized interest of $286 in 2016 and $3,343 in 2015

$

(20,252

)

 

$

(16,506

)

Income taxes

$

19,603

 

 

$

63,740

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Net increase (decrease) in payables for purchases of property and equipment

$

9,283

 

 

$

(50,487

)

Net decrease in deposits on equipment purchases

$

4,397

 

 

$

64,638

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

7


PATTERSON-UTI ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Consolidation and Presentation

The unaudited interim condensed consolidated financial statements include the accounts of Patterson-UTI Energy, Inc. (the “Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Except for wholly-owned subsidiaries, the Company has no controlling financial interests in any entity which would require consolidation.

The unaudited interim condensed consolidated financial statements have been prepared by management of the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes the disclosures included either on the face of the financial statements or herein are sufficient to make the information presented not misleading. In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for a fair statement of the information in conformity with accounting principles generally accepted in the United States of America have been included. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2015, as presented herein, was derived from the audited consolidated balance sheet of the Company, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The results of operations for the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year.

The U.S. dollar is the functional currency for all of the Company’s operations except for its Canadian operations, which uses the Canadian dollar as its functional currency. The effects of exchange rate changes are reflected in accumulated other comprehensive income, which is a separate component of stockholders’ equity.

During the first quarter of 2016, the Company determined that certain income and expense items should be classified as “other operating (income) expense, net” in the condensed consolidated statements of operations. This caption now includes gains and losses on asset disposals and expenses related to certain legal settlements.  Gains and losses on asset disposals were previously presented as a separate line in the condensed consolidated statements of operations.  Expenses related to legal settlements were previously included in operating costs of the respective operating segment or in selling, general and administrative expense.  For comparative purposes, all such prior period amounts were reclassified to conform to the current presentation, including the Company’s previously disclosed $12.3 million legal settlement that was previously included within selling, general and administrative expense for the six months ended June 30, 2015.

The Company provides a dual presentation of its net income (loss) per common share in its unaudited condensed consolidated statements of operations: Basic net income (loss) per common share (“Basic EPS”) and diluted net income (loss) per common share (“Diluted EPS”).

Basic EPS excludes dilution and is computed by first allocating earnings between common stockholders and holders of non-vested shares of restricted stock. Basic EPS is then determined by dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding during the period, excluding non-vested shares of restricted stock.

Diluted EPS is based on the weighted average number of common shares outstanding plus the dilutive effect of potential common shares, including stock options, non-vested shares of restricted stock and restricted stock units. The dilutive effect of stock options and restricted stock units is determined using the treasury stock method. The dilutive effect of non-vested shares of restricted stock is based on the more dilutive of the treasury stock method or the two-class method, assuming a reallocation of undistributed earnings to common stockholders after considering the dilutive effect of potential common shares other than non-vested shares of restricted stock.

8


The following table presents information necessary to calculate net loss per share for the three and six month periods ended June 30, 2016 and 2015 as well as potentially dilutive securities excluded from the weighted average number of diluted common shares outstanding because their inclusion would have been anti-dilutive (in thousands, except per share amounts):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

BASIC EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(85,866

)

 

$

(18,975

)

 

$

(156,369

)

 

$

(9,850

)

Adjust for loss attributed to holders of non-vested restricted stock

 

846

 

 

 

198

 

 

 

1,526

 

 

 

109

 

Loss attributed to other common stockholders

$

(85,020

)

 

$

(18,777

)

 

$

(154,843

)

 

$

(9,741

)

Weighted average number of common shares outstanding, excluding

   non-vested shares of restricted stock

 

145,944

 

 

 

145,300

 

 

 

145,857

 

 

 

145,142

 

Basic net loss per common share

$

(0.58

)

 

$

(0.13

)

 

$

(1.06

)

 

$

(0.07

)

DILUTED EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss attributed to other common stockholders

$

(85,020

)

 

$

(18,777

)

 

$

(154,843

)

 

$

(9,741

)

Weighted average number of common shares outstanding, excluding

   non-vested shares of restricted stock

 

145,944

 

 

 

145,300

 

 

 

145,857

 

 

 

145,142

 

Add dilutive effect of potential common shares

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average number of diluted common shares outstanding

 

145,944

 

 

 

145,300

 

 

 

145,857

 

 

 

145,142

 

Diluted net loss per common share

$

(0.58

)

 

$

(0.13

)

 

$

(1.06

)

 

$

(0.07

)

Potentially dilutive securities excluded as anti-dilutive

 

9,370

 

 

 

8,208

 

 

 

9,370

 

 

 

8,208

 

 

 

2. Stock-based Compensation

 

The Company uses share-based payments to compensate employees and non-employee directors.  The Company recognizes the cost of share-based payments under the fair-value-based method.  Share-based awards consist of equity instruments in the form of stock options, restricted stock or restricted stock units and have included service and, in certain cases, performance conditions.  The Company’s share-based awards also included share-settled performance unit awards.  Share-settled performance unit awards are accounted for as equity awards.  The Company issues shares of common stock when vested stock options are exercised, when restricted stock is granted and when restricted stock units and share-settled performance unit awards vest.  

Stock Options — The Company estimates the grant date fair values of stock options using the Black-Scholes-Merton valuation model. Volatility assumptions are based on the historic volatility of the Company’s common stock over the most recent period equal to the expected term of the options as of the date the options are granted. The expected term assumptions are based on the Company’s experience with respect to employee stock option activity. Dividend yield assumptions are based on the expected dividends at the time the options are granted. The risk-free interest rate assumptions are determined by reference to United States Treasury yields. Weighted-average assumptions used to estimate the grant date fair values for stock options granted for the three and six month periods ended June 30, 2016 and 2015 follow:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Volatility

 

34.87

%

 

 

37.91

%

 

 

35.13

%

 

 

37.95

%

Expected term (in years)

 

5.00

 

 

 

5.00

 

 

 

5.00

 

 

 

5.00

 

Dividend yield

 

2.16

%

 

 

1.97

%

 

 

2.19

%

 

 

2.00

%

Risk-free interest rate

 

1.40

%

 

 

1.35

%

 

 

1.42

%

 

 

1.37

%

 

 

9


Stock option activity from January 1, 2016 to June 30, 2016 follows:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

Underlying

 

 

Exercise Price

 

 

Shares

 

 

Per Share

 

Outstanding at January 1, 2016

 

6,307,250

 

 

$

21.68

 

Granted

 

894,900

 

 

$

18.35

 

Exercised

 

 

 

$

-

 

Cancelled

 

 

 

$

-

 

Expired

 

(50,000

)

 

$

29.24

 

Outstanding at June 30, 2016

 

7,152,150

 

 

$

21.21

 

Exercisable at June 30, 2016

 

5,666,148

 

 

$

21.48

 

Restricted Stock — For all restricted stock awards to date, shares of common stock were issued when the awards were made. Non-vested shares are subject to forfeiture for failure to fulfill service conditions and, in certain cases, performance conditions. Non-forfeitable dividends are paid on non-vested shares of restricted stock. The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock activity from January 1, 2016 to June 30, 2016 follows:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Date Fair Value

 

 

Shares

 

 

Per Share

 

Non-vested restricted stock outstanding at January 1, 2016

 

1,432,250

 

 

$

24.56

 

Granted

 

748,825

 

 

$

20.66

 

Vested

 

(670,987

)

 

$

24.53

 

Forfeited

 

(26,626

)

 

$

24.76

 

Non-vested restricted stock outstanding June 30, 2016

 

1,483,462

 

 

$

22.60

 

Restricted Stock Units — For all restricted stock unit awards made to date, shares of common stock are not issued until the units vest.  Restricted stock units are subject to forfeiture for failure to fulfill service conditions.  Non-forfeitable cash dividend equivalents are paid on certain non-vested restricted stock units.  The Company uses the straight-line method to recognize periodic compensation cost over the vesting period.

Restricted stock unit activity from January 1, 2016 to June 30, 2016 follows:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average Grant

 

 

 

 

 

 

Date Fair Value

 

 

Shares

 

 

Per Share

 

Non-vested restricted stock units outstanding at January 1, 2016

 

41,686

 

 

$

26.22

 

Granted

 

18,350

 

 

$

21.71

 

Vested

 

(15,033

)

 

$

27.30

 

Forfeited

 

(7,668

)

 

$

24.83

 

Non-vested restricted stock units outstanding June 30, 2016

 

37,335

 

 

$

23.86

 

 

 

Performance Unit Awards.  The Company has granted stock-settled performance unit awards to certain executive officers (the “Performance Units”) on an annual basis since 2010.  The Performance Units provide for the recipients to receive a grant of shares of stock upon the achievement during a specified period of certain performance goals established by the Compensation Committee.  The performance period for the Performance Units is the three year period commencing on April 1 of the year of grant, except that for the Performance Units granted in 2013 the performance period has been extended pursuant to its terms, as described below.  

 

10


The performance goals for the Performance Units are tied to the Company’s total shareholder return for the performance period as compared to total shareholder return for a peer group determined by the Compensation Committee.  These goals are considered to be market conditions under the relevant accounting standards and the market conditions were factored into the determination of the fair value of the respective performance units.  Generally, the recipients will receive a target number of shares if the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, is at the 50th percentile.  If the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, is at the 75th percentile or higher, then the recipients will receive two times the target number of shares.  If the Company’s total shareholder return during the performance period is positive, and, when compared to the peer group, is at the 25th percentile, then the recipients will only receive one-half of the target number of shares.  If the Company’s total shareholder return during the performance period is positive and, when compared to the peer group, achievement is between the 25th and 75th percentile, then the shares to be received by the recipients will be determined on a pro-rata basis.  For the Performance Units awarded prior to 2016, there is no payout unless the Company’s total shareholder return is positive and, when compared to the peer group, is at or above the 25th percentile.  

 

For the Performance Units granted in April 2016, if the Company’s total shareholder return is negative, and, when compared to the peer group is at or above the 25th percentile, then the recipients will receive one-half of the number of shares they would have received if the Company’s total shareholder return had been positive.

 

In respect of the 2013 Performance Units, the performance period ended March 31, 2016, the Company’s total shareholder return for the performance period was negative, the Company’s total shareholder return for the performance period when compared to the peer group was above the 75th percentile, and there was no payout; provided, however, that pursuant to the terms of those 2013 awards, if, during the two-year period ending March 31, 2018, the Company’s total shareholder return for any 30 consecutive day period equals or exceeds 18 percent on an annualized basis from April 1, 2013 through the last day of such 30 consecutive day period, and the recipient is actively employed by the Company through the last day of the extended performance period, then the Company will issue to the recipient the number of shares equal to the amount the recipient would have been entitled to receive if the Company’s total shareholder return had been positive during the initial three year performance period.

The total target number of shares with respect to the Performance Units for the awards in 2012-2016 is set forth below:

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

 

Unit Awards

 

Target number of shares

 

185,000

 

 

 

190,600

 

 

 

154,000

 

 

 

236,500

 

 

 

192,000

 

Because the performance units are stock-settled awards, they are accounted for as equity awards and measured at fair value on the date of grant using a Monte Carlo simulation model. The fair value of the Performance Units is set forth below (in thousands):

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance

 

 

Performance