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 2017 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. Certain reclassifications have been made to the prior year financial statements in order for them to conform with the current presentation. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, and payables approximated fair value because of the relatively short maturity of these instruments. Cash equivalents include only those investments having a maturity date of three months or less at the time of purchase. See Note 7 for the fair value of long-term debt and Note 10 for the fair value of derivative financial instruments.
Inventories consist of (in millions):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials and supplies
|
|
$
|
627
|
|
|
$
|
656
|
|
Work in process
|
|
|
600
|
|
|
|
513
|
|
Finished goods and purchased products
|
|
|
1,950
|
|
|
|
1,834
|
|
Total
|
|
$
|
3,177
|
|
|
$
|
3,003
|
|
Accrued liabilities consist of (in millions):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Compensation
|
|
$
|
281
|
|
|
$
|
345
|
|
Vendor costs
|
|
|
128
|
|
|
|
150
|
|
Warranty
|
|
|
114
|
|
|
|
135
|
|
Taxes (non-income)
|
|
|
103
|
|
|
|
152
|
|
Insurance
|
|
|
61
|
|
|
|
74
|
|
Commissions
|
|
|
38
|
|
|
|
58
|
|
Interest
|
|
|
27
|
|
|
|
7
|
|
Fair value of derivatives
|
|
|
13
|
|
|
|
8
|
|
Other
|
|
|
258
|
|
|
|
309
|
|
Total
|
|
$
|
1,023
|
|
|
$
|
1,238
|
|
6
Warranties
The Company provides warranties on certain of its products and services. The Company accrues warranty liability based upon specific claims and a review of historical claim experience in accordance with Accounting Standards Codification (“ASC”) Topic 450 “Contingencies”. Adjustments are made to accruals as claim data and historical experience change. In addition, the Company incurs discretionary costs to service its products in connection with product performance issues and accrues for them when they are encountered.
The changes in the warranty provision are as follows (in millions):
Balance at December 31, 2017
|
|
$
|
135
|
|
Net provisions for warranties issued during the year
|
|
|
27
|
|
Amounts incurred
|
|
|
(48
|
)
|
Balance at September 30, 2018
|
|
$
|
114
|
|
4.
|
Accumulated Other Comprehensive Income (Loss)
|
The components of accumulated other comprehensive income (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, 2017
|
|
$
|
(1,104
|
)
|
|
$
|
7
|
|
|
$
|
(13
|
)
|
|
$
|
(1,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss) before reclassifications
|
|
|
(225
|
)
|
|
|
3
|
|
|
|
—
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated
other comprehensive income (loss)
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
4
|
|
Balance at September 30, 2018
|
|
$
|
(1,323
|
)
|
|
$
|
8
|
|
|
$
|
(13
|
)
|
|
$
|
(1,328
|
)
|
The components of amounts reclassified from accumulated other comprehensive income (loss) are as follows (in millions):
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Cost of revenue
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Other income (expense), net
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Tax effect
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
Currency
|
|
|
Derivative
|
|
|
Defined
|
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
Translation
|
|
|
Financial
|
|
|
Benefit
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
|
Adjustments
|
|
|
Instruments
|
|
|
Plans
|
|
|
Total
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
Cost of revenue
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
Other income (expense), net
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Tax effect
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
$
|
6
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
The Company’s reporting currency is the U.S. dollar. For a majority of the Company’s international entities in which there is a substantial investment, the local currency is their functional currency. As a result, currency translation adjustments resulting from the
7
process of translating the entities’ financial statements into the reporting currency are reported in other comprehensive income or loss in accordance with ASC Topic 830 “Foreign Currency Matters” (“ASC
Topic 830”). For the three and nine months ended September 30, 2018, a majority of these local currencies weakened against the U.S. dollar resulting in net other comprehensive losses of $32 million and $219 million, respectively, upon the translation from
local currencies to the U.S. dollar.
For the three and nine months ended September 30, 2017, a majority of these local currencies strengthened against the U.S. dollar resulting in net other comprehensive income of $124 million and $290 million, respective
ly, upon the translation from local currencies to the U.S. Due to the sale of a non-core industrial business, $6 million of currency translation losses were reclassified from accumulated other comprehensive income (loss) into other income (expense), net in
the Consolidated Statements of Income for the three and nine months ended September 30, 2018.
The effect of changes in the fair values of derivatives designated as cash flow hedges are accumulated in other comprehensive income or loss, net of tax, until the underlying transactions they hedge are realized. The movement in other comprehensive income or loss from period to period will be the result of the combination of changes in fair value of open derivatives and the outflow of other comprehensive income or loss related to cumulative changes in the fair value of derivatives that have settled in the current period. The accumulated effect was other comprehensive income of $2 million (net of tax of $0) and $1 million (net of tax of $0) for the three and nine months ended September 30, 2018, respectively. The accumulated effect was other comprehensive income of $25 million (net of tax of $8 million) and $53 million (net of tax of $15 million) for the three and nine months ended September 30, 2017, respectively.
Operating results by segment are as follows (in millions):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
847
|
|
|
$
|
693
|
|
|
$
|
2,351
|
|
|
$
|
1,862
|
|
Completion & Production Solutions
|
|
|
735
|
|
|
|
682
|
|
|
|
2,143
|
|
|
|
1,982
|
|
Rig Technologies
|
|
|
637
|
|
|
|
510
|
|
|
|
1,771
|
|
|
|
1,638
|
|
Eliminations
|
|
|
(65
|
)
|
|
|
(50
|
)
|
|
|
(210
|
)
|
|
|
(147
|
)
|
Total revenue
|
|
$
|
2,154
|
|
|
$
|
1,835
|
|
|
$
|
6,055
|
|
|
$
|
5,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
$
|
40
|
|
|
|
—
|
|
|
$
|
90
|
|
|
$
|
(81
|
)
|
Completion & Production Solutions
|
|
|
46
|
|
|
|
44
|
|
|
|
102
|
|
|
|
79
|
|
Rig Technologies
|
|
|
58
|
|
|
|
18
|
|
|
|
138
|
|
|
|
37
|
|
Eliminations and corporate costs
|
|
|
(71
|
)
|
|
|
(69
|
)
|
|
|
(206
|
)
|
|
|
(201
|
)
|
Total operating profit (loss)
|
|
$
|
73
|
|
|
$
|
(7
|
)
|
|
$
|
124
|
|
|
$
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore Technologies
|
|
|
4.7
|
%
|
|
|
0.0
|
%
|
|
|
3.8
|
%
|
|
|
(4.4
|
%)
|
Completion & Production Solutions
|
|
|
6.3
|
%
|
|
|
6.5
|
%
|
|
|
4.8
|
%
|
|
|
4.0
|
%
|
Rig Technologies
|
|
|
9.1
|
%
|
|
|
3.5
|
%
|
|
|
7.8
|
%
|
|
|
2.3
|
%
|
Total operating profit (loss)%
|
|
|
3.4
|
%
|
|
|
(0.4
|
%)
|
|
|
2.0
|
%
|
|
|
(3.1
|
%)
|
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.
Included in operating profit (loss) are other items primarily related to costs associated with severance, facility closures, and credits for the reversals of certain accruals.
8
The Company’s products and services are sold based upon purchase orders or other contracts with customers that include fixed or determinable prices and do not generally include right of return or other significant post-delivery obligations. The majority of our revenue streams record revenue at a point in time when a performance obligation has been satisfied by transferring control of promised goods or services to the customer. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Payment terms and conditions vary by contract type. The Company’s contracts are structured to align milestone billings with progress and revenue recognition, so generally do not include a financing component.
We have elected to apply the practical expedient that does not require an adjustment for a financing component if, at contract inception, the period between when we transfer the promised goods or service to the customer and when the customer pays for the goods or service is one year or less.
The Company elects to treat shipping and handling costs as costs to fulfill a performance obligation instead of as a separate performance obligation. We recognize the cost for shipping and handling when incurred, generally when control over the products has transferred to the customer, as an expense in cost of sales.
Our contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately, versus together, may require significant judgment. We consider the degree of customization, integration and interdependency of the related products and services when assessing distinctness.
Judgment is also required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. To determine the SSP, the Company uses the price at which the products and services would be sold separately to the customer. We also review past sales transactions to confirm that invoice prices for each distinct performance obligation reasonably approximate SSP and that there are no significant deviations. A discount, when provided, is also allocated based on the relative SSP of the various products and services.
We may provide other credits or incentives, which are accounted for as variable consideration when determining the transaction price. These credits or incentives are estimated at contract inception and recognized only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. The estimates are updated each reporting period as additional information becomes available.
For revenue that is not recognized at a point in time, the Company follows accounting guidance for revenue recognized over time, as follows:
Revenue Recognition under Long-term Construction Contracts
The Company uses the over-time method to account for certain long-term construction contracts in the Completion & Production Solutions and Rig Technologies segments. These long-term construction contracts include the following characteristics:
|
•
|
the contracts include custom designs for customer-specific applications;
|
|
•
|
the structural design is unique and requires significant engineering efforts; and
|
|
•
|
the Company has an enforceable right to payment for performance completed to date, including a reasonable profit.
|
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost (input) measure of progress for our contracts because it best depicts the transfer of assets to the customer which occurs as we incur costs. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. These costs include labor, materials, subcontractors’ costs, and other direct costs. If estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.
Our long-term construction contracts generally include a significant service of integrating a complex set of tasks and components into a single project or capability, so are accounted for as one performance obligation.
9
Estimating total revenue and cost at completion of long-term construction contracts is complex, subject to many varia
bles and requires significant judgment. It is common for our long-term contracts to contain late delivery fees, work performance guarantees, and other provisions that can either increase or decrease the transaction price. We estimate variable consideration
as the most likely amount we expect to receive. We include variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur, or when the uncertainty associat
ed with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of our anticipated performance and historical, current and
forecasted information that is reasonably available to us. Net revenue recognized from performance obligations satisfied in previous periods was $56 million for the nine months ended September 30, 2018 primarily due to change orders.
Service and Repair Work
For service contracts, we generally use the output method to measure progress due to the manner in which the customer receives and derives value from the services provided. For repair contracts, we generally use the cost-to-cost measure of progress because it best depicts the transfer of assets to the customer.
Remaining Performance Obligations
Remaining performance obligations represents the transaction price of firm orders for all revenue streams for which work has not been performed on contracts with an 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, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $2,147 million. The Company expects to recognize approximately $408 million in revenue for the remaining performance obligations in 2018 and $1,739 million in 2019 and thereafter.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the incremental costs of obtaining a contract, such as sales commissions, with a customer when we expect the benefit of those costs to be longer than one year. Costs to fulfill a contract, such as set-up and mobilization costs, are also capitalized when we expect to recover those costs. These contract costs are deferred and amortized over the period of contract performance. Total capitalized costs to obtain and fulfill a contract and the related amortization were immaterial during the periods presented and are included in other current and long-term assets on our consolidated balance sheets. We apply the practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less.
Disaggregation of Revenue
The following tables disaggregate our revenue by destinations, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. In the tables below, North America includes only the U.S. and Canada. (in millions):
|
|
Three Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Eliminations
|
|
|
Total
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Eliminations
|
|
|
Total
|
|
North America
|
|
$
|
469
|
|
|
$
|
343
|
|
|
$
|
189
|
|
|
$
|
—
|
|
|
$
|
1,001
|
|
|
$
|
377
|
|
|
$
|
282
|
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
798
|
|
International
|
|
|
362
|
|
|
|
372
|
|
|
|
419
|
|
|
|
—
|
|
|
|
1,153
|
|
|
|
305
|
|
|
|
384
|
|
|
|
348
|
|
|
|
—
|
|
|
|
1,037
|
|
Eliminations
|
|
|
16
|
|
|
|
20
|
|
|
|
29
|
|
|
|
(65
|
)
|
|
|
—
|
|
|
|
11
|
|
|
|
16
|
|
|
|
23
|
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
$
|
847
|
|
|
$
|
735
|
|
|
$
|
637
|
|
|
$
|
(65
|
)
|
|
$
|
2,154
|
|
|
$
|
693
|
|
|
$
|
682
|
|
|
$
|
510
|
|
|
$
|
(50
|
)
|
|
$
|
1,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
707
|
|
|
$
|
521
|
|
|
$
|
206
|
|
|
$
|
—
|
|
|
$
|
1,434
|
|
|
$
|
553
|
|
|
$
|
468
|
|
|
$
|
174
|
|
|
$
|
—
|
|
|
$
|
1,195
|
|
Offshore
|
|
|
124
|
|
|
|
194
|
|
|
|
402
|
|
|
|
—
|
|
|
|
720
|
|
|
|
129
|
|
|
|
198
|
|
|
|
313
|
|
|
|
—
|
|
|
|
640
|
|
Eliminations
|
|
|
16
|
|
|
|
20
|
|
|
|
29
|
|
|
|
(65
|
)
|
|
|
—
|
|
|
|
11
|
|
|
|
16
|
|
|
|
23
|
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
$
|
847
|
|
|
$
|
735
|
|
|
$
|
637
|
|
|
$
|
(65
|
)
|
|
$
|
2,154
|
|
|
$
|
693
|
|
|
$
|
682
|
|
|
$
|
510
|
|
|
$
|
(50
|
)
|
|
$
|
1,835
|
|
10
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
Wellbore
|
|
|
& Production
|
|
|
Rig
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Eliminations
|
|
|
Total
|
|
|
Technologies
|
|
|
Solutions
|
|
|
Technologies
|
|
|
Eliminations
|
|
|
Total
|
|
North America
|
|
$
|
1,333
|
|
|
$
|
977
|
|
|
$
|
467
|
|
|
$
|
—
|
|
|
$
|
2,777
|
|
|
$
|
1,024
|
|
|
$
|
780
|
|
|
$
|
399
|
|
|
$
|
—
|
|
|
$
|
2,203
|
|
International
|
|
|
970
|
|
|
|
1,104
|
|
|
|
1,204
|
|
|
|
—
|
|
|
|
3,278
|
|
|
|
802
|
|
|
|
1,162
|
|
|
|
1,168
|
|
|
|
—
|
|
|
|
3,132
|
|
Eliminations
|
|
|
48
|
|
|
|
62
|
|
|
|
100
|
|
|
|
(210
|
)
|
|
|
—
|
|
|
|
36
|
|
|
|
40
|
|
|
|
71
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
$
|
2,351
|
|
|
$
|
2,143
|
|
|
$
|
1,771
|
|
|
$
|
(210
|
)
|
|
$
|
6,055
|
|
|
$
|
1,862
|
|
|
$
|
1,982
|
|
|
$
|
1,638
|
|
|
$
|
(147
|
)
|
|
$
|
5,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,950
|
|
|
$
|
1,476
|
|
|
$
|
586
|
|
|
$
|
—
|
|
|
$
|
4,012
|
|
|
$
|
1,479
|
|
|
$
|
1,281
|
|
|
$
|
508
|
|
|
$
|
—
|
|
|
$
|
3,268
|
|
Offshore
|
|
|
353
|
|
|
|
605
|
|
|
|
1,085
|
|
|
|
—
|
|
|
|
2,043
|
|
|
|
347
|
|
|
|
661
|
|
|
|
1,059
|
|
|
|
—
|
|
|
|
2,067
|
|
Eliminations
|
|
|
48
|
|
|
|
62
|
|
|
|
100
|
|
|
|
(210
|
)
|
|
|
—
|
|
|
|
36
|
|
|
|
40
|
|
|
|
71
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
$
|
2,351
|
|
|
$
|
2,143
|
|
|
$
|
1,771
|
|
|
$
|
(210
|
)
|
|
$
|
6,055
|
|
|
$
|
1,862
|
|
|
$
|
1,982
|
|
|
$
|
1,638
|
|
|
$
|
(147
|
)
|
|
$
|
5,335
|
|
Contract Assets and Liabilities
Contract assets include unbilled amounts resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, and right to payment is not only subject to the passage of time. There were no impairment losses recorded on contract assets for the periods ending September 30, 2018 or 2017.
Contract liabilities consist of advance payments, billings in excess of revenue recognized and deferred revenue. For the balance at December 31, 2017, we reclassified $240 million of advance payments and deferred revenue from accrued liabilities to contract liabilities to conform with the 2018 presentation.
The changes in the carrying amount of contract assets and contract liabilities are as follows (in millions):
Contract Assets
|
|
|
|
Balance at December 31, 2017
|
$
|
495
|
|
Additions and Milestone Billings
|
|
(606
|
)
|
Revenue Recognized
|
|
637
|
|
Currency translation adjustments and other
|
|
(43
|
)
|
Balance at September 30, 2018
|
$
|
483
|
|
Contract Liabilities
|
|
|
|
Balance at December 31, 2017
|
$
|
519
|
|
Additions
|
|
856
|
|
Revenue Recognized
|
|
(676
|
)
|
Currency translation adjustments and other
|
|
(129
|
)
|
Balance at September 30, 2018
|
$
|
570
|
|
11
Debt consists of (in millions):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
$1.4 billion in Senior Notes, interest at 2.60% payable
semiannually, principal due on December 1, 2022
|
|
$
|
1,394
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
$1.1 billion in Senior Notes, interest at 3.95% payable
semiannually, principal due on December 1, 2042
|
|
|
1,088
|
|
|
|
1,088
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
232
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
2,714
|
|
|
|
2,712
|
|
Less current portion
|
|
|
8
|
|
|
|
6
|
|
Long-term debt
|
|
$
|
2,706
|
|
|
$
|
2,706
|
|
The Company has a $3.0 billion, five-year unsecured revolving credit facility, which expires on June 27, 2022. The Company has the right to increase the aggregate commitments under this agreement to an aggregate amount of up to $4.0 billion upon the consent of only those lenders holding any such increase. Interest under the 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 finan
cial covenant regarding maximum debt-to-capitalization ratio of 60%. As of September 30, 2018, the Company was in compliance with a debt-to-capitalization ratio of 16.3%.
The Company has a commercial paper program under which borrowings are classified as l
ong-term since the program is supported by the $3.0 billion, five-year credit facility. At September 30, 2018, there were no commercial paper borrowings, and there were no outstanding letters of credit issued under the credit facility, resulting in $3.0 billion of funds available under this credit facility.
The Company had $471 million of outstanding letters of credit at September 30, 2018, 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, 2018 and December 31, 2017, the fair value of the Company’s unsecured Senior Notes approximated $2,287 million and $2,346 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 September 30, 2018 and December 31, 2017, the carrying value of the Company’s unsecured Senior Notes approximated $2,482 million and $2,480 million, respectively.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018. At September 30, 2018 and December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we made reasonable estimates of the effects and recorded provisional amounts. We will continue to make and refine our calculations as additional analysis is completed. We have not recorded any significant changes in 2018. We recognized an income tax benefit of $242 million in the year ended December 31, 2017 associated with the revaluation of our net deferred tax liability. Our provisional estimate of the one-time transition tax resulted in no additional tax expense. Our provisional estimate on Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Base Erosion and Anti-Abuse Tax (“BEAT”), and IRC Section 163(j) interest limitation do not impact our effective tax rate for the three and nine months ended September 30, 2018. The accounting for the tax effects of the Act will be finalized in the fourth quarter of 2018 as permitted by the U.S. Securities and Exchange Commission’s SAB No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
12
The provision (benefit) for income taxes for the three and nine months ended September 30, 2018 were
$29 million and $37 million, respectively, compared to ($13 million) and ($43 million) for the same periods in 2017. The Company established valuation allowances on deferred tax assets for losses and tax credits generated in each period which resulted in a
corresponding tax charge. The change in tax provision (benefit) from 2017 to 2018 was also impacted by the decrease in the U.S. federal corporate tax rate from 35% in 2017 to 21% in 2018.
The balance of unrecognized tax benefits at September 30, 2018 was $92 million. The settlement of a foreign jurisdiction audit resulted in a decrease in uncertain tax positions during the year.
For the three and nine months ended September 30, 2018, the Company utilized the discrete-period method to compute its interim tax provision due to significant variations in the relationship between income tax expense and pre-tax accounting income or loss. For the three and nine months ended September 30, 2017, the Company estimated and recorded tax based on a full year effective tax rate.
9.
|
Stock-Based Compensation
|
The Company has a stock-based compensation plan known as the National Oilwell Varco, Inc. Long-Term Incentive Plan (the “Plan”). The Plan provides for the granting of stock options, performance-based share awards, restricted stock, phantom shares, stock payments and stock appreciation rights (“SARs”). The number of shares authorized under the Plan is 69.4 million. The Plan is subject to a fungible ratio concept, such that the issuance of stock options and SARs reduces the number of available shares under the Plan on a 1-for-1 basis, and the issuance of other awards reduces the number of available shares under the Plan on a 3-for-1 basis. At September 30, 2018, 10,253,618 shares remain available for future grants under the Plan, all of which are available for grants of stock options, performance-based share awards, restricted stock awards, phantom shares, stock payments and SARs.
On February 28, 2018, the Company granted 1,610,599 stock options with a fair value of $10.01 per share and an exercise price of $35.09 per share; 2,391,933 shares of restricted stock and restricted stock units with a fair value of $35.09 per share; performance share awards to senior management employees with potential payouts varying from zero to 449,532 shares; and 14,228 SARs. 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 performance share awards can be earned based on performance against established goals over a three-year performance period. The performance share awards are based entirely on a TSR (total shareholder return) goal. Performance against the TSR goal is determined by comparing the performance of the Company’s TSR with the TSR performance of the members of the OSX (Oil Service Sector) index for the three-year performance period.
The Company’s other 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. 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 17.8 million. The 2018 Plan is also subject to a fungible ratio concept, such that the issuance of stock options and SARs reduces the number of available shares under the 2015 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 September 30, 2018, 17,709,906 shares remain available for future grants under the 2018 Plan. On May 11, 2018, the Company granted 35,432 restricted stock awards under the 2018 Plan with a fair value of $40.65 per share. The awards were granted to non-employee members of the board of directors and vest on the first anniversary of the grant date.
Total stock-based compensation for all stock-based compensation arrangements under the Plan and the 2018 Plan was $30 million and $88 million for the three and nine months ended September 30, 2018, respectively, and $33 million and $85 million for the three and nine months ended September 30, 2017, respectively. The total income tax benefit recognized in the Consolidated Statements of Income (Loss) for all stock-based compensation arrangements under the Plan and the 2018 Plan was $6 million and $12 million for the three and nine months ended September 30, 2018, respectively, and $9 million and $18 million for the three and nine months ended September 30, 2017, respectively.
10.
|
Derivative Financial Instruments
|
The Company uses derivative instruments to manage foreign currency exchange rate risk. Forward contracts against various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit (cash flow hedge). In addition, the Company will enter into non-designated forward contracts against various foreign currencies to manage the foreign currency exchange rate risk on non-functional-currency monetary accounts (non-designated hedge).
The Company records all derivative financial instruments at their fair value in its Consolidated Balance Sheet. Except for certain non-designated hedges discussed below, all derivative financial instruments that the Company holds are designated as cash flow hedges
13
and are highly effective in offsetting movements in the underlying risks. Such arrangements typically have terms between 2 and 24 months, but may have longer terms depending on the underlying cash flows being hedged, typically rel
ated to the projects in our backlog. The Company may also use interest rate contracts to mitigate exposure to changes in interest rates on anticipated long-term debt issuances.
At September 30, 2018, the Company has determined that the fair value of its derivative financial instruments representing assets of $18 million and liabilities of $16 million (primarily currency related derivatives) are determined using level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on publicly available foreign exchange and interest rates at each financial reporting date. At September 30, 2018, the net fair value of the Company’s foreign currency forward contracts totaled a net asset of $2 million.
At September 30, 2018, the Company did not have any interest rate contracts and its financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when the Company’s financial instruments are in net liability positions. The Company does not use derivative financial instruments for trading or speculative purposes.
Cash Flow Hedging Strategy
To protect against the volatility of forecasted foreign currency cash flows resulting from forecasted revenues and expenses, the Company has instituted a cash flow hedging program. The Company hedges portions of its forecasted revenues and expenses denominated in non-functional currencies with forward contracts. When the U.S. dollar strengthens or weakens against the foreign currencies, the change in present value of future foreign currency revenues and expenses is offset by changes in the fair value of the forward contracts designated as hedges.
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is subject to a particular currency risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are cash flows associated with forecasted revenues). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, is recognized in the Consolidated Statements of Income (Loss) during the current period.
For the nine months ended September 30, 2018, the Company recognized a gain of $2 million as a result of the discontinuance of certain cash flow hedges when it became probable that the original forecasted transactions would not occur by the end of the originally specified time period. At September 30, 2018, there were $10 million in pre-tax losses recorded in accumulated other comprehensive income (loss). Significant changes in forecasted operating levels or delays in large capital construction projects, whereby certain hedged transactions associated with these projects are no longer probable of occurring by the end of the originally specified time period, could result in losses or gains due to the de-designation of existing hedge contracts.
The Company had the following outstanding foreign currency forward contracts to hedge non-functional currency cash flows from forecasted revenues and expenses (in millions):
|
|
Currency Denomination
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Foreign Currency
|
|
2018
|
|
|
2017
|
|
Norwegian Krone
|
|
|
NOK 3,875
|
|
|
|
NOK 4,013
|
|
Japanese Yen
|
|
|
JPY 326
|
|
|
|
JPY 982
|
|
U.S. Dollar
|
|
|
USD 111
|
|
|
|
USD 163
|
|
Euro
|
|
|
EUR 82
|
|
|
|
EUR 120
|
|
Danish Krone
|
|
|
DKK 19
|
|
|
|
DKK 30
|
|
British Pound Sterling
|
|
|
GBP 9
|
|
|
|
GBP 11
|
|
Canadian Dollar
|
|
|
CAD 1
|
|
|
|
CAD —
|
|
Non-designated Hedging Strategy
The Company enters into foreign currency forward contracts to hedge certain non-functional currency monetary accounts. The purpose of the Company’s foreign currency hedging activities is to protect the Company from risk that the eventual U.S. dollar
14
equivalent cash flows from the non-functional currency monetary accounts will be adversely affected by changes in the exchange rates.
For derivative instruments that are non-designated, the gain or loss on the derivative instrument subject to the hedged risk (i.e., non-functional currency monetary accounts) is recognized in the Consolidated Statements of Income (Loss).
The Company had the following outstanding foreign currency forward contracts that hedge the fair value of non-functional currency monetary accounts (in millions):
|
|
Currency Denomination
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Foreign Currency
|
|
2018
|
|
|
2017
|
|
Norwegian Krone
|
|
|
NOK 1,708
|
|
|
|
NOK 1,734
|
|
Russian Ruble
|
|
|
RUB 1,329
|
|
|
|
RUB 2,699
|
|
U.S. Dollar
|
|
|
USD 539
|
|
|
|
USD 463
|
|
Mexican Peso
|
|
|
MXN 285
|
|
|
|
MXN —
|
|
South African Rand
|
|
|
ZAR 176
|
|
|
|
ZAR 150
|
|
Euro
|
|
|
EUR 122
|
|
|
|
EUR 99
|
|
Danish Krone
|
|
|
DKK 15
|
|
|
|
DKK 15
|
|
British Pound Sterling
|
|
|
GBP 8
|
|
|
|
GBP 3
|
|
Canadian Dollar
|
|
|
CAD 1
|
|
|
|
CAD —
|
|
The Company has the following gross fair values of its derivative instruments and their balance sheet classifications:
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
Balance Sheet
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Location
|
|
2018
|
|
|
2017
|
|
|
Location
|
|
2018
|
|
|
2017
|
|
Derivatives designated as
hedging instruments
under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current
assets
|
|
$
|
8
|
|
|
$
|
13
|
|
|
Accrued liabilities
|
|
$
|
5
|
|
|
$
|
3
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
3
|
|
|
|
8
|
|
|
Other liabilities
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated
as hedging instruments
under ASC Topic 815
|
|
|
|
$
|
11
|
|
|
$
|
21
|
|
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedging instruments
under ASC Topic 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Prepaid and other current
assets
|
|
$
|
4
|
|
|
$
|
10
|
|
|
Accrued liabilities
|
|
$
|
8
|
|
|
$
|
5
|
|
Foreign exchange contracts
|
|
Other Assets
|
|
|
3
|
|
|
|
2
|
|
|
Other Liabilities
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not
designated as hedging
instruments under ASC
Topic 815
|
|
|
|
$
|
7
|
|
|
$
|
12
|
|
|
|
|
$
|
9
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
18
|
|
|
$
|
33
|
|
|
|
|
$
|
16
|
|
|
$
|
11
|
|
15
The Effect of Derivative Instruments on the Consolidated Statements of Income ($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss)
|
|
Amount of Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss)
|
|
Amount of Gain (Loss)
|
|
|
Recognized in Income on
|
|
Recognized in Income on
|
|
Derivatives in
|
|
Amount of Gain (Loss)
|
|
|
Reclassified from
|
|
Reclassified from
|
|
|
Derivative (Ineffective
|
|
Derivative (Ineffective
|
|
ASC Topic 815
|
|
Recognized in
|
|
|
Accumulated
|
|
Accumulated OCI
|
|
|
Portion and Amount
|
|
Portion and Amount
|
|
Cash Flow Hedging
|
|
OCI on Derivative
|
|
|
OCI into Income
|
|
into Income
|
|
|
Excluded from
|
|
Excluded from
|
|
Relationships
|
|
(Effective Portion) (a)
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
|
Effectiveness Testing)
|
|
Effectiveness Testing) (b)
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
—
|
|
|
|
6
|
|
|
Cost of revenue
|
|
|
1
|
|
|
|
10
|
|
Foreign exchange
contracts
|
|
|
4
|
|
|
|
67
|
|
|
Cost of revenue
|
|
|
2
|
|
|
|
(18
|
)
|
|
Other income(expense), net
|
|
|
(5
|
)
|
|
|
4
|
|
Total
|
|
|
4
|
|
|
|
67
|
|
|
|
|
|
|
|
2
|
|
|
|
(12
|
)
|
|
|
|
|
(4
|
)
|
|
|
14
|
|
Derivatives Not Designated as
|
|
Location of Gain (Loss)
|
|
Amount of Gain (Loss)
|
|
Hedging Instruments under
|
|
Recognized in Income
|
|
Recognized in Income on
|
|
ASC Topic 815
|
|
on Derivative
|
|
Derivative
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
|
(11
|
)
|
|
|
65
|
|
Total
|
|
|
|
|
|
|
(11
|
)
|
|
|
65
|
|
(a) The Company expects that $8 million of the accumulated other comprehensive income (loss) will be reclassified into earnings within the next twelve months with an offset by losses from the underlying transactions resulting in no impact to earnings or cash flow.
(b) The amount of gain (loss) recognized in income includes $1 million and $10 million related to the ineffective portion of the hedging relationships for the nine months ended September 30, 2018 and 2017, respectively, and $(5) million and $4 million related to the amount excluded from the assessment of the hedge effectiveness for the nine months ended September 30, 2018 and 2017, respectively.
11.
|
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,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company
|
$
|
1
|
|
|
$
|
(26
|
)
|
|
$
|
(43
|
)
|
|
$
|
(223
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic—weighted average common shares outstanding
|
|
379
|
|
|
|
377
|
|
|
|
378
|
|
|
|
377
|
|
Dilutive effect of employee stock options and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unvested stock awards
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted outstanding shares
|
|
383
|
|
|
|
377
|
|
|
|
378
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.00
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.59
|
)
|
Diluted
|
$
|
0.00
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
16
ASC Topic 260, “Earnings Per Share” requires companies with unvested part
icipating 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 unv
ested 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 and nine months e
nded September 30, 2018 and 2017 and therefore not excluded from net income attributable to Company per share calculation.
The Company had stock options outstanding that were anti-dilutive totaling 11 million shares and 17 million shares for each of the three and nine months ended September 30, 2018, and 17 million shares and 13 million shares for each of the three and nine months ended September 30, 2017, respectively.
On August 16, 2018, the Company’s Board of Directors approved a cash dividend of $0.05 per share. The cash dividend was paid on September 28, 2018, to each stockholder of record on September 14, 2018. Cash dividends were $19 million and $57 million for the three and nine months ended September 30, 2018, respectively, and $19 million and $57 million for the three and nine months ended September 30, 2017. 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.
13.
|
Commitments and Contingencies
|
Our business is affected both directly and indirectly by governmental laws and regulations relating to the oilfield service industry in general, as well as by environmental and safety regulations that specifically apply to our business. Our business is also subject to trade regulations that may restrict or prohibit trade with certain countries, companies and/or individuals, for example, trade sanctions applicable, to Russia, Syria and Iran. Although we have not incurred material costs in connection with our compliance with such laws, there can be no assurance that other developments, such as new environmental laws, regulations and enforcement policies may not result in additional, presently unquantifiable, costs or liabilities to us. We are also subject to increasing local content and localization requirements in various jurisdictions, as well as increasing trade tariffs, retaliatory tariffs and other trade controversies, all of which could result in material negative impacts to our business.
The Company is involved, from time to time, in internal and regulatory investigations, regulatory agency audits and pending or threatened legal actions, arbitration and litigation involving a variety of matters. In many instances, the Company maintains insurance that covers claims arising from risks associated with the business activities of the Company, including claims for injuries to third parties and third parties’ property, e.g., 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 sufficient to cover such risks. See Item 1A. Risk Factors. If, however, such insurance was inapplicable or insufficient to cover such losses, there could be material negative impacts to our business.
The Company is also a party to claims, threatened and actual litigation, governmental regulatory proceedings and private arbitration arising from ordinary day to day business activities, in which parties assert claims against the Company for a broad spectrum of potential liabilities, including: individual employment law claims, collective actions under federal employment laws, intellectual property claims, e.g., alleged patent infringement, and/or misappropriation of trade secrets, premises liability claims, personal injuries arising from allegedly defective products, alleged breach of warranty, improper payments under anti-corruption and anti-bribery laws and other commercial claims seeking recovery for alleged actual or exemplary damages. In currently pending litigation and arbitrations, adverse parties have asserted damages in material amounts for which they seek recovery from the Company. Due to the inherent risks and uncertainty of litigation, an unexpected adverse result may occur from time to time. For many such 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, 2018, the Company recorded reserves in an amount believed to be sufficient for contingent liabilities representing all contingencies believed to be probable to cover such liabilities. The Company has also assessed the potential for additional losses above the amounts accrued as well as potential losses for matters that are not probable but are reasonably possible. The total potential loss on these matters cannot be determined; however, in our opinion, any ultimate liability, to the extent not otherwise provided for and except for the specific cases referred to above, 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 intention and experience.
17
Further, in some instances, direct or indirect consumers of our products and services, entities providing fi
nancing 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, suc
h 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 also become involved in these investigations, at substantial cost to the Company.
14.
|
New Accounting Pronouncements
|
Recently Adopted Accounting Standards
In March 2017, the FASB issued Accounting Standard Update No. 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (ASU 2017-07). This update requires that an employer report the service cost compon
ent in the same line item as other compensation costs and separately from other components of net benefit cost. ASU 2017-07 is effective for fiscal periods beginning after December 15, 2017, and for interim periods within those fiscal years. The Company adopted this update on January 1, 2018 with no material impact.
In August 2016, the FASB issued Accounting Standard Update No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). This update amends Accounting Standard Codification Topic No. 230 “Statement of Cash Flows” and provides guidance and clarification on presentation of certain cash flow issues. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal y
ears. The Company adopted this update on January 1, 2018 with no material impact.
In May 2014, the FASB issued Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), which supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU proscribes a five-step model for determining when and how revenue is recognized. Under the model, an entity will recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services.
ASU 2014-09 is effective for fiscal periods beginning after December 15, 2017. The Company adopted this update on January 1, 2018, using the modified retrospective approach, in which an immaterial cumulative effect adjustment was made to retained earnings. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the nine months ended September 30, 2018. See Note 6 for additional details of the Company’s revenue recognition policies.
Recently Issued Accounting Standards
In August 2017, the FASB issued Accounting Standard Update No. 2017-12 “Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12). This update improves the financial reporting of hedging relationships and simplifies the application of the hedge accounting guidance. ASU 2017-12 is effective for fiscal periods beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of ASU 2017-12. The Company is currently assessing the impact of the adoption of ASU No. 2017-12 on its consolidated financial position and results of operations.
In March 2016, the FASB issued ASC Topic 842, “Leases” (ASC Topic 842), which supersedes the lease requirements in ASC Topic No. 840 “Leases” and most industry-specific guidance. This update increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASC Topic 842 is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years.
The Company’s internal team, assisted by a top-tier accounting and consulting firm, has implemented and is testing new software, processes, procedures and controls to correctly account for leases under the new requirements. We currently estimate implementing ASC Topic 842 in the first quarter of 2019 will gross-up the Company’s balance sheet with additional assets and liabilities in the range of approximately $500 to $750 million. Implementing the new standard will not affect the Company’s compliance with the debt-to-capitalization covenant of our $3 billion revolving credit facility (see Note 7) because that agreement grandfathers the prior treatment of operating leases for purposes of the calculation.
18