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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For quarterly period ended:  March 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 April 30, 2016

Common Stock, $0.10 par value

 

108,039,174

 

 

 



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 March 31, 2016 and September 30, 2015

3

 

 

 

 

Consolidated Condensed Statements of Income for the Three and Six Months Ended March 31, 2016 and 2015

4

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2016 and 2015

5

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 2016 and 2015

6

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Six Months Ended March 31, 2016

7

 

 

 

 

Notes to Consolidated Condensed Financial Statements

8-31

 

 

 

Item 2.

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

32-40

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

 

 

 

Item 4.

Controls and Procedures

41

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

42-44

 

 

 

Item 6.

Exhibits

45

 

 

 

Signatures

 

46

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

 

 

September 30,

 

 

 

March 31,
2016

 

2015
(as adjusted)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

898,013

 

$

729,384

 

Short-term investments

 

45,526

 

45,543

 

Accounts receivable, less reserve of $5,148 at March 31, 2016 and $6,181 at September 30, 2015

 

330,726

 

445,948

 

Inventories

 

129,649

 

128,541

 

Deferred income taxes

 

 

17,206

 

Prepaid expenses and other

 

56,233

 

64,475

 

Current assets of discontinued operations

 

230

 

8,097

 

Total current assets

 

1,460,377

 

1,439,194

 

 

 

 

 

 

 

Investments

 

83,363

 

104,354

 

Property, plant and equipment, net

 

5,446,352

 

5,563,170

 

Other assets

 

35,013

 

40,524

 

 

 

 

 

 

 

Total assets

 

$

7,025,105

 

$

7,147,242

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

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

 

$

39,144

 

$

39,094

 

Accounts payable

 

91,437

 

108,169

 

Accrued liabilities

 

240,665

 

197,557

 

Current liabilities of discontinued operations

 

82

 

3,377

 

Total current liabilities

 

371,328

 

348,197

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt less unamortized discount and debt issuance costs

 

492,919

 

492,443

 

Deferred income taxes

 

1,278,664

 

1,295,916

 

Other

 

95,984

 

110,120

 

Noncurrent liabilities of discontinued operations

 

4,110

 

4,720

 

Total noncurrent liabilities

 

1,871,677

 

1,903,199

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.10 par value, 160,000,000 shares authorized, 111,356,865 shares and 110,987,546 shares issued as of March 31, 2016 and September 30, 2015, respectively and 108,039,174 shares and 107,767,915 shares outstanding as of March 31, 2016 and September 30, 2015, respectively

 

11,136

 

11,099

 

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

 

 

 

Additional paid-in capital

 

436,117

 

420,141

 

Retained earnings

 

4,536,047

 

4,648,346

 

Accumulated other comprehensive loss

 

(13,214

)

(1,377

)

Treasury stock, at cost

 

(187,986

)

(182,363

)

Total shareholders’ equity

 

4,782,100

 

4,895,846

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

7,025,105

 

$

7,147,242

 

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015
(as adjusted)

 

2016

 

2015
(as adjusted)

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Drilling — U.S. Land

 

$

349,283

 

$

718,463

 

$

719,088

 

$

1,608,510

 

Drilling — Offshore

 

34,325

 

62,428

 

76,205

 

132,315

 

Drilling — International Land

 

51,352

 

101,038

 

123,546

 

197,711

 

Other

 

3,231

 

3,741

 

7,199

 

7,921

 

 

 

438,191

 

885,670

 

926,038

 

1,946,457

 

 

 

 

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

 

 

 

 

Operating costs, excluding depreciation

 

221,611

 

467,099

 

498,255

 

1,026,562

 

Depreciation

 

141,517

 

150,248

 

283,646

 

288,480

 

General and administrative

 

33,811

 

34,995

 

65,885

 

67,731

 

Research and development

 

2,315

 

4,857

 

5,234

 

9,015

 

Income from asset sales

 

(2,684

)

(2,855

)

(7,273

)

(7,028

)

 

 

396,570

 

654,344

 

845,747

 

1,384,760

 

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations

 

41,621

 

231,326

 

80,291

 

561,697

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

799

 

2,564

 

1,532

 

2,859

 

Interest expense

 

(5,721

)

(2,600

)

(10,245

)

(3,190

)

Other

 

653

 

55

 

392

 

369

 

 

 

(4,269

)

19

 

(8,321

)

38

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

37,352

 

231,345

 

71,970

 

561,735

 

Income tax provision

 

12,178

 

77,803

 

30,898

 

204,570

 

Income from continuing operations

 

25,174

 

153,542

 

41,072

 

357,165

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

(56

)

(76

)

48

 

(91

)

Income tax provision

 

3,913

 

(77

)

3,913

 

(77

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(3,969

)

1

 

(3,865

)

(14

)

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

21,205

 

$

153,543

 

$

37,207

 

$

357,151

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.23

 

$

1.42

 

$

0.38

 

$

3.29

 

Loss from discontinued operations

 

(0.04

)

 

(0.04

)

 

Net income

 

$

0.19

 

$

1.42

 

$

0.34

 

$

3.29

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.23

 

$

1.41

 

$

0.37

 

$

3.27

 

Loss from discontinued operations

 

(0.04

)

 

(0.04

)

 

Net income

 

$

0.19

 

$

1.41

 

$

0.33

 

$

3.27

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

108,014

 

107,646

 

107,933

 

107,812

 

Diluted

 

108,466

 

108,370

 

108,430

 

108,620

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.6875

 

$

0.6875

 

$

1.3750

 

$

1.3750

 

 

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

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015
(as adjusted)

 

2016

 

2015
(as adjusted)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

21,205

 

$

153,543

 

$

37,207

 

$

357,151

 

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

 

 

 

 

 

 

 

 

 

Unrealized depreciation on securities, net of income taxes of ($0.9) million and ($7.9) million at March 31, 2016 and ($0.8) million and ($27.4) million at March 31, 2015

 

(1,453

)

(1,203

)

(12,463

)

(43,447

)

Minimum pension liability adjustments, net of income taxes of $0.2 million and $0.4 million at March 31, 2016 and $0.1 million and $0.2 million at March 31, 2015

 

313

 

197

 

626

 

393

 

Other comprehensive loss

 

(1,140

)

(1,006

)

(11,837

)

(43,054

)

Comprehensive income

 

$

20,065

 

$

152,537

 

$

25,370

 

$

314,097

 

 

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)

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2016

 

2015
(as adjusted)

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

37,207

 

$

357,151

 

Adjustment for loss from discontinued operations

 

3,865

 

14

 

Income from continuing operations

 

41,072

 

357,165

 

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

 

 

 

 

 

Depreciation

 

283,646

 

288,480

 

Amortization of debt discount and debt issuance costs

 

558

 

187

 

Stock-based compensation

 

13,987

 

13,079

 

Pension settlement charge

 

1,454

 

 

Other

 

105

 

33

 

Income from asset sales

 

(7,273

)

(7,028

)

Deferred income tax expense

 

4,877

 

133,678

 

Change in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

115,222

 

71,881

 

Inventories

 

(1,108

)

(18,409

)

Prepaid expenses and other

 

13,753

 

(12,631

)

Accounts payable

 

(13,574

)

3,259

 

Accrued liabilities

 

51,059

 

(47,620

)

Deferred income taxes

 

2,580

 

20

 

Other noncurrent liabilities

 

(13,939

)

34,488

 

Net cash provided by operating activities from continuing operations

 

492,419

 

816,582

 

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

 

98

 

(14

)

Net cash provided by operating activities

 

492,517

 

816,568

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(180,481

)

(766,029

)

Purchase of short-term investments

 

(21,869

)

 

Proceeds from sales of short-term investments

 

21,676

 

 

Proceeds from asset sales

 

9,715

 

15,155

 

Net cash used in investing activities

 

(170,959

)

(750,874

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from senior notes, net of discount

 

 

497,125

 

Debt issuance costs

 

(32

)

(4,334

)

Net increase in bank overdraft

 

 

12,560

 

Proceeds on short-term debt

 

 

1,002

 

Payments on short-term debt

 

 

(1,002

)

Dividends paid

 

(149,300

)

(149,347

)

Repurchase of common stock

 

 

(59,654

)

Exercise of stock options, net of tax withholding

 

(199

)

(1,079

)

Tax withholdings related to net share settlements of restricted stock

 

(3,617

)

(4,248

)

Excess tax benefit from stock-based compensation

 

219

 

2,761

 

Net cash provided by (used in) financing activities

 

(152,929

)

293,784

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

168,629

 

359,478

 

Cash and cash equivalents, beginning of period

 

729,384

 

360,307

 

Cash and cash equivalents, end of period

 

$

898,013

 

$

719,785

 

 

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

SIX MONTHS ENDED MARCH 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

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2015, as adjusted

 

110,987

 

$

11,099

 

$

420,141

 

$

4,648,346

 

$

(1,377

)

3,220

 

$

(182,363

)

$

4,895,846

 

Net income

 

 

 

 

 

 

 

37,207

 

 

 

 

 

 

 

37,207

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(11,837

)

 

 

 

 

(11,837

)

Dividends declared ($1.375 per share)

 

 

 

 

 

 

 

(149,506

)

 

 

 

 

 

 

(149,506

)

Exercise of stock options, net of tax withholding

 

179

 

18

 

5,583

 

 

 

 

 

97

 

(5,800

)

(199

)

Tax benefit of stock-based awards

 

 

 

 

 

219

 

 

 

 

 

 

 

 

 

219

 

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

 

190

 

19

 

(3,813

)

 

 

 

 

1

 

177

 

(3,617

)

Stock-based compensation

 

 

 

 

 

13,987

 

 

 

 

 

 

 

 

 

13,987

 

Balance, March 31, 2016

 

111,356

 

$

11,136

 

$

436,117

 

$

4,536,047

 

$

(13,214

)

3,318

 

$

(187,986

)

$

4,782,100

 

 

The accompanying notes are an integral part of these statements.

 

7



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Basis of Presentation

 

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

 

The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information.  Accordingly, these interim financial statements do not include all information or footnote disclosures required by GAAP for complete financial statements and, therefore, should be read in conjunction with the Consolidated Financial Statements and notes thereto in our 2015 Annual Report on Form 10-K and other current filings with the Commission.  In the opinion of management all adjustments, consisting of those of a normal recurring nature, necessary to present fairly the results of the periods presented have been included.  The results of operations for the interim periods presented may not necessarily be indicative of the results to be expected for the full year.

 

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

 

Starting October 1, 2015, the reporting year-end of these foreign operations was changed from August 31 to September 30.  The previously existing one-month reporting lag was eliminated as it is no longer required to achieve a timely consolidation due to our investments in technology, ERP systems and personnel to enhance our financial statement close process.  We believe this change is preferable because the financial information of all operating segments is now reported based on the same period-end, which improves overall financial reporting to investors by providing the most current information available.  In accordance with Accounting Standards Codification (“ASC) 810-10-50-2, “A Change in the Difference Between Parent and Subsidiary Fiscal Year-Ends,” the elimination of this previously existing reporting lag is considered a voluntary change in accounting principle in accordance with ASC 250-10-50 “Change in Accounting Principle.”   Voluntary changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented.  Accordingly, our financial statements for periods prior to fiscal 2016 have been changed to reflect the period-specific effects of applying this accounting principle.  This change resulted in a cumulative effect of an accounting change of $1.6 million, net of income tax effect, to retained earnings as of October 1, 2015.  Net income from continuing operations for the second quarter of fiscal 2016 would have been approximately $6.3 million lower absent the accounting change primarily due to the recognition of approximately $6.1 million currency devaluation losses that were recognized in the quarter ending December 31, 2015, as opposed to the second quarter of fiscal 2016, as a result of the elimination of the one month lag.  Net income from continuing operations for the six months ended March 31, 2016 would have been approximately $0.9 million lower absent the accounting change.  Net loss from discontinued operations would have been approximately $4.0 million less in the three and six months ended March 31, 2016 absent the accounting change due to a currency devaluation recognized in the quarter ending March 31, 2016, as opposed to the third quarter of fiscal 2016.

 

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

 

 

 

 

 

 

 

After Voluntary

 

 

 

 

 

 

 

Change in

 

 

 

 

 

 

 

Accounting

 

 

 

As Reported

 

Adjustments

 

Principle

 

 

 

Three Months Ended March 31, 2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

883,052

 

$

2,618

 

$

885,670

 

Operating costs, excluding depreciation

 

469,328

 

(2,229

)

467,099

 

Net income

 

149,537

 

4,006

 

153,543

 

Diluted earnings per common share

 

1.37

 

0.04

 

1.41

 

 

8



Table of Contents

 

 

 

Six Months Ended March 31, 2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

1,939,637

 

$

(6,820

)

$

1,946,457

 

Operating costs, excluding depreciation

 

1,023,571

 

(2,991

)

1,026,562

 

Net income

 

352,579

 

4,572

 

357,151

 

Diluted earnings per common share

 

3.23

 

0.04

 

3.27

 

 

 

 

September 30, 2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,152,012

 

$

(4,770

)

$

7,147,242

 

Total liabilities

 

2,254,560

 

(3,164

)

2,251,396

 

Total shareholders’ equity

 

4,897,452

 

(1,606

)

4,895,846

 

 

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

 

As more fully described in our 2015 Annual Report on Form 10-K, our contract drilling revenues are comprised of daywork drilling contracts for which the related revenues and expenses are recognized as services are performed.  For contracts that are terminated by customers prior to the expirations of their fixed terms, contractual provisions customarily require early termination amounts to be paid to us. Revenues from early terminated contracts are recognized when all contractual requirements have been met.  During the three and six months ended March 31, 2016, early termination revenue was approximately $79.6 million and $108.4 million, respectively.  We had $72.4 million and $95.8 million, respectively, of early termination revenue for the three and six months ended March 31, 2015.

 

Depreciation in the Consolidated Condensed Statements of Income includes abandonments of $0.3 million and $0.8 million for the three and six months ended March 31, 2016 compared to $10.1 million and $12.3 million for the three and six months ended March 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 are aggregate foreign currency gains of $0.2 million and losses of $8.3 million, respectively, for the three and six months ended March 31, 2016.  The losses are primarily the result of a sharp devaluation of the Argentine peso in December 2015.  For the three and six months ended March 31, 2015, we had aggregate currency gains of $0.3 million and $1.7 million, respectively.

 

2.              Discontinued Operations

 

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

 

In March 2016, the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system.  The implementation of this system resulted in a reported loss from discontinued operations of $4.0 million in the second fiscal quarter of 2016, all of which corresponds to the Company’s former operations in Venezuela.

 

3.     Earnings per Share

 

ASC 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share.  We have granted and expect to continue to grant to employees restricted stock grants that contain non-forfeitable rights to dividends.  Such grants are

 

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Table of Contents

 

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.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015
(as adjusted)

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

25,174

 

$

153,542

 

$

41,072

 

$

357,165

 

Income (loss) from discontinued operations

 

(3,969

)

1

 

(3,865

)

(14

)

Net income

 

21,205

 

153,543

 

37,207

 

357,151

 

Adjustment for basic earnings per share:

 

 

 

 

 

 

 

 

 

Earnings allocated to unvested shareholders

 

(483

)

(974

)

(940

)

(2,241

)

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

24,691

 

152,568

 

40,132

 

354,924

 

From discontinued operations

 

(3,969

)

1

 

(3,865

)

(14

)

 

 

 

 

 

 

 

 

 

 

Adjustment for diluted earnings per share:

 

20,722

 

152,569

 

36,267

 

354,910

 

Effect of reallocating undistributed earnings of unvested shareholders

 

 

3

 

 

10

 

Numerator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

24,691

 

152,571

 

40,132

 

354,934

 

From discontinued operations

 

(3,969

)

1

 

(3,865

)

(14

)

 

 

$

20,722

 

$

152,572

 

$

36,267

 

$

354,920

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share — weighted-average shares

 

108,014

 

107,646

 

107,933

 

107,812

 

Effect of dilutive shares from stock options and restricted stock

 

452

 

724

 

497

 

808

 

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

 

108,466

 

108,370

 

108,430

 

108,620

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.23

 

$

1.42

 

$

0.38

 

$

3.29

 

Loss from discontinued operations

 

(0.04

)

 

(0.04

)

 

Net income

 

$

0.19

 

$

1.42

 

$

0.34

 

$

3.29

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.23

 

$

1.41

 

$

0.37

 

$

3.27

 

Loss from discontinued operations

 

(0.04

)

 

(0.04

)

 

Net income

 

$

0.19

 

$

1.41

 

$

0.33

 

$

3.27

 

 

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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

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Shares excluded from calculation of diluted earnings per share

 

2,211

 

667

 

2,211

 

667

 

Weighted-average price per share

 

$

62.29

 

$

72.85

 

$

62.29

 

$

72.85

 

 

4.     Financial Instruments and Fair Value Measurement

 

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

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Equity securities March 31, 2016

 

$

64,462

 

$

30,765

 

$

24,069

 

$

71,158

 

Equity securities September 30, 2015

 

$

64,462

 

$

28,530

 

$

1,509

 

$

91,483

 

 

On an ongoing basis we evaluate the marketable equity securities to determine if any decline in fair value below cost is other-than-temporary.  If a decline in fair value below cost is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis established.  We review several factors to determine whether a loss is other-than-temporary.  These factors include, but are not limited to, (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near-term prospects of the issuer and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities used in determining realized gains and losses is based on the average cost basis of the security sold.  One of our securities was in an unrealized loss position for under 30 days at September 30, 2015 and then dropped below cost again in December 2015 and continued to be in a loss position through May 2, 2016.  The security is in the international offshore drilling industry which is cyclical and has been impacted by the downturn in the energy sector.  Considering the factors above including the limited time that the security was in an unrealized position and based on our ability and intent to hold these investments until the fair value recovers, impairment was not considered other-than-temporary at March 31, 2016.

 

The assets held in the Non-qualified Supplemental Savings Plan are carried at fair value which totaled $12.2 million at March 31, 2016 and $12.9 million at September 30, 2015.  The assets are comprised of mutual funds that are measured using Level 1 inputs.

 

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

 

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.  We use the fair value hierarchy established in ASC 820-10 to measure fair value to prioritize the inputs:

 

·                  Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

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

 

·                  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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Table of Contents

 

At March 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 March 31, 2016, 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.

 

The following table summarizes our assets measured at fair value on a recurring basis presented in our Consolidated Condensed Balance Sheet as of March 31, 2016:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

18,427

 

$

 

$

18,427

 

$

 

U.S. government and federal agency securities

 

27,099

 

16,661

 

10,438

 

 

Total short-term investments

 

45,526

 

16,661

 

28,865

 

 

Cash and cash equivalents

 

898,013

 

898,013

 

 

 

 

Investments

 

71,158

 

71,158

 

 

 

Other current assets

 

28,912

 

28,662

 

250

 

 

Other assets

 

2,000

 

2,000

 

 

 

Total assets measured at fair value

 

$

1,045,609

 

$

1,016,494

 

$

29,115

 

$

 

 

The following information presents the supplemental fair value information about long-term fixed-rate debt at March 31, 2016 and September 30, 2015:

 

 

 

March 31,

 

September 30,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

 

 

 

 

 

 

Carrying value of long-term fixed-rate debt

 

$

532.1

 

$

531.5

 

Fair value of long-term fixed-rate debt

 

$

533.2

 

$

553.5

 

 

The fair value at March 31, 2016 for the $40 million fixed-rate debt was estimated using discounted cash flows at rates reflecting current interest rates at similar maturities plus a credit spread which was estimated using the outstanding market information on debt instruments with a similar credit profile to us.  The debt was valued using a Level 2 input.

 

The fair value for the $500 million fixed-rate debt was based on broker quotes at March 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 have had no purchases of common shares in fiscal 2016.  During the six months ended March 31, 2015, we purchased 810,097 common shares at an aggregate cost of $59.7 million, which are held as treasury shares.

 

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Table of Contents

 

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

 

 

 

March 31,

 

September 30,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Pre-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

6,696

 

$

27,021

 

Unrecognized actuarial loss

 

(29,158

)

(30,144

)

 

 

$

(22,462

)

$

(3,123

)

After-tax amounts:

 

 

 

 

 

Unrealized appreciation on securities

 

$

4,738

 

$

17,201

 

Unrecognized actuarial loss

 

(17,952

)

(18,578

)

 

 

$

(13,214

)

$

(1,377

)

 

The following is a summary of the changes in accumulated other comprehensive income (loss), net of tax, by component for the three and six months ended March 31, 2016:

 

 

 

Three Months Ended March 31, 2016

 

 

 

Unrealized

 

 

 

 

 

 

 

Appreciation 
(Depreciation) on

 

Defined

 

 

 

 

 

Available-for-sale

 

Benefit

 

 

 

 

 

Securities

 

Pension Plan

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balances at January 1, 2016

 

$

6,191

 

$

(18,265

)

$

(12,074

)

Other comprehensive loss before reclassifications

 

(1,453

)

 

(1,453

)

Amounts reclassified from accumulated other comprehensive income

 

 

313

 

313

 

Net current-period other comprehensive income (loss)

 

(1,453

)

313

 

(1,140

)

Balances at March 31, 2016

 

$

4,738

 

$

(17,952

)

$

(13,214

)

 

 

 

Six Months Ended March 31, 2016

 

 

 

Unrealized

 

 

 

 

 

 

 

Appreciation 
(Depreciation) on

 

Defined

 

 

 

 

 

Available-for-sale

 

Benefit

 

 

 

 

 

Securities

 

Pension Plan

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Balances at October 1, 2015

 

$

17,201

 

$

(18,578

)

$

(1,377

)

Other comprehensive loss before reclassifications

 

(12,463

)

 

(12,463

)

Amounts reclassified from accumulated other comprehensive income

 

 

626

 

626

 

Net current-period other comprehensive income (loss)

 

(12,463

)

626

 

(11,837

)

Balances at March 31, 2016

 

$

4,738

 

$

(17,952

)

$

(13,214

)

 

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Table of Contents

 

The following provides detail about accumulated other comprehensive income (loss) components which were reclassified to the Condensed Consolidated Statement of Income during the three and six months ended March 31, 2016:

 

 

 

Amount Reclassified from Accumulated
Other Comprehensive Income (Loss)

 

 

 

Details About Accumulated Other
Comprehensive Income

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

Affected Line Item in the
Condensed Consolidated

 

(Loss) Components

 

2016

 

2015

 

2016

 

2015

 

Statement of Income

 

 

 

(in thousands)

 

(in thousands)

 

 

 

Defined Benefit Pension Items

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss

 

$

(493

)

$

(309

)

$

(986

)

$

(618

)

General and administrative

 

 

 

180

 

112

 

360

 

225

 

Income tax provision

 

Total reclassifications for the period

 

$

(313

)

$

(197

)

$

(626

)

$

(393

)

Net of tax

 

 

6.              Cash Dividends

 

The $0.6875 per share cash dividend declared December 1, 2015, was paid March 1, 2016.  On March 2, 2016, a cash dividend of $0.6875 per share was declared for shareholders of record on May 13, 2016, payable June 1, 2016. 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 and restricted stock awards to selected employees and to non-employee Directors.  Restricted stock may be granted for no consideration other than prior and future services.  The purchase price per share for stock options may not be less than market price of the underlying stock on the date of grant.  Stock options expire 10 years after the grant date.  There were 876,379 non-qualified stock options and 294,575 shares of restricted stock awards granted in the six months ended March 31, 2016.  Awards outstanding in the 2005 Long-Term Incentive Plan (the “2005 Plan”) remain subject to the terms and conditions of that plan.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

(in thousands)

 

Compensation expense

 

 

 

 

 

 

 

 

 

Stock options

 

$

1,776

 

$

1,908

 

$

5,326

 

$

4,970

 

Restricted stock

 

4,290

 

4,189

 

8,661

 

8,109

 

 

 

$

6,066

 

$

6,097

 

$

13,987

 

$

13,079

 

 

STOCK OPTIONS

 

The following summarizes the weighted-average assumptions utilized in determining the fair value of options granted during the six months ended March 31, 2016 and 2015:

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Risk-free interest rate

 

1.8

%

1.7

%

Expected stock volatility

 

37.6

%

36.9

%

Dividend yield

 

4.6

%

3.9

%

Expected term (in years)

 

5.5

 

5.5

 

 

Risk-Free Interest Rate.  The risk-free interest rate is based on U.S. Treasury securities for the expected term of the option.

 

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Table of Contents

 

Expected Volatility Rate.  Expected volatility is based on the daily closing price of our stock based upon historical experience over a period which approximates the expected term of the option.

 

Expected Dividend Yield.  The expected dividend yield is based on our current dividend yield.

 

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

 

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

 

 

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Term

 

Value

 

Options

 

(in thousands)

 

Price

 

(in years)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2016

 

3,531

 

$

51.51

 

 

 

 

 

Granted

 

 

58.25

 

 

 

 

 

Exercised

 

(61

)

30.94

 

 

 

 

 

Forfeited/Expired

 

(14

)

58.25

 

 

 

 

 

Outstanding at March 31, 2016

 

3,456

 

$

51.85

 

6.2

 

$

31.6

 

Vested and expected to vest at March 31, 2016

 

3,411

 

$

51.74

 

6.2

 

$

31.6

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2016

 

2,270

 

$

46.46

 

4.7

 

$

31.6

 

 

 

 

Six Months Ended
March 31, 2016

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Exercise

 

Options

 

(in thousands)

 

Price

 

 

 

 

 

 

 

Outstanding at October 1, 2015

 

2,776

 

$

48.51

 

Granted

 

876

 

58.25

 

Exercised

 

(180

)

31.10

 

Forfeited/Expired

 

(16

)

57.74

 

Outstanding at March 31, 2016

 

3,456

 

$

51.85

 

 

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

 

The total intrinsic value of options exercised during the three and six months ended March 31, 2016 was $1.9 million and $5.1 million, respectively.

 

As of March 31, 2016, the unrecognized compensation cost related to stock options was $10.8 million which is expected to be recognized over a weighted-average period of 3.2 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 March 31, 2016, there was $28.5 million of total unrecognized compensation cost related to unvested restricted stock awards which is expected to be recognized over a weighted-average period of 2.7 years.

 

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Table of Contents

 

A summary of the status of our restricted stock awards as of March 31, 2016 and changes in restricted stock outstanding during the six months then ended is presented below:

 

 

 

Six Months Ended

 

 

 

March 31, 2016

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Restricted Stock Awards

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at October 1, 2015

 

668

 

$

67.03

 

Granted

 

294

 

58.25

 

Vested (1)

 

(256

)

64.75

 

Forfeited

 

(9

)

63.18

 

Unvested at March 31, 2016

 

697

 

$

64.21

 

 


(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 March 31, 2016 and September 30, 2015, we had the following unsecured long-term debt outstanding:

 

 

 

 

 

 

 

Unamortized Discount and

 

 

 

Principal

 

Debt Issuance Costs

 

 

 

March 31,

 

September 30,

 

March 31,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Unsecured senior notes issued July 21, 2009:
Due July 21, 2016

 

$

40,000

 

$

40,000

 

$

(335

)

$

(498

)

 

 

 

 

 

 

 

 

 

 

Unsecured senior notes issued March 19, 2015:
Due March 19, 2025

 

500,000

 

500,000

 

(7,602

)

(7,965

)

 

 

540,000

 

540,000

 

(7,937

)

(8,463

)

Less long-term debt due within one year

 

40,000

 

40,000

 

(856

)

(906

)

Long-term debt

 

$

500,000

 

$

500,000

 

$

(7,081

)

$

(7,557

)

 

We have $40 million senior unsecured fixed-rate notes outstanding at March 31, 2016 that mature July 2016.  Interest on the notes is paid semi-annually based on an annual rate of 6.10 percent.  A final annual principal repayment of $40 million is due 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.

 

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

 

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 March 31, 2016, 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.  As of March 31, 2016, there were no borrowings, but there

 

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were three letters of credit outstanding in the amount of $40.3 million.  At March 31, 2016, we had $259.7 million available to borrow under our $300 million unsecured credit facility.

 

At March 31, 2016, we had two letters of credit outstanding, totaling $12 million that were issued to support international operations.  These letters of credit were issued separately from the $300 million credit facility so they do not reduce the available borrowing capacity discussed in the previous paragraph.

 

9.     Income Taxes

 

Our effective tax rate for the first six months of fiscal 2016 and 2015 was 42.9 percent and 36.4 percent, respectively.  Our effective tax rate for the three months ended March 31, 2016 and 2015 was 32.6 percent and 33.6 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 six months ended March 31, 2016 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

 

In conjunction with our current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $15.7 million are outstanding at March 31, 2016.

 

Other than the matters described below, the Company is a party to various pending legal actions arising in the ordinary course of its business.  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.  Although we presently believe that the outcome of our discussions will not have a material adverse effect on the Company, we cannot estimate the amount of any potential loss, nor can we provide any assurances as to the timing or eventual outcome of these discussions.

 

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-

 

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

 

We evaluate segment performance based on income or loss from continuing operations (segment operating income) before income taxes which includes:

 

·                  revenues from external and internal customers

·                  direct operating costs

·                  depreciation and

·                  allocated general and administrative costs

 

but excludes corporate costs for other depreciation, income from asset sales and other corporate income and expense.

 

General and administrative costs are allocated to the segments based primarily on specific identification and, to the extent that such identification is not practical, on other methods which we believe to be a reasonable reflection of the utilization of services provided.

 

Segment operating income for all segments is a non-GAAP financial measure of our performance, as it excludes certain general and administrative expenses, corporate depreciation, income from asset sales and other corporate income and expense.  We consider segment operating income to be an important supplemental measure of operating performance by presenting trends in our core businesses.  We use this measure to facilitate period-to-period comparisons in operating performance of our reportable segments in the aggregate by eliminating items that affect comparability between periods.  We believe that segment operating income is useful to investors because it provides a means to evaluate the operating performance of the segments on an ongoing basis using criteria that are used by our internal decision makers.  Additionally, it highlights operating trends and aids analytical comparisons.  However, segment operating income has limitations and should not be used as an alternative to operating income or loss, a performance measure determined in accordance with GAAP, as it excludes certain costs that may affect our operating performance in future periods.

 

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

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

March 31, 2016

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

719,088

 

$

 

$

719,088

 

$

118,053

 

Offshore

 

76,205

 

 

76,205

 

11,021

 

International Land

 

123,546

 

 

123,546

 

(8,933

)

 

 

918,839

 

 

918,839

 

120,141

 

Other

 

7,199

 

429

 

7,628

 

(2,653

)

 

 

926,038

 

429

 

926,467

 

117,488

 

Eliminations

 

 

(429

)

(429

)

 

Total

 

$

926,038

 

$

 

$

926,038

 

$

117,488

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

March 31, 2015, as adjusted

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

1,608,510

 

$

 

$

1,608,510

 

$

542,988

 

Offshore

 

132,315

 

 

132,315

 

40,702

 

International Land

 

197,711

 

 

197,711

 

21,140

 

 

 

1,938,536

 

 

1,938,536

 

604,830

 

Other

 

7,921

 

442

 

8,363

 

(5,116

)

 

 

1,946,457

 

442

 

1,946,899

 

599,714

 

Eliminations

 

 

(442

)

(442

)

 

Total

 

$

1,946,457

 

$

 

$

1,946,457

 

$

599,714

 

 

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

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

March 31, 2016

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

349,283

 

$

 

$

349,283

 

$

62,521

 

Offshore

 

34,325

 

 

34,325

 

3,299

 

International Land

 

51,352

 

 

51,352

 

(2,268

)

 

 

434,960

 

 

434,960

 

63,552

 

Other

 

3,231

 

210

 

3,441

 

(1,349

)

 

 

438,191

 

210

 

438,401

 

62,203

 

Eliminations

 

 

(210

)

(210

)

 

Total

 

$

438,191

 

$

 

$

438,191

 

$

62,203

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

March 31, 2015, as adjusted

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

718,463

 

$

 

$

718,463

 

$

224,859

 

Offshore

 

62,428

 

 

62,428

 

19,040

 

International Land

 

101,038

 

 

101,038

 

10,579

 

 

 

881,929

 

 

881,929

 

254,478

 

Other

 

3,741

 

220

 

3,961

 

(3,217

)

 

 

885,670

 

220

 

885,890

 

251,261

 

Eliminations

 

 

(220

)

(220

)

 

Total

 

$

885,670

 

$

 

$

885,670

 

$

251,261

 

 

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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 Income:

 

 

 

Three Months Ended

March 31,

 

Six Months Ended

March 31,

 

 

 

 

 

 

 

 

 

2015

 

 

 

2015

 

 

 

2016

 

(as adjusted)

 

2016

 

(as adjusted)

 

 

 

(in thousands)

 

(in thousands)

 

Segment operating income

 

$

62,203

 

$

251,261

 

$

117,488

 

$

599,714

 

Income from asset sales

 

2,684

 

2,855

 

7,273

 

7,028

 

Corporate general and administrative costs and corporate depreciation

 

(23,266

)

(22,790

)

(44,470

)

(45,045

)

Operating income

 

41,621

 

231,326

 

80,291

 

561,697

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

799

 

2,564

 

1,532

 

2,859

 

Interest expense

 

(5,721

)

(2,600

)

(10,245

)

(3,190

)

Other

 

653

 

55

 

392

 

369

 

Total other income (expense)

 

(4,269

)

19

 

(8,321

)

38

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

37,352

 

$

231,345

 

$

71,970

 

$

561,735

 

 

The following table presents total assets by reportable segment:

 

 

 

 

 

September 30,

 

 

 

March 31,
2016

 

2015
(as adjusted)

 

 

 

(in thousands)

 

Total assets

 

 

 

 

 

U.S. Land

 

$

5,210,465

 

$

5,429,179

 

Offshore

 

110,446

 

118,852

 

International Land

 

530,310

 

565,712

 

Other

 

37,117

 

38,397

 

 

 

5,888,338

 

6,152,140

 

Investments and corporate operations

 

1,136,537

 

987,005

 

Total assets from continued operations

 

7,024,875

 

7,139,145

 

Discontinued operations

 

230

 

8,097

 

 

 

$

7,025,105

 

$

7,147,242

 

 

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

 

 

 

Three Months Ended

March 31,

 

Six Months Ended

March 31,

 

 

 

 

 

 

 

2016

 

2015
(as adjusted)

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands)

 

(in thousands)

 

Operating revenues

 

 

 

 

 

 

 

 

 

United States

 

$

385,977

 

$

778,637

 

$

795,483

 

$

1,734,918

 

Argentina

 

35,371

 

46,273

 

85,157

 

74,749

 

Colombia

 

4,602

 

22,691

 

11,345

 

46,628

 

Ecuador

 

527

 

5,510

 

4,467

 

19,400

 

Other foreign

 

11,714

 

32,559

 

29,586

 

70,762

 

Total

 

$

438,191

 

$

885,670

 

$

926,038

 

$

1,946,457

 

 

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12.       Pensions and Other Post-retirement Benefits

 

The following provides information at March 31, 2016 and 2015 related to the Company-sponsored domestic defined benefit pension plan:

 

Components of Net Periodic Benefit Cost

 

 

Three Months Ended

March 31,

 

Six Months Ended

March 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

(in thousands)

 

Interest cost

 

$

1,115

 

$

1,171

 

$

2,231

 

$

2,342

 

Expected return on plan assets

 

(1,490

)

(1,743

)

(2,980

)

(3,486

)

Recognized net actuarial loss

 

493

 

309

 

986

 

618

 

Settlement

 

1,454

 

 

1,454

 

 

Net pension expense (benefit)

 

$

1,572

 

$

(263

)

$

1,691

 

$

(526

)

 

We record settlement expense when benefit payments exceed the total annual service and interest costs.

 

Employer Contributions

 

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

 

 

 

Six Months Ended

March 31,

 

 

 

 

 

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands)

 

 

 

 

 

 

 

Capital expenditures incurred

 

$

169,166

 

$

682,435

 

Additions incurred prior year but paid for in current period

 

25,344

 

123,548

 

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

 

(14,029

)

(39,954

)

Capital expenditures per Consolidated Condensed Statements of Cash Flows

 

$

180,481

 

$

766,029

 

 

14.       International Risk Factors

 

We currently have 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

 

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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 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.

 

For the six months ended, we experienced aggregate foreign currency losses of $8.3 million. The losses are primarily the result of a sharp devaluation of the Argentine peso in December 2015.  It is expected that the Argentine peso will be allowed to float in the free exchange market and foreign exchange restrictions will be less prohibitive.  However, whether in Argentina or elsewhere, 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.

 

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.  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 we find acceptable.

 

Although we attempt to minimize the potential impact of such risks by operating in more than one geographical area, during the six months ended March 31, 2016, approximately 14.1 percent of our consolidated operating revenues were generated from international locations in our contract drilling business.  During the six months ended March 31, 2016, approximately 81.7 percent of operating revenues from international locations were from operations in South America.  All of the South American operating revenues were from Argentina, Colombia and Ecuador.  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 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, 2017, 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.

 

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 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.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 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 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 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 mandates a modified retrospective transition method. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

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In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  ASU 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 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.

 

16.       Guarantor and Non-Guarantor Financial Information

 

In March 2015, Helmerich & Payne International Drilling Co. (“the issuer”), a wholly-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 for the issuer, Helmerich & Payne International Drilling Co. and parent/guarantor, Helmerich & Payne, Inc., in accordance with the Commission disclosure requirements.  Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements.

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands)

 

 

 

Three Months Ended March 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

 

$

382,747

 

$

55,460

 

$

(16

)

$

438,191

 

Operating costs and other

 

3,156

 

331,998

 

61,818

 

(402

)

396,570

 

Operating income (loss) from continuing operations

 

(3,156

)

50,749

 

(6,358

)

386

 

41,621

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (loss), net

 

(271

)

734

 

1,375

 

(386

)

1,452

 

Interest expense

 

(62

)

(5,272

)

(387

)

 

(5,721

)

Equity in net income (loss) of subsidiaries

 

23,065

 

(7,818

)

 

(15,247

)

 

Income (loss) from continuing operations before income taxes

 

19,576

 

38,393

 

(5,370

)

(15,247

)

37,352

 

Income tax provision

 

(1,629

)

15,657

 

(1,850

)

 

12,178

 

Income (loss) from continuing operations

 

21,205

 

22,736

 

(3,520

)

(15,247

)

25,174

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 

 

(56

)

 

(56

)

Income tax provision

 

 

 

3,913

 

 

3,913

 

Loss from discontinued operations

 

 

 

(3,969

)

 

(3,969

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,205

 

$

22,736

 

$

(7,489

)

$

(15,247

)

$

21,205

 

 

23



Table of Contents

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended March 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,205

 

$

22,736

 

$

(7,489

)

$

(15,247

)

$

21,205

 

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

 

 

 

 

 

 

 

 

 

 

 

Unrealized depreciation on securities, net

 

 

(1,453

)

 

 

(1,453

)

Minimum pension liability adjustments, net

 

106

 

207

 

 

 

313

 

Other comprehensive income (loss)

 

106

 

(1,246

)

 

 

(1,140

)

Comprehensive income

 

$

21,311

 

$

21,490

 

$

(7,489

)

$

(15,247

)

$

20,065

 

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands)

 

 

 

Three Months Ended March 31, 2015, as adjusted

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

 

$

774,896

 

$

110,798

 

$

(24

)

$

885,670

 

Operating costs and other

 

3,059

 

548,083

 

104,236

 

(1,034

)

654,344

 

Operating income (loss) from continuing operations

 

(3,059

)

226,813

 

6,562

 

1,010

 

231,326

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

2

 

3,738

 

(111

)

(1,010

)

2,619

 

Interest expense

 

(12

)

(121

)

(2,467

)

 

(2,600

)

Equity in net income of subsidiaries

 

155,706

 

3,373

 

 

(159,079

)

 

Income from continuing operations before income taxes

 

152,637

 

233,803

 

3,984

 

(159,079

)

231,345

 

Income tax provision

 

(906

)

78,923

 

(214

)

 

77,803

 

Income from continuing operations

 

153,543

 

154,880

 

4,198

 

(159,079

)

153,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 

 

(76

)

 

(76

)

Income tax provision

 

 

 

(77

)

 

(77

)

Loss from discontinued operations

 

 

 

1

 

 

1

 

Net income

 

$

153,543

 

$

154,880

 

$

4,199

 

$

(159,079

)

$

153,543

 

 

24



Table of Contents

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended March 31, 2015, as adjusted

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

153,543

 

$

154,880

 

$

4,199

 

$

(159,079

)

$

153,543

 

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

 

 

 

 

 

 

 

 

 

 

 

Unrealized depreciation on securities, net

 

 

(1,203

)

 

 

(1,203

)

Minimum pension liability adjustments, net

 

82

 

115

 

 

 

197

 

Other comprehensive income (loss)

 

82

 

(1,088

)

 

 

(1,006

)

Comprehensive income

 

$

153,625

 

$

153,792

 

$

4,199

 

$

(159,079

)

$

152,537

 

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands)

 

 

 

Six Months Ended March 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

 

$

788,284

 

$

137,787

 

$

(33

)

$

926,038

 

Operating costs and other

 

5,861

 

688,749

 

151,940

 

(803

)

845,747

 

Operating income (loss) from continuing operations

 

(5,861

)

99,535

 

(14,153

)

770

 

80,291

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

(251

)

1,390

 

1,555

 

(770

)

1,924

 

Interest expense

 

(124

)

(9,990

)

(131

)

 

(10,245

)

Equity in net income (loss) of subsidiaries

 

40,614

 

(16,015

)

 

(24,599

)

 

Income from continuing operations before income taxes

 

34,378

 

74,920

 

(12,729

)

(24,599

)

71,970

 

Income tax provision

 

(2,829

)

34,884

 

(1,157

)

 

30,898

 

Income (loss) from continuing operations

 

37,207

 

40,036

 

(11,572

)

(24,599

)

41,072

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 

 

48

 

 

48

 

Income tax provision

 

 

 

3,913

 

 

3,913

 

Loss from discontinued operations

 

 

 

(3,865

)

 

(3,865

)

Net income (loss)

 

$

37,207

 

$

40,036

 

$

(15,437

)

$

(24,599

)

$

37,207

 

 

25



Table of Contents

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Six Months Ended March 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

37,207

 

$

40,036

 

$

(15,437

)

$

(24,599

)

$

37,207

 

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

 

 

 

 

 

 

 

 

 

 

 

Unrealized depreciation on securities, net

 

 

(12,463

)

 

 

(12,463

)

Minimum pension liability adjustments, net

 

213

 

413

 

 

 

626

 

Other comprehensive income (loss)

 

213

 

(12,050

)

 

 

(11,837

)

Comprehensive income (loss)

 

$

37,420

 

$

27,986

 

$

(15,437

)

$

(24,599

)

$

25,370

 

 

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands)

 

 

 

Six Months Ended March 31, 2015, as adjusted

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

 

$

1,727,005

 

$

219,492

 

$

(40

)

$

1,946,457

 

Operating costs and other

 

6,080

 

1,177,121

 

203,625

 

(2,066

)

1,384,760

 

Operating income (loss) from continuing operations

 

(6,080

)

549,884

 

15,867

 

2,026

 

561,697

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

3

 

4,659

 

592

 

(2,026

)

3,228

 

Interest expense

 

(19

)

(103

)

(3,068

)

 

(3,190

)

Equity in net income of subsidiaries

 

361,065

 

10,091

 

 

(371,156

)

 

Income from continuing operations before income taxes

 

354,969

 

564,531

 

13,391

 

(371,156

)

561,735

 

Income tax provision

 

(2,182

)

205,045

 

1,707

 

 

204,570

 

Income from continuing operations

 

357,151

 

359,486

 

11,684

 

(371,156

)

357,165

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 

 

(91

)

 

(91

)

Income tax provision

 

 

 

(77

)

 

(77

)

Loss from discontinued operations

 

 

 

(14

)

 

(14

)

Net income

 

$

357,151

 

$

359,486

 

$

11,670

 

$

(371,156

)

$

357,151

 

 

26



Table of Contents

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Six Months Ended March 31, 2015, as adjusted

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

357,151

 

$

359,486

 

$

11,670

 

$

(371,156

)

$

357,151

 

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

 

 

 

 

 

 

 

 

 

 

 

Unrealized depreciation on securities, net

 

 

(43,447

)

 

 

(43,447

)

Minimum pension liability adjustments, net

 

164

 

229

 

 

 

393

 

Other comprehensive income (loss)

 

164

 

(43,218

)

 

 

(43,054

)

Comprehensive income

 

$

357,315

 

$

316,268

 

$

11,670

 

$

(371,156

)

$

314,097

 

 

27



Table of Contents

 

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

 

 

 

March 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

(1,900

)

$

885,570

 

$

14,343

 

$

 

$

898,013

 

Short-term investments

 

 

45,526

 

 

 

45,526

 

Accounts receivable, net of reserve

 

(13

)

270,387

 

60,352

 

 

330,726

 

Inventories

 

 

88,799

 

40,850

 

 

129,649

 

Prepaid expenses and other

 

25,867

 

3,142

 

43,353

 

(16,129

)

56,233

 

Current assets of discontinued operations

 

 

 

230

 

 

230

 

Total current assets

 

23,954

 

1,293,424

 

159,128

 

(16,129

)

1,460,377

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

12,205

 

71,158

 

 

 

83,363

 

Property, plant and equipment, net

 

64,190

 

4,962,375

 

419,787

 

 

5,446,352

 

Intercompany

 

15,144

 

1,310,646

 

262,269

 

(1,588,059

)

 

Other assets

 

10,992

 

478

 

34,301

 

(10,758

)

35,013

 

Investment in subsidiaries

 

5,653,326

 

211,418

 

 

(5,864,744

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,779,811

 

$

7,849,499

 

$

875,485

 

$

(7,479,690

)

$

7,025,105

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due within one year

 

$

 

$

39,144

 

$

 

$

 

$

39,144

 

Accounts payable

 

78,165

 

10,529

 

2,743

 

 

91,437

 

Accrued liabilities

 

11,388

 

193,249

 

52,157

 

(16,129

)

240,665

 

Current liabilities of discontinued operations

 

 

 

82

 

 

82

 

Total current liabilities

 

89,553

 

242,922

 

54,982

 

(16,129

)

371,328

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

492,919

 

 

 

492,919

 

Deferred income taxes

 

 

1,267,164

 

22,258

 

(10,758

)

1,278,664

 

Intercompany

 

890,370

 

183,734

 

513,855

 

(1,587,959

)

 

Other

 

17,788

 

27,204

 

50,992

 

 

95,984

 

Noncurrent liabilities of discontinued operations

 

 

 

4,110

 

 

4,110

 

Total noncurrent liabilities

 

908,158

 

1,971,021

 

591,215

 

(1,598,717

)

1,871,677

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

11,136

 

100

 

 

(100

)

11,136

 

Additional paid-in capital

 

436,117

 

46,832

 

393

 

(47,225

)

436,117

 

Retained earnings

 

4,536,047

 

5,596,819

 

228,895

 

(5,825,714

)

4,536,047

 

Accumulated other comprehensive loss

 

(13,214

)

(8,195

)

 

8,195

 

(13,214

)

Treasury stock, at cost

 

(187,986

)

 

 

 

(187,986

)

Total shareholders’ equity

 

4,782,100

 

5,635,556

 

229,288

 

(5,864,844

)

4,782,100

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,779,811

 

7,849,499

 

$

875,485

 

$

(7,479,690

)

$

7,025,105

 

 

28



Table of Contents

 

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

 

 

 

September 30, 2015, as adjusted

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

(838

)

$

693,273

 

$

36,949

 

$

 

$

729,384

 

Short-term investments

 

 

45,543

 

 

 

45,543

 

Accounts receivable, net of reserve

 

152

 

374,383

 

71,418

 

(5

)

445,948

 

Inventories

 

 

88,010

 

40,531

 

 

128,541

 

Deferred income taxes

 

2,834

 

19,277

 

 

(4,905

)

17,206

 

Prepaid expenses and other

 

20,018

 

6,713

 

45,647

 

(7,903

)

64,475

 

Current assets of discontinued operations

 

 

 

8,097

 

 

8,097

 

Total current assets

 

22,166

 

1,227,199

 

202,642

 

(12,813

)

1,439,194

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

12,871

 

91,483

 

 

 

104,354

 

Property, plant and equipment, net

 

55,902

 

5,063,705

 

443,563

 

 

5,563,170

 

Intercompany

 

15,875

 

1,192,634

 

230,652

 

(1,439,161

)

 

Other assets

 

8,387

 

1,389

 

38,901

 

(8,153

)

40,524

 

Investment in subsidiaries

 

5,623,754

 

227,587

 

 

(5,851,341

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,738,955

 

$

7,803,997

 

$

915,758

 

$

(7,311,468

)

$

7,147,242

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due within one year

 

$

 

$

39,094

 

$

 

$

 

$

39,094

 

Accounts payable

 

80,673

 

20,404

 

7,097

 

(5

)

108,169

 

Accrued liabilities

 

10,688

 

151,721

 

46,251

 

(11,103

)

197,557

 

Current liabilities of discontinued operations

 

 

 

3,377

 

 

3,377

 

Total current liabilities

 

91,361

 

211,219

 

56,725

 

(11,108

)

348,197

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

492,443

 

 

 

492,443

 

Deferred income taxes

 

 

1,275,428

 

33,546

 

(13,058

)

1,295,916

 

Intercompany

 

733,008

 

186,784

 

516,169

 

(1,435,961

)

 

Other

 

18,740

 

31,560

 

59,820

 

 

110,120

 

Noncurrent liabilities of discontinued operations

 

 

 

4,720

 

 

4,720

 

Total noncurrent liabilities

 

751,748

 

1,986,215

 

614,255

 

(1,449,019

)

1,903,199

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

11,099

 

100

 

 

(100

)

11,099

 

Additional paid-in capital

 

420,141

 

45,824

 

349

 

(46,173

)

420,141

 

Retained earnings

 

4,648,346

 

5,556,783

 

244,429

 

(5,801,212

)

4,648,346

 

Accumulated other comprehensive income (loss)

 

(1,377

)

3,856

 

 

(3,856

)

(1,377

)

Treasury stock, at cost

 

(182,363

)

 

 

 

(182,363

)

Total shareholders’ equity

 

4,895,846

 

5,606,563

 

244,778

 

(5,851,341

)

4,895,846

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,738,955

 

$

7,803,997

 

$

915,758

 

$

(7,311,468

)

$

7,147,242

 

 

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Table of Contents

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended March 31, 2016

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

3,543

 

$

510,685

 

$

(21,711

)

$

 

$

492,517

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(12,667

)

(165,291

)

(2,523

)

 

(180,481

)

Intercompany transfers

 

12,667

 

(12,667

)

 

 

 

Purchase of short-term investments

 

 

(21,869

)

 

 

(21,869

)

Proceeds from sale of short-term investments

 

 

21,676

 

 

 

21,676

 

Proceeds from asset sales

 

 

8,131

 

1,584

 

 

9,715

 

Net cash used in investing activities

 

 

(170,020

)

(939

)

 

(170,959

)

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(149,300

)

 

 

 

(149,300

)

Intercompany transfers

 

149,300

 

(149,300

)

 

 

 

Debt issuance costs

 

 

(32

)

 

 

(32

)

Exercise of stock options, net of tax withholding

 

(199

)

 

 

 

(199

)

Tax withholdings related to net share settlements of restricted stock

 

(3,617

)

 

 

 

(3,617

)

Excess tax benefit from stock-based compensation

 

(789

)

964

 

44

 

 

219

 

Net cash provided by (used in) financing activities

 

(4,605

)

(148,368

)

44

 

 

(152,929

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(1,062

)

192,297

 

(22,606

)

 

168,629

 

Cash and cash equivalents, beginning of period

 

(838

)

693,273

 

36,949

 

 

729,384

 

Cash and cash equivalents, end of period

 

$

(1,900

)

$

885,570

 

$

14,343

 

$

 

$

898,013

 

 

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Table of Contents

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended March 31, 2015, as adjusted

 

 

 

Guarantor/

 

Issuer

 

Non-Guarantor

 

 

 

Total

 

 

 

Parent

 

Subsidiary

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Net cash provided by operating activities

 

$

64,996

 

$

730,744

 

$

20,828

 

$

 

$

816,568

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(11,571

)

(713,797

)

(40,661

)

 

(766,029

)

Intercompany transfers

 

11,571

 

(11,571

)

 

 

 

Proceeds from asset sales

 

1

 

14,215

 

939

 

 

15,155

 

Net cash provided by (used in) investing activities

 

1

 

(711,153

)

(39,722

)

 

(750,874

)

 

 

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from senior notes, net of discount

 

 

497,125

 

 

 

497,125

 

Debt issuance costs

 

 

(4,334

)

 

 

(4,334

)

Net increase in bank overdraft

 

 

 

12,560

 

 

12,560

 

Dividends paid

 

(149,347

)

 

 

 

(149,347

)

Intercompany transfers

 

149,347

 

(149,347

)

 

 

 

Repurchase of common stock

 

(59,654

)

 

 

 

(59,654

)

Exercise of stock options, net of tax withholding

 

(1,079

)

 

 

 

(1,079

)

Tax withholdings related to net share settlements of restricted stock

 

(4,248

)

 

 

 

(4,248

)

Excess tax benefit from stock-based compensation

 

85

 

2,653

 

23

 

 

2,761

 

Net cash provided by (used in) financing activities

 

(64,896

)

346,097

 

12,583

 

 

293,784

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

101

 

365,688

 

(6,311

)

 

359,478

 

Cash and cash equivalents, beginning of period

 

(2,050

)

329,655

 

32,702

 

 

360,307

 

Cash and cash equivalents, end of period

 

$

(1,949

)

$

695,343

 

$

26,391

 

$

 

$

719,785

 

 

17.  Subsequent Events

 

Due to the continued downturn in the oil and gas industry from the decline in oil prices, our customers have reduced their drilling activity.  Based on received early termination notices, early termination revenue recognized is expected to be over $80 million during the third quarter of fiscal 2016.

 

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

AND RESULTS OF OPERATIONS

March 31, 2016

 

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 2015 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 2015 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

 

Prior to September 30, 2015, fiscal years of our foreign operations ended on August 31 to facilitate reporting of consolidated results, resulting in a one-month reporting lag when compared to the remainder of the Company.

 

Starting October 1, 2015, the reporting year-end of these foreign operations was changed from August 31 to September 30.  The previously existing one-month reporting lag was eliminated as it is no longer required to achieve a timely consolidation due to our investments in technology, ERP systems and personnel to enhance our financial statement close process.  We believe this change is preferable because the financial information of all operating segments is now reported based on the same period-end, which improves overall financial reporting to investors by providing the most current information available.  The elimination of this previously existing reporting lag is considered a voluntary change in accounting principle in accordance with ASC 250-10-50 “Change in Accounting Principle.”   Voluntary changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented.  Accordingly, our financial statements for periods prior to fiscal 2016 have been changed to reflect the period-specific effects of applying this accounting principle.

 

Three Months Ended March 31, 2016 vs. Three Months Ended March 31, 2015

 

We reported income from continuing operations of $25.2 million ($0.23 per diluted share) from operating revenues of $438.2 million for the second quarter ended March 31, 2016, compared with income from continuing operations and net income of $153.5 million ($1.41 per diluted share) from operating revenues of $885.7 million for the second quarter of fiscal year 2015.  Including discontinued operations, we recorded net income of $21.2 million ($0.19 per diluted share) for the three months ended March 31, 2016.  Income from continuing operations for the second quarter of fiscal 2016 includes approximately $1.5 million ($0.01 per diluted share) of after-

 

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tax gains from the sale of assets.  Net income for the second quarter of fiscal 2015 includes approximately $1.8 million ($0.02 per diluted share) of after-tax gains from the sale of assets.

 

In March 2016, the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system.  The implementation of this system resulted in a reported loss from discontinued operations of $4.0 million ($0.04 loss per diluted share) in the second fiscal quarter of 2016, all of which corresponds to the Company’s former operations in Venezuela.

 

The following tables summarize operations by reportable operating segment for the three months ended March 31, 2016 and 2015.  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.

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands, except days and per day amounts)

 

U.S. LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

349,283

 

$

718,463

 

Direct operating expenses

 

155,884

 

352,489

 

General and administrative expense

 

12,196

 

12,605

 

Depreciation

 

118,682

 

128,510

 

Segment operating income

 

$

62,521

 

$

224,859

 

 

 

 

 

 

 

Revenue days

 

9,601

 

20,802

 

Average rig revenue per day

 

$

34,218

 

$

30,988

 

Average rig expense per day

 

$

14,139

 

$

13,395

 

Average rig margin per day

 

$

20,079

 

$

17,593

 

Rig utilization

 

31

%

68

%

 

U.S. Land segment operating income decreased to $62.5 million for the second quarter of fiscal 2016 compared to $224.9 million in the same period of fiscal 2015.  Revenues were $349.3 million and $718.5 million in the second quarter of fiscal 2016 and 2015, respectively.  Included in U.S. land revenues for the three months ended March 31, 2016 and 2015 are reimbursements for “out-of-pocket” expenses of $20.8 million and $73.9 million, respectively.  Also included in revenue for the three months ended March 31, 2016 is early termination revenue of $79.6 million compared to $71.0 million during the same period of fiscal 2015.

 

Excluding early termination per day revenue of $8,287 and $3,413 for the second quarter of fiscal 2016 and fiscal 2015, respectively, average rig revenue per day for the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015 decreased by $1,644 to $25,931.  The decline in oil prices continued to have a negative effect on customer spending.  Some customers did not renew expiring contracts while others elected to terminate fixed-term contracts early. As a result, we experienced a 54% decrease in revenue days when comparing the second fiscal quarter of 2016 to the same period in 2015.  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).

 

The average rig expense per day increased to $14,139 for the second quarter of fiscal 2016 from $13,395 for the second quarter of fiscal 2015 primarily due to the large number of rigs that became idle during the current quarter that incurred expenses related to personnel management and rig stacking, which are then allocated across a smaller number of revenue days during the quarter.

 

Depreciation decreased $9.8 million in the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015.  The decrease is primarily due to the decommissioning of 23 rigs in fiscal 2015.  Included in depreciation are abandonments of $0.3 million and $9.9 million, respectively, for the three months ended March 31, 2016 and 2015.

 

U.S. land rig utilization decreased to 31 percent for the second quarter of 2016 compared to 68 percent for the second quarter of fiscal 2015.  U.S. land rig revenue days for the second quarter of fiscal 2016 were 9,601 compared with 20,802 for the same period of fiscal 2015, with an average of 105.5 and 231.1 rigs working during the second quarter of fiscal 2016 and 2015, respectively.  We expect rig utilization to decrease in the third quarter of fiscal 2016 primarily due to rigs idled during the second quarter that are expected to remain idle throughout the third quarter and rigs that have recently become idle.

 

At March 31, 2016, 94 out of 347 existing rigs in the U.S. Land segment were contracted.  Of the 94 contracted rigs, 82 were under fixed term contracts and 12 were working in the spot market.  As of May 2, 2016, 84 rigs remain contracted in the segment.  Based on received early termination notices, early termination revenue is expected to be over $80 million during the third fiscal quarter of 2016.

 

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Table of Contents

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands, except days and per day amounts)

 

OFFSHORE OPERATIONS

 

 

 

 

 

Revenues

 

$

34,325

 

$

62,428

 

Direct operating expenses

 

27,065

 

39,264

 

General and administrative expense

 

837

 

954

 

Depreciation

 

3,124

 

3,170

 

Segment operating income

 

$

3,299

 

$

19,040

 

 

 

 

 

 

 

Revenue days

 

691

 

794

 

Average rig revenue per day

 

$

28,004

 

$

49,783

 

Average rig expense per day

 

$

20,658

 

$

31,112

 

Average rig margin per day

 

$

7,346

 

$

18,671

 

Rig utilization

 

84

%

98

%

 

Offshore revenues include reimbursements for “out-of-pocket” expenses of $6.1 million and $5.1 million for the three months ended March 31, 2016 and 2015, respectively.

 

Average rig revenue per day and average rig margin per day decreased in the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015 primarily due to several rigs moving to lower pricing while on standby or other special dayrates.

 

At the end of March 31, 2016, seven platform rigs were contracted compared to eight at March 31, 2015.

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands, except days and per day amounts)

 

INTERNATIONAL LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

51,352

 

$

101,038

 

Direct operating expenses

 

38,113

 

75,391

 

General and administrative expense

 

887

 

1,112

 

Depreciation

 

14,620

 

13,956

 

Segment operating income (loss)

 

$

(2,268

)

$

10,579

 

 

 

 

 

 

 

Revenue days

 

1,307

 

1,771

 

Average rig revenue per day

 

$

36,774

 

$

52,054

 

Average rig expense per day

 

$

26,287

 

$

37,761

 

Average rig margin per day

 

$

10,487

 

$

14,293

 

Rig utilization

 

38

%

49

%

 

The International Land segment incurred an operating loss of $2.3 million for the second quarter of fiscal 2016 compared to operating income of $10.6 million in the same period of fiscal 2015.  Included in International land revenues for the three months ended March 31, 2016 and 2015 are reimbursements for “out-of-pocket” expenses of $3.3 million and $8.9 million, respectively.

 

Excluding early termination per day revenue of $796 in the second quarter of fiscal 2015, average rig margin per day for the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015 decreased by $3,010 to $10,487.  The decline in oil prices continued to have a negative effect on customer spending.  Some customers did not renew expiring contracts while others elected to terminate fixed-term contracts early. As a result, we experienced a 26% decrease in revenue days when comparing the second fiscal quarter of 2016 to the same period in 2015.  During the current quarter, an average of 14.4 rigs worked compared to an average of 19.7 rigs in the second quarter of fiscal 2015.  We expect revenue days to decrease in the third quarter of fiscal 2016 due to two rigs that became idle during the second quarter.

 

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Table of Contents

 

RESEARCH AND DEVELOPMENT

 

For the three months ended March 31, 2016 and 2015, we incurred $2.3 million and $4.9 million, respectively, of research and development expenses related to ongoing development of a rotary steerable system.

 

OTHER

 

Interest expense, net of amounts capitalized, totaled $5.7 million and $2.6 million for the three months ended March 31, 2016 and 2015, respectively.  Interest expense is primarily attributable to fixed-rate debt outstanding.  The increase in interest expense in the comparative quarters is primarily due to the issuance of $500 million unsecured senior notes in March 2015.

 

Income tax expense decreased to $12.2 million in the second quarter of fiscal 2016 from $77.8 million in the second quarter of fiscal 2015, and the effective tax rate decreased to 32.6 percent from 33.6 percent.  We expect the effective tax rate for each of the remaining two quarters of fiscal 2016 to be between 33 and 36 percent.

 

Six Months Ended March 31, 2016 vs. Six Months Ended March 31, 2015

 

We reported income from continuing operations of $41.1 million ($0.37 per diluted share) from operating revenues of $926.0 million for the six months ended March 31, 2016, compared with income from continuing operations and net income of $357.2 million ($3.27 per diluted share) from operating revenues of $1.9 billion for the first six months of fiscal year 2015.  Including discontinued operations, we recorded net income of $37.2 million ($0.33 per diluted share) for the six months ended March 31, 2016.  Income from continuing operations for the first six months of fiscal 2016 includes approximately $4.4 million ($0.04 per diluted share) of after-tax gains from the sale of assets.  Net income for the first six months of fiscal 2015 includes approximately $4.4 million ($0.04 per diluted share) of after-tax gains from the sale of assets.

 

In March 2016, the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system.  The implementation of this system resulted in a reported loss from discontinued operations of $3.9 million ($0.04 loss per diluted share) for the six months ended March 31, 2016, all of which corresponds to the Company’s former operations in Venezuela.

 

The following tables summarize operations by reportable operating segment for the six months ended March 31, 2016 and 2015.  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.

 

 

 

Six Months Ended March 31,

 

 

 

2016

 

2015

 

 

 

(in thousands, except days and per day amounts)

 

U.S. LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

719,088

 

$

1,608,510

 

Direct operating expenses

 

337,425

 

793,615

 

General and administrative expense

 

24,569

 

24,320

 

Depreciation

 

239,041

 

247,587

 

Segment operating income

 

$

118,053

 

$

542,988

 

 

 

 

 

 

 

Revenue days

 

21,546

 

48,157

 

Average rig revenue per day

 

$

31,132

 

$

30,118

 

Average rig expense per day

 

$

13,447

 

$

13,196

 

Average rig margin per day

 

$

17,685

 

$

16,922

 

Rig utilization

 

35

%

78

%

 

U.S. Land segment operating income decreased to $118.1 million for the first six months of fiscal 2016 compared to $543.0 million in the same period of fiscal 2015.  Revenues were $719.1 million and $1.6 billion in the first six months of fiscal 2016 and 2015, respectively.  Included in U.S. land revenues for the six months ended March 31, 2016 and 2015 are reimbursements for “out-of-pocket” expenses of $48.3 million and $158.1 million, respectively.  Also included in revenue for the six months ended March 31, 2016 is early termination revenue of $108.4 million compared to $94.4 million during the same period of fiscal 2015.

 

Excluding early termination per day revenue of $5,033 and $1,960 for the first six months of fiscal 2016 and fiscal 2015, respectively, average rig revenue per day for the first six months of fiscal 2016 compared to the first six months of fiscal 2015 decreased by $2,059

 

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to $26,099.  The decline in oil prices continued to have a negative effect on customer spending.  Some customers did not renew expiring contracts while others elected to terminate fixed-term contracts early. As a result, we experienced a 55% decrease in revenue days when comparing the first six months of 2016 to the same period in 2015.  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).

 

Depreciation decreased $8.5 million in the first six months of fiscal 2016 compared to the first six months of fiscal 2015.  The decrease is primarily due to the decommissioning of 23 rigs in fiscal 2015.  Included in depreciation are abandonments of $0.8 million and $11.9 million, respectively, for the six months ended March 31, 2016 and 2015.

 

U.S. land rig utilization decreased to 35 percent for the first six months of 2016 compared to 78 percent for the first six months of fiscal 2015.  U.S. land rig revenue days for the first six months of fiscal 2016 were 21,546 compared with 48,157 for the same period of fiscal 2015, with an average of 117.7 and 264.6 rigs working during the first six months of fiscal 2016 and 2015, respectively.  We expect rig utilization to decrease in the third quarter of fiscal 2016 primarily due to rigs idled during the second quarter that are expected to remain idle throughout the third quarter and rigs that have recently become idle.

 

At March 31, 2016, 94 out of 347 existing rigs in the U.S. Land segment were contracted.  Of the 94 contracted rigs, 82 were under fixed term contracts and 12 were working in the spot market.  As of May 2, 2016, 84 rigs remain contracted in the segment.  Based on received early termination notices, early termination revenue is expected to be over $80 million during the third fiscal quarter of 2016.

 

 

 

Six Months Ended March 31,

 

 

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands, except days and per day amounts)

 

OFFSHORE OPERATIONS

 

 

 

 

 

Revenues

 

$

76,205

 

$

132,315

 

Direct operating expenses

 

57,358

 

83,739

 

General and administrative expense

 

1,699

 

1,780

 

Depreciation

 

6,127

 

6,094

 

Segment operating income

 

$

11,021

 

$

40,702

 

 

 

 

 

 

 

Revenue days

 

1,427

 

1,603

 

Average rig revenue per day

 

$

27,764

 

$

52,588

 

Average rig expense per day

 

$

20,123

 

$

32,877

 

Average rig margin per day

 

$

7,641

 

$

19,711

 

Rig utilization

 

87

%

98

%

 

Offshore revenues include reimbursements for “out-of-pocket” expenses of $12.4 million and $10.8 million for the first six months ended March 31, 2016 and 2015, respectively.

 

Average rig revenue per day and average rig margin per day decreased in the first six months of fiscal 2016 compared to the first six months of fiscal 2015 primarily due to several rigs moving to lower pricing while on standby or other special dayrates.

 

At the end of March 31, 2016, seven platform rigs were contracted compared to eight at March 31, 2015.

 

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Table of Contents

 

 

 

Six Months Ended March 31,

 

 

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands, except days and per day amounts)

 

INTERNATIONAL LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

123,546

 

$

197,711

 

Direct operating expenses

 

102,121

 

149,314

 

General and administrative expense

 

1,605

 

1,628

 

Depreciation

 

28,753

 

25,629

 

Segment operating income (loss)

 

$

(8,933

)

$

21,140

 

 

 

 

 

 

 

Revenue days

 

2,718

 

3,840

 

Average rig revenue per day

 

$

41,580

 

$

46,014

 

Average rig expense per day

 

$

30,406

 

$

33,850

 

Average rig margin per day

 

$

11,174

 

$

12,164

 

Rig utilization

 

39

%

54

%

 

The International Land segment incurred an operating loss of $8.9 million for the first six months of fiscal 2016 compared to operating income of $21.1 million in the same period of fiscal 2015.  Included in International land revenues for the six months ended March 31, 2016 and 2015 are reimbursements for “out-of-pocket” expenses of $10.5 million and $21.0 million, respectively.

 

Included in direct operating expenses for the six months ended March 31, 2016 is $8.9 million of foreign currency transaction losses, primarily due to a devaluation of the Argentine peso in December 2015.

 

Excluding early termination per day revenue of $367 in the first six months of fiscal 2015, average rig margin per day for the first six months of fiscal 2016 compared to the first six months of fiscal 2015 decreased by $623 to $11,174.  The decline in oil prices continued to have a negative effect on customer spending.  Some customers did not renew expiring contracts while others elected to terminate fixed-term contracts early. As a result, we experienced a 29% decrease in revenue days when comparing the first six months of 2016 to the same period in 2015.  During the first six months of fiscal 2016, an average of 14.9 rigs worked compared to an average of 21.1 rigs in the first six months of fiscal 2015.  We expect revenue days to decrease in the third quarter of fiscal 2016 due to two rigs that became idle during the second quarter.

 

RESEARCH AND DEVELOPMENT

 

For the six months ended March 31, 2016 and 2015, we incurred $5.2 million and $9.0 million, respectively, of research and development expenses related to ongoing development of a rotary steerable system.

 

OTHER

 

Interest expense, net of amounts capitalized, totaled $10.2 million and $3.2 million for the six months ended March 31, 2016 and 2015, respectively.  Interest expense is primarily attributable to fixed-rate debt outstanding.  The increase in interest expense in the comparative quarters is primarily due to the issuance of $500 million unsecured senior notes in March 2015.

 

Income tax expense decreased to $30.9 million in the first six months of fiscal 2016 from $204.6 million in the first six months of fiscal 2015, and the effective tax rate increased to 42.9 percent from 36.4 percent.  The effective tax rate for the six months ended March 31, 2016 was 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.  We expect the effective tax rate for each of the remaining two quarters of fiscal 2016 to be between 33 and 36 percent.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

Cash and cash equivalents increased to $898.0 million at March 31, 2016 from $729.4 million at September 30, 2015. The following table provides a summary of cash flows:

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2016

 

2015
(as adjusted)

 

 

 

(in thousands)

 

Net cash provided (used) by:

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

492,517

 

$

816,568

 

Investing activities

 

(170,959

)

(750,874

)

Financing activities

 

(152,929

)

293,784

 

Increase (decrease) in cash and cash equivalents

 

$

168,629

 

$

359,478

 

 

Operating activities

 

Cash flows from operating activities were approximately $492.5 million for the six months ended March 31, 2016 compared to approximately $816.6 million for the same period ended March 31, 2015.  Multiple items contributed to the change, including lower net income, changes in current assets and current liabilities due to lower rig utilization and increased deferred revenue from early termination compensation from customers in the first six months of fiscal 2016 compared to the same period in fiscal 2015.

 

Investing activities

 

Capital expenditures during the six months ended March 31, 2016 were $180.5 million compared to $766.0 million during the six months ended March 31, 2015.  The decrease is primarily due to the reduction in the number of new rigs built during the comparative periods.

 

Financing activities

 

Cash used in financing activities for the first six months of 2016 was comprised primarily of dividends paid of $149.3 million.  During the second quarter of fiscal year 2015, we received proceeds, net of discount and debt issuance costs of $492.8 million.  Additionally, during the first six months of fiscal 2015, we purchased 810,097 common shares at an aggregate cost of $59.7 million and paid dividends of $149.3 million.

 

Other Liquidity

 

Our operating cash requirements, scheduled debt repayments, interest payments, dividend payments, any stock repurchases and estimated capital expenditures, including our rig construction program, for fiscal 2016 are expected to be funded through cash and cash provided from operating activities.  Given current market conditions, there can be no assurance that we will continue to generate cash flows at current levels.  Our indebtedness totaled $532.1 million at March 31, 2016, of which $40.0 million is due later in fiscal 2016.  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 March 31, 2016 and September 30, 2015 was $2.3 billion and $3.1 billion, respectively.  The decrease in backlog at March 31, 2016 from September 30, 2015 is primarily due to the revenue earned since September 30, 2015 and the expiration and termination of long-term contracts.  Approximately 75.2 percent of the March 31, 2016 backlog is not reasonably expected to be filled in fiscal 2016. Included in backlog is early termination revenue expected to be recognized after the periods presented in which early termination notice was received prior to the end of the period.  In addition, a portion of the backlog represents term contracts for new rigs that will be constructed in the future.

 

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The following table sets forth the total backlog by reportable segment as of March 31, 2016 and September 30, 2015, and the percentage of the March 31, 2016 backlog not reasonably expected to be filled in fiscal 2016:

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

September 30,

 

Percentage Not Reasonably

 

Reportable Segment

 

2016

 

2015

 

Expected to be Filled in Fiscal 2016

 

 

 

(in billions)

 

 

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

1.6

 

$

2.2

 

71.5

%

Offshore

 

0.1

 

0.1

 

78.1

%

International Land

 

0.6

 

0.8

 

84.9

%

 

 

$

2.3

 

$

3.1

 

 

 

 

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.  However, in some limited circumstances, such as sustained unacceptable performance by us, no early termination payment would be paid to us.  Also, our customers may be unable to perform their contractual obligations.  Accordingly, the actual amount of revenue earned may vary from the backlog reported.  See the risk factors under “Item 1A. Risk Factors” of our 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission, regarding fixed term contract risk.

 

Capital Resources

 

During the three months ended March 31, 2016, we completed two new FlexRigs.  We are scheduled to complete another two FlexRigs during this fiscal year.  As 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 2016 is expected to be in the range of $300 million to $350 million.  The actual spending level may vary depending primarily on actual maintenance capital requirements and market driven special projects related to the further enhancement of our existing fleet.  All new FlexRigs scheduled for delivery during calendar 2016 are supported with multi-year contracts.  Capital expenditures were $180.5 million and $766.0 million for the first six months of fiscal 2016 and 2015, respectively.

 

There were no other significant changes in our financial position since September 30, 2015.

 

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MATERIAL COMMITMENTS

 

Material commitments as reported in our 2015 Annual Report on Form 10-K have not changed significantly at March 31, 2016.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our accounting policies and estimates 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 2015 Annual Report on Form
10-K.  There have been no material changes in these critical accounting policies and estimates.

 

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, 2017, 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.

 

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 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.

 

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

 

In February 2016, the FASB issued ASU. 2016-02, Leases (Topic 842). ASU 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 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 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 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 Accounting Standards Update No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  ASU 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 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.

 

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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 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 25, 2015;

·                  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;

·                  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; and

·                  Risk Factors in Item 1A of Part II hereof with regard to commodity price risk and foreign currency exchange risk.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Beginning in fiscal 2015, we began designing and implementing a new enterprise resource planning system.  We are implementing aspects of this system in discrete phases and the initial and most significant transition from our current system to the new system occurred in February 2016.  As we move forward, this implementation will continue to require us to monitor and maintain appropriate internal control over financial reporting. While we expect that our internal controls over financial reporting will remain largely similar or unchanged, it is possible that during the implementation, we may make changes to our internal control over financial reporting that could materially affect our internal control over financial reporting.  In addition, it is possible that during future phases of the implementation, we may make changes to our internal control over financial reporting that may not materially affect our internal control over financial reporting, but, when fully implemented, the cumulative effect of the changes made may be considered material.

 

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 March 31, 2016 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.

 

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PART II.   OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

Investigation by the U.S. Attorney.  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.

 

Venezuela Expropriation.  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”).  We are seeking damages for the taking of our 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.

 

ITEM 1A.  RISK FACTORS

 

Our business depends on the level of activity in the oil and natural gas industry, which is significantly impacted by the volatility of oil and natural gas prices and other factors, including the recent decline in oil prices.

 

Our business depends on the conditions of the land and offshore oil and natural gas industry.  Demand for our services depends on oil and natural gas industry exploration and production activity and expenditure levels, which are directly affected by trends in oil and natural gas prices.  Oil and natural gas prices, and market expectations regarding potential changes to these prices, significantly affect oil and natural gas industry activity.

 

In June 2014, oil prices reached over $106 per barrel and then began to decline significantly during the second half of 2014 and continued to decline in 2015 closing below $40 per barrel by December 31, 2015.  During early 2016, oil prices dropped below $30 per barrel before recovering to recent price levels of over $40 per barrel.  As a result, many of our customers announced significant reductions in their 2016 capital spending budgets.  At March 31, 2015, 179 out of an available 332 land rigs were working in the U.S. Land segment.  In contrast, at March 31, 2016, 94 out of an available 347 land rigs were contracted in the U.S. Land segment.  After giving effect to new FlexRigs placed into service and additional rig releases since March 31, 2016, as of May 2, 2016, 84 rigs remain contracted in the U.S. Land segment.  In the event oil prices remain depressed for a sustained period, or decline further, our U.S. Land, International Land and Offshore segments may experience further, significant declines in both drilling activity and spot dayrate pricing which could have a material adverse effect on our business, financial condition and results of operations.

 

Oil and natural gas prices are impacted by many factors beyond our control, including:

 

·                                          the demand for oil and natural gas;

·                                          the cost of exploring for, developing, producing and delivering oil and natural gas;

·                                          the worldwide economy;

·                                          expectations about future oil and natural gas prices;

·                                          domestic and international tax policies;

·                                          political and military conflicts in oil producing regions or other geographical areas or acts of terrorism in the U.S. or elsewhere;

·                                          technological advances;

·                                          the development and exploitation of alternative fuels;

·                                          local and international political, economic and weather conditions;

·                                          the ability of The Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and pricing;

·                                          the level of production by OPEC and non-OPEC countries; and

·                                          the environmental and other laws and governmental regulations regarding exploration and development of oil and natural gas reserves.

 

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The level of land and offshore exploration, development and production activity and the price for oil and natural gas is volatile and is likely to continue to be volatile in the future.  Higher oil and natural gas prices do not necessarily translate into increased activity because demand for our services is typically driven by our customer’s expectations of future commodity prices.  However, a sustained decline in worldwide demand for oil and natural gas or prolonged low oil or natural gas prices would likely result in reduced exploration and development of land and offshore areas and a decline in the demand for our services, which could have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to the political, economic and social instability risks and local laws associated with doing business in certain foreign countries.

 

We currently have 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 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 December 2015, the Company experienced aggregate foreign currency losses of $8.5 million for the three months ended December 31, 2015.  The losses are primarily the result of a sharp devaluation of the Argentine peso in December 2015.  It is expected that the Argentine peso will be allowed to float in the free exchange market and foreign exchange restrictions will be less prohibitive.  However, whether in Argentine or elsewhere, 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.

 

In March 2016, the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system.  The implementation of this system resulted in a reported loss from discontinued operations of $4.0 million in the second fiscal quarter of 2016, all of which corresponds to the Company’s former operations in Venezuela.

 

Additionally, 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.  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 we find acceptable.

 

Although we attempt to minimize the potential impact of such risks by operating in more than one geographical area, during the six months ended March 31, 2016, approximately 14.1 percent of our consolidated operating revenues were generated from international locations in our contract drilling business.  During the six months ended March 31, 2016, approximately 81.7 percent of operating revenues from international locations were from operations in South America.  All of the South American operating revenues were from Argentina, Colombia and Ecuador.  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.

 

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Other risk factors

 

Reference is made to the risk factors pertaining to the Company’s securities portfolio and current backlog of contract drilling revenue in Item 1A of Part 1 of the Company’s Form 10-K for the year ended September 30, 2015.  In order to update these risk factors for developments that have occurred during the first six months of fiscal 2016, the risk factors are hereby amended and updated by reference to, and incorporation herein of Note 4 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof (regarding our securities portfolio) and Liquidity and Capital Resources — Backlog contained in Item 2 of Part I hereof.

 

Except as discussed above for the six months ended March 31, 2016, there have been no material changes to the risk factors disclosed in Item 1A of Part 1 in our Form 10-K.

 

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ITEM 6.   EXHIBITS

 

The following documents are included as exhibits to this Form 10-Q.  Those exhibits below that are incorporated herein by reference are indicated as such by the information supplied in the parenthetical thereafter.  If no parenthetical appears after an exhibit, the exhibit is filed or furnished herewith.

 

Exhibit

 

 

Number

 

Description

 

 

 

10.1

 

Helmerich & Payne, Inc. 2016 Omnibus Incentive Plan (incorporated herein by reference to Appendix A of the Registrant’s Definitive Proxy Statement on Schedule 14A filed on January 19, 2016).

10.2

 

Amendment to Advisory Services Agreement dated February 28, 2016 between Helmerich & Payne, Inc. and Steven R. Mackey.

31.1

 

Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

 

Financial statements from the quarterly report on Form 10-Q of Helmerich & Payne, Inc. for the quarter ended March 31, 2016, filed on May 6, 2016, formatted in Extensive Business Reporting Language (XBRL): (i) the Consolidated Condensed Statements of Income, (ii) the Consolidated Condensed Statements of Comprehensive Income, (iii) the Consolidated Condensed Balance Sheets, (iv) the Consolidated Condensed Statements of Stockholders’ Equity, (v) the Consolidated Condensed Statements of Cash Flows and (vi) the Notes to Consolidated Condensed Financial Statements.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

HELMERICH & PAYNE, INC.

 

 

(Registrant)

 

 

 

 

 

 

Date:

May 6, 2016

By:

/S/ JOHN W. LINDSAY

 

 

 

John W. Lindsay, Chief Executive Officer

 

 

 

 

 

 

 

 

Date:

May 6, 2016

By:

/S/ JUAN PABLO TARDIO

 

 

 

Juan Pablo Tardio, Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

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EXHIBIT INDEX

 

The following documents are included as exhibits to this Form 10-Q.  Those exhibits below that are incorporated herein by reference are indicated as such by the information supplied in the parenthetical thereafter.  If no parenthetical appears after an exhibit, the exhibit is filed or furnished herewith.

 

Exhibit

 

 

Number

 

Description

 

 

 

10.1

 

Helmerich & Payne, Inc. 2016 Omnibus Incentive Plan (incorporated herein by reference to Appendix A of the Registrant’s Definitive Proxy Statement on Schedule 14A filed on January 19, 2016).

10.2

 

Amendment to Advisory Services Agreement dated February 28, 2016 between Helmerich & Payne, Inc. and Steven R. Mackey.

31.1

 

Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

 

Financial statements from the quarterly report on Form 10-Q of Helmerich & Payne, Inc. for the quarter ended March 31, 2016, filed on May 6, 2016, formatted in Extensive Business Reporting Language (XBRL): (i) the Consolidated Condensed Statements of Income, (ii) the Consolidated Condensed Statements of Comprehensive Income, (iii) the Consolidated Condensed Balance Sheets, (iv) the Consolidated Condensed Statements of Stockholders’ Equity, (v) the Consolidated Condensed Statements of Cash Flows and (vi) the Notes to Consolidated Condensed Financial Statements.

 

47