What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-27 compared with 2022-01-31 · 359 added, 165 removed, 207 unchanged (72% of the section changed)

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The inclusion of such statements should not be regarded as a representation that such plans, estimates, or expectations will be achieved.

These forward-looking statements include, among others, information concerning our possible or assumed future results of operations and statements about the following subjects as:

These forward-looking statements include, among others, information concerning our possible or assumed future results of operations and statements about the following such as:

• our business strategy;

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• impact of federal and state legislative and regulatory actions and policies affecting our costs and increasing operation restrictions or delay and other adverse impacts on our business;

• impact of geopolitical developments and tensions, war and uncertainty in oil-producing countries;

• impact of geopolitical developments and tensions, war and uncertainty in oil-producing countries (including the invasion of Ukraine by Russia and any related political or economic responses and counter-responses or otherwise by various global actors or the general effect on the global economy);

• 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;

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• potential long-lived asset impairments;

• our sustainability strategy, including expectations, plans, or goals related to corporate responsibility, sustainability and environmental matters, and related reputational risks as a result of execution of this strategy.

• our sustainability strategy, including expectations, plans, or goals related to corporate responsibility, sustainability and environmental matters, and any related reputational risks as a result of execution of this strategy.

Important factors that could cause actual results to differ materially from our expectations or results discussed in the forward‑looking statements are disclosed in our 2021 Annual Report on Form 10-K under Item 1A— “Risk Factors,” and Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All subsequent written and oral forward‑looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by such cautionary statements.

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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 December 31, 2021, our drilling rig fleet included a total of 271 drilling rigs.

Our reportable operating business segments consist of the North America Solutions segment with 236 rigs, the Offshore Gulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 28 rigs as of December 31, 2021.

At the close of the first quarter of fiscal year 2022, we had 166 contracted rigs, of which 88 were under a fixed-term contract and 78 were working well-to-well, compared to 137 contracted rigs at September 30, 2021.

As of March 31, 2022, our drilling rig fleet included a total of 271 drilling rigs.

At the close of the second quarter of fiscal year 2022, we had 181 contracted rigs, of which 106 were under a fixed-term contract and 75 were working well-to-well, compared to 137 contracted rigs at September 30, 2021.

Our long-term strategy remains focused on innovation, technology, safety, operational excellence and reliability.

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Accordingly, we believe we are well positioned to respond to various market conditions.

In early March 2020, the increase in crude oil supply resulting from production escalations from the Organization of the Petroleum Exporting Countries and other oil producing nations ("OPEC+") combined with a decrease in crude oil demand stemming from the global response and uncertainties surrounding the COVID-19 pandemic resulted in a sharp decline in crude oil prices.

In early March 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 America 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.

Crude oil prices stabilized during the back half of calendar 2020 and were in the $40 to $50 per barrel range as customers set their capital budgets for calendar year 2021.

During calendar 2021 crude oil prices continued to increase, reaching more than $70 per barrel.

However, as expected, rig activity did not move in tandem with crude oil prices to the same extent it had historically as a large portion of our customers have a more disciplined approach to their operations and capital spending in order to enhance their own financial returns.

As our customers establish their capital budgets for calendar year 2022, they are doing so in a higher crude oil price environment compared to a year ago, which suggests a higher level of capital spending in calendar year 2022 compared to calendar year 2021.

Additionally, higher commodity prices have allowed customers to repair strengthen their balance sheets following the 2020 downturn freeing up additional funds for investment.

Consequently, we anticipate a higher rig activity in fiscal 2022 relative to fiscal 2021.

Our North America Solutions active rigs count has more than tripled from 47 rigs in August 2020 to 154 rigs at December 31, 2021.

The initial sizable increase in our rig count of 25 rigs occurred during our first fiscal quarter of 2021 as customers set their 2021 capital spending budgets followed by another 15 rig increase during the second fiscal quarter of 2021.

More recently the other sizable increase occurred during our first fiscal quarter of 2022 with an addition of another 27 rigs to our active rig count.

To date, our fiscal 2022 rig count increases appear to mirror those of 2021 as we expect to add somewhere between 11 and 21 rigs during the second fiscal quarter of 2022.

The capital budgets for calendar year 2022 established by our customers were done so in a higher crude oil price environment compared to the prior year, which suggests a higher level of capital spending and activity in calendar year 2022 compared to calendar year 2021.

Additionally, higher commodity prices have allowed customers to strengthen their balance sheets following the 2020 downturn freeing up additional funds for investment.

More recently the invasion of Ukraine by Russia caused crude oil prices to spike well above $100 per barrel.

However, as we have experienced in recent years, our customers have maintained a disciplined approach to their operations and kept capital spending levels as originally planned.

We have noted no material reaction in customer behavior resulting from the spike in crude oil prices.

In the U.S., the demand for super-spec rigs continues to strengthen following higher capital spending by E&Ps in both calendar year 2021 and year to date 2022.

While there is still idle super-spec rig capacity in the market, much of that idle capacity represents rigs that have not been active during the preceding two years and in some cases even longer.

Consequently, there are additional costs that would be incurred to bring those long-idled rigs back into working condition, which has resulted in upward pricing for super-spec rigs.

This supply-demand dynamic combined with the value proposition we provide our customers through our drilling expertise, high-quality FlexRig fleet, and automation technology has resulted in an improvement in our underlying contract economics.

We believe these improvements will become more apparent in the coming quarters as an increasing amount of our active rigs are re-priced at higher rates.

Our North America Solutions active rig count has more than tripled from 47 rigs in August 2020 to 171 rigs at March 31, 2022.

To date, our fiscal 2022 rig count increases appear to mirror those of 2021 with 27 rigs added during the first quarter and 17 rigs added during the second quarter of fiscal 2022 compared to 25 rigs and 15 rigs added for the same fiscal quarters in the prior year, respectively.

Considering the Company's disciplined approach to deploying capital, maintaining our fiscal year 2022 capital budget of $250 to $270 million, and given the current market dynamics, we expect our active count to grow at a much more muted pace during the remaining quarters in fiscal year 2022.

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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While we do not expect much change in our Offshore Gulf of Mexico segment, we see opportunities for improvement in our International Solutions segment, but those will likely occur on a more extended timeline compared to what we have experienced in the North America Solutions segment.

H&P recognizes the uncertainties and concerns caused by the ongoing COVID-19 pandemic;

however, we have managed the Company over time to be in a position of strength both financially and operationally when facing uncertainties of this magnitude.

The COVID-19 pandemic has had a significant financial impact on the Company, including increased costs as a result of labor shortages and logistics constraints.

The global response to coping with the pandemic resulted in a drop in demand for crude oil, which, when combined with a more than adequate supply of crude oil, resulted in a sharp decline in crude oil prices, causing our customers to have pronounced pullbacks in their operations and planned capital expenditures.

Despite the beginning of a recovery during 2021, the direct impact of COVID-19 on H&P's operations has created some challenges that we believe the Company is adequately addressing to ensure a robust continuation of our operations.

The health and safety of all H&P stakeholders - our employees, customers, and vendors - remains a top priority at the Company.

Accordingly, H&P has implemented additional policies and procedures designed to protect the well-being of our stakeholders and to minimize the impact of COVID-19 on our ongoing operations.

We are adhering 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.

As such, in the event that there are further government-imposed stay at home orders, we will continue to operate rigs and technology solutions, and provide valuable services to our customers in support of the global energy infrastructure.

Since the COVID-19 outbreak began, no rigs have been fully shut down (other than temporary shutdowns for disinfecting and the suspension for a certain period of time on one of our international rigs) and these temporary shutdowns have not had a significant impact on service.

We believe our service levels are unchanged from pre-pandemic levels.

The nature of the COVID-19 pandemic is inherently uncertain, and as a result, the Company is unable to reasonably estimate the duration and ultimate impacts of the pandemic, including the timing or level of any subsequent recovery.

As a result, the Company cannot be certain of the degree of impact on the Company’s business, results of operations and/or financial position for future periods.

From a financial perspective, we believe the Company is well positioned to continue to manage through a more protracted disruption caused by COVID-19 and the resulting oil price volatility.

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

The actions we took during fiscal year 2020 included a reduction to the annual dividend of approximately $200 million, a reduction of approximately $145 million in the fiscal year 2020 capital spend, a reduction of over $50 million in fixed operational overhead, and a reduction of selling, general and administrative expenses of more than $25 million on an annualized basis.

The culmination of these cost-saving initiatives resulted in a $16 million restructuring charge during fiscal year 2020.

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

These measures will result in an estimated annualized savings of more than $10 million with the full benefit expected to be realized in calendar year 2022.

We anticipate further cost reductions going forward;

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

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

On September 27, 2021, the Company delivered a conditional notice of optional full redemption for all of the outstanding 4.65 percent unsecured senior notes due 2025 (the "2025 Notes") at a redemption price calculated in accordance with the indenture governing the 2025 Notes, plus accrued and unpaid interest on the 2025 Notes to be redeemed.

On September 29, 2021, we issued $550.0 million aggregate principal amount of our 2.90 percent unsecured senior notes due 2031 (the "2031 Notes").

The Company’s obligation to redeem the 2025 Notes was conditioned upon the prior consummation of the issuance of the 2031 Notes, which was satisfied on September 29, 2021.

The proceeds from the offering of the 2031 Notes were used to redeem the 2025 Notes.

On October 27, 2021, we redeemed all of the outstanding 2025 Notes.

As a result, the associated make-whole premium of $56.4 million and the write off of the unamortized discount and debt issuance costs of $3.7 million were recognized during the first fiscal quarter of 2022 contemporaneously with the October 27, 2021 debt extinguishment and recorded in Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated Statements of Operations..

See “—Liquidity and Capital Resources—Senior Notes—2.90% Senior Notes due 2031” below and Note 6—Debt to our Consolidated Financial Statements for more information.

At December 31, 2021, the Company had cash and cash equivalents and short-term investments of $441.3 million and availability under the 2018 Credit Facility (as defined herein) of $750.0 million resulting in approximately $1.2 billion in near-term liquidity.

We currently do not anticipate the need to draw on the 2018 Credit Facility.

As part of the Company's normal operations, we regularly monitor the creditworthiness of our customers and vendors, screening out those that we believe have a high risk of failure to honor their counter-party obligations either through payment or delivery of goods or services.

We also perform routine reviews of our accounts receivable and other amounts owed to us to assess and quantify the ultimate collectability of those amounts.

At December 31, 2021 and September 30, 2021, the Company had a net allowance against its accounts receivable of $1.7 million and $2.1 million, respectively.

From a financial perspective, we believe the Company is well positioned to manage through events, even protracted ones, that may result from market disruptions and the related commodity price volatility.

More recent events, like the COVID-19 global pandemic and the Russian invasion of Ukraine, have elevated commodity price volatility and have other far reaching global market ramifications.

The direct impacts of the COVID-19 pandemic on the Company have diminished significantly as health guidelines and restrictions have eased in most jurisdictions in which we operate.

Recently, the conflict between the Russian Federation and Ukraine, and the international and social sanctions in reaction to the conflict have resulted in an increase in commodity price volatility.

The Company does not have any operations in the Russia Federation, Ukraine or adjacent regions and therefore our rig activity levels are not directly impacted by this conflict.

While we do not have supplies originating in these countries, the conflict may create some inflationary pressures within our supply chain.

Recent Developments

Investments in Geothermal

During the three months ended December 31, 2021, we purchased an additional $9.0 million in geothermal investments consisting of both debt and equity securities.

Investments were made in two separate companies that are pursuing technological concepts to make unconventional geothermal energy a viable economic renewable energy source.

One company’s focus is centered on an enhanced geothermal system concept that utilizes horizontal drilling and fiber-optic sensing.

The other company’s focus is on a closed-loop concept that uses horizontal multilateral wellbores and proprietary working fluid.

Both concepts are designed to harvest geothermal heat to create carbon-free, baseload energy.

Our aggregate balance of investments in geothermal companies was $11.8 million at December 31, 2021.

Investments in Geothermal Energy

During the six months ended March 31, 2022 , we made an additional $14.1 million in geothermal energy investments consisting of both debt and equity securities.

Investments were made in four separate companies that are pursuing technological concepts to make unconventional geothermal energy a viable economic renewable energy source.

These companies are developing an enhanced geothermal system ("EGS") and closed loop concepts.

The EGS concept uses horizontal drilling, induced permeability, and fiber optic sensing.

The closed loop concepts use multilateral wellbores, propriety working fluid, or coaxial pipe configurations.

All of these concepts are designed to harvest geothermal heat to create carbon-free, baseload energy.

Our aggregate balance of investments in geothermal energy companies was $16.9 million at March 31, 2022 .

Investment in ADNOC Drilling

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We have applied the guidance in Topic 820, Fair Value Measurement, in the initial accounting of the transaction and the subsequent revaluation of the investment balance, concluding that a contractual restriction on the sale of an equity security that is publicly traded is not considered in measuring fair value.

During the three months ended December 31, 2021, we recognized a gain of $47.7 million in our Unaudited Condensed Consolidated Statement of Operations.

As of December 31, 2021, this investment is classified as a Level 1 investment and based on the quoted stock price on the Abu Dhabi Securities Exchange, without applying a discount factor.

During the three and six months ended March 31, 2022, we recognized a gain of $16.7 million and $64.5 million, respectively, in our Unaudited Condensed Consolidated Statement of Operations.

As of March 31, 2022, this investment is classified as a Level 1 investment and based on the quoted stock price on the Abu Dhabi Securities Exchange, without applying a discount factor.

Investment in Galileo Technologies

During April 2022, the Company made a $33.0 million cornerstone investment in an affiliate of Galileo Technologies ("Galileo") in the form of a convertible note.

The convertible note bears interest at 5% per annum and matures on April 2027.

If the conversion option is exercised, the note would convert into common shares of Galileo.

One of our Directors is an independent director of Galileo.

This Director does not have a direct or indirect material interest in the transaction and was not involved in the negotiations or any approvals related to the transaction.

Contract Backlog

As of December 31, 2021 and September 30, 2021, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $723.5 million and $572.0 million, respectively.

As of March 31, 2022 and September 30, 2021, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $727.7 million and $572.0 million, respectively.

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

The increase in backlog at December 31, 2021 from September 30, 2021 is primarily due to an increase in the number of longer term drilling contracts executed.

Approximately 33.7 percent of the December 31, 2021 total backlog is reasonably expected to be fulfilled in fiscal year 2023 and thereafter.

The following table sets forth the total backlog by reportable segment as of December 31, 2021 and September 30, 2021, and the percentage of the December 31, 2021 backlog reasonably expected to be fulfilled in fiscal year 2023 and thereafter:

(in millions) December 31, 2021 September 30, 2021 Percentage Reasonably Expected to be Filled in Fiscal Year 2023 and Thereafter

The increase in backlog at March 31, 2022 from September 30, 2021 is primarily due to an increase in the number of fixed term drilling contracts executed.

Approximately 39.8 percent of the March 31, 2022 total backlog is reasonably expected to be fulfilled in fiscal year 2023 and thereafter.

The following table sets forth the total backlog by reportable segment as of March 31, 2022 and September 30, 2021, and the percentage of the March 31, 2022 backlog reasonably expected to be fulfilled in fiscal year 2023 and thereafter:

(in millions) March 31, 2022 September 30, 2021 Percentage Reasonably Expected to be Filled in Fiscal Year 2023 and Thereafter

North America Solutions $ 534.2 $ 429.6 29.7 %

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$ 727.7 $ 572.0

$ 723.5 $ 572.0

(1) Subsequent to December 31, 2021, we received notice from an International Solutions customer of their intent to early terminate a fixed-term drilling services contract.

Due to the notification being received subsequent to December 31, 2021, the backlog as of December 31, 2021 includes approximately $22.0 million of future dayrate revenue related to this contract.

The early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations and cash flows.

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Risk Factors – The impact and effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, have adversely affected and are expected to continue to adversely affect our business, financial condition and results of operations" within our 2021 Annual Report on Form 10-K.

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

Results of Operations for the Three Months Ended March 31, 2022 and 2021

Consolidated Results of Operations

Net Loss We reported a loss from continuing operations of $58.9 million ($0.48 loss per diluted share) on operating revenues of $409.8 million for the three months ended December 31, 2021 compared to a loss from continuing operations of $77.9 million ($0.73 loss per diluted share) on operating revenues of $246.4 million for the three months ended December 31, 2020.

Included in the net loss for the three months ended December 31, 2021 is a loss of $31.0 thousand (with no impact on a per diluted share basis) from discontinued operations.

Including discontinued operations, we recorded a net loss of $51.4 million ($0.48 loss per diluted share) for the three months ended December 31, 2021 compared to a net loss of $70.4 million ($0.66 loss per diluted share) for the three months ended December 31, 2020.

Selling, General and Administrative Expense Selling, general and administrative expenses increased to $43.7 million during the three months ended December 31, 2021 compared to $39.3 million during the three months ended December 31, 2020.

The $4.4 million increase in fiscal year 2022 compared to the same period in fiscal year 2021 is primarily due to higher professional services fees.

Asset Impairment Charge During the three months ended December 31, 2021, we identified two partial rig substructures and two international FlexRig ® drilling rigs that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets.

The combined net book value of the rig substructures of $2.0 million were written down to their estimated scrap value of $0.1 million, resulting in a non-cash impairment charge of $1.9 million within our North America Solutions segment during the three months ended December 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations.

In conjunction with establishing a plan to sell the two international FlexRig ® drilling rigs, we recognized a non-cash impairment charge of $2.5 million within our International Solutions segment during the three months ended December 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations, as the rigs aggregate net book value of $3.4 million exceeded the fair value of the rigs less estimated cost to sell of $0.9 million.

Gain on Investment Securities In September 2021 H&P purchased a cornerstone equity investment consisting of 159.7 million shares for $100.0 million as part of ADNOC Drilling's initial public offering.

Net Loss We reported a loss from continuing operations of $4.6 million ($0.05 loss per diluted share) on operating revenues of $467.6 million for the three months ended March 31, 2022 compared to a loss from continuing operations of $123.3 million ($1.15 loss per diluted share) on operating revenues of $296.2 million for the three months ended March 31, 2021.

Included in the net loss for the three months ended March 31, 2022 is a loss of $0.4 million (with no impact on a per diluted share basis) from discontinued operations.

Including discontinued operations, we recorded a net loss of $5.0 million ($0.05 loss per diluted share) for the three months ended March 31, 2022 compared to a net loss of $121.0 million ($1.13 loss per diluted share) for the three months ended March 31, 2021.

Selling, General and Administrative Expense Selling, general and administrative expenses increased to $47.1 million during the three months ended March 31, 2022 compared to $39.3 million during the three months ended March 31, 2021.

The $7.8 million increase in fiscal year 2022 compared to the same period in fiscal year 2021 is primarily due to increases in IT infrastructure spending and professional services fees.

Asset Impairment Charge During the three months ended March 31, 2022, we reported no asset impairment charge in the Unaudited Condensed Consolidated Statement of Operations, compared to an impairment charge of $54.3 million for the three months ended March 31, 2021.

Gain on Investment Securities In September 2021, the Company made a cornerstone equity investment consisting of 159.7 million shares for $100.0 million as part of ADNOC Drilling's initial public offering.

This investment is subject to a three-year lock-up period.

During the three months ended December 31, 2021 we recognized a gain of $47.7 million due to an increase in the fair market value of the stock.

During the three months ended March 31, 2022 we recognized a gain of $16.7 million due to an increase in the fair market value of the stock.

Income Taxes We have historically calculated our provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full year to pre-tax income or loss, excluding discrete items, for the reporting period.

We used a discrete effective tax rate method to calculate income taxes for the three months ended March 31, 2022 as we determined the historical annualized effective rate method would not provide a reliable estimate for the three months ended March 31, 2022.

We anticipate utilizing the discrete effective tax rate method to calculate the provision for income taxes for the remainder of this fiscal year.

For the three months ended March 31, 2022, we had an income tax expense of $2.7 million compared to an income tax benefit of $36.6 million for the three months ended March 31, 2021.

Our statutory federal income tax rate for fiscal year 2022 is 21.0 percent (before incremental state and foreign taxes).

North America Solutions

Three Months Ended March 31,

(in thousands, except operating statistics) 2022 2021

Operating revenues $ 408,814 $ 249,939 63.6

Direct operating expenses 294,397 185,841 58.4

Depreciation and amortization 95,817 99,917 (4.1)

Research and development 6,420 5,329 20.5

Selling, general and administrative expense 10,883 12,960 (16.0)

Asset impairment charge — 54,284 (100.0)

Restructuring charges — 1,442 (100.0)

Segment operating income (loss) $ 1,297 $ (109,834) (101.2)

Financial Data and Other Operating Statistics 1 :

Direct margin (Non-GAAP) 2

114,417 64,098 78.5

Revenue days 3

14,752 9,454 56.0

Average active rigs 4

Number of active rigs at the end of period 5

Number of available rigs at the end of period 236 242 (2.5)

Reimbursements of "out-of-pocket" expenses $ 46,664 $ 27,290 71.0

1) These operating metrics and financial data, including average active rigs, are provided to 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.

2) Direct margin, which is considered a non-GAAP metric, is defined as operating revenues less direct operating expenses and is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time.

See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin.

3) Defined as the number of contractual days we recognized revenue for during the period.

4) Active rigs generate revenue for the Company;

accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period.

This metric is calculated by dividing revenue days by total days in the applicable period (i.e.

5) Defined as the number of rigs generating revenue at the applicable end date of the time period.

Operating Revenues Operating revenues were $408.8 million and $249.9 million in the three months ended March 31, 2022 and 2021, respectively.

The 63.6 percent increase in operating revenue is primarily due to a 56.0 percent increase in activity levels and higher pricing levels.

Direct Operating Expenses Direct operating expenses increased to $294.4 million during the three months ended March 31, 2022 as compared to $185.8 million during the three months ended March 31, 2021.

The increase in direct operating expense was due to higher activity levels and an increase in field wages in December of 2021.

Depreciation and Amortization Depreciation and amortization decreased to $95.8 million during the three months ended March 31, 2022 as compared to $99.9 million during the three months ended March 31, 2021.

The decrease was primarily attributable to the termination of depreciation on the six rigs located in the US that were included in the ADNOC sale in fiscal year 2021 and ongoing relatively low levels of capital expenditures.

Asset Impairment Charge During the three months ended March 31, 2022, we reported no asset impairment charge, compared to an impairment charge of $54.3 million for the three months ended March 31, 2021.

Offshore Gulf of Mexico

Three Months Ended March 31,

(in thousands, except operating statistics) 2022 2021 % Change

Operating revenues $ 29,147 $ 29,274 (0.4)

Direct operating expenses 20,884 23,069 (9.5)

Depreciation 2,401 2,593 (7.4)

Selling, general and administrative expense 584 634 (7.9)

Segment operating income $ 5,278 $ 2,978 77.2

Financial Data and Other Operating Statistics 1 :

Direct margin (Non-GAAP) 2

8,263 6,205 33.2

Revenue days 3

Average active rigs 4

Number of active rigs at the end of period 5

Number of available rigs at the end of period 7 7 —

Reimbursements of "out-of-pocket" expenses $ 5,809 $ 5,193 11.9

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

See — Non-GAAP Measurements below for a reconciliation of segment operating income to direct margin.

3) Defined as the number of contractual days we recognized revenue for during the period.

4) Active rigs generate revenue for the Company;

accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period.

This metric is calculated by dividing revenue days by total days in the applicable period (i.e.

5) Defined as the number of rigs generating revenue at the applicable end date of the time period.

Operating Revenues Operating revenues were $29.1 million and $29.3 million in the three months ended March 31, 2022 and 2021, respectively.

The 0.4 percent decrease was primarily driven by the mix of rigs working at full rates as compared to being on lower standby or mobilization rates.

Direct Operating Expenses Direct operating expenses decreased to $20.9 million during the three months ended March 31, 2022 as compared to $23.1 million during the three months ended March 31, 2021.

The decrease was primarily driven by a favorable adjustment in self-insurance liabilities related to prior period as well as the factors described above.

International Solutions

Three Months Ended March 31,

(in thousands, except operating statistics) 2022 2021 % Change

Operating revenues $ 27,422 $ 14,813 85.1

Direct operating expenses 25,171 16,718 50.6

Depreciation 1,049 415 152.8

Selling, general and administrative expense 2,050 1,138 80.1

Segment operating loss $ (848) $ (3,458) (75.5)

Financial Data and Other Operating Statistics 1 :

Direct margin (Non-GAAP) 2

2,251 (1,905) (218.2)

Revenue days 3

Average active rigs 4

Number of active rigs at the end of period 5

Number of available rigs at the end of period 28 32 (12.5)

Reimbursements of "out-of-pocket" expenses $ 1,226 $ 1,613 (24.0)

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

See — Non-GAAP Measurements below for a reconciliation of segment operating loss to direct margin.

3) Defined as the number of contractual days we recognized revenue for during the period.

4) Active rigs generate revenue for the Company;

accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period.

This metric is calculated by dividing revenue days by total days in the applicable period (i.e.

5) Defined as the number of rigs generating revenue at the applicable end date of the time period.

Operating Revenues Operating revenues increased to $27.4 million during the three months ended March 31, 2022 as compared to $14.8 million during the three months ended March 31, 2021.

The change was primarily driven by a 62 percent increase in activity as well as the mix of rigs working.

For the three months ended March 31, 2022, we reported $0.5 million in early termination revenue associated with term contracts compared to $1.9 million during the same period of fiscal year 2021.

Direct Operating Expenses Direct operating expenses increased to $25.2 million during the three months ended March 31, 2022 as compared to $16.7 million during the three months ended March 31, 2021.

This increase was primarily driven by higher activity levels.

Selling, General and Administrative Expense We recognized a $0.9 million increase in selling, general and administrative costs during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

This increase was primarily driven by higher compensation expense due to an increase in sales personnel.

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,

(in thousands) 2022 2021 % Change

Operating revenues $ 15,418 $ 10,825 42.4

Direct operating expenses 11,208 11,222 (0.1)

Depreciation 370 359 3.1

Research and development — 5 (100.0)

Selling, general and administrative expense 673 311 116.4

Operating income (loss) $ 3,167 $ (1,072) (395.4)

Operating Revenues On October 1, 2019, we elected to capitalize a new Captive insurance company to insure the deductibles for our domestic workers’ compensation, general liability and automobile liability claims programs, and to continue the practice of insuring deductibles from the Company's international casualty and rig property programs.

Intercompany premium revenues recorded by the Captives during the three months ended March 31, 2022 and 2021 amounted to $13.2 million and $8.7 million, respectively, which were eliminated upon consolidation.

Direct Operating Expenses Direct operating costs consisted primarily of $1.8 million and $2.3 million in adjustments to accruals for estimated losses allocated to the Captives and rig casualty insurance premiums of $7.9 million and $5.0 million during the three months ended March 31, 2022 and 2021, respectively.

The decrease in estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary.

Results of Operations for the Six Months Ended March 31, 2022 and 2021

Consolidated Results of Operations

Net Loss We reported a loss from continuing operations of $56.0 million ($0.53 loss per diluted share) on operating revenues of $877.4 million for the six months ended March 31, 2022 compared to a loss from continuing operations of $201.2 million ($1.87 loss per diluted share) on operating revenues of $542.5 million for the six months ended March 31, 2021.

Included in the net loss for the six months ended March 31, 2022 is a loss of $0.3 million (with no impact on a per diluted share basis) from discontinued operations.

Including discontinued operations, we recorded a net loss of $56.3 million ($0.53 loss per diluted share) for the six months ended March 31, 2022 compared to a net loss of $191.4 million ($1.78 loss per diluted share) for the six months ended March 31, 2021.

Selling, General and Administrative Expense Selling, general and administrative expenses increased to $90.8 million during the six months ended March 31, 2022 compared to $78.7 million during the six months ended March 31, 2021.

The $12.1 million increase in fiscal year 2022 compared to the same period in fiscal year 2021 is is primarily due to increases in IT infrastructure spending and professional services fees.

Asset Impairment Charge During the first quarter of fiscal year 2022, we identified two partial rig substructures and two international FlexRig® drilling rigs located in Colombia that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets.

The combined net book value of the rig substructures of $2.0 million were written down to their estimated scrap value of $0.1 million, resulting in a non-cash impairment charge of $1.9 million, within our North America Solutions segment and recorded in the Unaudited Condensed Consolidated Statement of Operations for the six months ended March 31, 2022, compared to an impairment charge of $54.3 million for the six months ended March 31, 2021.

In conjunction with establishing a plan to sell the two international FlexRig ® drilling rigs, we recognized a non-cash impairment charge of $2.5 million within our International Solutions segment and recorded in the Unaudited Condensed Consolidated Statement of Operations during the six months ended March 31, 2022, as the rigs aggregate net book value of $3.4 million exceeded the fair value of the rigs less estimated cost to sell of $0.9 million.

This investment is subject to a three-year lock-up period.

During the six months ended March 31, 2022 we recognized a gain of $64.5 million due to an increase in the fair market value of the stock.

Loss on Extinguishment of Debt On October 27, 2021, we redeemed all of the outstanding 2025 Notes.

Income Taxes We had an income tax benefit of $7.6 million for the three months ended December 31, 2021 (which includes Argentina income tax related to the drilling contract settlement with YPF and discrete tax expense of $3.5 million related to equity compensation) compared to an income tax benefit of $18.1 million (which includes discrete tax expense of approximately $4.1 million related to equity compensation) for the three months ended December 31, 2020.

We used a discrete effective tax rate method to calculate income taxes for the six months ended March 31, 2022 as we determined the historical annualized method would not provide a reliable estimate for the six months ended March 31, 2022.

We anticipate utilizing the discrete effective tax rate method to calculate the provision for income taxes for the remainder of this fiscal year.

For the six months ended March 31, 2022, we had an income tax benefit of $4.9 million compared to an income tax benefit of $54.7 million (which included discrete tax expense of approximately $4.1 million related to equity compensation) for the six months ended March 31, 2021.

Our statutory federal income tax rate for fiscal year 2022 is 21.0 percent (before incremental state and foreign taxes).

North America Solutions

Three Months Ended December 31,

Six Months Ended March 31,

(in thousands, except operating statistics) 2022 2021 % Change

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Direct operating expenses 550,965 343,150 60.6

Segment gross margin 84,466 44,681 89.0

Depreciation and amortization 189,438 200,241 (5.4)

4 unchanged sentences

Segment operating loss $ (27,596) $ (182,762) (84.9)

Operating Statistics (1) :

Financial Data and Other Operating Statistics 1 :

Direct margin (Non-GAAP) 2

198,883 108,779 82.8

Revenue days 3

27,698 16,916 63.7

Average active rigs 4

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Reimbursements of "out-of-pocket" expenses $ 89,793 $ 46,079 94.9

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

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

Segment Gross Margin The North America Solutions segment gross margin was $84.5 million for the three months ended December 31, 2021 compared to $44.7 million in the same period of fiscal year 2021.

The increase was primarily driven by a higher average active rig count.

Revenues were $341.0 million and $202.0 million in the three months ended December 31, 2021 and 2020, respectively.

The increase in operating revenue is primarily due to higher activity levels, partially offset by a decrease in early termination revenue.

For the three months ended December 31, 2021, we reported no early termination revenue associated with term contracts compared to $5.8 million during the same period of fiscal year 2021.

Direct operating expenses increased to $256.6 million during the three months ended December 31, 2021 as compared to $157.3 million during the three months ended December 31, 2020.

See — Non-GAAP Measurements below for a reconciliation of segment operating loss to direct margin.

3) Defined as the number of contractual days we recognized revenue for during the period.

4) Active rigs generate revenue for the Company;

accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period.

This metric is calculated by dividing revenue days by total days in the applicable period (i.e.

5) Defined as the number of rigs generating revenue at the applicable end date of the time period.

Operating Revenues Operating revenues were $749.8 million and $451.9 million during the six months ended March 31, 2022 and 2021, respectively.

The 65.9 percent increase in operating revenue is primarily due to a 63.7 percent increase in activity levels, partially offset by a decrease in early termination revenue.

For the six months ended March 31, 2022, we reported $0.2 million in early termination revenue associated with term contracts compared to $5.8 million during the same period of fiscal year 2021.

Direct Operating Expenses Direct operating expenses increased to $551.0 million during the six months ended March 31, 2022 as compared to $343.2 million during the six months ended March 31, 2021.

The increase in direct operating expense was due to higher activity levels and higher rig recommissioning expenses.

Depreciation and Amortization Depreciation and amortization decreased to $93.6 million during the three months ended December 31, 2021 as compared to $100.3 million during the three months ended December 31, 2020.

The decrease was primarily attributable to the termination of depreciation on the six US rigs included in the ADNOC sale in fiscal year 2021 and ongoing low levels of capital expenditures.

Asset Impairment Charge During the three months ended December 31, 2021, we identified two partial rig substructures that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets.

The combined net book value of these assets of $2.0 million were written down to their estimated scrap value of $0.1 million, resulting in a non-cash impairment charge of $1.9 million during the three months ended December 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations.

Depreciation and Amortization Depreciation and amortization decreased to $189.4 million during the six months ended March 31, 2022 as compared to $200.2 million during the six months ended March 31, 2021.

Asset Impairment Charge During the first quarter of fiscal year 2022, we identified two partial rig substructures that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets.

The combined net book value of these assets of $2.0 million were written down to their estimated scrap value of $0.1 million, resulting in a non-cash impairment charge of $1.9 million during the six months ended March 31, 2022 in the Unaudited Condensed Consolidated Statement of Operations, compared to an impairment charge of $54.3 million for the six months ended March 31, 2021.

Offshore Gulf of Mexico

Three Months Ended December 31,

Six Months Ended March 31,

(in thousands, except operating statistics) 2022 2021 % Change

1 unchanged sentence

Direct operating expenses 41,595 49,325 (15.7)

Segment gross margin 8,603 6,017 43.0

Depreciation 4,781 5,199 (8.0)

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Segment operating income $ 10,744 $ 5,720 87.8

Operating Statistics (1) :

Financial Data and Other Operating Statistics 1 :

Direct margin (Non-GAAP) 2

16,866 12,222 38.0

Revenue days 3

728 820 (11.2)

Average active rigs 4

2 unchanged sentences

Reimbursements of "out-of-pocket" expenses $ 11,884 $ 13,061 (9.0)

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

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

Segment Gross Margin During the three months ended December 31, 2021, the Offshore Gulf of Mexico segment gross margin was $8.6 million compared to a gross margin of $6.0 million for the three months ended December 31, 2020.

This increase was primarily driven by a favorable adjustment in self-insurance liabilities related to prior period claims and the mix of rigs working as compared to being on standby, or mobilization rates.

We had a 9.2 percent decrease in operating revenue during the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

Direct operating expenses decreased to $20.7 million during the three months ended December 31, 2021 as compared to $26.3 million during the three months ended December 31, 2020.

The decrease in operating revenue and expenses was primarily driven by the factors described above.

See — Non-GAAP Measurements below for a reconciliation of segment operating income to direct margin.

3) Defined as the number of contractual days we recognized revenue for during the period.

4) Active rigs generate revenue for the Company;

accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period.

This metric is calculated by dividing revenue days by total days in the applicable period (i.e.

5) Defined as the number of rigs generating revenue at the applicable end date of the time period.

Operating Revenues Operating revenues were $58.5 million and $61.5 million in the six months ended March 31, 2022 and 2021, respectively.

The 5.0 percent decrease was primarily driven by the mix of rigs working at full rates as compared to being on lower standby or mobilization rates.

Direct Operating Expenses Direct operating expenses decreased to $41.6 million during the six months ended March 31, 2021 as compared to $49.3 million during the six months ended March 31, 2021.

The decrease was primarily driven by a favorable adjustment in self-insurance liabilities related to prior period claims as well as the factors described above.

International Solutions

Three Months Ended December 31,

Six Months Ended March 31,

(in thousands, except operating statistics) 2022 2021 % Change

1 unchanged sentence

Direct operating expenses 49,302 34,241 44.0

Segment gross margin 13,028 (7,005) (286.0)

Depreciation 1,804 788 128.9

2 unchanged sentences

Segment operating income (loss) $ 7,201 $ (11,815) (160.9)

Operating Statistics (1) :

Financial Data and Other Operating Statistics 1 :

Direct margin (Non-GAAP) 2

15,279 (8,910) (271.5)

Revenue days 3

1,283 741 73.1

Average active rigs 4

2 unchanged sentences

Reimbursements of "out-of-pocket" expenses $ 2,669 $ 4,172 (36.0)

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

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

Segment Gross Margin The International Solutions segment gross margin was $13.0 million for the three months ended December 31, 2021 compared to a gross margin of $(7.0) million for the three months ended December 31, 2020.

The change was primarily driven by the settlement of a contractual dispute that was recognized in operating revenues.

See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin.

3) Defined as the number of contractual days we recognized revenue for during the period.

4) Active rigs generate revenue for the Company;

accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period.

This metric is calculated by dividing revenue days by total days in the applicable period (i.e.

5) Defined as the number of rigs generating revenue at the applicable end date of the time period.

Operating Revenues Operating revenues increased to $64.6 million during the six months ended March 31, 2022 as compared to $25.3 million during the six months ended March 31, 2021.

The change was primarily driven by a 73.1 percent increase in activity as well as the settlement of a contractual dispute that was recognized in operating revenues during the six months ended March 31, 2022.

Refer to Note 9—Revenue from Contracts with Customers for additional details.

Operating revenues increased to $37.2 million during the three months ended December 31, 2021 as compared to $10.5 million during the three months ended December 31, 2020.

Direct operating expenses increased to $24.1 million during the three months ended December 31, 2021 as compared to $17.5 million during the three months ended December 31, 2020.

This increase in both operating revenue and expense was primarily driven by higher activity levels and the settlement of a contractual dispute mentioned above.

Selling, General and Administrative Expense We recognized a $0.8 million increase in selling, general and administrative costs during the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

This increase was primarily driven by higher accrued variable compensation expense.

Asset Impairment Charge During the three months ended December 31, 2021, we identified two international FlexRig ® drilling rigs that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets.

In conjunction with establishing a plan to sell these rigs we recognized a non-cash impairment charge of $2.5 million during the three months ended December 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations, as the aggregate net book value of $3.4 million exceeded the fair value less estimated cost to sell of $0.9 million.

For the six months ended March 31, 2022, we reported $0.5 million in early termination revenue associated with term contracts compared to $1.9 million during the same period of fiscal year 2021.

Direct Operating Expenses Direct operating expenses increased to $49.3 million during the six months ended March 31, 2022 as compared to $34.2 million during the six months ended March 31, 2021.

This increase was primarily driven by higher activity levels partially offset by fixed cost leverage.

Selling, General and Administrative Expense We recognized a $1.7 million increase in selling, general and administrative costs during the six months ended March 31, 2022 compared to the six months ended March 31, 2021.

This increase was primarily driven by primarily driven by higher compensation expense due to an increase in sales personnel.

Asset Impairment Charge During the first quarter of fiscal year 2022, we identified two international FlexRig ® drilling rigs that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets.

In conjunction with establishing a plan to sell these rigs we recognized a non-cash impairment charge of $2.5 million during the six months ended March 31, 2021 in the Unaudited Condensed Consolidated Statement of Operations, as the aggregate net book value of $3.4 million exceeded the fair value less estimated cost to sell of $0.9 million.

Other Operations

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

Three Months Ended December 31,

Six Months Ended March 31,

(in thousands) 2022 2021 % Change

1 unchanged sentence

Direct operating expenses 22,528 14,972 50.5

Gross margin 4,603 4,968 (7.3)

Depreciation 715 718 (0.4)

2 unchanged sentences

Operating income $ 7,096 $ 3,039 133.5

Gross Margin On October 1, 2019, we elected to capitalize a new Captive insurance company to insure the deductibles for our domestic workers’ compensation, general liability and automobile liability claims programs, and to continue the practice of insuring deductibles from the Company's international casualty and rig property programs.

Direct operating costs consisted primarily $(2.2) million and $0.5 million in adjustments to accruals for estimated losses allocated to the Captives and rig casualty insurance premiums of $8.8 million and $2.5 million during the three months ended December 31, 2021 and 2020, respectively, and were recorded within drilling services operating expenses in our Unaudited Condensed Statement of Operations.

Intercompany premium revenues recorded by the Captives during the six months ended March 31, 2022 and 2021 amounted to $26.9 million and $15.8 million, respectively, which were eliminated upon consolidation.

Direct Operating Expenses Direct operating costs consisted primarily of $(0.4) million and $2.8 million in adjustments to accruals for estimated losses allocated to the Captives and rig casualty insurance premiums of $16.7 million and $7.5 million during the six months ended March 31, 2022 and 2021, respectively.

The decrease in estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary.

Intercompany premium revenues recorded by the Captives during the three months ended December 31, 2021 and 2020 amounted to $13.6 million and $7.1 million, respectively, which were eliminated upon consolidation.

Liquidity and Capital Resources

8 unchanged sentences

Agency issued debt securities, corporate bonds and commercial paper, certificates of deposit and money market funds.

Likewise, if we are generating excess cash flows or have cash balances on hand beyond our near-term needs, we generally invest in highly rated short‑term money market and debt securities.

These investments can include U.S.

Treasury securities, U.S.

Agency issued debt securities, corporate bonds and commercial paper, certificates of deposit and money market funds.

However, in some international locations we may make short-term investments that are less conservative, as equivalent highly rated investments are unavailable.

2 unchanged sentences

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 ongoing effects of the COVID-19 pandemic and the oil price collapse in 2020 have had significant ongoing adverse consequences for general economic, financial and business conditions, as well as for our business and financial position and the business and financial position of our customers, suppliers and vendors and may, among other things, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all and affect our future need or ability to borrow under the 2018 Credit Facility.

In addition to our potential sources of funding, the effects of such global events may impact our liquidity or need to alter our allocation or sources of capital, implement additional cost reduction measures and further change our financial strategy.

Although the COVID-19 pandemic and the oil price liquidity could have a broad range of effects on our sources and uses of liquidity, the ultimate effect thereon, if any, will depend on future developments, which cannot be predicted at this time.

Our cash flows fluctuate depending on a number of factors, including, among others, the number of our drilling rigs under contract, the revenue we receive under those contracts, the efficiency with which we operate our drilling units, the timing of collections on outstanding accounts receivable, the timing of payments to our vendors for operating costs, and capital expenditures, all of which was impacted by the COVID-19 pandemic and the oil price collapse in 2020.

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 rigs, the timing of collections on outstanding accounts receivable, the timing of payments to our vendors for operating costs, and capital expenditures.

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 December 31, 2021, we had $234.2 million of cash and cash equivalents on hand and $207.1 million of short-term investments.

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

Three Months Ended December 31,

As of March 31, 2022, we had $202.2 million of cash and cash equivalents on hand and $148.4 million of short-term investments.

Our cash flows for the six months ended March 31, 2022 and 2021 are presented below:

Six Months Ended March 31,

(in thousands) 2022 2021

Net cash used in:

Net cash provided by (used in):

Operating activities $ 18,896 $ 58,802

3 unchanged sentences

Operating Activities

Management believes that operating net working capital is important for the purpose of understanding the impact of our operating activities on our cash flows.

Operating net working capital is calculated as current assets, excluding cash and cash equivalents, short-term investments, and assets held-for-sale, less current liabilities, excluding dividends payable and short-term debt.

Operating net working capital was $78.5 million as of December 31, 2021 compared to $43.4 million as of September 30, 2021.

The sequential increase in net working capital was primarily driven by higher rig activity and seasonal payments of annual incentive compensation and ad valorem taxes.

Included in accounts receivable as of December 31, 2021 was $24.4 million of income tax receivables.

Cash flows used in operating activities were approximately $3.7 million and $19.6 million for the three months ended December 31, 2021 and 2020, respectively.

The change in cash used in operating activities is primarily driven by higher operating activity.

Our operating net working capital (non-GAAP) as of March 31, 2022 and September 30, 2021 is presented below:

March 31, September 30,

(in thousands) 2022 2021

Total current assets $ 918,496 $ 1,586,566

Cash and cash equivalents 202,206 917,534

Short-term investments 148,377 198,700

Assets held-for-sale 57,373 71,453

510,540 398,879

Total current liabilities 377,598 866,306

Dividends payable 26,697 27,332

Current portion of long-term debt, net — 483,486

Advance payment for sale of property, plant and equipment 78,793 86,524

$ 272,108 $ 268,964

Operating net working capital (non-GAAP) $ 238,432 $ 129,915

Cash flows provided by operating activities were approximately $18.9 million and $58.8 million for the six months ended March 31, 2022 and 2021, respectively.

The change in cash used in operating activities is primarily driven by changes in working capital.

For the six months ended March 31, 2022, working capital was a use of cash, while during the six months ended March 31, 2021, working capital was a source of cash.

Higher activity levels during the six months ended March 31, 2022, are an offsetting contribution to cash flow from operations.

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 advance payments for sale of property, plant and equipment.

Operating net working capital was $238.4 million as of March 31, 2022 compared to $129.9 million as of September 30, 2021.

This metric is considered a non-GAAP measure of the Company's liquidity.

The Company considers operating net working capital to be a supplemental measure for presenting and analyzing trends in our cash flows from operations over time.

Likewise, the Company believes that operating net working capital is useful to investors because it provides a means to evaluate the operating performance of the business using criteria that are used by our internal decision makers.

The sequential increase in operating net working capital was primarily driven by higher rig activity and seasonal payments of annual incentive compensation and ad valorem taxes.

Included in accounts receivable as of March 31, 2022 was $24.3 million of income tax receivables, a portion of which we expect to collect before the end of calendar year 2022.

Investing Activities

Capital Expenditures Our capital expenditures during the three months ended December 31, 2021 were $44.0 million compared to $14.0 million during the three months ended December 31, 2020.

Capital Expenditures Our capital expenditures during the six months ended March 31, 2022 were $104.5 million compared to $30.7 million during the six months ended March 31, 2021.

The increase is driven by higher activity and spending on walking rig conversions.

Purchase (Sales) of Short-Term Investments Our net purchases of short-term investments during the three months ended December 31, 2021 were $9.3 million compared to net purchases of $57.1 million during the three months ended December 31, 2020.

The decrease in net purchases is driven by our ongoing liquidity management.

Purchase of Long-Term Investments Our purchases of long-term investments during the three months ended December 31, 2021 were $9.0 million compared to $1.0 million during the three months ended December 31, 2020.

The increase is driven by additional purchases of geothermal investments made during the quarter.

Sale of Assets Our proceeds from asset sales during the three months ended December 31, 2021 were $21.5 million compared to proceeds of $6.8 million during the three months ended December 31, 2020.

The increase in proceeds is driven by the sale of our casing running and trucking assets and higher rig activity which drives higher reimbursement from customers for lost or damaged drill pipe.

Purchase (Sales) of Short-Term Investments Our net sales of short-term investments during the six months ended March 31, 2022 were $(48.9) million compared to net purchases of $41.9 million during the six months ended March 31, 2021.

The change is driven by our ongoing liquidity management.

Purchase of Long-Term Investments Our purchases of long-term investments during the six months ended March 31, 2022 were $14.1 million compared to $1.1 million during the six months ended March 31, 2021.

The increase is driven by purchases of geothermal investments made during the six months ended March 31, 2021.

Sale of Assets Our proceeds from asset sales during the six months ended March 31, 2022 were $34.9 million compared to proceeds of $13.4 million during the six months ended March 31, 2021.

The increase in proceeds is mainly driven by higher rig activity which drives higher reimbursement from customers for lost or damaged drill pipe.

The increase is also attributable to the sale of our casing running and trucking assets that occurred during the six months ended March 31, 2022.

Financing Activities

Dividends We paid dividends of $0.25 per share during the three months ended December 31, 2021 and 2020.

Total dividends paid were $27.3 million and $26.9 million during the three months ended December 31, 2021 and 2020, respectively.

A cash dividend of $0.25 per share was declared on September 1, 2021 for shareholders of record on November 23, 2021, payable on December 1, 2021.

Dividends We paid dividends of $0.50 per share during the six months ended March 31, 2022 and 2021.

Total dividends paid were $54.0 million and $54.2 million during the six months ended March 31, 2022 and 2021, respectively.

A cash dividend of $0.25 per share was declared on March 2, 2022 for shareholders of record on May 13, 2022, payable on May 27, 2022.

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.

1 unchanged sentence

As a result, the associated make-whole premium of $56.4 million was paid during the first fiscal quarter of 2022 contemporaneously with the October 27, 2021 debt extinguishment.

Repurchase of Shares We have an evergreen authorization from the Board of Directors (the "Board") for the repurchase of up to four million common shares in any calendar year.

Repurchase of Shares We have an evergreen authorization from the Board for the repurchase of up to four million common shares in any calendar year.

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

During the three months ended December 31, 2021, we repurchased 2.5 million common shares at an aggregate cost of $60.4 million, which are held as treasury shares.

During the six months ended March 31, 2021, we repurchased 3.2 million common shares at an aggregate cost of $77.0 million, which are held as treasury shares.

Credit Facilities

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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.

On March 8, 2022, we entered into the second amendment to the 2018 Credit Facility, which, among other things, raised the number of potential future extensions of the maturity date applicable to extending lenders from one to two such potential extensions and replaced provisions in respect of interest rate determinations that were based on the London Interbank Offered Rate with provisions based on the Secured Overnight Financing Rate.

Lenders with $680.0 million of commitments under the 2018 Credit Facility also exercised their option to extend the maturity of the 2018 Credit Facility from November 12, 2025 to November 11, 2026.

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 December 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 March 31, 2022, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility.

For a full description of the 2018 Credit Facility, see Note 7—Debt to the consolidated financial statements in our 2021 Annual Report on Form 10-K.

As of December 31, 2021, we had five separate bi-lateral credit facilities with banks with an aggregate outstanding balance of $30.4 million.

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

Of the $20.0 million, $5.8 million of financial guarantees were outstanding as of December 31, 2021.

As of March 31, 2022, we had four separate bi-lateral credit facilities with banks with an aggregate outstanding balance of $33.8 million.

As of March 31, 2022, we also had a $20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds.

Of the $20.0 million, $5.8 million of financial guarantees were outstanding as of March 31, 2022.

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 December 31, 2021, we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2022.

At March 31, 2022, we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2022.

2.90% Senior Notes due 2031 On September 29, 2021, we issued $550.0 million aggregate principal amount of the 2.90 percent 2031 Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act (“Rule 144A”) and to certain non-U.S.

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On October 27, 2021, we redeemed all of the outstanding 2025 Notes.

Future Cash Requirements

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We currently do not anticipate the need to draw on the 2018 Credit Facility.

Our indebtedness under our unsecured senior notes totaled $550.0 million at December 31, 2021 and matures on September 29, 2031.

As of December 31, 2021, we had a $545.9 million deferred tax liability on our Unaudited Condensed Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment.

Our indebtedness under our unsecured senior notes totaled $550.0 million at March 31, 2022 and matures on September 29, 2031.

During April 2022, the Company made a $33.0 million cornerstone investment in an affiliate of Galileo in the form of a convertible note.

Refer to Note 15—Subsequent Events for further details.

As of March 31, 2022, we had a $552.3 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.

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

At December 31, 2021, we had $4.6 million recorded for uncertain tax positions and related interest and penalties.

At March 31, 2022, we had $4.9 million recorded for uncertain tax positions and related interest and penalties.

However, the timing of such payments to the respective taxing authorities cannot be estimated at this time.

The long-term debt to total capitalization ratio was 16.5 percent and 15.9 percent at December 31, 2021 and September 30, 2021, respectively.

The long-term debt to total capitalization ratio was 16.7 percent and 15.9 percent at March 31, 2022 and September 30, 2021, 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 2021 Annual Report on Form 10-K have not changed significantly at December 31, 2021, other than those disclosed in Note 6—Debt and Note 13—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements.

Material commitments as reported in our 2021 Annual Report on Form 10-K have not changed significantly at March 31, 2022, other than those disclosed in Note 6—Debt and Note 13—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

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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.

Non-GAAP Measurements

Direct Margin

Direct margin is considered a non-GAAP metric.

We define "Direct margin" as operating revenues less direct operating expenses.

Direct margin is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time.

Direct margin is not a substitute for financial measures prepared in accordance with GAAP and should therefore be considered only as supplemental to such GAAP financial measures.

The following table reconciles direct margin to segment operating income (loss), which we believe is the financial measure calculated and presented in accordance with GAAP that is most directly comparable to direct margin.

Three Months Ended March 31, 2022

(in thousands) North America Solutions Offshore Gulf of Mexico International Solutions

Segment operating income (loss) $ 1,297 $ 5,278 $ (848)

Depreciation and amortization 95,817 2,401 1,049

Research and development 6,420 — —

Selling, general and administrative expense 10,883 584 2,050

Direct margin (Non-GAAP) $ 114,417 $ 8,263 $ 2,251

Three Months Ended March 31, 2021

(in thousands) North America Solutions Offshore Gulf of Mexico International Solutions

Segment operating income (loss) $ (109,834) $ 2,978 $ (3,458)

Depreciation and amortization 99,917 2,593 415

Research and development 5,329 — —

Selling, general and administrative expense 12,960 634 1,138

Asset impairment charge 54,284 — —

Restructuring charges 1,442 — —

Direct margin (Non-GAAP) $ 64,098 $ 6,205 $ (1,905)

Six Months Ended March 31, 2022

(in thousands) North America Solutions Offshore Gulf of Mexico International Solutions

Segment operating income (loss) $ (27,596) $ 10,744 $ 7,201

Depreciation and amortization 189,438 4,781 1,804

Research and development 12,988 — —

Selling, general and administrative expense 21,712 1,341 3,779

Asset impairment charge 1,868 — 2,495

Restructuring charges 473 — —

Direct margin (Non-GAAP) $ 198,883 $ 16,866 $ 15,279

Six Months Ended March 31, 2021

(in thousands) North America Solutions Offshore Gulf of Mexico International Solutions

Segment operating income (loss) $ (182,762) $ 5,720 $ (11,815)

Depreciation and amortization 200,241 5,199 788

Research and development 10,795 — —

Selling, general and administrative expense 24,640 1,303 2,117

Asset impairment charge 54,284 — —

Restructuring charges 1,581 — —

Direct Margin (Non-GAAP) $ 108,779 $ 12,222 $ (8,910)

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