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Helmerich & Payne, Inc.
Helmerich & Payne, Inc. is the holding Company for
Helmerich & Payne International Drilling Co., an international
drilling contractor with land and offshore operations in the
United States, South America, Mexico, Trinidad, Africa
and the Middle East. Holdings also include commercial real
estate properties in the Tulsa, Oklahoma area, and an
energy-weighted portfolio of securities valued at approximately
$326 million as of September 30, 2010.
FINANCIAL HIGHLIGHTS
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per share amounts) | ||||||||||
Operating Revenues | $1,875,162 | $1,843,740 | $1,869,371 | |||||||
Net Income | 156,312 | 353,545 | 461,738 | |||||||
Diluted Earnings per Share | 1.45 | 3.31 | 4.32 | |||||||
Dividends Paid per Share | .210 | .200 | .185 | |||||||
Capital Expenditures | 329,572 | 876,839 | 697,906 | |||||||
Total Assets | 4,265,370 | 4,161,024 | 3,588,045 |
To the Co-owners
of Helmerich & Payne, Inc.:
Two thousand and ten was a year of transition and recovery; let me take the opportunity to reflect on some of the milestones that stand out. First, Venezuela was certainly a disappointing episode for the Company this year but, while perhaps receiving more than its fair share of attention, it is now behind us and we have moved forward.
The industry fought its way back from a dramatic "once in 30 year" free fall that started in the early Fall of 2008 and bottomed in June of 2009. In terms of utilization, margins, operating income and returns, we outpaced our land drilling peers during the recovery that unfolded in the second half of 2009 and continued through our fiscal year 2010. Industry-wide activity steadily improved through the year, as the U.S. land count currently stands at 80 percent of the number of rigs that were running in October of 2008. For the Company's rig count, we have exceeded that percentage. During 2010, we reactivated nearly 90 rigs, our largest single-year effort, and the Company recently crossed the threshold of having 190 rigs operating in the U.S. This surpassed our previous record during the last cyclical peak and achieves the highest level of activity in the U.S. in the Company's history. In addition to better utilization, we outpaced our peers by maintaining significantly higher premiums in average rig revenue and margins during all parts of the cycle.
Another milestone worthy of mention is our new build effort in 2010. In a year where natural gas prices have fallen in half, the Company has been able to secure 23 new FlexRig orders since last March, all long-term contracts with favorable returns. These new orders help us maintain our market leadership in the AC powered land rig market where three-quarters of our U.S. fleet is AC powered compared to one-third for the nearest competitor. Our experience gives us a simple, but profound advantage that enables us to build rigs for a lower cost and achieve higher returns than our peers. That experience represents over 560 rig years of running AC powered technology in the field and captures learnings from more than ten years of our own design and integrated manufacturing efforts.
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In November, we rolled our 100th FlexRig3 off the line. The FlexRig3 is the flagship of our fleet, and we marked the event with a celebration at our Greens Port assembly facility in Houston, Texas. When we read so much about the diminished level of manufacturing in our country, it's nice to have the opportunity to recognize the efforts of people who have built over 200 FlexRigs in that facility. The 100th FlexRig3 on display contained multiple feature enhancements and improvements compared to the first Flex3 assembled in 2002. These improvements come from "eating your own cooking" and a Company-wide focus, from our design and engineering effort through our field operations, to constantly improve and drive innovations that enhance performance.
The Company had two milestone retirements in 2010: Doug Fears, Executive Vice President and Chief Financial Officer of the Company for over 22 years, and Alan Orr, Executive Vice President, Drilling Technology and Development, who spearheaded the FlexRig design effort and had 35 years of service.
Finally, the Company celebrated its 90th anniversary in 2010. Relatedly, we want to recognize my dad, Walt Helmerich, for his 60th year of involvement with H&P. He started work fresh out of Harvard Business School in 1950 and continues today as the Company's Chairman. We are thankful for his leadership and are enormously indebted to him and to the many other loyal employees, past and present, who have built the Company's reputation the old-fashioned way: brick by brick, precept upon precept. Our job going forward is to vigorously defend and advance a powerful combination: Being the world's oldest and most experienced land contract driller and, at the same time, the most innovative and forward thinking. That is the charge we embrace heading into 2011.
Sincerely, | ||
![]() | ||
Hans Helmerich President | ||
November 24, 2010 |
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HELMERICH & PAYNE, INC.
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
SUMMARY OF CONSOLIDATED STATEMENTS OF INCOME*† | ||||||||||||
Operating Revenues | $1,875,162 | $1,843,740 | $1,869,371 | |||||||||
Operating Costs, excluding depreciation | 1,071,959 | 944,780 | 987,838 | |||||||||
Depreciation** | 262,658 | 227,535 | 195,343 | |||||||||
General and Administrative Expense | 81,479 | 58,822 | 56,429 | |||||||||
Operating Income (Loss) | 451,796 | 608,875 | 640,084 | |||||||||
Interest and Dividend Income | 1,811 | 2,755 | 3,524 | |||||||||
Gain on Sale of Investment Securities | — | — | 21,994 | |||||||||
Interest Expense | 17,158 | 13,590 | 18,721 | |||||||||
Income (Loss) from Continuing Operations | 286,081 | 380,546 | 420,258 | |||||||||
Net Income | 156,312 | 353,545 | 461,738 | |||||||||
Diluted Earnings Per Common Share: | ||||||||||||
Income (Loss) from Continuing Operations | 2.66 | 3.56 | 3.93 | |||||||||
Net Income | 1.45 | 3.31 | 4.32 | |||||||||
*$000's omitted, except per share data | ||||||||||||
SUMMARY FINANCIAL DATA* | ||||||||||||
Cash** | $ 63,020 | $ 96,142 | $ 77,549 | |||||||||
Working Capital** | 417,888 | 157,103 | 274,519 | |||||||||
Investments | 320,712 | 356,404 | 199,266 | |||||||||
Property, Plant, and Equipment, Net** | 3,275,020 | 3,194,273 | 2,605,384 | |||||||||
Total Assets | 4,265,370 | 4,161,024 | 3,588,045 | |||||||||
Long-term Debt | 360,000 | 420,000 | 475,000 | |||||||||
Shareholders' Equity | 2,807,465 | 2,683,009 | 2,265,474 | |||||||||
Capital Expenditures | 329,572 | 876,839 | 697,906 | |||||||||
*$000's omitted | ||||||||||||
Rig Fleet Summary | ||||||||||||
Drilling Rigs – | ||||||||||||
U. S. Land – FlexRigs | 182 | 163 | 146 | |||||||||
U. S. Land – Highly Mobile | 11 | 11 | 12 | |||||||||
U. S. Land – Conventional | 27 | 27 | 27 | |||||||||
Offshore Platform | 9 | 9 | 9 | |||||||||
International Land† | 28 | 33 | 19 | |||||||||
Total Rig Fleet | 257 | 243 | 213 | |||||||||
Rig Utilization Percentage – | ||||||||||||
U. S. Land – FlexRigs | 87 | 76 | 100 | |||||||||
U. S. Land – Highly Mobile | 0 | 29 | 83 | |||||||||
U. S. Land – Conventional | 17 | 39 | 80 | |||||||||
U. S. Land – All Rigs | 73 | 68 | 96 | |||||||||
Offshore Platform | 80 | 89 | 75 | |||||||||
International Land† | 71 | 70 | 72 | |||||||||
|
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| 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
$1,502,380 | $1,140,219 | $ 733,902 | $ 532,759 | $ 472,407 | $ 472,865 | $ 479,132 | $ 348,495 | ||||||||||||||||||
788,967 | 606,945 | 435,057 | 375,600 | 322,553 | 319,330 | 295,021 | 223,945 | ||||||||||||||||||
137,187 | 93,363 | 88,483 | 139,591 | 76,748 | 56,208 | 46,134 | 69,329 | ||||||||||||||||||
47,401 | 51,873 | 41,015 | 37,661 | 41,003 | 36,563 | 28,180 | 23,306 | ||||||||||||||||||
586,506 | 395,341 | 182,355 | (14,698 | ) | 35,845 | 61,946 | 113,890 | 32,465 | |||||||||||||||||
4,143 | 9,688 | 5,772 | 1,622 | 2,467 | 3,624 | 9,128 | 18,144 | ||||||||||||||||||
65,458 | 19,866 | 26,969 | 25,418 | 5,529 | 24,820 | 1,189 | 13,295 | ||||||||||||||||||
9,591 | 6,499 | 12,416 | 12,541 | 12,357 | 993 | 1,715 | 2,715 | ||||||||||||||||||
415,924 | 269,852 | 120,666 | (1,016 | ) | 16,417 | 55,017 | 71,046 | 36,882 | |||||||||||||||||
449,261 | 293,858 | 127,606 | 4,359 | 17,873 | 63,517 | 144,254 | 82,300 | ||||||||||||||||||
3.95 | 2.54 | 1.16 | (0.01 | ) | 0.17 | 0.54 | 0.70 | 0.36 | |||||||||||||||||
4.27 | 2.77 | 1.23 | 0.04 | 0.17 | 0.63 | 1.42 | 0.82 |
$ 67,445 | $ 32,193 | $ 284,460 | $ 63,785 | $ 29,763 | $ 45,699 | $ 127,395 | $ 106,171 | ||||||||||||||||||
209,766 | 126,540 | 378,496 | 157,266 | 82,712 | 87,584 | 201,549 | 165,513 | ||||||||||||||||||
223,360 | 218,309 | 178,452 | 161,532 | 158,770 | 150,175 | 203,271 | 307,425 | ||||||||||||||||||
2,068,812 | 1,399,974 | 897,504 | 913,338 | 983,026 | 824,815 | 565,195 | 489,722 | ||||||||||||||||||
2,885,369 | 2,134,712 | 1,663,350 | 1,406,844 | 1,417,770 | 1,227,313 | 1,300,121 | 1,200,854 | ||||||||||||||||||
445,000 | 175,000 | 200,000 | 200,000 | 200,000 | 100,000 | 50,000 | 50,000 | ||||||||||||||||||
1,815,516 | 1,381,892 | 1,079,238 | 914,110 | 917,251 | 895,170 | 1,026,477 | 955,703 | ||||||||||||||||||
885,583 | 521,847 | 78,677 | 86,057 | 233,850 | 298,295 | 152,123 | 62,224 | ||||||||||||||||||
118 | 73 | 50 | 48 | 43 | 26 | 13 | 6 | ||||||||||||||||||
12 | 12 | 12 | 11 | 11 | 11 | 11 | 10 | ||||||||||||||||||
27 | 28 | 29 | 28 | 29 | 29 | 25 | 22 | ||||||||||||||||||
9 | 9 | 11 | 11 | 12 | 12 | 10 | 10 | ||||||||||||||||||
16 | 16 | 14 | 19 | 21 | 19 | 20 | 22 | ||||||||||||||||||
182 | 138 | 116 | 117 | 116 | 97 | 79 | 70 | ||||||||||||||||||
100 | 100 | 100 | 99 | 97 | 96 | 100 | 99 | ||||||||||||||||||
93 | 100 | 99 | 91 | 89 | 97 | 89 | 95 | ||||||||||||||||||
87 | 95 | 82 | 67 | 58 | 70 | 99 | 77 | ||||||||||||||||||
97 | 99 | 94 | 87 | 81 | 84 | 97 | 85 | ||||||||||||||||||
65 | 69 | 53 | 48 | 51 | 83 | 98 | 94 | ||||||||||||||||||
89 | 95 | 80 | 47 | 42 | 59 | 69 | 60 |
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Management's Discussion & Analysis of Financial Condition and Results of Operations
Helmerich & Payne, Inc.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with Part I of our Form 10-K as well as the Consolidated Financial Statements and related notes thereto. Our future operating results may be affected by various trends and factors, which are beyond our control. These include, among other factors, fluctuations in oil and natural gas prices, unexpected expiration or termination of drilling contracts, currency exchange gains and losses, expropriation of real and personal property, changes in general economic conditions, disruptions to the global credit markets, rapid or unexpected changes in technologies, risks of foreign operations, uninsured risks, changes in domestic and foreign policies, laws and regulations 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.
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. 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, assumed facts 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 and those factors discussed under Risk Factors beginning on page 5 of our Form 10-K are important factors (but not necessarily all important factors) that could cause actual
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results to differ materially from those expressed in any forward-looking statement made by us or persons acting on our behalf. We undertake no duty to update or revise our forward-looking statements based on changes of internal estimates or expectations or otherwise.
EXECUTIVE SUMMARY
Helmerich & Payne, Inc. is primarily a contract drilling company which owned and operated a total of 257 drilling rigs at September 30, 2010. Our contract drilling segments include the U.S. Land segment in which we had 220 rigs, the Offshore segment in which we had 9 offshore platform rigs, and the International Land segment in which we had 28 rigs at September 30, 2010. After experiencing a very significant decline in rig utilization and spot pricing in the U.S. land market during the prior year, we experienced a partial and encouraging recovery during 2010. A confluence of events in the U.S. contributed to this recovery, including increased levels of drilling to hold acreage by production, operator access to capital through several favorable exploration and production joint venture agreements, and the shift of operators' drilling budgets from natural gas to crude oil and liquids-rich projects. With some exceptions, international markets in general also recovered during fiscal 2010, allowing us to generate strong results from continuing operations as compared to the prior year. Activity in our Offshore segment remained relatively strong and was not significantly impacted by the deepwater drilling moratorium in the Gulf of Mexico. Drilling continues to become more challenging and technologically focused, requiring more highly capable rigs which are expected to be in short supply as demand improves. We are well positioned to meet the long-term needs of our customers and to compete successfully for opportunities in any improving market.
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As further discussed in Note 2 of the Consolidated Financial Statements, our Venezuelan subsidiary was classified as discontinued operations on June 30, 2010, after the announced "forceful acquisition" of our drilling assets in that country by the Venezuelan government. The subsidiary was previously classified as an operating segment within our International Land segment. Accordingly, we reclassified the financial statements and related disclosures for all periods presented. These reclassifications had no impact on net income, total assets or total shareholders' equity. Unless otherwise indicated, the following discussion pertains only to our continuing operations. All historical statements and statistical data have been restated to exclude discontinued operations. Unless otherwise indicated, references to 2010, 2009 and 2008 in the following discussion are referring to our fiscal year 2010, 2009 and 2008.
RESULTS OF OPERATIONS
All per share amounts included in the Results of Operations discussion are stated on a diluted basis. Our net income for 2010 was $156.3 million ($1.45 per share), compared with $353.5 million ($3.31 per share) for 2009 and $461.7 million ($4.32 per share) for 2008. Included in our net income for 2008 were after-tax gains from the sale of investment securities of $13.5 million ($0.13 per share). Net income also includes after-tax gains from the sale of assets of $3.3 million ($0.03 per share) in 2010, $3.4 million ($0.03 per share) in 2009 and $8.3 million ($0.08 per share) in 2008. Included in net income in 2009 and 2008 are after-tax gains of $0.3 million and $6.5 million ($0.06 per share), respectively, from involuntary conversion of long-lived assets that sustained significant damage as a result of Hurricane Katrina in 2005. Also included in net income is our portion of income from an equity affiliate, Atwood Oceanics, Inc. ("Atwood"), of $0.09 per share in 2009 and $0.16 per
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share in 2008. Effective April 1, 2009, we determined we no longer had the ability to exercise significant influence over operating and financial policies at Atwood and discontinued accounting for Atwood using the equity method. The investment in Atwood is now recorded at fair value with changes included as a component of other comprehensive income.
Consolidated operating revenues were $1,875.2 million in 2010, $1,843.7 million in 2009, and $1,869.4 million in 2008. In 2009, as oil and natural gas prices declined and uncertainty in the capital markets increased, customers reduced spending on exploration and development drilling causing a reduction in rig utilization. Our U.S. land rig utilization was 73 percent in 2010, 68 percent in 2009 and 96 percent in 2008. The average number of U.S. land rigs available was 207 rigs in 2010, 194 rigs in 2009 and 171 rigs in 2008. Revenue in the Offshore segment remained steady in 2010 and 2009 after increasing in 2009 from 2008. Rig utilization for offshore rigs was 80 percent in 2010, compared to 89 percent in 2009 and 75 percent in 2008. International rig revenues increased in 2010 after staying relatively level in 2009 from 2008. Rig utilization in our International Land segment was 71 percent in 2010, 70 percent in 2009 and 72 percent in 2008.
We did not sell any investment securities in 2010 or 2009, but recorded gains of $22.0 million in 2008 from the sale of investment securities. Interest and dividend income was $1.8 million, $2.8 million and $3.5 million in 2010, 2009 and 2008, respectively.
Direct operating costs in 2010 were $1,072.0 million or 57 percent of operating revenues, compared with $944.8 million or 51 percent
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of operating revenues in 2009 and $987.8 million or 53 percent of operating revenues in 2008.
Depreciation expense was $262.7 million in 2010, $227.5 million in 2009 and $195.3 million in 2008. Included in depreciation are abandonments of equipment of $4.2 million in 2010, $5.3 million in 2009, and $13.3 million in 2008. Depreciation expense, exclusive of the abandonments, increased over the three-year period as we placed into service 23 new rigs in 2010, 25 in 2009 and 29 in 2008. Depreciation expense in 2011 is expected to increase from 2010 from new rigs placed into service during 2010 and additional rigs placed into service during 2011. (See Liquidity and Capital Resources.)
As conditions warrant, management performs an analysis of the industry market conditions impacting its long-lived assets in each drilling segment. Based on this analysis, management determines if any impairment is required. In 2010, 2009 and 2008, no impairment was recorded.
General and administrative expenses totaled $81.5 million in 2010, $58.8 million in 2009, and $56.4 million in 2008. The $22.7 million increase in 2010 from 2009 is partially due to an increase in stock-based compensation of $7.5 million. The increase in stock-based compensation is comprised of additional expense of $4.9 million resulting from a change in our Long-Term Incentive Plan which permitted continued equity vesting after retirement, and $2.6 million expense resulting from options granted in 2010 having a higher grant price and value than options amortized at September 30, 2009. Also contributing to increased general and administrative expenses in 2010 were additional pension expense of $2.2 million and an increase of $10.3 million from increases in employee salaries,
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an increase in the number of employees and an increase in bonus accruals.
Interest expense was $17.2 million in 2010, $13.6 million in 2009, and $18.7 million in 2008. Interest expense is primarily attributable to the fixed-rate debt outstanding and advances on the senior credit facility. Interest expense increased in 2010 from 2009 primarily as a result of borrowings under a fixed rate credit facility obtained in July 2009. Capitalized interest was $6.4 million, $6.6 million and $4.7 million in 2010, 2009 and 2008, respectively. All of the capitalized interest is attributable to our rig construction program.
The provision for income taxes totaled $152.2 million in 2010, $227.9 million in 2009, and $242.6 million in 2008. The effective income tax rate decreased to 35 percent in 2010 from 38 percent in 2009 and 2008. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Recoverability of any tax assets are evaluated and necessary allowances are provided. The carrying value of the net deferred tax assets is based on management's judgments using certain estimates and assumptions that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the benefits of such assets. If these estimates and related assumptions change in the future, additional valuation allowances may be recorded against the deferred tax assets resulting in additional income tax expense in the future. (See Note 4 of the Consolidated Financial Statements for additional income tax disclosures.)
On May 21, 2008, we acquired a private limited partnership, TerraVici Drilling Solutions ("TerraVici") in a transaction accounted for under the purchase method of accounting. Under the purchase
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method of accounting, the assets and liabilities of TerraVici were recorded as of the acquisition date, at their respective fair values, and consolidated with our financial statements. The operations for TerraVici are included with all other non-reportable business segments.
TerraVici is developing patented rotary steerable technology to enhance horizontal and directional drilling operations. We acquired TerraVici to complement technology currently used with FlexRigs. The process of drilling has become increasingly challenging as preferred well types deviate from simple vertical drilling. By combining this new technology with our existing capabilities, we expect to improve drilling productivity and reduce total well cost to the customer.
We paid a total purchase price of $12.2 million, including acquisition related fees of $1.2 million. In conjunction with the acquisition, we recorded an in-process research and development ("IPR&D") charge of $11.1 million in 2008. The IPR&D represented rotary steerable system ("RSS") tools under development by TerraVici at the date of acquisition that had not yet achieved technological feasibility and would have no future alternative use. The $11.1 million estimated fair value of the IPR&D was derived using the multi-period excess-earnings method. The terms of the transaction provide for future contingency payments of up to $11 million based on specific commerciality milestones and certain earn-out provisions based on future earnings being met. Pursuant to the satisfaction of a performance milestone, we paid $4.0 million subsequent to September 30, 2010. This additional payment will be accounted for as goodwill.
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During 2010, 2009 and 2008, we incurred $12.3 million, $9.7 million and $1.8 million, respectively, of research and development expenses related to ongoing development of the RSS. We anticipate research and development expenses to continue during 2011.
In 2010 and 2009, we had a net loss from discontinued operations of $129.8 million and $27.0 million, respectively, compared to net income from discontinued operations in 2008 of $41.5 million. We determined that, as of the beginning of the second quarter of fiscal 2009 and forward, services to our customer in Venezuela, Petroleos de Venezuela, S.A. ("PDVSA"), no longer met the revenue recognition criteria as collectability became uncertain. The ability to collect accounts receivable in U.S. dollars from PDVSA deteriorated to the point that, during the second quarter of fiscal 2009, we decided to discontinue work as contracts expired. All of our eleven rigs in Venezuela were active at the end of 2008 and one rig remained active at the end of 2009, but became idle during the first quarter of 2010. As a result of the change in revenue recognition, $57.9 million of revenue was not recorded during 2009 and only cash collected of $13.5 million was recorded as revenue in 2010. Contributing to the net loss in 2010 was approximately $70.2 million loss from derecognizing our Venezuelan property and equipment and inventory as a result of the seizing of our assets by the Venezuelan government. Accounts receivable, payables and other deferred charges and credits, netting to approximately $9.5 million, were also written off because the related future cash inflows and outflows associated with them were no longer expected to occur. At September 30, 2010, we had approximately $31.3 million (U.S. currency equivalent) cash balances in Venezuela. Our Venezuelan subsidiary has had, since July 22, 2008, an outstanding application
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with the Venezuelan government requesting approval to remit approximately $14.2 million as a dividend to its U.S. based parent, converting bolivar fuerte cash balances to U.S. dollars. Because of the seizure of our assets by the Venezuelan government and our inability to obtain approval of the dividend, we also impaired approximately $21.1 million cash as of September 30, 2010. On January 8, 2010, the Venezuelan government devalued its currency and, as a result, we recorded an exchange loss of approximately $20.4 million which is included in discontinued operations for 2010.
We are currently evaluating various remedies, including any recourse we may have against PDVSA or related parties, any remuneration or reimbursement that we might collect from PDVSA or related parties, and any other sources of recovery for our losses. While there exists the possibility of realizing a recovery, we are currently unable to determine the timing or amounts we may receive, if any, or the likelihood of recovery. No gain contingencies are recognized in our Consolidated Financial Statements.
The following tables summarize operations by reportable operating segment.
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COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009
| 2010 | 2009 | % Change | ||||||
---|---|---|---|---|---|---|---|---|---|
U.S. LAND OPERATIONS | (in thousands, except operating statistics) | ||||||||
Operating revenues | $1,412,495 | $1,441,164 | (2.0 | )% | |||||
Direct operating expenses | 772,766 | 663,385 | 16.5 | ||||||
General and administrative expense | 23,799 | 16,812 | 41.6 | ||||||
Depreciation | 211,652 | 187,259 | 13.0 | ||||||
Segment operating income | $ 404,278 | $ 573,708 | (29.5 | ) | |||||
Operating Statistics: | |||||||||
Revenue days | 55,051 | 48,055 | 14.6 | % | |||||
Average rig revenue per day | $ 23,909 | $ 28,194 | (15.2 | ) | |||||
Average rig expense per day | $ 12,288 | $ 12,009 | 2.3 | ||||||
Average rig margin per day | $ | 11,621 | $ | 16,185 | (28.2 | ) | |||
Number of rigs at end of period | 220 | 201 | 9.5 | ||||||
Rig utilization | 73 | % | 68 | % | 7.4 |
Operating statistics for per day revenue, expense and margin do not include reimbursements of "out-of-pocket" expenses of $96,304 and $86,297 for 2010 and 2009, respectively.
Rig utilization excludes one FlexRig completed and ready for delivery at September 30, 2010.
Rig utilization excludes seven FlexRigs completed and ready for delivery at September 30, 2009.
Operating income in the U.S. Land segment decreased to $404.3 million in 2010 from $573.7 million in 2009. Included in U.S. land revenues for 2010 and 2009 is approximately $41.2 million and $169.4 million, respectively, from early termination revenue and revenue from customers that requested delivery delays for new FlexRigs. Excluding early termination related revenue and customer requested delivery delay revenue for new FlexRigs, the average revenue per day for 2010 decreased by $1,509 to $23,161 from $24,670 in 2009, as a result of lower average dayrates in 2010 compared to 2009.
Direct operating expenses increased 17 percent in 2010 from 2009, and the expense as a percentage of revenue increased to 55 percent in 2010 from 46 percent in 2009. However, the average rig expense per day increased by only $279 during 2010, primarily as a result of costs incurred to reactivate idle rigs.
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Rig utilization increased to 73 percent in 2010 from 68 percent in 2009. The total number of rigs at September 30, 2010 was 220 compared to 201 rigs at September 30, 2009. The net increase is due to 14 new FlexRigs having been completed and placed into service, one transferred to the International Land segment with a customer commitment, and six transferred from the International Land segment. Subsequent to September 30, 2010, we classified two conventional rigs as held for sale.
Depreciation includes charges for abandoned equipment of $3.5 million and $4.9 million in 2010 and 2009, respectively. Excluding the abandonment amounts, depreciation in 2010 increased 14 percent from 2009 due to the increase in available rigs.
We expect to complete and deliver another 16 new FlexRigs by the end of the third fiscal quarter of 2011. Like those completed in fiscal 2010, each of these new rigs is committed to work for an exploration and production company under a fixed term contract, performing drilling services on a daywork contract basis. As a result of the new FlexRigs added in 2010 and additional rigs scheduled for completion in 2011, we anticipate depreciation expense to continue to increase in fiscal 2011.
During 2009, the economic recession, including the decrease in oil and natural gas prices and deterioration in the credit markets, had an effect on customer spending. As a result, the industry's active land drilling rig count in the U.S. land market declined by over fifty percent from the fall of 2008 to the summer of 2009. Since June 2009, the industry's U.S. land rig count has been experiencing a steady recovery but the rig count still remains about 20 percent below the peak level reported during the fall of 2008. At
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September 30, 2010, 185 out of 220 existing rigs in the U.S. Land segment were generating revenue. Of the 185 rigs generating revenue, 127 were under fixed term contracts, and 58 were working in the spot market. At November 18, 2010, the number of existing rigs under fixed term contracts in the segment increased to 132 and the number of rigs working in the spot market remained at 58. Only one of the rigs under a fixed term contract was under a customer requested delivery delay. Delayed FlexRigs do not generate revenue days and are not considered for purposes of calculating and reporting utilization rates.
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009
| 2010 | 2009 | % Change | ||||||
---|---|---|---|---|---|---|---|---|---|
OFFSHORE OPERATIONS | (in thousands, except operating statistics) | ||||||||
Operating revenues | $202,734 | $204,702 | (1.0 | )% | |||||
Direct operating expenses | 131,325 | 133,442 | (1.6 | ) | |||||
General and administrative expense | 5,821 | 4,095 | 42.1 | ||||||
Depreciation | 12,519 | 11,872 | 5.4 | ||||||
Segment operating income | $ | 53,069 | $ | 55,293 | (4.0 | ) | |||
Operating Statistics: | |||||||||
Revenue days | 2,642 | 2,938 | (10.1 | )% | |||||
Average rig revenue per day | $ 47,534 | $ 48,677 | (2.3 | ) | |||||
Average rig expense per day | $ 24,653 | $ 27,373 | (9.9 | ) | |||||
Average rig margin per day | $ 22,881 | $ 21,304 | 7.4 | ||||||
Number of rigs at end of period | 9 | 9 | — | ||||||
Rig utilization | 80 | % | 89 | % | (10.1 | ) |
Operating statistics of per day revenue, expense and margin do not include reimbursements of "out-of-pocket" expenses of $37,594 and $34,125 for 2010 and 2009, respectively. Also excluded are the effects of offshore platform management contracts and currency revaluation expense.
Segment operating income in our Offshore segment decreased by four percent in 2010 from 2009 primarily due to reduced activity. Segment operating income was not significantly impacted during 2010 as a result of the government imposed deepwater drilling moratorium.
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Currently, we have seven of our nine platform rigs working. The rig located offshore Trinidad was placed on standby during the fourth fiscal quarter of 2010 but is expected to commence operations for a new customer by the first fiscal quarter of 2011.
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009
| 2010 | 2009 | % Change | ||||||
---|---|---|---|---|---|---|---|---|---|
INTERNATIONAL LAND OPERATIONS | (in thousands, except operating statistics) | ||||||||
Operating revenues | $ | 247,179 | $ | 187,099 | 32.1 | % | |||
Direct operating expenses | 166,021 | 146,565 | 13.3 | ||||||
General and administrative expense | 2,949 | 2,301 | 28.2 | ||||||
Depreciation | 29,938 | 19,278 | 55.3 | ||||||
Segment operating income | $ | 48,271 | $ | 18,955 | 154.7 | ||||
Operating Statistics: | |||||||||
Revenue days | 7,254 | 4,807 | 50.9 | % | |||||
Average rig revenue per day | $ | 32,451 | $ | 35,618 | (8.9 | ) | |||
Average rig expense per day | $ | 21,142 | $ | 26,528 | (20.3 | ) | |||
Average rig margin per day | $ | 11,309 | $ | 9,090 | 24.4 | ||||
Number of rigs at end of period | 28 | 33 | (15.2 | ) | |||||
Rig utilization | 71 | % | 70 | % | 1.4 |
Operating statistics of per day revenue, expense and margin do not include reimbursements of "out-of-pocket" expenses of $11,779 and $15,884 for 2010 and 2009, respectively. Also excluded are the effects of currency revaluation expense.
Rig utilization at September 30, 2009 excludes one FlexRig completed and ready for delivery and two FlexRigs delivered waiting on customer location.
The International Land segment had operating income of $48.3 million for 2010 compared to $19.0 million for 2009, primarily due to an increase in revenue days.
Rig utilization for international land operations increased to 71 percent in 2010 from 70 percent in 2009. The total number of rigs at September 30, 2010 was 28 compared to 33 rigs at September 30, 2009. The decrease was due to six rigs transferred to the U.S. Land segment and one rig transferred to the International Land segment. Five of the six rigs had been in the International Land
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segment for prospective bidding purposes and came back to the U.S. under contract. The rig transferred to the International Land segment was in transit to a customer location at September 30, 2010. Two FlexRigs completed in 2009 and one FlexRig completed in 2008 were placed into service during 2010.
Direct operating expenses increased primarily due to an increase in activity. However, the average rig expense per day decreased in 2010 from 2009 as revenue days increased and labor and stacking expenses related to rigs that became idle were reduced.
Subsequent to September 30, 2010, two rigs were transferred to the U.S. Land segment with one of those under contract. Three international rigs have received release notifications and are expected to return to the U.S. Land segment late in the first quarter and early second quarter of fiscal 2011.
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
| 2009 | 2008 | % Change | ||||||
---|---|---|---|---|---|---|---|---|---|
U.S. LAND OPERATIONS | (in thousands, except operating statistics) | ||||||||
Operating revenues | $ | 1,441,164 | $ | 1,542,038 | (6.5 | )% | |||
Direct operating expenses | 663,385 | 756,828 | (12.3 | ) | |||||
General and administrative expense | 16,812 | 17,599 | (4.5 | ) | |||||
Depreciation | 187,259 | 161,893 | 15.7 | ||||||
Segment operating income | $ 573,708 | $ 605,718 | (5.3 | ) | |||||
Operating Statistics: | |||||||||
Revenue days | 48,055 | 59,804 | (19.6 | )% | |||||
Average rig revenue per day | $ 28,194 | $ 24,522 | 15.0 | ||||||
Average rig expense per day | $ 12,009 | $ 11,393 | 5.4 | ||||||
Average rig margin per day | $ 16,185 | $ 13,129 | 23.3 | ||||||
Number of rigs at end of period | 201 | 185 | 8.6 | ||||||
Rig utilization | 68 | % | 96 | % | (29.2 | ) |
Operating statistics for per day revenue, expense and margin do not include reimbursements of "out-of-pocket" expenses of $86,297 and $75,519 for 2009 and 2008, respectively.
Rig utilization excludes seven FlexRigs completed and ready for delivery at September 30, 2009.
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Operating income in the U.S. Land segment decreased to $573.7 million in 2009 from $605.7 million in 2008. Included in U.S. land revenues for 2009 was approximately $169.4 million from early termination revenue and revenue from customers that requested delivery delays for new FlexRigs. The average revenue per day for 2009 increased $3,672 of which $3,524 was attributable to the early termination related revenue and customer requested delivery delay revenue for new FlexRigs.
During 2009, we received 37 early termination notices from customers corresponding to the new rig build program. All 37 rigs released had been deployed to the field prior to fiscal 2008.
Direct operating expenses decreased 12.3 percent from 2008 to 2009, and the expense as a percentage of revenue declined to 46 percent in 2009 from 49 percent in 2008. The average rig expense per day, however, increased during 2009 due to fixed expenses incurred on idle rigs including property taxes and insurance as well as labor and other expenses associated with stacking rigs.
Rig utilization decreased to 68 percent in 2009 from 96 percent in 2008. The total number of rigs at September 30, 2009 was 201 compared to 185 rigs at September 30, 2008. The net increase was due to 22 new FlexRigs having been completed and placed into service, 7 rigs completed and ready for service, 7 transferred to the International Land segment with customer commitments, 5 transferred to the International Land segment to be used for bidding prospective work, and 1 rig removed and held for sale. Depreciation included charges for abandoned equipment of $4.9 million and $13.2 million in 2009 and 2008, respectively. Excluding the
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abandonment amounts, depreciation in 2009 increased 23 percent from 2008 due to the increase in available rigs.
COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
| 2009 | 2008 | % Change | ||||||
---|---|---|---|---|---|---|---|---|---|
OFFSHORE OPERATIONS | (in thousands, except operating statistics) | ||||||||
Operating revenues | $204,702 | $154,452 | 32.5 | % | |||||
Direct operating expenses | 133,442 | 104,454 | 27.8 | ||||||
General and administrative expense | 4,095 | 4,452 | (8.0 | ) | |||||
Depreciation | 11,872 | 12,152 | (2.3 | ) | |||||
Segment operating income | $ 55,293 | $ 33,394 | 65.6 | ||||||
Operating Statistics: | |||||||||
Revenue days | 2,938 | 2,442 | 20.3 | % | |||||
Average rig revenue per day | $ 48,677 | $ 47,743 | 2.0 | ||||||
Average rig expense per day | $ | 27,373 | $ | 29,655 | (7.7 | ) | |||
Average rig margin per day | $ 21,304 | $ 18,088 | 17.8 | ||||||
Number of rigs at end of period | 9 | 9 | — | ||||||
Rig utilization | 89 | % | 75 | % | 18.7 |
Operating statistics of per day revenue, expense and margin do not include reimbursements of "out-of-pocket" expenses of $34,125 and $16,330 for 2009 and 2008, respectively. Also excluded are the effects of offshore platform management contracts and currency revaluation expense.
Segment operating income in our Offshore segment increased 66 percent in 2009 from 2008 due to increased activity and a rig beginning work in Trinidad during 2008.
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COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 2009 AND 2008
| 2009 | 2008 | % Change | |||||||
---|---|---|---|---|---|---|---|---|---|---|
INTERNATIONAL LAND OPERATIONS | (in thousands, except operating statistics) | |||||||||
Operating revenues | $187,099 | $161,072 | 16.2 | % | ||||||
Direct operating expenses | 146,565 | 125,660 | 16.6 | |||||||
General and administrative expense | 2,301 | 3,344 | (31.2 | ) | ||||||
Depreciation | 19,278 | 14,191 | 35.8 | |||||||
Segment operating income | $ 18,955 | $ 17,877 | 6.0 | |||||||
Operating Statistics: | ||||||||||
Revenue days | 4,807 | 4,120 | 16.7 | % | ||||||
Average rig revenue per day | $ 35,618 | $ 34,964 | 1.9 | |||||||
Average rig expense per day | $ 26,528 | $ 25,949 | 2.2 | |||||||
Average rig margin per day | $ 9,090 | $ 9,015 | 0.8 | |||||||
Number of rigs at end of period | 33 | 19 | 73.7 | |||||||
Rig utilization | 70 | % | 72 | % | (2.8 | ) |
Operating statistics of per day revenue, expense and margin do not include reimbursements of "out-of-pocket" expenses of $15,884 and $17,019 for 2009 and 2008, respectively. Also excluded are the effects of currency revaluation expense.
Rig utilization at September 30, 2009 excludes one FlexRig completed and ready for delivery and two FlexRigs delivered waiting on customer location. Rig utilization at September 30, 2008 excludes four FlexRigs completed and ready for delivery.
Segment operating income for our International Land segment increased six percent in 2009 from 2008. The total number of rigs at September 30, 2009 was 33 compared to 19 rigs at September 30, 2008. During 2009, 12 rigs were transferred to the International Land segment from the U.S. Land segment. Of those twelve, seven were under contract with the remaining five used for bidding prospective work. Those five were subsequently returned to the U.S. Land segment. Five new FlexRigs were placed into service during 2009 with two of them completed in 2008 and two completed in 2009. The fifth FlexRig was completed during 2008 and was under contract at the end of 2009 waiting to be sent to a location to be determined by the operator.
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LIQUIDITY AND CAPITAL RESOURCES
Our capital spending was $329.6 million in 2010, $876.8 million in 2009 and $697.9 million in 2008. Net cash provided from operating activities was $462.3 million in 2010, $895.9 million in 2009 and $588.6 million in 2008. Our 2011 capital spending level will be primarily driven by our new build construction program as it adapts to market demand for incremental FlexRigs during the year. Given the number of customer commitments that we already have for new FlexRigs to be completed in 2011, and the level of rig component orders that are required to ensure our ability to effectively respond to additional new FlexRig demand, our current capital spending estimate for 2011 is approximately $600 million.
Historically, we have financed operations primarily through internally generated cash flows. In periods when internally generated cash flows are not sufficient to meet liquidity needs, we will either borrow from available credit sources or, if market conditions are favorable, sell portfolio securities. Likewise, if we are generating excess cash flows, we may invest in short-term investments. In 2009, we purchased $12.5 million of short-term investments. The $12.5 million short-term investment matured in 2010.
We manage a portfolio of marketable securities that, at the close of fiscal 2010, had a market value of $320.7 million. Our investments in Atwood and Schlumberger, Ltd. made up 93 percent of the portfolio's market value on September 30, 2010. The value of the portfolio is subject to fluctuation in the market and may vary considerably over time. Excluding our investments in limited
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partnerships carried at cost, the portfolio is recorded at fair value on our balance sheet.
We generated cash proceeds from the sale of portfolio securities of $25.5 million in 2008. We did not sell any portfolio securities in 2010 or 2009.
In 2008, proceeds were primarily from the sale of 170,000 shares of Schlumberger, Ltd. and all other available-for-sale securities we owned. Proceeds were primarily used to fund capital expenditures.
Our proceeds from asset sales totaled $7.9 million in 2010, $8.1 million in 2009 and $22.5 million in 2008. In 2008, two international land rigs were sold generating $13.0 million in proceeds. Income from asset sales in 2008 totaled $13.0 million. The rigs sold in 2008 were idle at the time of the sales and, with our emphasis on FlexRig technology, we took advantage of the opportunity to sell older rigs. In each year we also had sales of old or damaged rig equipment and drill pipe used in the ordinary course of business.
In 2009 and 2008, we received insurance proceeds of approximately $0.2 million and $5.3 million, respectively, for damages sustained to our offshore Rig 201 during Hurricane Katrina. During the fourth quarter of fiscal 2007, our Rig 178 was lost when the well it was drilling had a blowout. During 2009 and 2008, we received gross insurance proceeds of approximately $0.3 million and $8.7 million, respectively, in connection with the loss of Rig 178. We recorded a net gain from involuntary conversion of approximately $0.5 million
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in 2009 and $10.2 million in 2008. The proceeds, shown in the Consolidated Statements of Cash Flows under investing activities, were used to rebuild Rig 201 and replace Rig 178. The costs for both rigs were capitalized with Rig 201 returning to work in the fourth fiscal quarter of 2007 and the replacement rig returning to work in 2008. We have settled both claims and no additional insurance proceeds are expected.
We have $150 million of intermediate-term unsecured debt obligations with staged maturities of $75 million in August, 2012 and $75 million in August, 2014. The annual average interest rate through maturity will be 6.53 percent. The terms of the debt obligations require that we maintain a minimum ratio of debt to total capitalization of less than 55 percent. The note purchase agreement also contains additional terms, conditions, and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.
We have $200 million senior unsecured fixed-rate notes that mature over a period from July 2012 to July 2016. Interest on the notes is paid semi-annually based on an annual rate of 6.10 percent. We will make five equal annual principal repayments of $40 million starting on July 21, 2012. Financial covenants require that we 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. The note purchase agreement also contains additional terms, conditions, and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.
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We have an agreement with a multi-bank syndicate for a five-year, $400 million senior unsecured credit facility expiring December 2011. We have the option to borrow at the prime rate for maturities of less than 30 days but anticipate the majority of all of the borrowings over the remaining life of the facility will accrue interest at a spread over the London Interbank Bank Offered Rate (LIBOR). We pay a commitment fee based on the unused balance of the facility. The spread over LIBOR and the commitment fee are determined according to a scale based on the ratio of our total debt to total capitalization. The LIBOR spread ranges from .30 percent to .45 percent depending on the ratio. Based on the ratio at the close of the 2010 fiscal year, the LIBOR spread on borrowings was .35 percent and the commitment fee was .075 percent per annum. The advances bear an interest rate of 0.61 percent. At September 30, 2010, we had two letters of credit totaling $21.9 million under the facility and had borrowed $10 million against the facility with $368.1 million remaining available to borrow. Subsequent to September 30, 2010, we paid the $10 million outstanding balance and had $378.1 million available to borrow.
Financial covenants in the facility require that we 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 facility contains additional terms, conditions, and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality. At September 30, 2010, we were in compliance with all debt covenants.
In January 2010, a $105 million unsecured line of credit that matured was paid in full using operating cash flow and borrowings under the $400 million facility. At the same time, an interest rate
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swap with the same maturity and a notional amount of $105 million expired.
At September 30, 2010, we had 142 existing rigs with contracts under fixed terms with original term durations ranging from six months to seven years, with some expiring in fiscal 2011. The contracts provide for termination at the election of the customer, with an early termination payment to be paid if a contract is terminated prior to the expiration of the fixed term. While most of our customers are primarily major oil companies and large independent oil companies, a risk exists that a customer, especially a smaller independent oil company, may become unable to meet its obligations and may exercise its early termination election in the future and not be able to pay the early termination fee. Although not expected at this time, our future revenue and operating results would be negatively impacted if this were to happen.
Our operating cash requirements and estimated capital expenditures, including completion of the remaining rig construction, for fiscal 2011 will be funded through current cash, cash provided from operating activities, funds available under the current credit facility, funds available under any new credit facility and, possibly, sales of available-for-sale securities.
The current ratio was 2.9 at September 30, 2010 and 1.6 at September 30, 2009. The long-term debt to total capitalization ratio was 11 percent and 14 percent at September 30, 2010 and 2009, respectively. The decrease is due to equity increasing, primarily from earnings, and a decrease in long-term debt.
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During 2010, we paid dividends of $.21 per share, or a total of $22.3 million, representing the 38th consecutive year of dividend increases.
STOCK PORTFOLIO HELD
September 30, 2010 | Number of Shares | Cost Basis | Market Value | | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except share amounts) | |||||||||||
Atwood Oceanics, Inc. | 8,000,000 | $ | 121,498 | $ | 243,600 | ||||||
Schlumberger, Ltd. | 967,500 | 7,685 | 59,608 | ||||||||
Other | 12,369 | 22,507 | |||||||||
Total | $141,552 | $325,715 | |||||||||
MATERIAL COMMITMENTS
We have no off balance sheet arrangements other than operating leases discussed below. Our contractual obligations as of September 30, 2010, are summarized in the table below in thousands:
| Payments due by year | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations | Total | 2011 | 2012 | 2013 | 2014 | 2015 | After 2015 | |||||||||||||||
Long-term debt and estimated interest (a) | $435,065 | $22,026 | $146,304 | $54,205 | $126,159 | $44,406 | $41,965 | |||||||||||||||
Operating leases (b) | 27,754 | 7,204 | 4,742 | 3,633 | 2,154 | 2,038 | 7,983 | |||||||||||||||
Purchase obligations (b) | 68,837 | 68,837 | — | — | — | — | — | |||||||||||||||
Total Contractual Obligations | $531,656 | $98,067 | $151,046 | $57,838 | $128,313 | $46,444 | $49,948 | |||||||||||||||
(a) The estimated future interest payments on our variable-rate credit facilities were based on the interest rate and principal balance at September 30, 2010. Interest on fixed-rate debt was estimated based on principal maturities. See Note 3 "Debt" to our Consolidated Financial Statements.
(b) See Note 15 "Commitments and Contingencies" to our Consolidated Financial Statements.
The above table does not include obligations for our pension plan or amounts recorded for uncertain tax positions.
In 2010, we contributed $3.4 million to the pension plan. Based on current information available from plan actuaries, we estimate contributing at least $0.6 million in 2011 to meet the minimum
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contribution required by law. We expect to make additional contributions to fund unexpected distributions in lieu of liquidating pension assets. Future contributions beyond 2011 are difficult to estimate due to multiple variables involved.
At September 30, 2010, we had $8.8 million recorded for uncertain tax positions and related interest and penalties. However, the timing of such payments to the respective taxing authorities cannot be estimated at this time. Income taxes are more fully described in Note 4 to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Financial Statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. These estimates and assumptions are evaluated on an on-going basis. Estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following is a discussion of the critical accounting policies and estimates used in our financial statements. Other significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements.
Property, Plant and Equipment Property, plant and equipment, including renewals and betterments, are stated at cost, while maintenance and repairs are expensed as incurred. Interest costs applicable to the construction of qualifying assets are capitalized as a component of the cost of such assets. We account for the
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depreciation of property, plant and equipment using the straight-line method over the estimated useful lives of the assets considering the estimated salvage value of the property, plant and equipment. Both the estimated useful lives and salvage values require the use of management estimates. Certain events, such as unforeseen changes in operations, technology or market conditions, could materially affect our estimates and assumptions related to depreciation. Management believes that these estimates have been materially accurate in the past. For the years presented in this report, no significant changes were made to the determinations of useful lives or salvage values. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are recorded in the results of operations.
Impairment of Long-lived Assets Management assesses the potential impairment of our long-lived assets whenever events or changes in conditions indicate that the carrying value of an asset may not be recoverable. Changes that could prompt such an assessment may include equipment obsolescence, changes in the market demand for a specific asset, periods of relatively low rig utilization, declining revenue per day, declining cash margin per day, completion of specific contracts, and/or overall changes in general market conditions. If a review of the long-lived assets indicates that the carrying value of certain of these assets is more than the estimated undiscounted future cash flows, an impairment charge is made to adjust the carrying value to the estimated fair market value of the asset. The fair value of drilling rigs is determined based on quoted market prices, if available; otherwise, it is determined based upon estimated discounted future cash flows. Cash flows are estimated by management considering factors such as prospective market demand, recent changes in rig technology and its effect on each rig's
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marketability, any cash investment required to make a rig marketable, suitability of rig size and makeup to existing platforms, and competitive dynamics due to lower industry utilization. Use of different assumptions could result in an impairment charge different from that reported.
Fair Value of Financial Instruments Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The carrying amounts reported in the statement of financial position for current assets and current liabilities qualifying as financial instruments approximate fair value because of the short-term nature of the instruments. Marketable securities are carried at fair value which is generally determined by quoted market prices. We have categorized financial assets and liabilities measured at fair value into a three-level hierarchy in accordance with Accounting Standards Codification ("ASC") 820. (See Note 8 of the Consolidated Financial Statements for fair value disclosures.)
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Self-Insurance Accruals We self-insure a significant portion of expected losses relating to worker's compensation, general liability, employer's liability, and auto liabilities. Generally, deductibles are $1 million or $2 million per occurrence depending on whether a claim occurs inside or outside of the United States. Insurance is purchased over deductibles to reduce our exposure to catastrophic events. Estimates for incurred outstanding liabilities for worker's compensation, general liability claims and for claims that are incurred but not reported are recorded. Estimates are based on historic experience and statistical methods that we believe are reliable. Nonetheless, insurance estimates include certain assumptions and management judgments regarding the frequency and severity of claims, claim development and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense that would be reported under these programs.
Our wholly-owned captive insurance company, White Eagle Assurance Company, provides a portion of our physical damage insurance for company-owned drilling rigs and reinsures international casualty deductibles. With the exception of "named windstorm" risk in the Gulf of Mexico, we insure rig and related equipment at values that approximate the current replacement cost on the inception date of the policy. We self-insure a $1 million per occurrence deductible, as well as 10 percent of the estimated replacement cost of offshore rigs and 30 percent of the estimated replacement cost for land rigs and equipment. We have two insurance policies covering six offshore platform rigs for "named windstorm" risk in the Gulf of Mexico. The first policy covers four rigs and has a $55 million insurance limit over a $20 million deductible. We have been indemnified by a customer for $17 million of this deductible. The second policy covers two rigs and has a $40 million limit and a $3.5 million deductible.
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We maintain certain other insurance coverage with deductibles as high as $5 million. Excess insurance is purchased over these coverage amounts to limit our exposure to catastrophic claims, but there can be no assurance that such coverage will respond or be adequate in all circumstances. Retained losses are estimated and accrued based upon our estimates of the aggregate liability for claims incurred and, using adjuster's estimates, our historical loss experience or estimation methods that are believed to be reliable. Nonetheless, insurance estimates include certain assumptions and management judgments regarding the frequency and severity of claims, claim development, and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense and related liabilities. We self insure a number of other risks including loss of earnings and business interruption.
Pension Costs and Obligations Our pension benefit costs and obligations are dependent on various actuarial assumptions. We make assumptions relating to discount rates and expected return on plan assets. Our discount rate is determined by matching projected cash distributions with the appropriate corporate bond yields in a yield curve analysis. The discount rate was lowered from 5.42 percent to 4.48 percent as of September 30, 2010 to reflect changes in the market conditions for high-quality fixed-income investments. The expected return on plan assets is determined based on historical portfolio results and future expectations of rates of return. Actual results that differ from estimated assumptions are accumulated and amortized over the estimated future working life of the plan participants and could therefore affect the expense recognized and obligations in future periods. As of September 30, 2006, the Pension Plan was frozen and benefit accruals were discontinued. As a result, the rate of compensation increase assumption has been eliminated
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from future periods. We anticipate pension expense to be approximately $2.7 million in 2011 which is comparable to 2010.
Stock-Based Compensation Historically, we have granted stock-based awards to key employees and non-employee directors as part of their compensation. We estimate the fair value of all stock option awards as of the date of grant by applying the Black-Scholes option-pricing model. The application of this valuation model involves assumptions, some of which are judgmental and highly sensitive. These assumptions include, among others, the expected stock price volatility, the expected life of the stock options and the risk-free interest rate. Expected volatilities were estimated using the historical volatility of our stock based upon the expected term of the option. We consider information in determining the grant date fair value that would have indicated that future volatility would be expected to be significantly different than historical volatility. The expected term of the option was derived from historical data and represents the period of time that options are estimated to be outstanding. The risk-free interest rate for periods within the estimated life of the option was based on the U.S. Treasury Strip rate in effect at the time of the grant. The fair value of each award is amortized on a straight-line basis over the vesting period for awards granted to employees. Stock-based awards granted to non-employee directors are expensed immediately upon grant.
The fair value of restricted stock is determined based on the average of the high and low price of our common stock on the date of grant. We amortize the fair value of restricted stock awards to compensation expense on a straight-line basis over the vesting period. At September 30, 2010, unrecognized compensation cost related to
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unvested restricted stock was $4.7 million. The cost is expected to be recognized over a weighted-average period of 1.7 years.
Revenue Recognition Revenues and expenses for daywork contracts are recognized daily as the work progresses. For certain contracts, payments are received that are contractually designated for the mobilization of rigs and other drilling equipment. Revenues earned, net of direct costs incurred for the mobilization, are deferred and recognized over the term of the related drilling contract. Other lump-sum payments received from customers relating to specific contracts are deferred and amortized to income as services are performed. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met.
NEW ACCOUNTING STANDARDS
Effective October 1, 2009, we adopted the guidance contained in ASC 260,Earnings per Share, that clarifies that all outstanding unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities. An entity must include participating securities in its calculation of basic and diluted earnings per share pursuant to the two-class method pursuant to ASC 260. All prior-period earnings per share data presented has been adjusted retrospectively to conform to the provisions of ASC 260. The impact of the adoption is shown in Note 7 of the Consolidated Financial Statements.
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In December 2008, the Financial Accounting Standards Board ("FASB") issued revisions to ASC Topic 715,Compensation—Retirement Benefits. The new guidance expands disclosure by requiring more information about how investment allocation decisions are made, more information about major categories of plan assets, including concentration of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. The disclosure requirements have been adopted in our annual financial statements for the year ended September 30, 2010, on a prospective basis. The adoption had no material impact on the Consolidated Financial Statements.
On October 1, 2009, we implemented the previously deferred provisions of ASC 820,Fair Value Measurements and Disclosures, for nonfinancial assets and liabilities recorded at fair value, as required. Additionally, we adopted Accounting Standards Update ("ASU") No. 2009-05,Measuring Liabilities at Fair Value which provided amendments to ASC 820,Fair Value Measurements and Disclosure, for the fair value measurement of liabilities when a quoted price in an active market is not available. The adoption of these pronouncements had no impact on the Consolidated Financial Statements.
In October 2009, the FASB issued ASU 2009-13,Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (Topic 605), which amends the revenue guidance under ASC 605. This update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. This guidance eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. ASU No. 2009-13 is effective for fiscal years beginning on or after
36
June 15, 2010 and may be applied prospectively for arrangements entered into after the effective date or retrospectively for all periods presented. The adoption is effective for us no later than the beginning of fiscal 2011. We do not expect the provision of ASU 2009-13 to have a material effect on our Consolidated Financial Statements.
On January 21, 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The disclosure requirements requiring reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy was adopted on December 15, 2009 with no impact on the Consolidated Financial Statements. Effective for fiscal years beginning after December 15, 2010, a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method, which is used to price the hardest to value instruments, will be required. We currently believe the adoption related to Level 3 financial instruments will have no impact on the Consolidated Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk We have operations in several South American countries, Trinidad, Mexico, Africa and the Middle East. With the exception of Argentina, our exposure to currency valuation losses is usually immaterial due to the fact that virtually all invoice billings and receipts in other countries are in U.S. dollars. The exchange rate between the U.S. dollar and the Argentine peso stayed within a narrow range for seven years and then devalued 27 percent during 2009, resulting in the recording of a $2.2 million
37
currency loss. In 2010, a devaluation loss of $0.8 million was recorded from a 2.6 percent devaluation of the Argentine peso to the U.S. dollar.
We are not operating in any country that is currently considered highly inflationary, which is defined as cumulative inflation rates exceeding 100 percent in the most recent three-year period. All of our foreign subsidiaries use the U.S. dollar as the functional currency and local currency monetary assets are remeasured into U.S. dollars with gains and losses resulting from foreign currency transactions included in current results of operations. As such, if a foreign economy is considered highly inflationary, there would be no impact on the Consolidated Financial Statements.
Commodity Price Risk The demand for contract drilling services is a result of exploration and production companies spending money to explore and develop drilling prospects in search of crude oil and natural gas. Their appetite for such spending is driven by their cash flow and financial strength, which is very dependent on, among other things, crude oil and natural gas commodity prices. Crude oil prices are determined by a number of factors including supply and demand, worldwide economic conditions, and geopolitical factors. Crude oil and natural gas prices have been volatile and very difficult to predict. While current energy prices are important contributors to positive cash flow for customers, expectations about future prices and price volatility are generally more important for determining future spending levels. This volatility has led many exploration and production companies to base their capital spending on much more conservative estimates of commodity prices. As a result, demand for contract drilling services is not always purely a function of the movement of commodity prices.
38
In addition, customers may finance their exploration activities through cash flow from operations, the incurrence of debt or the issuance of equity. Any deterioration in the credit and capital markets, as experienced in 2008 and 2009, can make it difficult for customers to obtain funding for their capital needs. A reduction of cash flow resulting from declines in commodity prices or a reduction of available financing may result in a reduction in customer spending and the demand for drilling services. This reduction in spending could have a material adverse effect on our business, financial condition or operations.
We attempt to secure favorable prices through advanced ordering and purchasing for drilling rig components. While these materials have generally been available at acceptable prices, there is no assurance the prices will not vary significantly in the future. Any fluctuations in market conditions causing increased prices in materials and supplies could impact future operating costs adversely.
Interest Rate Risk Our interest rate risk exposure results primarily from short-term rates, mainly LIBOR-based, on borrowings from our commercial banks. Our current risk due to interest fluctuation was minimal at September 30, 2010 due to the amount of our fixed-rate debt being approximately 97 percent of total debt.
39
The following tables provide information as of September 30, 2010 and 2009 about our interest rate risk sensitive instruments:
INTEREST RATE RISK AS OF SEPTEMBER 30, 2010 (dollars in thousands)
| 2011 | 2012 | 2013 | 2014 | 2015 | After 2015 | Total | Fair Value 9/30/10 | | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fixed-Rate Debt | $ | — | $ | 115,000 | $ | 40,000 | $ | 115,000 | $ | 40,000 | $ | 40,000 | $ | 350,000 | $ | 382,852 | |||||||||||
Average Interest Rate | — | 6.4 | % | 6.1 | % | 6.5 | % | 6.1 | % | 6.1 | % | 6.3 | % | ||||||||||||||
Variable Rate Debt | $ | — | $ 10,000 | $ — | $ — | $ — | $ — | $ 10,000 | $ 10,000 | ||||||||||||||||||
Average Interest Rate (a) | (a | ) |
(a) Advances bear interest rate of .61%
INTEREST RATE RISK AS OF SEPTEMBER 30, 2009 (dollars in thousands)
| 2010 | 2011 | 2012 | 2013 | 2014 | After 2014 | Total | Fair Value 9/30/09 | | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fixed-Rate Debt | $ — | $ — | $115,000 | $40,000 | $115,000 | $80,000 | $350,000 | $380,925 | |||||||||||||||||||
Average Interest Rate | — | — | 6.4 | % | 6.1 | % | 6.5 | % | 6.1 | % | 6.3 | % | |||||||||||||||
Variable Rate Debt | $ — | $ — | $ 70,000 | $ — | $ — | $ — | $ 70,000 | $ 70,000 | |||||||||||||||||||
Average Interest Rate (a) | (a | ) |
(a) Advances bear interest rate of .60%
Equity Price Risk On September 30, 2010, we had a portfolio of securities with a total fair value of $325.7 million. The total fair value of the portfolio of securities was $359.5 million at September 30, 2009. Our investments in Atwood and Schlumberger, Ltd. made up 93 percent of the portfolio's fair value at September 30, 2010. Although we sold portions of our positions in Schlumberger, Ltd. in 2008, we make no specific plans to sell securities, but rather sell securities based on market conditions and other circumstances. These securities are subject to a wide variety and number of market-related risks that could substantially reduce or increase the fair value of our holdings. Except for our investments in limited partnerships carried at cost, the portfolio is recorded at fair value on the balance sheet with changes in unrealized after-tax value reflected in the equity section of the balance sheet. At November 18, 2010, the total fair value of the portfolio of securities had increased
40
to approximately $396.8 million with an estimated after-tax value of $258.4 million. Currently, the fair value exceeds the cost of the investments. We continually monitor the fair value of the investments but are unable to predict future market volatility and any potential impact to the Consolidated Financial Statements.
41
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Shareholders
Helmerich & Payne, Inc.
We have audited the accompanying consolidated balance sheets of Helmerich & Payne, Inc. as of September 30, 2010 and 2009, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Helmerich & Payne, Inc. at September 30, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2010, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective October 1, 2007, the Company adopted the requirements for accounting for uncertainty in income taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Helmerich & Payne Inc.'s internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 24, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
November 24, 2010
42
Consolidated Statements of Income
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share amounts) | |||||||||||
OPERATING REVENUES | ||||||||||||
Drilling – U.S. Land | $1,412,495 | $1,441,164 | $1,542,038 | |||||||||
Drilling – Offshore | 202,734 | 204,702 | 154,452 | |||||||||
Drilling – International Land | 247,179 | 187,099 | 161,072 | |||||||||
Other | 12,754 | 10,775 | 11,809 | |||||||||
1,875,162 | 1,843,740 | 1,869,371 | ||||||||||
OPERATING COSTS AND EXPENSES | ||||||||||||
Operating costs, excluding depreciation | 1,071,959 | 944,780 | 987,838 | |||||||||
Depreciation | 262,658 | 227,535 | 195,343 | |||||||||
Research and development | 12,262 | 9,671 | 1,833 | |||||||||
Acquired in-process research and development | — | — | 11,129 | |||||||||
General and administrative | 81,479 | 58,822 | 56,429 | |||||||||
Gain from involuntary conversion of long-lived assets | — | (541 | ) | (10,236 | ) | |||||||
Income from asset sales | (4,992 | ) | (5,402 | ) | (13,049 | ) | ||||||
1,423,366 | 1,234,865 | 1,229,287 | ||||||||||
Operating income from continuing operations | 451,796 | 608,875 | 640,084 | |||||||||
Other income (expense) | ||||||||||||
Interest and dividend income | 1,811 | 2,755 | 3,524 | |||||||||
Interest expense | (17,158 | ) | (13,590 | ) | (18,721 | ) | ||||||
Gain on sale of investment securities | — | — | 21,994 | |||||||||
Other | 1,787 | 245 | (1,396 | ) | ||||||||
(13,560 | ) | (10,590 | ) | 5,401 | ||||||||
Income from continuing operations before income taxes and equity in income of affiliate | 438,236 | 598,285 | 645,485 | |||||||||
Income tax provision | 152,155 | 227,850 | 242,593 | |||||||||
Equity in income of affiliate net of income taxes | — | 10,111 | 17,366 | |||||||||
Income from continuing operations | 286,081 | 380,546 | 420,258 | |||||||||
Income (loss) from discontinued operations before income taxes | (125,944 | ) | (22,470 | ) | 54,444 | |||||||
Income tax provision | 3,825 | 4,531 | 12,964 | |||||||||
Income (loss) from discontinued operations | (129,769 | ) | (27,001 | ) | 41,480 | |||||||
NET INCOME | $ 156,312 | $ 353,545 | $ 461,738 | |||||||||
Basic earnings per common share: | ||||||||||||
Income from continuing operations | $ | 2.70 | $ | 3.61 | $ | 4.02 | ||||||
Income (loss) from discontinued operations | $ | (1.23 | ) | $ | (0.26 | ) | $ | 0.40 | ||||
Net income | $ | 1.47 | $ | 3.35 | $ | 4.42 | ||||||
Diluted earnings per common share: | ||||||||||||
Income from continuing operations | $ | 2.66 | $ | 3.56 | $ | 3.93 | ||||||
Income (loss) from discontinued operations | $ | (1.21 | ) | $ | (0.25 | ) | $ | 0.39 | ||||
Net income | $ | 1.45 | $ | 3.31 | $ | 4.32 | ||||||
Weighted average shares outstanding (in thousands): | ||||||||||||
Basic | 105,711 | 105,364 | 104,284 | |||||||||
Diluted | 107,404 | 106,608 | 106,583 |
The accompanying notes are an integral part of these statements.
43
ASSETS
September 30, | 2010 | 2009 | |||||||
---|---|---|---|---|---|---|---|---|---|
(in thousands) | |||||||||
CURRENT ASSETS: | |||||||||
Cash and cash equivalents | $ 63,020 | $ 96,142 | |||||||
Short-term investments | — | 12,500 | |||||||
Accounts receivable, less reserve of $830 in 2010 and $659 in 2009 | 457,659 | 233,949 | |||||||
Inventories | 43,402 | 39,544 | |||||||
Deferred income taxes | 14,282 | 6,373 | |||||||
Assets held for sale | — | 1,023 | |||||||
Prepaid expenses and other | 64,171 | 52,495 | |||||||
Current assets of discontinued operations | 10,270 | 80,906 | |||||||
Total current assets | 652,804 | 522,932 | |||||||
INVESTMENTS | 320,712 | 356,404 | |||||||
PROPERTY, PLANT AND EQUIPMENT, at cost: | |||||||||
Contract drilling equipment | 4,285,277 | 3,901,967 | |||||||
Construction in progress | 154,595 | 232,055 | |||||||
Real estate properties | 61,735 | 61,114 | |||||||
Other | 182,087 | 169,099 | |||||||
4,683,694 | 4,364,235 | ||||||||
Less – Accumulated depreciation | 1,408,674 | 1,169,962 | |||||||
Net property, plant and equipment | 3,275,020 | 3,194,273 | |||||||
NONCURRENT ASSETS: | |||||||||
Other assets | 16,834 | 15,781 | |||||||
Noncurrent assets of discontinued operations | — | 71,634 | |||||||
Total noncurrent assets | 16,834 | 87,415 | |||||||
TOTAL ASSETS | $ | 4,265,370 | $ | 4,161,024 | |||||
The accompanying notes are an integral part of these statements.
44
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, | 2010 | 2009 | |||||||
---|---|---|---|---|---|---|---|---|---|
(in thousands, except share data and per share amounts) | |||||||||
CURRENT LIABILITIES: | |||||||||
Accounts payable | $ 80,534 | $ 68,173 | |||||||
Accrued liabilities | 144,112 | 111,750 | |||||||
Short-term debt | — | 105,000 | |||||||
Current liabilities of discontinued operations | 7,992 | 16,983 | |||||||
Total current liabilities | 232,638 | 301,906 | |||||||
NONCURRENT LIABILITIES: | |||||||||
Long-term debt | 360,000 | 420,000 | |||||||
Deferred income taxes | 771,383 | 672,358 | |||||||
Other | 91,606 | 73,546 | |||||||
Noncurrent liabilities of discontinued operations | 2,278 | 10,205 | |||||||
Total noncurrent liabilities | 1,225,267 | 1,176,109 | |||||||
SHAREHOLDERS' EQUITY: | |||||||||
Common stock, $.10 par value, 160,000,000 shares authorized, 107,057,904 shares issued as of September 30, 2010 and 2009 and 105,819,161 and 105,486,218 shares outstanding as of September 30, 2010 and 2009, respectively | 10,706 | 10,706 | |||||||
Preferred stock, no par value, 1,000,000 shares authorized, no shares issued | — | — | |||||||
Additional paid-in capital | 191,900 | 176,039 | |||||||
Retained earnings | 2,547,917 | 2,414,942 | |||||||
Accumulated other comprehensive income | 84,107 | 112,451 | |||||||
2,834,630 | 2,714,138 | ||||||||
Less treasury stock, 1,238,743 shares in 2010 and 1,571,686 shares in 2009, at cost | 27,165 | 31,129 | |||||||
Total shareholders' equity | 2,807,465 | 2,683,009 | |||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $4,265,370 | $4,161,024 | |||||||
The accompanying notes are an integral part of these statements.
45
Consolidated Statements of Shareholders' Equity
| Common Stock | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Retained Earnings | | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||
| |||||||||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||||||||
Balance, September 30, 2007 | 107,058 | $10,706 | $143,146 | $1,645,766 | $75,885 | 3,573 | $(59,987 | ) | $1,815,516 | ||||||||||||||||||
Adjustment to initially apply ASC 740-10-30-5 | (5,048 | ) | (5,048 | ) | |||||||||||||||||||||||
Comprehensive Income: | |||||||||||||||||||||||||||
Net income | 461,738 | 461,738 | |||||||||||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||||||
Unrealized losses on available-for-sale securities, net | (30,863 | ) | (30,863 | ) | |||||||||||||||||||||||
Amortization of net periodic benefit costs – net of actuarial gain | (6,615 | ) | (6,615 | ) | |||||||||||||||||||||||
Total other comprehensive loss | (37,478 | ) | |||||||||||||||||||||||||
Total comprehensive income | 424,260 | ||||||||||||||||||||||||||
Capital adjustment of equity investee | 1,669 | 1,669 | |||||||||||||||||||||||||
Dividends declared ($.185 per share) | (19,938 | ) | (19,938 | ) | |||||||||||||||||||||||
Exercise of stock options | (9,740 | ) | (1,735 | ) | 24,277 | 14,537 | |||||||||||||||||||||
Tax benefit of stock-based awards, including excess tax benefits of $24.9 million | 27,022 | 27,022 | |||||||||||||||||||||||||
Treasury stock issued for vested restricted stock | (56 | ) | (3 | ) | 56 | — | |||||||||||||||||||||
Stock-based compensation | 7,456 | 7,456 | |||||||||||||||||||||||||
Balance, September 30, 2008 | 107,058 | 10,706 | 169,497 | 2,082,518 | 38,407 | 1,835 | (35,654 | ) | 2,265,474 | ||||||||||||||||||
Comprehensive Income: | |||||||||||||||||||||||||||
Net income | 353,545 | 353,545 | |||||||||||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||||||
Unrealized gains on available-for-sale securities, net | 88,519 | 88,519 | |||||||||||||||||||||||||
Amortization of net periodic benefit costs – net of actuarial gain | (14,475 | ) | (14,475 | ) | |||||||||||||||||||||||
Total other comprehensive gain | 74,044 | ||||||||||||||||||||||||||
Total comprehensive income | 427,589 | ||||||||||||||||||||||||||
Capital adjustment of equity investee | 174 | 174 | |||||||||||||||||||||||||
Dividends declared ($.20 per share) | (21,121 | ) | (21,121 | ) | |||||||||||||||||||||||
Exercise of stock options | (1,978 | ) | (197 | ) | 3,250 | 1,272 | |||||||||||||||||||||
Tax benefit of stock-based awards, including excess tax benefits of $1.2 million | 1,273 | 1,273 | |||||||||||||||||||||||||
Treasury stock issued for vested restricted stock | (1,275 | ) | (66 | ) | 1,275 | — | |||||||||||||||||||||
Stock-based compensation | 8,348 | 8,348 | |||||||||||||||||||||||||
Balance, September 30, 2009 | 107,058 | 10,706 | 176,039 | 2,414,942 | 112,451 | 1,572 | (31,129 | ) | 2,683,009 | ||||||||||||||||||
Comprehensive Income: | |||||||||||||||||||||||||||
Net income | 156,312 | 156,312 | |||||||||||||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||||||
Unrealized losses on available-for-sale securities, net | (22,885 | ) | (22,885 | ) | |||||||||||||||||||||||
Amortization of net periodic benefit costs – net of actuarial gain | (5,459 | ) | (5,459 | ) | |||||||||||||||||||||||
Total other comprehensive loss | (28,344 | ) | |||||||||||||||||||||||||
Total comprehensive income | 127,968 | ||||||||||||||||||||||||||
Dividends declared ($.22 per share) | (23,337 | ) | (23,337 | ) | |||||||||||||||||||||||
Exercise of stock options | (2,721 | ) | (263 | ) | 2,519 | (202 | ) | ||||||||||||||||||||
Tax benefit of stock-based awards, including excess tax benefits of $3.9 million | 4,172 | 4,172 | |||||||||||||||||||||||||
Treasury stock issued for vested restricted stock | (1,445 | ) | (70 | ) | 1,445 | — | |||||||||||||||||||||
Stock-based compensation | 15,855 | 15,855 | |||||||||||||||||||||||||
Balance, September 30, 2010 | 107,058 | $ | 10,706 | $ | 191,900 | $ | 2,547,917 | $ | 84,107 | 1,239 | $ | (27,165 | ) | $ | 2,807,465 | ||||||||||||
The accompanying notes are an integral part of these statements.
46
Consolidated Statements of Cash Flows
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | ||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||
Net income | $ 156,312 | $ 353,545 | $ 461,738 | |||||||||||
Adjustment for (income) loss from discontinued operations | 129,769 | 27,001 | (41,480 | ) | ||||||||||
Income from continuing operations | 286,081 | 380,546 | 420,258 | |||||||||||
Adjustments to reconcile net income | ||||||||||||||
Depreciation | 262,658 | 227,535 | 195,343 | |||||||||||
Provision for bad debt | 206 | (645 | ) | 704 | ||||||||||
Equity in income of affiliate before income taxes | — | (16,308 | ) | (28,009 | ) | |||||||||
Stock-based compensation | 15,855 | 8,348 | 7,456 | |||||||||||
Gain on sale of investment securities | — | — | (21,864 | ) | ||||||||||
Gain from involuntary conversion of long-lived assets | — | (541 | ) | (10,236 | ) | |||||||||
Income from asset sales | (4,992 | ) | (5,402 | ) | (13,049 | ) | ||||||||
Acquired in-process research and development | — | — | 11,129 | |||||||||||
Deferred income tax expense | 105,691 | 158,153 | 117,998 | |||||||||||
Other | 79 | (244 | ) | 754 | ||||||||||
Change in assets and liabilities: | ||||||||||||||
Accounts receivable | (223,916 | ) | 156,863 | (107,949 | ) | |||||||||
Inventories | (3,858 | ) | (10,981 | ) | (3,534 | ) | ||||||||
Prepaid expenses and other | (12,800 | ) | (9,442 | ) | (23,640 | ) | ||||||||
Accounts payable | 16,760 | (24,996 | ) | (15,643 | ) | |||||||||
Accrued liabilities | 14,031 | 2,672 | 29,203 | |||||||||||
Deferred income taxes | 2,453 | 8,234 | 12,317 | |||||||||||
Other noncurrent liabilities | 8,402 | (1,525 | ) | 5,916 | ||||||||||
Net cash provided by operating activities from continuing operations | 466,650 | 872,267 | 577,154 | |||||||||||
Net cash provided by (used in) operating activities from discontinued operations | (4,362 | ) | 23,672 | 11,480 | ||||||||||
Net cash provided by operating activities | 462,288 | 895,939 | 588,634 | |||||||||||
INVESTING ACTIVITIES: | ||||||||||||||
Capital expenditures | (329,572 | ) | (876,839 | ) | (697,906 | ) | ||||||||
Acquisition of business, net of cash acquired | — | (16 | ) | (12,041 | ) | |||||||||
Proceeds from asset sales | 7,867 | 8,069 | 22,470 | |||||||||||
Insurance proceeds from involuntary conversion | — | 541 | 13,926 | |||||||||||
Purchase of short-term investments | (16 | ) | (12,500 | ) | — | |||||||||
Proceeds from sale of investments | 12,516 | — | 25,507 | |||||||||||
Net cash used in investing activities from continuing operations | (309,205 | ) | (880,745 | ) | (648,044 | ) | ||||||||
Net cash used in investing activities from discontinued operations | (55 | ) | (3,284 | ) | (7,291 | ) | ||||||||
Net cash used in investing activities | (309,260 | ) | (884,029 | ) | (655,335 | ) | ||||||||
FINANCING ACTIVITIES: | ||||||||||||||
Increase (decrease) in notes payable | — | (1,733 | ) | 1,733 | ||||||||||
Decrease in long-term debt | — | (25,000 | ) | — | ||||||||||
Proceeds from line of credit | 895,000 | 3,840,000 | 3,550,000 | |||||||||||
Payments on line of credit | (1,060,000 | ) | (3,790,000 | ) | (3,495,000 | ) | ||||||||
Increase (decrease) in bank overdraft | (2,038 | ) | 2,038 | — | ||||||||||
Dividends paid | (22,254 | ) | (21,111 | ) | (19,333 | ) | ||||||||
Exercise of stock options | (202 | ) | 1,272 | 14,537 | ||||||||||
Excess tax benefit from stock-based compensation | 3,344 | 1,217 | 24,868 | |||||||||||
Net cash provided by (used in) financing activities | (186,150 | ) | 6,683 | 76,805 | ||||||||||
Net increase (decrease) in cash and cash equivalents | (33,122 | ) | 18,593 | 10,104 | ||||||||||
Cash and cash equivalents, beginning of period | 96,142 | 77,549 | 67,445 | |||||||||||
Cash and cash equivalents, end of period | $ | 63,020 | $ | 96,142 | $ | 77,549 | ||||||||
The accompanying notes are an integral part of these statements.
47
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Helmerich & Payne, Inc. and its wholly-owned subsidiaries. Fiscal years of our foreign operations end on August 31 to facilitate reporting of consolidated results. There were no significant intervening events which materially affected the financial statements.
BASIS OF PRESENTATION
We classified the Venezuelan operation, an operating segment within the International Land segment, as a discontinued operation in the third quarter of fiscal 2010, as more fully described in Note 2. Accordingly, the assets and liabilities of this business, along with its results of operations, have been reclassified for all periods presented. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates only to our continuing operations.
The adoption of the guidance contained in Accounting Standards Codification ("ASC") 260,Earnings per Share, discussed in Note 7 changed the calculation of basic earnings per share requiring restricted stock grants that have previously been included in our diluted weighted-average shares to be included in basic weighted-average shares. Earnings per share for the fiscal years ended September 30, 2009 and 2008 have been recalculated to conform to the current year presentation.
FOREIGN CURRENCIES
The functional currency for all our foreign subsidiaries 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 year. Gains and losses from remeasurement of foreign currency financial statements and foreign currency translations into U.S. dollars are included in direct operating costs. Aggregate foreign currency remeasurement and transaction losses included in direct operating costs totaled $0.5 million, $3.0 million and $1.6 million in fiscal 2010, 2009 and 2008, respectively.
USE OF ESTIMATES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective October 1, 2009, we adopted the guidance contained in ASC 260,Earnings per Share. ASC 260 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under
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the two-class method described in ASC 260. The calculation of earnings per share is more fully described in Note 7.
In December 2008, the Financial Accounting Standards Board ("FASB") issued revisions to ASC Topic 715,Compensation—Retirement Benefits. The new guidance expands disclosure by requiring more information about how investment allocation decisions are made, more information about major categories of assets, including concentration of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. The disclosure requirements have been adopted for our annual financial statements for the year ended September 30, 2010, on a prospective basis. The adoption had no material impact on the Consolidated Financial Statements.
On October 1, 2009, we implemented the previously deferred provisions of ASC 820,Fair Value Measurements and Disclosures, for nonfinancial assets and liabilities recorded at fair value, as required. Additionally, we adopted Accounting Standards Update ("ASU") No. 2009-05,Measuring Liabilities at Fair Value, which provided amendments to ASC 820 for the fair value measurements of liabilities when a quoted price in an active market is not available. On December 15, 2009, we adopted the disclosure requirements in ASU 2009-06,Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements, requiring that information be provided about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy described in Note 8. The adoption of these pronouncements had no impact on the Consolidated Financial Statements.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less. The carrying values of these assets approximate their fair values. We primarily utilize a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts, and several "zero-balance" disbursement accounts for funding payroll and accounts payable. As a result of our cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. Checks outstanding in excess of related book cash balances are included in accounts payable where applicable and included as a financing activity in the Consolidated Statements of Cash Flows.
RESTRICTED CASH AND CASH EQUIVALENTS
We had restricted cash and cash equivalents of $14.8 million and $13.9 million at September 30, 2010 and 2009, respectively. Restricted cash is primarily for the purpose of potential insurance claims in our wholly-owned captive insurance company. Of the total at September 30, 2010, $2.0 million is from the initial capitalization of the captive company and management has elected to restrict an additional $12.8 million. The restricted amounts are primarily invested in short-term money market securities.
The restricted cash and cash equivalents are reflected in the balance sheet as follows (in thousands):
September 30, | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Other current assets | $12,848 | $11,890 | |||||
Other assets | $ 2,000 | $ 2,000 |
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INVENTORIES AND SUPPLIES
Inventories and supplies are primarily replacement parts and supplies held for use in our drilling operations. Inventories and supplies are valued at the lower of cost (moving average or actual) or market value.
INVESTMENTS
We maintain investments in equity securities of unaffiliated companies. The cost of securities used in determining realized gains and losses is based on the average cost basis of the security sold.
We regularly review investment securities for impairment based on criteria that include the extent to which the investment's carrying value exceeds its related fair value, the duration of the market decline and the financial strength and specific prospects of the issuer of the security. Unrealized losses that are other than temporary are recognized in earnings.
Investments in companies owned from 20 to 50 percent are accounted for using the equity method by recognizing our proportionate share of the income or loss of the investee. Effective April 1, 2009, Atwood Oceanics, Inc. ("Atwood") was accounted for as an available-for-sale investment, as we determined that we no longer had the ability to exercise significant influence over operating and financial policies at Atwood and discontinued accounting for Atwood using the equity method. The investment in Atwood is now recorded at fair value with changes deferred as a component of other comprehensive income. We have no other equity method investments.
DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risk in the normal course of business operations due to ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. ASC 815,Derivatives and Hedging, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We have not historically entered into derivative financial instruments for trading purposes or for speculation. For further disclosure regarding an interest rate swap, refer to Note 3.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation. Substantially all property, plant and equipment are depreciated using the straight-line method based on the estimated useful lives of the assets (contract drilling equipment, 4-15 years; real estate buildings and equipment, 10-45 years; and other, 2-23 years). Depreciation in the Consolidated Statements of Income includes abandonments of $4.2 million, $5.3 million and $13.3 million for fiscal 2010, 2009 and 2008, respectively. The cost of maintenance and repairs is charged to direct operating cost, while betterments and refurbishments are capitalized.
We lease office space and equipment for use in operations. Leases are evaluated at inception or at any subsequent material modification and, depending on the lease terms, are classified as either capital leases or operating leases as appropriate under ASC 840,Leases. We do not have significant capital leases.
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CAPITALIZATION OF INTEREST
We capitalize interest on major projects during construction. Interest is capitalized based on the average interest rate on related debt. Capitalized interest for fiscal 2010, 2009 and 2008 was $6.4 million, $6.6 million, and $4.7 million, respectively.
VALUATION OF LONG-LIVED ASSETS
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Changes that could prompt such an assessment include a significant decline in revenue or cash margin per day, extended periods of low rig utilization, changes in market demand for a specific asset, obsolescence, completion of specific contracts, and/or overall general market conditions. If a review of the long-lived assets indicates that the carrying value of certain of these assets is more than the estimated undiscounted future cash flows, an impairment charge is made to adjust the carrying value down to the estimated fair value of the asset. The fair value of drilling rigs is determined based on quoted market prices, if available; otherwise, it is determined based upon estimated discounted future cash flows. Cash flows are estimated by management considering factors such as prospective market demand, recent changes in rig technology and its effect on each rig's marketability, any cash investment required to make a rig marketable, suitability of rig size and make up to existing platforms, and competitive dynamics due to lower industry utilization.
ACQUISITIONS
We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired in-process research and development are expensed at the date of acquisition. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact results of operations. Accordingly, for significant items, assistance from third party valuation specialists is typically obtained. The valuations are based on information available near the acquisition date and are based on expectations and assumptions that have been deemed reasonable by management.
SELF INSURANCE ACCRUALS
We have accrued a liability for estimated worker's compensation and other casualty claims incurred. The liability for other benefits to former or inactive employees after employment but before retirement is not material.
DRILLING REVENUES
Contract drilling revenues are comprised of daywork drilling contracts for which the related revenues and expenses are recognized as services are performed and collection is reasonably assured. For certain contracts, we receive payments contractually designated for the mobilization of rigs and other drilling equipment. Mobilization payments received, and direct costs incurred for the mobilization, are deferred and recognized on a straight-line basis over the term of the related drilling contract. Costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. Reimbursements received for out-of-pocket expenses are recorded as revenues and direct costs.
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Reimbursements for fiscal 2010, 2009 and 2008 were $145.7 million, $136.3 million and $108.9 million, respectively. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met.
RENT REVENUES
We enter into leases with tenants in our rental properties consisting primarily of retail and multi-tenant warehouse space. The lease terms of tenants occupying space in the retail centers and warehouse buildings range from one to eleven years. Minimum rents are recognized on a straight-line basis over the term of the related leases. Overage and percentage rents are based on tenants' sales volume. Recoveries from tenants for property taxes and operating expenses are recognized in other operating revenues in the Consolidated Statements of Income. Our rent revenues are as follows:
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | ||||||||||
Minimum rents | $8,613 | $8,803 | $9,469 | |||||||
Overage and percentage rents | $1,241 | $1,414 | $1,582 |
At September 30, 2010, minimum future rental income to be received on noncancelable operating leases was as follows (in thousands):
Fiscal Year | Amount | ||||
---|---|---|---|---|---|
2011 | $ 7,390 | ||||
2012 | 5,492 | ||||
2013 | 3,973 | ||||
2014 | 2,879 | ||||
2015 | 2,335 | ||||
Thereafter | 3,061 | ||||
Total | $25,130 | ||||
Leasehold improvement allowances are capitalized and amortized over the lease term.
At September 30, 2010 and 2009, the cost and accumulated depreciation for real estate properties were as follows (in thousands):
September 30, | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Real estate properties | $61,735 | $61,114 | |||||
Accumulated depreciation | (39,030 | ) | (37,786 | ) | |||
$22,705 | $23,328 | ||||||
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INCOME TAXES
Current income tax expense is the amount of income taxes expected to be payable for the current year. Deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis of our assets and liabilities.
We provide for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed in ASC 740,Income Taxes, which was adopted effective October 1, 2007, and is more fully discussed in Note 4. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. We recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in other expense in the Consolidated Statements of Income.
On October 1, 2007, we adopted the requirements regarding the accounting for income tax benefits of dividends on share-based payment awards. As a result of the adoption, we recognized a realized income tax benefit associated with dividends or dividend equivalents paid on nonvested equity-classified employee share-based payment awards that were charged to retained earnings as an increase to additional paid-in capital. The adoption did not have a material impact on our financial position, results of operations or cash flows.
EARNINGS PER SHARE
Basic net income per share is computed utilizing the two-class method and is calculated based on weighted-average number of common shares outstanding during the periods presented. Diluted net income 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.
STOCK-BASED COMPENSATION
We record compensation expense associated with stock options in accordance with ASC 718,Compensation—Stock Compensation. Compensation expense is determined using a fair-value-based measurement method for all awards granted. In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate, volatility, dividend yield and expected remaining term of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Stock-based compensation is recognized on a straight-line basis over the requisite service periods of the stock awards, which is generally the vesting period. Compensation expense related to stock options is recorded as a component of general and administrative expenses in the Consolidated Statements of Income.
TREASURY STOCK
Treasury stock purchases are accounted for under the cost method whereby the cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares are credited or charged to additional paid-in capital using the average-cost method.
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NEW ACCOUNTING STANDARDS
In October 2009, the FASB issued ASU 2009-13,Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (Topic 605), which amends the revenue guidance under ASC 605. This update requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. This guidance eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. ASU No. 2009-13 is effective for fiscal years beginning on or after June 15, 2010 and may be applied prospectively for arrangements entered into after the effective date or retrospectively for all periods presented. The adoption is effective for us no later than the beginning of fiscal 2011. We do not expect the provision of ASU 2009-13 to have a material effect on our Consolidated Financial Statements.
On January 21, 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The disclosure requirements requiring reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy was adopted on December 15, 2009 with no impact on the Consolidated Financial Statements. Effective for fiscal years beginning after December 15, 2010, a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method, which is used to price the hardest to value instruments, will be required. We currently believe the adoption related to Level 3 financial instruments will have no impact on the Consolidated Financial Statements.
NOTE 2 DISCONTINUED OPERATIONS
On June 30, 2010, the Official Gazette of Venezuela published the Decree of Venezuelan President Hugo Chavez, which authorized the "forceful acquisition" of eleven rigs owned by our Venezuelan subsidiary. The Decree also authorized the seizure of "all the personal and real property and other improvements" used by our Venezuelan subsidiary in its drilling operations. The seizing of our assets became effective June 30, 2010, and met the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements. Therefore, operations from the Venezuelan subsidiary, an operating segment within the International Land segment, have been classified as discontinued operations in our September 30, 2010, Consolidated Financial Statements. All historical statements have been reclassified to conform to this presentation.
Our revenue in Venezuela was from providing drilling services to Petroleos de Venezuela, S.A. ("PDVSA"), the Venezuelan state-owned petroleum company. We determined, as of the beginning of the second quarter of fiscal 2009 and forward, that the revenue recognition criteria in Venezuela was no longer met as collectability of revenue was not reasonably assured, primarily due to the uncertainty of the timing of collections. However, up until the time of the seizing of our assets, we continued to receive payments from PDVSA and were in discussions with PDVSA officials regarding payments and the possibility of contract negotiations to put our rigs back to work.
As a result of the seizing of our assets in the third quarter of fiscal 2010, we derecognized our Venezuela property and equipment, $65.0 million, and warehouse inventory, $5.2 million, resulting in a loss of approximately $70.2 million. Accounts receivable, payables and other deferred charges and credits, netting to
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approximately $9.5 million, were also written off because the related future cash inflows and outflows associated with them were no longer expected to occur. At September 30, 2010, we had approximately $31.3 million (U.S. currency equivalent) cash balances in Venezuela. Our Venezuelan subsidiary has had, since July 22, 2008, an outstanding application with the Venezuelan government requesting approval to remit approximately $14.2 million as a dividend to its U.S. based parent, converting bolivar fuerte (Bsf) cash balances to U.S. dollars. Because of the seizure of our assets by the Venezuelan government and our inability to obtain approval of the dividend, we also impaired approximately $21.1 million cash as of September 30, 2010. The remaining cash was classified as restricted cash, a current asset from discontinued operations, to meet remaining in-country current obligations.
Summarized operating results from discontinued operations are as follows:
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Revenue | $ | 13,534 | $ | 50,298 | $ | 167,172 | ||||
Income (loss) before income taxes | (125,944 | ) | (22,470 | ) | 54,444 | |||||
Income tax expense | (3,825 | ) | (4,531 | ) | (12,964 | ) | ||||
Income (loss) from discontinued operations | $ | (129,769 | ) | $ | (27,001 | ) | $ | 41,480 | ||
Significant categories of assets and liabilities from discontinued operations are as follows:
September 30, | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Cash and cash equivalents | $ | — | $ | 45,344 | |||
Accounts receivable | — | 12,841 | |||||
Other current assets | 10,270 | 22,721 | |||||
Total current assets | 10,270 | 80,906 | |||||
Property, plant and equipment, net | — | 71,634 | |||||
Total assets | $ | 10,270 | $ | 152,540 | |||
Total current liabilities | $ | 7,992 | $ | 16,983 | |||
Total noncurrent liabilities | 2,278 | 10,205 | |||||
Total liabilities | $ | 10,270 | $ | 27,188 | |||
Liabilities consist of municipal and income taxes payable and social obligations due within the country of Venezuela.
On January 8, 2010, the Venezuelan government devalued its currency. The official exchange rate was devalued from 2.15 Bsf to each U.S. dollar to 4.30 Bsf. As a result of the devaluation, we recorded an exchange loss of approximately $20.4 million during fiscal 2010. The devaluation is included in discontinued operations.
Effective January 1, 2010, Venezuela was designated hyper-inflationary, which is defined as cumulative inflation rates exceeding 100 percent in the most recent three-year period. All of our foreign subsidiaries use the U.S.
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dollar as the functional currency and local currency monetary assets are remeasured into U.S. dollars with gains and losses resulting from foreign currency transactions included in current results of operations. As such, the designation of Venezuela as hyper-inflationary had no impact on our Consolidated Financial Statements.
NOTE 3 DEBT
At September 30, 2010 and 2009, we had $360 million and $420 million, respectively, in unsecured long-term debt outstanding at rates and maturities shown in the following table (in thousands):
| September 30, | |||||||
---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | ||||||
Unsecured intermediate debt issued August 15, 2002: | ||||||||
Series C, due August 15, 2012, 6.46% | $ 75,000 | $ 75,000 | ||||||
Series D, due August 15, 2014, 6.56% | 75,000 | 75,000 | ||||||
Unsecured senior notes issued July 21, 2009: | ||||||||
Due July 21, 2012, 6.10% | 40,000 | 40,000 | ||||||
Due July 21, 2013, 6.10% | 40,000 | 40,000 | ||||||
Due July 21, 2014, 6.10% | 40,000 | 40,000 | ||||||
Due July 21, 2015, 6.10% | 40,000 | 40,000 | ||||||
Due July 21, 2016, 6.10% | 40,000 | 40,000 | ||||||
Unsecured senior credit facility due December 18, 2011, .61% | 10,000 | 70,000 | ||||||
$360,000 | $420,000 | |||||||
Less long-term debt due within one year | — | — | ||||||
Long-term debt | $ | 360,000 | $ | 420,000 | ||||
The intermediate unsecured debt outstanding at September 30, 2010 matures over a period from August 2012 to August 2014 and carries a weighted-average interest rate of 6.53 percent, which is paid semi-annually. The terms require that we maintain a minimum ratio of debt to total capitalization of less than 55 percent. The debt is held by various entities, including $3 million held by a company affiliated with one of our Board members.
We have $200 million senior unsecured fixed-rate notes that mature over a period from July 2012 to July 2016. Interest on the notes is paid semi-annually based on an annual rate of 6.10 percent. We will make five equal annual principal repayments of $40 million starting on July 21, 2012. Financial covenants 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. The note purchase agreement also contains additional terms, conditions, and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.
We have an agreement with a multi-bank syndicate for a $400 million senior unsecured credit facility maturing December 2011. While we have the option to borrow at the prime rate for maturities of less than 30 days, we anticipate that the majority of all the borrowings over the life of the facility will accrue interest at a spread
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over the London Interbank Bank Offered Rate (LIBOR). We pay a commitment fee based on the unused balance of the facility. The spread over LIBOR as well as the commitment fee is determined according to a scale based on a ratio of our total debt to total capitalization. The LIBOR spread ranges from .30 percent to .45 percent depending on the ratio. At September 30, 2010, the LIBOR spread on borrowings was .35 percent and the commitment fee was .075 percent per annum. At September 30, 2010, we had two letters of credit totaling $21.9 million under the facility and had $10 million borrowed against the facility with $368.1 million available to borrow. The advances bear an interest rate of 0.61 percent at September 30, 2010. Subsequent to September 30, 2010, we paid the $10 million outstanding balance and had $378.1 million available to borrow.
Financial covenants in the facility require we 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 facility contains additional terms, conditions, and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality. At September 30, 2010, we were in compliance with all debt covenants.
In January 2010, a $105 million unsecured line of credit that matured was paid in full using operating cash flow and borrowings under the $400 million facility. At the same time, an interest rate swap with the same maturity and a notional amount of $105 million expired.
At September 30, 2010, aggregate maturities of long-term debt are as follows (in thousands):
Years ending September 30, | | |||
---|---|---|---|---|
2011 | $ — | |||
2012 | 125,000 | |||
2013 | 40,000 | |||
2014 | 115,000 | |||
2015 | 40,000 | |||
Thereafter | 40,000 | |||
$360,000 | ||||
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NOTE 4 INCOME TAXES
The components of the provision for income taxes are as follows:
Years Ended September 30, | 2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | |||||||||||
Current: | |||||||||||
Federal | $ 31,312 | $ 45,780 | $ 97,871 | ||||||||
Foreign | 13,215 | 13,442 | 15,232 | ||||||||
State | 1,937 | 8,889 | 10,813 | ||||||||
46,464 | 68,111 | 123,916 | |||||||||
Deferred: | |||||||||||
Federal | 100,206 | 148,367 | 110,077 | ||||||||
Foreign | 7,846 | 2,865 | (788 | ) | |||||||
State | (2,361 | ) | 8,507 | 9,388 | |||||||
105,691 | 159,739 | 118,677 | |||||||||
Total provision | $152,155 | $227,850 | $242,593 | ||||||||
The amounts of domestic and foreign income before income taxes and equity in income of affiliate are as follows:
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | ||||||||||
Domestic | $389,383 | $571,028 | $627,344 | |||||||
Foreign | 48,853 | 27,257 | 18,141 | |||||||
$438,236 | $598,285 | $645,485 | ||||||||
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Recoverability of any tax assets are evaluated and necessary allowances are provided. The carrying value of the net deferred tax assets is based on management's judgments using certain estimates and assumptions that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the benefits of such assets. If these estimates and related assumptions change in the future, additional valuation allowances may be recorded against the deferred tax assets resulting in additional income tax expense in the future.
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The components of our net deferred tax liabilities are as follows:
September 30, | 2010 | 2009 | |||||||
---|---|---|---|---|---|---|---|---|---|
(in thousands) | |||||||||
Deferred tax liabilities: | |||||||||
Property, plant and equipment | $ | 703,404 | $ | 591,074 | |||||
Available-for-sale securities | 107,917 | 123,763 | |||||||
Equity investments | — | — | |||||||
Other | 136 | 166 | |||||||
Total deferred tax liabilities | 811,457 | 715,003 | |||||||
Deferred tax assets: | |||||||||
Pension reserves | 15,549 | 12,901 | |||||||
Self-insurance reserves | 4,249 | 3,740 | |||||||
Net operating loss and foreign tax credit carryforwards | 45,343 | 48,107 | |||||||
Financial accruals | 31,102 | 25,829 | |||||||
Other | 3,456 | 3,939 | |||||||
Total deferred tax assets | 99,699 | 94,516 | |||||||
Valuation allowance | 45,343 | 48,107 | |||||||
Net deferred tax assets | 54,356 | 46,409 | |||||||
Net deferred tax liabilities | $ | 757,101 | $ | 668,594 | |||||
The change in our net deferred tax assets and liabilities is impacted by foreign currency remeasurement.
As of September 30, 2010, we had state and foreign net operating loss carryforwards for income tax purposes of $3.3 million and $16.0 million, respectively, and foreign tax credit carryforwards of approximately $39.6 million which will expire in years 2011 through 2018. The valuation allowance is primarily attributable to state and foreign net operating loss carryforwards and foreign tax credit carryforwards which more likely than not will not be utilized.
Effective income tax rates as compared to the U.S Federal income tax rate are as follows:
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
U.S. Federal income tax rate | 35 | % | 35 | % | 35 | % | ||||
Effect of foreign taxes | 1 | 1 | 1 | |||||||
State income taxes | (1 | ) | 2 | 2 | ||||||
Effective income tax rate | 35 | % | 38 | % | 38 | % | ||||
Effective October 1, 2007, we adopted the guidance in ASC 740,Income Taxes, issued by the FASB in July 2006 that clarified the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribed a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain income tax position must be recognized in the financial statements at the largest amount that is more likely than not
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to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50 percent likelihood of being sustained. The cumulative effect of adoption resulted in a decrease of approximately $5.0 million in retained earnings.
We recognize accrued interest related to unrecognized tax benefits in interest expense, and penalties in other expense in the Consolidated Statements of Income. As of September 30, 2010 and 2009, we had accrued interest and penalties of $3.2 million and $1.7 million, respectively.
A reconciliation of the change in our gross unrecognized tax benefits for the fiscal year ended September 30, 2010 and 2009 is as follows (in thousands):
September 30, | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Unrecognized tax benefits at October 1, | $ | 5,244 | $ | 5,692 | |||
Gross decreases – tax positions in prior periods | — | (731 | ) | ||||
Gross increases – tax positions in prior periods | 177 | — | |||||
Gross increases – current period effect of tax positions | 128 | 283 | |||||
Unrecognized tax benefits at September 30 | $ | 5,549 | $ | 5,244 | |||
As of September 30, 2010 and September 30, 2009, our liability for unrecognized tax benefits was $5.6 million and $5.2 million, respectively, which would affect the effective tax rate if recognized. The liabilities for unrecognized tax benefits and related interest and penalties are included in other noncurrent liabilities in our Consolidated Balance Sheets.
It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. However, we do not expect the change to have a material effect on results of operations or financial position.
We file a consolidated U.S. federal income tax return, as well as income tax returns in various states and foreign jurisdictions. The tax years that remain open to examination by U.S. federal and state jurisdictions include fiscal years 2006 through 2009. Audits in foreign jurisdictions are generally complete through fiscal year 2001.
NOTE 5 SHAREHOLDERS' EQUITY
On September 30, 2010, we had 105,819,161 outstanding common stock purchase rights ("Rights") pursuant to the terms of the Rights Agreement dated January 8, 1996, as amended by Amendment No. 1 dated December 8, 2005. As adjusted for the two-for-one stock splits in fiscals 1998 and 2006, and as long as the Rights are not separately transferable, one-half Right attaches to each share of our common stock. Under the terms of the Rights Agreement each Right entitles the holder thereof to purchase one full unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock ("Preferred Stock"), without par value, at a price of $250 per unit. The exercise price and the number of units of Preferred Stock issuable on exercise of the Rights are subject to adjustment in certain cases to prevent dilution. The Rights will be
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attached to the common stock certificates and are not exercisable or transferable apart from the common stock, until ten business days after a person acquires 15 percent or more of the outstanding common stock or ten business days following the commencement of a tender offer or exchange offer that would result in a person owning 15 percent or more of the outstanding common stock. In the event we are acquired in a merger or certain other business combination transactions (including one in which we are the surviving corporation), or more than 50 percent of our assets or earning power is sold or transferred, each holder of a Right shall have the right to receive, upon exercise of the Right, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Rights are redeemable under certain circumstances at $0.01 per Right and will expire, unless earlier redeemed, on January 31, 2016.
NOTE 6 STOCK-BASED COMPENSATION
We have one plan providing for common-stock based awards to employees and to non-employee Directors. The plan permits the granting of various types of awards including stock options and restricted stock awards. 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 ten years after the grant date. We have the right to satisfy option exercises from treasury shares and from authorized but unissued shares.
On December 1, 2009, we amended the forms of agreement under the plan for awards of nonqualified stock options, incentive stock options and restricted stock. We also amended existing stock option and restricted stock award agreements. The amendments provide for continued vesting (and accelerated vesting upon death) of restricted stock and stock options effective upon a participant becoming retirement eligible. A participant meets the definition of retirement eligible if the participant attains age 55 and has 15 or more years of continuous service as a full-time employee. The amendments apply retroactively. As a result of the continued vesting provisions, we incurred additional compensation cost of approximately $4.9 million in fiscal 2010.
A summary of compensation cost for stock-based payment arrangements recognized in general and administrative expense in fiscal 2010, 2009 and 2008 is as follows (in thousands):
September 30, | 2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Compensation expense | |||||||||||
Stock options | $ | 11,475 | $ | 6,899 | $ | 6,210 | |||||
Restricted stock | 4,380 | 1,449 | 1,246 | ||||||||
$ | 15,855 | $ | 8,348 | $ | 7,456 | ||||||
Benefits of tax deductions in excess of recognized compensation cost of $3.3 million, $1.2 million and $24.9 million are reported as a financing cash flow in the Consolidated Statements of Cash Flows for fiscal 2010, 2009 and 2008, respectively.
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STOCK OPTIONS
Vesting requirements for stock options are determined by the Human Resources Committee of our Board of Directors. Options currently outstanding began vesting one year after the grant date with 25 percent of the options vesting for four consecutive years.
We use the Black-Scholes formula to estimate the fair value of stock options granted to employees. The fair value of the options is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods. The weighted-average fair value calculations for options granted within the fiscal period are based on the following weighted-average assumptions set forth in the table below. Options that were granted in prior periods are based on assumptions prevailing at the date of grant.
| 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Risk-free interest rate | 2.3 | % | 1.7 | % | 3.3 | % | ||||
Expected stock volatility | 49.9 | % | 43.3 | % | 31.1 | % | ||||
Dividend yield | 0.5 | % | 0.9 | % | 0.5 | % | ||||
Expected term (in years) | 5.8 | 5.8 | 4.8 |
Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury securities for the expected term of the option.
Expected Volatility Rate. Expected volatilities are 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 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.
Based on these calculations, the weighted-average fair value per option granted to acquire a share of common stock was $17.64, $8.16 and $10.81 per share for fiscal 2010, 2009 and 2008, respectively.
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The following summary reflects the stock option activity for our common stock and related information for fiscal 2010, 2009 and 2008 (shares in thousands):
| 2010 | 2009 | 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options | Weighted-Average Exercise Price | Options | Weighted-Average Exercise Price | Options | Weighted-Average Exercise Price | |||||||||
Outstanding at October 1, | 5,401 | $20.55 | 4,819 | $20.02 | 6,032 | $15.80 | |||||||||
Granted | 570 | 38.02 | 865 | 21.07 | 742 | 35.11 | |||||||||
Exercised | (397 | ) | 13.63 | (267 | ) | 12.18 | (1,845 | ) | 11.87 | ||||||
Forfeited/Expired | (2 | ) | 38.02 | (16 | ) | 26.91 | (110 | ) | 27.31 | ||||||
Outstanding on September 30, | 5,572 | $22.82 | 5,401 | $20.55 | 4,819 | $20.02 | |||||||||
Exercisable on September 30, | 3,888 | $19.68 | 3,599 | $17.42 | 3,206 | $15.07 | |||||||||
Shares available to grant | 7,614 | 1,656 | 2,511 |
The following table summarizes information about stock options at September 30, 2010 (shares in thousands):
| Outstanding Stock Options | Exercisable Stock Options | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices | Options | Weighted-Average Remaining Life | Weighted-Average Exercise Price | Options | Weighted-Average Exercise Price | |||||||
$11.3318 to $16.010 | 2,348 | 2.6 | $13.50 | 2,348 | $13.50 | |||||||
$21.0500 to $27.440 | 1,475 | 7.3 | $23.56 | 691 | $25.03 | |||||||
$30.2300 to $38.015 | 1,749 | 7.3 | $34.72 | 849 | $32.43 | |||||||
$11.3318 to $38.015 | 5,572 | 5.3 | $22.82 | 3,888 | $19.68 | |||||||
At September 30, 2010, the weighted-average remaining life of exercisable stock options was 4.1 years and the aggregate intrinsic value was $80.8 million with a weighted-average exercise price of $19.68 per share.
The number of options vested or expected to vest at September 30, 2010 was 5,498,304 with an aggregate intrinsic value of $97.5 million and a weighted-average exercise price of $22.73 per share.
As of September 30, 2010, the unrecognized compensation cost related to the stock options was $10.0 million. That cost is expected to be recognized over a weighted-average period of 2.6 years.
The total intrinsic value of options exercised during fiscal 2010, 2009 and 2008 was $11.3 million, $4.9 million, and $21.9 million, respectively.
The grant date fair value of shares vested during fiscal 2010, 2009 and 2008 was $7.0 million, $6.3 million and $5.8 million, respectively.
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 is determined based on the average of the high and low price of our shares on the grant date.
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As of September 30, 2010, there was $4.7 million of total unrecognized compensation cost related to unvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 1.7 years.
A summary of the status of our restricted stock awards as of September 30, 2010, and of changes in restricted stock outstanding during the fiscal years ended September 30, 2010, 2009 and 2008 is as follows (share amounts in thousands):
| 2010 | 2009 | 2008 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Weighted-Average Grant Date Fair Value per Share | Shares | Weighted-Average Grant Date Fair Value per Share | Shares | Weighted-Average Grant Date Fair Value per Share | |||||||||
Outstanding at October 1, | 177 | $30.06 | 243 | $29.92 | 240 | $29.27 | |||||||||
Granted | 182 | 38.02 | — | — | 22 | 35.11 | |||||||||
Vested | (70 | ) | 29.36 | (66 | ) | 29.52 | (3 | ) | 16.01 | ||||||
Forfeited/Expired | — | — | — | — | (16 | ) | 30.24 | ||||||||
Outstanding on September 30, | 289 | $35.23 | 177 | $30.06 | 243 | $29.92 |
NOTE 7 EARNINGS PER SHARE
ASC 260,Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. We have granted and expect to continue to grant restricted stock grants to employees and non-employee directors that contain non-forfeitable rights to dividends. Such grants are considered participating securities under ASC 260. As such, we are required to include these grants in the calculation of our basic earnings per share and calculate basic earnings per share using the two-class method. Restricted stock grants have previously been included in our dilutive earnings per share calculation using the treasury stock 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. Earnings per share have been recalculated for prior periods to conform to the current year presentation. As a result, the number of shares used to compute earnings per share changed. For the year ended September 30, 2009, basic and diluted earnings per share decreased $0.01 due to the adoption. For the year ended September 30, 2008, basic and diluted earnings per share decreased $0.01 and $0.02, respectively, due to the adoption.
Basic net income per share is computed utilizing the two-class method and is calculated based on weighted-average number of common shares outstanding during the periods presented.
Diluted net income 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.
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The following table sets forth the computation of basic and diluted earnings per share:
| | | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
September 30, | 2010 | 2009 | 2008 | |||||||||
| (in thousands) | |||||||||||
Numerator: | ||||||||||||
Income from continuing operations | $ | 286,081 | $ | 380,546 | $ | 420,258 | ||||||
Income (loss) from discontinued operations | (129,769 | ) | (27,001 | ) | 41,480 | |||||||
Net income | 156,312 | 353,545 | 461,738 | |||||||||
Adjustment for basic earnings per share | ||||||||||||
Earnings allocated to unvested shareholders | (404 | ) | (617 | ) | (1,121 | ) | ||||||
Numerator for basic earnings per share: | ||||||||||||
From continuing operations | 285,677 | 379,929 | 419,137 | |||||||||
From discontinued operations | (129,769 | ) | (27,001 | ) | 41,480 | |||||||
155,908 | 352,928 | 460,617 | ||||||||||
Adjustment for diluted earnings per share: | ||||||||||||
Effect of reallocating undistributed earnings of unvested shareholders | 6 | 6 | 23 | |||||||||
Numerator for diluted earnings per share: | ||||||||||||
From continuing operations | 285,683 | 379,935 | 419,160 | |||||||||
From discontinued operations | (129,769 | ) | (27,001 | ) | 41,480 | |||||||
$ | 155,914 | $ | 352,934 | $ | 460,640 | |||||||
Denominator: | ||||||||||||
Denominator for basic earnings per share – | 105,711 | 105,364 | 104,284 | |||||||||
Effect of dilutive shares from stock options and restricted stock | 1,693 | 1,244 | 2,299 | |||||||||
Denominator for diluted earnings per share – | 107,404 | 106,608 | 106,583 | |||||||||
Basic earnings per common shares: | ||||||||||||
Income from continuing operations | $ | 2.70 | $ | 3.61 | $ | 4.02 | ||||||
Income (loss) from discontinued operations | (1.23 | ) | (0.26 | ) | 0.40 | |||||||
Net income | $ | 1.47 | $ | 3.35 | $ | 4.42 | ||||||
Diluted earnings per common shares: | ||||||||||||
Income from continuing operations | $ | 2.66 | $ | 3.56 | $ | 3.93 | ||||||
Income (loss) from discontinued operations | (1.21 | ) | (0.25 | ) | 0.39 | |||||||
Net income | $ | 1.45 | $ | 3.31 | $ | 4.32 | ||||||
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:
| 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share amounts) | |||||||||
Shares excluded from calculation of diluted earnings per share | 554 | 1,206 | — | |||||||
Weighted-average price per share | $ | 38.02 | $ | 33.12 | $ | — |
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NOTE 8 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT
The estimated fair value of our available-for-sale securities is primarily based on market quotes. The following is a summary of available-for-sale securities, which excludes investments in limited partnerships carried at cost and assets held in a Non-qualified Supplemental Savings Plan:
| Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||
---|---|---|---|---|---|---|---|---|---|
| |||||||||
| (in thousands) | ||||||||
Equity Securities: | |||||||||
September 30, 2010 | $129,183 | $174,025 | $— | $303,208 | |||||
September 30, 2009 | 129,183 | 210,640 | $— | 339,823 | |||||
On an on-going basis, we evaluate the marketable equity securities to determine if a 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.
During the year ended September 30, 2008, marketable equity available-for-sale securities with a fair value at the date of sale of $25.5 million were sold. For the same year, the gross realized gain on such sales of available-for-sale securities totaled $22.0 million. The cost of securities used in determining realized gains and losses is based on the average cost basis of the security sold. We had no sales of marketable equity available-for-sale securities in fiscal years 2010 and 2009.
The investments in the limited partnerships carried at cost were approximately $12.4 million at September 30, 2010 and 2009. The estimated fair value of the limited partnerships was $22.5 million and $19.7 million at September 30, 2010 and 2009, respectively.
The assets held in a Non-qualified Supplemental Savings Plan are carried at fair market value which totaled $5.1 million and $4.2 million at September 30, 2010 and 2009, respectively.
The majority of cash equivalents are invested in taxable and non-taxable money-market mutual funds. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those investments.
At September 30, 2009, our short-term investments consisted of a bank certificate of deposit with an original maturity greater than three months. The certificate matured in the second quarter of fiscal 2010. Interest earned is included in interest and dividend income on the Consolidated Statements of Income. The carrying amount of the certificate of deposit approximated fair value.
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The carrying value of other assets, accrued liabilities and other liabilities approximated fair value at September 30, 2010 and 2009.
ASC 820 defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". ASC 820 establishes a fair value hierarchy to prioritize the inputs used in valuation techniques into three levels as follows:
- •
- Level 1 – Observable inputs that reflect quoted prices in active markets for identical assets or liabilities in active markets.
- •
- Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
- •
- Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data.
At September 30, 2010, our financial assets utilizing Level 1 inputs include cash equivalents, equity securities with active markets and money market funds we have elected to classify as restricted assets that are included in other current assets and other assets. Also included is cash denominated in a foreign currency we have elected to classify as restricted that is included in current assets of discontinued operations and limited to remaining liabilities of discontinued operations. For these items, quoted current market prices are readily available.
At September 30, 2010, Level 2 inputs include bank certificates of deposit, which are included in current assets.
Currently, we do not have any financial instruments utilizing Level 3 inputs.
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The following table summarizes our assets and liabilities measured at fair value on a recurring basis presented in our Consolidated Balance Sheets as of September 30, 2010:
| Total Measured at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||
---|---|---|---|---|---|---|---|---|---|
| |||||||||
(in thousands) | |||||||||
Assets: | |||||||||
Cash and cash equivalents | $ 63,020 | $ 63,020 | $— | $— | |||||
Investments | 303,208 | 303,208 | — | — | |||||
Other current assets | 23,118 | 22,868 | 250 | — | |||||
Other assets | 2,000 | 2,000 | — | — | |||||
Total assets measured at fair value | $391,346 | $391,096 | $250 | $— | |||||
The following information presents the supplemental fair value information about long-term fixed-rate debt at September 30, 2010 and September 30, 2009.
September 30, | 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
(in thousands) | |||||||
Carrying value of long-term fixed-rate debt | $ | 350.0 | $ | 350.0 | |||
Fair value of long-term fixed-rate debt | $ | 382.9 | $ | 380.9 |
The fair value for fixed-rate debt was estimated using discounted cash flows and interest rates currently being offered on credits with similar maturities and credit profiles. The outstanding line of credit and short-term debt bear interest at market rates and the cost of borrowings, if any, would approximate fair value. The debt was valued using a Level 2 input.
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NOTE 9 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) for the years ended September 30, 2010, 2009 and 2008 were as follows (in thousands):
| | | | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
Unrealized appreciation (depreciation) on securities, net of tax of $(13,730), $54,254 and $(10,558) | $ | (22,885 | ) | $ | 88,519 | $ | (17,227 | ) | ||
Reclassification of realized gains in net income, net of tax of $0, $0 and $(8,358) | — | — | (13,636 | ) | ||||||
Amortization of net periodic benefit costs—net of actuarial gain, net of tax of $(3,276), $(8,872) and $(4,054). | (5,459 | ) | (14,475 | ) | (6,615 | ) | ||||
$ | (28,344 | ) | $ | 74,044 | $ | (37,478 | ) | |||
The components of accumulated other comprehensive income (loss) at September 30, 2010 and 2009, net of applicable tax effects, were as follows (in thousands):
| | | |||||
---|---|---|---|---|---|---|---|
September 30, | 2010 | 2009 | |||||
Unrealized appreciation on securities | $ | 107,712 | $ | 130,597 | |||
Unrecognized actuarial loss and prior service cost | (23,605 | ) | (18,146 | ) | |||
$ | 84,107 | $ | 112,451 | ||||
NOTE 10 ACQUISITION OF TERRAVICI DRILLING SOLUTIONS
On May 21, 2008, we acquired a private limited partnership, TerraVici Drilling Solutions ('TerraVici') in a transaction accounted for under the purchase method of accounting. Under the purchase method of accounting, the assets acquired and liabilities assumed of TerraVici are recorded as of the acquisition date, at their respective fair values, and included in our Consolidated Financial Statements from the date of acquisition. TerraVici is included with all other non-reportable business segments.
TerraVici is developing patented rotary steerable technology to enhance horizontal and directional drilling operations. We acquired TerraVici to complement technology currently used with the FlexRig. By combining this new technology with our existing capabilities, we expect to improve drilling productivity and reduce total well cost to the customer.
In-process research and development ("IPR&D") represents rotary steerable system tools under development by TerraVici at the date of acquisition that had not yet achieved technological feasibility, and would have no future alternative use. Accordingly, the purchase price allocated to IPR&D was expensed immediately subsequent to the acquisition. This charge is being amortized over 15 years for tax purposes. The $11.1 million estimated fair value of IPR&D was derived using the multi-period excess-earnings method.
Pursuant to the satisfaction of a performance milestone, we paid $4.0 million subsequent to September 30, 2010. This additional payment will be accounted for as goodwill.
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NOTE 11 EMPLOYEE BENEFIT PLANS
We maintain a domestic noncontributory defined benefit pension plan covering certain U.S. employees who meet certain age and service requirements. In July 2003, we revised the Helmerich & Payne, Inc. Employee Retirement Plan ("Pension Plan") to close the Pension Plan to new participants effective October 1, 2003, and reduce benefit accruals for current participants through September 30, 2006, at which time benefit accruals were discontinued and the Pension Plan was frozen.
The following table provides a reconciliation of the changes in the pension benefit obligations and fair value of Pension Plan assets over the two-year period ended September 30, 2010 and a statement of the funded status as of September 30, 2010 and 2009 (in thousands):
| 2010 | 2009 | ||||||
---|---|---|---|---|---|---|---|---|
Accumulated Benefit Obligation | $ | 102,097 | $ | 89,996 | ||||
Changes in Projected Benefit Obligations | ||||||||
Projected benefit obligation at beginning of year | $ | 89,996 | $ | 69,475 | ||||
Interest cost | 4,825 | 4,988 | ||||||
Actuarial gain (loss) | 11,482 | 18,977 | ||||||
Benefits paid | (4,206 | ) | (3,444 | ) | ||||
Projected benefit obligation at end of year | $ | 102,097 | $ | 89,996 | ||||
Change in plan assets | ||||||||
Fair value of plan assets at beginning of year | $ | 57,181 | $ | 59,605 | ||||
Actual return on plan assets | 5,005 | 270 | ||||||
Employer contribution | 3,408 | 750 | ||||||
Benefits paid | (4,206 | ) | (3,444 | ) | ||||
Fair value of plan assets at end of year | $ | 61,388 | $ | 57,181 | ||||
Funded status of the plan at end of year | $ | (40,709 | ) | $ | (32,815 | ) | ||
September 30, | 2010 | 2009 | ||||||
---|---|---|---|---|---|---|---|---|
Amounts Recognized in the Consolidated Balance Sheets (in thousands): | ||||||||
Accrued liabilities | $ | (181 | ) | $ | (40 | ) | ||
Noncurrent liabilities-other | (40,528 | ) | (32,775 | ) | ||||
Net amount recognized | $ | (40,709 | ) | $ | (32,815 | ) | ||
The amounts recognized in Accumulated Other Comprehensive Income at September 30, 2010 and 2009, and not yet reflected in net periodic benefit cost, are as follows (in thousands): | ||||||||
Net actuarial gain (loss) | $ | (38,001 | ) | $ | (29,267 | ) | ||
Prior service cost | (2 | ) | (1 | ) | ||||
Total | $ | (38,003 | ) | $ | (29,268 | ) | ||
The amount recognized in Accumulated Other Comprehensive Income and not yet reflected in periodic benefit cost expected to be amortized in next year's periodic benefit cost is a net actuarial loss of $3.0 million.
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The weighted average assumptions used for the pension calculations were as follows:
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Discount rate for net periodic benefit costs | 5.42% | 7.25% | 6.25% | |||||||
Discount rate for year-end obligations | 4.48% | 5.42% | 7.25% | |||||||
Expected return on plan assets | 8.00% | 8.00% | 8.00% |
We contributed $3.4 million to the Pension Plan in fiscal 2010 to fund distributions in lieu of liquidating pension assets. We estimate contributing at least $0.6 million in fiscal 2011 to meet the minimum contribution required by law and expect to make additional contributions to continue funding distributions. Additional contributions will be made if needed to fund unexpected distributions.
Components of the net periodic pension expense (benefit) were as follows (in thousands):
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Interest cost | $ | 4,825 | $ | 4,988 | $ | 4,919 | ||||
Expected return on plan assets | (4,552 | ) | (4,643 | ) | (5,990 | ) | ||||
Amortization of prior service cost | — | (1 | ) | — | ||||||
Recognized net actuarial loss | 2,295 | 3 | 9 | |||||||
Net pension expense (benefit) | $ | 2,568 | $ | 347 | $ | (1,062 | ) | |||
The following table reflects the expected benefits to be paid from the Pension Plan in each of the next five fiscal years, and in the aggregate for the five years thereafter (in thousands).
Years Ended September 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2011 | 2012 | 2013 | 2014 | 2015 | 2016-2020 | Total | |||||||||||||
$ | 4,907 | $ | 6,035 | $ | 5,707 | $ | 5,613 | $ | 6,901 | $36,170 | $ | 65,333 |
Included in the Pension Plan is an unfunded supplemental executive retirement plan.
INVESTMENT STRATEGY AND ASSET ALLOCATION
Our investment policy and strategies are established with a long-term view in mind. The investment strategy is intended to help pay the cost of the Plan while providing adequate security to meet the benefits promised under the Plan. We maintain a diversified asset mix to minimize the risk of a material loss to the portfolio value that might occur from devaluation of any one investment. In determining the appropriate asset mix, our financial strength and ability to fund potential shortfalls are considered. Plan assets are invested in portfolios of diversified public-market equity securities and fixed income securities. The plan holds no securities of the Company.
The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the Plans' investment portfolio after analyzing historical experience and future expectations of the return and volatility of various asset classes.
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The target allocation for 2011 and the asset allocation for the Pension Plan at the end of fiscal 2010 and 2009, by asset category, follows:
| Target Allocation | Percentage of Plan Assets At September 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Asset Category | 2011 | 2010 | 2009 | ||||||||
U.S. equities | 56 | % | 53 | % | 57 | % | |||||
International equities | 14 | 15 | 15 | ||||||||
Fixed income | 25 | 31 | 27 | ||||||||
Real estate and other | 5 | 1 | 1 | ||||||||
Total | 100 | % | 100 | % | 100 | % | |||||
PLAN ASSETS
The fair value of Plan assets at September 30, 2010, summarized by level within the fair value hierarchy described in Note 8, are as follows (in thousands):
| Total | Level 1 | Level 2 | Level 3 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Short-term investments | $ | 63 | $ | 63 | $ | — | $ | — | |||||||
Mutual funds: | |||||||||||||||
Domestic stock funds | 17,858 | 17,858 | — | — | |||||||||||
Bond funds | 18,872 | 18,872 | — | — | |||||||||||
International stock funds | 8,956 | 8,956 | — | — | |||||||||||
Total Mutual funds | 45,686 | 45,686 | — | — | |||||||||||
Domestic common stock | 13,710 | 13,710 | — | — | |||||||||||
Common collective trust | 785 | — | 785 | — | |||||||||||
Foreign equity stock | 869 | 869 | — | — | |||||||||||
Oil and gas properties | 275 | — | — | 275 | |||||||||||
Total | $ | 61,388 | $ | 60,328 | $ | 785 | $ | 275 | |||||||
The Plan's financial assets utilizing Level 1 inputs include publicly traded mutual funds, common stock and foreign equity stocks. These assets are valued based on quoted prices in active markets for identical securities. The Plan's financial assets utilizing Level 2 inputs include a common collective trust (Wells Fargo Short-term Investment Fund). The statements of net assets available for benefits present the fair value of the Wells Fargo Short-term Investment Fund. The Plan's interest in the trust is valued at Net Asset Value per information provided by the Plan's trustee. The Plan's financial instruments utilizing Level 3 inputs consist of oil and gas properties. The fair value of oil and gas properties is determined by Wells Fargo Bank, N.A., based upon actual revenue received for the previous twelve-month period and experience with similar assets.
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The following table sets forth a summary of changes in the fair value of the plan's Level 3 assets for the year ended September 30, 2010 (in thousands):
| Oil and gas properties | |||
---|---|---|---|---|
Balance, beginning of year | $ | 435 | ||
Unrealized losses relating to property still held at the reporting date | (160 | ) | ||
Balance, end of year | $ | 275 | ||
DEFINED CONTRIBUTION PLAN
Substantially all employees on the United States payroll may elect to participate in the 401(k)/Thrift Plan by contributing a portion of their earnings. We contribute an amount equal to 100 percent of the first five percent of the participant's compensation subject to certain limitations. The annual expense incurred for this defined contribution plan was $14.2 million, $14.3 million, and $15.0 million in fiscal 2010, 2009 and 2008, respectively.
FOREIGN PLAN
We maintain an unfunded pension plan in one of our international subsidiaries. Pension expense was approximately $0.1 million, $0.4 million and $0.4 million in fiscal 2010, 2009 and 2008, respectively. The pension liability at September 30, 2010 and 2009 was $5.4 million and $5.0 million, respectively.
NOTE 12 SUPPLEMENTAL BALANCE SHEET INFORMATION
The following reflects the activity in our reserve for bad debt for 2010, 2009 and 2008:
September 30, | 2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | |||||||||||
Reserve for bad debt: | |||||||||||
Balance at October 1, | $ | 659 | $ | 1,331 | $ | 1,707 | |||||
Provision for (recovery of) bad debt | 206 | (645 | ) | 704 | |||||||
Write-off of bad debt | (35 | ) | (27 | ) | (1,080 | ) | |||||
Balance at September 30, | $ | 830 | $ | 659 | $ | 1,331 | |||||
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Accounts receivable, prepaid expenses, accrued liabilities, and long-term liabilities at September 30 consist of the following:
September 30, | 2010 | 2009 | ||||||
---|---|---|---|---|---|---|---|---|
(in thousands) | ||||||||
Accounts receivable, net of reserve: | ||||||||
Trade receivables | $ | 409,920 | $ | 233,949 | ||||
Income tax | 47,739 | — | ||||||
$ | 457,659 | $ | 233,949 | |||||
| ||||||||
Prepaid expenses and other: | ||||||||
Prepaid value added tax | $ | 15,481 | $ | 16,450 | ||||
Restricted cash | 12,848 | 11,890 | ||||||
Prepaid insurance | 9,196 | 7,887 | ||||||
Deferred mobilization | 14,430 | 9,046 | ||||||
Other | 12,216 | 7,222 | ||||||
$ | 64,171 | $ | 52,495 | |||||
| ||||||||
Accrued liabilities: | ||||||||
Taxes payable, other than income tax | $ | 44,934 | $ | 37,654 | ||||
Accrued income taxes | — | 14,201 | ||||||
Self-insurance liabilities | 4,135 | 2,626 | ||||||
Payroll and employee benefits | 33,392 | 13,449 | ||||||
Accrued operating costs | 23,436 | 2,150 | ||||||
Deferred mobilization | 13,522 | 6,063 | ||||||
Deferred income | 6,438 | 26,026 | ||||||
Other | 18,255 | 9,581 | ||||||
$ | 144,112 | $ | 111,750 | |||||
| ||||||||
Noncurrent liabilities—Other: | ||||||||
Pension and other non-qualified retirement plans | $ | 51,690 | $ | 42,422 | ||||
Deferred income | 14,983 | 7,536 | ||||||
Uncertain tax positions including interest and penalties | 6,755 | 6,298 | ||||||
Self-insurance liabilities | 5,328 | 6,103 | ||||||
Deferred mobilization | 7,816 | 5,164 | ||||||
Other | 5,034 | 6,023 | ||||||
$ | 91,606 | $ | 73,546 | |||||
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NOTE 13 SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | ||||||||||
Cash payments: | ||||||||||
Interest paid, net of amounts capitalized | $ | 16,721 | $ | 12,196 | $ | 18,627 | ||||
Income taxes paid | $ | 104,028 | $ | 31,009 | $ | 115,600 |
Capital expenditures on the Consolidated Statements of Cash Flows for the years ended September 30, 2010, 2009 and 2008 do not include additions which have been incurred but not paid for as of the end of the year. The following table reconciles total capital expenditures incurred to total capital expenditures in the Consolidated Statements of Cash Flows:
September 30, | 2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | |||||||||||
Capital expenditures incurred | $ | 345,264 | $ | 819,798 | $ | 737,809 | |||||
Additions incurred prior year but paid for in current year | 9,816 | 66,857 | 26,954 | ||||||||
Additions incurred but not paid for as of the end of the year | (25,508 | ) | (9,816 | ) | (66,857 | ) | |||||
Capital expenditures per Consolidated Statements of Cash Flows | $ | 329,572 | $ | 876,839 | $ | 697,906 | |||||
NOTE 14 RISK FACTORS
CONCENTRATION OF CREDIT
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term investments and trade receivables. We place temporary cash investments in the U.S. with established financial institutions and invest in a diversified portfolio of highly rated, short-term money market instruments. Our trade receivables, primarily with established companies in the oil and gas industry, may impact credit risk as customers may be similarly affected by prolonged changes in economic and industry conditions. International sales also present various risks including governmental activities that may limit or disrupt markets and restrict the movement of funds. Most of our international sales, however, are to large international or government-owned national oil companies. We perform ongoing credit evaluations of customers and do not typically require collateral in support for trade receivables. We provide an allowance for doubtful accounts, when necessary, to cover estimated credit losses. Such an allowance is based on management's knowledge of customer accounts. Except as disclosed in Note 2, Discontinued Operations, no significant credit losses have been experienced in recent history.
VOLATILITY OF MARKET
Our operations can be materially affected by oil and gas prices. Oil and natural gas prices are volatile and have declined from the peak levels in June 2008. While current energy prices are important contributors to positive cash flow for customers, expectations about future prices and price volatility are generally more important for determining a customer's future spending levels. This volatility, along with the difficulty in predicting future prices can lead many exploration and production companies to base their capital spending on
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much more conservative estimates of commodity prices. As a result, demand for contract drilling services is not always purely a function of the movement of commodity prices.
In addition, customers may finance their exploration activities through cash flow from operations, the incurrence of debt or the issuance of equity. Any deterioration in the credit and capital markets may cause difficulty for customers to obtain funding for their capital needs. A reduction of cash flow resulting from declines in commodity prices or a reduction of available financing may result in a reduction in customer spending and the demand for drilling services. This reduction in spending could have a material adverse effect on our operations.
SELF-INSURANCE
We self-insure a significant portion of expected losses relating to worker's compensation, general liability, and automobile liability. Insurance coverage has been purchased for individual claims that exceed $1 million or $2 million, depending on whether a claim occurs inside or outside of the United States. Insurance is purchased over deductibles to reduce our exposure to catastrophic events. We record estimates for incurred outstanding liabilities for worker's compensation, general liability claims and for claims that are incurred but not reported. Estimates are based on adjusters' estimates, historic experience and statistical methods that we believe are reliable. Nonetheless, insurance estimates include certain assumptions and management judgments regarding the frequency and severity of claims, claim development, and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense that would be reported under these programs.
We have a wholly-owned captive insurance company, White Eagle Assurance Company, which provides a portion of our physical damage insurance for company-owned drilling rigs and reinsures international casualty deductibles. With the exception of "named wind storm" risk in the Gulf of Mexico, we insure rigs and related equipment at values that approximate the current replacement cost on the inception date of the policy.
INTERNATIONAL DRILLING OPERATIONS
International drilling operations may significantly contribute to our revenues and net operating income. There can be no assurance that we will be able to successfully conduct such operations, and a failure to do so may have an adverse effect on our financial position, results of operations, and cash flows. Also, the success of our international operations will be subject to numerous contingencies, some of which are beyond management's control. These contingencies include general and regional economic conditions, fluctuations in currency exchange rates, changes in international regulatory requirements and international employment issues, risk of expropriation of real and personal property, and the burden of complying with foreign laws. Additionally, in the event that extended labor strikes occur or a country experiences significant political, economic or social instability, we could experience shortages in labor and/or material and supplies necessary to operate some of our drilling rigs, thereby causing an adverse effect on our business, financial condition and results of operations.
We are not operating in any country that is currently considered highly inflationary, which is defined as cumulative inflation rates exceeding 100 percent in the most recent three-year period. All of our foreign subsidiaries use the U.S. dollar as the functional currency and local currency monetary assets are remeasured into U.S. dollars with gains and losses resulting from foreign currency transactions included in current results of operations. As such, if a foreign economy is considered highly inflationary, there would be no impact on the Consolidated Financial Statements.
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NOTE 15 COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Over the last six years, the Company entered into separate drilling contracts with many different customers to build and operate over 160 new FlexRigs. As of November 18, 2010, 12 new FlexRigs with customer commitments remained under construction. During construction, rig construction cost is included in construction in progress and then transferred to contract drilling equipment when the rig is placed in the field for service. Equipment, parts and supplies are ordered in advance to promote efficient construction progress. At September 30, 2010, we had purchase orders outstanding of approximately $68.8 million for the purchase of drilling equipment.
LEASES
We lease approximately 135,000 square feet of office space near downtown Tulsa, Oklahoma as well as other office space and equipment for use in operations. For operating leases that contain built-in pre-determined rent escalations, rent expense is recognized on a straight-line basis over the life of the lease. Leasehold improvements are capitalized and amortized over the lease term. Future minimum rental payments required under operating leases having initial or remaining non-cancelable lease terms in excess of one year at September 30, 2010 are as follows:
Fiscal Year | Amount (in thousands) | ||
---|---|---|---|
2011 | $ 7,204 | ||
2012 | 4,742 | ||
2013 | 3,633 | ||
2014 | 2,154 | ||
2015 | 2,038 | ||
Thereafter | 7,983 | ||
Total | $27,754 | ||
Total rent expense was $5.4 million, $5.2 million and $4.2 million for fiscal 2010, 2009 and 2008, respectively.
CONTINGENCIES
A lawsuit was filed against us by a former customer for whom we performed drilling services with five rigs under term drilling contracts. The suit alleged, among other things, that we failed to perform drilling operations in accordance with good oilfield practice, breached express performance warranties, and made certain fraudulent representations regarding drilling performance. As a consequence, Plaintiff prayed for actual and punitive damages. The case was settled in the fourth quarter of fiscal 2010 for an immaterial amount.
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Various legal actions, the majority of which arise in the ordinary course of business, are pending. We maintain insurance against certain business risks subject to certain deductibles. None of these legal actions are expected to have a material adverse effect on our financial condition, cash flows or results of operations.
We are contingently liable to sureties in respect of bonds issued by the sureties in connection with certain commitments entered into by us in the normal course of business. We have agreed to indemnify the sureties for any payments made by them in respect of such bonds.
During the ordinary course of our business, contingencies arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible gain contingency. We account for gain contingencies in accordance with the provisions of ASC 450,Contingencies, and, therefore, we do not record gain contingencies and recognize income until realized. As discussed in Note 2, Discontinued Operations, property and equipment of our Venezuelan subsidiary was seized by the Venezuelan government on June 30, 2010. We are currently evaluating various remedies, including any recourse we may have against PDVSA or related parties, any remuneration or reimbursement that we might collect from PDVSA or related parties, and any other sources of recovery for our losses. 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.
NOTE 16 SEGMENT INFORMATION
We operate principally in the contract drilling industry. Our contract drilling business includes the following reportable operating segments: U.S. Land, Offshore, and International Land. The contract drilling operations consist mainly of contracting Company-owned drilling equipment primarily to large oil and gas exploration companies. Our primary international areas of operation include Colombia, Ecuador, Argentina, Mexico, Tunisia, Bahrain and other South American countries. The International Land operations have similar services, have similar types of customers, operate in a consistent manner and have similar economic and regulatory characteristics. Therefore, we have aggregated our international operations into one reportable segment. Our Venezuelan operation, which was historically an operating segment within the International Land Segment, was discontinued in the third quarter of fiscal 2010. Consequently, its operating results are excluded from the segment data tables below for all periods presented. Each reportable segment is a strategic business unit which is managed separately. Other includes non-reportable operating segments. Revenues included in Other consist primarily of rental income. Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.
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We evaluate segment performance based on income or loss from 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 for presenting trends in our core businesses. We use this measure to facilitate period-to-period comparisons in operating performance of our reportable segments in the aggregate by eliminating items that affect comparability between periods. We believe that segment operating income is useful to investors because it provides a means to evaluate the operating performance of the segments on an ongoing basis using criteria that are used by our internal decision makers. Additionally, it highlights operating trends and aids analytical comparisons. However, segment operating income has limitations and should not be used as an alternative to operating income or loss, a performance measure determined in accordance with GAAP, as it excludes certain costs that may affect our operating performance in future periods.
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Summarized financial information of our reportable segments for continuing operations for each of the years ended September 30, 2010, 2009 and 2008 is shown in the following table:
(in thousands) | External Sales | Inter- Segment | Total Sales | Segment Operating Income (Loss) | Depreciation | Total Assets | Additions to Long-Lived Assets | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | ||||||||||||||||||||||||
Contract Drilling | ||||||||||||||||||||||||
U.S. Land | $ | 1,412,495 | $ | — | $ | 1,412,495 | $ | 404,278 | $ | 211,652 | $ | 3,257,382 | $ | 305,206 | ||||||||||
Offshore | 202,734 | — | 202,734 | 53,069 | 12,519 | 132,342 | 9,982 | |||||||||||||||||
International | 247,179 | — | 247,179 | 48,271 | 29,938 | 411,339 | 23,865 | |||||||||||||||||
1,862,408 | — | 1,862,408 | 505,618 | 254,109 | 3,801,063 | 339,053 | ||||||||||||||||||
Other | 12,754 | 814 | 13,568 | (6,765 | ) | 8,549 | 454,037 | 6,211 | ||||||||||||||||
1,875,162 | 814 | 1,875,976 | 498,853 | 262,658 | 4,255,100 | 345,264 | ||||||||||||||||||
Eliminations | — | (814 | ) | (814 | ) | — | — | — | — | |||||||||||||||
Total | $ | 1,875,162 | $ | — | $ | 1,875,162 | $ | 498,853 | $ | 262,658 | $ | 4,255,100 | $ | 345,264 | ||||||||||
2009 | ||||||||||||||||||||||||
Contract Drilling | ||||||||||||||||||||||||
U.S. Land | $ | 1,441,164 | $ | — | $ | 1,441,164 | $ | 573,708 | $ | 187,259 | $ | 2,955,574 | $ | 703,073 | ||||||||||
Offshore | 204,702 | — | 204,702 | 55,293 | 11,872 | 129,465 | 17,584 | |||||||||||||||||
International | 187,099 | — | 187,099 | 18,955 | 19,278 | 391,099 | 94,627 | |||||||||||||||||
1,832,965 | — | 1,832,965 | 647,956 | 218,409 | 3,476,138 | 815,284 | ||||||||||||||||||
Other | 10,775 | 836 | 11,611 | (7,032 | ) | 9,126 | 532,346 | 4,514 | ||||||||||||||||
1,843,740 | 836 | 1,844,576 | 640,924 | 227,535 | 4,008,484 | 819,798 | ||||||||||||||||||
Eliminations | — | (836 | ) | (836 | ) | — | — | — | — | |||||||||||||||
Total | $ | 1,843,740 | $ | — | $ | 1,843,740 | $ | 640,924 | $ | 227,535 | $ | 4,008,484 | $ | 819,798 | ||||||||||
2008 | ||||||||||||||||||||||||
Contract Drilling | ||||||||||||||||||||||||
U.S. Land | $ | 1,542,038 | $ | — | $ | 1,542,038 | $ | 605,718 | $ | 161,893 | $ | 2,655,595 | $ | 682,310 | ||||||||||
Offshore | 154,452 | — | 154,452 | 33,394 | 12,152 | 152,497 | 14,614 | |||||||||||||||||
International | 161,072 | — | 161,072 | 17,877 | 14,191 | 202,255 | 33,967 | |||||||||||||||||
1,857,562 | — | 1,857,562 | 656,989 | 188,236 | 3,010,347 | 730,891 | ||||||||||||||||||
Other | 11,809 | 878 | 12,687 | (7,996 | ) | 7,107 | 366,773 | 6,918 | ||||||||||||||||
1,869,371 | 878 | 1,870,249 | 648,993 | 195,343 | 3,377,120 | 737,809 | ||||||||||||||||||
Eliminations | — | (878 | ) | (878 | ) | — | — | — | — | |||||||||||||||
Total | $ | 1,869,371 | $ | — | $ | 1,869,371 | $ | 648,993 | $ | 195,343 | $ | 3,377,120 | $ | 737,809 | ||||||||||
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The following table reconciles segment operating income to income from continuing operations before income taxes and equity in income of affiliate as reported on the Consolidated Statements of Income (in thousands):
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Segment operating income | $498,853 | $640,924 | $648,993 | |||||||||
Income from asset sales | 4,992 | 5,402 | 13,049 | |||||||||
Gain from involuntary conversion of long-lived assets | — | 541 | 10,236 | |||||||||
Corporate general and administrative costs and corporate depreciation | (52,049 | ) | (37,992 | ) | (32,194 | ) | ||||||
Operating income | 451,796 | 608,875 | 640,084 | |||||||||
Other income (expense) | ||||||||||||
Interest and dividend income | 1,811 | 2,755 | 3,524 | |||||||||
Interest expense | (17,158 | ) | (13,590 | ) | (18,721 | ) | ||||||
Gain on sale of investment securities | — | — | 21,994 | |||||||||
Other | 1,787 | 245 | (1,396 | ) | ||||||||
Total unallocated amounts | (13,560 | ) | (10,590 | ) | 5,401 | |||||||
Income from continuing operations before income taxes and equity in in income of affiliate | $438,236 | $598,285 | $645,485 | |||||||||
The following table presents revenues from external customers and long-lived assets by country based on the location of service provided (in thousands):
Years Ended September 30, | 2010 | 2009 | 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues | ||||||||||||
United States | $1,572,139 | $1,613,940 | $1,687,075 | |||||||||
Argentina | 55,855 | 42,087 | 44,367 | |||||||||
Ecuador | 52,115 | 52,250 | 55,100 | |||||||||
Colombia | 57,533 | 77,322 | 42,439 | |||||||||
Other Foreign | 137,520 | 58,141 | 40,390 | |||||||||
Total | $1,875,162 | $1,843,740 | $1,869,371 | |||||||||
Long-Lived Assets | ||||||||||||
United States | $ | 2,973,712 | $ | 2,879,222 | $ | 2,461,726 | ||||||
Argentina | 91,322 | 99,896 | 38,125 | |||||||||
Ecuador | 27,772 | 26,022 | 25,560 | |||||||||
Colombia | 59,798 | 62,942 | 41,889 | |||||||||
Other Foreign | 122,416 | 126,191 | 38,084 | |||||||||
Total | $3,275,020 | $3,194,273 | $2,605,384 | |||||||||
Long-lived assets are comprised of property, plant and equipment.
Revenues from one company doing business with the contract drilling business accounted for approximately 12.5 percent, 10.1 percent, and 3.7 percent of the total operating revenues during the years ended September 30, 2010, 2009 and 2008, respectively. Revenues from another company doing business with the contract drilling business accounted for approximately 10.6 percent, 12.4 percent, and 11.3 percent of total operating revenues during the years ended September 30, 2010, 2009 and 2008, respectively. Collectively,
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the receivables from these customers were approximately $85.1 million and $53.0 million at September 30, 2010 and 2009, respectively.
NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
2010 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues | $396,242 | $436,579 | $483,384 | $558,957 | ||||||||||
Operating income | 105,384 | 101,706 | 111,474 | 133,232 | ||||||||||
Income from continuing operations | 63,802 | 74,105 | 64,883 | 83,291 | ||||||||||
Net income (loss) | 63,235 | 46,747 | (36,715 | ) | 83,045 | |||||||||
Basic earnings per common share: | ||||||||||||||
Income from continuing operations | 0.61 | 0.70 | 0.61 | 0.78 | ||||||||||
Net income (loss) | 0.60 | 0.44 | (0.35 | ) | 0.78 | |||||||||
Diluted earnings per common share: | ||||||||||||||
Income from continuing operations | 0.60 | 0.68 | 0.61 | 0.77 | ||||||||||
Net income (loss) | 0.59 | 0.43 | (0.34 | ) | 0.77 | |||||||||
2009 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating revenues | $580,805 | $520,300 | $384,359 | $358,276 | ||||||||||
Operating income | 207,524 | 204,741 | 106,155 | 90,455 | ||||||||||
Income from continuing operations | 133,551 | 123,998 | 68,021 | 54,976 | ||||||||||
Net income | 145,275 | 103,738 | 53,044 | 51,488 | ||||||||||
Basic earnings per common share: | ||||||||||||||
Income from continuing operations | 1.27 | 1.17 | 0.64 | 0.52 | ||||||||||
Net income | 1.38 | 0.98 | 0.50 | 0.49 | ||||||||||
Diluted earnings per common share: | ||||||||||||||
Income from continuing operations | 1.25 | 1.17 | 0.64 | 0.51 | ||||||||||
Net income | 1.36 | 0.98 | 0.50 | 0.48 | ||||||||||
The sum of earnings per share for the four quarters may not equal the total earnings per share for the year due to changes in the average number of common shares outstanding.
In the first quarter of fiscal 2010, net income includes an after-tax gain from the sale of assets of $0.7 million, $0.01 per share on a diluted basis.
In the second quarter of fiscal 2010, net income includes an after-tax gain from the sale of assets of $0.6 million, $0.01 per share on a diluted basis.
In the third quarter of fiscal 2010, net income includes an after-tax gain from the sale of assets of $1.5 million, $0.01 per share on a diluted basis.
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In the fourth quarter of fiscal 2010, net income includes an after-tax gain from the sale of assets of $0.5 million with no effect on diluted earnings per share.
In the first quarter of fiscal 2009, net income includes an after-tax gain from the sale of assets of $0.6 million, $0.01 per share on a diluted basis.
In the second quarter of fiscal 2009, net income includes an after-tax gain from the sale of assets of $1.3 million, $0.01 per share on a diluted basis.
In the third quarter of fiscal 2009, net income includes an after-tax gain from the sale of assets of $1.1 million, $0.01 per share on a diluted basis.
In the fourth quarter of fiscal 2009, net income includes an after-tax gain from the sale of assets of $0.4 million with no effect on diluted earnings per share.
NOTE 18 SUBSEQUENT EVENTS
We have evaluated events and transactions occurring after the balance sheet date through the date these consolidated financial statements were issued, and have determined we have no recognized subsequent events.
Subsequent to September 30, 2010, we classified two conventional rigs from our U.S. Land segment as held for sale.
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Directors | Officers |
W. H. Helmerich, III Chairman of the Board Tulsa, Oklahoma Hans Helmerich President and Chief Executive Officer Tulsa, Oklahoma William L. Armstrong**(***) President Colorado Christian University Lakewood, Colorado Randy A. Foutch*(***) Chairman and Chief Executive Officer Laredo Petroleum, Inc. Tulsa, Oklahoma Paula Marshall**(***) Chief Executive Officer The Bama Companies, Inc. Tulsa, Oklahoma Hon. Francis Rooney*(***) Chief Executive Officer, Rooney Holdings, Inc. Former U.S. Ambassador to the Holy See, 2005-2008 Tulsa, Oklahoma Edward B. Rust, Jr.*(***) Chairman, President and Chief Executive Officer State Farm Mutual Automobile Insurance Company Bloomington, Illinois John D. Zeglis**(***) Chairman and Chief Executive Officer, Retired AT&T Wireless Services, Inc. Basking Ridge, New Jersey | W. H. Helmerich, III Chairman of the Board Hans Helmerich President and Chief Executive Officer John W. Lindsay Executive Vice President, U.S. and International Operations of Helmerich & Payne International Drilling Co. Steven R. Mackey Executive Vice President, Secretary, General Counsel & Chief Administrative Officer Juan Pablo Tardio Vice President and Chief Financial Officer Gordon K. Helm Vice President and Controller | Stockholders' Meeting The annual meeting of stockholders will be held on March 2, 2011. A formal notice of the meeting, together with a proxy statement and form of proxy will be mailed to shareholders on or about January 25, 2011. Stock Exchange Listing Helmerich & Payne, Inc. Common Stock is traded on the New York Stock Exchange with the ticker symbol "HP." The newspaper abbreviation most commonly used for financial reporting is "HelmP." Options on the Company's stock are also traded on the New York Stock Exchange. Stock Transfer Agent and Registrar As of November 18, 2010, there were 609 record holders of Helmerich & Payne, Inc. common stock as listed by the transfer agent's records. Our transfer agent is responsible for our shareholder records, issuance of stock certificates, and distribution of our dividends and the IRS Form 1099. Your requests, as shareholders, concerning these matters are most efficiently answered by corresponding directly with the transfer agent at the following address: Computershare Trust Company, N.A. Investor Services P.O. Box 43078 Providence, RI 02940-3078 Telephone: (800) 884-4225 (781) 575-4706 Available Information Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, earnings releases, and financial statements are made available free of charge on the investor relations section of the Company's website as soon as reasonably practicable after the Company electronically files such materials with, or furnishes it to, the SEC. Also located on the investor relations section of the Company's website are certain corporate governance documents, including the following: the charters of the committees of the Board of Directors; the Company's Corporate Governance Guidelines and Code of Business Conduct and Ethics; the Code of Ethics for Principal Executive Officer and Senior Financial Officers; the Related Person Transaction Policy; the Foreign Corrupt Practices Act Compliance Policy; certain Audit Committee Practices and a description of the means by which employees and other interested persons may communicate certain concerns to the Company's Board of Directors, including the communication of such concerns confidentially and anonymously via the Company's ethics hotline at 1-800-205-4913. Annual reports, quarterly reports, current reports, amendments to those reports, earnings releases, financial statements and the various corporate governance documents are also available free of charge upon written request. | ||
* Member, Audit Committee ** Member, Human Resources Committee *** Member, Nominating and Corporate Governance Committee | Annual CEO Certification The annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual was provided to the New York Stock Exchange on or about April 5, 2010. Direct Inquiries To: Investor Relations Helmerich & Payne, Inc. 1437 South Boulder Avenue Tulsa, Oklahoma 74119 Telephone: (918) 742-5531 Internet Address: http://www.hpinc.com |
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Helmerich & Payne, Inc.
FORM 10-K, 2010
HELMERICH & PAYNE, INC.
ANNUAL REPORT FOR 2010
HELMERICH & PAYNE, INC.
1437 SOUTH BOULDER AVENUE
TULSA, OKLAHOMA 74119
ANNUAL REPORT FOR 2010