Item 1. Financial Statements
NATIONAL OILWELL VARCO, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,530
|
|
|
$
|
1,408
|
|
Receivables, net
|
|
|
2,086
|
|
|
|
2,083
|
|
Inventories, net
|
|
|
3,207
|
|
|
|
3,325
|
|
Costs in excess of billings
|
|
|
599
|
|
|
|
665
|
|
Prepaid and other current assets
|
|
|
319
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,741
|
|
|
|
7,876
|
|
Property, plant and equipment, net
|
|
|
3,052
|
|
|
|
3,150
|
|
Deferred income taxes
|
|
|
70
|
|
|
|
86
|
|
Goodwill
|
|
|
6,129
|
|
|
|
6,067
|
|
Intangibles, net
|
|
|
3,438
|
|
|
|
3,530
|
|
Investment in unconsolidated affiliates
|
|
|
306
|
|
|
|
307
|
|
Other assets
|
|
|
151
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,887
|
|
|
$
|
21,140
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
448
|
|
|
$
|
414
|
|
Accrued liabilities
|
|
|
1,489
|
|
|
|
1,568
|
|
Billings in excess of costs
|
|
|
337
|
|
|
|
440
|
|
Current portion of long-term debt and short-term borrowings
|
|
|
506
|
|
|
|
506
|
|
Accrued income taxes
|
|
|
71
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,851
|
|
|
|
3,047
|
|
Long-term debt
|
|
|
2,708
|
|
|
|
2,708
|
|
Deferred income taxes
|
|
|
999
|
|
|
|
1,064
|
|
Other liabilities
|
|
|
307
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,865
|
|
|
|
7,137
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stockpar value $.01; 1 billion shares authorized; 380,052,282 and 378,637,403 shares
issued and outstanding at June 30, 2017 and December 31, 2016
|
|
|
4
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
8,163
|
|
|
|
8,103
|
|
Accumulated other comprehensive loss
|
|
|
(1,258
|
)
|
|
|
(1,452
|
)
|
Retained earnings
|
|
|
7,044
|
|
|
|
7,285
|
|
|
|
|
|
|
|
|
|
|
Total Company stockholders equity
|
|
|
13,953
|
|
|
|
13,940
|
|
Noncontrolling interests
|
|
|
69
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
14,022
|
|
|
|
14,003
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
20,887
|
|
|
$
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
1,759
|
|
|
$
|
1,724
|
|
|
$
|
3,500
|
|
|
$
|
3,913
|
|
Cost of revenue
|
|
|
1,528
|
|
|
|
1,689
|
|
|
|
3,060
|
|
|
|
3,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
231
|
|
|
|
35
|
|
|
|
440
|
|
|
|
279
|
|
Selling, general and administrative
|
|
|
293
|
|
|
|
305
|
|
|
|
599
|
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(62
|
)
|
|
|
(270
|
)
|
|
|
(159
|
)
|
|
|
(459
|
)
|
Interest and financial costs
|
|
|
(26
|
)
|
|
|
(30
|
)
|
|
|
(51
|
)
|
|
|
(55
|
)
|
Interest income
|
|
|
4
|
|
|
|
3
|
|
|
|
8
|
|
|
|
8
|
|
Equity loss in unconsolidated affiliates
|
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(13
|
)
|
Other income (expense), net
|
|
|
(2
|
)
|
|
|
(34
|
)
|
|
|
(13
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(88
|
)
|
|
|
(338
|
)
|
|
|
(217
|
)
|
|
|
(574
|
)
|
Provision for income taxes
|
|
|
(14
|
)
|
|
|
(121
|
)
|
|
|
(23
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(74
|
)
|
|
|
(217
|
)
|
|
|
(194
|
)
|
|
|
(335
|
)
|
Net income attributable to noncontrolling interests
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company
|
|
$
|
(75
|
)
|
|
$
|
(217
|
)
|
|
$
|
(197
|
)
|
|
$
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.20
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
377
|
|
|
|
375
|
|
|
|
377
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
377
|
|
|
|
375
|
|
|
|
377
|
|
|
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(74
|
)
|
|
$
|
(217
|
)
|
|
$
|
(194
|
)
|
|
$
|
(335
|
)
|
Currency translation adjustments
|
|
|
76
|
|
|
|
(46
|
)
|
|
|
166
|
|
|
|
97
|
|
Changes in derivative financial instruments, net of tax
|
|
|
23
|
|
|
|
29
|
|
|
|
28
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
25
|
|
|
|
(234
|
)
|
|
|
|
|
|
|
(107
|
)
|
Comprehensive income attributable to noncontrolling interest
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Company
|
|
$
|
24
|
|
|
$
|
(234
|
)
|
|
$
|
(3
|
)
|
|
$
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
4
NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(194
|
)
|
|
$
|
(335
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
349
|
|
|
|
353
|
|
Deferred income taxes
|
|
|
19
|
|
|
|
(288
|
)
|
Equity loss in unconsolidated affiliates
|
|
|
2
|
|
|
|
13
|
|
Other, net
|
|
|
90
|
|
|
|
201
|
|
Change in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(9
|
)
|
|
|
858
|
|
Inventories
|
|
|
122
|
|
|
|
320
|
|
Costs in excess of billings
|
|
|
65
|
|
|
|
460
|
|
Prepaid and other current assets
|
|
|
82
|
|
|
|
70
|
|
Accounts payable
|
|
|
37
|
|
|
|
(190
|
)
|
Accrued liabilities
|
|
|
(96
|
)
|
|
|
(514
|
)
|
Billings in excess of costs
|
|
|
(103
|
)
|
|
|
(132
|
)
|
Income taxes payable
|
|
|
(54
|
)
|
|
|
(190
|
)
|
Other assets/liabilities, net
|
|
|
(31
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
279
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(85
|
)
|
|
|
(161
|
)
|
Business acquisitions, net of cash acquired
|
|
|
(82
|
)
|
|
|
(36
|
)
|
Other
|
|
|
19
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(148
|
)
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings against lines of credit and other debt
|
|
|
|
|
|
|
2,963
|
|
Payments against lines of credit and other debt
|
|
|
(3
|
)
|
|
|
(3,748
|
)
|
Cash dividends paid
|
|
|
(38
|
)
|
|
|
(192
|
)
|
Activity under stock incentive plans
|
|
|
10
|
|
|
|
1
|
|
Other
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(31
|
)
|
|
|
(990
|
)
|
Effect of exchange rates on cash
|
|
|
22
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
122
|
|
|
|
(419
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,408
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,530
|
|
|
$
|
1,661
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash payments (receipts) during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
48
|
|
|
$
|
53
|
|
Income taxes
|
|
$
|
97
|
|
|
$
|
120
|
|
See notes to unaudited consolidated financial statements.
5
NATIONAL OILWELL VARCO, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
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 and six months ended
June 30, 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.
2. Inventories, net
Inventories consist of (in
millions):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials and supplies
|
|
$
|
786
|
|
|
$
|
961
|
|
Work in process
|
|
|
517
|
|
|
|
561
|
|
Finished goods and purchased products
|
|
|
1,904
|
|
|
|
1,803
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,207
|
|
|
$
|
3,325
|
|
|
|
|
|
|
|
|
|
|
6
3. Accrued Liabilities
Accrued liabilities consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Compensation
|
|
$
|
237
|
|
|
$
|
181
|
|
Customer prepayments and billings
|
|
|
236
|
|
|
|
222
|
|
Vendor costs
|
|
|
221
|
|
|
|
235
|
|
Warranty
|
|
|
161
|
|
|
|
172
|
|
Taxes (non-income)
|
|
|
142
|
|
|
|
176
|
|
Insurance
|
|
|
92
|
|
|
|
103
|
|
Commissions
|
|
|
55
|
|
|
|
57
|
|
Fair value of derivative financial instruments
|
|
|
20
|
|
|
|
66
|
|
Interest
|
|
|
7
|
|
|
|
8
|
|
Other
|
|
|
318
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,489
|
|
|
$
|
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
|
|
|
24
|
|
Amounts incurred
|
|
|
(42
|
)
|
Currency translation adjustments and other
|
|
|
7
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
161
|
|
|
|
|
|
|
4. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
7,157
|
|
|
$
|
8,132
|
|
Estimated earnings
|
|
|
3,350
|
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,507
|
|
|
|
12,001
|
|
Less: Billings to date
|
|
|
10,245
|
|
|
|
11,776
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
262
|
|
|
$
|
225
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
599
|
|
|
$
|
665
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(337
|
)
|
|
|
(440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
262
|
|
|
$
|
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
|
|
|
166
|
|
|
|
26
|
|
|
|
|
|
|
|
192
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
(1,210
|
)
|
|
$
|
(11
|
)
|
|
$
|
(37
|
)
|
|
$
|
(1,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of amounts reclassified from accumulated other comprehensive income (loss) are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Currency
Translation
Adjustments
|
|
|
Derivative
Financial
Instruments
|
|
|
Defined
Benefit
Plans
|
|
|
Total
|
|
|
Currency
Translation
Adjustments
|
|
|
Derivative
Financial
Instruments
|
|
|
Defined
Benefit
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(2
|
)
|
Cost of revenue
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Tax effect
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
32
|
|
|
$
|
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Currency
Translation
Adjustments
|
|
|
Derivative
Financial
Instruments
|
|
|
Defined
Benefit
Plans
|
|
|
Total
|
|
|
Currency
Translation
Adjustments
|
|
|
Derivative
Financial
Instruments
|
|
|
Defined
Benefit
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
$
|
(3
|
)
|
Cost of revenue
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
122
|
|
|
|
|
|
|
|
122
|
|
Tax effect
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
84
|
|
|
$
|
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2017, a majority of these local currencies strengthened
against the U.S. dollar resulting in net other comprehensive income of $76 million, upon the translation from local currencies to the U.S. dollar. For the six months ended June 30, 2017, a majority of these local currencies strengthened against
the U.S. dollar resulting in net other comprehensive income of $166 million, upon the translation from local currencies to the U.S. dollar. For the three months ended June 30, 2016, a majority of these local currencies weakened against the U.S.
dollar resulting in net other comprehensive loss of $46 million upon the translation from local currencies to the U.S. dollar. For the six months ended June 30, 2016, a majority of these local currencies strengthened against the U.S. dollar
resulting in net other comprehensive income of $97 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. The movement in other comprehensive
income or loss from period to period will be 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 $23 million (net of tax of $6 million) and $28 million (net of tax of $7 million) for the three and six months ended June 30, 2017, respectively.
The accumulated effect was other comprehensive income of $29 million (net of tax of $12 million) and $131 million (net of tax of $52 million) for the three and six months ended June 30, 2016, respectively.
8
6. Business Segments
Operating results by segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
346
|
|
|
$
|
564
|
|
|
$
|
739
|
|
|
$
|
1,490
|
|
Rig Aftermarket
|
|
|
341
|
|
|
|
364
|
|
|
|
662
|
|
|
|
755
|
|
Wellbore Technologies
|
|
|
614
|
|
|
|
511
|
|
|
|
1,169
|
|
|
|
1,142
|
|
Completion & Production Solutions
|
|
|
652
|
|
|
|
538
|
|
|
|
1,300
|
|
|
|
1,096
|
|
Eliminations
|
|
|
(194
|
)
|
|
|
(253
|
)
|
|
|
(370
|
)
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,759
|
|
|
$
|
1,724
|
|
|
$
|
3,500
|
|
|
$
|
3,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
(7
|
)
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
74
|
|
Rig Aftermarket
|
|
|
76
|
|
|
|
62
|
|
|
|
137
|
|
|
|
131
|
|
Wellbore Technologies
|
|
|
(24
|
)
|
|
|
(146
|
)
|
|
|
(81
|
)
|
|
|
(237
|
)
|
Completion & Production Solutions
|
|
|
27
|
|
|
|
(33
|
)
|
|
|
35
|
|
|
|
(71
|
)
|
Eliminations and corporate costs
|
|
|
(134
|
)
|
|
|
(160
|
)
|
|
|
(252
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit (loss)
|
|
$
|
(62
|
)
|
|
$
|
(270
|
)
|
|
$
|
(159
|
)
|
|
$
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
|
(2.0
|
%)
|
|
|
1.2
|
%
|
|
|
0.3
|
%
|
|
|
5.0
|
%
|
Rig Aftermarket
|
|
|
22.3
|
%
|
|
|
17.0
|
%
|
|
|
20.7
|
%
|
|
|
17.4
|
%
|
Wellbore Technologies
|
|
|
(3.9
|
%)
|
|
|
(28.6
|
%)
|
|
|
(6.9
|
%)
|
|
|
(20.8
|
%)
|
Completion & Production Solutions
|
|
|
4.1
|
%
|
|
|
(6.1
|
%)
|
|
|
2.7
|
%
|
|
|
(6.5
|
%)
|
Total operating profit (loss) %
|
|
|
(3.5
|
%)
|
|
|
(15.7
|
%)
|
|
|
(4.5
|
%)
|
|
|
(11.7
|
%)
|
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 June 30, 2017, the Company had approximately $45 million accrued for the VERP
postretirement medical benefits.
9
7. Debt
Debt consists of (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
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
|
|
|
1,392
|
|
|
|
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
|
|
|
3,214
|
|
|
|
3,214
|
|
Less current portion
|
|
|
506
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,708
|
|
|
$
|
2,708
|
|
|
|
|
|
|
|
|
|
|
On June 27, 2017, the Company entered into a new $3.0 billion credit agreement evidencing a five-year unsecured revolving
credit facility, which expires on June 27, 2022, with a syndicate of financial institutions. This new credit facility replaced the Companys previous $4.5 billion revolving credit facility. The Company has the right to increase the
aggregate commitments under this new agreement to an aggregate amount of up to $4.0 billion upon the consent of only those lenders holding any such increase. Interest under the new multicurrency facility is based upon LIBOR, NIBOR or CDOR plus
1.125% subject to a ratings-based grid or the U.S. prime rate. The new credit facility contains a financial covenant regarding maximum debt-to-capitalization ratio of 60%. As of June 30, 2017, the Company was in compliance with a
debt-to-capitalization ratio of 18.6%.
The Company has a commercial paper program under which borrowings are classified as long-term since the program is
supported by the $3.0 billion, five-year credit facility. At June 30, 2017, there were no commercial paper borrowings, and there were no outstanding letters of credit issued under the credit facility, resulting in $3.0 billion of funds
available under this credit facility.
The Company had $833 million of outstanding letters of credit at June 30, 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 June 30, 2017 and December 31, 2016, the fair value of the Companys unsecured
Senior Notes approximated $2,766 million and $2,669 million, respectively. At June 30, 2017 and December 31, 2016, the carrying value of the Companys unsecured Senior Notes approximated $2,978 million and $2,977 million,
respectively.
10
8. Tax
The
effective tax rate for the three and six months ended June 30, 2017 was 15.9% and 10.6%, respectively, compared to 35.8% and 41.6% for the same periods in 2016. Market conditions continued to negatively impact our business in the second quarter
of 2017. As a result of these conditions, we continue to establish valuation allowances on deferred tax assets for losses and tax credits generated 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 and six months ended June 30, 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 and six months ended June 30, 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 and six months ended
June 30, 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 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 June 30, 2017, 20,318,747 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.
On
May 17, 2017, the Company granted 36,701 restricted stock awards with a fair value of $33.38 per share. The awards were granted to non-employee members of the board of directors and vest on the first anniversary of the grant date.
Total stock-based compensation for all stock-based compensation arrangements under the Plan was $22 million and $52 million for the three and six months ended
June 30, 2017, respectively, and $21 million and $50 million for the three and six months ended June 30, 2016, respectively. Included in stock-based compensation for the six months ended June 30, 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 $5 million and
$9 million for the three and six months ended June 30, 2017, respectively, and $5 million and $12 million for the three and six months ended June 30, 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 June 30, 2017, the Company has
determined that the fair value of its derivative financial instruments representing assets of $26 million and liabilities of $21 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 June 30, 2017, the net fair value of the Companys foreign currency forward contracts totaled a net asset of $5 million.
At June 30, 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 and six months ended
June 30, 2017, the Company recognized a loss of $2 million and a gain of $13 million, respectively, 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 June 30, 2017, there were $14 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
|
|
Foreign Currency
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Norwegian Krone
|
|
|
NOK
|
|
|
|
4,762
|
|
|
|
NOK
|
|
|
|
5,621
|
|
Japanese Yen
|
|
|
JPY
|
|
|
|
1,142
|
|
|
|
JPY
|
|
|
|
1,462
|
|
U.S. Dollar
|
|
|
USD
|
|
|
|
275
|
|
|
|
USD
|
|
|
|
321
|
|
Euro
|
|
|
EUR
|
|
|
|
88
|
|
|
|
EUR
|
|
|
|
279
|
|
Danish Krone
|
|
|
DKK
|
|
|
|
29
|
|
|
|
DKK
|
|
|
|
29
|
|
British Pound Sterling
|
|
|
GBP
|
|
|
|
12
|
|
|
|
GBP
|
|
|
|
1
|
|
Singapore Dollar
|
|
|
SGD
|
|
|
|
1
|
|
|
|
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
|
|
Foreign Currency
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Russian Ruble
|
|
|
RUB
|
|
|
|
2,417
|
|
|
|
RUB
|
|
|
|
1,893
|
|
Norwegian Krone
|
|
|
NOK
|
|
|
|
1,115
|
|
|
|
NOK
|
|
|
|
538
|
|
U.S. Dollar
|
|
|
USD
|
|
|
|
461
|
|
|
|
USD
|
|
|
|
457
|
|
South African Rand
|
|
|
ZAR
|
|
|
|
150
|
|
|
|
ZAR
|
|
|
|
150
|
|
Euro
|
|
|
EUR
|
|
|
|
84
|
|
|
|
EUR
|
|
|
|
272
|
|
Danish Krone
|
|
|
DKK
|
|
|
|
17
|
|
|
|
DKK
|
|
|
|
49
|
|
Singapore Dollar
|
|
|
SGD
|
|
|
|
4
|
|
|
|
SGD
|
|
|
|
7
|
|
British Pound Sterling
|
|
|
GBP
|
|
|
|
2
|
|
|
|
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
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
Balance Sheet
Location
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Derivatives designated as hedging instruments under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current assets
|
|
$
|
8
|
|
|
$
|
24
|
|
|
Accrued liabilities
|
|
$
|
8
|
|
|
$
|
37
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
6
|
|
|
|
6
|
|
|
Other liabilities
|
|
|
1
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under ASC Topic 815
|
|
|
|
$
|
14
|
|
|
$
|
30
|
|
|
|
|
$
|
9
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current assets
|
|
$
|
12
|
|
|
$
|
32
|
|
|
Accrued liabilities
|
|
$
|
12
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments under ASC Topic 815
|
|
|
|
$
|
12
|
|
|
$
|
32
|
|
|
|
|
$
|
12
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
26
|
|
|
$
|
62
|
|
|
|
|
$
|
21
|
|
|
$
|
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)
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Cost of revenue
|
|
|
|
4
|
|
|
|
3
|
|
|
Cost of revenue
Other income (expense), net
|
|
|
13
|
|
|
|
(17
|
)
|
Foreign exchange contracts
|
|
|
34
|
|
|
|
65
|
|
|
|
|
(17
|
)
|
|
|
(105
|
)
|
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34
|
|
|
|
65
|
|
|
|
|
|
|
(13
|
)
|
|
|
(102
|
)
|
|
|
|
|
18
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
Foreign exchange contracts
|
|
|
Other income
(expense), net
|
|
|
|
|
|
|
46
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
46
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $13 million and $(17) million related to the ineffective portion of the hedging relationships for the six months ended June 30, 2017 and 2016, respectively,
and $5 million and $1 million related to the amount excluded from the assessment of the hedge effectiveness for the six months ended June 30, 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company
|
|
$
|
(75
|
)
|
|
$
|
(217
|
)
|
|
$
|
(197
|
)
|
|
$
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basicweighted average common shares outstanding
|
|
|
377
|
|
|
|
375
|
|
|
|
377
|
|
|
|
375
|
|
Dilutive effect of employee stock options and other unvested stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted outstanding shares
|
|
|
377
|
|
|
|
375
|
|
|
|
377
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.20
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.20
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and six months ended June 30, 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
18 million shares and 13 million shares for of the three and six months ended June 30, 2017, respectively, and 14 million shares for each of the three and six months ended June 30, 2016.
12. Cash Dividends
On May 18, 2017, the
Companys Board of Directors approved a cash dividend of $0.05 per share. The cash dividend was paid on June 30, 2017, to each stockholder of record on June 16, 2017. Cash dividends were $19 million and $38 million for the three and
six months ended June 30, 2017, respectively, and $19 million and $192 million for the three and six months ended June 30, 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 June 30, 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 trade, 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 trade regulations, trade sanctions, 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 sought, and may in the future seek, 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. As the
result of such disputes, payments to us may be delayed or jeopardized. Further, customers in other markets may seek delay or suspension of deliveries, the extension of 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 supersedes
the revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU proscribes
17
a five-step model for determining when and how revenue is recognized. Under the model, an entity will 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.
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. ASU 2014-09 is
effective for fiscal periods beginning after December 15, 2017. The Company currently anticipates following the modified retrospective adoption, but will not make a final decision on the adoption method until early 2018.
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.
Based on an analysis of first-quarter 2017 transactions against the requirements of ASU 2014-09, the Company does not expect a material
change in the timing or other impacts to revenue recognition across most of our businesses. We are still evaluating certain revenue streams, which may change from point-in-time to over-time revenue recognition, and reviewing the impact of the new
disclosure requirements.
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 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). 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, improve 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 second quarter ended June 30, 2017, the Company had a $75 million net loss attributable to Company, or $(0.20) per fully diluted share, on
$1.8 billion in revenue. Compared to the first quarter of 2017, revenue increased $18 million or 1% and net loss attributable to Company decreased $47 million or 39%. Compared to the second quarter of 2016, revenue increased
$35 million or 2%, and net loss attributable to Company decreased $142 million or 65%.
Operating loss for the second quarter of 2017 was
$62 million, or (3.5)% of sales. Excluding other items from all periods, operating loss was $32 million or (1.8)% of sales in the second quarter of 2017, compared to operating loss of $70 million or (4.0)% of sales in the first
quarter of 2017, and operating loss of $153 million or (8.9)% of sales in the second quarter of 2016.
During the second quarter of 2017, first
quarter of 2017, and second quarter of 2016,
pre-tax
other items (severance, facility closures, write-downs, and other) included in operating loss were $30 million, $27 million and $117 million,
respectively. Excluding other items from all periods, second quarter 2017 earnings (losses) were $(0.14) per fully diluted share, compared to $(0.17) per fully diluted share in the first quarter of 2017 and $(0.30) per fully diluted share in the
second 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 showed early signs of improvement during the fourth quarter of 2016. During the first half of 2017, land drilling activity in North America continued to increase, while international markets stabilized and offshore activity neared
bottom. The average price of West Texas Intermediate Cushing Crude for the second quarter of 2017 was $48.24 a barrel.
Segment Performance
The Rig Systems segment generated $346 million in revenue and $(7) million in operating loss or (2.0)% of sales in the second quarter of 2017. Compared to
the prior quarter, revenue decreased $47 million or 12%, and operating profit decreased $16 million or 178%. Compared to the second quarter of 2016, segment revenue decreased $218 million or 39%, and operating profit decreased
$14 million or 200%. Second quarter 2017 revenue out of backlog for the Rig Systems segment decreased 21% sequentially and 49% year-over-year on fewer shipments of offshore projects. During the second quarter of 2017, the segment received
$124 million in new orders. Backlog for capital equipment orders for the Rig Systems segment at June 30, 2017 was $2.2 billion.
The Rig
Aftermarket segment generated $341 million in revenue and $76 million in operating profit or 22.3% of sales in the second quarter of 2017. Compared to the prior quarter, revenue increased $20 million or 6%, and operating profit
increased $15 million or 25%. Compared to the second quarter of 2016, segment revenue decreased $23 million or 6%, and operating profit increased $14 million or 23%. Revenue increased over the first quarter of 2017 as land drilling
activity increased and customers ordered to replenish depleted spare parts inventories.
The Wellbore Technologies segment generated $614 million in
revenue and a $(24) million operating loss, or (3.9)% of sales, for the second quarter of 2017. Compared to the prior quarter, revenue increased $59 million or 11%, and operating loss decreased $33 million or 58%. Compared to the second
quarter of 2016, revenue increased $103 million or 20%, and operating loss decreased $122 million or 84%. The increase in revenue from the prior year was driven primarily by activity increases in North America.
21
The Completion & Production Solutions segment generated $652 million in revenue and
$27 million in operating profit or 4.1% of sales during the second quarter of 2017. Compared to the prior quarter, revenue increased $4 million or 1%, and operating profit increased $19 million or 238%. Compared to the second quarter
of 2016, revenue increased $114 million or 21%, and operating profit increased $60 million or 182%. 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 June 30, 2017 was $881 million.
Outlook
Activity in North America increased sharply off historical lows during the last two quarters of 2016 and first half of 2017 and declines in supply, assisted by
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 the second half of 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 land drilling has increased, activity levels remain well below prior cyclical highs. International activity, which had been slower to fall
than North American activity, appears to be at or approaching a bottom with many markets stabilizing. Offshore activity, which has longer project cycle times and, in certain instances, more challenged economics, may continue to decline through the
second half of 2017. Although the Company believes offshore activity is approaching a bottom.
Low activity levels result in an oversupply of service
capacity and capital equipment, creating challenging prospects for many of our customers and sharply reducing demand for our products. In this environment, contractors are hesitant to invest in their existing equipment to conserve as much capital as
possible. Equipment is neglected and idle fleets are often 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 lowers the marginal cost of supply for oil and gas operating companies. We believe the very tight spending reductions our customers have had in place for an extended period have created pent up demand for our products
that is beginning to show in certain areas where industry activity levels have begun to improve.
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.
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 has closed, or is in the process of closing, 374 locations over the past three years. It has reduced its annual expenses relating to salaries, wages, outside
services, contractors, travel and entertainment by approximately $3.0 billion. 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 is expected to continue 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 second quarter of 2017 and 2016, and the first quarter of 2017 include
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2Q17*
|
|
|
2Q16*
|
|
|
1Q17*
|
|
|
%
2Q17
2Q16
|
|
|
%
2Q17
1Q17
|
|
Active Drilling Rigs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
892
|
|
|
|
421
|
|
|
|
739
|
|
|
|
111.9
|
%
|
|
|
20.7
|
%
|
Canada
|
|
|
115
|
|
|
|
49
|
|
|
|
299
|
|
|
|
134.7
|
%
|
|
|
(61.5
|
%)
|
International
|
|
|
957
|
|
|
|
943
|
|
|
|
939
|
|
|
|
1.5
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
1,964
|
|
|
|
1,413
|
|
|
|
1,977
|
|
|
|
39.0
|
%
|
|
|
(0.7
|
%)
|
West Texas Intermediate
|
|
$
|
48.24
|
|
|
$
|
45.41
|
|
|
$
|
51.77
|
|
|
|
6.2
|
%
|
|
|
(6.8
|
%)
|
Crude Prices (per barrel)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Prices ($/mmbtu)
|
|
$
|
3.05
|
|
|
$
|
2.13
|
|
|
$
|
2.98
|
|
|
|
43.2
|
%
|
|
|
2.3
|
%
|
*
|
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 June 30, 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 decreased 0.7% (from 1,977 to 1,964), and the U.S. increased 20.7%
(from 739 to 892), in the second quarter of 2017 compared to the first quarter of 2017. The average per barrel price of West Texas Intermediate Crude Oil decreased 6.8% (from $51.77 per barrel to $48.24 per barrel) and natural gas prices
increased 2.3% (from $2.98 per mmbtu to $3.05 per mmbtu) in the second quarter of 2017 compared to the first quarter of 2017.
U.S. rig activity at
July 21, 2017 was 950 rigs, increasing 7% compared to the second quarter of 2017 average of 892 rigs. The price for West Texas Intermediate Crude Oil was at $45.77 per barrel at July 21, 2017, decreasing 5% from the second quarter of 2017
average. The price for natural gas was at $2.97 per mmbtu at July 21, 2017, decreasing 3% from the second quarter of 2017 average.
24
Results of Operations
Operating results by segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
346
|
|
|
$
|
564
|
|
|
$
|
739
|
|
|
$
|
1,490
|
|
Rig Aftermarket
|
|
|
341
|
|
|
|
364
|
|
|
|
662
|
|
|
|
755
|
|
Wellbore Technologies
|
|
|
614
|
|
|
|
511
|
|
|
|
1,169
|
|
|
|
1,142
|
|
Completion & Production Solutions
|
|
|
652
|
|
|
|
538
|
|
|
|
1,300
|
|
|
|
1,096
|
|
Eliminations
|
|
|
(194
|
)
|
|
|
(253
|
)
|
|
|
(370
|
)
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,759
|
|
|
$
|
1,724
|
|
|
$
|
3,500
|
|
|
$
|
3,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
$
|
(7
|
)
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
74
|
|
Rig Aftermarket
|
|
|
76
|
|
|
|
62
|
|
|
|
137
|
|
|
|
131
|
|
Wellbore Technologies
|
|
|
(24
|
)
|
|
|
(146
|
)
|
|
|
(81
|
)
|
|
|
(237
|
)
|
Completion & Production Solutions
|
|
|
27
|
|
|
|
(33
|
)
|
|
|
35
|
|
|
|
(71
|
)
|
Eliminations and corporate costs
|
|
|
(134
|
)
|
|
|
(160
|
)
|
|
|
(252
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit (loss)
|
|
$
|
(62
|
)
|
|
$
|
(270
|
)
|
|
$
|
(159
|
)
|
|
$
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
|
(2.0
|
%)
|
|
|
1.2
|
%
|
|
|
0.3
|
%
|
|
|
5.0
|
%
|
Rig Aftermarket
|
|
|
22.3
|
%
|
|
|
17.0
|
%
|
|
|
20.7
|
%
|
|
|
17.4
|
%
|
Wellbore Technologies
|
|
|
(3.9
|
%)
|
|
|
(28.6
|
%)
|
|
|
(6.9
|
%)
|
|
|
(20.8
|
%)
|
Completion & Production Solutions
|
|
|
4.1
|
%
|
|
|
(6.1
|
%)
|
|
|
2.7
|
%
|
|
|
(6.5
|
%)
|
Total operating profit (loss) %
|
|
|
(3.5
|
%)
|
|
|
(15.7
|
%)
|
|
|
(4.5
|
%)
|
|
|
(11.7
|
%)
|
Rig Systems
Three and
six months ended June
30, 2017 and 2016
. Revenue from Rig Systems was $346 million for the three months ended June 30, 2017, compared to $564 million for the three months ended June 30, 2016, a decrease of
$218 million or 39%. For the six months ended June 30, 2017, revenue from Rig Systems was $739 million compared to $1,490 million for the six months ending June 30, 2016, a decrease of $751 million or 50%.
Operating loss from Rig Systems was $7 million for the three months ended June 30, 2017 compared to operating income of $7 million for the
three months ended June 30, 2016, a decrease of $14 million or 200%. Operating profit (loss) percentage decreased to (2.0)% for the three months ended June 30, 2017, from 1.2% in the three months ended June 30, 2016. For the six
months ended June 30, 2017, operating profit from Rig Systems was $2 million compared to $74 million for the six months ending June 30, 2016, a decrease of $72 million or 97%. Operating profit percentage decreased to 0.3%
for the six months ended June 30, 2017, from 5.0% in the six months ended June 30, 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 $2.2 billion at June 30, 2017, a decrease of
$717 million, or 24%, from backlog of $2.9 billion at
June 30, 2016. Numerous factors may affect the timing of revenue out of
backlog. Considering these factors, the Company reasonably expects approximately $480 million of revenue out of backlog for the remainder of 2017 and approximately $1.7 billion of revenue out of backlog in 2018 and thereafter. At
June 30, 2017, approximately 78% 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 and six months ended
June
30, 2017 and 2016
. Revenue from Rig Aftermarket was $341 million for the three months ended June 30, 2017, compared to $364 million for the three months ended June 30, 2016, a decrease of
$23 million or 6%. For the six months ended June 30, 2017, revenue from Rig Aftermarket was $662 million compared to $755 million for the six months ending June 30, 2016, a decrease of $93 million or 12%. This decrease
was due to the decrease in offshore related drilling activity.
25
Operating profit from Rig Aftermarket was $76 million for the three months ended June 30, 2017 compared
to $62 million for the three months ended June 30, 2016, an increase of $14 million or 23%. Operating profit percentage increased to 22.3% for the three months ended June 30, 2017, from 17.0% in the three months ended
June 30, 2016. For the six months ended June 30, 2017, operating profit from Rig Aftermarket was $137 million compared to $131 million for the six months ending June 30, 2016, an increase of $6 million or 5%. Operating
profit percentage increased to 20.7% for the six months ended June 30, 2017, from 17.4% in the six months ended June 30, 2016. Operating profit percentage increased due to product mix.
Wellbore Technologies
Three and six months ended
June
30, 2017 and 2016.
Revenue from Wellbore Technologies was $614 million for the three months ended June 30, 2017, compared to $511 million for the three months ended June 30, 2016, an increase of
$103 million or 20%. For the six months ended June 30, 2017, revenue from Wellbore Technologies was $1,169 million compared to $1,142 million for the six months ending June 30, 2016, an increase of $27 million or 2%.
This increase was due to improving North American conditions.
Operating loss from Wellbore Technologies was $24 million for the three months ended
June 30, 2017 compared to $146 million for the three months ended June 30, 2016, a decrease of $122 million or 84%. Operating loss percentage decreased to (3.9)% for the three months ended June 30, 2017, from (6.9)% in the
three months ended June 30, 2016. For the six months ended June 30, 2017, operating loss from Wellbore Technologies was $81 million compared to $237 million for the six months ending June 30, 2016, a decrease of
$156 million or 66%. Operating loss percentage decreased to (6.9)% for the six months ended June 30, 2017, from (20.8)% in the six months ended June 30, 2016. This improvement was due to operating efficiencies and better market
conditions.
Completion & Production Solutions
Three and six months ended June
30, 2017 and 2016.
Revenue from Completion & Production Solutions was $652 million
for the three months ended June 30, 2017, compared to $538 million for the three months ended June 30, 2016, an increase of $114 million or 21%. For the six months ended June 30, 2017, revenue from Completion &
Production Solutions was $1,300 million compared to $1,096 million for the six months ending June 30, 2016, an increase of $204 million or 19%. 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 $27 million for the three
months ended June 30, 2017 compared to $(33) million for the three months ended June 30, 2016, an increase of $60 million or 182%. Operating profit (loss) percentage increased to 4.1% for the three months ended June 30, 2017,
from (6.1)% in the three months ended June 30, 2016. For the six months ended June 30, 2017, operating profit from Completion & Production Solutions was $35 million compared to operating loss of $71 million for the six
months ending June 30, 2016, an increase of $106 million or 149%. Operating profit (loss) percentage increased to 2.7% for the six months ended June 30, 2017, from (6.5)% in the six months ended June 30, 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 $881 million
at June 30, 2017, a decrease of $66 million, or 7% from backlog of $947 million at June 30, 2016. Numerous factors may affect the timing of revenue out of backlog. Considering these factors, the Company reasonably expects
approximately $616 million of revenue out of backlog for the remainder of 2017 and approximately $265 million of revenue out of backlog in 2018 and thereafter. At June 30, 2017, approximately 61% of the capital equipment backlog was
for offshore products and approximately 75% of the capital equipment backlog was destined for international markets.
Eliminations and corporate costs
Eliminations and corporate costs were $134 million and $252 million for the three and six months ended June 30, 2017, respectively,
compared to $160 million and $356 million for the three and six months ended June 30, 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.
26
Other income (expense), net
Other income (expense), net were expenses of $2 million and $13 million for the three and six months ended June 30, 2017, respectively, compared
to expenses of $34 million and $55 million for the three and six months ended June 30, 2016, respectively. The change in expense was primarily due to the fluctuations in foreign currencies.
Provision for income taxes
The effective tax rates for
the three and six months ended June 30, 2017 were 15.9% and 10.6%, respectively, compared to 35.8% and 41.6% for the same periods in 2016. Market conditions continued to negatively impact our business in the second quarter of 2017. As a result
of these conditions, we continue to establish valuation allowances on deferred tax assets for losses and tax credits generated 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 and six months ended June 30, 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.
27
Non-GAAP
Financial Measures and Reconciliations
To provide investors with additional information regarding our results of operations, 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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
Reconciliation of operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating loss
|
|
$
|
(62
|
)
|
|
$
|
(270
|
)
|
|
$
|
(97
|
)
|
|
$
|
(159
|
)
|
|
$
|
(459
|
)
|
Other (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig Systems
|
|
|
16
|
|
|
|
23
|
|
|
|
7
|
|
|
|
23
|
|
|
|
75
|
|
Rig Aftermarket
|
|
|
1
|
|
|
|
5
|
|
|
|
5
|
|
|
|
6
|
|
|
|
13
|
|
Wellbore Technologies
|
|
|
(4
|
)
|
|
|
50
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
88
|
|
Completion & Production Solutions
|
|
|
17
|
|
|
|
38
|
|
|
|
15
|
|
|
|
32
|
|
|
|
72
|
|
Eliminations
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss excluding other items
|
|
$
|
(32
|
)
|
|
$
|
(153
|
)
|
|
$
|
(70
|
)
|
|
$
|
(102
|
)
|
|
$
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
Reconciliation of operating loss %:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating loss %
|
|
|
(3.5
|
%)
|
|
|
(15.7
|
%)
|
|
|
(5.6
|
%)
|
|
|
(4.5
|
%)
|
|
|
(11.7
|
%)
|
Asset write-downs and other items %
|
|
|
1.7
|
%
|
|
|
6.8
|
%
|
|
|
1.6
|
%
|
|
|
1.6
|
%
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss % excluding other items
|
|
|
(1.8
|
%)
|
|
|
(8.9
|
%)
|
|
|
(4.0
|
%)
|
|
|
(2.9
|
%)
|
|
|
(5.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
Reconciliation of adjusted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP loss per share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.90
|
)
|
Other (1)
|
|
|
0.06
|
|
|
|
0.23
|
|
|
|
0.04
|
|
|
|
0.10
|
|
|
|
0.48
|
|
Fixed asset write-downs (Other income (expense), net)
|
|
|
|
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
0.02
|
|
|
|
0.06
|
|
Tax items (Provision for income taxes)
|
|
|
|
|
|
|
|
|
|
|
0.09
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted loss per share excluding other items
|
|
$
|
(0.14
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in operating loss 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 and six months ended June 30, 2017, other items included in operating loss were $30 million and $57 million, respectively. For the three and six months ended June 30, 2016,
other items included in operating loss were $117 million and $258 million, respectively. Other items included in operating loss for the three months ended March 31, 2017 totaled $27 million.
|
28
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 June 30, 2017, the Company had cash and cash equivalents of $1,530 million and total debt of $3,214 million. At December 31, 2016,
cash and cash equivalents were $1,408 million and total debt was $3,214 million. As of June 30, 2017, approximately $1,258 million of the $1,530 million of cash and cash equivalents was held by our foreign subsidiaries, of
which $1,238 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 indefinitely 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.
On June 27, 2017, the Company entered into a new $3.0 billion credit agreement evidencing a five-year unsecured revolving credit facility, which expires on
June 27, 2022, with a syndicate of financial institutions. This new credit facility replaced the Companys previous $4.5 billion revolving credit facility. The Company has the right to increase the aggregate commitments under this new
agreement to an aggregate amount of up to $4.0 billion upon the consent of only those lenders holding any such increase. Interest under the new multicurrency facility is based upon LIBOR, NIBOR or CDOR plus 1.125% subject to a ratings-based grid or
the U.S. prime rate. The new credit facility contains a financial covenant regarding maximum debt-to-capitalization ratio of 60%. As of June 30, 2017, the Company was in compliance with a debt-to-capitalization ratio of 18.6%.
The Companys outstanding debt at June 30, 2017 was $3,214 million and consisted of $499 million in 1.35% Senior Notes,
$1,392 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 June 30, 2017.
At June 30, 2017, there were no commercial paper borrowings supported by the $3.0 billion credit facility and no outstanding letters of credit
issued under the credit facility, resulting in $3.0 billion of funds available under this credit facility.
The Company had $833 million of
outstanding letters of credit at June 30, 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):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
279
|
|
|
$
|
749
|
|
Net cash used in investing activities
|
|
|
(148
|
)
|
|
|
(194
|
)
|
Net cash used in financing activities
|
|
|
(31
|
)
|
|
|
(990
|
)
|
Operating Activities
For
the first six months of 2017, cash provided by operating activities was $279 million compared to $749 million in the same period of 2016. Before changes in operating assets and liabilities, net of acquisitions, cash was provided primarily
by net loss from operations of $194 million plus
non-cash
charges of $460 million.
The change in
operating assets and liabilities in the first six 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 income taxes payable. Net changes in operating assets and liabilities, net of acquisitions, provided $13 million of cash for the first six months of 2017 compared to cash provided of $805 million in the same period
in 2016.
29
Investing Activities
For the first six months of 2017, net cash used in investing activities was $148 million compared to $194 million for the same period of 2016. The
decrease in net cash used in investing activities in the first six months of 2017 compared to the same period in 2016 was primarily the result of lower capital expenditures, partially offset by higher acquisition activity. The Company used
$85 million for capital expenditures during the first six months of 2017 compared to $161 million for the same period of 2016 and $82 million for acquisitions in the first six months of 2017 compared to $36 million for the same
period of 2016.
Financing Activities
For the first
six months of 2017, net cash used in financing activities was $31 million compared to $990 million for the same period of 2016. This decrease was primarily the result of dividends paid of $38 million in 2017 compared to
$192 million in 2016 and $3 million in payments on net borrowings in 2017 compared to $785 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 $22 million and $16 million for the first six 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.
30
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 supersedes the revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU
proscribes a five-step model for determining when and how revenue is recognized. Under the model, an entity will 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.
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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. ASU
2014-09
is effective for
fiscal periods beginning after December 15, 2017. The Company currently anticipates following the modified retrospective adoption, but will not make a final decision on the adoption method until early 2018.
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.
Based on an analysis of first-quarter 2017 transactions against the requirements of
ASU
2014-09,
the Company does not expect a material change in the timing or other impacts to revenue recognition across most of our businesses. We are still evaluating certain revenue streams, which may change
from
point-in-time
to over-time revenue recognition, and reviewing the impact of the new disclosure requirements.
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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.
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