Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 NATURE OF OPERATIONS
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.
During the third quarter of fiscal year 2020, we restructured our operations to accommodate scale during an industry downturn and re-organized our operations to align to new marketing and management strategies. This is consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources. Operations previously reported within the former U.S. Land and H&P Technologies operating and reportable segments are now managed and presented within the North America Solutions reportable segment. As a result, beginning with the third quarter of fiscal year 2020, our drilling services operations were organized into the following reportable operating business segments: North America Solutions, Offshore Gulf of Mexico and International Solutions. All segment disclosures have been recast for these segment changes. Our real estate operations, our incubator program for new research and development projects and our wholly-owned captive insurance companies are included in "Other." Refer to Note 15—Business Segments and Geographic Information for further details on our reportable segments.
Our North America Solutions operations are primarily located in Colorado, Ohio, Oklahoma, New Mexico, North Dakota, Texas, West Virginia and Wyoming. Additionally, Offshore Gulf of Mexico operations are conducted in Louisiana and in U.S. federal waters in the Gulf of Mexico and our International Solutions operations have rigs primarily located in four international locations: Argentina, Bahrain, Colombia and United Arab Emirates.
We also own, develop and operate limited commercial real estate properties. Our real estate investments, which are located exclusively within Tulsa, Oklahoma, include a shopping center and undeveloped real estate.
Fiscal Year 2020 Dispositions
In December 2019, we closed on the sale of a wholly-owned subsidiary of Helmerich & Payne International Drilling Co. ("HPIDC"), TerraVici Drilling Solutions, Inc. ("TerraVici"). As a result of the sale, 100% of TerraVici's outstanding capital stock was transferred to the purchaser in exchange for approximately $15.1 million, resulting in a total gain on the sale of TerraVici of approximately $15.0 million. Prior to the sale, TerraVici was a component of the North America Solutions operating segment. This transaction did not represent a strategic shift in our operations and will not have a significant effect on our operations and financial results going forward.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, RISKS AND UNCERTAINTIES
Interim Financial Information
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) pertaining to interim financial information. Accordingly, these interim financial statements do not include all information or footnote disclosures required by GAAP for complete financial statements and, therefore, should be read in conjunction with the Consolidated Financial Statements and notes thereto in our 2020 Annual Report on Form 10-K and other current filings with the SEC. In the opinion of management, all adjustments, consisting of those of a normal recurring nature, necessary to present fairly the results of the periods presented have been included. The results of operations for the interim periods presented may not necessarily be indicative of the results to be expected for the full year. To conform to current period presentation, certain operating expenses of $10.1 million, previously reported in the Unaudited Condensed Consolidated Statement of Operations for the three months ended December 31, 2019 as other operating expenses were reclassified to drilling services operating expenses, excluding depreciation and amortization. The reclassification had no impact on consolidated net income, comprehensive income or shareholders' equity.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Helmerich & Payne, Inc. and its domestic and foreign subsidiaries. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the fiscal year are included in the Unaudited Condensed Consolidated Statements of Operations and Statements of Comprehensive Income (Loss) from the date the Company gains control until the date when the Company ceases to control the subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
COVID-19 and OPEC+ Production Impacts
The outbreak of a novel strain of coronavirus (“COVID-19”) and its development into a pandemic has resulted in significant global economic disruption, including North America and many of the other geographic areas where we operate, or where our customers are located, or suppliers or vendors operate. Actions taken to prevent the spread of COVID-19 by governmental authorities around the world, including imposing mandatory closures of all non-essential business facilities, seeking voluntary closures of such facilities and imposing restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions, have significantly reduced global economic activity, thereby resulting in lower demand for crude oil. In particular, the travel restrictions in certain countries where we operate, including the closure of their borders to travel into the country, have resulted in an inability to effectively staff or rotate personnel at, and thereby operate, certain of our rigs and could lead to an inability to fulfill our contractual obligations under contracts with customers. Governmental authorities have also implemented multi-step policies with the goal of re-opening various sectors of the economy. However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases, while other jurisdictions are continuing to re-open or have nearly completed the re-opening process despite increases in COVID-19 cases. The COVID-19 outbreak may significantly worsen during the upcoming months, which may cause governmental authorities to reconsider restrictions on business and social activities. In the event governmental authorities increase restrictions, the re-opening of the economy may be further curtailed. We have experienced, and expect to continue to experience, some disruptions to our business operations, as these restrictions have significantly impacted, and may continue to impact, many sectors of the economy. In addition, the perceived risk of infection and health risk associated with COVID-19, and the illness of many individuals across the globe, has and will continue to alter behaviors of consumers and policies of companies around the world; such altered behaviors and policies have many of the same effects intended by governmental authorities to stop the spread of COVID-19, such as self-imposed or voluntary social distancing, quarantining, and remote work policies. We are complying with local governmental jurisdiction policies and procedures where our operations reside. In some cases, policies and procedures are more stringent in our foreign operations than in our North America operations and this has resulted in a complete suspension, for a certain period of time, of all drilling operations in at least one foreign jurisdiction. In addition, a customer in one foreign jurisdiction has claimed force majeure resulting in zero chargeable revenues during the suspension period.
In early March 2020, the increase in crude oil supply resulting from production escalations from the Organization of the Petroleum Exporting Countries and other oil producing nations (“OPEC+”) combined with a decrease in crude oil demand stemming from the global response and uncertainties surrounding the COVID-19 pandemic resulted in a sharp decline in crude oil prices. Consequently, we saw a significant decrease in customer 2020 capital budgets and a corresponding dramatic decline in the demand for land rigs. Although OPEC+ agreed in April 2020 to cut oil production and has extended such production cuts through March 2021, production cuts for future months will be determined on a monthly basis, and there is no assurance that the agreement will continue or be observed by its parties. Despite the production cuts, prices in the oil and gas market have remained depressed, as the oversupply and lack of demand in the market persist. Oil and natural gas prices are expected to continue to be volatile as a result of the near-term production instability and the ongoing COVID-19 outbreak and as changes in oil and natural gas inventories, industry demand and global and national economic performance are reported.
These events have had, and could continue to have, an adverse impact on numerous aspects of our business, financial condition and results of operations. The ultimate extent of the impact of COVID-19 and prolonged excess oil supply on our business, financial condition and results of operations will depend largely on future developments, including the duration and spread of the COVID-19 outbreak within the United States and the parts of the world in which we operate and the related impact on the oil and gas industry, the impact of governmental actions designed to prevent the spread of COVID-19 and the development, availability and timely distribution of effective treatments and vaccines worldwide, all of which are highly uncertain and cannot be predicted with certainty at this time.
From a financial perspective, we believe the Company is operationally and financially well positioned to continue operating even through a more protracted disruption caused by COVID-19, oil oversupply and low oil prices. At December 31, 2020, the Company had cash and cash equivalents and short-term investments of $523.8 million. The 2018 Credit Facility (as defined within Note 6—Debt) has $750.0 million in aggregate availability with a maximum of $75.0 million available for use as letters of credit. As of December 31, 2020, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility. We currently do not anticipate the need to draw on the 2018 Credit Facility. Furthermore, the Company 2025 Notes (as defined within Note 6—Debt) do not mature until March 19, 2025.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash on hand, demand deposits with banks and all highly liquid investments with original maturities of three months or less. Our cash, cash equivalents and short-term investments are subject to potential credit risk, and certain of our cash accounts carry balances greater than the federally insured limits.
We had restricted cash of $48.7 million and $39.3 million at December 31, 2020 and 2019, respectively, and $48.9 million and $35.0 million at September 30, 2020 and 2019, respectively. Of the total at December 31, 2020 and September 30, 2020, $3.2 million and $3.6 million, respectively, is related to the acquisition of drilling technology companies, $2.0 million as of both fiscal period ends is from the initial capitalization of the captive insurance companies, and $43.4 million and $43.1 million, respectively, represents an additional amount management has elected to restrict for the purpose of potential insurance claims in our wholly-owned captive insurance companies. The restricted amounts are primarily invested in short-term money market securities.
The cash, cash equivalents, and restricted cash are reflected within the following line items on the Unaudited Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
(in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
373,980
|
|
|
$
|
355,010
|
|
|
$
|
487,884
|
|
|
$
|
347,943
|
|
Restricted cash
|
|
|
|
|
|
|
|
Prepaid expenses and other, net
|
45,688
|
|
|
35,618
|
|
|
45,577
|
|
|
31,291
|
|
Other assets, net
|
2,985
|
|
|
3,687
|
|
|
3,286
|
|
|
3,737
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
422,653
|
|
|
$
|
394,315
|
|
|
$
|
536,747
|
|
|
$
|
382,971
|
|
Recently Issued Accounting Updates
Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASUs") to the FASB Accounting Standards Codification ("ASC"). We consider the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable, clarifications of ASUs listed below, immaterial, or already adopted by the Company.
The following table provides a brief description of recent accounting pronouncements and our analysis of the effects on our financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
Description
|
Date of
Adoption
|
Effect on the Financial Statements or Other Significant Matters
|
Recently Adopted Accounting Pronouncements
|
ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) and related ASUs issued subsequent
|
This ASU introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income (loss), and (4) beneficial interests in securitized financial assets. This update is effective for annual periods beginning after December 15, 2019.
|
October 1, 2020
|
We adopted this ASU during the first quarter of fiscal year 2021, as required. Refer to "—Allowance for Credit Losses" below for additional information.
|
Standards that are not yet adopted as of December 31, 2020
|
ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans—General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans
|
This ASU amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit, pension and other postretirement plans. This update is effective for annual periods ending after December 15, 2020.
|
October 1, 2021
|
We are currently evaluating the impact the new guidance may have on our unaudited condensed consolidated financial statements and disclosures.
|
ASU No. 2019-12, Financial Instruments – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
|
This ASU simplifies the accounting for income taxes by removing certain exceptions related to Topic 740. The ASU also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for annual and interim periods beginning after December 15, 2020. Early adoption of the amendment is permitted, including adoption in any interim period for public entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. Upon adoption, the amendments addressed in this ASU will be applied either prospectively, retrospectively or on a modified retrospective basis through a cumulative effect adjustment to retained earnings. This update is effective for annual periods beginning after December 15, 2020.
|
October 1, 2021
|
We are currently evaluating the impact the new guidance may have on our unaudited condensed consolidated financial statements and disclosures.
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses
On October 1, 2020, we adopted ASU 2016-13 on a modified retrospective basis through a cumulative-effect adjustment without restating comparative periods, as permitted under the adoption provisions. Upon adoption, we recognized a $1.6 million increase to our allowance for credit losses and a corresponding cumulative adjustment to reduce retained earnings, net of income taxes, of $1.3 million. This transition adjustment reflects the development of our models to estimate expected credit losses over the life of our financial assets, which primarily consist of our accounts receivable. Pursuant to ASU 2016-13, we have evaluated our customers’ financial strength and liquidity based on aging of accounts receivable, payment history, and other relevant information, including ratings agency, credit ratings and alerts, and publicly available reports.
Self-Insurance
We have accrued a liability for estimated workers' compensation and other casualty claims incurred based upon cash reserves plus an estimate of loss development and incurred but not reported claims. The estimate is based upon historical trends. Insurance recoveries related to such liability are recorded when considered probable.
We self-insure a significant portion of expected losses relating to workers’ compensation, general 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. Estimates are recorded for incurred outstanding liabilities for workers’ compensation, general, and automobile liability claims that are incurred but not reported. Estimates are based on adjusters' estimates, historical experience and statistical methods commonly used within the insurance industry that we believe are reliable. We have also engaged a third-party actuary to perform a review of our domestic casualty losses as well as losses in our captive insurance companies. 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.
On October 1, 2019, we elected to utilize a wholly-owned insurance captive (“Captive”) to insure the deductibles for our workers’ compensation, general liability and automobile liability insurance programs. Casualty claims occurring prior to October 1, 2019 will remain recorded within each of the operating segments and future adjustments to these claims will continue to be reflected within the operating segments. Reserves for legacy claims occurring prior to October 1, 2019, will remain as liabilities in our operating segments until they have been resolved. Changes in those reserves will be reflected in segment earnings as they occur. We will continue to utilize the Captive to finance the risk of loss to equipment and rig property assets. The Company and the Captive maintain excess property and casualty reinsurance programs with third-party insurers in an effort to limit the financial impact of significant events covered under these programs. Our operating subsidiaries are paying premiums to the Captive, typically on a monthly basis, for the estimated losses based on an external actuarial analysis. These premiums are currently held in a restricted account, resulting in a transfer of risk from our operating subsidiaries to the Captive. Direct operating costs consisted primarily of adjustments to accruals for estimated losses of approximately $0.5 million and $8.5 million allocated to the Captive during the three months ended December 31, 2020 and 2019, respectively, and were recorded within drilling services operating expenses in our Unaudited Condensed Consolidated Statement of Operations. Intercompany premium revenues recorded by the Captive during the three months ended December 31, 2020 and 2019 amounted to $7.1 million and $7.7 million, respectively, which were eliminated upon consolidation. These intercompany insurance premiums are reflected as segment operating expenses within the North America Solutions, Offshore Gulf of Mexico, and International Solutions reportable operating segments and are reflected as intersegment sales within "Other." The Company self-insures employee health plan exposures in excess of employee deductibles. Starting in the second quarter of fiscal year 2020, the Captive insurer issued a stop-loss program that will reimburse the Company's health plan for claims that exceed $50,000. This program will also be reviewed at the end of each policy year by an outside actuary. One hundred percent of the stop-loss premium is being set aside by the Captive as reserves. The stop-loss program does not have a material impact on a consolidated basis.
International Solutions Drilling Risks
International Solutions drilling operations may significantly contribute to our revenues and net operating income. There can be no assurance that we will be able to successfully conduct such operations, and a failure to do so may have an adverse effect on our financial position, results of operations, and cash flows. Also, the success of our International Solutions operations will be subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general and regional economic conditions, fluctuations in currency exchange rates, modified exchange controls, changes in international regulatory requirements and international employment issues, risk of expropriation of real and personal property and the burden of complying with foreign laws. Additionally, in the event that extended labor strikes occur or a country experiences significant political, economic or social instability, we could experience shortages in labor and/or material and supplies necessary to operate some of our drilling rigs, thereby potentially causing an adverse material effect on our business, financial condition and results of operations.
Many of the countries in which we operate have implemented measures in response to the COVID-19 pandemic. These measures, including imposing mandatory closures of all non-essential business facilities, seeking voluntary closures of such facilities and imposing restrictions on, or advisories with respect to, travel, business operations and public gatherings or interactions, have significantly reduced global economic activity, thereby, resulting in lower demand for crude oil. In particular, the travel restrictions in certain countries where we operate, including the closure of their borders to travel into the country, have resulted in an inability to effectively staff or rotate personnel at, and thereby operate, certain of our rigs and could lead to an inability to fulfill our contractual obligations under contracts with customers.
We have also experienced certain risks related to our Argentine operations. In Argentina, while our dayrate is denominated in U.S. dollars, we are paid in Argentine pesos. The Argentine branch of one of our second-tier subsidiaries remits U.S. dollars to its U.S. parent by converting the Argentine pesos into U.S. dollars through the Argentine Foreign Exchange Market and repatriating the U.S. dollars. Argentina also has a history of implementing currency controls which restrict the conversion and repatriation of U.S. dollars, including controls that were implemented in September 2019. In September 2020, Argentina implemented additional currency controls in an effort to preserve Argentina's U.S. dollar reserves. As a result of these currency controls, our ability to remit funds from our Argentine subsidiary to its U.S. parent has been limited. In the past, the Argentine government has also instituted price controls on crude oil, diesel and gasoline prices and instituted an exchange rate freeze in connection with those prices. These price controls and an exchange rate freeze could be instituted again in the future. In addition, in March 2020, the Argentine government introduced labor regulations that prohibit employee dismissals or suspensions without just cause, for lack of (or reduction in) work or due to force majeure, subject to certain exceptions that may result in the payment of compensation to suspended employees and/or increased severance costs to the company. These prohibitions have resulted in significant challenges for our Argentine operations and it remains uncertain for how long they will be in effect. Further, there are additional concerns regarding Argentina's debt burden, notwithstanding Argentina's restructuring deal with international bondholders in August 2020, as Argentina attempts to manage its substantial sovereign debt issues. These concerns could further negatively impact Argentina's economy and adversely affect our Argentine operations. Argentina’s economy is considered highly inflationary, which is defined as cumulative inflation rates exceeding 100 percent in the most recent three-year period based on inflation data published by the respective governments. Nonetheless, all of our foreign subsidiaries use the U.S. dollar as the functional currency and local currency monetary assets and liabilities are remeasured into U.S. dollars with gains and losses resulting from foreign currency transactions included in current results of operations.
For the three months ended December 31, 2020 and 2019, we recorded an aggregate foreign currency loss of $1.8 million and an aggregate foreign currency gain of $1.0 million, respectively. In the future, we may incur larger currency devaluations, foreign exchange restrictions or other difficulties repatriating U.S. dollars from Argentina or elsewhere, which could have a material adverse impact on our business, financial condition and results of operations. As of December 31, 2020, our cash balance in Argentina was $23.8 million.
Because of the impact of local laws, our future operations in certain areas may be conducted through entities in which local citizens own interests and through entities (including joint ventures) in which we hold only a minority interest or pursuant to arrangements under which we conduct operations under contract to local entities. While we believe that neither operating through such entities nor pursuant to such arrangements would have a material adverse effect on our operations or revenues, there can be no assurance that we will in all cases be able to structure or restructure our operations to conform to local law (or the administration thereof) on terms acceptable to us.
Although we attempt to minimize the potential impact of such risks by operating in more than one geographical area, during the three months ended December 31, 2020, approximately 4.4 percent of our operating revenues were generated from international locations in our drilling business compared to 7.8 percent during the three months ended December 31, 2019. During the three months ended December 31, 2020, approximately 18.1 percent of operating revenues from international locations were from operations in South America compared to 87.0 percent during the three months ended December 31, 2019. Substantially all of the South American operating revenues were from Argentina and Colombia. The future occurrence of one or more international events arising from the types of risks described above could have a material adverse impact on our business, financial condition and results of operations.
NOTE 3 DISCONTINUED OPERATIONS
Noncurrent liabilities from discontinued operations is an uncertain tax liability related to the country of Venezuela. Expenses incurred for in-country obligations are reported as discontinued operations within our Unaudited Condensed Consolidated Statements of Operations.
The activity for the three months ended December 31, 2020 was primarily due to the remeasurement of uncertain tax liabilities as a result of the devaluation of the Venezuela Bolivar. Early in 2018, the Venezuelan government announced that it changed the existing dual-rate foreign currency exchange system by eliminating its heavily subsidized foreign exchange rate, which was 10 Bolivars per United States dollar, and relaunched an exchange system known as DICOM. The Venezuela government also established a new currency called the “Sovereign Bolivar,” which was determined by the elimination of five zeros from the old currency. The DICOM floating rate was approximately 1,107,199 Bolivars per United States dollar at December 31, 2020, compared to 436,677 and 46,621 Bolivars per United States dollar at September 30, 2020, and December 31, 2019, respectively. The DICOM floating rate might not reflect the barter market exchange rates.
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2020 and September 30, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Estimated Useful Lives
|
|
December 31, 2020
|
|
September 30, 2020
|
Drilling services equipment
|
4 - 15 years
|
|
$
|
7,255,178
|
|
|
$
|
7,313,234
|
|
Tubulars
|
4 years
|
|
612,431
|
|
|
615,281
|
|
Real estate properties
|
10 - 45 years
|
|
43,365
|
|
|
43,389
|
|
Other
|
2 - 23 years
|
|
465,205
|
|
|
464,704
|
|
Construction in progress (1)
|
|
|
53,630
|
|
|
49,592
|
|
|
|
|
8,429,809
|
|
|
8,486,200
|
|
Accumulated depreciation
|
|
|
(4,877,702)
|
|
|
(4,839,859)
|
|
Property, plant and equipment, net
|
|
|
$
|
3,552,107
|
|
|
$
|
3,646,341
|
|
(1)Included in construction in progress are costs for projects in progress to upgrade or refurbish certain rigs in our existing fleet. Additionally, we include other capital maintenance purchase-orders that are open/in process. As these various projects are completed, the costs are then classified to their appropriate useful life category.
Depreciation
Depreciation expense in the Unaudited Condensed Consolidated Statements of Operations was $105.1 million and $128.2 million, including $0.3 million and $0.8 million in abandonments, for the three months ended December 31, 2020 and 2019, respectively.
Gain on Sale of Assets
We had a gain on sale of assets of $12.3 million and $4.3 million for the three months ended December 31, 2020 and 2019, respectively. During the three months ended December 31, 2020, we closed on the sale of an offshore platform rig within our Offshore Gulf of Mexico operating segment for total consideration of $12.0 million with an aggregate net book value of $2.8 million, resulting in a gain of $9.2 million, which is included within Gain on Sale of Assets on our Unaudited Condensed Consolidated Statements of Operations. We also had gains on asset sales related to customer reimbursement for the replacement value of drill pipe damaged or lost in drilling operations.
Decommissioning
During the fiscal year ended September 30, 2020, we decommissioned two rigs and 35 rigs from our legacy Domestic Conventional asset group and FlexRig3® asset group, respectively. The decommissioned rigs were impaired as of March 31, 2020. We did not decommission any rigs during the three months ended December 31, 2020.
NOTE 5 GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the fair values of the assets acquired and liabilities assumed in a business combination, at the date of acquisition. Goodwill is not amortized but is tested for potential impairment at the reporting unit level, at a minimum on an annual basis, or when indications of potential impairment exist. All of our goodwill is within our North America Solutions reportable segment.
During the three months ended December 31, 2020, we had no additions or impairments to goodwill. As of December 31, 2020 and September 30, 2020, the goodwill balance was $45.7 million.
Intangible Assets
Finite-lived intangible assets are amortized using the straight-line method over the period in which these assets contribute to our cash flows and are evaluated for impairment in accordance with our policies for valuation of long-lived assets. All of our intangible assets are within our North America Solutions reportable segment. Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
September 30, 2020
|
(in thousands)
|
Weighted Average Estimated Useful Lives
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Finite-lived intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
15 years
|
|
$
|
89,096
|
|
|
$
|
17,716
|
|
|
$
|
71,380
|
|
|
$
|
89,096
|
|
|
$
|
16,222
|
|
|
$
|
72,874
|
|
Intellectual property
|
13 years
|
|
1,500
|
|
|
131
|
|
|
1,369
|
|
|
1,500
|
|
|
103
|
|
|
1,397
|
|
Trade name
|
20 years
|
|
5,865
|
|
|
921
|
|
|
4,944
|
|
|
5,865
|
|
|
842
|
|
|
5,023
|
|
Customer relationships
|
5 years
|
|
4,000
|
|
|
2,467
|
|
|
1,533
|
|
|
4,000
|
|
|
2,267
|
|
|
1,733
|
|
|
|
|
$
|
100,461
|
|
|
$
|
21,235
|
|
|
$
|
79,226
|
|
|
$
|
100,461
|
|
|
$
|
19,434
|
|
|
$
|
81,027
|
|
Amortization expense in the Unaudited Condensed Consolidated Statements of Operations was $1.8 million and $1.9 million for the three months ended December 31, 2020 and 2019, respectively. Amortization is estimated to be approximately $5.4 million for the remainder of fiscal year 2021, approximately $7.2 million for fiscal year 2022, approximately $6.5 million for fiscal year 2023, and approximately $6.4 million for fiscal years 2024 and 2025.
NOTE 6 DEBT
We had the following unsecured long-term debt outstanding with maturities shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
September 30, 2020
|
(in thousands)
|
Face
Amount
|
|
Unamortized
Discount and Debt Issuance
Cost
|
|
Book
Value
|
|
Face
Amount
|
|
Unamortized
Discount and Debt Issuance
Cost
|
|
Book
Value
|
Unsecured senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
Due March 19, 2025
|
$
|
487,148
|
|
|
$
|
(5,961)
|
|
|
$
|
481,187
|
|
|
$
|
487,148
|
|
|
$
|
(6,421)
|
|
|
$
|
480,727
|
|
|
487,148
|
|
|
(5,961)
|
|
|
481,187
|
|
|
487,148
|
|
|
(6,421)
|
|
|
480,727
|
|
Less long-term debt due within one year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-term debt
|
$
|
487,148
|
|
|
$
|
(5,961)
|
|
|
$
|
481,187
|
|
|
$
|
487,148
|
|
|
$
|
(6,421)
|
|
|
$
|
480,727
|
|
Senior Notes
On December 20, 2018, we issued approximately $487.1 million in aggregate principal amount of 4.65 percent unsecured senior notes due 2025 (the"Company 2025 Notes"). Interest on the Company 2025 Notes is payable semi-annually on March 15 and September 15 of each year, commencing March 15, 2019. The debt issuance costs are being amortized straight-line over the stated life of the obligation, which approximates the effective interest method.
Credit Facilities
On November 13, 2018, we entered into a credit agreement by and among the Company, as borrower, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, which was amended on November 13, 2019, providing for an unsecured revolving credit facility (as amended, the “2018 Credit Facility”), that is set to mature on November 13, 2024. The 2018 Credit Facility has $750.0 million in aggregate availability with a maximum of $75.0 million available for use as letters of credit. As of December 31, 2020, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility. For a full description of the 2018 Credit Facility, see Note 8—Debt to the consolidated financial statements in our 2020 Annual Report on Form 10-K.
As of December 31, 2020, we had three separate outstanding letters of credit with banks, in the amounts of $24.8 million, $0.5 million and $2.1 million.
As of December 31, 2020, we also had a $20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds. Of the $20.0 million, $1.8 million of financial guarantees were outstanding as of December 31, 2020.
The applicable agreements for all unsecured debt contain additional terms, conditions and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality. At December 31, 2020, we were in compliance with all debt covenants.
NOTE 7 INCOME TAXES
We use an estimated annual effective tax rate for purposes of determining the income tax provision during interim reporting periods. In calculating our estimated annual effective tax rate, we consider forecasted annual pre-tax income and estimated permanent book versus tax differences. Adjustments to the effective tax rate and estimates will occur as information and assumptions change.
Our income tax provision (benefit) from continuing operations for the three months ended December 31, 2020 and 2019 was $(18.1) million and $14.1 million, respectively, resulting in effective tax rates of 18.9 percent and 31.5 percent, respectively. Effective tax rates differ from the U.S. federal statutory rate of 21.0 percent for the three months ended December 31, 2020 and 2019 primarily due to state and foreign income taxes, permanent non-deductible items and discrete adjustments. Additionally, the effective tax rate for the three months ended December 31, 2020 includes a federal tax benefit arising from the ability to carryback the projected fiscal year 2021 federal net operating loss to a year when the statutory rate was 35.0 percent. The discrete adjustments for the three months ended December 31, 2020 and 2019 are primarily due to tax expense related to equity compensation of $4.1 million and $2.4 million, respectively.
For the next 12 months, we cannot predict with certainty whether we will achieve ultimate resolution of any uncertain tax positions associated with our U.S. and international operations that could result in increases or decreases of our unrecognized tax benefits. However, we do not expect the increases or decreases to have a material effect on our results of continuing operations or financial position.
NOTE 8 SHAREHOLDERS’ EQUITY
The Company has 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. We had no purchases of common shares during the three months ended December 31, 2020 and 2019.
A cash dividend of $0.25 per share was declared on September 9, 2020 for shareholders of record on November 13, 2020 and was paid on December 1, 2020. An additional cash dividend of $0.25 per share was declared on December 11, 2020 for shareholders of record on February 12, 2021, payable on March 1, 2021. As a result, we recorded a dividend payable of $27.4 million within Dividends Payable on our Unaudited Condensed Consolidated Balance Sheets as of December 31, 2020.
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31,
2020
|
|
September 30,
2020
|
Pre-tax amounts:
|
|
|
|
Unrecognized net actuarial loss
|
$
|
(33,333)
|
|
|
$
|
(33,923)
|
|
|
$
|
(33,333)
|
|
|
$
|
(33,923)
|
|
After-tax amounts:
|
|
|
|
Unrecognized net actuarial loss
|
$
|
(25,731)
|
|
|
$
|
(26,188)
|
|
|
$
|
(25,731)
|
|
|
$
|
(26,188)
|
|
The following is a summary of the changes in accumulated other comprehensive loss, net of tax, related to the defined benefit pension plan for the three months ended December 31, 2020:
|
|
|
|
|
|
(in thousands)
|
Three Months Ended December 31, 2020
|
Balance at September 30, 2020
|
$
|
(26,188)
|
|
Activity during the period
|
|
Amounts reclassified from accumulated other comprehensive income
|
457
|
|
Net current-period other comprehensive income
|
457
|
|
Balance at December 31, 2020
|
$
|
(25,731)
|
|
NOTE 9 REVENUE FROM CONTRACTS WITH CUSTOMERS
Drilling Services Revenue
During the three months ended December 31, 2020 and 2019, early termination revenue associated with term contracts was approximately $5.8 million and $0.1 million, respectively.
Contract Costs
We had capitalized fulfillment costs of $5.8 million and $6.2 million as of December 31, 2020 and September 30, 2020, respectively.
Remaining Performance Obligations
The total aggregate transaction price allocated to the unsatisfied performance obligations, commonly referred to as backlog, as of December 31, 2020 was approximately $526.6 million, of which approximately $338.0 million is expected to be recognized during the remainder of fiscal year 2021, approximately $130.4 million during fiscal year 2022, and approximately $58.2 million during fiscal year 2023 and thereafter. These amounts do not include anticipated contract renewals or expected performance bonuses. Additionally, contracts that currently contain month-to-month terms are represented in our backlog as one month of unsatisfied performance obligations. Our contracts are subject to cancellation or modification at the election of the customer; however, due to the level of capital deployed by our customers on underlying projects, we have not been materially adversely affected by contract cancellations or modifications in the past. However, the impact of the COVID-19 pandemic is inherently uncertain, and, as a result, the Company is unable to reasonably estimate the duration and ultimate impacts of the pandemic, including the effect it may have on our contractual obligations with our customers.
Contract Assets and Liabilities
The following tables summarize the balances of our contract assets and liabilities at the dates indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
|
September 30, 2020
|
Contract assets
|
$
|
3,389
|
|
|
$
|
2,367
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
Contract liabilities balance at September 30, 2020
|
$
|
8,636
|
|
Payment received/accrued and deferred
|
5,726
|
|
Revenue recognized during the period
|
(6,208)
|
|
Contract liabilities balance at December 31, 2020
|
$
|
8,154
|
|
NOTE 10 STOCK-BASED COMPENSATION
On March 3, 2020, the Helmerich & Payne, Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”) was approved by our stockholders. The 2020 Plan replaces our stockholder-approved Helmerich & Payne, Inc. 2016 Omnibus Incentive Plan (the "2016 Plan"). The 2020 Plan is a stock and cash-based incentive plan that, among other things, authorizes the Board or Human Resources Committee of the Board to grant executive officers, employees and non-employee directors stock options, stock appreciation rights, restricted shares and restricted share units (including performance share units), share bonuses, other share-based awards and cash awards. Restricted stock may be granted for no consideration other than prior and future services. The purchase price per share for stock options may not be less than market price of the underlying stock on the date of grant. Stock options expire ten years after the grant date. Awards outstanding under the Helmerich & Payne, Inc. 2005 Long-Term Incentive Plan, the Helmerich & Payne, Inc. 2010 Long-Term Incentive Plan and the 2016 Plan remain subject to the terms and conditions of those plans. Beginning with fiscal year 2019, we replaced stock options with performance share units as a component of our executives’ long-term equity incentive compensation. As a result, there were no stock options granted during the three months ended December 31, 2020 and 2019. We have also eliminated stock options as an element of our non-employee director compensation program. The Board has determined to award stock-based compensation to non-employee directors solely in the form of restricted stock. During the three months ended December 31, 2020, 631,166 shares of restricted stock awards and 312,600 performance share units were granted under the 2020 Plan.
A summary of compensation cost for stock-based payment arrangements recognized in drilling services operating expense, research and development expense and selling, general and administrative expense during the three months ended December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(in thousands)
|
|
|
|
|
2020
|
|
2019
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
$
|
318
|
|
|
$
|
571
|
|
Restricted stock
|
|
|
|
|
6,011
|
|
|
7,370
|
|
Performance share units
|
|
|
|
|
1,122
|
|
|
2,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,451
|
|
|
$
|
10,201
|
|
Of the total stock-based compensation expense, during the three months ended December 31, 2020, $1.8 million was recorded in drilling services operating expense, $0.3 million was recorded in research and development expense, and $5.4 million was recorded in selling, general and administrative expense on our Unaudited Condensed Consolidated Statements of Operations.
Of the total stock-based compensation expense, during the three months ended December 31, 2019, $2.4 million was recorded in drilling services operating expense and $7.8 million was recorded in selling, general and administrative expense on our Unaudited Condensed Consolidated Statements of Operations.
Stock Options
A summary of stock option activity under all existing long-term incentive plans for the three months ended December 31, 2020 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts and years)
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term in Years
|
|
Aggregate Intrinsic Value
|
Outstanding at September 30, 2020
|
2,863
|
|
$
|
62.41
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited/Expired
|
(174)
|
|
|
48.17
|
|
|
|
|
|
Outstanding at December 31, 2020
|
2,689
|
|
$
|
63.34
|
|
|
4.54
|
|
$
|
—
|
|
Vested or expected to vest at December 31, 2020
|
158
|
|
$
|
59.28
|
|
|
6.93
|
|
$
|
—
|
|
Exercisable at December 31, 2020
|
2,531
|
|
$
|
63.59
|
|
|
4.39
|
|
$
|
—
|
|
No options were exercised during the three months ended December 31, 2020. The total intrinsic value of options exercised during the three months ended December 31, 2019 was $0.3 million.
As of December 31, 2020, the unrecognized compensation cost related to stock options was $0.9 million, which is expected to be recognized over a weighted-average period of 1.0 years.
Restricted Stock
Restricted stock awards consist of our common stock. Awards granted prior to September 30, 2020 are time-vested over four years, and awards granted after September 30, 2020 are time vested over three years. Non-forfeitable dividends are paid on non-vested shares of restricted stock. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of restricted stock awards is determined based on the closing price of our shares on the grant date. As of December 31, 2020, there was $41.6 million of total unrecognized compensation cost related to unvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 2.6 years.
A summary of the status of our restricted stock awards as of December 31, 2020 and changes in non-vested restricted stock outstanding during the three months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
Shares (1)
|
|
Weighted Average Grant Date Fair Value per Share
|
Non-vested restricted stock outstanding at September 30, 2020
|
1,280
|
|
|
$
|
49.81
|
|
Granted
|
631
|
|
|
25.29
|
|
Vested (2)
|
(466)
|
|
|
55.93
|
|
Forfeited
|
(2)
|
|
|
49.07
|
|
Non-vested restricted stock outstanding at December 31, 2020
|
1,443
|
|
|
$
|
37.08
|
|
(1) The beginning balance of restricted stock shares includes phantom shares that confer the benefits of owning company stock without the actual ownership or transfer of any shares. There were no phantom shares granted during the three months ended December 31, 2020. There were 20,616 phantom shares granted during fiscal year 2020.
(2) The number of restricted stock awards vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.
Performance Share Units
We have made awards to certain employees that are subject to market-based performance conditions ("performance share units"). Subject to the terms and conditions set forth in the applicable performance share unit award agreements, the 2016 Plan and the 2020 Plan, grants of performance share units are subject to a vesting period of three years (the “Vesting Period”) that is dependent on the achievement of certain performance goals. Such performance share unit awards consist of two separate components. Performance share units that comprise the first component are subject to a three-year performance cycle. Performance share units that comprise the second component are further divided into three separate tranches, each of which is subject to a separate one-year performance cycle within the full three-year performance cycle. The vesting of the performance share units is generally dependent on (i) the achievement of the Company’s total shareholder return (“TSR”) performance goals relative to the TSR achievement of a peer group of companies (the “Peer Group”) over the applicable performance cycle, and (ii) the continued employment of the recipient of the performance share unit award throughout the Vesting Period.
The vesting of units ranges from zero to 200 percent of the units granted depending on the Company’s TSR relative to the TSR of the Peer Group on the vesting date. Additional performance share units are credited based on the amount of cash dividends on our common shares divided by the market value of our common shares on the date such dividend is paid. Such dividend equivalents are subject to the same terms and conditions and are settled or forfeited in the same manner and at the same time as the performance share units to which they were credited.
The grant date fair value of performance share units was determined through use of the Monte Carlo simulation method. The Monte Carlo simulation method requires the use of highly subjective assumptions. Our key assumptions in the method include the price and the expected volatility of our stock and our self-determined Peer Group companies’ stock, risk free rate of return and cross-correlations between the Company and our Peer Group companies. The valuation model assumes dividends are immediately reinvested. As of December 31, 2020, there was $14.6 million of unrecognized compensation cost related to unvested performance share units. That cost is expected to be recognized over a weighted-average period of 2.6 years.
A summary of the status of our performance share units as of December 31, 2020 and changes in non-vested performance share units outstanding during the three months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
Non-vested performance share units outstanding at September 30, 2020
|
337
|
|
|
$
|
51.09
|
|
Granted
|
313
|
|
|
29.77
|
|
Reinvested dividends
|
42
|
|
|
52.85
|
|
|
|
|
|
Non-vested performance share units outstanding at December 31, 2020
|
692
|
|
|
$
|
41.58
|
|
The weighted-average fair value calculation for performance share units granted during the three months ended December 31, 2020 is based on the following weighted-average assumptions set forth in the table below.
|
|
|
|
|
|
|
Three Months Ended December 31, 2020
|
Risk-free interest rate (1)
|
0.2
|
%
|
Expected stock volatility (2)
|
62.3
|
%
|
Expected term (in years)
|
3.1
|
(1)The risk-free interest rate is based on U.S. Treasury securities for the expected term of the performance share units.
(2)Expected volatilities are based on the daily closing price of our stock based upon historical experience over a period which approximates the expected term of the performance share units.
NOTE 11 EARNINGS (LOSSES) PER COMMON SHARE
ASC 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. We have granted and expect to continue to grant to employees restricted stock grants that contain non-forfeitable rights to dividends. Such grants are considered participating securities under ASC 260. As such, we are required to include these grants in the calculation of our basic earnings per share and calculate basic earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.
Basic earnings per share is computed utilizing the two-class method and is calculated based on the weighted-average number of common shares outstanding during the periods presented.
Diluted earnings per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options, non-vested restricted stock and performance share units.
Under the two-class method of calculating earnings per share, dividends paid and a portion of undistributed net income, but not losses, are allocated to unvested restricted stock grants that receive dividends, which are considered participating securities.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
(in thousands, except per share amounts)
|
|
|
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
|
|
$
|
(77,924)
|
|
|
$
|
30,729
|
|
Income (loss) from discontinued operations
|
|
|
|
|
7,493
|
|
|
(124)
|
|
Net income (loss)
|
|
|
|
|
(70,431)
|
|
|
30,605
|
|
Adjustment for basic earnings (loss) per share
|
|
|
|
|
|
|
|
Earnings allocated to unvested shareholders
|
|
|
|
|
(361)
|
|
|
(991)
|
|
|
|
|
|
|
|
|
|
Numerator for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
From continuing operations
|
|
|
|
|
(78,285)
|
|
|
29,738
|
|
From discontinued operations
|
|
|
|
|
7,493
|
|
|
(124)
|
|
|
|
|
|
|
(70,792)
|
|
|
29,614
|
|
Adjustment for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
Effect of reallocating undistributed earnings of unvested shareholders
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
From continuing operations
|
|
|
|
|
(78,285)
|
|
|
29,738
|
|
From discontinued operations
|
|
|
|
|
7,493
|
|
|
(124)
|
|
|
|
|
|
|
$
|
(70,792)
|
|
|
$
|
29,614
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share - weighted-average shares
|
|
|
|
|
107,617
|
|
|
108,555
|
|
Effect of dilutive shares from stock options, restricted stock and performance share units
|
|
|
|
|
—
|
|
|
169
|
|
Denominator for diluted earnings (loss) per share - adjusted weighted-average shares
|
|
|
|
|
107,617
|
|
|
108,724
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
|
|
$
|
(0.73)
|
|
|
$
|
0.27
|
|
Income from discontinued operations
|
|
|
|
|
0.07
|
|
|
—
|
|
Net income (loss)
|
|
|
|
|
$
|
(0.66)
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
|
|
$
|
(0.73)
|
|
|
$
|
0.27
|
|
Income from discontinued operations
|
|
|
|
|
0.07
|
|
|
—
|
|
Net income (loss)
|
|
|
|
|
$
|
(0.66)
|
|
|
$
|
0.27
|
|
We had a net loss for the three months ended December 31, 2020. Accordingly, our diluted earnings per share calculation this period was equivalent to our basic earnings per share calculation since diluted earnings per share excluded any assumed exercise of equity awards. These were excluded because they were deemed to be anti-dilutive, meaning their inclusion would have reduced the reported net loss per share in the applicable period.
The following potentially dilutive average shares attributable to outstanding equity awards were excluded from the calculation of diluted earnings (loss) per share because their inclusion would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
(in thousands, except per share amounts)
|
|
|
|
|
2020
|
|
2019
|
Potentially dilutive shares excluded as anti-dilutive
|
|
|
|
|
4,494
|
|
3,413
|
Weighted-average price per share
|
|
|
|
|
$
|
55.61
|
|
|
$
|
61.02
|
|
NOTE 12 FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS
We have certain assets and liabilities that are required to be measured and disclosed at fair value. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use the fair value hierarchy established in ASC 820-10 to measure fair value to prioritize the inputs:
•Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
•Level 2 — Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The assets held in a Non-Qualified Supplemental Savings Plan are carried at fair value and totaled $22.0 million at December 31, 2020 and $19.8 million at September 30, 2020. The assets are comprised of mutual funds that are measured using Level 1 inputs.
Short-term investments include securities classified as trading securities. Both realized and unrealized gains and losses on trading securities are included in other income (expense) in the Unaudited Condensed Consolidated Statements of Operations. The securities are recorded at fair value.
Our non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value when acquired in a business combination or when an impairment charge is recognized. If measured at fair value in the Unaudited Condensed Consolidated Balance Sheets, these would generally be classified within Level 2 or 3 of the fair value hierarchy.
The majority of cash equivalents are invested in highly liquid money-market mutual funds invested primarily in direct or indirect obligations of the U.S. Government and in federally insured deposit accounts. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those investments.
The carrying value of other current assets, accrued liabilities and other liabilities approximated fair value at December 31, 2020 and September 30, 2020.
The following table summarizes our assets and liabilities measured at fair value presented in our Unaudited Condensed Consolidated Balance Sheet as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
Corporate and municipal debt securities
|
144,780
|
|
|
—
|
|
|
144,780
|
|
|
—
|
|
U.S. government and federal agency securities
|
5,030
|
|
|
5,030
|
|
|
—
|
|
|
—
|
|
Total short-term investments
|
149,822
|
|
|
5,030
|
|
|
144,792
|
|
|
—
|
|
Cash and cash equivalents
|
373,980
|
|
|
373,980
|
|
|
—
|
|
|
—
|
|
Investments
|
12,049
|
|
|
10,206
|
|
|
343
|
|
|
1,500
|
|
Other current assets
|
45,688
|
|
|
45,688
|
|
|
—
|
|
|
—
|
|
Other assets
|
2,985
|
|
|
2,985
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
584,524
|
|
|
$
|
437,889
|
|
|
$
|
145,135
|
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent earnout liability
|
$
|
8,973
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,973
|
|
At December 31, 2020, our financial instruments measured at fair value utilizing Level 1 inputs include cash equivalents, U.S. Agency issued debt securities, equity securities with active markets and money market funds that are classified as restricted assets. The current portion of restricted amounts are included in prepaid expenses and other, and the noncurrent portion is included in other assets. For these items, quoted current market prices are readily available.
At December 31, 2020, assets measured at fair value using Level 2 inputs include certificates of deposit, municipal bonds and corporate bonds measured using broker quotations that utilize observable market inputs.
Our financial instruments measured using Level 3 unobservable inputs primarily consist of potential earnout payments primarily associated with our business acquisitions in fiscal year 2019.
The following table presents a reconciliation of changes in the fair value of our financial liabilities classified as Level 3 fair value measurements in the fair value hierarchy for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
(in thousands)
|
2020
|
|
2019
|
Net liabilities at September 30,
|
$
|
9,123
|
|
|
$
|
18,373
|
|
Additions
|
—
|
|
|
1,500
|
|
Total gains or losses:
|
|
|
|
Included in earnings
|
100
|
|
|
—
|
|
Settlements (1)
|
(250)
|
|
|
—
|
|
Net liabilities at December 31,
|
$
|
8,973
|
|
|
$
|
19,873
|
|
(1)Settlements represent earnout payments that have been paid or earned during the period.
The following table provides quantitative information (in thousands) about our Level 3 unobservable inputs related to our financial liabilities at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Unobservable Input
|
|
Range
|
|
Weighted Average (1)
|
$1,000
|
|
Monte Carlo simulation
|
|
Discount rate
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
Revenue Volatility
|
|
46.7
|
%
|
|
|
|
|
|
|
|
|
Risk free rate
|
|
1.4
|
%
|
|
|
|
|
$7,973
|
|
Probability analysis
|
|
Discount rate
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
Payment amounts
|
|
|
|
$5,250 - $7,000
|
|
$
|
6,400
|
|
|
|
|
|
Probabilities
|
|
|
|
40% - 60%
|
|
53
|
%
|
(1)The weighted average of the payment amounts and the probabilities (Level 3 unobservable inputs), associated with the contingent consideration valued using probability analysis, were weighted by the relative undiscounted fair value of payment amounts and of probability payment amounts, respectively.
The above significant unobservable inputs are subject to change based on changes in economic and market conditions. The use of significant unobservable inputs creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement of the contingent consideration using Monte Carlo simulation are (i) discount rate, (ii) revenue volatility and (iii) risk-free rate. Significant increases or decreases in the discount rate and risk-free rate in isolation would result in a significantly lower or higher fair value measurement. Significant changes in revenue volatility in isolation would result in a significantly lower or higher fair value measurement. The significant unobservable inputs used in the fair value measurement of the contingent consideration using probability analysis are (i) discount rate, (ii) payment amounts and (iii) probabilities. Significant increases or decreases in the discount rate in isolation would result in a significantly lower or higher fair value measurement. Significant increases or decreases in the payment amounts or probabilities in isolation would result in a significantly higher or lower fair value measurement. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.
The following information presents the supplemental fair value information about long-term fixed-rate debt at December 31, 2020 and September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
December 31, 2020
|
|
September 30, 2020
|
Carrying value of long-term fixed-rate debt
|
$
|
481.2
|
|
|
$
|
480.7
|
|
Fair value of long-term fixed-rate debt
|
543.1
|
|
|
534.5
|
|
The fair value for the $543.1 million fixed-rate debt is based on broker quotes. The notes are classified within Level 2 as they are not actively traded in markets.
The estimated fair value of our investments, reflected on our Unaudited Condensed Consolidated Balance Sheets as Investments, is primarily based on Level 1 inputs. As a result of the change in the fair value of our investments, we recorded a gain of $2.9 million for the three months ended December 31, 2020.
NOTE 13 EMPLOYEE BENEFIT PLANS
Components of Net Periodic Benefit Cost
The following provides information at December 31, 2020 and 2019, related to the Company-sponsored domestic defined benefit pension plan, the Helmerich & Payne, Inc. Employee Retirement Plan (the “Pension Plan”):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
(in thousands)
|
2020
|
|
2019
|
Interest cost
|
$
|
753
|
|
|
$
|
1,097
|
|
Expected return on plan assets
|
(967)
|
|
|
(1,381)
|
|
Recognized net actuarial loss
|
590
|
|
|
669
|
|
Settlement
|
1,015
|
|
|
—
|
|
Net pension expense
|
$
|
1,391
|
|
|
$
|
385
|
|
According to ASC 715, Compensation—Retirement Benefits, if the lump sum distributions made during a plan year exceed the total of the projected service cost and interest cost for the plan year, settlement accounting is required. Lump sum payments exceeded this threshold during the three months ended December 31, 2020. Accordingly, we recognized settlement expense of $1.0 million for the three months ended December 31, 2020, in other expense within our Unaudited Condensed Consolidated Statements of Operations.
Employer Contributions
We did not make any contributions to the Pension Plan during the three months ended December 31, 2020. For the remainder of fiscal year 2021, we do not expect minimum contributions required by law to be needed. However, we may make contributions during the remainder of fiscal year 2021, if needed, to fund unexpected distributions in lieu of liquidating pension assets.
NOTE 14 COMMITMENTS AND CONTINGENCIES
Purchase Commitments
Equipment, parts and supplies are ordered in advance to promote efficient construction and capital improvement progress. At December 31, 2020, we had purchase commitments for equipment, parts and supplies of approximately $16.5 million.
Guarantee Arrangements
We are contingently liable to sureties in respect of bonds issued by the sureties in connection with certain commitments entered into by us in the normal course of business. We have agreed to indemnify the sureties for any payments made by them in respect of such bonds.
Contingencies
During the ordinary course of our business, contingencies arise resulting from an existing condition, situation or set of circumstances involving an uncertainty as to the realization of a possible gain or loss contingency. We account for gain contingencies in accordance with the provisions of ASC 450, Contingencies, and, therefore, we do not record gain contingencies or recognize income until realized. The property and equipment of our Venezuelan subsidiary was seized by the Venezuelan government on June 30, 2010. Our wholly-owned subsidiaries, 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., seeking damages for the taking of their 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.
The Company and its subsidiaries are parties to various other pending legal actions arising in the ordinary course of our business. We maintain insurance against certain business risks subject to certain deductibles. Although no assurance can be given, we believe, based on our experiences to date and taking into account established reserves and insurance, that the ultimate resolution of such items will not have a material adverse impact on our financial condition, cash flows, or results of operations. When we determine a loss is probable of occurring and is reasonably estimable, we accrue an undiscounted liability for such contingencies based on our best estimate using information available at that time. If the estimated loss is a range of potential outcomes and there is no better estimate within the range, we accrue the amount at the low end of the range. We disclose contingencies where an adverse outcome may be material, or in the judgment of management, we conclude the matter should otherwise be disclosed.
NOTE 15 BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Description of the Business
We are a performance-driven drilling solutions and technologies company based in Tulsa, Oklahoma with operations in all major U.S. onshore basins as well as South America and the Middle East. Our drilling operations consist mainly of contracting Company-owned drilling equipment primarily to large oil and gas exploration companies. We believe we are the recognized industry leader in drilling as well as technological innovation.
During the third quarter of fiscal year 2020, as part of our restructuring efforts and consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources we implemented organizational changes. We have moved from a product-based offering, such as a rig or separate technology package, to an integrated solution-based approach by combining proprietary rig technology, automation software, and digital expertise into our rig operations. Operations previously reported within the former U.S. Land and H&P Technologies operating and reportable segments are now managed and presented within the North America Solutions reportable segment. As a result, beginning with the third quarter of fiscal year 2020, our drilling services operations are organized into the following reportable operating business segments: North America Solutions, Offshore Gulf of Mexico and International Solutions. All prior period segment disclosures have been recast for these segment changes. Consolidated revenues and expenses reflect the elimination of intercompany transactions.
Each reportable operating segment is a strategic business unit that is managed separately, and consolidated revenues and expenses reflect the elimination of all material intercompany transactions. Our real estate operations, our incubator program for new research and development projects, and our wholly-owned captive insurance companies are included in "Other." External revenues included in “Other” primarily consist of rental income.
Segment Performance
We evaluate segment performance based on income or loss from continuing operations (segment operating income (loss)) before income taxes which includes:
•Revenues from external and internal customers
•Direct operating costs
•Depreciation and amortization
•Allocated general and administrative costs
•Restructuring charges
but excludes gain on sale of assets and corporate selling, general and administrative costs, corporate depreciation, and corporate restructuring charges.
General and administrative costs are allocated to the segments based primarily on specific identification and, to the extent that such identification is not practical, on other methods which we believe to be a reasonable reflection of the utilization of services provided.
Summarized financial information of our reportable segments for the three months ended December 31, 2020 and 2019 is shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2020
|
(in thousands)
|
North America Solutions
|
|
Offshore Gulf of Mexico
|
|
International Solutions
|
|
|
|
Other
|
|
Eliminations
|
|
Total
|
External sales
|
$
|
201,990
|
|
|
$
|
32,273
|
|
|
$
|
10,518
|
|
|
|
|
$
|
1,596
|
|
|
$
|
—
|
|
|
$
|
246,377
|
|
Intersegment
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
7,122
|
|
|
(7,122)
|
|
|
—
|
|
Total sales
|
201,990
|
|
|
32,273
|
|
|
10,518
|
|
|
|
|
8,718
|
|
|
(7,122)
|
|
|
246,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
(72,928)
|
|
|
2,742
|
|
|
(8,357)
|
|
|
|
|
4,111
|
|
|
(2,126)
|
|
|
(76,558)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2019
|
(in thousands)
|
North America Solutions (1)
|
|
Offshore Gulf of Mexico
|
|
International Solutions
|
|
|
|
Other
|
|
Eliminations
|
|
Total
|
External sales
|
$
|
524,681
|
|
|
$
|
40,255
|
|
|
$
|
46,462
|
|
|
|
|
$
|
3,259
|
|
|
$
|
—
|
|
|
$
|
614,657
|
|
Intersegment
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
7,740
|
|
|
(7,740)
|
|
|
—
|
|
Total sales
|
524,681
|
|
|
40,255
|
|
|
46,462
|
|
|
|
|
10,999
|
|
|
(7,740)
|
|
|
614,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
52,139
|
|
|
6,328
|
|
|
3,115
|
|
|
|
|
(1,237)
|
|
|
—
|
|
|
60,345
|
|
(1)Operations previously reported within the H&P Technologies reportable segment are now managed and presented within the North America Solutions reportable segment.
The following table reconciles segment operating income (loss) per the tables above to income (loss) from continuing operations before income taxes as reported on the Unaudited Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(in thousands)
|
2020
|
|
2019
|
Segment operating income (loss)
|
$
|
(76,558)
|
|
|
$
|
60,345
|
|
Gain on sale of assets
|
12,336
|
|
|
4,279
|
|
Corporate selling, general and administrative costs, corporate depreciation and corporate restructuring charges
|
(29,001)
|
|
|
(33,256)
|
|
Operating income (loss) from continuing operations
|
(93,223)
|
|
|
31,368
|
|
Other income (expense)
|
|
|
|
Interest and dividend income
|
1,879
|
|
|
2,214
|
|
Interest expense
|
(6,139)
|
|
|
(6,100)
|
|
Gain on investment securities
|
2,924
|
|
|
2,821
|
|
Gain on sale of subsidiary
|
—
|
|
|
14,963
|
|
Other
|
(1,480)
|
|
|
(399)
|
|
Total unallocated amounts
|
(2,816)
|
|
|
13,499
|
|
Income (loss) from continuing operations before income taxes
|
$
|
(96,039)
|
|
|
$
|
44,867
|
|
The following table presents total assets by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31,
2020
|
|
September 30,
2020
|
Total assets (1)
|
|
|
|
North America Solutions (2)
|
$
|
3,749,435
|
|
|
$
|
3,812,718
|
|
Offshore Gulf of Mexico
|
98,712
|
|
|
93,501
|
|
International Solutions
|
170,151
|
|
|
181,181
|
|
Other
|
81,683
|
|
|
22,144
|
|
|
4,099,981
|
|
|
4,109,544
|
|
Investments and corporate operations
|
626,772
|
|
|
720,077
|
|
Total assets from continuing operations
|
4,726,753
|
|
|
4,829,621
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
$
|
4,726,753
|
|
|
$
|
4,829,621
|
|
(1)Assets by segment exclude investments in subsidiaries and intersegment activity.
(2)Operations previously reported within the H&P Technologies reportable segment are now managed and presented within the North America Solutions reportable segment.
The following table presents revenues from external customers by country based on the location of service provided:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
(in thousands)
|
2020
|
|
2019
|
Operating revenues
|
|
|
|
United States
|
$
|
235,444
|
|
|
$
|
566,815
|
|
Argentina
|
1,553
|
|
|
40,609
|
|
Bahrain
|
7,549
|
|
|
4,684
|
|
United Arab Emirates
|
990
|
|
|
173
|
|
Colombia
|
429
|
|
|
996
|
|
Other Foreign
|
412
|
|
|
1,380
|
|
Total
|
$
|
246,377
|
|
|
$
|
614,657
|
|
Refer to Note 9—Revenue from Contracts with Customers for additional information regarding the recognition of revenue upon adoption of ASC 606.