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 552 locations across six continents, NOV designs, manufactures and services a comprehensive line of drilling, well servicing and offshore construction 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. More recently, by applying its deep knowledge in technology, the Company has helped advance the transition toward sustainable energy. 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 principally 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 to conform with the 2021 presentation. The Company discloses Adjusted EBITDA (defined as Operating Profit excluding Depreciation, Amortization, and, when applicable, Other Items (as defined below under "Executive Summary")) 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, worldwide oil and gas inventory levels and, to a lesser degree, the
level of investment in wind, solar and geothermal energy products. Key industry
indicators for the past three years include the following:
% increase (decrease)
2021 v 2021 v
2021* 2020* 2019* 2020 2019
Active Drilling Rigs:
U.S. 475 436 944 8.9 % (49.7 %)
Canada 132 90 135 46.7 % (2.2 %)
International 755 825 1,106 (8.5 %) (31.7 %)
Worldwide 1,362 1,351 2,185 0.8 % (37.7 %)West Texas Intermediate Crude Prices (per
barrel)$ 67.99 $ 39.33 $ 56.98 72.9 % 19.3 % Natural Gas Prices ($/mmbtu)$ 3.88 $ 2.01 $ 2.52 93.0 % 54.0 %
* 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, 2021 on a quarterly basis:
[[Image Removed]]
Source: Rig count:
The average price per barrel of West Texas Intermediate Crude was$67.99 in 2021, an increase of 73% over the average price for 2020 of$39.33 per barrel. The average natural gas price in 2021 was$3.88 per mmbtu, an increase of 93% percent compared to the 2020 average of$2.01 per mmbtu. Average rig activity worldwide increased 1 percent for the full year in 2021 compared to 2020. The average crude oil price for the fourth quarter of 2021 was$77.45 per barrel, and natural gas was$4.74 per mmbtu. AtFebruary 4, 2022 , there were 831 rigs actively drilling inNorth America , compared to the fourth quarter average of 720 rigs, an increase of 15 percent. The price for West Texas Intermediate Crude Oil was$92.31 per barrel atFebruary 4, 2022 , an increase of 19 percent from the fourth quarter of 2021 average. The price for natural gas was$4.57 per mmbtu atFebruary 4, 2022 , a decrease of four percent from the fourth quarter of 2021 average. The Company is also becoming increasingly engaged with energy transition related opportunities and is currently involved in projects related to wind energy, solar, geothermal power, rare earth metal extraction, biogas production, and carbon sequestration. Additionally, the Company is investing in developing technologies and solutions that will support other energy transition related industry verticals. Management expects to see continued growth in these areas as low carbon power becomes a larger portion of the global energy supply. 39
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EXECUTIVE SUMMARY
NOV Inc. generated revenue of$5.52 billion in 2021, which was lower from the prior year as the Company entered the year with lower order backlog resulting from sharply lower oil and gas prices and industry activity during 2020. While industry activity began a slow recovery during 2021, the average 2021 worldwide rig count (as measured by Baker Hughes) did not increase significantly when compared to 2020. For the year endedDecember 31, 2021 , the Company reported an operating loss of$134 million compared to an operating loss of$2,425 million in 2020, and a net loss attributable to the Company of$250 million , or$0.65 per share compared to a net loss of$2,542 million or$6.62 per share during 2020. For the fourth quarter endedDecember 31, 2021 , revenue was$1.52 billion , a$176 million or 13 percent increase compared to the third quarter of 2021. The Company reported a net loss of$40 million , or$0.10 per fully diluted share, an improvement of$29 million , or$0.08 per fully diluted share, from the third quarter of 2021. Compared to the fourth quarter of 2020, revenue increased$190 million or 14 percent, and net loss improved$307 million . During the fourth quarter of 2021, third quarter of 2021, and fourth quarter of 2020, 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$9 million ,$24 million , and$236 million , respectively. Excluding the Other Items from all periods, fourth quarter 2021 Adjusted EBITDA was$69 million , compared to$56 million in the third quarter of 2021 and$17 million in the fourth quarter of 2020.
Segment Performance
Wellbore Technologies
Wellbore Technologies generated revenues of$576 million in the fourth quarter of 2021, an increase of 14 percent from the third quarter of 2021 and an increase of 54 percent from the fourth quarter of 2020. The increase in revenues resulted from increased drilling activity levels inNorth America partially offset by declines in international and offshore markets. Operating profit, which included$(1) million in Other Items, was$50 million . Adjusted EBITDA increased$11 million sequentially and$76 million from the prior year to$88 million , or 15.3 percent of sales.
Completion & Production Solutions
Completion & Production Solutions generated revenues of$549 million in the fourth quarter of 2021, an increase of 15 percent from the third quarter of 2021 and an increase of 1 percent from the fourth quarter of 2020. Continued COVID-19 related operational challenges negatively impacted margin flow-through during the quarter. Operating loss, which included$2 million in Other Items, was$16 million . Adjusted EBITDA increased$7 million sequentially and decreased$26 million from the prior year to$2 million , or 0.4 percent of sales. New orders booked improved 29 percent sequentially to$495 million , representing a book-to-bill of 159 percent when compared to the$311 million of orders shipped from backlog. Backlog for capital equipment orders for Completion & Production Solutions atDecember 31, 2021 was$1,287 million , an increase of$592 million , or 85 percent from backlog of$695 million atDecember 31, 2020 .
Rig Technologies
Rig Technologies generated revenues of$431 million in the fourth quarter of 2021, an increase of 11 percent from the third quarter of 2021 and a decrease of 1 percent from the fourth quarter of 2020. Increasing offshore drilling activity levels resulting in lower capital equipment backlog contributed to the increase in revenues in the fourth quarter of 2021 when compared to the third quarter of 2021. Operating profit, which included$3 million in Other Items, was$1 million . Adjusted EBITDA decreased$4 million sequentially and increased$2 million from the prior year to$21 million , or 4.9 percent of sales. New orders booked during the quarter totaled$191 million , representing a book-to-bill of 102 percent when compared to the$188 million of orders shipped from backlog. AtDecember 31, 2021 , backlog for capital equipment orders for Rig Technologies was$2,767 million , an increase of$98 million , or 4 percent, from backlog of$2,669 million atDecember 31, 2020 . 40
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During 2020, the COVID-19 outbreak rapidly spread across the world, driving sharp demand destruction for crude oil as countries took measures that curtailed economic activity to slow the spread of the outbreak. Companies across the industry responded with severe capital spending budget cuts, curtailed production, cost reductions, personnel layoffs, facility closures and bankruptcy filings. Towards the end of 2020 and into 2021, commodity prices stabilized and began to recover resulting in improving industry activity levels inNorth America . Throughout 2021, greater availability of COVID-19 vaccines resulted in the gradual reopening of certain economies around the world. Pent-up consumer and industrial demand combined with government economic stimulus programs are serving to amplify the global recovery, improve economic activity, and drive higher demand for oil and gas, which management believes is setting the stage for a global recovery in drilling activity. During 2021, oil and gas drilling activity levels increased in every major region of the world, reflecting this growing demand. However, supply chain disruptions and inflationary challenges are significant and have continued into 2022. Despite near-term disruptions from ongoing COVID-19 outbreaks, pandemic related supply chain disruptions, and inflationary forces, management is optimistic that improving market fundamentals and the actions NOV has taken to position its business for the future will drive growth and improve profitability for the Company. NOV remains committed to improving organizational efficiencies while focusing on the development and commercialization of innovative products and services, including environmentally friendly technologies, that are responsive to the longer-term needs of NOV's customers. We believe this strategy will further advance the Company's competitive position, regardless of the market.
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
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Revenue:
Wellbore Technologies $ 1,959 $ 1,867 $ 3,214 4.9 % (41.9 )%Completion & Production Solutions 1,963 2,433 2,771
(19.3 )% (12.2 )%
Rig Technologies 1,739 1,919 2,682 (9.4 )% (28.4 )%
Eliminations (137 ) (129 ) (188 ) (6.2 )% 31.4 %
Total Revenue $ 5,524 $ 6,090 $ 8,479 (9.3 )% (28.2 )%
Operating Profit (Loss):
Wellbore Technologies $ 74 $ (858 ) $ (3,551 ) 108.6 % 75.8 %Completion & Production Solutions (65 ) (977 ) (1,934 )
93.3 % 49.5 %
Rig Technologies 43 (362 ) (524 ) 111.9 % 30.9 %
Eliminations and corporate costs (186 ) (228 ) (270 ) 18.4 % 15.6 %
Total Operating Profit (Loss) $ (134 ) $ (2,425 ) $ (6,279 ) 94.5 % 61.4 %
Operating Profit (Loss)%:
Wellbore Technologies 3.8 % (46.0 )% (110.5 )%Completion & Production Solutions (3.3 )% (40.2 )% (69.8 )% Rig Technologies
2.5 % (18.9 )% (19.5 )%
Total Operating Profit (Loss) % (2.4 )% (39.8 )% (74.1 )%
Years Ended
Wellbore Technologies
Revenue from Wellbore Technologies for the year ended
Operating profit from Wellbore Technologies was$74 million for the year endedDecember 31, 2021 , an increase of$932 million compared to the year endedDecember 31, 2020 . Operating profit percentage for 2021 was 3.8 percent compared to an operating loss percentage of -46 percent in 2020. 41
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Other Items included in operating loss for Wellbore Technologies were
Completion & Production Solutions
Revenue from Completion & Production Solutions for the year endedDecember 31, 2021 was$1,963 million , a decrease of$470 million (-19%) compared to the year endedDecember 31, 2020 . Operating loss from Completion & Production Solutions was$65 million for the year endedDecember 31, 2021 compared to an operating loss of$977 million for 2020, an improvement of$912 million . Operating loss percentage for 2021 was -3.3 percent compared to -40.2 percent in 2020. Included in operating loss are Other Items related to impairment charges, inventory charges, severance accruals and other charges and credits. Other items included in operating loss for Completion & Production Solutions was zero for the year endedDecember 31, 2021 and$1,132 million for the year endedDecember 31, 2020 . 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$1,287 million atDecember 31, 2021 , an increase of$592 million , or 85 percent from backlog of$695 million atDecember 31, 2020 . Although numerous factors can affect the timing of revenue out of backlog (including, but not limited to, customer change orders and supplier accelerations or delays), the Company reasonably expects approximately$1,125 million of revenue out of backlog in 2022 and approximately$162 million of revenue out of backlog in 2023 and thereafter. AtDecember 31, 2021 , approximately 68 percent of the capital equipment backlog was for offshore products and approximately 79 percent of the capital equipment backlog was destined for international markets.
Rig Technologies
Revenue from Rig Technologies for the year endedDecember 31, 2021 was$1,739 million , a decrease of$180 million (-9%) compared to the year endedDecember 31, 2020 .
Operating profit from Rig Technologies was
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$20 million for the year endedDecember 31, 2021 and$402 million for the year endedDecember 31, 2020 . 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$2,767 million atDecember 31, 2021 , an increase of$98 million , or 4 percent, from backlog of$2,669 million atDecember 31, 2020 . Although numerous factors can affect the timing of revenue out of backlog (including, but not limited to, customer change orders and supplier accelerations or delays), the Company reasonably expects approximately$692 million of revenue out of backlog in 2022 and the remaining in 2023 and thereafter. AtDecember 31, 2021 , approximately 31 percent of the capital equipment backlog was for offshore products and approximately 92 percent of the capital equipment backlog was destined for international markets.
Eliminations and corporate costs
Eliminations and corporate costs were$186 million for the year endedDecember 31, 2021 compared to$228 million for the year endedDecember 31, 2020 . 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. 42
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Other income (expense), net
Other income (expense), net was expense of$23 million for the year endedDecember 31, 2021 compared to expense of$17 million for the year endedDecember 31, 2020 . The increase in expense was primarily due to higher foreign exchange losses for 2021. Provision for income taxes The effective tax rate for the year endedDecember 31, 2021 was -6.5 percent, compared to 8.7 percent for 2020. For the year endedDecember 31, 2021 the effective tax rate was negatively impacted by current year losses in certain jurisdictions with no tax benefit, partially offset by favorable adjustments related to utilization of losses and tax credits for prior year tax returns. For the year endedDecember 31, 2020 the effective tax rate was negatively impacted by the impairment of nondeductible goodwill and the establishment of additional valuation allowance for current year losses and other tax attributes, partially offset by the release of valuation allowance as a result of (a) the carryback of$591 million ofU.S. net operating losses from 2019 to 2014 as a result of the CARES Act and (b) the filing of an amended US tax return to deduct foreign tax credits and carryback the resulting$287 million U.S. net operating loss from 2016 to 2014.
Results of Operations in 2020 Compared to 2019
Information related to the comparison of our operating results between the years 2020 and 2019 is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K filed with theSEC and is incorporated by reference into this annual report on Form 10-K.
Non-GAAP Financial Measures and Reconciliations
This Form 10-K contains certain non-GAAP financial measures that management believes are useful tools for internal use and the investment community in evaluating NOV's overall financial performance. These non-GAAP financial measures are broadly used to value and compare companies in the oilfield services and equipment industry. Not all companies define these measures in the same way. In addition, these non-GAAP financial measures are not a substitute for financial measures prepared in accordance with GAAP and should therefore be considered only as supplemental to such GAAP financial measures. The Company defines Adjusted EBITDA as Operating Profit excluding Depreciation, Amortization and, when applicable, Other Items. Management believes this is important information to provide because it is used by management to evaluate the Company's operational performance and trends between periods and manage the business. Management also believes this information may be useful to investors and analysts to gain a better understanding of the Company's results of ongoing operations. Adjusted EBITDA is not intended to replace GAAP financial measures, such as Net Income.
Other items consist of charges and credits related to (in millions):
Three Months Ended Years Ended
December 31, September 30, December 31,
2021 2020 2021 2021 2020
Other items by category:
Goodwill $ - $ - $ - $ - $ 1,295
Identified intangibles - - - - 292
Inventory (1 ) 174 (4 ) (13 ) 326
Long-lived assets - - - - 304
Severance, facility closures
and other 10 62 28 70 206
Total other items $ 9 $ 236 $ 24 $ 57 $ 2,423
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The following tables set forth the reconciliation of Adjusted EBITDA to its most directly comparable GAAP financial measures (in millions):
Three Months Ended Years Ended
December 31, September 30, December 31,
2021 2020 2021 2021 2020
Operating profit (loss):
Wellbore Technologies $ 50 $ (78 ) $ 32 $ 74 $ (858 )
Completion & Production
Solutions (16 ) (31 ) (26 ) (65 ) (977 )
Rig Technologies 1 (132 ) 1 43 (362 )
Eliminations and corporate
costs (50 ) (60 ) (50 ) (186 ) (228 )
Total operating profit (loss) $ (15 ) $ (301 ) $ (43 ) $ (134 ) $ (2,425 )
Other Items:
Wellbore Technologies $ (1 ) $ 46 $ 7 $ 30 $ 849
Completion & Production
Solutions 2 43 6 - 1,132
Rig Technologies 3 132 6 20 402
Corporate 5 15 5 7 40
Total Other Items $ 9 $ 236 $ 24 $ 57 $ 2,423
Depreciation & amortization:
Wellbore Technologies $ 39 $ 44 $ 38 $ 158 $ 187
Completion & Production
Solutions 16 16 15 62 75
Rig Technologies 17 19 18 71 77
Corporate 3 3 4 15 13
Total depreciation &
amortization $ 75 $ 82 $ 75 $ 306 $ 352
Adjusted EBITDA:
Wellbore Technologies $ 88 $ 12 $ 77 $ 262 $ 178
Completion & Production
Solutions 2 28 (5 ) (3 ) 230
Rig Technologies 21 19 25 134 117
Eliminations and corporate
costs (42 ) (42 ) (41 ) (164 ) (175 )
Total Adjusted EBITDA $ 69 $ 17 $ 56 $ 229 $ 350
Reconciliation of Adjusted
EBITDA:
GAAP net loss attributable to
Company $ (40 ) $ (347 ) $ (69 ) $ (250 ) $ (2,542 )
Noncontrolling interests (3 ) (1 ) 4 5 5
Provision (benefit) for
income taxes 14 22 5 15 (242 )
Interest expense 19 19 19 77 84
Interest income (2 ) (2 ) (3 ) (9 ) (7 )
Equity (income) loss in
unconsolidated affiliate (1 ) 10 2 5 260
Other (income) expense, net (2 ) (2 ) (1 ) 23 17
Depreciation and amortization 75 82 75 306 352
Other Items 9 236 24 57 2,423
Total Adjusted EBITDA $ 69 $ 17 $ 56 $ 229 $ 350
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Liquidity and Capital Resources
AtDecember 31, 2021 , the Company had cash and cash equivalents of$1,591 million , and total debt of$1,713 million . AtDecember 31, 2020 , cash and cash equivalents were$1,692 million and total debt was$1,834 million . As ofDecember 31, 2021 , approximately$893 million of the$1,591 million of cash and cash equivalents was held by our foreign subsidiaries and the earnings associated with this cash, if repatriated to theU.S. , could be subject to foreign withholding taxes and incrementalU.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. OnApril 8, 2021 , the Company extended the maturity date of the revolving credit facility by one additional year toOctober 30, 2025 . The revolving credit facility has a borrowing capacity of$2.0 billion throughOctober 30, 2024 , and a borrowing capacity of$1.7 billion fromOctober 31, 2024 , toOctober 30, 2025 . The Company has the right to increase the commitments under this agreement to an aggregate amount of up to$3.0 billion upon the consent of only those lenders holding any such increase. Interest under the multicurrency facility is based upon LIBOR, NIBOR or CDOR plus 1.125% subject to a ratings-based grid or theU.S. prime rate. The credit facility contains a financial covenant regarding maximum debt-to-capitalization ratio of 60%. As ofDecember 31, 2021 , the Company was in compliance with a debt-to-capitalization ratio of 28% and had no outstanding letters of credit issued under the facility, resulting in$2.0 billion of available funds. The Company also has a$150 million bank line of credit for the construction of a facility inSaudi Arabia . Interest under the bank line of credit is based upon LIBOR plus 1.40%. The bank line of credit contains a financial covenant regarding maximum debt-to-equity ratio of 75%. As ofDecember 31, 2021 , the Company was in compliance. As ofDecember 31, 2021 , the Company had$102 million in borrowings related to this line of credit. The first payment inDecember 2022 will be approximately$5 million . OnApril 9, 2021 , the Company repaid the entire outstanding balance of$182 million of its 2.60% unsecured Senior Notes dueDecember 1, 2022 using available cash balances. Upon redemption, the Company paid$191 million , which included a redemption premium of$6.8 million as well as accrued and unpaid interest of$1.7 million . As a result of the redemption, the Company recorded a loss on extinguishment of debt of$7.1 million , which included the redemption premium of$6.8 million and non-cash charges of$0.3 million to write-off of unamortized discount and debt issuance costs. Following the repayment, the Company's earliest bond maturity is in 2029.
The Company's outstanding debt at
The Company had$444 million of outstanding letters of credit atDecember 31, 2021 that are under various bilateral letter of credit facilities. Letters of credit are issued as bid bonds, advanced payment bonds and performance bonds. The following table summarizes our net cash provided by 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, 2021 2020 2019
Net cash provided by operating activities
(196 ) (144 ) (315 )
Net cash used in financing activities (189 ) (259 ) (647 )
Significant sources and uses of cash during 2021
• Cash flows provided by operating activities was
included changes in the primary components of our working capital
(inventories, contract assets, and accounts payable).
• Capital expenditures were $201 million .
• Business acquisitions, net of cash acquired, were $52 million .
• Payments of $20 million in dividends to our shareholders.
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Other
The effect of the change in exchange rates on cash was a decrease of$7 million ,$2 million , and$8 million for the years endedDecember 31, 2021 , 2020 and 2019, 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 for the foreseeable future.
We may 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. As ofDecember 31, 2021 , the Company had$60 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. 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 and impairment of goodwill and other indefinite-lived intangible assets. 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.
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. Estimating total revenue and cost at completion of long-term construction contracts is complex, subject to many variables and requires significant judgement. 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 integrating a complex set of tasks and components into a single project or capability, so are accounted for as one performance obligation.
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
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recognized from performance obligations satisfied in previous periods was
The Company has approximately$1.5 billion of goodwill as ofDecember 31, 2021 . Generally accepted accounting principles require the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances indicate that goodwill 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 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. 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. 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. During 2021, 2020, and 2019 we recorded charges for additions to inventory reserves of$73 million ,$367 million , and$659 million , respectively, consisting primarily of obsolete and surplus inventories. AtDecember 31, 2021 and 2020, inventory reserves totaled$444 and$577 million , or 25.0% and 29.0% 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 2021 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. 47
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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.
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
The Private Securities Litigation Reform Act of 1995 provides safe harbor
provisions for forward-looking information. 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," "believe," "plan,"
"will," "expect," "anticipate," "estimate," "should," "forecast," and similar
words, although some forward-looking statements are expressed differently. We
may also provide oral or written forward-looking information in other materials
we release to the public.? Forward-looking information involves risk and
uncertainties and reflects our best judgment based on current ?information. ?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. 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.
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, and additional disclosures we
make in our press releases and ?Forms 10-Q, and 8-K. We also suggest that you
listen to our quarterly earnings release conference calls with financial
analysts.
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