Item 1. Financial Statements
Notes to Consolidated Financial Statements (Unaudited)
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect reported and contingent amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accompanying unaudited consolidated financial statements of National Oilwell Varco, Inc. (“NOV” or the “Company”) present information in accordance with GAAP in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. They do not include all information or footnotes required by GAAP in the United States for complete consolidated financial statements and should be read in conjunction with the Company’s 2019 Annual Report on Form 10-K.
In our opinion, the consolidated financial statements include all adjustments, which are of a normal recurring nature unless otherwise disclosed, necessary for a fair presentation of the results for the interim periods. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year.
The fair values of cash and cash equivalents, receivables and payables were approximately the same as their presented carrying values because of the short maturities of these instruments. The fair value of long-term debt is provided in Note 8, and the fair values of derivative financial instruments are provided in Note 11.
Inventories consist of (in millions):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials and supplies
|
|
$
|
531
|
|
|
$
|
577
|
|
Work in process
|
|
|
377
|
|
|
|
364
|
|
Finished goods and purchased products
|
|
|
1,983
|
|
|
|
2,099
|
|
|
|
|
2,891
|
|
|
|
3,040
|
|
Less: Inventory reserve
|
|
|
(859
|
)
|
|
|
(843
|
)
|
Total
|
|
$
|
2,032
|
|
|
$
|
2,197
|
|
Accrued liabilities consist of (in millions):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Compensation
|
|
$
|
176
|
|
|
$
|
270
|
|
Vendor costs
|
|
|
130
|
|
|
|
121
|
|
Fair value of derivatives
|
|
|
97
|
|
|
|
24
|
|
Warranties
|
|
|
86
|
|
|
|
90
|
|
Taxes (non-income)
|
|
|
74
|
|
|
|
112
|
|
Insurance
|
|
|
53
|
|
|
|
57
|
|
Commissions
|
|
|
33
|
|
|
|
31
|
|
Interest
|
|
|
25
|
|
|
|
8
|
|
Other
|
|
|
214
|
|
|
|
236
|
|
Total
|
|
$
|
888
|
|
|
$
|
949
|
|
7
4.
|
Accumulated Other Comprehensive Loss
|
The components of accumulated other comprehensive loss are as follows (in millions):
|
|
|
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
|
Currency
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
|
Translation
|
|
|
Instruments,
|
|
|
Plans,
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Net of Tax
|
|
|
Net of Tax
|
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
(1,403
|
)
|
|
$
|
(4
|
)
|
|
$
|
(16
|
)
|
|
$
|
(1,423
|
)
|
Accumulated other comprehensive
income (loss) before reclassifications
|
|
|
(180
|
)
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
(236
|
)
|
Amounts reclassified from accumulated
other comprehensive income (loss)
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Balance at March 31, 2020
|
|
$
|
(1,583
|
)
|
|
$
|
(56
|
)
|
|
$
|
(16
|
)
|
|
$
|
(1,655
|
)
|
The components of amounts reclassified from accumulated other comprehensive income (loss) are as follows (in millions):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost of revenue
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Tax effect
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
The Company’s reporting currency is the U.S. dollar. A majority of the Company’s international entities in which there is a substantial investment have the local currency as 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 (loss). For the three months ended March 31, 2020, a majority of these local currencies weakened against the U.S. dollar, resulting in other comprehensive loss of $180 million compared to other comprehensive income of $20 million for the three months ended March 31, 2019.
The effect of changes in the fair values of derivatives designated as cash flow hedges are accumulated in other comprehensive income (loss), net of tax, until the underlying transactions they hedge are realized. The movement in other comprehensive income (loss) from period to period will be the result of the combination of: 1) changes in fair value of open derivatives ($-56 million during the three months ended March 31, 2020); and, 2) the outflow of other comprehensive income (loss) related to cumulative changes in the fair value of derivatives that have settled in the current period ($4 million during the three months ended March 31, 2020).
8
Financial results by operating segment are as follows (in millions):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
691
|
|
|
$
|
807
|
|
Completion & Production Solutions
|
|
|
675
|
|
|
|
581
|
|
Rig Technologies
|
|
|
557
|
|
|
|
603
|
|
Eliminations
|
|
|
(40
|
)
|
|
|
(51
|
)
|
Total revenue
|
|
$
|
1,883
|
|
|
$
|
1,940
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
(663
|
)
|
|
|
19
|
|
Completion & Production Solutions
|
|
|
(1,013
|
)
|
|
|
(35
|
)
|
Rig Technologies
|
|
|
(202
|
)
|
|
|
31
|
|
Eliminations and corporate costs
|
|
|
(72
|
)
|
|
|
(63
|
)
|
Total operating profit (loss)
|
|
$
|
(1,950
|
)
|
|
$
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)%:
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
|
(95.9
|
%)
|
|
|
2.4
|
%
|
Completion & Production Solutions
|
|
|
(150.1
|
%)
|
|
|
(6.0
|
%)
|
Rig Technologies
|
|
|
(36.3
|
%)
|
|
|
5.1
|
%
|
Total operating profit (loss)%
|
|
|
(103.6
|
%)
|
|
|
(2.5
|
%)
|
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 three reporting segments that are eliminated in consolidation. Intrasegment transactions are eliminated within each segment.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Other items in operating profit:
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
715
|
|
|
$
|
(2
|
)
|
Completion & Production Solutions
|
|
|
1,054
|
|
|
|
11
|
|
Rig Technologies
|
|
|
238
|
|
|
|
2
|
|
Eliminations and corporate costs
|
|
|
16
|
|
|
|
—
|
|
Total other items in operating profit
|
|
$
|
2,023
|
|
|
$
|
11
|
|
First quarter 2020 operating profit (loss) includes pre-tax charges for impairment of goodwill, indefinite-lived and finite-lived intangible and long-lived tangible assets ($1,891 million); inventory charges ($114 million); and, severance, facility closures and other items ($18 million). First quarter 2019 operating profit includes pre-tax charges for inventory, facility closure and other items ($11 million).
9
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major geographic and market segment destination. In the table, North America includes the U.S. and Canada (in millions):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Eliminations
|
|
|
Total
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Eliminations
|
|
|
Total
|
|
North America
|
|
$
|
361
|
|
|
$
|
225
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
663
|
|
|
$
|
460
|
|
|
$
|
269
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
870
|
|
International
|
|
|
313
|
|
|
|
437
|
|
|
|
470
|
|
|
|
—
|
|
|
|
1,220
|
|
|
|
331
|
|
|
|
296
|
|
|
|
443
|
|
|
|
—
|
|
|
|
1,070
|
|
Eliminations
|
|
|
17
|
|
|
|
13
|
|
|
|
10
|
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
16
|
|
|
|
16
|
|
|
|
19
|
|
|
|
(51
|
)
|
|
|
—
|
|
|
|
$
|
691
|
|
|
$
|
675
|
|
|
$
|
557
|
|
|
$
|
(40
|
)
|
|
$
|
1,883
|
|
|
$
|
807
|
|
|
$
|
581
|
|
|
$
|
603
|
|
|
$
|
(51
|
)
|
|
$
|
1,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
529
|
|
|
$
|
416
|
|
|
$
|
151
|
|
|
$
|
—
|
|
|
$
|
1,096
|
|
|
$
|
665
|
|
|
$
|
405
|
|
|
$
|
215
|
|
|
$
|
—
|
|
|
$
|
1,285
|
|
Offshore
|
|
|
145
|
|
|
|
246
|
|
|
|
396
|
|
|
|
—
|
|
|
|
787
|
|
|
|
126
|
|
|
|
160
|
|
|
|
369
|
|
|
|
—
|
|
|
|
655
|
|
Eliminations
|
|
|
17
|
|
|
|
13
|
|
|
|
10
|
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
16
|
|
|
|
16
|
|
|
|
19
|
|
|
|
(51
|
)
|
|
|
—
|
|
|
|
$
|
691
|
|
|
$
|
675
|
|
|
$
|
557
|
|
|
$
|
(40
|
)
|
|
$
|
1,883
|
|
|
$
|
807
|
|
|
$
|
581
|
|
|
$
|
603
|
|
|
$
|
(51
|
)
|
|
$
|
1,940
|
|
Performance Obligations
Net revenue recognized from performance obligations satisfied in previous periods was $4 million for the three months ended March 31, 2020, primarily due to change orders.
Remaining performance obligations represents the transaction price of firm orders for all revenue streams for which work has not been performed on contracts with original expected duration of one year or more. We do not disclose the remaining performance obligations of royalty contracts, service contracts for which there is a right to invoice, and short-term contracts that are expected to have a duration of one year or less. As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $3,558 million. The Company expects to recognize approximately $937 million in revenue for the remaining performance obligations in 2020, and $2,621 million in 2021 and thereafter.
Contract Assets and Liabilities
Contract assets include unbilled amounts when revenue recognized exceeds the amount billed to the customer under contracts where revenue is recognized over-time. Contract liabilities consist of customer billings in excess of revenue recognized under over-time contracts, customer advance payments and deferred revenue.
The changes in the carrying amount of net contract assets and contract liabilities are as follows (in millions):
|
|
Contract Assets
|
|
|
Contract Liabilities
|
|
Balance at December 31, 2019
|
|
$
|
643
|
|
|
$
|
427
|
|
Provision
|
|
|
(4
|
)
|
|
|
-
|
|
Billings
|
|
|
(84
|
)
|
|
|
282
|
|
Revenue recognized
|
|
|
99
|
|
|
|
(233
|
)
|
Currency translation adjustments and other
|
|
|
(15
|
)
|
|
|
(6
|
)
|
Balance at March 31, 2020
|
|
$
|
639
|
|
|
$
|
470
|
|
10
The Company leases certain facilities and equipment to support its operations around the world. These leases generally require the Company to pay maintenance, insurance, taxes and other operating costs in addition to rent. Renewal options are common in longer term leases; however, it is rare that the Company initially intends that a lease option will be exercised due to the cyclical nature of the Company’s business. Residual value guarantees are not typically part of the Company’s leases. Occasionally, the Company sub-leases excess facility space, generally at terms similar to the source lease. The Company reviews agreements at inception to determine if they include a lease and, when they do, uses its incremental borrowing rate to determine the present value of the future lease payments as most do not include implicit interest rates.
Components of leases are as follows (in millions):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current portion of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
83
|
|
|
$
|
84
|
|
Financing
|
|
|
32
|
|
|
|
30
|
|
Total
|
|
$
|
115
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Long-term portion of lease liability:
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
394
|
|
|
$
|
424
|
|
Financing
|
|
|
252
|
|
|
$
|
250
|
|
Total
|
|
$
|
646
|
|
|
$
|
674
|
|
8.Debt
Debt consists of (in millions):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
$1.1 billion in Senior Notes, interest at 3.95% payable semiannually,
principal due on December 1, 2042
|
|
$
|
1,089
|
|
|
$
|
1,088
|
|
$0.5 billion in Senior Notes, interest at 3.60% payable semiannually,
principal due on December 1, 2029
|
|
|
493
|
|
|
|
493
|
|
$0.4 billion in Senior Notes, interest at 2.60% payable semiannually,
principal due on December 1, 2022
|
|
|
399
|
|
|
|
399
|
|
Other debt
|
|
|
21
|
|
|
|
9
|
|
Total
|
|
$
|
2,002
|
|
|
$
|
1,989
|
|
The Company has a $2.0 billion, five-year unsecured revolving credit facility, which expires on October 30, 2024. The Company has the right to increase the commitments under this agreement to an aggregate amount of up to $3.0 billion upon the consent of only those lenders holding any such increase. Interest under the 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 credit facility contains a financial covenant regarding maximum debt-to-capitalization ratio of 60%. As of March 31, 2020, the Company was in compliance with a debt-to-capitalization ratio of 29.2%.
Additionally, the Company has a $150 million bank line of credit for the construction of a facility in Saudi Arabia. Interest under the bank line of credit is based upon LIBOR plus 1.40%. The bank line of credit contains a financial covenant regarding maximum debt-to-equity ratio of 75%. As of March 31, 2020, the Company was in compliance.
11
The Company has a commercial paper program under which borrowings are classified as long-term since the program is supported by the $2.0 billion, five-year credit facility. At March 31, 2020, there were no commercial paper borrowings, and there were no outstanding letters of credit issued under the credit facility, resulting in $2.0 billion of funds available under this credit facility.
The Company had $524 million of outstanding letters of credit at March 31, 2020, primarily in the U.S. and Norway, that are under various bilateral letter of credit facilities. Letters of credit are issued as bid bonds, advanced payment bonds and performance bonds.
At March 31, 2020 and December 31, 2019, the fair value of the Company’s unsecured Senior Notes approximated $1,445 million and $1,947 million, respectively. The fair value of the Company’s debt is estimated using Level 2 inputs in the fair value hierarchy and is based on quoted prices for those or similar instruments. At March 31, 2020 and December 31, 2019, the carrying value of the Company’s unsecured Senior Notes approximated $1,981 million and $1,980 million, respectively.
The effective tax rate for the three months ended March 31, 2020 and 2019 was 7.1% and 11.8%, respectively. The Company established valuation allowances on deferred tax assets for losses and tax credits generated in 2020 and 2019. The change in the effective tax rate from 2019 to 2020 was impacted by a change in jurisdictional mix of income between the two periods and 2020 was negatively impacted by the impairment of nondeductible goodwill partially offset by an income tax benefit of $123 million from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was enacted on March 27, 2020 allowing net operating losses originating in 2018, 2019 or 2020 to be carried back five years. The Company anticipates filing a refund claim to carryback its 2019 United States net operating loss to its 2014 tax year which will result in a cash refund of $123 million.
10.
|
Stock-Based Compensation
|
The Company’s stock-based compensation plan, known as the National Oilwell Varco, Inc. 2018 Long-Term Incentive Plan (the “2018 Plan”), was approved by shareholders on May 11, 2018 and amended and restated on May 28, 2019. The 2018 Plan provides for the granting of stock options, restricted stock, restricted stock units, performance awards, phantom shares, stock appreciation rights, stock payments and substitute awards. The number of shares authorized under the 2018 Plan is 20.2 million. The 2018 Plan is also subject to a fungible ratio concept, such that the issuance of stock options and stock appreciation rights reduces the number of available shares under the 2018 Plan on a 1-for-1 basis, and the issuance of other awards reduces the number of available shares under the 2018 Plan on a 2.5-for-1 basis. At March 31, 2020, 1,348,877 shares remain available for future grants under the 2018 Plan. The Company also has outstanding awards under its other stock-based compensation plan known as the National Oilwell Varco, Inc. Long-Term Incentive Plan (the “Plan”), however the Company is no longer granting awards under the Plan.
On February 25, 2020, under the 2018 Plan, the Company granted 1,650,262 stock options with a fair value of $5.83 per option and an exercise price of $20.23 per share; 2,535,174 shares of restricted stock and restricted stock units with a fair value of $20.23 per share; and performance share awards to senior management employees with potential payouts varying from zero to 1,063,274 shares. The stock options vest over a three-year period from the grant date. The restricted stock and restricted stock units vest in three equal annual installments commencing on the first anniversary of the grant date. The 2020 performance share awards can be earned based on performance against two established goals over a three-year performance period. The performance share awards are divided into two independent parts that are subject to two separate performance metrics: 85% with a TSR (total shareholder return) goal and 15% with an internal NVA (“National Oilwell Varco Value Added”) (return on capital metric) goal. Performance against the TSR goal is determined by comparing the performance of the Company’s TSR with the TSR performance of the members of the OSX index for the three-year performance period. The TSR portion of the performance share awards is subject to vesting cap equal to 100% of Target Level if the Company’s absolute TSR is negative, regardless of relative TSR results. Conversely, if the Company’s absolute TSR is greater than 15% annualized over the three-year performance period the payout amount shall not be less than 50% of Target Level, regardless of relative TSR results. The NVA goal is based on the Company’s improvement in NVA from the beginning of the performance period until the end of the performance period. NVA shall be calculated as an amount equal to the Company’s (a) gross cash earnings less (b) average gross operating assets times an amount equal to a required return on assets.
Total stock-based compensation for all stock-based compensation arrangements under the Plan and the 2018 Plan was $27 million and $33 million for the three months ended March 31, 2020 and 2019, respectively.
The total income tax benefit recognized in the Consolidated Statements of Income (Loss) for all stock-based compensation arrangements under the Plan was nil and $4 million for the three months ended March 31, 2020 and 2019, respectively.
11.
|
Derivative Financial Instruments
|
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is the foreign currency exchange rate risk associated with sourcing goods and services in a currency different than the
12
currency of sale. Forward currency contracts are executed to manage the foreign exchange 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 executes forward currency contracts to manage the foreign currency risk on recognized nonfunctional currency monetary accounts (non-designated hedge).
The Company had the following outstanding foreign currency forward contracts at March 31, 2020 (in millions):
|
|
Currency Denomination
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Foreign Currency
|
|
2020
|
|
|
2019
|
|
South Korean Won
|
|
KRW
|
|
17,600
|
|
|
KRW
|
|
17,600
|
|
Norwegian Krone
|
|
NOK
|
|
5,232
|
|
|
NOK
|
|
5,377
|
|
Russian Ruble
|
|
RUB
|
|
1,274
|
|
|
RUB
|
|
1,012
|
|
U.S. Dollar
|
|
USD
|
|
536
|
|
|
USD
|
|
686
|
|
Mexican Peso
|
|
MXN
|
|
458
|
|
|
MXN
|
|
115
|
|
Euro
|
|
EUR
|
|
207
|
|
|
EUR
|
|
188
|
|
Japanese Yen
|
|
JPY
|
|
191
|
|
|
JPY
|
|
36
|
|
South African Rand
|
|
ZAR
|
|
124
|
|
|
ZAR
|
|
124
|
|
British Pound Sterling
|
|
GBP
|
|
38
|
|
|
GBP
|
|
20
|
|
Danish Krone
|
|
DKK
|
|
25
|
|
|
DKK
|
|
21
|
|
Singapore Dollar
|
|
SGD
|
|
18
|
|
|
SGD
|
|
42
|
|
Canadian Dollar
|
|
CAD
|
|
1
|
|
|
CAD
|
|
3
|
|
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. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is recorded in accumulated 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 Company includes time value in hedge relationships.
The Company expects $41 million of the accumulated other comprehensive income (loss) will be reclassified into earnings within the next twelve months.
Non-designated Hedging Strategy
The Company enters into forward exchange contracts to hedge certain nonfunctional currency monetary accounts. The gain or loss on the derivative instrument is recognized in other income (expense), together with the changes in the hedged nonfunctional monetary accounts.
The amount of gain (loss) recognized in other income (expense), net was ($43) million and $4 million for the three months ended March 31, 2020 and 2019, respectively.
13
The Company has the following fair values of its derivative instruments and their balance sheet classifications (in millions):
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Location
|
|
2020
|
|
|
2019
|
|
|
Location
|
|
2020
|
|
|
2019
|
|
Derivatives designated as
hedging instruments
under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current
assets
|
|
$
|
7
|
|
|
$
|
5
|
|
|
Accrued liabilities
|
|
$
|
65
|
|
|
$
|
18
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
3
|
|
|
|
4
|
|
|
Other liabilities
|
|
|
21
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated
as hedging instruments
under ASC Topic 815
|
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
|
|
$
|
86
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedging instruments
under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current
assets
|
|
$
|
15
|
|
|
$
|
8
|
|
|
Accrued liabilities
|
|
$
|
32
|
|
|
$
|
6
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
2
|
|
|
|
1
|
|
|
Other Liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not
designated as hedging
instruments under ASC
Topic 815
|
|
|
|
$
|
17
|
|
|
$
|
9
|
|
|
|
|
$
|
32
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
27
|
|
|
$
|
18
|
|
|
|
|
$
|
118
|
|
|
$
|
26
|
|
14
12.
|
Net Income (Loss) Attributable to Company Per Share
|
The following table sets forth the computation of weighted average basic and diluted shares outstanding (in millions, except per share data):
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
Net loss attributable to Company
|
$
|
(2,047
|
)
|
|
$
|
(77
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Basic—weighted average common shares outstanding
|
|
383
|
|
|
|
380
|
|
Dilutive effect of employee stock options and other
|
|
|
|
|
|
|
|
unvested stock awards
|
|
—
|
|
|
|
—
|
|
Diluted outstanding shares
|
|
383
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(5.34
|
)
|
|
$
|
(0.20
|
)
|
Diluted
|
$
|
(5.34
|
)
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
$
|
0.05
|
|
|
$
|
0.05
|
|
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 income (loss) attributable to Company allocated to these participating securities was immaterial for the three months ended March 31, 2020 and 2019 and therefore not excluded from net income attributable to Company per share calculation.
The Company had stock options outstanding that were anti-dilutive totaling 27 million shares and 21 million shares for each of the three months ended March 31, 2020 and 2019, respectively.
On February 27, 2020, the Company announced that its Board of Directors declared a cash dividend of $0.05 per share. The cash dividend was paid on March 27, 2020, to each stockholder of record on March 13, 2020. Cash dividends were $19 million for both the three months ended March 31, 2020 and 2019. The declaration and payment of future dividends is at the discretion of the Company’s Board of Directors and will be dependent upon the Company’s results of operations, financial condition, capital requirements and other factors deemed relevant by the Company’s Board of Directors.
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets
The Company tests intangible assets for impairment annually, or more frequently if events or circumstances indicate they could be impaired. Potential impairment indicators include, but are not limited to: a sustained increase in worldwide inventories of oil or gas, sustained reductions in: worldwide oil and gas prices or drilling activity; the profitability or cash flow of oil and gas companies or drilling contractors; available financing or other capital for oil and gas companies or drilling contractors; the market capitalization of the Company or its customers; or, capital investments by drilling companies and oil and gas companies.
15
The unprecedented global oil and gas downturn that began in 2014 has repeatedly exhibited signs of recovery that subsequently faded. There have been three points when, in management’s judgement, based on the information available at the time, market factors, events and circumstances clearly indicated a fundamental shift to a more prolonged downturn and shallower recovery than had been expected. As a result, management reduced its forecasts in the third quarter of 2016, the second quarter of 2019 and the first quarter of 2020. Forecasts were based on management’s judgement of the information management had at the time the forecast was made, which often included, but was not limited to: internally developed market intelligence and sales forecasts; formal and informal communications from customers and other industry participants about their economic outlook and spending plans; 3rd party industry analysts and information compilers and the reports and forecasts they publish; and, industry-specific and general global economic statistics, outlook and forecasts from Governmental and other sources. These external sources assisted management in developing our views regarding forecasted rig counts and capital spending by our customers, among other matters.
During the first quarter of 2020 the widely publicized and discussed coronavirus (COVID-19) outbreak rapidly spread across the world, driving sharp demand destruction for crude oil as whole economies ordered curtailed activity. Members of the Organization of the Petroleum Exporting Countries and other producing countries (OPEC+), including Russia, met in early March to discuss additional production cuts to help stabilize prices, however, the group could not come to an agreement and production was instead increased into the already oversupplied market, decimating oil prices. The result was the Company’s stock price reaching a new low during the quarter and its market capitalization falling below its carrying value. West Texas Intermediate (WTI), a key benchmark for the US oil market, fell more than $40 per barrel from January 1, 2020 to March 31, 2020 (losing two thirds of its value in 90 days) to its lowest level in nearly two decades. As travel restrictions and government directives to shut down businesses increase, demand is expected to continue declining in the second quarter of 2020. Management reduced its forecast accordingly.
In the Company’s view, falling rig count levels in the first quarter and a depressed outlook provided evidence to the equity markets that oil and gas producers were committed to reduced levels of capital investment in drilling, which will further reduce levels of demand for capital equipment and oilfield services that the Company sells to its customers. Also, due to the prolonged poor market conditions, capital availability to many of the Company’s customers became even more limited and is unlikely to improve near-term. In management’s judgement the facts and circumstances including those described above constituted a triggering event in the first quarter which indicated the Company’s goodwill and other long-lived assets may be impaired. The Company performed a detailed analysis under ASC 350, incorporating this refined outlook, which determined that the fair values were less than the respective carrying values for all of the Company’s business units (“Reporting Units”).
The Company primarily uses the discounted cash flow method to estimate the fair value of its Reporting Units when conducting the impairment test, but also considers the comparable companies and representative transaction methods to validate the test result and management’s forecast and other expectations, where possible. The valuation techniques used in the test were consistent with those used during previous testing. Fair value of the Reporting Unit is determined using significant unobservable inputs, or level 3 in the fair value hierarchy. These inputs are based on internal management estimates, forecasts and judgements, using discounted cash flow. The inputs used in the test were updated to reflect management’s judgement, current market conditions and forecasts.
The discounted cash flow was based on management’s forecast of operating performance for each Reporting Unit. The two main assumptions used, which bear the risk of change and could impact the test result, include the forecast cash flow from operations from each of the Company’s Reporting Units and their respective weighted average cost of capital. The starting point for each of the Reporting Unit’s cash flow from operations was the detailed forecast, modified to incorporate our revised outlook, as appropriate. The Reporting Unit carrying values were adjusted based on the long-lived asset impairment assessment noted below. Cash flows beyond the plan or forecast were estimated using a terminal value calculation which incorporated historical and forecasted financial cyclical trends for each Reporting Unit and considered long-term earnings growth rates. Financial and credit market volatility directly impacts our fair value measurement through the weighted average cost of capital used to determine a discount rate. During times of volatility, significant judgement must be applied to determine whether credit changes are a short-term or long-term trend.
For the first quarter of 2020, the Company recorded $1,295 million in impairment charges to goodwill and $83 million in charges to indefinite-lived intangible assets.
Following the impairment charges, several Reporting Units did not have a fair value substantially in excess of their book value. Further deterioration of market conditions, in management’s judgement, beyond those incorporated into the extended forecast by management, will likely result in additional impairment charges. The remaining goodwill balance for these Reporting Units at March 31, 2020 is as follows: Rig Equipment ($661 million), Marine Construction ($51 million), ReedHycalog ($124 million), M/D Totco ($32 million), Wellsite ($174 million), XL Systems ($64 million), Fiberglass Systems ($346 million), and Process and Flow Technologies ($63 million).
16
The Company has approximately $1.52 billion of goodwill, by segment as follows (in millions):
|
|
Wellbore Technologies
|
|
|
Completion & Production Solutions
|
|
|
Rig Technologies
|
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
843
|
|
|
$
|
1,054
|
|
|
$
|
910
|
|
|
$
|
2,807
|
|
Impairment
|
|
|
(517
|
)
|
|
|
(580
|
)
|
|
|
(198
|
)
|
|
|
(1,295
|
)
|
Additions
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Currency translation adjustments and other
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Balance at March 31, 2020(1)
|
|
$
|
330
|
|
|
$
|
473
|
|
|
$
|
712
|
|
|
$
|
1,515
|
|
(1)
|
Accumulated goodwill impairment was $7,261 million as of March 31, 2020.
|
Impairment of Long-Lived Assets (Excluding Goodwill and Other Indefinite-Lived Intangible Assets)
Long-lived assets, which include property, plant and equipment, right of use, and finite-lived intangible assets, comprise a significant amount of the Company’s total assets. The Company makes judgements and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and estimated useful lives.
The Company identifies its Reporting Units as individual asset groups. The carrying values of these asset groups are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount of the asset is not recoverable based on estimated future undiscounted cash flows. We estimate the fair value of these intangible and fixed assets using an income approach that requires the Company to make long-term forecasts of its future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for the Company’s products and services, future market conditions and technological developments. The forecasts are dependent upon assumptions including those regarding oil and gas prices, the general outlook for the global oil and gas industry, available financing for the Company’s customers, political stability in major oil and gas producing areas, and the potential obsolescence of various types of equipment we sell, among other factors. Financial and credit market volatility directly impacts our fair value measurement through our income forecast. Changes to these assumptions, including, but not limited to: sustained declines in worldwide rig counts below current analysts’ forecasts; collapse of spot and futures prices for oil and gas; significant deterioration of external financing for our customers; higher risk premiums or higher cost of equity; or any other significant adverse economic news could require a provision for impairment.
During the first quarter of 2020, the results of the Company's test for impairment of goodwill and indefinite-lived intangible assets, and the other negative market indicators described above, were a triggering event that indicated that its long-lived tangible assets and finite-lived intangible assets were impaired.
Impairment testing performed in the first quarter resulted in the determination that certain long-lived assets associated with most of the Company’s asset groups were not recoverable. The estimated fair value of these asset groups was below the carrying value and as a result, during the first quarter of 2020, the Company recorded impairment charges of $209 million to customer relationships, patents, trademarks, tradenames, and other finite-lived intangible assets, $262 million to property, plant and equipment, and $42 million for right-of-use assets. Additionally, the Company recorded a $224 million impairment on its equity investment in unconsolidated affiliates.
The Company has approximately $534 million of identified intangible assets, by segment as follows (in millions):
|
|
Wellbore Technologies
|
|
|
Completion & Production Solutions
|
|
|
Rig Technologies
|
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
326
|
|
|
$
|
275
|
|
|
$
|
251
|
|
|
$
|
852
|
|
Impairment
|
|
|
(78
|
)
|
|
|
(214
|
)
|
|
|
—
|
|
|
|
(292
|
)
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
(17
|
)
|
Currency translation adjustments and other
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(9
|
)
|
Balance at March 31, 2020
|
|
$
|
242
|
|
|
$
|
50
|
|
|
$
|
242
|
|
|
$
|
534
|
|
17
At March 31, 2020, the Company’s Wellbore Technology segment recorded $71 million, Completion and Production Solutions recorded $221 million and Rig Technology reported $12 million of the total $304 million impairment related to property, plant and equipment and right-of-use assets.
15.
|
Commitments and Contingencies
|
Our business is governed by laws and regulations promulgated by U.S. federal and state governments and regulatory agencies, as well as international governmental authorities in the many countries in which we conduct business, including those related to the oilfield service industry. In the United States these governmental authorities include: the U.S. Department of Labor, the Occupational Safety and Health Administration (“OSHA”), the Environmental Protection Agency, the Bureau of Land Management, the Department of Treasury, Office of Foreign Asset Controls, state and international environmental agencies and many others. We are unaware of any material unreserved liabilities in connection with our compliance with such laws. New laws, regulations and enforcement policies may result in additional, presently unquantifiable or unknown, costs or liabilities.
The Company is involved in various claims, regulatory agency audits and pending or threatened legal actions involving a variety of matters. The Company maintains insurance that covers many of the claims arising from risks associated with the business activities of the Company, including claims for premises liability, product liability and other such claims. The Company carries substantial insurance to cover such risks above a self-insured retention. The Company believes, and the Company’s experience has been, that such insurance has been enough to cover such risks. See Item 1A. Risk Factors.
The Company is also a party to claims, threatened and actual litigation, private arbitration, internal investigations of potential regulatory and compliance matters arising from ordinary day-to-day business activities in which parties, including government authorities, assert claims against the Company for a broad spectrum of potential claims and theories of liability, including: individual employment law claims, collective actions or class actions under employment laws, intellectual property claims, (such as alleged patent infringement, and/or misappropriation of trade secrets), premises liability claims, environmental, product liability claims, warranty claims, personal injury claims arising from allegedly defective products, negligence or other theories of liability, alleged regulatory violations, alleged violations of anti-corruption and anti-bribery laws and other commercial claims seeking recovery for alleged actual or exemplary damages or fines and penalties. For some contingent claims, the Company’s insurance coverage is inapplicable or an exclusion to coverage may apply. In such instances, settlement or other resolution of such contingent claims could have a material financial or reputational impact on the Company. As of December 31, 2019, the Company recorded reserves in an amount believed to be sufficient, given the range of potential outcomes, for contingent liabilities representing all contingencies believed to be probable. These reserves include all costs expected for reclamation of a closed barite mine and product liability claims, as well as other circumstances involving material claims.
The Company has 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 litigation process as well as the final outcome of regulatory oversight is inherently uncertain, and our best judgement concerning the probable outcome of litigation or regulatory enforcement matters may prove to be incorrect in some instances. The total potential loss on these matters cannot be determined; however, in our opinion, any ultimate liability, to the extent not otherwise provided for, will not materially affect our financial position, cash flow or results of operations. These estimated liabilities are based on the Company’s assessment of the nature of these matters, their progress toward resolution, the advice of legal counsel and outside experts as well as management’s experience. Of course, because of uncertainty and risk inherent to litigation and arbitration, the actual liabilities incurred may exceed our estimated liabilities and reserves, which could have a material financial or reputational impact on the Company. In many instances, the Company’s products and services embody or incorporate trade secrets or patented inventions. From time to time, we are engaged in disputes concerning protection of trade secrets and confidential information, patents and other intellectual property rights. Such disputes frequently involve complex, factual, technical and/or legal issues which result in high costs to adjudicate our rights and difficulty in predicting the ultimate outcome. Because of the importance of the Company’s intellectual property to the Company’s performance, an adverse result in such disputes could materially and adversely impact our financial performance.
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 have 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. We may, from time to time, become involved in these investigations, at substantial cost to the Company. We also are subject to trade regulations and other regulatory compliance in which the laws and regulations of different jurisdictions conflict or trade regulations may conflict with contractual terms. In such circumstances, our compliance with U.S. laws and regulations may subject us to risk of fines, penalties or contractual liability in other jurisdictions. Our efforts to actively manage such risks may not always be successful which could lead to negative impacts on revenue or earnings.
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The Company is exposed to customs and regulatory risk in the countries in which we do business or to which we transport goods. For example, the effects of the United Kingdom’s withdrawal from the European Union, known as Brexit, may have a negative impact on our results from operations. Uncertainty concerning the legal and regulatory risks of Brexit, include: (i) supply chain risks resulting from lack of trade agreements, potential changes in customs administrations or tariffs; (ii) revenue risk, loss of customers or increased costs; (iii) delays in delivery of materials to the Company or delay in delivery by the Company; and (iv) the need for renegotiation of agreements; and other business disruptions. In addition, trade regulations and laws may adversely impact our ability to do business in certain countries, e.g.: Iran, Syria, Russia and Venezuela. Such trade regulations can be complex and present compliance challenges which could result in future liabilities.
As a result of the recent COVID-19 pandemic, the Company may be exposed to additional liabilities and risks. “Shelter-in-Place” orders in response to the COVID-19 pandemic have resulted in a severe slowdown in economic activity, and a sharp reduction in oil activity and a corresponding decline in demand for oil. This has and will lead to a sharp reduction in drilling activity in North America and reduction of activity internationally. The persistence of this supply/demand imbalance has caused oil prices to drop precipitously, to the lowest prices in decades.
As a result of these market conditions, demand for our products and services will decline. Our customers may attempt to cancel or delay projects, cancel contracts or may invoke force majeure clauses. Our customers may also seek to delay or may default on their payments to us. Further, we have seen, and expect to see, an increasing number of energy companies filing bankruptcy. Our collection of receivables could be materially delayed and/or impaired.
The Company also may be exposed to liabilities resulting from operational delays due to supply chain disruption and closure or limitations imposed on our facilities and work force, from “shelter in place” orders around the world. The Company’s ability to perform services could also be impaired and the Company could be exposed to liabilities resulting from interruption in its ability to perform due to limited manpower and travel restrictions. These potential operational and service delays resulting from the COVID-19 pandemic could result in contractual or other legal claims from our customers. At this time, it is not possible to quantify these risks, but the combination of these factors could have a material impact on our financial results.
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New Accounting Pronouncements
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Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. This update improves financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope. ASU 2016-13 is effective for fiscal periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this update on January 1, 2020, with no material impact. The Company estimates its reserves using information about past events, current conditions and risk characteristics of each customer, and reasonable and supportable forecasts relevant to assessing risk associated with the collectability of Trade Accounts Receivables, Contract Assets, Unbilled Accounts Receivables, and Long-Term Receivables. The Company’s customer base, mostly in the oil and gas industry, have generally similar collectability risk characteristics, although larger and state-owned customers may have lower risk than smaller independent customers. As of March 31, 2020, allowance for bad debts and contract assets totaled $138 million.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This ASU eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of accounting for income taxes. ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. Management is currently assessing the impact of adopting ASU 2019-12 on the company’s financial position, results of operations and cash flows.
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