UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

 

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended:  December 31, 2006

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from       to      

Commission File Number: 1-4221

HELMERICH & PAYNE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware	73-0679879
(State or other jurisdiction of	(I.R.S. Employer I.D. Number)
incorporation or organization)

 

1437 South Boulder Avenue, Tulsa, Oklahoma,74119

(Address of principal executive office)(Zip Code)

(918) 742-5531

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   x              Accelerated filer   o          Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

CLASS		OUTSTANDING AT January 31, 2007
Common Stock, $0.10 par value		103, 231, 570
		Total Number of Pages - 25

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets as of December 31, 2006 and September 30, 2006	3
	Consolidated Condensed Statements of Income for the Three Months Ended December 31, 2006 and 2005	4
	Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 2006 and 2005	5
	Consolidated Condensed Statement of Shareholders’ Equity for the Three Months Ended December 31, 2006	6
	Notes to Consolidated Condensed Financial Statements	7-17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	24
Signatures		25

 

2

PART I. FINANCIAL INFORMATION

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share amounts)

ITEM 1. FINANCIAL STATEMENTS

		Unaudited December 31,			September 30,
		2006			2006
ASSETS
Current assets:
Cash and cash equivalents		$	73,088		$	33,853
Short term investments		333			48,673
Accounts receivable, less reserve of $2,015 at December 31, 2006 and $2,007 at September 30, 2006		329,150			289,479
Inventories		26,422			26,165
Deferred income tax		8,624			10,168
Assets held for sale		3,879			4,234
Prepaid expenses and other		30,829			16,119
Total current assets		472,325			428,691
Investments		191,119			218,309
Property, plant and equipment, net		1,603,978			1,483,134
Other assets		4,584			4,578
Total assets		$	2,272,006		$	2,134,712
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	13,721		$	3,721
Accounts payable		116,472			138,750
Accrued liabilities		140,735			97,077
Long-term debt due within one year		25,000			25,000
Total current liabilities		295,928			264,548
NonCurrent liabilities:
Long-term notes payable		205,000			175,000
Deferred income taxes		271,453			269,919
Other		41,307			43,353
Total noncurrent liabilities		517,760			488,272
Shareholders’ equity:
Common stock, $.10 par value, 160,000,000 shares authorized, 107,057,904 shares issued		10,706			10,706
Preferred stock, no par value, 1,000,000 shares authorized, no shares issued		—			—
Additional paid-in capital		137,225			135,500
Retained earnings		1,321,286			1,215,127
Accumulated other comprehensive income		53,408			69,645
Treasury stock, at cost		(64,307		)	(49,086		)
Total shareholders’ equity		1,458,318			1,381,892
Total liabilities and shareholders’ equity		$	2,272,006		$	2,134,712

 

The accompanying notes are an integral part of these statements.

3

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)
(in thousands, except per share data)

		Three Months Ended
		December 31,
		2006			2005
Operating revenues:
Drilling — U.S. Land		$	269,900		$	172,754
Drilling — U.S. Offshore		30,986			29,520
Drilling — International		82,614			50,257
Real Estate		2,899			2,857
		386,399			255,388
Operating costs and other:
Operating costs, excluding depreciation		199,467			140,596
Depreciation		30,151			22,923
General and administrative		10,613			11,938
Income from asset sales		(486		)	(973		)
		239,745			174,484
Operating income		146,654			80,904
Other income (expense):
Interest and dividend income		1,244			2,530
Interest expense		(919		)	(2,580		)
Gain on sale of investment securities		26,337			2,720
Other		64			(513		)
		26,726			2,157
Income before income taxes and equity in income of affiliate		173,380			83,061
Income tax provision		64,098			32,802
Equity in income of affiliate net of income taxes		1,504			555
NET INCOME		$	110,786		$	50,814
Earnings per common share:
Basic		$	1.07		$	0.49
Diluted		$	1.06		$	0.48
Weighted average shares outstanding:
Basic		103,312			103,987
Diluted		104,776			106,173
Dividends declared per common share		$	0.04500		$	0.04125

 

The accompanying notes are an integral part of these statements.

4

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

		Three Months Ended
		December 31,
		2006			2005
OPERATING ACTIVITIES:
Net income		$	110,786		$	50,814
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		30,151			22,923
Equity in income of affiliate before income taxes		(2,426		)	(895		)
Stock-based compensation		1,835			2,720
Gain on sale of investment securities		(26,199		)	(2,584		)
Gain on sale of assets		(486		)	(973		)
Other-net		—			(2		)
Deferred income tax expense		12,173			2,712
Change in assets and liabilities-
Accounts receivable		(45,764		)	(23,925		)
Inventories		(257		)	(345		)
Prepaid expenses and other		(14,716		)	(12,336		)
Accounts payable		30,773			(6,333		)
Accrued liabilities		43,682			26,290
Deferred income taxes		857			376
Other noncurrent liabilities		(2,591		)	2,032
Net cash provided by operating activities		137,818			60,474
INVESTING ACTIVITIES:
Capital expenditures		(187,484		)	(53,654		)
Insurance proceeds from involuntary conversion		330			—
Proceeds from sale of investments		84,605			3,060
Proceeds from asset sales		681			1,468
Net cash used in investing activities		(101,868		)	(49,126		)
FINANCING ACTIVITIES:
Repurchase of common stock		(17,621		)	—
Increase in notes payable		10,000			—
Increase in long-term debt		30,000			—
Decrease in bank overdraft		(14,943		)	—
Dividends paid		(4,655		)	(4,291		)
Proceeds from exercise of stock options		471			3,718
Excess tax benefit from stock-based compensation		33			2,051
Net cash provided by financing activities		3,285			1,478
Net increase in cash and cash equivalents		39,235			12,826
Cash and cash equivalents, beginning of period		33,853			288,752
Cash and cash equivalents, end of period		$	73,088		$	301,578

 

The accompanying notes are an integral part of these statements.

5

HELMERICH & PAYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except per share amounts)

		Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive			Treasury Stock					Total Shareholders’
		Shares		Amount			Capital			Earnings			Income			Shares		Amount			Equity
Balance, September 30, 2006		107,058		$	10,706		$	135,500		$	1,215,127		$	69,645		3,189		$	(49,086	)	$	1,381,892
Comprehensive Income:
Net Income										110,786											110,786
Other comprehensive income, Unrealized losses on available- for-sale securities, net of realized gains included in net income of $16,329 (net of $10,008 income tax)													(16,237		)						(16,237		)
Total Comprehensive income																					94,549
Cash dividends ($0.045 per share)										(4,627		)									(4,627		)
Exercise of stock options							(167		)							(41	)	638			471
Tax benefit of stock-based awards,  including excess tax benefits of $33							57														57
Repurchase of common stock																682		(15,859		)	(15,859		)
Stock-based compensation							1,835														1,835
Balance, December 31, 2006		107,058		$	10,706		$	137,225		$	1,321,286		$	53,408		3,830		$	(64,307	)	$	1,458,318

 

The accompanying notes are an integral part of these statements.

6

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.     Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information.  Accordingly, these interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements and, therefore should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s 2006 Annual Report on Form 10-K and other current filings with the Commission.  In the opinion of management, all adjustments, consisting of those of a normal recurring nature, necessary to present fairly the results of the periods presented have been included. The results of operations for the interim periods presented may not necessarily be indicative of the results to be expected for the full year.

All prior period common stock and applicable share and per share amounts have been retroactively adjusted to reflect a 2-for-1 split of the Company’s common stock effective June 26, 2006.

2.     Earnings per Share

Basic earnings per share is based on the weighted-average number of common shares outstanding during the period.  Diluted earnings per share includes the dilutive effect of stock options and restricted stock.

A reconciliation of the weighted-average common shares outstanding on a basic and diluted basis is as follows (in thousands):

		Three Months Ended December 31,
		2006		2005
Basic weighted average shares		103,312		103,987
Effect of dilutive shares:
Stock options and restricted stock		1,464		2,186
Diluted weighted average shares		104,776		106,173

 

3.               Inventories

Inventories consist primarily of replacement parts and supplies held for use in the Company’s drilling operations.

4.     Investments

The following is a summary of available-for-sale securities, which excludes those accounted for under the equity method of accounting, investments in limited partnerships carried at cost and assets held in a Non-qualified Supplemental Savings Plan.  The investments in the limited partnerships carried at cost were approximately $12.4 million at December 31, 2006 and at September 30, 2006.  The assets held in the Non-qualified Supplemental Savings Plan are valued at fair market which totaled $6.4 million at December 31, 2006 and $5.9 million at September 30, 2006.  The recorded amounts for investments accounted for under the equity method are $60.7 million and $58.3 million at December 31, 2006 and September 30, 2006, respectively.

7

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

					Gross				Gross				Est.
					Unrealized				Unrealized				Fair
		Cost			Gains				Losses				Value
		(in thousands)
Equity Securities 12/31/06		$	15,441		$		96,185		$		—		$		111,626
Equity Securities 09/30/06		$	19,413		$	122,490			$	(115		)	$	141,788

 

5.               Sale of Investment Securities

Net income includes after-tax gains from the sale of available-for-sale securities as follows (in thousands, except per share amounts):

		Three Months Ended December 31,
		2006				2005
After-tax gain		$		16,184		$		1,721
Earnings per diluted share		$	0.15			$	0.02

 

6.               Comprehensive Income

Comprehensive income, net of related tax, is as follows (in thousands):

		Three Months Ended December 31,
		2006				2005
Net Income		$		110,786		$		50,814
Other comprehensive income:
Net unrealized gain (loss) on securities		(16,237			)	8,244
Total comprehensive income		$	94,549			$	59,058

 

The components of accumulated other comprehensive income, net of related taxes, are as follows (in thousands):

		December 31,				September 30,
		2006				2006
Unrealized gain on securities, net		$		59,634		$		75,871
Minimum pension liability		(6,226			)	(6,226			)
Accumulated other comprehensive income		$	53,408			$	69,645

 

7.               Financial Instruments

At September 30, 2006, the Company’s short-term investments consisted primarily of auction rate securities classified as available-for-sale.  During the three months ended December 31, 2006, the Company sold $48.3 million in auction rate securities with no realized gains or losses.  The proceeds of those sales are included in the sale of investments under investing activities on the Consolidated Condensed Statements of Cash Flows.

8.               Cash Dividends

The $0.045 cash dividend declared September 6, 2006, was paid December 1, 2006. On December 5, 2006, a cash dividend of $0.045 per share was declared for shareholders of record on February 15, 2007, payable March 1, 2007.

8

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

9.               Stock-Based Compensation

The Company has two plans providing for common-stock based awards to employees and to non-employee Directors.  The plans permit 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 grant.   Vesting requirements are determined by the Human Resources Committee of the Company’s Board of Directors.  Readers should refer to Note 6 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006 for additional information related to these stock-based compensation plans.

In October 2005, the Company adopted SFAS 123(R) “Share-Based Payment” using a modified prospective application.  The Company uses the Black-Scholes formula to estimate the value of stock options granted.  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 Company has the right to satisfy option exercises from treasury shares and from authorized but unissued shares.

During the three months ended December 31, 2006, the Company repurchased 681,900 shares of its common stock at an aggregate cost of $15.9 million.  The Company may repurchase additional shares of its common stock during fiscal 2007 if the share price is favorable.

A summary of compensation cost for stock-based payment arrangements recognized in general and administrative expense and cash received from the exercise of stock options is as follows (in thousands, except per share amounts):

			Three Months Ended December 31,
			2006					2005
Compensation expense
Stock options			$1,508					$2,624
Restricted stock			327					96
			$1,835					$2,720
After-tax stock based compensation			$1,138					$1,686
Per basic share			$	.01				$	.02
Per diluted share			$	.01				$	.02
Cash received from exercise of stock options			$	471				$3,718

 

In December 2005, the Company accelerated the vesting of share options held by a senior executive who retired.  As a result of that modification, the Company recognized additional compensation expense of $0.9 million for the three months ended December 31, 2005.

9

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

STOCK OPTIONS

The following summarizes the weighted-average assumptions in the model for the three months ended December 31, 2006 and 2005:

		2006		2005
Risk-free interest rate		4.6	%	4.5	%
Expected stock volatility		35.9	%	36.9	%
Dividend yield		.7	%	.5	%
Expected term (in years)		5.5		5.2

 

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 the Company’s stock based upon historical experience over a period which approximates the expected term of the option.

Dividend Yield.  The expected dividend yield is based on the Company’s current dividend yield.

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

A summary of stock option activity under the Plan for the three months ended December 31, 2006 and 2005 is presented in the following tables:

December 31, 2006 Options			Shares (in thousands)				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value (in thousands)
Outstanding at October 1, 2006			5,619				$14.24
Granted			729				26.90
Exercised			(41	)			11.65
Forfeited/Expired			—				—
Outstanding at December 31, 2006			6,307				$15.72				6.22				$55,175
Vested and expected to vest at December 31, 2006			6,239				$15.61				6.19				$55,304
Exercisable at December 31, 2006			4,591				$12.71				5.22				$53,977

 

10

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

The weighted-average fair value of options granted in the first quarter of fiscal 2007 and 2006 was $10.36 and $11.62, respectively.

The total intrinsic value of options exercised during the three months ended December 31, 2006 and 2005 was $0.5 million and $5.7 million, respectively.

As of December 31, 2006, the unrecognized compensation cost related to the stock options was $14.8 million.  That costs is expected to be recognized over a weighted-average period of 3.1 years.

RESTRICTED STOCK

Restricted stock awards consist of the Company’s common stock and are time vested over 3-5 years.  The Company recognizes compensation expense on a straight-line basis over the vesting period.  The fair value of restricted stock awards is determined based on the closing trading price of the Company’s shares on the grant date.  The weighted-average grant-date fair value of shares granted for the three months ended December 31, 2006 and 2005 was $26.90 and $30.24, respectively.

A summary of the status of the Company’s restricted stock awards as of December 31, 2006 and 2005, and changes during the three months then ended are presented below:

		Three months ended December 31,
		2006						2005
				Weighted-						Weighted-
				Average						Average
		Shares		Grant-Date				Shares		Grant-Date
Restricted Stock Awards		(in thousands)		Fair Value				(in thousands)		Fair Value
Unvested at October 1		213		$		29.57		10		$		16.01
Granted		27		26.90				203		30.24
Vested		—		—				—		—
Forfeited		—		—				—		—
Unvested at December 31		240		$	29.27			213		$	29.57

 

As of December 31, 2006, there was $5.6 million of total unrecognized compensation cost related to unvested restricted stock options granted under the Plan.  That cost is expected to be recognized over a weighted-average period of 4.1 years.

11

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

10.         Notes Payable and Long-term Debt

At December 31, 2006, the Company had the following unsecured long-term debt outstanding:

Maturity Date		Interest Rate
Fixed rate debt:
August 15, 2007			5.51	%		$			25,000,000
August 15, 2009			5.91	%		25,000,000
August 15, 2012			6.46	%		75,000,000
August 15, 2014			6.56	%		75,000,000
Senior credit facility:
December 18, 2011			5.70	%		30,000,000
						$		230,000,000
less long-term debt due within one year						(25,000,000
Long-term debt						$	205,000,000

 

The terms of the fixed rate debt obligations require the Company to maintain a minimum ratio of debt to total capitalization.

On December 18, 2006, the Company entered into an agreement with a multi-bank syndicate for a five-year, $400 million senior unsecured credit facility.  The Company anticipates that the majority of all of the borrowings over the life of the facility will accrue interest at a spread over LIBOR.  The Company will also pay a commitment fee based on the unused balance of the facility.  The spread over LIBOR as well as the commitment fee will be determined according to a scale based on a ratio of the Company’s total debt to total capitalization.  The LIBOR spread will range from .30 percent to .45 percent depending on the ratios.  At December 31, 2006, the LIBOR spread on borrowings was .35 percent and the commitment fee was .075 percent per annum.

Financial covenants in the facility require the Company to maintain a funded leverage ratio (as defined) of less than 50 percent and an interest coverage ratio (as defined) of less than 3.00 to 1.00.  The new facility contains additional terms, conditions, and restrictions that the Company believes are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.  At closing, the Company transferred two letters of credit totaling $20.9 million to the facility that remained outstanding at December 31, 2006.  As of December 31, 2006, the Company had $30 million borrowed against the facility. The advance bears interest at 5.7 percent.  Subsequent to December 31, 2006, the advance was renewed for an additional 30 days and an additional $35 million was borrowed at 5.67 percent.

In conjunction with the $400 million senior unsecured credit facility, the Company entered into an agreement with a single bank to amend and restate the previous unsecured line of credit from $50 million to $5 million.  Pricing on the amended line of credit is prime minus 1.75 percent.  The covenants and other terms and conditions are similar to the aforementioned senior credit facility except that there is no commitment fee.  At December 31, 2006, the Company had no outstanding borrowings against this line.

As of December 31, 2006, the Company had outstanding, unsecured notes payable to a bank totaling $13.7 million denominated in a foreign currency.  The interest rate of the notes ranged from 12 to 13 percent with a 60 day maturity.  Subsequent to December 31, 2006, all debt balances were repaid.

12

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

11.         Income Taxes

The Company’s effective tax rate for the three months ended December 31, 2006 and 2005 was 37.0 percent and 39.5 percent, respectively.  The effective rate differs from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign taxes.

12.         Contingent Liabilities and Commitments

In conjunction with the Company’s current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $236.3 million are outstanding at December 31, 2006.

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

13.         Segment Information

The Company operates principally in the contract drilling industry. The Company’s contract drilling business includes the following reportable operating segments: U.S. Land, U.S. Offshore, and International.  The contract drilling operations consist mainly of contracting Company-owned drilling equipment primarily to major and large independent oil and gas exploration companies.  The Company’s primary international areas of operation include Venezuela, Colombia, Ecuador, other South American countries and Africa.  The International operations have similar services, have similar types of customers, operate in a consistent manner and have similar economic and regulatory characteristics.  Therefore, the Company has aggregated its International operations into one reportable segment.  The Company also has a Real Estate segment whose operations are conducted exclusively in the metropolitan area of Tulsa, Oklahoma.  The key areas of operation include a shopping center and several multi-tenant warehouses.  Each reportable segment is a strategic business unit which is managed separately. Other includes investments and corporate operations.

The Company evaluates 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 the Company believes to be a reasonable reflection of the utilization of services provided.

Segment operating income for all segments is a non-GAAP financial measure of the Company’s performance, as it excludes general and administrative expenses, corporate depreciation, income from asset sales and other corporate income and expense. The Company considers segment operating income to be an important supplemental measure of operating performance for presenting trends in the Company’s core businesses.  This measure is used by the Company to facilitate

13

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

period-to-period comparisons in operating performance of the Company’s reportable segments in the aggregate by eliminating items that affect comparability between periods.  The Company believes that segment operating income is useful to investors because it provides a means to evaluate the operating performance of the segments and the Company 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 the Company’s operating performance in future periods.

Summarized financial information of the Company’s reportable segments for the three months ended December 31, 2006, and 2005, is shown in the following tables:

(in thousands)		External Sales			Inter- Segment			Total Sales			Segment Operating Income
December 31, 2006
Contract Drilling:
U.S. Land		$	269,900		$	—		$	269,900		$	118,408
U.S. Offshore		30,986			—			30,986			5,691
International		82,614			—			82,614			25,763
		383,500			—			383,500			149,862
Real Estate		2,899			198			3,097			1,467
		386,399			198			386,597			151,329
Eliminations		—			(198		)	(198		)	—
Total		$	386,399		$	—		$	386,399		$	151,329

 

(in thousands)		External Sales			Inter- Segment			Total Sales			Segment Operating Income
December 31, 2005
Contract Drilling:
U.S. Land		$	172,754		$	—		$	172,754		$	70,991
U.S. Offshore		29,520			—			29,520			5,111
International		50,257			—			50,257			9,302
		252,531			—			252,531			85,404
Real Estate		2,857			192			3,049			1,453
		255,388			192			255,580			86,857
Eliminations		—			(192		)	(192		)	—
Total		$	255,388		$	—		$	255,388		$	86,857

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following table reconciles segment operating income per the table above to income before income taxes and equity in income of affiliate as reported on the Consolidated Condensed Statements of Income.

		Three Months Ended December 31,
		2006				2005
		(in thousands)
Segment operating income		$		151,329		$		86,857
Income from asset sales		486				973
Corporate general and administrative costs and corporate depreciation		(5,161			)	(6,926			)
Operating income		146,654				80,904
Other income (expense):
Interest and dividend income		1,244				2,530
Interest expense		(919			)	(2,580			)
Gain (loss) on sale of investment securities		26,337				2,720
Other		64				(513			)
Total other income		26,726				2,157
Income before income taxes and equity in income of affiliate		$	173,380			$	83,061

 

The following tables present revenues from external customers and total assets by country based on the location of service provided.

		Three Months Ended December 31,
		2006				2005
		(in thousands)
Operating revenues
United States		$		303,785		$		205,131
Venezuela		23,900				17,356
Ecuador		26,948				19,111
Other Foreign		31,766				13,790			)
Total		$	386,399			$	255,388

 

		December 31,				September 30,
		2006				2006
		(in thousands)
Total Assets
U.S. Land		$		1,530,575		$		1,356,817
U.S. Offshore		92,026				110,192
International		329,629				311,605
		1,952,230				1,778,614
Real Estate		30,660				30,626
Other		289,116				325,472
		$	2,272,006			$	2,134,712

 

 

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

14.         Pensions and Other Post-retirement Benefits

The following provides information at December 31, 2006 and 2005 as to the Company-sponsored domestic defined benefit pension plan.

Components of Net Periodic Benefit Cost (Benefit)

		Three Months Ended December 31,
		2006				2005
		(in thousands)
Service Cost
Interest Cost		$		—		$		1,021
Expected return on plan assets		1,216				1,210
Recognized net actuarial loss		(1,281			)	(1,234			)
Net pension expense (benefit)		35				219
		$	(30		)	$	1,216

 

Plan Assets

The weighted-average asset allocations for the pension plan by asset category follow:

At December 31,		2006		2005
Asset Category
Equity Securities		76.5	%	74.5	%
Debt Securities		20.8	%	23.6	%
Real Estate and Other		2.7	%	1.9	%
Total		100.0	%	100.0	%

 

Employer Contributions

The Company does not anticipate funding the Pension Plan in fiscal 2007 will be required.  However, the Company can choose to make discretionary contributions to fund distributions in lieu of liquidating pension assets.  The Company estimates contributing $3.0 million in fiscal 2007.  Through December 31, 2006, the Company had contributed $0.3 million to the Pension Plan.

Foreign Plan

The Company maintains an unfunded pension plan in one of the international subsidiaries.  Pension expense was approximately $90,000 and $92,000 for the three months ended December 31, 2006 and 2005, respectively.  The pension liability at December 31, 2006 and September 30, 2006 was $3.8 million and $3.5 million respectively.

15.   Risk Factors

The Company derives its revenue in Venezuela from Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned petroleum company.  The net receivable from PDVSA, as disclosed in the Company’s 2006 Annual Report on Form 10-K, was approximately $66 million at December 1, 2006.  At December 31, 2006, the net receivable was $64 million, a reduction due to collections from PDVSA.  As of February 1, 2006, the net receivable from PDVSA was approximately $44 million. With the collection of the amounts due, all short-term borrowings from two local banks in Venezuela have been paid.

16.   Gain Contingencies

In August 2006, the Company signed an option agreement to sell two U.S. offshore rigs.  The net book value of the two rigs at December 31, 2006 was approximately $3.9 million and has been classified as “Assets held for sale” in the Company’s December 31, 2006 Consolidated Balance Sheet.  In September 2006, the Company received $2.0 million from the optionee for exclusive rights to purchase the rigs. An additional $6.0 million was received in October 2006 to exercise the extended

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

option term.  The $8.0 million is classified in current liabilities in the Consolidated Balance Sheet at December 31, 2006.  The purchase option was exercised subsequent to December 31, 2006 and the transaction is expected to close in the second quarter of fiscal 2007.

In August 2005, the Company’s Rig 201, which operates on an operator’s tension-leg platform in the Gulf of Mexico, lost its entire derrick and suffered significant damage as a result of Hurricane Katrina.  The rig was insured at a value that approximated replacement cost to cover the net book value and any additional losses.  Therefore, the Company expects to record a gain resulting from the receipt of insurance proceeds.  Capital costs incurred in conjunction with any repairs will be capitalized and depreciated in accordance with the Company’s accounting policies.  Insurance proceeds of approximately $3.0 million were received in fiscal 2006 and $0.3 million was received during the three months ended December 31, 2006. Subsequent to December 31, 2006, additional insurance proceeds of approximately $3.5 million were received and additional claims will be submitted.  The total proceeds received through December 31, 2006 approximated the net book value of equipment lost in the hurricane so no gain has been recognized through December 31, 2006.  Insurance proceeds are in the Consolidated Statements of Cash Flows under investing activities.  Additional insurance proceeds, as received, will be recorded as income in the Consolidated Statement of Income.  At this time, it is expected the entire amount of insurance proceeds may not be received until fiscal 2008.  The Company anticipates the rig returning to service during fiscal 2007.

17.   Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans (SFAS 158).  SFAS 158 requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position.  This statement is effective for financial statements as of the end of fiscal years ending after December 15, 2006.  The Company’s pension plan was frozen on September 30, 2006, and as a result, the Company has effectively reflected the funded status of the plan in the Consolidated Balance Sheets; therefore, SFAS 158 will have no impact on consolidated financial statements.

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