Item 1.
|
Financial Statements
|
NATIONAL OILWELL VARCO, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,479
|
|
|
$
|
1,408
|
|
Receivables, net
|
|
|
1,978
|
|
|
|
2,083
|
|
Inventories, net
|
|
|
3,254
|
|
|
|
3,325
|
|
Costs in excess of billings
|
|
|
653
|
|
|
|
665
|
|
Prepaid and other current assets
|
|
|
380
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,744
|
|
|
|
7,876
|
|
|
|
|
Property, plant and equipment, net
|
|
|
3,108
|
|
|
|
3,150
|
|
Deferred income taxes
|
|
|
87
|
|
|
|
86
|
|
Goodwill
|
|
|
6,065
|
|
|
|
6,067
|
|
Intangibles, net
|
|
|
3,467
|
|
|
|
3,530
|
|
Investment in unconsolidated affiliates
|
|
|
302
|
|
|
|
307
|
|
Other assets
|
|
|
131
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,904
|
|
|
$
|
21,140
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
388
|
|
|
$
|
414
|
|
Accrued liabilities
|
|
|
1,512
|
|
|
|
1,568
|
|
Billings in excess of costs
|
|
|
363
|
|
|
|
440
|
|
Current portion of long-term debt and short-term borrowings
|
|
|
506
|
|
|
|
506
|
|
Accrued income taxes
|
|
|
83
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,852
|
|
|
|
3,047
|
|
Long-term debt
|
|
|
2,707
|
|
|
|
2,708
|
|
Deferred income taxes
|
|
|
1,043
|
|
|
|
1,064
|
|
Other liabilities
|
|
|
317
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,919
|
|
|
|
7,137
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock - par value $.01; 1 billion shares authorized; 380,060,041 and 378,637,403
shares issued and outstanding at March 31, 2017 and December 31, 2016
|
|
|
4
|
|
|
|
4
|
|
Additional
paid-in
capital
|
|
|
8,135
|
|
|
|
8,103
|
|
Accumulated other comprehensive loss
|
|
|
(1,356
|
)
|
|
|
(1,452
|
)
|
Retained earnings
|
|
|
7,138
|
|
|
|
7,285
|
|
|
|
|
|
|
|
|
|
|
Total Company stockholders equity
|
|
|
13,921
|
|
|
|
13,940
|
|
Noncontrolling interests
|
|
|
64
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
13,985
|
|
|
|
14,003
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
20,904
|
|
|
$
|
21,140
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
2
NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
1,741
|
|
|
$
|
2,189
|
|
Cost of revenue
|
|
|
1,532
|
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
209
|
|
|
|
244
|
|
Selling, general and administrative
|
|
|
306
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(97
|
)
|
|
|
(189
|
)
|
Interest and financial costs
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Interest income
|
|
|
4
|
|
|
|
5
|
|
Equity loss in unconsolidated affiliates
|
|
|
|
|
|
|
(6
|
)
|
Other income (expense), net
|
|
|
(11
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(129
|
)
|
|
|
(236
|
)
|
Provision for income taxes
|
|
|
(9
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(120
|
)
|
|
|
(118
|
)
|
Net income attributable to noncontrolling interests
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company
|
|
$
|
(122
|
)
|
|
$
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.32
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.05
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
376
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
376
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
3
NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(120
|
)
|
|
$
|
(118
|
)
|
Currency translation adjustments
|
|
|
90
|
|
|
|
143
|
|
Changes in derivative financial instruments, net of tax
|
|
|
5
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(25
|
)
|
|
|
127
|
|
Comprehensive income (loss) attributable to noncontrolling interest
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Company
|
|
$
|
(27
|
)
|
|
$
|
126
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements
4
NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(120
|
)
|
|
$
|
(118
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
175
|
|
|
|
175
|
|
Deferred income taxes
|
|
|
4
|
|
|
|
(135
|
)
|
Equity loss in unconsolidated affiliates
|
|
|
|
|
|
|
6
|
|
Other, net
|
|
|
55
|
|
|
|
83
|
|
Change in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
101
|
|
|
|
706
|
|
Inventories
|
|
|
65
|
|
|
|
112
|
|
Costs in excess of billings
|
|
|
12
|
|
|
|
210
|
|
Prepaid and other current assets
|
|
|
16
|
|
|
|
(11
|
)
|
Accounts payable
|
|
|
(26
|
)
|
|
|
(157
|
)
|
Accrued liabilities
|
|
|
(61
|
)
|
|
|
(231
|
)
|
Billings in excess of costs
|
|
|
(77
|
)
|
|
|
(81
|
)
|
Income taxes payable
|
|
|
(41
|
)
|
|
|
(65
|
)
|
Other assets/liabilities, net
|
|
|
8
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
111
|
|
|
|
621
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(42
|
)
|
|
|
(84
|
)
|
Business acquisitions, net of cash acquired
|
|
|
(6
|
)
|
|
|
(21
|
)
|
Other
|
|
|
6
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(42
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings against lines of credit and other debt
|
|
|
|
|
|
|
2,368
|
|
Payments against lines of credit and other debt
|
|
|
(2
|
)
|
|
|
(3,052
|
)
|
Cash dividends paid
|
|
|
(19
|
)
|
|
|
(173
|
)
|
Activity under stock incentive plans
|
|
|
9
|
|
|
|
1
|
|
Other
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(13
|
)
|
|
|
(861
|
)
|
Effect of exchange rates on cash
|
|
|
15
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
71
|
|
|
|
(321
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,408
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,479
|
|
|
$
|
1,759
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash payments (receipts) during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3
|
|
|
$
|
3
|
|
Income taxes
|
|
$
|
56
|
|
|
$
|
(32
|
)
|
See notes to unaudited consolidated financial statements.
5
NATIONAL OILWELL VARCO, INC.
Notes to Consolidated Financial Statements (Unaudited)
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) in the United States requires management to make estimates and assumptions that affect reported and contingent amounts of assets and liabilities as of the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accompanying unaudited consolidated financial
statements of National Oilwell Varco, Inc. (NOV or the Company) present information in accordance with GAAP in the United States for interim financial information and the instructions to Form
10-Q
and applicable rules of
Regulation S-X.
They do not include all information or footnotes required by GAAP in the United States for complete consolidated
financial statements and should be read in conjunction with our 2016 Annual Report on Form
10-K.
In our opinion,
the consolidated financial statements include all adjustments, which are of a normal recurring nature, unless otherwise disclosed, necessary for a fair presentation of the results for the interim periods. The results of operations for the three
months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, and payables approximated fair value because of the relatively short maturity of these
instruments. Cash equivalents include only those investments having a maturity date of three months or less at the time of purchase. See Note 7 for the fair value of long-term debt and Note 10 for the fair value of derivative financial instruments.
Inventories consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Raw materials and supplies
|
|
$
|
903
|
|
|
$
|
961
|
|
Work in process
|
|
|
528
|
|
|
|
561
|
|
Finished goods and purchased products
|
|
|
1,823
|
|
|
|
1,803
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,254
|
|
|
$
|
3,325
|
|
|
|
|
|
|
|
|
|
|
6
Accrued liabilities consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Vendor costs
|
|
$
|
236
|
|
|
$
|
235
|
|
Customer prepayments and billings
|
|
|
232
|
|
|
|
222
|
|
Compensation
|
|
|
222
|
|
|
|
181
|
|
Warranty
|
|
|
169
|
|
|
|
172
|
|
Taxes
(non-income)
|
|
|
121
|
|
|
|
176
|
|
Insurance
|
|
|
101
|
|
|
|
103
|
|
Commissions
|
|
|
61
|
|
|
|
57
|
|
Fair value of derivative financial instruments
|
|
|
53
|
|
|
|
66
|
|
Interest
|
|
|
29
|
|
|
|
8
|
|
Other
|
|
|
288
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,512
|
|
|
$
|
1,568
|
|
|
|
|
|
|
|
|
|
|
Service and Product Warranties
The Company provides service and warranty policies on certain of its products. The Company accrues liabilities under service and warranty policies based upon
specific claims and a review of historical warranty and service claim experience in accordance with Accounting Standards Codification (ASC) Topic 450 Contingencies. Adjustments are made to accruals as claim data and
historical experience change. In addition, the Company incurs discretionary costs to service its products in connection with product performance issues and accrues for them when they are encountered.
The changes in the carrying amount of service and product warranties are as follows (in millions):
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
172
|
|
|
|
|
|
|
Net provisions for warranties issued during the year
|
|
|
16
|
|
Amounts incurred
|
|
|
(25
|
)
|
Currency translation adjustments and other
|
|
|
6
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
169
|
|
|
|
|
|
|
4.
|
Costs and Estimated Earnings on Uncompleted Contracts
|
Costs and estimated earnings on uncompleted
contracts consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
7,257
|
|
|
$
|
8,132
|
|
Estimated earnings
|
|
|
3,424
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,681
|
|
|
|
12,001
|
|
Less: Billings to date
|
|
|
10,391
|
|
|
|
11,776
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
290
|
|
|
$
|
225
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
653
|
|
|
$
|
665
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(363
|
)
|
|
|
(440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
290
|
|
|
$
|
225
|
|
|
|
|
|
|
|
|
|
|
7
5.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of accumulated other comprehensive income
(loss) are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation
Adjustments
|
|
|
Derivative
Financial
Instruments,
Net of Tax
|
|
|
Defined
Benefit
Plans,
Net of Tax
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
(1,376
|
)
|
|
$
|
(39
|
)
|
|
$
|
(37
|
)
|
|
$
|
(1,452
|
)
|
Accumulated other comprehensive income (loss) before reclassifications
|
|
|
90
|
|
|
|
10
|
|
|
|
1
|
|
|
|
101
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
(1,286
|
)
|
|
$
|
(34
|
)
|
|
$
|
(36
|
)
|
|
$
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of amounts reclassified from accumulated other comprehensive income (loss) are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Currency
Translation
Adjustments
|
|
|
Derivative
Financial
Instruments
|
|
|
Defined
Benefit
Plans
|
|
|
Total
|
|
|
Currency
Translation
Adjustments
|
|
|
Derivative
Financial
Instruments
|
|
|
Defined
Benefit
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
|
|
|
$
|
(1
|
)
|
Cost of revenue
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
76
|
|
Tax effect
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
52
|
|
|
$
|
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys reporting currency is the U.S. dollar. For a majority of the Companys international entities in which
there is a substantial investment, the local currency is their functional currency. As a result, currency translation adjustments resulting from the process of translating the entities financial statements into the reporting currency are
reported in other comprehensive income or loss in accordance with ASC Topic 830 Foreign Currency Matters (ASC Topic 830). For the three months ended March 31, 2017, a majority of these local currencies strengthened
against the U.S. dollar resulting in net other comprehensive income of $90 million, upon the translation from local currencies to the U.S. dollar. For the three months ended March 31, 2016, a majority of these local currencies strengthened
against the U.S. dollar resulting in net other comprehensive income of $143 million upon the translation from local currencies to the U.S. dollar.
The effect of changes in the fair values of derivatives designated as cash flow hedges are accumulated in other comprehensive income or loss, net of tax,
until the underlying transactions to which they are designed to hedge are realized. Any movement in other comprehensive income or loss from period to period is the result of the combination of changes in fair value for open derivatives and the
outflow of other comprehensive income or loss related to cumulative changes in the fair value of derivatives that have settled in the current or prior periods. The accumulated effect was other comprehensive income of $5 million (net of tax of
$1 million) and $102 million (net of tax of $40 million) for the three months ended March 31, 2017 and March 31, 2016, respectively.
8
Operating results by segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
393
|
|
|
$
|
926
|
|
Rig Aftermarket
|
|
|
321
|
|
|
|
391
|
|
Wellbore Technologies
|
|
|
555
|
|
|
|
631
|
|
Completion & Production Solutions
|
|
|
648
|
|
|
|
558
|
|
Eliminations
|
|
|
(176
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,741
|
|
|
$
|
2,189
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
9
|
|
|
$
|
67
|
|
Rig Aftermarket
|
|
|
61
|
|
|
|
69
|
|
Wellbore Technologies
|
|
|
(57
|
)
|
|
|
(91
|
)
|
Completion & Production Solutions
|
|
|
8
|
|
|
|
(38
|
)
|
Eliminations and corporate costs
|
|
|
(118
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
Total operating profit (loss)
|
|
$
|
(97
|
)
|
|
$
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)%:
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
|
2.3
|
%
|
|
|
7.2
|
%
|
Rig Aftermarket
|
|
|
19.0
|
%
|
|
|
17.6
|
%
|
Wellbore Technologies
|
|
|
(10.3
|
%)
|
|
|
(14.4
|
%)
|
Completion & Production Solutions
|
|
|
1.2
|
%
|
|
|
(6.8
|
%)
|
Total operating profit (loss) %
|
|
|
(5.6
|
%)
|
|
|
(8.6
|
%)
|
Sales from one segment to another generally are priced at estimated equivalent commercial selling prices; however, segments
originating an external sale are credited with the full profit to the Company. Eliminations include intercompany transactions conducted between the four reporting segments that are eliminated in consolidation. Intercompany transactions within each
reporting segment are eliminated within each reporting segment.
Included in operating profit (loss) are other items primarily related to costs associated
with severance, facility closures, and Voluntary Early Retirement Plans (VERP) established by the Company during the first quarter of 2016. As of March 31, 2017, the Company had approximately $47 million accrued for the VERP
postretirement medical benefits. Other items by segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Other items:
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
7
|
|
|
$
|
52
|
|
Rig Aftermarket
|
|
|
5
|
|
|
|
8
|
|
Wellbore Technologies
|
|
|
|
|
|
|
38
|
|
Completion & Production Solutions
|
|
|
15
|
|
|
|
34
|
|
Eliminations and corporate costs
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total other items
|
|
$
|
27
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
9
Debt consists of (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
$500 million in Senior Notes, interest at 1.35% payable semiannually, principal due on
December 1, 2017
|
|
$
|
499
|
|
|
$
|
499
|
|
$1.4 billion in Senior Notes, interest at 2.60% payable semiannually, principal due on
December 1, 2022
|
|
|
1,391
|
|
|
|
1,391
|
|
$1.1 billion in Senior Notes, interest at 3.95% payable semiannually, principal due
on December 1, 2042
|
|
|
1,087
|
|
|
|
1,087
|
|
Other
|
|
|
236
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
3,213
|
|
|
|
3,214
|
|
Less current portion
|
|
|
506
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,707
|
|
|
$
|
2,708
|
|
|
|
|
|
|
|
|
|
|
The Company has a $4.5 billion, five-year credit facility which expires September 28, 2018. The Company also has a
commercial paper program under which borrowings are classified as long-term since the program is supported by the $4.5 billion, five-year credit facility. At March 31, 2017, there were no commercial paper borrowings, and there were no
outstanding letters of credit issued under the credit facility, resulting in $4,500 million of funds available under this credit facility. Interest under this multicurrency facility is based upon LIBOR, NIBOR or EURIBOR plus 1.125% subject to a
ratings-based grid, or the U.S. prime rate. The credit facility contains a financial covenant regarding maximum
debt-to-capitalization
ratio of 60%. As of March 31,
2017, the Company was in compliance with a
debt-to-capitalization
ratio of 18.7%.
The Company had $1,002 million of outstanding letters of credit at March 31, 2017 that are under various bilateral letter of credit facilities.
Letters of credit are issued as bid bonds, advanced payment bonds and performance bonds.
The fair value of the Companys debt is estimated using
Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At March 31, 2017 and December 31, 2016, the fair value of the Companys unsecured Senior Notes approximated
$2,740 million and $2,669 million, respectively. At both March 31, 2017 and December 31, 2016, the carrying value of the Companys unsecured Senior Notes approximated $2,977 million.
10
The effective tax rate for the three months ended March 31, 2017 and 2016 was 7.0% and 50.0%,
respectively. Market conditions continued to negatively impact our business in the first quarter of 2017. As a result of these conditions, we established a valuation allowance on losses and tax credits in the current year, which, when applied to
losses resulted in a lower effective tax rate than the U.S. statutory rate. For the three months ended March 31, 2016, the effect of lower tax rates on income earned in foreign jurisdictions and a reduction in tax reserves due to audit
settlements, when applied to losses, resulted in a higher effective tax rate.
For the three months ended March 31, 2016, the Company utilized the
discrete-period method to compute its interim tax provision due to significant variations in the relationship between income tax expense and
pre-tax
accounting income or loss; consequently, the actual
effective rate for the interim period was reported. For the three months ended March 31, 2017, the Company has returned to estimating and recording a full year effective tax rate.
9.
|
Stock-Based Compensation
|
The Company has a stock-based compensation plan known as the National Oilwell
Varco, Inc. Long-Term Incentive Plan (the Plan). The Plan provides for the granting of stock options, performance-based share awards, restricted stock, phantom shares, stock payments and stock appreciation rights
(SARs). The number of shares authorized under the Plan is 69.4 million. The Plan is now subject to a fungible ratio concept, such that the issuance of stock options and SARs reduces the number of available shares under the Plan
on a
1-for-1
basis, and the issuance of other awards reduces the number of available shares under the Plan on a
3-for-1
basis. At March 31, 2017, 19,871,859 shares remain available for future grants under the Plan, all of which are available for grants of stock options, performance-based share awards, restricted
stock awards, phantom shares, stock payments and SARs.
On February 22, 2017, the Company granted 3,362,460 stock options with a fair value of $10.98
per share and an exercise price of $38.86 per share; 1,504,450 shares of restricted stock and restricted stock units with a fair value of $38.86 per share; performance share awards to senior management employees with potential payouts varying from
zero to 388,380 shares; and 14,400 SARs. The stock options vest over a three-year period from the grant date. The restricted stock and restricted stock units vest on the third anniversary of the date of grant or in three equal annual installments
commencing on the first anniversary of the date of grant. The performance share awards can be earned based on performance against established goals over a three-year performance period. The performance share awards are based entirely on a TSR
(total shareholder return) goal. Performance against the TSR goal is determined by comparing the performance of the Companys TSR with the TSR performance of the members of the OSX index for the three-year performance period. The SARs are
cash-settled awards and vest over a three-year period from the grant date. We account for the SARs as liability awards, which requires the awards to be revalued at each reporting period.
Total stock-based compensation for all stock-based compensation arrangements under the Plan was $30 million and $29 million for the three months
ended March 31, 2017 and 2016, respectively. Included in stock-based compensation for the three months ended March 31, 2016 is $5 million related to the Voluntary Early Retirement Plan established by the Company in the first quarter
of 2016. The total income tax benefit recognized in the Consolidated Statements of Loss for all stock-based compensation arrangements under the Plan was $4 million and $7 million for the three months ended March 31, 2017 and 2016,
respectively.
11
10.
|
Derivative Financial Instruments
|
ASC Topic 815, Derivatives and Hedging requires a company
to recognize all of its derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
The
Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange rate risk. Forward contracts against various foreign currencies are entered into
to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit (cash flow hedge). In addition, the Company will enter into
non-designated
forward contracts against various foreign currencies to manage the foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts
(non-designated
hedge).
The Company records all derivative financial instruments at their fair value in its
Consolidated Balance Sheet. Except for certain
non-designated
hedges discussed below, all derivative financial instruments that the Company holds are designated as cash flow hedges and are highly effective in
offsetting movements in the underlying risks. Such arrangements typically have terms between 2 and 24 months, but may have longer terms depending on the underlying cash flows being hedged, typically related to the projects in our backlog. The
Company may also use interest rate contracts to mitigate its exposure to changes in interest rates on anticipated long-term debt issuances.
At
March 31, 2017, the Company has determined that the fair value of its derivative financial instruments representing assets of $80 million and liabilities of $55 million (primarily currency related derivatives) are determined using
level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the
fair value is based on publicly available foreign exchange and interest rates at each financial reporting date. At March 31, 2017, the net fair value of the Companys foreign currency forward contracts totaled a net asset of
$25 million.
At March 31, 2017, the Company did not have any interest rate swaps and its financial instruments do not contain any
credit-risk-related or other contingent features that could cause accelerated payments when the Companys financial instruments are in net liability positions. We do not use derivative financial instruments for trading or speculative purposes.
Cash Flow Hedging Strategy
To protect against the
volatility of forecasted foreign currency cash flows resulting from forecasted revenues and expenses, the Company has instituted a cash flow hedging program. The Company hedges portions of its forecasted revenues and expenses denominated in
nonfunctional currencies with forward contracts. When the U.S. dollar strengthens or weakens against the foreign currencies, the change in present value of future foreign currency revenues and expenses is offset by changes in the fair value of the
forward contracts designated as hedges.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to
variability in expected future cash flows that is subject to a particular currency risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into
earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in revenues when the hedged transactions are cash flows associated
with forecasted revenues). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded
from the assessment of effectiveness, is recognized in the Consolidated Statements of Loss during the current period.
For the three months ended
March 31, 2017, the Company recognized gains of $15 million as a result of the discontinuance of certain cash flow hedges when it became probable that the original forecasted transactions would not occur by the end of the originally
specified time period. At March 31, 2017, there were $44 million in
pre-tax
losses recorded in accumulated other comprehensive income (loss). Significant changes in forecasted operating levels or
delays in large capital construction projects, whereby certain hedged transactions associated with these projects are no longer probable of occurring by the end of the originally specified time period, could result in additional losses due to the
de-designation
of existing hedge contracts.
12
The Company had the following outstanding foreign currency forward contracts that were entered into to hedge
nonfunctional currency cash flows from forecasted revenues and expenses (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Denomination
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Foreign Currency
|
|
2017
|
|
|
2016
|
|
Norwegian Krone
|
|
NOK
|
|
|
4,803
|
|
|
NOK
|
|
|
5,621
|
|
Japanese Yen
|
|
JPY
|
|
|
1,462
|
|
|
JPY
|
|
|
1,462
|
|
U.S. Dollar
|
|
USD
|
|
|
335
|
|
|
USD
|
|
|
321
|
|
Euro
|
|
EUR
|
|
|
94
|
|
|
EUR
|
|
|
279
|
|
Danish Krone
|
|
DKK
|
|
|
21
|
|
|
DKK
|
|
|
29
|
|
British Pound Sterling
|
|
GBP
|
|
|
16
|
|
|
GBP
|
|
|
1
|
|
Singapore Dollar
|
|
SGD
|
|
|
2
|
|
|
SGD
|
|
|
2
|
|
Non-designated
Hedging Strategy
The Company enters into forward exchange contracts to hedge certain nonfunctional currency monetary accounts. The purpose of the Companys foreign
currency hedging activities is to protect the Company from risk that the eventual U.S. dollar equivalent cash flows from the nonfunctional currency monetary accounts will be adversely affected by changes in the exchange rates.
For derivative instruments that are
non-designated,
the gain or loss on the derivative instrument subject to the
hedged risk (i.e., nonfunctional currency monetary accounts) is recognized in other income (expense), net in current earnings.
The Company had the
following outstanding foreign currency forward contracts that hedge the fair value of nonfunctional currency monetary accounts (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Denomination
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Foreign Currency
|
|
2017
|
|
|
2016
|
|
Russian Ruble
|
|
RUB
|
|
|
1,747
|
|
|
RUB
|
|
|
1,893
|
|
Norwegian Krone
|
|
NOK
|
|
|
1,377
|
|
|
NOK
|
|
|
538
|
|
Euro
|
|
EUR
|
|
|
420
|
|
|
EUR
|
|
|
272
|
|
U.S. Dollar
|
|
USD
|
|
|
408
|
|
|
USD
|
|
|
457
|
|
South African Rand
|
|
ZAR
|
|
|
150
|
|
|
ZAR
|
|
|
150
|
|
Danish Krone
|
|
DKK
|
|
|
78
|
|
|
DKK
|
|
|
49
|
|
Singapore Dollar
|
|
SGD
|
|
|
7
|
|
|
SGD
|
|
|
7
|
|
British Pound Sterling
|
|
GBP
|
|
|
4
|
|
|
GBP
|
|
|
3
|
|
Canadian Dollar
|
|
CAD
|
|
|
1
|
|
|
CAD
|
|
|
1
|
|
13
The Company has the following gross fair values of its derivative instruments and their balance sheet
classifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet
Location
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Balance Sheet
Location
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Derivatives designated as hedging
instruments under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current assets
|
|
$
|
3
|
|
|
$
|
24
|
|
|
Accrued liabilities
|
|
$
|
29
|
|
|
$
|
37
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
1
|
|
|
|
6
|
|
|
Other liabilities
|
|
|
2
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging
instruments under ASC Topic 815
|
|
|
|
$
|
4
|
|
|
$
|
30
|
|
|
|
|
$
|
31
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current assets
|
|
$
|
76
|
|
|
$
|
32
|
|
|
Accrued liabilities
|
|
$
|
24
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging
instruments under ASC Topic 815
|
|
|
|
$
|
76
|
|
|
$
|
32
|
|
|
|
|
$
|
24
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
80
|
|
|
$
|
62
|
|
|
|
|
$
|
55
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the Consolidated Statements of Income
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC Topic 815
Cash Flow
Hedging
Relationships
|
|
Amount of Gain (Loss)
Recognized in OCI on
Derivative (Effective Portion) (a)
|
|
|
Location of Gain (Loss)
Reclassified
from
Accumulated OCI into
Income
(Effective Portion)
|
|
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
|
|
|
Location of Gain (Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded
from
Effectiveness
Testing)
|
|
|
Amount of Gain (Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded
from
Effectiveness Testing) (b)
|
|
|
|
Three Months Ended
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
March 31,
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
5
|
|
|
|
1
|
|
|
Cost of revenue
|
|
|
15
|
|
|
|
(16
|
)
|
Foreign exchange contracts
|
|
|
13
|
|
|
|
66
|
|
|
Cost of revenue
|
|
|
(11
|
)
|
|
|
(60
|
)
|
|
Other income (expense), net
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13
|
|
|
|
66
|
|
|
|
|
|
(6
|
)
|
|
|
(59
|
)
|
|
|
|
|
23
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
Hedging Instruments under
ASC Topic 815
|
|
Location of Gain (Loss)
Recognized in Income
on
Derivative
|
|
Amount of Gain (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
|
9
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
9
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The Company expects that $8 million of the accumulated other comprehensive income (loss) will be reclassified into earnings within the next twelve months with an offset by gains from the underlying transactions
resulting in no impact to earnings or cash flow.
|
(b)
|
The amount of gain (loss) recognized in income represents $15 million and $(16) million related to the ineffective portion of the hedging relationships for the three months ended March 31, 2017 and 2016, respectively,
and $8 million and $(1) million related to the amount excluded from the assessment of the hedge effectiveness for the three months ended March 31, 2017 and 2016, respectively.
|
14
11.
|
Net Loss Attributable to Company Per Share
|
The following table sets forth the computation of weighted
average basic and diluted shares outstanding (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss attributable to Company
|
|
$
|
(122
|
)
|
|
$
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basicweighted average common shares outstanding
|
|
|
376
|
|
|
|
375
|
|
Dilutive effect of employee stock options and other unvested stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted outstanding shares
|
|
|
376
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.32
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.05
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
ASC Topic 260, Earnings Per Share requires companies with unvested participating securities to utilize a
two-class
method for the computation of net income attributable to Company per share. The
two-class
method requires a portion of net income attributable to Company to be
allocated to participating securities, which are unvested awards of share-based payments with
non-forfeitable
rights to receive dividends or dividend equivalents, if declared. Net loss attributable to Company
allocated to these participating securities was immaterial for the three months ended March 31, 2017 and therefore not excluded from net income attributable to Company per share calculation.
The Company had stock options outstanding that were anti-dilutive totaling 13 million and 15 million for the three months ended March 31, 2017
and 2016, respectively.
On February 24, 2017, the Companys Board of Directors approved a cash
dividend of $0.05 per share. The cash dividend was paid on March 31, 2017, to each stockholder of record on March 17, 2017. Cash dividends were $19 million and $173 million for the three months ended March 31, 2017 and 2016,
respectively. The declaration and payment of future dividends is at the discretion of the Companys Board of Directors and will be dependent upon the Companys results of operations, financial condition, capital requirements and other
factors deemed relevant by the Companys Board of Directors.
15
13.
|
Commitments and Contingencies
|
We are involved in various claims, internal investigations, regulatory
agency audits and pending or threatened legal actions involving a variety of matters. Predicting the ultimate outcome of such matters involves subjective judgment, estimates and inherent uncertainties. As of March 31, 2017, the Company recorded
an amount for contingent liabilities representing all contingencies believed to be probable. The Company has also assessed the potential for additional losses above the amounts accrued as well as potential losses for matters that are not probable
but are reasonably possible. The total potential loss on these matters cannot be determined; however, in our opinion, any ultimate liability, to the extent not otherwise provided for and except for the cases referred to herein, will not materially
affect our financial position, cash flow or results of operations. As it relates to the cases referred to herein, we currently anticipate that any judgment, arbitral award, administrative fine or penalty agreed to as part of a resolution would be
within established accruals, and would not have a material effect on our financial position or results of operations. These estimated liabilities are based on the Companys assessment of the nature of these matters, their progress toward
resolution, the advice of legal counsel and outside experts as well as managements intention and experience.
Our business is affected both directly
and indirectly by governmental laws and regulations relating to the oilfield service industry in general, as well as by environmental and safety regulations that specifically apply to our business. Although we have not incurred material costs in
connection with our compliance with such laws, there can be no assurance that other developments, such as new environmental laws, regulations and enforcement policies hereunder may not result in additional, presently unquantifiable, costs or
liabilities to us.
Further, in some instances, direct or indirect consumers of our products and services, entities providing financing for purchases of
our products and services or members of the supply chain for our products and services may become involved in governmental investigations, internal investigations, political or other enforcement matters. In such circumstances, such investigations
may adversely impact the ability of consumers of our products, entities providing financial support to such consumers or entities in the supply chain to timely perform their business plans or to timely perform under agreements with us. For example,
the
on-going,
publicly disclosed investigations in Brazil have adversely impacted our shipyard customers, their customers, entities providing financing for our shipyard customers and/or entities in the supply
chain. The investigations in Brazil have led to, and are expected to continue to lead to, delays in deliveries to our shipyard customers in Brazil, along with temporary suspension of performance under our supply contracts, and have resulted in
cancellations and could result in further attempted cancellation or other breaches of our contracts by our shipyard customers.
In other jurisdictions,
our shipyard customers customers in some instances have, and may in the future, sought suspension, delay or cancellation of the contracts or payment due between our shipyard customers and their customers. To the extent our shipyard customers
and their customers become engaged in disputes or litigation related to any such suspensions, delays or cancellations, we may also become involved, either directly or indirectly, in such disputes or litigation, as we enforce the terms of our
contracts with our shipyard customers. Further, customers in other markets may seek delay or suspension of deliveries, extending delivery into future periods, or may attempt cancellations. While we manage deliveries and collection of payment to
achieve milestone payments that mitigate our financial risk, such delays, suspensions, attempted cancellations, breaches of contract or other similar circumstances, could adversely affect our operating results, collections of accounts receivable and
financial condition and could reduce our backlog.
16
14.
|
New Accounting Pronouncements
|
Recently Adopted Accounting Standards
In July 2015, the FASB issued Accounting Standard Update
No. 2015-11
Simplifying the Measurement of
Inventory (ASU
2015-11).
This update requires inventory measured using the first in, first out (FIFO) or average cost methods to be subsequently measured at the lower of cost and net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation. ASU
2015-11
is effective for fiscal
years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company adopted this update on January 1, 2017 with no material impact.
In March 2016, the FASB issued Accounting Standard Update
No. 2016-09
Improvements to Employee Share-Based
Payment Accounting (ASU
2016-09).
This update simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, forfeitures, and the classification on
the statement of cash flows. ASU
2016-09
is effective for fiscal periods beginning after December 15, 2016, and for interim periods within those fiscal years. The Company adopted this update on
January 1, 2017. The cumulative impact of the adoption of this standard was $1 million to retained earnings, and the classification on the statement of cash flows was applied on a prospective basis. The Company also recorded a
$4 million increase to tax expense in the first quarter of 2017 due to the impact of the adoption of this standard.
In October 2016, the FASB issued
Accounting Standard Update
No. 2016-16
Intra-Entity Transfers of Assets Other Than Inventory (ASU
2016-16).
This update requires an entity to recognize
the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU
2016-16
is effective for fiscal years beginning after December 15, 2017, and for
interim reporting periods within those fiscal years. The Company has early adopted this update on January 1, 2017 and recorded a $5 million reduction to retained earnings and receivables. The effect of the change on net income is not
significant.
Recently Issued Accounting Standards
In March 2017, the FASB issued Accounting Standard Update
No. 2017-07
Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU
2017-07).
This update requires that an employer report the service cost component in the same line item as other compensation costs
and separately from other components of net benefit cost. ASU
2017-04
is effective for fiscal periods beginning after December 15, 2017, and for interim periods within those fiscal years. The Company is
currently assessing the impact of the adoption of ASU
No. 2017-04
on its consolidated financial position and results of operations.
In January 2017, the FASB issued Accounting Standard Update
No. 2017-04
Simplifying the Test for Goodwill
Impairment (ASU
2017-04).
This update eliminates the requirement to compute the implied fair value of goodwill under Step 2 of the goodwill impairment test. ASU
2017-04
is effective for fiscal periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. The Company is currently assessing the impact of the adoption of ASU
No. 2017-04
on its consolidated financial position and results of operations.
In August 2016, the FASB issued Accounting Standard Update
No. 2016-15
Classification of Certain Cash
Receipts and Cash Payments (ASU
2016-15).
This update amends Accounting Standard Codification Topic No. 230 Statement of Cash Flows and provides guidance and clarification on
presentation of certain cash flow issues. ASU
No. 2016-15
is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The Company is currently
assessing the impact of the adoption of ASU
No. 2016-15
on its consolidated statement of cash flows.
In
March 2016, the FASB issued ASC Topic 842, Leases (ASC Topic 842), which supersedes the lease requirements in ASC Topic No. 840 Leases and most industry-specific guidance. This update increases transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASC Topic 842 is effective for fiscal years beginning after December 15, 2018,
and for interim periods within those fiscal years.
In preparing for the adoption of this new standard, the Company has established an internal team to
centralize the implementation process as well as engaged external resources to assist in our approach. We are currently utilizing a software program to consolidate and accumulate our existing leases with documentation as required by the new
standard. We have assessed the changes to the Companys current accounting practices and are currently investigating the related tax impact and process changes. We are also in process of quantifying the impact of the new standard on
our balance sheet.
In May 2014, the FASB issued Accounting Standard Update
No. 2014-09,
Revenue from
Contracts with Customers (ASU
2014-09),
which outlines a single comprehensive model for entities to use in accounting for revenue. This ASU supersedes the revenue recognition requirements in FASB ASC
Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the
transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services.
17
In 2015, the FASB issued guidance to defer the effective date to fiscal years beginning after December 15,
2017 with optional early adoption for fiscal periods beginning after December 15, 2016. The Company does not plan to early adopt ASU
2014-09.
The standard permits either a full retrospective adoption, in which the standard is applied to all the periods presented, or a modified retrospective
adoption, in which the standard is applied only to the current period with a cumulative-effect adjustment reflected in retained earnings. The Company currently anticipates following the modified retrospective adoption, but will not make a final
decision on the adoption method until later in 2017.
In 2015, the Company assembled an internal team to study the provisions of ASU
2014-09,
began assessing the potential impacts on the Company and educating the organization. In 2016, the Company engaged external resources to complete the assessment of potential changes to current
accounting practices related to material revenue streams. Potential impacts were identified based on required changes to current processes to accommodate provisions in the new standard. During 2017, we will quantify the potential impacts
as well as design and implement required process, system, control and data requirements to address the impacts identified in the assessments.
The Company
has not quantified and is not currently able to reasonably estimate the effect of the potential timing or other impacts to revenue recognition caused by the new standard.
18
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Introduction
National Oilwell Varco, Inc. (the
Company) is a leading oilfield equipment manufacturer and technology provider. The breadth and depth of our product and technology portfolio supports customers full-field development needs, from drilling to completion to
production, in basins around the world, land or offshore. As a leading provider of innovation, technology, and industrial capabilities to the oilfield, we have a long tradition of pioneering innovations that improve the cost-effectiveness,
efficiency, safety and environmental impact of oil and gas operations.
Unless indicated otherwise, results of operations data are presented in accordance
with accounting principles generally accepted in the United States (GAAP). In an effort to provide investors with additional information regarding our results of operations, certain
non-GAAP
financial measures are provided. See
Non-GAAP
Financial Measures and Reconciliations in Results of Operations for an explanation of our use of
non-GAAP
financial
measures and reconciliations to their corresponding measures calculated in accordance with GAAP.
Rig Systems
The Companys Rig Systems segment makes and supports the capital equipment and integrated systems needed to drill oil and gas wells on land and offshore.
The segment designs, manufactures, and sells land rigs, complete offshore drilling equipment packages, and drilling rig components that mechanize and automate many complex rig processes.
Equipment and technologies in Rig Systems include: power transmission systems, like drives and generators; substructures, derricks, and masts; pipe lifting,
racking, rotating, and assembly systems; pressure control equipment, including blowout preventers; cranes; and rig instrumentation and control systems.
Rig Systems supports land and offshore drillers. Demand for the segments products depends on drilling contractors and oil and gas companies
capital spending plans, specifically capital expenditures on rig construction and refurbishment.
Rig Aftermarket
The Companys Rig Aftermarket segment provides comprehensive aftermarket products and services to support a large installed base of land and offshore
rigs, and drilling rig components manufactured by the Companys Rig Systems segment. The segment provides spare parts, repair, and rentals as well as technical support, field service and first well support, field engineering, and customer
training through a network of aftermarket service and repair facilities strategically located in major areas of drilling operations.
Rig Aftermarket
supports land and offshore drillers. Demand for the segments products and services depends on overall levels of oilfield drilling activity, which drives demand for spare parts, service, and repair for Rig Systems large installed base of
equipment; and secondarily on drilling contractors and oil and gas companies capital spending plans, specifically capital expenditures on rig refurbishments and
re-certifications.
Wellbore Technologies
The Companys Wellbore
Technologies segment designs, manufactures, rents, and sells a variety of equipment and technologies used to perform drilling operations, and offers services that optimize their performance. Key technologies and services include: drilling
optimization and automation services; instrumentation, measuring and monitoring systems; drill bits; downhole tools, like downhole drilling motors and other steerable technologies; solids control and waste management equipment and services; drilling
fluids; premium drill pipe, wired pipe and drill string accessories; tubular inspection, repair and coating services; fishing tools and hole openers; and portable power generation.
The Wellbore Technologies segment focuses on oil and gas companies and supports drilling contractors, oilfield service companies, and oilfield rental
companies. Additional customers include steel mills and industrial companies. Demand for Wellbore Technologies products and services primarily depends on the level of oilfield drilling activity by oil and gas companies, drilling contractors,
and oilfield service companies, as measured by rig count, well count, and footage drilled.
19
Completion & Production Solutions
The Companys Completion & Production Solutions segment integrates technologies for well completions and oil and gas production. The segment
designs, manufactures, and sells equipment and technologies needed for hydraulic stimulation, including pressure pumping trucks, blenders, sanders, hydration units, injection units, flowline, manifolds and completion tools; well intervention,
including coiled tubing units, coiled tubing, and wireline units and tools; offshore production, including process equipment, conductor pipe connectors, floating production systems and subsea production technologies; and, onshore production
including surface transfer and progressive cavity pumps, positive displacement reciprocating pumps, pressure vessels, composite pipe, and artificial lift systems.
Completion & Production Solutions supports service companies and oil and gas companies. Demand for Completion & Production Solutions
products depends on the level of oilfield completions and workover activity by oilfield service companies and drilling contractors and capital spending plans by oil and gas companies and oilfield service companies.
Critical Accounting Policies and Estimates
In our annual
report on Form
10-K
for the year ended December 31, 2016, we identified our most critical accounting policies. In preparing the financial statements, we make assumptions, estimates and judgments that
affect the amounts reported. We periodically evaluate our estimates and judgments that are most critical in nature which are related to revenue recognition under long-term construction contracts; allowance for doubtful accounts; inventory reserves;
impairment of long-lived assets (excluding goodwill and other indefinite-lived intangible assets); goodwill and other indefinite-lived intangible assets; purchase price allocation of acquisitions; service and product warranties; and income taxes.
Our estimates are based on historical experience and on our future expectations that we believe are reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results are likely to differ from our current estimates and those differences may be material.
20
EXECUTIVE SUMMARY
For its first quarter ended March 31, 2017, the Company had a $122 million net loss, or $0.32 per fully diluted share, on $1.7 billion in
revenue. Compared to the fourth quarter of 2016, revenue increased $49 million or 3% and net loss decreased $592 million or 83%. Compared to the first quarter of 2016, revenue decreased $448 million or 20%, and net loss increased
$3 million or 3%.
Operating loss for the first quarter of 2017 was $97 million, or (5.6)% of sales. Excluding other items from all periods,
operating loss was $70 million or (4.0)% of sales in the first quarter of 2017, compared to operating loss of $72 million or (4.3)% of sales in the fourth quarter of 2016, and operating loss of $48 million or (2.2)% of sales in the
first quarter of 2016.
During the first quarter of 2017, fourth quarter of 2016, and first quarter of 2016,
pre-tax
other items (severance, facility closures, write-downs, and other) included in operating loss were $27 million, $694 million and $141 million, respectively. Excluding other items from
all periods, first quarter 2017 earnings (losses) were $(0.17) per fully diluted share, compared to $(0.15) per fully diluted share in the fourth quarter of 2016 and $(0.06) per fully diluted share in the first quarter of 2016.
Oil & Gas Equipment and Services Market
Over
the past two decades, technological advancements in the oilfield equipment and service space unlocked production from formations that were previously deemed uneconomic, especially in North America. From 2004 to 2014 global oil and liquids supply
increased dramatically from U.S. unconventional resources, deep-water (defined as water depths greater than 400 feet) resources and from other sources. The advances in technology combined with relatively high commodity prices caused by growing
demand enabled and sustained an increase in global drilling activity. Global supply started to catch up to demand, and in the latter half of 2014, demand growth in areas such as Asia, Europe and the U.S. weakened while drilling activity remained
strong and production continued to grow. As a result, global inventories of crude and refined products grew and the price of oil declined significantly during early 2015, remaining depressed throughout the year and undergoing another major reduction
toward the end of 2015. In early 2016, the market witnessed oil trading in the high $20 per barrel range, prices not seen since 2003.
In response to
rapidly deteriorating market conditions, operators acutely reduced both operating and capital expenditures. Orders for our equipment and services slowed and rig counts declined rapidly with active U.S. drilling rig counts hitting 70 year lows
and international rig counts reaching decade lows during the second quarter of 2016. As a result of the sharp cutback in activity, production began to decline in certain areas of the world and commodity prices started to rebound as oil markets
commenced the process of
re-balancing.
The market downturn began to stabilize during the second half of 2016 and, aided by OPEC and certain other countries announcing production cuts of 1.7 million
barrels per day, showed early signs of improvement during the fourth quarter of 2016. During the first quarter of 2017, land drilling activity continued to increase, particularly in North America, and offshore activity remained depressed. The price
of West Texas Intermediate Cushing Crude ended the first quarter of 2017 at $51.77 a barrel.
Segment Performance
The Rig Systems segment generated $393 million in revenue and $9 million in operating profit or 2.3% of sales in the first quarter of 2017. Compared
to the prior quarter, revenue decreased $33 million or 8%, and operating profit decreased $90 million or 111%. Compared to the first quarter of 2016, segment revenue decreased $533 million or 58%, and operating profit decreased
$58 million or 87%. First quarter 2017 revenue out of backlog for the Rig Systems segment decreased 12% sequentially and 63% year-over-year on fewer shipments of offshore projects. During the first quarter of 2017, the segment received
$118 million in new orders, consisting of well servicing rigs and discrete capital equipment components. Backlog for capital equipment orders for the Rig Systems segment at March 31, 2017 was $2.3 billion.
The Rig Aftermarket segment generated $321 million in revenue and $61 million in operating profit or 19.0% of sales in the first quarter of 2017.
Compared to the prior quarter, revenue decreased $18 million or 5%, and operating profit increased $35 million or 135%. Compared to the first quarter of 2016, segment revenue decreased $70 million or 18%, and operating profit
decreased $8 million or 12%. Revenue decreased year-over-year as drilling contractors reduced spending, depleted existing spares inventories rather than purchase new, and deferred repair and maintenance work on their rig fleets when possible.
The Wellbore Technologies segment generated $555 million in revenue and a $57 million operating loss, or (10.3)% of sales, for the first
quarter of 2017. Compared to the prior quarter, revenue increased $24 million or 5%, and operating loss decreased $382 million or 87%. Compared to the first quarter of 2016, revenue decreased $76 million or 12%, and operating loss
decreased $34 million or 37%. The decline in revenue from prior year was driven by lower levels of worldwide drilling activity, which required and consumed less of the segments services and product offerings.
The Completion & Production Solutions segment generated $648 million
in revenue and $8 million in operating profit or 1.2% of sales during the first quarter of 2017. Compared to the prior quarter, revenue increased $46 million or 8%, and operating profit
21
increased $142 million or 106%. Compared to the first quarter of 2016, revenue increased $90 million or 16%, and operating profit increased $46 million or 121%. Revenue and
operating profit increased year-over-year on higher levels of worldwide activity. Backlog for capital equipment orders for the Completion & Production Solutions segment at March 31, 2017 was $751 million.
Outlook
Activity in North America increased sharply off
historical lows during the last two quarters of 2016 and declines in supply, assisted by the OPEC production cuts, appear to be rebalancing the market; however, global stocks of crude oil and refined product remain bloated and challenging conditions
persist. Consequently, we are cautious in our outlook for 2017, and anticipate that our customers will continue to moderate capital expenditures until there is more certainty in a sustainable recovery in commodity prices.
While North America has exhibited the signs of a burgeoning recovery, activity levels remain well below prior cyclical highs. International activity, which
has been slower to fall than North American activity, appears to be approaching a bottom, which could be achieved in the second quarter of 2017. Offshore activity, which has longer project cycle times and, in certain instances, more challenged
economics, may continue to decline throughout 2017.
Low activity levels result in an oversupply of service capacity and capital equipment, creating
challenging prospects for many of our customers in the form of reduced volumes and pricing pressures. In this environment, contractors have been hesitant to invest in their existing equipment to conserve as much capital as possible. Equipment has
been neglected and idle fleets have been stripped of parts to sustain assets that remains active. Additionally, certain equipment becomes less desirable and obsolete as equipment manufacturers develop new technologies and produce more efficient
equipment that improves efficiencies and lowers the marginal cost of supply for oil and gas operating companies. As a result, the industry may retire a significant portion of the installed base of capital equipment that existed at the beginning of
this cyclical downturn, causing a sharp rebound in newbuild orders if commodity prices continue to recover and activity levels increase.
Our global
customer base includes national oil companies, international oil companies, independent oil and gas companies, onshore and offshore service companies and others whose strategies and reactions to low commodity prices vary. Likewise, we expect the
slope and timing of revenue decline, stabilization and recovery will be different across our operating regions and our four business segments. Elements of our Wellbore Technologies and Rig Aftermarket segments are expected to see a faster recovery
as drilling of new wells increases, while a strong recovery for the more capital equipment oriented businesses within our Completion & Production Solutions and Rig Systems segments may come later in the cycle.
Throughout the rest of 2017 we will continue to focus on what we can control, in the form of sizing our operations with anticipated levels of activity while
continuing to invest in developing and acquiring new products, technologies and operations that advance our longer term strategic goals. The Company has a history of implementing cost-control measures and downsizing in response to depressed market
conditions as well as cost effectively ramping operations to capitalize on rapidly increasing demand. The Company remains optimistic regarding longer-term market fundamentals as existing oil and gas fields continue to deplete and numerous major
projects to replenish supply have been deferred or canceled while global demand continues to grow.
22
Operating Environment Overview
The Companys results are dependent on, among other things, the level of worldwide oil and gas drilling, well remediation activity, the prices of crude
oil and natural gas, capital spending by other oilfield service companies and drilling contractors, and worldwide oil and gas inventory levels. Key industry indicators for the first quarter of 2017 and 2016, and the fourth quarter of 2016 include
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q17
|
|
|
1Q17
|
|
|
|
1Q17*
|
|
|
1Q16*
|
|
|
4Q16*
|
|
|
1Q16
|
|
|
4Q16
|
|
Active Drilling Rigs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
739
|
|
|
|
555
|
|
|
|
586
|
|
|
|
33.2
|
%
|
|
|
26.1
|
%
|
Canada
|
|
|
299
|
|
|
|
163
|
|
|
|
179
|
|
|
|
83.4
|
%
|
|
|
67.0
|
%
|
International
|
|
|
939
|
|
|
|
1,017
|
|
|
|
924
|
|
|
|
(7.7
|
%)
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
1,977
|
|
|
|
1,735
|
|
|
|
1,689
|
|
|
|
13.9
|
%
|
|
|
17.1
|
%
|
|
|
|
|
|
|
West Texas Intermediate
|
|
$
|
51.77
|
|
|
$
|
33.18
|
|
|
$
|
49.14
|
|
|
|
56.0
|
%
|
|
|
5.4
|
%
|
Crude Prices (per barrel)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Prices ($/mmbtu)
|
|
$
|
2.98
|
|
|
$
|
1.98
|
|
|
$
|
3.01
|
|
|
|
50.5
|
%
|
|
|
(1.0
|
%)
|
*
|
Averages for the quarters indicated. See sources below.
|
The following table details the U.S., Canadian, and
international rig activity and West Texas Intermediate Crude Oil prices for the past nine quarters ended March 31, 2017, on a quarterly basis:
Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); West Texas Intermediate Crude Oil and Natural Gas Prices:
Department of Energy, Energy Information Administration (www.eia.doe.gov).
23
The worldwide quarterly average rig count increased 17.1% (from 1,689 to 1,977), and the U.S. increased 26.1%
(from 586 to 739), in the first quarter of 2017 compared to the fourth quarter of 2016. The average per barrel price of West Texas Intermediate Crude Oil increased 5.4% (from $49.14 per barrel to $51.77 per barrel) and natural gas prices
decreased 1.0% (from $3.01 per mmbtu to $2.98 per mmbtu) in the first quarter of 2017 compared to the fourth quarter of 2016.
U.S. rig activity at
April 21, 2017 was 857 rigs, increasing 16% compared to the first quarter of 2017 average of 739 rigs. The price for West Texas Intermediate Crude Oil was at $49.62 per barrel at April 21, 2017, decreasing 4% from the first quarter of
2017 average. The price for natural gas was at $3.10 per mmbtu at April 21, 2017, increasing 4% from the first quarter of 2017 average.
24
Results of Operations
Operating results by segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
393
|
|
|
$
|
926
|
|
Rig Aftermarket
|
|
|
321
|
|
|
|
391
|
|
Wellbore Technologies
|
|
|
555
|
|
|
|
631
|
|
Completion & Production Solutions
|
|
|
648
|
|
|
|
558
|
|
Eliminations
|
|
|
(176
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,741
|
|
|
$
|
2,189
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
9
|
|
|
$
|
67
|
|
Rig Aftermarket
|
|
|
61
|
|
|
|
69
|
|
Wellbore Technologies
|
|
|
(57
|
)
|
|
|
(91
|
)
|
Completion & Production Solutions
|
|
|
8
|
|
|
|
(38
|
)
|
Eliminations and corporate costs
|
|
|
(118
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
Total operating profit (loss)
|
|
$
|
(97
|
)
|
|
$
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)%:
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
|
2.3
|
%
|
|
|
7.2
|
%
|
Rig Aftermarket
|
|
|
19.0
|
%
|
|
|
17.6
|
%
|
Wellbore Technologies
|
|
|
(10.3
|
%)
|
|
|
(14.4
|
%)
|
Completion & Production Solutions
|
|
|
1.2
|
%
|
|
|
(6.8
|
%)
|
Total operating profit (loss) %
|
|
|
(5.6
|
%)
|
|
|
(8.6
|
%)
|
Rig Systems
Three
months ended March
31, 2017 and 2016
. Revenue from Rig Systems was $393 million for the three months ended March 31, 2017, compared to $926 million for the three months ended March 31, 2016, a decrease
of $533 million or 58%.
Operating profit from Rig Systems was $9 million for the three months ended March 31, 2017 compared to
$67 million for the three months ended March 31, 2016, a decrease of $58 million or 87%. Operating profit percentage decreased to 2.3% for the three months ended March 31, 2017, from 7.2% in the three months ended March 31,
2016. Operating profit percentage decreased as the segments
through-put
fell in its manufacturing facilities as the Company worked down its backlog.
The Rig Systems segment monitors its capital equipment backlog to plan its business. New orders are added to backlog only when the Company receives a firm
written order for major drilling rig components or a signed contract related to a construction project. The capital equipment backlog was $2.3 billion at March 31, 2017, a decrease of $992 million, or 30%, from backlog of
$3.3 billion at
March 31, 2016. Numerous factors may affect the timing of revenue out of backlog. Considering these factors, the Company
reasonably expects approximately $660 million of revenue out of backlog for the remainder of 2017 and approximately $1.6 billion of revenue out of backlog in 2018 and thereafter. At March 31, 2017, approximately 79% of the capital
equipment backlog was for offshore products and approximately 81% of the capital equipment backlog was destined for international markets.
Rig
Aftermarket
Three months ended March
31, 2017 and 2016
. Revenue from Rig Aftermarket was $321 million for the
three months ended March 31, 2017, compared to $391 million for the three months ended March 31, 2016, a decrease of $70 million or 18%. This decrease was due to the decrease in offshore related drilling activity.
Operating profit from Rig Aftermarket was $61 million for the three months ended March 31, 2017 compared to $69 million for the three months
ended March 31, 2016, a decrease of $8 million or 12%. Operating profit percentage increased to 19.0% for the three months ended March 31, 2017, from 17.6% in the three months ended March 31, 2016. Operating profit percentage
increased due to product mix.
25
Wellbore Technologies
Three months ended March
31, 2017 and 2016.
Revenue from Wellbore Technologies was $555 million for the three months ended
March 31, 2017, compared to $631 million for the three months ended March 31, 2016, a decrease of $76 million or 12%. This decrease was due to challenging international conditions offsetting the North American recovery.
Operating loss from Wellbore Technologies was $57 million for the three months ended March 31, 2017 compared to $91 million for the three
months ended March 31, 2016, a decrease of $34 million. Operating loss percentage decreased to (10.3)% for the three months ended March 31, 2017, from (14.4)% in the three months ended March 31, 2016. This decrease was due to a
shift in product mix for drilling activity.
Completion & Production Solutions
Three months ended March
31, 2017 and 2016.
Revenue from Completion & Production Solutions was $648 million for
the three months ended March 31, 2017, compared to $558 million for the three months ended March 31, 2016, an increase of $90 million or 16%. This increase was due to the overall increase in demand for capital equipment used in
completion and production related activities.
Operating profit (loss) from Completion & Production Solutions was $8 million for the three
months ended March 31, 2017 compared to $(38) million for the three months ended March 31, 2016, an increase of $46 million or 121%. Operating profit (loss) percentage increased to 1.2% for the three months ended March 31, 2017,
from (6.8)% in the three months ended March 31, 2016. This increase was due to an overall increase in market activity.
The Completion &
Productions Solutions segment monitors its capital equipment backlog to plan its business. New orders are added to backlog only when the Company receives a firm written order for major completion and production components or a signed contract
related to a construction project. The capital equipment backlog was $751 million at March 31, 2017, a decrease of $243 million, or 24% from backlog of $994 million at March 31, 2016. Numerous factors may affect
the timing of revenue out of backlog. Considering these factors, the Company reasonably expects approximately $690 million of revenue out of backlog for the remainder of 2017 and approximately $60 million of revenue out of backlog in 2018
and thereafter. At March 31, 2017, approximately 57% of the capital equipment backlog was for offshore products and approximately 78% of the capital equipment backlog was destined for international markets.
Eliminations and corporate costs
Eliminations and
corporate costs were $118 million and $196 million for the three months ended March 31, 2017 and 2016, respectively. This change is primarily due to the change in intersegment eliminations. Sales from one segment to another generally
are priced at estimated equivalent commercial selling prices; however, segments originating an external sale are credited with the full profit to the company. Eliminations include intercompany transactions conducted between the four reporting
segments that are eliminated in consolidation. Intercompany transactions within each reporting segment are eliminated within each reporting segment.
Other income (expense), net
Other income (expense), net
were expenses of $(11) million and $(21) million for the three months ended March 31, 2017 and 2016, respectively. The change in expense was primarily due to the fluctuations in foreign currencies.
Provision for income taxes
The effective tax rate for
the three months ended March 31, 2017 and 2016 was 7.0% and 50.0%, respectively. Market conditions continued to negatively impact our business in the first quarter of 2017. As a result of these conditions, we established a valuation allowance
on losses and tax credits in the current year, which, when applied to losses resulted in a lower effective tax rate than the U.S. statutory rate. For the three months ended March 31, 2016, the effect of lower tax rates on income earned in
foreign jurisdictions and a reduction in tax reserves due to audit settlements, when applied to losses, resulted in a higher effective tax rate.
26
Non-GAAP
Financial Measures and Reconciliations
In an effort to provide investors with additional information regarding our results as determined by GAAP, we disclose various
non-GAAP
financial measures in our quarterly earnings press releases and other public disclosures. Each of these financial measures excludes the impact of certain amounts as further identified below and have
not been calculated in accordance with GAAP. A reconciliation of each of these
non-GAAP
financial measures to its most comparable GAAP financial measure is included below, and these non-GAAP financial measures
are not intended to replace GAAP financial measures.
We use these
non-GAAP
financial measures internally to
evaluate and manage the Companys operations because we believe it provides useful supplemental information regarding the Companys
on-going
economic performance. We have chosen to provide this
information to investors to enable them to perform more meaningful comparisons of operating results and as a means to emphasize the results of
on-going
operations.
The following tables set forth the reconciliations of these
non-GAAP
financial measures to their most comparable GAAP
financial measures (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Reconciliation of operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating loss
|
|
$
|
(97
|
)
|
|
$
|
(189
|
)
|
|
$
|
(766
|
)
|
Other (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
|
7
|
|
|
|
52
|
|
|
|
121
|
|
Rig Aftermarket
|
|
|
5
|
|
|
|
8
|
|
|
|
49
|
|
Wellbore Technologies
|
|
|
|
|
|
|
38
|
|
|
|
364
|
|
Completion & Production Solutions
|
|
|
15
|
|
|
|
34
|
|
|
|
151
|
|
Eliminations
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss excluding other items
|
|
$
|
(70
|
)
|
|
$
|
(48
|
)
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Reconciliation of operating loss %:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating loss %
|
|
|
(5.6
|
%)
|
|
|
(8.6
|
%)
|
|
|
(45.3
|
%)
|
Asset write-downs and other items %
|
|
|
1.6
|
%
|
|
|
6.4
|
%
|
|
|
41.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss % excluding other items
|
|
|
(4.0
|
%)
|
|
|
(2.2
|
%)
|
|
|
(4.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Reconciliation of adjusted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP loss per share
|
|
$
|
(0.32
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(1.90
|
)
|
Other (1)
|
|
|
0.04
|
|
|
|
0.25
|
|
|
|
1.26
|
|
Fixed asset write-downs (Other income (expense), net)
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.02
|
|
Tax items (Provision for income taxes)
|
|
|
0.09
|
|
|
|
|
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted loss per share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in operating profit are other items related to costs associated with the Voluntary Early Retirement Plan established by the Company during the first quarter of 2016 and costs related to severance, facility
closures, and other items. See Note 6. For the three months ended March 31, 2017 and 2016, other items included in operating profit were $27 million and $141 million, respectively. Other items included in operating profit for the
three months ended December 31, 2016 totaled $694 million.
|
27
Liquidity and Capital Resources
Overview
The Company assesses liquidity in terms of its
ability to generate cash to fund operating, investing and financing activities. The Company remains in a strong financial position, with resources available to reinvest in existing businesses, strategic acquisitions and capital expenditures to meet
short- and long-term objectives. The Company believes that cash on hand, cash generated from expected results of operations, amounts available under its credit facility and its commercial paper program will be sufficient to fund operations,
anticipated working capital needs and other cash requirements such as capital expenditures, debt and interest payments and dividend payments for the foreseeable future.
At March 31, 2017, the Company had cash and cash equivalents of $1,479 million and total debt of $3,213 million. At December 31,
2016, cash and cash equivalents were $1,408 million and total debt was $3,214 million. As of March 31, 2017, approximately $1,233 million of the $1,479 million of cash and cash equivalents was held by our foreign
subsidiaries, of which $1,224 million would be subject to a 35% U.S. income tax rate, offset by any available foreign tax credits if repatriated. However, our current plans are to permanently reinvest these funds outside of the U.S. If
opportunities to invest in the U.S. are greater than available cash balances that are not subject to income tax, rather than repatriating cash, the Company may choose to borrow against its revolving credit facility or utilize its commercial paper
program.
The Companys outstanding debt at March 31, 2017 was $3,213 million and consisted of $499 million in 1.35% Senior Notes,
$1,391 million in 2.60% Senior Notes, $1,087 million in 3.95% Senior Notes, and other debt of $236 million. The Company was in compliance with all covenants at March 31, 2017.
At March 31, 2017, there were no commercial paper borrowings supported by the $4.5 billion credit facility and no outstanding letters of credit
issued under the credit facility, resulting in $4,500 million of funds available under this credit facility.
The Company had $1,002 million of
outstanding letters of credit at March 31, 2017 that are under various bilateral letter of credit facilities. Letters of credit are issued as bid bonds, advanced payment bonds and performance bonds.
The following table summarizes our net cash provided by (used in) continuing operating activities, continuing investing activities and continuing financing
activities for the periods presented (in millions):
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Three Months Ended
March 31,
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2017
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2016
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Net cash provided by operating activities
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$
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111
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$
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621
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Net cash used in investing activities
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(42
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)
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(103
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)
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Net cash used in financing activities
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(13
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)
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(861
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)
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Operating Activities
For
the first three months of 2017, cash provided by operating activities was $111 million compared to $621 million in the same period of 2016. Before changes in operating assets and liabilities, net of acquisitions, cash was used by
operations primarily through loss from operations of $120 million plus
non-cash
charges of $234 million.
The change in cash used in the first three months of 2017 compared to the same period in 2016 was primarily due to declines in accounts receivable, inventory
and costs in excess of billings, partially offset by declines in accounts payable, accrued liabilities and billings in excess of costs. Net changes in operating assets and liabilities, net of acquisitions, used $3 million of cash for the first
three months of 2017 compared to cash provided of $610 million in the same period in 2016.
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Investing Activities
For the first three months of 2017, net cash used in investing activities was $42 million compared to $103 million for the same period of 2016. Net
cash used in investing activities was primarily the result of capital expenditures and acquisition activity, both of which decreased in the first three months of 2017 compared to the same period of 2016. The Company used $42 million during the
first three months of 2017 for capital expenditures compared to $84 million for the same period of 2016 and $6 million for acquisitions in the first three months of 2017 compared to $21 million for the same period of 2016.
Financing Activities
For the first three months of 2017,
net cash used in financing activities was $13 million compared to $861 million for the same period of 2016. This decrease was primarily the result of dividends paid of $19 million in 2017 compared to $173 million in 2016 and
$2 million in payments on net borrowings in 2017 compared to $861 million used to make payments on net commercial paper borrowings in 2016.
Other
The effect of the change in exchange rates on cash
flows was an increase of $15 million and $22 million for the first three months of 2017 and 2016, respectively.
We believe that cash on hand,
cash generated from operations, amounts available under our credit facility and through our commercial paper program, as well as from other sources of debt will be sufficient to fund operations, working capital needs, capital expenditure
requirements, dividends and financing obligations.
We intend to pursue additional acquisition candidates, but the timing, size or success of any
acquisition effort and the related potential capital commitments cannot be predicted. We continue to expect to fund future acquisitions primarily with cash on hand and cash flow from operations and borrowings, including the unborrowed portion of the
credit facility, our commercial paper program or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at
terms acceptable to us.
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New Accounting Pronouncements
Recently Adopted Accounting Standards
In July 2015, the
FASB issued Accounting Standard Update
No. 2015-11
Simplifying the Measurement of Inventory (ASU
2015-11).
This update requires inventory measured using
the first in, first out (FIFO) or average cost methods to be subsequently measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable
cost of completion, disposal and transportation. ASU
2015-11
is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company
adopted this update on January 1, 2017 with no material impact.
In March 2016, the FASB issued Accounting Standard Update
No. 2016-09
Improvements to Employee Share-Based Payment Accounting (ASU
2016-09).
This update simplifies several aspects of accounting for share-based
payment transactions, including the income tax consequences, forfeitures, and the classification on the statement of cash flows. ASU
2016-09
is effective for fiscal periods beginning after December 15,
2016, and for interim periods within those fiscal years. The Company adopted this update on January 1, 2017. The cumulative impact of the adoption of this standard was $1 million to retained earnings, and the classification on the
statement of cash flows was applied on a prospective basis. The Company also recorded a $4 million increase to tax expense in the first quarter of 2017 due to the impact of the adoption of this standard.
In October 2016, the FASB issued Accounting Standard Update
No. 2016-16
Intra-Entity Transfers of Assets
Other Than Inventory (ASU
2016-16).
This update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU
2016-16
is effective for fiscal years beginning after December 15, 2017, and for interim reporting periods within those fiscal years. The Company has early adopted this update on January 1, 2017 and
recorded a $5 million reduction to retained earnings and receivables. The effect of the change on net income is not significant.
Recently Issued
Accounting Standards
In March 2017, the FASB issued Accounting Standard Update
No. 2017-07
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU
2017-07).
This update requires that an employer report the service cost component in the
same line item as other compensation costs and separately from other components of net benefit cost. ASU
2017-04
is effective for fiscal periods beginning after December 15, 2017, and for interim periods
within those fiscal years. The Company is currently assessing the impact of the adoption of ASU
No. 2017-04
on its consolidated financial position and results of operations.
In January 2017, the FASB issued Accounting Standard Update
No. 2017-04
Simplifying the Test for Goodwill
Impairment (ASU
2017-04).
This update eliminates the requirement to compute the implied fair value of goodwill under Step 2 of the goodwill impairment test. ASU
2017-04
is effective for fiscal periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017.
In August 2016, the FASB issued Accounting Standard Update
No. 2016-15
Classification of Certain
Cash Receipts and Cash Payments (ASU
2016-15).
This update amends Accounting Standard Codification Topic No. 230 Statement of Cash Flows and provides guidance and clarification on
presentation of certain cash flow issues. ASU
No. 2016-15
is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The Company is currently
assessing the impact of the adoption of ASU
No. 2016-15
on its consolidated statement of cash flows.
In
March 2016, the FASB issued ASC Topic 842, Leases (ASC Topic 842), which supersedes the lease requirements in ASC Topic No. 840 Leases and most industry-specific guidance. This update increases transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASC Topic 842 is effective for fiscal years beginning after December 15, 2018,
and for interim periods within those fiscal years.
In preparing for the adoption of this new standard, the Company has established an internal team to
centralize the implementation process as well as engaged external resources to assist in our approach. We are currently utilizing a software program to consolidate and accumulate our existing leases with documentation as required by the new
standard. We have assessed the changes to the Companys current accounting practices and are currently investigating the related tax impact and process changes. We are also in process of quantifying the impact of the new standard on
our balance sheet.
In May 2014, the FASB issued Accounting Standard Update
No. 2014-09,
Revenue from
Contracts with Customers (ASU
2014-09),
which outlines a single comprehensive model for entities to use in accounting for revenue. This ASU supersedes the revenue recognition requirements in FASB ASC
Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the
transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services.
30
In 2015, the FASB issued guidance to defer the effective date to fiscal years beginning after December 15,
2017 with optional early adoption for fiscal periods beginning after December 15, 2016. The Company does not plan to early adopt ASU
2014-09.
The standard permits either a full retrospective adoption, in which the standard is applied to all the periods presented, or a modified retrospective
adoption, in which the standard is applied only to the current period with a cumulative-effect adjustment reflected in retained earnings. The Company currently anticipates following the modified retrospective adoption, but will not make a final
decision on the adoption method until later in 2017.
In 2015, the Company assembled an internal team to study the provisions of ASU
2014-09,
began assessing the potential impacts on the Company and educating the organization. In 2016, the Company engaged external resources to complete the assessment of potential changes to current
accounting practices related to material revenue streams. Potential impacts were identified based on required changes to current processes to accommodate provisions in the new standard. During 2017, we will quantify the potential impacts
as well as design and implement required process, system, control and data requirements to address the impacts identified in the assessments.
The Company
has not quantified and is not currently able to reasonably estimate the effect of the potential timing or other impacts to revenue recognition caused by the new standard.
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Forward-Looking Statements
Some of the information in this document contains, or has incorporated by reference, forward-looking statements. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements typically are identified by use of terms such as may, expect, anticipate, estimate,
and similar words, although some forward-looking statements are expressed differently. All statements herein regarding expected merger synergies are forward-looking statements. You should be aware that our actual results could differ materially from
results anticipated in the forward-looking statements due to a number of factors, including but not limited to changes in oil and gas prices, customer demand for our products, difficulties encountered in integrating mergers and acquisitions, and
worldwide economic activity. You should also consider carefully the statements under Risk Factors, as disclosed in our Annual Report on Form
10-K
for the year ended December 31, 2016, which
address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such
forward-looking statements. We undertake no obligation to update any such factors or forward-looking statements to reflect future events or developments.
32