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:  December 31, 2014

 

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 January 31, 2015

Common Stock, $0.10 par value

 

107,640,834

 

 

 



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 December 31, 2014 and September 30, 2014

 

3

 

 

 

 

 

Consolidated Condensed Statements of Income for the Three Months Ended December 31, 2014 and 2013

 

4

 

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended December 31, 2014 and 2013

 

5

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 2014 and 2013

 

6

 

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Three Months Ended December 31, 2014

 

7

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

 

8-19

 

 

 

 

Item 2.

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

 

20-24

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

25

 

 

 

 

Item 4.

Controls and Procedures

 

25

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

25

 

 

 

 

Item 1A.

Risk Factors

 

25-27

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

 

 

 

Item 6.

Exhibits

 

28

 

 

 

 

Signatures

 

29

 

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

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

251,636

 

$

360,909

 

Accounts receivable, less reserve of $4,597 at December 31, 2014 and September 30, 2014

 

734,329

 

705,214

 

Inventories

 

110,773

 

106,241

 

Deferred income taxes

 

15,739

 

16,519

 

Prepaid expenses and other

 

90,118

 

81,277

 

Current assets of discontinued operations

 

7,397

 

7,206

 

Total current assets

 

1,209,992

 

1,277,366

 

 

 

 

 

 

 

Investments

 

165,581

 

236,644

 

Property, plant and equipment, net

 

5,400,016

 

5,188,544

 

Other assets

 

25,930

 

19,307

 

 

 

 

 

 

 

Total assets

 

$

6,801,519

 

$

6,721,861

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

168,346

 

$

182,031

 

Accrued liabilities

 

234,932

 

282,278

 

Short-term debt

 

1,002

 

 

Long-term debt due within one year

 

40,000

 

40,000

 

Current liabilities of discontinued operations

 

3,176

 

3,217

 

Total current liabilities

 

447,456

 

507,526

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt

 

40,000

 

40,000

 

Deferred income taxes

 

1,317,264

 

1,215,259

 

Other

 

71,356

 

64,110

 

Noncurrent liabilities of discontinued operations

 

4,221

 

3,989

 

Total noncurrent liabilities

 

1,432,841

 

1,323,358

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.10 par value, 160,000,000 shares authorized, 110,826,947 shares and 110,508,605 shares issued as of December 31, 2014 and September 30, 2014, respectively and 107,635,334 shares and 108,232,284 shares outstanding as of December 31, 2014 and September 30, 2014, respectively

 

11,083

 

11,051

 

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

 

 

 

Additional paid-in capital

 

395,325

 

383,972

 

Retained earnings

 

4,654,349

 

4,525,797

 

Accumulated other comprehensive income

 

41,078

 

83,126

 

Treasury stock, at cost

 

(180,613

)

(112,969

)

Total shareholders’ equity

 

4,921,222

 

4,890,977

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

6,801,519

 

$

6,721,861

 

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

Drilling — U.S. Land

 

$

890,047

 

$

731,674

 

Drilling — Offshore

 

69,473

 

59,054

 

Drilling — International Land

 

92,885

 

95,341

 

Other

 

4,180

 

3,083

 

 

 

1,056,585

 

889,152

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

Operating costs, excluding depreciation

 

554,243

 

474,048

 

Depreciation

 

137,613

 

120,237

 

General and administrative

 

32,907

 

32,243

 

Research and development

 

4,158

 

4,257

 

Income from asset sales

 

(4,155

)

(5,664

)

 

 

724,766

 

625,121

 

 

 

 

 

 

 

Operating income from continuing operations

 

331,819

 

264,031

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest and dividend income

 

285

 

453

 

Interest expense

 

(561

)

(1,194

)

Other

 

314

 

(345

)

 

 

38

 

(1,086

)

 

 

 

 

 

 

Income from continuing operations before income taxes

 

331,857

 

262,945

 

Income tax provision

 

128,800

 

89,763

 

Income from continuing operations

 

203,057

 

173,182

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

(15

)

 

Income tax provision

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(15

)

 

 

 

 

 

 

 

NET INCOME

 

$

203,042

 

$

173,182

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.87

 

$

1.61

 

Income from discontinued operations

 

 

 

Net income

 

$

1.87

 

$

1.61

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.85

 

$

1.59

 

Income from discontinued operations

 

 

 

Net income

 

$

1.85

 

$

1.59

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

107,973

 

107,149

 

Diluted

 

108,843

 

108,577

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.6875

 

$

0.6250

 

 

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

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

203,042

 

$

173,182

 

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

 

 

 

 

 

Unrealized depreciation on securities, net of income taxes of $26.6 million at December 31, 2014 and $1.9 million at December 31, 2013

 

(42,244

)

(2,961

)

Minimum pension liability adjustments, net of income taxes of ($0.1) million at December 31, 2014 and December 31, 2013

 

196

 

147

 

Other comprehensive loss

 

(42,048

)

(2,814

)

Comprehensive income

 

$

160,994

 

$

170,368

 

 

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)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

203,042

 

$

173,182

 

Adjustment for loss from discontinued operations

 

15

 

 

Income from continuing operations

 

203,057

 

173,182

 

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

 

 

 

 

 

Depreciation

 

137,613

 

120,237

 

Stock-based compensation

 

6,982

 

7,010

 

Income from asset sales

 

(4,155

)

(5,664

)

Deferred income tax expense

 

129,548

 

1,943

 

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(29,115

)

(8,820

)

Inventories

 

(4,532

)

(8,469

)

Prepaid expenses and other

 

(15,464

)

20,003

 

Accounts payable

 

(4,373

)

(25,701

)

Accrued liabilities

 

(39,352

)

38,705

 

Deferred income taxes

 

(229

)

(1,317

)

Other noncurrent liabilities

 

9,727

 

(6,251

)

Net cash provided by operating activities from continuing operations

 

389,707

 

304,858

 

Net cash used in operating activities from discontinued operations

 

(15

)

 

Net cash provided by operating activities

 

389,692

 

304,858

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(369,029

)

(140,643

)

Proceeds from asset sales

 

7,125

 

7,913

 

Net cash used in investing activities

 

(361,904

)

(132,730

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Dividends paid

 

(74,822

)

(53,860

)

Repurchase of common stock

 

(59,654

)

 

Proceeds on short-term debt

 

1,002

 

 

Exercise of stock options, net of tax withholding

 

(2,062

)

8,201

 

Tax withholdings related to net share settlements of restricted stock

 

(4,248

)

(3,049

)

Excess tax benefit from stock-based compensation

 

2,723

 

10,126

 

Net cash used in financing activities

 

(137,061

)

(38,582

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(109,273

)

133,546

 

Cash and cash equivalents, beginning of period

 

360,909

 

447,868

 

Cash and cash equivalents, end of period

 

$

251,636

 

$

581,414

 

 

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

THREE MONTHS ENDED DECEMBER 31, 2014

(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, 2014

 

110,509

 

$

11,051

 

$

383,972

 

$

4,525,797

 

$

83,126

 

2,276

 

$

(112,969

)

$

4,890,977

 

Net income

 

 

 

 

 

 

 

203,042

 

 

 

 

 

 

 

203,042

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(42,048

)

 

 

 

 

(42,048

)

Dividends declared ($0.6875 per share)

 

 

 

 

 

 

 

(74,490

)

 

 

 

 

 

 

(74,490

)

Exercise of stock options, net of tax withholding

 

104

 

11

 

1,669

 

 

 

 

 

47

 

(3,742

)

(2,062

)

Tax benefit of stock-based awards

 

 

 

 

 

2,723

 

 

 

 

 

 

 

 

 

2,723

 

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

 

214

 

21

 

(21

)

 

 

 

 

59

 

(4,248

)

(4,248

)

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

810

 

(59,654

)

(59,654

)

Stock-based compensation

 

 

 

 

 

6,982

 

 

 

 

 

 

 

 

 

6,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

110,827

 

$

11,083

 

$

395,325

 

$

4,654,349

 

$

41,078

 

3,192

 

$

(180,613

)

$

4,921,222

 

 

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 2014 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.

 

As more fully described in our 2014 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.

 

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.

 

3.              Earnings per Share

 

Accounting Standards Codification (“ASC”) 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share.  We have granted and expect to continue to grant 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.

 

8



Table of Contents

 

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Income from continuing operations

 

$

203,057

 

$

173,182

 

Loss from discontinued operations

 

(15

)

 

Net income

 

203,042

 

173,182

 

Adjustment for basic earnings per share:

 

 

 

 

 

Earnings allocated to unvested shareholders

 

(1,255

)

(992

)

Numerator for basic earnings per share:

 

 

 

 

 

From continuing operations

 

201,802

 

172,190

 

From discontinued operations

 

(15

)

 

 

 

201,787

 

172,190

 

Adjustment for diluted earnings per share:

 

 

 

 

 

Effect of reallocating undistributed earnings of unvested shareholders

 

6

 

7

 

Numerator for diluted earnings per share:

 

 

 

 

 

From continuing operations

 

201,808

 

172,197

 

From discontinued operations

 

(15

)

 

 

 

$

201,793

 

$

172,197

 

Denominator:

 

 

 

 

 

Denominator for basic earnings per share — weighted-average shares

 

107,973

 

107,149

 

Effect of dilutive shares from stock options and restricted stock

 

870

 

1,428

 

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

 

108,843

 

108,577

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.87

 

$

1.61

 

Income from discontinued operations

 

 

 

Net income

 

$

1.87

 

$

1.61

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.85

 

$

1.59

 

Income from discontinued operations

 

 

 

Net income

 

$

1.85

 

$

1.59

 

 

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

Shares excluded from calculation of diluted earnings per share

 

669

 

261

 

Weighted-average price per share

 

$

72.87

 

$

79.67

 

 

9



Table of Contents

 

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 December 31, 2014

 

$

64,462

 

$

88,947

 

$

 

$

153,409

 

Equity securities September 30, 2014

 

$

64,462

 

$

157,838

 

$

 

$

222,300

 

 

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.

 

The assets held in the Non-qualified Supplemental Savings Plan are carried at fair value which totaled $12.2 million at December 31, 2014 and $14.3 million at September 30, 2014.  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.

 

·                  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 December 31, 2014, our financial instruments utilizing Level 1 inputs include cash equivalents, equity securities with active markets, restricted cash included in other current assets and money market funds we have elected to classify as restricted assets that are included in other current assets and other assets.  Also included is cash denominated in a foreign currency 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 December 31, 2014, financial instruments utilizing level 2 inputs include a bank certificate of deposit included in other current assets.

 

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

 

10



Table of Contents

 

The following table summarizes our assets measured at fair value on a recurring basis presented in our Consolidated Condensed Balance Sheet as of December 31, 2014:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

Total

 

in Active

 

Significant

 

 

 

 

 

Measure

 

Markets for

 

Other

 

Significant

 

 

 

at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

251,636

 

$

251,636

 

$

 

$

 

Equity securities

 

153,409

 

153,409

 

 

 

Other current assets

 

36,386

 

36,136

 

250

 

 

Other assets

 

2,000

 

2,000

 

 

 

Total assets measured at fair value

 

$

443,431

 

$

443,181

 

$

250

 

$

 

 

The following information presents the supplemental fair value information about long-term fixed-rate debt at December 31, 2014 and September 30, 2014:

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

 

 

(in millions)

 

 

 

 

 

 

 

Carrying value of long-term fixed-rate debt

 

$

80.0

 

$

80.0

 

Fair value of long-term fixed-rate debt

 

$

82.5

 

$

84.3

 

 

The fair value for 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.

 

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.  During the three months ended December 31, 2014, we purchased 810,097 common shares at an aggregate cost of $59.7 million, which are held as treasury shares.  We had no purchases of common shares in fiscal 2014.

 

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

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

 

 

(in thousands)

 

 

 

 

 

Pre-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

88,947

 

$

157,838

 

Unrecognized actuarial loss

 

(23,096

)

(23,405

)

 

 

$

65,851

 

$

134,433

 

After-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

55,174

 

$

97,418

 

Unrecognized actuarial loss

 

(14,096

)

(14,292

)

 

 

$

41,078

 

$

83,126

 

 

11



Table of Contents

 

The following is a summary of the changes in accumulated other comprehensive income (loss), net of tax, by component for the three months ended December 31, 2014:

 

 

 

Three Months Ended December 31, 2014

 

 

 

Unrealized

 

 

 

 

 

 

 

Appreciation
(Depreciation) on

 

Defined

 

 

 

 

 

Available-for-sale

 

Benefit

 

 

 

 

 

Securities

 

Pension Plan

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balances at September 30, 2014

 

$

97,418

 

$

(14,292

)

$

83,126

 

Other comprehensive loss before reclassifications

 

(42,244

)

 

(42,244

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

196

 

196

 

Net current-period other comprehensive income (loss)

 

(42,244

)

196

 

(42,048

)

Balances at December 31, 2014

 

$

55,174

 

$

(14,096

)

$

41,078

 

 

The following provides detail about accumulated other comprehensive income (loss) components which were reclassified to the Condensed Consolidated Statement of Income during the three months ended December 31, 2014:

 

Details About Accumulated Other

 

Amount Reclassified from
Accumulated Other Comprehensive
Income (Loss)

 

Affected Line Item in the

 

Comprehensive Income 

 

Three Months Ended

 

Condensed Consolidated

 

(Loss) Components

 

December 31, 2014

 

Statement of Income

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Defined Benefit Pension Items

 

 

 

 

 

Amortization of net actuarial loss

 

$

309

 

General and administrative

 

 

 

(113

)

Income tax provision

 

Total reclassifications for the period

 

$

196

 

Net of tax

 

 

6.              Cash Dividends

 

The $0.6875 per share cash dividend declared September 3, 2014, was paid December 1, 2014.  On December 2, 2014, a cash dividend of $0.6875 per share was declared for shareholders of record on February 13, 2015, payable March 2, 2015. The dividend payable is included in accounts payable in the Consolidated Condensed Balance Sheet.

 

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, restricted stock awards and stock appreciation rights 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 419,585 non-qualified stock options and 275,250 shares of restricted stock awards granted in the three months ended December 31, 2014.  Awards outstanding in the 2005 Long-Term Incentive Plan (the “2005 Plan”) and one prior equity plan remain subject to the terms and conditions of those plans.

 

12



Table of Contents

 

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Compensation expense

 

 

 

 

 

Stock options

 

$

 3,062

 

$

 3,653

 

Restricted stock

 

3,920

 

3,357

 

 

 

$

 6,982

 

$

 7,010

 

 

STOCK OPTIONS

 

The following summarizes the weighted-average assumptions utilized in determining the fair value of options granted during the three months ended December 31, 2014 and 2013:

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Risk-free interest rate

 

1.72

%

1.58

%

Expected stock volatility

 

36.92

%

52.55

%

Dividend yield

 

3.92

%

3.14

%

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.

 

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 months ended December 31, 2014 is presented in the following tables:

 

 

 

Three Months Ended December 31, 2014

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Term

 

Value

 

Options

 

(in thousands)

 

Price

 

(in years)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at October 1, 2014

 

2,629

 

$

43.46

 

 

 

 

 

Granted

 

420

 

68.83

 

 

 

 

 

Exercised

 

(104

)

16.09

 

 

 

 

 

Forfeited/Expired

 

(14

)

67.10

 

 

 

 

 

Outstanding at December 31, 2014

 

2,931

 

$

47.96

 

5.9

 

$

60.7

 

Vested and expected to vest at December 31, 2014

 

2,924

 

$

47.91

 

5.9

 

$

60.7

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2014

 

2,168

 

$

41.35

 

4.8

 

$

57.8

 

 

The weighted-average fair value of options granted in the first quarter of fiscal 2014 was $16.39.

 

The total intrinsic value of options exercised during the three months ended December 31, 2014 was $6.9 million.

 

13



Table of Contents

 

As of December 31, 2014, the unrecognized compensation cost related to stock options was $11.1 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 December 31, 2014, there was $34.2 million of total unrecognized compensation cost related to unvested restricted stock awards which is expected to be recognized over a weighted-average period of 2.9 years.

 

A summary of the status of our restricted stock awards as of December 31, 2014 and changes in restricted stock outstanding during the three months then ended is presented below:

 

 

 

Three Months Ended

 

 

 

December 31, 2014

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Restricted Stock Awards

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at October 1, 2014

 

634

 

$

64.03

 

Granted

 

275

 

68.83

 

Vested (1)

 

(214

)

54.18

 

Forfeited

 

(6

)

65.95

 

Unvested at December 31, 2014

 

689

 

$

66.93

 

 


(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 December 31, 2014 and September 30, 2014, we had the following unsecured long-term debt outstanding:

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

 

 

(in thousands)

 

 

 

 

 

Unsecured senior notes issued July 21, 2009:

 

 

 

 

 

Due July 21, 2015, 6.10%

 

$

40,000

 

$

40,000

 

Due July 21, 2016, 6.10%

 

40,000

 

40,000

 

 

 

$

80,000

 

$

80,000

 

Less long-term debt due within one year

 

40,000

 

40,000

 

Long-term debt

 

$

40,000

 

$

40,000

 

 

We have $80 million senior unsecured fixed-rate notes outstanding at December 31, 2014 that mature over a period from July 2015 to July 2016.  Interest on the notes is paid semi-annually based on an annual rate of 6.10 percent.  Annual principal repayments of $40 million are due July 2015 and July 2016.  We have complied with our financial covenants which require us to maintain a funded leverage ratio of less than 55 percent and an interest coverage ratio (as defined) of not less than 2.50 to 1.00.

 

We have a $300 million unsecured revolving credit facility that will mature May 25, 2017.  The credit facility has $100 million available to use for letters of credit.  The majority of 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 .35 percent per annum.  Based on our debt to total capitalization on December 31, 2014, the spread over LIBOR and commitment fees would be 1.125 percent and .15 percent, respectively.  Financial covenants in the facility require us to maintain a funded leverage ratio (as defined) of less than 50 percent and an interest coverage ratio (as defined) of not less than 3.00 to 1.00.  The 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.  At December 31, 2014, we were in compliance with all debt covenants.  As of December 31, 2014, there were no borrowings, but there were three letters of credit outstanding in

 

14



Table of Contents

 

the amount of $42.2 million.  At December 31, 2014, we had $257.8 million available to borrow under our $300 million unsecured credit facility.

 

At December 31, 2014, 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 so they do not reduce the available borrowing capacity discussed in the previous paragraph.

 

During the first quarter of fiscal 2015, we borrowed $1.0 million with an interest rate of seven percent against a short-term $9.5 million line of credit in an international location.  The $1.0 million and interest were paid in full subsequent to the end of the quarter.

 

9.              Income Taxes

 

Our effective tax rate for the three months ended December 31, 2014 and 2013 was 38.8 percent and 34.1 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 three months ended December 31, 2014 was also impacted by a December 2014 tax law change which resulted in a reduction of the fiscal 2014 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 believe it is reasonably possible that the reserve for uncertain tax positions may increase by approximately $8.4 million to $11.0 million during the next 12 months due to an international matter.

 

10.       Commitments and Contingencies

 

In conjunction with our current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $327.2 million are outstanding at December 31, 2014.

 

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

 

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

 

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.

 

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.  We can provide no assurances as to the timing or eventual outcome of these discussions and are unable to determine the amount of penalty, if any, that may be assessed.  However, we presently believe that the outcome of our discussions will not have a material adverse effect on the Company.

 

15



Table of Contents

 

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, Tunisia, Bahrain, U.A.E. and other South American and Middle Eastern countries.  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.

 

16



Table of Contents

 

Summarized financial information of our reportable segments for the three months ended December 31, 2014 and 2013 is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

890,047

 

$

 

$

890,047

 

$

318,122

 

Offshore

 

69,473

 

 

69,473

 

21,484

 

International Land

 

92,885

 

 

92,885

 

12,214

 

 

 

1,052,405

 

 

1,052,405

 

351,820

 

Other

 

4,180

 

222

 

4,402

 

(1,899

)

 

 

1,056,585

 

222

 

1,056,807

 

349,921

 

Eliminations

 

 

(222

)

(222

)

 

Total

 

$

1,056,585

 

$

 

$

1,056,585

 

$

349,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

731,674

 

$

 

$

731,674

 

$

250,952

 

Offshore

 

59,054

 

 

59,054

 

18,498

 

International Land

 

95,341

 

 

95,341

 

12,751

 

 

 

886,069

 

 

886,069

 

282,201

 

Other

 

3,083

 

220

 

3,303

 

(3,005

)

 

 

889,152

 

220

 

889,372

 

279,196

 

Eliminations

 

 

(220

)

(220

)

 

Total

 

$

889,152

 

$

 

$

889,152

 

$

279,196

 

 

The following table reconciles segment operating income per the table above to income from continuing operations before income taxes as reported on the Consolidated Condensed Statements of Income.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

Segment operating income

 

$

349,921

 

$

279,196

 

Income from asset sales

 

4,155

 

5,664

 

Corporate general and administrative costs and corporate depreciation

 

(22,257

)

(20,829

)

Operating income

 

331,819

 

264,031

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest and dividend income

 

285

 

453

 

Interest expense

 

(561

)

(1,194

)

Gain on sale of investment securities

 

 

 

Other

 

314

 

(345

)

Total other income (expense)

 

38

 

(1,086

)

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

331,857

 

$

262,945

 

 

17



Table of Contents

 

The following table presents total assets by reportable segment.

 

 

 

December 31,

 

September 30,

 

 

 

2014

 

2014

 

 

 

(in thousands)

 

 

 

 

 

Total assets

 

 

 

 

 

U.S. Land

 

$

5,451,403

 

$

5,260,810

 

Offshore

 

138,539

 

137,101

 

International Land

 

650,872

 

589,968

 

Other

 

40,612

 

40,080

 

 

 

6,281,426

 

6,027,959

 

Investments and corporate operations

 

512,696

 

686,696

 

Total assets from continued operations

 

6,794,122

 

6,714,655

 

Discontinued operations

 

7,397

 

7,206

 

 

 

$

6,801,519

 

$

6,721,861

 

 

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Operating revenues

 

 

 

 

 

United States

 

$

956,281

 

$

788,691

 

Colombia

 

23,451

 

26,730

 

Argentina

 

25,083

 

26,359

 

Ecuador

 

15,194

 

17,800

 

Other foreign

 

36,576

 

29,572

 

Total

 

$

1,056,585

 

$

889,152

 

 

12.       Pensions and Other Post-retirement Benefits

 

The following provides information at December 31, 2014 and 2013 related to the Company-sponsored domestic defined benefit pension plan.

 

Components of Net Periodic Benefit Cost

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

Interest cost

 

$

1,171

 

$

1,201

 

Expected return on plan assets

 

(1,743

)

(1,664

)

Recognized net actuarial loss

 

309

 

229

 

Net pension benefit

 

$

(263

)

$

(234

)

 

Employer Contributions

 

We did not make any contributions to the Pension Plan during the three months ended December 31, 2014.  We could make contributions during fiscal 2015 to fund distributions in lieu of liquidating assets.

 

13.       Supplemental Cash Flow Information

 

Capital expenditures on the Consolidated Condensed Statements of Cash Flows do not include additions which have been incurred but not paid for as of the end of the period.  The following table reconciles total capital expenditures incurred to total capital expenditures in the Consolidated Condensed Statements of Cash Flows:

 

18



Table of Contents

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

Capital expenditures incurred

 

$

352,055

 

$

140,153

 

Additions incurred prior year but paid for in current period

 

123,548

 

29,264

 

Additions incurred but not paid for as of the end of the period

 

(106,574

)

(28,774

)

Capital expenditures per Consolidated Condensed Statements of Cash Flows

 

$

369,029

 

$

140,643

 

 

14.       International Risk Factors

 

International operations are subject to certain political, economic and other uncertainties not encountered in U.S. operations, including increased risks of terrorism, kidnapping of employees, expropriation of drilling rigs, equipment, land and other property, as well as expropriation of a particular oil company’s property and drilling rights, taxation policies, foreign exchange restrictions, currency rate fluctuations and general hazards associated with foreign sovereignty over certain areas in which operations are conducted. In January 2015, the Venezuelan government announced plans for a new foreign currency exchange system. We are monitoring the status of this change in Venezuela’s exchange control policy. There can be no assurance that there will not be changes in local laws, regulations and administrative requirements or the interpretation thereof which could have a material adverse effect on the profitability of our operations or on our ability to continue operations in certain areas.

 

15.       Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually all existing revenue recognition guidance.  The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.  This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  The provisions of ASU 2014-09 are effective for interim and annual periods beginning after December 15, 2016, and we have the option of using either a full retrospective or a modified retrospective approach when adopting this new standard.  We are currently evaluating the alternative transition methods and the potential effects of the adoption of this update on our financial statements.

 

16.       Subsequent Events

 

Due to the decline in oil prices, our customers are reducing their drilling activity.  As a result, in the U.S. Land segment we have received termination notices for rigs that were under long-term contracts at December 31, 2014.  Given the current trend, we could have less than 200 rigs active in the U.S. Land segment by March 31, 2015 and early termination revenue could exceed $60 million during the second quarter of fiscal 2015.  We expect to have approximately $8 million of early termination revenue in our International Land segment as one early termination has been received.  We are also having ongoing discussions with a customer regarding the possibility of an additional rig contract being terminated early.

 

19



Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

December 31, 2014

 

RISK FACTORS AND FORWARD-LOOKING STATEMENTS

 

The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and related notes included elsewhere herein and the Consolidated Financial Statements and notes thereto included in our 2014 Annual Report on Form 10-K.  Our future operating results may be affected by various trends and factors which are beyond our control. These include, among other factors, fluctuations in natural gas and crude oil prices, the loss of one or a number of our largest customers, early termination of drilling contracts and failure to realize backlog drilling revenue, forfeiture of early termination payments under fixed term contracts due to sustained unacceptable performance, unsuccessful collection of receivables, inability to procure key rig components, failure to timely deliver rigs within applicable grace periods, disruption to or cessation of the business of our limited source vendors or fabricators, currency exchange losses, expropriation of assets and other international uncertainties, loss of well control, pollution of offshore waters and reservoir damage, operational risks that are not fully insured against or covered by adequate contractual indemnities, passage of laws or regulations including those limiting hydraulic fracturing, litigation and governmental investigations, failure to comply with the terms of our plea agreement with the United States Department of Justice, failure to comply with the United States Foreign Corrupt Practices Act, foreign anti-bribery laws and other governmental laws and regulations, a sluggish global economy, changes in general economic and political conditions, adverse weather conditions including hurricanes, rapid or unexpected changes in drilling or other technologies and uncertain business conditions that affect our businesses. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.  Our risk factors are more fully described in our 2014 Annual Report on Form 10-K and elsewhere in this Form 10-Q.

 

With the exception of historical information, the matters discussed in Management’s Discussion & Analysis of Financial Condition and Results of Operations include forward-looking statements.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, or “continue” or the negative thereof or similar terminology.  These forward-looking statements are based on various assumptions.  We caution that, while we believe such assumptions to be reasonable and make them in good faith, assumptions about future events and conditions almost always vary from actual results.  The differences between assumed facts and actual results can be material.  We are including this cautionary statement to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us or persons acting on our behalf.  The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us or persons acting on our behalf.  Except as required by law, we undertake no duty to update or revise our forward-looking statements based on changes of internal estimates on expectations or otherwise.

 

RESULTS OF OPERATIONS

 

Three Months Ended December 31, 2014 vs. Three Months Ended December 31, 2013

 

We reported net income of $203.0 million ($1.85 per diluted share) from operating revenues of $1.1 billion for the first quarter ended December 31, 2014, compared with net income from continuing operations of $173.2 million ($1.59 per diluted share) from operating revenues of $889.2 million for the first quarter of fiscal year 2014.  Net income for the first quarter of fiscal 2015 includes approximately $2.5 million ($0.02 per diluted share) of after-tax gains from the sale of assets.  Net income for the first quarter of fiscal 2014 includes approximately $3.7 million ($0.03 per diluted share) of after-tax gains from the sale of assets.

 

The following tables summarize operations by reportable operating segment for the three months ended December 31, 2014 and 2013.  Operating statistics in the tables exclude the effects of offshore platform and international management contracts, and do not include reimbursements of “out-of-pocket” expenses in revenue, expense and margin per day calculations.  Per day calculations for international operations also exclude gains and losses from translation of foreign currency transactions.  Segment operating income is described in detail in Note 11 to the Consolidated Condensed Financial Statements.

 

20



Table of Contents

 

 

 

Three Months Ended December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands, except days and per day amounts)

 

 

 

 

 

U.S. LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

890,047

 

$

731,674

 

Direct operating expenses

 

441,126

 

367,186

 

General and administrative expense

 

11,715

 

9,957

 

Depreciation

 

119,084

 

103,579

 

Segment operating income

 

$

318,122

 

$

250,952

 

 

 

 

 

 

 

Revenue days

 

27,355

 

23,464

 

Average rig revenue per day

 

$

29,457

 

$

28,468

 

Average rig expense per day

 

$

13,046

 

$

12,934

 

Average rig margin per day

 

$

16,411

 

$

15,534

 

Rig utilization

 

89

%

84

%

 

U.S. Land segment operating income increased to $318.1 million for the first quarter of fiscal 2015 compared to $251.0 million in the same period of fiscal 2014.  Revenues were $890.0 million and $731.7 million in the first quarter of fiscal 2015 and 2014, respectively.  Included in U.S. land revenues for the three months ended December 31, 2014 and 2013 are reimbursements for “out-of-pocket” expenses of $84.3 million and $63.7 million, respectively.  Also included in revenue for the three months ended December 31, 2014 and 2013 are early termination fees of $23.4 million and $9.9 million, respectively.

 

The average revenue per day for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 increased $989 of which $432 is attributable to early termination fees.  The decline in oil prices is having an effect on customer spending.  As a result, some operators are not renewing contracts or are terminating their contract early.  Fixed-term contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term (except in limited circumstances including sustained unacceptable performance by us).

 

U.S. land rig utilization increased to 89 percent for the first quarter of 2015 compared to 84 percent for the first quarter of fiscal 2014.  U.S. land rig revenue days for the first quarter of fiscal 2015 were 27,355 compared with 23,464 for the same period of fiscal 2014, with an average of 297.3 and 255.0 rigs working during the first quarter of fiscal 2015 and 2014, respectively.  We expect rig utilization to decrease in the second quarter of fiscal 2015 as customers continue to reduce their drilling activity and rigs are idled.  Given the current trend, we could have less than 200 rigs active by March 31, 2015.

 

During the first quarter of fiscal 2015, five FlexRigs were transferred to the International Land segment and one conventional rig was transferred to the U.S. Land segment from the International Land segment.  At December 31, 2014, 294 out of 337 existing rigs in the U.S. Land segment were contracted.  Of the 294 contracted rigs, 177 were under fixed term contracts and 117 were working in the spot market.  As of February 5, 2015, 235 rigs remain active in the segment excluding rigs that are in the process of stacking.  Based on the early termination notices received since December 31, 2014, early termination revenue could exceed $60 million during the second fiscal quarter of 2015.

 

 

 

Three Months Ended December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands, except days and per day amounts)

 

 

 

 

 

OFFSHORE OPERATIONS

 

 

 

 

 

Revenues

 

$

69,473

 

$

59,054

 

Direct operating expenses

 

44,239

 

34,876

 

General and administrative expense

 

826

 

2,330

 

Depreciation

 

2,924

 

3,350

 

Segment operating income

 

$

21,484

 

$

18,498

 

 

 

 

 

 

 

Revenue days

 

809

 

736

 

Average rig revenue per day

 

$

55,341

 

$

62,306

 

Average rig expense per day

 

$

34,609

 

$

34,857

 

Average rig margin per day

 

$

20,732

 

$

27,449

 

Rig utilization

 

98

%

89

%

 

Offshore revenues include reimbursements for “out-of-pocket” expenses of $5.5 million and $2.8 million for the three months ended December 31, 2014 and 2013, respectively.

 

21



Table of Contents

 

Total revenue and segment operating income in our Offshore segment increased in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 primarily due to our offshore management contracts.  Average revenue per day and average rig margin per day decreased in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014 primarily due to a contractual decrease in a dayrate for one rig.

 

At the end of December 31, 2014, nine platform rigs were active compared to eight active platform rigs during the first quarter of fiscal 2014.

 

 

 

Three Months Ended December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands, except days and per day amounts)

 

 

 

 

 

INTERNATIONAL LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

92,885

 

$

95,341

 

Direct operating expenses

 

68,937

 

71,930

 

General and administrative expense

 

687

 

1,000

 

Depreciation

 

11,047

 

9,660

 

Segment operating income

 

$

12,214

 

$

12,751

 

 

 

 

 

 

 

Revenue days

 

2,080

 

2,156

 

Average rig revenue per day

 

$

39,987

 

$

38,433

 

Average rig expense per day

 

$

29,217

 

$

28,091

 

Average rig margin per day

 

$

10,770

 

$

10,342

 

Rig utilization

 

63

%

82

%

 

International Land segment operating income for the first quarter of fiscal 2015 was $12.2 million compared to $12.8 million in the same period of fiscal 2014.  Included in International land revenues for the three months ended December 31, 2014 and 2013 are reimbursements for “out-of-pocket” expenses of $9.7 million and $12.5 million, respectively.

 

During the current quarter, an average of 22.9 rigs worked compared to an average of 23.7 rigs in the first quarter of fiscal 2014.  During the first quarter of fiscal 2015, five FlexRigs were transferred from the U.S. Land segment and one conventional rig was transferred to the U.S. Land segment.  The five rigs transferred into the segment had not commenced operations by the end of the quarter which reduced the quarterly rig utilization.  They are all expected to begin work by the end of the fourth fiscal quarter.

 

We have received early termination notification for a rig and expect approximately $8 million in early termination revenue during the second quarter of fiscal 2015.  We are also having ongoing discussions with a customer regarding the possibility of an additional rig contract being terminated early.

 

RESEARCH AND DEVELOPMENT

 

For the three months ended December 31, 2014 and 2013, we incurred $4.2 million and $4.3 million, respectively, of research and development expenses related to ongoing development of a rotary steerable system.

 

OTHER

 

General and administrative expenses were $32.9 million in the first quarter of fiscal 2015 compared to $32.2 million in the first quarter of fiscal 2014.

 

Income tax expense increased to $128.8 million in the first quarter of fiscal 2015 from $89.8 in the first quarter of fiscal 2014 and the effective tax rate increased to 38.8 percent from 34.1 percent.  The higher effective tax rate was the result of the impact from tax law changes that occurred during the first quarter of fiscal 2015 which resulted in a reduction of the fiscal 2014 Internal Revenue Code Section 199 deduction for domestic production activities.  We expect the effective tax rate for the remaining three quarters of fiscal 2015 to be between 35 and 36 percent.

 

22



Table of Contents

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

Cash and cash equivalents decreased to $251.6 million at December 31, 2014 from $360.9 million at September 30, 2014. The following table provides a summary of cash flows:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Net cash provided (used) by:

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

389,692

 

$

304,858

 

Investing activities

 

(361,904

)

(132,730

)

Financing activities

 

(137,061

)

(38,582

)

Increase (decrease) in cash and cash equivalents

 

$

(109,273

)

$

133,546

 

 

Operating activities

 

Cash flows from operating activities were approximately $389.7 million for the three months ended December 31, 2014 compared to approximately $304.9 million for the same period ended December 31, 2013.  Multiple items contributed to the change, including a decrease in income taxes payable during the comparative three months primarily the result of legislation passed in December 2014 extending the 50 percent special allowance for depreciation (“bonus depreciation”) for qualified property placed in service during 2014.

 

Investing activities

 

Capital expenditures during the three months ended December 31, 2014 were $369.0 million compared to $140.6 million during the three months ended December 31, 2013 due to the execution of additional fixed-term contracts during calendar 2014 for the operation of new FlexRigs.

 

Financing activities

 

Dividends paid during the first quarter of fiscal 2015 were $0.6875 per share or $74.8 million compared to $0.50 per share or $53.9 million paid during the first quarter of fiscal 2014.  Also during the first quarter of fiscal 2015, we purchased 810,097 common shares at an aggregate cost of $59.7 million.

 

Other Liquidity

 

Our operating cash requirements, scheduled debt repayments, any stock repurchases and estimated capital expenditures, including our rig construction program, for fiscal 2015 are expected to be funded through current cash, cash to be provided from operating activities and, possibly, from additional borrowings and sales of available-for-sale securities.  Given current market conditions, there can be no assurance that we will continue to generate cash flows at current levels or obtain additional financing.  Our indebtedness totaled $81.0 million at December 31, 2014, of which $1.0 million was paid subsequent to the end of the first quarter of fiscal 2015 and $40.0 million is due later in fiscal 2015.  For additional information regarding debt agreements, refer to Note 8 of the Consolidated Condensed Financial Statements.

 

Backlog

 

Our contract drilling backlog, being the expected future revenue from executed contracts with original terms in excess of one year, as of December 31, 2014 and September 30, 2014 was $4.6 billion and $5.0 billion, respectively.  The decrease in backlog at December 31, 2014 from September 30, 2014 is primarily due to the revenue earned since September 30, 2014.  Approximately 70.2 percent of the December 31, 2014 backlog is not reasonably expected to be filled in fiscal 2015. Term contracts customarily provide for termination at the election of the customer with an “early termination payment” to be paid to us if a contract is terminated prior to the expiration of the fixed term.  However, under certain limited circumstances, such as destruction of a drilling rig, bankruptcy, sustained unacceptable performance by us, or delivery of a rig beyond certain grace and/or liquidated damage periods, no early termination payment would be paid to us.  In addition, a portion of the backlog represents term contracts for new rigs that will be constructed in the future.  We obtain certain key rig components from a single or limited number of vendors or fabricators. Certain of these vendors or fabricators are thinly capitalized independent companies located on the Texas Gulf Coast.  Therefore, disruptions in rig component deliveries may occur.  Accordingly, the actual amount of revenue earned may vary from the backlog reported.  See the risk factors under “Item 1A. Risk Factors” of our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission, regarding fixed term contract risk, operational risks, including weather, and vendors that are limited in number and thinly capitalized.

 

23



Table of Contents

 

The following table sets forth the total backlog by reportable segment as of December 31, 2014 and September 30, 2014, and the percentage of the December 31, 2014 backlog not reasonably expected to be filled in fiscal 2015:

 

 

 

Three Months Ended

 

 

 

 

 

December 31,

 

September 30,

 

Percentage Not Reasonably

 

Reportable Segment

 

2014

 

2014

 

Expected to be Filled in Fiscal 2015

 

 

 

(in billions)

 

 

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

3.4

 

$

3.8

 

66.5%

 

Offshore

 

0.2

 

0.1

 

76.0%

 

International Land

 

1.0

 

1.1

 

81.5%

 

 

 

$

4.6

 

$

5.0

 

 

 

 

Capital Resources

 

Since September 30, 2014, we have announced that we had secured multi-year term contracts to build and operate six new FlexRigs with two customers in the U.S. During the three months ended December 31, 2014, we placed into service 12 new FlexRigs.  Three additional new FlexRigs under fixed-term contract were placed into service by January 29, 2015.  Like those completed and placed into service in prior fiscal periods, each of the new FlexRigs is committed to work for an exploration and production company under a fixed-term contract, performing drilling services on a daywork contract basis.

 

Our capital spending estimate for fiscal 2015 is now expected to total approximately $1.3 billion.  The monthly cadence of the new FlexRig construction program is expected to decline from four to two rigs per month beginning in June 2015 through the end of the calendar year.  However, the actual spending level may vary depending primarily on actual maintenance capital requirements and on the timing of procurement related to our ongoing newbuild efforts.  All new FlexRigs scheduled for delivery during calendar 2015 are supported with multi-year contracts.  Capital expenditures were $369.0 million and $140.6 million for the first three months of fiscal 2015 and 2014, respectively.

 

There were no other significant changes in our financial position since September 30, 2014.

 

MATERIAL COMMITMENTS

 

Material commitments as reported in our 2014 Annual Report on Form 10-K have not changed significantly at December 31, 2014.

 

CRITICAL ACCOUNTING POLICIES

 

Our accounting policies that are critical or the most important to understand our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2014 Annual Report on Form 10-K.  There have been no material changes in these critical accounting policies.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually all existing revenue recognition guidance.  The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.  This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  The provisions of ASU 2014-09 are effective for interim and annual periods beginning after December 15, 2016, and we have the option of using either a full retrospective or a modified retrospective approach when adopting this new standard.  We are currently evaluating the alternative transition methods and the potential effects of the adoption of this update on our financial statements.

 

24



Table of Contents

 

PART I.  FINANCIAL INFORMATION

December 31, 2014

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a description of our market risks, see

 

·                  Note 4 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof with regard to equity price risk is incorporated herein by reference;

·                  “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 26, 2014;

·                  Note 8 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof with regard to interest rate risk is incorporated herein by reference; and

·                  Note 14 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof with regard to foreign currency exchange rate risk is incorporated herein by reference.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, an evaluation was performed with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2014 at ensuring that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  There have been no changes in our internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II.   OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

Investigation by th