Item 7. Management’s Discussion and Analysis
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, 2023, our drilling rig fleet included a total of 262 drilling rigs. Our reportable operating business segments consist of the North America Solutions segment with 233 rigs, the Offshore Gulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 22 rigs as of September 30, 2023. At the close of fiscal year 2023, we had 164 active contracted rigs, of which 91 were under a fixed-term contract and 73 were working well-to-well, compared to 192 contracted rigs at September 30, 2022. 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.
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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 capital budgets set to achieve respective production targets in relation to 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 commodity prices. While that correlation remains for a segment of the market, beginning in 2021, a portion of rig activity has not moved in tandem with crude oil prices to the same extent 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 2024 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 2024 to be similar to that experienced in calendar year 2023. The overall demand for super-spec rigs in the U.S. remains relatively strong and while some readily available idle super-spec capacity exists in the market, it is not to a level that has materially impacted pricing as it could be quickly reabsorbed into the market. This supply-demand dynamic combined with the value proposition we provide our customers through our drilling expertise, high-quality FlexRig® fleet, and automation technology is expected to result in an improvement in our underlying contract economics.
With regards to our North America Solutions segment, volatility in natural gas prices and the related reduced rig demand contributed to an increased level of rig releases in the market during the first half of calendar year 2023. During the second half of calendar year 2023, other non-commodity price related factors, such as customer capital budgets, drilling plans, productions levels and customer consolidations, also led some customers to release rigs as well. Heading into our fiscal year 2024, we expect our rig activity to increase modestly during the first half of the fiscal year as customers reset their capital budgets for 2024 and will likely remain at a relatively stable level during the back half of the fiscal year. This is similar to the rig activity patterns we have experienced during the last few years as well. During fiscal year 2023, the Company employed a fiscally prudent approach to deploying capital and prioritizing economic margins over rig utilization, and we plan to maintain this approach in fiscal 2024. Furthermore, we still believe the supply and demand dynamics surrounding our North America Solutions segment remain constructive for future activity and pricing levels.
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. During fiscal 2024, we plan to continue to devote capital to our international expansion strategy. While we understand this strategy will take time and capital to execute, we believe it is important in terms of growth and diversification for the Company. Currently, activity levels in the International Solutions and Offshore Gulf of Mexico business segments look to remain relatively steady at current levels for the foreseeable future.
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Over the past two years, the Company has experienced inflationary pressures related to labor and consumable inventory and more recently as a result of cost-acceleration related to running our rig fleet harder to achieve the well designs, lateral lengths and drilling efficiencies our customers demand. The inflationary forces have abated, and the financial impacts were partially mitigated by pass-through mechanisms in our contracts. However, the performance and efficiency gains we achieve require us to continue to push the service intensity of our rigs and equipment. Accordingly, we expect operational expenses to remain at elevated levels compared to recent years. Additionally, we are also experiencing inflationary pressures in our non-operational expenses particularly around labor and third-party services. As a consequence of these pressures, we are projecting an increase in our selling, general and administrative expenses during fiscal 2024.
Recent Developments
Credit Facility Extension
On February 10, 2023, 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 11, 2026 to November 12, 2027. 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.
Investment in Tamboran
In October 2022, we made a $14.1 million equity investment, representing 106.0 million common shares in Tamboran Resources Limited, a publicly traded company on the Australian Securities Exchange Ltd under the ticker "TBN." Tamboran is focused on playing a constructive role in the global energy transition towards a lower carbon future, by developing a significantly low CO 2 gas resource within Australia's Beetaloo Sub-basin. During the year ended September 30, 2023, we recognized a loss of $4.2 million, recorded within Gain (loss) on investment securities on our Consolidated Statements of Operations, as a result of the change in fair value of the investment during the period. Concurrent with the investment agreement, we entered into a fixed-term drilling services agreement with Tamboran. During the fourth fiscal quarter of 2023, drilling services commenced. See Note 2—Summary of Significant Accounting Policies, Related Risks and Uncertainties to our Consolidated Financial Statements for additional related party disclosures.
Significant Lease Commenced
During the fiscal year ended September 30, 2023, we entered into a lease agreement to relocate our Tulsa corporate headquarters to a new office space. This lease commenced during the fourth fiscal quarter of 2023 and resulted in a $17.6 million increase to right-of-use assets and lease liability on our Consolidated Balance Sheets. In addition, we began amortizing the right of use asset over the initial lease term of approximately 12 years.
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, 2023 and 2022, our contract drilling backlog was $1.4 billion and $1.2 billion, respectively. The increase in backlog at September 30, 2023 from 2022 is primarily due to an increase in the number of contracts executed under FlexPool agreements. Approximately 33.8 percent of the September 30, 2023 total backlog is reasonably expected to be fulfilled in fiscal year 2025 and thereafter.
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The following table sets forth the total backlog by reportable segment as of September 30, 2023 and 2022, and the percentage of the September 30, 2023 backlog reasonably expected to be fulfilled in fiscal year 2025 and thereafter:
(in billions) September 30, 2023 September 30, 2022 Percentage Reasonably
Expected to be Fulfilled in Fiscal Year 2025
and Thereafter
North America Solutions $ 1.1 $ 0.9 29.0 %
Offshore Gulf of Mexico $ — $ — —
International Solutions $ 0.3 $ 0.3 52.7
$ 1.4 $ 1.2
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, 2023 and 2022
Consolidated Results of Operations
Net Income We recorded net income of $434.1 million ($4.16 per diluted share) for the fiscal year ended September 30, 2023 compared to net income of $7.0 million ($0.05 per diluted share) for the fiscal year ended September 30, 2022.
Operating Revenue Consolidated operating revenues were $2.9 billion and $2.1 billion during fiscal years 2023 and 2022, respectively. The $0.8 billion increase in fiscal year 2023 from fiscal year 2022 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 2023 were $1.7 billion, compared to direct operating expenses of $1.4 billion in fiscal year 2022. The increase in fiscal year 2023 from fiscal year 2022 was primarily attributable to the previously mentioned higher activity levels as well as a North America Solutions wage increase that became effective at the end of fiscal year 2022.
Depreciation and Amortization Depreciation and amortization expense was $382.3 million in fiscal year 2023 and $403.2 million in fiscal year 2022. The decrease is reflective of lower capital expenditures over the last several years. Depreciation and amortization includes amortization of intangible assets of $6.6 million and $7.2 million in fiscal years 2023 and 2022, and abandonments of equipment of $3.3 million and $6.6 million in fiscal years 2023 and 2022, respectively.
Selling, General and Administrative Expense Selling, general and administrative expenses increased to $206.7 million in the fiscal year ended September 30, 2023 compared to $182.4 million in the fiscal year ended September 30, 2022. The $24.3 million increase in fiscal year 2023 is primarily due to an increase in professional fees of $12.0 million and an increase in labor and labor-related expenses of $8.6 million.
Asset Impairment Charges During the fiscal year ended September 30, 2023, the Company initiated a plan to decommission, scrap and/or sell certain assets including four international FlexRig ® drilling rigs, four international conventional drilling rigs, and additional equipment. The aggregate net book value of these assets of $13.2 million was written down to their estimated scrap value of $1.1 million, resulting in non-cash impairment charges of $12.1 million for the fiscal year ended September 30, 2023, of which $8.1 million of the charge is recorded within the International Solutions segment. The remaining $4.0 million is recorded within the North America Solutions segment. The impairment charge was recorded in the Consolidated Statement of Operations for the fiscal year ended September 30, 2023. Comparatively, 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 within our North America Solutions and International Solutions segments, which resulted in a non-cash impairment charge of $4.4 million, of which $2.5 million of the charge is recorded within the International Solutions segment. The remaining $1.9 million is recorded within the North America Solutions segment. The impairment charge was recorded in the Consolidated Statement of Operations for the fiscal year ended September 30, 2022.
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Gain on Investment Securities During the fiscal year ended September 30, 2023, we recognized an aggregate gain of $11.3 million on investment securities. This gain was mainly comprised of a $27.4 million gain on our equity investment in ADNOC Drilling, partially offset against a $4.2 million loss on our investment in Tamboran; both of which were a result of fluctuations in the fair market value of the stocks. Additionally, the aggregate gain was offset by a $12.2 million loss on investment recognized during the fiscal year ended September 30, 2023 as a result of a Blue Chip Swap transaction that occurred during the period. See—Note 2—Summary of Significant Accounting Policies, Related Risks and Uncertainties—International Solutions Drilling Risks for additional information related to the Blue Chip Swap. During the fiscal year ended September 30, 2022, we recognized an aggregate gain of $57.9 million on investment securities. This gain was mainly 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, and a gain of $8.2 million on the sale of our equity investment in Schlumberger, Ltd.
Interest and Dividend Income Interest and dividend income was $28.4 million and $18.1 million in fiscal years 2023 and 2022, respectively. The increase in interest and dividend income in fiscal year 2023 was primarily due to higher market interest rates.
Interest Expense Interest expense totaled $17.3 million in fiscal year 2023 and $19.2 million in fiscal year 2022. The decrease in interest expense is primarily attributable to the fiscal year 2022 interest expense associated with our 4.65% Senior Notes due 2025 which were redeemed on October 27, 2021.
Income Taxes We had an income tax expense of $159.3 million in fiscal year 2023 compared to an income tax expense of $24.4 million in fiscal year 2022. The effective income tax rate was 26.8 percent in fiscal year 2023 compared to 77.8 percent in fiscal year 2022. The effective rates differ from the U.S. federal statutory rate (21.0 percent for the fiscal years 2023 and 2022) 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 7—Income Taxes to our Consolidated Financial Statements for additional income tax disclosures.
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North America Solutions
The following table presents certain information with respect to our North America Solutions reportable segment:
(in thousands, except operating statistics) 2023 2022 % Change
Operating revenues $ 2,519,743 $ 1,788,167 40.9 %
Direct operating expenses 1,447,528 1,218,134 18.8
Depreciation and amortization 353,976 375,250 (5.7)
Research and development 30,457 26,728 14.0
Selling, general and administrative expense 58,367 43,796 33.3
Asset impairment charges 3,948 1,868 111.3
Restructuring charges — 498 (100.0)
Segment operating income $ 625,467 $ 121,893 413.1
Financial Data and Other Operating Statistics 1 :
Direct margin (Non-GAAP) 2
$ 1,072,215 $ 570,033 88.1
Revenue days 3
61,814 59,672 3.6
Average active rigs 4
169 163 3.7
Number of active rigs at the end of period 5
147 176 (16.5)
Number of available rigs at the end of period 233 236 (1.3)
Reimbursements of "out-of-pocket" expenses $ 304,870 $ 232,092 31.4
(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 $2.5 billion and $1.8 billion in fiscal year 2023 and 2022, respectively. Operating revenues increased $0.7 billion in fiscal year 2023 primarily due to higher pricing and a 3.6 percent increase in activity levels.
Direct Operating Expenses Direct operating expenses increased to $1.4 billion during the fiscal year ended September 30, 2023 as compared to $1.2 billion during the fiscal year ended September 30, 2022. This increase was primarily driven by an increase of $137.3 million in labor and labor-related expenses driven by higher activity levels and increased field wages beginning in late September 2022. Additionally, materials and supplies expense increased by $19.3 million, which was also primarily driven by higher activity levels.
Depreciation and Amortization Depreciation and amortization expense decreased to $354.0 million during the fiscal year ended September 30, 2023 as compared to $375.3 million during the fiscal year ended September 30, 2022. The decrease is reflective of lower capital expenditures over the last several years.
Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $58.4 million during the fiscal year ended September 30, 2023 as compared to $43.8 million during the fiscal year ended September 30, 2022. This increase was largely driven by a $10.8 million increase in professional services fees.
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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) 2023 2022 % Change
Operating revenues $ 130,244 $ 125,465 3.8 %
Direct operating expenses 96,781 90,415 7.0
Depreciation 7,622 9,175 (16.9)
Selling, general and administrative expense 3,035 2,661 14.1
Segment operating income $ 22,806 $ 23,214 (1.8)
Financial Data and Other Operating Statistics 1 :
Direct margin (Non-GAAP) 2
$ 33,463 $ 35,050 (4.5)
Revenue days 3
1,460 1,460 —
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 $ 30,445 $ 26,077 16.8
(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 $130.2 million and $125.5 million in the fiscal year ended September 30, 2023 and 2022, respectively. The 3.8 percent increase in operating revenue was largely driven by pricing increases and wage increase pass-throughs which occurred in the latter portion of fiscal year 2022 partially offset by the mix of rigs being on lower standby or mobilization rates as opposed to working at full rates.
Direct Operating Expenses Direct operating expenses increased to $96.8 million during the fiscal year ended September 30, 2023 as compared to $90.4 million during the fiscal year ended September 30, 2022. The increase was primarily driven by the factors described above.
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International Solutions
The following table presents certain information with respect to our International Solutions reportable segment:
(in thousands, except operating statistics) 2023 2022 % Change
Operating revenues $ 212,566 $ 136,072 56.2 %
Direct operating expenses 187,292 120,780 55.1
Depreciation 7,615 4,156 83.2
Selling, general and administrative expense 10,401 8,779 18.5
Asset impairment charges 8,149 2,495 226.6
Segment operating loss $ (891) $ (138) (545.7)
Financial Data and Other Operating Statistics 1 :
Direct margin (Non-GAAP) 2
$ 25,274 $ 15,292 65.3
Revenue days 3
4,788 3,036 57.7
Average active rigs 4
13 8 62.5
Number of active rigs at the end of period 5
13 12 8.3
Number of available rigs at the end of period 22 28 (21.4)
Reimbursements of "out-of-pocket" expenses $ 10,227 $ 4,910 108.3
(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 $212.6 million and $136.1 million in the fiscal years ended September 30, 2023 and 2022, respectively. The $76.5 million increase in fiscal year 2023 from fiscal year 2022 was primarily driven by a 57.7 percent increase in activity levels. Additionally, during the year ended September 30, 2022, we recognized $16.4 million in revenue related to the settlement of a contract drilling dispute related to drilling services provided from fiscal year 2016 through 2019 with YPF S.A. Refer to Note 9 - Revenue from Contracts with Customers for additional details.
Operating Expenses Direct operating expenses increased to $187.3 million during the fiscal year ended September 30, 2023 as compared to $120.8 million during the fiscal year ended September 30, 2022. This increase was primarily driven by an increase of $33.3 million in labor and labor-related expense and an increase of $17.6 million in materials and supplies as a result of higher activity levels.
Asset Impairment Charges During the fiscal year ended September 30, 2023, the Company initiated a plan to decommission and scrap four international FlexRig ® drilling rigs and four conventional drilling rigs located in Argentina that are not suitable for unconventional drilling. As a result, these rigs were reclassified to Assets held-for-sale on our Consolidated Balance Sheets. The rigs’ aggregate net book value of $8.8 million was written down to the estimated scrap value of $0.7 million, which resulted in a non-cash impairment charge of $8.1 million recorded in Asset impairment charges within our Consolidated Statement of Operations during the fiscal year ended September 30, 2023. 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 to Assets held-for-sale on our Consolidated Balance Sheets. This resulted in a non-cash impairment charge of $2.5 million recorded in Asset impairment charges within our Consolidated Statement of Operations during the fiscal year ended September 30, 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.
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Other Operations
Results of our other operations, excluding corporate selling, general and administrative costs, and corporate depreciation, are as follows:
(in thousands) 2023 2022 % Change
Operating revenues $ 77,296 $ 66,287 16.6 %
Direct operating expenses 57,944 50,683 14.3
Depreciation 2,014 1,701 18.4
Selling, general and administrative expense 1,462 1,183 23.6
Operating income $ 15,876 $ 12,720 24.8
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, 2023 and 2022 amounted to $67.4 million and $57.0 million, respectively, which were eliminated upon consolidation.
Direct Operating Expenses Direct operating expenses consisted primarily of $12.5 million and $7.0 million in adjustments to accruals for estimated losses allocated to the Captives and rig and casualty insurance premiums of $39.7 million and $35.6 million during the fiscal years ended September 30, 2023 and 2022, 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, 2022 and 2021
A discussion of our results of operations for the fiscal year ended September 30, 2022 compared to the fiscal year ended September 30, 2021 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, 2022, filed with the Securities and Exchange Commission ("SEC") on November 16, 2022 .
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 return cash to shareholders through dividends or share repurchases, or 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, Related 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.
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 offset these cumulative cost trends with rate increases.
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As of September 30, 2023 and 2022, we had cash and cash equivalents of $257.2 million and $232.1 million and short-term investments of $93.6 million and $117.1 million, respectively. Our cash flows for the fiscal years ended September 30, 2023, 2022 and 2021 are presented below:
Year Ended September 30,
(in thousands) 2023 2022 2021
Net cash provided by (used in):
Operating activities $ 833,682 $ 233,913 $ 136,440
Investing activities (322,584) (167,315) (161,994)
Financing activities (463,869) (734,305) 425,523
Net increase (decrease) in cash and cash equivalents and restricted cash $ 47,229 $ (667,707) $ 399,969
Operating Activities
Our operating net working capital (non-GAAP) as of September 30, 2023, 2022, and 2021 is presented below:
Year Ended September 30,
(in thousands) 2023 2022 2021
Total current assets $ 1,006,625 $ 1,002,944 $ 1,586,566
Less:
Cash and cash equivalents 257,174 232,131 917,534
Short-term investments 93,600 117,101 198,700
Assets held-for-sale 645 4,333 71,453
Prepaid property, plant and equipment 21,821 10,091 —
633,385 639,288 398,879
Total current liabilities 418,931 394,810 866,306
Less:
Dividends payable 25,194 26,693 27,332
Current portion of long-term debt, net — — 483,486
Advance payment for sale of property, plant and equipment — 600 86,524
$ 393,737 $ 367,517 $ 268,964
Operating net working capital (non-GAAP) $ 239,648 $ 271,771 $ 129,915
Cash flows provided by operating activities were approximately $833.7 million, $233.9 million, and $136.4 million for the fiscal year ended September 30, 2023, 2022, and 2021 respectively. The increase in cash provided by operating activities between fiscal years 2023 and 2022 is primarily driven by higher activity and pricing. The increase in cash provided by operating activities between fiscal years 2022 and 2021 was primarily driven by higher activity and pricing, and is partially offset by changes in operating net working capital. 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, assets held-for-sale, and prepaid property, plant and equipment, less current liabilities, excluding dividends payable, short-term debt and advance payments for sale of property, plant and equipment.
Operating net working capital was $239.6 million, $271.8 million and $129.9 million as of September 30, 2023, 2022 and 2021, 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.
Investing Activities
Capital Expenditures Our capital expenditures were $395.5 million, $250.9 million and $82.1 million in fiscal years 2023, 2022 and 2021, respectively. The increase in capital expenditures is largely driven by higher activity levels and increased costs associated with rig upgrades, including walking rig conversions. Our fiscal year 2024 capital spending is currently estimated to be between $450 million and $500 million. This estimate includes normal capital maintenance requirements, information technology spending, and skidding to walking conversions for up to 14 rigs.
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Net Purchases & Sales of Short-Term Investments Our net sales of short-term investments during fiscal year 2023 were $14.3 million compared to net sales of $79.6 million and net purchases $107.4 million in fiscal years 2022 and 2021, respectively. The change in activity is driven by our ongoing liquidity management. Additionally, the Central Bank of Argentina maintains currency controls that limit our ability to access U.S. dollars in Argentina and remit cash from our Argentine operations. The execution of certain trades known as Blue Chip Swaps effectively results in a parallel U.S. dollar exchange rate. During the fiscal year ended 2023, we entered into a Blue Chip Swap transaction, which resulted in a $12.2 million loss on investment recorded in Gain on investment securities within our Consolidated Statements of Operations. As a result of the Blue Chip Swap transaction, $9.8 million of net cash was repatriated to the U.S. during the period.
Net Purchases of Long-Term Investments Our net purchases of long-term investments were $20.7 million, $29.2 million and $102.5 million in fiscal years 2023, 2022 and 2021, respectively. During the fiscal year ended September 30, 2023, our activity was primarily driven by a $14.1 million equity investment in Tamboran Resources Limited, $4.1 million in debt and equity security investments in various geothermal energy companies, and $2.5 million investments in other equity securities. 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.
Sale of Assets Our proceeds from asset sales totaled $70.1 million, $62.3 million and $43.5 million in fiscal year 2023, 2022 and 2021, respectively. The increase in proceeds is largely driven by higher rig activity which drives higher reimbursement from customers for lost or damaged drill pipe and other used drilling equipment. Additionally, in fiscal year 2022, we sold our casing running and trucking assets.
Insurance Proceeds from Involuntary Conversion I n November 2022, a fire at a wellsite caused substantial damage to one of our super spec-rigs within our North America Solutions segment. The major components were destroyed beyond repair and considered a total loss, and, as a result, these assets were written off and the rig was removed from our available rig count. At the time of the loss, the rig was fully insured under replacement cost insurance. The insurance recovery is expected to exceed the net book value of the components written off. During the fiscal year ended September 30, 2023, we collected $9.2 million of the total expected insurance proceeds.
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 $86.5 million in cash consideration in advance of delivering the rigs.
Financing Activities
Repurchase of Shares The Company has an evergreen authorization from the Board of Directors for the repurchase of up to four million common shares in any calendar year. In December 2022, the Board of Directors increased the maximum number of shares authorized to be repurchased in calendar year 2023 to five million common shares. On June 7, 2023, the Board of Directors further increased the maximum number of shares authorized to be repurchased in calendar year 2023 to seven million shares. The repurchases may be made using our cash and cash equivalents or other available sources and are held as treasury shares on our Condensed Consolidated Balance Sheets. During the fiscal year ended September 30, 2023, we repurchased 6.5 million common shares at an aggregate cost of $249.0 million, including accrued excise tax of $1.8 million, resulting in a net cash outflow of $247.2 million. During the fiscal year ended September 30, 2022, we repurchased 3.2 million common shares at an aggregate cost of $77.0 million. There were no purchases of common shares in fiscal year 2021.
Dividends We paid dividends of $1.94 per share, comprised of a base cash dividend of $1.00 and a supplemental cash dividend of $0.94 during the fiscal year 2023. Comparatively, we paid dividends of $1.00 per share in 2022 and 2021. Total dividends paid were $201.5 million, $107.4 million and $109.1 million in fiscal years 2023, 2022 and 2021, respectively.
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.
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 6—Debt.
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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.
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. All 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 were 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.
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.
Credit Facility
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. 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. Additionally, 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 12, 2025 to November 11, 2026. On February 10, 2023, 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 11, 2026 to November 12, 2027. 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, 2023, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility. For a full description of the 2018 Credit Facility, see Note 6—Debt to the Consolidated Financial Statements.
As of September 30, 2023, we had $95.0 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 $95.0 million, $40.0 million was outstanding as of September 30, 2023. Separately, we had $2.1 million in standby letters of credit and bank guarantees outstanding. In total, we had $42.1 million outstanding as of September 30, 2023.
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, 2023, we were in compliance with all debt covenants.
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Future Cash Requirements
Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2024 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, 2023 and matures on September 29, 2031.
As of September 30, 2023, we had a $517.8 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 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, 2023, we have recorded approximately $3.1 million of unrecognized tax benefits, interest, and penalties. We believe it is reasonably possible up to $2.6 million of the unrecognized tax benefits, interest, and penalties will be recognized as of June 30, 2024 as a result of a lapse of the statute of limitations. Any further reversals or payments of the liability cannot be estimated at this time.
The long‑term debt to total capitalization ratio was 16.6 percent as of September 30, 2023 and 2022. For additional information regarding debt agreements, refer to Note 6—Debt to the Consolidated Financial Statements.
There were no other significant changes in our financial position since September 30, 2022.
Material Commitments
Our contractual obligations as of September 30, 2023 are summarized in the table below:
Obligations due by year
(in thousands) Total 2024 2025 2026 2027 2028 Thereafter
Long-term debt 550,000 — — — — — 550,000
Interest 1
128,658 16,069 16,073 16,076 16,080 16,084 48,276
Operating leases 2
54,421 10,534 7,552 5,390 5,055 4,499 21,391
Purchase obligations 3
130,694 130,694 — — — — —
Total contractual obligations $ 863,773 $ 157,297 $ 23,625 $ 21,466 $ 21,135 $ 20,583 $ 619,667
(1) Interest on fixed-rate 2031 Notes was estimated based on principal maturities. See Note 6—Debt to our Consolidated Financial Statements.
(2) See Note 4—Leases to our Consolidated Financial Statements.
(3) See Note 15—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, Related 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.
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Property, Plant and Equipment
Property, plant and equipment, including renewals and betterments, are capitalized at cost, while maintenance and repairs are expensed as incurred. 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, auto liability, as well as other insurance coverages. 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.
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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, Related 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.
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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, 2023
(in thousands) North America Solutions Offshore Gulf of Mexico International Solutions
Segment operating income (loss) $ 625,467 $ 22,806 $ (891)
Add back:
Depreciation and amortization 353,976 7,622 7,615
Research and development 30,457 — —
Selling, general and administrative expense 58,367 3,035 10,401
Asset impairment charges 3,948 — 8,149
Direct margin (Non-GAAP) $ 1,072,215 $ 33,463 $ 25,274
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