What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-28 compared with 2021-04-29 · 197 added, 185 removed, 296 unchanged (56% of the section changed)

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(“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 of March 31, 2021, our drilling rig fleet included a total of 281 drilling rigs.

Our drilling services and solutions segments consist of the North America Solutions segment with 242 rigs, the Offshore Gulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 32 rigs as of March 31, 2021.

At the close of the second quarter of fiscal year 2021, we had 118 contracted rigs, of which 65 were under a fixed-term contract and 53 were working well-to-well, compared to 79 contracted rigs at September 30, 2020.

As of June 30, 2021, our drilling rig fleet included a total of 281 drilling rigs.

Our reportable operating business segments consist of the North America Solutions segment with 242 rigs, the Offshore Gulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 32 rigs as of June 30, 2021.

At the close of the third quarter of fiscal year 2021, we had 131 contracted rigs, of which 64 were under a fixed-term contract and 67 were working well-to-well, compared to 79 contracted rigs at September 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.

As we move forward, we believe that our advanced uniform rig fleet, technology offerings, financial strength, contract backlog and strong customer and employee base position us very well to respond to continued cyclical and often times volatile market conditions and take advantage of future opportunities.

Market Outlook

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We experienced much of our rig count decline during the second and third quarters of fiscal year 2020 as our North American Solutions active rig count declined from 195 rigs at December 31, 2019 to a low of 47 rigs in August of 2020.

However, during the fourth quarter of fiscal year 2020, the market experienced a stabilization of crude oil prices in the $40 per barrel range and subsequently crude oil prices moved toward $50 per barrel as our customers set their capital budgets for calendar year 2021 More recently, crude oil prices have continued to increase, reaching $60 per barrel.

More recently, crude oil prices have continued to increase, reaching more than $70 per barrel.

That said, however, we do not expect rig activity to move in tandem with crude oil prices to the same extent as it has historically.

This is primarily due to our customers having a more disciplined approach to their operations and capital spending.

This is primarily due to a large portion of our customers having a more disciplined approach to their operations and capital spending.

We expect a majority will maintain their activity levels in accordance with their capital budgets for 2021, which were set during a time when crude oil prices were lower and will not adjust spending levels higher as crude oil prices move higher.

Along with stabilization of crude prices during the fourth quarter of fiscal year 2020, our rig activity began to increase, and increased more significantly during the first and second quarters of fiscal year 2021.

Our North American Solutions active rig count has more than doubled from 47 rigs in August 2020 to 109 rigs at March 31, 2021.

Our North American Solutions active rig count has more than doubled from 47 rigs in August 2020 to 121 rigs at June 30, 2021.

We do expect further increases in our rig count for the remainder of fiscal year 2021 as the level of customer capital spending is higher in calendar 2021 than it was in calendar 2020.

However, we expect the rate of rig count increases to be at a much more modest pace during the last half of fiscal year 2021 compared to what we experienced during the first half of fiscal year 2021.

However, we expect the rate of rig count increases to be at a much more modest pace during the remainder of our fiscal year 2021 compared to what we experienced during the first nine months of fiscal year 2021.

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.

At March 31, 2021, we had 127 idle super-spec rigs out of our FlexRig® fleet of 234 super-spec rigs (46 percent utilization).

At June 30, 2021, we had 113 idle super-spec rigs out of our FlexRig® fleet of 232 super-spec rigs (51 percent utilization).

Collectively, our other business segments, Offshore Gulf of Mexico and International Solutions, are exposed to the same macro commodity price environment affecting our North America Solutions segment;

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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 global response to coping with the pandemic resulted in a drop in demand for crude oil, which, when combined with a more than adequate supply of crude oil, 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 the Department of Homeland Security and the Cybersecurity 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 to Center 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 March 31, 2020, the Company was aware that 565 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 545 of 565 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 been vaccinated are permitted to remain at work.

Employees who have not been vaccinated and 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.

We are adhering to Center for Disease Control guidelines for evaluating actual and potential COVID-19 exposures and we are complying with local governmental jurisdiction policies and procedures where our operations reside;

in some instances, policies and procedures are more stringent in our foreign operations than in our North America operations and this resulted in a complete suspension, for a certain period of time, of all drilling operations in at least one foreign jurisdiction.

In the United States, the Company is an ‘essential critical infrastructure’ company as defined by the Department of Homeland Security and the Cybersecurity 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.

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.

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, oil oversupply and low oil prices.

We have taken measures to reduce costs and capital expenditures to levels that better reflect a lower activity environment.

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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.

At March 31, 2021, the Company had cash and cash equivalents and short-term investments of $561.7 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.

Further, we took additional steps in fiscal year 2021 to reduce our operating cost structure.

These measures will result in an estimated annualized savings of $7 million with the full benefit expected to be realized in calendar year 2022.

We anticipate further cost reductions going forward;

however, implementation of future cost initiatives will be incremental and are anticipated to be realized over the next few quarters.

These cost reduction measures could lead to additional restructuring charges in future periods.

At June 30, 2021, the Company had cash and cash equivalents and short-term investments of $557.8 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 delivery of goods or services.

As part of the Company's normal operations, we regularly monitor the creditworthiness of our customer s 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.

At March 31, 2021 and September 30, 2020, the Company had a net allowance against its accounts receivable of $1.8 million for both periods.

At June 30, 2021 and September 30, 2020, the Company had a net allowance against its accounts receivable of $1.9 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.

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Recent Developments

Credit Facility Maturity Extension

On April 16, 2021, lenders with $680.0 million of commitments under the 2018 Credit Facility exercised their option to extend the maturity of the 2018 Credit Facility from November 13, 2024 to November 12, 2025.

No other terms of the 2018 Credit Facility were amended in connection with this extension.

The remaining $70.0 million of commitments under the 2018 Credit Facility will expire on November 13, 2024, unless extended by the applicable lender before such date.

Assets Held-for-Sale

In March 2021, the Company's leadership executed the current strategy, which was initially introduced in 2019, focusing on operating various types of highly capable upgraded rigs and phasing out the older, less capable fleet.

In March 2021, the Company's leadership continued the execution of the current strategy, which was initially introduced in 2019, focusing on operating various types of highly capable upgraded rigs and phasing out the older, less capable fleet.

As a result, the Company has undertaken a plan to sell 71 Domestic non-super-spec rigs, all within our North America Solutions segment, the majority of which were previously decommissioned, written down and/or held as capital spares.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale on our Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021.

As a result, we recognized a non-cash impairment charge of $54.3 million, during the three months ended March 31, 2021, in the Unaudited Condensed Consolidated Statement of Operations.

The significant assumptions utilized in the valuation were based on our intended method of disposal, historical sales of similar assets, and market quotes and are classified as Level 2 and Level 3 inputs by ASC Topic 820, Fair Value Measurement and Disclosures.

Although we believe the assumptions used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and our resulting conclusion.

Sale of Offshore Rig

During the first quarter of fiscal year 2021, we closed on the sale of an offshore platform rig within our Offshore Gulf 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) loss on sale of assets on our Unaudited Condensed Consolidated Statements of Operations during the six months ended March 31, 2021.

Additional Restructuring Charges

During the second quarter of fiscal 2021, we reorganized our IT operations and moved select IT functions to a managed service provider.

Cost incurred, as of March 31, 2021, in connection with the restructuring are comprised of one-time severance benefits to employees who were involuntarily terminated.

The termination date of some of the employees extend beyond March 31, 2021, and such employees are required to render service through their respective termination date in order to receive the one-time severance benefit.

The book values of those assets were written down to their fair value less cost to sell of $13.5 million, and were reclassified as held-for-sale in the second and third quarter of fiscal year 2021.

As a result, we recognized a non-cash impairment charge of $56.4 million, during the nine months ended June 30, 2021, in the Unaudited Condensed Consolidated Statement of Operations.

During the three months ended June 30, 2021, we completed the sale of assets with a net book value of $3.4 million that were classified as held-for-sale during the second quarter of fiscal year 2021.

Restructuring Charges

During the second quarter of fiscal year 2021, we reorganized our IT operations and moved select IT functions to a managed service provider.

Costs incurred as of June 30, 2021 in connection with the restructuring are primarily comprised of one-time severance benefits to employees who were involuntarily terminated.

The termination date of some of the employees extend beyond June 30, 2021, and such employees are required to render service through their respective termination date in order to receive the one-time severance benefit.

During the third quarter of fiscal year 2021, we commenced a voluntary separation program at our local office in Argentina for which we incurred one-time severance charges for employees who were voluntarily terminated.

Additionally, we continue to take measures to lower our cost structure based on activity levels.

During the second and third quarter of fiscal year 2021, we incurred one-time moving related expenses due to the downsizing and relocation of our Houston assembly facility and storage yards.

This together with additional restructuring activities that could result from our in-process cost management review could result in additional restructuring charges throughout the year.

Sale of Offshore Rig

Contract Backlog

As of March 31, 2021 and September 30, 2020, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $435.3 million and $658.0 million, respectively.

As of June 30, 2021 and September 30, 2020, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $582.5 million and $658.0 million, respectively.

These amounts do not include anticipated contract renewals or expected performance bonuses.

The decrease in backlog at March 31, 2021 from September 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 50.0 percent of the March 31, 2021 total backlog is reasonably expected to be fulfilled in fiscal year 2022 and thereafter.

The decrease in backlog at June 30, 2021 from September 30, 2020 is primarily due to prevailing market conditions causing a decline in the number of longer term drilling contracts executed.

Approximately 65.2 percent of the June 30, 2021 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 and six months ended March 31, 2021 and 2020, early termination revenue associated with term contracts was $1.9 million and $7.7 million, respectively, and $8.2 million and $8.3 million, respectively.

The following table sets forth the total backlog by reportable segment as of March 31, 2021 and September 30, 2020, and the percentage of the March 31, 2021 backlog reasonably expected to be fulfilled in fiscal year 2022 and thereafter:

(in millions) March 31, 2021 September 30, 2020 Percentage Reasonably

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, opted to renegotiate or early terminate existing drilling contracts.

Such renegotiations included requests to lower the contract dayrate in exchange for additional terms, temporary stacking of the rig, and other proposals.

During the three months ended June 30, 2021, we reported no early termination revenue associated with term contracts.

For the nine months ended June 30, 2021, we recognized $7.7 million of early termination revenue associated with term contracts.

During the three and nine months ended June 30, 2020, we reported early termination revenue of $49.5 million and $57.8 million, respectively.

The following table sets forth the total backlog by reportable segment as of June 30, 2021 and September 30, 2020, and the percentage of the June 30, 2021 backlog reasonably expected to be fulfilled in fiscal year 2022 and thereafter:

(in millions) June 30, 2021 September 30, 2020 Percentage Reasonably

Expected to be Filled in

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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.

Results of Operations for the Three Months Ended March 31, 2021 and 2020

Results of Operations for the Three Months Ended June 30, 2021 and 2020

Consolidated Results of Operations

Net Loss We reported a loss from continuing operations of $123.3 million ($1.15 loss per diluted share) from operating revenues of $296.2 million for the three months ended March 31, 2021 compared to a loss from continuing operations of $420.5 million ($3.88 loss per diluted share) from operating revenues of $633.6 million for the three months ended March 31, 2020.

Included in the net loss for the three months ended March 31, 2021 is income of $2.3 million ($0.02 per diluted share) from discontinued operations.

Including discontinued operations, we recorded a net loss of $121.0 million ($1.13 loss per diluted share) for the three months ended March 31, 2021 compared to a net loss of $420.5 million ($3.88 loss per diluted share) for the three months ended March 31, 2020.

Research and Development For the three months ended March 31, 2021 and 2020, we incurred $5.3 million and $6.2 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 ended March 31, 2021 compared to $42.0 million during the three months ended March 31, 2020.

Net Loss We reported a loss from continuing operations of $56.7 million ($0.53 loss per diluted share) on operating revenues of $332.2 million for the three months ended June 30, 2021 compared to a loss from continuing operations of $46.0 million ($0.43 loss per diluted share) on operating revenues of $317.4 million for the three months ended June 30, 2020.

Included in the net loss for the three months ended June 30, 2021 is income of $1.2 million ($0.01 per diluted share) from discontinued operations.

Including discontinued operations, we recorded a net loss of $55.6 million ($0.52 loss per diluted share) for the three months ended June 30, 2021 compared to a net loss of $45.6 million ($0.43 loss per diluted share) for the three months ended June 30, 2020.

Research and Development For the three months ended June 30, 2021 and 2020, we incurred $5.6 million and $3.6 million, respectively, of research and development expenses.

Selling, General and Administrative Expense Selling, general and administrative expenses decreased to $41.7 million during the three months ended June 30, 2021 compared to $43.1 million during the three months ended June 30, 2020.

The $1.4 million decrease in fiscal year 2021 compared to the same period in fiscal year 2020 is primarily due to a lower number of personnel, partially offset by higher accrued variable compensation expense.

Asset Impairment Charge In March 2021, we have undertaken a plan to sell 68 Domestic non-super-spec rigs, all within our North America Solutions segment, the majority of which were previously decommissioned, written down and/or held as capital spares.

The book values of those assets were written down to their net realizable value of $13.1 million and were reclassified as held-for-sale on the Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021.

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), which is included in asset impairment charge on the Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2021, compared to an impairment charge of $563.2 million ($437.5 million net of tax, or $5.21 per diluted share) for the three months ended March 31, 2020.

Restructuring Charges We incurred $1.6 million in restructuring expenses during the three months ended March 31, 2021.

These expenses were comprised of one-time severance benefits to IT employees who were involuntarily terminated and one-time moving related expenses due to the downsizing and relocation of our Houston assembly facility.

Income Taxes We had an income tax benefit of $36.6 million for the three months ended March 31, 2021 compared to an income tax benefit of $113.4 million for the three months ended March 31, 2020.

Asset Impairment Charge During the three months ended June 30, 2021, three Domestic non super-spec rigs were reclassified as assets held-for-sale.

As such, the book values of these rigs were written down to their fair value less costs to sell of $0.4 million, resulting in a non-cash impairment charge of $2.1 million ($0.9 million net of tax, or $0.01 per diluted share) in the Unaudited Consolidated Statement of Operations.

We had no impairment charges during the three months ended June 30, 2020.

Restructuring Charges During the three months ended June 30, 2021 and 2020 we incurred $2.1 million and $15.5 million, respectively, in restructuring charges.

The charges incurred during the third quarter of fiscal year 2021 included $0.7 million in one-time severance benefits paid to employees who were voluntarily or involuntarily terminated coupled with charges of $1.4 million related to the downsizing of yard facilities.

The charges incurred during the third quarter of fiscal year 2020 were primarily comprised of $19.0 million in one-time severance benefits to employees who were voluntarily or involuntarily terminated, offset by a benefit of $3.5 million related to forfeitures and modifications of stock-based compensation awards.

Income Taxes We had an income tax benefit of $23.7 million for the three months ended June 30, 2021 (which includes discrete tax benefits of approximately $5.8 million primarily related to a decrease in our deferred state income tax rate) compared to an income tax benefit of $17.6 million for the three months ended June 30, 2020 (which includes discrete tax benefits of approximately $5.9 million primarily related to a decrease in our deferred state income tax rate and return to provision adjustments).

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 March 31,

(in thousands, except operating statistics) 2021 2020 (1)

Three Months Ended June 30,

(in thousands, except operating statistics) 2021 2020 % Change

Operating revenues $ 281,132 $ 254,434 10.5

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Segment gross margin 74,960 101,771 (26.3)

Depreciation 99,917 117,334 (14.8)

Depreciation and amortization 96,997 102,699 (5.6)

Research and development 5,605 3,459 62.0

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Reimbursements of "out-of-pocket" expenses $ 33,282 $ 27,806 19.7

(1) Operations previously reported within the H&P Technologies reportable segment are now managed and presented within the North America Solutions reportable segment.

(1) These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results.

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As a result, prior year comparative information is also provided above.

Segment Gross Margin The North America Solutions segment gross margin was $64.1 million for the three months ended March 31, 2021 compared to $199.4 million in the same period of fiscal year 2020.

The decrease was primarily driven by lower activity levels.

Revenues were $249.9 million and $546.0 million in the three months ended March 31, 2021 and 2020, respectively.

The decline in operating revenue is primarily due to lower activity levels, lower early termination revenue and lower average rig operating rates.

For the three months ended March 31, 2021 we reported no early termination revenue compared to $8.2 million during the same period of fiscal year 2020.

Segment Gross Margin The North America Solutions segment gross margin was $75.0 million for the three months ended June 30, 2021 compared to $101.8 million in the same period of fiscal year 2020.

The decrease was primarily driven by a decline in early termination revenue, partially offset by higher activity levels.

Revenues were $281.1 million and $254.4 million in the three months ended June 30, 2021 and 2020, respectively.

The increase in operating revenue is primarily due to higher activity levels.

For the three months ended June 30, 2021, we reported no early termination revenue associated with term contracts compared to $48.8 million during the same period of fiscal year 2020.

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 (except in limited circumstances including sustained unsatisfactory performance by us).

Direct operating expenses decreased to $185.8 million during the three months ended March 31, 2021 as compared to $346.6 million during the three months ended March 31, 2020.

The decrease was due to lower activity levels, partially offset by higher idle rig expense and rig recommissioning expense driven by sequential activity increases.

Depreciation Depreciation decreased to $99.9 million during the three months ended March 31, 2021 as compared to $117.3 million during the three months ended March 31, 2020.

Direct operating expenses increased to $206.2 million during the three months ended June 30, 2021 as compared to $152.7 million during the three months ended June 30, 2020.

The increase was due to higher activity levels and higher rig recommissioning expenses.

Depreciation Depreciation decreased to $97.0 million during the three months ended June 30, 2021 as compared to $102.7 million during the three months ended June 30, 2020.

The decrease was primarily attributable to rig impairments during fiscal year 2020 and ongoing low levels of capital expenditures.

Asset Impairment Charge In March 2021, we have undertaken a plan to sell 68 Domestic non-super-spec rigs, the majority of which were previously decommissioned, written down and/or held as capital spares.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale..

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), for the three months ended March 31, 2021, compared to an impairment charge of $406.5 million ($313.7 million net of tax, or $3.76 per diluted share) for the three months ended March 31, 2020.

Restructuring Charges For the three months ended March 31, 2021, we incurred $1.4 million in restructuring charges.

Asset Impairment Charge During the three months ended June 30, 2021, three Domestic non super-spec rigs were reclassified as assets held-for-sale.

As such, the book values of these rigs were written down to their fair value less cost to sell of $0.4 million, resulting in a non-cash impairment charge of $2.1 million in the Unaudited Consolidated Statement of Operations.

We had no impairment charges during the three months ended June 30, 2020.

Restructuring Charges For the three months ended June 30, 2021, we incurred $1.4 million in restructuring charges.

These expenses primarily include charges related to the downsizing of yard facilities.

During the three months ended June 30, 2020, we incurred $7.2 million in restructuring charges primarily comprised of $10.2 million in one-time severance benefits to employees who were voluntarily or involuntarily terminated, offset by a benefit of $3.0 million related to forfeitures and modifications of stock-based compensation awards.

Offshore Gulf of Mexico Operations Segment

Three Months Ended March 31,

Three Months Ended June 30,

(in thousands, except operating statistics) 2021 2020 % Change

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Selling, general and administrative expense 592 1,248 (52.6)

Segment operating income (loss) $ 2,978 $ (3,319) (189.7)

Restructuring charges — 1,262 (100.0)

Segment operating income $ 5,707 $ 3,013 89.4

Operating Statistics (1) :

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As a result, prior year comparative information is also provided above.

Segment Gross Margin During the three months ended March 31, 2021, the Offshore Gulf of Mexico segment gross margin was $6.2 million compared to a gross margin of $0.4 million for the three months ended March 31, 2020.

This increase was driven by the absence of $3.7 million of bad debt expense that was incurred during the three months ending March 31, 2020 and due to a rig that was mobilizing to the customer platform and generating losses during the three months ended March 31, 2020.

We recorded an 11.5 percent decrease in operating revenue during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels partially offset by the mix of rigs working as compared to being on standby or mobilization rates.

Direct operating expenses decreased to $23.1 million during the three months ended March 31, 2021 as compared to $32.6 million during the three months ended March 31, 2020.

The decrease was primarily driven by the factors described above.

Segment Gross Margin During the three months ended June 30, 2021, the Offshore Gulf of Mexico segment gross margin was $9.2 million compared to a gross margin of $8.5 million for the three months ended June 30, 2020.

This increase was driven by increased contribution from a rig that finished its mobilization and began drilling operations in April 2020.

We had an 11.0 percent decrease in operating revenue during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Direct operating expenses decreased to $24.1 million during the three months ended June 30, 2021 as compared to $29.0 million during the three months ended June 30, 2020.

The decrease in operating revenue and expenses was primarily driven by the previously mentioned rig mobilization.

Restructuring Charges We did not incur any restructuring charges during the three months ended June 30, 2021.

During the three months ended June 30, 2020, we incurred $1.3 million in restructuring charges, which primarily consisted of employee termination benefits that resulted from our reduction in staffing levels.

International Solutions Operations Segment

Three Months Ended March 31,

Three Months Ended June 30,

(in thousands, except operating statistics) 2021 2020 % Change

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Selling, general and administrative expense 1,346 1,129 19.2

Asset impairment charge — 156,686 (100.0)

Restructuring charges 207 2,297 (91.0)

Segment operating loss $ (3,538) $ (9,540) (62.9)

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As a result, prior year comparative information is also provided above.

Segment Gross Margin The International Solutions segment gross margin was $(1.9) million for the three months ended March 31, 2021 compared to a gross margin of $13.3 million for the three months ended March 31, 2020.

The change was primarily driven by lower activity coupled with fixed minimum levels of country overhead during the three months ended March 31, 2021.

We recorded a 71.1 percent decrease in operating revenue during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels.

Direct operating expenses decreased to $16.7 million during the three months ended March 31, 2021 as compared to $38.0 million during the three months ended March 31, 2020.

The decrease was driven by the factors described above.

Asset Impairment Charge During the three months ended March 31, 2021, we recorded no impairment charges, compared to an impairment charge of $156.7 million ($123.8 million net of tax, or $1.45 per diluted share) for the three months ended March 31, 2020.

Segment Gross Margin The International Solutions segment gross margin was $(1.4) million for the three months ended June 30, 2021 compared to a gross margin of $(5.1) million for the three months ended June 30, 2020.

The change was primarily driven by lower activity levels offset by fixed minimum levels of country overhead during the three months ended June 30, 2021.

We had a 32.0 percent decrease in operating revenue during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Direct operating expenses decreased to $16.7 million during the three months ended June 30, 2021 as compared to $27.6 million during the three months ended June 30, 2020.

This decrease in both operating revenue and expense was driven by lower activity levels.

Restructuring Charges For the three months ended June 30, 2021 and 2020, we incurred $0.2 million and $2.3 million in restructuring charges, respectively.

During the three months ended June 30, 2021, we commenced a voluntary separation program at our local office in Argentina for which we incurred one-time severance charges for employees who were voluntarily terminated.

Charges incurred during the three months ended June 30, 2020 primarily consisted of employee termination benefits that resulted from our reduction in staffing levels.

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 March 31,

Three Months Ended June 30,

(in thousands) 2021 2020 % Change

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Selling, general and administrative expense 261 309 (15.5)

Restructuring charges — 267 (100.0)

Operating income (loss) $ (4,670) $ 4,389 (206.4)

Gross Margin On October 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 $2.3 million and $6.0 million allocated to the Captive during the three months ended March 31, 2021 and 2020, 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 ended March 31, 2021.

Intercompany premium revenues recorded by the Captive during the three months ended March 31, 2021 and 2020 amounted to $8.7 million and $10.5 million, respectively, which were eliminated upon consolidation.

Results of Operations for the Six Months Ended March 31, 2021 and 2020

Direct operating costs consisted primarily of adjustments to accruals for estimated losses of $6.0 million and $1.1 million allocated to the Captive during the three months ended June 30, 2021 and 2020, respectively.

The increase in estimated losses is primarily due to revised estimates of probable losses related to an open claim associated with an incident that occurred in the period covered by the Captive.

Intercompany premium revenues recorded by the Captive during the three months ended June 30, 2021 and 2020 amounted to $9.4 million and $10.4 million, respectively, which were eliminated upon consolidation.

Results of Operations for the Nine Months Ended June 30, 2021 and 2020

Consolidated Results of Operations

Net Loss We reported a loss from continuing operations of $201.2 million ($1.87 loss per diluted share) from operating revenues of $542.5 million for the six months ended March 31, 2021 compared to a loss from continuing operations of $389.7 million ($3.61 loss per diluted share) from operating revenues of $1.2 billion for the six months ended March 31, 2020.

Included in the net loss for the six months ended March 31, 2021 is income of $9.8 million ($0.09 per diluted share) from discontinued operations.

Including discontinued operations, we recorded a net loss of $191.4 million ($1.78 loss per diluted share) for the six months ended March 31, 2021 compared to a net loss of $389.9 million ($3.61 loss per diluted share) for the six months ended March 31, 2020.

Research and Development For the six months ended March 31, 2021 and 2020, we incurred $10.9 million and $13.1 million, respectively, of research and development expenses.

Selling, General and Administrative Expense Selling, general and administrative expenses decreased to $78.7 million during the six months ended March 31, 2021 compared to $91.8 million during the six months ended March 31, 2020.

Net Loss We reported a loss from continuing operations of $257.9 million ($2.40 loss per diluted share) on operating revenues of $874.8 million for the nine months ended June 30, 2021 compared to a loss from continuing operations of $435.7 million ($4.05 loss per diluted share) on operating revenues of $1.6 billion for the nine months ended June 30, 2020.

Included in the net loss for the nine months ended June 30, 2021 is income of $10.9 million ($0.10 per diluted share) from discontinued operations.

Including discontinued operations, we recorded a net loss of $247.0 million ($2.30 loss per diluted share) for the nine months ended June 30, 2021 compared to a net loss of $435.5 million ($4.05 loss per diluted share) for the nine months ended June 30, 2020.

Research and Development For the nine months ended June 30, 2021 and 2020, we incurred $16.5 million and $16.7 million, respectively, of research and development expenses.

Selling, General and Administrative Expense Selling, general and administrative expenses decreased to $120.4 million during the nine months ended June 30, 2021 compared to $134.9 million during the nine months ended June 30, 2020.

The $14.5 million decrease in fiscal year 2021 compared to the same period in fiscal year 2020 is primarily due to a lower number of personnel, partially offset by higher accrued variable compensation expense.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale on the Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021.

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), which is included in asset impairment charge on the Unaudited Condensed Consolidated Statement of Operations for the six months ended March 31, 2021, compared to an impairment charge of $563.2 million ($437.5 million net of tax, or $5.21 per diluted share) for the six months ended March 31, 2020.

Restructuring Charges We incurred $1.7 million in restructuring expenses during the six months ended March 31, 2021.

These expenses were primarily comprised of one-time severance benefits to IT employees who were involuntarily terminated and one-time moving related expenses due to the downsizing and relocation of our Houston assembly facility.

Income Taxes We had an income tax benefit of $54.7 million for the six months ended March 31, 2021 (which includes discrete tax expense of approximately $4.1 million related to equity compensation) compared to income tax benefit of $99.3 million (which included discrete tax expense of approximately $2.4 million related to equity compensation) for the six months ended March 31, 2020.

Asset Impairment Charge During the nine months ended June 30, 2021, we undertook a plan to sell 71 Domestic non-super-spec rigs, all within our North America Solutions segment, the majority of which were previously decommissioned, written down and/or held as capital spares.

This resulted in an impairment charge of $56.4 million ($43.3 million, net of tax, or $0.40 per diluted share), which is included in asset impairment charge on the Unaudited Condensed Consolidated Statement of Operations for the nine months ended June 30, 2021.

Comparatively, during the nine months ended June 30, 2020, we recorded an asset impairment charge of $563.2 million ($438.6 million net of tax, or $5.21 per diluted share) resulting from impairment of several assets including rotational inventory, property, plant and equipment, and goodwill.

Restructuring Charges During the nine months ended June 30, 2021 and 2020, we incurred $3.9 million and $15.5 million, respectively, in restructuring charges.

The charges incurred during the nine months ended June 30, 2021 included $0.9 million in one-time severance benefits paid to employees who were voluntarily or involuntarily terminated coupled with charges of $3.0 million related to the relocation of the Houston assembly facility and the downsizing of storage yard facilities.

The charges incurred during the nine months ended June 30, 2020 were primarily comprised of $19.0 million in one-time severance benefits to employees who were voluntarily or involuntarily terminated, offset by a benefit of $3.5 million related to forfeitures and modifications of stock-based compensation awards.

Income Taxes We had an income tax benefit of $78.4 million for the nine months ended June 30, 2021 (which includes discrete tax benefits of approximately $1.9 million primarily related to a decrease in our deferred state income tax rate and equity compensation) compared to income tax benefit of $116.9 million (which includes discrete tax benefits of approximately $3.5 million primarily related to a decrease in our deferred state income tax rate, return to provision adjustments, and equity compensation) for the nine months ended June 30, 2020.

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

Six Months Ended March 31,

(in thousands, except operating statistics) 2021 2020 (1)

Nine Months Ended June 30,

(in thousands, except operating statistics) 2021 2020 % Change

Operating revenues $ 733,061 $ 1,325,076 (44.7)

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Segment gross margin 183,739 492,847 (62.7)

Depreciation 200,241 233,399 (14.2)

Depreciation and amortization 297,238 336,098 (11.6)

Research and development 16,400 15,871 3.3

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Reimbursements of "out-of-pocket" expenses $ 79,361 $ 164,540 (51.8)

(1) Operations previously reported within the H&P Technologies reportable segment are now managed and presented within the North America Solutions reportable segment.

(1) These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results.

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As a result, prior year comparative information is also provided above.

Segment Gross Margin The North America Solutions segment gross margin was $108.8 million for the six months ended March 31, 2021 compared to $391.1 million in the same period of fiscal year 2020.

The decrease was primarily driven by lower activity levels.

Revenues were $451.9 million and $1.1 billion in the six months ended March 31, 2021 and 2020, respectively.

The decline in operating revenue is primarily due to lower activity levels.

Included in revenues for the six months ended March 31, 2021 is early termination revenue of $5.8 million compared to $8.3 million during the same period of fiscal year 2020.

Segment Gross Margin The North America Solutions segment gross margin was $183.7 million for the nine months ended June 30, 2021 compared to $492.8 million in the same period of fiscal year 2020.

The decrease was primarily driven by lower activity levels, lower early termination revenue, lower average rig pricing, and higher rig recommissioning expenses.

Revenues were $733.1 million and $1.3 billion in the nine months ended June 30, 2021 and 2020, respectively.

The decrease in operating revenue is primarily due to the factors mentioned above.

Included in revenues for the nine months ended June 30, 2021 is early termination revenue associated with term contracts of $5.8 million compared to $57.1 million during the same period of fiscal year 2020.

Direct operating expenses decreased to $343.2 million during the six months ended March 31, 2021 as compared to $679.5 million during the six months ended March 31, 2020 primarily due to lower activity levels.

Depreciation Depreciation decreased to $200.2 million during the six months ended March 31, 2021 as compared to $233.4 million during the six months ended March 31, 2020.

The decrease was primarily attributable to the lower carrying cost of our impaired assets.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale..

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), for the six months ended March 31, 2021, compared to an impairment charge of $406.5 million ($313.7 million net of tax, or $3.76 per diluted share) for the six months ended March 31, 2020.

Restructuring Charges For the six months ended March 31, 2021, we incurred $1.6 million in restructuring charges.

Direct operating expenses decreased to $549.3 million during the nine months ended June 30, 2021 as compared to $832.2 million during the nine months ended June 30, 2020 primarily due to the factors mentioned above.

Depreciation Depreciation decreased to $297.2 million during the nine months ended June 30, 2021 as compared to $336.1 million during the nine months ended June 30, 2020.

The decrease was primarily attributable to rig impairments during fiscal year 2020 and ongoing low levels of capital expenditures.

This resulted in an impairment charge of $56.4 million ($43.3 million, net of tax, or $0.40 per diluted share), for the nine months ended June 30, 2021.

Comparatively, during the nine months ended June 30, 2020, we recorded an impairment charge of $406.5 million ($314.9 million net of tax, or $3.76 per diluted share) resulting from our impairment of our Domestic Conventional, FlexRig3, and FlexRig4 asset groups, in addition to our in-progress drilling equipment and rotational inventory.

Restructuring Charges During the nine months ended June 30, 2021 and 2020, we incurred $3.0 million and $7.2 million, respectively, in restructuring charges.

The charges incurred during the nine months ended June 30, 2021 primarily included charges of $2.9 million related to the relocation of the Houston assembly facility and the downsizing of storage yard facilities.

The charges incurred during the nine months ended June 30, 2020 were primarily comprised of $10.3 million in one-time severance benefits to employees who were voluntarily or involuntarily terminated, offset by a benefit of $3.0 million related to forfeitures and modifications of stock-based compensation awards.

Offshore Gulf of Mexico Operations Segment

Six Months Ended March 31,

Nine Months Ended June 30,

(in thousands, except operating statistics) 2021 2020 % Change

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Selling, general and administrative expense 1,895 3,293 (42.5)

Restructuring charges — 1,262 (100.0)

Segment operating income $ 11,427 $ 6,022 89.8

8 unchanged sentences

As a result, prior year comparative information is also provided above.

Segment Gross Margin During the six months ended March 31, 2021, the Offshore Gulf of Mexico segment gross margin was $12.2 million compared to a gross margin of $10.6 million for the six months ended March 31, 2020.

This increase was driven by the absence of $3.7 million of bad debt expense that was incurred during the six months ending March 31, 2020 and due to a rig that was mobilizing to the customer platform and generating losses during the six months ended March 31, 2020.

We recorded a 16.1 percent decrease in operating revenue during the six months ended March 31, 2021 compared to the six months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels partially offset by the mix of rigs working as compared to being on standby or mobilization rates.

Direct operating expenses decreased to $49.3 million during the six months ended March 31, 2021 as compared to $62.7 million during the six months ended March 31, 2020 and was primarily driven by the factors described above.

Segment Gross Margin During the nine months ended June 30, 2021, the Offshore Gulf of Mexico segment gross margin was $21.5 million compared to a gross margin of $19.2 million for the nine months ended June 30, 2020.

This increase was driven by the absence of $3.7 million of bad debt expense that was incurred during the nine months ended June 30, 2020.

We had a 14.4 percent decrease in operating revenue during the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020.

The decrease in operating revenue is primarily due to lower activity levels partially offset by the mix of rigs working as compared to being on standby or mobilization rates.

Direct operating expenses decreased to $73.5 million during the nine months ended June 30, 2021 as compared to $91.7 million during the nine months ended June 30, 2020.

The decrease was primarily driven by the factors described above.

Restructuring Charges We did not incur any restructuring charges during the nine months ended June 30, 2021.

During the nine months ended June 30, 2020, we incurred $1.3 million in restructuring charges.

Charges incurred during the nine months ended June 30, 2020 primarily consisted of employee termination benefits that resulted from our reduction in staffing levels.

International Solutions Operations Segment

Six Months Ended March 31,

Nine Months Ended June 30,

(in thousands, except operating statistics) 2021 2020 % Change

5 unchanged sentences

Asset impairment charge — 156,686 (100.0)

Restructuring charges 207 2,297 (91.0)

Segment operating loss $ (15,353) $ (158,894) (90.3)

8 unchanged sentences

As a result, prior year comparative information is also provided above.

Segment Gross Margin The International Solutions segment gross margin was $(8.9) million for the six months ended March 31, 2021 compared to a gross margin of $25.7 million for the six months ended March 31, 2020.

The change was primarily driven by lower activity levels coupled with fixed minimum levels of country overhead during the six months ended March 31, 2021.

We recorded a 74.1 percent decrease in operating revenue during the six months ended March 31, 2021 compared to the six months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels.

Direct operating expenses decreased to $34.2 million during the six months ended March 31, 2021 as compared to $72.0 million during the six months ended March 31, 2020 and was driven by the factors described above.

Asset Impairment Charge During the six months ended March 31, 2021, we recorded no impairment charges, compared to an impairment charge of $156.7 million ($123.8 million net of tax, or $1.45 per diluted share) for the six months ended March 31, 2020.

Segment Gross Margin The International Solutions segment gross margin was $(10.3) million for the nine months ended June 30, 2021 compared to a gross margin of $20.6 million for the nine months ended June 30, 2020.

The change was primarily driven by lower activity levels coupled with fixed minimum levels of country overhead during the nine months ended June 30, 2021.

We had a 66.2 percent decrease in operating revenue during the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020.

The decrease in operating revenue is primarily due to lower activity levels.

Direct operating expenses decreased to $50.9 million during the nine months ended June 30, 2021 as compared to $99.6 million during the nine months ended June 30, 2020 and was driven by the factors described above.

Asset Impairment Charge During the nine months ended June 30, 2021, we recorded no impairment charges, compared to an impairment charge of $156.7 million ($123.8 million net of tax, or $1.45 per diluted share) for the nine months ended June 30, 2020.

Restructuring Charges For the nine months ended June 30, 2021 and 2020, we incurred $0.2 million and $2.3 million in restructuring charges, respectively.

During the nine months ended June 30, 2021, we commenced a voluntary separation program at our local office in Argentina for which we incurred one-time severance charges for employees who were voluntarily terminated.

Charges incurred during the nine months ended June 30, 2020 primarily consisted of employee termination benefits that resulted from our reduction in staffing levels.

Other Operations

Results of our other operations, excluding corporate restructuring charges, corporate selling, general and administrative costs and corporate depreciation, are as follows:

Six Months Ended March 31,

Nine Months Ended June 30,

(in thousands) 2021 2020 % Change

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Selling, general and administrative expense 953 796 19.7

Restructuring charges — 267 (100.0)

Operating income (loss) $ (1,631) $ 3,704 (144.0)

Gross Margin On October 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 $2.8 million and $14.7 million allocated to the Captive during the six months ended March 31, 2021 and 2020, 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 six months ended March 31, 2021.

Intercompany premium revenues recorded by the Captive during the six months ended March 31, 2021 and 2020 amounted to $15.8 million and $18.2 million, respectively, which were eliminated upon consolidation.

Direct operating costs consisted primarily of adjustments to accruals for estimated losses of $8.8 million and $15.8 million allocated to the Captive during the nine months ended June 30, 2021 and 2020, respectively.

The decrease in estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary as well as lower activity levels.

Intercompany premium revenues recorded by the Captive during the nine months ended June 30, 2021 and 2020 amounted to $25.2 million and $28.9 million, respectively, which were eliminated upon consolidation.

Liquidity and Capital Resources

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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 short‑term money market and debt securities.

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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.

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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.

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.

Our cash flows fluctuate depending on a number of factors, including, among others, the number of our drilling rigs under contract, the revenue we receive under those contracts, the efficiency with which we operate our drilling units, the timing of collections on outstanding accounts receivable, the timing of payments to our vendors for operating costs, and capital expenditures, all of which was impacted by the COVID-19 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 of March 31, 2021, we had $427.2 million of cash and cash equivalents on hand and $134.5 million of short-term investments.

Our cash flows for the six months ended March 31, 2021 and 2020 are presented below:

Six Months Ended March 31,

As of June 30, 2021, we had $370.6 million of cash and cash equivalents on hand and $187.3 million of short-term investments.

Our cash flows for the nine months ended June 30, 2021 and 2020 are presented below:

Nine Months Ended June 30,

(in thousands) 2021 2020

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Financing activities (84,944) (265,976)

Net decrease in cash and cash equivalents and restricted cash $ (58,112) $ (2,752)

Net increase (decrease) in cash and cash equivalents and restricted cash $ (114,875) $ 93,253

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 cash equivalents, short-term investments, and assets held-for-sale, less current liabilities, excluding dividends payable, short-term debt and the current portion of long-term debt.

Operating net working capital was $179.5 million as of March 31, 2021 compared to $194.2 million as of September 30, 2020.

The sequential decrease in net working capital was primarily driven by the collection of a $32.1 million income tax receivable during the three months ended March 31, 2021, partially offset by activity-driven increases in other components of our operating net working capital.

Included in accounts receivable as of March 31, 2021 was $18.9 million of income tax receivables.

Cash flows provided by operating activities were approximately $58.8 million and $232.6 million for the six months ended March 31, 2021 and 2020, respectively.

The decrease in cash provided by operating activities is primarily driven by lower operating activity.

Operating net working capital was $177.7 million as of June 30, 2021 compared to $194.2 million as of September 30, 2020.

The sequential decrease in net working capital was primarily driven by the collection of a $32.1 million income tax receivable during the second quarter of fiscal year 2021, partially offset by activity-driven increases in other components of our operating net working capital.

Included in accounts receivable as of June 30, 2021 was $23.1 million of income tax receivables.

Cash flows provided by operating activities were approximately $89.8 million and $446.3 million for the nine months ended June 30, 2021 and 2020, respectively.

The decrease in cash provided by operating activities is primarily driven by lower operating activity and lower pricing.

Investing Activities

Capital Expenditures Our capital expenditures during the six months ended March 31, 2021 were $30.7 million compared to $94.3 million during the six months ended March 31, 2020.

Capital Expenditures Our capital expenditures during the nine months ended June 30, 2021 were $49.2 million compared to $121.0 million during the nine months ended June 30, 2020.

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 six months ended March 31, 2021 were $43.0 million compared to net sales of $7.6 million during the six months ended March 31, 2020.

Purchase of Investments Our net purchases of investments during the nine months ended June 30, 2021 were $97.4 million compared to net purchases of $12.3 million during the nine months ended June 30, 2020.

The increase in purchases is attributable to our strategy to optimize our returns on investment.

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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 of March 31, 2021, our marketable securities primarily consist of common shares in Schlumberger, Ltd.

that, at the close of the second quarter of fiscal year 2021, had a fair value of $12.7 million.

Equity Securities As of June 30, 2021, our equity securities primarily consist of common shares in Schlumberger, Ltd.

that, at the close of the third quarter of fiscal year 2021, had a fair value of $15.0 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.

This investment is recorded at fair value on our Unaudited Condensed Consolidated Balance Sheets.

Financing Activities

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The repurchases may be made using our cash and cash equivalents or other available sources.

We had no purchases of common shares during the six months ended March 31, 2021.

We had $28.5 million cash outflow for repurchases of common shares during the six months ended March 31, 2020.

Dividends We paid dividends of $0.50 and $1.42 per share during the six months ended March 31, 2021 and 2020, respectively.

Total dividends paid were $54.2 million and $155.9 million during the six months ended March 31, 2021 and 2020, respectively.

A cash dividend of $0.25 per share was declared on March 3, 2021 for shareholders of record on May 17, 2021, payable on June 1, 2021.

We had a $28.5 million cash outflow for repurchases of common shares during the nine months ended June 30, 2020.

There were no purchases of common shares during the nine months ended June 30, 2021.

Dividends We paid dividends of $0.75 and $2.13 per share during the nine months ended June 30, 2021 and 2020, respectively.

Total dividends paid were $81.8 million and $233.1 million during the nine months ended June 30, 2021 and 2020, respectively.

A cash dividend of $0.25 per share was declared on June 2, 2021 for shareholders of record on August 17, 2021, payable on August 31, 2021.

The declaration and amount of future dividends is at the discretion of the Board and subject to our financial condition, results of operations, cash flows, and other factors the Board deems relevant.

Credit Facilities

On November 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 on November 13, 2019, providing for an unsecured revolving credit facility (as amended, the “2018 Credit Facility”), that is set to mature on November 13, 2024.

No other terms of the 2018 Credit Facility were amended in connection with this extension.

The remaining $70.0 million of commitments under the 2018 Credit Facility will expire on November 13, 2024, unless extended by the applicable lender before such date.

The 2018 Credit Facility has $750.0 million in aggregate availability with a maximum of $75.0 million available for use as letters of credit.

As of March 31, 2021, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility.

As of June 30, 2021, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility.

For a full description of the 2018 Credit Facility, see Note 8—Debt to the consolidated financial statements in our 2020 Annual Report on Form 10-K.

As of March 31, 2021, we had 2 outstanding letters of credit with banks, in the amounts of $24.8 million and $2.1 million, respectively.

As of March 31, 2021, we also had a $20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds.

Of the $20.0 million, $1.8 million of financial guarantees were outstanding as of March 31, 2021.

As of June 30, 2021, we had two outstanding letters of credit with banks, in the amounts of $24.8 million and $2.1 million, respectively.

As of June 30, 2021, we also had a $20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds.

Of the $20.0 million, $1.8 million of financial guarantees were outstanding as of June 30, 2021.

The applicable agreements for all unsecured debt contain additional terms, conditions and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.

At March 31, 2021, we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2021.

See Note 17—Subsequent Events.

At June 30, 2021, we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2021.

On December 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").

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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 at March 31, 2021 and matures on March 19, 2025.

As of March 31, 2021, we had a $604.5 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.

Our indebtedness under our unsecured senior notes totaled $487.1 million at June 30, 2021 and matures on March 19, 2025.

As of June 30, 2021, we had a $584.6 million deferred tax liability on our Unaudited Condensed Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment.

Our levels of capital expenditures over the last several years have been subject to accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, enabling us to defer a portion of cash tax payments to future years.

Future levels of capital expenditures and results of operations will determine the timing and amount of future cash tax payments.

We expect to be able to meet any such obligations utilizing cash and investments on hand, as well as cash generated from ongoing operations.

The long-term debt to total capitalization ratio was 13.6 percent and 12.8 percent at March 31, 2021 and September 30, 2020, respectively.

The long-term debt to total capitalization ratio was 13.9 percent and 12.8 percent at June 30, 2021 and September 30, 2020, respectively.

For additional information regarding debt agreements, refer to Note 6—Debt to the Unaudited Condensed Consolidated Financial Statements.

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Material Commitments

Material commitments as reported in our 2020 Annual Report on Form 10-K have not changed significantly at March 31, 2021, other than those disclosed in Note 14—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements.

Material commitments as reported in our 2020 Annual Report on Form 10-K have not changed significantly at June 30, 2021, other than those disclosed in Note 13—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis