| 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
Inventories
Inventories consist of raw materials, work-in-process first-in, first-out on-hand,
The Company evaluates inventory quarterly using the best
information available at the time to inform our assumptions and
estimates about future demand and resulting sales volumes, and
recognizes reserves as necessary to properly state inventory. The
historically severe oil-industry mid-2014
Based on an update of our assumptions related to estimates of
future demand, during the fourth quarter we recorded a charge for
additions to inventory reserves of $582 million, consisting
primarily of obsolete and surplus inventories. At December 31,
2016 and 2015, inventory reserves totaled $1,017 million and
$500 million, or 23.4% and 9.7% of gross inventory,
respectively.
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, which includes the
amortization of assets recorded under capital leases, was
$370 million, $391 million and $413 million for the
years ended December 31, 2016, 2015 and 2014, respectively.
Accumulated depreciation of $2,298 million as of December 31, 2016
included accumulated depreciation of $6 million for capital leases.
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 $54 million in impairments of long-lived assets for
the year ended December 31, 2016, and nil for the each of the
years ended December 31, 2015 and 2014.
Intangible Assets
The Company has approximately $6.1 billion of goodwill and
$3.5 billion of identified intangible assets at
December 31, 2016.
Goodwill is identified by segment as follows (in millions):
Rig Rig Wellbore Completion & Total
Balance at December 31, 2014 $ 1,236 $ 877 $ 4,357 $ 2,069 $ 8,539
Goodwill acquired and adjusted during period
—
— 8 (8 )
—
Impairment (1)
—
— (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
Goodwill acquired and adjusted during period
—
— 24 126 150
Impairment (1) (972 )
—
—
— (972 )
Currency translation adjustments and other (2 )
— (24 ) (65 ) (91 )
Balance at December 31, 2016 $ 258 $ 877 $ 2,874 $ 2,058 $ 6,067
(1) Accumulated goodwill impairment was
$2,457 million as of December 31, 2016.
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.
The net book values of identified intangible assets are identified
by segment as follows (in millions):
Rig Systems Rig Wellbore Completion & Total
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
Additions to intangible assets
—
— 15 9 24
Amortization (15 ) (7 ) (205 ) (106 ) (333 )
Currency translation adjustments and other (1 ) (1 )
— (8 ) (10 )
Balance at December 31, 2016 $ 160 $ 115 $ 2,064 $ 1,191 $ 3,530
Identified intangible assets by major classification consist of the
following (in millions):
Gross Accumulated Net Book
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
December 31, 2016:
Customer relationships $ 4,024 $ (1,874 ) $ 2,150
Trademarks 878 (290 ) 588
Indefinite-lived trade names 384
— 384
Other 1,048 (640 ) 408
Total identified intangibles $ 6,334 $ (2,804 ) $ 3,530
Asset Impairment
The steep worldwide oil and gas industry downturn that started in
2014 stabilized somewhat during the third quarter of 2016, though
at very low levels of activity. Operators have improved their cost
structures and achieved operational efficiencies, reducing the
industry’s marginal cost of supply, primarily in the North
American land market. While some improvements in offshore
operations have been made, many deepwater projects will not be able
to achieve an economically competitive cost structure under the
current commodity pricing outlook. As a result, the market shift
from offshore drilling to land drilling in North America
intensified. Announced cancellations of major offshore projects
during the third quarter, releases of contracted offshore rigs, the
number of idle offshore rigs and the number of current newbuilds
still to be completed and enter the market all indicate a large
over-supply of offshore equipment that may take years to absorb,
even as offshore drilling activity recovers. During the third
quarter of 2016, these factors indicated a more prolonged downturn
associated with newbuild offshore drilling rigs, and we reduced our
forecast accordingly, which indicated a goodwill impairment in the
Rig Offshore reporting unit was possible.
Generally Accepted Accounting Principles require the company test
goodwill and other indefinite-lived intangible assets for
impairment at least annually or more frequently whenever events or
circumstances occur indicating that those assets might be
impaired.
The first step of the impairment analysis is to compare the
reporting unit’s carrying value to the respective fair value.
Fair value of the reporting unit 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.
The discounted cash flow is based on management’s forecast of
operating performance for the 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 reporting unit and its weighted average cost of capital. The
starting point for each of the reporting unit’s cash flow
from operations is the detailed annual plan or updated forecast.
Cash flows beyond the updated forecasted 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.
Based on the Company’s step one impairment analysis, as of
July 1, 2016, completed as a result of the indicators
identified in the third quarter, the Rig Offshore reporting unit
had a calculated fair value below its carrying value, and required
a step two analysis, which compares the implied fair value of
goodwill of a reporting unit to the carrying value of goodwill for
the reporting unit. 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. Consistent with the step one analysis,
fair value of the assets and liabilities was determined in
accordance with ASC Topic 820. Based on the step two analysis
performed for the Rig Offshore reporting unit, the Company recorded
a $972 million write-down of goodwill during the third
quarter.
Also, to achieve higher efficiencies and reduce costs, the Company
combined the operations of the Rig Offshore and Rig Land reporting
units during the third quarter of 2016. Generally accepted
accounting principles require the Company to test the value of
goodwill assets for impairment before and after combining reporting
units. As a result we also tested Rig Land before the combination
as well as the combined reporting unit, Rig Systems, as of
July 1, 2016 for goodwill impairment, in accordance with ASC
Topic 350.
Based on the Company’s step one impairment analysis, the
calculated fair value of the Rig Land reporting unit was
substantially in excess of its carrying value. Additionally, the
goodwill impairment analysis performed subsequent to the
combination of the two reporting units into the Rig Systems
reporting unit, concluded that the calculated fair value of the Rig
Systems reporting unit was substantially in excess of its carrying
value. We also considered whether impairment indicators existed
that would suggest the goodwill of our other reporting units was
more likely than not impaired and concluded there were none. While
the outlook for offshore new-builds
During the fourth quarter of 2016, the Company performed its annual
impairment test, as described in ASC Topic 350, as of
October 1, 2016. Based on the Company’s annual
impairment test, the calculated fair values for all of the
Company’s reporting units were substantially in excess of the
respective reporting unit’s carrying value. Additionally, the
fair value for all of the Company’s intangible assets with
indefinite lives were substantially in excess of the respective
asset carrying values.
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 $(10)
million, $(47) million and $20 million for the years ending
December 31, 2016, 2015 and 2014, 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 quarter of 2015, the
Venezuelan government officially devalued the Venezuelan bolivar
against the U.S. dollar. As a result, the Company incurred
approximately $9 million in devaluation charges in the first
quarter of 2015. 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 nil at December 31, 2016.
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 costs 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
• 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, 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
Net provisions for warranties issued during the year 50
Amounts incurred (127 )
Currency translation adjustments and other 5
Balance at December 31, 2016 $ 172
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 $209 million and $159 million at
December 31, 2016 and 2015.
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
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,
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 (Loss) Attributable to Company Per Share
The following table sets forth the computation of weighted average
basic and diluted shares outstanding (in millions, except per share
data):
Years Ended
December 31,
2016 2015 2014
Numerator:
Income (loss) from continuing
operations $ (2,412 ) $ (769 ) $ 2,450
Income from discontinued operations $
— $
— $ 52
Net income (loss) attributable to Company $ (2,412 ) $ (769 ) $ 2,502
Denominator:
Basic—weighted average common shares outstanding 376 387 428
Dilutive effect of employee stock options and other
—
— 2
Diluted outstanding shares 376 387 430
Per share data:
Basic:
Income (loss) from continuing
operations $ (6.41 ) $ (1.99 ) $ 5.73
Income from discontinued operations $
— $
— $ 0.12
Net income (loss) attributable to Company $ (6.41 ) $ (1.99 ) $ 5.85
Diluted:
Income (loss) from continuing
operations $ (6.41 ) $ (1.99 ) $ 5.70
Income from discontinued operations $
— $
— $ 0.12
Net income (loss) attributable to Company $ (6.41 ) $ (1.99 ) $ 5.82
Cash dividends per share $ 0.61 $ 1.84 $ 1.64
ASC Topic 260, “Earnings Per Share” (“ASC Topic
260”) requires companies with unvested participating
securities to utilize a two-class two-class non-forfeitable
Recently Adopted Accounting Standards
In November 2015, the FASB issued Accounting Standard
Update No. 2015-17 2015-17). This non-current 2015-17 non-current
In April 2015, the FASB issued Accounting Standard
Update No. 2015-03 2015-03) No. 2015-03
In August 2014, the FASB issued Accounting Standard
Update No. 2014-15 No. 2014-15), No. 2014-15 No. 2014-15
Recently Issued Accounting Standards
In August 2016, the FASB issued Accounting Standard
Update No. 2016-15 2016-15). No. 2016-15 No. 2016-15
In March 2016, the FASB issued Accounting Standard
Update No. 2016-09 2016-09). No. 2016-09 No. 2016-09
In March 2016, the FASB issued ASC Topic 842, “Leases”
(ASC Topic 842), which supersedes the lease requirements in ASC
Topic No. 840 “Leases” and most industry-specific
guidance. This update increases transparency and comparability
among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information
about leasing arrangements. ASC Topic 842 is effective for fiscal
years beginning after December 15, 2018, and for interim
periods within those fiscal years.
In preparing for the adoption of this new standard, the Company has
established an internal team to centralize the implementation
process as well as engaged external resources to assist in our
approach. We are currently utilizing a software program to
consolidate and accumulate our existing leases with documentation
as required by the new standard. We have assessed the changes
to the Company’s current accounting practices and are
currently investigating the related tax impact and process
changes. We are also in process of quantifying the impact of
the new standard on our balance sheet.
In May 2014, the FASB issued Accounting Standard Update No. 2014-09, 2014-09),
In 2015, the FASB issued guidance to defer the effective date to
fiscal years beginning after December 15, 2017 with optional
early adoption for fiscal periods beginning after December 15,
2016. The Company does not plan to early adopt ASU 2014-09.
The standard permits either a full retrospective adoption, in which
the standard is applied to all the periods presented, or a modified
retrospective adoption, in which the standard is applied only to
the current period with a cumulative-effect adjustment reflected in
retained earnings. The Company currently anticipates following
the modified retrospective adoption, but will not make a final
decision on the adoption method until later in 2017.
In 2015, the Company assembled an internal team to study the
provisions of ASU 2014-09,
The Company has not quantified and is not currently able to
reasonably estimate the effect of the potential timing or other
impacts to revenue recognition caused by the new standard, nor the
amount of contract assets and liabilities which will be added to
our balance sheet. |
