NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Nature of Operations
Weatherford International plc (“Weatherford Ireland”), an Irish public limited company, together with its subsidiaries (“Weatherford,” the “Company,” “we,” “us” and “our”), is a multinational oilfield service company. Weatherford is one of the world’s leading providers of equipment and services used in the drilling, evaluation, completion, production and intervention of oil and natural gas wells. We operate in approximately 80 countries, which are located in virtually all of the major oil and natural gas producing regions in the world. Many of our businesses, including those of our predecessor companies, have been operating for more than 50 years.
The authorized share capital of Weatherford includes 1.356 billion ordinary shares with a par value of $0.001 per share. While our ordinary shares remain registered on the New York Stock Exchange (the “NYSE”), the NYSE suspended trading in our ordinary shares in May 2019 and our appeal of that suspension is pending. Since our emergence from bankruptcy, our ordinary shares have been quoted on the OTC Pink Marketplace under the symbol “WFTLF”.
Principles of Consolidation
We consolidate all wholly owned subsidiaries, controlled joint ventures and variable interest entities where the Company has determined it is the primary beneficiary. At December 31, 2019, we had a variable interest entity related to our subsidiaries in Mexico held in trust during our bankruptcy proceedings. Subsequently, in January 2020, the trust was dissolved. All material intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year presentation, including those related to the adoption of new accounting standards. Prior year net income and shareholders’ deficiency were not affected by these reclassifications. See subsection entitled “New Accounting Pronouncements” for additional details.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions, including those related to uncollectible accounts receivable, lower of cost or net realizable value of inventories, equity investments, derivative financial instruments, intangible assets and goodwill, property, plant and equipment (“PP&E”), leases, income taxes, self-insurance, foreign currency exchange rates, pension and post-retirement benefit plans, disputes, litigation, contingencies and share-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
For information about our use of estimates relating to Fresh Start Accounting, refer to Note 3 – Fresh Start Accounting for further details.
Bankruptcy and Fresh Start Accounting
On July 1, 2019 (the “Petition Date”), Weatherford Ireland, Weatherford International Ltd. (“Weatherford Bermuda”), and Weatherford International, LLC (“Weatherford Delaware”) (collectively, “Weatherford Parties”), filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of Texas (“Bankruptcy Court”). The Weatherford Parties obtained joint administration of their Chapter 11 cases under the caption In re Weatherford International plc, et al., Case No. 19-33694 (“Cases”). On September 11, 2019 the Plan, as amended, was confirmed by the Bankruptcy Court and on December 13, 2019 (“Effective Date” or “Fresh Start Reporting Date”) after all conditions to effectiveness were satisfied, we emerged from bankruptcy after successfully completing the reorganization pursuant to the Plan.
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The Consolidated Financial Statements included herein have been prepared as if we are a going concern and in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852 – Reorganizations (“ASC 852”).
During bankruptcy we segregated liabilities and obligations whose treatment and satisfaction were dependent on the outcome of the Chapter 11 proceedings and classified these items as “Liabilities Subject to Compromise” with respect to the Predecessor (as defined below) as shown in “Note 3 – Fresh Start Accounting”. In addition, we have classified all income, expenses, gains or losses that were incurred or realized as a result of the Chapter 11 proceedings as “Reorganization Items” in our Consolidated Statements of Operations through the Effective Date.
In accordance with ASC 852, we qualified for and adopted fresh start accounting (“Fresh Start Accounting”) upon emergence from Chapter 11, at which point we became a new entity for financial reporting because (i) the holders of the then existing ordinary shares of the Predecessor company received less than 50% of the new ordinary shares of the Successor company outstanding upon emergence and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the total of all post-petition liabilities and allowed claims.
Upon adoption of Fresh Start Accounting as reflected in “Note 3 – Fresh Start Accounting,” the reorganization value derived from the enterprise value associated with the Plan was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values (except for deferred income taxes), with the remaining excess value allocated to Goodwill in accordance with ASC 805 – Business Combinations. Deferred income tax amounts were 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 Predecessor balance sheets.
References to “Predecessor” relate to the Consolidated Balance Sheets as of December 31, 2018, and Consolidated Statements of Operations for the year ended December 31, 2018 and 2017 and for the period from January 1, 2019 through and including the adjustments from the application of Fresh Start Accounting on December 13, 2019 (“Predecessor Period”). References to “Successor” relate to the Consolidated Balance Sheets of the reorganized Company as of December 31, 2019 and Consolidated Statements of Operations from December 14, 2019 through December 31, 2019 (“Successor Period”) and are not comparable to the Consolidated Financial Statements of the Predecessor as indicated by the “black line” division in the financials and footnote tables, which emphasizes the lack of comparability between amounts presented. In addition, Note 3 – Fresh Start Accounting provides a summary of the Consolidated Balance Sheets as of December 13, 2019 in the first column, and then presents adjustments to reflect the Plan and fresh start impacts to derive the opening Successor Consolidated Balance Sheets as of December 13, 2019. The Company’s financial results for future periods following the application of Fresh Start Accounting will be different from historical trends and the differences may be material.
See “Note 2 – Emergence from Chapter 11 Bankruptcy Proceedings” and “Note 3 – Fresh Start Accounting” for additional details regarding the bankruptcy.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less to be cash equivalents.
Restricted Cash
Our restricted cash balance of $182 million as of December 31, 2019 primarily includes cash collateral for certain of our letters of credit facilities and cash escrowed for the payment of bankruptcy professional fees. We had no restricted cash balances as of December 31, 2018.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts based on various factors including historical experience, the current aging status of our customer accounts, the financial condition of our customers and the business and political environment in which our customers operate. Provisions for doubtful accounts are recorded when it becomes probable that customer accounts are uncollectible.
Major Customers and Credit Risk
Substantially all of our customers are engaged in the energy industry. This concentration of customers may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and
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industry conditions. We perform on-going credit evaluations of our customers and do not generally require collateral in support of our trade receivables. We maintain allowances for potential credit losses. International sales also present various risks, including risks of war, civil disturbances and governmental activities that may limit or disrupt markets, restrict the movement of funds, or result in the deprivation of contract rights or the taking of property without fair consideration. Most of our international sales are to large international or national oil companies and these sales have resulted in a concentration of receivables from certain national oil companies. As of December 31, 2019, the Eastern Hemisphere accounted for 53% of our net outstanding accounts receivables and the Western Hemisphere accounted for 47% of our net outstanding accounts receivables. As of December 31, 2019, our net outstanding accounts receivable in the U.S. accounted for 14% of our balance and Mexico accounted for 17% of our balance. No other country accounted for more than 10% of our net outstanding accounts receivables balance. During 2019, 2018 and 2017, no individual customer accounted for more than 10% of our consolidated revenues.
Inventories
Inventory held as of our emergence date was remeasured to fair value. Refer to Note 3 – Fresh Start Accounting for further details.
We value our inventories at the lower of cost or net realizable value using either the first-in, first-out (“FIFO”) or average cost method. Cost represents third-party invoice or production cost. Production cost includes material, labor and manufacturing overhead. Work in process and finished goods inventories include the cost of materials, labor and manufacturing overhead. To maintain a book value that is the lower of cost or net realizable value, we regularly review inventory quantities on hand and maintain reserves for excess, slow moving and obsolete inventory.
Property, Plant and Equipment
PP&E held as of our emergence date was remeasured to fair value. Refer to Note 3 – Fresh Start Accounting for further details.
PP&E, both owned and under finance leases, is carried at cost less accumulated depreciation. The carrying values are based on our estimates and judgments relative to capitalized costs, useful lives and salvage value, where applicable. We expense maintenance and repairs as incurred. We capitalize expenditures for improvements as well as renewals and replacements that extend the useful life of the asset. We depreciate our fixed assets on a straight-line basis over their estimated useful lives, allowing for salvage value where applicable.
The estimated useful lives of our major classes of PP&E are as follows:
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Major Classes of Property, Plant and Equipment
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Predecessor and Future
PP&E Estimated Useful Lives
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Buildings and leasehold improvements
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10 – 40 years or lease term
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Rental and service equipment
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2 – 15 years (3 – 10 years for assets added after emergence)
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Machinery and other
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2 – 12 years
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Assets Held for Sale
We consider businesses or assets to be held for sale when all of the following criteria are met: (a) management commits to a plan to sell the business or asset; (b) the business or asset is available for immediate sale in its present condition; (c) actions required to complete the sale of the business or asset have been initiated; (d) the sale of the business or asset is probable and we expect the completed sale will occur within one year; (e) the business or asset is actively being marketed for sale at a price that is reasonable given its current fair value; and, (f) it is unlikely that the plan to sell will be significantly modified or withdrawn.
Upon designation as held for sale, we record the carrying value of each business or asset at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and cease recording depreciation. If at any time these criteria are no longer met, subject to certain exceptions, the assets previously classified as held for sale are reclassified as held and used and measured individually at the lower of the following: (a) the carrying amount before being classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the asset been continuously classified as held and used or (b) the fair value at the date of the subsequent decision not to sell.
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Goodwill and Intangible Assets
Goodwill represents the excess of consideration paid (or with respect to Fresh Start Accounting, the excess of reorganization value) over the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized but is evaluated for impairment. We perform an impairment test for goodwill annually as of October 1 or more frequently if indicators of potential impairment exist that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. We have the option to assess qualitative factors to determine if it is necessary to perform the quantitative step of the impairment test. If it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, further testing is not required. If it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, we must perform the quantitative goodwill impairment test. We also have the unconditional option to bypass the qualitative assessment at any time and perform the quantitative step. The quantitative step of the goodwill impairment test involves a comparison of the fair value of each of our reporting units with their carrying values. If the carrying value of a reporting unit’s goodwill were to exceed its fair value, goodwill impairment is recognized as the difference to the extent of the goodwill balance.
With respect to the Successor and as a result of Fresh Start Accounting, our newly established identifiable intangible assets included developed technologies and our trade name. With respect to the Predecessor, our identifiable intangible assets were acquired technology, licenses, patents, customer relationships and other identifiable intangible assets. Successor identifiable intangible assets are amortized on a straight-line basis over their estimated economic lives generally ranging from 5 to 10 years. As many areas of our business rely on patents and proprietary technology, we seek patent protection both inside and outside the U.S. for products and methods that appear to have commercial significance. We capitalize patent defense costs when we determine that a successful defense is probable.
Long-Lived Assets
Long-lived assets held as of our emergence date were remeasured to fair value. Refer to Note 3 – Fresh Start Accounting for further details.
Long-lived assets at recorded at cost and reviewed on a regular basis to determine whether any events or changes in circumstances indicate the carrying amount of the assets or asset group may not be recoverable. Factors that might indicate a potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset or asset group, 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 associated with the use of the long-lived asset. If these or other factors indicate the carrying amount of the asset or asset group may not be recoverable, we determine whether an impairment has occurred through analysis of undiscounted cash flow of the asset or asset group at the lowest level that has an identifiable cash flow. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset or asset group. We estimate the fair value of the asset or asset group using market prices when available or, in the absence of market prices, based on an estimate of discounted cash flows or replacement cost. Cash flows are generally discounted using an interest rate commensurate with a weighted average cost of capital for a similar asset.
Research and Development Expenditures
Research and development expenditures are expensed as incurred.
Derivative Financial Instruments
We record derivative instruments on the balance sheet at their fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss), depending on whether the derivative is designated as part of a hedge relationship, and if so, the type of hedge.
Foreign Currency
Results of operations for our foreign subsidiaries with functional currencies other than the U.S. dollar are translated using average exchange rates during the period. Assets and liabilities of these foreign subsidiaries are translated using the exchange rates in effect at the balance sheet dates, and the resulting translation adjustments are included in “Accumulated Other Comprehensive Income (Loss)”, a component of Shareholders’ Equity (Deficiency).
For our subsidiaries that have a functional currency that differs from the currency of their balances and transactions, inventories, PP&E and other non-monetary assets and liabilities, together with their related elements of expense or income, are remeasured
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into the functional currency using historical exchange rates. All monetary assets and liabilities are remeasured into the functional currency at current exchange rates. All revenues and expenses are translated into the functional currency at average exchange rates. Remeasurement gains and losses for these subsidiaries are recognized in our results of operations during the period incurred. We record net foreign currency gains and losses on foreign currency derivatives (see “Note 16 – Derivative Instruments”) in “Other Income (Expense), Net” on the accompanying Consolidated Statements of Operations. Devaluation charges on foreign currencies when incurred are reported in “Currency Devaluation Charges” on the accompanying Consolidated Statements of Operations.
Share-Based Compensation
We account for all share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted shares, restricted share units and performance units by measuring these awards at the date of grant and recognizing the grant date fair value as an expense, net of expected forfeitures, over the service period, which is usually the vesting period.
Income Taxes
Income taxes have been provided based upon the tax laws and rates in the countries in which our operations are conducted and income is earned. 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. A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. The impact of an uncertain tax position taken or expected to be taken on an income tax return is recognized in the financial statements at the largest amount that is more likely than not to be sustained upon examination by the relevant taxing authority.
Leases
We lease certain facilities, land, vehicles, and equipment. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Beginning January 1, 2019, operating right of use (“ROU”) assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of January 1, 2019. We determine if an arrangement is classified as a lease at inception of the arrangement. As most of our leases do not provide an implicit rate of return, we use our incremental borrowing rate, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments, which is updated on a quarterly basis. For adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) issued by the Financial Accounting Standards Board (“FASB”) in February 2016 and the series of related updates that followed (collectively referred to as “Topic 842”), we used the December 31, 2018 incremental borrowing rate, for operating leases that commenced prior to December 31, 2018. For certain equipment leases, such as copiers and vehicles, we account for the leases under a portfolio method. Operating lease payments include related options to extend or terminate lease terms that are reasonably certain of being exercised.
Upon emergence from bankruptcy on December 13, 2019, our lease liabilities were remeasured to fair value using the present value of the remaining lease payments as if we acquired new leases. The remeasurement was based on our incremental borrowing rate as of December 13, 2019. Additionally, the ROU assets were revalued based upon the present value of market-based rent. The remeasurement of our ROU assets was based on the market discount rate as of December 13, 2019.
See “Note 4 – New Accounting Pronouncements” and “Note 12 – Leases” for details on the impact of adopting the new leasing guidance.
Disputes, Litigation and Contingencies
We accrue an estimate of costs to resolve certain disputes, legal matters and contingencies when a loss on these matters is deemed probable and reasonably estimable. For matters not deemed probable or not reasonably estimable, we have not accrued any amounts. Our contingent loss estimates are based upon an analysis of potential results, assuming a combination of possible litigation and settlement strategies. The accuracy of these estimates is impacted by the complexity of the associated issues.
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Revenue Recognition
The majority of our revenue is derived from short term contracts. Subsequent to January 1, 2018, we account for revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and all of the related amendments, collectively referred to as “Topic 606”. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. As of January 1, 2018, we adopted the Topic 606 revenue recognition guidance and the comparative period information for 2017 has not been adjusted and continues to be reported under the previous revenue standard, the primary accounting policies for which are discussed below.
Our services and products are generally sold based upon purchase orders, contracts or other legally enforceable arrangements with our customers that included fixed or determinable prices but do not generally include right of return provisions or other significant post-delivery obligations. Our products are produced in a standard manufacturing operation, even if produced to our customer’s specifications. Prior to the adoption of Topic 606, revenue was recognized for products when persuasive evidence of an arrangement existed, sales prices were fixed and determinable, title passed to the customer, collectability was reasonably assured, delivery occurred as directed by our customer and when the customer assumed the risks and rewards of ownership. Revenue was recognized for services when they are rendered. Both contract drilling and pipeline service revenue is contractual by nature and generally governed by day-rate based contracts. We recognized revenue for day-rate contracts as the services were rendered. See “Note 23 – Revenues” for details on revenue recognition disclosures.
The unmanned equipment that we lease to customers as operating leases consist primarily of drilling rental tools and artificial lift pumping equipment. These equipment rental revenues are generally provided based on call-out work orders that include fixed per unit prices and are derived from short-term contracts.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets (including unbilled receivables), and customer advances and deposits (contract liabilities classified as deferred revenues). Receivables for products and services with customers, under Topic 606, are included in “Accounts Receivable, Net,” contract assets are included in “Other Current Assets” and contract liabilities are included in “Other Current Liabilities” on our Consolidated Balance Sheets.
Consideration under certain contracts such as turnkey or lump sum contracts may be classified as contract assets as the invoicing occurs once the performance obligations have been satisfied while the customer simultaneously receives and consumes the benefits provided. We also have receivables for work completed but not billed in which the rights to consideration are conditional and would be classified as contract assets. These are primarily related to service contracts and are not material to our Consolidated Financial Statements. We may also have contract liabilities and defer revenues for certain product sales that are not distinct from their installation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
Our principal business is to provide equipment and services to the oil and natural gas exploration and production industry, both on land and offshore, through our major product lines: Production, Completions, Drilling and Evaluation, and Well Construction.
Generally, under Topic 606 our revenue is recognized for services over time as the services are rendered and we primarily utilize an output method such as time elapsed or footage drilled which coincides with how customers receive the benefit. Both contract drilling and pipeline service revenue is contractual by nature and generally governed by day-rate based contracts. Revenue is recognized on product sales at a point in time when control passes and is generally upon delivery but is dependent on the terms of the contract.
Our services and products are generally sold based upon purchase orders, contracts or call-out work orders that include fixed per unit prices or variable consideration but do not generally include right of return provisions or other significant post-delivery obligations. We generally bill our sales of services and products upon completion of the performance obligation. Product sales are billed and recognized when control passes to the customer. Our products are produced in a standard manufacturing operation, even
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if produced to our customer’s specifications. Revenues are recognized at the amount to which we have the right to invoice for services performed. Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer and record as a contract liability. We defer revenue recognition on such payments until the products or services are delivered to the customer.
From time to time, we may enter into bill and hold arrangements. When we enter into these arrangements, we determine if the customer has obtained control of the product by determining (a) the reason for the bill-and-hold arrangement; (b) whether the product is identified separately as belonging to the customer; (c) whether the product is ready for physical transfer to the customer; and (d) whether we are unable to utilize the product or direct it to another customer.
We account for individual products and services separately if they are distinct and the product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration, including any discounts, is allocated between separate products and services based on their standalone selling prices. The standalone selling prices are determined based on the prices at which we separately sell our products and services. For items not sold separately (e.g. term software licenses in our Production product line), we estimate standalone selling prices using the adjusted market assessment approach.
Costs of relocating equipment without contracts are expensed as incurred. Demobilization fees received are recognized over the contract period and may be constrained to the amount that it is probable a significant reversal in the fees will not occur. When determining if such variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue as well as the likelihood and magnitude of such a potential reversal.
The nature of our contracts gives rise to several types of variable consideration, including claims and lost-in-hole charges. Our claims are not significant and lost-in-hole charges are constrained variable consideration. We do not estimate revenue associated with these types of variable consideration.
We incur rebillable expenses including shipping and handling, third-party inspection and repairs, and customs costs and duties. We recognize the revenue associated with these rebillable expenses when reimbursed by customers as “Product Revenues” and all related costs as “Cost of Products” in the accompanying Consolidated Statements of Operations.
We provide certain assurance warranties on product sales which range from one to five years but do not offer extended warranties on any of our products or services. These assurance warranties are not separate performance obligations thus no portion of the transaction price is allocated to our obligations under the assurance warranties.
Earnings (Loss) per Share
Basic earnings (loss) per share for all periods presented equals net income (loss) divided by the weighted average number of our shares outstanding during the period including participating securities. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of our shares outstanding during the period including participating securities, adjusted for the dilutive effect of our stock options, restricted shares and performance units, when applicable.
Unvested share-based payment awards and other instruments issued by the Company that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and are included in the computation of earnings per share following the two-class method. Accordingly, we included restricted share awards and the outstanding warrant until it expired on May 21, 2019, which contained the right to receive dividends, in the computation of both basic and diluted earnings per share when dilutive.
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2. Emergence from Chapter 11 Bankruptcy Proceedings
Restructuring Support Agreement; Voluntary Reorganization Under Chapter 11 of the U.S. Bankruptcy Code
On May 10, 2019, the Weatherford Parties entered into the Restructuring Support Agreement (“RSA”) with certain holders of our unsecured notes (“Consenting Creditors”), setting forth, subject to certain conditions, the terms of the proposed capital financial restructuring of the Company (“Transaction”). The RSA included certain milestones for the progress of the upcoming court proceedings, which included the dates by which the Weatherford Parties were required to, among other things, obtain certain court orders and complete the Transaction. In addition, the parties to the RSA had the right to terminate the RSA and their support for the Transaction under certain circumstances.
On June 28, 2019, the Weatherford Parties commenced a solicitation for acceptance of their prepackaged plan of reorganization (“Plan”) by causing the Plan and the corresponding disclosure statement to be distributed to certain creditors of the Company that were entitled to vote on the Plan. On July 1, 2019, Weatherford Ireland, Weatherford Bermuda, and Weatherford Delaware, filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas (the “Cases”).
Payments Due on Certain Indebtedness
The Weatherford Parties’ 7.75% Senior Notes due 2021, 8.25% Senior Notes due 2023 and 6.80% Senior Notes due 2037 (together, “Certain Senior Notes”) provided for an aggregate $69 million interest payment that became due on June 15, 2019. The applicable indenture governing the Certain Senior Notes provided a 30-day grace period that extended the latest date for making this interest payment to July 16, 2019, before an event of default would occur under the applicable indenture. The Weatherford Parties elected to not make this interest payment on the due date and to utilize the 30-day grace period provided by the indentures. As a result of filing the Cases on July 1, 2019, an event of default occurred under each indenture governing these unsecured notes, which automatically accelerated maturity of the principal, plus any accrued and unpaid interest, on such series of unsecured notes and certain other obligations of the Weatherford Parties. Any efforts to enforce such payment obligations under the unsecured notes or other accelerated obligations of the Weatherford Parties were automatically stayed as a result of the Cases, and the creditors’ rights of enforcement in respect of the unsecured notes and other accelerated obligations of the Weatherford Parties were subject to the applicable provisions of the Bankruptcy Code. In addition, all of the Weatherford Parties’ prepetition unsecured senior notes and related unpaid interest were classified as “Liabilities Subject to Compromise” on our Consolidated Balance Sheets during bankruptcy as further defined herein and in subsequent disclosures throughout and with respect to the Predecessor as shown in “Note 3 – Fresh Start Accounting”.
The Weatherford Parties’ Term Loan Agreement required a quarterly payment of $12.5 million plus interest that became due on June 30, 2019. On July 1, 2019, the Weatherford Parties and the Term Loan Lenders entered into a Term Loan Forbearance Agreement where the lenders agreed to forbear from exercising their rights and remedies available to them, including the right to accelerate any indebtedness, for a specified period of time. On July 3, 2019, all unpaid principal and interest under the Term Loan Agreement were repaid in full. See discussion below.
Forbearance Agreements
On July 1, 2019, the Weatherford Parties and the Credit Agreement Lenders under the Amended and Restated Credit Agreement (the “A&R Credit Agreement”), dated as of May 9, 2016, among WOFS Assurance Limited and Weatherford Bermuda, as borrowers, the Company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto entered into a forbearance agreement (the “Credit Agreement Forbearance Agreement”) with respect to certain defaults under the A&R Credit Agreement, including those arising from the Weatherford Parties’ commencement of the Cases. Specifically, under the Credit Agreement Forbearance Agreement, the Credit Agreement Lenders agreed to forbear from exercising their rights and remedies available to them due to the Specified Defaults defined in the agreement, including the right to accelerate any indebtedness, for a specified period of time. Under the terms of the Credit Agreement Forbearance Agreement, the Weatherford Parties paid a fee for the ratable account of the Credit Agreement Lenders in an amount equal to 0.25% on the outstanding principal amount of the loans and total letter of credit exposure under the A&R Credit Agreement. Additionally, (i) to the extent such entities were not already guarantors under the A&R Credit Agreement, all subsidiaries of the Company who were guarantors under the DIP Credit Agreement (defined below) joined as guarantors under the A&R Credit Agreement and (ii) all U.S. and Canadian subsidiaries of the Company granted a second lien security interest in favor of the Credit Agreement Lenders in the same assets that such U.S. and Canadian subsidiaries pledged a first lien security interest in under the DIP Credit Agreement; provided that the aggregate amount of the guaranteed obligations to be secured under the A&R Credit Agreement did not exceed $100 million; and provided, further, that if the obligations under the A&R Credit Agreement were not paid in full by our emergence date, as amended, such second lien security
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interest of the Credit Agreement Lenders shall automatically transition from second liens to pari passu liens with the liens under the DIP Credit Agreement.
On July 1, 2019, the Weatherford Parties and the Term Loan Lenders under the Term Loan Agreement, dated as of May 4, 2016, among Weatherford Bermuda, as borrower, the Company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (the “Term Loan Agreement”) entered into a forbearance agreement (the “Term Loan Forbearance Agreement”) with respect to certain defaults under the Term Loan Agreement. Specifically, under the Term Loan Forbearance Agreement, the Term Loan Lenders agreed to forbear from exercising their rights and remedies available to them due to the Specified Defaults defined in the agreement, including the right to accelerate any indebtedness, for a specified period of time. On July 3, 2019, the Company repaid in full its outstanding indebtedness under the Term Loan.
On July 1, 2019, the Weatherford Parties and the 364-Day Lenders under the 364-Day Revolving Credit Agreement, dated August 16, 2018, among Weatherford Bermuda, as borrower, the other borrowers party thereto, the Company, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (“364-Day Credit Agreement”) entered into a forbearance agreement (the “364-Day Revolving Forbearance Agreement”) with respect to certain defaults under the 364-Day Credit Agreement. Specifically, under the 364-Day Revolving Forbearance Agreement, the 364-Day Lenders agreed to forbear from exercising their rights and remedies available to them due to the Specified Defaults defined in the agreement, including the right to accelerate any indebtedness, for a specified period of time. On July 3, 2019, the Company repaid in full its outstanding indebtedness under the 364-Day Revolving Credit Agreement.
On July 1, 2019, the Weatherford Parties and three lenders under the DIP Credit Agreement (the “Swap Counterparties”) each party to a hedging agreement with Weatherford Bermuda for the purpose of hedging foreign currency exposure incurred by the Weatherford Parties (each, a “Swap Agreement” and, collectively, the “Swap Agreements”) entered into a consent to swap agreement termination forbearance (the “Swap Forbearance Agreement”) with respect to certain defaults under the Swap Agreements. Specifically, under the Swap Forbearance Agreement, the Swap Counterparties agreed to forbear from exercising their rights and remedies available to them due to certain Events of Default and Termination Events defined in the agreements for a specified period of time. On July 3, 2019, the Weatherford Parties entered into amended and restated Swap Agreements with such Swap Counterparties to govern existing and future foreign currency transactions entered into with such Swap Counterparties.
Backstop Commitment Agreement
On July 1, 2019, the Weatherford Parties and the commitment parties thereto (the “Initial Commitment Parties”) entered into a Backstop Commitment Agreement. Pursuant to the terms of the Plan, and subject to approval by the Bankruptcy Court in connection with confirmation of the Plan, the Company agreed to offer to holders of its existing unsecured notes, including the Commitment Parties, subscription rights to purchase the Exit Notes in aggregate principal amount of $1.25 billion, upon the Company’s emergence from bankruptcy. On September 9, 2019, the Weatherford Parties, certain of the Initial Commitment Parties and certain additional commitment parties (the “Additional Commitment Parties” and, together with the Initial Commitment Parties, the “Commitment Parties”) entered into an amendment to the Backstop Commitment Agreement. The Backstop Commitment Agreement Amendment provided for (i) the joinder of the Additional Commitment Parties to the Backstop Commitment Agreement, (ii) the increase in the backstop commitment by $350 million (the “Increased Commitment”) from $1.25 billion to up to $1.6 billion, and (iii) an amendment to the Backstop Commitment Agreement to account for the changes reflected in the Third RSA Amendment.
Subject to the terms and conditions contained in the Backstop Commitment Agreement, the Consenting Creditors agreed to purchase any Exit Notes that were not duly subscribed for pursuant to the rights offering at a price equal to $1,000 per $1,000 in principal amount of the Exit Notes purchased by such Commitment Party. On July 1, 2019, as consideration for the commitment, the Weatherford Parties made an aggregate payment of $62.5 million in cash to the Commitment Parties. Except under certain circumstances set forth in the Backstop Commitment Agreement, the payment was non-refundable, regardless of the principal amount of unsubscribed Exit Notes (if any) purchased by the Commitment Parties. As consideration for the Increased Commitment agreed to on September 9, 2019, the Weatherford Parties made an aggregate payment of $18.7 million in cash to certain of the Commitment Parties upon our emergence date. Subject to certain termination rights, the payment was non-refundable, regardless of the principal amount of unsubscribed Exit Notes (if any) purchased by the Commitment Parties.
The transactions contemplated by the Backstop Commitment Agreement were conditioned upon the satisfaction or waiver of customary conditions for transactions of this nature, including, without limitation, that (i) the Bankruptcy Court shall have approved the rights offering, (ii) the Bankruptcy Court shall have confirmed the Plan and (iii) the rights offering shall have been conducted, in all material respects, in accordance with the approval of the Bankruptcy Court, the Plan and the Backstop Commitment Agreement.
Weatherford International plc – 2019 Form 10-K | 69
Debtor in Possession Credit Agreement
On July 3, 2019, the Weatherford Parties entered into a senior secured superpriority debtor in possession credit agreement (the “DIP Credit Agreement”). The DIP Credit Agreement had two debtor in possession (“DIP”) facilities to provide liquidity during the pendency of the Cases. The facilities consisted of (a) a DIP revolving credit facility in the principal amount of up to $750 million provided by banks or other lenders and (b) a DIP term loan facility in the amount of up to $1.0 billion, which was fully backstopped by the Consenting Creditors. The DIP Credit Agreement matured on the earlier of (i) the date that is 12 months after the Weatherford Parties’ entry into the DIP Credit Agreement or (ii) the date of completion of the Transaction. The DIP Credit Agreement bore interest (i) with respect to Eurodollar borrowings, based on an adjusted LIBOR rate plus an applicable margin of 3.00%, with a 0.00% LIBOR floor and (ii) with respect to alternate base rate borrowings, a base rate plus an applicable margin of 2.00%. In addition to paying interest on outstanding principal amounts under the DIP Credit Agreement, the Weatherford Parties were required to pay an unused commitment fee to the revolving facility lenders in respect of the unutilized DIP revolving facility commitments at a rate equal to 0.375% per annum on the average daily amount of the unutilized revolving facility commitments.
The DIP Credit Agreement included a minimum liquidity covenant of $150 million and was secured by substantially all the personal assets and properties of the Weatherford Parties and certain of their subsidiaries. The DIP Credit Agreement was also guaranteed on an unsecured basis by certain other subsidiaries of the Weatherford Parties. Through the term of the DIP Credit Agreement, we were in compliance with our covenants under the DIP Credit Agreement.
On July 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. On July 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, the Company cash collateralized approximately $271 million of letters of credit and similar instruments with borrowings from the DIP Credit Agreement. See “Note 13 – Short-term Borrowings and Other Debt Obligations” for additional details. We repaid our DIP Credit Agreement borrowings in full on the Effective Date.
Amended RSA; Plan Confirmation
On August 23, 2019, the Weatherford Parties entered into the second amendment of the RSA (the “Second RSA Amendment”) with certain of the noteholders, and certain equity holders who collectively held approximately 208 million shares of the Weatherford’s outstanding ordinary shares (the “Consenting Equity Holders”) which joined the Consenting Equity Holders as parties to the RSA. In addition, it provided for the payment of $250 thousand to the Consenting Equity Holders’ counsel and amended the terms of the new warrants to be issued under the Plan to the holders of the Company’s existing ordinary shares. The amended new warrant terms include extending the maturity date of the warrants to four years after the effective date of the Plan and reduced the exercise price.
Pursuant to the terms of the Third RSA Amendment, the Weatherford Parties agreed to issue a single tranche of up to $2.1 billion aggregate principal amount of new unsecured notes (“Exit Notes”) upon emergence from bankruptcy, consisting of up to $1.6 billion of Exit Notes were issued for cash to holders of subscription rights issued in a rights offering (the “Exit Rights Offering Notes”) and to holders of Unsecured Notes Claims and $500 million of Exit Notes issued on a pro rata basis (the “Exit Takeback Notes”). The Exit Notes were issued in lieu of the two tranches of new unsecured notes in aggregate principal amount of $2.5 billion previously contemplated by the original RSA. The Exit Notes bear interest at a rate of 11% per annum and otherwise generally have the terms set forth in the form of New Senior Unsecured Notes Indenture (“Notes Indenture”) with modifications to reflect the amendments contemplated by the Third RSA Amendment, the removal of the 125% of Consolidated Cash Flow prong in the Notes Indenture and the addition of a covenant requiring the Company to use commercially reasonable efforts to obtain and maintain a rating for the Exit Notes from both Standard & Poor’s and Moody’s Investors Service.
On September 11, 2019, the Transaction was approved through the confirmation of the Plan filed in the Cases.
Weatherford International plc – 2019 Form 10-K | 70
The amended RSA and the confirmed Plan contemplated a comprehensive deleveraging of our balance sheet and provided, in pertinent part, as follows (as further described in later paragraphs):
|
|
•
|
Our existing unsecured notes would be cancelled and exchanged for 99% of the ordinary shares of the reorganized Company (“New Common Stock”) and the Weatherford Parties would issue a single tranche of up to $2.1 billion aggregate principal amount of new Exit Notes upon emergence from bankruptcy, consisting of up to $1.6 billion of Exit Rights Offering Notes (fully backstopped by Commitment Parties in the Backstop Commitment Agreement) issued for cash to holders of subscription rights issued in a rights offering and $500 million of Exit Takeback Notes issued on a pro rata basis with a five-year maturity.
|
|
|
•
|
All trade claims against the Company whether arising prior to or after the commencement of the Cases would be paid in full in the ordinary course of business.
|
|
|
•
|
Our existing equity would be cancelled and exchanged for 1% of the New Common Stock and four-year warrants to purchase 10% of the New Common Stock, both subject to dilution on account of the equity issued pursuant to the management incentive plan. The strike price of the warrants was expected to be set at an equity value at which the noteholders would receive a recovery equal to par as of the date of the commencement of the Cases in respect of the existing unsecured notes and all other general unsecured claims that were pari passu with the existing unsecured notes.
|
Our affiliates entities that did not file voluntary petitions under the Bankruptcy Code continued operating their businesses and facilities without disruption to customers, vendors, partners or employees. The Plan and first day relief provided that vendors and other unsecured creditors could continue to work with the non-debtor affiliates on existing terms and would be paid in the ordinary course of business (in the case of creditors of the Weatherford Parties, following consummation of the Plan). All existing customer and vendor contracts remained in place and were serviced in the ordinary course of business.
Weatherford Bermuda commenced provisional liquidation proceedings (“Bermuda Proceedings”) pursuant to the Bermuda Companies Act 1981 by presenting a winding up petition to the Supreme Court of Bermuda (“Bermuda Court”). The Bermuda Court appointed a provisional liquidator who acted as an officer of the Bermuda Court. The appointment of the provisional liquidator provided an automatic statutory stay of proceedings in Bermuda against Weatherford Bermuda and its assets. On the return date of September 6, 2019 for the Bermuda petition - similar to a second day hearing in a Chapter 11 proceeding - Weatherford Bermuda postponed its petition for a specified period, while the Cases were administered. Before the Weatherford Parties emerged from Chapter 11, Weatherford Bermuda, along with the provisional liquidator and subject to the direction of the Bermuda Court, convened meetings of the impaired creditors in order to consider and approve, if appropriate, a scheme of arrangement pursuant to the Bermuda Companies Act 1981. The terms of the approved Bermuda scheme mirrored the terms of the Plan and was a mechanism for ensuring that all of the impaired creditors of Weatherford Bermuda were bound by the terms of the Bermuda scheme. The Bermuda Scheme was effective as of November 25, 2019.
On September 23, 2019, Weatherford Ireland filed a petition under the Irish Companies Act 2014 in Ireland (“Irish Examinership Proceeding”) to seek approval for its scheme of arrangement following confirmation of the Plan in the U.S. The filing of the Irish Examinership Proceeding commenced a 100-calendar day protection period under Irish law, during which Weatherford Ireland had the benefit of protection against enforcement and other actions by its creditors. Weatherford Ireland continued operating its business in the ordinary course during the protection period. The approved terms of the Irish scheme mirrored the terms of the Plan. The Irish scheme was approved by the Irish High Court on December 12, 2019.
Subject to certain exceptions, under the Bankruptcy Code, the filing of the Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Weatherford Parties or their property to recover, collect or secure a claim arising prior to the date of the Cases. In addition, all of the Weatherford Parties’ prepetition unsecured senior notes and related unpaid interest were liabilities subject to compromise, further discussed below. Since the commencement of the Cases until emergence, the Weatherford Parties continued to operate their businesses as debtors-in-possession under the jurisdiction of and in accordance with the applicable provisions of the Bankruptcy Code, orders of the Bankruptcy Court, the Irish Examinership Proceeding and the Bermuda Proceeding.
Weatherford International plc – 2019 Form 10-K | 71
Emergence
On the Effective Date of December 13, 2019, except as noted below:
(1)the Company amended and restated its certificate of incorporation and bylaws on December 10, 2019;
(2)the Company appointed new members to the Successor’s board of directors to replace the directors of the Predecessor;
|
|
(3)
|
all outstanding obligations under our unsecured senior and exchangeable notes were cancelled and the applicable agreements governing such obligations were terminated; for additional details see “Note 14 – Long-term Debt”;
|
|
|
(4)
|
the senior secured superpriority debtor-in-possession credit agreement (the “DIP Credit Agreement”) the Company previously entered into was paid in full and terminated; for additional details see “Note 13 – Short-term Borrowings and Other Debt Obligations”;
|
|
|
(5)
|
the Company issued a $2.1 billion aggregate principal amount of unsecured 11.00% Exit Notes due 2024; for additional details see “Note 14 – Long-term Debt”;
|
|
|
(6)
|
the Company entered into a senior secured asset-based revolving credit agreement in an aggregate amount of $450 million (the “ABL Credit Agreement”) with the lenders party thereto and Wells Fargo Bank, N.A. as administrative agent; for additional details see Note 13 – Short-term Borrowings and Other Debt Obligations;
|
|
|
(7)
|
the Company entered into a senior secured letter of credit agreement in an aggregate amount of $195 million (the “LC Credit Agreement”) for issuance of bid and performance letters of credit; for additional details see Note 13 – Short-term Borrowings and Other Debt Obligations;
|
|
|
(8)
|
the Company issued 69,999,954 shares of Successor new ordinary shares (“New Ordinary Shares”) to the holders of the Company’s existing senior notes and holders of the existing ordinary shares (“Old Ordinary Shares”); for additional details see “Note 20 – Shareholders’ Equity (Deficiency)”;
|
|
|
(9)
|
the Company issued warrants (the “New Warrants”), to holders of the Company’s existing Old Ordinary Shares, to purchase up to an aggregate of 7,777,779 New Ordinary Shares in the Company at an exercise price of $99.96 per ordinary share. The New Warrants are exercisable until the earlier of December 13, 2023 and the date of consummation of any liquidity event as defined in the Warrant Agreement; for additional details see “Note 20 – Shareholders’ Equity (Deficiency)”.
|
Prepetition Charges
Expenses, gains and losses that are realized or incurred before July 1, 2019 and in relation to the Cases are recorded under the caption “Prepetition Charges” on our Consolidated Statements of Operations. The $86 million of prepetition charges primarily consisted of professional and other fees related to the Cases.
Weatherford International plc – 2019 Form 10-K | 72
Reorganization Items
Any expenses, gains and losses that are realized or incurred as of or subsequent to the Petition Date and as a direct result of the Cases are recorded under “Reorganization Items” on our Consolidated Statements of Operations for the Predecessor and Successor Periods and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Period From
|
|
|
Period From
|
|
|
12/14/19
|
|
|
01/01/19
|
|
|
through
|
|
|
through
|
Reorganization Gain (Expense) (Dollars in millions)
|
|
12/31/19
|
|
|
12/13/19
|
Gain on Settlement of Liabilities Subject to Compromise
|
|
$
|
—
|
|
|
|
$
|
4,297
|
|
Fresh Start Valuation Adjustments
|
|
—
|
|
|
|
1,434
|
|
Reorganization Items for Plan Effects (Non-Cash)
|
|
—
|
|
|
|
5,731
|
|
|
|
|
|
|
|
Unamortized Debt Issuance and Discount
|
|
$
|
—
|
|
|
|
$
|
(128
|
)
|
Unamortized Interest Rate Derivative Loss
|
|
—
|
|
|
|
(8
|
)
|
Reorganization Items (Non-Cash)
|
|
—
|
|
|
|
(136
|
)
|
|
|
|
|
|
|
Backstop Commitment Fees
|
|
$
|
—
|
|
|
|
$
|
(81
|
)
|
DIP Financing Fees
|
|
—
|
|
|
|
(56
|
)
|
Professional Fees
|
|
(4
|
)
|
|
|
(69
|
)
|
Reorganization Fees
|
|
(4
|
)
|
|
|
(206
|
)
|
|
|
|
|
|
|
Total Reorganization Items
|
|
$
|
(4
|
)
|
|
|
$
|
5,389
|
|
|
|
|
|
|
|
Reorganization Items (Fees) Unpaid
|
|
$
|
30
|
|
|
|
$
|
30
|
|
Reorganization Items (Fees) Paid
|
|
$
|
4
|
|
|
|
$
|
176
|
|
Weatherford International plc – 2019 Form 10-K | 73
Liabilities Subject to Compromise
The Weatherford Parties’ prepetition principal balance on the Predecessor’s unsecured Senior and Exchangeable Senior Notes and related unpaid accrued interest as of the Petition Date were reclassified from “Long-term Debt” and “Other Current Liabilities”, respectively, to “Liabilities Subject to Compromise” on our Consolidated Balance Sheets on July 2, 2019 and during the bankruptcy proceedings at the amounts that were allowed as claims by the Bankruptcy Court. See also “Note 3 – Fresh Start Accounting” for further details. Upon emergence from bankruptcy, the liabilities subject to compromise of $7.6 billion were cancelled and the applicable agreements governing such obligations were terminated.
|
|
|
|
|
|
Predecessor
|
|
December 13,
|
(Dollars in millions)
|
2019
|
5.125% Senior Notes due 2020
|
$
|
365
|
|
5.875% Exchangeable Senior Notes due 2021
|
1,265
|
|
7.75% Senior Notes due 2021
|
750
|
|
4.50% Senior Notes due 2022
|
646
|
|
8.25% Senior Notes due 2023
|
750
|
|
9.875% Senior Notes due 2024
|
790
|
|
9.875% Senior Notes due 2025
|
600
|
|
6.50% Senior Notes due 2036
|
453
|
|
6.80% Senior Notes due 2037
|
259
|
|
7.00% Senior Notes due 2038
|
461
|
|
9.875% Senior Notes due 2039
|
250
|
|
6.75% Senior Notes due 2040
|
463
|
|
5.95% Senior Notes due 2042
|
375
|
|
Accrued Interest on Senior Notes and Exchangeable Senior Notes
|
207
|
|
Liabilities Subject to Compromise
|
$
|
7,634
|
|
The contractual interest expense on our Senior and Exchangeable Senior Notes is in excess of recorded interest expense on these notes by $257 million during the bankruptcy proceeding from the Petition Date until the Effective Date and was not included as interest expense on the Consolidated Statements of Operations for the Predecessor Period because the Company discontinued accruing interest subsequent to the Petition Date in accordance with ASC 852. We did not make any interest payments on our Senior and Exchangeable Senior Notes subsequent to the commencement of the Cases.
Weatherford International plc – 2019 Form 10-K | 74
3. Fresh Start Accounting
Fresh Start Accounting
Upon emergence from bankruptcy, we qualified for and adopted Fresh Start Accounting in accordance with ASC 852, which resulted in the Company becoming a new entity for financial reporting purposes because (1) the holders of the then existing common shares of the Predecessor received less than 50 percent of the new common shares of the Successor outstanding upon emergence and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the total of all post-petition liabilities and allowed claims.
The reorganization value derived from the range of enterprise values associated with the Plan was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values (except for deferred income taxes) with the remaining excess value allocated to goodwill in accordance with ASC 805 – Business Combinations. The amount of deferred income taxes 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 sheets.
Reorganization Value
Under ASC 852, the Successor determined a value to be assigned to the equity of the emerging entity as of the date of adoption of Fresh Start Accounting. Based on the Company’s revised projections filed with the SEC on a Form 8-K on October 7, 2019 and October 16, 2019, management and its investment bankers reassessed the value of the Company, resulting in an estimated range of enterprise value between $4.5 billion and $6.0 billion. The Company engaged third-party valuation advisors to assist in determining a point estimate of enterprise value within the range. Management concluded that the best point estimate of enterprise value was $4.5 billion. The Company engaged valuation experts to assist management in the allocation of such enterprise value to the assets and liabilities for financial reporting purposes based on management’s latest outlook as of the effective date. Based on this reassessment, the Company deemed it appropriate to use a final enterprise value of $4.5 billion for financial reporting purposes.
The following table reconciles the enterprise value to the estimated fair value of our Successor common shares as of the Fresh Start Reporting Date:
|
|
|
|
|
(Dollars in millions)
|
Fresh Start Reporting Date
|
Enterprise Value
|
$
|
4,516
|
|
Plus: Cash and Cash Equivalents (includes $25 million cash collateral released from restricted cash on 12/17/19)
|
518
|
|
Less: Fair Value of Debt
|
(2,103
|
)
|
Fair Value of Successor Equity
|
$
|
2,931
|
|
The following table reconciles the enterprise value to the reorganization value of the Successor’s assets to be allocated to the Company’s individual assets as of the Fresh Start Reporting Date:
|
|
|
|
|
(Dollars in millions)
|
Fresh Start Reporting Date
|
Enterprise Value
|
$
|
4,516
|
|
Plus: Cash and Cash Equivalents (includes $25 million cash collateral released from restricted cash on 12/17/19)
|
518
|
|
Plus: Current Liabilities Excluding Short-term Borrowings and Current Portion of Long-term Debt
|
1,707
|
|
Plus: Non-current Liabilities Excluding Long-term Debt
|
627
|
|
Reorganization Value of Successor’s Assets to be Allocated
|
$
|
7,368
|
|
With the assistance of third-party valuation advisors, we determined the enterprise and corresponding equity value of the Successor using various valuation methods, including: (i) a calculation of the present value of future cash flows based on our financial projections, and (ii) a peer group trading analysis. The enterprise value and corresponding equity value are dependent upon achieving the future financial results set forth in our valuations, as well as the realization of certain other assumptions. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the
Weatherford International plc – 2019 Form 10-K | 75
enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, we cannot assure you that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
Valuation Process
The fair values of the Company’s principal assets, including inventory, rental and service equipment, real property, and intangible assets were estimated with the assistance of third-party valuation advisors. In addition, we also estimated the fair value of the Company’s lease liabilities, Exit Notes, and New Warrants issued.
Inventory
The fair value of the inventory was determined by using both a cost approach and income approach. Inventory was segregated into raw materials, spare parts, work in process (“WIP”), and finished goods. Fair value of raw materials and spare parts inventory were determined using the cost approach. Fair value of WIP and finished goods inventory were determined by estimating the net realizable value of the inventory, adjusted for holding period before an item is sold. Additional obsolescence assessment was performed on the estimated fair value of inventory to determine if further adjustments were necessary.
Property, Plant and Equipment
Land, Buildings and Leasehold Improvements
The fair value of real property locations were estimated using the sales comparison (market) approach and cost approach. As part of the valuation process, the third-party advisors obtained information on the Company’s current usage, building type, year built, and history of major capital expenditures made by the Company. Certain site inspections were conducted and review of market information such as comparable sales and current listings were obtained for the Company’s largest sites. In addition, an obsolescence assessment for real property locations at the reporting unit level was reviewed to determine if adjustments to fair value estimates were needed.
Rental and Service Equipment, Machinery and Other
The fair values of rental and service equipment and machinery were estimated using a direct and indirect cost approach depending upon the asset type. The cost approach estimates fair value by considering the amount required to construct or purchase a new asset of equal utility at current prices, with adjustments for asset function, age, physical deterioration, and obsolescence. For certain assets, such as trucks, trailers and metalworking equipment, where an active secondary market exists, fair value was estimated using the market approach.
Intangible Assets
We applied the income approach methodology to estimate the value of developed and acquired technology and trade name (the “Intangible Assets”). The value of the Company’s trade name and developed and acquired technology were estimated through the relief from royalty method based on the present value of the cost savings realized due to the Company’s ownership of the assets. For acquired and developed technology, the present values of the hypothetical royalty savings were applied to revenue attributable to technologies after obsolescence. The hypothetical royalty savings percentage ranged from 1% to 7% of revenue depending on the segment, reporting unit and market differentiation the technologies. For the Company’s trade name, the present value of hypothetical royalty savings applied to revenue attributable to trade name ranged from 1.5% to 2% depending on the reporting unit. The present value of the after tax cash flows for all Intangible Assets were estimated based on a discount rate between 12.8% and 16%.
Lease liabilities and right of use assets
The fair value of lease liabilities was measured as the present value of the remaining lease payments, as if the lease were a new lease as of the Effective Date. The Company used its incremental borrowing rate (“IBR”) as the discount rate in determining the present value of the remaining lease payments, which is consistent with the market yield utilized in determining the fair value of the Company’s Exit Notes, discussed below. Based upon the corresponding lease term, the IBR ranged from 8.45% to 10.35%.
Weatherford International plc – 2019 Form 10-K | 76
Upon emergence from bankruptcy on December 13, 2019, the ROU assets were revalued based upon the present value of market-based rent. The remeasurement of our ROU assets was based on the real estate market discount rate as of December 13, 2019.
Exit Notes
The fair value of the Exit Notes was estimated to approximate par value based on third-party valuation advisors’ analysis of the Company’s collateral coverage, financial metrics, and interest rate for the Exit Notes relative to market rates.
New Warrants
The fair value of the new warrants was estimated by applying a Black-Scholes model. The Black-Scholes model is a pricing model used to estimate the theoretical price or fair value for a European-style call or put option/warrant based on current stock price, strike price, time to maturity, risk-free rate, volatility, and dividend yield.
Consolidated Balance Sheet
The adjustments included in the following fresh start consolidated balance sheet reflect the effects of the transactions contemplated by the Plan and executed by the Company on the Fresh Start Reporting Date (reflected in the column “Reorganization Adjustments”), and fair value and other required accounting adjustments resulting from the adoption of Fresh Start Accounting (reflected in the column “Fresh Start Accounting Adjustments”). The explanatory notes provide additional information and significant assumptions with regard to the adjustments recorded and the methods used to determine the fair values.
Weatherford International plc – 2019 Form 10-K | 77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 13, 2019
|
|
|
|
|
|
Fresh Start
|
|
|
|
|
|
Reorganization
|
|
Accounting
|
|
|
(Dollars in millions)
|
Predecessor
|
|
Adjustments (1)
|
|
Adjustments
|
|
Successor
|
Assets:
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
$
|
641
|
|
|
$
|
(148
|
)
|
(2)
|
$
|
—
|
|
|
$
|
493
|
|
Restricted Cash
|
398
|
|
|
(137
|
)
|
(3)
|
—
|
|
|
261
|
|
Accounts Receivable, Net
|
1,274
|
|
|
—
|
|
|
—
|
|
|
1,274
|
|
Inventories, Net
|
1,071
|
|
|
—
|
|
|
(84
|
)
|
(17)
|
987
|
|
Other Current Assets
|
494
|
|
|
(4
|
)
|
(4)
|
(14
|
)
|
(18)
|
476
|
|
Total Current Assets
|
3,878
|
|
|
(289
|
)
|
|
(98
|
)
|
|
3,491
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net
|
1,838
|
|
|
—
|
|
|
289
|
|
(19)
|
2,127
|
|
Goodwill
|
—
|
|
|
—
|
|
|
239
|
|
(20)
|
239
|
|
Intangible Assets, Net
|
166
|
|
|
—
|
|
|
957
|
|
(21)
|
1,123
|
|
Other Non-current Assets
|
336
|
|
|
25
|
|
(5)
|
27
|
|
(22)
|
388
|
|
Total Assets
|
$
|
6,218
|
|
|
$
|
(264
|
)
|
|
$
|
1,414
|
|
|
$
|
7,368
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Debtor in Possession Financing
|
$
|
1,528
|
|
|
$
|
(1,528
|
)
|
(6)
|
$
|
—
|
|
|
$
|
—
|
|
Short-term Borrowings and Current Portion of
Long-term Debt
|
319
|
|
|
(305
|
)
|
(7)
|
(1
|
)
|
(23)
|
13
|
|
Accounts Payable
|
667
|
|
|
(4
|
)
|
(8)
|
—
|
|
|
663
|
|
Accrued Salaries and Benefits
|
263
|
|
|
—
|
|
|
—
|
|
|
263
|
|
Income Taxes Payable
|
214
|
|
|
—
|
|
|
—
|
|
|
214
|
|
Other Current Liabilities
|
618
|
|
|
(22
|
)
|
(9)
|
(39
|
)
|
(24)
|
557
|
|
Total Current Liabilities
|
3,609
|
|
|
(1,859
|
)
|
|
(40
|
)
|
|
1,710
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
60
|
|
|
2,097
|
|
(10)
|
(6
|
)
|
(25)
|
2,151
|
|
Other Non-current Liabilities
|
518
|
|
|
—
|
|
|
58
|
|
(26)
|
576
|
|
Total Liabilities Not Subject to Compromise
|
4,187
|
|
|
238
|
|
|
12
|
|
|
4,437
|
|
|
|
|
|
|
|
|
|
Liabilities Subject to Compromise
|
7,634
|
|
|
(7,634
|
)
|
(11)
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity (Deficiency):
|
|
|
|
|
|
|
|
Predecessor Ordinary Shares
|
1
|
|
|
(1
|
)
|
(12)
|
—
|
|
|
—
|
|
Successor Ordinary Shares
|
—
|
|
|
—
|
|
(13)
|
—
|
|
|
—
|
|
Predecessor Capital in Excess of Par Value
|
6,733
|
|
|
(35
|
)
|
(14)
|
(6,698
|
)
|
(27)
|
—
|
|
Successor Capital in Excess of Par Value
|
—
|
|
|
2,897
|
|
(15)
|
—
|
|
(28)
|
2,897
|
|
Retained Earnings (Deficit)
|
(10,682
|
)
|
|
4,271
|
|
(16)
|
6,411
|
|
(27)
|
—
|
|
Accumulated Other Comprehensive Income
(Loss)
|
(1,697
|
)
|
|
—
|
|
|
1,697
|
|
(27)
|
—
|
|
Weatherford Shareholders’ Equity (Deficiency)
|
(5,645
|
)
|
|
7,132
|
|
|
1,410
|
|
|
2,897
|
|
Noncontrolling Interests
|
42
|
|
|
—
|
|
|
(8
|
)
|
(28)
|
34
|
|
Total Shareholders’ Equity (Deficiency)
|
(5,603
|
)
|
|
7,132
|
|
|
1,402
|
|
|
2,931
|
|
Total Liabilities and Shareholders’ Equity (Deficiency)
|
$
|
6,218
|
|
|
$
|
(264
|
)
|
|
$
|
1,414
|
|
|
$
|
7,368
|
|
Weatherford International plc – 2019 Form 10-K | 78
Reorganization Adjustments (Dollars in Millions)
Reorganization adjustments required in connection with the application of Fresh Start Accounting and the allocation of the enterprise value to our individual assets and liabilities by reporting unit resulted in the following Reorganization Adjustments.
|
|
(1)
|
Represent amounts recorded as of the Effective Date for the implementation of the Plan, including, among other items, settlement of the Predecessor’s liabilities subject to compromise, repayment of certain of the Predecessor’s debt, issuances of the Successor’s common shares, proceeds received from the Successor’s debt offering and transfer of restricted cash for the issuance of the Successor’s debt.
|
|
|
(2)
|
Net change in Cash and Cash Equivalents:
|
|
|
|
|
|
Proceeds from Exit Notes
|
$
|
1,600
|
|
Cash Collateral Released
|
167
|
|
Payment in full on the DIP Credit Agreement and related unpaid interest
|
(1,531
|
)
|
Payment in full on the A&R Credit Agreement and related unpaid interest
|
(306
|
)
|
Payment to Escrow Remaining Professional Fees
|
(30
|
)
|
Payment on Deferred Financing Fees for Exit Credit Agreements
|
(22
|
)
|
Payments on Other Liabilities
|
(18
|
)
|
Payment on Professional Fees not escrowed
|
(8
|
)
|
Net Change in Cash and Cash Equivalents
|
$
|
(148
|
)
|
|
|
(3)
|
Net change in Restricted Cash:
|
|
|
|
|
|
Payment to Escrow Professional Fees
|
$
|
30
|
|
Cash Collateral Released
|
(167
|
)
|
Net Change in Restricted Cash
|
$
|
(137
|
)
|
|
|
(4)
|
Represents the reclass of amounts to deferred financing fees on the Exit Credit Agreements.
|
|
|
(5)
|
Net change in Other Non-current Assets include the following:
|
|
|
|
|
|
Payment on Deferred Financing Fees, Including Professional Fees, on the Exit Credit Agreements.
|
$
|
22
|
|
Reclass of amounts from Other Current Assets to deferred financing fees on the Exit Credit Agreements.
|
4
|
|
Accrual of Deferred Financing Fees on the Exit Credit Agreements
|
1
|
|
Write-off of Deferred Financing Fees on the A&R Credit Agreement
|
(2
|
)
|
Net Change in Other Non-current Assets
|
$
|
25
|
|
|
|
(6)
|
Represents the payment in full on the DIP Credit Agreement Principal.
|
|
|
(7)
|
Represents the payment in full on the A&R Credit Agreement Principal.
|
|
|
(8)
|
The decrease in Accounts Payable represents the payment on professional fees offset by the accrual of deferred financing fees.
|
|
|
(9)
|
Net change in Other Current Liabilities include the following:
|
|
|
|
|
|
Payments of Other Liabilities
|
$
|
(18
|
)
|
Payment of Interest on the DIP Credit Agreement
|
(3
|
)
|
Payment of Interest on the A&R Credit Agreement
|
(1
|
)
|
Net Change in Other Current Liabilities
|
$
|
(22
|
)
|
Weatherford International plc – 2019 Form 10-K | 79
|
|
(10)
|
Changes in Long-term debt include the issuance of the unsecured 11.00% Exit Notes Due 2024 which is comprised of $1.6 billion of the Exit Rights Offering Notes and $500 million of the Exit Takeback Notes, offset by the accrual of deferred financing fees.
|
|
|
(11)
|
Liabilities Subject to Compromise to be settled in accordance with the Plan and the resulting gain were determined as follows:
|
|
|
|
|
|
Liabilities Subject to Compromise
|
$
|
7,634
|
|
Distribution of equity to creditors
|
(2,837
|
)
|
Issue Exit Takeback Notes to creditors
|
(500
|
)
|
Gain on Settlement of Liabilities Subject to Compromise
|
$
|
4,297
|
|
|
|
(12)
|
Represents the cancellation of Predecessor Ordinary Shares at Par Value.
|
|
|
(13)
|
Represents the issuance of New Ordinary Shares to Creditors and Prior Ordinary Share Holders at Par Value.
|
|
|
(14)
|
Net change in Predecessor Capital in Excess of Par Value include the following:
|
|
|
|
|
|
Acceleration of share-based compensation
|
$
|
24
|
|
Cancellation of Predecessor Ordinary Shares
|
1
|
|
Issuance of New Ordinary Shares to Prior Ordinary Share Holders
|
(29
|
)
|
Issuance of New Warrant to Prior Ordinary Share Holders
|
$
|
(31
|
)
|
Net Change in Predecessor Capital in Excess of Par Value
|
$
|
(35
|
)
|
|
|
(15)
|
Net change in Successor Capital in Excess of Par Value include the following:
|
|
|
|
|
|
Issuance of New Ordinary Shares to Creditors
|
$
|
2,837
|
|
Issuance of New Warrant to Prior Ordinary Share Holders
|
31
|
|
Issuance of New Ordinary Shares to Prior Ordinary Share Holders
|
29
|
|
Net Change in Successor Capital in Excess of Par Value
|
$
|
2,897
|
|
|
|
(16)
|
Net Change in Retained Deficit include the following:
|
|
|
|
|
|
Gain on Settlement of Liabilities Subject to Compromise
|
$
|
4,297
|
|
Acceleration of share-based compensation
|
(24
|
)
|
Write-off of deferred financing fees on the A&R Credit Agreement
|
(2
|
)
|
Net Change in Retained Deficit
|
$
|
4,271
|
|
Fresh Start Adjustments (Dollars in Millions)
|
|
(17)
|
Changes in Inventories, Net reflect the fair value adjustment of $84 million.
|
|
|
|
|
|
|
|
|
|
|
|
Successor Fair Value
|
|
|
Predecessor Historical Value
|
Raw Materials, Components and Supplies
|
78
|
|
|
|
$
|
78
|
|
Work in Process
|
51
|
|
|
|
55
|
|
Finished Goods
|
858
|
|
|
|
938
|
|
Totals
|
$
|
987
|
|
|
|
$
|
1,071
|
|
Weatherford International plc – 2019 Form 10-K | 80
|
|
(18)
|
Reflects the elimination of current deferred costs associated with contracts with customers of $10 million and the elimination of certain prepaid taxes of $4 million due to the adoption of Fresh Start Accounting.
|
|
|
(19)
|
Changes in Property, Plant and Equipment, Net reflect the fair value adjustment of $289 million.
|
|
|
|
|
|
|
|
|
|
|
|
Successor Fair Value
|
|
|
Predecessor Historical Value
|
Land, Buildings and Leasehold Improvements
|
$
|
569
|
|
|
|
$
|
1,205
|
|
Rental and Service Equipment
|
1,280
|
|
|
|
4,697
|
|
Machinery and Other
|
278
|
|
|
|
1,543
|
|
|
2,127
|
|
|
|
7,445
|
|
Less: Accumulated Depreciation
|
—
|
|
|
|
(5,607
|
)
|
Property, Plant and Equipment, Net
|
$
|
2,127
|
|
|
|
$
|
1,838
|
|
|
|
(20)
|
Reflects the recognition of Goodwill.
|
|
|
(21)
|
Changes in Intangible Assets reflect the fair value adjustment of $957 million.
|
|
|
|
|
|
|
|
|
|
|
|
Successor Fair Value
|
|
|
Predecessor Historical Value
|
Developed and Acquired Technology
|
$
|
728
|
|
|
|
$
|
74
|
|
Trade Name
|
395
|
|
|
|
—
|
|
Customer Relationships and Contracts
|
—
|
|
|
|
39
|
|
Other
|
—
|
|
|
|
53
|
|
Totals
|
$
|
1,123
|
|
|
|
$
|
166
|
|
|
|
(22)
|
Reflects the fair value adjustment to the increase the Company’s Right of Use Assets by $13 million and Non-current Deferred Tax Asset by $14 million.
|
|
|
(23)
|
Reflects the fair value adjustment to the Company’s current portion of financed lease obligations.
|
|
|
(24)
|
Reflects the fair value adjustments to (i) increase the current portion of operating lease obligations by $5 million, (ii) decrease deferred revenues associated with contracts with customers by $29 million, and (iii) decrease intangible liability by $15 million.
|
|
|
(25)
|
Reflects the fair value adjustment to the Company’s long-term portion of financed lease obligations.
|
|
|
(26)
|
Reflects the fair value adjustment to (i) increase the long-term portion of operating lease obligations by $22 million, (ii) decrease the intangible liability by $7 million, and (iii) record a Non-current Deferred Tax Liability of $43 million.
|
|
|
(27)
|
Reflects the cumulative impact of Fresh Start Accounting adjustments discussed herein and the elimination of Predecessor accumulated other comprehensive loss and Predecessor accumulated deficit.
|
|
|
(28)
|
Reflects the fair value adjustment to noncontrolling ownership interests in certain subsidiaries.
|
Weatherford International plc – 2019 Form 10-K | 81
4. New Accounting Pronouncements
Accounting Standards Adopted in 2019
Effective January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842) issued by the FASB in February 2016 and the series of related updates that followed (collectively referred to as “Topic 842”), which requires a lessee to recognize a ROU lease asset and lease liability for all qualifying leases with terms longer than twelve months on the balance sheet, including those classified as operating leases under previously existing U.S. GAAP. The ASU also changes the definition of a lease and requires expanded quantitative and qualitative disclosures for both lessees and lessors.
We elected to adopt Topic 842 using the modified retrospective approach. As such, comparative financial information for prior periods has not been restated and continues to be reported under the previous accounting guidance for those periods. We did not elect the hindsight practical expedient. See “Note 12 – Leases” for additional lease information and practical expedients elected.
The impact of Topic 842 on our consolidated balance sheet beginning January 1, 2019 was through the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases (previously referred to as capital leases) remains substantially unchanged. Amounts recognized at January 1, 2019 for operating leases were as follows:
|
|
|
|
|
(Dollars in millions)
|
Balance at January 1, 2019
|
Assets and Liabilities:
|
|
Other Non-Current Assets
|
$
|
288
|
|
Other Current Liabilities
|
92
|
|
Other Non-Current Liabilities
|
219
|
|
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. We adopted this standard in the first quarter of 2019 and an election was not made to reclassify the income tax effects of the Tax Cuts and Jobs Act from Accumulated Other Comprehensive Income to retained earnings.
In July 2017, the FASB issued ASU 2017-11, Part I Accounting for Certain Financial Instruments with Down Round Features, which amends the accounting for certain equity-linked financial instruments and states a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. For an equity-linked financial instrument no longer accounted for as a liability at fair value, the amendments require a down round to be treated as a dividend and as a reduction of income available to ordinary shareholders in basic earnings per share. We adopted this standard in the first quarter of 2019 on a retrospective basis and the adoption did not have a significant impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans, which makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and other post-retirement benefit plans. We adopted ASU 2018-14 for the year ended December 31, 2019 and the adoption did not have a significant impact on the disclosures to our Consolidated Financial Statements.
Accounting Standards Issued Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The ASU is effective beginning with the first quarter of 2020, and early adoption is permitted. The ASU is required to be applied retrospectively, except the new Level 3 disclosure requirements which are applied prospectively. We evaluated the potential impact of this new standard and concluded that the adoption of the ASU will not have a significant impact on the disclosures to our Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable
Weatherford International plc – 2019 Form 10-K | 82
information to determine credit loss estimates. The guidance requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance applies to (i) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, and (ii) loan commitments and other off-balance sheet credit exposures. The amended guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We will adopt the new standard, including subsequent amendments, on the effective date of January 1, 2020. We evaluated the potential impact of this new standard and concluded that the adoption of the ASU will not have a significant impact on our Consolidated Financial Statements.
5. Accounts Receivable Factoring and Other Receivables
From time to time, we participate in factoring arrangements to sell accounts receivable to third-party financial institutions. During the Successor Period, we sold accounts receivable of $7 million, recognized an insignificant loss and received cash proceeds of $7 million. In the 2019 Predecessor Period, we sold accounts receivable of $199 million, recognized a loss of $1 million and received cash proceeds of $186 million. For the full year 2019, we sold a total combined amount of accounts receivable of $206 million, recognized a loss of $1 million and received cash proceeds totaling $193 million on these sales. In 2018, we sold accounts receivables of $382 million, recognized a loss of $2 million and received cash proceeds totaling $373 million on these sales. In 2017, we sold accounts receivables of $227 million, recognized a loss of $1 million and received cash proceeds totaling $223 million on these sales. Our factoring transactions were recognized as sales, and the proceeds are included as operating cash flows in our Consolidated Statements of Cash Flows.
In the first quarter of 2017, we converted trade receivables of $65 million into a note from a customer with a face value of $65 million. The note had a three-year term at a 4.625% stated interest rate. During the second quarter of 2017, we sold the note for $59 million.
6. Inventories, Net
Inventories, net of reserves, by category were as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
Raw Materials, Components and Supplies
|
$
|
78
|
|
|
|
$
|
131
|
|
Work in Process
|
64
|
|
|
|
47
|
|
Finished Goods
|
830
|
|
|
|
847
|
|
|
$
|
972
|
|
|
|
$
|
1,025
|
|
During the 2019 Predecessor Period, and years ended December 31, 2018 and 2017, we recognized inventory write-off and other related charges, including excess and obsolete charges, totaling $159 million, $80 million and $540 million, respectively. These charges were largely attributable to the downturn in the oil and gas industry, where certain inventory has been deemed commercially unviable or technologically obsolete considering current and future demand.
Weatherford International plc – 2019 Form 10-K | 83
7. Business Combinations and Divestitures
Acquisitions
On March 26, 2018, we acquired the remaining 50% equity interest in our Qatari joint venture that we previously accounted for as an equity method investment and consolidated the entity. The total consideration to purchase the remaining equity interest was $87 million, which is comprised of a cash consideration of $72 million and an estimated contingent consideration of $15 million related to services the Qatari entity will render under new contracts. Of the $72 million in cash consideration, $48 million was paid in accordance with closing terms through the joint venture, with the remaining payment of $24 million to be paid two years from closing. As a result of this step acquisition transaction with a change in control, we remeasured our previously held equity investment to fair value and recognized a $12 million gain. The Level 3 fair value of the acquisition was determined using an income approach. The unobservable inputs to the income approach included the Qatari entity’s estimated future cash flows and estimates of discount rates commensurate with the entity’s risks. Upon consolidation, we recognized intangible assets of $22 million, PP&E of $25 million, goodwill of $27 million, other current assets of $16 million and other liabilities of $43 million as a result of the purchase accounting assessment.
Divestitures
On April 30, 2019, we completed the sale of our Reservoir Solutions business, also known as our laboratory services business to Oil & Gas Labs, LLC, an affiliate of CSL Capital Management, L.P., for an aggregate purchase price of $206 million in cash, subject to escrow release and customary post-closing working capital adjustments. The business disposition included our laboratory and geological analysis business, including the transfer of substantially all personnel and associated contracts related to the business. We recognized a gain of $117 million and divested a carrying amount of $61 million in net assets previously included in held for sale.
On April 30, 2019, we completed the sale of our surface data logging business to Excellence Logging for $50 million in total consideration, subject to customary post-closing working capital adjustments. The business disposition included our surface data logging equipment, technology and associated contracts related to the business. We recognized an insignificant loss and divested a carrying amount of $34 million in net assets previously included in held for sale.
In the first quarter of 2019, we completed the final closings in a series of closings pursuant to the purchase and sale agreements (“Agreements”) entered into with ADES International Holding Ltd. (“ADES”). We entered into the Agreements in July of 2018 to sell our land drilling rig operations in Algeria, Kuwait and Saudi Arabia, as well as two idle land rigs in Iraq, for an aggregate purchase price of $288 million to be completed in a series of closings. As a result of entering into certain purchase and sale agreements as asset sales, we recognized asset write-down charges of $58 million for deferred mobilization costs and other rigs related assets as such costs were no longer recoverable. During the third quarter of 2018, we recorded an $18 million charge to “Long-Lived Asset Impairments, Asset Write-Downs and Other” in our Consolidated Statements of Operations to correct an immaterial error relating to our estimates of recoverability of certain assets associated with the original and ongoing valuation of the assets and liabilities classified as held for sale associated with the planned disposition of our land drilling rig operations. We received the remaining gross proceeds of $72 million and recognized a loss of $6 million in the first quarter of 2019. The carrying amounts of net assets divested previously included in held for sale was $66 million. In the fourth quarter of 2018, we received gross proceeds of $216 million and recognized a loss of $9 million. The carrying amount of the assets and liabilities held for sale sold in 2018 totaled $253 million and $36 million, respectively, to include PP&E, inventory, accounts receivable and other assets and liabilities. The closings in the fourth quarter of 2018 were for our land drilling rigs operations in Kuwait and Saudi Arabia. We divested several of our remaining rig assets through separate asset sale agreements throughout 2019.
In March of 2018, we completed the sale of our continuous sucker rod service business in Canada for a purchase price of $25 million and recognized a gain of $2 million. The carrying amounts of the major classes of assets divested total $23 million and included PP&E of $14 million, allocated goodwill of $8 million and inventory of $1 million. In the third quarter of 2018, we completed the sale of an equity investment in a joint venture for $12.5 million and recognized a gain of $3 million.
In December of 2017, we completed the sale of our U.S. pressure pumping and pump-down perforating assets for $430 million in cash. As part of this transaction, we disposed of our ownership of our U.S. pressure pumping and pump-down perforating related facilities and supplier and customer contracts. Proceeds from the sale were used to reduce outstanding indebtedness. The net gain on the disposition of the U.S. pressure pumping and pump-down assets was $96 million. The carrying amount of the major classes of assets divested total $391 million and included PP&E of $222 million, allocated goodwill of $162 million and inventory of $7 million. The carrying amounts of the major classes of liabilities divested total $61 million and included other liabilities of $52 million and long-term debt of $9 million.
Weatherford International plc – 2019 Form 10-K | 84
See “Note 9 – Long-Lived Asset Impairments and Asset Write-Downs” for further details related to impairments and those specific to our land drilling rigs assets.
Held for Sale
During the second quarter of 2019, we reclassified remaining land drilling rigs held for sale assets of $53 million to assets held for use as the time required to close the recent land drilling rigs sales indicate that we may not be able to conclude that a sale is probable to occur in an appropriate timeline. However, we continue to pursue options to sell all of our remaining land drilling rigs operations and successfully divested several of our remaining rig assets through separate asset sale agreements throughout 2019. At December 31, 2019, assets qualifying as held for sale were insignificant.
At December 31, 2018, assets qualifying as held for sale totaled $265 million and liabilities held for sale totaled $17 million. These amounts primarily consisted of our surface data logging and laboratory services business held for sale (which was completed as of April 30, 2019) and our remaining land drilling rigs operations held for sale (which the unsold portions were reclassified back to held for use). During 2018 and 2017, there were no reclassifications from held for sale into held and used.
8. Property, Plant and Equipment, Net
Property, plant and equipment, net was composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
Land, Buildings and Leasehold Improvements
|
$
|
571
|
|
|
|
$
|
1,303
|
|
Rental and Service Equipment
|
1,296
|
|
|
|
4,869
|
|
Machinery and Other
|
280
|
|
|
|
1,700
|
|
|
2,147
|
|
|
|
7,872
|
|
Less: Accumulated Depreciation
|
25
|
|
|
|
5,786
|
|
Property, Plant and Equipment, Net
|
$
|
2,122
|
|
|
|
$
|
2,086
|
|
Depreciation expense for the Successor Period was $25 million and was $386 million during the Predecessor Period, and $493 million and $749 million for the years ended December 31, 2018 and 2017, respectively.
Weatherford International plc – 2019 Form 10-K | 85
9. Long-Lived Asset Impairments and Asset Write-Downs
We recognized long-lived asset impairments of $20 million for the 2019 Predecessor Period to write-down our assets to the lower of carrying amount or fair value less cost to sell for our land drilling rigs. We had asset write-downs of $91 million for assets where there was low or no demand.
The long-lived asset impairments in 2019 were primarily related to our Western Hemisphere segment totaling $13 million and Eastern Hemisphere totaling $7 million. During the second quarter of 2019, we reclassified our remaining land drilling rigs assets back into held for use. 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 and 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.
During 2018, we recognized long-lived asset impairments of $151 million, of which $141 million ($43 million in our Western Hemisphere segment and $98 million in our Eastern Hemisphere segment) was to write-down our land drilling rigs assets to the lower of carrying amount or fair value less cost to sell and the remaining $10 million, of which $3 million was in our Western Hemisphere and $7 million is in our Eastern Hemisphere segment) of charges were for land drilling rigs assets charges not in held for sale. See “Note 7 – Business Combinations and Divestitures” for more details. 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.
During 2017, we recognized long-lived asset impairments of $928 million, of which $923 million was related to PP&E impairments and $5 million was related to the impairment of intangible assets. The PP&E impairments in our Eastern Hemisphere segment include a $740 million write-down to the lower of carrying amount or fair value less cost to sell of our land drilling rigs classified as held for sale, $135 million related to Western Hemisphere segment product line assets and $37 million related to other Eastern Hemisphere segment product line assets. In addition, we recognized $11 million of long-lived impairment charges related to Corporate assets. The 2017 impairments were due to the sustained downturn in the oil and gas industry, whose recovery was not as strong as expected and whose recovery in subsequent quarters was slower than had previously been anticipated. The change in the expectations of the market’s recovery, in addition to successive negative operating cash flows in certain 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.
Weatherford International plc – 2019 Form 10-K | 86
10. Goodwill and Intangible Assets
Goodwill
As a result of Fresh Start Accounting, we recognized $239 million of goodwill in our Middle East & North Africa (“MENA”) and Russia reporting units. In the Predecessor Period, our goodwill impairment tests indicated that goodwill for all our reporting units in the Western Hemisphere and Eastern Hemisphere were impaired and as a result we incurred a goodwill impairment charge of $730 million. In the fourth quarter of 2018, our annual and interim goodwill impairment tests indicated that our goodwill was impaired and as a result we incurred a goodwill impairment charge of $1.9 billion. The cumulative impairment loss for goodwill was $3.4 billion for the Predecessor. The changes in the carrying amount of goodwill by reporting segment are presented in the following table.
The impairment indicators during the 2019 Predecessor Period and December 31, 2018, included the steep decline in oil prices and expectations for lower exploration and production capital spending that resulted in a sharp reduction in share prices in the oilfield services sector. See Goodwill Impairment Assessment Factors below for additional details. In 2017 our annual goodwill impairment test indicated that goodwill was not impaired. The changes in the carrying amount of goodwill by reporting segment for the years ended December 31, 2019 and 2018, are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Western Hemisphere
|
|
Eastern Hemisphere
|
|
Total
|
Balance at December 31, 2017 (Predecessor)
|
$
|
1,958
|
|
|
$
|
769
|
|
|
$
|
2,727
|
|
Impairment
|
(1,380
|
)
|
|
(537
|
)
|
|
(1,917
|
)
|
Disposals
|
(10
|
)
|
|
—
|
|
|
(10
|
)
|
Reclassification to assets held for sale
|
(5
|
)
|
|
(2
|
)
|
|
(7
|
)
|
Acquisitions
|
—
|
|
|
27
|
|
|
27
|
|
Foreign currency translation
|
(69
|
)
|
|
(38
|
)
|
|
(107
|
)
|
Balance at December 31, 2018 (Predecessor)
|
$
|
494
|
|
|
$
|
219
|
|
|
$
|
713
|
|
Impairment
|
(508
|
)
|
|
(222
|
)
|
|
(730
|
)
|
Reclassification from assets held for sale
|
4
|
|
|
—
|
|
|
4
|
|
Foreign currency translation
|
10
|
|
|
3
|
|
|
13
|
|
Balance at December 13, 2019 (Predecessor)
|
—
|
|
|
—
|
|
|
—
|
|
Fresh Start Accounting Valuation
|
—
|
|
|
239
|
|
|
239
|
|
Balance at December 31, 2019 (Successor)
|
$
|
—
|
|
|
$
|
239
|
|
|
$
|
239
|
|
Goodwill Impairment Assessment Factors
The Predecessor impairment indicators during 2019 were a result of lower activity levels and lower exploration and production capital spending that resulted in a decline in drilling activity and forecasted growth in all our reporting units. Our lower than expected and forecasted financial results were due to the continued weakness within the energy market and consequently our inability to meet the original timeline of our restructuring plan savings, defined in “Note 11 – Restructuring, Facility Consolidation and Severance Charges.” These circumstances, prompted us to evaluate whether circumstances had changed that would more likely than not reduce the fair value of one or more of our reporting units below their carrying amount.
When conducting this evaluation, we considered macroeconomic and industry conditions, including the outlook for exploration and production spending by our customers and overall financial performance of each of our reporting units. We also considered whether there were any changes in our long-term forecasts, which are impacted by assumptions about the future commodity pricing and supply and demand for our goods and services.
Weatherford International plc – 2019 Form 10-K | 87
Intangible Assets
The components of intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
December 31, 2019
|
|
Gross
|
|
|
|
Net
|
|
Carrying
|
|
Accumulated
|
|
Intangible
|
(Dollars in millions)
|
Amount
|
|
Amortization
|
|
Assets
|
Developed and Acquired Technology
|
$
|
728
|
|
|
$
|
(7
|
)
|
|
$
|
721
|
|
Trade Names
|
395
|
|
|
(2
|
)
|
|
393
|
|
Totals
|
$
|
1,123
|
|
|
$
|
(9
|
)
|
|
$
|
1,114
|
|
At December 31, 2018, our intangible assets were $213 million, net of amortization. Amortization expense was $9 million in the Successor Period and was $61 million for the Predecessor Period, and $63 million and $52 million for the years ended December 31, 2018 and 2017, respectively. Based on the carrying value of intangible assets at December 31, 2019, amortization expense for the subsequent five years is estimated as follows (dollars in millions):
|
|
|
|
|
Period
|
Amount
|
|
2020
|
$
|
184
|
|
2021
|
184
|
|
2022
|
184
|
|
2023
|
184
|
|
2024
|
177
|
|
Weatherford International plc – 2019 Form 10-K | 88
11. Restructuring, Facility Consolidation and Severance Charges
Due to the highly competitive nature of our business and the continuing losses we incurred over the last few years, we continue to reduce our overall cost structure and workforce to better align our business with current activity levels. Our current and historical restructuring plans include workforce reductions, organization restructurings, facility consolidations and other cost reduction measures and efficiency initiatives across all of our geographic regions.
During the 2019 Predecessor Period, we recognized restructuring charges of $189 million, which include severance charges of $53 million and other restructuring charges of $99 million and restructuring related asset charges of $37 million.
During 2018, we recognized restructuring charges of $126 million, which include severance charges of $61 million, other restructuring charges of $59 million and restructuring related asset charges of $6 million.
During 2017, we recognized restructuring charges of $183 million, which include severance charges of $109 million, other restructuring charges of $62 million and restructuring related asset charges of $12 million.
The following table presents total restructuring charges by reporting segment and Corporate for the Successor Period and the Predecessor Period in 2019 and the years ended December 31, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Hemisphere
|
Eastern Hemisphere
|
Corporate
|
Total
|
Successor Period - 2019
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Predecessor Period - 2019
|
84
|
|
50
|
|
55
|
|
189
|
|
2018
|
27
|
|
45
|
|
54
|
|
126
|
|
2017
|
70
|
|
77
|
|
36
|
|
183
|
|
The following table presents total restructuring accrual activity charges, payments and other changes for the Successor and Predecessor Periods in 2019 and the years ended December 31, 2018 and 2017. In the first quarter of 2019, we reclassified $12 million of restructuring cease-use liability to the initial ROU asset in accordance with the adoption of Topic 842.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Accrued Balance at Beginning of Period
|
|
Charges
|
|
Cash Payments
|
|
Other
|
|
Accrued Balance at End of Period
|
Successor - 2019
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66
|
|
Predecessor - 2019
|
$
|
59
|
|
|
$
|
152
|
|
|
$
|
(120
|
)
|
|
$
|
(25
|
)
|
|
$
|
66
|
|
2018
|
$
|
61
|
|
|
$
|
120
|
|
|
$
|
(109
|
)
|
|
$
|
(13
|
)
|
|
$
|
59
|
|
2017
|
$
|
86
|
|
|
$
|
171
|
|
|
$
|
(167
|
)
|
|
$
|
(29
|
)
|
|
$
|
61
|
|
The restructuring charges accrual in the table above excludes restructuring related asset charges of $37 million in the 2019 Predecessor Period, $6 million for the period ended December 31, 208 and $12 million for the period ended December 31, 2017.
Weatherford International plc – 2019 Form 10-K | 89
12. Leases
We lease certain facilities, land, vehicles, and equipment. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet (including short-term sale leaseback transactions); we recognize lease expense for these leases on a straight-line basis over the lease term.
For adoption of Topic 842 we used the December 31, 2018 incremental borrowing rate, for operating leases that commenced prior to December 31, 2018. We have data center lease agreements with lease and non-lease components which are accounted for separately, while for the remainder of our agreements we have elected the practical expedient to account for lease and non-lease components as a single lease component. For certain equipment leases, such as copiers and vehicles, we account for the leases under a portfolio method. Operating lease payments include related options to extend or terminate lease terms that are reasonably certain of being exercised.
The unmanned equipment that we lease to customers as operating leases consists primarily of drilling rental tools and artificial lift pumping equipment. These equipment rental revenues are generally provided based on call-out work orders that include fixed per unit prices and are derived from short-term contracts. See “Note 1 – Summary of Significant Accounting Policies” and “Note 23 – Revenues” for additional details on our equipment rental revenues.
|
|
|
|
|
|
|
|
|
|
Successor
|
(Dollars in millions)
|
Classification
|
|
December 31, 2019
|
Balance Sheet Components:
|
|
|
|
Assets
|
|
|
|
Operating
|
Other Non-Current Assets
|
|
$
|
256
|
|
Finance
|
Property Plant and Equipment, Net
|
|
62
|
|
Total leased assets
|
|
|
$
|
318
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Other Current Liabilities
|
|
$
|
79
|
|
Finance
|
Short-term Borrowings and Current Portion of Long-term Debt
|
|
10
|
|
|
|
|
|
Non-Current
|
|
|
|
Operating
|
Other Non-Current Liabilities
|
|
213
|
|
Finance
|
Long-term Debt
|
|
54
|
|
Total lease liabilities
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Period From
|
|
|
Period From
|
|
|
12/14/19
|
|
|
1/1/2019
|
|
|
through
|
|
|
through
|
(Dollars in millions)
|
|
12/31/2019
|
|
|
12/13/2019
|
Lease Expense Components:
|
|
|
|
|
|
Operating lease expense
|
|
$
|
5
|
|
|
|
$
|
109
|
|
Short-term and variable lease expense
|
|
5
|
|
|
|
91
|
|
Finance lease expense: Amortization of ROU assets and interest on lease liabilities
|
|
1
|
|
|
|
11
|
|
Sublease income
|
|
(1
|
)
|
|
|
(6
|
)
|
Total lease expense
|
|
$
|
10
|
|
|
|
$
|
205
|
|
Weatherford International plc – 2019 Form 10-K | 90
In 2019 total expense incurred under operating leases was $10 million in the Successor Period and $200 million in the Predecessor Period, and $187 million and $217 million for the years ended December 31, 2018 and December 31, 2017, respectively.
We are committed under various operating lease agreements primarily related to office space and equipment. Generally, these leases include renewal provisions and rental payments, which may be adjusted for taxes, insurance and maintenance related to the property. Future minimum commitments under operating and finance leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Operating
|
Finance
|
(Dollars in millions)
|
|
Leases
|
Leases
|
Maturity of Lease Liabilities as of December 31, 2019:
|
|
|
|
2020
|
|
$
|
101
|
|
$
|
15
|
|
2021
|
|
80
|
|
12
|
|
2022
|
|
54
|
|
11
|
|
2023
|
|
30
|
|
11
|
|
2024
|
|
24
|
|
11
|
|
After 2024
|
|
149
|
|
25
|
|
Total Lease Payments
|
|
438
|
|
85
|
|
Less: Interest
|
|
146
|
|
21
|
|
Present Value of Lease Liabilities
|
|
$
|
292
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
Period From
|
|
Period From
|
|
12/14/19
|
|
1/1/2019
|
|
through
|
|
through
|
(Dollars in millions except years and percentages)
|
12/31/2019
|
|
12/13/2019
|
Other Supplemental Information:
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash outflows from operating leases
|
$
|
5
|
|
|
$
|
131
|
|
Operating cash outflows from finance leases
|
$
|
—
|
|
|
$
|
4
|
|
Financing cash outflows from finance leases
|
$
|
1
|
|
|
$
|
8
|
|
|
|
|
|
ROU assets obtained in exchange of new operating lease liabilities
|
$
|
2
|
|
|
$
|
59
|
|
ROU assets obtained in exchange of new finance lease liabilities
|
$
|
—
|
|
|
$
|
6
|
|
Loss on sale leaseback transactions (short-term) (a)
|
$
|
—
|
|
|
$
|
34
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Weighted-average remaining lease term (years)
|
|
|
|
Operating leases
|
7.8
|
|
|
|
Finance leases
|
6.7
|
|
|
|
|
|
|
|
Weighted-average discount rate (percentages)
|
|
|
|
Operating leases
|
9.2
|
%
|
|
|
Finance leases
|
9.1
|
%
|
|
|
(a) Included in “Long-Lived Asset Impairments, Write-Downs and Other” in our Condensed Consolidated Statements of Operations and “Other, Net” in our Condensed Consolidated Statements of Cash Flows.
Weatherford International plc – 2019 Form 10-K | 91
13. Short-term Borrowings and Other Debt Obligations
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
364-Day Credit Agreement (repaid in full July 3, 2019)
|
$
|
—
|
|
|
|
$
|
317
|
|
A&R Credit Agreement (repaid in full December 13, 2019)
|
—
|
|
|
|
—
|
|
ABL Credit Agreement (issued December 13, 2019)
|
—
|
|
|
|
—
|
|
Other Short-term Loans
|
3
|
|
|
|
9
|
|
Current Portion of Long-term Debt
|
10
|
|
|
|
57
|
|
Short-term Borrowings and Current Portion of Long-term Debt
|
$
|
13
|
|
|
|
$
|
383
|
|
Exit Credit Agreements (Effective Date)
ABL Credit Agreement
On the Effective Date pursuant to the terms of the Plan, the Company entered into a senior secured asset-based revolving credit agreement in an aggregate amount of $450 million (the “ABL Credit Agreement”) with the lenders party thereto and Wells Fargo Bank, N.A. as administrative agent. Among other things, proceeds of loans under the ABL Credit Agreement may be used to refinance certain existing indebtedness in connection with the Cases, and finance ongoing working capital and general corporate needs of the Company and certain of its subsidiaries. The maturity date of loans made under the ABL Credit Agreement is June 13, 2024. At December 31, 2019, the Company did not have any borrowings under the ABL Credit Agreement.
Revolving Loans as defined in and under the ABL Credit Agreement will bear interest at a rate of (i) in the case of LIBOR rate borrowings, the LIBOR rate plus an applicable margin in the range of 175-225 basis points per annum, with a zero LIBOR rate floor, and (ii) in the case of base rate borrowings, the base rate plus an applicable margin in the range of 75-125 basis points per annum, in the case of clauses (i) and (ii), based on the Average Excess Availability (as defined in the ABL Credit Agreement).
The FILO Loans (as defined in the ABL Credit Agreement) under the ABL Credit Agreement will bear interest at a rate of (i) in the case of LIBOR rate borrowings, the LIBOR rate plus an applicable margin of 350 basis points per annum, with a zero LIBOR rate floor, and (ii) in the case of base rate borrowings, the base rate plus an applicable margin of 250 basis points per annum. In addition to paying interest on outstanding principal amounts under the ABL Credit Agreement, the Company will be required to pay (A) a letter of credit fee for each letter of credit issued thereunder equal to (i) in the case of those allocated to the Revolver Commitments (as defined in the ABL Credit Agreement), 175-225 basis points per annum based on the Average Excess Availability, and (ii) in the case of those allocated to the FILO Commitments (as defined in the ABL Credit Agreement), 350 basis points per annum, in each case, on the amount of each such letter of credit, and (b) a 12.5 basis point per annum fronting fee on the amount of each such letter of credit, and (B) an unused commitment fee in respect of the average unutilized Revolver Commitments and the average unutilized FILO Commitments at a rate of either 37.5 or 50 basis point per annum, based on the level of the Average Facility Usage (as defined in the ABL Credit Agreement).
The ABL Credit Agreement has a financial covenant that applies only after the occurrence of a Covenant Trigger Event (as defined in the ABL Credit Agreement) and requires, during any Covenant Testing Period (as defined in the ABL Credit Agreement), at least a 1.00 to 1.00 ratio of (a) Consolidated Adjusted EBITDA (as defined in the ABL Credit Agreement) minus Unfinanced Capital Expenditures (as defined in the ABL Credit Agreement) to (b) Fixed Charges (as defined in the ABL Credit Agreement). The ABL Credit Agreement is secured by substantially all of the personal assets and properties of the Company and certain of its subsidiaries (including a first lien on the priority collateral for the ABL Credit Agreement and a second lien on the priority collateral for the LC Credit Agreement (as defined below), in each case, subject to permitted liens). The ABL Credit Agreement is also guaranteed on an unsecured basis by certain other subsidiaries of the Company.
LC Credit Agreement
On December 13, 2019, pursuant to the terms of the Plan, the Company entered into a senior secured letter of credit credit agreement in an aggregate amount of $195 million (the “LC Credit Agreement”, together with the ABL Credit Agreement, the “Exit Credit Agreements”) with the lenders party thereto and Deutsche Bank Trust Company Americas as administrative agent. The LC Credit Agreement will be used for the issuance of bid and performance letters of credit of the Company and certain of its subsidiaries. The maturity date under the LC Credit Agreement is June 13, 2024. The outstanding amount of each letter of credit
Weatherford International plc – 2019 Form 10-K | 92
under the LC Credit Agreement will bear interest at LIBOR plus an applicable margin of 350 basis points per annum. The LC Credit Agreement includes (i) a 12.5 basis point per annum fronting fee on the outstanding amount of each such letter of credit and (ii) an unused commitment fee in respect of the unutilized commitments at a rate of 50 basis point per annum on the average daily unused commitments under the LC Credit Agreement. Upon the Effective Date, the Company had approximately $65.8 million in outstanding letters of credit under the LC Credit Agreement.
The LC Credit Agreement has a minimum liquidity covenant of $200 million and is secured by substantially all the personal assets and properties of the Company and certain of its subsidiaries (including a first lien on the priority collateral for the LC Credit Agreement and a second lien on the priority collateral for the ABL Credit Agreement, in each case, subject to permitted liens). The LC Credit Agreement is also guaranteed on an unsecured basis by certain other subsidiaries of the Company.
As of December 31, 2019, we were in compliance with these financial covenants as defined in the Exit Credit Agreements and in the covenants under our indentures.
DIP Credit Agreements Overview
On July 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 financed the working capital needs and general corporate purposes of the Weatherford Parties and certain of their subsidiaries. The DIP Credit Agreement was comprised of the DIP Term Loan and the DIP Revolving Credit Facility. On July 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, leaving only the A&R Credit Agreement with total borrowings of $305 million outstanding at December 13, 2019 that was repaid in full upon emergence date from Bankruptcy on the Effective Date under the terms of the RSA. 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” and “Note 3 – Fresh Start Accounting” for additional details regarding interest rates and terms of the DIP Credit Agreement.
Prior Credit Agreements (364-Day, A&R, and Term Loan)
At December 31, 2018, we had two revolving credit agreements with total commitments of $846 million, comprised of an unsecured senior revolving credit agreement (the “A&R Credit Agreement”) in the amount of $529 million, and a Secured Second Lien 364-Day Revolving Credit Agreement (the “364-Day Credit Agreement” and, together with the A&R Credit Agreement, the “Revolving Credit Agreements”) in the amount of $317 million. At December 31, 2018, we had principal borrowings of $310 million under the Term Loan Agreement. We collectively refer to our Revolving Credit Agreements and Term Loan Agreement as the “Prior Credit Agreements.”
Under the terms of the A&R Credit Agreement, commitments of $226 million from non-extending lenders (“non-extending lenders”) matured on July 12, 2019 and commitments of $303 million from extending lenders (“extending lenders”) would mature on July 13, 2020.The 364-Day Credit Agreement matured on August 15, 2019. On July 3, 2019, the Company repaid in full its outstanding indebtedness under the 364-Day Credit Agreement. The A&R Credit Agreement was repaid in full upon emergence from Bankruptcy on December 13, 2019 under the terms of the RSA.
The Term Loan Agreement required a quarterly payment of $12.5 million plus interest that became due on June 30, 2019. On July 1, 2019, the Weatherford Parties and the Term Loan Lenders entered into a Term Loan Forbearance Agreement where the lenders agreed to forbear from exercising their rights and remedies available to them, including the right to accelerate any indebtedness, for a specified period of time. On July 3, 2019, the Company repaid in full its outstanding indebtedness under the Term Loan.
On July 3, 2019, the Weatherford Parties borrowed approximately $1.4 billion under the DIP Credit Agreement, comprised of the DIP Term Loan and the DIP Revolving Credit Facility, and the proceeds of the borrowings were used to repay certain prepetition indebtedness, cash collateralize certain obligations with respect to letters of credit and similar instruments and financed the working capital needs and general corporate purposes of the Weatherford Parties and certain of their subsidiaries. The borrowings were used to repay in full the outstanding amounts due under the secured Term Loan Agreement and 364-Day Credit Agreement totaling approximately $616 million on July 3, 2019. The DIP Credit Agreement was repaid in full upon emergence from Bankruptcy on December 13, 2019.
Loans under the Prior Credit Agreements were subject to varying rates of interest based on whether the loan was a Eurodollar loan or an alternate base rate loan. We also incurred a quarterly facility fee on the amount of the A&R Credit Agreement. For the
Weatherford International plc – 2019 Form 10-K | 93
year ended December 31, 2019 and through the time the outstanding balances were each paid in full, the interest rate for the A&R Credit Agreement was LIBOR plus a margin rate of 3.55% for extending lenders and LIBOR plus a margin rate of 2.80% for non-extending lenders and the interest rate for borrowings under the Term Loan Agreement and 364-Day Credit Agreement was LIBOR plus a margin rate of 2.30% and LIBOR plus a margin rate of 3.05%, respectively. Note after the Petition Date, the interest rate for the A&R Credit Agreement was LIBOR plus default interest of 2.0% in addition to a margin rate of 3.55% for extending lenders and a margin rate of 2.80% for non-extending lenders; the interest rate for alternate base rate borrowings under the A&R Credit Agreement, was alternate base rate plus default interest of 2.0% in addition to a margin rate of 2.55% for extending lenders and a margin rate of 1.80% for non-extending lenders. Prior to the repayment of the borrowings of the Term Loan and 364-Day Credit Agreement on July 3, 2019, the interest rate for borrowings under our Term Loan Agreement and 364-Day Credit Agreement were LIBOR plus a margin rate of 2.30% and LIBOR plus a margin rate of 3.05%, respectively.
Other Short-Term Borrowings and Debt Activity
In February 2018, we repaid in full our 6.00% senior notes due March 2018. In June 2017, we repaid in full our 6.35% senior notes on the maturity date.
We have short-term borrowings with various domestic and international institutions pursuant to uncommitted credit facilities and other financing arrangements. At December 31, 2019, we had $3 million in short-term borrowings under these arrangements.
As of December 31, 2019, we had $399 million of letters of credit and performance and bid bonds outstanding, consisting of $141 million of letters of credit under the ABL Credit Agreement, $105 million of letters of credit under the LC Credit Agreement and $153 million of letters of credit under various uncommitted facilities. At December 31, 2019, we had cash collateral of $152 million supporting letters of credit under our various uncommitted facilities. The cash is included in “Restricted Cash” in the accompanying Consolidated Balance Sheets.
At December 31, 2019 and December 31, 2018, the current portion of long-term debt was primarily related to the short-term portion of our financed leases and the current portion of our Term Loan Agreement of $50 million, respectively.
Weatherford International plc – 2019 Form 10-K | 94
14. Long-term Debt
Our long-term debt carrying value consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
11.00 % Exit Notes due 2024
|
$
|
2,097
|
|
|
|
$
|
—
|
|
5.125% Senior Notes due 2020
|
—
|
|
|
|
364
|
|
5.875% Exchangeable Senior Notes due 2021
|
—
|
|
|
|
1,194
|
|
7.75% Senior Notes due 2021
|
—
|
|
|
|
743
|
|
4.50% Senior Notes due 2022
|
—
|
|
|
|
644
|
|
8.25% Senior Notes due 2023
|
—
|
|
|
|
742
|
|
9.875% Senior Notes due 2024
|
—
|
|
|
|
781
|
|
9.875% Senior Notes due 2025
|
—
|
|
|
|
588
|
|
6.50% Senior Notes due 2036
|
—
|
|
|
|
447
|
|
6.80% Senior Notes due 2037
|
—
|
|
|
|
255
|
|
7.00% Senior Notes due 2038
|
—
|
|
|
|
456
|
|
9.875% Senior Notes due 2039
|
—
|
|
|
|
245
|
|
6.75% Senior Notes due 2040
|
—
|
|
|
|
457
|
|
5.95% Senior Notes due 2042
|
—
|
|
|
|
369
|
|
Term Loan Agreement due 2020
|
—
|
|
|
|
308
|
|
Finance and Other Lease Obligations
|
64
|
|
|
|
69
|
|
Total Senior Notes and Other Debt
|
2,161
|
|
|
|
7,662
|
|
Less: Amounts Due in One Year
|
10
|
|
|
|
57
|
|
Long-term Debt
|
$
|
2,151
|
|
|
|
$
|
7,605
|
|
The accrued interest on our borrowings was $12 million and $140 million at December 31, 2019 and 2018, respectively. The following is a summary of scheduled long-term debt maturities by year (dollars in millions):
|
|
|
|
|
2020
|
$
|
10
|
|
2021
|
7
|
|
2022
|
7
|
|
2023
|
8
|
|
2024
|
2,105
|
|
Thereafter
|
24
|
|
|
$
|
2,161
|
|
Successor Exit Notes
On the Effective Date pursuant to the terms of the Plan, 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 will accrue at the rate of 11.00% per annum and will be payable semiannually in arrears on June 1 and December 1, commencing on June 1, 2020.
At any time prior to December 1, 2021, the Company may redeem the Exit Notes, in whole or in part, at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) the “make-whole” premium at the redemption date, plus (iii) accrued and unpaid interest, if any, to the redemption date (subject to the right of the noteholders of record on the relevant record date to receive interest due on an interest payment date that is on or prior to the redemption date). On and after December 1, 2021, the Company may redeem all or part of the 11.00% Exit Notes at redemption prices (expressed as percentages of the principal amount)
Weatherford International plc – 2019 Form 10-K | 95
equal to (i) 105.500% for the twelve-month period beginning on December 1, 2021; (ii) 102.750% for the twelve-month period beginning on December 1, 2022; and (iii) 100.000% for the twelve-month period beginning December 1, 2023 and at any time thereafter, plus accrued and unpaid interest at the redemption date.
In addition, at any time prior to December 1, 2022, the Company may redeem up to $500 million in the aggregate principal amount of the 11.00% Exit Notes at a redemption price of 103.00% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date.
If a change of control (as defined in the Indenture) occurs, holders of the Exit Notes will have the right to require the Company to repurchase all or any part of their Exit Notes at a purchase price equal to 101% of the aggregate principal amount of the 11.00% Exit Notes repurchased, plus accrued and unpaid interest, if any, to the repurchase date.
The Exit Notes are guaranteed on a senior basis by the Company’s existing domestic subsidiaries and certain foreign subsidiaries that guarantee its obligations under the Exit Credit Agreements on a full and unconditional basis.
The Indenture governing the Exit Notes contains covenants that limit, among other things, the Company’s ability and the ability of certain of its subsidiaries, to: incur, assume or guarantee additional indebtedness; pay dividends or distributions on capital stock or redeem or repurchase capital stock; make investments; sell stock of its subsidiaries; transfer or sell assets; create liens; enter into transactions with affiliates; and enter into mergers or consolidations.
At such time as (1) the Exit Notes have an investment grade rating from both of Moody’s Investors Service, Inc. and Standard and Poor’s Ratings Services and (2) no default has occurred and is continuing under the Indenture, certain of these and other covenants will be suspended and cease to be in effect so long as the rating assigned by either Moody’s or S&P has not subsequently declined to below Baa3 or BBB- (or equivalent).
The Indenture also provides for certain customary events of default, including, among others, nonpayment of principal or interest, failure to pay final judgments in excess of a specified threshold, failure of a guarantee to remain in effect, bankruptcy and insolvency events, and cross acceleration, which would permit the principal, premium, if any, interest and other monetary obligations on all the then outstanding Exit Notes to be declared due and payable immediately.
Term Loan Agreement
The Term Loan Agreement was due in 2020 and comprised $50 million of the current portion of long-term debt as of December 31, 2018. On July 3, 2019, the Company repaid in full its outstanding indebtedness under the Term Loan. See Note 13 – Short-term Borrowings and Other Debt Obligations for additional information.
Weatherford International plc – 2019 Form 10-K | 96
Predecessor Senior Notes, Exchangeable Senior Notes and Tender Offers
Prior to the Petition Date, we issued various senior notes, all of which rank equally with our existing and future senior unsecured indebtedness, which have semi-annual interest payments and no sinking fund requirements. 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. The related unamortized debt issuance and debt discounts were expensed to “Reorganization Items” on the Consolidated Statements of Operations. See “Note 2 – Emergence from Chapter 11 Bankruptcy Proceedings” for details regarding reorganization items and liabilities subject to compromise. Upon emergence from bankruptcy on December 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.
Predecessor Exchangeable Senior Notes
On June 7, 2016, we issued exchangeable notes with a par value of $1.265 billion and an interest rate of 5.875%. The notes have a conversion price of $7.74 per share and are exchangeable into a total of 163.4 million shares of the Company upon the occurrence of certain events on or after January 1, 2021. The notes mature on July 1, 2021. We have the choice to settle an exchange of the notes in any combination of cash or shares. Before the Petition date, the exchange feature was reported with a carrying amount of $97 million in “Capital in Excess of Par Value” on the accompanying Consolidated Balance Sheets. Upon emergence from bankruptcy on December 13, 2019, the exchangeable senior notes were cancelled pursuant to the terms of the Plan, resulting in a gain recorded at face value in “Reorganization Items” on the Consolidated Statement of Operations. In 2019 (through the Petition Date), full year 2018 and 2017, interest expense related to accrued interest and amortization of the discount on the notes was $50 million, $99 million and $97 million, respectively.
Predecessor Senior Notes
Upon the Effective Date, the notes were cancelled pursuant to the terms of the Plan, resulting in a gain recorded at face value included in “Reorganization Items” on the Consolidated Statement of Operations.
In February 2018, we repaid in full our 6.00% senior notes due March 2018. On February 28, 2018, we issued $600 million in aggregate principal amount of our 9.875% senior notes due 2025.
In June 2017, we repaid in full our 6.35% senior notes on the maturity date. On June 26, 2017, we issued an additional $250 million aggregate principal amount of our 9.875% senior notes due 2024. These notes were issued as additional securities under an indenture pursuant to which we previously issued $540 million aggregate principal amount of our 9.875% senior notes due 2024.
Predecessor Tender Offers
The February 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. In April 2018, we repaid the remaining principal outstanding on an early redemption of the bond. We recognized a cumulative loss of $34 million on these transactions in “Bond Tender and Call Premium” on the accompanying Consolidated Statements of Operations.
Weatherford International plc – 2019 Form 10-K | 97
15. Fair Value of Financial Instruments, Assets and Other Assets
Financial Instruments and Other Assets Measured and Recognized at Fair Value
We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that we categorize using a three level hierarchy, from highest to lowest level of observable inputs. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are quoted prices or other market data for similar assets and liabilities in active markets, or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based upon our own judgment and assumptions used to measure assets and liabilities at fair value. Classification of a financial asset or liability within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. Other than the derivative instruments discussed in “Note 16 – Derivative Instruments” and held for sale assets and liabilities described in “Note 1 – Summary of Significant Accounting Policies” and “Note 7 – Business Combinations and Divestitures,” we had no other material assets or liabilities measured and recognized at fair value on a recurring basis at December 31, 2019 and 2018.
Fair Value of Other Financial Instruments
Our other financial instruments include cash and cash equivalents, accounts receivable, accounts payable, held-to-maturity investments, short-term borrowings and long-term debt. The carrying value of our cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings approximates their fair value due to their short maturities. These short-term borrowings are classified as Level 2 in the fair value hierarchy. During 2017, we purchased $50 million of held-to-maturity Angolan government bonds maturing in 2020. The carrying value of $50 million in both periods approximate their fair value as of December 31, 2019 and 2018. We assess whether an other-than-temporary impairment loss on the investment has occurred due to a decline in fair value or other market conditions. If the fair value of the security is below amortized cost and it is more likely than not that we will not be able to recover its amortized cost basis before its stated maturity, we will record an other-than-temporary impairment charge in the Consolidated Statements of Operations.
The fair value of our long-term debt fluctuates with changes in applicable interest rates among other factors. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued and will be less than the carrying value when the market rate is greater than the interest rate at which the debt was originally issued. The fair value of our long-term debt is classified as Level 2 in the fair value hierarchy and is established based on observable inputs in less active markets.
The fair value and carrying value of our senior notes were as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
Fair Value
|
$
|
2,252
|
|
|
|
$
|
4,455
|
|
Carrying Value
|
2,097
|
|
|
|
7,285
|
|
Non-recurring Fair Value Measurements
In the Successor Period, our Fresh Start Accounting to determine the reorganization value derived from the enterprise value associated with the Plan was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values (except for deferred income taxes), with the remaining excess value allocated to Goodwill. They were determined to be Level 3 fair values. See further discussion at Note 3 – Fresh Start Accounting.
In the 2019 Predecessor Period, our goodwill impairment tests indicated that our goodwill was impaired and as a result all of our reporting units were written down to their estimated fair value. The Level 3 fair values of our reporting units were determined using a combination of the income and market approach. The unobservable inputs to the income approach included each reporting unit’s estimated future cash flows and estimates of discount rates commensurate with the reporting unit’s risks. The market approach considered market multiples of comparable publicly traded companies to estimate fair value as a multiple of each reporting unit’s actual and forecasted earnings. See further discussion at “Note 10 – Goodwill and Intangible Assets.”
Weatherford International plc – 2019 Form 10-K | 98
During the 2019 Predecessor Period, we recognized long-lived asset impairments to write-down our assets to the lower of carrying amount or fair value less cost to sell 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 and income approach. See further discussion at “Note 9 – Long-Lived Asset Impairments and Asset Write-Downs.”
In the fourth quarter of 2018, our annual and interim goodwill impairment tests indicated that our goodwill was impaired and as a result three of our reporting units were written down to their estimated fair values. The Level 3 fair values of our reporting units were determined using a combination of the income and market approach. The unobservable inputs to the income approach included the reporting unit’s estimated future cash flows and estimates of discount rates commensurate with the reporting unit’s risks. The market approach considered market multiples of comparable publicly traded companies to estimate fair value as a multiple of each reporting unit’s actual and forecasted earnings.
During 2018, long-lived assets were impaired and written down to their estimated fair values due to the sustained downturn in the oil and gas industry that resulted in a reassessment of our disposal groups for our land drilling rigs that were included in assets held for sale at December 31, 2018 and 2017. The Level 3 fair values of the long-lived assets were determined using a combination of the market and 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.
During the fourth quarter of 2017, long-lived assets were impaired and written down to their estimated fair values. The Level 3 fair values of the assets were determined using an income approach. The unobservable inputs to the income approach included the assets’ estimated future cash flows and estimates of discount rates commensurate with the assets’ risks.
16. Derivative Instruments
From time to time, we may enter into derivative financial instrument transactions to manage or reduce our market risk. We manage our debt portfolio to achieve an overall desired position of fixed and floating rates, and we may employ interest rate swaps as a tool to achieve that goal. We enter into foreign currency forward contracts and cross-currency swap contracts to economically hedge our exposure to fluctuations in various foreign currencies. The major risks from interest rate derivatives include changes in the interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in floating interest rates, changes in foreign exchange rates and the creditworthiness of the counterparties in such transactions.
We monitor the creditworthiness of our counterparties, which are multinational commercial banks. The fair values of all our outstanding derivative instruments are determined using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates.
Warrants – Successor
On the Effective Date, pursuant to the terms of the Plan, 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. For details on the New Warrants see “Note 20 – Shareholders’ Equity (Deficiency)”.
Warrants – Predecessor
During the fourth quarter of 2016, in conjunction with the issuance of 84.5 million ordinary shares, we issued a warrant (“Old Warrant”) that gave the holder the option to acquire an additional 84.5 million ordinary shares. The exercise price on the Old Warrant was $6.43 per share and was exercisable prior to May 21, 2019. The option period lapsed and the warrants expired unexercised with a fair value of zero. The Old Warrant was classified as a liability and carried at fair value on the Consolidated Balance Sheets and changes in the fair value were reported through earnings.
The Old Warrant fair value was a Level 2 valuation and was estimated using the Black Scholes valuation model. Inputs to the model included Weatherford’s share price, volatility of our share price, and the risk-free interest rate. The fair value of the Old Warrant was nil at December 31, 2018. We recognized an insignificant gain in May 2019 related to the Old Warrant expiration. We recognized a gain of $70 million and $86 million in 2018 and 2017, respectively, with changes in fair value of the Old Warrant recorded each period in “Warrant Fair Value Adjustment” on the accompanying Consolidated Statements of Operations. The change in fair value of the Old Warrant during 2018 was primarily driven by eliminating the warrant share value associated with any future
Weatherford International plc – 2019 Form 10-K | 99
equity issuance and a decrease in Weatherford’s stock price. The change in fair value of the warrant during 2017 was principally due to a decrease in Weatherford’s stock price.
Fair Value Hedges
We may use interest rate swaps to help mitigate exposures related to changes in the fair values of fixed-rate debt. The interest rate swap is recorded at fair value with changes in fair value recorded in earnings. The carrying value of fixed-rate debt would be adjusted for changes in interest rates, with the changes in value recorded in earnings. After termination of the hedge, any discount or premium on fixed-rate debt is amortized to interest expense over the remaining term of the debt. As of December 31, 2019, we did not have any fair value hedges designated.
Cash Flow Hedges
We may use interest rate swaps to mitigate our exposure to variability in forecasted cash flows due to changes in interest rates. In 2008, we entered into interest rate derivative instruments to hedge projected exposures to interest rates in anticipation of a debt offering. These hedges were terminated at the time of the issuance of the debt in 2008, and the associated loss was being amortized from “Accumulated Other Comprehensive Income (Loss)” to interest expense over the remaining term of that debt and was fully recognized under ASC 852 and Fresh Start Accounting. As of December 31, 2019, we did not have any cash flow hedges designated.
Other Derivative Instruments
We enter into contracts to hedge our exposure to currency fluctuations in various foreign currencies. At December 31, 2019 and 2018, we had outstanding foreign currency forward contracts with notional amounts aggregating to $389 million and $435 million, respectively. These foreign currency forward contracts are not designated as hedges under ASU 2014-03, Derivatives and Hedging (Topic 815). 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.
The amount of derivative instruments’ gain or (loss) on the Consolidated Statements of Operations is in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Period From
|
|
|
Period From
|
|
|
|
|
|
|
|
12/14/19 to
|
|
|
01/01/19 to
|
|
Year Ended 12/31
|
|
|
(Dollars in millions)
|
12/31/19
|
|
|
12/13/19
|
|
2018
|
|
2017
|
|
Classification
|
Foreign Currency Forward Contracts
|
$
|
1
|
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
(25
|
)
|
|
Other Income (Expense), Net
|
Old Warrant on Weatherford Shares
|
—
|
|
|
|
—
|
|
|
70
|
|
|
86
|
|
|
Warrant Fair Value Adjustment
|
17. Retirement and Employee Benefit Plans
We have defined contribution plans covering certain employees. Contribution expenses related to these plans totaled $31 million, $37 million and $24 million for the Predecessor Period and years ended December 31, 2018 and 2017, respectively. Contribution expenses for the Successor Period were not material. The increase in employer contributions subsequent to 2017 relates primarily to the recommencement of employer matching contributions to our U.S. 401(k) savings plan and other contribution plans sponsored by the Company.
We have defined benefit pension and other post-retirement benefit plans covering certain U.S. and international employees. Plan benefits are generally based on factors such as age, compensation levels and years of service. Net periodic benefit income/cost related to these plans totaled $5 million of cost, $8 million of cost, and $38 million of income for the Predecessor Period and the years ended December 31, 2018 and 2017 respectively. Net periodic benefit cost for the Successor Period was not material. The decrease in net periodic benefit cost in the Predecessor Period is due primarily to the conversion of our Netherlands plan from
Weatherford International plc – 2019 Form 10-K | 100
defined benefit to defined contribution which led to no defined benefit expense for the year and a curtailment gain for that plan. The change in net periodic benefit cost in 2018 was due primarily to amortization of the unrecognized net gain associated with our supplemental executive retirement plan in 2017. The projected benefit obligations on a consolidated basis were $198 million and $173 million as of December 31, 2019 and 2018, respectively. The increase year over year is due primarily to actuarial losses as a result of lower discount rates. The fair values of plan assets on a consolidated basis (determined primarily using Level 2 inputs) were $144 million and $123 million as of December 31, 2019 and 2018, respectively. The increase in plan assets year over year is due primarily to positive asset returns. As of December 31, 2019 and December 31, 2018, the net underfunded obligation was substantially all recorded within Other Non-current Liabilities. Additionally, the consolidated pre-tax amount in accumulated other comprehensive income (loss) as of December 31, 2019, that has not yet been recognized as a component of net periodic benefit cost was a net gain of $2 million. The consolidated pre-tax amount in accumulated other comprehensive income (loss) as of December 31, 2018, along with gains (losses) incurred up to December 13, 2019 have been eliminated in conjunction with Fresh Start Accounting.
The weighted average assumption rates used for benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From 12/14/19
|
|
|
Year Ended December 31,
|
|
to 12/31/19
|
|
|
2018
|
Discount rate:
|
|
|
|
|
United States Plans
|
2.50% - 3.25%
|
|
|
|
3.00% - 4.25%
|
|
International Plans
|
0.80% - 6.25%
|
|
|
|
1.85% - 7.25%
|
|
Rate of Compensation Increase:
|
|
|
|
|
|
|
United States Plans
|
—
|
|
|
|
—
|
|
International Plans
|
2.00% - 3.50%
|
|
|
|
2.00% - 3.50%
|
|
During the Predecessor Period and the year ended December 31, 2018, we made contributions and paid direct benefits of $5 million and $5 million, respectively, in connection with our defined benefit pension and other post-retirement benefit plans. Contributions in the Successor Period were immaterial. In 2020, we expect to fund approximately $5 million related to those plans.
Weatherford International plc – 2019 Form 10-K | 101
18. 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 and our income tax provision or benefit 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 and in our operating structure. On September 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. Our income derived from sources outside Switzerland are exempt from Swiss cantonal and communal tax and are also granted participation relief from Swiss federal tax for qualifying dividend income and capital gains related to the sale of qualifying investments in subsidiaries. The participation relief should result in a full exemption of participation income from Swiss federal income tax.
Our income tax provision from continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From
|
|
|
Period From
|
|
|
|
12/14/19
|
|
|
1/1/2019
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
(Dollars in millions)
|
12/31/2019
|
|
|
12/13/2019
|
|
2018
|
|
2017
|
Total Current Provision
|
$
|
(9
|
)
|
|
|
$
|
(110
|
)
|
|
$
|
(113
|
)
|
|
$
|
(162
|
)
|
Total Deferred (Provision) Benefit
|
—
|
|
|
|
(25
|
)
|
|
79
|
|
|
25
|
|
Provision for Income Taxes
|
$
|
(9
|
)
|
|
|
$
|
(135
|
)
|
|
$
|
(34
|
)
|
|
$
|
(137
|
)
|
The difference between the income tax provision at the Irish and Swiss income tax rate and the income tax (provision) benefit attributable to “Loss Before Income Taxes” for the 2019 Successor and Predecessor Periods, and the Predecessor years ended December 31, 2018 and 2017 is analyzed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From
|
|
|
Period From
|
|
|
|
12/14/19
|
|
|
1/1/2019
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
(Dollars in millions)
|
12/31/2019
|
|
|
12/13/2019
|
|
2018
|
|
2017
|
Irish or Swiss Income Tax rate at 12.5% and 7.83%, respectively
|
$
|
2
|
|
|
|
$
|
(299
|
)
|
|
$
|
216
|
|
|
$
|
208
|
|
Tax on Operating Earnings Subject to Rates Different than the Irish or Swiss Federal Income Tax Rate
|
(65
|
)
|
|
|
197
|
|
|
(387
|
)
|
|
123
|
|
Estimated Tax on Settlement of Liabilities Subject to Compromise and Fresh Start Accounting
|
—
|
|
|
|
(495
|
)
|
|
—
|
|
|
—
|
|
Change in Valuation Allowance Attributed to Estimated Tax on Settlement of Liabilities Subject to Compromise and Fresh Start Accounting
|
—
|
|
|
|
463
|
|
|
—
|
|
|
—
|
|
U.S. Tax Reform - Remeasure of U.S. Deferred Tax Assets
|
—
|
|
|
|
—
|
|
|
—
|
|
|
(249
|
)
|
Change in Valuation Allowance Attributed to U.S. Tax Reform
|
—
|
|
|
|
—
|
|
|
—
|
|
|
301
|
|
Change in Valuation Allowance
|
56
|
|
|
|
17
|
|
|
166
|
|
|
(459
|
)
|
Change in Uncertain Tax Positions
|
(2
|
)
|
|
|
(18
|
)
|
|
(29
|
)
|
|
(61
|
)
|
Provision for Income Taxes
|
$
|
(9
|
)
|
|
|
$
|
(135
|
)
|
|
$
|
(34
|
)
|
|
$
|
(137
|
)
|
Our income tax provision in the Successor Period was $9 million on a loss before income taxes of $15 million. The primary drivers of the tax expense for the Successor Period included 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.
Weatherford International plc – 2019 Form 10-K | 102
Our income tax provision in the 2019 Predecessor Period was $135 million on earnings before income taxes of $3.8 billion. The primary drivers of the tax expense for the 2019 Predecessor Period included 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. Our results for period also 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 or write-downs. Other charges of approximately $77 million, related to restructuring expense and gain on the sale of businesses, resulted in $3 million in tax benefit. 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 to Bermuda, which has no income tax regime, and the U.S., which resulted in the reduction of our U.S. unbenefited net operating losses carryforward under the operative tax statute and applicable regulations offset by the release of the valuation allowance. Prepetition charges (charges prior to Petition Date) and reorganization items (charges after Petition Date) had no significant tax impact.
Our income tax provision in 2018 was $34 million on a loss before income taxes of $2.8 billion. Results for the year ended December 31, 2018 include losses with no significant tax benefit. The tax expense for the year ended December 31, 2018 also includes withholding taxes and deemed profit taxes that do not directly correlate to ordinary income or loss. The primary driver of the tax expense was due to profits in certain jurisdictions, deemed profit countries and withholding taxes on intercompany and third-party transactions. Our results for 2018 also include charges with $70 million tax benefit principally related to the $1.9 billion goodwill impairment. The other asset write-downs and other charges, including $238 million in long-lived asset impairments, $126 million in restructuring charges and the warrant fair value adjustment of $70 million resulted in no significant tax benefit.
Our income tax provision in 2017 was $137 million on a loss before income taxes of $2.7 billion. The primary driver of the tax expense was due to profits in certain jurisdictions, deemed profit countries and withholding taxes on intercompany and third-party transactions. In addition, the Company concluded that it needed to record a valuation allowance of $73 million in the fourth quarter of 2017 against certain previously benefited deferred tax assets since it cannot support that it is more likely than not that the deferred tax assets will be realized. The additional valuation allowance was partially offset by a one-time $52 million benefit as a result of the recent U.S tax reform. Our results for 2017 also include charges with no significant tax benefit principally related to asset write-downs and other charges including $928 million in long-lived asset impairments, $540 million inventory charges including excess and obsolete, $230 million in the write-down of Venezuelan receivables and $66 million of other write-downs charges and credits, $183 million in restructuring charges and the warrant fair value adjustment of $86 million.
On December 22, 2017, the U.S. enacted into law a comprehensive tax reform bill (the “Tax Cuts and Jobs Act,” or “TCJA”). The TCJA significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries as of 2017 held in cash and illiquid assets (with the latter taxed at a lower rate), and a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a partial territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base, such as the base erosion and anti-abuse tax). The permanent reduction in the U.S. statutory corporate tax rate to 21% from 35% decreased the amount of the U.S. deferred tax assets and liabilities by $249 million with a decrease to the valuation allowance of $301 million for a net tax benefit of $52 million recorded for the year ended December 31, 2017. The TCJA did not have other impacts on the Company’s effective tax rate because of the valuation allowance against the U.S. deferred tax assets. Any potential impact would be offset by un-benefitted U.S. net operating loss carryforwards. As we did not have all the necessary information to analyze all effects of this tax reform as of December 31, 2017, this was a provisional amount which we believed represented a reasonable estimate of the accounting implications of this tax reform. We finalized our accounting for this matter during 2018 and concluded that no adjustments to the provisional amounts recorded during 2017 were identified during the twelve months ended December 31, 2019 or 2018.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements. The measurement of deferred tax assets and liabilities is based on enacted tax laws and rates currently in effect in each of the jurisdictions in which we have operations.
Weatherford International plc – 2019 Form 10-K | 103
The components of the net deferred tax asset (liability) attributable to continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
Deferred Tax Assets:
|
|
|
|
|
Net Operating Losses Carryforwards
|
$
|
696
|
|
|
|
$
|
1,002
|
|
Accrued Liabilities and Reserves
|
155
|
|
|
|
331
|
|
Tax Credit Carryforwards
|
11
|
|
|
|
94
|
|
Employee Benefits
|
26
|
|
|
|
29
|
|
Property, Plant and Equipment
|
63
|
|
|
|
—
|
|
Inventory
|
67
|
|
|
|
67
|
|
Other Differences between Financial and Tax Basis
|
264
|
|
|
|
324
|
|
Valuation Allowance
|
(1,166
|
)
|
|
|
(1,702
|
)
|
Total Deferred Tax Assets
|
116
|
|
|
|
145
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
Property, Plant and Equipment
|
—
|
|
|
|
(15
|
)
|
Intangible Assets
|
(90
|
)
|
|
|
(57
|
)
|
Other Differences between Financial and Tax Basis
|
(31
|
)
|
|
|
(52
|
)
|
Total Deferred Tax Liabilities
|
(121
|
)
|
|
|
(124
|
)
|
Net Deferred Tax Asset (Liability)
|
$
|
(5
|
)
|
|
|
$
|
21
|
|
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 the 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 evaluated 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).
We will continue to evaluate whether valuation allowances are needed in future reporting periods. Valuation allowances will remain until the Company can determine that net deferred tax assets are more likely than not to be realized. In the event that the Company were to determine that it would be able to realize the deferred income tax assets in the future as a result of significant improvement in earnings as a result of market conditions, the Company would adjust the valuation allowance, reducing the provision for income taxes in the period of such adjustment.
The decrease in the valuation allowance in 2019 is primarily attributable to a decrease of un-benefited net operating loss carryforwards, primarily attributed to the US (see discussion below), and the foreign exchange remeasurement of our net deferred tax assets.
Deferred income taxes generally have not been recognized on the cumulative undistributed earnings of our non-Irish subsidiaries because they are considered to be indefinitely reinvested. Distribution of these earnings in the form of dividends or otherwise may result in a combination of income and withholding taxes payable in various countries. As of December 31, 2019, the pool of positive undistributed earnings of our non-Irish subsidiaries that are considered indefinitely reinvested and may be subject to tax if distributed amounts to approximately$1.6 billion. Due to complexities in the tax laws and the manner of repatriation, it is not practicable to estimate the unrecognized amount of deferred income taxes and the related dividend withholding taxes associated with these undistributed earnings.
Weatherford International plc – 2019 Form 10-K | 104
At December 31, 2019, we had approximately $4 billion of NOLs in various jurisdictions, $1.9 billion of which were generated by certain U.S. subsidiaries. On December 13, 2019 the company emerged from Chapter 11 of the U.S. bankruptcy code. As a result, in the U.S. approximately $480 million of cancellation of indebtedness (COD) income was realized for tax purposes. Under exceptions applying to COD income resulting from a bankruptcy reorganization, the U.S. subsidiaries were not required to recognize this COD income currently as taxable income. Instead, the company’s US net operating losses were reduced under the operative tax statute and applicable regulations, affecting the balance of deferred taxes. The Company also realized COD income attributable to Bermuda, which does not have an income tax regime. As a result, there was no impact from the COD Income. Our U.S. subsidiaries experienced an ownership change as the Company’s emergence from Chapter 11 bankruptcy proceedings is considered a “ownership change” for purposes of Internal Revenue Code section 382. The Internal Revenue Code sections 382 and 383 impose limitations on the ability of a company to utilize tax attributes after experiencing an “ownership change.” We estimate that we would have an annual limitation of approximately $23 million against the utilization of our U.S. loss carryforwards and other tax attributes, including credits, in the future, subject to the final valuation of the U.S. As a result, $1.2 billion of the U.S. loss carryforward will expire before it can be utilized. The gross amount of our U.S. subsidiaries NOLs that we will be able to utilize is not $1.9 billion and our net operating loss carryforward deferred tax asset decreased by $257 million (tax effect of the anticipated expired U.S. loss carryforward). The Company maintains a valuation allowance against the U.S. net deferred tax asset position so the adjustment to the U.S. loss carryforward had a corresponding reduction to the valuation allowance and therefore resulted in no current financial impact. The deferred tax asset, as of December 31, 2019, reflects the maximum amount of U.S. loss carryforward that the Company may be able to utilize, which is $639 million. Our non-indefinite loss carryforwards, if not utilized, will mostly expire for U.S. subsidiaries from 2030 through 2037 and at various dates from 2019 through 2038 for non-U.S. subsidiaries. At December 31, 2019, we had $77 million of tax credit carryovers, of which $66 million is for U.S. subsidiaries. The U.S. credits primarily consists of $35 million of research and development tax credit carryforwards which expire from 2020 through 2038, and $31 million of foreign tax credit carryforwards which expire from 2020 through 2038. We anticipate that all the U.S. credits will expire before they can be utilized because of the annual limitation. As a result, as of December 31, 2019, our tax credit carryforward is $11 million and the tax credit deferred tax asset has been decreased by $66 million with an offsetting reduction in valuation allowance.
A tabular reconciliation of the total amounts of uncertain tax positions at the beginning and end of the period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From
|
|
|
Period From
|
|
|
|
12/14/19
|
|
|
1/1/2019
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
(Dollars in millions)
|
12/31/2019
|
|
|
12/13/2019
|
|
2018
|
|
2017
|
Balance at Beginning of Year
|
$
|
213
|
|
|
|
$
|
195
|
|
|
$
|
217
|
|
|
$
|
208
|
|
Additions as a Result of Tax Positions Taken During a Prior Period
|
—
|
|
|
|
34
|
|
|
31
|
|
|
65
|
|
Reductions as a Result of Tax Positions Taken During a Prior Period
|
—
|
|
|
|
(1
|
)
|
|
(9
|
)
|
|
(1
|
)
|
Additions as a Result of Tax Positions Taken During the Current Period
|
2
|
|
|
|
17
|
|
|
14
|
|
|
12
|
|
Reductions Relating to Settlements with Taxing Authorities
|
(1
|
)
|
|
|
(20
|
)
|
|
(18
|
)
|
|
(29
|
)
|
Reductions as a Result of a Lapse of the Applicable Statute of Limitations
|
—
|
|
|
|
(5
|
)
|
|
(23
|
)
|
|
(38
|
)
|
Foreign Exchange Effects
|
—
|
|
|
|
(7
|
)
|
|
(17
|
)
|
|
—
|
|
Balance at End of Year
|
$
|
214
|
|
|
|
$
|
213
|
|
|
$
|
195
|
|
|
$
|
217
|
|
Substantially all of the uncertain tax positions, if recognized in future periods, would impact our effective tax rate. To the extent penalties and interest would be assessed on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense and other non-current liabilities in the Consolidated Financial Statements in accordance with our accounting policy. We recorded an expense of $1 million, $15 million, $1 million and $10 million in interest and penalty for the 2019 Successor and Predecessor Periods and the years ended December 31, 2018 and 2017, respectively. The amounts in the table above exclude cumulative accrued interest and penalties of $77 million, $60 million, and $61 million at December 31, 2019, 2018 and 2017, respectively, which are included in other liabilities.
Weatherford International plc – 2019 Form 10-K | 105
We are subject to income tax in many of the approximately 80 countries where we operate. As of December 31, 2019, the following table summarizes the tax years that remain subject to examination for the major jurisdictions in which we operate:
|
|
|
Canada
|
2011 - 2019
|
Mexico
|
2009 - 2019
|
Russia
|
2016 - 2019
|
Switzerland
|
2011 - 2019
|
United States
|
2016 - 2019
|
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 financial statements. As of December 31, 2019, we anticipate that it is reasonably possible that the amount of uncertain tax positions may decrease by up to $6 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations.
19. Disputes, Litigation and Legal Contingencies
Shareholder Litigation
GAMCO Shareholder Litigation
On September 6, 2019, GAMCO Asset Management, Inc. (“GAMCO”), purportedly on behalf of itself and other, similarly situated shareholders, filed a lawsuit asserting violations of the federal securities laws against certain then current and former officers and directors of the Company. GAMCO alleges violations of Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, and violations of Sections 11 and 15 of the Securities Act of 1933 based on allegations that the Company and certain of its officers made false and/or misleading statements, and alleged non-disclosure of material facts, regarding the Company’s business, operations, prospects and performance. GAMCO seeks damages on behalf of purchasers of the Company’s ordinary shares from October 26, 2016 through May 10, 2019. GAMCO’s lawsuit was filed in the United States District Court for the Southern District of Texas, Houston Division, and it is captioned GAMCO Asset Management, Inc. v. McCollum, et al., Case No. 4:19-cv-03363. We cannot reliably predict the outcome of GAMCO’s claims, including the amount of any possible loss.
Prior Shareholder Litigation
In 2010, three shareholder derivative actions were filed, purportedly on behalf of the Company, asserting breach of duty and other claims against certain then current and former officers and directors of the Company related to the United Nations oil-for-food program governing sales of goods into Iraq, the Foreign Corrupt Practices Act of 1977 and trade sanctions related to the U.S. government investigations disclosed in our SEC filings since 2007. Those shareholder derivative cases were filed in Harris County, Texas state court and consolidated under the caption Neff v. Brady, et al., No. 2010040764 (collectively referred to as the “Neff Case”). Other shareholder demand letters covering the same subject matter were received by the Company in early 2014, and a fourth shareholder derivative action was filed, purportedly on behalf of the Company, also asserting breach of duty and other claims against certain then current and former officers and directors of the Company related to the same subject matter as the Neff Case. That case, captioned Erste-Sparinvest KAG v. Duroc-Danner, et al., No. 201420933 (Harris County, Texas) was consolidated into the Neff Case in September 2014. A motion to dismiss was granted May 15, 2015, and an appeal was filed on June 15, 2015. Following briefing and oral argument, on June 29, 2017, the Texas Court of Appeals denied in part and granted in part the shareholders’ appeal. The Court ruled that the shareholders lacked standing to bring claims that arose prior to the Company’s redomestication to Switzerland in 2009 and upheld the dismissal of those claims. The Court reversed as premature the trial court’s dismissal of claims arising after the redomestication and remanded to the trial court for further proceedings. On February 1, 2018, the individual defendants and nominal defendant Weatherford filed a motion for summary judgment on the remaining claims in the case. On February 13, 2018, the trial court dismissed with prejudice certain directors for lack of jurisdiction. The plaintiffs have appealed the jurisdictional ruling. We cannot reliably predict the outcome of the remaining claims, including the amount of any possible loss.
U.S. Government Investigation
As of December 31, 2016, the Company had agreed to pay as part of the terms of a settlement with the SEC a total civil monetary penalty of $140 million relating to the SEC and the U.S. Department of Justice (“DOJ”) investigation of certain accounting issues associated with the material weakness in our internal control over financial reporting for income taxes for historical periods indicated in 2012 and 2011 SEC filings reporting the historical financial restatements. In addition, certain reports and certifications
Weatherford International plc – 2019 Form 10-K | 106
regarding our internal controls over accounting for income taxes were delivered to the SEC during the two years following the settlement. We have completed these reports as of April 2018. A payment of $50 million was made in 2016 and the remaining $90 million was paid in 2017. The 2017 payments are reported under the caption “Other Assets and Liabilities, Net” on our Consolidated Statements of Cash Flows.
Rapid Completions and Packers Plus Litigation
Several subsidiaries of the Company are defendants in a patent infringement lawsuit filed by Rapid Completions LLC (“RC”) in U.S. District Court for the Eastern District of Texas on July 31, 2015. RC claims that we and other defendants are liable for infringement of seven U.S. patents related to specific downhole completion equipment and the methods of using such equipment. These patents have been assigned to Packers Plus Energy Services, Inc., a Canadian corporation (“Packers Plus”), and purportedly exclusively licensed to RC. RC is seeking a permanent injunction against further alleged infringement, unspecified damages for infringement, supplemental and enhanced damages, and additional relief such as attorneys’ fees. The Company has filed a counterclaim against Packers Plus, seeking declarations of non-infringement, invalidity, and unenforceability of the four patents that remain asserted against the Company on the grounds of inequitable conduct. The Company is seeking attorneys’ fees and costs incurred in the lawsuit. The litigation was stayed, pending resolution of inter partes reviews (“IPR”) of each of the four patents before the Patent Trial and Appeal Board (“PTAB”) of the U.S. Patent and Trademark Office (“USPTO”). On February 22, 2018, the PTAB issued IPR decisions finding that all of the claims of the ‘505, ‘634, and ‘774 patents that were challenged by the Company in the IPRs are invalid. On October 16, 2018, the PTAB issued an IPR decision finding that all of the claims of the ‘501 patent are invalid. RC has appealed the decisions of the PTAB. On June 3, 2019, the Federal Circuit heard RC’s oral arguments on the appeal related to the ‘505, ‘634, and ‘774 patents and affirmed on June 6, 2019 the PTAB’s decision that the patents are invalid. The oral argument on RC’s appeal of the of the PTAB’s decision on the ‘501 patent took place on January 8, 2020, and the Federal Circuit affirmed the PTAB’s decision on January 21, 2020. All of the claims of the ‘501, ‘505, ‘634, and ‘774 patents that were asserted against the Company in the U.S. litigation are now invalid. With the exception of the Company’s potential claim for inequitable conduct against Packers Plus, the litigation in the U.S. has concluded.
On October 14, 2015, Packers Plus and RC filed suit in Federal Court in Toronto, Canada against the Company and certain subsidiaries alleging infringement of a related Canadian patent and seeking unspecified damages and an accounting of the Company’s profits. Trial on the validity of the Canadian patent was completed in March 2017. On November 3, 2017, the Federal Court issued its decision, wherein it concluded that the defendants proved that the patent-in-suit was invalid and dismissed Packers Plus and RC’s claims of infringement. On January 5, 2018, Packers Plus and RC filed their Notice of Appeal. The Company filed its responsive brief in June 2018. The hearing of the appeal took place on February 6, 2019, and on April 24, 2019, the appeal was dismissed in favor of Weatherford. Packers Plus and RC filed an Application for Leave to the Supreme Court of Canada requesting that the Supreme Court hear their appeal from the appellate court’s decision, but the Supreme Court dismissed the Application, thus concluding the litigation.
At this time, we believe it is unlikely that we will incur a loss related to these patent infringement matters, and therefore we have not accrued any loss provisions related to these matters. For claims, disputes and pending litigation in which we believe a negative outcome is probable and a loss can be reasonably estimated, we have recorded a liability for the expected loss.
In addition, we have certain claims, disputes and pending litigation for which we do not believe a negative outcome is probable or for which we can only estimate a range of liability. It is possible, however, that an unexpected judgment could be rendered against us, or we could decide to resolve a case or cases, that would result in liability that could be uninsured and beyond the amounts we currently have reserved and in some cases those losses could be material. If one or more negative outcomes were to occur relative to these matters, the aggregate impact to our financial condition could be material.
Accrued litigation and settlements recorded in “Other Current Liabilities” on the accompanying Consolidated Balance Sheets as of December 31, 2019 and 2018 were $44 million and $29 million, respectively. The increase in our accrued litigation balance was incurred primarily in our 2019 Predecessor Period.
Weatherford International plc – 2019 Form 10-K | 107
20. Shareholders’ Equity (Deficiency)
Changes in our ordinary shares issued were as follows:
|
|
|
|
(Shares in millions)
|
Issued
|
Balance at December 31, 2017 (Predecessor)
|
993
|
|
Equity Awards Granted, Vested and Exercised
|
9
|
|
Balance at December 31, 2018 (Predecessor)
|
1,002
|
|
Equity Awards Granted, Vested and Exercised
|
7
|
|
Predecessor Shares Cancellation
|
(1,009
|
)
|
Balance at December 13, 2019 (Predecessor)
|
—
|
|
Share Issuance
|
70
|
|
Balance at December 13, 2019 (Successor)
|
70
|
|
Share Issuance
|
—
|
|
Balance at December 31, 2019 (Successor)
|
70
|
|
Upon the effectiveness of the Plan, all previously issued and outstanding equity interests in the Predecessor were cancelled and the Company issued 69,999,954 “New Ordinary Shares” to the holders of the Company’s existing senior notes and holders of “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.
On the Effective Date, the Company issued 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, 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.” At December 31, 2019 no warrants had been exercised. The warrant fair value was a Level 2 valuation and is estimated using the Black Scholes valuation model. Inputs to the model include Weatherford’s share price, volatility of our share price, and the risk-free interest rate.
The New Warrants are exercisable until “Expiration Date” of which is the earlier of (i) December 13, 2023 and (ii) the date of consummation of any liquidity event resulting in the sale or exchange of all or substantially all of the equity interests of the Company to one or more third parties (whether by merger, sale, recapitalization, consolidation, combination or otherwise) or the sale, directly or indirectly, by the Company of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole; or a liquidation, dissolution or winding up of the Company. All unexercised New Warrants will expire, and the rights of the warrant holders to purchase New Ordinary Shares will terminate, on the Expiration Date.
On November 21, 2016, we issued 84.5 million ordinary shares at a price of $5.40 per ordinary share, and a warrant (“Old Warrant”) to purchase 84.5 million ordinary shares on or prior to May 21, 2019 at an exercise price of $6.43 per ordinary share to a selected institutional investor. On May 21, 2019, the Old Warrant option period lapsed and the warrants expired unexercised.
Weatherford International plc – 2019 Form 10-K | 108
Accumulated Other Comprehensive Loss
The following table presents the changes in our accumulated other comprehensive loss by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Currency Translation Adjustment
|
|
Defined Benefit Pension
|
|
Deferred Loss on Derivatives
|
|
Total
|
Balance at December 31, 2017 (Predecessor)
|
$
|
(1,484
|
)
|
|
$
|
(26
|
)
|
|
$
|
(9
|
)
|
|
$
|
(1,519
|
)
|
Other Comprehensive (Loss) Income before Reclassifications
|
(240
|
)
|
|
10
|
|
|
—
|
|
|
(230
|
)
|
Reclassifications
|
—
|
|
|
2
|
|
|
1
|
|
|
3
|
|
Net Activity
|
(240
|
)
|
|
12
|
|
|
1
|
|
|
(227
|
)
|
Balance at December 31, 2018 (Predecessor)
|
(1,724
|
)
|
|
(14
|
)
|
|
(8
|
)
|
|
(1,746
|
)
|
Other Comprehensive Income (Loss) before Reclassifications
|
52
|
|
|
(12
|
)
|
|
—
|
|
|
40
|
|
Reclassifications
|
—
|
|
|
1
|
|
|
8
|
|
|
9
|
|
Net Activity
|
52
|
|
|
(11
|
)
|
|
8
|
|
|
49
|
|
Balance at December 13, 2019 (Predecessor)
|
(1,672
|
)
|
|
(25
|
)
|
|
—
|
|
|
(1,697
|
)
|
Elimination of Predecessor Equity Balances
|
1,672
|
|
|
25
|
|
|
—
|
|
|
1,697
|
|
Balance at December 13, 2019 (Successor)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other Comprehensive Income
|
7
|
|
|
2
|
|
|
—
|
|
|
9
|
|
Balance at December 31, 2019 (Successor)
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Weatherford International plc – 2019 Form 10-K | 109
21. Share-Based Compensation
As part of the emergence from bankruptcy, outstanding awards under all Predecessor equity incentive plans were cancelled, and the 2019 Plan was approved by the Successor.
The share-based compensation plans permit the grant of options, stock appreciation rights, restricted share awards restricted share units (“RSUs”), performance share awards, performance unit awards (“PUs”), other share-based awards and cash-based awards to any employee, non-employee directors and other individual service providers or any affiliate. In addition, the Predecessor had share-based compensation provisions under the Employee Share Purchase Plan (“ESPP”).
For restricted share awards and RSUs, compensation expense is recognized on a straight-line basis over the requisite service period for the separately vesting portion of each award. For PUs, compensation expense is recognized on a straight-line basis over the requisite service period for the entire award. Upon emergence from bankruptcy, all remaining compensation expense was recognized when certain shares accelerated due to change in control provisions in the original award agreements and all remaining outstanding awards were cancelled.
The provisions of each award vary based on the type of award granted and are determined by the Compensation Committee of our Board of Directors. Those awards that are based on a specific contractual term will be granted with a term not to exceed 10 years. Upon grant of a restricted share award, the recipient has the rights of a shareholder, including but not limited to the right to vote such shares and the right to receive any dividends paid on such shares, but not the right to disposition prior to vesting. Recipients of RSUs do not have the rights of a shareholder until such date as the shares are issued or transferred to the recipient under the Plan. As of December 31, 2019, we had four million shares available for grant under our Successor share-based compensation plan.
Share-Based Compensation Expense
We did not recognize any share-based compensation expense during the Successor Period. We recognized the following share-based compensation expense during the 2019 Predecessor Period and the years ended December 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From
|
|
|
Period From
|
|
|
|
12/14/19
|
|
|
01/01/2019
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
(Dollars in millions)
|
12/31/2019
|
|
|
12/13/2019
|
|
2018
|
|
2017
|
Share-based Compensation
|
$
|
—
|
|
|
|
$
|
46
|
|
|
$
|
47
|
|
|
$
|
70
|
|
Related Tax (Provision) Benefit
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weatherford International plc – 2019 Form 10-K | 110
Restricted Share Awards and Restricted Share Units
There were no restricted share awards outstanding in 2019. RSUs vest based on continued employment, generally over a three-year period. The fair value of RSUs is determined based on the closing price of our shares on the date of grant. The total fair value, less forfeitures, is expensed over the vesting period. The weighted-average grant date fair value of RSUs granted during the 2019 Predecessor Period and the years ended December 31, 2018 and December 31, 2017 was $0.90, $1.76 and $4.26, respectively. The total fair value of restricted share awards and RSUs vested during the 2019 Predecessor Period and the years ended December 31, 2018 and December 31, 2017 was $2 million, $17 million and $30 million, respectively.
A summary of RSU activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
RSU
|
|
Weighted Average
Grant Date Fair Value
|
|
|
(In thousands)
|
|
|
Non-Vested at December 31, 2018 (Predecessor)
|
|
17,278
|
|
|
$
|
2.82
|
|
Granted
|
|
76
|
|
|
0.90
|
|
Vested
|
|
(9,747
|
)
|
|
3.64
|
|
Cancelled or Forfeited
|
|
(7,607
|
)
|
|
1.75
|
|
Non-Vested at December 13, 2019 (Predecessor)
|
|
—
|
|
|
—
|
|
Granted, Vested, Cancelled or Forfeited
|
|
—
|
|
|
—
|
|
Non-Vested at December 31, 2019 (Successor)
|
|
—
|
|
|
—
|
|
Performance Units
The performance units granted by the Predecessor had a three-year service period and were to vest upon the Company’s achievement of certain market-based and performance goals. Depending on the performance levels achieved in relation to the predefined targets, shares may be issued for up to 200% of the units awarded. If the established performance goals are not met no shares are issued. In addition, the award agreement had a 200% accelerated vesting condition in the event of a change in control. The grant date fair value of the performance units with market-based goals was determined through use of the Monte Carlo simulation method. The assumptions used in the Monte Carlo simulation during the year ended December 31, 2018, included a weighted average risk-free rate of 2.28%, volatility of 63.0% and a zero dividend yield. The grant date fair value of the performance units with performance goals was determined based on the closing price of our shares on the date of grant. The weighted-average grant date fair value of all performance units we granted during the years ended December 31, 2018 and 2017 was $4.57 and $6.06, respectively. For the 2019 Predecessor Period, 6 million shares were issued when the bankruptcy triggered a change of control clause accelerating the vesting of all outstanding performance units at 200%. The total fair value of these shares was $95 thousand. For the year ended December 31, 2018, we did not issue any shares for performance units. For the year ended December 31, 2017, 145 thousand shares were issued for the performance units related to the departure of a former executive officer. The total fair value of these shares was $1 million.
A summary of performance unit activity for the year ended December 31, 2019, is presented below:
|
|
|
|
|
|
|
|
|
Performance Units
|
|
Weighted Average Grant Date Fair Value
|
|
(In thousands)
|
|
|
Non-vested at December 31, 2018 (Predecessor)
|
4,014
|
|
|
$
|
4.99
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(3,033
|
)
|
|
4.79
|
|
Cancelled or Forfeited
|
(981
|
)
|
|
5.63
|
|
Non-vested at December 13, 2019 (Predecessor)
|
—
|
|
|
—
|
|
Granted
|
—
|
|
|
—
|
|
Non-vested at December 31, 2019 (Successor)
|
—
|
|
|
—
|
|
Weatherford International plc – 2019 Form 10-K | 111
Employee Stock Purchase Plan
The Predecessor had an ESPP which permitted eligible employees to make payroll deductions to purchase Weatherford shares. Each offering period had a six-month duration beginning on either March 1 or September 1. Shares were purchased at 90% of the lower of the closing price for our ordinary shares on the first or last day of the offering period. We issued 4 million and 3 million shares under the ESPP during the years ended December 31, 2018 and 2017, respectively. In January 2019, we temporarily suspended our ESPP due to insufficient shares remaining available for issuance under the plan as a consequence of our lower share price. New Ordinary Shares have not been registered for issuance under our ESPP.
22. Earnings per Share
Basic earnings per share for all periods presented equals net income (loss) divided by the weighted average number of our shares outstanding during the period including participating securities. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of our shares outstanding during the period including participating securities, adjusted for the dilutive effect of our stock options, restricted shares and performance units.
The following discloses basic and diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From
|
|
|
Period From
|
|
|
|
12/14/19
|
|
|
01/01/2019
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
(Shares in millions)
|
12/31/2019
|
|
|
12/13/2019
|
|
2018
|
|
2017
|
Basic and Diluted Weighted Average Shares Outstanding
|
70
|
|
|
|
1,004
|
|
|
997
|
|
|
990
|
|
Our basic and diluted weighted average shares outstanding for the 2019 Predecessor Period are equivalent as we believe including the dilutive impact of our Predecessor potential shares would not be meaningful as the potential shares were cancelled pursuant to the terms of the Plan.
Our basic and diluted weighted average shares outstanding for the Successor Period, and for the years ended December 31, 2018 and 2017, are equivalent due to the net loss attributable to shareholders. Diluted weighted average shares outstanding for the Successor Period, and the years ended December 31, 2018 and 2017, exclude potential shares for stock options, restricted shares, performance units, exchangeable senior notes, warrants outstanding and the ESPP as we have net losses for those periods and their inclusion would be anti-dilutive. The following table discloses the number of shares excluded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From
|
|
|
Period From
|
|
|
|
12/14/19
|
|
|
01/01/2019
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
(Shares in millions)
|
12/31/2019
|
|
|
12/13/2019
|
|
2018
|
|
2017
|
Potential Shares Excluded
|
8
|
|
|
|
197
|
|
|
251
|
|
|
250
|
|
Weatherford International plc – 2019 Form 10-K | 112
23. Revenues
Disaggregated Revenue by Product Line and Geographic Region
The following tables disaggregate our revenues from contracts with customers by major product line and geographic region. Equipment revenues recognized under ASC 842 was $12 million in the Successor Period, $284 million in the Predecessor Period and $337 million in the year ended December 31, 2018, which are included in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Period from December 14, 2019 through December 31, 2019
|
(Dollars in millions)
|
Western Hemisphere
|
Eastern Hemisphere
|
Total Revenues
|
Product Lines:
|
|
|
|
Production
|
$
|
56
|
|
$
|
26
|
|
$
|
82
|
|
Completions
|
22
|
|
44
|
|
66
|
|
Drilling and Evaluation
|
21
|
|
36
|
|
57
|
|
Well Construction
|
22
|
|
34
|
|
56
|
|
Total
|
$
|
121
|
|
$
|
140
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Period from January 1, 2019
to December 13, 2019
|
(Dollars in millions)
|
Western Hemisphere
|
Eastern Hemisphere
|
Total Revenues
|
Product Lines:
|
|
|
|
Production
|
$
|
1,132
|
|
$
|
339
|
|
$
|
1,471
|
|
Completions
|
468
|
|
652
|
|
1,120
|
|
Drilling and Evaluation
|
498
|
|
695
|
|
1,193
|
|
Well Construction
|
522
|
|
648
|
|
1,170
|
|
Total
|
$
|
2,620
|
|
$
|
2,334
|
|
$
|
4,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Year Ended December 31, 2018
|
(Dollars in millions)
|
Western Hemisphere
|
Eastern Hemisphere
|
Total Revenues
|
Product Lines:
|
|
|
|
Production
|
$
|
1,195
|
|
$
|
364
|
|
$
|
1,559
|
|
Completions
|
610
|
|
604
|
|
1,214
|
|
Drilling and Evaluation
|
647
|
|
778
|
|
1,425
|
|
Well Construction
|
611
|
|
935
|
|
1,546
|
|
Total
|
$
|
3,063
|
|
$
|
2,681
|
|
$
|
5,744
|
|
Weatherford International plc – 2019 Form 10-K | 113
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Year Ended December 31, 2017
|
(Dollars in millions)
|
Western Hemisphere
|
Eastern Hemisphere
|
Total Revenues
|
Product Lines:
|
|
|
|
Production
|
$
|
1,085
|
|
$
|
380
|
|
$
|
1,465
|
|
Completions
|
641
|
|
624
|
|
1,265
|
|
Drilling and Evaluation
|
623
|
|
767
|
|
1,390
|
|
Well Construction
|
588
|
|
991
|
|
1,579
|
|
Total
|
$
|
2,937
|
|
$
|
2,762
|
|
$
|
5,699
|
|
Revenues by Geographic Regions
Revenue by geographic area is summarized below. Revenues from customers in Ireland were nil in each of the years presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Period From
|
|
|
Period From
|
|
|
|
|
|
12/14/19
|
|
|
01/01/19
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
(Dollars in millions)
|
12/31/19
|
12/13/19
|
|
2018
|
|
2017
|
Geographic Areas:
|
|
|
|
|
|
|
|
|
North America
|
$
|
68
|
|
|
|
$
|
1,548
|
|
|
$
|
1,987
|
|
|
$
|
2,047
|
|
Latin America
|
53
|
|
|
|
1,072
|
|
|
1,076
|
|
|
890
|
|
Western Hemisphere
|
121
|
|
|
|
2,620
|
|
|
3,063
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
Middle East & North Africa and Asia
|
88
|
|
|
|
1,427
|
|
|
1,716
|
|
|
1,755
|
|
Europe/Sub-Sahara Africa/Russia
|
52
|
|
|
|
907
|
|
|
965
|
|
|
1,007
|
|
Eastern Hemisphere
|
140
|
|
|
|
2,334
|
|
|
2,681
|
|
|
2,762
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
$
|
261
|
|
|
|
$
|
4,954
|
|
|
$
|
5,744
|
|
|
$
|
5,699
|
|
Total revenues in the United States, part of our Western Hemisphere segment, were $59 million in the Successor Period and $1.3 billion in the Predecessor Period and $1.6 billion and $1.6 billion for the years ended December 31, 2018 and 2017, respectively.
Contract Balances
Receivables for products and services with customers are included in “Accounts Receivable, Net,” contract assets are included in “Other Current Assets” and contract liabilities are included in “Other Current Liabilities” on our Consolidated Balance Sheets. The following table provides information about receivables for product and services included in “Accounts Receivable, Net” at December 31, 2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
(Dollars in millions)
|
December 31, 2019
|
|
|
December 31, 2018
|
Receivables for Product and Services in Accounts Receivable, Net
|
$
|
1,089
|
|
|
|
$
|
1,051
|
|
Weatherford International plc – 2019 Form 10-K | 114
Significant changes in the contract assets and liabilities balances during the period are as follows:
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Contract Assets
|
Contract Liabilities
|
Balance at December 31, 2018 (Predecessor)
|
$
|
4
|
|
$
|
64
|
|
Revenue recognized that was included in the deferred revenue balance at the beginning of the
period
|
—
|
|
(61
|
)
|
Increase due to cash received, net of amount recognized as revenue during the period
|
—
|
|
21
|
|
Increase due to revenue recognized during the period but contingent on future performance
|
9
|
|
—
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
(2
|
)
|
—
|
|
Transferred to receivables from contract assets recognized during the period
|
(8
|
)
|
—
|
|
Adjustments due to changes in estimates or contract modifications
|
—
|
|
9
|
|
Adjustments due to Fresh Start Accounting
|
—
|
|
(29
|
)
|
Balance at December 13, 2019 (Successor)
|
3
|
|
4
|
|
Increase due to cash received, net of amount recognized as revenue during the period
|
—
|
|
8
|
|
Balance at December 31, 2019 (Successor)
|
$
|
3
|
|
$
|
12
|
|
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In the following table, estimated revenue expected to be recognized in the future related to performance obligations that are either unsatisfied or partially unsatisfied as of December 31, 2019 primarily relate to subsea services and an artificial lift contract. All consideration from contracts with customers is included in the amounts presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Service revenue
|
$
|
48
|
|
$
|
17
|
|
$
|
16
|
|
$
|
16
|
|
$
|
4
|
|
$
|
101
|
|
Venezuela Revenue Recognition
In the second quarter of 2017, we changed the accounting for revenue with our primary customer in Venezuela to record a discount reflecting the time value of money and accrete the discount as interest income over the expected collection period using the effective interest method. In the fourth quarter of 2017, we changed the accounting for revenue with substantially all of our customers in Venezuela due to the downgrade of the country’s bonds by certain credit agencies, continued significant political and economic turmoil and continued economic sanctions around certain financing transactions imposed by the U.S. government. In connection with this development, we recorded a charge of $230 million to fully reserve our receivables for these customers in Venezuela. We continue to monitor our Venezuelan operations and will actively pursue the collection of our outstanding invoices. During 2018, we collected $16 million on previously fully reserved accounts receivable.
Weatherford International plc – 2019 Form 10-K | 115
24. Segment Information
Reporting Segments
The Company’s chief operating decision maker (its chief executive officer) regularly reviews information by our two reportable segments, which are our Western Hemisphere and Eastern Hemisphere segments. These reportable segments are based on management’s organization and view of Weatherford’s business when making operating decisions, allocating resources and assessing performance. Research and development expenses are included in the results of our Western and Eastern Hemisphere segments. Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately on the caption Corporate General and Administrative.
Financial information by segment is summarized below. Revenues are attributable to countries based on the ultimate destination of the sale of products or performance of services. The accounting policies of the segments are the same as those described in “Note 1 – Summary of Significant Accounting Policies.” Excluded from capital expenditures in the tables below is the capital expenditures related to the acquisition of assets held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Period From December 14 through December 31, 2019
|
(Dollars in millions)
|
Revenues
|
|
Income (Loss)
from
Operations
|
|
Depreciation
and
Amortization
|
|
Capital
Expenditures
|
Western Hemisphere
|
$
|
121
|
|
|
$
|
(4
|
)
|
|
$
|
14
|
|
|
$
|
9
|
|
Eastern Hemisphere
|
140
|
|
|
10
|
|
|
20
|
|
|
7
|
|
|
261
|
|
|
6
|
|
|
34
|
|
|
16
|
|
Corporate General and Administrative
|
|
|
(5
|
)
|
|
—
|
|
|
4
|
|
Total
|
$
|
261
|
|
|
$
|
1
|
|
|
$
|
34
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Period From January 1, 2019 to December 13, 2019
|
(Dollars in millions)
|
Revenues
|
|
Income (Loss)
from
Operations
|
|
Depreciation
and
Amortization
|
|
Capital
Expenditures
|
Western Hemisphere
|
$
|
2,620
|
|
|
$
|
54
|
|
|
$
|
171
|
|
|
$
|
113
|
|
Eastern Hemisphere
|
2,334
|
|
|
134
|
|
|
269
|
|
|
115
|
|
|
4,954
|
|
|
188
|
|
|
440
|
|
|
228
|
|
Corporate General and Administrative
|
|
|
(118
|
)
|
|
7
|
|
|
22
|
|
Goodwill Impairment (a)
|
|
|
(730
|
)
|
|
|
|
|
Prepetition Charges (b)
|
|
|
(86
|
)
|
|
|
|
|
Long-live Asset Impairments, Asset Write-Downs, Inventory Write-Downs and Other (c)
|
|
|
(374
|
)
|
|
|
|
|
Restructuring Charges (d)
|
|
|
(189
|
)
|
|
|
|
|
Gain on Operational Assets Sale
|
|
|
15
|
|
|
|
|
|
Gain on Sale of Businesses, Net (e)
|
|
|
112
|
|
|
|
|
|
Total
|
$
|
4,954
|
|
|
$
|
(1,182
|
)
|
|
$
|
447
|
|
|
$
|
250
|
|
|
|
(a)
|
Impairment of the remaining goodwill related to our reporting units.
|
|
|
(b)
|
Prepetition charges for professional and other fees related to the Cases.
|
|
|
(c)
|
Includes asset write-downs, inventory write-downs and other charges, partially offset by a reduction of a contingency reserve on a legacy contract.
|
Weatherford International plc – 2019 Form 10-K | 116
|
|
(d)
|
Includes restructuring charges of $189 million: $84 million in Western Hemisphere, $50 million in Eastern Hemisphere and $55 million in Corporate.
|
|
|
(e)
|
Primarily includes the gain on sale of our laboratory services business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Year Ended December 31, 2018
|
(Dollars in millions)
|
Revenues
|
|
Income (Loss) from
Operations
|
|
Depreciation
and
Amortization
|
|
Capital
Expenditures
|
Western Hemisphere
|
$
|
3,063
|
|
|
$
|
208
|
|
|
$
|
216
|
|
|
$
|
81
|
|
Eastern Hemisphere
|
2,681
|
|
|
119
|
|
|
333
|
|
|
87
|
|
|
5,744
|
|
|
327
|
|
|
549
|
|
|
168
|
|
Corporate General and Administrative
|
|
|
(130
|
)
|
|
7
|
|
|
18
|
|
Goodwill Impairment (f)
|
|
|
(1,917
|
)
|
|
|
|
|
Long-Lived Asset Impairments, Asset Write-Downs and Other Charges (g)
|
|
|
(238
|
)
|
|
|
|
|
Restructuring Charges (h)
|
|
|
(126
|
)
|
|
|
|
|
Total
|
$
|
5,744
|
|
|
$
|
(2,084
|
)
|
|
$
|
556
|
|
|
$
|
186
|
|
|
|
(f)
|
Goodwill impairment of $1.9 billion was taken during the fourth quarter of 2018.
|
|
|
(g)
|
During 2018, impairments, asset write-downs and other includes $151 million in long-lived asset impairments primarily related to the land drilling rigs business and $87 million of other asset write-downs, charges and credits.
|
|
|
(h)
|
Includes restructuring charges of $126 million: $27 million in the Western Hemisphere, $45 million in the Eastern Hemisphere and $54 million in Corporate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Year Ended December 31, 2017
|
(Dollars in millions)
|
Revenues
|
|
Income (Loss)
from
Operations
|
|
Depreciation
and
Amortization
|
|
Capital
Expenditures
|
Western Hemisphere
|
$
|
2,937
|
|
|
$
|
(113
|
)
|
|
$
|
352
|
|
|
$
|
70
|
|
Eastern Hemisphere
|
2,762
|
|
|
(139
|
)
|
|
443
|
|
|
130
|
|
|
5,699
|
|
|
(252
|
)
|
|
795
|
|
|
200
|
|
Corporate General and Administrative
|
|
|
(130
|
)
|
|
6
|
|
|
25
|
|
Long-Lived Asset Impairments, Write-Downs and Other Related Charges (i)
|
|
|
(1,711
|
)
|
|
|
|
|
Restructuring Charges (j)
|
|
|
(183
|
)
|
|
|
|
|
Litigation Charges
|
|
|
10
|
|
|
|
|
|
Loss on Sale of Businesses, Net (k)
|
|
|
96
|
|
|
|
|
|
Total
|
$
|
5,699
|
|
|
$
|
(2,170
|
)
|
|
$
|
801
|
|
|
$
|
225
|
|
|
|
(i)
|
During 2017, impairments, asset write-downs and other include $928 million in long-lived asset impairments (of which $740 million relates to the write-down to the lower of carrying amount or fair value less cost to sell of our land drilling rigs assets classified as held for sale), $506 million of asset write-downs, charges and credits and $230 million in the write-down of Venezuelan receivables.
|
|
|
(j)
|
Includes restructuring charges of $183 million: $70 million in the Western Hemisphere, $77 million in the Eastern Hemisphere and $36 million in Corporate.
|
|
|
(k)
|
In the fourth quarter of 2017, we recognized a gain on the disposition of our U.S. pressure pumping and pump-down perforating assets.
|
Weatherford International plc – 2019 Form 10-K | 117
The following table presents total assets by segment at December 31:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
Western Hemisphere
|
$
|
2,514
|
|
|
|
$
|
3,122
|
|
Eastern Hemisphere
|
4,392
|
|
|
|
2,966
|
|
Corporate
|
387
|
|
|
|
513
|
|
Total
|
$
|
7,293
|
|
|
|
$
|
6,601
|
|
Total assets in the United States, part of our Western Hemisphere segment, were $1.2 billion and $1.6 billion as of December 31, 2019 and 2018, respectively.
Revenues Percentages by Product Lines
We provide equipment and services used in the production, completions, drilling and evaluation, and well construction of oil and natural gas wells. The composition of our consolidated revenues by product line are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
Period From
|
|
|
Period From
|
|
|
|
12/14/19
|
|
|
01/01/19
|
|
Years Ended
|
|
through
|
|
|
through
|
|
December 31,
|
|
12/31/2019
|
|
|
12/13/2019
|
|
2018
|
|
2017
|
Production
|
32
|
%
|
|
|
29
|
%
|
|
27
|
%
|
|
26
|
%
|
Completions
|
25
|
|
|
|
23
|
|
|
21
|
|
|
22
|
|
Drilling and Evaluation
|
22
|
|
|
|
24
|
|
|
25
|
|
|
24
|
|
Well Construction
|
21
|
|
|
|
24
|
|
|
27
|
|
|
28
|
|
Total
|
100
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Long-lived Assets by Geographic Areas
Long-lived assets by geographic area within the segments are summarized below. Long-lived assets in Ireland were nil in each of the years presented. Long-lived assets exclude goodwill and intangible assets as well as deferred tax assets of $39 million and $35 million at December 31, 2019 and 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
December 31,
|
|
|
December 31,
|
(Dollars in millions)
|
2019
|
|
|
2018
|
North America
|
$
|
753
|
|
|
|
$
|
809
|
|
Latin America
|
296
|
|
|
|
381
|
|
Western Hemisphere
|
$
|
1,049
|
|
|
|
$
|
1,190
|
|
|
|
|
|
|
Middle East & North Africa and Asia
|
$
|
715
|
|
|
|
$
|
587
|
|
Europe/Sub-Sahara Africa/Russia
|
684
|
|
|
|
411
|
|
Eastern Hemisphere
|
$
|
1,399
|
|
|
|
$
|
998
|
|
|
|
|
|
|
Total
|
$
|
2,448
|
|
|
|
$
|
2,188
|
|
Weatherford International plc – 2019 Form 10-K | 118
25. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for the Successor and Predecessor Periods and for the year ended December 31, 2018 are presented in the following tables. In the following tables, the sum of “Basic and Diluted Loss Per Share” for the four quarters may differ from the annual amounts due to the required method of computing weighted average number of shares in the respective periods. Additionally, due to the effect of rounding, the sum of the individual quarterly earnings per share amounts may not equal the calculated year earnings per share amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
|
|
|
|
|
|
Period From
|
|
Period From
|
|
Period From
|
|
2019
|
|
2019
|
|
2019
|
|
10/01/19
|
|
01/01/19
|
|
12/14/19
|
(Dollars in millions, except
|
First
|
|
Second
|
|
Third
|
|
through
|
|
through
|
|
through
|
per share amounts)
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
12/13/19
|
|
12/13/19
|
|
12/31/19
|
Revenues
|
$
|
1,346
|
|
|
$
|
1,309
|
|
|
$
|
1,314
|
|
|
$
|
985
|
|
|
$
|
4,954
|
|
|
$
|
261
|
|
Gross Profit
|
264
|
|
|
290
|
|
|
307
|
|
|
240
|
|
|
1,101
|
|
|
53
|
|
Net Income (Loss) Attributable to Weatherford
|
(481
|
)
|
(a)
|
(316
|
)
|
(b)
|
(821
|
)
|
(c)
|
5,279
|
|
(d)
|
3,661
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income (Loss) Per Share
|
(0.48
|
)
|
|
(0.31
|
)
|
|
(0.82
|
)
|
|
5.26
|
|
|
3.65
|
|
|
(0.37
|
)
|
|
|
(a)
|
Includes charges of $298 million primarily related to goodwill impairment of $229 million, as well as $69 million primarily related to long-lived asset impairments, asset write-downs and inventory charges, restructuring and transformation charges and prepetition charges.
|
|
|
(b)
|
Includes charges of $125 million primarily related to goodwill impairment of $102 million and prepetition charges of $76 million, as well as $61 million primarily related to restructuring, transformation and asset write-downs charges, partially offset by gains on sales of businesses of $114 million.
|
|
|
(c)
|
Includes charges of $487 million primarily related to goodwill impairment of $399 million, restructuring and transformation charges and asset write-downs and inventory charges. We also incurred reorganization charges of $303 million related to our bankruptcy Plan.
|
|
|
(d)
|
Includes reorganization gains of $5.7 billion related to our emergence from bankruptcy and Fresh Start Accounting. Includes charges of $342 million primarily related to restructuring and transformation charges and asset write-downs and inventory charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarters
|
|
|
(Dollars in millions, except per share amounts)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
Revenues
|
$
|
1,423
|
|
|
$
|
1,448
|
|
|
$
|
1,444
|
|
|
$
|
1,429
|
|
|
$
|
5,744
|
|
Gross Profit
|
278
|
|
|
305
|
|
|
339
|
|
|
308
|
|
|
1,230
|
|
Net Loss Attributable to Weatherford
|
(245
|
)
|
(e)
|
(264
|
)
|
(f)
|
(199
|
)
|
(g)
|
(2,103
|
)
|
(h)
|
(2,811
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss Per Share
|
(0.25
|
)
|
|
(0.26
|
)
|
|
(0.20
|
)
|
|
(2.10
|
)
|
|
(2.82
|
)
|
|
|
(e)
|
Includes charges of $57 million primarily related to a bond tender and call premium, restructuring and transformation charges, currency devaluation charges, asset write-downs and inventory charges, offset by gains on purchase of the remaining interest in a joint venture and a warrant fair value adjustment.
|
|
|
(f)
|
Includes credits of $109 million primarily related to restructuring and transformation charges, currency devaluation charges, long-lived asset impairments, other asset write-downs, offset by gains on property sales and a reduction of a contingency reserve on a legacy contract and a warrant fair value adjustment.
|
|
|
(g)
|
Includes charges of $95 million primarily related to restructuring and transformation charges, currency devaluation charges, long-lived asset impairments and deferred mobilization costs and other assets of the land drilling rigs business, offset by a gain on a warrant fair value adjustment.
|
|
|
(h)
|
Includes charges of $2.0 billion primarily related to goodwill impairment of $1.9 billion.
|
Weatherford International plc – 2019 Form 10-K | 119
Table of ContentsItem 9 | Changes in and Disagreement with Accountants on Accounting and Financial Disclosure