| 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 at each point in time related
to estimates of future demand, during 2017 and 2016 we recorded
charges for additions to inventory reserves of $114 million and
$606 million, respectively, consisting primarily of obsolete
and surplus inventories. At December 31, 2017 and 2016,
inventory reserves totaled $800 million and
$1,017 million, or 21.0% and 23.4% 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
$359 million, $370 million and $391 million for the
years ended December 31, 2017, 2016 and 2015, respectively.
Accumulated depreciation of $2,559 million as of
December 31, 2017 included accumulated depreciation of $18
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
were $10 million and $54 million in impairments of long-lived
assets for the years ended December 31, 2017 and 2016,
respectively, and nil for the year ended December 31,
2015.
Intangible Assets
The Company has approximately $6.2 billion of goodwill and
$3.3 billion of identified intangible assets at
December 31, 2017. Goodwill is identified by segment as
follows (in millions):
Wellbore Completion & Rig Total
Balance at December 31, 2015 $ 2,874 $ 1,997 $ 2,109 $ 6,980
Goodwill acquired and adjusted during period 4 70
— 74
Impairment
—
— (972 ) (972 )
Currency translation adjustments (4 ) (9 ) (2 ) (15 )
Balance at December 31, 2016 $ 2,874 $ 2,058 $ 1,135 $ 6,067
Goodwill acquired and adjusted during period 37 41 11 89
Currency translation adjustments 45 23 3 71
Balance at December 31, 2017 (1) $ 2,956 $ 2,122 $ 1,149 $ 6,227
(1) Accumulated goodwill impairment was
$2,457 million as of December 31, 2017.
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):
Wellbore Completion & Rig Total
Balance at December 31, 2015 $ 2,254 $ 1,296 $ 299 $ 3,849
Additions to intangible assets 15 9
— 24
Amortization (205 ) (106 ) (22 ) (333 )
Currency translation adjustments
— (8 ) (2 ) (10 )
Balance at December 31, 2016 $ 2,064 $ 1,191 $ 275 $ 3,530
Additions to intangible assets 18 41 2 61
Amortization (208 ) (108 ) (23 ) (339 )
Currency translation adjustments 9 36 4 49
Balance at December 31, 2017 $ 1,883 $ 1,160 $ 258 $ 3,301
Identified intangible assets by major classification consist of the
following (in millions):
Gross Accumulated Net Book
December 31, 2016:
Customer relationships $ 4,024 $ (1,874 ) $ 2,150
Trademarks 878 (290 ) 588
Patents 585 (345 ) 240
Indefinite-lived trade names 384
— 384
Other 463 (295 ) 168
Total identified intangibles $ 6,334 $ (2,804 ) $ 3,530
December 31, 2017:
Customer relationships $ 4,074 $ (2,118 ) $ 1,956
Trademarks 885 (317 ) 568
Patents 602 (384 ) 218
Indefinite-lived trade names 384
— 384
Other 499 (324 ) 175
Total identified intangibles $ 6,444 $ (3,143 ) $ 3,301
Asset Impairment
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.
Prior to 2017, the impairment analysis was a two-step process as
the Company early adopted Accounting Standard Update No. 2017-04
“Simplifying the Test for Goodwill Impairment,” which
eliminates step two effective July 1, 2017.
The impairment analysis compares 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 market 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.
On July 1, 2017, the Company’s Wellbore Technologies segment
reorganized three of its reporting units, moving various operations
between them. The goodwill impairment analyses performed prior to
and subsequent to the restructuring of the three reporting units,
concluded that the calculated fair values of these reporting units
were substantially in excess of their carrying value. The
restructuring had no effect on Wellbore Technologies consolidated
financial position and results of operations.
The Company combined its Rig Systems and Rig Aftermarket reporting
units into two different reporting units, Rig Equipment and Marine
Construction, under a segment called Rig Technologies, effective
October 1, 2017. The restructuring better aligns operations with
the current and anticipated market environments, reduces
administrative burden, and eliminates reported intercompany
transactions between Rig Technologies’ capital equipment and
aftermarket operations. The Company tested the Rig Systems and Rig
Aftermarket reporting units for impairment prior to combining, and
the two, new reporting units under the Rig Technologies segment for
impairment after combining, and concluded all fair values of the
reporting units were substantially in excess of their carrying
values.
During the fourth quarter of 2017, the Company performed its annual
impairment test, as described in ASC Topic 350, as of October 1,
2017. 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
Certain foreign operations, including our operations in Norway, use
the U.S. dollar as the functional 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. 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 $(3)
million, $(10) million and $(47) million for the years ending
December 31, 2017, 2016 and 2015, 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, 2017.
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 method to account for
certain long-term construction contracts in the
Completion & Production Solutions and Rig Technologies
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, 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
Net provisions for warranties issued during the year 46
Amounts incurred (86 )
Currency translation adjustments and other 3
Balance at December 31, 2017 $ 135
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 $187 million and $209 million at
December 31, 2017 and 2016, respectively.
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 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,
2017 2016 2015
Numerator:
Net loss attributable to Company $ (237 ) $ (2,412 ) $ (769 )
Denominator:
Basic—weighted average common shares outstanding 377 376 387
Dilutive effect of employee stock options and other unvested stock
awards
—
—
—
Diluted outstanding shares 377 376 387
Basic loss attributable to Company per share $ (0.63 ) $ (6.41 ) $ (1.99 )
Diluted loss attributable to Company per share $ (0.63 ) $ (6.41 ) $ (1.99 )
Cash dividends per share $ 0.20 $ 0.61 $ 1.84
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 July 2015, the FASB issued Accounting Standard
Update No. 2015-11 2015-11). 2015-11
In March 2016, the FASB issued Accounting Standard
Update No. 2016-09 2016-09). 2016-09
In October 2016, the FASB issued Accounting Standard
Update No. 2016-16 2016-16). 2016-16
In January 2017, the FASB issued Accounting Standard
Update No. 2017-04 2017-04). 2017-04
Recently Issued Accounting Standards
In August 2017, the FASB issued Accounting Standard
Update No. 2017-12 2017-12). 2017-12 2017-12. No. 2017-12
In March 2017, the FASB issued Accounting Standard
Update No. 2017-07 2017-07). 2017-07 No. 2017-07
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 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 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 the 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),
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. ASU 2014-09
In 2015, the Company assembled an internal team to study the
provisions of ASU 2014-09,
Based on an analysis of revenue streams, customer contracts and
transactions, the Company does not expect a material change in the
timing or other impacts to revenue recognition across most of our
businesses. Certain service and repair revenue will change from
point-in-time to over-time revenue recognition, and the timing of
including uninstalled materials in projects will shift, changing
only the timing of revenue recognition and not the total amount. We
expect the cumulative-effect adjustment we will record in the first
quarter of 2018, as required by the modified retrospective method,
to be less than $50 million. The final adjustment is subject to
concluding on the available practical expediants. |
