HELMERICH & PAYNE, INC. The following discussion should be read in conjunction with Part I of this Form 10K as well as the Consolidated Financial Statements and related notes thereto included in Item 8- "Financial Statements and Supplementary Data" of this Form 10K. Our future operating results may be affected by various trends and factors which are beyond our control. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this Form 10-K under "Cautionary Note regarding Forward-Looking Statements" and Item 1A-- "Risk Factors." Accordingly, past results and trends should not be used by investors to anticipate future results or trends. 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 ofSeptember 30, 2020 , our drilling rig fleet included a total of 302 drilling rigs. Our drilling services and solutions segments consist of the North America Solutions segment with 262 rigs, the OffshoreGulf of Mexico segment with eight offshore platform rigs and the International Solutions segment with 32 rigs as ofSeptember 30, 2020 . At the close of fiscal year 2020, we had 79 contracted rigs, of which 56 were under a fixed-term contract and 23 were working well-to-well, compared to 218 contracted rigs atSeptember 30, 2019 . 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 volatile market conditions and take advantage of future opportunities. Market Outlook Our revenues are 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 various supply and demand factors. Both commodities have historically been, and we expect them to continue to be, cyclical and highly volatile. 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, which at times have proven to be dramatic. 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, as a result of having a large super-spec fleet, we gained market share and became the largest provider of super-spec rigs in the industry. As such, we believe we are well positioned to respond to various market conditions. 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. Since the beginning of the 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. Consequently, we have seen a significant decrease in customer 2020 capital budgets representing a decline of nearly 50% from calendar year 2019 levels. There has been a corresponding dramatic decline in the demand for land rigs, such that the overall rig count for calendar year 2020 will average significantly less than in calendar year 2019. 34
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During calendar year 2020, our North American Solutions rig count has declined from 195 contracted rigs atDecember 31, 2019 to 69 contracted rigs atSeptember 30, 2020 . Of the 69 contracted rigs atSeptember 30, 2020 , 58 are active with 11 stacked. When contracted rigs are stacked, they remain under the terms of the contract but typically pay a reduced rate, where the remaining term days are generally not reduced, but our operating expenses are typically reduced. We experienced much of our rig count decline during our second and third fiscal quarters with the absolute level of our rigs remaining relatively stable during the fourth fiscal quarter. Additionally, during our fourth fiscal quarter, the market experienced a stabilization of crude oil prices in the$40 per barrel range. At such levels, we believe our customers will have more robust capital budgets entering into 2021 and are already seeing evidence of this in our near-term rig count activity projections. Consequently, we believe we will experience a higher level of rig activity in fiscal year 2021 compared to where we stand today. However, given the current levels of commodity prices and the lasting impacts of the global pandemic, we do not expect or anticipate customers' capital budgets will support activity levels like those experienced prior toMarch 2020 . Utilization for our super-spec FlexRig® fleet peaked in late calendar year 2018 with 216 of 221 super-spec rigs working (98 percent utilization); however, the recent decline in the demand for land rigs resulted in customers idling a large portion of our super-spec FlexRig® fleet. AtSeptember 30, 2020 , we had 167 idle super-spec rigs out of our FlexRig® fleet of 234 super-spec rigs (29% percent utilization). Collectively, our other business segments, OffshoreGulf of Mexico and International Solutions, are exposed to the same macro environment adversely affecting our North America Solutions segment and those unfavorable factors are creating similar challenges for these business segments as well. H&P recognizes the uncertainties and concerns caused by the 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 an indirect, yet significant financial impact on the Company. The global response to coping with the pandemic has resulted in a drop in demand for crude oil, which, when combined with a more than adequate supply of crude oil, has resulted in a sharp decline in crude oil prices, causing our customers to have pronounced pullbacks in their operations and planned capital expenditures. 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 albeit at a lower activity level. The Company is an 'essential critical infrastructure' company as defined by theDepartment of Homeland Security and theCybersecurity and Infrastructure Security Agency and, as such, continues to operate rigs and technology solutions, providing valuable services to our customers in support of the global energy infrastructure. The health and safety of all H&P stakeholders - our employees, customers, and vendors - remain 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. Some of the safeguards we have implemented include: • The Company mobilized a global COVID-19 response team to
manage the
evolving situation
• The Company moved to a global "remote work" model for office
personnel (beginning March 13, 2020 )
• The Company suspended all non-essential travel
• We are adhering toCenter for Disease Control ("CDC")
guidelines for
evaluating actual and potential COVID-19 exposures
• Operational and third-party personnel are required to complete
a COVID-19 questionnaire prior to reporting to a field
location and office personnel are required to complete one
prior to returning to their respective offices in order to
evaluate actual and potential COVID-19 exposures and
individuals identified as being high risk are not allowed on
location
• The temperatures of operational personnel are taken prior to
them being allowed to enter a rig site
• The Company has implemented enhanced sanitization and cleaning protocols
• 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
our North America operations and this has resulted in a complete
suspension, for a certain period of time, of all drilling operations
in at least one foreign jurisdiction
As of September 30, 2020 , the Company was aware that 109 out of its
approximately 4,100 employees have had confirmed cases of COVID-19 since the
COVID-19 outbreak began, of which we believe approximately 52% contracted the
virus outside of their work location. We have had no fatalities and 100 of 109
employees who had confirmed cases have returned to work. Upon being notified
that an employee has tested positive, the Company follows pre-established
guidelines and places the employee on leave as appropriate. Per CDC Guidelines,
employees testing positive are permitted to return to their worksite after 10
days. Employees who are considered a Level 1 exposure but who have not tested
positive are required to quarantine and are permitted to return to their
worksite after 14 days. In addition, the Company applies its enhanced
sanitization procedures to the employee's work location prior to allowing
employees to re-enter the location. Since the COVID-19 outbreak began, no rigs
have been fully shut down (other than temporary shutdowns for disinfecting) and
such measures to disinfect facilities have not had a significant impact on
service. We believe our service levels are unchanged from pre-pandemic levels.
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From a financial perspective we believe the Company is well positioned to continue as a going concern even through a more protracted disruption caused by COVID-19. We have taken measures to reduce costs and capital expenditures to levels that better reflect a lower activity environment. Actions taken during the second quarter of fiscal year 2020 included a reduction to the annual dividend of approximately$200 million , a reduction in planned fiscal year 2020 capital spend of$95 million , and a reduction of over$50 million in fixed operational overhead. During the third quarter of fiscal year 2020, the Company took further steps to reduce its planned fiscal year 2020 capital spend by another$40 million and its selling, general and administrative cost structures by another$25 million on an annualized basis. The culmination of these cost-saving initiatives resulted in a$16.0 million restructuring charge during fiscal year 2020. We anticipate further cost reductions in our International Solutions operations as well and are working through local jurisdictional regulations to implement those measures. AtSeptember 30, 2020 , the Company had cash and cash equivalents and short-term investments of$577.2 million and availability under the 2018 Credit Facility (as defined herein) of$750.0 million resulting in approximately$1.3 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. AtSeptember 30, 2020 , the Company had a net allowance against its accounts receivable of$1.8 million and incurred bad debt expense of$2.2 million during fiscal year 2020. Subsequent toMarch 31, 2020 , we adjusted our credit risk monitoring for specific customers, in response to the recent economic events described above. 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. Recent Developments Restructuring Beginning in the third quarter of fiscal year 2020, we implemented cost controls and began evaluating further measures to respond to the combination of weakened commodity prices, uncertainties related to the COVID-19 pandemic, and the resulting market volatility. We restructured our operations to accommodate scale during an industry downturn and to re-organize our operations to align to new marketing and management strategies. We commenced a number of restructuring efforts as a result of this evaluation, which included, among other things a reduction in our capital allocation plans, changes to our organizational structure, and a reduction of staffing levels. Refer to Note 19-Restructuring Charges to our Consolidated Financial Statements. Business Segments During the third quarter of fiscal year 2020, as part of our restructuring efforts (see Note 19-Restructuring Charges to our Consolidated Financial Statements) and consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources, we implemented organizational changes. We are moving from a product-based offering, such as a rig or separate technology package, to an integrated solution-based approach by combining proprietary rig technology, automation software, and digital expertise into our rig operations. Operations previously reported within the formerU.S. Land and H&P Technologies operating and reportable segments are now managed and presented within the North America Solutions reportable segment. As a result, beginning with the third quarter of fiscal year 2020, our drilling services operations are organized into the following reportable operating business segments: North America Solutions, OffshoreGulf of Mexico and International Solutions. All prior period segment disclosures have been recast for these segment changes. Our real estate operations, our incubator program for new research and development projects, and our wholly-owned captive insurance companies are included in "Other." Consolidated revenues and expenses reflect the elimination of intercompany transactions. 36
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OnOctober 1, 2019 , we elected to utilize a wholly-owned insurance captive ("Captive") to insure the deductibles for our workers' compensation, general liability and automobile liability insurance programs. Casualty claims occurring prior toOctober 1, 2019 will remain recorded within each of the operating segments' and future adjustments to these claims will continue to be reflected within the operating segments. Reserves for legacy claims occurring prior toOctober 1, 2019 , will remain as liabilities in our operating segments until they have been resolved. Changes in those reserves will be reflected in segment earnings as they occur. We will continue to utilize the Captive to finance the risk of loss to equipment and rig property assets. The Company and the Captive maintain excess property and casualty reinsurance programs with third-party insurers in an effort to limit the financial impact of significant events covered under these programs. Our operating subsidiaries are paying premiums to the Captive, typically on a monthly basis, for the estimated losses based on an external actuarial analysis. These premiums are currently held in a restricted account, resulting in a transfer of risk from our operating subsidiaries to the Captive. The actuarial estimated underwriting expenses for the fiscal year endedSeptember 30, 2020 were approximately$16.4 million and were recorded within drilling services operating expenses in our Consolidated Statement of Operations. Intercompany premium revenues and expenses during the fiscal year endedSeptember 30, 2020 amounted to$36.9 million , which were eliminated upon consolidation. These intercompany insurance premiums are reflected as segment operating expenses within the North America Solutions, OffshoreGulf of Mexico , and International Solutions reportable operating segments and are reflected as intersegment sales within "Other." The Company self-insures employee health plan exposures in excess of employee deductibles. Starting in the second quarter of fiscal year 2020, the Captive insurer issued a stop-loss program that will reimburse the Company's health plan for claims that exceed$50,000 . This program will also be reviewed at the end of each policy year by an outside actuary. One hundred percent of the stop-loss premium is being set aside by the Captive as reserves. The stop-loss program does not have a material impact on a consolidated basis. Dispositions During the fiscal year endedSeptember 30, 2020 , we closed on the sale of a portion of our real estate investment portfolio, including six industrial sites, for total consideration, net of selling related expenses, of$40.7 million and an aggregate net book value of$13.5 million , resulting in a gain of$27.2 million , which is included within Gain on Sale of Assets on our Consolidated Statement of Operations. InDecember 2019 , we closed on the sale of a wholly-owned subsidiary ofHelmerich & Payne International Drilling Co. ("HPIDC"),TerraVici Drilling Solutions, Inc. ("TerraVici"). As a result of the sale, 100% of TerraVici's outstanding capital stock was transferred to the purchaser in exchange for approximately$15.1 million , resulting in a total gain on the sale of TerraVici of approximately$15.0 million . Prior to the sale, TerraVici was a component of the North America Solutions operating segment. This transaction does not represent a strategic shift in our operations and will not have a significant effect on our operations and financial results going forward. Impairments During the second quarter of fiscal year 2020, several significant economic events took place that severely impacted the current demand on drilling services, including the significant drop in crude oil prices caused by OPEC+'s price war coupled with the decrease in the demand due to the COVID-19 pandemic. Property, Plant and Equipment and Inventory During the second quarter of fiscal year 2020, to maintain a competitive edge in a challenging market, the Company's management introduced a new strategy focused on operating various types of highly capable upgraded rigs and phasing out the older, less capable fleet. This resulted in grouping the super-spec rigs of our legacy Domestic FlexRig® 3 asset group and our FlexRig® 5 asset group creating a new "Domestic super-spec FlexRig®" asset group, while combining the legacy Domestic conventional asset group, FlexRig® 4 asset group and FlexRig® 3 non-super-spec rigs into one asset group (Domestic non-super-spec asset group). Given the current and projected low utilization for our Domestic non-super-spec asset group and all International asset groups, we considered these economic factors to be indicators that these asset groups may be impaired. As a result of these indicators, we performed impairment testing atMarch 31, 2020 on each of our Domestic non-super-spec and International conventional, FlexRig® 3, and FlexRig® 4 asset groups which had an aggregate net book value of$605.8 million . We concluded that the net book value of each asset group is not recoverable through estimated undiscounted cash flows and recorded a non-cash impairment charge of$441.4 million in the Consolidated Statement of Operations for the fiscal year endedSeptember 30, 2020 . Of the$441.4 million total impairment charge recorded,$292.4 million and$149.0 million was recorded in the North America Solutions and International Solutions segments, respectively. Impairment was measured as the amount by which the net book value of each asset group exceeds its fair value. No further impairments were recognized in fiscal year 2020. The most significant assumptions used in our undiscounted cash flow model include timing on awards of future drilling contracts, drilling rig utilization, estimated remaining useful life, and net proceeds received upon future sale/disposition. These assumptions are classified as Level 3 inputs by Accounting Standards Codification ("ASC") Topic 820 Fair Value Measurement and Disclosures as they are based upon unobservable inputs and primarily rely on management assumptions and forecasts. 37
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In determining the fair value of each asset group, we utilized a combination of income and market approaches. The significant assumptions in the valuation are based on those of a market participant and are classified as Level 2 and Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures. As ofMarch 31, 2020 , the Company also recorded an additional non-cash impairment charge related to in-progress drilling equipment and rotational inventory of$44.9 million and$38.6 million , respectively, which had aggregate book values of$68.4 million and$38.6 million , respectively, in the Consolidated Statement of Operations for the fiscal year endedSeptember 30, 2020 . Of the$83.5 million total impairment charge recorded for in-progress drilling equipment and rotational inventory,$75.8 million and$7.7 million was recorded in the North America Solutions and International Solutions segments, respectively. Goodwill Consistent with our policy, we test goodwill annually for impairment in the fourth quarter of our fiscal year, or more frequently if there are indicators that goodwill might be impaired. Due to the market conditions described above, during the second quarter of fiscal year 2020, we concluded that goodwill and intangible assets might be impaired and tested the H&P Technologies reporting unit, where the goodwill balance is allocated and the intangible assets are recorded, for recoverability. This resulted in a goodwill only non-cash impairment charge of$38.3 million recorded in Asset Impairment Charge on the Consolidated Statement of Operations during the fiscal year endedSeptember 30, 2020 . The recoverable amount of the H&P Technologies reporting unit was determined based on a fair value calculation which uses cash flow projections based on the Company's financial projections presented to the Board covering a five-year period, and a discount rate of 14 percent. Cash flows beyond that five-year period were extrapolated using the fifth-year data with no implied growth factor. The reporting unit level is defined as an operating segment or one level below an operating segment. The recoverable amount of the intangible assets tested for impairment within the H&P Technologies reporting unit is determined based on undiscounted cash flow projections using the Company's financial projections presented to the Board covering a five-year period and extrapolated for the remaining weighted average useful lives of the intangible assets. The most significant assumptions used in our cash flow model include timing on awards of future contracts, commercial pricing terms, utilization, discount rate, and the terminal value. These assumptions are classified as Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures as they are based upon unobservable inputs and primarily rely on management assumptions and forecasts. Although we believe the assumptions used in our analysis and the probability-weighted average of expected future cash flows are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and our resulting conclusion. Results of Operations for the Fiscal Years EndedSeptember 30, 2020 and 2019 Consolidated Results of Operations All per share amounts included in the Results of Operations discussion are stated on a diluted basis. Except as specifically discussed, the following results of operations pertain only to our continuing operations. Net Loss We reported a loss from continuing operations of$496.4 million ($4.62 loss per diluted share) from operating revenues of$1.8 billion for the fiscal year endedSeptember 30, 2020 compared to a loss from continuing operations of$32.5 million ($0.33 loss per diluted share) from operating revenues of$2.8 billion for the fiscal year endedSeptember 30, 2019 . Included in the net loss for the fiscal year endedSeptember 30, 2020 is income of$1.9 million ($0.02 impact per diluted share) from discontinued operations. Including discontinued operations, we recorded a net loss of$494.5 million ($4.60 loss per diluted share) for the fiscal year endedSeptember 30, 2020 compared to a net loss of$33.7 million ($0.34 loss per diluted share) for the fiscal year endedSeptember 30, 2019 . Revenue Consolidated operating revenues were$1.8 billion in fiscal year 2020 and$2.8 billion in fiscal year 2019, including early termination revenue of$73.4 million and$11.3 million in each respective fiscal year. Excluding early termination revenue, operating revenue decreased$1.1 billion in fiscal year 2020 compared to fiscal year 2019. The decrease in fiscal year 2020 from fiscal year 2019 was driven by lower activity and pricing as a result of the collapse in oil prices that occurred inMarch 2020 , which drove our customers to quickly reduce rig activity beginning in the second half ofMarch 2020 and continuing throughout the remainder of fiscal year 2020. Direct Operating Expenses, Excluding Depreciation and Amortization Direct operating expenses in fiscal year 2020 were$1.2 billion , compared with$1.8 billion in fiscal year 2019. The decrease in fiscal year 2020 from fiscal year 2019 was primarily attributable to the previously-mentioned lower activity levels. Depreciation and Amortization Depreciation and amortization expense was$481.9 million in fiscal year 2020 and$562.8 million in fiscal year 2019. The decrease in depreciation and amortization during fiscal year endedSeptember 30, 2020 compared to fiscal year endedSeptember 30, 2019 was primarily attributable to the lower carrying cost of our impaired assets. Depreciation and amortization includes amortization of intangible assets of$7.2 million and$5.8 million in fiscal years 2020 and 2019, respectively, and abandonments of equipment of$4.0 million and$11.4 million in fiscal years 2020 and 2019, respectively. 38
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Research and Development For the fiscal years endedSeptember 30, 2020 and 2019, we incurred$21.6 million and$27.5 million , respectively, of research and development expenses. The decrease in expense was primarily due to reduced spending related to the development of rotary steerable system tools given theDecember 2019 sale of TerraVici. Selling, General and Administrative Expense Selling, general and administrative expenses decreased to$167.5 million in the fiscal year endedSeptember 30, 2020 compared to$194.4 million in the fiscal year endedSeptember 30, 2019 . The$26.9 million decrease in fiscal year 2020 compared to fiscal year 2019 is primarily due to lower accrued variable compensation expense and a reduction of staffing levels that was implemented in third quarter of fiscal year 2020. Asset Impairment During the fiscal year endedSeptember 30, 2020 , we impaired several assets, including inventory, property, plant and equipment, and goodwill, which resulted in a non-cash impairment charge of$563.2 million ($437.5 million , net of tax, or$5.21 per diluted share), which is included in Asset Impairment Charge on the Consolidated Statement of Operations. Comparatively, during the fiscal year endedSeptember 30, 2019 , mainly driven by the downsizing of our fleet of FlexRig® 4 drilling rigs, we wrote down excess capital spares and drilling support equipment, which had an aggregate net book value of$235.3 million , and as a result, an asset impairment charge of$224.3 million ($195.0 million , net of tax, or$1.78 per diluted share) was recorded in our Consolidated Statements of Operations. Restructuring Charges Beginning in the third quarter of fiscal year 2020, we implemented cost controls and began evaluating further measures to respond to the combination of weakened commodity prices, uncertainties related to the COVID-19 pandemic, and the resulting market volatility. We commenced a number of restructuring efforts as a result of this evaluation, which included, among other things, a reduction in our capital allocation plans, changes to our organizational structure, and a reduction of staffing levels. For the fiscal year endedSeptember 30, 2020 , we incurred$16.0 million in restructuring charges. Interest and Dividend Income Interest and dividend income was$7.3 million and$9.5 million in fiscal years 2020 and 2019, respectively. The decrease in interest and dividend income in fiscal year 2020 was primarily due to lower interest rates. Interest Expense Interest expense totaled$24.5 million in fiscal year 2020 and$25.2 million in fiscal year 2019. Interest expense is primarily attributable to fixedrate debt outstanding. Income Taxes We had an income tax benefit of$140.1 million in fiscal year 2020 compared to an income tax benefit of$18.7 million in fiscal year 2019. The effective income tax rate was 22.0 percent in fiscal year 2020 compared to 36.5 percent in fiscal year 2019. The effective rates differ from theU.S. federal statutory rate (21.0 percent for fiscal years 2020 and 2019) due to non-deductible permanent items, state and foreign income taxes, and adjustments to the deferred state income tax rate. 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 values of the net deferred tax assets are 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 9-Income Taxes to our Consolidated Financial Statements for additional income tax disclosures. Discontinued Operations Expenses incurred within the country ofVenezuela are reported as discontinued operations. Our wholly-owned subsidiaries, HPIDC andHelmerich & Payne deVenezuela , C.A., filed a lawsuit in theUnited States District Court for the District of Columbia onSeptember 23, 2011 against theBolivarian Republic of Venezuela,Petroleos de Venezuela, S.A. andPDVSA Petroleo, S.A. We are seeking damages for the taking of our Venezuelan drilling business in violation of international law and for breach of contract. While there exists the possibility of realizing a recovery, we are currently unable to determine the timing or amounts we may receive, if any, or the likelihood of recovery. InMarch 2016 , the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system. Activity within discontinued operations for both fiscal years 2020 and 2019 is primarily a result of the impact of exchange rate fluctuations due to the remeasurement of uncertain tax liabilities. 39
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North America Solutions The following table presents certain information with respect to our North America Solutions reportable segment: (in thousands, except operating statistics) 2020 2019 (1) % Change Operating revenues$ 1,474,380 $ 2,426,191 (39.2 )% Direct operating expenses 942,277 1,532,576 (38.5 ) Depreciation 438,039 504,466 (13.2 ) Research and development 20,699 25,164 (17.7 ) Selling, general and administrative expense 53,714 66,179 (18.8 ) Asset impairment charge 406,548 216,908 87.4 Restructuring charges 7,005 - - Segment operating income (loss)$ (393,902 ) $ 80,898 (586.9 ) Operating Statistics (2): Revenue days 49,003 81,805 (40.1 ) Average rig revenue per day (3)$ 26,589 $ 26,167
1.6
Average rig expense per day (3) 15,730 15,243
3.2
Average rig margin per day (3)$ 10,859 $ 10,924 (0.6 ) Number of rigs at the end of period 262 299 (12.4 ) Rig utilization 47 % 67 % (29.9 )
(1) Operations previously reported within the H&P Technologies reportable segment
are now managed and presented within the North America Solutions reportable
segment.
(2) These operating metrics allow investors to analyze the various components of
segment financial results in terms of volume, revenue per unit, cost per unit
and margin per unit. Management uses these metrics to analyze historical
segment financial results and as the key inputs for forecasting and budgeting
segment financial results.
(3) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
million for fiscal years 2020 and 2019, respectively.
Operating Income (Loss) The North America Solutions segment had an operating loss of$393.9 million for the fiscal year endedSeptember 30, 2020 compared to operating income of$80.9 million for the fiscal year endedSeptember 30, 2019 . The decrease was primarily driven by increased asset impairment charges and reduced rig activity in fiscal year 2020. Revenues were$1.5 billion and$2.4 billion in fiscal year 2020 and 2019, respectively. Included in revenues for fiscal year 2020 is early termination revenue of$68.8 million compared to$6.4 million during fiscal year 2019. Fixedterm contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term (except in limited circumstances including sustained unacceptable performance by us). Revenue Excluding early termination per day revenue of$1,404 and$78 for fiscal years 2020 and 2019, respectively, average rig revenue per day decreased by$904 to$25,185 primarily due to a portion of our contracted rigs operating in an idle-but-contracted state during the third and fourth quarters of fiscal year 2020, with lower average daily revenue and average daily expense and lower pricing for rigs working in the spot market. Compared to fiscal year 2019, our revenue days declined by 40.1 percent. This decline was initially driven by the collapse in oil prices that occurred in March of 2020, which led our customers to quickly reduce rig activity beginning in the second half ofMarch 2020 and continuing throughout fiscal year 2020. Our level of contracted rigs hit a low of 62 rigs in August of 2020 before modestly recovery to 69 rigs at fiscal year end. Direct Operating Expenses Average rig expense per day increased$487 to$15,730 during the fiscal year endedSeptember 30, 2020 compared to the fiscal year endedSeptember 30, 2019 . The increase is due to higher self-insurance expenses and idle rig expenses, partially offset by the previously mentioned effect of idle-but-contracted rigs. Depreciation Depreciation expense decreased to$438.0 million during the fiscal year endedSeptember 30, 2020 compared to the fiscal year endedSeptember 30, 2019 . The decrease in depreciation during fiscal year endedSeptember 30, 2020 compared to fiscal year endedSeptember 30, 2019 was primarily attributable to the lower carrying cost of our impaired assets. Depreciation includes charges for abandoned equipment of$2.5 million and$10.6 million for the fiscal years endedSeptember 30, 2020 and 2019, respectively. In the fiscal year endedSeptember 30, 2020 , depreciation expense included$1.5 million of accelerated depreciation for components on rigs that are scheduled for conversion in fiscal year 2021 as compared to$4.7 million of accelerated depreciation for fiscal year endedSeptember 30, 2019 . 40
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Asset Impairment Charge During the fiscal year endedSeptember 30, 2020 , we impaired our Domestic non-super-spec asset group, in addition to in-progress drilling equipment and rotational inventory. This resulted in an aggregate non-cash impairment charge of$368.2 million ($284.1 million , net of tax, or$3.41 per diluted share) for the fiscal year endedSeptember 30, 2020 . During the fiscal year endedSeptember 30, 2020 , we also recorded a goodwill impairment loss of$38.3 million ($29.6 million , net of tax, or$0.35 per diluted share). Comparatively, during the fiscal year endedSeptember 30, 2019 , we recorded an asset impairment charge of$216.9 million ($188.6 million , net of tax, or$1.72 per diluted share), mainly driven by the downsizing of our fleet of FlexRig® 4 drilling rigs. These non-cash impairment charges are included in Asset Impairment Charge on the Consolidated Statements of Operations for the fiscal years endedSeptember 30, 2020 and 2019. Restructuring Charges For the fiscal year endedSeptember 30, 2020 , we incurred$7.0 million in restructuring charges primarily comprised of one-time severance benefits to employees as a result of headcount reductions that occurred during the third fiscal quarter of 2020. Utilization Rig utilization decreased to 47 percent for the fiscal year endedSeptember 30, 2020 compared to 67 percent during the fiscal year endedSeptember 30, 2019 . In addition to the previously mentioned reduction in revenue days, we decommissioned two rigs and 35 rigs from our legacy Domestic Conventional asset group and FlexRig® 3 asset group, respectively effective as ofApril 30, 2020 . AtSeptember 30, 2020 , 69 out of 262 existing rigs in the North America Solutions segment were contracted. Of the 69 contracted rigs, 54 were under fixed-term contracts and 15 were working in the spot market. OffshoreGulf of Mexico The following table presents certain information with respect to our OffshoreGulf of Mexico reportable segment: (in thousands, except operating statistics) 2020 2019 % Change Operating revenues$ 143,149 $ 147,635 (3.0 )% Direct operating expenses 119,371 114,306 4.4 Depreciation 11,681 10,010 16.7 Selling, general and administrative expense 3,365 3,725 (9.7 ) Restructuring charges 1,254 - - Segment operating income$ 7,478 $ 19,594 (61.8 ) Operating Statistics (1): Revenue days 1,922 2,163 (11.1 ) Average rig revenue per day (2)$ 45,145 $ 37,478
20.5
Average rig expense per day (2) 37,410 28,663
30.5
Average rig margin per day (2)$ 7,735 $ 8,815 (12.3 ) Number of rigs at the end of period 8 8 - Rig utilization 66 % 74 % (10.8 )
(1) These operating metrics allow investors to analyze the various components of
segment financial results in terms of volume, revenue per unit, cost per unit
and margin per unit. Management uses these metrics to analyze historical
segment financial results and as the key inputs for forecasting and budgeting
segment financial results.
(2) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
for fiscal years 2020 and 2019, respectively. The operating statistics only
include rigs that we own and exclude offshore platform management and
contract labor service revenues of
platform management and contract labor service expenses of
thousand for fiscal years 2020 and 2019, respectively.
Operating Income During the fiscal year endedSeptember 30, 2020 , the OffshoreGulf of Mexico segment had operating income of$7.5 million compared to operating income of$19.6 million for the fiscal year endedSeptember 30, 2019 . This decrease is primarily attributable to lower contribution from two rigs that demobilized back to shore during the first quarter of fiscal year 2020. One of the two rigs began mobilizing to a new platform duringMarch 2020 and commenced drilling operations during the third quarter of fiscal year 2020. Additionally, we incurred$4.2 million of bad debt expense during fiscal year 2020. Revenue Average rig revenue per day increased 20.5 percent to$45,145 in fiscal year 2020 compared to fiscal year 2019. This was primarily due to one of our customers shifting its activity from a customer-owned rig managed by H&P to a rig owned by H&P. Direct Operating Expenses Average rig expense per day increased to$37,410 during fiscal year 2020 from$28,663 during fiscal year 2019, primarily due to factors mentioned above. Restructuring Charges For the fiscal year endedSeptember 30, 2020 , we incurred$1.3 million in restructuring charges primarily comprised of one-time severance benefits to employees as a result of headcount reductions that occurred during the third fiscal quarter of 2020. Utilization As ofSeptember 30, 2020 , five of our eight available platform rigs were under contract, compared to six of our eight available platform rigs as ofSeptember 30, 2019 . 41
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International Solutions The following table presents certain information with respect to our International Solutions reportable segment: (in thousands, except operating statistics) 2020 2019 % Change Operating revenues$ 144,185 $ 211,731 (31.9 )% Direct operating expenses 124,791 157,856 (20.9 ) Depreciation 17,531 35,466 (50.6 ) Selling, general and administrative expense 4,565 5,624 (18.8 ) Asset impairment charge 156,686 7,419 2,012.0 Restructuring charges 2,980 - - Segment operating income (loss)$ (162,368 ) $ 5,366 (3,125.9 ) Operating Statistics (1): Revenue days 4,605 6,426 (28.3 ) Average rig revenue per day (2)$ 29,116 $ 31,269 (6.9 ) Average rig expense per day (2) 23,066 21,626
6.7
Average rig margin per day (2)$ 6,050 $ 9,643 (37.3 ) Number of rigs at the end of period 32 31 3.2 Rig utilization 40 % 55 % (27.3 )
(1) These operating metrics allow investors to analyze the various components of
segment financial results in terms of volume, revenue per unit, cost per unit
and margin per unit. Management uses these metrics to analyze historical
segment financial results and as the key inputs for forecasting and budgeting
segment financial results.
(2) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
for fiscal years 2020 and 2019, respectively. Also excluded are the effects
of currency revaluation expense of
years 2020 and 2019, respectively.
Operating Income (Loss) The International Solutions segment had an operating loss of$162.4 million for fiscal year 2020 compared to operating income of$5.4 million for fiscal year 2019. The decrease was primarily driven by asset impairment charges during fiscal year 2020. Revenue We experienced a 28.3 percent decrease in revenue days when comparing fiscal year 2020 to fiscal year 2019. The average number of active rigs was 12.6 during fiscal year 2020 compared to 17.6 during fiscal year 2019. Average rig revenue per day decreased by 6.9 percent primarily due to a shifting rig mix. Direct Operating Expenses Average rig expense per day increased to$23,066 during fiscal year 2020 as compared to$21,626 during fiscal year 2019. The increase was driven by lower activity coupled with fixed minimum levels of country overhead. Depreciation Depreciation expense decreased to$17.5 million during the fiscal year endedSeptember 30, 2020 compared to the fiscal year endedSeptember 30, 2019 . The decrease in depreciation during fiscal year endedSeptember 30, 2020 compared to fiscal year endedSeptember 30, 2019 was primarily attributable to the lower carrying cost of our impaired assets. Asset Impairment Charge During the fiscal year endedSeptember 30, 2020 , we impaired our International Conventional, FlexRig® 3, and FlexRig® 4 asset groups, in addition to rotational inventory. This resulted in an aggregate non-cash impairment charge of$156.7 million ($123.8 million , net of tax, or$1.45 per diluted share), which is included in Asset Impairment Charge on the Consolidated Statements of Operations for the fiscal year endedSeptember 30, 2020 . Comparatively, during the fiscal year endedSeptember 30, 2019 , mainly driven by the downsizing of our fleet of FlexRig® 4 drilling rigs, we wrote down capital spares and drilling support equipment and, as a result, we recorded an asset impairment charge of$7.4 million , in our Consolidated Statements of Operations for the fiscal year endedSeptember 30, 2019 . Restructuring Charges For the fiscal year endedSeptember 30, 2020 , we incurred$3.0 million in restructuring charges primarily comprised of one-time severance benefits to employees as a result of headcount reductions that occurred during the third fiscal quarter of 2020. Utilization Our utilization decreased during fiscal year 2020 compared to fiscal year 2019. AtSeptember 30, 2020 , five out of 32 existing rigs in the International Solutions segment were contracted. Of the five contracted rigs, two were under fixed-term contracts and three were working in the spot market. 42
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Other Operations Results of our other operations, excluding corporate selling, general and administrative costs, corporate restructuring, and corporate depreciation, are as follows: (in thousands) 2020 2019 % Change Operating revenues$ 49,114 $ 12,933 279.8 % Direct operating expenses 41,027 5,382 662.3 Depreciation and amortization 1,241 1,523 (18.5 ) Research and development 946 2,303 (58.9 ) Selling, general and administrative expense 1,237 350 253.4 Restructuring charges 260 - - Operating income$ 4,403 $ 3,375 30.5 Operating Income OnOctober 1, 2019 , we elected to utilize the Captive to insure the deductibles for our workers' compensation, general liability and automobile liability claims programs. Direct operating costs include accruals for estimated losses of approximately$16.4 million allocated to the Captive during the fiscal year endedSeptember 30, 2020 . Intercompany premium revenues recorded by the Captive during the fiscal year endedSeptember 30, 2020 amounted to$36.9 million , which were eliminated upon consolidation. Results of Operations for the Fiscal Years EndedSeptember 30, 2019 and 2018 A discussion of our results of operations for the fiscal year endedSeptember 30, 2019 compared to the fiscal year endedSeptember 30, 2018 is included in Part II, Item 7- "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 , filed with theSEC onNovember 15, 2019 , and is incorporated by reference into this Form 10-K. 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 marketable securities. Likewise, if we are generating excess cash flows, 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. Our marketable securities are recorded at fair value. 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. The effects of the COVID-19 outbreak and the oil price collapse in 2020 have had significant 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 outbreak and the oil price collapse 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 dayrates 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 outbreak and the oil price collapse in 2020. As our revenues increase, net working capital is typically a use of capital, while conversely, as our revenues decrease, net working capital is typically a source of capital. To date, general inflationary trends have not had a material effect on our operating margins. 43
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As ofSeptember 30, 2020 , we had$487.9 million of cash and cash equivalents on hand and$89.3 million of short-term investments. Our cash flows for the fiscal years endedSeptember 30, 2020 , 2019 and 2018 are presented below: Year Ended September 30, (in thousands) 2020 2019 2018 Net cash provided (used) by: Operating activities$ 538,881 $ 855,751 $ 557,852 Investing activities (87,885 ) (422,636 ) (472,362 ) Financing activities (297,220 ) (376,329 ) (319,814 ) Net increase (decrease) in cash and cash equivalents and restricted cash$ 153,776 $
56,786
Operating Activities For the purpose of understanding the impact on our Cash Flow from Operations, net working capital is calculated as current assets, excluding cash and short-term investments, less current liabilities, excluding dividends payable, short-term debt and the current portion of long-term debt. Net working capital was$194.2 million as ofSeptember 30, 2020 compared to$381.7 million as ofSeptember 30, 2019 . Included in accounts receivable as ofSeptember 30, 2020 were$5.2 million of early termination fees and$42.4 million of income tax receivables. Cash flows provided by operating activities was$538.9 million in fiscal year 2020 compared to$855.8 million fiscal year 2019. The decrease in cash provided by operating activities is primarily driven by lower operating activity and a favorable variance in the use of working capital. Cash flows provided by operating activities in fiscal year 2018 was$557.9 million . The$297.9 million increase compared to fiscal year 2019 was primarily due to a decrease in working capital. Investing Activities Capital Expenditures Our investing activities are primarily related to capital expenditures for our fleet. Our capital expenditures were$140.8 million ,$458.4 million and$466.6 million in fiscal years 2020, 2019 and 2018, respectively. The year-over-year decrease in capital expenditures is driven by a decrease in super-spec upgrades and lower maintenance capital expenditure levels as a result of lower activity. Our fiscal year 2021 capital spending is currently estimated to be between$85 and$105 million . This estimate includes normal capital maintenance requirements, information technology spending and a limited number of upgrades primarily related to augmenting the capabilities of our existing rig fleet. Acquisition of Business We paid$16.2 million and$47.9 million , net of cash acquired, during the 2019 and 2018 fiscal year, respectively, for the acquisition of drilling technology companies. Sale of Assets Our proceeds from asset sales totaled$78.4 million ,$50.8 million and$44.4 million in fiscal year 2020, 2019 and 2018, respectively. The current year increase is primarily driven by the sale of a portion of our real estate investment portfolio. During the fiscal year endedSeptember 30, 2020 , we closed on the sale of a portion of our real estate investment portfolio, including six industrial sites, for total consideration, net of selling related expenses, of$40.7 million . Sale of Subsidiary InDecember 2019 , we closed on the sale of a wholly-owned subsidiary of HPIDC, TerraVici. As a result of the sale, 100% of TerraVici's outstanding capital stock was transferred to the purchaser in exchange for approximately$15.1 million , resulting in a total gain on the sale of TerraVici of approximately$15.0 million . Marketable Securities InSeptember 2019 , we sold our remaining 1.6 million shares in Valaris, previously known asEnsco Rowan plc , for total proceeds of approximately$12.0 million . As ofSeptember 30, 2020 , our marketable securities consist primarily of common shares in Schlumberger, Ltd. that, at the close of fiscal year 2020, had a fair value of$7.3 million . The value of our securities are subject to fluctuation in the market and may vary considerably over time. Our marketable securities are recorded at fair value on our balance sheet. Our equity investment in Schlumberger Ltd. held as ofSeptember 30, 2020 is presented below: (in thousands, except for share amounts) Number of Shares Cost Basis Market Value Schlumberger, Ltd. 467,500 3,713 7,274 Financing Activities Repurchase of Shares During fiscal year 2020, we repurchased 1.5 million shares for$28.5 million compared to one million shares for$42.8 million during fiscal year 2019. 44
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Dividends We paid dividends of$2.38 ,$2.84 , and$2.82 per share during fiscal years 2020, 2019 and 2018, respectively. Total dividends paid were$260.3 million ,$313.4 million and$308.4 million in fiscal years 2020, 2019 and 2018, respectively. OnJune 3, 2020 , we reduced our quarterly cash dividend to$0.25 per share and onSeptember 9, 2020 , declared a cash dividend in that amount for shareholders of record onNovember 13, 2020 , payable onDecember 1, 2020 . 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. 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 (the "2018 Credit Facility") that is set to mature onNovember 13, 2024 . 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. The 2018 Credit Facility also permits aggregate commitments under the facility to be increased by$300.0 million , subject to the satisfaction of certain conditions and the procurement of additional commitments from new or existing lenders. The borrowings under the 2018 Credit Facility accrue interest at a spread over either theLondon Interbank Offered Rate ("LIBOR") or the Base Rate. We also pay a commitment fee on the unused balance of the facility. Borrowing spreads as well as commitment fees are determined based on the debt rating for senior unsecured debt of the Company, as determined by Moody's andStandard & Poor's . The spread over LIBOR ranges from 0.875 percent to 1.500 percent per annum and commitment fees range from 0.075 percent to 0.200 percent per annum. Based on the unsecured debt rating of the Company onSeptember 30, 2020 , the spread over LIBOR would have been 1.125 percent had borrowings been outstanding under the 2018 Credit Facility and commitment fees are 0.125 percent. There is a financial covenant in the 2018 Credit Facility that requires us to maintain a total debt to total capitalization ratio of less than or equal to 50 percent. The 2018 Credit Facility contains additional terms, conditions, restrictions and covenants that we believe are usual and customary in unsecured debt arrangements for companies of similar size and credit quality, including a limitation that priority debt (as defined in the credit agreement) may not exceed 17.5 percent of the net worth of the Company. AtSeptember 30, 2020 , 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 2021. As ofSeptember 30, 2020 , there were no borrowings or letters of credit outstanding, leaving$750.0 million available to borrow under the 2018 Credit Facility. As ofSeptember 30, 2020 , we had two separate outstanding letters of credit with banks, in the amounts of$24.8 million and$2.1 million , respectively. As ofSeptember 30, 2020 , 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 ,$4.3 million of financial guarantees were outstanding as ofSeptember 30, 2020 . Subsequent toSeptember 30, 2020 ,$2.6 million in financial guarantees have expired. 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. Senior Notes Exchange Offer, Consent Solicitation and Redemption OnDecember 20, 2018 , we settled an offer to exchange (the "Exchange Offer") any and all outstanding 4.65 percent unsecured senior notes due 2025 of HPIDC (the "HPIDC 2025 Notes") for (i) up to$500.0 million aggregate principal amount of new 4.65 percent unsecured senior notes due 2025 of the Company (the "Company 2025 Notes"), with registration rights, and (ii) cash, pursuant to which we issued approximately$487.1 million in aggregate principal amount of Company 2025 Notes. Interest on the Company 2025 Notes is payable semi-annually onMarch 15 andSeptember 15 of each year, commencingMarch 15, 2019 . The debt issuance costs are being amortized straight-line over the stated life of the obligation, which approximates the effective interest method. Following the consummation of the Exchange Offer, HPIDC had outstanding approximately$12.9 million in aggregate principal amount of HPIDC 2025 Notes. OnDecember 20, 2018 , HPIDC, the Company andWells Fargo Bank, National Association , as trustee, entered into a supplemental indenture to the indenture governing the HPIDC 2025 Notes to adopt certain proposed amendments pursuant to a consent solicitation conducted concurrently with the Exchange Offer. OnSeptember 27, 2019 , we redeemed the remaining approximately$12.9 million in aggregate principal amount of HPIDC 2025 Notes for approximately$14.6 million , including accrued interest and a prepayment premium. Simultaneously with the redemption of the HPIDC 2025 Notes, HPIDC was released as a guarantor under the Company 2025 Notes and the 2018 Credit Facility. As a result of such release, H&P is the only obligor under the Company 2025 Notes and the 2018 Credit Facility. 45
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Repurchase of Common Shares We have an evergreen authorization from theBoard for the purchase of up to four million common shares in any calendar year. During the fiscal year endedSeptember 30, 2020 , we purchased 1.5 million common shares at an aggregate cost of$28.5 million , which are held as treasury shares. We purchased 1.0 million common shares at an aggregate cost of$42.8 million , which are held as treasury shares, during the fiscal year endedSeptember 30, 2019 . We had no purchases of common shares during the fiscal year endedSeptember 30, 2018 . Future Cash Requirements Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2021 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. OnJune 3, 2020 , we reduced our quarterly cash dividend to$0.25 per share. If needed, we may decide to obtain additional funding from our$750.0 million 2018 Credit Facility. Our indebtedness under our unsecured senior notes totaled$487.1 million atSeptember 30, 2020 and matures onMarch 19, 2025 . As ofSeptember 30, 2020 , we had a$650.7 million deferred tax liability on our Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment. Our increased levels of capital expenditures over the last several years have been subject to accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, enabling us to defer a portion of cash tax payments to future years. Future levels of capital expenditures and results of operations will determine the timing and amount of future cash tax payments. We expect to be able to meet any such obligations utilizing cash and investments on hand, as well as cash generated from ongoing operations. The longterm debt to total capitalization ratio was 12.8 percent atSeptember 30, 2020 compared to 10.8 percent atSeptember 30, 2019 . For additional information regarding debt agreements, refer to Note 8-Debt to our Consolidated Financial Statements. Off-balance Sheet Arrangements We have no off-balance sheet arrangements as that term is defined in Item 303(a)(4)(ii) of Regulation S-K. For information regarding our drilling contract backlog, see Item 1- "Business - Contract Backlog". Material Commitments Our contractual obligations as ofSeptember 30, 2020 are summarized in the table below: Payments due by year (in thousands) Total 2021 2022 2023 2024 2025 Thereafter Long-term debt$ 487,148 $ - $ - $ - $ -$ 487,148 $ - Interest (1) 101,934 22,652 22,652 22,652 22,652 11,326 - Operating leases (2) 38,166 11,680 8,133 7,466 7,018 3,231 638 Purchase obligations (3) 2,692 2,692 - - - - -
Total contractual obligations
(1) Interest on fixedrate debt was estimated based on principal maturities. See
Note 8-Debt to our Consolidated Financial Statements.
(2) See Note 6-Leases to our Consolidated Financial Statements.
(3) See Note 17-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 fiscal years 2020 and 2019, we did not make any contributions to the pension plan. Contributions may be made in fiscal year 2021 to fund unexpected distributions in lieu of liquidating pension assets. Future contributions beyond fiscal year 2021 are difficult to estimate due to multiple variables involved. AtSeptember 30, 2020 , we had$16.3 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 9-Income Taxes to our Consolidated Financial Statements. 46
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Critical Accounting Policies and Estimates Accounting policies that we consider significant are summarized in Note 2-Summary of Significant Accounting Policies, Risks and Uncertainties to our Consolidated Financial Statements included in Part II, Item 8- "Financial Statements and Supplementary Data" of this Form 10-K. The preparation of our financial statements in conformity withU.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. 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. These estimates and assumptions are evaluated on an ongoing basis. 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. Property, Plant and Equipment Property, plant and equipment, including renewals and betterments, are capitalized at cost, while maintenance and repairs are expensed as incurred. The interest expense applicable to the construction of qualifying assets is capitalized as a component of the cost of such assets. We account for the depreciation of property, plant and equipment using the straightline 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 or result in abandonments. For the fiscal years presented in this Form 10-K, 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 Longlived Assets,Goodwill and Other Intangible Assets Management assesses the potential impairment of our longlived assets and finite-lived intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Changes that could prompt such an assessment may include equipment obsolescence, changes in the market demand, periods of relatively low rig utilization, declining revenue per day, declining cash margin per day, completion of specific contracts, change in technology and/or overall changes in general market conditions. If a review of the longlived assets and finite-lived intangibles indicates that the carrying value of certain of these assets or asset groups is more than the estimated undiscounted future cash flows, an impairment charge is made, as required, to adjust the carrying value to the estimated fair value. 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 makeup to existing platforms, and competitive dynamics including utilization. The fair value of drilling rigs is determined based upon either an income approach using estimated discounted future cash flows, a market approach considering factors such as recent market sales of rigs of other companies and our own sales of rigs, appraisals and other factors, a cost approach utilizing reproduction costs new as adjusted for the asset age and condition, and/or a combination of multiple approaches. The use of different assumptions could increase or decrease the estimated fair value of assets and could therefore affect any impairment measurement. We review goodwill for impairment annually in the fourth fiscal quarter or more frequently if events or changes in circumstances indicate it is more likely than not that the carrying amount of the reporting unit holding such goodwill may exceed its fair value. We initially assess goodwill for impairment based on qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount. If further testing is necessary or a quantitative test is elected, we quantitatively compare the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, an impairment charge will be recognized in an amount equal to the excess; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. SelfInsurance Accruals We selfinsure a significant portion of expected losses relating to workers' compensation, general liability, employer's liability and automobile liability. Generally, deductibles range from$1 million to$10 million per occurrence depending on the coverage and whether a claim occurs outside or inside ofthe United States . Insurance is purchased over deductibles to reduce our exposure to catastrophic events but there can be no assurance that such coverage will apply or be adequate in all circumstances. Estimates are recorded for incurred outstanding liabilities for workers' compensation and other casualty claims. Retained losses are estimated and accrued based upon our estimates of the aggregate liability for claims incurred. Estimates for liabilities and retained losses are based on adjusters' estimates, our historical loss experience and statistical methods commonly used within the insurance industry that we believe are reliable. We also engage a third-party actuary to perform a periodic review of our domestic casualty losses. 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. 47
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Our whollyowned captive insurance company finances a significant portion of the physical damage risk on companyowned drilling rigs as well as international casualty deductibles. An actuary reviews our captive losses on an annual basis. We insure working land rigs and related equipment at values that approximate the current replacement costs on the inception date of the policies. However, we self-insure large deductibles under these policies. We also carry insurance with varying deductibles and coverage limits with respect to stacked rigs, offshore platform rigs, and "named wind storm" risk in theGulf of Mexico . We selfinsure a number of other risks, including loss of earnings and business interruption, and most cyber risks. Revenue Recognition Drilling services and solutions 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 as the drilling service is provided. 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 outofpocket expenses are recorded as revenue. 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. Income Taxes Deferred income taxes are accounted for under the liability method, which takes into account the differences between the basis of the assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. Our net deferred tax liability balance at year-end reflects the application of our income tax accounting policies and is based on management's estimates, judgments and assumptions. Included in our net deferred tax liability balance are deferred tax assets that are assessed for realizability. If it is more likely than not that a portion of the deferred tax assets will not be realized in a future period, the deferred tax assets will be reduced by a valuation allowance based on management's estimates. In addition, we operate in several countries throughout the world and our tax returns filed in those jurisdictions are subject to review and examination by tax authorities within those jurisdictions. We recognize uncertain tax positions we believe have a greater than 50 percent likelihood of being sustained. We cannot predict or provide assurance as to the ultimate outcome of any existing or future assessments. New Accounting Standards See Note 2-Summary of Significant Accounting Policies, Risks and Uncertainties to our Consolidated Financial Statements for recently adopted accounting standards and new accounting standards not yet adopted.
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