| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and
cash equivalents, receivables, and payables approximated fair value
because of the relatively short maturity of these instruments. Cash
equivalents include only those investments having a maturity date
of three months or less at the time of purchase.
Derivative Financial Instruments
Accounting Standards Codification (“ASC”) Topic 815,
“Derivatives and Hedging” (“ASC Topic 815”)
requires companies to recognize all derivative instruments as
either assets or liabilities in the Consolidated Balance Sheet at
fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based
upon the exposure being hedged, as a fair value hedge, cash flow
hedge, or a hedge of a net investment in a foreign operation.
The Company records all derivative financial instruments at their
fair value in its Consolidated Balance Sheet. Except for certain
non-designated hedges discussed below, all derivative financial
instruments that the Company holds are designated as cash flow
hedges and are highly effective in offsetting movements in the
underlying risks. Such arrangements typically have terms between
two and 24 months, but may have longer terms depending on the
underlying cash flows being hedged, typically related to the
projects in our backlog.
Inventories
Inventories consist of raw materials, work-in-process and oilfield
and industrial finished products, manufactured equipment and spare
parts. Inventories are stated at the lower of cost or market using
the first-in, first-out or average cost methods. Allowances for
excess and obsolete inventories are determined based on our
historical usage of inventory on-hand as well as our future
expectations related to our installed base, the development of new
products and consideration of current market conditions. The
allowance, which totaled $500 million and $370 million at
December 31, 2015 and 2014, respectively, is the amount
necessary to reduce the cost of the inventory to its estimated net
realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures
for major improvements that extend the lives of property and
equipment are capitalized while minor replacements, maintenance and
repairs are charged to operations as incurred. Disposals are
removed at cost less accumulated depreciation with any resulting
gain or loss reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of
individual items. Depreciation expense was $391 million, $413
million and $381 million for the years ended December 31,
2015, 2014 and 2013, respectively. The estimated useful lives of
the major classes of property, plant and equipment are included in
Note 6 to the consolidated financial statements.
We record impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets are impaired
and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. The
carrying value of assets used in operations that are not
recoverable is reduced to fair value if lower than carrying value.
In determining the fair market value of the assets, we consider
market trends and recent transactions involving sales of similar
assets, or when not available, discounted cash flow analysis. There
have been no impairments of long-lived assets for the years ended
December 31, 2015, 2014 and 2013.
Intangible Assets
The Company has approximately $7.0 billion of goodwill and
$3.8 billion of identified intangible assets at
December 31, 2015. Goodwill is identified by segment as
follows (in millions):
Rig Rig Wellbore Completion & Discontinued Total
Balance at December 31, 2013 $ 1,279 $ 906 $ 4,425 $ 2,106 $ 333 $ 9,049
Goodwill acquired and adjusted during period
—
— 17 150
— 167
Goodwill disposed of during the period
—
—
— (71 ) (332 ) (403 )
Currency translation adjustments and other (43 ) (29 ) (85 ) (116 ) (1 ) (274 )
Balance at December 31, 2014 $ 1,236 $ 877 $ 4,357 $ 2,069 $
— $ 8,539
Goodwill acquired and adjusted during period
—
— 8 (8 )
—
—
Impairment
—
— (1,485 )
—
— (1,485 )
Currency translation adjustments and other (4 )
— (6 ) (64 )
— (74 )
Balance at December 31, 2015 $ 1,232 $ 877 $ 2,874 $ 1,997 $
— $ 6,980
Identified intangible assets with determinable lives consist
primarily of customer relationships, trademarks, trade names,
patents, and technical drawings acquired in acquisitions, and are
being amortized on a straight-line basis over the estimated useful
lives of 2-30 years. Amortization expense of identified intangibles
is expected to be approximately $340 million in each of the next
five years. Included in intangible assets are $384 million of
indefinite-lived trade names.
The net book values of identified intangible assets are identified
by segment as follows (in millions):
Rig Rig Wellbore Completion & Discontinued Total
Balance at December 31, 2013 $ 232 $ 142 $ 2,999 $ 1,614 $ 68 $ 5,055
Additions to intangible assets
—
— 5 54
— 59
Disposal of intangible assets
—
—
— (50 ) (67 ) (117 )
Asset impairment
—
— (104 )
—
— (104 )
Amortization (22 ) (6 ) (218 ) (119 ) (1 ) (366 )
Currency translation adjustments and other (2 ) (3 ) (16 ) (62 )
— (83 )
Balance at December 31, 2014 $ 208 $ 133 $ 2,666 $ 1,437 $
— $ 4,444
Additions to intangible assets
—
— 2 57
— 59
Asset impairment (7 )
— (173 ) (24 )
— (204 )
Amortization (22 ) (6 ) (214 ) (114 )
— (356 )
Currency translation adjustments and other (3 ) (4 ) (27 ) (60 )
— (94 )
Balance at December 31, 2015 $ 176 $ 123 $ 2,254 $ 1,296 $
— $ 3,849
Identified intangible assets by major classification consist of the
following (in millions):
Gross Accumulated Net Book
December 31, 2014:
Customer relationships $ 4,094 $ (1,379 ) $ 2,715
Trademarks 871 (226 ) 645
Indefinite-lived trade names 536
— 536
Other 1,058 (510 ) 548
Total identified intangibles $ 6,559 $ (2,115 ) $ 4,444
December 31, 2015:
Customer relationships $ 4,016 $ (1,630 ) $ 2,386
Trademarks 880 (265 ) 615
Indefinite-lived trade names 384
— 384
Other 1,040 (576 ) 464
Total identified intangibles $ 6,320 $ (2,471 ) $ 3,849
Asset Impairment
Generally accepted accounting principles require the Company to
test goodwill and other indefinite-lived intangible assets for
impairment at least annually or more frequently whenever events or
circumstances occur indicating that goodwill or other
indefinite-lived intangible assets might be impaired. Events or
circumstances which could indicate a potential impairment include
(but are not limited to) a significant sustained reduction in
worldwide oil and gas prices or drilling; a significant sustained
reduction in profitability or cash flow of oil and gas companies or
drilling contractors; a 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 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 business 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. The detailed planning and
forecasting process takes into consideration a multitude of factors
including worldwide rig activity, inflationary forces, pricing
strategies, customer analysis, operational issues, competitor
analysis, capital spending requirements, working capital needs,
customer needs to replace aging equipment, increased complexity of
drilling, new technology, and existing backlog among other items
which impact the individual reporting unit projections. 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 judgment
must be applied to determine whether credit changes are a
short-term or long-term trend.
During the fourth quarter of 2015, the worldwide average rig count
was 2,034 rigs, down 7% from the third quarter 2015 average of
2,188 and down 44% from the fourth quarter 2014 average of 3,632.
The fourth quarter 2015 average rig count represented the lowest
quarterly average in the past six years. The annual impairment
test, as described in ASC Topic 350,
“Intangibles—Goodwill and Other” (“ASC
Topic 350”), is performed as of October 1 of each
year.
Based on the Company’s annual impairment test performed in
the fourth quarter of 2015, the calculated fair values for all of
the Company’s reporting units were in excess of the
respective reporting unit’s carrying value, with two
exceptions. Two reporting units within the Company’s Wellbore
Technologies segment, had a calculated fair value below carrying
value, and were required to perform step two resulting in a $1,485
million write-down in goodwill.
The implied fair value of goodwill is determined by deducting the
fair value of a reporting unit’s identifiable assets and
liabilities from the fair value of that reporting unit as a whole.
Fair value of the reporting units is determined in accordance with
ASC Topic 820 “Fair Value Measurements and Disclosures”
using significant unobservable inputs, or level 3 in the fair value
hierarchy. These inputs are based on internal management estimates,
forecasts and judgments, using discounted cash flow.
Other indefinite-lived intangible assets, representing trade names
management intends to use indefinitely, were valued using
significant unobservable inputs (level 3) and are tested for
impairment using the Relief from Royalty Method, a form of the
Income Approach. An impairment is measured and recognized based on
the amount the book value of the indefinite-lived intangible assets
exceeds its estimated fair value as of the date of the impairment
test. Included in the impairment test are assumptions, for each
trade name, regarding the related revenue streams attributable to
the trade names, which are determined in a manner consistent with
the forecasting process described above, the royalty rate, and the
discount rate applied.
Based on the Company’s annual indefinite-lived intangible
asset impairment analysis performed during the fourth quarter of
2015, the fair value for all of the Company’s intangible
assets with indefinite lives were in excess of the respective asset
carrying values, with one exception. This intangible asset, which
represents a trade name within the Company’s Wellbore
Technologies segment, had a calculated fair value approximately
$149 million below its carrying value.
In addition, during the third quarter of 2015, the Company incurred
$55 million in impairment charges on identified intangible assets
with finite lives that were impaired and written off.
These impairment charges were primarily the result of the
substantial decline in oil prices and worldwide rig counts
continuing in the fourth quarter of 2015, declines in forecasts in
rig activity, and a decline in the revenue forecast for the Company
for 2016.
Foreign Currency
The functional currency for most of our foreign operations is the
local currency. The cumulative effects of translating the balance
sheet accounts from the functional currency into the U.S. dollar at
current exchange rates are included in accumulated other
comprehensive income (loss). Revenues and expenses are translated
at average exchange rates in effect during the period. Certain
other foreign operations, including our operations in Norway, use
the U.S. dollar as the functional currency. Accordingly, financial
statements of these foreign subsidiaries are remeasured to U.S.
dollars for consolidation purposes using current rates of exchange
for monetary assets and liabilities and historical rates of
exchange for nonmonetary assets and related elements of expense.
Revenue and expense elements are remeasured at rates that
approximate the rates in effect on the transaction dates. For all
operations, gains or losses from remeasuring foreign currency
transactions into the functional currency are included in income.
Net foreign currency transaction gains (losses) were ($47) million,
$20 million and ($24) million for the years ending
December 31, 2015, 2014 and 2013, respectively, and are
included in other income (expense) in the accompanying statement of
income.
Historically, the Venezuelan government has devalued the
country’s currency. During the first quarters of 2015 and
2013, the Venezuelan government again officially devalued the
Venezuelan bolivar against the U.S. dollar. As a result, the
Company incurred approximately $9 million and $12 million in
devaluation charges in the first quarter of 2015 and 2013,
respectively. The reporting currency of all of the Company’s
Venezuelan entities is the U.S. dollar. The Company’s net
remaining investment in Venezuela, which is largely U.S. dollar,
was $25 million at December 31, 2015.
During the fourth quarter of 2015, the Argentinian government
officially devalued the Argentine peso against the U.S. dollar. As
a result, the Company incurred approximately $7 million devaluation
charges in the fourth quarter of 2015. The reporting currency of
all of the Company’s Argentinian entities is the Argentine
peso.
Revenue Recognition
The Company’s products and services are sold based upon
purchase orders or contracts with the customer that include fixed
or determinable prices and that do not generally include right of
return or other similar provisions or other significant post
delivery obligations. Except for certain construction contracts and
drill pipe sales described below, the Company records revenue at
the time its manufacturing process is complete, the customer has
been provided with all proper inspection and other required
documentation, title and risk of loss has passed to the customer,
collectability is reasonably assured and the product has been
delivered. Customer advances or deposits are deferred and
recognized as revenue when the Company has completed all of its
performance obligations related to the sale. The Company also
recognizes revenue as services are performed. The amounts billed
for shipping and handling cost are included in revenue and related
costs are included in cost of sales.
Revenue Recognition under Long-term Construction
Contracts
The Company uses the percentage-of-completion method to account for
certain long-term construction contracts in the Rig Systems and
Completion & Production Solutions segments. These
long-term construction contracts include the following
characteristics:
• the contracts include custom designs
for customer specific applications;
• the structural design is unique and
requires significant engineering efforts; and
• construction projects often have
progress payments.
This method requires the Company to make estimates regarding the
total costs of the project, progress against the project schedule
and the estimated completion date, all of which impact the amount
of revenue and gross margin the Company recognizes in each
reporting period. The Company prepares detailed cost estimates at
the beginning of each project. Significant projects and their
related costs and profit margins are updated and reviewed at least
quarterly by senior management. Factors that may affect future
project costs and margins include shipyard access, weather,
production efficiencies, availability and costs of labor, materials
and subcomponents and other factors. These factors can impact the
accuracy of the Company’s estimates and materially impact the
Company’s current and future reported earnings.
The asset, “Costs in excess of billings,” represents
revenues recognized in excess of amounts billed. The liability,
“Billings in excess of costs,” represents billings in
excess of revenues recognized.
Drill Pipe Sales
For drill pipe sales, if requested in writing by the customer,
delivery may be satisfied through delivery to the Company’s
customer storage location or to a third-party storage facility. For
sales transactions where title and risk of loss have transferred to
the customer but the supporting documentation does not meet the
criteria for revenue recognition prior to the products being in the
physical possession of the customer, the recognition of the
revenues and related inventory costs from these transactions are
deferred until the customer takes physical possession.
Service and Product Warranties
The Company provides service and warranty policies on certain of
its products. The Company accrues liabilities under service and
warranty policies based upon specific claims and a review of
historical warranty and service claim experience in accordance with
ASC Topic 450 “Contingencies” (“ASC Topic
450”). Adjustments are made to accruals as claim data and
historical experience change. In addition, the Company incurs
discretionary costs to service its products in connection with
product performance issues and accrues for them when they are
encountered. The Company monitors the actual cost of performing
these discretionary services and adjusts the accrual based on the
most current information available.
The changes in the carrying amount of service and product
warranties are as follows (in millions):
Balance at December 31, 2013 $ 228
Net provisions for warranties issued during the year 123
Amounts incurred (78 )
Currency translation adjustments and other (1 )
Balance at December 31, 2014 $ 272
Net provisions for warranties issued during the year 92
Amounts incurred (117 )
Currency translation adjustments and other (3 )
Balance at December 31, 2015 $ 244
Income Taxes
The liability method is used to account for income taxes. Deferred
tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates that will
be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce
deferred tax assets to amounts which are more likely than not to be
realized.
Concentration of Credit Risk
We grant credit to our customers, which operate primarily in the
oil and gas industry. Concentrations of credit risk are limited
because we have a large number of geographically diverse customers,
thus spreading trade credit risk. We control credit risk through
credit evaluations, credit limits and monitoring procedures. We
perform periodic credit evaluations of our customers’
financial condition and generally do not require collateral, but
may require letters of credit for certain international sales.
Credit losses are provided for in the financial statements.
Allowances for doubtful accounts are determined based on a
continuous process of assessing the Company’s portfolio on an
individual customer basis taking into account current market
conditions and trends. This process consists of a thorough review
of historical collection experience, current aging status of the
customer accounts, and financial condition of the Company’s
customers. Based on a review of these factors, the Company will
establish or adjust allowances for specific customers. Accounts
receivable are net of allowances for doubtful accounts of
approximately $159 million and $125 million at December 31,
2015 and 2014.
Stock-Based Compensation
Compensation expense for the Company’s stock-based
compensation plans is measured using the fair value method required
by ASC Topic 718 “Compensation—Stock
Compensation” (“ASC Topic 718”). Under this
guidance the fair value of stock option grants and restricted stock
is amortized to expense using the straight-line method over the
shorter of the vesting period or the remaining employee service
period.
The Company provides compensation benefits to employees and
non-employee directors under share-based payment arrangements,
including various employee stock option plans.
Environmental Liabilities
When environmental assessments or remediations are probable and the
costs can be reasonably estimated, remediation liabilities are
recorded on an undiscounted basis and are adjusted as further
information develops or circumstances change.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
reported and contingent amounts of assets and liabilities as of the
date of the financial statements and reported amounts of revenues
and expenses during the reporting period. Such estimates include
but are not limited to, estimated losses on accounts receivable,
estimated costs and related margins of projects accounted for under
percentage-of-completion, estimated realizable value on excess and
obsolete inventory, contingencies, estimated liabilities for
litigation exposures and liquidated damages, estimated warranty
costs, estimates related to pension accounting, estimates related
to the fair value of reporting units for purposes of assessing
goodwill and other indefinite-lived intangible assets for
impairment and estimates related to deferred tax assets and
liabilities, including valuation allowances on deferred tax assets.
Actual results could differ from those estimates.
Contingencies
The Company accrues for costs relating to litigation claims and
other contingent matters, including liquidated damage liabilities,
when such liabilities become probable and reasonably estimable. In
circumstances where the most likely outcome of a contingency can be
reasonably estimated, we accrue a liability for that amount. Where
the most likely outcome cannot be estimated, a range of potential
losses is established and if no one amount in that range is more
likely than others, the low end of the range is accrued. Such
estimates may be based on advice from third parties or on
management’s judgment, as appropriate. Revisions to
contingent liabilities are reflected in income in the period in
which different facts or information become known or circumstances
change that affect the Company’s previous judgments with
respect to the likelihood or amount of loss. Amounts paid upon the
ultimate resolution of contingent liabilities may be materially
different from previous estimates and could require adjustments to
the estimated reserves to be recognized in the period such new
information becomes known.
Net Income Attributable to Company Per Share
The following table sets forth the computation of weighted average
basic and diluted shares outstanding (in millions, except per share
data):
Years Ended
December 31,
2015 2014 2013
Numerator:
Income (loss) from continuing operations $ (769 ) $ 2,450 $ 2,180
Income from discontinued operations $
— $ 52 $ 147
Net income (loss) attributable to Company $ (769 ) $ 2,502 $ 2,327
Denominator:
Basic—weighted average common shares outstanding 387 428 426
Dilutive effect of employee stock options and other unvested stock
awards
— 2 2
Diluted outstanding shares 387 430 428
Per share data:
Basic:
Income (loss) from continuing operations $ (1.99 ) $ 5.73 $ 5.11
Income from discontinued operations $
— $ 0.12 $ 0.35
Net income (loss) attributable to Company $ (1.99 ) $ 5.85 $ 5.46
Diluted:
Income (loss) from continuing operations $ (1.99 ) $ 5.70 $ 5.09
Income from discontinued operations $
— $ 0.12 $ 0.35
Net income (loss) attributable to Company $ (1.99 ) $ 5.82 $ 5.44
Cash dividends per share $ 1.84 $ 1.64 $ 0.91
ASC Topic 260, “Earnings Per Share” (“ASC Topic
260”) requires companies with unvested participating
securities to utilize a two-class method for the computation of net
income attributable to Company per share. The two-class method
requires a portion of net income attributable to Company to be
allocated to participating securities, which are unvested awards of
share-based payments with non-forfeitable rights to receive
dividends or dividend equivalents, if declared. Net income
attributable to Company allocated to these participating securities
was immaterial for the years ended December 31, 2015, 2014 and
2013 and therefore not excluded from net income attributable to
Company per share calculation. The Company had stock options
outstanding that were anti-dilutive totaling 13 million,
8 million, and 7 million at December 31, 2015, 2014
and 2013, respectively.
Recently Issued Accounting Standards
In November 2015, the FASB issued ASU 2015-17 “Balance Sheet
Classification of Deferred Taxes” (ASU No. 2015-17),
which amends existing guidance on income taxes to require the
classification of all deferred tax assets and liabilities as
non-current on the balance sheet. ASU No. 2015-17 is effective
for fiscal years beginning after December 15, 2017, with early
adoption permitted, and the guidance may be applied either
prospectively or retrospectively. The Company does not expect the
adoption of ASU No. 2015-17 will have a material effect on its
consolidated financial position and results of operations.
In April 2015, the FASB issued an ASU 2015-03 “
In May 2014, the FASB issued Accounting Standard Update
No. 2014-09 “Revenue from Contracts with
Customers” (ASU No. 2014-09), which supersedes the
revenue recognition requirements in Accounting Standard
Codification Topic No. 605 “Revenue Recognition”
and most industry-specific guidance. This update requires that
entities recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the
consideration to which a company expects to be entitled in exchange
for those goods or services. ASU No. 2014-09 is effective for
fiscal years beginning after December 15, 2017, and for
interim periods within those fiscal years. The Company is currently
assessing the impact of the adoption of ASU No. 2014-09 on its
consolidated financial position and results of operations. |
