Attached files

file filename
EX-10.2 - EXHIBIT 10.2 AMENDED 2006 OMNIBUS INCENTIVE PLAN - Weatherford International plcex102wft2006omnibusincenti.htm
EX-32.1 - EXHIBIT 32.1 CFO 906 CERT WFT 63015 - Weatherford International plcex321ceo906certwft63015.htm
EX-31.2 - EXHIBIT 31.2 CFO 302 CERT WFT 63015 - Weatherford International plcex312cfo302certwft63015.htm
EX-10.7 - EXHIBIT 10.7 FORM OF CHANGE IN CONTROL AGREEMENT - Weatherford International plcex107changeincontrolagreem.htm
EX-10.4 - EXHIBIT 10.4 FORM OF RSU AWARD OFFICER CIC - Weatherford International plcex104rsuawardagreement2010.htm
EX-31.1 - EXHIBIT 31.1 CEO 302 CERTIFICATION 63015 - Weatherford International plcex311ceo302certwft63015.htm
EX-32.2 - EXHIBIT 32.2 CFO 906 CERT WFT 63015 - Weatherford International plcex322cfo906certwft63015.htm
EX-10.5 - EXHIBIT 10.5 FORM OF RSU AWARD DIRECTOR - Weatherford International plcex105formofrestrictedshare.htm
EX-10.6 - EXHIBIT 10.6 FORM OF PU AWARD OFFICER - Weatherford International plcex106formofperformanceunit.htm

            

 
UNITED STATES
 
 
SECURITIES AND EXCHANGE COMMISSION
 
 
WASHINGTON, D.C. 20549
 
(Mark One)
 
Form 10-Q
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2015
 
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________________________________to __________________________________
 
 
Commission file number 001-36504
 

Weatherford International public limited company
(Exact Name of Registrant as Specified in Its Charter)
Ireland
 
98-0606750
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
 
 
 
Bahnhofstrasse 1, 6340 Baar, Switzerland
 
CH 6340
(Address of Principal Executive Offices including Zip Code)
 
(Zip Code)

Registrant’s Telephone Number, Including Area Code: +41.22.816.1500
 
N/A
 
 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 

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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of July 13, 2015, there were 775,296,080 shares of Weatherford ordinary shares, $0.001 par value per share, outstanding.




Weatherford International public limited company
Form 10-Q for the Six Months Ended June 30, 2015



1


PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
WEATHERFORD INTERNATIONAL PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars and shares in millions, except per share amounts)
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Products
$
891

 
$
1,490

 
$
1,931

 
$
2,936

Services
1,499

 
2,221

 
3,253

 
4,371

Total Revenues
2,390

 
3,711

 
5,184

 
7,307

 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Cost of Products
802

 
1,101

 
1,705

 
2,165

Cost of Services
1,214

 
1,728

 
2,513

 
3,503

Research and Development
59

 
75

 
123

 
144

Selling, General and Administrative Attributable to Segments
339

 
396

 
702

 
810

Corporate General and Administrative
53

 
59

 
120

 
133

Long-Lived Assets Impairment and Other Related Charges
181

 
143

 
191

 
143

Goodwill and Equity Investment Impairment
20

 
125

 
20

 
125

Restructuring Charges
69

 
59

 
110

 
129

Litigation Charges
112

 

 
112

 

Loss on Sale of Businesses, Net
5

 

 
2

 

Total Costs and Expenses
2,854

 
3,686

 
5,598

 
7,152

 
 
 
 
 
 
 
 
Operating Income (Loss)
(464
)
 
25

 
(414
)
 
155

 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
Interest Expense, Net
(117
)
 
(128
)
 
(237
)
 
(254
)
Foreign Exchange Related Charges
(16
)
 

 
(42
)
 

Other, Net
(18
)
 
(19
)
 
(29
)
 
(28
)
 
 
 
 
 
 
 
 
Loss Before Income Taxes
(615
)
 
(122
)
 
(722
)
 
(127
)
(Provision) Benefit for Income Taxes
132

 
(11
)
 
132

 
(38
)
Net Loss
(483
)
 
(133
)
 
(590
)
 
(165
)
Net Income Attributable to Noncontrolling Interests
6

 
12

 
17

 
21

Net Loss Attributable to Weatherford
$
(489
)
 
$
(145
)
 
$
(607
)
 
$
(186
)
 
 
 
 
 
 
 
 
Loss Per Share Attributable to Weatherford:
 
 
 
 
 
 
 
Basic and Diluted
$
(0.63
)
 
$
(0.19
)
 
$
(0.78
)
 
$
(0.24
)
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Basic and Diluted
778

 
777

 
778

 
776



The accompanying notes are an integral part of these condensed consolidated financial statements.
2


WEATHERFORD INTERNATIONAL PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Net Loss
$
(483
)
 
$
(133
)
 
$
(590
)
 
$
(165
)
Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
Currency Translation Adjustments
115

 
166

 
(230
)
 
(36
)
Defined Benefit Pension Activity
(1
)
 

 
21

 

Other Comprehensive Income (Loss)
114

 
166

 
(209
)
 
(36
)
Comprehensive Income (Loss)
(369
)
 
33

 
(799
)
 
(201
)
Comprehensive Income Attributable to Noncontrolling Interests
6

 
12

 
17

 
21

Comprehensive Income (Loss) Attributable to Weatherford
$
(375
)
 
$
21

 
$
(816
)
 
$
(222
)

The accompanying notes are an integral part of these condensed consolidated financial statements.
3


WEATHERFORD INTERNATIONAL PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
 
December 31,
(Dollars and shares in millions, except par value)
2015
 
2014
 
(Unaudited)
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
611

 
$
474

Accounts Receivable, Net of Allowance for Uncollectible Accounts of $121 in 2015 and $108 in 2014
2,259

 
3,015

Inventories, Net
2,921

 
3,087

Deferred Tax Assets
295

 
303

Other Current Assets
978

 
1,065

Total Current Assets
7,064

 
7,944

 
 
 
 
Property, Plant and Equipment, Net of Accumulated Depreciation of $7,141 and $6,895
6,694

 
7,123

Goodwill
2,945

 
3,011

Other Intangible Assets, Net of Accumulated Amortization of $765 and $733
390

 
440

Equity Investments
81

 
106

Other Non-Current Assets
460

 
265

Total Assets
$
17,634

 
$
18,889

 
 
 
 
Current Liabilities:
 
 
 
Short-term Borrowings and Current Portion of Long-term Debt
$
1,556

 
$
727

Accounts Payable
1,104

 
1,736

Accrued Salaries and Benefits
410

 
425

Income Taxes Payable
105

 
230

Other Current Liabilities
962

 
909

Total Current Liabilities
4,137

 
4,027

 
 
 
 
Long-term Debt
6,268

 
6,798

Other Non-Current Liabilities
982

 
1,031

Total Liabilities
11,387

 
11,856

 
 
 
 
Shareholders’ Equity:
 
 
 
Shares - Par Value $0.001; Authorized 1,356 shares, Issued and Outstanding 775 shares at June 30, 2015 and 774 shares at December 31, 2014
1

 
1

Capital in Excess of Par Value
5,441

 
5,411

Retained Earnings
1,820

 
2,427

Accumulated Other Comprehensive Loss
(1,090
)
 
(881
)
Weatherford Shareholders’ Equity
6,172

 
6,958

Noncontrolling Interests
75

 
75

Total Shareholders’ Equity
6,247

 
7,033

Total Liabilities and Shareholders’ Equity
$
17,634

 
$
18,889

 

The accompanying notes are an integral part of these condensed consolidated financial statements.
4


WEATHERFORD INTERNATIONAL PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended June 30,
(Dollars in millions)
2015
 
2014
Cash Flows From Operating Activities:
 
 
 
Net Loss
$
(590
)
 
$
(165
)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:
 
 
 
Depreciation and Amortization
627

 
706

Employee Share-Based Compensation Expense
34

 
31

Long-Lived Assets Impairment
124

 
143

Restructuring and Other Asset Related Charges
122

 

Goodwill and Equity Investment Impairment
20

 
125

Litigation Charges
112

 

Deferred Income Tax Provision (Benefit)
(191
)
 
16

Foreign Exchange Related Charges
42

 

Other, Net
86

 
2

Change in Operating Assets and Liabilities, Net of Effect of Businesses Acquired:
 
 
 
Accounts Receivable
687

 
32

Inventories
76

 
(70
)
Other Current Assets
27

 
(73
)
Accounts Payable
(616
)
 
(155
)
Billings in Excess of Costs and Estimated Earnings
(1
)
 
(127
)
Other Current Liabilities
(173
)
 
(342
)
Other, Net
(137
)
 
(94
)
Net Cash Provided by Operating Activities
249

 
29

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Capital Expenditures for Property, Plant and Equipment
(411
)
 
(662
)
Acquisitions of Businesses

 
17

Acquisition of Intellectual Property
(3
)
 
(3
)
Proceeds from Sale of Assets and Businesses, Net
23

 
26

Net Cash Used in Investing Activities
(391
)
 
(622
)
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
Repayments of Long-term Debt, Net
(161
)
 
(36
)
Borrowings of Short-term Debt, Net
478

 
738

Excess Tax Benefits from Share-Based Compensation

 
4

Proceeds from Sale of Executive Deferred Compensation Plan Treasury Shares

 
22

Other Financing Activities, Net
(15
)
 
(6
)
Net Cash Provided by Financing Activities
302

 
722

Effect of Exchange Rate Changes on Cash and Cash Equivalents
(23
)
 
7

 
 
 
 
Net Increase in Cash and Cash Equivalents
137

 
136

Cash and Cash Equivalents at Beginning of Period
474

 
435

Cash and Cash Equivalents at End of Period
$
611

 
$
571

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest Paid
$
239

 
$
259

Income Taxes Paid, Net of Refunds
$
180

 
$
205

 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5


WEATHERFORD INTERNATIONAL PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1.  General

The accompanying unaudited Condensed Consolidated Financial Statements of Weatherford International plc (the “Company”) are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and include all adjustments of a normal recurring nature which, in our opinion, are necessary to present fairly our Condensed Consolidated Balance Sheet at June 30, 2015 and December 31, 2014, Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014, and Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014. When referring to “Weatherford” and using phrases such as “we,” “us,” and “our,” the intent is to refer to Weatherford International plc, a public limited company organized under the law of Ireland, and its subsidiaries as a whole or on a regional basis, depending on the context in which the statements are made.
Although we believe the disclosures in these financial statements are adequate, certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to U.S. Securities and Exchange Commission (“SEC”) rules and regulations. These financial statements should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2014 included in our Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results expected for the year ending December 31, 2015.
The preparation of financial statements in conformity with 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 ongoing basis, we evaluate our estimates and assumptions, including those related to uncollectible accounts receivable, lower of cost or market of inventories, equity investments, intangible assets and goodwill, property, plant and equipment, income taxes, percentage-of-completion accounting for long-term contracts, self-insurance, foreign currency exchange rates, pension and post-retirement benefit plans, 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.

Change in Reportable Segments

During the first quarter of 2015, we changed our business structure to better align with management’s current view and future growth objectives. This involved separating our Land Drilling Rigs business into a reportable segment resulting in a total of five reportable segments. We have recast prior periods to conform to the current business segment presentation. See “Note 15 – Segment Information” for additional information.

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. Investments in affiliates in which we exercise significant influence over operating and financial policies are accounted for using the equity method. All material intercompany accounts and transactions have been eliminated in consolidation.

Foreign Exchange Related Charges – Devaluation and Other Inflationary Impacts

A new Venezuelan currency exchange system, known as the “Marginal Currency System” (or “SIMADI”), opened for trading February 12, 2015, replacing Venezuela’s Supplementary Foreign Currency Administration System auction rate (“SICAD II”) mechanism. The SIMADI is intended to provide limited access to a free market rate of exchange. In the first quarter of 2015, we began using the SIMADI rate and recognized remeasurement charges of $26 million and we will continue to monitor the impact on our financial statements of the evolving Venezuela exchange rate. At June 30, 2015 our net monetary asset position denominated in Venezuelan bolivar was approximately $7 million


6


In the second quarter of 2015, the Angolan kwanza devalued approximately 11% and we recognized foreign exchange related charges of $16 million. We will continue to monitor the impact on our financial statements of the evolving Angola exchange rate. At June 30, 2015 our net monetary asset position denominated in Angolan kwanza was approximately $124 million

2.  Business Combinations and Divestitures

Acquisitions

From time to time, we acquire assets and businesses we believe are important to our long-term strategy or dispose of assets and businesses that are no longer a strategic fit within our business. We did not complete any acquisitions or divestitures during the first six months ended June 30, 2015.

In April 2014, we acquired an additional 30% ownership interest in a joint venture in China. We paid $13 million for the incremental interest, thereby increasing our ownership interest from 45% to 75% and gaining control of the joint venture. As a result of this transaction, we adjusted our previously held equity investment to fair value, recognizing a $16 million gain, and we applied the consolidation method of accounting, recognizing $6 million of goodwill and $30 million of cash.

In May 2012, we acquired a company that designs and produces well completion tools. Our purchase consideration included a contingent consideration arrangement valued at approximately $3 million at December 31, 2014. At June 30, 2015, the contingent consideration arrangement was valued at approximately $12 million, and is expected to be settled in 2016.

Divestitures

We completed the sale of our our pipeline and specialty services business in September 2014. As of December 31, 2014, we received consideration of $246 million, ($245 million, net of cash disposed) and recognized a gain of approximately $49 million resulting from this transaction.

In early July 2014, we completed the sale of our land drilling and workover rig operations in Russia and Venezuela. As of December 31, 2014, we received cash consideration of $499 million ($486 million, net of cash disposed). As a result of our commitment to sell, we recognized a $143 million long-lived assets impairment loss and a $121 million goodwill impairment loss. Of the $121 million goodwill impairment, $95 million pertained to goodwill attributable to our divested land drilling and workover rig operations in Russia. See “Note 7 – Goodwill” regarding the impact of the 2014 goodwill impairment.

3. Restructuring Charges

In the fourth quarter of 2014, in response to the significant decline in the price of crude oil and our anticipation of a lower level of exploration and production spending in 2015, we initiated a plan to reduce our overall costs and workforce to better align with anticipated activity levels. This cost reduction plan (the “2015 Plan”) included a workforce reduction and other cost reduction measures initiated across our geographic regions. In connection with the 2015 Plan, we recognized restructuring charges of $69 million and $110 million in the three and six months ended June 30, 2015, respectively. For the three and six months ended June 30, 2015, our restructuring charges include termination (severance) benefits of $19 million and $59 million, respectively, and other restructuring charges of $50 million and $51 million, respectively. Other restructuring charges for both the three and six months ended June 30, 2015 includes asset write-offs of $23 million related to Yemen due to the political disruption and $22 million in other regions. Other restructuring charges also include exit charges, contract termination costs, relocation and other associated costs.

In the first quarter of 2014, we announced a cost reduction plan (the “2014 Plan”), which included a worldwide workforce reduction and other cost reduction measures. The 2014 Plan resulted in restructuring charges of $32 million and $98 million related to termination (severance) benefits in the three and six months ended June 30, 2014, respectively. As of December 31, 2014, we completed our planned headcount reductions and closures of underperforming operating locations in connection with the 2014 Plan.

The following tables present the components of the 2015 Plan and the 2014 Plan restructuring charges by segment for the three and six months ended June 30, 2015 and 2014.

7


 
Three Months Ended June 30, 2015
 
 
Other
Total
(Dollars in millions)
Severance
Restructuring
Severance and
2015 Plan
Charges
Charges
Other Charges
North America
$
4

$
17

$
21

MENA/Asia Pacific
6

23

29

Europe/SSA/Russia
5

9

14

Latin America
3

1

4

  Subtotal
18

50

68

Land Drilling Rigs
1


1

Corporate and Research and Development



  Total
$
19

$
50

$
69


 
Three Months Ended June 30, 2014
 
 
Other
Total
(Dollars in millions)
Severance
Restructuring
Severance and
2014 Plan
Charges
Charges
Other Charges
North America
$
4

$
15

$
19

MENA/Asia Pacific
6

7

13

Europe/SSA/Russia
6

2

8

Latin America
3

1

4

  Subtotal
19

25

44

Land Drilling Rigs
1


1

Corporate and Research and Development
12

2

14

  Total
$
32

$
27

$
59


 
Six Months Ended June 30, 2015
 
 
Other
Total
(Dollars in millions)
Severance
Restructuring
Severance and
2015 Plan
Charges
Charges
Other Charges
North America
$
12

$
17

$
29

MENA/Asia Pacific
11

24

35

Europe/SSA/Russia
12

9

21

Latin America
15

1

16

  Subtotal
50

51

101

Land Drilling Rigs
6


6

Corporate and Research and Development
3


3

  Total
$
59

$
51

$
110



8


 
Six Months Ended June 30, 2014
 
 
Other
Total
(Dollars in millions)
Severance
Restructuring
Severance and
2014 Plan
Charges
Charges
Other Charges
North America
$
13

$
15

$
28

MENA/Asia Pacific
10

7

17

Europe/SSA/Russia
21

6

27

Latin America
22

1

23

  Subtotal
66

29

95

Land Drilling Rigs
4


4

Corporate and Research and Development
28

2

30

  Total
$
98

$
31

$
129


The severance and other restructuring charges gave rise to certain liabilities, the components of which are summarized below, and largely relate to the severance accrued as part of both plans that will be paid pursuant to the respective arrangements and statutory requirements.
 
At June 30, 2015
 
2015 Plan
 
2014 Plan
 
Total Severance
 
 
Other
 
 
Other
 
and Other
 
Severance
Restructuring
 
Severance
Restructuring
 
Restructuring
(Dollars in millions)
Liability
Liability
 
Liability
Liability
 
Liability
North America
$
6

$
4

 
$

$

 
$
10

MENA/Asia Pacific
5


 
1

5

 
11

Europe/SSA/Russia
5

3

 

2

 
10

Latin America
1


 


 
1

  Subtotal
17

7

 
1

7

 
32

Land Drilling Rigs


 


 

Corporate and Research and Development


 
5


 
5

  Total
$
17

$
7

 
$
6

$
7

 
$
37

The following table presents the restructuring liability activity for the six months ended June 30, 2015.
 
 
 
Six Months Ended June 30, 2015
 
 
(Dollars in millions)
Accrued Balance at December 31, 2014
 
Charges
 
Cash Payments
 
Other 
 
Accrued Balance at June 30, 2015
2015 Plan:
 
 
 
 
 
 
 
 
 
Severance liability
$
53

 
$
59

 
$
(93
)
 
$
(2
)
 
$
17

Other restructuring liability

 
6

 
(2
)
 
3

 
7

2014 Plan:
 
 
 
 
 
 
 
 
 
Severance liability
14

 

 
(6
)
 
(2
)
 
6

Other restructuring liability
12

 

 
(3
)
 
(2
)
 
7

Total severance and other restructuring liability
$
79

 
$
65

 
$
(104
)
 
$
(3
)
 
$
37



9


4.  Percentage-of-Completion Contracts

In the three and six months ended June 30, 2015, we recognized estimated project losses of $69 million and $27 million, respectively, related to our long-term early production facility construction contract in Iraq accounted for under the percentage-of-completion method. Total estimated losses on these projects were $406 million at June 30, 2015.

As of June 30, 2015, our percentage-of-completion project estimates include $137 million of claims revenue and $21 million of back charges. Our costs in excess of billings as of June 30, 2015 were $129 million and are included in the “Other Current Assets” line on the balance sheet. We also have a variety of unapproved contract change orders or claims that are not included in our revenues as of June 30, 2015. The amounts associated with these contract change orders or claims are included in revenue only when they can be estimated reliably and their realization is reasonably assured.

In the three and six months ended June 30, 2014, we recognized estimated project losses of $2 million and $28 million, respectively. Total estimated losses on these projects were $335 million at June 30, 2014. As of June 30, 2014, our percentage-of-completion project estimates include $21 million of claims revenue. No claims revenue was recognized during the three months ended June 30, 2014 and $28 million of claims revenue was recognized during the six months ended June 30, 2014.

5.  Inventories, Net

Inventories, net of reserves, by category were as follows:
(Dollars in millions)
June 30, 2015
 
December 31, 2014
Raw materials, components and supplies
$
170

 
$
194

Work in process
102

 
135

Finished goods
2,649

 
2,758

 
$
2,921

 
$
3,087


6.  Long-lived Asset Impairments

In the second quarter of 2015, the continued weakness in crude oil prices contributed to lower exploration and production spending and a decline in the utilization of our pressure pumping assets. The continued weakness in oil prices and its impact on demand represent a significant adverse change in the business climate and an indication that these long-lived assets may not be recoverable. Based on these impairment indicators, we performed an analysis of our pressure pumping assets and recorded long-lived asset impairment charges of $124 million to adjust the assets to fair value in our North America Segment. See “Note 9 – Fair Value of Financial Instruments” for additional information regarding the fair value determination.

We prepared an analysis to determine the fair value of our equity investments in less than majority owned entities. Upon completion of this valuation, we determined that the fair value attributable to an equity investment was significantly below its carrying value. We assessed this decline in value as other than temporary and recognized an impairment loss of $20 million during the second quarter of 2015. See “Note 9 – Fair Value of Financial Instruments” for additional information regarding the fair value determination. 

In July 2014, we completed the sale of our rig operations in Russia and Venezuela. We expected the sale would significantly impact the revenues and results of our Russia operations. We considered the associated circumstances and determined that the fair values of our Russia and Latin America rig operations were below their carrying amounts. As a result of our commitment to sell, we recorded a $143 million long-lived assets impairment charge.


10


7.  Goodwill

We perform an impairment test for goodwill and indefinite-lived intangible assets annually as of October 1, or more frequently if indicators of potential impairment exist. Due to the change in our reporting segments (See “Note 15 – Segment Information”), we now report Land Drilling Rigs as a segment. The goodwill associated with the Land Drilling Rigs reporting unit was previously impaired in 2014. We recognized a goodwill impairment loss of $121 million in 2014 associated with the sale of our land drilling and workover rig operations in Russia and Venezuela.
 
The changes in the carrying amount of goodwill by reportable segment for the six months ended June 30, 2015 were as follows:
(Dollars in millions)
North
America
 
MENA/
Asia Pacific
 
Europe/
SSA/
Russia
 
Latin
America
 
Land Drilling Rigs
 
Total
Balance at December 31, 2014
$
1,896

 
$
195

 
$
623

 
$
297

 
$

 
$
3,011

Foreign currency translation adjustments
(55
)
 
(3
)
 
(3
)
 
(5
)
 

 
(66
)
Balance at June 30, 2015
$
1,841

 
$
192

 
$
620

 
$
292

 
$

 
$
2,945


8.  Short-term Borrowings and Current Portion of Long-term Debt
(Dollars in millions)
June 30, 2015
 
December 31, 2014
Commercial paper program
$
198

 
$
245

Revolving credit agreement
730

 

364-day term loan facility

 
175

Other short-term bank loans
220

 
257

Total short-term borrowings
1,148

 
677

Current portion of long-term debt
408

 
50

Short-term borrowings and current portion of long-term debt
$
1,556

 
$
727


Revolving Credit Agreement

We maintain a $2.25 billion unsecured, revolving credit agreement (the “Credit Agreement”). On June 30, 2015, we entered into an amendment to the Credit Agreement to extend the maturity date to July 13, 2017 and to make certain other changes. The Credit Agreement can be used for a combination of borrowings, support for our $2.25 billion commercial paper program and issuances of letters of credit. This agreement requires that we maintain a debt-to-total capitalization ratio of less than 60%. We were in compliance with this covenant at June 30, 2015. At June 30, 2015, we had $1.3 billion available under the Credit Agreement, and there were $16 million in outstanding letters of credit in addition to the commercial paper and borrowings under the revolving credit facility.

364-Day Term Loan Facility

On April 9, 2015, the maturity date, we repaid the remaining balance of $175 million on our $400 million, 364-day term loan facility.

Other Short-Term Borrowings and Other Debt Activity

We have short-term borrowings with various domestic and international institutions pursuant to uncommitted credit facilities. At June 30, 2015, we had $220 million in short-term borrowings under these arrangements, including $180 million borrowed under a credit agreement entered into in March 2014 that matures on March 20, 2016 (with respect to $150 million) and June 20, 2016 (with respect to the remaining $30 million), with a LIBOR-based weighted average interest rate of 1.73% as of June 30, 2015. In addition, we had $549 million of letters of credit under various uncommitted facilities and $278 million of surety bonds, primarily performance bonds, issued by financial sureties against an indemnification from us at June 30, 2015.


11


The current portion of long-term debt at June 30, 2015 is primarily related to our 5.5% senior notes maturing February 2016 and our capital leases.

In the first three months of 2015, through a series of open market transactions, we repurchased certain of our 4.5% senior notes, 5.95% senior notes, 6.5% senior notes and 6.75% senior notes with a total book value of $160 million. We recognized a cumulative gain of approximately $12 million on these transactions. No repurchases were made during the second quarter of 2015.

9.  Fair Value of Financial Instruments, Assets and Equity Investments
 
Financial Instruments 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. Other than the derivative instruments discussed in “Note 10 – Derivative Instruments,” we had no other material assets or liabilities measured and recognized at fair value on a recurring basis at June 30, 2015 and December 31, 2014.

Fair Value of Other Financial Instruments

Our other financial instruments include short-term borrowings and long-term debt. The carrying value of our commercial paper and other short-term borrowings approximates their fair value due to the short-term duration of the associated interest rate periods. These short-term borrowings are classified as Level 2 in the fair value hierarchy.

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. 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: 
(Dollars in millions)
June 30, 2015
 
December 31, 2014
Fair value
$
6,642

 
$
6,733

Carrying value
6,497

 
6,660


Non-recurring Fair Value Measurements

During the second quarter of 2015, long-lived pressure pumping assets and an equity investment were impaired and written down to their estimated fair values. The level 3 fair value of the long-lived assets was determined using a combination of the cost approach and the market approach, which used inputs that included replacement costs (unobservable), physical deterioration estimates (unobservable), and market sales data for comparable assets. The equity investment level 3 fair value was determined using an income based approach utilizing estimates of future cash flow, discount rate, long-term growth rate, and marketability discount, all of which were unobservable.

During the second quarter of 2014, long-lived assets in the rig operations in Russia and Venezuela and goodwill for the Russia reporting unit were impaired and written down to their estimated fair values. The level 3 fair value of the long-lived assets in the rig operations was determined using the market approach that considered the estimated sales price of those businesses. The goodwill level 3 fair value was determined using a combination of the income and market approaches with observable inputs that consisted of earnings multiples and unobservable inputs that included estimates of future cash flows, discount rate, long-term growth rate, and control premiums.


12


10.  Derivative Instruments

We are exposed to market risk from changes in foreign currency and changes in interest rates. 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. 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 and the creditworthiness of the counterparties in such transactions. In light of events in the global credit markets and the potential impact of these events on the liquidity of the banking industry, we continue to 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. Level 2 values for financial assets and liabilities are based on quoted prices in inactive markets, or whose values are based on models using observable inputs other than quoted prices. Level 2 inputs to those models are observable either directly or indirectly for substantially the full term of the asset or liability. 

Fair Value Hedges
 
We may use interest rate swaps to help mitigate exposures related to changes in the fair values of the associated debt. Amounts paid or received upon termination of interest rate swaps accounted for as fair value hedges represent the fair value of the agreements at the time of termination and are amortized as a reduction, in the case of gains, or as an increase, in the case of losses, of interest expense over the remaining term of the debt. As of June 30, 2015, we had net unamortized gains of $28 million associated with interest rate swap terminations. These gains are being amortized over the remaining term of the originally hedged debt as a reduction in interest expense.
 
Other Derivative Instruments

We enter into foreign currency forward contracts and cross-currency swap contracts to hedge our exposure to fluctuations in various foreign currencies. At June 30, 2015 and December 31, 2014, we had outstanding foreign currency forward contracts with notional amounts aggregating $1.4 billion and $1.6 billion, respectively. 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.

At December 31, 2014, to hedge our exposure to the Canadian dollar, we held cross-currency swaps between the U.S. dollar and the Canadian dollar with a notional amount of $168 million. We settled the cross-currency swap arrangements in the three months ended March 31, 2015 after recognizing a mark-to-market gain of $13 million in the first quarter of 2015. We collected $8 million in proceeds upon settlement.

Our foreign currency forward contracts and cross-currency swaps were not designated as hedges, and the changes in fair value of the contracts are recorded each period in current earnings in the line captioned “Other, Net” on the accompanying Condensed Consolidated Statements of Operations.

The total estimated fair values of these foreign currency forward contracts and amounts receivable or owed associated with closed foreign currency contracts and the total estimated fair values of our cross-currency contracts are as follows:
(Dollars in millions)
 
June 30, 2015
 
December 31, 2014
 
Classification
Derivative assets not designated as hedges:
 
 
 
 
 
 
Foreign currency forward contracts
 
$
10

 
$
12

 
Other Current Assets
 
 
 
 
 
 
 
Derivative liabilities not designated as hedges:
 
 
 
 
 
 
Foreign currency forward contracts
 
(11
)
 
(17
)
 
Other Current Liabilities
Cross-currency swap contracts
 

 
(5
)
 
Other Liabilities


13


The effect of derivative instruments designated as fair value hedges and those not designated as hedges on the Condensed Consolidated Statements of Operations was as follows:
 
 
Gain (Loss) Recognized in Income
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
(Dollars in millions)
 
2015
 
2014
 
2015
 
2014
 
Classification
Interest rate swaps
 
$
3

 
$
2

 
$
5

 
$
4

 
Interest Expense, Net
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
10

 
4

 
(56
)
 
(7
)
 
Other, Net
Cross-currency swap contracts
 

 
(8
)
 
13

 
1

 
Other, Net

11. Income Taxes

We estimate our annual effective tax rate based on year-to-date operating results and our forecast of operating results for the remainder of the year, by jurisdiction, and apply this rate to the year-to-date operating results. If our actual results, by jurisdiction, differ from the forecasted operating results, our effective tax rate can change, affecting the tax expense for both successive interim results as well as the annual tax results. For both the three and six months ended June 30, 2015, we had a $132 million tax benefit on a loss before income taxes of $615 million and $722 million, respectively. Our results for the three months ended June 30, 2015 includes $112 million of litigation settlements, $69 million of project losses, $16 million of devaluation of the Angolan kwanza currency, $20 million of equity investment impairment and $69 million of restructuring charges with no significant tax benefit. Our results for the six months ended June 30, 2015 includes $112 million of litigation settlements, $27 million of project losses, $42 million of currency devaluation, $20 million of equity investment impairment and $110 million of restructuring charges with no significant tax benefit.

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. We continue to anticipate a possible reduction in the balance of uncertain tax positions by approximately $19 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations.

For the three and six months ended June 30, 2014, we had a tax provision of $11 million and $38 million on a loss before income taxes of $122 million and $127 million, respectively. Our results for the three and six months ended June 30, 2014 include a $143 million impairment loss ($121 million, net of tax) to record the land drilling and workover rig operations in Russia and Venezuela at fair value. We also recorded a $125 million non-cash impairment charge to goodwill based on our analysis triggered by the planned sale of our land drilling and workover rig operations in Russia and Venezuela, which was non-deductible for income tax purposes. Our results for the six months ended June 30, 2014 were also impacted by discrete income before tax items, including restructuring charges and project losses of approximately $177 million, with no significant tax benefit.


14


12.  Shareholders’ Equity

The following summarizes our shareholders’ equity activity for the six months ended June 30, 2015 and 2014:
(Dollars in millions)
Par Value of Issued Shares
 
Capital In Excess of Par Value
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Shares
 
Non-controlling Interests
 
Total Shareholders’ Equity
Balance at December 31, 2013
$
775

 
$
4,600

 
$
3,011

 
$
(187
)
 
$
(37
)
 
$
41

 
$
8,203

Net Income (Loss)

 

 
(186
)
 

 

 
21

 
(165
)
Other Comprehensive Loss

 

 

 
(36
)
 

 

 
(36
)
Consolidation of Joint Venture

 

 

 

 

 
26

 
26

Dividends Paid to Noncontrolling Interests

 

 

 

 

 
(15
)
 
(15
)
Change in Common Shares, Treasury Shares and Paid in Capital Associated with Redomestication
(778
)
 
750

 

 

 
39

 

 
11

Equity Awards Granted, Vested and Exercised
4

 
24

 

 

 
(2
)
 

 
26

Balance at June 30, 2014
$
1

 
$
5,374

 
$
2,825

 
$
(223
)
 
$

 
$
73

 
$
8,050

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
1

 
$
5,411

 
$
2,427

 
$
(881
)
 
$

 
$
75

 
$
7,033

Net Income (Loss)

 

 
(607
)
 

 

 
17

 
(590
)
Other Comprehensive Loss

 

 

 
(209
)
 

 

 
(209
)
Dividends Paid to Noncontrolling Interests

 

 

 

 

 
(18
)
 
(18
)
Equity Awards Granted, Vested and Exercised

 
30

 

 

 

 

 
30

Other

 

 

 

 

 
1

 
1

Balance at June 30, 2015
$
1

 
$
5,441

 
$
1,820

 
$
(1,090
)
 
$

 
$
75

 
$
6,247


The following table presents the changes in our accumulated other comprehensive income (loss) by component for the six months ended June 30, 2015 and 2014:
(Dollars in millions)
Currency Translation Adjustment
 
Defined Benefit Pension
 
Deferred Loss on Derivatives
 
Total
Balance at December 31, 2013
$
(140
)
 
$
(38
)
 
$
(9
)
 
$
(187
)
Other comprehensive loss
(36
)
 

 

 
(36
)
Balance at June 30, 2014
$
(176
)
 
$
(38
)
 
$
(9
)
 
$
(223
)
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
(813
)
 
$
(57
)
 
$
(11
)
 
$
(881
)
Other comprehensive income (loss) before reclassifications
(230
)
 
20

 

 
(210
)
Reclassifications

 
1

 

 
1

Net activity
(230
)
 
21

 

 
(209
)
Balance at June 30, 2015
$
(1,043
)
 
$
(36
)
 
$
(11
)
 
$
(1,090
)

The other comprehensive income before reclassifications from the defined benefit pension component of other comprehensive income relates to the conversion of one of our international pension plans from a defined benefit plan to a defined contribution plan.


15


13.  Earnings per Share

Basic earnings per share for all periods presented equals net income divided by the weighted average number of our shares outstanding during the period including participating securities. Diluted earnings per share is computed by dividing net income 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:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Shares in millions)
2015
 
2014
 
2015
 
2014
Basic and diluted weighted average shares outstanding
778

 
777

 
778

 
776


Our basic and diluted weighted average shares outstanding for the periods presented are equivalent due to the net loss attributable to shareholders. Diluted weighted average shares outstanding for the three and six months ended June 30, 2015 and 2014 exclude potential shares for stock options, restricted shares and performance units outstanding as we have net losses for that period and their inclusion would be anti-dilutive.

The following table discloses the number of anti-dilutive shares excluded:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Shares in millions)
2015
 
2014
 
2015
 
2014
Anti-dilutive potential shares due to net loss
3

 
5

 
3

 
5


14. Share-Based Compensation

We recognized the following employee share-based compensation expense during the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Share-based compensation
$
19

 
$
16

 
$
34

 
$
31

Related tax benefit
4

 
3

 
7

 
6


During the six months ended June 30, 2015, we granted approximately 1.6 million performance units, which will vest with continued employment, if the Company meets certain market-based performance goals. The performance units have a weighted average grant date fair value of $10.45 per share based on the Monte Carlo simulation method. The assumptions used in the Monte Carlo simulation included a risk-free rate of 0.51%, volatility of 46.1% and a zero dividend yield. As of June 30, 2015, there was $20 million of unrecognized compensation related to our performance units. This cost is expected to be recognized over a weighted average period of 2 years.

During the six months ended June 30, 2015, we also granted 6.3 million restricted shares at a weighted average grant date fair value of $12.90 per share. As of June 30, 2015, there was $120 million of unrecognized compensation related to our unvested restricted share grants. This cost is expected to be recognized over a weighted average period of 2 years.


16


15. Segment Information
 
In the first quarter of 2015, we changed our business structure to better align with management’s current view and future growth objectives. This involved separating our Land Drilling Rigs business into a reportable segment resulting in a total of five reportable segments which are North America, MENA/Asia Pacific, Europe/SSA/Russia, Latin America and Land Drilling Rigs. The operational performance of our segments is reviewed and managed primarily on a geographic basis, and we report the regional segments as separate, distinct reporting segments. In addition, the operations we intend to divest, in the case of our Land Drilling Rigs business, is reviewed and managed apart from our regional segments. Our corporate and other expenses that do not individually meet the criteria for segment reporting continue to be reported separately as Corporate and Research and Development. Each business reflects a reportable segment led by separate business segment management that reports directly or indirectly to our chief operating decision maker (“CODM”). Our CODM assesses performance and allocates resources on the basis of the five reportable segments. We have revised our business segment reporting to reflect our current management approach and recast prior periods to conform to the current business segment presentation.

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 the summary of significant accounting policies as presented in our Form 10-K.
 
Three Months Ended June 30, 2015
(Dollars in millions)
Net
Operating
Revenues
 
Income
from
Operations
 
Depreciation
and
Amortization
North America
$
808

 
$
(92
)
 
$
97

MENA/Asia Pacific
516

 
(17
)
 
66

Europe/SSA/Russia
418

 
65

 
53

Latin America
463

 
76

 
62

Subtotal
2,205

 
32

 
278

Land Drilling Rigs
185

 
4

 
27

 
2,390

 
36

 
305

Corporate and Research and Development
 
 
(105
)
 
6

Long-Lived Assets Impairment and Other Related Charges (a)
 
 
(181
)
 
 
Equity Investment Impairment
 
 
(20
)
 
 
Restructuring Charges (b)
 
 
(69
)
 
 
Litigation Charges
 
 
(112
)
 
 
Loss on Sale of Businesses, Net
 
 
(5
)
 
 
Other Items (c)
 
 
(8
)
 
 
Total
$
2,390

 
$
(464
)
 
$
311


(a)
For the three months ended June 30, 2015 includes asset impairment charges of $124 million, pressure pumping business related charges of $37 million and supply agreement charges related to a non-core business divestiture of $20 million.
(b)
For the three months ended June 30, 2015, we recognized restructuring charges of $69 million: $21 million in North America, $29 million in MENA/Asia Pacific, $14 million in Europe/SSA/Russia, $4 million in Latin America, and $1 million in Land Drilling Rigs.
(c)
The three months ended June 30, 2015 includes professional fees of $3 million related to the divestiture of non-core businesses, facility closure fees of $3 million, restatement related litigation, post-settlement monitor and auditor expenses and other charges of $2 million.

Certain leased equipment of our Land Drilling Rigs and North America pressure pumping business includes contractual residual value guarantees at June 30, 2015. We maintain a liability of $80 million related to these guarantees, of which $46 million is recorded as “Other Current Liabilities” and $34 million as “Other Non-Current Liabilities” on our Condensed Consolidated Balance Sheets. Certain of our supply agreements contain minimum purchase commitments and we maintain a liability at June 30, 2015, of $63 million, of which $50 million is recorded as “Other Current Liabilities” and $13 million as “Other Non-Current Liabilities” on our Condensed Consolidated Balance Sheets.


17


 
Three Months Ended June 30, 2014
(Dollars in millions)
Net
Operating
Revenues
 
Income
from
Operations
 
Depreciation
and
Amortization
North America
$
1,659

 
$
244

 
$
107

MENA/Asia Pacific
579

 
61

 
71

Europe/SSA/Russia
561

 
105

 
57

Latin America
518

 
76

 
61

  Subtotal
3,317

 
486

 
296

Land Drilling Rigs
394

 
4

 
54

 
3,711

 
490

 
350

Corporate and Research and Development
 
 
(120
)
 
5

Long-Lived Assets Impairment
 
 
(143
)
 
 
Goodwill Impairment
 
 
(125
)
 
 
Restructuring Charges (d)
 
 
(59
)
 
 
Other Items (e)
 
 
(18
)
 
 
Total
$
3,711

 
$
25

 
$
355

(d)
For the three months ended June 30, 2014, we recognized restructuring charges of $59 million: $19 million in North America, $13 million in MENA/Asia Pacific, $8 million in Europe/SSA/Russia, $4 million in Latin America, $1 million in Land Drilling Rigs and $14 million in Corporate and Research and Development.
(e)
The three months ended June 30, 2014 includes professional fees related to the divestiture of our non-core businesses, restatement related litigation, the settlement of the U.S. government investigations and our redomestication from Switzerland to Ireland.
 
Six Months Ended June 30, 2015
(Dollars in millions)
Net
Operating
Revenues
 
Income
from
Operations
 
Depreciation
and
Amortization
North America
$
1,971

 
$
(102
)
 
$
202

MENA/Asia Pacific
1,049

 
43

 
131

Europe/SSA/Russia
835

 
136

 
103

Latin America
949

 
174

 
123

Subtotal
4,804

 
251

 
559

Land Drilling Rigs
380

 
14

 
56

 
5,184

 
265

 
615

Corporate and Research and Development
 
 
(225
)
 
12

Long-Lived Assets Impairment and Other Related Charges (a)
 
 
(191
)
 
 
Equity Investment Impairment
 
 
(20
)
 
 
Restructuring Charges (b)
 
 
(110
)
 
 
Litigation Charges
 
 
(112
)
 
 
Loss on Sale of Businesses, Net
 
 
(2
)
 
 
Other Items (c)
 
 
(19
)
 
 
Total
$
5,184

 
$
(414
)
 
$
627

(a)
The six months ended June 30, 2015 includes asset impairment charges of $124 million, pressure pumping business related charges of $37 million and supply agreement charges related to a non-core business divestiture of $30 million.
(b)
For the six months ended June 30, 2015, we recognized restructuring charges of $110 million: $29 million in North America, $35 million in MENA/Asia Pacific, $21 million in Europe/SSA/Russia, $16 million in Latin America, $6 million in Land Drilling Rigs and $3 million in Corporate and Research and Development.
(c)
The six months ended June 30, 2015 includes professional fees of $5 million related to the divestiture of our non-core businesses, facility closure fees of $3 million, restatement related litigation, post-settlement monitor and auditor expenses and other charges of $11 million.


18


 
Six Months Ended June 30, 2014
(Dollars in millions)
Net
Operating
Revenues
 
Income
from
Operations
 
Depreciation
and
Amortization
North America
$
3,269

 
$
440

 
$
214

MENA/Asia Pacific
1,198

 
66

 
143

Europe/SSA/Russia
1,077

 
183

 
111

Latin America
1,027

 
166

 
119

Subtotal
6,571

 
855

 
587

Land Drilling Rigs
736

 
(23
)
 
108

 
7,307

 
832

 
695

Corporate and Research and Development
 
 
(236
)
 
11

Long-Lived Assets Impairment
 
 
(143
)
 
 
Goodwill Impairment
 
 
(125
)
 
 
Restructuring Charges (d)
 
 
(129
)
 
 
Other Items (e)
 
 
(44
)
 
 
Total
$
7,307

 
$
155

 
$
706


(d)
For the six months ended June 30, 2014, we recognized restructuring charges of $129 million: $28 million in North America, $17 million in MENA/Asia Pacific, $27 million in Europe/SSA/Russia, $23 million in Latin America, $4 million in Land Drilling Rigs and $30 million in Corporate and Research and Development.
(e)
The six months ended June 30, 2014 included professional fees of $40 million related to the divestiture of our non-core businesses, restatement related litigation, the settlement of the U.S. government investigations, the remediation of our material weakness related to income taxes and our recently completed redomestication from Switzerland to Ireland and other charges of $4 million.

16. Disputes, Litigation and Contingencies

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 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 FCPA and trade sanctions related to the U.S. government investigations disclosed above and in our U.S. Securities and Exchange Commission (the “SEC”) filings since 2007. Those shareholder derivative cases, captioned Neff v. Brady, et al., No. 201040764, Rosner v. Brady, et al., No. 201047343, and Hess v. Duroc-Danner, et al., No. 201040765, were filed in Harris County, Texas state court and consolidated (collectively referred to as the “Neff Case”). In 2014, one of the three cases, Hess v. Duroc-Danner, et al., No. 201040765, was voluntarily dismissed from 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 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.

We cannot reliably predict the outcome of these cases including the amount of any possible loss. If one or more negative outcomes were to occur relative to these cases, the aggregate impact to our financial condition could be material.

In March 2012, a purported securities class action captioned Freedman v. Weatherford International Ltd., et al., No. 1:12-cv-02121-LAK (SDNY) was filed in the Southern District of New York against us and certain current and former officers. That case alleges violation of the federal securities laws related to the restatement of our historical financial statements announced on February 21, 2012, and later added claims related to the announcement of a subsequent restatement on July 24, 2012. In the three months ended December 31, 2014, we advanced settlement negotiations such that settlement was deemed probable, and we maintained an accrual of the estimated probable loss. As a result of ongoing negotiations in the second quarter of 2015, a settlement agreement was reached on June 30, 2015, subject to notice to the class, approval by the U.S. District Court for the Southern District of New York and other conditions. The settlement agreement requires payments totaling $120 million in exchange for the dismissal with prejudice of the litigation and the unconditional release of all claims, of which $95 million was accrued during the second quarter of 2015.

19



In March 2011, a shareholder derivative action, Iron Workers Mid-South Pension Fund v. Duroc-Danner, et al., No. 201119822, was filed in Harris County, Texas, civil court purportedly on behalf of the Company against certain current and former officers and directors, alleging breaches of duty related to the material weakness and restatement announcements. In February 2012, a second substantially similar shareholder derivative action, Wandel v. Duroc-Danner, et al., No. 1:12-cv-01305-LAK (SDNY), was filed in federal court in the Southern District of New York. In June 2014, the parties signed a term sheet resolving the action for an agreed upon set of revised corporate procedures, no monetary payment by the defendants, and an award of attorneys’ fees for the plantiff’s counsel. In March 2015, the court approved notice to the class of the proposed settlement and set the final hearing for June 24, 2015. On June 24, 2015, the court approved the settlement. We maintain an immaterial accrual for the attorney’s fees included in the settlement, which was subsequently paid in July 2015.

In March 2011, a purported shareholder class action captioned Dobina v. Weatherford International Ltd., et al., No. 1:11-cv-01646-LAK (SDNY), was filed in the U.S. District Court for the Southern District of New York, following our announcement on March 1, 2011 of a material weakness in our internal controls over financial reporting for income taxes, and restatement of our historical financial statements (the “2011 Class Action”). The lawsuit alleged violation of the federal securities laws by us and certain current and former officers. During the three months ended December 31, 2013, we entered into negotiations to settle the 2011 Class Action. As a result of these negotiations, settlement became probable and a settlement agreement was signed on January 29, 2014. The settlement was approved by the U.S. District Court for the Southern District of New York on January 5, 2015, and final judgment entered on January 30, 2015. The settlement agreement required payments totaling $53 million which was entirely funded by our insurers.

U.S. Government and Internal Investigations
 
On January 17, 2014, the U.S. District Court for the Southern District of Texas approved the settlement agreements between us and certain of our subsidiaries and the U.S. Department of Justice (“DOJ”). On November 26, 2013, we announced that we and our subsidiaries also entered into settlement agreements with the U.S. Departments of Treasury and Commerce and with the SEC, which the U.S. District Court for the Southern District of Texas entered on December 20, 2013. These agreements collectively resolved investigations of prior alleged violations by us and certain of our subsidiaries relating to certain trade sanctions laws, participation in the United Nations oil-for-food program governing sales of goods into Iraq and non-compliance with FCPA matters. 

The $253 million payable by us and our subsidiaries was paid in January and February 2014 pursuant to the terms of the settlement agreements. These agreements include a requirement to retain, for a period of at least 18 months, an independent monitor responsible for assessing our compliance with the terms of the agreement so as to address and reduce the risk of recurrence of alleged misconduct, after which we would continue to evaluate our own compliance program and make periodic reports to the DOJ and SEC and maintain agreed compliance monitoring and reporting systems. In April 2014, the independent monitor was retained and the compliance assessment period began. These agreements also require us to retain an independent third party to retroactively audit our compliance with U.S. export control laws during the years 2012, 2013 and 2014. This audit is on-going.

The SEC and DOJ are also investigating the circumstances surrounding the material weakness in our internal controls over financial reporting for income taxes that was disclosed in a notification of late filing on Form 12b-25 filed on March 1, 2011 and in current reports on Form 8-K filed on February 21, 2012 and on July 24, 2012 and the subsequent restatements of our historical financial statements. We are cooperating fully with these investigations. We are unable to predict the outcome of these matters due to the inherent uncertainties presented by such investigations, and we are unable to predict potential outcomes or estimate the range of potential loss contingencies, if any. The government, generally, has a broad range of civil and criminal penalties available for these types of matters under applicable law and regulation, including injunctive relief, fines, penalties and modifications to business practices, some of which, if imposed on us, could be material to our business, financial condition or results of operations.

Additionally, we are aware of various disputes and potential claims and are a party in various litigation involving claims against us, some of which are covered by insurance. 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. These liabilities are immaterial to our financial condition and results of operations. In addition we have certain claims, disputes and pending litigation 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.


20



17. New Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued new guidance that requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation.  The new standard will be effective January 1, 2017 and will be applied prospectively.  Early adoption is permitted.  We are evaluating the impact that this new guidance will have on our Consolidated Financial Statements and related Note disclosures.

In April 2015, the FASB issued new guidance related to accounting for fees paid in a cloud computing arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our Consolidated Financial Statements and related Note disclosures.

In April 2015, the FASB issued new guidance related to presentation of debt issue costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our Consolidated Financial Statements and related Note disclosures.

In February 2015, the FASB issued new guidance related to consolidations. The new standard amends the guidelines for determining whether certain legal entities should be consolidated and reduces the number of consolidation models. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our Consolidated Financial Statements and related Note disclosures.

In May 2014, the FASB issued new guidance intended to change the criteria for recognition of revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective beginning with the first quarter of 2017 and early adoption is not permitted. In April 2015, the FASB proposed a one year deferral of the effective date of the new revenue standard for public and non-public entities reporting under U.S. GAAP and on July 9, 2015, the FASB approved the one year deferral. The effective date of the amended standard will begin in the first quarter of 2018 and the FASB plans to submit its amendment to defer the effective date by the end of the third quarter 2015. We are currently evaluating the impact the adoption of this guidance would have on our Consolidated Financial Statements and related Note disclosures.



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18. Condensed Consolidating Financial Statements

Weatherford International plc (“Weatherford Ireland”), a public limited company organized under the laws of Ireland, a Swiss tax resident, and the ultimate parent of the Weatherford group, guarantees the obligations of our subsidiaries – Weatherford International Ltd., a Bermuda exempted company (“Weatherford Bermuda”), and Weatherford International, LLC, a Delaware limited liability company (“Weatherford Delaware”), including the notes and credit facilities listed below.

The following obligations of Weatherford Delaware were guaranteed by Weatherford Bermuda at June 30, 2015 and December 31, 2014: (1) 6.35% senior notes and (2) 6.80% senior notes.
 
The following obligations of Weatherford Bermuda were guaranteed by Weatherford Delaware at June 30, 2015 and December 31, 2014: (1) revolving credit facility, (2) 5.50% senior notes, (3) 6.50% senior notes, (4) 6.00% senior notes, (5) 7.00% senior notes, (6) 9.625% senior notes, (7) 9.875% senior notes, (8) 5.125% senior notes, (9) 6.75% senior notes, (10) 4.50% senior notes and (11) 5.95% senior notes. At December 31, 2014, we had a 364-day term loan facility which was an obligation of Weatherford Bermuda guaranteed by Weatherford Delaware.

As a result of certain of these guarantee arrangements, we are required to present the following condensed consolidating financial information. The accompanying guarantor financial information is presented on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for our share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.

Condensed Consolidating Statement of Operations and
Comprehensive Income (Loss)
Three Months Ended June 30, 2015
(Unaudited)
(Dollars in millions)
Weatherford
Ireland
 
Weatherford Bermuda
 
Weatherford Delaware
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Revenues
$

 
$

 
$

 
$
2,390

 
$

 
$
2,390

Costs and Expenses
(100
)
 
(4
)
 

 
(2,750
)
 

 
(2,854
)
Operating Income (Loss)
(100
)
 
(4
)
 

 
(360
)
 

 
(464
)
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest Expense, Net

 
(98
)
 
(15
)
 
(4
)
 

 
(117
)
Intercompany Charges, Net
(26
)
 
(28
)
 
(68
)
 
122

 

 

Equity in Subsidiary Income
(363
)
 
366

 
874

 

 
(877
)
 

Other, Net

 
1

 

 
(35
)
 

 
(34
)
Income (Loss) Before Income Taxes
(489
)
 
237

 
791

 
(277
)
 
(877
)
 
(615
)
(Provision) Benefit for Income Taxes

 

 
29

 
103

 

 
132

Net Income (Loss)
(489
)
 
237

 
820

 
(174
)
 
(877
)
 
(483
)
Noncontrolling Interests

 

 

 
6

 

 
6

Net Income (Loss) Attributable to Weatherford
$
(489
)
 
$
237

 
$
820

 
$
(180
)
 
$
(877
)
 
$
(489
)
Comprehensive Income (Loss) Attributable to Weatherford
$
(375
)
 
$
263

 
$
843

 
$
(66
)
 
$
(1,040
)
 
$
(375
)
 

22


Condensed Consolidating Statement of Operations and
Comprehensive Income (Loss)
Three Months Ended June 30, 2014
(Unaudited) 
(Dollars in millions)
Weatherford
Ireland
 
Weatherford
Bermuda
 
Weatherford
Delaware
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Revenues
$

 
$

 
$

 
$
3,711

 
$

 
$
3,711

Costs and Expenses
(9
)
 
(1
)
 

 
(3,676
)
 

 
(3,686
)
Operating Income (Loss)
(9
)
 
(1
)
 

 
35

 

 
25

 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest Expense, Net

 
(106
)
 
(14
)
 
(8
)
 

 
(128
)
Intercompany Charges, Net
(12
)
 
(22
)
 
(77
)
 
(1,709
)
 
1,820

 

Equity in Subsidiary Income
(123
)
 
(192
)
 
(175
)
 

 
490

 

Other, Net

 
(11
)
 
(1
)
 
(7
)
 

 
(19
)
Income (Loss) Before Income Taxes
(144
)
 
(332
)
 
(267
)
 
(1,689
)
 
2,310

 
(122
)
(Provision) Benefit for Income Taxes
(1
)