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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, 2016

 

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, 2016

Common Stock, $0.10 par value

 

108,066,141

 

 

 


 


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, 2016 and September 30, 2015

3

 

 

 

 

Consolidated Condensed Statements of Operations for the Three and Nine Months Ended June 30, 2016 and 2015

4

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2016 and 2015

5

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 2016 and 2015

6

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2016

7

 

 

 

 

Notes to Consolidated Condensed Financial Statements

8-33

 

 

 

Item 2.

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

34-42

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

43

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 1A.

Risk Factors

44-46

 

 

 

Item 6.

Exhibits

47

 

 

 

Signatures

48

 

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

 

 

 

 

 

September 30,

 

 

 

June 30,
2016

 

2015
(as adjusted)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

907,032

 

$

729,384

 

Short-term investments

 

49,565

 

45,543

 

Accounts receivable, less reserve of $1,828 at June 30, 2016 and $6,181 at September 30, 2015

 

351,317

 

445,948

 

Inventories

 

128,885

 

128,541

 

Deferred income taxes

 

 

17,206

 

Prepaid expenses and other

 

79,021

 

64,475

 

Assets held for sale

 

21,772

 

 

Current assets of discontinued operations

 

80

 

8,097

 

Total current assets

 

1,537,672

 

1,439,194

 

 

 

 

 

 

 

Investments

 

99,898

 

104,354

 

Property, plant and equipment, net

 

5,306,434

 

5,563,170

 

Other assets

 

32,515

 

40,524

 

 

 

 

 

 

 

Total assets

 

$

6,976,519

 

$

7,147,242

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Long-term debt due within one year less unamortized debt issuance costs

 

$

39,234

 

$

39,094

 

Accounts payable

 

92,692

 

108,169

 

Accrued liabilities

 

194,645

 

197,557

 

Current liabilities of discontinued operations

 

38

 

3,377

 

Total current liabilities

 

326,609

 

348,197

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt less unamortized discount and debt issuance costs

 

493,150

 

492,443

 

Deferred income taxes

 

1,358,093

 

1,295,916

 

Other

 

93,221

 

110,120

 

Noncurrent liabilities of discontinued operations

 

3,984

 

4,720

 

Total noncurrent liabilities

 

1,948,448

 

1,903,199

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.10 par value, 160,000,000 shares authorized, 111,383,982 shares and 110,987,546 shares issued as of June 30, 2016 and September 30, 2015, respectively and 108,063,579 shares and 107,767,915 shares outstanding as of June 30, 2016 and September 30, 2015, respectively

 

11,138

 

11,099

 

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

 

 

 

Additional paid-in capital

 

442,883

 

420,141

 

Retained earnings

 

4,438,748

 

4,648,346

 

Accumulated other comprehensive loss

 

(3,156

)

(1,377

)

Treasury stock, at cost

 

(188,151

)

(182,363

)

Total shareholders’ equity

 

4,701,462

 

4,895,846

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

6,976,519

 

$

7,147,242

 

 

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,

 

 

 

2016

 

2015
(as adjusted)

 

2016

 

2015
(as adjusted)

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Drilling — U.S. Land

 

$

285,028

 

$

494,615

 

$

1,004,116

 

$

2,103,125

 

Drilling — Offshore

 

30,492

 

57,071

 

106,697

 

189,386

 

Drilling — International Land

 

47,983

 

106,551

 

171,529

 

304,262

 

Other

 

2,983

 

3,208

 

10,182

 

11,129

 

 

 

366,486

 

661,445

 

1,292,524

 

2,607,902

 

 

 

 

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

 

 

 

 

Operating costs, excluding depreciation

 

186,146

 

350,640

 

684,401

 

1,377,202

 

Depreciation

 

138,690

 

144,965

 

422,336

 

433,445

 

Asset impairment charge

 

6,250

 

 

6,250

 

 

General and administrative

 

46,496

 

29,253

 

112,381

 

96,984

 

Research and development

 

2,707

 

3,329

 

7,941

 

12,344

 

Income from asset sales

 

(547

)

(1,791

)

(7,820

)

(8,819

)

 

 

379,742

 

526,396

 

1,225,489

 

1,911,156

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) from continuing operations

 

(13,256

)

135,049

 

67,035

 

696,746

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

778

 

1,588

 

2,310

 

4,447

 

Interest expense

 

(6,407

)

(6,136

)

(16,652

)

(9,326

)

Other

 

534

 

(281

)

926

 

88

 

 

 

(5,095

)

(4,829

)

(13,416

)

(4,791

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(18,351

)

130,220

 

53,619

 

691,955

 

Income tax provision

 

2,842

 

39,321

 

33,740

 

243,891

 

Income (loss) from continuing operations

 

(21,193

)

90,899

 

19,879

 

448,064

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

2,193

 

(27

)

2,241

 

(118

)

Income tax provision

 

2,200

 

 

6,113

 

(77

)

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(7

)

(27

)

(3,872

)

(41

)

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(21,200

)

$

90,872

 

$

16,007

 

$

448,023

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.20

)

$

0.84

 

$

0.18

 

$

4.13

 

Loss from discontinued operations

 

 

 

(0.04

)

 

Net income (loss)

 

$

(0.20

)

$

0.84

 

$

0.14

 

$

4.13

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.20

)

$

0.83

 

$

0.17

 

$

4.10

 

Loss from discontinued operations

 

 

 

(0.04

)

 

Net income (loss)

 

$

(0.20

)

$

0.83

 

$

0.13

 

$

4.10

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

108,047

 

107,652

 

107,970

 

107,759

 

Diluted

 

108,047

 

108,469

 

108,523

 

108,571

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.7000

 

$

0.6875

 

$

2.0750

 

$

2.0625

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015
(as adjusted)

 

2016

 

2015
(as adjusted)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(21,200

)

$

90,872

 

$

16,007

 

$

448,023

 

Other comprehensive income (loss), net of income taxes:

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) on securities, net of income taxes of $6.1 million and ($1.7) million at June 30, 2016 and ($2.1) million and ($29.5) million at June 30, 2015

 

9,744

 

(3,307

)

(2,719

)

(46,754

)

Minimum pension liability adjustments, net of income taxes of $0.1 million and $0.5 million at June 30, 2016 and $0.1 million and $0.3 million at June 30, 2015

 

314

 

197

 

940

 

590

 

Other comprehensive income (loss)

 

10,058

 

(3,110

)

(1,779

)

(46,164

)

Comprehensive income (loss)

 

$

(11,142

)

$

87,762

 

$

14,228

 

$

401,859

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended

 

 

 

June 30,

 

 

 

2016

 

2015
(as adjusted)

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

16,007

 

$

448,023

 

Adjustment for loss from discontinued operations

 

3,872

 

41

 

Income from continuing operations

 

19,879

 

448,064

 

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

 

 

 

 

 

Depreciation

 

422,336

 

433,445

 

Asset impairment charge

 

6,250

 

 

Amortization of debt discount and debt issuance costs

 

879

 

485

 

Recovery of bad debt

 

(3,067

)

 

Stock-based compensation

 

19,661

 

19,120

 

Pension settlement charge

 

3,343

 

1,200

 

Other

 

255

 

 

Income from asset sales

 

(7,820

)

(8,819

)

Deferred income tax expense

 

77,886

 

145,986

 

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

97,698

 

229,837

 

Inventories

 

(344

)

(22,026

)

Prepaid expenses and other

 

(6,537

)

(30,362

)

Accounts payable

 

(13,643

)

(41,134

)

Accrued liabilities

 

14,632

 

(64,975

)

Deferred income taxes

 

2,673

 

317

 

Other noncurrent liabilities

 

(18,741

)

40,459

 

Net cash provided by operating activities from continuing operations

 

615,340

 

1,151,597

 

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

 

70

 

(41

)

Net cash provided by operating activities

 

615,410

 

1,151,556

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(219,549

)

(971,602

)

Purchase of short-term investments

 

(36,958

)

 

Proceeds from sales of short-term investments

 

32,681

 

 

Proceeds from asset sales

 

12,804

 

17,757

 

Net cash used in investing activities

 

(211,022

)

(953,845

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from senior notes, net of discount

 

 

497,125

 

Debt issuance costs

 

(32

)

(5,202

)

Net increase in bank overdraft

 

 

10,824

 

Proceeds on short-term debt

 

 

1,002

 

Payments on short-term debt

 

 

(1,002

)

Dividends paid

 

(224,040

)

(223,827

)

Repurchase of common stock

 

 

(59,654

)

Exercise of stock options, net of tax withholding

 

483

 

(609

)

Tax withholdings related to net share settlements of restricted stock

 

(3,912

)

(5,104

)

Excess tax benefit from stock-based compensation

 

761

 

2,969

 

Net cash provided by (used in) financing activities

 

(226,740

)

216,522

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

177,648

 

414,233

 

Cash and cash equivalents, beginning of period

 

729,384

 

360,307

 

Cash and cash equivalents, end of period

 

$

907,032

 

$

774,540

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED JUNE 30, 2016

(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, 2015, as adjusted

 

110,987

 

$

11,099

 

$

420,141

 

$

4,648,346

 

$

(1,377

)

3,220

 

$

(182,363

)

$

4,895,846

 

Net income

 

 

 

 

 

 

 

16,007

 

 

 

 

 

 

 

16,007

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(1,779

)

 

 

 

 

(1,779

)

Dividends declared ($2.075 per share)

 

 

 

 

 

 

 

(225,605

)

 

 

 

 

 

 

(225,605

)

Exercise of stock options, net of tax withholding

 

204

 

20

 

6,263

 

 

 

 

 

97

 

(5,800

)

483

 

Tax benefit of stock-based awards

 

 

 

 

 

761

 

 

 

 

 

 

 

 

 

761

 

Stock issued for vested restricted stock, net of shares withheld for employee taxes

 

193

 

19

 

(3,943

)

 

 

 

 

3

 

12

 

(3,912

)

Stock-based compensation

 

 

 

 

 

19,661

 

 

 

 

 

 

 

 

 

19,661

 

Balance, June 30, 2016

 

111,384

 

$

11,138

 

$

442,883

 

$

4,438,748

 

$

(3,156

)

3,320

 

$

(188,151

)

$

4,701,462

 

 

The accompanying notes are an integral part of these statements.

 

7



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 2015 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.

 

The Consolidated Condensed Financial Statements include the accounts of Helmerich & Payne, Inc. and its wholly-owned subsidiaries.  Prior to September 30, 2015, for financial reporting purposes, fiscal years of our foreign operations ended on August 31 to facilitate reporting of consolidated results, resulting in a one-month reporting lag when compared to the remainder of the Company.

 

Starting October 1, 2015, the reporting year-end of these foreign operations was changed from August 31 to September 30.  The previously existing one-month reporting lag was eliminated as it is no longer required to achieve a timely consolidation due to our investments in technology, ERP systems and personnel to enhance our financial statement close process.  We believe this change is preferable because the financial information of all operating segments is now reported based on the same period-end, which improves overall financial reporting to investors by providing the most current information available.  In accordance with Accounting Standards Codification (“ASC) 810-10-50-2, “A Change in the Difference Between Parent and Subsidiary Fiscal Year-Ends,” the elimination of this previously existing reporting lag is considered a voluntary change in accounting principle in accordance with ASC 250-10-50 “Change in Accounting Principle.”   Voluntary changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented.  Accordingly, our financial statements for periods prior to fiscal 2016 have been changed to reflect the period-specific effects of applying this accounting principle.  This change resulted in a cumulative effect of an accounting change of $1.6 million, net of income tax effect, to retained earnings as of October 1, 2015.  Net loss from continuing operations for the third quarter of fiscal 2016 would have been approximately $2.4 million lower absent the accounting change.  Net income from continuing operations for the nine months ended June 30, 2016 would have been approximately $0.8 million higher absent the accounting change.  Net loss from discontinued operations would have been approximately $4.0 million more in the three months ended June 30, 2016 absent the accounting change due to a currency devaluation recognized in the quarter ending March 31, 2016, as opposed to the third quarter of fiscal 2016.  There was no significant difference in discontinued operations for the nine months ended June 30, 2016 from the accounting change.

 

The impact of this change in accounting principle to eliminate the one-month lag for foreign subsidiaries is summarized below for significant items.  Other accounts were minimally impacted.

 

 

 

 

 

 

 

After Voluntary

 

 

 

 

 

 

 

Change in

 

 

 

 

 

 

 

Accounting

 

 

 

As Reported

 

Adjustments

 

Principle

 

 

 

Three Months Ended June 30, 2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

659,694

 

$

1,751

 

$

661,445

 

Operating costs, excluding depreciation

 

351,670

 

(1,030

)

350,640

 

Net income

 

90,860

 

12

 

90,872

 

Diluted earnings per common share

 

0.83

 

 

0.83

 

 

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Table of Contents

 

 

 

Nine Months Ended June 30, 2015

 

 

 

(in thousands)

 

Operating revenues

 

$

2,599,331

 

$

8,571

 

$

2,607,902

 

Operating costs, excluding depreciation

 

1,375,241

 

1,961

 

1,377,202

 

Net income

 

443,439

 

4,584

 

448,023

 

Diluted earnings per common share

 

4.06

 

0.04

 

4.10

 

 

 

 

September 30, 2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,152,012

 

$

(4,770

)

$

7,147,242

 

Total liabilities

 

2,254,560

 

(3,164

)

2,251,396

 

Total shareholders’ equity

 

4,897,452

 

(1,606

)

4,895,846

 

 

In November 2015, the Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes requiring all deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts.  The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, however, we have elected to early adopt effective October 1, 2015 prospectively.  As a result of the adoption, we will no longer have deferred income taxes as a current asset in our Consolidated Condensed Balance Sheet.

 

As more fully described in our 2015 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 terms, 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.  During the three and nine months ended June 30, 2016, early termination revenue was approximately $80.7 million and $189.2 million, respectively.  We had $93.0 million and $188.8 million, respectively, of early termination revenue for the three and nine months ended June 30, 2015.

 

Depreciation in the Consolidated Condensed Statements of Operations includes abandonments of $0.9 million for the nine months ended June 30, 2016 compared to $1.2 million and $13.5 million, respectively, for the three and nine months ended June 30, 2015.

 

During the three months ended June 30, 2016, we recorded an asset impairment charge in the U.S. Land segment of $6.3 million to reduce the carrying value in rig and rig related equipment classified as held for sale to their estimated fair values, based on expected sales prices.  The rig equipment is from rigs that were decommissioned from service in prior fiscal years and written down to their estimated recoverable value at the time of decommissioning.  During the three months ended June 30, 2016, we began actively marketing the equipment.  We believe the equipment will be disposed of in under a year.

 

The functional currency for all our foreign operations is the U.S. dollar.  Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the period.  Income statement accounts are translated at average rates for the period presented.  Foreign currency gains and losses from remeasurement of foreign currency financial statements and foreign currency translations into U.S. dollars are included in direct operating costs.  Included in direct operating costs are aggregate foreign currency losses of $1.1 million and $9.4 million, respectively, for the three and nine months ended June 30, 2016.  The losses are primarily the result of a sharp devaluation of the Argentine peso in December 2015.  For the three and nine months ended June 30, 2015, we had aggregate currency losses of $0.3 million and gains of $1.5 million, respectively.

 

2.              Discontinued Operations

 

Current assets of discontinued operations consist of restricted cash to meet remaining current obligations within the country of Venezuela.  Current and noncurrent liabilities consist of municipal and income taxes payable and social obligations due within the country of Venezuela.  Expenses incurred for in-country obligations are reported as discontinued operations.

 

In March 2016, the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system.  The implementation of this system resulted in a reported loss from discontinued operations of $3.9 million in the first nine months of fiscal 2016, all of which corresponds to the Company’s former operations in Venezuela.

 

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3.              Earnings per Share

 

ASC 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share.  We have granted and expect to continue to grant to employees restricted stock grants that contain non-forfeitable rights to dividends.  Such grants are considered participating securities under ASC 260.  As such, we are required to include these grants in the calculation of our basic earnings per share and calculate basic earnings per share using the two-class 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.

 

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

 

Diluted earnings 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.

 

Under the two-class method of calculating earnings per share, dividends paid and a portion of undistributed net income, but not losses, are allocated to unvested restricted stock grants that receive dividends, which are considered participating securities.

 

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Table of Contents

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015
(as adjusted)

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(21,193

)

$

90,899

 

$

19,879

 

$

448,064

 

Loss from discontinued operations

 

(7

)

(27

)

(3,872

)

(41

)

Net income (loss)

 

(21,200

)

90,872

 

16,007

 

448,023

 

Adjustment for basic earnings per share:

 

 

 

 

 

 

 

 

 

Earnings allocated to unvested shareholders

 

(451

)

(558

)

(1,410

)

(2,801

)

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

(21,644

)

90,341

 

18,469

 

445,263

 

From discontinued operations

 

(7

)

(27

)

(3,872

)

(41

)

 

 

(21,651

)

90,314

 

14,597

 

445,222

 

Adjustment for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Effect of reallocating undistributed earnings of unvested shareholders

 

 

1

 

 

10

 

Numerator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

(21,644

)

90,342

 

18,469

 

445,273

 

From discontinued operations

 

(7

)

(27

)

(3,872

)

(41

)

 

 

$

(21,651

)

$

90,315

 

$

14,597

 

$

445,232

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share — weighted-average shares

 

108,047

 

107,652

 

107,970

 

107,759

 

Effect of dilutive shares from stock options and restricted stock

 

 

817

 

553

 

812

 

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

 

108,047

 

108,469

 

108,523

 

108,571

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.20

)

$

0.84

 

$

0.18

 

$

4.13

 

Loss from discontinued operations

 

 

 

(0.04

)

 

Net income (loss)

 

$

(0.20

)

$

0.84

 

$

0.14

 

$

4.13

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.20

)

$

0.83

 

$

0.17

 

$

4.10

 

Loss from discontinued operations

 

 

 

(0.04

)

 

Net income (loss)

 

$

(0.20

)

$

0.83

 

$

0.13

 

$

4.10

 

 

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Table of Contents

 

We had a net loss for the three months ended June 30, 2016.  Accordingly, our diluted earnings per share calculation for the three months ended June 30, 2016 was equivalent to our basic earnings per share calculation since diluted earnings per share excluded any assumed exercise of equity awards.  These were excluded because they were deemed to be anti-dilutive, meaning their inclusion would have reduced the reported net loss per share in the applicable period.

 

Shares attributable to outstanding equity awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Shares excluded from calculation of diluted earnings per share

 

3,409

 

592

 

1,861

 

667

 

Weighted-average price per share

 

$

51.94

 

$

73.36

 

$

63.70

 

$

72.85

 

 

4.              Financial Instruments and Fair Value Measurement

 

The estimated fair value of our available-for-sale securities, reflected on our Consolidated Condensed Balance Sheets as Investments, is based on market quotes.  The following is a summary of available-for-sale securities, which excludes assets held in a Non-qualified Supplemental Savings Plan:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Equity securities June 30, 2016

 

$

64,462

 

$

33,257

 

$

10,669

 

$

87,050

 

Equity securities September 30, 2015

 

$

64,462

 

$

28,530

 

$

1,509

 

$

91,483

 

 

On an ongoing basis we evaluate the marketable equity securities to determine if any decline in fair value below cost is other-than-temporary.  If a decline in fair value below cost 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.  One of our securities was in an unrealized loss position for under 30 days at September 30, 2015 and then dropped below cost again in December 2015 and continued to be in a loss position through August 4, 2016.  The security is in the international offshore drilling industry which is cyclical and has been impacted by the downturn in the energy sector.  Considering the factors above including the limited time that the security was in an unrealized position and based on our ability and intent to hold these investments until the fair value recovers, impairment was not considered other-than-temporary at June 30, 2016.

 

The assets held in the Non-qualified Supplemental Savings Plan are carried at fair value which totaled $12.8 million at June 30, 2016 and $12.9 million at September 30, 2015.  The assets are comprised of mutual funds that are measured using Level 1 inputs.

 

The majority of cash equivalents are invested in highly liquid money-market mutual funds invested primarily in direct or indirect obligations of the U.S. Government.  The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those investments.

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or 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 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

·                  Level 2 — Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

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Table of Contents

 

·                  Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  This includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

At June 30, 2016, our financial instruments utilizing Level 1 inputs include cash equivalents, equity securities with active markets, 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 that we have elected to classify as restricted to be used to settle the remaining liabilities of discontinued operations.  For these items, quoted current market prices are readily available.

 

At June 30, 2016, financial instruments utilizing level 2 inputs include bank certificates of deposit included in short-term investments and 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 presented in our Consolidated Condensed Balance Sheet as of June 30, 2016:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Recurring fair value measurements:

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

$

2,000

 

$

 

$

2,000

 

$

 

Corporate debt securities

 

20,608

 

 

20,608

 

 

U.S. government and federal agency securities

 

26,957

 

17,751

 

9,206

 

 

Total short-term investments

 

49,565

 

17,751

 

31,814

 

 

Cash and cash equivalents

 

907,032

 

907,032

 

 

 

 

Investments

 

87,050

 

87,050

 

 

 

Other current assets

 

26,813

 

26,563

 

250

 

 

Other assets

 

2,000

 

2,000

 

 

 

Total assets measured at fair value

 

$

1,072,460

 

$

1,040,396

 

$

32,064

 

$

 

Nonrecurring fair value measurements:

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale (1)

 

$

3,840

 

$

 

$

 

$

3,840

 

 


(1)         Represents the book value as of June 30, 2016 of decommissioned rigs and rig related equipment written down to their estimated recoverable amounts at June 30, 2016. These assets are included in assets held for sale in our Consolidated Condensed Balance Sheets.

 

The following information presents the supplemental fair value information about long-term fixed-rate debt at June 30, 2016 and September 30, 2015:

 

 

 

June 30,

 

September 30,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

 

 

 

 

 

 

Carrying value of long-term fixed-rate debt

 

$

532.4

 

$

531.5

 

Fair value of long-term fixed-rate debt

 

$

569.4

 

$

553.5

 

 

The fair value at June 30, 2016 for the $40 million fixed-rate debt was estimated using discounted cash flows at rates reflecting current interest rates at similar maturities plus a credit spread which was estimated using the outstanding market information on debt instruments with a similar credit profile to us.  The debt was valued using a Level 2 input.

 

The fair value for the $500 million fixed-rate debt was based on broker quotes at June 30, 2016.  The notes are classified within Level 2 as they are not actively traded in markets.

 

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Table of Contents

 

5.              Shareholders’ Equity

 

The Company has authorization from the Board of Directors for the repurchase of up to four million shares per calendar year.  The repurchases may be made using our cash and cash equivalents or other available sources.  We have had no purchases of common shares in fiscal 2016.  During the nine months ended June 30, 2015, we purchased 810,097 common shares at an aggregate cost of $59.7 million, which are held as treasury shares.

 

Components of accumulated other comprehensive income (loss) were as follows:

 

 

 

June 30,

 

September 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Pre-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

22,587

 

$

27,021

 

Unrecognized actuarial loss

 

(28,666

)

(30,144

)

 

 

$

(6,079

)

$

(3,123

)

After-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

14,482

 

$

17,201

 

Unrecognized actuarial loss

 

(17,638

)

(18,578

)

 

 

$

(3,156

)

$

(1,377

)

 

The following is a summary of the changes in accumulated other comprehensive income (loss), net of tax, by component for the three and nine months ended June 30, 2016:

 

 

 

Three Months Ended June 30, 2016

 

 

 

Unrealized

 

 

 

 

 

 

 

Appreciation on

 

Defined

 

 

 

 

 

Available-for-sale

 

Benefit

 

 

 

 

 

Securities

 

Pension Plan

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balances at April 1, 2016

 

$

4,738

 

$

(17,952

)

$

(13,214

)

Other comprehensive income before reclassifications

 

9,744

 

 

9,744

 

Amounts reclassified from accumulated other comprehensive income

 

 

314

 

314

 

Net current-period other comprehensive income

 

9,744

 

314

 

10,058

 

Balances at June 30, 2016

 

$

14,482

 

$

(17,638

)

$

(3,156

)

 

 

 

Nine Months Ended June 30, 2016

 

 

 

Unrealized

 

 

 

 

 

 

 

Appreciation
(Depreciation) on

 

Defined

 

 

 

 

 

Available-for-sale

 

Benefit

 

 

 

 

 

Securities

 

Pension Plan

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balances at October 1, 2015

 

$

17,201

 

$

(18,578

)

$

(1,377

)

Other comprehensive loss before reclassifications

 

(2,719

)

 

(2,719

)

Amounts reclassified from accumulated other comprehensive income

 

 

940

 

940

 

Net current-period other comprehensive income (loss)

 

(2,719

)

940

 

(1,779

)

Balances at June 30, 2016

 

$

14,482

 

$

(17,638

)

$

(3,156

)

 

14



Table of Contents

 

The following provides detail about accumulated other comprehensive income (loss) components which were reclassified to the Condensed Consolidated Statement of Operations during the three and nine months ended June 30, 2016:

 

 

 

Amount Reclassified from Accumulated
Other Comprehensive Income (Loss)

 

 

 

Details About Accumulated Other
Comprehensive Income

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

Affected Line Item in the
Condensed Consolidated

 

(Loss) Components

 

2016

 

2015

 

2016

 

2015

 

Statement of Operations

 

 

 

(in thousands)

 

(in thousands)

 

 

 

Defined Benefit Pension Items

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss

 

$

493

 

$

309

 

$

1,479

 

$

927

 

General and administrative

 

 

 

(179

)

(112

)

(539

)

(337

)

Income tax provision

 

Total reclassifications for the period

 

$

314

 

$

197

 

$

940

 

$

590

 

Net of tax

 

 

6.              Cash Dividends

 

The $0.6875 per share cash dividend declared March 2, 2016, was paid June 1, 2016.  On June 1, 2016, a cash dividend of $0.70 per share was declared for shareholders of record on August 15, 2016, payable September 1, 2016. The dividend payable is included in accounts payable in the Consolidated Condensed Balance Sheets.

 

7.              Stock-Based Compensation

 

On March 2, 2011, the 2010 Long-Term Incentive Plan (the “2010 Plan”) was approved by our stockholders.  The 2010 Plan, among other things, authorizes the Human Resources Committee of the Board to grant non-qualified stock options and restricted stock awards to selected employees and to non-employee Directors.  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 10 years after the grant date.  There were 876,379 non-qualified stock options and 294,575 shares of restricted stock awards granted in the nine months ended June 30, 2016.  Awards outstanding in the 2005 Long-Term Incentive Plan (the “2005 Plan”) remain subject to the terms and conditions of that plan.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

(in thousands)

 

Compensation expense

 

 

 

 

 

 

 

 

 

Stock options

 

$

1,722

 

$

1,930

 

$

7,048

 

$

6,900

 

Restricted stock

 

3,952

 

4,111

 

12,613

 

12,220

 

 

 

$

5,674

 

$

6,041

 

$

19,661

 

$

19,120

 

 

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, 2016 and 2015:

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Risk-free interest rate

 

1.8

%

1.7

%

Expected stock volatility

 

37.6

%

36.9

%

Dividend yield

 

4.6

%

3.9

%

Expected term (in years)

 

5.5

 

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.

 

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Table of Contents

 

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.

 

Expected 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 all existing long-term incentive plans for the three and nine months ended June 30, 2016 is presented in the following tables:

 

 

 

Three Months Ended June 30, 2016

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Term

 

Value

 

Options

 

(in thousands)

 

Price

 

(in years)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at April 1, 2016

 

3,456

 

$

51.85

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(24

)

28.00

 

 

 

 

 

Forfeited/Expired

 

(23

)

63.46

 

 

 

 

 

Outstanding at June 30, 2016

 

3,409

 

$

51.94

 

6.0

 

$

55.6

 

Vested and expected to vest at June 30, 2016

 

3,381

 

$

51.89

 

6.0

 

$

55.3

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2016

 

2,244

 

$

46.66

 

4.5

 

$

48.0

 

 

 

 

Nine Months Ended
June 30, 2016

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Exercise

 

Options

 

(in thousands)

 

Price

 

 

 

 

 

 

 

Outstanding at October 1, 2015

 

2,776

 

$

48.51

 

Granted

 

876

 

58.25

 

Exercised

 

(204

)

30.73

 

Forfeited/Expired

 

(39

)

61.04

 

Outstanding at June 30, 2016

 

3,409

 

$

51.94

 

 

The weighted-average fair value of options granted in the first quarter of fiscal 2016 was $13.12.  No options were granted in the second and third quarters of fiscal 2016.

 

The total intrinsic value of options exercised during the three and nine months ended June 30, 2016 was $0.9 million and $6.0 million, respectively.

 

As of June 30, 2016, the unrecognized compensation cost related to stock options was $8.9 million which is expected to be recognized over a weighted-average period of 3.0 years.

 

RESTRICTED STOCK

 

Restricted stock awards consist of our common stock and are time-vested over three to six years.  We recognize compensation expense on a straight-line basis over the vesting period.  The fair value of restricted stock awards under the 2010 Plan is determined based on the closing price of our shares on the grant date.  As of June 30, 2016, there was $23.9 million of total unrecognized compensation cost related to unvested restricted stock awards which is expected to be recognized over a weighted-average period of 2.4 years.

 

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A summary of the status of our restricted stock awards as of June 30, 2016 and changes in restricted stock outstanding during the nine months then ended is presented below:

 

 

 

Nine Months Ended

 

 

 

June 30, 2016

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Restricted Stock Awards

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at October 1, 2015

 

668

 

$

67.03

 

Granted

 

294

 

58.25

 

Vested (1)

 

(256

)

64.75

 

Forfeited

 

(36

)

63.68

 

Unvested at June 30, 2016

 

670

 

$

64.22

 

 


(1)         The number of restricted stock awards vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.

 

8.              Debt

 

At June 30, 2016 and September 30, 2015, we had the following unsecured long-term debt outstanding:

 

 

 

 

 

 

 

Unamortized Discount and

 

 

 

Principal

 

Debt Issuance Costs

 

 

 

June 30,

 

September 30,

 

June 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Unsecured senior notes issued July 21, 2009:

 

 

 

 

 

 

 

 

 

Due July 21, 2016

 

$

40,000

 

$

40,000

 

$

(213

)

$

(498

)

 

 

 

 

 

 

 

 

 

 

Unsecured senior notes issued March 19, 2015:

 

 

 

 

 

 

 

 

 

Due March 19, 2025

 

500,000

 

500,000

 

(7,403

)

(7,965

)

 

 

540,000

 

540,000

 

(7,616

)

(8,463

)

Less long-term debt due within one year

 

40,000

 

40,000

 

(766

)

(906

)

Long-term debt

 

$

500,000

 

$

500,000

 

$

(6,850

)

$

(7,557

)

 

We have $40 million senior unsecured fixed-rate notes outstanding at June 30, 2016 that matured in July 2016.  The final annual principal repayment of $40 million along with interest was paid in July 2016.

 

On March 19, 2015, we issued $500 million of 4.65 percent 10-year unsecured senior notes.  The net proceeds, after discount and issuance cost, have been or will be used for general corporate purposes, including capital expenditures associated with our rig construction program.  Interest is payable semi-annually on March 15 and September 15.  The debt discount is being amortized to interest expense using the effective interest method.  The debt issuance costs are amortized straight-line over the stated life of the obligation, which approximates the effective yield method.

 

At June 30, 2016 we had a $300 million unsecured revolving credit facility with no borrowings, but there were three letters of credit outstanding in the amount of $40.3 million.  This facility was terminated on July 13, 2016, and the letters of credit were transferred to a new $300 million unsecured revolving credit facility which will mature on July 13, 2021.  The new facility has $75 million available to use as letters of credit.  The majority of any borrowings under the facility would accrue interest at a spread over the London Interbank Offered Rate (LIBOR).  We also pay a commitment fee based on the unused balance of the facility.  Borrowing spreads as well as commitment fees are determined according to a scale based on a ratio of our total debt to total capitalization.  The spread over LIBOR ranges from 1.125 percent to 1.75 percent per annum and commitment fees range from .15 percent to .30 percent per annum.  Based on our debt to total capitalization on June 30, 2016, the spread over LIBOR and commitment fees would be 1.125 percent and .15 percent, respectively.  There is one financial covenant in the facility which requires us to maintain a funded leverage ratio (as defined) of less than 50 percent.  The credit facility contains additional terms, conditions, restrictions, and covenants that we believe are usual and customary in unsecured debt arrangements for companies of similar size and credit quality

 

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At June 30, 2016, we had two letters of credit outstanding, totaling $12 million that were issued to support international operations.  These letters of credit were issued separately from the $300 million credit facility discussed in the preceding paragraph and do not reduce the available borrowing capacity of that facility.

 

9.              Income Taxes

 

Our effective tax rate for the first nine months of fiscal 2016 and 2015 was 62.9 percent and 35.2 percent, respectively.  The effective tax rate for the third quarter of fiscal 2016 and 2015 was -15.5 percent and 30.2 percent, respectively.  Effective tax rates differ from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign income taxes and the tax benefit from the Internal Revenue Code Section 199 deduction for domestic production activities.  The effective tax rate for the nine months ended June 30, 2016 was significantly impacted by reduced earnings before taxes, in conjunction with a December 2015 tax law change which resulted in a reduction of the fiscal 2015 Internal Revenue Code Section 199 deduction for domestic production activities.

 

For the next 12 months, we cannot predict with certainty whether we will achieve ultimate resolution of any uncertain tax positions associated with our U.S. and international operations that could result in increases or decreases of our unrecognized tax benefits.  However, we do not expect the increases or decreases to have a material effect on results of operations or financial position.

 

10.       Commitments and Contingencies

 

In conjunction with our current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $4.9 million are outstanding at June 30, 2016.

 

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.

 

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 or recognize income until realized.  The property and equipment of our Venezuelan subsidiary was seized by the Venezuelan government on June 30, 2010.  Our wholly-owned subsidiaries, Helmerich & Payne International Drilling Co. and Helmerich & Payne de Venezuela, C.A., filed a lawsuit in the United States District Court for the District of Columbia on September 23, 2011 against the Bolivarian Republic of Venezuela, Petroleos de Venezuela, S.A. (“PDVSA”) and PDVSA Petroleo, S.A. (“Petroleo”).  Our subsidiaries seek damages for the taking of their Venezuelan drilling business in violation of international law and for breach of contract.  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 Financial Statements.

 

The Company and its subsidiaries are parties to various pending legal actions arising in the ordinary course of our business.  We maintain insurance against certain business risks subject to certain deductibles.  Although no assurance can be given, we believe, based on our experiences to date and taking into account established reserves and insurance, that the ultimate resolution of such items will not have a material adverse impact on our financial condition, cash flows, or results of operations.  When we determine a loss is probable of occurring and is reasonably estimable, we accrue an undiscounted liability for such contingencies based on our best estimate using information available at that time.  If the estimated loss is a range of potential outcomes and there is no better estimate within the range, we accrue the amount at the low end of the range.  We disclose contingencies where an adverse outcome may be material, or in the judgment of management, we conclude the matter should otherwise be disclosed.

 

On November 8, 2013, the United States District Court for the Eastern District of Louisiana approved the previously disclosed October 30, 2013 plea agreement between our wholly owned subsidiary, Helmerich & Payne International Drilling Co., and the United States Department of Justice, United States Attorney’s Office for the Eastern District of Louisiana (“DOJ”).  The court’s approval of the plea agreement resolved the DOJ’s investigation into certain choke manifold testing irregularities that occurred in 2010 at one of Helmerich & Payne International Drilling Co.’s offshore platform rigs in the Gulf of Mexico.  We have been engaged in discussions with the Inspector General’s office of the Department of Interior regarding the same events that were the subject of the DOJ’s investigation.  Although we presently believe that the outcome of our discussions will not have a material adverse effect on the Company, we cannot estimate the amount of any potential loss, nor can we provide any assurances as to the timing or eventual outcome of these discussions.

 

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Table of Contents

 

On or about April 28, 2015, Joshua Keel (“Keel”), an employee of Helmerich & Payne International Drilling Co. (“HPIDC”), filed a petition in the 152nd Judicial Court for Harris County, Texas (Cause No. 2015-24531) against Helmerich & Payne Inc., HPIDC, the operator, and several subcontractors of the operator.  The suit arises from injuries Keel sustained in an accident that occurred while he was working on HPIDC Rig 223 in New Mexico in July of 2014.  Keel alleges that the defendants were negligent and negligent per se, acted recklessly, intentionally, and/or with an utterly wanton disregard for the rights and safety of the plaintiff and has recently indicated he will seek damages well in excess of $100 million.  Pursuant to the terms of the drilling contract between HPIDC and the operator, HPIDC has indemnified most of the co-defendants in the lawsuit, subject to certain reservations.  We believe we have meritorious defenses to this matter and intend to vigorously defend the Company and HPIDC, both of whom have motions for summary judgment pending.  The trial for this matter is set to begin September 19, 2016.  We will continue to defend our position and will look to our insurance carriers to respond to any liability that may arise from this incident, including our contractual indemnity obligations; however, we cannot predict the outcome.  We have accrued the amount of our self-insured retention.

 

11.       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.  To provide information about the different types of business activities in which we operate, we have included Offshore and International Land, along with our U.S. Land reportable operating segment, as separate reportable operating segments.  Additionally, each reportable operating segment is a strategic business unit that is managed separately.  Our primary international areas of operation include Colombia, Ecuador, Argentina, Bahrain, and the U.A.E.  Other includes additional non-reportable operating segments.  Revenues included in Other consist primarily of rental income.  Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.

 

We evaluate segment performance based on income or loss from continuing 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 for all segments is a non-GAAP financial measure of our performance, as it excludes certain 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.  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.

 

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Table of Contents

 

Summarized financial information of our reportable segments for the three months ended June 30, 2016 and 2015 is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

June 30, 2016

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

285,028

 

$

 

$

285,028

 

$

25,802

 

Offshore

 

30,492

 

 

30,492

 

2,084

 

International Land

 

47,983

 

 

47,983

 

(4,991

)

 

 

363,503

 

 

363,503

 

22,895

 

Other

 

2,983

 

206

 

3,189

 

(2,186

)

 

 

366,486

 

206

 

366,692

 

20,709

 

Eliminations

 

 

(206

)

(206

)

 

Total

 

$

366,486

 

$

 

$

366,486

 

$

20,709

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

June 30, 2015, as adjusted

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

494,615

 

$

 

$

494,615

 

$

121,734

 

Offshore

 

57,071

 

 

57,071

 

14,684

 

International Land

 

106,551

 

 

106,551

 

18,999

 

 

 

658,237

 

 

658,237

 

155,417

 

Other

 

3,208

 

204

 

3,412

 

(2,324

)

 

 

661,445

 

204

 

661,649

 

153,093

 

Eliminations

 

 

(204

)

(204

)

 

Total

 

$

661,445

 

$

 

$

661,445

 

$

153,093

 

 

Summarized financial information of our reportable segments for the nine months ended June 30, 2016 and 2015 is shown in the following tables: