WEATHERFORD INTERNATIONAL PLC As used in this item, the "Company," "we," "us" and "our" refer toWeatherford International plc , a public limited company organized under the laws ofIreland , and its subsidiaries on a consolidated basis. The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in "Item 8. - Financial Statements and Supplementary Data." Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements include certain risks and uncertainties. For information about these risks and uncertainties, refer to the section entitled "Forward-Looking Statements" and the section entitled "Item 1A. - Risk Factors." As described in "Note 1 - Summary of Significant Accounting Policies" references to "Predecessor" relate to the Consolidated Statements of Operations for the period fromJanuary 1, 2019 through and including the adjustments from the application of Fresh Start Accounting onDecember 13, 2019 and for the year endedDecember 31, 2018 ("Predecessor Periods"). References to "Successor" relate to the Consolidated Statements of Operations for the year endedDecember 31, 2020 and for the period fromDecember 14, 2019 throughDecember 31, 2019 ("2020 Successor Period and 2019 Successor Period", respectively) and are not comparable to the Consolidated Financial Statements of the Predecessor Periods as indicated by the "Black line" division in the financials and footnote tables, which emphasizes the lack of comparability between amounts presented.
References and comparisons to results for the year ended
Overview
We conduct operations in over 75 countries and have service and sales locations in oil and natural gas producing regions globally. Our operational performance is reviewed on a geographic basis, and we report the Western Hemisphere and Eastern Hemisphere as separate, distinct reporting segments.
Our principal business is to provide equipment and services to the oil and natural gas exploration and production industry, both onshore and offshore. Our two product lines are as follows: (1) Completion and Production and (2) Drilling, Evaluation and Intervention.
•Completion and Production offers production optimization services and a
complete production ecosystem, featuring our artificial-lift portfolio, testing
and flow-measurement solutions, and optimization software, to boost productivity
and profitability. In addition, we have a suite of modern completion products,
reservoir stimulation designs, and engineering capabilities that isolate zones
and unlock reserves in deepwater, unconventional, and aging reservoirs.
•Drilling, Evaluation and Intervention comprises a suite of services ranging
from early well planning to reservoir management. The drilling services offer
innovative tools and expert engineering to increase efficiency and maximize
reservoir exposure. The evaluation services merge wellsite capabilities
including wireline and managed pressure drilling. We also build or rebuild well
integrity for the full life cycle of the well. Using conventional to advanced
Weatherford International plc - 2020 Form 10-K | 20
--------------------------------------------------------------------------------Table of Contents Item 7 | MD&A equipment, we offer safe and efficient tubular running services in any environment. Our skilled fishing and re-entry teams execute under any contingency from drilling to abandonment, and our drilling tools provide reliable pressure control even in extreme wellbores.
Financial Results Overview
Successor revenues totaled$3.7 billion in 2020, a decrease of$1.5 billion , or 29%, compared to the 2019 Combined Period revenues, as the unprecedented global health and economic crisis sparked by the COVID-19 pandemic negatively impacted industry activity. Our revenue decline was predominantly driven by lower activity levels inNorth America as a result of lower demand for our products and services inthe United States , but was also impacted by declines in activity internationally, primarily inLatin America , theMiddle East ,North Africa andRussia . Successor consolidated operating loss of$1.5 billion worsened$305 million , or 26%, in 2020 compared to the 2019 Combined Period consolidated operating loss of$1.2 billion . The higher operating loss in 2020 primarily reflects the decline in business demand due to the COVID-19 pandemic, long-lived asset impairment charges, goodwill impairment, and inventory charges, partially offset by the lower retention expenses and cost savings from our various restructuring activities. Successor segment operating income was$55 million in 2020, a decrease of$139 million , compared to the 2019 Combined Period. The decrease was driven primarily by the decline in demand for our products and services as a result of the COVID-19 pandemic and additional expense of COVID-19 protocols, partially offset by our lower cost structure. Revenues in the 2019 Combined Period compared to 2018 decreased$529 million , or 9%, which was predominantly driven by lower activity levels inCanada , lower demand for our products and services inthe United States , uncertainty related to economic conditions and customer budget reductions inArgentina , as well as decreased revenues associated with the divested land drilling rigs, laboratory services and surface logging businesses. This decline was partially offset by increased activity in theMiddle East and higher service activity inRussia and theNorth Sea . Excluding the impact of revenues from the portion of the divested businesses, consolidated revenues were down$166 million , or 3% in 2019 Combined Period compared to 2018. Consolidated operating results improved$903 million , or 43% in the 2019 Combined Period compared to 2018 while segment operating income declined$133 million , or 41% in the 2019 Combined Period compared to 2018. The improvement in the 2019 Combined Period consolidated operating results was primarily due to lower goodwill impairment charges and the net gain on sale of businesses. The segment operating income in the 2019 Combined Period declined due to the reduced activity inNorth America and an unfavorable product mix inCanada andthe United States . Lower demand for our products and services coupled with an unfavorable product mix and lack of supply chain savings caused the expected benefits from our cost reduction initiatives to slow and consequently resulted in significantly lower actual results compared to our expectations during 2019. These declines were partially offset by higher integrated service project activity inLatin America and operational improvements in the Eastern Hemisphere as a result of a more favorable geographic and product mix.
Summary of Significant Charges and Credits
For the Successor year endedDecember 31, 2020 , significant charges incurred totaled$1.2 billion and included$814 million of long-lived asset impairments,$239 million of goodwill impairments,$138 million of inventory charges and$45 million in other charges. In addition, we had$206 million of restructuring charges. Reorganization items in the 2019 Predecessor Period directly related to bankruptcy include the$4.3 billion gain on settlement of liabilities subject to compromise,$1.4 billion gain on revaluation of the Company's assets and liabilities, and$346 million of charges for debt issuance write-offs, debt discount write-offs, backstop commitment fees, DIP financing fees and professional fees related to bankruptcy matters. In addition, we incurred$86 million of prepetition charges for professional and other fees related to the Cases incurred before the petition date. For the 2019 Predecessor Period, significant charges incurred totaled$1.1 billion and included$730 million of goodwill impairment,$237 million in asset write-downs and rigs related and other charges,$117 million of inventory charges and$20 million of long-lived asset impairments. In addition, we had$189 million of restructuring charges.Weatherford International plc - 2020 Form 10-K | 21 -------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A For the year endedDecember 31, 2018 , significant charges incurred totaled$2.2 billion and included$1.9 billion of goodwill impairment,$151 million of long-lived asset impairments and$87 million in other charges. In addition, we had$126 million of restructuring charges.
Please refer to more details as discussed in "Note 3 - Fresh Start Accounting" and "Note 4 - Impairments and Other Charges."
The unprecedented global economic and industry conditions resulting from the decline in demand and impact from the COVID-19 pandemic were identified as goodwill and long-lived asset impairment indicators. As a result, we performed impairment assessments quarterly in 2020 through analysis of the undiscounted cash flow of our asset groups, which include property, plant and equipment, definite-lived intangible assets, goodwill and right of use assets. As ofMarch 31, 2020 , and as ofJune 30, 2020 , we identified that impairment occurred in certain asset groups and with the assistance of third-party valuation advisors we determined the fair value of those asset groups. Based on our impairment tests, we determined the carrying amount of certain long-lived asset groups and reporting units exceeded their respective fair values and we recognized$814 million of long-lived asset impairments and$239 million of goodwill impairment in ourMiddle East &North Africa ("MENA") andRussia ,Turkmenistan andKazakhstan ("Russia") reporting units in "Impairments and Other Charges" on the accompanying Consolidated Statements of Operations during the year endedDecember 31, 2020 . The$239 million of goodwill in our MENA andRussia reporting units was established in the 2019 Successor Period upon emergence from bankruptcy as part of Fresh Start. However in the 2019 Predecessor period, we determined that goodwill for all our reporting units in the Western Hemisphere and Eastern Hemisphere was fully impaired and we incurred a goodwill impairment charge of$730 million . The 2019 Predecessor Period impairment indicators were a result of lower activity levels and lower exploration and production capital spending in our reporting units. Our lower forecasted financial results were due to the continued weakness within the energy market which impacted our ability to meet the original timeline of our revenue and profitability improvement efforts under our restructuring over the past two years, defined in "Note 12 - Restructuring Charges". During the 2019 Predecessor Period, we recognized long-lived asset impairments of$20 million to write-down our assets to the lower of carrying amount or fair value less cost to sell for our land drilling rigs. During 2018, we recorded a goodwill impairment of$1.9 billion which was based upon our annual fair value assessment of our business and assets. The rapid and steep decline in oil prices and consequentially lower expectations for future exploration and production capital spending, resulted in a sharp reduction in share prices in the oilfield services sector, including our share price, which triggered the goodwill impairment. During 2018, we also recognized long-lived asset impairments of$151 million to write-down our land drilling rigs assets. The 2018 impairments were due to the sustained downturn in the oil and gas industry that resulted in a reassessment of our disposal groups. The change in our expectations of the market's recovery, in addition to successive negative operating cash flows in certain disposal asset groups represented an indicator that those assets will no longer be recoverable over their remaining useful lives. See "Note 10 - Long-Lived Asset Impairments," "Note 11 -Goodwill and Intangible Assets" and "Note 15 - Fair Value of Financial Instruments, Assets and Other Assets" for additional information regarding goodwill and long-lived asset impairments.
Business Outlook
The COVID-19 pandemic, customer activity shutdowns, travel constraints and
access restrictions to customer work locations caused significant uncertainty
for the global economy, resulting in the significant decline in the global
demand for oil and gas. The impacts of the COVID-19 pandemic together with
uncertainty around the extent and timing for an economic recovery, caused
extreme market volatility for commodity prices and resulted in significant
reductions to the capital spending during 2020 of our primary customer base,
with lowering expectations of oil and gas related spending into 2021 and beyond.
We continue to closely monitor the global impacts surrounding the COVID-19
pandemic, including operational and manufacturing disruptions, logistical
constraints and travel restrictions. We have experienced and expect to continue
to experience delays or a lack of availability of key components from our
suppliers, shipping and other logistical delays and disruptions, customer
restrictions that prevent access to their sites, community measures to contain
the spread of the virus, and changes to Weatherford's policies that have both
restricted and changed the way our employees work. We expect most, if not all,
of these disruptions and constraints will continue to effect how we and our
customers and suppliers work in the future.
Weatherford International plc - 2020 Form 10-K | 22
--------------------------------------------------------------------------------Table of Contents Item 7 | MD&A
We continuously improve crew rotations and management practices to minimize our employees' exposure to COVID-19 while at client facilities. Our identification and management of COVID-19 cases evolve with the latest guidance through the development of updated protocols, advanced testing and response procedures. Faced with these challenges, we evolved our digital portfolio and enhanced our applications to offer fully-integrated digital oilfield solutions. We also increased our offerings of automated well construction and remote monitoring and predictive analytics related to our production offerings. Oil prices have risen recently, buoyed by recent supply-ledOrganization of Petroleum Exporting Countries ("OPEC") and other high oil exporting non-OPEC nations ("OPEC+") policy, the ongoing COVID-19 vaccine rollout, and multinational economic stimulus actions which is providing a runway for a meaningful oil demand recovery throughout 2021. We continue to anticipate multi-year dislocation across the industry, particularly inNorth America ,Europe ,Latin America and Sub Saharan Africa. We continue to anticipate constraints on our ability to generate and grow our revenues, profits and cash flows given the global economic uncertainty.
We implemented, and will continue to implement, aggressive actions to right-size our business to address current market conditions, including:
•Cost reductions across all our operations, as well as our global support structure to match our reduced size; and •Consolidation of geographic and product line structures to better align with market conditions. The oilfield services industry growth is highly dependent on many external factors, such as the global response to the COVID-19 pandemic, our customers' capital expenditures, world economic and political conditions, the price of oil and natural gas, member-country quota compliance within theOPEC and weather conditions and other factors, including those described in the section entitled "Forward-Looking Statements" and the section entitled "Item 1A. - Risk Factors."
Industry Trends
The level of spending in the energy industry is heavily influenced by the current and expected future prices of oil and natural gas. Changes in expenditures result in an increased or decreased demand for our products and services. Rig count is an indicator of the level of spending for the exploration for and production of oil and natural gas reserves. The following charts set forth certain statistics that reflect historical market conditions. The table below shows the average oil and natural gas prices forWest Texas Intermediate ("WTI") andHenry Hub natural gas during years endedDecember 31, 2020 , 2019 and 2018. Commodity prices decreased during 2020 following the dual impact of the COVID-19 pandemic and the inability ofOPEC and OPEC+ nations to agree on production cuts. Years Ended 12/31/2020 12/31/2019 12/31/2018 Oil price - WTI (1)$39.23 $56.98 $64.94 Natural Gas price - Henry Hub (2)$2.04 $2.57 $3.17
(1) Oil price measured in dollars per barrel (rounded to the nearest dollar) (2) Natural gas price measured in dollars per million British thermal units (Btu), or MMBtu
The historical average rig counts based on the weekly Baker Hughes Company rig count information were as follows:
Years Ended
12/31/2020 12/31/2019 12/31/2018
North America 522 1,077 1,223
International 825 1,098 988
Worldwide 1,347 2,175 2,211
As of December 31, 2020 , the North America and International Rig Count totaled
410 and 665, respectively.
Weatherford International plc - 2020 Form 10-K | 23-------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A Global demand for oil dropped precipitously from January through April of 2020 due to numerous different factors, but primarily including the expansion of the COVID-19 coronavirus outbreak, as governments around the world responded with lockdowns, resulting in significantly reduced travel. Global stocks of crude and refined products increased as oil supply could not respond quickly enough to balance the market. These factors contributed to the resulting precipitous decline in commodity prices, rising oil and gas inventory levels, decreased realized and expected levels of oil and gas demand, decreased level of production capacity and geopolitical uncertainty. During the second half of 2020, theOPEC -led supply alliance agreed to production limits, which stabilized and improved oil prices. Opportunities and Challenges As production decline rates persist and reservoir productivity complexities increase, our customers continue to face challenges in balancing the cost of extraction activities with securing desired rates of production while achieving acceptable rates of return on investment. These challenges increase our customers' requirements for technologies that improve productivity and efficiency, which in turn puts pressure on us to deliver our products and services at competitive rates. In addition, as consolidation of the oil and gas services industry continues due to market conditions, there has been an increased demand for companies with specialized products, services and technologies. We believe we are well positioned to satisfy our customers' needs, but the level of improvement in our businesses in the future will depend heavily on pricing, volume of work, and our ability to offer solutions to more efficiently extract oil and gas, control costs, and penetrate new and existing markets with our newly developed technologies. Over the long-term, we expect the world's demand for energy will rise from current levels requiring increased oil field services and more advanced technology from the oilfield service industry. We remain focused on delivering innovative and cost-efficient solutions for customers to assist them in achieving their operational, safety and environmental objectives. Our challenges also include adverse market conditions that could make our targeted cost reduction benefits more difficult to recruit new and retain existing employees. Oil prices have risen recently, buoyed by recent supply-led OPEC+ policy, the ongoing COVID-19 vaccine rollout, and multinational economic stimulus actions which is providing a runway for a meaningful oil demand recovery throughout 2021. We continue to anticipate a multi-year dislocation across the industry, particularly inNorth America ,Europe ,Latin America and Sub Saharan Africa. In addition, continued negative sentiment for the energy industry in the capital markets has impacted, and may continue to impact, demand for our products and services, as our customers, particularly those inNorth America , have experienced and likely will continue to experience challenges securing appropriate amounts of capital under suitable terms to finance their operations. The cyclicality of the energy industry and the COVID-19 pandemic continues to impact the demand for our products and services which strongly depend on the level of exploration and development activity and the completion phase of the well life cycle or on the number of wells and the type of production systems used. We are following our long-term strategy aimed at achieving profitability in our businesses, servicing our customers and creating value for our shareholders. Our long-term success will be determined by our ability to manage effectively the cyclicality of our industry, including the ongoing and prolonged industry downturn, our ability to respond to industry demands and periods of over-supply or uncertain oil prices, and ultimately to generate consistent positive cash flow and positive returns on the invested capital.
Exchange Listing
The delisting of our ordinary shares from theNew York Stock Exchange ("NYSE") became effective onApril 27, 2020 . Our ordinary shares were deregistered under Section 12(b) of the Exchange Act onJuly 16, 2020 . We continue to evaluate listing options and intend to relist our ordinary shares when our Board of Directors determines market conditions are appropriate. The Company intends to continue filing periodic reports with theSecurities and Exchange Commission ("SEC") on a voluntary basis. Our ordinary shares continue to trade on theOTC Pink Marketplace under the ticker symbol "WFTLF".
2019 Emergence from Bankruptcy Proceedings and Fresh Start Accounting
OnJuly 1, 2019 (the "Petition Date"), Weatherford and two of our subsidiaries (collectively, the "Weatherford Parties" ) commenced voluntary reorganization proceedings (the "Cases"), including under Chapter 11 of Title 11 ("Chapter 11") of the United States Bankruptcy Code in theU.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court "), with ancillary proceedings filed inIreland andBermuda . The plan of reorganization (as amended, the "Plan"), together with the schemes of arrangement inIreland andBermuda , became effective onDecember 13, 2019 (the "Effective Date") and the Weatherford Parties emerged from Chapter 11. Upon emergence from Chapter 11, we adopted fresh start accounting ("Fresh Start Accounting"). For additional details regarding the Chapter 11, see "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" and "Note 3 - Fresh Start Accounting".Weatherford International plc - 2020 Form 10-K | 24 -------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A Upon adoption of Fresh Start Accounting, the reorganization value derived from the range of enterprise value as disclosed in the Disclosure Statement associated with the Plan, as adjusted for the revised projections filed with theSEC on a Form 8-K onOctober 7 andOctober 16, 2019 , was allocated to the Company's assets and liabilities based on their fair values (except for deferred income taxes) in accordance with ASC 805 - Business Combinations. The amount of deferred income taxes to be recorded was determined in accordance with ASC 740 - Income Taxes. The Effective Date fair values of the Company's assets and liabilities differ materially from their recorded values as reflected on the historical balance sheet. Under Fresh Start Accounting, our balance sheet on the Effective Date reflected all our assets and liabilities at fair value. Our emergence from bankruptcy and the adoption of Fresh Start Accounting resulted in a new reporting entity, referred to herein as the "Successor," for financial reporting purposes. To facilitate discussion and analysis of our financial condition and results of operations, we refer to the reorganized Weatherford Parties as the Successor for periods subsequent toDecember 13, 2019 and as the "Predecessor" for periods on or prior toDecember 13, 2019 . As a result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, our consolidated financial statements subsequent toDecember 13, 2019 are not comparable to our consolidated financial statements on or prior toDecember 13, 2019 , and as such, "Black-line" financial statements are presented to distinguish between the Predecessor and Successor companies. References to "Successor" relate to the Consolidated Statements of Operations for the year endedDecember 31, 2020 and fromDecember 14, 2019 throughDecember 31, 2019 ("Successor Periods").
References to the year ended
Debt Transactions and Equity Issuances
OnAugust 28, 2020 , we completed a series of financing transactions that meaningfully enhanced our liquidity, including issuing$500 million of 8.75% Senior Secured Notes ("Senior Secured Notes"), terminating our ABL Credit Agreement, and amending and increasing the size of our senior secured letter of credit agreement (the "LC Credit Agreement") to$215 million . See "Note 14 - Borrowings and Other Debt Obligations" for additional details. OnJuly 3, 2019 , the Weatherford Parties borrowed approximately$1.4 billion under the DIP Credit Agreement and the proceeds were used to repay certain prepetition indebtedness, cash collateralize certain obligations with respect to letters of credit and similar instruments and finance the working capital needs and general corporate purposes of the Weatherford Parties and certain of their subsidiaries. OnJuly 3, 2019 , the Company repaid all outstanding amounts due under the secured Term Loan Agreement and 364-Day Credit Agreement totaling approximately$616 million with borrowings from our DIP Credit Agreement. In addition, we cash collateralized approximately$271 million of letters of credit and similar instruments with borrowings from the DIP Credit Agreement. See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" for additional details. The DIP Credit Agreement was repaid in full upon emergence from Bankruptcy onDecember 13, 2019 . As of the Petition Date, the Predecessor's senior notes and exchangeable senior notes and related unpaid accrued interest totaling$7.6 billion were placed into liabilities subject to compromise during the bankruptcy period with respect to the Predecessor as shown in "Note 3 - Fresh Start Accounting". Upon emergence from bankruptcy onDecember 13, 2019 , the Predecessor's senior and exchangeable senior notes were cancelled pursuant to the terms of the Plan, resulting in a gain on extinguishment of debt of$4.3 billion recorded in "Reorganization Items" on the Consolidated Statements of Operations. On the Effective Date, we issued Senior Notes maturing onDecember 1, 2024 ("Exit Notes") for an aggregate principal amount of$2.1 billion (of which$500 million was in the form of Exit Takeback Notes to existing creditors on the senior notes being cancelled). Interest on the Exit Notes accrue at the rate of 11.00% per annum and is payable semiannually in arrears onJune 1 andDecember 1 . We commenced interest payments onJune 1, 2020 . For the 2019 Predecessor Period, we had net short-term repayments of$347 million primarily from our borrowings and repayments of the DIP Credit Agreement and our Predecessor Revolving Credit Agreements, including the repayment of our 364-Day Credit Agreement. Our long-term debt repayments of$318 million on our Term Loan Agreement and financed leases. OnDecember 13, 2019 , all previously issued and outstanding equity interests in the Predecessor were cancelled and the Company issued 69,999,954 new ordinary shares ("New Ordinary Shares") to the holders of the Company's existing senior notes and holders of old ordinary shares ("Old Ordinary Shares"). The amount in excess of par value of$2.9 billion is reported in "Capital in Excess of Par Value" on the accompanying Consolidated Balance Sheets.Weatherford International plc - 2020 Form 10-K | 25 -------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A On the Effective Date, the Company issued warrants ("New Warrants") to holders of the Company's Old Ordinary Shares, to purchase up to an aggregate of 7,777,779 New Ordinary Shares in the Company, par value$0.001 (the "New Ordinary Shares"), at an exercise price of$99.96 per ordinary share. The New Warrants are equity classified and, upon issuance, have a value of$31 million , which was recorded in "Capital in Excess of Par Value." In February of 2018, we repaid in full our 6.00% senior notes dueMarch 2018 . OnFebruary 28, 2018 , we issued$600 million in aggregate principal amount of our 9.875% senior notes due 2025. TheFebruary 2018 debt offering partially funded a concurrent tender offer to purchase for cash any and all of our 9.625% senior notes due 2019. We settled the tender offer in cash for the amount of$475 million , retiring an aggregate face value of$425 million and accrued interest of$20 million . InApril 2018 , we repaid the remaining principal outstanding on an early redemption of the bond. We recognized a cumulative bond tender loss of$34 million on these transactions in "Other Expense, Net" on the accompanying Consolidated Statements of Operations.
See "Note 14 - Borrowings and Other Debt Obligations" for additional details of our financing activities.
Divestitures
We did not have any significant divestitures of businesses during the Successor
year ended
Weatherford International plc - 2020 Form 10-K | 26
--------------------------------------------------------------------------------
Table of Contents Item 7 | MD&A
Results of Operations
The following table sets forth consolidated results of operations and financial
information by operating segment and other selected information for the periods
indicated. The 2020 and 2019 Successor Periods and the 2019 and 2018 Predecessor
Periods are distinct reporting periods as a result of our emergence from
bankruptcy on December 13, 2019 . References in these results of operations to
the change and the percentage change combine the 2019 Successor Period and 2019
Predecessor Period results for the year ended December 31, 2019 in order to
provide some comparability of such information to the years ended December 31,
2020 and December 31, 2018 . While this combined presentation is not presented
according to generally accepted accounting principles in the United States
("GAAP") and no comparable GAAP measure are presented, management believes that
providing this financial information is the most relevant and useful method for
making comparisons to the years ended December 31, 2020 and December 31, 2018 as
the eighteen days of the Successor Period is not a significant period of time
impacting the combined results.
Successor Predecessor Combined Change Combined Change
From From Favorable Favorable
Year 12/14/19 01/01/19 Year (Unfavorable) (Unfavorable)
Ended through through Ended $ % $ %
(Dollars in millions, except per
share data) 12/31/20 12/31/19 12/13/19 12/31/18 2020 vs 2019 2019 vs 2018
Revenues:
Western Hemisphere $ 1,586 $ 121 $ 2,620 $ 3,063 $ (1,155) (42) % $ (322) (11) %
Eastern Hemisphere 2,099 140 2,334 2,681 (375) (15) % (207) (8) %
Total Revenues 3,685 261 4,954 5,744 (1,530) (29) % (529) (9) %
Operating Income (Loss):
Western Hemisphere 18 (4) 54 208 (32) (64) % (158) (76) %
Eastern Hemisphere 37 10 134 119 (107) (74) % 25 21 %
Total Segment Operating Income 55 6 188 327 (139) (72) % (133) (41) %
Corporate (111) (5) (118) (130) 12 10 % 7 5 %
Impairments and Other Charges (1,236) - (1,104) (2,155) (132) (12) % 1,051 49 %
Restructuring Charges (206) - (189) (126) (17) (9) % (63) (50) %
Prepetition Charges - - (86) - 86 100 % (86) NA
Gain on Operational Assets Sale 12 - 15 - (3) (20) % 15 NA
Gain on Sale of Businesses, Net - - 112 - (112) (100) % 112 NA
Total Operating Income (Loss) (1,486) 1 (1,182) (2,084) (305) (26) % 903 43 %
Reorganization Items (9) (4) 5,389 - (5,394) (100) % 5,385 NA
Interest Expense, Net (266) (12) (362) (614) 108 29 % 240 39 %
Total Other Expense, Net (53) - (26) (59) (27) (104) % 33 56 %
Income (Loss) before Income Taxes (1,814) (15) 3,819 (2,757) (5,618) (148) % 6,561 238 %
Income Tax Provision (85) (9) (135) (34) 59 41 % (110) (324) %
Net Income (Loss) $ (1,899) $ (24) $ 3,684 $ (2,791) $ (5,559) (152) % $ 6,451 231 %
Revenues Percentage by Product Lines
Successor Predecessor
Period From Period From
Year 12/14/19 01/01/19 Year
Ended through through Ended
12/31/2020 12/31/2019 12/13/2019 12/31/2018
Completion and Production 51 % 52 % 47 % 47 %
Drilling, Evaluation and Intervention 49 48 53 53
Total 100 % 100 % 100 % 100 %
Weatherford International plc - 2020 Form 10-K | 27-------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A Consolidated and Segment Revenues
2020 vs 2019 Revenues
Consolidated 2020 revenues of$3.7 billion decreased$1.5 billion , or 29%, compared to the 2019 Combined Period. The unprecedented global health and economic crisis sparked by the COVID-19 pandemic negatively impacted industry activity. The lower demand for oil and gas created by the impact of the COVID-19 pandemic, together with uncertainty around the extent and timing for an economic recovery, have caused significant reductions to the capital spending plans of exploration and production companies. •Western Hemisphere revenues decreased$1.2 billion , or 42%, in 2020 compared to the 2019 Combined Period due to the decline in activity and demand due to the COVID-19 pandemic. This resulted in lower activity levels in theU.S. andCanada as a result of a decline in rig related activity and exploration spending, which has reduced demand for completion, production drilling, evaluation and intervention products and services. We also experienced declines inLatin America with significant activity reductions inArgentina andColombia due to the COVID-19 pandemic and lower demand for oil and gas.
•Eastern Hemisphere revenues decreased
2019 vs 2018 Revenues
Consolidated revenues for the 2019 Combined Period decreased$529 million , or 9% compared to 2018. Excluding the impact of revenues from the divested portion of the land drilling rigs, laboratory services and surface logging businesses, consolidated revenues were down$166 million , or 3%, in 2019 compared to 2018. •Western Hemisphere revenues decreased$322 million , or 11%, in the 2019 Combined Period compared to 2018, due to lower activity levels in theU.S. andCanada as a result of a decline in rig related activity and exploration spending, which has reduced demand for completion, production, drilling, evaluation and intervention products and services. The decline inCanada was partially offset by higher activity in integrated service projects and product sales inMexico . •Eastern Hemisphere revenues decreased$207 million , or 8%, in the 2019 Combined Period compared to 2018. The decline in revenues was primarily due to lower revenues from our divested land drilling rigs businesses in theMiddle East andNorth Africa , as well as our divested laboratories and surface logging businesses. Increased revenues in the completions product line partially offset this decline. Excluding the impact of revenues from the divested portion of the land drilling rigs, laboratory services and surface logging businesses, revenues in 2019 increased$105 million , or 5% in 2019 compared to 2018.
Consolidated and Segment Operating Results
2020 vs 2019 Segment Operating Results
Successor segment operating income in 2020 was$55 million , a decrease of$139 million , compared to the 2019 Combined Period. The result was principally driven by the impact of the COVID-19 pandemic resulting in lower activity levels inNorth America as well as declines in activity internationally, primarily inLatin America ,Middle East ,North Africa andRussia . Western Hemisphere Successor segment reported operating income of$18 million in the year endedDecember 31, 2020 declined$32 million , compared to the 2019 Combined Period. The segment income decline was impacted by lower activity levels inNorth America ,Argentina andColombia , the deterioration in demand for services due to the COVID-19 pandemic and weakening demand for oil and gas. Eastern Hemisphere Successor segment reported operating income of$37 million for the year endedDecember 31, 2020 was down by$107 million compared to the 2019 Combined Period. The segment income decline was impacted by slowing activity levels, deterioration in demand for services due to the COVID-19 pandemic and weakening demand for oil and gas.Weatherford International plc - 2020 Form 10-K | 28 -------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A 2019 vs 2018 Segment Operating Results Segment operating income decreased$133 million in the 2019 Combined Period compared 2018. The decrease was driven by lower activity levels, an unfavorable product mix inCanada andthe United States , and start-up costs for projects inLatin America . These declines were partially offset by improved operating results from higher integrated service project activity inLatin America and operational improvements in the Eastern Hemisphere. Excluding the impact of operating results from the divested portion of the land drilling rigs, laboratory services and surface logging businesses, segment operating results in 2019 declined$55 million compared to 2018. •Western Hemisphere segment operating income declined$158 million , or 76%, in the 2019 Combined Period compared to 2018. The segment income decline was driven by lower activity levels, lower operating margin product sales inCanada , start-up costs for projects inArgentina and employee retention expenses. These declines were partially offset by improved operating results from higher integrated service project activity inMexico . •Eastern Hemisphere segment operating income improved$25 million , or 21%, in the 2019 Combined Period compared to 2018. The improvement in segment operating income was due to the lower direct expenses, cost improvements, partially offset by the impact of the divestitures. Excluding the impact of operating results from the divested portion of the land drilling rigs, laboratory services and surface logging businesses, segment operating results in 2019 improved$94 million compared to 2018.
Interest Expense, Net
Consolidated net interest expense of$266 million for year endedDecember 31, 2020 represents interest on our 11.0% Exit Notes, our 8.75% Senior Secured Notes and the write-off of unamortized deferred debt issuance costs of$15 million associated with the termination of our senior secured lending agreement ("ABL Credit Agreement"). See "Note 14 - Borrowings and Other Debt Obligations" to the Consolidated Financial Statements for further details on the refinancing. Net interest expense was$12 million for the Successor Period 2019 representing interest expense on our Exit Notes and$362 million for the 2019 Predecessor Period, as compared to$614 million for the Predecessor in 2018. The decrease in interest expense for 2019 was primarily due to unrecognized contractual interest (no longer accruing interest) on our unsecured senior notes as well as the elimination of the amortization of deferred financing costs and debt discounts during the Chapter 11 proceedings, which beganJuly 1, 2019 , partially offset by interest on debtor-in-possession financing and default interest on our A&R Credit Agreement.
Other Income (Expense), Net
Successor other expense was$53 million for the year endedDecember 31, 2020 compared to Predecessor other expense of$26 million in 2019 and$59 million in 2018. Other expense was primarily driven by foreign currency exchange losses of$34 million for the year endedDecember 31, 2020 compared to$14 million for the 2019 Combined Period. The unfavorable change primarily relates to the weakening of foreign currencies following the onset of the COVID-19 pandemic. Other expense also includes letter of credit fees and other financing fees. In 2019 and 2018, other expense was primarily driven by foreign currency exchange losses, letter of credit fees, other financing fees and non-service periodic pension and other post-retirement benefit expenses. Foreign exchange losses are typically due to the strengtheningU.S. dollar compared to our foreign denominated operations. Included in other expense on the accompanying Consolidated Statements of Operations for the year endedDecember 31, 2018 , was currency devaluation expense of$49 million primarily related to the devaluation of the Angolan kwanza due to a change in Angolan central bank policy in 2018. Warrant fair value income was$70 million in 2018 related to the fair value adjustment to the Predecessor warrant liability. We did not have any warrant fair value income in 2020 or 2019. OnMay 21, 2019 , the option period to exercise the warrants lapsed and the warrants expired unexercised with a fair value of zero. The change in fair value of the warrant during 2018 was primarily driven by eliminating the warrant share value associated with any future equity issuance and a decrease in the Predecessor's stock price.Weatherford International plc - 2020 Form 10-K | 29 -------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A In the year endedDecember 31, 2018 other expense included a cumulative bond tender loss of$34 million in "Other Expense, Net" on the accompanying Consolidated Statements of Operations. We did not have any bond tender loss in 2020 or 2019. Income Taxes We provide for income taxes based on the laws and rates in effect in the countries in which operations are conducted, or in which we or our subsidiaries are considered resident for income tax purposes. The relationship between our pre-tax income or loss from continuing operations and our income tax benefit or provision varies from period to period as a result of various factors, which include changes in total pre-tax income or loss, the jurisdictions in which our income is earned, the tax laws in those jurisdictions, the impacts of tax planning activities and the resolution of tax audits. OnSeptember 26, 2019 , our parent company ceased to be a Swiss tax resident and became an Irish tax resident subject to tax under the Irish tax regime. As a result, our effective rate differs from the Irish statutory tax rate as the majority of our operations are taxed in jurisdictions with different tax rates. In addition, we are unable to recognize tax benefit on our losses. We record deferred tax assets for net operating losses and temporary differences between the book and tax basis of assets and liabilities that are expected to produce tax deductions in future periods. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those deferred tax assets would be deductible. The Company assesses the realizability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers all available evidence (both positive and negative) when determining whether a valuation allowance is required. The Company evaluates possible sources of taxable income that may be available to realize the benefit of deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies, and the impact of fresh start accounting in making this assessment. The realizability of the deferred tax assets is dependent upon judgments and assumptions inherent in the determination of future taxable income, including factors such as future operation conditions (particularly as related to prevailing oil prices and market demand for our products and services). The Company concluded it was not able to realize the benefit of its deferred tax assets and has established a valuation allowance. The income tax provision for the Successor year 2020 was$85 million as compared to a tax provision of$9 million for the Successor Period and$135 million for the Predecessor Period of 2019, and$34 million in 2018, which resulted in an effective tax rate of (5)%, (60)%, 3% and (1)%, respectively. Our tax expense is primarily driven by profits in certain jurisdictions, deemed profit countries and withholding taxes on intercompany and third-party transactions that do not directly correlate to ordinary income or loss. Impairments and other charges are subject to tax rules in our various jurisdiction as to their deductibility, but generally do not result in significant tax benefits to us due to our inability to forecast realization of such benefits. Our results for the 2019 Predecessor period include$32 million of tax expense related to the Fresh Start accounting impacts and$14 million of tax benefit primarily related to goodwill and other asset impairments and write-downs. We also recognized$4.3 billion gain on Settlement of Liabilities Subject to Compromise as a result of the bankruptcy (See "Note 3 - Fresh Start Accounting") with no tax impact due to it being attributed toBermuda , which has no income tax regime, and theU.S. , which resulted in the reduction of ourU.S. unbenefited net operating losses carryforward under the operative tax statute and applicable regulations offset by the release of a similar amount of valuation allowance. Prepetition charges (charges prior to Petition Date) and reorganization items (charges after Petition Date) had no significant tax impact.
Our results for the 2018 Predecessor period include charges with
We are continuously under tax examination in various jurisdictions. We cannot predict the timing or outcome regarding resolution of these tax examinations or if they will have a material impact on our consolidated financial statements. As ofDecember 31, 2020 , we anticipate that it is reasonably possible that the amount of our uncertain tax positions of$222 million may decrease by up to$4 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations. In response to the COVID-19 pandemic, many countries have enacted tax relief measures to provide aid and economic stimulus to companies impacted by the COVID-19 pandemic. For the Successor year endedDecember 31, 2020 , there were no material tax impacts to our financial statements as it relates to COVID-19 tax relief measures.Weatherford International plc - 2020 Form 10-K | 30
-------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A Restructuring Charges In response to the impact of our business from the COVID-19 pandemic and the significant and sudden changes in oil and gas prices, we have continued to develop and execute on plans to rationalize and restructure our business and right-size our operations and personnel. Additional charges with respect to our ongoing cost reduction actions may be recognized in subsequent periods. During the Successor year endedDecember 31, 2020 , we incurred restructuring charges of$206 million . During the 2019 and 2018 Predecessor Periods, we recognized restructuring charges of$189 million and$126 million . Please see "Note 12 - Restructuring Charges" to our Consolidated Financial Statements for additional details of our charges by type and by segment.
Liquidity and Capital Resources
AtDecember 31, 2020 , we had total cash and cash equivalents and restricted cash of$1.3 billion of which$167 million was restricted cash, compared to total cash and cash equivalents and restricted cash of$800 million of which$182 million was restricted cash atDecember 31, 2019 . The following table summarizes cash provided by (used in) each type of business activity, for the years endedDecember 31, 2020 , 2019 and 2018: Successor Predecessor From From Year 12/14/2019 1/1/2019 Year Ended through through Ended (Dollars in millions) 12/31/2020 12/31/2019 12/13/2019 12/31/2018 Net Cash Provided by (Used in) Operating Activities$ 210 $ 61$ (747) (242) Net Cash Provided by (Used in) Investing Activities (75) (14) 149 122 Net Cash Provided by (Used in) Financing Activities 348 (2) 749 168 Operating Activities Cash provided by operating activities was$210 million and$61 million during the 2020 and 2019 Successor Periods. Cash provided by Successor operating activities during 2020 was driven by collections on our accounts receivables, partially offset by payments for interest and severance. Cash used in operating activities was$747 million in the 2019 Predecessor Period compared to$242 million in 2018. Cash used in operating activities in 2019 and 2018 were driven by working capital needs, payments for debt interest, and severance and other restructuring and transformation costs. In 2019, cash used in operating activities also included payments for reorganization items and prepetition charges primarily for professional and other fees related to the Cases and retention and performance bonuses.
Investing Activities
Cash used in investing activities for the Successor was$75 million for the year endedDecember 31, 2020 . The primary use of cash in investing activities were capital expenditures of$154 million for property, plant and equipment. The primary sources of cash from investing activities included$22 million from asset dispositions and$50 million from the maturity of our Angolan government bonds. The amount we spend for capital expenditures varies each year and is based on the types of contracts into which we enter, our asset availability and our expectations with respect to activity levels. Cash used in investing activities was$14 million during the 2019 Successor Period primarily for capital expenditures, which was partially offset by adjustments to proceeds from a prior divestiture of a business. Our investing activities provided cash of$149 million during the 2019 Predecessor Period and$122 million during 2018.Weatherford International plc - 2020 Form 10-K | 31
-------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A During the 2019 Successor Period, the primary use of cash from investing activities was$20 million capital expenditures for property, plant and equipment. During the 2019 Predecessor Period, the primary uses of cash in investing activities were (i) capital expenditures of$250 million for property, plant and equipment and (ii) cash paid of$13 million to acquire intellectual property and other intangibles, offset by the primary sources of cash that were (i) proceeds from the divestitures of businesses of$328 million (primarily from the divestitures of our rigs, laboratory services and surface data logging businesses) and (ii) proceeds of$84 million from the asset dispositions. See "Note 8 - Business Combinations and Divestitures" for additional information. During 2018, the primary uses of cash in investing activities were (i) capital expenditures of$217 million for property, plant and equipment and the acquisition of assets held for sale and (ii) cash paid of$28 million to acquire intellectual property and other intangibles. During 2018, the primary sources of cash were (i) cash proceeds from the divestiture of business and investments of$257 million (primarily from the divestitures of our land drilling rigs businesses inKuwait andSaudi Arabia , the continuous sucker rod service business inCanada and the sale of an equity investment) and (ii) cash proceeds of$106 million from the disposition of other assets.
Financing Activities
Cash provided by financing activities for the Successor was$348 million for the year endedDecember 31, 2020 , sourced primarily from net proceeds of$453 million from the issuance of our Senior Secured Notes and offset by the repayment of debt, cash paid of$24 million related to a deferred consideration for our 2018 acquisition of our Qatari joint venture and other financing activities of$81 million . OnAugust 28, 2020 , we completed a series of financing transactions that meaningfully enhanced our liquidity, including issuing$500 million of Senior Secured Notes, terminating our ABL Credit Agreement, and amending and increasing the size of our LC Credit Agreement to$215 million . See "Note 14 - Borrowings and Other Debt Obligations" to the Consolidated Financial Statements for further details.
Cash provided by financing activities was
OnJuly 3, 2019 , the Weatherford Parties borrowed approximately$1.4 billion under the DIP Credit Agreement and the proceeds were used to repay certain prepetition indebtedness, cash collateralize certain obligations with respect to letters of credit and similar instruments and finance the working capital needs and general corporate purposes of the Weatherford Parties and certain of their subsidiaries. OnJuly 3, 2019 , the Company repaid all outstanding amounts due under the secured Term Loan Agreement and 364-Day Credit Agreement totaling approximately$616 million with borrowings from our DIP Credit Agreement. In addition, we cash collateralized approximately$271 million of letters of credit and similar instruments with borrowings from the DIP Credit Agreement. See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" for additional details. The DIP Credit Agreement was repaid in full upon emergence from Bankruptcy onDecember 13, 2019 . As of the Petition Date, the Predecessor's senior and exchangeable senior notes and related unpaid accrued interest totaling$7.6 billion were placed into liabilities subject to compromise during the bankruptcy period with respect to the Predecessor as shown in "Note 3 - Fresh Start Accounting". Upon emergence from bankruptcy onDecember 13, 2019 , the Predecessor's senior and exchangeable senior notes were cancelled pursuant to the terms of the Plan, resulting in a gain on extinguishment of debt of$4.3 billion recognized in "Reorganization Items" on the Consolidated Statements of Operations. OnDecember 13, 2019 , the Effective Date, we issued unsecured 11.00% Exit Notes due in 2024 for an aggregate principal amount of$2.1 billion (of which$500 million was in the form of Exit Takeback Notes to existing creditors on the senior notes being cancelled). Interest on the Exit Notes accrues at the rate of 11.00% per annum and is payable semiannually in arrears onJune 1 andDecember 1 . We commenced interest payments thereunder onJune 1, 2020 . In the 2019 Predecessor Period, we had net short-term debt repayments of$347 million primarily from our borrowings and repayments of the DIP Credit Agreement and our Predecessor Revolving Credit Agreements, including the repayment of our 364-Day Credit Agreement. Our long-term debt repayments of$318 million on our Term Loan Agreement and financed leases. Cash provided by financing activities was$168 million during the Predecessor year endedDecember 31, 2018 . In February of 2018, we issued$600 million of our 9.875% senior notes due 2025 for net proceeds of$586 million . We used part of the proceeds from our debt offering to repay in full our 6.00% senior notes dueMarch 2018 and to fund a concurrent tender offer to purchase all of our 9.625% senior notes due 2019.Weatherford International plc - 2020 Form 10-K | 32 --------------------------------------------------------------------------------
Table of Contents Item 7 | MD&A
Net long- and short-term debt repayments, including the tender offer and borrowings under our revolving credit facilities, in 2018 totaled$378 million . We settled the tender offer for$475 million , retiring an aggregate face value of$425 million and accrued interest of$20 million . InApril 2018 , we repaid the remaining principal outstanding on an early redemption of the bond. We recognized a cumulative bond tender loss of$34 million on these transactions in "Other Income (Expense)" on the accompanying Consolidated Statements of Operations. The debt repayments and bond tender premium payments were partially offset by net borrowings primarily under our revolving credit facilities of$158 million . Other financing activities in 2018 primarily included the costs incurred for the amended Credit Agreements and payments of non-controlling interest dividends.
See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" and "Note 14 - Borrowings and Other Debt Obligations" and "for additional details of our financing activities.
Non-GAAP Free Cash Flow
Non-GAAP Free Cash Flow ("Free Cash Flow") represents cash flow from operations
less capital expenditures (including the acquisition of assets held for sale)
plus proceeds from the disposition of assets. Free cash flow was a positive $78
million and positive $41 million during the 2020 and 2019 Successor Periods and
a negative $913 million and negative $353 million during the 2019 and 2018
Predecessor Periods. Management believes that Free Cash Flow is useful to
investors and management as an important liquidity measure of our ability to
generate cash, pay obligations and grow the business and shareholder value. It
is a non-GAAP financial measure that should be considered in addition to, not as
substitute for or superior to, cash flow from operations.
Sources of Liquidity
Our sources of available liquidity going forward include cash generated by our operations, cash and cash equivalent balances, accounts receivable factoring, dispositions, and availability under our LC Credit Agreement. We have aggregate commitments of$215 million under the LC Credit Agreement for the issuance of letters of credit. AtDecember 31, 2020 , we had approximately$167 million in outstanding letters of credit under the LC Credit Agreement and availability of$48 million . We historically have accessed banks for short-term loans and have accessed the capital markets with debt and equity offerings. However, the energy industry continues to have negative sentiment in the market which has impacted the ability of energy sector participants to access appropriate amounts of capital and under suitable terms. Although we may have access to capital markets, it may not be on terms that are commercially acceptable to the Company. From time to time we may enter into transactions to dispose of businesses or capital assets that no longer fit our long-term strategy.
Exit and Senior Secured Notes and LC Credit Agreement
OnDecember 13, 2019 , the date of bankruptcy emergence, we issued unsecured 11.00% Exit Notes due in 2024 for an aggregate principal amount of$2.1 billion (of which$500 million was in the form of a Exit Takeback Notes to existing creditors on the senior notes being cancelled). Interest on the Exit Notes accrues at the rate of 11.00% per annum and is payable semiannually in arrears onJune 1 andDecember 1 . We commenced interest payments thereunder onJune 1, 2020 . OnAugust 28, 2020 , we completed a series of financing transactions that meaningfully enhanced our liquidity, including issuing$500 million of Senior Secured Notes, terminating our ABL Credit Agreement, and amending and increasing the size of our LC Credit Agreement to$215 million . Interest of the Senior Secured Notes in 8.75% per annum and is payable semiannually on arrears onMarch 1 andSeptember 1 . See "Note 14 - Borrowings and Other Debt Obligations" to the Consolidated Financial Statements for further details. The Company is subject to a$175 million minimum liquidity covenant under our amended LC Credit Agreement and Senior Secured notes and, as defined in the applicable documents, Weatherford had available liquidity of$928 million as ofDecember 31, 2020 . Under our amended LC Credit Agreement, the Company is also subject to a minimum secured liquidity (or cash in controlled accounts) covenant of$125 million . Our secured liquidity was$779 million atDecember 31, 2020 . As ofDecember 31, 2020 , we were in compliance with the covenants of the indentures governing the Exit Notes and Senior Secured Notes and the LC Credit Agreement.Weatherford International plc - 2020 Form 10-K | 33 --------------------------------------------------------------------------------
Table of Contents Item 7 | MD&A
Ratings Services' Credit Ratings
As ofDecember 31, 2020 , ourMoody's Investor Services credit rating on the Senior Secured Notes and our senior secured LC Credit Agreement was Ba3, with a negative outlook. Our Exit Notes have a credit rating of B3 with a negative outlook. AtDecember 31, 2020 , our S&P credit rating on our Senior Secured Notes and our LC Agreement was B-, with a negative outlook. The credit rating on our Exit Notes was CCC with a negative outlook. The ratings from both agencies have been downgraded during 2020 from the ratings assigned at the end of 2019. While we may continue to have access to credit markets, our credit rating, restrictions under our Exit Notes, Senior Secured Notes and LC agreement, and the industry downturn, could limit our ability to raise capital, refinance our existing debt, or could cause us to refinance or issue debt with less favorable and more restrictive terms and conditions, and could increase certain fees and interest of our borrowings. Customer Receivables In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers' cash flow from operations and their access to the credit markets as well as unsettled political conditions. Given the nature and significance of the COVID-19 pandemic and disruption in the oil and gas industry, we could experience delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies. Cash Requirements Our cash requirements will continue to include interest payments on our long-term debt, payments for capital expenditures, repayment of financed leases, payments for short-term working capital needs and costs associated with our revenue and cost improvement efforts under our restructuring plans, including severance payments. Our cash requirements may also include awards under our employee incentive programs and other amounts to settle litigation related matters. We anticipate funding these requirements from cash and cash equivalent balances, accounts receivable factoring and proceeds from disposals of businesses or capital assets that no longer fit our long-term strategy. As ofDecember 31, 2020 , we had approximately$2.6 billion of long-term debt with$2.1 billion in aggregate principal amount maturing onDecember 1, 2024 and$500 million in aggregate principal amount maturing onSeptember 1, 2024 . We expect to have interest payments of approximately$275 million annually until the maturity of our senior notes. Please see "Note 14 - Borrowings and Other Debt Obligations" for additional details. Our payments on operating leases and purchase obligations, including capital expenditures in the upcoming year are expected to be approximately$91 million and$364 million , respectively. See "Note 13 - Leases" for details of our lease obligations by year. Our capital spending for 2021 is projected to be approximately$140 million . Capital expenditures are expected to be used primarily to support the ongoing activities and commitments in our core business. Cash and cash equivalents (including restricted cash of$167 million primarily related to cash collateral on our letters of credit) totaled$1.3 billion atDecember 31, 2020 , and are held by subsidiaries outside ofIreland , our taxing jurisdiction. AtDecember 31, 2020 we had approximately$160 million of our cash and cash equivalents that cannot be immediately repatriated from various countries due to country central bank controls or other regulations. Based on the nature of our structure, other than the restrictions noted above, we are generally able to redeploy cash with minimal or no incremental tax.
Accounts Receivable Factoring
From time to time, we participate in factoring arrangements to sell accounts receivable to third-party financial institutions for cash proceeds net of discount and hold-back. The programs we factor under are uncommitted and thus we cannot assure they will be available as a source of liquidity. During the 2020 Successor Period, we sold accounts receivable balances of$90 million and received cash proceeds of$79 million . During the 2019 Combined Period, we sold accounts receivable of$206 million and received cash proceeds of$193 million . In 2018, we sold accounts receivables of$382 million and received cash proceeds of$373 million . Our factoring transactions were recognized as sales, and the proceeds are included as operating cash flows in our Consolidated Statements of Cash Flows.Weatherford International plc - 2020 Form 10-K | 34
-------------------------------------------------------------------------------- Table of Contents Item 7 | MD&A Derivative Instruments We enter into contracts to hedge our exposure to currency fluctuations in various foreign currencies. AtDecember 31, 2020 andDecember 31, 2019 , we had outstanding foreign currency forward contracts with notional amounts aggregating to$337 million and$389 million , respectively. The notional amounts of our foreign currency forward contracts do not generally represent amounts exchanged by the parties and thus are not a measure of the cash requirements related to these contracts or of any possible loss exposure. The amounts actually exchanged at maturity are calculated by reference to the notional amounts and by other terms of the derivative contracts, such as exchange rates. Our foreign currency derivatives are not designated as hedges under ASC 815, and the changes in fair value of the contracts are recorded in each period in "Other Income (Expense), Net" on the accompanying Consolidated Statements of Operations. See "Note 16 - Derivative Instruments" for additional information.
Off-Balance Sheet Arrangements
Guarantees
Weatherford International plc , a public limited company organized under the laws ofIreland , and as the ultimate parent of the Weatherford group, guarantees the obligations of its subsidiaries -Weatherford International Ltd. , aBermuda exempted company ("Weatherford Bermuda"), andWeatherford International, LLC , a Delaware limited liability company ("Weatherford Delaware"), including the notes and credit facilities listed below. OnAugust 28, 2020 ,Weatherford International Ltd. , as issuer,Weatherford International plc andWeatherford International, LLC , as guarantors, and the other subsidiary guarantors party thereto, entered into an indenture withWilmington Trust, National Association , as trustee and collateral agent, and issued the 8.75% Senior Secured Notes dueSeptember 1, 2024 in an aggregate principal amount of$500 million . OnDecember 13, 2019 , the date of bankruptcy emergence, or the effective date pursuant to the terms of the Plan, we issued unsecured 11.00% Exit Notes dueDecember 1, 2024 ofWeatherford Bermuda guaranteed byWeatherford Delaware for an aggregate principal amount of$2.1 billion . Upon emergence from bankruptcy onDecember 13, 2019 , the Predecessor's senior notes, exchangeable senior notes, and guarantees under these instruments, were cancelled pursuant to the terms of the Plan. In addition, we repaid in full the Predecessor's Amended and Restated Credit Agreement and Term Loan pursuant to the terms of the Plan. See "Note 3 - Fresh Start Accounting" for additional details related to our financial restructuring.
Letters of Credit and Surety Bonds
As ofDecember 31, 2020 , we had$338 million of letters of credit outstanding, consisting of$167 million under the LC Credit Agreement and$171 million under various uncommitted facilities (of which there was$164 million in cash collateral held and recorded in "Restricted Cash" on the Consolidated Balance Sheets). InLatin America we utilize surety bonds as part of our customary business practice. As ofDecember 31, 2020 , we had surety bonds outstanding of$326 million , primarily inLatin America . Any of our outstanding letters of credit or surety bonds could be called by the beneficiaries should we breach certain contractual or performance obligations. If the beneficiaries were to call the letters of credit under our LC Credit Agreement or surety bonds, our available liquidity would be reduced by the amount called.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operation is based upon our Consolidated Financial Statements. We prepare these consolidated financial statements in conformity withU.S. GAAP. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience and available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. The accounting policies we believe require management's most difficult, subjective or complex judgments and are the most critical to our reporting of results of operations and financial position are as follows: Fresh Start AccountingWeatherford International plc - 2020 Form 10-K | 35
--------------------------------------------------------------------------------
Table of Contents Critical Accounting Policies and Estimates
On the Effective Date in 2019, we adopted and applied the relevant guidance with respect to the accounting and financial reporting for entities that have emerged from bankruptcy proceedings, or "Fresh Start Accounting." Under Fresh Start Accounting, our balance sheet on the Effective Date reflects all of our assets and liabilities at fair value. Our emergence from bankruptcy and the adoption of Fresh Start Accounting resulted in a new reporting entity, referred to herein as the "Successor," for financial reporting purposes. To facilitate discussion and analysis of our financial condition and results of operations herein, we refer to the reorganized Weatherford Parties as the Successor for periods subsequent toDecember 13, 2019 and as the "Predecessor" for periods on or prior toDecember 13, 2019 . As a result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, our consolidated financial statements subsequent toDecember 13, 2019 are not comparable to our consolidated financial statements on or prior toDecember 13, 2019 , and as such, "black-line" financial statements are presented to distinguish between the Predecessor and Successor Periods.
Allocation of Reorganization Value under Fresh Start Accounting
Upon emergence onDecember 13, 2019 , we allocated the reorganization value under Fresh Start Accounting to the Company's identifiable tangible and intangible assets and liabilities based on estimated fair values. The excess of the reorganization value over the amount allocated to the assets and liabilities was recorded as goodwill. We used all available information to estimate fair values, including quoted market prices, the carrying value of acquired assets and widely accepted valuation techniques such as discounted cash flows. We engaged third-party appraisal firms to assist in fair value determination of PP&E, inventories, leases, identifiable intangible assets and any other significant assets or liabilities when appropriate. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
As a result of Fresh Start Accounting onDecember 13, 2019 , we recognized and allocated$239 million of goodwill to our MENA andRussia reporting units and have presented that amount as ofDecember 31, 2019 as Successor goodwill, which represents the excess of reorganization value over the fair value of our identifiable tangible and intangible assets and liabilities. During the first and second quarters of 2020, the unprecedented global economic and industry conditions resulting from the decline in demand and impact from the COVID-19 pandemic were identified as goodwill and long-lived asset impairment indicators or triggering events. We identified lower exploration and production capital spending that resulted in lower drilling and forecasted activity. We performed interim quantitative goodwill assessment as ofMarch 31, 2020 andJune 30, 2020 as described in "Note 11 -Goodwill and Intangible Assets" to our Consolidated Financial Statements. The fair values of these two reporting units were determined using a combination of the income approach and the market approach for comparable companies in our industry, a Level 3 fair value analysis. Determining the fair value of the reporting units requires management to exercise significant judgments, including estimating the discounted future cash flows by reporting unit, specifically the forecasted revenue, forecasted operating margins and discount rates.Goodwill impairment occurs when the carrying amount of a reporting unit exceeds the fair value. We determined that the fair value of these reporting units were less than their carrying values, as a result of our impairment tests, we fully impaired our goodwill in the MENA andRussia reporting units as presented in "Impairments and Other Charges" on the accompanying Consolidated Statements of Operations.Weatherford International plc - 2020 Form 10-K | 36 --------------------------------------------------------------------------------
Table of Contents Critical Accounting Policies and Estimates Long-Lived Assets
Long-lived assets, which include PP&E, definite-lived intangibles and right of
use assets, comprise a significant amount of our assets. We make estimates about
their expected useful lives. The cost of the long-lived assets is then amortized
over its expected useful life. A change in the estimated useful lives of our
long-lived assets would have an impact on our results of operations. We estimate
the useful lives of our long-lived asset groups as follows:
Asset Category Estimated Useful Lives
Buildings and Leasehold Improvements 10 - 40 years or lease term
Rental and Service Equipment 3 - 10 years
Machinery and Other 2 - 12 years
Intangible Assets 5 - 10 years
In estimating the useful lives of our property, plant and equipment, we rely
primarily on our actual experience with the same or similar assets. The useful
lives of our intangible assets are determined by the years over which we expect
the assets to generate a benefit based on legal, contractual or regulatory
terms.
Long-lived assets to be held and used by us are reviewed to determine whether
any events or changes in circumstances indicate that we may not be able to
recover the carrying amount of the asset or asset group. Factors that might
indicate a long-lived asset or asset group may not be recoverable may include,
but are not limited to, significant decreases in the market value of the
long-lived asset, a significant change in the long-lived asset's physical
condition, the introduction of competing technologies, legal challenges, a
reduction in the utilization rate of the assets, a change in industry
conditions, or a reduction in cash flows driven by pricing pressure as a result
of oversupply associated with the use of the long-lived asset. The Company
groups individual assets at the lowest level of identifiable cash flows and
performs an undiscounted cash flow analysis to identify assets or asset groups
that may not be recoverable. If the undiscounted cash flows do not exceed the
carrying value of the long-lived asset group, the asset group is not recoverable
and impairment is recognized to the extent the carrying amount exceeds the
estimated fair value of the asset group. A fair value assessment is performed on
assets or asset groups identified as not being recoverable using a discounted
cash flow analysis to determine if an impairment has occurred. If an impairment
has occurred, the Company recognizes a loss for the difference between the
carrying amount and the fair value of the asset or asset group. The discounted
cash flow analysis consists of estimating the future cash flows that are
directly associated with, and are expected to arise from, the use and eventual
disposition of the asset over its remaining useful life. These estimated
discounted cash flows are inherently subjective and includes significant
assumptions, specifically the forecasted revenue, forecasted operating margins,
and the discount rate assumptions and require estimates based upon historical
experience and future expectations. The fair value of the asset or asset group
is measured using market prices, or in the absence of market prices, is based on
an estimate of discounted cash flows. Cash flows are discounted at an interest
rate commensurate with our weighted average cost of capital for a similar asset.
We generally group operating assets by product line of the respective region. We
have long-lived assets, such as facilities, utilized by multiple operating
divisions that do not have identifiable cash flows and impairment testing for
these long-lived assets is based on the consolidated entity.
The unprecedented global economic and industry conditions resulting from the
decline in demand and impact from the COVID-19 pandemic were identified as
impairment indicators. As a result, we performed impairment assessments
quarterly in 2020 through analysis of the undiscounted cash flow of our asset
groups, which include property, plant and equipment, definite-lived intangible
assets, goodwill and right of use assets. As of March 31, 2020 , and as of June
30, 2020 , we identified that impairment occurred in certain asset groups and
with the assistance of third-party valuation advisors we determined the fair
value of those asset groups. Based on our impairment tests, we determined the
carrying amount of certain long-lived asset groups exceeded their respective
fair values and we recognized of long-lived asset impairments in "Impairments
and Other Charges" on the accompanying Consolidated Statements of Operations
during the year ended December 31, 2020 . See "Note 10 - Long-Lived Asset
Impairments", "Note 11 - Goodwill and Intangible Assets" and "Note 15 - Fair
Value of Financial Instruments, Assets and Other Assets" for additional
information regarding the impairment and the fair value determination used in
the impairment calculation.
The fair values of our long-lived assets were determined using discounted cash
flow or Level 3 fair value analyses. The unobservable inputs to the income
approach included the estimated discounted future cash flows by asset group and
significant
Weatherford International plc - 2020 Form 10-K | 37
--------------------------------------------------------------------------------
Table of Contents Critical Accounting Policies and Estimates
assumptions, specifically the forecasted revenue, forecasted operating margins,
and discount rate assumptions used to determine the fair value of certain asset
groups.
The 2019 impairments were due to the sustained downturn in the oil and gas
industry that resulted in us having to reassess our disposal groups for our land
drilling rigs. The change in our expectations of the market's recovery, in
addition to successive negative operating cash flows in certain disposal asset
groups represented an indicator that those assets will no longer be recoverable
over their remaining useful lives. The Level 3 fair values of the long-lived
assets were determined using a combination of the market approach and the income
approach. The market approach considered market sales values for similar assets.
The unobservable inputs to the income approach included the assets' estimated
future cash flows and estimates of discount rates commensurate with the assets'
risks. See "Note 15 - Fair Value of Financial Instruments, Assets and Other
Assets" for additional information regarding the fair value determination used
in the impairment calculation.
The 2018 impairments were due to the sustained downturn in the oil and gas
industry that resulted a reassessment of our disposal groups for our land
drilling rigs. The change in our expectations of the market's recovery, in
addition to successive negative operating cash flows in certain disposal asset
groups represented an indicator that those assets will no longer be recoverable
over their remaining useful lives. See "Note 15 - Fair Value of Financial
Instruments, Assets and Other Assets" for additional information regarding the
fair value determination used in the impairment calculation.
The decline and its impact on demand represent a significant adverse change in
the business climate and an indication that some of our long-lived assets may
not be recoverable. Based on the impairment indicators noted we performed an
analysis of our long-lived assets in 2020, 2019 and 2018 and recorded long-lived
and other asset impairment charges to adjust to fair value. See "Note 10 -
Long-Lived Asset Impairments" for additional information regarding the
long-lived assets impairment.
Management cannot predict the occurrence of future impairment-triggering events,
so we continue to assess whether indicators of impairment to long-lived assets
exist due to the current business conditions in the oilfield services industry.
Income Taxes
We take into account the differences between the financial statement treatment
and tax treatment of certain transactions. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates is recognized as income or expense
in the period that includes the enactment date. See "Note 18 - Income Taxes" for
detailed discussion of results.
We recognize the impact of an uncertain tax position taken or expected to be
taken on an income tax return in the financial statements at the largest amount
that is more likely than not to be sustained upon examination by the relevant
taxing authority.
We operate in over 75 countries through hundreds of legal entities. As a result,
we are subject to numerous tax laws in the jurisdictions, and tax agreements and
treaties among the various taxing authorities. Our operations in these
jurisdictions in which we operate are taxed on various bases: income before
taxes, deemed profits (which is generally determined using a percentage of
revenues rather than profits), withholding taxes based on revenue, and other
alternative minimum taxes. The calculation of our tax liabilities involves
consideration of uncertainties in the application and interpretation of complex
tax regulations in a multitude of jurisdictions across our global operations. We
recognize potential liabilities and record tax liabilities for anticipated tax
audit issues in the tax jurisdictions based on our estimate of whether, and the
extent to which, additional taxes will be due. The tax liabilities are reflected
net of realized tax loss carryforwards. We adjust these reserves upon specific
events; however, due to the complexity of some of these uncertainties, the
ultimate resolution may result in a payment that is different from our current
estimate of the tax liabilities.
If our estimate of tax liabilities proves to be less than the ultimate
assessment, an additional charge to expense would result. If payment of these
amounts ultimately proves to be less than the recorded amounts, the reversal of
the liabilities would result in tax benefits being recognized in the period when
the contingency has been resolved and the liabilities are no longer necessary.
Changes in tax laws, regulations, agreements and treaties, foreign currency
exchange restrictions or our level of operations or profitability in each taxing
jurisdiction could have an impact upon the amount of income taxes that we
provide during any given year.
Weatherford International plc - 2020 Form 10-K | 38
--------------------------------------------------------------------------------Table of Contents Critical Accounting Policies and Estimates Valuation Allowance for Deferred Tax Assets
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will expire before realization of the benefit. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. We have considered various tax planning strategies that we would implement, if necessary, to enable the realization of our deferred tax assets; however, when the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged to our income tax provision in the period in which the determination is made. The Company concluded it was not able to realize the benefits of its deferred tax assets and has established a valuation allowance. Our valuation allowance on our deferred tax assets was$1.5 billion atDecember 31, 2020 .
Allowance for Credit Losses
OnJanuary 1, 2020 , we adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology in previousU.S. GAAP with a methodology (Current Expected Credit Losses model, or CECL) that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. We estimate expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Our customer base has generally similar collectability risk characteristics, although risk profiles can vary between larger independent customers and state-owned customers, which may have a lower risk than smaller independent customers. We maintain an allowance for credit losses in order to record accounts receivable at their net realizable value. Significant judgment is involved in recognizing this allowance. The determination of the collectability requires us to use estimates and make judgments regarding future events and trends, including monitoring our customers' payment history and current creditworthiness, as well as consideration of the overall business and political climate in which our customers operate. The allowance for credit losses in "Accounts Receivable, Net of Allowance for Credit Losses" was$32 million , or 4%, over total gross accounts receivable as ofDecember 31, 2020 and was zero as ofDecember 31, 2019 due to Fresh Start Accounting. We believe that our allowance for credit loss is adequate to cover bad debt losses under current conditions. However, uncertainties regarding changes in the financial condition of our customers, either adverse or positive, could impact the amount and timing of any additional provisions for doubtful accounts that may be required. A 5% change in the current allowance for doubtful accounts would have had an immaterial impact on loss before income taxes in 2020.
Inventory Reserves
Inventory represents a significant component of current assets and is stated at
the lower of cost or net realizable value using either the first-in, first-out
("FIFO") or average cost method. To maintain a book value that is the lower of
cost or net realizable value, we maintain reserves for excess, slow moving and
obsolete inventory. To determine these reserve amounts, we review inventory
quantities on hand, future product demand, market conditions, production
requirements and technological obsolescence. This review requires us to make
judgments regarding potential future outcomes. Our estimates in 2020 included
assessing the impact of the COVID-19 pandemic and the resulting impact to our
business forecast. Our assessment of our inventory specifically identified
inventory in which we could not forecast demand and excess and obsolete
inventory. At December 31, 2020 , inventory reserves of $119 million represented
14% of gross inventory and we had no reserves at December 31, 2019 as a result
of fresh start accounting. We believe that our inventory reserves as of December
31, 2020 are adequate to properly state inventory at the lower of cost or net
realizable value. See "Note 7 - Inventories, Net" for further details.
Weatherford International plc - 2020 Form 10-K | 39
--------------------------------------------------------------------------------
Table of Contents
New Accounting Pronouncements
See "Note 5 - New Accounting Pronouncements" to our Consolidated Financial Statements for additional information.
© Edgar Online, source
