NOV INC. General Overview
The Company is a leading independent provider of equipment and technology to the upstream oil and gas industry. With operations in approximately 646 locations across six continents, NOV designs, manufactures and services a comprehensive line of drilling and well servicing equipment; sells and rents drilling motors, specialized downhole tools, and rig instrumentation; performs inspection and internal coating of oilfield tubular products; provides drill cuttings separation, management and disposal systems and services; and provides expendables and spare parts used in conjunction with the Company's large installed base of equipment. NOV also manufactures coiled tubing and high-pressure fiberglass and composite tubing, and sells and rents advanced in-line inspection equipment to makers of oil country tubular goods. The Company has a long tradition of pioneering innovations which improve the cost-effectiveness, efficiency, safety, and environmental impact of oil and gas operations. NOV's revenue and operating results are directly related to the level of worldwide oil and gas drilling and production activities and the profitability and cash flow of oil and gas companies and drilling contractors, which in turn are affected by current and anticipated prices of oil and gas. Oil and gas prices have been and are likely to continue to be volatile. See Item 1A. "Risk Factors". The Company conducts its operations through three business segments: Wellbore Technologies, Completion & Production Solutions and Rig Technologies. See Item 1. "Business", for a discussion of each of these business segments. Unless indicated otherwise, results of operations are presented in accordance with accounting principles generally accepted inthe United States ("GAAP"). Certain reclassifications have been made to the prior year financial statements in order for them to conform with the 2019 presentation. The Company discloses Adjusted EBITDA (defined as Operating Profit excluding Depreciation, Amortization and Other Items) in its periodic earnings press releases and other public disclosures to provide investors additional information about the results of ongoing operations. See Non-GAAP Financial Measures and Reconciliations in Results of Operations for an explanation of our use of non-GAAP financial measures and reconciliations to their corresponding measures calculated in accordance with GAAP.
Operating Environment Overview
NOV's results are dependent on, among other things, the level of worldwide oil
and gas drilling, well remediation activity, the price of crude oil and natural
gas, capital spending by exploration and production companies and drilling
contractors, and worldwide oil and gas inventory levels. Key industry indicators
for the past three years include the following:
% increase (decrease)
2019 v 2019 v
2019* 2018* 2017* 2018 2017
Active Drilling Rigs:
U.S. 944 1,031 875 (8.4 %) 7.9 %
Canada 135 191 207 (29.3 %) (34.8 %)
International 1,106 988 947 11.9 % 16.8 %
Worldwide 2,185 2,210 2,029 (1.1 %) 7.7 %West Texas Intermediate Crude Prices (per
barrel)$ 56.98 $ 64.94 $ 50.88 (12.3 %) 12.0 % Natural Gas Prices ($/mmbtu)$ 2.52 $ 3.13 $ 2.96 (19.5 %) (14.9 %)
* Averages for the years indicated. See sources below.
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The following table details the U.S. , Canadian, and international rig activity
and West Texas Intermediate Oil prices for the past nine quarters ended December
31, 2019 on a quarterly basis:
[[Image Removed]]
Source: Rig count:
The average price per barrel of West Texas Intermediate Crude was$56.98 in 2019, a decrease of 12% over the average price for 2018 of$64.94 per barrel. The average natural gas price in 2019 was$2.52 per mmbtu, a decrease of 20% percent compared to the 2018 average of$3.13 per mmbtu. Average rig activity worldwide decreased one percent for the full year in 2019 compared to 2018. The average crude oil price for the fourth quarter of 2019 was$56.92 per barrel, and natural gas was$2.36 per mmbtu. AtFebruary 7, 2020 , there were 1,047 rigs actively drilling inNorth America , compared to the fourth quarter average of 960 rigs, an increase of nine percent. The price for West Texas Intermediate Crude Oil was$50.32 per barrel atFebruary 7, 2020 , a decrease of 12% from the fourth quarter of 2019 average. The price for natural gas was$1.86 per mmbtu atFebruary 7, 2020 , a decrease of 21% from the fourth quarter of 2019 average.
EXECUTIVE SUMMARY
National Oilwell Varco, Inc. generated revenue of$8.48 billion in 2019, which was flat from the prior year as lower revenue inNorth America resulting from declining drilling activity in theU.S. was offset by sales growth in international and offshore markets. Average 2019 worldwide rig count (as measured by Baker Hughes) decreased slightly when compared to 2018. For the year endedDecember 31, 2019 , the Company reported an operating loss of$6,279 million compared to an operating profit of$211 million in 2018, and a net loss attributable to the Company of$6,095 million , or$15.96 per share compared to a net loss of$31 million or$0.08 per share during 2018. 32 -------------------------------------------------------------------------------- For the fourth quarter endedDecember 31, 2019 , revenue was$2.28 billion , a$155 million or seven percent increase compared to the third quarter of 2019. The Company reported a net loss of$385 million , or$1.01 per fully diluted share, a decrease of$141 million , or$0.37 per fully diluted share, from the third quarter of 2019. Compared to the fourth quarter of 2018, revenue decreased$117 million or five percent, and net income decreased$397 million . During the fourth quarter of 2019, third quarter of 2019, and fourth quarter of 2018, pre-tax other items: goodwill, intangible and long-lived asset impairment charges, inventory charges, severance accruals, and other charges and credits (collectively "Other Items"), were$537 million ,$314 million , and$21 million , respectively. Excluding the Other Items from all periods, fourth quarter 2019 Adjusted EBITDA was$288 million , compared to$262 million in the third quarter of 2019 and$279 million in the fourth quarter of 2018.
Segment Performance
Wellbore Technologies
Wellbore Technologies generated revenues of$764 million in the fourth quarter of 2019, a decrease of four percent from the third quarter of 2019 and a decrease of 14 percent from the fourth quarter of 2018. The decline in revenue resulted from lower drilling activity levels inNorth America that more than offset improving conditions in international and offshore markets. Cost savings initiatives and a better product mix improved margins. Operating loss, which included$410 million in Other Items, was$317 million . Adjusted EBITDA increased eight percent sequentially and decreased eight percent from the prior year to$143 million , or 18.7 percent of sales.
Completion & Production Solutions
Completion & Production Solutions generated revenues of$799 million in the fourth quarter of 2019, an increase of 10 percent from the third quarter of 2019 and an increase of one percent from the fourth quarter of 2018. The third straight quarter of double-digit top-line improvement was driven by growing demand from offshore and international markets, partially offset by a rapidly contracting demand for completion and other equipment inU.S. land markets. Operating profit, which included$13 million in Other Items, was$57 million , or 7.1 percent of sales. Adjusted EBITDA increased 17 percent sequentially and decreased 14 percent from the prior year to$96 million , or 12.0 percent of sales. New orders booked during the quarter were$502 million , representing a book-to-bill of 101 percent when compared to the$499 million of orders shipped from backlog. Backlog for capital equipment orders for Completion & Production Solutions atDecember 31, 2019 was$1.3 billion .
Rig Technologies
Rig Technologies generated revenues of$759 million in the fourth quarter of 2019, an increase of 17 percent from the third quarter of 2019 and a decrease of six percent from the fourth quarter of 2018. Increases in land rig deliveries and improved progress on offshore equipment projects drove the sequential improvement in results. Operating loss, which included$114 million in Other Items, was$23 million . Adjusted EBITDA increased seven percent sequentially and 10 percent from the prior year to$112 million , or 14.8 percent of sales. New orders booked during the quarter totaled$211 million , representing a book-to-bill of 59 percent when compared to the$360 million of orders shipped from backlog. AtDecember 31, 2019 , backlog for capital equipment orders for Rig Technologies was$3.0 billion .
Following approximately two and a half years of steady improvements in oil prices and global drilling activity levels, commodity prices declined sharply during the fourth quarter of 2018 due to stronger than expected growth inU.S. oil production and concerns regarding the global economy. These developments, along with pressure from investors on North American exploration and production companies to reduce investments and generate free cash flow, led to a prolonged 2019 budgeting season that resulted in a sharp decline in demand for our products and services in the first quarter and ultimately led to reductions in the budgets of North American exploration and production companies. 33 -------------------------------------------------------------------------------- As a result of reduced budgets, and despite a modest recovery in commodity prices, drilling activity levels in theU.S. declined throughout the year resulting in the first double digit percentage decrease in the average annual rig count since 2016. While the North American market deteriorated, the new-found capital austerity and fiscal discipline exhibited byU.S. operators along with declining production from underinvestment in overseas markets and rapidly growing demand for LNG inspired greater levels of confidence from international oil and gas companies, who must typically make longer-term investment decisions relative to the short-cycle nature of shale development projects in theU.S. As a result, the number of final investment decisions for international projects increased throughout 2019, driving higher levels of drilling activity and improved demand for our products and services in international and offshore markets. In 2020, NOV anticipates that higher international and offshore activity levels and growing market share for certain of NOV's products and services will continue to partially offset the continuing effects of capital austerity in the North American land marketplace, where a meaningful recovery is not expected before 2021. Longer-term, the Company remains optimistic regarding improvements in market fundamentals as existing oil and gas fields continue to deplete and investments in major projects to replenish supply remain constrained while global demand continues to grow. Notwithstanding this optimism, the outlook is uncertain and NOV remains committed to streamlining its operations and improving organizational efficiencies while continuing to focus on the capital investment strategies of our customers to ensure our investments in innovative products and services, including environmentally friendly technologies, are responsive to their longer-term investment outlook. We believe this strategy will further advance the Company's competitive position, regardless of the market environment.
Results of Operations
The following table summarizes the Company's revenue and operating profit (loss) by operating segment (in millions):
Years Ended December 31, % Change
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenue:
Wellbore Technologies $ 3,214 $ 3,235 $ 2,577 (0.6 %) 25.5 %Completion & Production Solutions 2,771 2,931 2,672
(5.5 %) 9.7 %
Rig Technologies 2,682 2,575 2,252 4.2 % 14.3 %
Eliminations (188 ) (288 ) (197 ) (34.7 %) 46.2 %
Total Revenue $ 8,479 $ 8,453 $ 7,304 0.3 % 15.7 %
Operating Profit (Loss):
Wellbore Technologies $ (3,551 ) $ 131 $ (102 ) (2810.7 %) (228.4 %)
Completion & Production Solutions (1,934 ) 166 98 (1265.1 %) 69.4 %
Rig Technologies (524 ) 213 (14 ) (346.0 %) (1621.4 %)
Eliminations and corporate costs (270 ) (299 ) (259 )
(9.7 %) 15.4 %
Total Operating Profit (Loss) $ (6,279 ) $ 211 $ (277 ) (3075.8 %) (176.2 %)
Operating Profit (Loss)%:
Wellbore Technologies (110.5 %) 4.0 % (4.0 %)Completion & Production Solutions (69.8 %) 5.7 % 3.7 % Rig Technologies
(19.5 %) 8.3 % (0.6 %)
Total Operating Profit (Loss) % (74.1 %) 2.5 % (3.8 %)
Years Ended
Wellbore Technologies
Revenue from Wellbore Technologies for the year ended
Operating loss from Wellbore Technologies was$3,551 million for the year endedDecember 31, 2019 , a decrease of$3,682 million compared to the year endedDecember 31, 2018 . Operating loss percentage for 2019 was (110.5%) compared to an operating profit of four percent in 2018. 34 -------------------------------------------------------------------------------- Other Items included in operating profit (loss) for Wellbore Technologies were$3,794 million for the year endedDecember 31, 2019 and$21 million for the year endedDecember 31, 2018 .
Completion & Production Solutions
Revenue from Completion & Production Solutions for the year endedDecember 31, 2019 was$2,771 million , a decrease of$(160) million (-5%) compared to the year endedDecember 31, 2018 . Operating loss from Completion & Production Solutions was$(1,934) million for the year endedDecember 31, 2019 compared to operating profit of$166 million for 2018, a decrease of$2,100 million . Operating profit percentage decreased to (69.8%) from 5.7% in 2018. Included in operating profit are Other Items related to impairment charges, inventory charges, severance accruals and other charges and credits. Other items included in operating profit (loss) for Completion & Production Solutions was$2,042 million for the year endedDecember 31, 2019 . There were no Other Items included in operating profit for Completion & Production Solutions for the year endedDecember 31, 2018 . The Completion & Production Solutions segment monitors its capital equipment backlog to plan its business. New orders are added to backlog only when the Company receives a firm written order for major completion and production components or a signed contract related to a construction project. The capital equipment backlog was$1.3 billion atDecember 31, 2019 , an increase of$411 million , or 46 percent from backlog of$894 million atDecember 31, 2018 . Numerous factors may affect the timing of revenue out of backlog. Considering these factors, the Company reasonably expects approximately$1.1 billion of revenue out of backlog in 2020 and approximately$157 million of revenue out of backlog in 2021 and thereafter. AtDecember 31, 2019 , approximately 65 percent of the capital equipment backlog was for offshore products and approximately 83 percent of the capital equipment backlog was destined for international markets.
Rig Technologies
Revenue from Rig Technologies for the year endedDecember 31, 2019 was$2,682 million , an increase of$107 million (4%) compared to the year endedDecember 31, 2018 . Operating loss from Rig Technologies was$(524) million for the year endedDecember 31, 2019 , a decrease of$(737) million compared to 2018. Operating loss percentage for 2019 was (19.5%) compared to an operating profit percentage of 8.3% in 2018. Included in operating profit are Other Items related to severance and facility closures, and asset write-downs. Other Items included in operating profit for Rig Technologies were$784 million for the year endedDecember 31, 2019 and$6 million for the year endedDecember 31, 2018 . The Rig Technologies segment monitors its capital equipment backlog to plan its business. New orders are added to backlog only when the Company receives a firm written order for major drilling rig components or a signed contract related to a construction project. The capital equipment backlog was$3.0 billion atDecember 31, 2019 , a decrease of$123 million , or four percent, from backlog of$3.1 billion atDecember 31, 2018 . Numerous factors may affect the timing of revenue out of backlog. Considering these factors, the Company reasonably expects approximately$0.6 billion of revenue out of backlog in 2020 and approximately$2.4 billion of revenue out of backlog in 2021 and thereafter. AtDecember 31, 2019 , approximately 28% of the capital equipment backlog was for offshore products and approximately 93% of the capital equipment backlog was destined for international markets.
Eliminations and corporate costs
Eliminations and corporate costs were$270 million for the year endedDecember 31, 2019 compared to$299 million for the year endedDecember 31, 2018 . This change is primarily due to a decrease in intersegment sales. 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 and corporate costs include intercompany transactions conducted between the three reporting segments that are eliminated in consolidation, as well as corporate costs not allocated to the segments. Intercompany transactions within each reporting segment are eliminated within each reporting segment. 35
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Other income (expense), net
Other income (expense), net were expenses of
Provision for income taxes The effective tax rate for the year endedDecember 31, 2019 was 5.7%, compared to 153.7% for 2018. For the year endedDecember 31, 2019 , the effective tax rate was negatively impacted by the impairment of nondeductible goodwill and the establishment of additional valuation allowances partially offset by the reduction in uncertain tax positions due to settlements. For the year endedDecember 31, 2018 , valuation allowances established on foreign tax credits generated during the year resulted in a higher effective tax rate than theU.S. statutory rate.
Refer to our 2018 Form 10-K for discussion of 2018 versus 2017.
Non-GAAP Financial Measures and Reconciliations
The Company discloses Adjusted EBITDA (defined as Operating Profit excluding Depreciation, Amortization and, when applicable, Other Items) in its periodic earnings press releases and other public disclosures to provide investors additional information about the results of ongoing operations. The Company uses Adjusted EBITDA internally to evaluate and manage the business. Adjusted EBITDA is not intended to replace GAAP financial measures, such as Net Income.
Other items consist of (in millions):
Three Months Ended Years Ended
December 31, September 30, December 31,
2019 2018 2019 2019 2018
Other items by category:
Goodwill $ 410 $ - $ - $ 3,509 $ -
Identified intangibles 16 - - 2,004 -
Inventory charges 63 (6 ) 265 633 (6 )
Long-lived assets $ 10 $ - $ 12 $ 309 $ -
Voluntary early retirement
program (3 ) - (2 ) 84 -
Severance, facility closures
and other 41 27 39 92 15
Total other items $ 537 $ 21 $ 314 $ 6,631 $ 9
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The following tables set forth the reconciliation of Adjusted EBITDA to its most comparable GAAP financial measure (in millions):
Three Months Ended Years Ended
December 31, September 30, December 31,
2019 2018 2019 2019 2018
Operating profit (loss):
Wellbore Technologies $ (317 ) $ 41 $ 42 $ (3,551 ) $ 131
Completion & Production Solutions 57 64 (24 ) (1,934 ) 166
Rig Technologies (23 ) 75 (110 ) (524 ) 213
Eliminations and corporate costs (66 ) (93 ) (62 ) (270 ) (299 )
Total operating profit (loss) $ (349 ) $ 87 $ (154 ) $ (6,279 ) $ 211
Other items:
Wellbore Technologies $ 410 $ 24 $ 41 $ 3,794 $ 21
Completion & Production Solutions 13 (3 ) 79 2,042 -
Rig Technologies 114 - 194 784 6
Corporate - - - 11 (18 )
Total other items $ 537 $ 21 $ 314 $ 6,631 $ 9
Depreciation & amortization:
Wellbore Technologies $ 50 $ 90 $ 50 $ 284 $ 374
Completion & Production Solutions 26 51 27 150 212
Rig Technologies 21 27 21 87 90
Corporate 3 3 4 12 14
Total depreciation & amortization $ 100 $ 171 $ 102 $ 533 $ 690
Adjusted EBITDA:
Wellbore Technologies $ 143 $ 155 $ 133 $ 527 $ 526
Completion & Production Solutions 96 112 82 258 378
Rig Technologies 112 102 105 347 309
Eliminations and corporate costs (63 ) (90 ) (58 ) (247 ) (303 )
Total Adjusted EBITDA $ 288 $ 279 $
262
Reconciliation of Adjusted EBITDA: GAAP net income (loss) attributable to Company$ (385 ) $ 12 $ (244 )$ (6,095 ) $ (31 ) Noncontrolling interests - 3 (5 ) 2 9 Provision (benefit) for income taxes (46 ) 26 60 (369 ) 63 Interest expense 25 22 25 100 93 Interest income (4 ) (7 ) (4 ) (20 ) (25 ) Equity loss in unconsolidated affiliate 7 2 4 13 3 Other (income) expense, net 54 29 10 90 99 Depreciation and amortization 100 171 102 533 690 Other items 537 21 314 6,631 9 Total Adjusted EBITDA$ 288 $ 279 $ 262$ 885 $ 910 37
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Liquidity and Capital Resources
AtDecember 31, 2019 , the Company had cash and cash equivalents of$1,171 million , and total debt of$1,989 million . AtDecember 31, 2018 , cash and cash equivalents were$1,427 million and total debt was$2,482 million . As ofDecember 31, 2019 , approximately$795 million of the$1,171 million of cash and cash equivalents was held by our foreign subsidiaries and the earnings associated with this cash were subject toU.S. taxation. If opportunities to invest in theU.S. are greater than available cash balances that are not subject to income tax, rather than repatriating cash, the Company may choose to borrow against its revolving credit facility or utilize its commercial paper program. The following table summarizes our net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities for the periods presented (in millions): Years Ended December 31, 2019 2018 2017
Net cash provided by operating activities
(315 ) (457 ) (245 )
Net cash used in financing activities (647 ) (30 ) (595 )
Significant sources and uses of cash during 2019
• Cash flows provided by operating activities was $714 million . This
included changes in the primary components of our working capital
(receivables, inventories and accounts payable), primarily related to
strong collections on receivables and inventory turns.
• We sold accounts receivable of
million), receiving cash proceeds totaling
accounts receivable of
receiving cash proceeds totaling $40 million .
• Business acquisitions, net of cash acquired, were $180 million .
• Capital expenditures were $233 million .
• We paid $77 million in dividends to our shareholders.
Effective October 30, 2019 , the Company amended its five-year unsecured
revolving credit facility, decreasing its borrowing availability to $2.0 billion
and extended its maturity to October 30, 2024 . The Company has the right to
increase the aggregate commitments under this new 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 new multicurrency facility is based upon
LIBOR, NIBOR or CDOR plus 1.125% subject to a ratings-based grid or the U.S.
prime rate. The new credit facility contains a financial covenant regarding
maximum debt-to-capitalization ratio of 60%. As of December 31, 2019 , the
Company was in compliance with a debt-to-capitalization ratio of 22.4%.
On
OnNovember 4, 2019 , the Company issued$500 million of 3.60% unsecured Senior Notes due 2029. The net proceeds were$493 million , after deducting$3 million in underwriting fees and a$4 million discount. Interest on each series of notes is due onJune 1 andDecember 1 of each year, beginning onJune 1, 2020 . The Company may redeem some or all of the Senior Notes at any time at the applicable redemption price, plus accrued interest, if any, to the redemption date. AtDecember 31, 2019 , the Company was in compliance with the covenants under the indenture governing the Senior Notes. The Company's outstanding debt atDecember 31, 2019 was$1,989 million and consisted of$399 million in 2.60% Senior Notes,$492 million in 3.60% Senior Notes,$1,088 million in 3.95% Senior Notes, no commercial paper borrowings, and other debt of$9 million . The Company was in compliance with all covenants atDecember 31, 2019 . AtDecember 31, 2019 , there were no commercial paper borrowings supported by the$2.0 billion credit facility and no outstanding letters of credit issued under the credit facility, resulting in$2.0 billion of funds available under this revolving credit facility. 38
-------------------------------------------------------------------------------- The Company had$502 million of outstanding letters of credit atDecember 31, 2019 that are under various bilateral letter of credit facilities. Letters of credit are issued as bid bonds, advanced payment bonds and performance bonds.
Other
The effect of the change in exchange rates on cash was an increase (decrease) of($8) million ,($44) million and$37 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively.
We believe that cash on hand, cash generated from operations and amounts available under our credit facilities and from other sources of debt will be sufficient to fund operations, working capital needs, capital expenditure requirements, dividends and financing obligations.
We intend to pursue additional acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We continue to expect to fund future cash acquisitions primarily with cash flow from operations and borrowings, including the unborrowed portion of the revolving credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us.
A summary of the Company's outstanding contractual obligations at
Payment Due by Period
Less
than 1 After 5
Total Year 1-3 Years 3-5 Years Years
Contractual Obligations:
Total debt $ 1,989 $ - $ 400 $ - $ 1,589
Operating leases 732 126 194 119 293
Finance Leases 337 15 30 30 262
Total Contractual Obligations $ 3,058 $ 141 $ 624 $ 149 $ 2,144
Commercial Commitments:
Standby letters of credit $ 502 $ 311 $ 160 $ 30 $ 1
As of December 31, 2019 , the Company had $38 million of unrecognized tax
benefits. This represents the tax benefits associated with various tax positions
taken, or expected to be taken, on domestic and international tax returns that
have not been recognized in our financial statements due to uncertainty
regarding their resolution. Due to the uncertainty of the timing of future cash
flows associated with these unrecognized tax benefits, we are unable to make
reasonably reliable estimates of the period of cash settlement, if any, with the
respective taxing authorities. Accordingly, unrecognized tax benefits have been
excluded from the contractual obligations table above. For further information
related to unrecognized tax benefits, see Note 15 to the Consolidated Financial
Statements.
Critical Accounting Policies and Estimates
In preparing the financial statements, we make assumptions, estimates and
judgements that affect the amounts reported. We periodically evaluate our
estimates and judgements that are most critical in nature which are related to
revenue recognition under long-term construction contracts; allowance for
doubtful accounts; inventory reserves; impairments of long-lived assets
(excluding goodwill and other indefinite-lived intangible assets); impairment of
goodwill and other indefinite-lived intangible assets; purchase price allocation
of acquisitions; service and product warranties and income taxes. Our estimates
are based on historical experience and on our future expectations that we
believe are reasonable. The combination of these factors forms the basis for
making judgements about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results are likely to differ
from our current estimates and those differences may be material.
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Revenue Recognition
The majority of the Company's 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 a customer. Products and services are sold or
rented based upon a fixed or determinable price and do not generally include
significant post-delivery obligations. Payment terms and conditions vary by
contract type. 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.
Shipping and handling costs are recognized when incurred and are treated as
costs to fulfill the original performance obligation.
Revenue is often generated from contracts that include multiple performance
obligations. Using significant judgement, the Company considers the degree of
customization, integration and interdependency of the related products and
services when assessing distinct performance obligations within one contract.
Stand-alone selling price ("SSP") for each distinct performance obligation is
generally determined using the price at which the products and services would be
sold separately to the customer. Discounts, when provided, are allocated based
on the relative SSP of the various products and services.
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
Revenue is recognized over-time for certain long-term construction contracts in the Completion & Production Solutions and Rig Technologies segments. These contracts include custom designs for customer-specific applications that are unique and require significant engineering efforts. Revenue is recognized as work progresses on each contract. Right to payment is enforceable for performance completed to date, including a reasonable profit. 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, progress towards completion of each contract 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. Any expected losses on a project are recorded in full in the period in which the loss becomes probable. These 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. Estimating total revenue and cost at completion of long-term construction contracts is complex, subject to many variables and requires significant judgement. 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 associated 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$62 million for the year endedDecember 31, 2019 primarily due to change orders.
Service and Repair Work
For service and repair contracts, revenue is recognized over time. We generally
use the output method to measure progress on service contracts 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.
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Remaining Performance Obligations
Remaining performance obligations represent 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 ofDecember 31, 2019 , the aggregate amount of the transaction price allocated to remaining performance obligations was$4,286 million . The Company expects to recognize approximately$1,084 million in revenue for the remaining performance obligations in 2020 and$3,202 million in 2021 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. Inventory Reserves Inventory is carried at the lower of cost or estimated net realizable value. The Company reviews historical usage of inventory on-hand, assumptions about future demand and market conditions, current cost and estimates about potential alternative uses, which are limited, to estimate net realizable value. The Company's inventory consists of finished goods, spare parts, work in process, and raw materials to support ongoing manufacturing operations and the Company's large installed base of highly specialized oilfield equipment. The Company's estimated carrying value of inventory depends upon demand largely driven by levels of oil and gas well drilling and remediation activity, which depends in turn upon oil and gas prices, the general outlook for economic growth worldwide, available financing for the Company's customers, political stability and governmental regulation in major oil and gas producing areas, and the potential obsolescence of various types of equipment we sell, among other factors. Based on an update of our assumptions at each point in time related to estimates of future demand, during 2019, 2018, and 2017 we recorded charges for additions to inventory reserves of$659 million ,$49 million , and$114 million , respectively, consisting primarily of obsolete and surplus inventories. AtDecember 31, 2019 and 2018, inventory reserves totaled$843 million and$644 million , or 27.7% and 17.7% of gross inventory, respectively. Throughout the downturn the Company has continued to invest in developing and advancing products and technologies, contributing to the obsolescence of certain older products in a dramatically-shifted and more highly competitive recovering market, but also ensuring that the portfolio of products and services offered by the Company will meet customer needs in 2020 and beyond. We will continue to assess our inventory levels and inventory offerings for our customers, which could require the Company to record additional allowances to reduce the value of its inventory. Such changes in our estimates or assumptions could be material under weaker market conditions or outlook.
Impairment of Long-Lived Assets (Excluding Goodwill and Other Indefinite-Lived Intangible Assets)
Long-lived assets, which include property, plant and equipment and identified
intangible assets, comprise a significant amount of the Company's total assets.
The Company makes judgements and estimates in conjunction with the carrying
value of these assets, including amounts to be capitalized, depreciation and
amortization methods and estimated useful lives.
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The carrying values of these assets 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 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. This 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 regarding oil and gas
prices, the general outlook for economic growth worldwide, 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. The financial and credit market volatility directly impacts
our fair value measurement through our income forecast. Changes to these
assumptions, including, but not limited to: sustained declines in worldwide rig
counts below current analysts' forecasts, collapse of spot and futures prices
for oil and gas, significant deterioration of external financing for our
customers, higher risk premiums or higher cost of equity, or any other
significant adverse economic news could require a provision for impairment in a
future period.
For the year ended December 31, 2019 , the Company recorded $2,209 million in
impairment charges related to long-lived assets. See Note 6 - Asset Impairments
(Part IV, Item 15 of this Form 10-K) for further discussion.
The Company has approximately$2.8 billion of goodwill and$0.3 billion of other intangible assets with indefinite lives as ofDecember 31, 2019 . Generally accepted accounting principles require the Company to test goodwill and other indefinite-lived intangible assets for impairment at least annually or more frequently whenever events or circumstances occur indicating that goodwill or other indefinite-lived intangible assets might be impaired. Events or circumstances which could indicate a potential impairment include (but are not limited to) a significant sustained reduction in worldwide oil and gas prices or drilling; a significant sustained reduction in profitability or cash flow of oil and gas companies or drilling contractors; a sustained reduction in the market capitalization of the Company; a significant sustained reduction in capital investment by drilling companies and oil and gas companies; or a significant sustained increase in worldwide inventories of oil or gas. The Company performs its goodwill and indefinite-lived intangible asset impairment test based on the Company's discounted cash flow analysis. The discounted cash flow is based on management's forecast of operating performance for each reporting unit. The two main assumptions used in measuring goodwill impairment, which bear the risk of change and could impact the Company's goodwill impairment analysis, include the cash flow from operations from each of the Company's individual Reporting Units and the weighted average cost of capital. The starting point for each of the reporting unit's cash flow from operations is the detailed annual plan or updated forecast. Cash flows beyond the specific operating plans 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. The financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate. During times of volatility, significant judgement must be applied to determine whether credit changes are a short-term or long-term trend. While the Company primarily uses the discounted cash flow method to assess fair value, the Company uses the comparable companies and representative transaction methods to validate the discounted cash flow analysis and further support management's expectations, where possible. The valuation techniques used in the annual test were consistent with those used during previous testing. The inputs used in the annual test were updated for current market conditions and forecasts. In 2017 and 2018, based on the Company's annual impairment test performed as ofOctober 1 , the calculated fair values for all the Company's Reporting Units were substantially in excess of the respective reporting unit's carrying value. Additionally, the fair value for all of the Company's intangible assets with indefinite lives were substantially in excess of the respective asset carrying values. For the year endedDecember 31, 2019 , the Company recorded a$3,509 million in impairment charges to goodwill and$103 million in charges to indefinite-lived intangible assets. See Note 6 - Asset Impairments (Part IV, Item 15 of this Form 10-K) for further discussion. 42
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Income Taxes
The Company isU.S. registered and is subject to income taxes in theU.S. The Company operates through various subsidiaries in a number of countries throughout the world. Income taxes have been recorded based upon the tax laws and rates of the countries in which the Company operates and income is earned. The Company's annual tax provision is based on taxable income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. The determination and evaluation of the annual tax provision and tax positions involves the interpretation of the tax laws in the various jurisdictions in which the Company operates. It requires significant judgement and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of income, deductions and tax credits. Changes in tax laws, regulations, and treaties, foreign currency exchange restrictions or the Company's level of operations or profitability in each jurisdiction could impact the tax liability in any given year. The Company also operates in many jurisdictions where the tax laws relating to the pricing of transactions between related parties are open to interpretation, which could potentially result in aggressive tax authorities asserting additional tax liabilities with no offsetting tax recovery in other countries. The Company maintains liabilities for estimated tax exposures in jurisdictions of operation. The annual tax provision includes the impact of income tax provisions and benefits for changes to liabilities that the Company considers appropriate, as well as related interest. Tax exposure items primarily include potential challenges to intercompany pricing and certain operating expenses that may not be deductible in foreign jurisdictions. These exposures are resolved primarily through the settlement of audits within these tax jurisdictions or by judicial means. The Company is subject to audits by federal, state and foreign jurisdictions which may result in proposed assessments. The Company believes that an appropriate liability has been established for estimated exposures under the guidance in ASC Topic 740 "Income Taxes" ("ASC Topic 740"). However, actual results may differ materially from these estimates. The Company reviews these liabilities quarterly and to the extent audits or other events result in an adjustment to the liability accrued for a prior year, the effect will be recognized in the period of the event. The Company currently has recorded valuation allowances that the Company intends to maintain until it is more likely than not the deferred tax assets will be realized. Income tax expense recorded in the future will be reduced to the extent of decreases in the Company's valuation allowances. The realization of remaining deferred tax assets is primarily dependent on future taxable income. Any reduction in future taxable income including but not limited to any future restructuring activities may require that the Company record an additional valuation allowance against deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a significant impact on future earnings. The Company has not provided for deferred taxes on the unremitted earnings of certain subsidiaries that are permanently reinvested. Should the Company make a distribution from the unremitted earnings of these subsidiaries, the Company may be required to record additional taxes. Unremitted earnings of these subsidiaries were$757 million atDecember 31, 2019 . The Company makes a determination each period whether to permanently reinvest these earnings. If, as a result of these reassessments, the Company distributes these earnings in the future, additional tax liabilities would result. 43
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Recently Issued and Recently Adopted Accounting Standards
See Note 2 - Summary of Significant Accounting Policies (Part IV, Item 15 of this Form 10-K) for further discussion.
Forward-Looking Statements
Some of the information in this document contains, or has incorporated by reference, forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements typically are identified by use of terms such as "may," "will," "expect," "anticipate," "estimate," and similar words, although some forward-looking statements are expressed differently. All statements herein regarding expected merger synergies are forward looking statements. You should be aware that our actual results could differ materially from results anticipated in the forward-looking statements due to a number of factors, including but not limited to changes in oil and gas prices, customer demand for our products and worldwide economic activity. You should also consider carefully the statements under "Risk Factors" which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements. We undertake no obligation to update any such factors or forward-looking statements to reflect future events or developments.
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