nov-10q_20180930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-12317

 

NATIONAL OILWELL VARCO, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

76-0475815

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

7909 Parkwood Circle Drive

Houston, Texas

77036-6565

(Address of principal executive offices)

(713) 346-7500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

Non-accelerated filer 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No

As of October 19, 2018 the registrant had 383,366,548 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL OILWELL VARCO, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In millions, except share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,293

 

 

$

1,437

 

Receivables, net

 

 

2,005

 

 

 

2,015

 

Inventories, net

 

 

3,177

 

 

 

3,003

 

Contract assets

 

 

483

 

 

 

495

 

Prepaid and other current assets

 

 

263

 

 

 

267

 

Total current assets

 

 

7,221

 

 

 

7,217

 

Property, plant and equipment, net

 

 

2,813

 

 

 

3,002

 

Deferred income taxes

 

 

13

 

 

 

13

 

Goodwill

 

 

6,339

 

 

 

6,227

 

Intangibles, net

 

 

3,072

 

 

 

3,301

 

Investment in unconsolidated affiliates

 

 

304

 

 

 

309

 

Other assets

 

 

131

 

 

 

137

 

Total assets

 

$

19,893

 

 

$

20,206

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

675

 

 

$

510

 

Accrued liabilities

 

 

1,023

 

 

 

1,238

 

Contract liabilities

 

 

570

 

 

 

519

 

Current portion of long-term debt and short-term borrowings

 

 

8

 

 

 

6

 

Accrued income taxes

 

 

 

 

 

81

 

Total current liabilities

 

 

2,276

 

 

 

2,354

 

Long-term debt

 

 

2,706

 

 

 

2,706

 

Deferred income taxes

 

 

672

 

 

 

677

 

Other liabilities

 

 

263

 

 

 

309

 

Total liabilities

 

 

5,917

 

 

 

6,046

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock - par value $.01; 1 billion shares authorized; 383,345,734 and

   380,104,970 shares issued and outstanding at September 30, 2018 and

  December 31, 2017

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

8,361

 

 

 

8,234

 

Accumulated other comprehensive loss

 

 

(1,328

)

 

 

(1,110

)

Retained earnings

 

 

6,869

 

 

 

6,966

 

Total Company stockholders' equity

 

 

13,906

 

 

 

14,094

 

Noncontrolling interests

 

 

70

 

 

 

66

 

Total stockholders’ equity

 

 

13,976

 

 

 

14,160

 

Total liabilities and stockholders’ equity

 

$

19,893

 

 

$

20,206

 

 

See notes to unaudited consolidated financial statements.

 

2


 

NATIONAL OILWELL VARCO, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

(In millions, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

2,154

 

 

$

1,835

 

 

$

6,055

 

 

$

5,335

 

Cost of revenue

 

 

1,761

 

 

 

1,550

 

 

 

5,020

 

 

 

4,610

 

Gross profit

 

 

393

 

 

 

285

 

 

 

1,035

 

 

 

725

 

Selling, general and administrative

 

 

320

 

 

 

292

 

 

 

911

 

 

 

891

 

Operating profit (loss)

 

 

73

 

 

 

(7

)

 

 

124

 

 

 

(166

)

Interest and financial costs

 

 

(24

)

 

 

(26

)

 

 

(71

)

 

 

(77

)

Interest income

 

 

6

 

 

 

11

 

 

 

18

 

 

 

19

 

Equity loss in unconsolidated affiliates

 

 

(2

)

 

 

(2

)

 

 

(1

)

 

 

(4

)

Other income (expense), net

 

 

(20

)

 

 

(16

)

 

 

(70

)

 

 

(36

)

Income (loss) before income taxes

 

 

33

 

 

 

(40

)

 

 

 

 

 

(264

)

Provision (benefit) for income taxes

 

 

29

 

 

 

(13

)

 

 

37

 

 

 

(43

)

Net income (loss)

 

 

4

 

 

 

(27

)

 

 

(37

)

 

 

(221

)

Net income (loss) attributable to noncontrolling interests

 

 

3

 

 

 

(1

)

 

 

6

 

 

 

2

 

Net income (loss) attributable to Company

 

$

1

 

 

$

(26

)

 

$

(43

)

 

$

(223

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Company per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

(0.07

)

 

$

(0.11

)

 

$

(0.59

)

Diluted

 

$

0.00

 

 

$

(0.07

)

 

$

(0.11

)

 

$

(0.59

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

$

0.05

 

 

$

0.05

 

 

$

0.15

 

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

379

 

 

 

377

 

 

 

378

 

 

 

377

 

Diluted

 

 

383

 

 

 

377

 

 

 

378

 

 

 

377

 

 

See notes to unaudited consolidated financial statements.

 

3


 

NATIONAL OILWELL VARCO, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

4

 

 

$

(27

)

 

$

(37

)

 

$

(221

)

Currency translation adjustments

 

 

(32

)

 

 

124

 

 

 

(219

)

 

 

290

 

Changes in derivative financial instruments, net of tax

 

 

2

 

 

 

25

 

 

 

1

 

 

 

53

 

Comprehensive income (loss)

 

 

(26

)

 

 

122

 

 

 

(255

)

 

 

122

 

Comprehensive income (loss) attributable to noncontrolling interest

 

 

3

 

 

 

(1

)

 

 

6

 

 

 

2

 

Comprehensive income (loss) attributable to Company

 

$

(29

)

 

$

123

 

 

$

(261

)

 

$

120

 

 

See notes to unaudited consolidated financial statements.

 

4


 

NATIONAL OILWELL VARCO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In millions)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

Net loss

 

$

(37

)

 

$

(221

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

519

 

 

 

523

 

Deferred income taxes

 

 

15

 

 

 

16

 

Equity loss in unconsolidated affiliates

 

 

1

 

 

 

4

 

Other, net

 

 

129

 

 

 

141

 

Change in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Receivables

 

 

37

 

 

 

13

 

Inventories

 

 

(193

)

 

 

103

 

Contract assets

 

 

12

 

 

 

147

 

Prepaid and other current assets

 

 

3

 

 

 

95

 

Accounts payable

 

 

152

 

 

 

36

 

Accrued liabilities

 

 

(239

)

 

 

(50

)

Contract liabilities

 

 

50

 

 

 

(152

)

Income taxes payable

 

 

(81

)

 

 

(72

)

Other assets/liabilities, net

 

 

(68

)

 

 

(72

)

Net cash provided by operating activities

 

 

300

 

 

 

511

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(173

)

 

 

(127

)

Business acquisitions, net of cash acquired

 

 

(280

)

 

 

(85

)

Other

 

 

61

 

 

 

28

 

Net cash used in investing activities

 

 

(392

)

 

 

(184

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments against lines of credit and other debt

 

 

(6

)

 

 

(4

)

Cash dividends paid

 

 

(57

)

 

 

(57

)

Activity under stock incentive plans

 

 

51

 

 

 

11

 

Other

 

 

 

 

 

(2

)

Net cash used in financing activities

 

 

(12

)

 

 

(52

)

Effect of exchange rates on cash

 

 

(40

)

 

 

39

 

Increase (decrease) in cash and cash equivalents

 

 

(144

)

 

 

314

 

Cash and cash equivalents, beginning of period

 

 

1,437

 

 

 

1,408

 

Cash and cash equivalents, end of period

 

$

1,293

 

 

$

1,722

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash payments during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

48

 

 

$

51

 

Income taxes

 

$

61

 

 

$

130

 

 

See notes to unaudited consolidated financial statements.

 

5


 

NATIONAL OILWELL VARCO, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

1.

Basis of Presentation

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect reported and contingent amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accompanying unaudited consolidated financial statements of National Oilwell Varco, Inc. (“NOV” or the “Company”) present information in accordance with GAAP in the United States for interim financial information and the instructions to Form 10-Q and applicable rules of Regulation S-X. They do not include all information or footnotes required by GAAP in the United States for complete consolidated financial statements and should be read in conjunction with the Company’s 2017 Annual Report on Form 10-K.

In our opinion, the consolidated financial statements include all adjustments, which are of a normal recurring nature unless otherwise disclosed, necessary for a fair presentation of the results for the interim periods. Certain reclassifications have been made to the prior year financial statements in order for them to conform with the current presentation. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables, and payables approximated fair value because of the relatively short maturity of these instruments. Cash equivalents include only those investments having a maturity date of three months or less at the time of purchase. See Note 7 for the fair value of long-term debt and Note 10 for the fair value of derivative financial instruments.

2.

Inventories, net

Inventories consist of (in millions):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Raw materials and supplies

 

$

627

 

 

$

656

 

Work in process

 

 

600

 

 

 

513

 

Finished goods and purchased products

 

 

1,950

 

 

 

1,834

 

Total

 

$

3,177

 

 

$

3,003

 

 

3.

Accrued Liabilities

Accrued liabilities consist of (in millions):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Compensation

 

$

281

 

 

$

345

 

Vendor costs

 

 

128

 

 

 

150

 

Warranty

 

 

114

 

 

 

135

 

Taxes (non-income)

 

 

103

 

 

 

152

 

Insurance

 

 

61

 

 

 

74

 

Commissions

 

 

38

 

 

 

58

 

Interest

 

 

27

 

 

 

7

 

Fair value of derivatives

 

 

13

 

 

 

8

 

Other

 

 

258

 

 

 

309

 

Total

 

$

1,023

 

 

$

1,238

 

 

6


 

Warranties

 

The Company provides warranties on certain of its products and services. The Company accrues warranty liability based upon specific claims and a review of historical claim experience in accordance with Accounting Standards Codification (“ASC”) Topic 450 “Contingencies”. Adjustments are made to accruals as claim data and historical experience change. In addition, the Company incurs discretionary costs to service its products in connection with product performance issues and accrues for them when they are encountered.

 

The changes in the warranty provision are as follows (in millions):

 

Balance at December 31, 2017

 

$

135

 

Net provisions for warranties issued during the year

 

 

27

 

Amounts incurred

 

 

(48

)

Balance at September 30, 2018

 

$

114

 

 

4.

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are as follows (in millions):

 

 

 

 

 

 

 

Derivative

 

 

Defined

 

 

 

 

 

 

 

Currency

 

 

Financial

 

 

Benefit

 

 

 

 

 

 

 

Translation

 

 

Instruments,

 

 

Plans,

 

 

 

 

 

 

 

Adjustments

 

 

Net of Tax

 

 

Net of Tax

 

 

Total

 

Balance at December 31, 2017

 

$

(1,104

)

 

$

7

 

 

$

(13

)

 

$

(1,110

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive

   income (loss) before reclassifications

 

 

(225

)

 

 

3

 

 

 

 

 

 

(222

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated

   other comprehensive income (loss)

 

 

6

 

 

 

(2

)

 

 

 

 

 

4

 

Balance at September 30, 2018

 

$

(1,323

)

 

$

8

 

 

$

(13

)

 

$

(1,328

)

 

The components of amounts reclassified from accumulated other comprehensive income (loss) are as follows (in millions):

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Currency

 

 

Derivative

 

 

Defined

 

 

 

 

 

 

Currency

 

 

Derivative

 

 

Defined

 

 

 

 

 

 

 

Translation

 

 

Financial

 

 

Benefit

 

 

 

 

 

 

Translation

 

 

Financial

 

 

Benefit

 

 

 

 

 

 

 

Adjustments

 

 

Instruments

 

 

Plans

 

 

Total

 

 

Adjustments

 

 

Instruments

 

 

Plans

 

 

Total

 

Revenue

 

$

 

 

$

1

 

 

$

 

 

$

1

 

 

$

 

 

$

(2

)

 

$

 

 

$

(2

)

Cost of revenue

 

 

 

 

 

2

 

 

 

 

 

 

2

 

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Other income (expense), net

 

 

6

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax effect

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

$

6

 

 

$

2

 

 

$

 

 

$

8

 

 

$

 

 

$

1

 

 

$

 

 

$

1

 

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Currency

 

 

Derivative

 

 

Defined

 

 

 

 

 

 

Currency

 

 

Derivative

 

 

Defined

 

 

 

 

 

 

 

Translation

 

 

Financial

 

 

Benefit

 

 

 

 

 

 

Translation

 

 

Financial

 

 

Benefit

 

 

 

 

 

 

 

Adjustments

 

 

Instruments

 

 

Plans

 

 

Total

 

 

Adjustments

 

 

Instruments

 

 

Plans

 

 

Total

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

(6

)

 

$

 

 

$

(6

)

Cost of revenue

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

 

 

 

 

 

8

 

 

 

 

 

 

8

 

Other income (expense), net

 

 

6

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax effect

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

$

6

 

 

$

(2

)

 

$

 

 

$

4

 

 

$

 

 

$

3

 

 

$

 

 

$

3

 

 

The Company’s reporting currency is the U.S. dollar. For a majority of the Company’s international entities in which there is a substantial investment, the local currency is their functional currency. As a result, currency translation adjustments resulting from the

7


 

process of translating the entities’ financial statements into the reporting currency are reported in other comprehensive income or loss in accordance with ASC Topic 830 “Foreign Currency Matters” (“ASC Topic 830”). For the three and nine months ended September 30, 2018, a majority of these local currencies weakened against the U.S. dollar resulting in net other comprehensive losses of $32 million and $219 million, respectively, upon the translation from local currencies to the U.S. dollar. For the three and nine months ended September 30, 2017, a majority of these local currencies strengthened against the U.S. dollar resulting in net other comprehensive income of $124 million and $290 million, respectively, upon the translation from local currencies to the U.S. Due to the sale of a non-core industrial business, $6 million of currency translation losses were reclassified from accumulated other comprehensive income (loss) into other income (expense), net in the Consolidated Statements of Income for the three and nine months ended September 30, 2018.

The effect of changes in the fair values of derivatives designated as cash flow hedges are accumulated in other comprehensive income or loss, net of tax, until the underlying transactions they hedge are realized. The movement in other comprehensive income or loss from period to period will be the result of the combination of changes in fair value of open derivatives and the outflow of other comprehensive income or loss related to cumulative changes in the fair value of derivatives that have settled in the current period. The accumulated effect was other comprehensive income of $2 million (net of tax of $0) and $1 million (net of tax of $0) for the three and nine months ended September 30, 2018, respectively. The accumulated effect was other comprehensive income of $25 million (net of tax of $8 million) and $53 million (net of tax of $15 million) for the three and nine months ended September 30, 2017, respectively.

5.

Business Segments

Operating results by segment are as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wellbore Technologies

 

$

847

 

 

$

693

 

 

$

2,351

 

 

$

1,862

 

Completion & Production Solutions

 

 

735

 

 

 

682

 

 

 

2,143

 

 

 

1,982

 

Rig Technologies

 

 

637

 

 

 

510

 

 

 

1,771

 

 

 

1,638

 

Eliminations

 

 

(65

)

 

 

(50

)

 

 

(210

)

 

 

(147

)

Total revenue

 

$

2,154

 

 

$

1,835

 

 

$

6,055

 

 

$

5,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wellbore Technologies

 

$

40

 

 

 

 

 

$

90

 

 

$

(81

)

Completion & Production Solutions

 

 

46

 

 

 

44

 

 

 

102

 

 

 

79

 

Rig Technologies

 

 

58

 

 

 

18

 

 

 

138

 

 

 

37

 

Eliminations and corporate costs

 

 

(71

)

 

 

(69

)

 

 

(206

)

 

 

(201

)

Total operating profit (loss)

 

$

73

 

 

$

(7

)

 

$

124

 

 

$

(166

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)%:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wellbore Technologies

 

 

4.7

%

 

 

0.0

%

 

 

3.8

%

 

 

(4.4

%)

Completion & Production Solutions

 

 

6.3

%

 

 

6.5

%

 

 

4.8

%

 

 

4.0

%

Rig Technologies

 

 

9.1

%

 

 

3.5

%

 

 

7.8

%

 

 

2.3

%

Total operating profit (loss)%

 

 

3.4

%

 

 

(0.4

%)

 

 

2.0

%

 

 

(3.1

%)

 

Sales from one segment to another generally are priced at estimated equivalent commercial selling prices; however, segments originating an external sale are credited with the full profit to the Company. Eliminations include intercompany transactions conducted between the three reporting segments that are eliminated in consolidation. Intrasegment transactions are eliminated within each segment.

Included in operating profit (loss) are other items primarily related to costs associated with severance, facility closures, and credits for the reversals of certain accruals.

8


 

6.

Revenue Recognition

The Company’s products and services are sold based upon purchase orders or other contracts with customers that include fixed or determinable prices and do not generally include right of return or other significant post-delivery obligations. The majority of our revenue streams record revenue at a point in time when a performance obligation has been satisfied by transferring control of promised goods or services to the customer. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.  

Payment terms and conditions vary by contract type. The Company’s contracts are structured to align milestone billings with progress and revenue recognition, so generally do not include a financing component. We have elected to apply the practical expedient that does not require an adjustment for a financing component if, at contract inception, the period between when we transfer the promised goods or service to the customer and when the customer pays for the goods or service is one year or less.  

The Company elects to treat shipping and handling costs as costs to fulfill a performance obligation instead of as a separate performance obligation. We recognize the cost for shipping and handling when incurred, generally when control over the products has transferred to the customer, as an expense in cost of sales.

Our contracts with customers often include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately, versus together, may require significant judgment. We consider the degree of customization, integration and interdependency of the related products and services when assessing distinctness.

Judgment is also required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. To determine the SSP, the Company uses the price at which the products and services would be sold separately to the customer. We also review past sales transactions to confirm that invoice prices for each distinct performance obligation reasonably approximate SSP and that there are no significant deviations. A discount, when provided, is also allocated based on the relative SSP of the various products and services.  

We may provide other credits or incentives, which are accounted for as variable consideration when determining the transaction price. These credits or incentives are estimated at contract inception and recognized only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. The estimates are updated each reporting period as additional information becomes available.

For revenue that is not recognized at a point in time, the Company follows accounting guidance for revenue recognized over time, as follows:

Revenue Recognition under Long-term Construction Contracts

The Company uses the over-time method to account for certain long-term construction contracts in the Completion & Production Solutions and Rig Technologies segments. These long-term construction contracts include the following characteristics:  

 

the contracts include custom designs for customer-specific applications;  

 

the structural design is unique and requires significant engineering efforts; and

 

the Company has an enforceable right to payment for performance completed to date, including a reasonable profit.

Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. We generally use the cost-to-cost (input) measure of progress for our contracts because it best depicts the transfer of assets to the customer which occurs as we incur costs. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. These costs include labor, materials, subcontractors’ costs, and other direct costs. If estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.