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, 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 January 31, 2017

Common Stock, $0.10 par value

 

108,563,000

 

 

 



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, 2016 and September 30, 2016

3

 

 

 

 

Consolidated Condensed Statements of Operations for the Three Months Ended December 31, 2016 and 2015

4

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2016 and 2015

5

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 2016 and 2015

6

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Three Months Ended December 31, 2016

7

 

 

 

 

Notes to Consolidated Condensed Financial Statements

8-28

 

 

 

Item 2.

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

29-34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36-38

 

 

 

Item 6.

Exhibits

39

 

 

 

Signatures

40

 

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,
2016

 

September 30,
2016

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

825,893

 

$

905,561

 

Short-term investments

 

45,263

 

44,148

 

Accounts receivable, less reserve of $5,016 at December 31, 2016 and $2,696 at September 30, 2016

 

326,771

 

375,169

 

Inventories

 

126,082

 

124,325

 

Prepaid expenses and other

 

75,926

 

78,067

 

Assets held for sale

 

45,297

 

45,352

 

Current assets of discontinued operations

 

51

 

64

 

Total current assets

 

1,445,283

 

1,572,686

 

 

 

 

 

 

 

Investments

 

105,177

 

84,955

 

Property, plant and equipment, net

 

5,102,679

 

5,144,733

 

Other assets

 

24,498

 

29,645

 

 

 

 

 

 

 

Total assets

 

$

6,677,637

 

$

6,832,019

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

111,638

 

$

95,422

 

Accrued liabilities

 

174,920

 

234,639

 

Current liabilities of discontinued operations

 

70

 

59

 

Total current liabilities

 

286,628

 

330,120

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt less unamortized discount and debt issuance costs

 

492,110

 

491,847

 

Deferred income taxes

 

1,332,269

 

1,342,456

 

Other

 

86,359

 

102,781

 

Noncurrent liabilities of discontinued operations

 

4,356

 

3,890

 

Total noncurrent liabilities

 

1,915,094

 

1,940,974

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.10 par value, 160,000,000 shares authorized, 111,876,237 shares and 111,400,339 shares issued as of December 31, 2016 and September 30, 2016, respectively and 108,562,523 shares and 108,077,916 shares outstanding as of December 31, 2016 and September 30, 2016, respectively

 

11,188

 

11,140

 

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

 

 

 

Additional paid-in capital

 

463,859

 

448,452

 

Retained earnings

 

4,178,235

 

4,289,807

 

Accumulated other comprehensive income (loss)

 

12,574

 

(204

)

Treasury stock, at cost

 

(189,941

)

(188,270

)

Total shareholders’ equity

 

4,475,915

 

4,560,925

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

6,677,637

 

$

6,832,019

 

 

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

 

 

 

December 31,

 

 

 

2016

 

2015

 

Operating revenues:

 

 

 

 

 

Drilling — U.S. Land

 

$

263,636

 

$

369,805

 

Drilling — Offshore

 

33,812

 

41,880

 

Drilling — International Land

 

68,031

 

72,194

 

Other

 

3,111

 

3,968

 

 

 

368,590

 

487,847

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

Operating costs, excluding depreciation

 

247,679

 

276,644

 

Depreciation

 

133,847

 

142,129

 

General and administrative

 

34,262

 

32,074

 

Research and development

 

2,808

 

2,919

 

Income from asset sales

 

(842

)

(4,589

)

 

 

417,754

 

449,177

 

 

 

 

 

 

 

Operating income (loss) from continuing operations

 

(49,164

)

38,670

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest and dividend income

 

990

 

733

 

Interest expense

 

(5,055

)

(4,524

)

Other

 

387

 

(261

)

 

 

(3,678

)

(4,052

)

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(52,842

)

34,618

 

Income tax provision

 

(18,288

)

18,720

 

Income (loss) from continuing operations

 

(34,554

)

15,898

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

(424

)

104

 

Income tax provision

 

85

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(509

)

104

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

(35,063

)

$

16,002

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.33

)

$

0.15

 

Income (loss) from discontinued operations

 

 

 

Net income (loss)

 

$

(0.33

)

$

0.15

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.33

)

$

0.15

 

Income (loss) from discontinued operations

 

 

 

Net income (loss)

 

$

(0.33

)

$

0.15

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

108,276

 

107,852

 

Diluted

 

108,276

 

108,409

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.7000

 

$

0.6875

 

 

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 (LOSS)

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Net income (loss)

 

$

(35,063

)

$

16,002

 

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

 

 

 

 

 

Unrealized appreciation (depreciation) on securities, net of income taxes of ($7.8) million at December 31, 2016 and $6.9 million at December 31, 2015

 

12,412

 

(11,010

)

Minimum pension liability adjustments, net of income taxes of ($0.2) million at December 31, 2016 and ($0.2) million at December 31, 2015

 

366

 

313

 

Other comprehensive income (loss)

 

12,778

 

(10,697

)

Comprehensive income (loss)

 

$

(22,285

)

$

5,305

 

 

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,

 

 

 

2016

 

2015

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(35,063

)

$

16,002

 

Adjustment for (income) loss from discontinued operations

 

509

 

(104

)

Income (loss) from continuing operations

 

(34,554

)

15,898

 

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

 

 

 

 

 

Depreciation

 

133,847

 

142,129

 

Amortization of debt discount and debt issuance costs

 

263

 

255

 

Provision for bad debt

 

2,350

 

6

 

Stock-based compensation

 

5,901

 

7,921

 

Other

 

10

 

233

 

Income from asset sales

 

(842

)

(4,589

)

Deferred income tax expense

 

(17,073

)

20,169

 

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

46,048

 

72,083

 

Inventories

 

(1,721

)

1,299

 

Prepaid expenses and other

 

7,288

 

(3,657

)

Accounts payable

 

15,883

 

(10,554

)

Accrued liabilities

 

(69,733

)

74,170

 

Deferred income taxes

 

(1,153

)

3,487

 

Other noncurrent liabilities

 

(15,827

)

(10,758

)

Net cash provided by operating activities from continuing operations

 

70,687

 

308,092

 

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

 

(19

)

104

 

Net cash provided by operating activities

 

70,668

 

308,196

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(82,127

)

(114,470

)

Purchase of short-term investments

 

(15,025

)

(6,918

)

Proceeds from sales of short-term investments

 

13,900

 

4,600

 

Proceeds from asset sales

 

1,209

 

6,058

 

Net cash used in investing activities

 

(82,043

)

(110,730

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Debt issuance costs

 

 

(32

)

Dividends paid

 

(76,176

)

(74,560

)

Exercise of stock options, net of tax withholding

 

9,827

 

(59

)

Tax withholdings related to net share settlements of restricted stock

 

(5,647

)

(3,617

)

Excess tax benefit from stock-based compensation

 

3,703

 

(352

)

Net cash used in financing activities

 

(68,293

)

(78,620

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(79,668

)

118,846

 

Cash and cash equivalents, beginning of period

 

905,561

 

729,384

 

Cash and cash equivalents, end of period

 

$

825,893

 

$

848,230

 

 

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, 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 (loss)

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2016

 

111,400

 

$

11,140

 

$

448,452

 

$

4,289,807

 

$

(204

)

3,322

 

$

(188,270

)

$

4,560,925

 

Net income (loss)

 

 

 

 

 

 

 

(35,063

)

 

 

 

 

 

 

(35,063

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

12,778

 

 

 

 

 

12,778

 

Dividends declared ($0.70 per share)

 

 

 

 

 

 

 

(76,509

)

 

 

 

 

 

 

(76,509

)

Exercise of stock options, net of tax withholding

 

335

 

34

 

13,161

 

 

 

 

 

49

 

(3,368

)

9,827

 

Tax benefit of stock-based awards

 

 

 

 

 

3,703

 

 

 

 

 

 

 

 

 

3,703

 

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

 

141

 

14

 

(7,358

)

 

 

 

 

(57

)

1,697

 

(5,647

)

Stock-based compensation

 

 

 

 

 

5,901

 

 

 

 

 

 

 

 

 

5,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

111,876

 

$

11,188

 

$

463,859

 

$

4,178,235

 

$

12,574

 

3,314

 

$

(189,941

)

$

4,475,915

 

 

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 2016 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 2016 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 months ended December 31, 2016, early termination revenue was approximately $13.5 million.  We had $28.9 million of early termination revenue for the three months ended December 31, 2015.

 

Depreciation in the Consolidated Condensed Statements of Operations includes abandonments of $0.8 million for the three months ended December 31, 2016 and $0.5 million for the three months ended December 31, 2015.

 

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 is an aggregate foreign currency loss of $1.4 million for the three months ended December 31, 2016.  For the three months ended December 31, 2015, we had aggregate foreign currency losses of $8.5 million, primarily due to the sharp devaluation of the Argentine peso in December 2015.

 

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 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.

 

8



Table of Contents

 

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.

 

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

 

 

 

Three Months Ended
December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Income (loss) from continuing operations

 

$

(34,554

)

$

15,898

 

Income (loss) from discontinued operations

 

(509

)

104

 

Net income

 

(35,063

)

16,002

 

Adjustment for basic earnings per share:

 

 

 

 

 

Earnings allocated to unvested shareholders

 

(446

)

(260

)

Numerator for basic earnings per share:

 

 

 

 

 

From continuing operations

 

(35,000

)

15,638

 

From discontinued operations

 

(509

)

104

 

 

 

(35,509

)

15,742

 

Adjustment for diluted earnings per share:

 

 

 

 

 

Effect of reallocating undistributed earnings of unvested shareholders

 

 

 

Numerator for diluted earnings per share:

 

 

 

 

 

From continuing operations

 

(35,000

)

15,638

 

From discontinued operations

 

(509

)

104

 

 

 

$

(35,509

)

$

15,742

 

Denominator:

 

 

 

 

 

Denominator for basic earnings per share — weighted-average shares

 

108,276

 

107,852

 

Effect of dilutive shares from stock options and restricted stock

 

 

557

 

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

 

108,276

 

108,409

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.33

)

$

0.15

 

Income (loss) from discontinued operations

 

 

 

Net income

 

$

(0.33

)

$

0.15

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.33

)

$

0.15

 

Income (loss) from discontinued operations

 

 

 

Net income

 

$

(0.33

)

$

0.15

 

 

We had a net loss for the three months ended December 31, 2016.  Accordingly, our diluted earnings per share calculation for the three months ended December 31, 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.

 

9



Table of Contents

 

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,

 

 

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

Shares excluded from calculation of diluted earnings per share

 

555

 

1,899

 

Weighted-average price per share

 

$

80.63

 

$

63.66

 

 

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, 2016

 

$

38,473

 

$

53,294

 

$

 

$

91,767

 

Equity securities September 30, 2016

 

$

38,473

 

$

33,051

 

$

 

$

71,524

 

 

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 $13.4 million at December 31, 2016 and September 30, 2016.  The assets are comprised of mutual funds that are measured using Level 1 inputs.

 

Short-term investments include securities classified as trading securities. Both realized and unrealized gains and losses on trading securities are included in other income (expense) in the Consolidated Statements of Operations. The securities are recorded at fair value.

 

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.

 

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At December 31, 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 December 31, 2016, Level 2 inputs include U.S. Agency issued debt securities and corporate bonds measured using broker quotations that utilize observable market inputs. Also included in level 2 inputs are bank certificate of deposits included in short-term investments or 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 December 31, 2016:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Recurring fair value measurements:

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

25,392

 

$

 

$

25,392

 

$

 

U.S. government and federal agency securities

 

19,871

 

15,883

 

3,988

 

 

Total short-term investments

 

45,263

 

15,883

 

29,380

 

 

Cash and cash equivalents

 

825,893

 

825,893

 

 

 

Investments

 

91,767

 

91,767

 

 

 

Other current assets

 

28,361

 

28,111

 

250

 

 

Other assets

 

2,000

 

2,000

 

 

 

Total assets measured at fair value

 

$

993,284

 

$

963,654

 

$

29,630

 

$

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements:

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale (1)

 

$

1,106

 

$

 

$

 

$

1,106

 

 


(1)   Represents the book value as of December 31, 2016 of decommissioned rigs and rig related equipment written down to their estimated recoverable amounts at December 31, 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 December 31, 2016 and September 30, 2016:

 

 

 

December 31,

 

September 30,

 

 

 

2016

 

2016

 

 

 

(in millions)

 

 

 

 

 

 

 

Carrying value of long-term fixed-rate debt

 

$

492.1

 

$

491.8

 

Fair value of long-term fixed-rate debt

 

$

513.1

 

$

529.6

 

 

The fair value for the $500 million fixed-rate debt was based on broker quotes at December 31, 2016.  The notes are classified within Level 2 as they are not actively traded in markets.

 

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 had no purchases of common shares in either the first quarter of fiscal 2017 or fiscal 2016.

 

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

 

 

 

December 31,

 

September 30,

 

 

 

2016

 

2016

 

 

 

(in thousands)

 

Pre-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

53,293

 

$

33,051

 

Unrecognized actuarial loss

 

(33,537

)

(34,112

)

 

 

$

19,756

 

$

(1,061

)

After-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

33,311

 

$

20,899

 

Unrecognized actuarial loss

 

(20,737

)

(21,103

)

 

 

$

12,574

 

$

(204

)

 

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, 2016:

 

 

 

Three Months Ended December 31, 2016

 

 

 

Unrealized

 

 

 

 

 

 

 

Appreciation
(Depreciation) on

 

Defined

 

 

 

 

 

Available-for-sale

 

Benefit

 

 

 

 

 

Securities

 

Pension Plan

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balances at September 30, 2016

 

$

20,899

 

$

(21,103

)

$

(204

)

Other comprehensive income before reclassifications

 

12,412

 

 

12,412

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

366

 

366

 

Net current-period other comprehensive income

 

12,412

 

366

 

12,778

 

Balances at December 31, 2016

 

$

33,311

 

$

(20,737

)

$

12,574

 

 

The following provides detail about accumulated other comprehensive income (loss) components which were reclassified to the Condensed Consolidated Statement of Operations:

 

 

 

Amount Reclassified from Accumulated

 

 

 

 

 

Other Comprehensive Income (Loss)

 

 

 

Details About Accumulated Other

 

Three Months Ended

 

Affected Line Item in the

 

Comprehensive Income

 

December 31,

 

Condensed Consolidated

 

(Loss) Components

 

2016

 

2015

 

Statement of Income

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Defined Benefit Pension

 

 

 

 

 

 

 

Amortization of net actuarial loss

 

$

575

 

$

493

 

General and administrative

 

 

 

(209

)

(180

)

Income tax provision

 

Total reclassifications for the period

 

$

366

 

$

313

 

Net of tax

 

 

6.              Cash Dividends

 

The $0.70 per share cash dividend declared September 8, 2016, was paid December 1, 2016.  On December 6, 2016, a cash dividend of $0.70 per share was declared for shareholders of record on February 13, 2017, payable March 1, 2017. The dividend payable is included in accounts payable in the Consolidated Condensed Balance Sheets.

 

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7.              Stock-Based Compensation

 

On March 2, 2016, the Helmerich & Payne, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) was approved by our stockholders. The 2016 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.  Awards outstanding in the Helmerich & Payne, Inc. 2005 Long-Term Incentive Plan (the “2005 Plan”) and the Helmerich & Payne, Inc. 2010 Long-Term Incentive Plan (the “2010 Plan”) remain subject to the terms and conditions of those plans. As of December 31, 2016, there were 323,775 non-qualified stock options and 263,362 shares of restricted stock awards granted under the 2016 Plan.

 

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Compensation expense

 

 

 

 

 

Stock options

 

$

1,652

 

$

3,550

 

Restricted stock

 

4,249

 

4,371

 

 

 

$

5,901

 

$

7,921

 

 

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, 2016 and 2015:

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Risk-free interest rate

 

2.0

%

1.8

%

Expected stock volatility

 

39.4

%

37.6

%

Dividend yield

 

3.4

%

4.6

%

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 upon historical experience of the daily closing price of our stock 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.

 

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A summary of stock option activity under all existing long-term incentive plans for the three months ended December 31, 2016 is presented in the following tables:

 

 

 

Three Months Ended December 31, 2016

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Term

 

Value

 

Options

 

(in thousands)

 

Price

 

(in years)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at October 1, 2016

 

3,312

 

$

51.74

 

 

 

 

 

Granted

 

324

 

81.31

 

 

 

 

 

Exercised

 

(335

)

39.40

 

 

 

 

 

Forfeited/Expired

 

(11

)

73.36

 

 

 

 

 

Outstanding at December 31, 2016

 

3,290

 

$

55.84

 

6.15

 

$

72.7

 

Vested and expected to vest at December 31, 2016

 

3,236

 

$

55.61

 

6.10

 

$

72.2

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2016

 

2,251

 

$

50.21

 

4.84

 

$

61.6

 

 

The weighted-average fair value of options granted in the first quarter of fiscal 2017 and 2016 was $22.42 and $13.12, respectively.

 

The total intrinsic value of options exercised during the three months ended December 31, 2016 and 2015 was $11.6 million and $3.1 million, respectively.

 

As of December 31, 2016, the unrecognized compensation cost related to stock options was $11.5 million which is expected to be recognized over a weighted-average period of 3.1 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 2016 Plan is determined based on the closing price of our shares on the grant date.  As of December 31, 2016, there was $34.4 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, 2016 and changes in restricted stock outstanding during the three months then ended is presented below:

 

 

 

Three Months Ended

 

 

 

December 31, 2016

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Restricted Stock Awards

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at October 1, 2016

 

648

 

$

64.24

 

Granted

 

263

 

81.31

 

Vested (1)

 

(270

)

63.79

 

Forfeited

 

(2

)

66.73

 

Unvested at December 31, 2016

 

639

 

$

71.46

 

 


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

 

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Principal

 

Unamortized Discount and

Debt Issuance Costs

 

 

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

 

 

2016

 

2016

 

2016

 

2016

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Unsecured senior notes issued March 19, 2015:

 

 

 

 

 

 

 

 

 

Due March 19, 2025

 

500,000

 

500,000

 

(7,890

)

(8,153

)

 

 

500,000

 

500,000

 

(7,890

)

(8,153

)

Less long-term debt due within one year

 

 

 

 

 

Long-term debt

 

$

500,000

 

$

500,000

 

$

(7,890

)

$

(8,153

)

 

 

 

 

 

 

 

 

 

 

 

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 interest method.

 

We have a $300 million unsecured revolving credit facility which will mature on July 13, 2021.  The credit 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 December 31, 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 including a limitation that priority debt (as defined in the agreement) may not exceed 17.5% of the net worth of the Company.  As of December 31, 2016, there were no borrowings, but there were four letters of credit outstanding in the amount of $40.3 million.  At December 31, 2016, we had $259.7 million available to borrow under our $300 million unsecured credit facility.

 

The applicable agreements for all unsecured debt contain additional terms, conditions and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.  At December 31, 2016, we were in compliance with all debt covenants.

 

9.              Income Taxes

 

Our effective tax rate for the first three months of fiscal 2017 and 2016 was 34.6 percent and 54.1 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, 2015 was also impacted by 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

 

Equipment, parts and supplies are ordered in advance to promote efficient construction and capital improvement progress.  At December 31, 2016, we had purchase commitments for equipment, parts and supplies of approximately $87.2 million.

 

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

 

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Table of Contents

 

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. (“HPIDC”) 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. and PDVSA Petroleo, S.A.  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, HPIDC, 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 HPIDC’s offshore platform rigs in the Gulf of Mexico.  We also engaged in discussions with the Inspector General’s office of the Department of Interior (“DOI”) regarding the same events that were the subject of the DOJ’s investigation.  Although we do not presently anticipate any further action by the DOI in this matter, we can provide no assurance as to the timing or eventual outcome of the DOI’s consideration of the matter.

 

On or about April 28, 2015, Joshua Keel (“Keel”), an employee of HPIDC, filed a petition in the 152nd Judicial Court for Harris County, Texas (Cause No. 2015-24531) against us, our customer and several subcontractors of our customer. The suit arose 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 alleged 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 sought damages well in excess of $100 million. Pursuant to the terms of the drilling contract between HPIDC and its customer, HPIDC indemnified most of the co-defendants in the lawsuit. On September 14, 2016, the parties in the Keel litigation entered into a global settlement agreement, which was approved by the court on October 14, 2016. The total settlement amount of $72 million, accrued at September 30, 2016, was paid by the Company and its insurers on behalf of all defendants, in December 2016, pursuant to industry standard contractual indemnification obligations.

 

11.       Segment Information

 

We operate principally in the contract drilling industry. The contract drilling operations consist mainly of contracting Company-owned drilling equipment primarily to large oil and gas exploration companies.  Our contract drilling business includes the following reportable operating segments: U.S. Land, Offshore and International Land.  Each reportable operating segment is a strategic business unit that is managed separately.  Our primary international areas of operation include Colombia, Ecuador, Argentina, 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.

 

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Table of Contents

 

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.

 

Summarized financial information of our reportable segments for the three months ended December 31, 2016 and 2015 is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

263,636

 

$

 

$

263,636

 

$

(30,888

)

Offshore

 

33,812

 

 

33,812

 

6,784

 

International Land

 

68,031

 

 

68,031

 

825

 

 

 

365,479

 

 

365,479

 

(23,279

)

Other

 

3,111

 

208

 

3,319

 

(2,049

)

 

 

368,590

 

208

 

368,798

 

(25,328

)

Eliminations

 

 

(208

)

(208

)

 

Total

 

$

368,590

 

$

 

$

368,590

 

$

(25,328

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

369,805

 

$

 

$

369,805

 

$

55,532

 

Offshore

 

41,880

 

 

41,880

 

7,722

 

International Land

 

72,194

 

 

72,194

 

(6,665

)

 

 

483,879

 

 

483,879

 

56,589

 

Other

 

3,968

 

219

 

4,187

 

(1,304

)

 

 

487,847

 

219

 

488,066

 

55,285

 

Eliminations

 

 

(219

)

(219

)

 

Total

 

$

487,847

 

$

 

$

487,847

 

$

55,285

 

 

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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 Operations:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

Segment operating income (loss)

 

$

(25,328

)

$

55,285

 

Income from asset sales

 

842

 

4,589

 

Corporate general and administrative costs and corporate depreciation

 

(24,678

)

(21,204

)

Operating income (loss)

 

(49,164

)

38,670

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest and dividend income

 

990

 

733

 

Interest expense

 

(5,055

)

(4,524

)

Other

 

387

 

(261

)

Total other income (expense)

 

(3,678

)

(4,052

)

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

$

(52,842

)

$

34,618

 

 

The following table presents total assets by reportable segment:

 

 

 

December 31,
2016

 

September 30,
2016

 

 

 

(in thousands)

 

 

 

 

 

Total assets

 

 

 

 

 

U.S. Land

 

$

4,933,281

 

$

5,005,299

 

Offshore

 

106,860

 

105,152

 

International Land

 

457,566

 

487,181

 

Other

 

36,408

 

36,141

 

 

 

5,534,115

 

5,633,773

 

Investments and corporate operations

 

1,143,471

 

1,198,182

 

Total assets from continued operations

 

6,677,586

 

6,831,955

 

Discontinued operations

 

51

 

64

 

 

 

$

6,677,637

 

$

6,832,019

 

 

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

Operating revenues

 

 

 

 

 

United States

 

$

300,559

 

$

409,506

 

Argentina

 

48,082

 

49,786

 

Colombia

 

9,371

 

6,743

 

Ecuador

 

1

 

3,940

 

Other foreign

 

10,577

 

17,872

 

Total

 

$

368,590

 

$

487,847

 

 

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12.       Pensions and Other Post-retirement Benefits

 

The following provides information at December 31, 2016 related to the Company-sponsored domestic defined benefit pension plan:

 

Components of Net Periodic Benefit Cost

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

Interest cost

 

$

975

 

$

1,116

 

Expected return on plan assets

 

(1,299

)

(1,490

)

Recognized net actuarial loss

 

575

 

493

 

Net pension expense

 

$

251

 

$

119

 

 

Employer Contributions

 

We did not contribute to the Pension Plan during the three months ended December 31, 2016.  We could make contributions for the remainder of fiscal 2017 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:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

Capital expenditures incurred

 

$

92,141

 

$

111,325

 

Additions incurred prior year but paid for in current period

 

9,465

 

25,344

 

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

 

(19,479

)

(22,199

)

Capital expenditures per Consolidated Condensed Statements of Cash Flows

 

$

82,127

 

$

114,470

 

 

14.       International Risk Factors

 

We currently have foreign operations in South America, the Middle East and Africa.  In the future, we may further expand the geographic reach of our operations.  As a result, we are exposed to certain political, economic and other uncertainties not encountered in U.S. operations, including increased risks of social unrest, strikes, terrorism, war, kidnapping of employees, nationalization, forced negotiation or modification of contracts, difficulty resolving disputes and enforcing contract provisions, expropriation of equipment as well as expropriation of oil and gas exploration and drilling rights, taxation policies, foreign exchange restrictions and restrictions on repatriation of income and capital, currency rate fluctuations, increased governmental ownership and regulation of the economy and industry in the markets in which we operate, economic and financial instability of national oil companies, and restrictive governmental regulation, bureaucratic delays and general hazards associated with foreign sovereignty over certain areas in which operations are conducted.

 

South American countries, in particular, have historically experienced uneven periods of economic growth, as well as recession, periods of high inflation and general economic and political instability.  From time to time these risks have impacted our business.  For example, on June 30, 2010, the Venezuelan government expropriated 11 rigs and associated real and personal property owned by our Venezuelan subsidiary.  Prior thereto, we also experienced currency devaluation losses in Venezuela and difficulty repatriating U.S. dollars to the United States.  Today, our contracts for work in foreign countries generally provide for payment in U.S. dollars.  However, in Argentina we are paid in Argentine pesos.  The Argentine branch of one of our second-tier subsidiaries then remits U.S. dollars to its U.S. parent by converting the Argentine pesos into U.S. dollars through the Argentine Foreign Exchange Market and repatriating the U.S. dollars.

 

In December 2015, the Argentine peso experienced a sharp devaluation resulting in an aggregate foreign currency loss of $8.5 million for the three months ended December 31, 2015.  Subsequent to the sharp devaluation, the Argentine peso significantly

 

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stabilized and the Argentine Foreign Exchange Market controls now place fewer restrictions on repatriating U.S. dollars.  For the three months ended December 31, 2016, we experienced aggregate foreign currency losses of $1.4 million. However, in the future, other contracts or applicable law may require payments to be made in foreign currencies.  As such, there can be no assurance that we will not experience in Argentina or elsewhere a devaluation of foreign currency, foreign exchange restrictions or other difficulties repatriating U.S. dollars even if we are able to negotiate contract provisions designed to mitigate such risks.  In the event of future payments in foreign currencies and an inability to timely exchange foreign currencies for U.S. dollars, we may incur currency devaluation losses which could have a material adverse impact on our business, financial condition and results of operations.

 

Because of the impact of local laws, our future operations in certain areas may be conducted through entities in which local citizens own interests and through entities (including joint ventures) in which we hold only a minority interest or pursuant to arrangements under which we conduct operations under contract to local entities. While we believe that neither operating through such entities nor pursuant to such arrangements would have a material adverse effect on our operations or revenues, there can be no assurance that we will in all cases be able to structure or restructure our operations to conform to local law (or the administration thereof) on terms acceptable to us.

 

Although we attempt to minimize the potential impact of such risks by operating in more than one geographical area, during the three months ended December 31, 2016, approximately 18.5 percent of our consolidated operating revenues were generated from international locations in our contract drilling business.  During the three months ended December 31, 2016, approximately 84.5 percent of operating revenues from international locations were from operations in South America.  Substantially all of the South American operating revenues were from Argentina and Colombia.  The future occurrence of one or more international events arising from the types of risks described above could have a material adverse impact on our business, financial condition and results of operations.

 

15.       Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually all existing revenue recognition guidance.  In May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This additional guidance does not change the core principle of the revenue recognition guidance issued by the FASB in May 2014.  Rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The ASU provides for full retrospective, modified retrospective, or use of the cumulative effect method during the period of adoption.  We have not yet determined which adoption method we will employ.  In July 2015, the FASB extended the effective date of this standard to interim and annual periods beginning on or after December 15, 2017. We are currently evaluating the potential effects of the adoption of this update on our financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The guidance provides principles and definitions for management that are intended to reduce diversity in the timing and content of disclosures provided in footnotes.  Under the standard, management is required to evaluate for each annual and interim reporting period whether it is probable that the entity will not be able to meet its obligations as they become due within one year after the date that financial statements are issued (or are available to be issued, where applicable).  The standard is effective for annual periods ending after December 15, 2016. We do not expect the adoption of this standard to have an impact on the Consolidated Condensed Financial Statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with the lower of cost or net realizable value test. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard should be applied prospectively and is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted.  We do not expect the adoption of this standard to have a material impact on our financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The standard requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income.  The provisions of ASU No. 2016-01 are effective for interim and annual periods starting after December 15, 2017.  At adoption, a cumulative-effect adjustment to beginning retained earnings will be recorded.  We will adopt this standard on October 1, 2018.  Subsequent to adoption, changes in the fair value of our available-for-sale investments will be recognized in net income and the effect will be subject to stock market fluctuations.

 

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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 will require organizations that lease assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU No. 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. For public entities, ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU No. 2016-02 mandates a modified retrospective transition method. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires companies to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This standard is effective for interim and annual periods beginning after December 15, 2019. We are currently assessing the impact this standard will have on our consolidated financial statements and disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The ASU is intended to reduce diversity in practice in presentation and classification of certain cash receipts and cash payments by providing guidance on eight specific cash flow issues. The ASU is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted, including adoption during an interim period. We are currently assessing the impact this standard will have on our consolidated statement of cash flows.

 

16.       Guarantor and Non-Guarantor Financial Information

 

In March 2015, Helmerich & Payne International Drilling Co. (“the issuer”), a 100 percent owned subsidiary of Helmerich & Payne, Inc. (“parent”, “the guarantor”), issued senior unsecured notes with an aggregate principal amount of $500.0 million.  The notes are fully and unconditionally guaranteed by the parent. No subsidiaries of parent currently guarantee the notes, subject to certain provisions that if any subsidiary guarantees certain other debt of the issuer or parent, then such subsidiary will provide a guarantee of the obligations under the notes.

 

In connection with the notes, we are providing the following condensed consolidating financial information in accordance with the Securities and Exchange Commission disclosure requirements. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements. Condensed consolidating financial information for the issuer, Helmerich & Payne International Drilling Co., and parent, guarantor, Helmerich & Payne, Inc. is shown in the tables below.

 

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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands)

 

 

 

Three Months Ended December 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

 

$

297,448

 

$

71,159

 

$

(17

)

$

368,590

 

Operating costs and other

 

3,460

 

339,502

 

75,023

 

(231

)

417,754

 

Operating income (loss) from continuing operations

 

(3,460

)

(42,054

)

(3,864

)

214

 

(49,164

)

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

1,019

 

572

 

(214

)

1,377

 

Interest expense

 

(86

)

(4,709

)

(260

)

 

(5,055

)

Equity in net income (loss) of subsidiaries

 

(32,992

)

329

 

 

32,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(36,538

)

(45,415

)

(3,552

)

32,663

 

(52,842

)

Income tax provision

 

(1,475

)

(12,550

)

(4,263

)

 

(18,288

)

Income (loss) from continuing operations

 

(35,063

)

(32,865

)

711

 

32,663

 

(34,554

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

 

 

(424

)

 

(424

)

Income tax provision

 

 

 

85

 

 

85

 

Loss from discontinued operations

 

 

 

(509

)

 

(509

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(35,063

)

$

(32,865

)

$

202

 

$

32,663

 

$

(35,063

)

 

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CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

 

 

Three Months Ended December 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non- Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(35,063

)

$

(32,865

)

$

202

 

$

32,663

 

$

(35,063

)

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

 

 

 

 

 

 

 

 

 

 

 

Unrealized (appreciation) depreciation on securities, net

 

 

12,412

 

 

 

12,412

 

Minimum pension liability adjustments, net

 

106

 

260

 

 

 

366

 

Other comprehensive income (loss)

 

106

 

12,672

 

 

 

12,778

 

Comprehensive income (loss)

 

$

(34,957

)

$

(20,193

)

$

202

 

$

32,663

 

$

(22,285

)

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands)

 

 

 

Three Months Ended December 31, 2015

 

 

 

Guarantor/

 

Issuer

 

Non- Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

 

$

405,537

 

$

82,327

 

$

(17

)

$

487,847

 

Operating costs and other

 

2,705

 

356,751

 

90,122

 

(401

)

449,177

 

Operating income (loss) from continuing operations

 

(2,705

)

48,786

 

(7,795

)

384

 

38,670

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

20

 

656

 

180

 

(384

)

472

 

Interest expense

 

(62

)

(4,718

)

256

 

 

(4,524

)

Equity in net income (loss) of subsidiaries

 

17,549

 

(8,197

)

 

(9,352

)

 

Income (loss) from continuing operations before income taxes

 

14,802

 

36,527

 

(7,359

)

(9,352

)

34,618

 

Income tax provision

 

(1,200

)

19,227

 

693

 

 

18,720

 

Income (loss) from continuing operations

 

16,002

 

17,300

 

(8,052

)

(9,352

)

15,898