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 and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally 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, such things 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 and other oil producing nations ("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 effect, impact, potential duration or other implications of the ongoing outbreak of a novel strain of coronavirus ("COVID-19") and the oil price collapse in 2020, 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, including as a result of the change in theU.S. presidential administration, affecting our costs and increasing operation restrictions or delay and other adverse impacts on our business; •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; •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; and •potential long-lived asset impairments. Important factors that could cause actual results to differ materially from our expectations or results discussed in the forwardlooking statements are disclosed in our 2020 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. 27 -------------------------------------------------------------------------------- Table of Contents 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, 2020 , our drilling rig fleet included a total of 301 drilling rigs. Our drilling services and solutions segments consist of the North America Solutions segment with 262 rigs, the OffshoreGulf of Mexico segment with 7 offshore platform rigs and the International Solutions segment with 32 rigs as ofDecember 31, 2020 . At the close of the first quarter of fiscal year 2021, we had 102 contracted rigs, of which 64 were under a fixed-term contract and 38 were working well-to-well, compared to 79 contracted rigs atSeptember 30, 2020 . 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 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 American Solutions 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. Along with this stabilization, our rig activity began to increase, and increased more significantly during the first quarter of fiscal year 2021. Our active rig count, which excludes idle but contracted rigs, doubled from 47 rigs inAugust 2020 to 94 rigs atDecember 31, 2020 . Additionally, during the first quarter of fiscal year 2021, crude oil prices improved from the$40 per barrel range to almost$50 per barrel. At such levels, we believe our customers will have more robust capital budgets entering into calendar year 2021 and we believe we will experience a higher level of rig activity in fiscal year 2021 compared to fiscal year 2020. However, even with the improved levels of commodity prices, the lasting impacts of the global pandemic remain, which will likely keep prices and demand for crude oil at relatively low levels compared to pre-pandemic levels. Consequently, 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 subsequent decline in the demand for land rigs resulted in customers idling a large portion of our super-spec FlexRig® fleet. AtDecember 31, 2020 , we had 142 idle super-spec rigs out of our FlexRig® fleet of 234 super-spec rigs (39 percent utilization). 28 -------------------------------------------------------------------------------- Table of Contents 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 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 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 (beginningMarch 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 ourNorth 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 ofDecember 31, 2020 , the Company was aware that 310 out of its approximately 4,600 employees have had confirmed cases of COVID-19 since the COVID-19 outbreak began, of which we believe approximately 60 percent contracted the virus outside of their work location. We have had no fatalities and 290 of 310 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. PerCDC 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 7 days with a negative test or 10 days without a test and no symptoms. 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. 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. 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$16.0 million restructuring charge during fiscal year 2020. We anticipate further cost reductions in our North America Solutions operations as we continue to take measures to adjust our cost structure lower based on activity levels. Additionally, we expect further cost reductions in our International Solutions operations as we work through local jurisdictional regulations to implement those cost savings measures. The cost reduction measures could lead to additional restructuring charges in future periods. AtDecember 31, 2020 , the Company had cash and cash equivalents and short-term investments of$523.8 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 29 -------------------------------------------------------------------------------- Table of Contents 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, 2020 andSeptember 30, 2020 , the Company had a net allowance against its accounts receivable of$1.6 million and$1.8 million , respectively. 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. Subsequent toMarch 31, 2020 , we adjusted our credit risk monitoring for specific customers, in response to the economic events described above. Recent Developments Gain on Sale of Assets During the three months endedDecember 31, 2020 , we closed on the sale of an offshore platform rig within our OffshoreGulf of Mexico operating segment for total consideration of$12.0 million with an aggregate net book value of$2.8 million , resulting in a gain of$9.2 million , which is included within Gain on Sale of Assets on our Unaudited Condensed Consolidated Statements of Operations. Contract Backlog As ofDecember 31, 2020 andSeptember 30, 2020 , our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was$526.6 million and$658.0 million , respectively. These amounts do not include anticipated contract renewals or expected performance bonuses. The decrease in backlog atDecember 31, 2020 fromSeptember 30, 2020 is primarily due to prevailing market conditions causing a decline in the number of longer term drilling contracts executed and to some extent an increase in the number of early terminations of contracts. Approximately 35.6 percent of theDecember 31, 2020 total backlog is reasonably expected to be fulfilled in fiscal year 2022 and thereafter. Fixed-term contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term. As a result of the depressed market conditions and negative outlook for the near term, beginning in the second quarter of fiscal year 2020, certain of our customers, as well as those of our competitors, have opted to renegotiate or early terminate existing drilling contracts. Such renegotiations have included requests to lower the contract dayrate in exchange for additional terms, temporary stacking of the rig, and other proposals. During the three months endedDecember 31, 2020 and 2019, early termination revenue associated with term contracts was$5.8 million and$0.1 million , respectively. The following table sets forth the total backlog by reportable segment as ofDecember 31, 2020 andSeptember 30, 2020 , and the percentage of theDecember 31, 2020 backlog reasonably expected to be fulfilled in fiscal year 2022 and thereafter: Percentage Reasonably Expected to be Filled in September 30, Fiscal Year 2022 (in millions) December 31, 2020 2020 and Thereafter North America Solutions $ 448.2$ 542.4 34.9 % Offshore Gulf of Mexico 15.5 16.7 - International Solutions 62.9 98.9 51.2 $ 526.6$ 658.0 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 2020 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 ongoing outbreak of COVID-19, have adversely affected and are expected to continue to adversely affect our business, financial condition and results of operations" within our 2020 Annual Report on Form 10-K. 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three Months EndedDecember 31, 2020 and 2019 Consolidated Results of OperationsNet Income (Loss) We reported a loss from continuing operations of$77.9 million ($0.73 loss per diluted share) from operating revenues of$246.4 million for the three months endedDecember 31, 2020 compared to income from continuing operations of$30.7 million ($0.27 per diluted share) from operating revenues of$614.7 million for the three months endedDecember 31, 2019 . Included in the net loss for the three months endedDecember 31, 2020 is income of$7.5 million ($0.07 per diluted share) from discontinued operations. Including discontinued operations, we recorded a net loss of$70.4 million ($0.66 loss per diluted share) for the three months endedDecember 31, 2020 compared to net income of$30.6 million ($0.27 per diluted share) for the three months endedDecember 31, 2019 . Research and Development For the three months endedDecember 31, 2020 and 2019, we incurred$5.6 million and$6.9 million , respectively, of research and development expenses. Selling, General and Administrative Expense Selling, general and administrative expenses decreased to$39.3 million during the three months endedDecember 31, 2020 compared to$49.8 million during the three months endedDecember 31, 2019 . The$10.5 million decrease in fiscal year 2021 compared to the same period in fiscal year 2020 is primarily due to expense reduction initiatives undertaken primarily during the second and third quarters of fiscal year 2020. Income Taxes We had an income tax benefit of$18.1 million for the three months endedDecember 31, 2020 (which included discrete tax expense of approximately$4.1 million related to equity compensation) compared to income tax provision of$14.1 million (which included discrete tax expense of$2.4 million related to equity compensation) for the three months endedDecember 31, 2019 . Our statutory federal income tax rate for fiscal year 2021 is 21.0 percent (before incremental state and foreign taxes). North America Solutions Operations Segment Three Months Ended December 31, (in thousands, except operating statistics) 2020 2019 (1) % Change Operating revenues$ 201,990 $ 524,681 (61.5) Direct operating expenses 157,309 332,982 (52.8) Segment gross margin 44,681 191,699 (76.7) Research and development 5,466 6,749 (19.0) Selling, general and administrative expense 11,680 16,746 (30.3) Depreciation 100,324 116,065 (13.6) Restructuring charges 139 - - Segment operating income (loss)$ (72,928) $ 52,139 (239.9) Operating Statistics (2): Average active rigs 81 192 (57.8) Number of active rigs at the end of period 94 195 (51.8) Number of available rigs at the end of period 262 299 (12.4) Reimbursements of "out-of-pocket" expenses$ 18,789 $ 59,568 (68.5) (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 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. Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics. As a result, prior year comparative information is also provided above. Segment Gross Margin The North America Solutions segment gross margin was$44.7 million for the three months endedDecember 31, 2020 compared to$191.7 million in the same period of fiscal year 2020. The decrease was primarily driven by lower activity levels. Revenues were$202.0 million and$524.7 million in the three months endedDecember 31, 2020 and 2019, respectively. Included in revenues for the three months endedDecember 31, 2020 is early termination revenue of$5.8 million compared to$0.1 million during the same period of fiscal year 2020. 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 unsatisfactory performance by us). Revenue We experienced a 61.5 percent decrease in operating revenue when comparing the three months endedDecember 31, 2020 to the three months endedDecember 31, 2019 . The decline in operating revenue is primarily due to lower activity levels during the three months endedDecember 31, 2020 . 31 -------------------------------------------------------------------------------- Table of Contents Direct Operating Expenses Direct operating expenses decreased to$157.3 million during the three months endedDecember 31, 2020 as compared to$333.0 million during the three months endedDecember 31, 2019 . The decrease was due to the factors mentioned above. Depreciation Depreciation decreased to$100.3 million during the three months endedDecember 31, 2020 as compared to$116.1 million during the three months endedDecember 31, 2019 . The decrease was primarily attributable to the lower carrying cost of our impaired assets. Offshore Gulf of Mexico Operations Segment Three Months Ended December 31, (in thousands, except operating statistics) 2020 2019 % Change Operating revenues$ 32,273 $ 40,255 (19.8) Direct operating expenses 26,256 30,045 (12.6) Segment gross margin 6,017 10,210 (41.1) Selling, general and administrative expense 669 1,137 (41.2) Depreciation 2,606 2,745 (5.1) Segment operating income$ 2,742 $ 6,328 (56.7) Operating Statistics (1): Average active rigs 5 6 (16.7) Number of active rigs at the end of period 4 6 (33.3) Number of available rigs at the end of period 7 8 (12.5) Reimbursements of "out-of-pocket" expenses$ 7,868 $ 9,901 (20.5) (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. Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics. As a result, prior year comparative information is also provided above. Segment Gross Margin During the three months endedDecember 31, 2020 , the OffshoreGulf of Mexico segment gross margin was$6.0 million compared to a gross margin of$10.2 million for the three months endedDecember 31, 2019 . This decrease is primarily attributable to decreased activity and pricing during the three months endedDecember 31, 2020 . Revenue We experienced a 19.8 percent decrease in operating revenue when comparing the three months endedDecember 31, 2020 to the three months endedDecember 31, 2019 . The decline in operating revenue is primarily due to the factors described above. Direct Operating Expenses Direct operating expenses decreased to$26.3 million during the three months endedDecember 31, 2020 as compared to$30.0 million during the three months endedDecember 31, 2019 . The decrease was primarily driven by lower activity, partially offset by unfavorable variances in self-insurance accruals. International Solutions Operations Segment Three Months Ended December 31, (in thousands, except operating statistics) 2020 2019 % Change Operating revenues$ 10,518 $ 46,462 (77.4) Direct operating expenses 17,523 34,075 (48.6) Segment gross margin (7,005) 12,387 (156.6) Selling, general and administrative expense 979 1,455 (32.7) Depreciation 373 7,817 (95.2) Segment operating income (loss)$ (8,357) $ 3,115 (368.3) Operating Statistics (1): Average active rigs 4 18 (77.8) Number of active rigs at the end of period 4 18 (77.8) Number of available rigs at the end of period 32 31 3.2 Reimbursements of "out-of-pocket" expenses$ 2,559 $ 1,587 61.2 (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. Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics. As a result, prior year comparative information is also provided above. 32 -------------------------------------------------------------------------------- Table of Contents Segment Gross Margin The International Solutions segment gross margin was$(7.0) million for the three months endedDecember 31, 2020 compared to a gross margin of$12.4 million for the three months endedDecember 31, 2019 . The change was primarily driven by lower activity coupled with fixed minimum levels of country overhead during the three months endedDecember 31, 2020 . Revenue We experienced a 77.4 percent decrease in operating revenue when comparing the three months endedDecember 31, 2020 to the three months endedDecember 31, 2019 . The decline in operating revenue is primarily due to lower activity during the three months endedDecember 31, 2020 . Direct Operating Expenses Direct operating expenses decreased to$17.5 million during the three months endedDecember 31, 2020 as compared to$34.1 million during the three months endedDecember 31, 2019 . The decrease was driven by the factors described above. 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) 2020 2019 % Change Operating revenues $ 8,718$ 10,999 (20.7) Direct operating expenses 3,750 11,545 (67.5) Gross margin 4,968 (546) 1,009.9 Research and development 117 129 (9.3) Selling, general and administrative expense 381 241 58.1 Depreciation 359 321 11.8 Operating income (loss) $ 4,111$ (1,237) 432.3 Gross Margin 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 consisted primarily of adjustments to accruals for estimated losses of approximately$0.5 million and$8.5 million allocated to the Captive during the three months endedDecember 31, 2020 and 2019, respectively. The decrease in accruals for estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary as well as lower activity levels during the three months endedDecember 31, 2020 . Intercompany premium revenues recorded by the Captive during the three months endedDecember 31, 2020 and 2019 amounted to$7.1 million and$7.7 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 marketable securities. 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. 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 33 -------------------------------------------------------------------------------- Table of Contents 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, 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, 2020 , we had$374.0 million of cash on hand and$149.8 million of short-term investments. Our cash flows for the three months endedDecember 31, 2020 and 2019 are presented below: Three Months Ended December 31, (in thousands) 2020 2019 Net cash provided by (used in): Operating activities$ (19,604) $ 111,781 Investing activities (65,203) (23,035) Financing activities (29,287) (77,402) Net increase (decrease) in cash and cash equivalents and restricted cash$ (114,094) $ 11,344 Operating Activities For the purpose of understanding the impact on our cash flows from operating activities, operating 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. Operating net working capital was$228.0 million as ofDecember 31, 2020 compared to$194.2 million as ofSeptember 30, 2020 . The sequential increase in net working capital was primarily driven by an increase in receivables caused by increased activity as well as payment of ad valorem taxes in various jurisdictions during the three months endedDecember 31, 2020 . Included in accounts receivable as ofDecember 31, 2020 were$5.0 million of early termination fees and$45.2 million of income tax receivables, of which$32.1 million of the income tax receivable was received subsequent toDecember 31, 2020 . Cash flows used in operating activities were approximately$19.6 million for the three months endedDecember 31, 2020 . Cash flows provided by operating activities were approximately$111.8 million for the three months endedDecember 31, 2019 . The decrease in cash provided by operating activities is primarily driven by lower operating activity. Investing Activities Capital Expenditures Our capital expenditures during the three months endedDecember 31, 2020 were$14.0 million compared to$46.0 million during the three months endedDecember 31, 2019 . The decrease is driven by lower maintenance capital expenditures as a result of lower activity. Purchase of Investments Our net purchases of investments during the three months endedDecember 31, 2020 were$58.1 million compared to$3.9 million during the three months endedDecember 31, 2019 . The increase is attributable to our strategy to optimize our returns on investment. Sale of Subsidiary InDecember 2019 , we closed on the sale of a wholly-owned subsidiary ofHelmerich & Payne International Drilling Co. ,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 . Marketable Securities As ofDecember 31, 2020 , our marketable securities primarily consist of common shares in Schlumberger, Ltd. that, at the close of the first quarter of fiscal year 2021, had a fair value of$10.2 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. Financing Activities Dividends We paid dividends of$0.25 and$0.71 per share during the three months endedDecember 31, 2020 and 2019, respectively. Total dividends paid were$26.9 million and$77.6 million during the three months endedDecember 31, 2020 and 2019, respectively. A cash dividend of$0.25 per share was declared onDecember 11, 2020 for shareholders of record onFebruary 12, 2021 , payable onMarch 1, 2021 . The declaration and amount of future dividends is at the discretion of the Board of Directors (the "Board") and subject to our financial condition, results of operations, cash flows, and other factors the Board deems relevant. 34 -------------------------------------------------------------------------------- Table of Contents 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 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. As ofDecember 31, 2020 , 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 6-Debt to the consolidated financial statements in our 2020 Annual Report on Form 10-K. As ofDecember 31, 2020 , we had three outstanding letters of credit with banks, in the amounts of$24.8 million ,$0.5 million and$2.1 million , respectively. As ofDecember 31, 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 ,$1.8 million of financial guarantees were outstanding as ofDecember 31, 2020 . 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, 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. Senior Notes OnDecember 20, 2018 , we issued approximately$487.1 million in aggregate principal amount of 4.65 percent unsecured senior notes due 2025 (the "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. Repurchase of Common Shares We have an evergreen authorization from theBoard 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. We had no purchases of common shares during the three months endedDecember 31, 2020 and 2019. 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. 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 atDecember 31, 2020 and matures onMarch 19, 2025 . As ofDecember 31, 2020 , we had a$635.4 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 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 long-term debt to total capitalization ratio was 13.1 percent and 12.8 percent atDecember 31, 2020 andSeptember 30, 2020 , 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, 2020 . 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 2- "Management's Discussion and Analysis of Financial Condition and Results of Operations-Contract Backlog". Material Commitments Material commitments as reported in our 2020 Annual Report on Form 10-K have not changed significantly atDecember 31, 2020 , other than those disclosed in Note 14-Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements. 35
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Table of Contents 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 2020 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies and estimates. Recently Issued Accounting Standards 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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