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 management’s 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 nine months ended September 30, 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):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials and supplies
|
|
$
|
434
|
|
|
$
|
577
|
|
Work in process
|
|
|
375
|
|
|
|
364
|
|
Finished goods and purchased products
|
|
|
1,556
|
|
|
|
2,099
|
|
|
|
|
2,365
|
|
|
|
3,040
|
|
Less: Inventory reserve
|
|
|
(620
|
)
|
|
|
(843
|
)
|
Total
|
|
$
|
1,745
|
|
|
$
|
2,197
|
|
Accrued liabilities consist of (in millions):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Compensation
|
|
$
|
176
|
|
|
$
|
270
|
|
Vendor costs
|
|
|
128
|
|
|
|
121
|
|
Taxes (non-income)
|
|
|
123
|
|
|
|
112
|
|
Warranties
|
|
|
85
|
|
|
|
90
|
|
Insurance
|
|
|
54
|
|
|
|
57
|
|
Fair value of derivatives
|
|
|
31
|
|
|
|
24
|
|
Interest
|
|
|
23
|
|
|
|
8
|
|
Other
|
|
|
232
|
|
|
|
267
|
|
Total
|
|
$
|
852
|
|
|
$
|
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
|
|
|
(151
|
)
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
(170
|
)
|
Amounts reclassified from accumulated other comprehensive
income (loss)
|
|
|
—
|
|
|
|
16
|
|
|
|
—
|
|
|
|
16
|
|
Balance at September 30, 2020
|
|
$
|
(1,554
|
)
|
|
$
|
(7
|
)
|
|
$
|
(16
|
)
|
|
$
|
(1,577
|
)
|
The components of amounts reclassified from accumulated other comprehensive income (loss) are as follows (in millions):
|
|
Three Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost of revenue
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Tax effect
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Cost of revenue
|
|
|
—
|
|
|
|
16
|
|
|
|
—
|
|
|
|
16
|
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
Tax effect
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
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). The Company recorded income of $20 million and a loss of $151 million for the three and nine months ended September 30, 2020, respectively, and a loss of $118 million and $80 million for the three and nine months ended September 30, 2019, respectively.
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 are realized. The movement in other comprehensive income (loss) from period to period will be the combination of: 1) changes in fair value of outstanding derivatives of $14 million and ($19) million during the three and nine months ended September 30, 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 ($2 million and $16 million during the three and nine months ended September 30, 2020).
8
Financial results by operating segment are as follows (in millions):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
361
|
|
|
$
|
793
|
|
|
$
|
1,494
|
|
|
$
|
2,450
|
|
Completion & Production Solutions
|
|
|
601
|
|
|
|
728
|
|
|
|
1,887
|
|
|
|
1,972
|
|
Rig Technologies
|
|
|
449
|
|
|
|
649
|
|
|
|
1,482
|
|
|
|
1,923
|
|
Eliminations
|
|
|
(27
|
)
|
|
|
(44
|
)
|
|
|
(100
|
)
|
|
|
(147
|
)
|
Total revenue
|
|
$
|
1,384
|
|
|
$
|
2,126
|
|
|
$
|
4,763
|
|
|
$
|
6,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
(50
|
)
|
|
|
42
|
|
|
$
|
(780
|
)
|
|
$
|
(3,234
|
)
|
Completion & Production Solutions
|
|
|
25
|
|
|
|
(24
|
)
|
|
|
(946
|
)
|
|
|
(1,991
|
)
|
Rig Technologies
|
|
|
(3
|
)
|
|
|
(110
|
)
|
|
|
(230
|
)
|
|
|
(501
|
)
|
Eliminations and corporate costs
|
|
|
(46
|
)
|
|
|
(62
|
)
|
|
|
(168
|
)
|
|
|
(204
|
)
|
Total operating profit (loss)
|
|
$
|
(74
|
)
|
|
$
|
(154
|
)
|
|
$
|
(2,124
|
)
|
|
$
|
(5,930
|
)
|
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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Other Significant Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
26
|
|
|
$
|
41
|
|
|
$
|
803
|
|
|
$
|
3,384
|
|
Completion & Production Solutions
|
|
|
23
|
|
|
|
79
|
|
|
|
1,089
|
|
|
|
2,029
|
|
Rig Technologies
|
|
|
12
|
|
|
|
194
|
|
|
|
270
|
|
|
|
670
|
|
Eliminations and corporate costs
|
|
|
1
|
|
|
|
—
|
|
|
|
25
|
|
|
|
11
|
|
For the three months ended September 30, 2020, operating profit (loss) included pre-tax charges for severance ($23 million); facility closures ($20 million); and inventory charges and other items ($19 million). For the nine months ended September 30, 2020, operating profit (loss) included pre-tax charges for impairment of goodwill, indefinite-lived and finite-lived intangible and long-lived tangible assets ($1,891 million); inventory charges ($152 million); and, severance, facility closures and other items ($144 million).
For the three months ended September 30, 2019, operating profit (loss) included pre-tax inventory charges ($265 million); impairment of long-lived tangible assets ($12 million); and severance, facility closure and other items ($37 million). For the nine months ended September 30, 2019, operating profit (loss) included pre-tax charges for impairment of goodwill, indefinite-lived and finite-lived intangible and long-lived tangible assets ($5,385 million); inventory charges ($571 million); a Voluntary Early Retirement Program ($87 million); and severance, facility closures and other items ($51 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 September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Elims.
|
|
|
Total
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Elims.
|
|
|
Total
|
|
North America
|
|
$
|
132
|
|
|
$
|
168
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
354
|
|
|
$
|
422
|
|
|
$
|
295
|
|
|
$
|
113
|
|
|
$
|
—
|
|
|
$
|
830
|
|
International
|
|
|
217
|
|
|
|
424
|
|
|
|
389
|
|
|
|
—
|
|
|
|
1,030
|
|
|
|
355
|
|
|
|
420
|
|
|
|
521
|
|
|
|
—
|
|
|
|
1,296
|
|
Eliminations
|
|
|
12
|
|
|
|
9
|
|
|
|
6
|
|
|
|
(27
|
)
|
|
|
—
|
|
|
|
16
|
|
|
|
13
|
|
|
|
15
|
|
|
|
(44
|
)
|
|
|
—
|
|
|
|
$
|
361
|
|
|
$
|
601
|
|
|
$
|
449
|
|
|
$
|
(27
|
)
|
|
$
|
1,384
|
|
|
$
|
793
|
|
|
$
|
728
|
|
|
$
|
649
|
|
|
$
|
(44
|
)
|
|
$
|
2,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
226
|
|
|
$
|
346
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
675
|
|
|
$
|
616
|
|
|
$
|
479
|
|
|
$
|
151
|
|
|
$
|
—
|
|
|
$
|
1,246
|
|
Offshore
|
|
|
123
|
|
|
|
246
|
|
|
|
340
|
|
|
|
—
|
|
|
|
709
|
|
|
|
161
|
|
|
|
236
|
|
|
|
483
|
|
|
|
—
|
|
|
|
880
|
|
Eliminations
|
|
|
12
|
|
|
|
9
|
|
|
|
6
|
|
|
|
(27
|
)
|
|
|
—
|
|
|
|
16
|
|
|
|
13
|
|
|
|
15
|
|
|
|
(44
|
)
|
|
|
—
|
|
|
|
$
|
361
|
|
|
$
|
601
|
|
|
$
|
449
|
|
|
$
|
(27
|
)
|
|
$
|
1,384
|
|
|
$
|
793
|
|
|
$
|
728
|
|
|
$
|
649
|
|
|
$
|
(44
|
)
|
|
$
|
2,126
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Elims.
|
|
|
Total
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Elims.
|
|
|
Total
|
|
North America
|
|
$
|
676
|
|
|
$
|
574
|
|
|
$
|
184
|
|
|
$
|
—
|
|
|
$
|
1,434
|
|
|
$
|
1,343
|
|
|
$
|
846
|
|
|
$
|
381
|
|
|
$
|
—
|
|
|
$
|
2,570
|
|
International
|
|
|
776
|
|
|
|
1,280
|
|
|
|
1,273
|
|
|
|
—
|
|
|
|
3,329
|
|
|
|
1,061
|
|
|
|
1,080
|
|
|
|
1,487
|
|
|
|
—
|
|
|
|
3,628
|
|
Eliminations
|
|
|
42
|
|
|
|
33
|
|
|
|
25
|
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
46
|
|
|
|
46
|
|
|
|
55
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
$
|
1,494
|
|
|
$
|
1,887
|
|
|
$
|
1,482
|
|
|
$
|
(100
|
)
|
|
$
|
4,763
|
|
|
$
|
2,450
|
|
|
$
|
1,972
|
|
|
$
|
1,923
|
|
|
$
|
(147
|
)
|
|
$
|
6,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,051
|
|
|
$
|
1,107
|
|
|
$
|
367
|
|
|
$
|
—
|
|
|
$
|
2,525
|
|
|
$
|
1,960
|
|
|
$
|
1,340
|
|
|
$
|
537
|
|
|
$
|
—
|
|
|
$
|
3,837
|
|
Offshore
|
|
|
401
|
|
|
|
747
|
|
|
|
1,090
|
|
|
|
—
|
|
|
|
2,238
|
|
|
|
444
|
|
|
|
586
|
|
|
|
1,331
|
|
|
|
—
|
|
|
|
2,361
|
|
Eliminations
|
|
|
42
|
|
|
|
33
|
|
|
|
25
|
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
46
|
|
|
|
46
|
|
|
|
55
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
$
|
1,494
|
|
|
$
|
1,887
|
|
|
$
|
1,482
|
|
|
$
|
(100
|
)
|
|
$
|
4,763
|
|
|
$
|
2,450
|
|
|
$
|
1,972
|
|
|
$
|
1,923
|
|
|
$
|
(147
|
)
|
|
$
|
6,198
|
|
Performance Obligations
Net revenue recognized from performance obligations satisfied in previous periods was $15 million for the three months ended September 30, 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 September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $3,718 million. The Company expects to recognize approximately $288 million in revenue for the remaining performance obligations in 2020 and $3,430 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.
10
The changes in the carrying amount of contract assets and contract liabilities are as follows (in millions):
|
|
Contract
Assets
|
|
|
Contract
Liabilities
|
|
Balance at December 31, 2019
|
|
$
|
643
|
|
|
$
|
427
|
|
Provision
|
|
|
(2
|
)
|
|
|
—
|
|
Billings
|
|
|
(692
|
)
|
|
|
924
|
|
Revenue recognized
|
|
|
655
|
|
|
|
(946
|
)
|
Currency translation adjustments and other
|
|
|
(49
|
)
|
|
|
(34
|
)
|
Balance at September 30, 2020
|
|
$
|
555
|
|
|
$
|
371
|
|
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):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current portion of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
82
|
|
|
$
|
84
|
|
Financing
|
|
|
29
|
|
|
|
30
|
|
Total
|
|
$
|
111
|
|
|
$
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Long-term portion of lease liability:
|
|
|
|
|
|
|
|
|
Operating
|
|
$
|
379
|
|
|
$
|
424
|
|
Financing
|
|
|
240
|
|
|
$
|
250
|
|
Total
|
|
$
|
619
|
|
|
$
|
674
|
|
Debt consists of (in millions):
|
|
September 30,
|
|
|
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
|
|
$0.2 billion in Senior Notes, interest at 2.60% payable
semiannually, principal due on December 1, 2022
|
|
|
182
|
|
|
|
399
|
|
|
Other debt
|
|
|
60
|
|
|
|
9
|
|
Total
|
|
$
|
1,824
|
|
|
$
|
1,989
|
|
11
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 September 30, 2020, the Company was in compliance with a debt-to-capitalization ratio of 27.4% and had no outstanding letters of credit issued under the facility, resulting in $2.0 billion of available funds.
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 September 30, 2020, the Company was in compliance. Other debt at September 30, 2020, included $24 million on the books of consolidated joint ventures due to the minority interest partner.
On August 25, 2020, the Company completed a cash tender offer for $217.3 million of its 2.60% unsecured Senior Notes using available cash balances. The Company paid $226 million, which included a redemption premium of $7.6 million as well as accrued and unpaid interest of $1.3 million. As a result of the redemption, the Company recorded a loss on extinguishment of debt of $8.2 million, which included the redemption premium of $7.6 million and non-cash charges of $0.6 million attributable to write-off unamortized discount and debt issuance costs.
The Company had $490 million of outstanding letters of credit at September 30, 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 September 30, 2020, and December 31, 2019, the fair value of the Company’s unsecured Senior Notes approximated $1,648 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 of similar instruments. At September 30, 2020, and December 31, 2019, the carrying value of the Company’s unsecured Senior Notes approximated $1,764 million and $1,980 million, respectively.
The effective tax rate for the three and nine months ended September 30, 2020, was 53.5% and 10.8%, respectively, compared to (31.7%) and 5.4% for the same periods in 2019. The Company’s 2019 and 2020 effective tax rates are negatively impacted by incremental valuation allowances primarily on net operating loss and tax attributes available in those years and the impairment of nondeductible goodwill. Furthermore, the Company recorded income tax benefits of $106 million in the three months ended September 30, 2020, and $206 million in the nine months ended September 30, 2020, related to the carryback of its 2019 United States net operating loss pursuant to 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. In addition, the Company recorded an income tax benefit of $90.3 million in the nine months ended September 30, 2020, to reflect the Company’s decision to amend its 2016 United States income tax return and resulting net operating loss carryback to 2014. The Company has recorded an income tax receivable of $112 million in Current Assets related to the 2019 net operating loss carryback and an income tax receivable in Other Assets of $90.3 million related to the 2016 net operating loss carryback.
10.
|
Stock-Based Compensation
|
Total expense for all stock-based compensation arrangements was $23 million and $78 million for the three and nine months ended September 30, 2020, respectively, and $41 million and $104 million for the three and nine months ended September 30, 2019, respectively.
The total income tax benefit recognized in the Consolidated Statements of Income (Loss) for all stock-based compensation arrangements was nil for the three and nine months ended September 30, 2020 and $5 million and $13 million for the three and nine months ended September 30, 2019, respectively.
11.
|
Derivative Financial Instruments
|
The Company uses forward currency contracts 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). The Company also executes forward currency contracts to manage the foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts (non-designated hedge).
12
The fair value of these derivative financial instruments is 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.
Forward currency contracts consist of (in millions):
|
|
Currency Denomination
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Foreign Currency
|
|
2020
|
|
|
2019
|
|
South Korean Won
|
|
KRW
|
|
17,600
|
|
|
KRW
|
|
17,600
|
|
Norwegian Krone
|
|
NOK
|
|
4,210
|
|
|
NOK
|
|
5,377
|
|
Russian Ruble
|
|
RUB
|
|
1,164
|
|
|
RUB
|
|
1,012
|
|
Danish Krone
|
|
DKK
|
|
885
|
|
|
DKK
|
|
21
|
|
Brazilian Real
|
|
BRL
|
|
768
|
|
|
BRL
|
|
—
|
|
Mexican Peso
|
|
MXN
|
|
444
|
|
|
MXN
|
|
115
|
|
U.S. Dollar
|
|
USD
|
|
411
|
|
|
USD
|
|
686
|
|
Japanese Yen
|
|
JPY
|
|
341
|
|
|
JPY
|
|
36
|
|
Euro
|
|
EUR
|
|
185
|
|
|
EUR
|
|
188
|
|
South African Rand
|
|
ZAR
|
|
124
|
|
|
ZAR
|
|
124
|
|
Singapore Dollar
|
|
SGD
|
|
36
|
|
|
SGD
|
|
42
|
|
British Pound Sterling
|
|
GBP
|
|
18
|
|
|
GBP
|
|
20
|
|
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 instituted a cash flow hedging program. For derivative instruments that are designated and qualify as a cash flow hedge, gains or losses are 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 $13 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 earnings 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 $11 million and ($27) million for the three and nine months ended September 30, 2020, respectively, and ($7) million and ($10) million for the three and nine months ended September 30, 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
|
|
September 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
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
|
|
$
|
4
|
|
|
$
|
5
|
|
|
Accrued liabilities
|
|
$
|
19
|
|
|
$
|
18
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
6
|
|
|
|
4
|
|
|
Other liabilities
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated
as hedging instruments
under ASC Topic 815
|
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
|
|
$
|
21
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedging instruments
under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other
current assets
|
|
$
|
8
|
|
|
$
|
8
|
|
|
Accrued liabilities
|
|
$
|
12
|
|
|
$
|
6
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
1
|
|
|
|
1
|
|
|
Other Liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not
designated as hedging
instruments under ASC
Topic 815
|
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
|
|
$
|
12
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
19
|
|
|
$
|
18
|
|
|
|
|
$
|
33
|
|
|
$
|
26
|
|
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
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company
|
$
|
(55
|
)
|
|
$
|
(244
|
)
|
|
$
|
(2,195
|
)
|
|
$
|
(5,710
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic—weighted average common shares outstanding
|
|
385
|
|
|
|
382
|
|
|
|
384
|
|
|
|
382
|
|
Dilutive effect of employee stock options and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unvested stock awards
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted outstanding shares
|
|
385
|
|
|
|
382
|
|
|
|
384
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Company per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.14
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(5.72
|
)
|
|
$
|
(14.95
|
)
|
Diluted
|
$
|
(0.14
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(5.72
|
)
|
|
$
|
(14.95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
14
Companies with unvested participating securities are required to utilize a two-class method for the computation of net income attributable to Company per share. The two-class method allocates a portion of net income attributable to Company 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 participating securities was immaterial for each of the three and nine months ended September 30, 2020 and 2019, respectively.
The Company had stock options outstanding that were anti-dilutive totaling 26 million shares for each of the three and nine months ended September 30, 2020, respectively, compared to 25 million and 21 million shares for the three and nine months ended September 30, 2019, respectively.
Cash dividends were nil and $19 million for the three and nine months ended September 30, 2020, compared to $20 million and $58 million for the three and nine months ended September 30, 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.
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.
During the first quarter of 2020 the 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, increased production 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 U.S. 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 increased, demand was 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, further reducing levels of demand for capital equipment and oilfield services that the Company sells to its customers. Also, due to these prolonged poor market conditions, capital availability to many of the Company’s customers became even more limited and was 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 updated 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 flows. The inputs used in the test were updated to reflect management’s judgement, current market conditions and forecasts.
15
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 September 30, 2020, is as follows: Rig Equipment ($661 million), Marine Construction ($51 million), ReedHycalog ($124 million), M/D Totco ($10 million), Wellsite Services ($174 million), XL Systems ($64 million), Fiberglass Systems ($346 million), and Process and Flow Technologies ($63 million).
At September 30, 2020, the Company has approximately $1,493 million 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
|
|
|
(22
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(23
|
)
|
Balance at September 30, 2020
|
|
$
|
308
|
|
|
$
|
473
|
|
|
$
|
712
|
|
|
$
|
1,493
|
|
Accumulated goodwill impairment was $7,261 million at September 30, 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 identified intangible assets, comprise a significant amount of the Company’s total assets. The Company makes judgments 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 identified 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 capital; 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.
16
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 to right-of-use assets. Additionally, the Company recorded a $224 million impairment on its equity investment in unconsolidated affiliates.
The Company has approximately $516 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
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(21
|
)
|
|
|
(38
|
)
|
Currency translation adjustments and other
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
(6
|
)
|
Balance at September 30, 2020
|
|
$
|
236
|
|
|
$
|
48
|
|
|
$
|
232
|
|
|
$
|
516
|
|
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, 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 any such material 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: employment law claims, collective actions or class action claims 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 September 30, 2020, 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 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 result in the loss of revenue from royalties or a decline in sales of products protected by patents, which could materially and adversely impact our financial performance.
17
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.
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, China 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” and other governmental orders and restrictions 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 caused oil prices to drop precipitously, to the lowest prices in decades. The COVID-19 pandemic continues to adversely impact many jurisdictions and continues to disrupt normal economic activities. As a result, the demand for energy continues to be constrained with continued adverse consequences for our customers and for the Company.
As a result of these market conditions, demand for our products and services has declined. Our customers may attempt to cancel or delay projects, cancel contracts or may invoke force majure 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.
18
16.
|
New Accounting Pronouncements
|
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 forecast 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 September 30, 2020, allowance for bad debts and contract assets totaled $115 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.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)” This ASU applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. Management is currently assessing the impact of adopting ASU 2020-04 on the company’s financial position, results of operations and cash flows.
19