Attached files

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EX-32.2 - EXHIBIT 32.2 CFO 906 CERT WFT 9.30.17 - Weatherford International plcex322cfo906certwft93017.htm
EX-32.1 - EXHIBIT 32.1 CEO 906 CERT WFT 9.30.17 - Weatherford International plcex321ceo906certwft93017.htm
EX-31.2 - EXHIBIT 31.2 CFO 302 CERT WFT 9.30.17 - Weatherford International plcex312cfo302certwft93017.htm
EX-31.1 - EXHIBIT 31.1 CEO 302 CERT WFT 9.30.17 - Weatherford International plcex311ceo302certwft93017.htm
EX-10.5 - EXHIBIT 10.5 RSU AWARD AGREEMENT - 2010 OMNIBUS INCENTIVE PLAN - Weatherford International plcex105rsuawardagreement-201.htm
EX-10.4 - EXHIBIT 10.4 DEED OF INDEMNIFICATION OF WEATHERFORD INTERNATIONAL LTD. (BERMUDA) - Weatherford International plcex104deedofindemnification.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 September 30, 2017
 
 
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.)
 
 
 
Weststrasse 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, a 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.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o
Smaller reporting company o
Emerging growth company o
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. 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 October 23, 2017, there were 992,527,349 shares of Weatherford ordinary shares, $0.001 par value per share, outstanding.




Weatherford International public limited company
Form 10-Q for the Third Quarter and Nine Months Ended September 30, 2017



1


PART I FINANCIAL INFORMATION
Item 1. Financial Statements.

WEATHERFORD INTERNATIONAL PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars and shares in millions, except per share amounts)
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Products
$
535

 
$
485

 
$
1,534

 
$
1,524

Services
925

 
871

 
2,675

 
2,819

Total Revenues
1,460

 
1,356

 
4,209

 
4,343

 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Cost of Products
480

 
508

 
1,439

 
1,603

Cost of Services
716

 
722

 
2,151

 
2,339

Research and Development
42

 
33

 
117

 
119

Selling, General and Administrative Attributable to Segments
230

 
237

 
676

 
736

Corporate General and Administrative
28

 
30

 
94

 
106

Long-lived Asset Impairments, Write-Downs and Other Charges
(2
)
 
740

 
(17
)
 
952

Restructuring Charges
34

 
22

 
140

 
150

Litigation Charges, Net
(4
)
 
9

 
(4
)
 
190

Total Costs and Expenses
1,524

 
2,301

 
4,596

 
6,195

 
 
 
 
 
 
 
 
Operating Loss
(64
)
 
(945
)
 
(387
)
 
(1,852
)
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
Interest Expense, Net
(148
)
 
(129
)
 
(427
)
 
(363
)
Bond Tender Premium, Net

 



 
(78
)
Warrant Fair Value Adjustment
(7
)
 

 
58

 

Currency Devaluation Charges

 

 

 
(31
)
Other Expense, Net
(7
)
 
(10
)
 
(28
)
 
(16
)
 
 
 
 
 
 
 
 
Loss Before Income Taxes
(226
)
 
(1,084
)
 
(784
)
 
(2,340
)
Income Tax Provision
(25
)
 
(692
)
 
(75
)
 
(489
)
Net Loss
(251
)
 
(1,776
)
 
(859
)
 
(2,829
)
Net Income Attributable to Noncontrolling Interests
5

 
4

 
16

 
14

Net Loss Attributable to Weatherford
$
(256
)
 
$
(1,780
)
 
$
(875
)
 
$
(2,843
)
 
 
 
 
 
 
 
 
Loss Per Share Attributable to Weatherford:
 
 
 
 
 
 
 
Basic & Diluted
$
(0.26
)
 
$
(1.98
)
 
$
(0.88
)
 
$
(3.27
)
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
Basic & Diluted
990

 
899

 
989

 
871


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


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Net Loss
$
(251
)
 
$
(1,776
)
 
$
(859
)
 
$
(2,829
)
 
 
 
 
 
 
 
 
Currency Translation Adjustments
91

 
(42
)
 
165

 
90

Defined Benefit Pension Activity
(3
)
 

 
(44
)
 
1

Other

 

 

 
1

Other Comprehensive Income (Loss)
88

 
(42
)
 
121

 
92

Comprehensive Loss
(163
)
 
(1,818
)
 
(738
)
 
(2,737
)
Comprehensive Income Attributable to Noncontrolling Interests
5

 
4

 
16

 
14

Comprehensive Loss Attributable to Weatherford
$
(168
)
 
$
(1,822
)
 
$
(754
)
 
$
(2,751
)

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


WEATHERFORD INTERNATIONAL PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
 
December 31,
(Dollars and shares in millions, except par value)
2017
 
2016
 
(Unaudited)
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
445

 
$
1,037

Accounts Receivable, Net of Allowance for Uncollectible Accounts of $85 in 2017 and $129 in 2016
1,236

 
1,383

Inventories, Net
1,752

 
1,802

Prepaid Expenses
266

 
263

Other Current Assets
409

 
402

Assets Held for Sale
935

 
23

Total Current Assets
5,043

 
4,910

 
 
 
 
Property, Plant and Equipment, Net of Accumulated Depreciation of $7,633 in 2017 and $7,362 in 2016
3,989

 
4,480

Goodwill
2,346

 
2,797

Other Intangible Assets, Net of Accumulated Amortization of $860 in 2017 and $801 in 2016
229

 
248

Equity Investments
65

 
66

Other Non-Current Assets
341

 
163

Total Assets
$
12,013

 
$
12,664

 
 
 
 
Current Liabilities:
 
 
 
Short-term Borrowings and Current Portion of Long-term Debt
$
391

 
$
179

Accounts Payable
815

 
845

Accrued Salaries and Benefits
285

 
291

Income Taxes Payable
223

 
255

Other Current Liabilities
702

 
858

Liabilities Held for Sale
54

 

Total Current Liabilities
2,470

 
2,428

 
 
 
 
Long-term Debt
7,530

 
7,403

Other Non-Current Liabilities
629

 
765

Total Liabilities
10,629

 
10,596

 
 
 
 
Shareholders’ Equity:
 
 
 
Shares - Par Value $0.001; Authorized 1,356 shares, Issued and Outstanding 992 shares at September 30, 2017 and 983 shares at December 31, 2016
$
1

 
$
1

Capital in Excess of Par Value
6,641

 
6,571

Retained Deficit
(3,825
)
 
(2,950
)
Accumulated Other Comprehensive Loss
(1,489
)
 
(1,610
)
Weatherford Shareholders’ Equity
1,328

 
2,012

Noncontrolling Interests
56

 
56

Total Shareholders’ Equity
1,384

 
2,068

Total Liabilities and Shareholders’ Equity
$
12,013

 
$
12,664

 

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)
 
Nine Months Ended September 30,
(Dollars in millions)
2017
 
2016
Cash Flows From Operating Activities:
 
 
 
Net Loss
$
(859
)
 
$
(2,829
)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities:
 
 
 
Depreciation and Amortization
611

 
741

Employee Share-Based Compensation Expense
55

 
57

Long-Lived Asset Impairments

 
436

Restructuring and Other Asset Charges
36

 
130

Bad Debt Expense
3

 
72

Inventory Charges
66

 
213

Defined Benefit Pension Plan Gains
(47
)
 

Litigation Charges
(4
)
 
190

Bond Tender Premium

 
78

Deferred Income Tax Provision (Benefit)
(7
)
 
426

Currency Devaluation Charges

 
31

Warrant Fair Value Adjustment
(58
)
 

Other, Net
75

 
80

Change in Operating Assets and Liabilities, Net of Effect of Businesses Acquired:
 
 
 
Accounts Receivable
(77
)
 
185

Inventories
(94
)
 
208

Other Current Assets
55

 
27

Accounts Payable
(44
)
 
(203
)
Accrued Litigation and Settlements
(93
)
 
(12
)
Other Current Liabilities
(35
)
 
(236
)
Other, Net
(67
)
 
(38
)
Net Cash Used in Operating Activities
(484
)
 
(444
)
 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Capital Expenditures for Property, Plant and Equipment
(147
)
 
(136
)
Acquisition of Assets Held for Sale
(244
)
 

Acquisitions of Businesses, Net of Cash Acquired
(7
)
 
(5
)
Acquisition of Intellectual Property
(13
)
 
(10
)
Insurance Proceeds Related to Asset Casualty Loss

 
39

Proceeds from Sale of Assets
36

 
28

Payment Related to Sale of Businesses, Net
(1
)
 
(20
)
Other Investing Activities
(25
)
 

Net Cash Used in Investing Activities
(401
)
 
(104
)
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
Borrowings of Long-term Debt
250

 
3,153

Repayments of Long-term Debt
(53
)
 
(1,895
)
Borrowings (Repayments) of Short-term Debt, Net
118

 
(1,138
)
Proceeds from Issuance of Ordinary Common Shares

 
623

Bond Tender Premium

 
(78
)
Payment for Leased Asset Purchase

 
(87
)
Other Financing Activities
(28
)
 
(21
)
Net Cash Provided by Financing Activities
287

 
557

Effect of Exchange Rate Changes on Cash and Cash Equivalents
6

 
(36
)
 
 
 
 
Net Decrease in Cash and Cash Equivalents
(592
)
 
(27
)
Cash and Cash Equivalents at Beginning of Period
1,037

 
467

Cash and Cash Equivalents at End of Period
$
445

 
$
440

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest Paid
$
434

 
$
362

Income Taxes Paid, Net of Refunds
$
71

 
$
140

Non-cash Financing Obligations
$
24

 
$
25

 

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 generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include all adjustments which, in our opinion, are considered necessary to present fairly our Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, and Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016. 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, 2016 included in our Annual Report on Form 10-K. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results expected for the year ending December 31, 2017.
Use of Estimates

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 net realizable value for inventories, equity investments, derivative financial instruments, intangible assets and goodwill, property, plant and equipment (PP&E), income taxes, percentage-of-completion accounting for long-term contracts, self-insurance, foreign currency exchange rates, pension and post-retirement benefit plans, disputes, litigation, contingencies and share-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

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.

Reclassifications

Certain prior year cash flow amounts have been reclassified to conform to the current year presentation related to the adoption of new accounting standards. Net income and shareholders’ equity were not affected by these reclassifications. See “Note 18 – New Accounting Pronouncements” for additional details.


6


Revenue Recognition

In the second quarter of 2017, the Company changed its accounting for revenue with our largest customer in Venezuela to record a discount reflecting the time value of money and accrete the discount as interest income over the expected collection period using the effective interest method. In connection with this development, the Company corrected this immaterial error for the three and six month periods ended June 30, 2017. The impact of the correction decreased revenue and increased interest income by approximately $31 million and $4 million, respectively, for the three month period ended June 30, 2017 and reduced accounts receivable by approximately $27 million as of June 30, 2017. As of September 30, 2017, to reflect the impact of payment delays and expectation that the time to collect may exceed one year, we reclassified $158 million of accounts receivable related to this customer in Other Non-Current Assets on the accompanying Condensed Consolidated Balance Sheets.

While we are continuing to experience delays with collections on our outstanding receivables with this customer, we believe the amounts are fully collectible based on the financial position and solvency of this customer and the dependence of the Venezuelan economy on oil production from this customer. We also considered our collections history with this customer and lack of historical material allowances or write-offs to our receivables balances. Our assumptions and related judgments are sensitive to the continued significant political and economic turmoil in Venezuela. If conditions continue to deteriorate, we may be required to record allowances or write-offs to our receivables balances that could have a material impact on our financial position and results of operations.

Currency Devaluation Charges

Currency devaluation charges are included in current earnings in “Currency Devaluation Charges” on the accompanying Condensed Consolidated Statements of Operations. In the first nine months of 2016, currency devaluation charges of $31 million reflected the impact of the devaluation of the Angolan kwanza. In the third quarter and the first nine months of 2017, we had no currency devaluation charges.

2.  Business Combinations and Divestitures

Held for Sale

On March 24, 2017, we entered a master formation agreement with affiliates of Schlumberger Limited (“Schlumberger”) to form a joint venture named “OneStimSM,” which will provide completion products and services for the development of unconventional land reservoirs in the United States and Canada. Under the terms of the master formation agreement, both parties will contribute their respective pressure pumping assets, multistage completions, and pump-down perforating businesses on land in the lower contiguous 48 states of the United States and the provinces of British Columbia, Saskatchewan, Manitoba and Alberta in Canada. In addition, we will contribute manufacturing facilities and supply chain resources to OneStim, and Schlumberger will provide the joint venture with access to its surface and downhole technologies and advanced geo-engineered workflows. At closing we will receive a one-time $535 million cash payment from Schlumberger, subject to agreed purchase price adjustments and will own a 30% equity interest in the OneStim joint venture while Schlumberger will own 70%. The transaction is expected to close in the fourth quarter of 2017 and is subject to regulatory approvals and other customary closing conditions. The carrying amounts of the major classes of assets and liabilities from our North America segment to be contributed to OneStim have been classified as held for sale in the table below.

7


 
 
September 30,
(Dollars in millions)
 
2017
Assets Held for Sale:
 
 
Inventory, Net
 
$
89

Property, Plant and Equipment, Net
 
261

Goodwill
 
559

Total Assets
 
$
909

 
 
 
Liabilities Held for Sale:
 
 
Long-term Debt
 
$
28

Other Liabilities
 
26

Total Liabilities
 
$
54


As of September 30, 2017, we also had $26 million of PP&E held for sale unrelated to the OneStim joint venture.

3. Restructuring Charges

Due to the ongoing lower than anticipated levels of exploration and production spending, we continue to reduce our overall cost structure and workforce to better align with current activity levels. The ongoing cost reduction plans, which began in 2016 and is continuing through 2017 (the “2016 Plan”), included a workforce reduction and other cost reduction measures initiated across our geographic regions.

In connection with the 2016 Plan, we recognized restructuring charges of $34 million and $140 million in the third quarter and the first nine months of 2017, respectively, which include termination (severance) charges of $15 million and $71 million, respectively, and other restructuring charges of $19 million and $57 million, respectively. Other restructuring charges include contract termination costs, relocation and other associated costs. The first nine months of 2017 also includes restructuring related asset charges of $12 million.

Also in connection with the 2016 Plan, we recognized restructuring charges of $22 million and $150 million in the third quarter and the first nine months of 2016, respectively, which include termination (severance) charges of $18 million and $126 million, respectively, and other restructuring charges of $4 million and $24 million, respectively. Other restructuring charges include contract termination costs, relocation and other associated costs.

The following tables present the components of restructuring charges by segment for the third quarter and the first nine months of 2017 and 2016.
 
Three Months Ended September 30, 2017
 
 
 
Total
(Dollars in millions)
Severance
Other
Severance and
2016 Plan
Charges
Charges
Other Charges
North America
$
1

$

$
1

MENA/Asia Pacific
4

16

20

Europe/SSA/Russia
2


2

Latin America
7

2

9

  Subtotal
14

18

32

Land Drilling Rigs



Corporate and Research and Development
1

1

2

  Total
$
15

$
19

$
34



8


 
Three Months Ended September 30, 2016
 
 
 
Total
(Dollars in millions)
Severance
Other
Severance and
2016 Plan
Charges
Charges
Other Charges
North America
$
5

$

$
5

MENA/Asia Pacific
4

1

5

Europe/SSA/Russia
(2
)
2


Latin America
9

1

10

  Subtotal
16

4

20

Land Drilling Rigs



Corporate and Research and Development
2


2

  Total
$
18

$
4

$
22


 
Nine Months Ended September 30, 2017
 
 
 
Total
(Dollars in millions)
Severance
Other
Severance and
2016 Plan
Charges
Charges
Other Charges
North America
$
3

$
21

$
24

MENA/Asia Pacific
12

17

29

Europe/SSA/Russia
10

21

31

Latin America
20

5

25

  Subtotal
45

64

109

Land Drilling Rigs
2


2

Corporate and Research and Development
24

5

29

  Total
$
71

$
69

$
140


 
Nine Months Ended September 30, 2016
 
 
 
Total
(Dollars in millions)
Severance
Other
Severance and
2016 Plan
Charges
Charges
Other Charges
North America
$
29

$
15

$
44

MENA/Asia Pacific
22

3

25

Europe/SSA/Russia
21

4

25

Latin America
35

2

37

  Subtotal
107

24

131

Land Drilling Rigs
5


5

Corporate and Research and Development
14


14

  Total
$
126

$
24

$
150



9


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 earlier 2014 and 2015 Plans, the 2016 Plan that will be paid pursuant to the respective arrangements and statutory requirements.
 
At September 30, 2017
 
2016 Plan
2015 and 2014 Plans
Total
 
 
 
 
 
Severance
 
Severance
Other
Severance
Other
and Other
(Dollars in millions)
Liability
Liability
Liability
Liability
Liability
North America
$
1

$
17

$

$

$
18

MENA/Asia Pacific
4

11



15

Europe/SSA/Russia
2

9


5

16

Latin America





  Subtotal
7

37


5

49

Land Drilling Rigs





Corporate and Research and Development
9




9

  Total
$
16

$
37

$

$
5

$
58

The following table presents the restructuring liability activity for the first nine months of 2017.
 
 
 
Nine Months Ended September 30, 2017
 
 
(Dollars in millions)
Accrued Balance at December 31, 2016
 
Charges
 
Cash Payments
 
Other 
 
Accrued Balance at September 30, 2017
2016 Plan:
 
 
 
 
 
 
 
 
 
Severance liability
$
52

 
$
71

 
$
(104
)
 
$
(3
)
 
$
16

Other restructuring liability
22

 
57

 
(21
)
 
(21
)
 
37

2015 and 2014 Plan:
 
 
 
 
 
 
 
 
 
Severance liability
3

 

 
(3
)
 

 

Other restructuring liability
9

 

 
(1
)
 
(3
)
 
5

Total severance and other restructuring liability
$
86

 
$
128

 
$
(129
)
 
$
(27
)
 
$
58


4.  Percentage-of-Completion Contracts

We account for our long-term early production facility construction contracts in Iraq under the percentage-of-completion method. In the third quarter and the first nine months of 2017, there was no change to our cumulative estimated loss since December 31, 2016. Our net billings in excess of costs as of September 30, 2017 were $47 million and are shown in the “Other Current Liabilities” on the accompanying Condensed Consolidated Balance Sheets.

On May 26, 2016, we entered into an agreement with our customer containing the terms and conditions of the settlement on the Zubair contract which included variation order requests, claims for extension of time, payments of remaining contract milestones and new project completion timelines that resulted in relief from the liquidated damages provisions. The settlement paid to us was a gross amount of $150 million, of which we received $62 million in the second quarter of 2016, $72 million in the third quarter of 2016 and $16 million in the first quarter of 2017.

In the third quarter and the first nine months of 2016, we were break-even for our Zubair contract. As of September 30, 2016, cumulative estimated losses on our Iraq projects were $532 million, project estimates included no claims revenue, $25 million in approved change orders and $25 million of back charges.


10


5.  Accounts Receivable Factoring and Other Receivables

From time to time, we participate in factoring arrangements to sell accounts receivable to third-party financial institutions. In the first nine months of 2017, we sold accounts receivable of $150 million and recognized a loss of approximately $1 million on these sales. We received cash proceeds totaling $148 million. In the first nine months of 2016, we sold approximately $102 million and recognized a loss of $0.4 million. Our factoring transactions in the first nine months of 2017 and 2016 were recognized as sales, and the proceeds are included as operating cash flows in our Condensed Consolidated Statements of Cash Flows.

In the first quarter of 2017, Weatherford converted trade receivables of $65 million into a note from the customer with a face value of $65 million. The note had a three year term at a 4.625% stated interest rate. We reported the note as a trading security within “Other Current Assets” at fair value on the Condensed Consolidated Balance Sheets at its fair value of $58 million on March 31, 2017. The note fair value was considered a Level 2 valuation and was estimated using secondary market data for similar bonds. During the second quarter of 2017, we sold the note for $59 million.

6.  Inventories, Net

Inventories, net of reserves, by category were as follows:
(Dollars in millions)
September 30, 2017
 
December 31, 2016
Raw materials, components and supplies
$
145

 
$
168

Work in process
70

 
49

Finished goods
1,537

 
1,585

 
$
1,752

 
$
1,802


We recognized inventory charges, including excess and obsolete and non-recurring inventory charges, totaling $66 million and $213 million in the first nine months of 2017 and 2016, respectively.

7.  Long-Lived Asset Impairments

In the first nine months of 2017, we had no long-lived asset impairment charges. During the third quarter of 2016, we recognized long-lived asset impairment charges of $436 million, of which $388 million was related to product line PP&E impairments and $48 million was related to the impairment of intangible assets. The PP&E impairment charges were related to our MENA/Asia Pacific Pressure Pumping and North America Well Construction, Drilling Services and Secure Drilling Service product lines. These impairment charges were attributed to the following segments: $235 million in North America, $109 million in MENA/Asia Pacific, $12 million in Europe/SSA/Russia, $16 million in Latin America and $16 million in Land Drilling Rigs. The intangible asset charge is related to the Well Construction and Completions businesses with $35 million attributable to the North America segment and $13 million related the Europe/SSA/Russia segment.

8.  Goodwill

The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2017, were as follows:
(Dollars in millions)
North
America
 
MENA/
Asia Pacific
 
Europe/
SSA/
Russia
 
Latin
America
 
Total
Balance at December 31, 2016
$
1,777

 
$
189

 
$
543

 
$
288

 
$
2,797

Reclassification to assets held for sale
(559
)
 

 

 

 
(559
)
Foreign currency translation adjustments
66

 
5

 
37

 

 
108

Balance at September 30, 2017
$
1,284

 
$
194

 
$
580

 
$
288

 
$
2,346

 

11


9.  Short-Term Borrowings and Other Debt Obligations
(Dollars in millions)
September 30, 2017
 
December 31, 2016
Revolving Credit Agreement
$
225

 
$

Other short-term loans
28

 
2

Total short-term borrowings
253

 
2

Current portion of long-term debt and term loan agreement
138

 
177

Short-term borrowings and current portion of long-term debt
$
391

 
$
179


Revolving Credit Agreement and Secured Term Loan Agreement

At September 30, 2017, we had total commitments under our revolving credit facility (the “Revolving Credit Agreement”) maturing in July of 2019 of $1.0 billion and borrowings of $388 million under our secured term loan agreement (“the Term Loan Agreement and collectively with the Revolving Credit Agreement, the “Credit Agreements”) maturing in July of 2020. At September 30, 2017, we had $691 million available under the Credit Agreements and the following table summarizes our borrowing availability under these agreements:
(Dollars in millions)
September 30, 2017
Facilities
$
1,388

Less uses of facilities:
 
Revolving credit agreement
225

Letters of credit
84

  Secured term loan before debt issuance cost
388

Borrowing Availability
$
691


Loans under the Credit Agreements are subject to varying interest rates based on whether the loan is Eurodollar loan or an alternate base rate loan. We also incur a quarterly facility fee on the amount of the Revolving Credit Agreement. For the three months ended September 30, 2017, the interest rate for the Revolving Credit Agreement was LIBOR plus a margin rate of 2.80%. For the three months ended September 30, 2017, the interest rate for the Term Loan Agreement was LIBOR plus a margin rate of 2.30%.

Our Credit Agreements contain customary events of default, including our failure to comply with our financial covenants. We must maintain a leverage ratio of no greater than 2.5 to 1, a leverage and letters of credit ratio of no greater than 3.5 to 1 and an asset coverage ratio of at least 4.0 to 1. At September 30, 2017, we were in compliance with these financial covenants.

Other Borrowings and Debt Activity

On June 26, 2017, we issued an additional $250 million aggregate principal amount of our 9.875% senior notes due 2024 (“Notes”). These Notes were issued as additional securities under an indenture pursuant to which we previously issued $540 million aggregate principal amount of our 9.875% senior notes due 2024.

We have short-term borrowings with various domestic and international institutions pursuant to uncommitted credit facilities. At September 30, 2017, we had $28 million in short-term borrowings under these arrangements. In addition, we had $387 million of letters of credit under various uncommitted facilities, of which $72 million has been cash collateralized (included in “Cash and Cash Equivalentsin the accompanying Condensed Consolidated Balance Sheets), and $59 million of surety bonds, primarily performance bonds, issued by financial sureties against an indemnification from us at September 30, 2017.

In June 2017, we repaid $88 million of our 6.35% Senior Notes on the maturity date. At September 30, 2017, the current portion of long-term debt was primarily related to $66 million of our 6.00% Senior Notes due March 2018, the $50 million current portion of our Term Loan Agreement and $22 million of current portion of capital leases and other debt.


12


10.  Fair Value of Financial Instruments
 
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. Our valuation techniques require inputs that we categorize using a three level hierarchy, from highest to lowest level of observable inputs. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are quoted prices or other market data for similar assets and liabilities in active markets, or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based upon our own judgment and assumptions used to measure assets and liabilities at fair value. Classification of a financial asset or liability within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. Other than the derivative instruments discussed in “Note 11 – Derivative Instruments”, we had no other material assets or liabilities measured and recognized at fair value on a recurring basis at September 30, 2017 and December 31, 2016.

Fair Value of Other Financial Instruments

Our other financial instruments include cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings and long-term debt. The carrying value of our cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings approximates their fair value due to their short maturities. These short-term borrowings are classified as Level 2 in the fair value hierarchy.

The fair value of our long-term debt fluctuates with changes in applicable interest rates among other factors. Fair value will generally exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued and will generally be less than the carrying value when the market rate is greater than the interest rate at which the debt was originally issued. The fair value of our long-term debt is classified as Level 2 in the fair value hierarchy and is established based on observable inputs in less active markets.

The fair value and carrying value of our senior notes were as follows: 
(Dollars in millions)
September 30, 2017
 
December 31, 2016
Fair value
$
7,231

 
$
6,739

Carrying value
7,210

 
7,028


11.  Derivative Instruments

From time to time, we may enter into derivative financial instrument transactions to manage or reduce our market risk. We manage our debt portfolio to achieve an overall desired position of fixed and floating rates, and we may employ interest rate swaps as a tool to achieve that goal. We enter into foreign currency forward contracts and cross-currency swap contracts to economically hedge our exposure to fluctuations in various foreign currencies. The major risks from interest rate derivatives include changes in the interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in floating interest rates, changes in foreign exchange rates and the creditworthiness of the counterparties in such transactions.

We monitor the creditworthiness of our counterparties, which are multinational commercial banks. The fair values of all our outstanding derivative instruments are determined using a model with Level 2 inputs including quoted market prices for contracts with similar terms and maturity dates.

Warrant

During the fourth quarter of 2016, in conjunction with the issuance of 84.5 million ordinary shares, we issued a warrant that gives the holder the option to acquire an additional 84.5 million ordinary shares. The exercise price on the warrant is $6.43 per share and is exercisable any time prior to May 21, 2019. The warrant is classified as a liability and carried at fair value with changes in its fair value reported through earnings. The warrant participates in dividends and other distributions as if the shares subject to the warrants were outstanding. In addition, the warrant permits early redemption due to a change in control.


13


The warrant fair value is considered a Level 3 valuation and is estimated using a combination of the Black Scholes option valuation model and Monte-Carlo simulation. Inputs to these models include Weatherford’s share price and volatility and the risk free interest rate. The valuation also considers the probabilities of future share issuances and anticipated issuance discounts, which are considered Level 3 inputs. The fair value of the warrant was $156 million on December 31, 2016 and $98 million on September 30, 2017, generating an unrealized loss of $7 million for the third quarter of 2017 and an unrealized gain of $58 million for the first nine months of 2017. The change in fair value of the warrant during the first nine months of 2017 was principally due to a decrease in Weatherford’s stock price. The warrant valuation would be negatively affected due to an increase in the likelihood of a future share issuance. 

Fair Value Hedges
 
We may use interest rate swaps to help mitigate exposures related to changes in the fair values of fixed-rate debt. The interest rate swap would be recorded at fair value with changes in fair value recorded in earnings. The carrying value of fixed-rate debt would be adjusted for changes in interest rates, with the changes in value recorded in earnings. After termination of the hedge, any discount or premium on the fixed-rate debt is amortized to interest expense over the remaining term of the debt. As of September 30, 2017, we did not have any fair value hedges designated.

As of September 30, 2017, we had net unamortized premiums on fixed-rate debt of $4 million associated with fair value hedge terminations. These premiums are being amortized over the remaining term of the originally hedged debt as a reduction in interest expense included in “Interest Expense, Net” on the accompanying Condensed Consolidated Statements of Operations.

Cash Flow Hedges

In 2008, we entered into interest rate derivative instruments to hedge projected exposures to interest rates in anticipation of a debt offering. These hedges were terminated at the time of the issuance of the debt, and the associated loss is being amortized from “Accumulated Other Comprehensive Income (Loss)” to interest expense over the remaining term of the debt. As of September 30, 2017, we had net unamortized losses of $9 million associated with our cash flow hedge terminations. As of September 30, 2017, we did not have any cash flow hedges designated.

Foreign Currency and Warrant Derivative Instruments

At September 30, 2017 and December 31, 2016, we had outstanding foreign currency forward contracts with notional amounts aggregating to $1.2 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.

Our foreign currency derivatives are not designated as hedges under ASC 815, and the changes in fair value of the contracts are recorded each period in “Other Expense, Net” on the accompanying Condensed Consolidated Statements of Operations. The total estimated fair values of our foreign currency forward contracts and warrant derivative were as follows:
(Dollars in millions)
 
September 30, 2017
 
December 31, 2016
 
Classification
Derivative assets not designated as hedges:
 
 
 
 
 
 
Foreign currency forward contracts
 
$
10

 
$
7

 
Other Current Assets
 
 
 
 
 
 
 
Derivative liabilities not designated as hedges:
 
 
 
 
 
 
Foreign currency forward contracts
 
(5
)
 
(14
)
 
Other Current Liabilities
Warrant on Weatherford Shares
 
(98
)
 
(156
)
 
Other Non-current Liabilities


14


The amount of derivative instruments’ gain or (loss) on the Condensed Consolidated Statements of Operations is in the table below.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
(Dollars in millions)
 
2017
 
2016
 
2017
 
2016
 
Classification
Foreign currency forward contracts
 
$
2

 
$
(22
)
 
$
(20
)
 
$
(12
)
 
Other Expense, Net
Warrant on Weatherford Shares
 
(7
)
 

 
58

 

 
Warrant Fair Value Adjustment

12. Income Taxes

We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items and pre-tax losses for which no benefit has been recognized) for the reporting period. For the three month and nine months periods ended September 30, 2017, we determined that since small changes in estimated ordinary annual income would result in significant changes in the estimated annual effective tax rate, the use of a discrete effective tax rate is appropriate for the current quarter. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. We will use this method each quarter until the annual effective tax rate method is deemed appropriate. For the third quarter and the first nine months of 2017, we had a tax expense of $25 million and $75 million, respectively, on a loss before income taxes of $226 million and $784 million, respectively. Results for the third quarter and the first nine months of 2017 include losses with no significant tax benefit. The tax expense for the third quarter and the first nine months of 2017 also includes withholding taxes, minimum taxes and deemed profit taxes that do not directly correlate to ordinary income or loss.

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 of approximately $10 million in the next twelve months due to expiration of statutes of limitations, settlements and/or conclusions of tax examinations.

For both the third quarter and the first nine months of 2016, we had a tax expense of $692 million and $489 million, respectively, on a loss before income taxes of $1.1 billion and $2.3 billion, respectively. The primary component of the tax expense for the third quarter and first nine months of 2016 relates to the Company’s conclusion that certain deferred tax assets that had previously been benefited are not more likely than not to be realized. As a result, additional valuation allowances have been established for the United States and other jurisdictions.

Our results for the third quarter of 2016 include charges with no significant tax benefit principally related to $436 million of long-lived asset impairment, $198 million of excess and obsolete inventory charges, $62 million in accounts receivable reserves and write-offs, and $44 million of other asset write-offs and charges. In addition, we recorded a tax charge of $137 million for a non-cash tax expense related to an internal restructuring of subsidiaries.

Our results for the first nine months of 2016 also include charges with no significant tax benefit principally related to $436 million of long-lived asset impairment, $213 million of excess and obsolete inventory charges, $140 million of settlement charges, $84 million related to a note adjustment for our largest customer in Venezuela, $78 million of bond tender premium, $62 million in accounts receivable reserves and write-offs, $31 million of currency devaluation related to the Angolan kwanza, $20 million in pressure pumping business related charges, and $15 million in supply agreement charges related to a non-core business divestitures. In addition, we recorded a tax charge of $526 million for the establishment of a valuation allowance, and $137 million for a non-cash tax expense related to an internal restructuring of subsidiaries.


15


13.  Shareholders’ Equity

The following summarizes our shareholders’ equity activity for the first nine months of 2017 and 2016:
(Dollars in millions)
Par Value of Issued Shares
 
Capital in Excess of Par Value
 
Retained Earnings (Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-controlling Interests
 
Total Shareholders’ Equity
Balance at December 31, 2015
$
1

 
$
5,502

 
$
442

 
$
(1,641
)
 
$
61

 
$
4,365

Net Income (Loss)

 

 
(2,843
)
 

 
14

 
(2,829
)
Other Comprehensive Income

 

 

 
92

 

 
92

Dividends Paid to Noncontrolling Interests

 

 

 

 
(15
)
 
(15
)
Issuance of Common Shares

 
623

 

 

 

 
623

Issuance of Exchangeable Notes

 
97

 

 

 

 
97

Equity Awards Granted, Vested and Exercised

 
51

 

 

 

 
51

Other

 

 

 

 
(1
)
 
(1
)
Balance at September 30, 2016
$
1

 
$
6,273

 
$
(2,401
)
 
$
(1,549
)
 
$
59

 
$
2,383

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
1

 
$
6,571

 
$
(2,950
)
 
$
(1,610
)
 
$
56

 
$
2,068

Net Income (Loss)

 

 
(875
)
 

 
16

 
(859
)
Other Comprehensive Income

 

 

 
121

 

 
121

Dividends Paid to Noncontrolling Interests

 

 

 

 
(16
)
 
(16
)
Equity Awards Granted, Vested and Exercised

 
70

 

 

 

 
70

Balance at September 30, 2017
$
1

 
$
6,641

 
$
(3,825
)
 
$
(1,489
)
 
$
56

 
$
1,384


In March 2016, we issued 115 million ordinary shares, and the amount in excess of par value of $623 million is reported in “Capital in Excess of Par Value” on the accompanying Condensed Consolidated Balance Sheets.

On June 7, 2016, we issued exchangeable notes with a par value of $1.265 billion. The exchange feature carrying value of $97 million is included in the line captioned “Capital in Excess of Par Value” on the accompanying Condensed Consolidated Balance Sheets.


16


The following table presents the changes in our accumulated other comprehensive loss by component for the first nine months of 2017 and 2016:
(Dollars in millions)
Currency Translation Adjustment
 
Defined Benefit Pension
 
Deferred Loss on Derivatives
 
Total
Balance at December 31, 2015
$
(1,602
)
 
$
(29
)
 
$
(10
)
 
$
(1,641
)
 
 
 
 
 
 
 
 
Other Comprehensive Income before Reclassifications
90

 
1

 

 
91

Reclassifications

 

 
1

 
1

Net activity
90

 
1

 
1

 
92

 
 
 
 
 
 
 
 
Balance at September 30, 2016
$
(1,512
)
 
$
(28
)
 
$
(9
)
 
$
(1,549
)
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
(1,614
)
 
$
13

 
$
(9
)
 
$
(1,610
)
 
 
 
 
 
 
 
 
Other Comprehensive Income before Reclassifications
165

 

 

 
165

Reclassifications

 
(44
)
 

 
(44
)
Net activity
165

 
(44
)
 

 
121

 
 
 
 
 
 
 
 
Balance at September 30, 2017
$
(1,449
)
 
$
(31
)
 
$
(9
)
 
$
(1,489
)

Defined benefit pension reclassifications relate to amortization of unrecognized net gains associated primarily with our supplemental executive retirement plan.

14.  Earnings per Share

Basic earnings per share for all periods presented equals net income (loss) divided by the weighted average number of our shares outstanding during the period including participating securities. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of our shares outstanding during the period including participating securities, adjusted for the dilutive effect of our stock options, restricted shares and performance share units. The following table presents our basic and diluted weighted average shares outstanding for the third quarter and the first nine months of 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Shares in millions)
2017
 
2016
 
2017
 
2016
Basic and Diluted weighted average shares outstanding
990

 
899

 
989

 
871


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 third quarter and the first nine months of 2017 and 2016 exclude potential shares for stock options, restricted shares, performance share units, exchangeable notes, warrant outstanding and the Employee Stock Purchase Plan as we have net losses for those periods, and their inclusion would be anti-dilutive. The following table presents the number of anti-dilutive shares excluded for the third quarter and the first nine months of 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Shares in millions)
2017
 
2016
 
2017
 
2016
Anti-dilutive potential shares due to net loss
250

 
166

 
250

 
71


17


15. Share-Based Compensation

We recognized the following employee share-based compensation expense during the third quarter and the first nine months of 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Share-based compensation
$
14

 
$
19

 
$
55

 
$
57

Related tax benefit

 
(8
)
 

 


During the first nine months of 2017, we granted to certain employees approximately 3.1 million performance share units that will vest with continued employment if the Company meets certain market-based performance goals. The performance share units have a weighted average grant date fair value of $6.06 per share based on the Monte Carlo simulation method. The assumptions used in the Monte Carlo simulation included a weighted average risk-free rate of 1.17%, volatility of 67% and a zero dividend yield. As of September 30, 2017, there was $12 million of unrecognized compensation expense related to our performance share units. This cost is expected to be recognized over a weighted average period of less than 2 years.

During the first nine months of 2017, we also granted 5 million restricted share units at a weighted average grant date fair value of $5.11 per share. As of September 30, 2017, there was $55 million of unrecognized compensation expense related to our unvested restricted share grants. This cost is expected to be recognized over a weighted average period of less than 2 years.

16. Segment Information
 
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. In the beginning of the fourth quarter of 2017, management commenced with the implementation of internal changes to the Company’s organization structure and as a result we are in the process of reassessing our reportable segments. See “Note 20 – Subsequent Event” for additional information.
 
Three Months Ended September 30, 2017
(Dollars in millions)
Net
Operating
Revenues
 
Income (Loss)
from
Operations
 
Depreciation
and
Amortization
North America
$
538

 
$
33

 
$
39

MENA/Asia Pacific
335

 
8

 
49

Europe/SSA/Russia
252

 
14

 
36

Latin America
229

 
(5
)
 
49

Subtotal
1,354

 
50

 
173

Land Drilling Rigs
106

 
(16
)
 
23

 
1,460

 
34

 
196

Corporate and Research and Development
 
 
(70
)
 
3

Restructuring Charges (a)
 
 
(34
)
 
 
Asset Write-Downs and Other
 
 
2

 
 
Litigation Credit
 
 
4

 
 
Total
$
1,460

 
$
(64
)
 
$
199

(a)
Includes restructuring charges of $34 million: $20 million in MENA/Asia Pacific, $9 million in Latin America, $2 million in Europe/SSA/Russia, $2 million in Corporate and Research and Development, and $1 million in North America.






18


 
Three Months Ended September 30, 2016
(Dollars in millions)
Net
Operating
Revenues
 
Income (Loss)
from
Operations
 
Depreciation
and
Amortization
North America
$
449

 
$
(95
)
 
$
55

MENA/Asia Pacific
329

 
(8
)
 
60

Europe/SSA/Russia
225

 
(3
)
 
45

Latin America
255

 
14

 
56

  Subtotal
1,258

 
(92
)
 
216

Land Drilling Rigs
98

 
(19
)
 
22

 
1,356

 
(111
)
 
238

Corporate and Research and Development
 
 
(63
)
 
4

Long-lived Asset Impairments, Write-Downs and Other Charges (b)
 
 
(740
)
 
 
Restructuring Charges (c)
 
 
(22
)
 
 
Litigation Charges, Net
 
 
(9
)
 
 
Total
$
1,356

 
$
(945
)
 
$
242

(b)
Includes $436 million in long-lived asset impairments, $198 million in inventory write-downs, $62 million in accounts receivable reserves and write-offs, and $44 million of other asset write-offs and charges.
(c)
Includes restructuring charges of $22 million: $10 million in Latin America, $5 million in North America, $5 million in MENA/Asia Pacific, and $2 million in Corporate and Research and Development.

 
Nine Months Ended September 30, 2017
(Dollars in millions)
Net
Operating
Revenues
 
Income (Loss)
from
Operations
 
Depreciation
and
Amortization
North America
$
1,503

 
$
17

 
$
119

MENA/Asia Pacific
996

 
14

 
151

Europe/SSA/Russia
740

 
9

 
114

Latin America (a)
674

 
(31
)
 
148

Subtotal
3,913

 
9

 
532

Land Drilling Rigs
296

 
(66
)
 
70

 
4,209

 
(57
)
 
602

Corporate and Research and Development
 
 
(211
)
 
9

Restructuring Charges (b)
 
 
(140
)
 
 
Asset Write-Downs and Other
 
 
17

 
 
Litigation Credit
 
 
4

 
 
Total
$
4,209

 
$
(387
)
 
$
611

(a)
In the second quarter of 2017, the Company changed its accounting for revenue with our largest customer in Venezuela. The total impact of this change for the first six months of 2017 related to prior periods is a reduction in revenues and income from operations of approximately $23 million for the second half of 2016. See “Note 1 – General” for additional details.
(b)
Includes restructuring charges of $140 million: $31 million in Europe/SSA/Russia, $29 million in MENA/Asia Pacific, $29 million in Corporate and Research and Development, $25 million in Latin America, $24 million in North America, and $2 million in Land Drilling Rigs.


19


 
Nine Months Ended September 30, 2016
(Dollars in millions)
Net
Operating
Revenues
 
Income (Loss)
from
Operations
 
Depreciation
and
Amortization
North America
$
1,393

 
$
(324
)
 
$
167

MENA/Asia Pacific
1,090

 
(4
)
 
181

Europe/SSA/Russia
725

 
(3
)
 
141

Latin America
809

 
59

 
173

  Subtotal
4,017

 
(272
)
 
662

Land Drilling Rigs
326

 
(62
)
 
67

 
4,343

 
(334
)
 
729

Corporate and Research and Development
 
 
(226
)
 
12

Long-lived Asset Impairments, Write-Downs and Other Charges (c)

 
 
(952
)
 
 
Restructuring Charges (d)
 
 
(150
)
 
 
Litigation Charges, Net
 
 
(190
)
 
 
Total
$
4,343

 
$
(1,852
)
 
$
741

(c)
Includes $436 million in long-lived asset impairments, $213 million in inventory write-downs, $121 million in other asset write-offs and charges, $84 million to adjust a note from our largest customer in Venezuela to fair value, $62 million in accounts receivable reserves and write-offs, $20 million in pressure pumping related charges, and $15 million in supply agreement charges related to a non-core business divestiture.
(d)
Includes restructuring charges of $150 million: $44 million in North America, $37 million in Latin America, $25 million in Europe/SSA/Russia, $25 million in MENA/Asia Pacific, $14 million in Corporate and Research and Development and $5 million in Land Drilling Rigs.

17. 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 Foreign Corrupt Practices Act of 1977 and trade sanctions related to the U.S. government investigations disclosed in our SEC filings since 2007. Those shareholder derivative cases were filed in Harris County, Texas state court and consolidated under the caption Neff v. Brady, et al., No. 2010040764 (collectively referred to as the “Neff Case”). Other shareholder demand letters covering the same subject matter were received by the Company in early 2014, and a fourth shareholder derivative action was filed, purportedly on behalf of the Company, also asserting breach of duty and other claims against certain current and former officers and directors of the Company related to the same subject matter as the Neff Case. That case, captioned Erste-Sparinvest KAG v. Duroc-Danner, et al., No. 201420933 (Harris County, Texas) was consolidated into the Neff Case in September 2014. A motion to dismiss was granted May 15, 2015, and an appeal was filed on June 15, 2015. Following briefing and oral argument, on June 29, 2017, the Texas Court of Appeals denied in part and granted in part the shareholders’ appeal. The Court ruled that the shareholders lacked standing to bring claims that arose prior to the Company’s redomestication to Switzerland in 2009, and upheld the dismissal of those claims. The Court reversed as premature the trial court’s dismissal of claims arising after the redomestication and remanded to the trial court for further proceedings. We cannot reliably predict the outcome of the remaining claims, including the amount of any possible loss.

Securities Class Action Settlement

On June 30, 2015, we signed a stipulation to settle a shareholder securities class action captioned Freedman v. Weatherford International Ltd., et al., No. 1:12-cv-02121-LAK (S.D.N.Y.) for $120 million subject to notice to the class and court approval. The Freedman lawsuit had been filed in the U.S. District Court for the Southern District of New York in March 2012, and alleged that we and certain current and former officers of Weatherford violated the federal securities laws in connection with the restatements of the Company’s historical financial statements announced on February 21, 2012 and July 24, 2012. On November 4, 2015, the U.S. District Court for the Southern District of New York entered a final judgment and an order approving the settlement. Pursuant to the settlement, we were required to pay $120 million, which was partially funded by insurance proceeds. There was no admission of liability or fault by a party in connection with the settlement. We are pursuing reimbursement from our insurance carriers and recovered $23 million of the settlement amount to date, of which $4 million was recovered in the second quarter of 2017.

20



U.S. Government and Other Investigations
 
The SEC and the U.S. Department of Justice (“DOJ”) investigated certain accounting issues associated with the material weakness in our internal control 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. During the first quarter 2016, we recorded a loss contingency in the amount of $65 million and increased it to $140 million in the second quarter to reflect our best estimate of the potential settlement. As disclosed in the Form 8-K filed on September 27, 2016, the Company settled with the SEC without admitting or denying the findings of the SEC, by consenting to the entry of an administrative order that requires the Company to cease and desist from committing or causing any violations and any future violations of the anti-fraud provisions of the Securities Act of 1933 (as amended, the “Securities Act”), and the anti-fraud, reporting, books and records, and internal controls provisions of the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), and the rules promulgated thereunder. As part of the terms of the SEC settlement, the Company agreed to pay a total civil monetary penalty of $140 million. In addition, certain reports and certifications regarding our tax internal controls must be delivered to the SEC during the two years following the settlement. We have completed two of three such reports and expect the final report to be delivered when due in March of 2018. A payment of $50 million was made during the fourth quarter of 2016, and a payment of $30 million was made in each of January and May 2017. A final payment of $30 million was made in September 2017.

Spitzer Industries Litigation

In August 2016, after a bench trial in Harris County, Texas, the court entered a judgment of $36 million against the Company in the case of Spitzer Industries, Inc. (“Spitzer”) vs. Weatherford U.S., L.P. in connection with Spitzer’s fabrication work on two mobile capture vessels used in the cleanup of marine oil spills. We continue to maintain a reserve in the amount of the judgment, and an appellate brief was filed on June 16, 2017 to the First Court of Appeals in Houston, Texas.

Rapid Completions and Packers Plus Litigation

Several subsidiaries of the Company are defendants in a patent infringement lawsuit filed by Rapid Completions LLC (“RC”) in U.S. District Court for the Eastern District of Texas on July 31, 2015. RC claims that we and other defendants are liable for infringement of seven U.S. patents related to specific downhole completion equipment and the methods of using such equipment. These patents have been assigned to Packers Plus Energy Services, Inc., a Canadian corporation (“Packers Plus”), and purportedly exclusively licensed to RC. The litigation is currently stayed pending resolution of inter partes reviews of each of the patents-in-suit, which are pending before the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (“USPTO”). RC is seeking a permanent injunction against further alleged infringement, unspecified damages for infringement, supplemental and enhanced damages, and additional relief such as attorneys’ fees. The Company has filed a counterclaim against Packers Plus, seeking declarations of non-infringement, invalidity, and unenforceability of the patents-in-suit on the grounds of inequitable conduct before the USPTO. The Company is seeking attorneys’ fees and costs incurred in the lawsuit.

On October 14, 2015, Packers Plus and RC filed suit in Federal Court in Toronto, Canada against the Company and certain subsidiaries alleging infringement of a related Canadian patent and seeking unspecified damages and an accounting of the Company’s profits. Trial on the validity of the Canadian patent was completed in March 2017. The parties are still awaiting a decision from the Court. If the Federal Court upholds the validity of the patent, a trial on infringement will be held in September 2018. The parties mediated both the U.S. and Canadian cases on July 5, 2017, but were unable to reach a settlement.

During the second quarter of 2017, the negotiations related to this matter progressed to a point where we recognized a liability for a loss contingency that we believe to be probable and for which a reasonable estimate could be made. The estimate remains unchanged as of September 30, 2017. In both cases, we will continue to defend ourselves vigorously. If one or more negative outcomes were to occur in either case, the impact to our financial position, results of operations, or cash flows could be material.

Other Disputes and Litigation

Additionally, we are aware of various disputes and potential claims and are a party in various litigation involving claims against us, including as a defendant in various employment claims alleging our failure to pay certain classes of workers overtime in compliance with the Fair Labor Standards Act for which an agreement was reached and settled during 2016. Some of these disputes and claims 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.


21


In addition we have certain claims, disputes and pending litigation for which we do not believe a negative outcome is probable or for which we can only estimate a range of liability. It is possible, however, that an unexpected judgment could be rendered against us, or we could decide to resolve a case or cases, that would result in liability that could be uninsured and beyond the amounts we currently have reserved and in some cases those losses could be material. If one or more negative outcomes were to occur relative to these matters, the aggregate impact to our financial condition could be material.

Accrued litigation and settlements recorded in “Other Current Liabilities” on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 were $91 million and $181 million, respectively.

Other Contingencies

The contractual residual value guarantee balance of $28 million in “Other Non-Current Liabilities” on the accompanying Condensed Consolidated Balance Sheets at December 31, 2016 was extinguished after the underlying leased equipment in our North America pressure pumping operations was purchased during the first quarter of 2017.

We have minimum purchase commitments related to supply contracts and maintain a liability at September 30, 2017 of $122 million for losses incurred on the contracts, of which $52 million is recorded in “Other Current Liabilities,” $47 million is recorded in “Other Non-Current Liabilities” and $23 million to be contributed to the OneStim joint venture is recorded in “Liabilities Held for Sale” on our Condensed Consolidated Balance Sheets.

18. New Accounting Pronouncements

Accounting Changes

In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of a share-based payment award changes as a result of changes in terms or conditions of the award. We have elected to early adopt ASU 2017-09 in the second quarter of 2017 and the adoption of this ASU had no impact on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires all income tax effects related to share-based payments at settlement (or expiration) be recorded through the income statement, including unrealized excess tax benefits. ASU 2016-09 also requires that all tax related cash flows resulting from share-based payments be presented as operating activities in the statement of cash flows. In addition, the guidance allows entities to increase the net-share settlement of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to estimate forfeitures or recognize them as they occur. Finally, the new guidance requires all cash payments made to a taxing authority on an employee’s behalf for shares withheld be presented as financing activities in the statement of cash flows.

We adopted ASU 2016-09 in the first quarter of 2017. We prospectively adopted the changes requiring all tax effects related to share-based payments to be recorded through the income statement and all tax related cash flows from share based payments to be presented as operating activities in the statement of cash flows. There is no cumulative effect as there is no impact from unrecognized excess tax benefits or minimum withholding requirements and prior periods have not been adjusted. We have also made an entity-wide accounting policy election to continue to estimate forfeitures and adjust the estimate when it is likely to change. We have retrospectively adopted the guidance to classify as a financing activity on the statement of cash flows all cash payments made to a taxing authority on an employee’s behalf for shares withheld for tax-withholding purposes. We have reclassified $5 million from other operating activities to other financing activities in the Statements of Cash Flows for the nine months ended September 30, 2016.

Accounting Standards Issued Not Yet Adopted

In July 2017, the FASB issued ASU 2017-11, which amends the accounting for certain equity-linked financial instruments and states a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. For an equity-linked financial instrument no longer accounted for as a liability at fair value, the amendments require a down round to be treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share. The ASU is effective beginning with the first quarter of 2019, and early adoption is permitted. The ASU is required to be applied retrospectively to outstanding instruments. Weatherford is evaluating the impact that the ASU will have on our Consolidated Financial Statements and whether we will early adopt the ASU.


22


In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends the presentation of net periodic pension and postretirement benefit cost (“net benefit cost”). The service cost component of net benefit cost will be bifurcated and presented with other employee compensation costs, while other components of net benefit costs will be presented separately. The standard is required to be applied on a retrospective basis and will be effective beginning with the first quarter of 2018, although early adoption is permitted. We are evaluating the impact that this new standard will have on our Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which eliminates a current exception in U.S. GAAP to the recognition of the income tax effects of temporary differences that result from intra-entity transfers of non-inventory assets. The intra-entity exception is being eliminated under the ASU. The standard is required to be applied on a modified retrospective basis and will be effective beginning with the first quarter of 2018.  Early adoption is permitted.  We estimate that the impact that this new standard will have on our Consolidated Financial Statements will be a reversal of $110 million of prepaid taxes through  retained earnings.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize a lease asset and lease liability for most leases, including those classified as operating leases under existing U.S. GAAP. The ASU also changes the definition of a lease and requires expanded quantitative and qualitative disclosures for both lessees and lessors.

Under ASU 2016-02, we will revise our leasing policies to require most of the leases, where we are the lessee, to be recognized on the balance sheet as a lease asset and lease liability whereas currently we do not recognize operating leases on our balance sheet.  Further, we will separate leases from other contracts where we are either the lessor or lessee when the rights conveyed under the contract indicate there is a lease, where we may not be required to do so under existing policies. While we cannot calculate the impact ASU 2016-02 will have on Weatherford’s financial statements, we anticipate that Weatherford’s assets and liabilities will increase by a significant amount.

This standard will be effective for us beginning with the first quarter of 2019. We do not anticipate adopting ASU 2016-02 early, which is permitted under the standard. ASU 2016-02 requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective transition method but permits certain practical expedients to be applied, which may exclude certain leases that commenced before the effective date.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace most existing revenue recognition guidance in U.S. GAAP. ASU 2014-09 will require an entity to 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. ASU 2014-09 requires a five-step approach to recognizing revenue: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. Subsequent to ASU 2014-09’s issuance, Topic 606 has been affected by other FASB updates that address certain aspects of Topic 606 or revised the effective date of the accounting changes.

Under ASU 2014-09, we will revise our revenue recognition policy to require revenue recognition when control passes. This is a change from current policies, which generally require revenue recognition when delivery has occurred and risk and rewards of ownership have passed.

We intend to adopt ASU 2014-09 as of its effective date in the first quarter of 2018. ASU 2014-09 permits two transition methods: the retrospective method or the modified retrospective method. Weatherford will be applying modified retrospective method which requires the recognition of a cumulative effect as an adjustment to opening retained earnings on the initial date of adoption.

We have planned and commenced our implementation of ASU 2014-09. We have substantially completed an assessment of the differences between ASU 2014-09 and current accounting practices (gap analysis). Our approach involved comparing existing accounting requirements to the requirements under Topic 606 for each of our product lines and reviewing a sample of contracts within each product line and region. We are currently in the process of establishing new policies, procedures, and controls, establishing appropriate presentation and disclosure changes and quantifying any adoption date adjustments. Although not finalized, based on the implementation efforts performed, management’s assessment is that ASU 2014-09 is not expected to materially affect us. Any changes are not expected to have any direct impact to our cash flows.



23


19. 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 its 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 6.80% senior notes of Weatherford Delaware were guaranteed by Weatherford Bermuda at September 30, 2017 and December 31, 2016. At December 31, 2016, Weatherford Bermuda also guaranteed the 6.35% senior notes of Weatherford Delaware.
 
The following obligations of Weatherford Bermuda were guaranteed by Weatherford Delaware at September 30, 2017 and December 31, 2016: (1) Revolving Credit Agreement, (2) Term Loan Agreement, (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 due 2039, (8) 5.125% senior notes, (9) 6.75% senior notes, (10) 4.50% senior notes, (11) 5.95% senior notes, (12) 5.875% exchangeable senior notes, (13) 7.75% senior notes, (14) 8.25% senior notes and (15) 9.875% senior notes due 2024.

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 September 30, 2017
(Unaudited)
(Dollars in millions)
Weatherford
Ireland
 
Weatherford Bermuda
 
Weatherford Delaware
 
Other
Subsidiaries
 
Eliminations
 
Consolidation
Revenues
$

 
$

 
$

 
$
1,460

 
$

 
$
1,460

Costs and Expenses
(3
)
 
6

 
1

 
(1,528
)
 

 
(1,524
)
Operating Income (Loss)
(3
)
 
6

 
1

 
(68
)
 

 
(64
)
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest Expense, Net

 
(149
)
 
(10
)
 
6

 
5

 
(148
)
Intercompany Charges, Net
(2
)
 
1

 
(59
)
 
60

 

 

Equity in Subsidiary Income (Loss)
(244
)
 
(518
)
 
(445
)
 

 
1,207

 

Other, Net
(7
)
 
(54
)
 
(53
)
 
48

 
52

 
(14
)
Income (Loss) Before Income Taxes
(256
)
 
(714
)
 
(566
)
 
46

 
1,264

 
(226
)
(Provision) Benefit for Income Taxes

 

 

 
(25
)
 

 
(25
)
Net Income (Loss)
(256
)
 
(714
)
 
(566
)
 
21

 
1,264

 
(251
)
Noncontrolling Interests

 

 

 
5