Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10Q ("Form 10Q") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans, objectives of management for future operations, contract terms, financing and funding, and the ongoing effect of the COVID-19 pandemic and actions we or others may take in response to the COVID-19 pandemic are forward-looking statements. In addition, forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "predict," "project," "target," "continue," or the negative thereof or similar terminology. Forward-looking statements are based upon current plans, estimates, and expectations that are subject to risks, uncertainties, and assumptions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates, or expectations will be achieved. These forward-looking statements include, among others, information concerning our possible or assumed future results of operations and statements about the following subjects as: •our business strategy; •estimates of our revenues, income, earnings per share, and market share; •our capital structure and our ability to return cash to stockholders through dividends or share repurchases; •the amount and nature of our future capital expenditures and how we expect to fund our capital expenditures; •the volatility of future oil and natural gas prices; •the effects of actions by, or disputes among or between, members of theOrganization of Petroleum Exporting Countries ("OPEC") and other oil producing nations (together, "OPEC+") with respect to production levels or other matters related to the prices of oil and natural gas; •changes in future levels of drilling activity and capital expenditures by our customers, whether as a result of global capital markets and liquidity, changes in prices of oil and natural gas or otherwise, which may cause us to idle or stack additional rigs, or increase our capital expenditures and the construction or acquisition of rigs; •the ongoing effect, impact, potential duration or other implications of the novel strain of coronavirus ("COVID-19") pandemic, including any variants of the virus, and the effectiveness of vaccines and distribution of vaccines to treat the virus, any reinstatement of governmental-imposed restrictions, and the pace of the economic recovery and any expectations we may have with respect thereto; •changes in worldwide rig supply and demand, competition, or technology; •possible cancellation, suspension, renegotiation or termination (with or without cause) of our contracts as a result of general or industry-specific economic conditions, mechanical difficulties, performance or other reasons; •expansion and growth of our business and operations; •our belief that the final outcome of our legal proceedings will not materially affect our financial results; •impact of federal and state legislative and regulatory actions and policies affecting our costs and increasing operation restrictions or delay and other adverse impacts on our business; •impact of geopolitical developments and tensions, war and uncertainty in oil-producing countries; •environmental or other liabilities, risks, damages or losses, whether related to storms or hurricanes (including wreckage or debris removal), collisions, grounding, blowouts, fires, explosions, other accidents, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable; 27 -------------------------------------------------------------------------------- Table of Contents •our financial condition and liquidity; •tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes; •the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems; •potential impacts on our business resulting from climate change, greenhouse gas regulations, and the impact of climate change-related changes in the frequency and severity of weather patterns; •potential long-lived asset impairments; and •our sustainability strategy, including expectations, plans, or goals related to corporate responsibility, sustainability and environmental matters, and related reputational risks as a result of execution of this strategy. Important factors that could cause actual results to differ materially from our expectations or results discussed in the forwardlooking statements are disclosed in our 2021 Annual Report on Form 10-K under Item 1A- "Risk Factors," and Item 7- "Management's Discussion and Analysis of Financial Condition and Results of Operations." All subsequent written and oral forwardlooking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by such cautionary statements. Because of the underlying risks and uncertainties, we caution you against placing undue reliance on these forward-looking statements. We assume no duty to update or revise these forwardlooking statements based on changes in internal estimates, expectations or otherwise, except as required by law. Executive SummaryHelmerich & Payne, Inc. ("H&P," which, together with its subsidiaries, is identified as the "Company," "we," "us," or "our," except where stated or the context requires otherwise) through its operating subsidiaries provides performance-driven drilling solutions and technologies that are intended to make hydrocarbon recovery safer and more economical for oil and gas exploration and production companies. As ofDecember 31, 2021 , our drilling rig fleet included a total of 271 drilling rigs. Our reportable operating business segments consist of the North America Solutions segment with 236 rigs, the OffshoreGulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 28 rigs as ofDecember 31, 2021 . At the close of the first quarter of fiscal year 2022, we had 166 contracted rigs, of which 88 were under a fixed-term contract and 78 were working well-to-well, compared to 137 contracted rigs atSeptember 30, 2021 . Our long-term strategy remains focused on innovation, technology, safety, operational excellence and reliability. As we move forward, we believe that our advanced uniform rig fleet, technology offerings, financial strength, contract backlog and strong customer and employee base position us very well to respond to continued cyclical and often times volatile market conditions and take advantage of future opportunities. Market Outlook Our revenues are primarily derived from the capital expenditures of companies involved in the exploration, development and production of crude oil and natural gas ("E&Ps"). Generally, the level of capital expenditures is dictated by current and expected future prices of crude oil and natural gas, which are determined by improving supply and demand factors. Both commodities have historically been, and we expect them to continue to be, cyclical and highly volatile. Our drilling services operations are organized into the following reportable operating segments: North America Solutions, OffshoreGulf of Mexico , and International Solutions. With respect to North America Solutions, the resurgence of oil and natural gas production coming fromthe United States brought about by unconventional shale drilling for oil has significantly impacted the supply of oil and natural gas and the type of rig utilized in theU.S. land drilling industry. The advent of unconventional drilling for oil inthe United States began in early 2009 and continues to evolve as E&Ps drill longer lateral wells with tighter well spacing. During this time, we designed, built and delivered to the market new technology AC drive rigs (FlexRig®), substantially growing our fleet. The pace of progress of unconventional drilling over the years has been cyclical and volatile, dictated by crude oil and natural gas price fluctuations. Throughout this time, the length of the lateral section of wells drilled inthe United States has continued to grow. The progression of longer lateral wells has required many of the industry's rigs to be upgraded to certain specifications in order to meet the technical challenges of drilling longer lateral wells. The upgraded rigs meeting those specifications are commonly referred to in the industry as super-spec rigs and have the following specific characteristics: AC drive, minimum of 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload rating, 7,500 psi mud circulating system, and multiple-well pad capability. The technical requirements of drilling longer lateral wells often necessitate the use of super-spec rigs and even when not required for shorter lateral wells, there is a strong customer preference for super-spec due to the drilling efficiencies gained in utilizing a super-spec rig. As a result, there has been a structural decline in the use of non-super-spec rigs across the industry. However, because we have a large super-spec fleet, we gained market share and became the largest provider of super-spec rigs in the industry. Accordingly, we believe we are well positioned to respond to various market conditions. 28 -------------------------------------------------------------------------------- Table of Contents In earlyMarch 2020 , the increase in crude oil supply resulting from production escalations from theOrganization of the Petroleum Exporting Countries and other oil producing nations ("OPEC+") combined with a decrease in crude oil demand stemming from the global response and uncertainties surrounding the COVID-19 pandemic resulted in a sharp decline in crude oil prices. Specifically, during calendar year 2020, crude oil prices fell from approximately$60 per barrel to the low-to-mid-$20 per barrel range, lower in some cases, which resulted in customers decreasing their 2020 capital budgets nearly 50 percent from calendar year 2019 levels. There was a corresponding dramatic decline in the demand for land rigs, such that the overall rig count for calendar year 2020 averaged roughly 430 rigs, significantly lower than in calendar year 2019, which averaged approximately 940 rigs. We experienced much of our rig count decline during the second and third quarters of fiscal year 2020 as our North America Solutions active rig count declined from 195 rigs atDecember 31, 2019 to a low of 47 rigs in August of 2020. However, during the fourth quarter of fiscal year 2020, the market experienced a stabilization of crude oil prices in the$40 per barrel range and subsequently crude oil prices moved toward$50 per barrel as our customers set their capital budgets for calendar year 2021. During calendar 2021 crude oil prices continued to increase, reaching more than$70 per barrel. However, as expected, rig activity did not move in tandem with crude oil prices to the same extent it had historically as a large portion of our customers have a more disciplined approach to their operations and capital spending in order to enhance their own financial returns. As our customers establish their capital budgets for calendar year 2022, they are doing so in a higher crude oil price environment compared to a year ago, which suggests a higher level of capital spending in calendar year 2022 compared to calendar year 2021. Additionally, higher commodity prices have allowed customers to repair strengthen their balance sheets following the 2020 downturn freeing up additional funds for investment. Consequently, we anticipate a higher rig activity in fiscal 2022 relative to fiscal 2021. Our North America Solutions active rigs count has more than tripled from 47 rigs inAugust 2020 to 154 rigs atDecember 31, 2021 . The initial sizable increase in our rig count of 25 rigs occurred during our first fiscal quarter of 2021 as customers set their 2021 capital spending budgets followed by another 15 rig increase during the second fiscal quarter of 2021. More recently the other sizable increase occurred during our first fiscal quarter of 2022 with an addition of another 27 rigs to our active rig count. To date, our fiscal 2022 rig count increases appear to mirror those of 2021 as we expect to add somewhere between 11 and 21 rigs during the second fiscal quarter of 2022. Collectively, our other business segments, OffshoreGulf of Mexico and International Solutions, are exposed to the same macro commodity price environment affecting our North America Solutions segment; however, activity levels in the International Solutions segment are also subject to other various geopolitical and financial factors specific to the countries of our operations. While we do not expect much change in our OffshoreGulf of Mexico segment, we see opportunities for improvement in our International Solutions segment, but those will likely occur on a more extended timeline compared to what we have experienced in the North America Solutions segment. H&P recognizes the uncertainties and concerns caused by the ongoing COVID-19 pandemic; however, we have managed the Company over time to be in a position of strength both financially and operationally when facing uncertainties of this magnitude. The COVID-19 pandemic has had a significant financial impact on the Company, including increased costs as a result of labor shortages and logistics constraints. The global response to coping with the pandemic resulted in a drop in demand for crude oil, which, when combined with a more than adequate supply of crude oil, resulted in a sharp decline in crude oil prices, causing our customers to have pronounced pullbacks in their operations and planned capital expenditures. Despite the beginning of a recovery during 2021, the direct impact of COVID-19 on H&P's operations has created some challenges that we believe the Company is adequately addressing to ensure a robust continuation of our operations. The health and safety of all H&P stakeholders - our employees, customers, and vendors - remains a top priority at the Company. Accordingly, H&P has implemented additional policies and procedures designed to protect the well-being of our stakeholders and to minimize the impact of COVID-19 on our ongoing operations. We are adhering toCenter for Disease Control guidelines for evaluating actual and potential COVID-19 exposures and we are complying with local governmental jurisdiction policies and procedures where our operations reside. In some instances, policies and procedures are more stringent in our foreign operations than in ourNorth America operations and this resulted in a complete suspension, for a certain period of time, of all drilling operations in at least one foreign jurisdiction. Inthe United States , the Company is an 'essential critical infrastructure' company as defined by theDepartment of Homeland Security and theCybersecurity and Infrastructure Security Agency . As such, in the event that there are further government-imposed stay at home orders, we will continue to operate rigs and technology solutions, and provide valuable services to our customers in support of the global energy infrastructure. Since the COVID-19 outbreak began, no rigs have been fully shut down (other than temporary shutdowns for disinfecting and the suspension for a certain period of time on one of our international rigs) and these temporary shutdowns have not had a significant impact on service. We believe our service levels are unchanged from pre-pandemic levels. The nature of the COVID-19 pandemic is inherently uncertain, and as a result, the Company is unable to reasonably estimate the duration and ultimate impacts of the pandemic, including the timing or level of any subsequent recovery. As a result, the Company cannot be certain of the degree of impact on the Company's business, results of operations and/or financial position for future periods. 29 -------------------------------------------------------------------------------- Table of Contents From a financial perspective, we believe the Company is well positioned to continue to manage through a more protracted disruption caused by COVID-19 and the resulting oil price volatility. We have taken measures to reduce costs and capital expenditures to levels that better reflect a lower activity environment. The actions we took during fiscal year 2020 included a reduction to the annual dividend of approximately$200 million , a reduction of approximately$145 million in the fiscal year 2020 capital spend, a reduction of over$50 million in fixed operational overhead, and a reduction of selling, general and administrative expenses of more than$25 million on an annualized basis. The culmination of these cost-saving initiatives resulted in a$16 million restructuring charge during fiscal year 2020. Further, we took additional steps in fiscal year 2021 to reduce our cost structure. These measures will result in an estimated annualized savings of more than$10 million with the full benefit expected to be realized in calendar year 2022. We anticipate further cost reductions going forward; however, implementation of future cost initiatives will be incremental and are anticipated to be realized over the next few quarters. These cost reduction measures could lead to additional restructuring charges in future periods. OnSeptember 27, 2021 , the Company delivered a conditional notice of optional full redemption for all of the outstanding 4.65 percent unsecured senior notes due 2025 (the "2025 Notes") at a redemption price calculated in accordance with the indenture governing the 2025 Notes, plus accrued and unpaid interest on the 2025 Notes to be redeemed. OnSeptember 29, 2021 , we issued$550.0 million aggregate principal amount of our 2.90 percent unsecured senior notes due 2031 (the "2031 Notes"). The Company's obligation to redeem the 2025 Notes was conditioned upon the prior consummation of the issuance of the 2031 Notes, which was satisfied onSeptember 29, 2021 . The proceeds from the offering of the 2031 Notes were used to redeem the 2025 Notes. OnOctober 27, 2021 , we redeemed all of the outstanding 2025 Notes. As a result, the associated make-whole premium of$56.4 million and the write off of the unamortized discount and debt issuance costs of$3.7 million were recognized during the first fiscal quarter of 2022 contemporaneously with theOctober 27, 2021 debt extinguishment and recorded in Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated Statements of Operations.. See "-Liquidity and Capital Resources-Senior Notes-2.90% Senior Notes due 2031" below and Note 6-Debt to our Consolidated Financial Statements for more information. AtDecember 31, 2021 , the Company had cash and cash equivalents and short-term investments of$441.3 million and availability under the 2018 Credit Facility (as defined herein) of$750.0 million resulting in approximately$1.2 billion in near-term liquidity. We currently do not anticipate the need to draw on the 2018 Credit Facility. As part of the Company's normal operations, we regularly monitor the creditworthiness of our customers and vendors, screening out those that we believe have a high risk of failure to honor their counter-party obligations either through payment or delivery of goods or services. We also perform routine reviews of our accounts receivable and other amounts owed to us to assess and quantify the ultimate collectability of those amounts. AtDecember 31, 2021 andSeptember 30, 2021 , the Company had a net allowance against its accounts receivable of$1.7 million and$2.1 million , respectively. Recent Developments Investments in Geothermal During the three months endedDecember 31, 2021 , we purchased an additional$9.0 million in geothermal investments consisting of both debt and equity securities. Investments were made in two separate companies that are pursuing technological concepts to make unconventional geothermal energy a viable economic renewable energy source. One company's focus is centered on an enhanced geothermal system concept that utilizes horizontal drilling and fiber-optic sensing. The other company's focus is on a closed-loop concept that uses horizontal multilateral wellbores and proprietary working fluid. Both concepts are designed to harvest geothermal heat to create carbon-free, baseload energy. Our aggregate balance of investments in geothermal companies was$11.8 million atDecember 31, 2021 . Investment in ADNOC Drilling DuringSeptember 2021 , the Company made a$100.0 million cornerstone investment in ADNOC Drilling in advance of its announced IPO, representing 159.7 million shares of ADNOC Drilling, equivalent to a one percent ownership stake and subject to a three-year lockup period. ADNOC Drilling's IPO was completed onOctober 3, 2021 and its shares are listed and traded on theAbu Dhabi Securities Exchange (ADX). Our investment is classified as a long-term equity investment within Investments in our Unaudited Condensed Consolidated Balance Sheets. We have applied the guidance in Topic 820, Fair Value Measurement, in the initial accounting of the transaction and the subsequent revaluation of the investment balance, concluding that a contractual restriction on the sale of an equity security that is publicly traded is not considered in measuring fair value. During the three months endedDecember 31, 2021 , we recognized a gain of$47.7 million in our Unaudited Condensed Consolidated Statement of Operations. As ofDecember 31, 2021 , this investment is classified as a Level 1 investment and based on the quoted stock price on the Abu Dhabi Securities Exchange, without applying a discount factor. 30 -------------------------------------------------------------------------------- Table of Contents Contract Backlog As ofDecember 31, 2021 andSeptember 30, 2021 , our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was$723.5 million and$572.0 million , respectively. These amounts do not include anticipated contract renewals or expected performance bonuses. The increase in backlog atDecember 31, 2021 fromSeptember 30, 2021 is primarily due to an increase in the number of longer term drilling contracts executed. Approximately 33.7 percent of theDecember 31, 2021 total backlog is reasonably expected to be fulfilled in fiscal year 2023 and thereafter. The following table sets forth the total backlog by reportable segment as ofDecember 31, 2021 andSeptember 30, 2021 , and the percentage of theDecember 31, 2021 backlog reasonably expected to be fulfilled in fiscal year 2023 and thereafter: Percentage Reasonably Expected to be Filled in Fiscal Year 2023 and (in millions) December 31, 2021 September 30, 2021 Thereafter North America Solutions $ 492.5 $ 429.6 20.9 % Offshore Gulf of Mexico 13.0 17.2 - International Solutions1 218.0 125.2 64.5 $ 723.5 $ 572.0 (1)Subsequent toDecember 31, 2021 , we received notice from an International Solutions customer of their intent to early terminate a fixed-term drilling services contract. Due to the notification being received subsequent toDecember 31, 2021 , the backlog as ofDecember 31, 2021 includes approximately$22.0 million of future dayrate revenue related to this contract. The early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations and cash flows. In some limited circumstances, such as sustained unacceptable performance by us, no early termination payment would be paid to us. Early terminations could cause the actual amount of revenue earned to vary from the backlog reported. See "Item 1A. Risk Factors - Our current backlog of drilling services and solutions revenue may continue to decline and may not be ultimately realized as fixedterm contracts and may, in certain instances, be terminated without an early termination payment," in our 2021 Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC"), regarding fixed term contract risk. Additionally, see "Item 1A. Risk Factors - The impact and effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, have adversely affected and are expected to continue to adversely affect our business, financial condition and results of operations" within our 2021 Annual Report on Form 10-K. Results of Operations for the Three Months EndedDecember 31, 2021 and 2020 Consolidated Results of Operations Net Loss We reported a loss from continuing operations of$58.9 million ($0.48 loss per diluted share) on operating revenues of$409.8 million for the three months endedDecember 31, 2021 compared to a loss from continuing operations of$77.9 million ($0.73 loss per diluted share) on operating revenues of$246.4 million for the three months endedDecember 31, 2020 . Included in the net loss for the three months endedDecember 31, 2021 is a loss of$31.0 thousand (with no impact on a per diluted share basis) from discontinued operations. Including discontinued operations, we recorded a net loss of$51.4 million ($0.48 loss per diluted share) for the three months endedDecember 31, 2021 compared to a net loss of$70.4 million ($0.66 loss per diluted share) for the three months endedDecember 31, 2020 . Selling, General and Administrative Expense Selling, general and administrative expenses increased to$43.7 million during the three months endedDecember 31, 2021 compared to$39.3 million during the three months endedDecember 31, 2020 . The$4.4 million increase in fiscal year 2022 compared to the same period in fiscal year 2021 is primarily due to higher professional services fees. Asset Impairment Charge During the three months endedDecember 31, 2021 , we identified two partial rig substructures and two international FlexRig® drilling rigs that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets. The combined net book value of the rig substructures of$2.0 million were written down to their estimated scrap value of$0.1 million , resulting in a non-cash impairment charge of$1.9 million within our North America Solutions segment during the three months endedDecember 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations. In conjunction with establishing a plan to sell the two international FlexRig® drilling rigs, we recognized a non-cash impairment charge of$2.5 million within our International Solutions segment during the three months endedDecember 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations, as the rigs aggregate net book value of$3.4 million exceeded the fair value of the rigs less estimated cost to sell of$0.9 million . 31 -------------------------------------------------------------------------------- Table of Contents Gain on Investment Securities InSeptember 2021 H&P purchased a cornerstone equity investment consisting of 159.7 million shares for$100.0 million as part of ADNOC Drilling's initial public offering. This investment is subject to a three-year lock-up period. During the three months endedDecember 31, 2021 we recognized a gain of$47.7 million due to an increase in the fair market value of the stock. Loss on Extinguishment of Debt OnOctober 27, 2021 , we redeemed all of the outstanding 2025 Notes. As a result, the associated make-whole premium of$56.4 million and the write off of the unamortized discount and debt issuance costs of$3.7 million were recognized during the first fiscal quarter of 2022 contemporaneously with theOctober 27, 2021 debt extinguishment and recorded in Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated Statements of Operations. Income Taxes We had an income tax benefit of$7.6 million for the three months endedDecember 31, 2021 (which includesArgentina income tax related to the drilling contract settlement with YPF and discrete tax expense of$3.5 million related to equity compensation) compared to an income tax benefit of$18.1 million (which includes discrete tax expense of approximately$4.1 million related to equity compensation) for the three months endedDecember 31, 2020 . Our statutory federal income tax rate for fiscal year 2022 is 21.0 percent (before incremental state and foreign taxes). North America Solutions Three Months Ended December 31, (in thousands, except operating statistics) 2021 2020 % Change Operating revenues$ 341,034 $ 201,990 68.8 Direct operating expenses 256,568 157,309 63.1 Segment gross margin 84,466 44,681 89.0 Depreciation and amortization 93,621 100,324 (6.7) Research and development 6,568 5,466 20.2 Selling, general and administrative expense 10,829 11,680 (7.3) Asset impairment charge 1,868 - - Restructuring charges 473 139 240.3 Segment operating loss$ (28,893) $ (72,928) (60.4) Operating Statistics (1): Average active rigs 141 81 74.1 Number of active rigs at the end of period 154 94 63.8 Number of available rigs at the end of period 236 262 (9.9) Reimbursements of "out-of-pocket" expenses$ 43,129 $ 18,789 129.5 (1)These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. Segment Gross Margin The North America Solutions segment gross margin was$84.5 million for the three months endedDecember 31, 2021 compared to$44.7 million in the same period of fiscal year 2021. The increase was primarily driven by a higher average active rig count. Revenues were$341.0 million and$202.0 million in the three months endedDecember 31, 2021 and 2020, respectively. The increase in operating revenue is primarily due to higher activity levels, partially offset by a decrease in early termination revenue. For the three months endedDecember 31, 2021 , we reported no early termination revenue associated with term contracts compared to$5.8 million during the same period of fiscal year 2021. Direct operating expenses increased to$256.6 million during the three months endedDecember 31, 2021 as compared to$157.3 million during the three months endedDecember 31, 2020 . The increase in direct operating expense was due to higher activity levels and higher rig recommissioning expenses. Depreciation and Amortization Depreciation and amortization decreased to$93.6 million during the three months endedDecember 31, 2021 as compared to$100.3 million during the three months endedDecember 31, 2020 . The decrease was primarily attributable to the termination of depreciation on the six US rigs included in the ADNOC sale in fiscal year 2021 and ongoing low levels of capital expenditures. Asset Impairment Charge During the three months endedDecember 31, 2021 , we identified two partial rig substructures that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets. The combined net book value of these assets of$2.0 million were written down to their estimated scrap value of$0.1 million , resulting in a non-cash impairment charge of$1.9 million during the three months endedDecember 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations. 32 -------------------------------------------------------------------------------- Table of Contents OffshoreGulf of Mexico Three Months Ended December 31, (in thousands, except operating statistics) 2021 2020 % Change Operating revenues$ 29,314 $ 32,273 (9.2) Direct operating expenses 20,711 26,256 (21.1) Segment gross margin 8,603 6,017 43.0 Depreciation 2,380 2,606 (8.7) Selling, general and administrative expense 757 669 13.2 Segment operating income$ 5,466 $ 2,742 99.3 Operating Statistics (1): Average active rigs 4 5 (20.0) Number of active rigs at the end of period 4 4 - Number of available rigs at the end of period 7 7 - Reimbursements of "out-of-pocket" expenses$ 6,075 $ 7,868 (22.8) (1)These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. Segment Gross Margin During the three months endedDecember 31, 2021 , the OffshoreGulf of Mexico segment gross margin was$8.6 million compared to a gross margin of$6.0 million for the three months endedDecember 31, 2020 . This increase was primarily driven by a favorable adjustment in self-insurance liabilities related to prior period claims and the mix of rigs working as compared to being on standby, or mobilization rates. We had a 9.2 percent decrease in operating revenue during the three months endedDecember 31, 2021 compared to the three months endedDecember 31, 2020 . Direct operating expenses decreased to$20.7 million during the three months endedDecember 31, 2021 as compared to$26.3 million during the three months endedDecember 31, 2020 . The decrease in operating revenue and expenses was primarily driven by the factors described above. International Solutions Three Months Ended December 31, (in thousands, except operating statistics) 2021 2020 % Change Operating revenues$ 37,159 $ 10,518 253.3 Direct operating expenses 24,131 17,523 37.7 Segment gross margin 13,028 (7,005) (286.0) Depreciation 755 373 102.4 Selling, general and administrative expense 1,729 979 76.6 Asset impairment charge 2,495 - - Segment operating income (loss)$ 8,049 $ (8,357) (196.3) Operating Statistics (1): Average active rigs 7 4 75.0 Number of active rigs at the end of period 8 4 100.0 Number of available rigs at the end of period 28 32 (12.5) Reimbursements of "out-of-pocket" expenses$ 1,443 $ 2,559 (43.6) (1)These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. Segment Gross Margin The International Solutions segment gross margin was$13.0 million for the three months endedDecember 31, 2021 compared to a gross margin of$(7.0) million for the three months endedDecember 31, 2020 . The change was primarily driven by the settlement of a contractual dispute that was recognized in operating revenues. Refer to Note 9-Revenue from Contracts with Customers for additional details. Operating revenues increased to$37.2 million during the three months endedDecember 31, 2021 as compared to$10.5 million during the three months endedDecember 31, 2020 . Direct operating expenses increased to$24.1 million during the three months endedDecember 31, 2021 as compared to$17.5 million during the three months endedDecember 31, 2020 . This increase in both operating revenue and expense was primarily driven by higher activity levels and the settlement of a contractual dispute mentioned above. Selling, General and Administrative Expense We recognized a$0.8 million increase in selling, general and administrative costs during the three months endedDecember 31, 2021 compared to the three months endedDecember 31, 2020 . This increase was primarily driven by higher accrued variable compensation expense. 33 -------------------------------------------------------------------------------- Table of Contents Asset Impairment Charge During the three months endedDecember 31, 2021 , we identified two international FlexRig® drilling rigs that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets. In conjunction with establishing a plan to sell these rigs we recognized a non-cash impairment charge of$2.5 million during the three months endedDecember 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations, as the aggregate net book value of$3.4 million exceeded the fair value less estimated cost to sell of$0.9 million . Other Operations Results of our other operations, excluding corporate restructuring charges, corporate selling, general and administrative costs and corporate depreciation, are as follows: Three Months Ended December 31, (in thousands) 2021 2020 % Change Operating revenues$ 15,923 $ 8,718 82.6 Direct operating expenses 11,320 3,750 201.9 Gross margin 4,603 4,968 (7.3) Depreciation 345 359 (3.9) Research and development - 117 (100.0) Selling, general and administrative expense 329 381 (13.6) Operating income$ 3,929 $ 4,111 (4.4) Gross Margin OnOctober 1, 2019 , we elected to capitalize a new Captive insurance company to insure the deductibles for our domestic workers' compensation, general liability and automobile liability claims programs, and to continue the practice of insuring deductibles from the Company's international casualty and rig property programs. Direct operating costs consisted primarily$(2.2) million and$0.5 million in adjustments to accruals for estimated losses allocated to the Captives and rig casualty insurance premiums of$8.8 million and$2.5 million during the three months endedDecember 31, 2021 and 2020, respectively, and were recorded within drilling services operating expenses in our Unaudited Condensed Statement of Operations. The decrease in estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary. Intercompany premium revenues recorded by the Captives during the three months endedDecember 31, 2021 and 2020 amounted to$13.6 million and$7.1 million , respectively, which were eliminated upon consolidation. Liquidity and Capital Resources Sources of Liquidity Our sources of available liquidity include existing cash balances on hand, cash flows from operations, and availability under the 2018 Credit Facility. Our liquidity requirements include meeting ongoing working capital needs, funding our capital expenditure projects, paying dividends declared, and repaying our outstanding indebtedness. Historically, we have financed operations primarily through internally generated cash flows. During periods when internally generated cash flows are not sufficient to meet liquidity needs, we may utilize cash on hand, borrow from available credit sources, access capital markets or sell our investments. Likewise, if we are generating excess cash flows or have cash balances on hand beyond our near-term needs, we may invest in highly rated shortterm money market and debt securities. These investments can includeU.S. Treasury securities,U.S. Agency issued debt securities, corporate bonds and commercial paper, certificates of deposit and money market funds. Likewise, if we are generating excess cash flows or have cash balances on hand beyond our near-term needs, we generally invest in highly rated shortterm money market and debt securities. These investments can includeU.S. Treasury securities,U.S. Agency issued debt securities, corporate bonds and commercial paper, certificates of deposit and money market funds. However, in some international locations we may make short-term investments that are less conservative, as equivalent highly rated investments are unavailable. See-Note 2-Summary of Significant Accounting Policies, Risks and Uncertainties-International Solutions Drilling Risks. We may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity as necessary, fund our additional purchases, exchange or redeem senior notes, or repay any amounts under the 2018 Credit Facility. Our ability to access the debt and equity capital markets depends on a number of factors, including our credit rating, market and industry conditions and market perceptions of our industry, general economic conditions, our revenue backlog and our capital expenditure commitments. 34 -------------------------------------------------------------------------------- Table of Contents The ongoing effects of the COVID-19 pandemic and the oil price collapse in 2020 have had significant ongoing adverse consequences for general economic, financial and business conditions, as well as for our business and financial position and the business and financial position of our customers, suppliers and vendors and may, among other things, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all and affect our future need or ability to borrow under the 2018 Credit Facility. In addition to our potential sources of funding, the effects of such global events may impact our liquidity or need to alter our allocation or sources of capital, implement additional cost reduction measures and further change our financial strategy. Although the COVID-19 pandemic and the oil price liquidity could have a broad range of effects on our sources and uses of liquidity, the ultimate effect thereon, if any, will depend on future developments, which cannot be predicted at this time. Cash Flows Our cash flows fluctuate depending on a number of factors, including, among others, the number of our drilling rigs under contract, the revenue we receive under those contracts, the efficiency with which we operate our drilling units, the timing of collections on outstanding accounts receivable, the timing of payments to our vendors for operating costs, and capital expenditures, all of which was impacted by the COVID-19 pandemic and the oil price collapse in 2020. As our revenues increase, operating net working capital is typically a use of capital, while conversely, as our revenues decrease, operating net working capital is typically a source of capital. To date, general inflationary trends have not had a material effect on our operating margins. As ofDecember 31, 2021 , we had$234.2 million of cash and cash equivalents on hand and$207.1 million of short-term investments. Our cash flows for the three months endedDecember 31, 2021 and 2020 are presented below: Three Months Ended December 31, (in thousands) 2021 2020 Net cash used in: Operating activities $ (3,718)$ (19,604) Investing activities (44,729) (65,203) Financing activities (635,610) (29,287)
Net decrease in cash and cash equivalents and restricted cash
Operating Activities Management believes that operating net working capital is important for the purpose of understanding the impact of our operating activities on our cash flows. Operating net working capital is calculated as current assets, excluding cash and cash equivalents, short-term investments, and assets held-for-sale, less current liabilities, excluding dividends payable and short-term debt. Operating net working capital was$78.5 million as ofDecember 31, 2021 compared to$43.4 million as ofSeptember 30, 2021 . The sequential increase in net working capital was primarily driven by higher rig activity and seasonal payments of annual incentive compensation and ad valorem taxes. Included in accounts receivable as ofDecember 31, 2021 was$24.4 million of income tax receivables. Cash flows used in operating activities were approximately$3.7 million and$19.6 million for the three months endedDecember 31, 2021 and 2020, respectively. The change in cash used in operating activities is primarily driven by higher operating activity. Investing Activities Capital Expenditures Our capital expenditures during the three months endedDecember 31, 2021 were$44.0 million compared to$14.0 million during the three months endedDecember 31, 2020 . The increase is driven by higher activity and spending on walking rig conversions. Purchase (Sales) of Short-Term Investments Our net purchases of short-term investments during the three months endedDecember 31, 2021 were$9.3 million compared to net purchases of$57.1 million during the three months endedDecember 31, 2020 . The decrease in net purchases is driven by our ongoing liquidity management. Purchase of Long-Term Investments Our purchases of long-term investments during the three months endedDecember 31, 2021 were$9.0 million compared to$1.0 million during the three months endedDecember 31, 2020 . The increase is driven by additional purchases of geothermal investments made during the quarter. Sale of Assets Our proceeds from asset sales during the three months endedDecember 31, 2021 were$21.5 million compared to proceeds of$6.8 million during the three months endedDecember 31, 2020 . The increase in proceeds is driven by the sale of our casing running and trucking assets and higher rig activity which drives higher reimbursement from customers for lost or damaged drill pipe. 35 -------------------------------------------------------------------------------- Table of Contents Financing Activities Dividends We paid dividends of$0.25 per share during the three months endedDecember 31, 2021 and 2020. Total dividends paid were$27.3 million and$26.9 million during the three months endedDecember 31, 2021 and 2020, respectively. A cash dividend of$0.25 per share was declared onSeptember 1, 2021 for shareholders of record onNovember 23, 2021 , payable onDecember 1, 2021 . The declaration and amount of future dividends is at the discretion of the Board and subject to our financial condition, results of operations, cash flows, and other factors the Board deems relevant. Redemption of 4.65% Senior Notes due 2025 OnOctober 27, 2021 , we redeemed all of the outstanding 2025 Notes, resulting in a cash outflow of$487.1 million . As a result, the associated make-whole premium of$56.4 million was paid during the first fiscal quarter of 2022 contemporaneously with theOctober 27, 2021 debt extinguishment. Repurchase of Shares We have an evergreen authorization from the Board of Directors (the "Board") for the repurchase of up to four million common shares in any calendar year. The repurchases may be made using our cash and cash equivalents or other available sources. During the three months endedDecember 31, 2021 , we repurchased 2.5 million common shares at an aggregate cost of$60.4 million , which are held as treasury shares. Credit Facilities OnNovember 13, 2018 , we entered into a credit agreement by and among the Company, as borrower,Wells Fargo Bank, National Association , as administrative agent, and the lenders party thereto, which was amended onNovember 13, 2019 , providing for an unsecured revolving credit facility (as amended, the "2018 Credit Facility"), that was set to mature onNovember 13, 2024 . OnApril 16, 2021 , lenders with$680.0 million of commitments under the 2018 Credit Facility exercised their option to extend the maturity of the 2018 Credit Facility fromNovember 13, 2024 toNovember 12, 2025 . No other terms of the 2018 Credit Facility were amended in connection with this extension. The remaining$70.0 million of commitments under the 2018 Credit Facility will expire onNovember 13, 2024 , unless extended by the applicable lender before such date. The 2018 Credit Facility has$750.0 million in aggregate availability with a maximum of$75.0 million available for use as letters of credit. As ofDecember 31, 2021 , there were no borrowings or letters of credit outstanding, leaving$750.0 million available to borrow under the 2018 Credit Facility. For a full description of the 2018 Credit Facility, see Note 7-Debt to the consolidated financial statements in our 2021 Annual Report on Form 10-K. As ofDecember 31, 2021 , we had five separate bi-lateral credit facilities with banks with an aggregate outstanding balance of$30.4 million . As ofDecember 31, 2021 , we also had a$20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds. Of the$20.0 million ,$5.8 million of financial guarantees were outstanding as ofDecember 31, 2021 . The applicable agreements for all unsecured debt contain additional terms, conditions and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality. AtDecember 31, 2021 , we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2022. Senior Notes 2.90% Senior Notes due 2031 OnSeptember 29, 2021 , we issued$550.0 million aggregate principal amount of the 2.90 percent 2031 Notes in an offering to persons reasonably believed to be qualified institutional buyers inthe United States pursuant to Rule 144A under the Securities Act ("Rule 144A") and to certain non-U.S. persons in transactions outsidethe United States pursuant to Regulation S under the Securities Act ("Regulation S"). Interest on the 2031 Notes is payable semi-annually onMarch 29 andSeptember 29 of each year, commencing onMarch 29, 2022 . The 2031 Notes will mature onSeptember 29, 2031 and bear interest at a rate of 2.90 percent per annum. The indenture governing the 2031 Notes contains certain covenants that, among other things and subject to certain exceptions, limit the ability of the Company and its subsidiaries to incur certain liens; engage in sale and lease-back transactions; and consolidate, merge or transfer all or substantially all of the assets of the Company. The indenture governing the 2031 Notes also contains customary events of default with respect to the 2031 Notes. 4.65% Senior Notes due 2025 OnDecember 20, 2018 , we issued approximately$487.1 million in aggregate principal amount of the 2025 Notes. Interest on the 2025 Notes was payable semi-annually onMarch 15 andSeptember 15 of each year, commencing onMarch 15, 2019 . The debt issuance cost was being amortized straight-line over the stated life of the obligation, which approximated the effective interest method. 36 -------------------------------------------------------------------------------- Table of Contents OnSeptember 27, 2021 , the Company delivered a conditional notice of optional full redemption for all of the outstanding 2025 Notes at a redemption price calculated in accordance with the indenture governing the 2025 Notes, plus accrued and unpaid interest on the 2025 Notes to be redeemed. The Company financed the redemption of the 2025 Notes with the net proceeds from the offering of the 2031 Notes, together with cash on hand. The Company's obligation to redeem the 2025 Notes was conditioned upon the prior consummation of the issuance of the 2031 Notes, which was satisfied onSeptember 29, 2021 . OnOctober 27, 2021 , we redeemed all of the outstanding 2025 Notes. As a result, the associated make-whole premium of$56.4 million and the write off of the unamortized discount and debt issuance costs of$3.7 million were recognized during the first fiscal quarter of 2022 contemporaneously with theOctober 27, 2021 debt extinguishment and recorded in Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated Statements of Operations. Future Cash Requirements Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2022 are expected to be funded through current cash and cash to be provided from operating activities. However, there can be no assurance that we will continue to generate cash flows at current levels. If needed, we may decide to obtain additional funding from our$750.0 million 2018 Credit Facility. We currently do not anticipate the need to draw on the 2018 Credit Facility. Our indebtedness under our unsecured senior notes totaled$550.0 million atDecember 31, 2021 and matures onSeptember 29, 2031 . As ofDecember 31, 2021 , we had a$545.9 million deferred tax liability on our Unaudited Condensed Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment. Our levels of capital expenditures over the last several years have been subject to accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, enabling us to defer a portion of cash tax payments to future years. Future levels of capital expenditures and results of operations will determine the timing and amount of future cash tax payments. We expect to be able to meet any such obligations utilizing cash and investments on hand, as well as cash generated from ongoing operations. AtDecember 31, 2021 , we had$4.6 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. The long-term debt to total capitalization ratio was 16.5 percent and 15.9 percent atDecember 31, 2021 andSeptember 30, 2021 , respectively. For additional information regarding debt agreements, refer to Note 6-Debt to the Unaudited Condensed Consolidated Financial Statements. There were no other significant changes in our financial position sinceSeptember 30, 2021 . Material Commitments Material commitments as reported in our 2021 Annual Report on Form 10-K have not changed significantly atDecember 31, 2021 , other than those disclosed in Note 6-Debt and Note 13-Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements. Critical Accounting Policies and Estimates Our accounting policies and estimates that are critical or the most important to understand our financial condition and results of operations, and that require management to make the most difficult judgments, are described in our 2021 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies and estimates. Recently Issued Accounting Policies
See Note 2-Summary of Significant Accounting Policies, Risks and Uncertainties to the Unaudited Condensed Consolidated Financial Statements for recently adopted accounting standards and new accounting standards not yet adopted.
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