Helmerich & Payne, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Part I of this Form 10‑K as well as the Consolidated Financial Statements and related notes thereto included in Part II, Item 8— “Financial Statements and Supplementary Data” of this Form 10‑K. Our future operating results may be affected by various trends and factors which are beyond our control. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this Form 10-K under “Cautionary Note regarding Forward-Looking Statements” and Item 1A— “Risk Factors.” Accordingly, past results and trends should not be used by investors to anticipate future results or trends. Executive Summary Helmerich & Payne, Inc. (“H&P,” which, together with its subsidiaries, is identified as the “Company,” “we,” “us,” or “our,” except where stated or the context requires otherwise) through its operating subsidiaries provides performance-driven drilling solutions and technologies that are intended to make hydrocarbon recovery safer and more economical for oil and gas exploration and production companies. As of September 30, 2022, 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 September 30, 2022. At the close of fiscal year 2022, we had 192 active contracted rigs, of which 125 were under a fixed-term contract and 67 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. 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 to take advantage of future opportunities. 2022 FORM 10-K | 37 Table of Contents Market Outlook Our revenues are primarily derived from the capital expenditures of companies involved in the exploration, development and production of crude oil and natural gas (“E&Ps”). Generally, the level of capital expenditures is dictated by current and expected future prices of crude oil and natural gas, which are determined by various supply and demand factors. Both commodities have historically been, and we expect them to continue to be, cyclical and highly volatile. Our drilling services operations are organized into the following reportable operating segments: North America Solutions, Offshore Gulf of Mexico, and International Solutions. With respect to North America Solutions, the resurgence of oil and natural gas production coming from the United States brought about by unconventional shale drilling for oil has significantly impacted the supply of oil and natural gas and the type of rig utilized in the U.S. land drilling industry. The technical requirements of drilling longer lateral unconventional shale wells often necessitate the use of rigs that are commonly referred to in the industry as super-spec rigs and have the following specific characteristics: AC drive, minimum of 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload rating, 7,500 psi mud circulating system, and multiple-well pad capability. There is a strong customer preference for super-spec rigs not only due to the higher rig specifications that enable more technical drilling, but also due to the drilling efficiencies gained in utilizing a super-spec rig. As a result, there has been a structural decline in the use of non-super-spec rigs across the industry. We are the largest provider of super-spec rigs in the industry and, accordingly, we believe we are well positioned to respond to various market conditions. Historically there has been a strong correlation between crude oil and natural gas prices and the demand for drilling rigs with the rig count increasing and decreasing with the up and down movements in the commodity prices. However, beginning in 2021, rig activity has not moved in tandem with crude oil prices to the same extent it had historically as a large portion of our customers instituted a more disciplined approach to their operations and capital spending in order to enhance their own financial returns. Those customers established capital budgets based upon commodity price assumptions for the upcoming year and adhered to them, not adjusting activity plans as commodity prices moved. The capital budgets for calendar year 2023 have not yet been established by many of our customers; however, based upon the crude oil and natural gas pricing environment and many of our customers' desire to at least maintain their current production levels, we expect the level of capital spending and activity in calendar year 2023 to be similar to modestly higher than that experienced in calendar year 2022. In recent years the U.S. demand for super-spec rigs has strengthened. Despite this increased demand for super-spec rigs there is still idle super-spec rig capacity in the market; however, 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 have been additional costs incurred to bring those long-idled rigs back into working condition, which contributed to 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 resulted in an improvement in our underlying contract economics. Our North America Solutions active rig count has more than tripled from COVID pandemic lows of 47 rigs in August 2020 to 176 rigs at September 30, 2022. Given the current market dynamics, our disciplined approach to deploying capital, and our fiscal year 2023 capital budget of $425 to $475 million, we project that our active rig count could reach 192 rigs during the first half of calendar 2023. While H&P stands ready to respond to the future demand for its super-spec rigs, we will do so by applying the same disciplined approach, focusing on financial returns. That said, the market for our rigs and others like them in the industry will likely remain tight as supply-chain challenges and labor constraints experienced across the energy industry may inhibit the industry’s ability overall to supply a significant quantity of super-specs rigs. As the largest provider of super-spec rigs in the U.S., H&P is not immune from supply-chain challenges or potential labor constraints, or inflationary pressures that can arise as a result of these matters. However, we believe we are well positioned to address these challenges and do not believe they are a limiting factor relative to our activity plans for fiscal 2023 nor believe they will have a significant adverse impact on our financial results. As a result of increased customer demand and limited supply additions given high required rig reactivation expenditures and supply chain constraints, we expect the momentum of the upward pressure on pricing to continue into fiscal 2023. 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; however, activity levels in the International Solutions segment are also subject to other various geopolitical and financial factors specific to the countries of our operations. While we do not expect much activity change in our Offshore Gulf of Mexico segment, we do expect margin improvements based on recent rate increases. Regarding our International Solutions segment, we see opportunities for improvement in activity and the related corresponding margin improvement, but those will likely occur on a more extended timeline compared to what we have experienced in the North America Solutions segment. 2022 FORM 10-K | 38 Table of Contents Recent Developments Investment in Tamboran In October 2022, we purchased a $14.1 million equity investment, representing approximately 106 million shares, in Tamboran Resources Limited ("Tamboran"). Tamboran's shares are listed and publicly traded on the Australian Securities Exchange. Additionally, during September 2022, we entered into a fixed-term drilling services agreement with Tamboran. The expected $30.3 million of revenue to be earned over the term of the contract is included within our contract backlog as of September 30, 2022, as mobilization is expected to commence in fiscal year 2023. Investments in Geothermal Energy During the fiscal year ended September 30, 2022, we purchased an additional $18.2 million in geothermal energy investments consisting of both debt and equity securities. Investments were made in five separate companies that are pursuing technological concepts to make unconventional geothermal energy a viable economic renewable energy source. These companies are developing enhanced geothermal system ("EGS") and closed loop concepts. The EGS concepts use one or more of the following: horizontal drilling, induced permeability, and fiber optic sensing. The closed loop concepts use multilateral wellbores, proprietary working fluid, or coaxial pipe configurations. All of these concepts are designed to harvest geothermal heat to create carbon-free, 24/7 geothermal energy. The aggregate balance of our investments in geothermal energy companies was $23.7 million and $2.7 million at September 30, 2022 and 2021, respectively . At this time, we expect the quantity and pace of our geothermal investments to be reduced relative to fiscal year 2022. Investment in ADNOC Drilling During September 2021, the Company made a $100.0 million cornerstone investment in ADNOC Drilling in advance of its announced IPO, representing 159.7 million shares of ADNOC Drilling, equivalent to a one percent ownership stake and subject to a three-year lockup period. ADNOC Drilling’s IPO was completed on October 3, 2021, and its shares are listed and traded on the Abu Dhabi Securities Exchange. Our investment is classified as a long-term equity investment within Investments in our Consolidated Balance Sheets. During the fiscal year ended September 30, 2022, we recognized a gain of $47.4 million on our Consolidated Statements of Operations, as a result of the change in fair value of the investment during the period. As of September 30, 2022, this investment is classified as a Level 1 investment based on the quoted stock price on the Abu Dhabi Securities Exchange. During the fiscal year ended September 30, 2022, we also received dividends in the amount of $6.6 million as a result of this investment. Investment in Galileo Technologies During the fiscal year ended September 30, 2022, the Company made a $33.0 million cornerstone investment in Galileo Holdco 2 Limited Technologies ("Galileo Holdco 2"), part of the group of companies known as Galileo Technologies (“Galileo”) in the form of a convertible note. Galileo specializes in liquification, natural gas compression and re-gasification modular systems and technologies to make the production, transportation, and consumption of natural gas, biomethane, and hydrogen more economically viable. The convertible note bears interest at 5% per annum with a maturity date of the earlier of April 2027 or an exit event (as defined in the agreement as either an initial public offering or a sale of Galileo). If the conversion option is exercised, the note would convert into common shares of the parent of Galileo Holdco 2 ("Galileo Parent"). We do not intend to sell this investment prior to its maturity date or an exit event. Two of our Directors are independent directors of Galileo Parent. Neither Director has a direct or indirect material interest in the transaction. Pension Plan Lump-sum Distribution During March 2022, the Company's domestic noncontributory defined benefit pension plan was amended to include a limited lump sum distribution option and a special eligibility window to be available to certain participants. During the period beginning on May 2, 2022 and ending on June 30, 2022, these participants could elect the limited lump sum distribution. This one-time lump sum was subsequently paid in August 2022 and resulted in a pension settlement charge of $7.8 million during the year ended September 30, 2022. 2022 FORM 10-K | 39 Table of Contents Contract Backlog Drilling contract backlog is the expected future dayrate revenue from executed contracts. We calculate backlog as the total expected revenue from fixed-term contracts and do not include any anticipated contract renewals or expected performance bonuses as part of its calculation. Additionally, contracts that currently contain month-to-month terms are represented in our backlog as one month of unsatisfied performance obligations. In addition to depicting the total expected revenue from fixed-term contracts, backlog is indicative of expected future cash flow that the Company expects to receive regardless of whether a customer honors the fixed-term contract to expiration of a contract or decides to terminate the contract early and pay an early termination payment. In the event of an early termination payment, the timing of the recognition of backlog and the total amount of revenue may differ; however, the overall associated gross margin is preserved. As such, management finds backlog a useful metric for future planning and budgeting, whereas investors consider it useful in estimating future revenue and cash flows of the Company. As of September 30, 2022 and 2021, our contract drilling backlog was $1.2 billion and $0.6 billion, respectively. The increase in backlog at September 30, 2022 from September 30, 2021 is primarily due to an increase in the number of fixed term drilling contracts executed. Approximately 30.8 percent of the September 30, 2022 total backlog is reasonably expected to be fulfilled in fiscal year 2024 and thereafter. The following table sets forth the total backlog by reportable segment as of September 30, 2022 and 2021, and the percentage of the September 30, 2022 backlog reasonably expected to be fulfilled in fiscal year 2024 and thereafter: (in millions) September 30, 2022 September 30, 2021 Percentage Reasonably Expected to be Fulfilled in Fiscal Year 2024 and Thereafter North America Solutions $ 863.6 $ 429.6 26.0 % Offshore Gulf of Mexico 7.6 17.2 — International Solutions 301.2 125.2 45.3 $ 1,172.4 $ 572.0 The early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations and cash flows. In some limited circumstances, such as sustained unacceptable performance by us, no early termination payment would be paid to us. Early terminations could cause the actual amount of revenue earned to vary from the backlog reported. See Item 1A—"Risk Factors— Our current backlog of drilling services and solutions revenue may decline and may not be ultimately realized as fixed‑term contracts and may, in certain instances, be terminated without an early termination payment ” within this Form 10-K regarding fixed term contract risk. Additionally, see Item 1A—"Risk Factors— The impact and effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, could have a material adverse effect on our business, financial condition and results of operations" within this Form 10-K. Results of Operations for the Fiscal Years Ended September 30, 2022 and 2021 Consolidated Results of Operations Net Income (Loss) We reported income from continuing operations of $6.6 million ($0.05 per diluted share) from operating revenues of $2.1 billion for the fiscal year ended September 30, 2022 compared to a loss from continuing operations of $337.5 million ($3.14 loss per diluted share) from operating revenues of $1.2 billion for the fiscal year ended September 30, 2021. Included in net income for the fiscal year ended September 30, 2022 is income of $0.4 million (with no impact on a per diluted share basis) from discontinued operations. Including discontinued operations, we recorded net income of $7.0 million ($0.05 per diluted share) for the fiscal year ended September 30, 2022 compared to a net loss of $326.2 million ($3.04 loss per diluted share) for the fiscal year ended September 30, 2021. Operating Revenue Consolidated operating revenues were $2.1 billion in fiscal year 2022 and $1.2 billion in fiscal year 2021, including early termination revenue of $0.7 million and $7.7 million in each respective fiscal year. Excluding early termination revenue, operating revenue increased $0.8 billion in fiscal year 2022 compared to fiscal year 2021. The increase in fiscal year 2022 from fiscal year 2021 was primarily driven by an increase in average rig pricing and activity levels in our North America Solutions segment and increased activity levels in our International Solutions segment. Refer to segment results below for further details. Direct Operating Expenses, Excluding Depreciation and Amortization Direct operating expenses in fiscal year 2022 were $1.4 billion, compared with $1.0 billion in fiscal year 2021. The increase in fiscal year 2022 from fiscal year 2021 was primarily attributable to the previously mentioned higher activity levels. 2022 FORM 10-K | 40 Table of Contents Depreciation and Amortization Depreciation and amortization expense was $403.2 million in fiscal year 2022 and $419.7 million in fiscal year 2021. The decrease in depreciation and amortization during the fiscal year ended September 30, 2022 compared to the fiscal year ended September 30, 2021 was primarily attributable to the termination of depreciation on eight rigs that were included in the ADNOC sale during the fourth quarter of fiscal year 2021 coupled with ongoing relatively low levels of capital expenditures. Depreciation and amortization includes amortization of intangible assets of $7.2 million in fiscal years 2022 and 2021, and abandonments of equipment of $6.6 million and $2.0 million in fiscal years 2022 and 2021, respectively. Selling, General and Administrative Expense Selling, general and administrative expenses increased to $182.4 million in the fiscal year ended September 30, 2022 compared to $172.2 million in the fiscal year ended September 30, 2021. The $10.2 million increase in fiscal year 2022 compared to fiscal year 2021 is primarily due to a $6.0 million increase in IT infrastructure spending, and a $5.6 million increase in labor and travel expense. Asset Impairment Charges During the fiscal year ended September 30, 2022, we identified various assets that met the asset held-for-sale criteria and were reclassified as assets held-for-sale on our Consolidated Balance Sheets. The combined net book value of these assets was $5.4 million and were written down to their estimated fair value less cost to sell of $1.0 million, resulting in a non-cash impairment charge of $4.4 million, within our North America Solutions and International Solutions segments. The impairment charge was recorded in the Consolidated Statement of Operations for the fiscal year ended September 30, 2022. Comparatively, during the fiscal year ended September 30, 2021, the Company developed 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, which resulted in an impairment charge of $56.4 million. Also, during the fiscal year ended September 30, 2021, we formalized a plan to sell assets related to two of our lower margin service offerings, trucking and casing running services, all within our North America Solutions segment, which resulted in a non-cash impairment charge of $14.4 million. Gain on Investment Securities During the fiscal year ended September 30, 2022, we recognized an aggregate gain of $57.9 million on investment securities. This gain was primarily comprised of a $47.4 million gain on our equity investment in ADNOC Drilling caused by an increase in the fair market value of the stock. 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. Additionally, during the fiscal year ended September 30, 2022, we sold our remaining equity securities of approximately 467.5 thousand shares in Schlumberger, Ltd. and received proceeds of approximately $22.0 million. We recognized an aggregate gain of $8.2 million related to this investment, which included a $0.5 million gain recognized upon the sale and a $7.7 million gain as a result of the change in the fair value of the investment during the fiscal year ended September 30, 2022. Restructuring Charges During the fiscal years ended September 30, 2022 and 2021, we incurred $0.8 million and $5.9 million, respectively, in restructuring charges. The charges incurred during the fiscal year ended September 30, 2021 included $1.5 million in one-time severance benefits paid to employees who were voluntarily or involuntarily terminated primarily as a result of the reorganization of our IT operations coupled with charges of $4.5 million primarily related to the relocation of our Houston assembly facility and the downsizing of our storage yards used for idle rigs. Interest and Dividend Income Interest and dividend income was $18.1 million and $10.3 million in fiscal years 2022 and 2021, respectively. The increase in interest and dividend income in fiscal year 2022 was primarily due to $6.6 million of dividend income received as a result of our investment in ADNOC drilling. Interest Expense Interest expense totaled $19.2 million in fiscal year 2022 and $24.0 million in fiscal year 2021. The decrease in interest expense is primarily attributable to a lower interest rate on our 2.90% Senior Notes due 2031 (issued in September 2021) as compared to our 4.65% Senior Notes due 2025, which was fully redeemed in October 2021. Income Taxes We had an income tax expense of $24.4 million in fiscal year 2022 compared to an income tax benefit of $103.7 million in fiscal year 2021. The effective income tax rate was 78.8 percent in fiscal year 2022 compared to 23.5 percent in fiscal year 2021. The effective rates differ from the U.S. federal statutory rate (21.0 percent for the fiscal years 2022 and 2021) primarily due to non-deductible permanent items, the foreign derived intangible income deduction (in fiscal year 2022), state and foreign income taxes, and adjustments to the deferred state income tax rate. Additionally, the effective income tax rate is higher in fiscal year 2022 as the low level of net income before tax increases the impact of the rate differences. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Recoverability of any tax assets are evaluated, and necessary allowances are provided. The carrying values of the net deferred tax assets are based on management’s judgments using certain estimates and assumptions that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the benefits of such assets. If these estimates and related assumptions change in the future, additional valuation allowances may be recorded against the deferred tax assets resulting in additional income tax expense in the future. See Note 8—Income Taxes to our Consolidated Financial Statements for additional income tax disclosures. 2022 FORM 10-K | 41 Table of Contents Discontinued Operations Income from discontinued operations was $0.4 million and $11.3 million in fiscal years 2022 and 2021, respectively. Expenses incurred within the country of Venezuela are reported as discontinued operations. Our wholly-owned subsidiaries, Helmerich & Payne International Drilling Co. ("HPIDC") and Helmerich & Payne de Venezuela, C.A., filed a lawsuit in the United States District Court for the District of Columbia on September 23, 2011 against the Bolivarian Republic of Venezuela, Petroleos de Venezuela, S.A. and PDVSA Petroleo, S.A. We are seeking damages for the seizure of our Venezuelan drilling business in violation of international law and for breach of contract. While there exists the possibility of realizing a recovery, we are currently unable to determine the timing or amounts we may receive, if any, or the likelihood of recovery. In March 2016, the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system. Activity within discontinued operations for both fiscal years 2022 and 2021 is caused by exchange rate fluctuations due to the remeasurement of an uncertain tax liability. North America Solutions The following table presents certain information with respect to our North America Solutions reportable segment: (in thousands, except operating statistics) 2022 2021 % Change Operating revenues $ 1,788,167 $ 1,026,364 74.2 % Direct operating expenses 1,218,134 773,507 57.5 Depreciation and amortization 375,250 392,415 (4.4) Research and development 26,728 21,811 22.5 Selling, general and administrative expense 43,796 51,089 (14.3) Asset impairment charges 1,868 70,850 (97.4) Restructuring charges 498 3,868 (87.1) Segment operating income (loss) $ 121,893 $ (287,176) (142.4) Financial Data and Other Operating Statistics 1 : Direct margin (Non-GAAP) 2 $ 570,033 $ 252,857 125.4 Revenue days 3 59,672 39,199 52.2 Average active rigs 4 163 107 52.3 Number of active rigs at the end of period 5 176 127 38.6 Number of available rigs at the end of period 236 236 — Reimbursements of "out-of-pocket" expenses $ 232,092 $ 113,897 103.8 (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., 365 days). (5) Defined as the number of rigs generating revenue at the applicable end date of the time period. Operating Revenues Operating revenues were $1.8 billion and $1.0 billion in fiscal year 2022 and 2021, respectively. Operating revenues increased $0.8 billion in fiscal year 2022 compared to fiscal year 2021. This increase is primarily driven by higher pricing and higher activity levels. Direct Operating Expenses Direct operating expenses increased to $1.2 billion during the fiscal year ended September 30, 2022 as compared to $0.8 billion during the fiscal year ended September 30, 2021. This increase was primarily driven by an increase of $241.0 million in labor expense and an increase of $87.0 million in materials and supplies as we experienced higher activity levels and had an increase in field wages beginning in December 2021. Depreciation and Amortization Depreciation expense decreased to $375.3 million during the fiscal year ended September 30, 2022 as compared to $392.4 million during the fiscal year ended September 30, 2021. The decrease was primarily attributable to the termination of depreciation on eight rigs located in the U.S. that were included in the ADNOC sale during the fourth quarter of fiscal year 2021 coupled with ongoing relatively low levels of capital expenditures during the 2022 fiscal year. Selling, General and Administrative Expenses We had a $7.3 million decrease in selling, general and administrative costs during the fiscal year ended September 30, 2022 compared to the fiscal year ended September 30, 2021. This decrease was primarily driven by a $5.3 million decrease in professional services fees. 2022 FORM 10-K | 42 Table of Contents Asset Impairment Charges During the fiscal year ended September 30, 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 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 fiscal year ended September 30, 2022 in the Consolidated Statement of Operations. Comparatively, during the fiscal year ended September 30, 2021, the Company developed 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 during the year ended September 30, 2021. During the same period, we also formalized a plan to sell assets related to two of our lower margin service offerings, trucking and casing running services, all within our North America Solutions segment, which resulted in a non-cash impairment charge of $14.4 million during the year ended September 30, 2021. Restructuring Charges For the fiscal years ended September 30, 2022 and 2021, we incurred $0.5 million and $3.9 million, respectively, in restructuring charges. The charges incurred during the fiscal year ended September 30, 2021 primarily included charges of $3.8 million related to the relocation of the Houston assembly facility and the downsizing of storage yards used for idle rigs. Offshore Gulf of Mexico The following table presents certain information with respect to our Offshore Gulf of Mexico reportable segment: (in thousands, except operating statistics) 2022 2021 % Change Operating revenues $ 125,465 $ 126,399 (0.7) % Direct operating expenses 90,415 97,249 (7.0) Depreciation 9,175 10,557 (13.1) Selling, general and administrative expense 2,661 2,624 1.4 Segment operating income $ 23,214 $ 15,969 45.4 Financial Data and Other Operating Statistics 1 : Direct margin (Non-GAAP) 2 $ 35,050 $ 29,150 20.2 Revenue days 3 1,460 1,552 (5.9) Average active rigs 4 4 4 — Number of active rigs at the end of period 5 4 4 — Number of available rigs at the end of period 7 7 — Reimbursements of "out-of-pocket" expenses $ 26,077 $ 27,388 (4.8) (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., 365 days). (5) Defined as the number of rigs generating revenue at the applicable end date of the time period. Operating Revenues Operating revenues were $125.5 million and $126.4 million in the fiscal year ended September 30, 2022 and 2021, respectively. The 0.7 percent decrease in operating revenue is primarily driven by lower reimbursable expenses and the mix of rigs working at full rates as opposed to being on lower standby or mobilization rates, partially offset by pricing increases which occurred in the later portion of the 2022 fiscal year. Direct Operating Expenses Direct operating expenses decreased to $90.4 million during the fiscal year ended September 30, 2022 as compared to $97.2 million during the fiscal year ended September 30, 2021. The decrease was primarily driven by a $6.3 million favorable adjustment in self-insurance liabilities related to prior period claims coupled with the factors described above. 2022 FORM 10-K | 43 Table of Contents International Solutions The following table presents certain information with respect to our International Solutions reportable segment: (in thousands, except operating statistics) 2022 2021 % Change Operating revenues $ 136,072 $ 57,917 134.9 % Direct operating expenses 120,780 68,672 75.9 Depreciation 4,156 2,013 106.5 Selling, general and administrative expense 8,779 8,028 9.4 Asset impairment charges 2,495 — — Restructuring charges — 207 (100.0) Segment operating loss $ (138) $ (21,003) (99.3) Financial Data and Other Operating Statistics 1 : Direct margin (Non-GAAP) 2 $ 15,292 $ (10,755) (242.2) Revenue days 3 3,036 1,815 67.3 Average active rigs 4 8 5 60.0 Number of active rigs at the end of period 5 12 6 100.0 Number of available rigs at the end of period 28 30 (6.7) Reimbursements of "out-of-pocket" expenses $ 4,910 $ 6,693 (26.6) (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., 365 days). (5) Defined as the number of rigs generating revenue at the applicable end date of the time period. Operating Revenues Operating revenues increased $78.2 million in fiscal year 2022 compared to fiscal year 2021. This increase is primarily driven by higher activity levels. Additionally, in the first quarter of fiscal year 2022, we recognized $16.4 million in revenue related to the settlement of a contract drilling dispute related to drilling services provided from fiscal years 2016 through 2019 with YPF S.A. Refer to Note 10—Revenue from Contracts with Customers for additional details. Operating Expenses Direct operating expenses increased to $120.8 million during the fiscal year ended September 30, 2022 as compared to $68.7 million during the fiscal year ended September 30, 2021. This increase was primarily driven by an increase of $25.9 million in labor expense and an increase of $25.4 million in materials and supplies as we experienced higher activity levels. Asset Impairment Charges During the fiscal year ended September 30, 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 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 fiscal year ended September 30, 2022 in the 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. During the fiscal year ended September 30, 2021, we recorded no impairment charges. 2022 FORM 10-K | 44 Table of Contents Other Operations Results of our other operations, excluding corporate selling, general and administrative costs, corporate restructuring, and corporate depreciation, are as follows: (in thousands) 2022 2021 % Change Operating revenues $ 66,287 $ 43,304 53.1 % Direct operating expenses 50,683 50,064 1.2 Depreciation 1,701 1,426 19.3 Research and development — 127 (100.0) Selling, general and administrative expense 1,183 1,205 (1.8) Restructuring charges — 186 (100.0) Operating income (loss) $ 12,720 $ (9,704) (231.1) Operating Revenues We continue to use our Captive insurance companies to insure the deductibles for our domestic workers’ compensation, general liability, automobile liability claims programs, and medical stop-loss program and to insure the deductibles from the Company's international casualty and rig property programs. Intercompany premium revenues recorded by the Captives during the fiscal years ended September 30, 2022 and 2021 amounted to $57.0 million and $35.4 million, respectively, which were eliminated upon consolidation. Direct Operating Expenses Direct operating expenses consisted primarily of $7.0 million and $12.6 million in adjustments to accruals for estimated losses allocated to the Captives and rig and casualty insurance premiums of $35.6 million and $21.9 million during the fiscal years ended September 30, 2022 and 2021, respectively. The change to accruals for estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary. Results of Operations for the Fiscal Years Ended September 30, 2021 and 2020 A discussion of our results of operations for the fiscal year ended September 30, 2021 compared to the fiscal year ended September 30, 2020 is included in Part II, Item 7— "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the Securities and Exchange Commission ("SEC") on November 18, 2021 . Liquidity and Capital Resources Sources of Liquidity Our sources of available liquidity include existing cash balances on hand, cash flows from operations, and availability under the 2018 Credit Facility. Our liquidity requirements include meeting ongoing working capital needs, funding our capital expenditure projects, paying dividends declared, and repaying our outstanding indebtedness. Historically, we have financed operations primarily through internally generated cash flows. During periods when internally generated cash flows are not sufficient to meet liquidity needs, we may utilize cash on hand, borrow from available credit sources, access capital markets or sell our investments. Likewise, if we are generating excess cash flows or have cash balances on hand beyond our near-term needs, we may invest in highly rated short‑term money market and debt securities. These investments can include U.S. Treasury securities, U.S. Agency issued debt securities, highly rated corporate bonds and commercial paper, certificates of deposit and money market funds. However, in some international locations we may make short-term investments that are less conservative, as equivalent highly rated investments are unavailable. See—Note 2—Summary of Significant Accounting Policies, Risks and Uncertainties—International Solutions Drilling Risks. We may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity as necessary, fund our additional purchases, exchange or redeem senior notes, or repay any amounts under the 2018 Credit Facility. Our ability to access the debt and equity capital markets depends on a number of factors, including our credit rating, market and industry conditions and market perceptions of our industry, general economic conditions, our revenue backlog and our capital expenditure commitments. 2022 FORM 10-K | 45 Table of Contents Cash Flows Our cash flows fluctuate depending on a number of factors, including, among others, the number of our drilling rigs under contract, the revenue we receive under those contracts, the efficiency with which we operate our drilling 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 or cash flows as we have been able to more than offset these cumulative cost trends with rate increases. As of September 30, 2022 and 2021, we had cash and cash equivalents of $232.1 million and $917.5 million and short-term investments of $117.1 million and $198.7 million, respectively. During the fiscal year ended September 30, 2022, our cash, cash equivalents, and restricted cash balance decreased approximately $667.7 million compared to our balance at September 30, 2021. This change was primarily driven by the redemption of all the outstanding 2025 Notes, resulting in a cash outflow of $487.1 million during the during the fiscal year ended September 30, 2022. Additionally, 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. Our cash flows for the fiscal years ended September 30, 2022, 2021 and 2020 are presented below: Year Ended September 30, (in thousands) 2022 2021 2020 Net cash provided by (used in): Operating activities $ 233,913 $ 136,440 $ 538,881 Investing activities (167,315) (161,994) (87,885) Financing activities (734,305) 425,523 (297,220) Net increase (decrease) in cash and cash equivalents and restricted cash $ (667,707) $ 399,969 $ 153,776 Operating Activities Our operating net working capital (non-GAAP) as of September 30, 2022, 2021, and 2020 is presented below: Year Ended September 30, (in thousands) 2022 2021 2020 Total current assets $ 1,002,944 $ 1,586,566 $ 963,327 Less: Cash and cash equivalents 232,131 917,534 487,884 Short-term investments 117,101 198,700 89,335 Assets held-for-sale 4,333 71,453 — 649,379 398,879 386,108 Total current liabilities 394,810 866,306 219,136 Less: Dividends payable 26,693 27,332 27,226 Current portion of long-term debt, net — 483,486 — Advance payment for sale of property, plant and equipment 600 86,524 — $ 367,517 $ 268,964 $ 191,910 Operating net working capital (non-GAAP) $ 281,862 $ 129,915 $ 194,198 Cash flows provided by operating activities were approximately $233.9 million, $136.4 million, and $538.9 million for the fiscal year ended September 30, 2022, 2021, and 2020 respectively. The change in cash provided by operating activities between fiscal years 2022 and 2021 is primarily driven by higher activity and rates, partially offset by changes in working capital. The decrease in cash provided by operating activities between fiscal years 2021 and 2020 was primarily driven by lower operating activity and lower pricing. 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. 2022 FORM 10-K | 46 Table of Contents Operating net working capital was $281.9 million, $129.9 million and $194.2 million as of September 30, 2022, 2021 and 2020, respectively. 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 increase in operating net working capital between fiscal years 2022 and 2021 was primarily driven by higher rig activity and rates. Included in accounts receivable as of September 30, 2022 was $27.8 million of income tax receivables, of which $24.9 million was received subsequent to fiscal year end. The remainder is expected to be collected within the next fiscal year. Investing Activities Capital Expenditures Our capital expenditures were $250.9 million, $82.1 million and $140.8 million in fiscal years 2022, 2021 and 2020, respectively. The increase in capital expenditures between fiscal years 2022 and 2021 is driven by higher activity and spending on walking rig conversions. The decrease in capital expenditures between fiscal years 2021 and 2020 was driven by lower maintenance capital expenditures as a result of lower activity. Our fiscal year 2023 capital spending is currently estimated to be between $425 million and $475 million. This estimate includes normal capital maintenance requirements, information technology spending, skidding to walking conversions for a limited number of rigs and plans to reactivate several super-spec rigs. Purchases & Sales of Short-Term Investments Our net sales of short-term investments during fiscal year 2022 were $79.6 million compared to net purchases of $107.4 million and $40.0 million in fiscal years 2021 and 2020, respectively. The change is driven by our ongoing liquidity management. Purchases of Long-Term Investments Our net purchases of long-term investments were $29.2 million, $102.5 million and $0.6 million in fiscal years 2022, 2021 and 2020, respectively. The decrease in net purchases between fiscal years 2022 and 2021 is primarily driven by our $100.0 million cornerstone investment in ADNOC Drilling purchased during fiscal year 2021, the $22.0 million of proceeds received from the liquidation of our remaining equity securities in Schlumberger, Ltd, during the fiscal year ended September 30, 2022, offset by the purchase of a $33.0 million cornerstone investment in a convertible note in Galileo Holdco 2 and the purchase of $18.2 million in various geothermal investments during fiscal year 2022. The increase in net purchases between fiscal years 2021 and 2020 is primarily driven by our purchase of ADNOC Drilling equity securities (as mentioned above) during fiscal year 2021 and the absence of such activity in fiscal year 2020. Sale of Assets Our proceeds from asset sales totaled $62.3 million, $43.5 million and $78.4 million in fiscal year 2022, 2021 and 2020, respectively. The increase in proceeds between fiscal years 2022 and 2021 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 fiscal year ended September 30, 2022. During the fiscal year ended September 30, 2020, we closed on the sale of a portion of our real estate investment portfolio, including six industrial sites, for total consideration, net of selling related expenses, of $40.7 million, which was the primary driver in the decrease in proceeds between fiscal years 2021 and 2020. Advance Payment for Sale of Property, Plant and Equipment During September 2021, the Company agreed to sell eight FlexRig land rigs with an aggregate net book value of $55.6 million to ADNOC Drilling for $86.5 million. We received the $86.5 million in cash consideration in advance of delivering the rigs. Financing Activities Repurchase of Shares We have an evergreen authorization from the Board of Directors (the "Board") for the repurchase of up to four million common shares in any calendar year. The repurchases may be made using our cash and cash equivalents or other available sources. During the fiscal year ended September 30, 2022 and 2020, we repurchased 3.2 million common shares at an aggregate cost of $77.0 million and 1.5 million common shares at an aggregate cost of $28.5 million, respectively, which are held as treasury shares. There were no purchases of common shares in fiscal year 2021. Dividends We paid dividends of $1.00 per share during fiscal years 2022 and 2021 compared to $2.38 per share during fiscal year 2020. Total dividends paid were $107.4 million, $109.1 million and $260.3 million in fiscal years 2022, 2021 and 2020, respectively. A cash dividend of $0.25 per share was declared on September 7, 2022 for shareholders of record on November 15, 2022, payable on December 1, 2022. Debt Issuance Proceeds and Costs On September 29, 2021, we issued $548.7 million aggregate principal amount of the 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. persons in transactions outside the United States pursuant to Regulation S under the Securities Act (“Regulation S”). Debt issuance fees paid as of September 30, 2021 were $3.9 million. 2022 FORM 10-K | 47 Table of Contents Redemption of 4.65% Senior Notes due 2025 On October 27, 2021, we redeemed all of the outstanding 2025 Notes, resulting in a cash outflow of $487.1 million. As a result, the associated make-whole premium of $56.4 million was paid during the first fiscal quarter of 2022 contemporaneously with the October 27, 2021 debt extinguishment. The Company financed the redemption of the 2025 Notes with the net proceeds from the offering of the 2031 Notes, together with cash on hand. Additional details are fully discussed in Note 7—Debt. 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 was set to mature on November 13, 2024. 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. Additionally, 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 September 30, 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. As of September 30, 2022, we had $55.0 million in uncommitted bilateral credit facilities, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds. Of the $55.0 million, $38.1 million of financial guarantees were outstanding as of September 30, 2022. Separately, we had $2.0 million in standby letters of credit and bank guarantees outstanding. In total, we had $40.1 million outstanding as of September 30, 2022. In October 2022, we increased one of our standby letters of credit by $1.9 million. 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 September 30, 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 2023. Senior Notes 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. persons in transactions outside the United States pursuant to Regulation S under the Securities Act (“Regulation S”). Interest on the 2031 Notes is payable semi-annually on March 29 and September 29 of each year, commencing on March 29, 2022. The 2031 Notes will mature on September 29, 2031 and bear interest at a rate of 2.90 percent annum. In June 2022, we settled a registered exchange offer (the “Registered Exchange Offer”) to exchange the 2031 Notes for new, SEC-registered notes that are substantially identical to the terms of the 2031 Notes, except that the offer and issuance of the new notes have been registered under the Securities Act and certain transfer restrictions, registration rights and additional interest provisions relating to the 2031 Notes do not apply to the new notes. One hundred percent of the 2031 Notes were exchanged in the Registered Exchange Offer. The indenture governing the 2031 Notes contains certain covenants that, among other things and subject to certain exceptions, limit the ability of the Company and its subsidiaries to incur certain liens; engage in sale and lease-back transactions; and consolidate, merge or transfer all or substantially all of the assets of the Company. The indenture governing the 2031 Notes also contains customary events of default with respect to the 2031 Notes. 4.65% Senior Notes due 2025 On December 20, 2018, we issued approximately $487.1 million in aggregate principal amount of the 2025 Notes. The debt issuance cost was being amortized straight-line over the stated life of the obligation, which approximated the effective interest method. On September 27, 2021, the Company delivered a conditional notice of optional full redemption for all of the outstanding 2025 Notes at a redemption price calculated in accordance with the indenture governing the 2025 Notes, plus accrued and unpaid interest on the 2025 Notes to be redeemed. The Company financed the redemption of the 2025 Notes with the net proceeds from the offering of the 2031 Notes, together with cash on hand. The Company’s obligation to redeem the 2025 Notes was conditioned upon the prior consummation of the issuance of the 2031 Notes, which was satisfied on September 29, 2021. 2022 FORM 10-K | 48 Table of Contents 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 Consolidated Statements of Operations during the fiscal year ended September 30, 2022. Future Cash Requirements Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2023 are expected to be funded through current cash and cash to be provided from operating activities. However, there can be no assurance that we will continue to generate cash flows at current levels. If needed, we may decide to obtain additional funding from our $750.0 million 2018 Credit Facility. We currently do not anticipate the need to draw on the 2018 Credit Facility. Our indebtedness under our unsecured senior notes totaled $550.0 million at September 30, 2022 and matures on September 29, 2031. As of September 30, 2022, we had a $537.7 million deferred tax liability on our Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment. Our 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. At September 30, 2022, we had $3.9 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 16.6 percent at September 30, 2022 compared to 15.9 percent at September 30, 2021. For additional information regarding debt agreements, refer to Note 7—Debt to the Consolidated Financial Statements. There were no other significant changes in our financial position since September 30, 2021. Material Commitments Our contractual obligations as of September 30, 2022 are summarized in the table below: Obligations due by year (in thousands) Total 2023 2024 2025 2026 2027 Thereafter Long-term debt 550,000 — — — — — 550,000 Interest 1 144,724 16,066 16,069 16,073 16,076 16,080 64,360 Operating leases 2 31,613 9,767 7,801 4,501 2,033 2,046 5,465 Purchase obligations 3 148,600 148,600 — — — — — Total contractual obligations $ 874,937 $ 174,433 $ 23,870 $ 20,574 $ 18,109 $ 18,126 $ 619,825 (1) Interest on fixed-rate 2031 Notes was estimated based on principal maturities. See Note 7—Debt to our Consolidated Financial Statements. (2) See Note 5—Leases to our Consolidated Financial Statements. (3) See Note 16—Commitments and Contingencies to our Consolidated Financial Statements. Critical Accounting Policies and Estimates Accounting policies that we consider significant are summarized in Note 2—Summary of Significant Accounting Policies, Risks and Uncertainties to our Consolidated Financial Statements included in Part II, Item 8—"Financial Statements and Supplementary Data" of this Form 10-K. The preparation of our financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. The following is a discussion of the critical accounting policies and estimates used in our financial statements. 2022 FORM 10-K | 49 Table of Contents Property, Plant and Equipment Property, plant and equipment, including renewals and betterments, are capitalized at cost, while maintenance and repairs are expensed as incurred. The interest expense applicable to the construction of qualifying assets is capitalized as a component of the cost of such assets. We account for the depreciation of property, plant and equipment using the straight‑line method over the estimated useful lives of the assets considering the estimated salvage value of the property, plant and equipment. Both the estimated useful lives and salvage values require the use of management estimates. Assets held-for-sale are reported at the lower of the carrying amount or fair value less estimated costs to sell. Our estimate of fair value represents our best estimate based on industry trends and reference to market transactions and is subject to variability. Certain events, such as unforeseen changes in operations, technology or market conditions, could materially affect our estimates and assumptions related to depreciation or result in abandonments. For the fiscal years presented in this Form 10-K, no significant changes were made to the determinations of useful lives or salvage values. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are recorded in the results of operations. Impairment of Long‑lived Assets, Goodwill and Other Intangible Assets Management assesses the potential impairment of our long‑lived assets and finite-lived intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Changes that could prompt such an assessment may include equipment obsolescence, changes in the market demand, periods of relatively low rig utilization, declining revenue per day, declining cash margin per day, completion of specific contracts, change in technology and/or overall changes in general market conditions. If a review of the long‑lived assets and finite-lived intangibles indicates that the carrying value of certain of these assets or asset groups is more than the estimated undiscounted future cash flows, an impairment charge is made, as required, to adjust the carrying value to the estimated fair value. Cash flows are estimated by management considering factors such as prospective market demand, recent changes in rig technology and its effect on each rig’s marketability, any cash investment required to make a rig marketable, suitability of rig size and makeup to existing platforms, and competitive dynamics including utilization. The fair value of drilling rigs is determined based upon either an income approach using estimated discounted future cash flows, a market approach considering factors such as recent market sales of rigs of other companies and our own sales of rigs, appraisals and other factors, a cost approach utilizing new reproduction costs adjusted for the asset age and condition, and/or a combination of multiple approaches. The use of different assumptions could increase or decrease the estimated fair value of assets and could therefore affect any impairment measurement. We review goodwill for impairment annually in the fourth fiscal quarter or more frequently if events or changes in circumstances indicate it is more likely than not that the carrying amount of the reporting unit holding such goodwill may exceed its fair value. We initially assess goodwill for impairment based on qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount. If further testing is necessary or a quantitative test is elected, we quantitatively compare the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, an impairment charge will be recognized in an amount equal to the excess; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. Self‑Insurance Accruals We insure working land rigs and related equipment at values that approximate the current replacement costs on the inception date of the policies. However, we self-insure large deductibles under these policies. We also carry insurance with varying deductibles and coverage limits with respect to stacked rigs, offshore platform rigs, and “named wind storm” risk in the Gulf of Mexico. We self‑insure a number of other risks, including loss of earnings and business interruption. We self‑insure a significant portion of expected losses relating to workers’ compensation, general liability, employer’s liability and automobile liability. Generally, deductibles range from $1 million to $10 million per occurrence depending on the coverage and whether a claim occurs outside or inside of the United States. Insurance is purchased over deductibles to reduce our exposure to catastrophic events but there can be no assurance that such coverage will apply or be adequate in all circumstances. Estimates are recorded for incurred outstanding liabilities for workers’ compensation and other casualty claims. Retained losses are estimated and accrued based upon our estimates of the aggregate liability for claims incurred. Estimates for liabilities and retained losses are based on adjusters’ estimates, our historical loss experience and statistical methods commonly used within the insurance industry that we believe are reliable. We also engage a third-party actuary to perform a periodic review of our casualty losses. Nonetheless, insurance estimates include certain assumptions and management judgments regarding the frequency and severity of claims, claim development and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense that would be reported under these programs. Our wholly‑owned captive insurance companies finance a significant portion of the physical damage risk on company‑owned drilling rigs as well as casualty deductibles. An actuary reviews the loss reserves retained by the Company and the captives on an annual basis. 2022 FORM 10-K | 50 Table of Contents Revenue Recognition Drilling services revenues are primarily comprised of daywork drilling contracts for which the related revenues and expenses are recognized as services are performed and collection is reasonably assured. With most drilling contracts, we receive payments contractually designated for the mobilization and demobilization of drilling rigs and other equipment to and from the client’s drill site. Revenue associated with the mobilization and demobilization of our drilling rigs to and from the client’s drill site do not relate to a distinct good or service. These revenues are deferred and recognized ratably over the related contract term that drilling services are provided. The amount of demobilization revenue that we ultimately collect is dependent upon the specific contractual terms, most of which include provisions for reduced or no payment for demobilization when, among other things, the contract is renewed or extended with the same client, or when the rig is subsequently contracted with another client prior to the termination of the current contract. Since revenues associated with demobilization activity are typically variable, at each period end, they are estimated at the most likely amount, and constrained when the likelihood of a significant reversal is probable. Direct costs incurred for the mobilization, are deferred and recognized on a straight-line basis as the drilling service is provided. While costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred. We also act as a principal for certain reimbursable services and auxiliary equipment provided by us to our clients, for which we incur costs and earn revenues. Many of these costs are variable, or dependent upon the activity that is performed each day under the related contract. Accordingly, reimbursements that we receive for out-of-pocket expenses are recorded as revenues and the out-of-pocket expenses for which they relate are recorded as operating costs during the period to which they relate within the series of distinct time increments. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met. Income Taxes Deferred income taxes are accounted for under the liability method, which takes into account the differences between the basis of the assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. Our net deferred tax liability balance at year-end reflects the application of our income tax accounting policies and is based on management’s estimates, judgments and assumptions. Included in our net deferred tax liability balance are deferred tax assets that are assessed for realizability. If it is more likely than not that a portion of the deferred tax assets will not be realized in a future period, the deferred tax assets will be reduced by a valuation allowance based on management’s estimates. In addition, we operate in several countries throughout the world and our tax returns filed in those jurisdictions are subject to review and examination by tax authorities within those jurisdictions. We recognize uncertain tax positions we believe have a greater than 50 percent likelihood of being sustained. We cannot predict or provide assurance as to the ultimate outcome of any existing or future assessments. New Accounting Standards See Note 2—Summary of Significant Accounting Policies, Risks and Uncertainties to our Consolidated Financial Statements for recently adopted accounting standards and new accounting standards not yet adopted. 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. 2022 FORM 10-K | 51 Table of Contents 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. Year Ended September 30, 2022 (in thousands) North America Solutions Offshore Gulf of Mexico International Solutions Segment operating income (loss) $ 121,893 $ 23,214 $ (138) Add back: Depreciation and amortization 375,250 9,175 4,156 Research and development 26,728 — — Selling, general and administrative expense 43,796 2,661 8,779 Asset impairment charges 1,868 — 2,495 Restructuring charges 498 — — Direct margin (Non-GAAP) $ 570,033 $ 35,050 $ 15,292 Year Ended September 30, 2021 (in thousands) North America Solutions Offshore Gulf of Mexico International Solutions Segment operating income (loss) $ (287,176) $ 15,969 $ (21,003) Add back: Depreciation and amortization 392,415 10,557 2,013 Research and development 21,811 — — Selling, general and administrative expense 51,089 2,624 8,028 Asset impairment charges 70,850 — — Restructuring charges 3,868 — 207 Direct margin (Non-GAAP) $ 252,857 $ 29,150 $ (10,755)