Valaris(VAL) - 2020 Q1 - Quarterly Report

Forward-Looking Statements This section highlights the inherent uncertainties and risks associated with future-oriented statements within the report - Statements in this report that are not historical facts are forward-looking and subject to numerous risks, uncertainties, and assumptions[12] - Key risks include the coronavirus global pandemic, precipitous decline in oil prices, projected negative cash flows, highly leveraged balance sheet, potential asset impairments, and the ability to service indebtedness or recapitalize the company[13][16] PART I - Financial Information This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Valaris plc, including statements of operations, comprehensive loss, balance sheets, and cash flows for the periods ended March 31, 2020 and 2019, along with detailed notes explaining accounting policies, significant transactions, and financial positions Report of Independent Registered Public Accounting Firm KPMG LLP reviewed Valaris plc's condensed consolidated interim financial information, finding no material modifications required for GAAP conformity - KPMG LLP reviewed the condensed consolidated interim financial information for Valaris plc for the three-month periods ended March 31, 2020 and 2019[18] - Based on their reviews, no material modifications were identified for conformity with U.S. generally accepted accounting principles (GAAP)[18] - The accompanying condensed consolidated balance sheet as of December 31, 2019, was fairly stated in all material respects[19] Condensed Consolidated Statements of Operations This statement details Valaris plc's revenues, expenses, and net loss for the three-month periods ended March 31, 2020 and 2019 Condensed Consolidated Statements of Operations (in millions, except per share amounts) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Operating Revenues | $456.6 | $405.9 | | Contract drilling (exclusive of depreciation) | $476.0 | $332.6 | | Loss on impairment | $2,808.2 | — | | Depreciation | $164.5 | $125.0 | | General and administrative | $53.4 | $29.6 | | Total operating expenses | $3,502.1 | $487.2 | | Equity in earnings of ARO | $(6.3) | — | | Operating Loss | $(3,051.8) | $(81.3) | | Other income (expense), net | $(107.9) | $(75.2) | | Loss Before Income Taxes | $(3,159.7) | $(156.5) | | Provision (Benefit) for Income Taxes | $(152.0) | $31.5 | | Net Loss | $(3,007.7) | $(188.0) | | Net (Income) Loss Attributable to Noncontrolling Interests | $1.4 | $(2.4) | | Net Loss Attributable to Valaris | $(3,006.3) | $(190.4) | | Loss Per Share - Basic and Diluted | $(15.19) | $(1.75) | | Weighted-Average Shares Outstanding (millions) | 197.9 | 108.7 | Condensed Consolidated Statements of Comprehensive Loss This statement presents Valaris plc's net loss and other comprehensive income (loss) components for the three-month periods ended March 31, 2020 and 2019 Condensed Consolidated Statements of Comprehensive Loss (in millions) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------------------------------------------------------------------- | :---------------------------------- | :---------------------------------- | | Net Loss | $(3,007.7) | $(188.0) | | Net change in derivative fair value | $(12.9) | — | | Reclassification of net (gains) losses derivative instruments from other comprehensive income (loss) into net loss | $(0.1) | $1.6 | | Other | $(0.4) | $(0.1) | | Net Other Comprehensive Income (Loss) | $(13.4) | $1.5 | | Comprehensive Loss | $(3,021.1) | $(186.5) | | Comprehensive (Income) Loss Attributable to Noncontrolling Interests | $1.4 | $(2.4) | | Comprehensive Loss Attributable to Valaris | $(3,019.7) | $(188.9) | Condensed Consolidated Balance Sheets This statement provides a snapshot of Valaris plc's assets, liabilities, and shareholders' equity as of March 31, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets (in millions) | Metric | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $184.9 | $97.2 | | Accounts receivable, net | $493.2 | $520.7 | | Other current assets | $427.5 | $446.5 | | Total current assets | $1,105.6 | $1,064.4 | | Property and equipment, net | $12,157.2 | $15,096.9 | | Long-term notes receivable from ARO | $452.9 | $452.9 | | Investment in ARO | $122.4 | $128.7 | | Other assets | $187.0 | $188.3 | | Total Assets | $14,025.1 | $16,931.2 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable - trade | $258.4 | $288.2 | | Accrued liabilities and other | $402.3 | $417.7 | | Current maturities of long-term debt | $224.5 | $124.8 | | Total current liabilities | $885.2 | $830.7 | | Long-term debt | $6,148.6 | $5,923.5 | | Other liabilities | $695.7 | $867.4 | | Total Valaris shareholders' equity | $6,298.3 | $9,310.9 | | Noncontrolling interests | $(2.7) | $(1.3) | | Total Equity | $6,295.6 | $9,309.6 | | Total Liabilities and Shareholders' Equity | $14,025.1 | $16,931.2 | Condensed Consolidated Statements of Cash Flows This statement outlines Valaris plc's cash inflows and outflows from operating, investing, and financing activities for the three-month periods ended March 31, 2020 and 2019 Condensed Consolidated Statements of Cash Flows (in millions) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Net loss | $(3,007.7) | $(188.0) | | Loss on impairment | $2,808.2 | — | | Depreciation expense | $164.5 | $125.0 | | Net cash used in operating activities | $(204.4) | $(24.4) | | Net cash provided by (used in) investing activities | $(25.9) | $55.3 | | Net cash provided by (used in) financing activities | $318.3 | $(7.3) | | Effect of exchange rate changes on cash and cash equivalents | $(0.3) | $(0.3) | | Increase in cash and cash equivalents | $87.7 | $23.3 | | Cash and cash equivalents, beginning of period | $97.2 | $275.1 | | Cash and cash equivalents, end of period | $184.9 | $298.4 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the accounting policies, significant transactions, and financial positions presented in the condensed consolidated financial statements Note 1 - Unaudited Condensed Consolidated Financial Statements This note details the company's name change, accounting standard adoptions, and ongoing evaluations of new accounting pronouncements - Valaris plc changed its name from Ensco Rowan plc on July 30, 2019, following the combination with Rowan Companies Limited on April 11, 2019[29] - The company adopted ASU 2016-13, 'Financial Instruments - Credit Losses (Topic 326)', effective January 1, 2020, with no material impact on its financial statements[33] - The company is evaluating the impact of ASU 2019-12 (Income Taxes) and ASU 2020-04 (Reference Rate Reform) for future adoption[34][36] Note 2 - Revenue from Contracts with Customers This note explains the company's revenue recognition policies for drilling contracts, including contract assets and liabilities - Revenue from drilling contracts is primarily on a day rate basis, recognized over time as a single performance obligation, and includes fees for mobilization, demobilization, and capital upgrades[38][40][45] Contract Assets and Liabilities (in millions) | Metric | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :------------- | :---------------- | | Current contract assets | $7.2 | $3.5 | | Noncurrent contract assets | $0.4 | — | | Current contract liabilities (deferred revenue) | $24.5 | $30.0 | | Noncurrent contract liabilities (deferred revenue) | $8.8 | $9.7 | Expected Future Amortization of Contract Liabilities and Deferred Costs (in millions) | Metric | 2020 | 2021 | 2022 | 2023 and Thereafter | Total | | :-------------------------------- | :--- | :--- | :--- | :------------------ | :---- | | Amortization of contract liabilities | $21.3 | $9.8 | $2.2 | — | $33.3 | | Amortization of deferred costs | $28.6 | $9.3 | $1.6 | $0.4 | $39.9 | Note 3 - Rowan Transaction This note describes the acquisition of Rowan Companies Limited, including the bargain purchase gain and pro forma financial impacts - The combination with Rowan Companies Limited was completed on April 11, 2019, with assets acquired and liabilities assumed recorded at estimated fair values[56] - A bargain purchase gain of $630.7 million was recognized, primarily due to the decline in Valaris's share price between the announcement and transaction dates[57][58] - Pro forma net loss for the three months ended March 31, 2019, would have been $(275.0) million, with revenues of $582.0 million, had the Rowan Transaction occurred on January 1, 2019[65] Note 4 - Equity Method Investment in ARO This note details Valaris's 50% equity interest in ARO, its financial performance, and potential capital contribution obligations - Valaris holds a 50% equity interest in ARO, a joint venture with Saudi Aramco, which owns seven jackup rigs and leases nine rigs from Valaris[66] - ARO ordered two newbuild jackups in January 2020 for 2022 delivery, with Valaris potentially required to make capital contributions up to $1.25 billion to fund the newbuild program[67] Summarized Financial Information for ARO (in millions) | Metric | Three Months Ended March 31, 2020 | | :------------------------------------ | :---------------------------------- | | Revenues | $140.3 | | Operating income | $10.7 | | Net income | $3.2 | | Current assets (March 31, 2020) | $351.2 | | Non-current assets (March 31, 2020) | $943.8 | | Total assets (March 31, 2020) | $1,295.0 | | Current liabilities (March 31, 2020) | $215.6 | | Non-current liabilities (March 31, 2020) | $992.9 | | Total liabilities (March 31, 2020) | $1,208.5 | - Equity in earnings of ARO was $(6.3) million for the three months ended March 31, 2020, after amortization of basis differences[74] - Total revenue from related-party transactions with ARO (lease, secondment, transition services) was $43.3 million for the three months ended March 31, 2020[75] - Valaris's maximum exposure to loss related to ARO was $613.2 million as of March 31, 2020[80] Note 5 - Fair Value Measurements This note provides fair value measurements for the company's financial instruments, including pension assets, derivatives, and debt - Supplemental executive retirement plan assets were measured at fair value using Level 1 inputs, totaling $21.2 million as of March 31, 2020[81] - Derivatives were measured at fair value using Level 2 inputs, resulting in net financial liabilities of $12.6 million as of March 31, 2020[81] Carrying Values and Estimated Fair Values of Debt Instruments (in millions) | Debt Instrument | March 31, 2020 Carrying Value | March 31, 2020 Estimated Fair Value | December 31, 2019 Carrying Value | December 31, 2019 Estimated Fair Value | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | | 6.875% Senior notes due 2020 | $124.1 | $27.8 | $124.8 | $117.3 | | 4.70% Senior notes due 2021 | $100.4 | $10.4 | $113.2 | $95.5 | | 4.875% Senior notes due 2022 | $601.2 | $125.9 | $599.2 | $460.5 | | 3.00% Exchangeable senior notes due 2024 | $707.7 | $214.3 | $699.0 | $607.4 | | 4.50% Senior notes due 2024 | $302.0 | $28.6 | $302.0 | $167.2 | | 4.75% Senior notes due 2024 | $278.6 | $64.2 | $276.5 | $201.4 | | 8.00% Senior notes due 2024 | $295.5 | $27.6 | $295.7 | $181.7 | | 5.20% Senior notes due 2025 | $331.8 | $33.8 | $331.7 | $186.7 | | 7.375% Senior notes due 2025 | $330.2 | $82.6 | $329.2 | $218.6 | | 7.75% Senior notes due 2026 | $987.7 | $107.7 | $987.1 | $575.1 | | 7.20% Debentures due 2027 | $111.7 | $16.6 | $111.7 | $70.0 | | 7.875% Senior notes due 2040 | $372.8 | $46.9 | $373.3 | $153.5 | | 5.40% Senior notes due 2042 | $263.2 | $78.8 | $262.8 | $194.4 | | 5.75% Senior notes due 2044 | $974.2 | $93.5 | $973.3 | $450.0 | | 5.85% Senior notes due 2044 | $269.1 | $80.6 | $268.8 | $194.8 | | Amounts borrowed under credit facility | $322.9 | $328.9 | — | — | | Total Debt | $6,373.1 | $1,368.2 | $6,048.3 | $3,874.1 | Note 6 - Property and Equipment This note explains the changes in property and equipment, including a significant impairment loss recorded in Q1 2020 - Property and equipment, net, decreased from $15,096.9 million as of December 31, 2019, to $12,157.2 million as of March 31, 2020[27] - A pre-tax, non-cash loss on impairment of $2.8 billion was recorded in Q1 2020 for certain floaters, jackups, and spare equipment[24][90] - The impairment was triggered by the coronavirus pandemic, a sharp decline in oil prices (Brent crude from ~$60 to ~$20 per barrel), and significantly reduced customer capital expenditure plans[89] Note 7 - Pension and Other Post-retirement Benefits This note outlines the net periodic pension cost and expected future contributions to pension and post-retirement benefit plans - Net periodic pension cost for the three months ended March 31, 2020, was a benefit of $(2.4) million[93] - The company expects to make additional contributions of approximately $32.6 million to pension and other post-retirement benefit plans for the remainder of 2020[93] Note 8 - Derivative Instruments This note describes the company's use of derivative instruments, primarily foreign currency forward contracts, to manage exchange rate risk - Valaris uses derivatives, primarily foreign currency forward contracts, to reduce exposure to foreign currency exchange rate risk[94] - As of March 31, 2020, net foreign currency derivative liabilities totaled $12.6 million, compared to assets of $5.4 million as of December 31, 2019[95] - The company had cash flow hedges outstanding to exchange an aggregate of $206.4 million for various foreign currencies as of March 31, 2020[99] Note 9 - Earnings Per Share This note presents the basic and diluted loss per share and explains the exclusion of anti-dilutive instruments - Basic and diluted loss per share was $(15.19) for the three months ended March 31, 2020[24] - Potentially dilutive instruments were excluded from the computation of diluted EPS as their effect would have been anti-dilutive due to the net loss position[103] Note 10 - Debt This note details the company's debt structure, compliance with covenants, and potential implications of NYSE non-compliance - Rowan and RCI transferred substantially all assets and liabilities to Valaris plc on February 3, 2020, making Valaris the obligor on the acquired Rowan Notes[107][244] - As of March 31, 2020, $332.1 million was outstanding under the credit facility, with $1.3 billion of undrawn capacity available, and the company was in compliance with debt covenants[108][250] - The NYSE notified Valaris of non-compliance with the minimum $1.00 share price requirement; delisting could trigger a repurchase right for the 2024 Convertible Notes[112][286] - Valaris repurchased $12.8 million of its 4.70% Senior notes due 2021 for $9.7 million, recognizing a pre-tax gain of $3.1 million[113][243] Note 11 - Shareholders' Equity This note explains the changes in total Valaris shareholders' equity, primarily driven by the net loss - Total Valaris shareholders' equity decreased from $9,310.9 million as of December 31, 2019, to $6,298.3 million as of March 31, 2020[27] - The primary driver for the decrease in equity was the net loss of $(3,006.3) million for the three months ended March 31, 2020[114] Note 12 - Income Taxes This note discusses the income tax benefit recognized in Q1 2020, including impacts from restructuring and tax authority withdrawals - A discrete income tax benefit of $164.4 million was recognized in Q1 2020, primarily due to a restructuring transaction, the U.S. Cares Act, and changes in unrecognized tax benefits[119][225] - The company de-recognized €79.0 million (approximately $87.2 million) in previously accrued Luxembourg uncertain tax liabilities after tax authorities withdrew assessments[122] - Valaris is vigorously contesting Australian tax assessments totaling approximately A$101 million ($62.0 million) plus interest for tax years 2011-2016[123][260] Note 13 - Contingencies This note outlines various contingent liabilities, including legal disputes, environmental assessments, and potential capital contributions to ARO - The VALARIS DS-8 non-drilling incident in Angola led to contract termination, a $150 million decline in revenue backlog, but the company expects to recover losses through loss of hire insurance ($602,500 per day)[125][180] - An Indonesian well-control event in July 2019 is under investigation, with potential for penalties[126] - A Middle East legal dispute was settled for $20.3 million (recognized as a loss in 2019), and the local partner's interest in the subsidiary was acquired for $27.5 million[127][128] - Valaris has a potential obligation to make additional capital contributions to ARO, up to $1.25 billion, to fund its newbuild jackup rig program[129][259] Note 14 - Segment Information This note provides financial information by reportable segment, including revenues, operating expenses, and impairment losses - The company's reportable segments include Floaters, Jackups, ARO, and Other (management services and rigs leased to ARO)[133] Segment Operating Income (Loss) for Three Months Ended March 31, 2020 (in millions) | Segment | Revenues | Operating Expenses (excl. Impairment) | Loss on Impairment | Operating Income (Loss) | | :-------- | :------- | :------------------------------------ | :----------------- | :---------------------- | | Floaters | $179.6 | $303.3 | $2,554.3 | $(2,678.0) | | Jackups | $212.8 | $284.6 | $253.9 | $(325.7) | | ARO | $140.3 | $129.6 | — | $10.7 | | Other | $64.2 | $47.1 | — | $17.1 | | Reconciling Items | $(140.3) | $(115.8) | — | $(75.9) | | Total Consolidated | $456.6 | $649.2 | $2,808.2 | $(3,051.8) | - As of March 31, 2020, Valaris operated 77 rigs (including 2 under construction and 1 held-for-sale), and ARO owned 7 rigs, with significant presence in Europe & the Mediterranean (22 Valaris rigs) and Middle East & Africa (25 Valaris rigs, 7 ARO rigs)[137] Note 15 - Supplemental Financial Information This note offers additional financial details, including key balance sheet accounts, top customers, and regional revenue breakdown Key Balance Sheet Accounts (in millions) | Account | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :------------- | :---------------- | | Accounts receivable, net | $493.2 | $520.7 | | Other current assets | $427.5 | $446.5 | | Other assets | $187.0 | $188.3 | | Accrued liabilities and other | $402.3 | $417.7 | | Other liabilities | $695.7 | $867.4 | | Accumulated other comprehensive income | $(7.2) | $6.2 | - Top customers by revenue for Q1 2020 were Total (16%) and Saudi Aramco (10%)[144] - Top regions by revenue for Q1 2020 were Saudi Arabia ($83.9 million), U.S. Gulf of Mexico ($78.7 million), and Angola ($61.5 million)[146] Note 16 - Guarantee of Registered Securities This note details Valaris plc's guarantees of senior notes and debentures issued by its subsidiaries - Valaris plc fully and unconditionally guarantees Pride's 6.875% senior notes due 2020 and 7.875% senior notes due 2040, with an aggregate outstanding principal balance of $422.9 million as of March 31, 2020[148] - Valaris also guarantees Ensco International Incorporated's 7.2% debentures due 2027, with an aggregate outstanding principal balance of $112.1 million as of March 31, 2020[149] - The section includes condensed consolidating financial statements for Valaris plc and its subsidiaries[150] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Valaris's business, industry conditions, and detailed analysis of its financial performance, liquidity, and capital resources for the three months ended March 31, 2020. It highlights the severe impact of the coronavirus pandemic and oil price decline on the offshore drilling market, leading to significant impairment losses and liquidity challenges Executive Summary This section provides a high-level overview of Valaris's business, the challenging offshore drilling market conditions, and the resulting financial impacts in Q1 2020 - Valaris is a leading provider of offshore contract drilling services, operating a fleet of 73 rigs (excluding 2 under construction and 1 held-for-sale)[170] - The offshore contract drilling industry is highly cyclical; Q1 2020 saw a sharp decline in global oil demand and increased supply, causing Brent crude oil prices to fall from ~$60 to ~$20 per barrel[171][172] - The pandemic and oil price decline led to contract cancellations, concessions, stacking rigs, and workforce reductions, with a challenging market expected through at least 2021[173][174] Backlog This section details the decrease in the company's contract backlog due to cancellations and concessions - Contract backlog decreased from $2.5 billion as of December 31, 2019, to $1.9 billion as of March 31, 2020[175] - The decrease was due to customer contract cancellations, concessions, and revenues realized, with further declines expected[175][176] Business Environment This section analyzes the market conditions and operational changes within the Floaters, Jackups, and Divestitures segments Floaters This section discusses the challenging floater market, contract changes, and rig sales - The floater contracting environment remains challenging due to limited demand, excess newbuild supply, and the precipitous fall in oil prices, leading to contract cancellations and delays[177] - The VALARIS DS-8 non-drilling incident in Angola resulted in contract termination and a $150 million backlog decline, expected to be largely offset by loss of hire insurance[179][180] - New contracts were awarded for VALARIS DS-7, DS-12, DS-9, MS-1, and 8505, while VALARIS 6002 and VALARIS 5004 were sold[181][182] Jackups This section describes the declining demand for jackups, contract terminations, and newbuild supply - Demand for jackups declined due to market uncertainty, resulting in contract terminations (VALARIS JU-109), concessions (VALARIS JU-120, JU-92, JU-72), and early contract endings (VALARIS JU-249, JU-100)[185][186] - New contracts were executed for VALARIS JU-118, JU-144, and JU-87, and VALARIS JU-68 was sold[187][188] - Approximately 50 newbuild jackup rigs are under construction, mostly uncontracted, and around 100 older jackups have been retired since the downturn[188][189] Divestitures This section outlines the company's strategy to divest older rigs and reports on recent rig sales and held-for-sale assets - Valaris continues its strategy to divest older, less capable, or non-core rigs to enhance shareholder value and improve liquidity[190][191] - VALARIS JU-68 and VALARIS 6002 were sold in Q1 2020, and VALARIS 5004 was sold in April 2020[190] - VALARIS JU-70 remains classified as held-for-sale as of March 31, 2020[190] Results of Operations This section provides a detailed analysis of Valaris's financial performance, including revenues, expenses, and segment-specific results for the three months ended March 31, 2020 Overview This section provides a high-level summary of changes in revenues, expenses, and impairment losses for Q1 2020 - Revenues increased by $50.7 million (12%) to $456.6 million in Q1 2020, driven by rigs from the Rowan Transaction ($103.6 million) and ARO-related revenues ($43.3 million), partially offset by rig sales and operational interruptions[192][193] - Contract drilling expense increased by $143.4 million (43%) to $476.0 million, primarily due to expenses from Rowan Transaction rigs ($140.1 million)[194] - A non-cash impairment loss of $2.8 billion was recorded in Q1 2020 due to adverse market changes[195] - Depreciation expense increased by $39.5 million (32%) and general and administrative expenses increased by $23.8 million (80%) due to Rowan Transaction rigs and higher professional fees, respectively[195][196] Rig Counts, Utilization and Average Day Rates This section presents detailed statistics on rig counts, utilization rates, and average day rates across different rig types Rig Counts as of March 31 | Rig Type | 2020 | 2019 | | :--------------- | :--- | :--- | | Floaters | 24 | 22 | | Jackups | 41 | 33 | | Other (leased to ARO) | 9 | — | | Under construction | 2 | 3 | | Held-for-sale | 1 | 1 | | Total Valaris | 77 | 59 | | ARO (owned) | 7 | — | Rig Utilization and Average Day Rates for Three Months Ended March 31 | Metric | 2020 | 2019 | | :-------------------- | :----- | :----- | | Rig Utilization | | | | Floaters | 38% | 43% | | Jackups | 61% | 68% | | Other | 100% | 100% | | Total Valaris | 59% | 60% | | ARO | 90% | — | | Average Day Rates | | | | Floaters | $195,541 | $240,440 | | Jackups | $81,492 | $72,146 | | Other | $42,343 | $82,712 | | Total Valaris | $94,784 | $118,733 | | ARO | $108,873 | — | Operating Income by Segment This section analyzes the operating income and impairment losses for the Floaters, Jackups, ARO, and Other segments - Floater revenue declined by $53.1 million (23%) in Q1 2020, primarily due to rig sales, fewer contract days, and the VALARIS DS-8 interruption, while contract drilling expense increased by $32.1 million (18%) due to acquired rigs[207][208] - Jackup revenues increased by $55.8 million (36%) in Q1 2020, mainly from Rowan Transaction rigs, but contract drilling expense increased by $90.7 million (67%) for the same reason[210][211] - The Floater segment recorded a $2.6 billion impairment loss, and the Jackup segment recorded a $253.9 million impairment loss in Q1 2020[209][212] - Other revenues increased by $48.0 million, primarily from rigs leased to ARO and revenues from Secondment and Transition Services Agreements[216] Other Income (Expense) This section details changes in interest income, interest expense, and foreign currency exchange gains/losses - Interest income increased to $4.8 million in Q1 2020, primarily due to $4.6 million earned on the shareholder note from ARO[219] - Interest expense, net, increased by $32.2 million to $(113.2) million in Q1 2020, mainly due to senior notes acquired in the Rowan Transaction[219][220] - Net foreign currency exchange gains of $3.8 million were reported in Q1 2020, compared to losses of $0.3 million in Q1 2019[221] Provision for Income Taxes This section explains the income tax benefit recorded in Q1 2020 and the variability of the effective tax rate - A discrete income tax benefit of $164.4 million was recorded in Q1 2020, primarily from a restructuring transaction, the U.S. Cares Act, and changes in unrecognized tax benefits[225] - Due to varying international tax regimes, the company generally incurs income tax expense even in periods of consolidated loss, and the effective tax rate can vary substantially[222][224] Liquidity and Capital Resources This section analyzes Valaris's financial liquidity, debt position, cash flows, and capital expenditure plans, highlighting the impact of market conditions on its financial stability Overview This section discusses Valaris's liquidity strategy, debt-to-capital ratio, and potential debt restructuring efforts - Valaris expects to fund near-term liquidity needs from cash, its credit facility, or future financing, but operating cash flows are expected to remain negative in the near term[226][238] - The total debt to total capitalization ratio increased to 52.1% as of March 31, 2020, due to $2.8 billion impairments; further impairments exceeding $1.7 billion could breach the 60% covenant, leading to default and cross-acceleration of $2.1 billion in senior notes[228][290] - The company has engaged financial and legal advisors to analyze liquidity and capital structure alternatives, including potential comprehensive debt restructuring that may involve substantial impairment or dilution for shareholders[231][287] Liquidity This section presents the company's liquidity position, including cash, available credit, working capital, and current ratio Liquidity Position (in millions, except ratios) | Metric | March 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $184.9 | $97.2 | | Available credit facility borrowing capacity | $1,290.0 | $1,622.2 | | Total liquidity | $1,474.9 | $1,719.4 | | Working capital | $220.4 | $233.7 | | Current ratio | 1.2 | 1.3 | Cash and Debt This section details total debt outstanding, principal debt maturities, and primary sources and uses of cash - Total debt principal outstanding was $6.8 billion as of March 31, 2020, representing 52.1% of total capitalization[234] - Principal debt maturities through 2024 include $122.9 million in 2020, $100.7 million in 2021, $620.8 million in 2022, and $1.8 billion in 2024[235] - Primary cash source in Q1 2020 was $328.9 million in net borrowings under the credit facility; primary uses were $204.4 million in operating activities and $36.3 million for capital expenditures[236] Cash Flow and Capital Expenditures This section analyzes net cash used in operating activities and provides a breakdown of capital expenditures - Net cash used in operating activities increased by $180.0 million to $(204.4) million in Q1 2020, primarily due to declining margins and interest on debt assumed in the Rowan Transaction[238] Capital Expenditures (in millions) | Category | 2020 | 2019 | | :-------------------------- | :--- | :--- | | New rig construction | $2.2 | $16.2 | | Rig enhancements | $21.0 | $3.0 | | Minor upgrades and improvements | $13.1 | $9.8 | | Total Capital Expenditures | $36.3 | $29.0 | - Expected capital expenditures for the remainder of 2020 are approximately $85 million[239] - Two ultra-deepwater drillships (VALARIS DS-13 and DS-14) are under construction, with remaining contractual payments of $248.9 million due by June 2022[240] Financing and Capital Resources This section elaborates on the company's debt-to-capital ratio, revolving credit facility, and share repurchase program - The total debt to total capital ratio was 52.1% as of March 31, 2020, up from 41.2% at December 31, 2019, due to increased borrowings and operating losses including asset impairments[241][242] - Valaris has $1.3 billion available under its $1.6 billion revolving credit facility, which expires in September 2022[245][250] - The company was in compliance with credit facility covenants as of March 31, 2020, but future compliance is uncertain given market conditions and potential further impairments[250][251] - Notes receivable from ARO total $452.9 million, maturing in October 2027 and October 2028[254] - A share repurchase program for up to $500 million (max 16.3 million shares) is approved until May 2023, but currently restricted by the revolving credit facility[256][301] Market Risk This section describes how Valaris manages foreign currency exchange rate risk using derivatives and quantifies potential impacts - Valaris uses foreign currency derivatives, including cash flow hedges and non-designated derivatives, to manage exposure to foreign currency exchange rate risk[262][263][264] - As of March 31, 2020, cash flow hedges were outstanding for an aggregate of $206.4 million for various foreign currencies[263] - A hypothetical 10% adverse change in foreign currency exchange rates would result in approximately $20.9 million in net unrealized losses, with $5.1 million offset by derivatives[265] Critical Accounting Policies This section confirms the consistency of critical accounting policies with the prior annual report and notes no material changes in estimates - Critical accounting policies, including property and equipment, impairment of property and equipment, income taxes, and pension and other post-retirement benefits, remain consistent with the 2019 annual report[269] - No material changes were made to the judgments, assumptions, or policies underlying critical accounting estimates during the three months ended March 31, 2020[269] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the market risk disclosures provided within Item 2, indicating no additional quantitative or qualitative information is presented here - Information required under Item 3 has been incorporated into 'Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk'[271] Item 4. Controls and Procedures The company's principal executive and financial officers concluded that disclosure controls and procedures were effective as of March 31, 2020. There were no material changes in internal controls over financial reporting during the quarter, apart from the ongoing integration of Rowan's operations and control processes - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of March 31, 2020[272] - No material changes in internal controls over financial reporting occurred during Q1 2020, except for the ongoing integration of Rowan into the control environment[273][274] PART II - Other Information This part contains disclosures on legal proceedings, risk factors, equity security sales, and a list of exhibits Item 1. Legal Proceedings This section details ongoing legal proceedings, including a lawsuit by UMB Bank alleging breach of fiduciary duty and fraudulent transfer, a shareholder derivative lawsuit concerning federal securities laws, and environmental matters in Brazil and Spain. The company intends to vigorously defend itself in these cases - UMB Bank filed a lawsuit alleging breach of fiduciary duty and fraudulent transfer related to intercompany transactions after the Rowan merger[277] - A shareholder derivative lawsuit alleges violations of federal securities laws regarding the performance of the ultra-deepwater segment[278] - Valaris is subject to pending environmental assessments in Brazil (drilling fluid spills, $112,000 liability) and an administrative proceeding in Spain (alleged environmental spill, ~$3.0 million claim)[280][281] Item 1A. Risk Factors This section outlines significant risks facing the company, including the potential delisting from the NYSE, the uncertainty surrounding debt restructuring efforts, the risk of non-compliance with credit facility covenants, and the adverse impacts of the coronavirus pandemic and low oil prices on its financial condition and operations - Valaris received a NYSE notification for failing to meet the minimum $1.00 share price requirement; delisting could trigger repurchase rights for its 2024 Convertible Notes[286] - The company is discussing potential comprehensive debt restructuring with lenders and bondholders, which may result in substantial impairment or dilution for shareholders[287][288] - Further impairments exceeding $1.7 billion could lead to non-compliance with the credit facility's total debt to total capitalization covenant (currently 52.1%, limit 60%), potentially accelerating $2.1 billion in senior notes[290] - The coronavirus pandemic and precipitous decline in oil prices are adversely impacting the company's financial condition, liquidity, and operations, leading to contract cancellations and reduced capital expenditures[295][296] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on equity securities repurchased from employees and non-employee directors for tax withholding obligations in Q1 2020. It also notes an approved share repurchase program for up to $500 million, which is currently restricted by the revolving credit facility - During Q1 2020, 263,740 equity securities were repurchased from employees and non-employee directors at an average price of $3.27 for income tax withholding obligations[298][300] - A share repurchase program, approved for up to $500 million (maximum 16.3 million shares) until May 2023, is currently prohibited by the revolving credit facility, except in limited circumstances[301] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various legal agreements, award agreements, certifications, and XBRL financial data documents - Exhibits include the Tenth Supplemental Indenture, Cooperation and Support Agreement, various Performance Unit and Restricted Share Unit Award Agreements, CEO and CFO Certifications, and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase documents[303][304] Signatures This section confirms the official signing of the report by Valaris plc's Executive Vice President and Chief Financial Officer - The report was signed on April 30, 2020, by Jonathan H. Baksht, Executive Vice President and Chief Financial Officer of Valaris plc[308]