Weatherford International plc — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Weatherford completed its redomestication from Switzerland to Ireland on June 17, 2014.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $3,877 | $3,820 | $11,184 | $11,525 |
| Operating income | $318 | $239 | $473 | $573 |
| Operating margin | 8.2% | 6.3% | 4.2% | 5.0% |
| Net income (loss) attributable to Weatherford | $77 | $22 | $(109) | $(74) |
| Diluted EPS | $0.10 | $0.03 | $(0.14) | $(0.10) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $379 | $567 |
Q3 revenue rose 1% year over year; nine-month revenue declined 3%. Products generated $1,552 of Q3 revenue and services $2,325. Q3 operating income improved 33%; nine-month operating income fell 17%. The nine-month results included $283 of restructuring charges, $143 of long-lived asset impairment, and $121 of goodwill impairment. Q3 included $154 of restructuring charges and a $38 net gain on business sales.
For the nine months, capital expenditures were $1,045, making operating cash flow less capital expenditures approximately negative $666. Investing cash flow was negative $250, including $781 in proceeds from asset and business sales. Cash increased to $582 from $435 at year-end 2013. Interest expense was $376 for the nine months, down from $388.
Balance sheet and liquidity
At September 30, cash was $582, current assets $8,927, and current liabilities $4,878. Total debt was approximately $8,719, comprising $1,715 of short-term borrowings and current maturities and $7,004 of long-term debt. The debt-to-total-capitalization covenant limit was below 60%; Weatherford reported compliance. Its $2.25 billion revolving credit facility had $1,247 of availability after commercial paper and letters of credit uses. A separate $400 million 364-day term loan was fully drawn and matures April 9, 2015.
Changes, outlook, and key risks
- Regional mix: North America revenue grew 14% in Q3, while Latin America fell 14% and Europe/SSA/Russia fell 7%. North America strength reflected demand and pricing in pressure pumping, artificial lift, completions, and formation evaluation. International revenue declined 7% in Q3, partly due to lower activity, legacy Iraq contracts, and divestitures.
- Portfolio actions: Weatherford sold its Russia and Venezuela land drilling/workover operations for $499 plus estimated working capital, recording a roughly $10 loss at closing after prior impairments. It sold pipeline and specialty services for $246 and recorded an approximately $50 gain. Well testing remained classified as held for sale. Management intended to divest additional non-core businesses and use proceeds to reduce debt.
- Management outlook: For the remainder of 2014, management expected revenue growth across regions excluding divested operations, led by North America; it also anticipated improvement in Latin America and positive Eastern Hemisphere activity, with seasonal and regional offsets. The company reported achieving its $500 annualized pretax cost-savings goal and projected 2014 capital expenditures of approximately $1.4 billion. Management emphasized cost discipline, cash generation, and debt reduction; no specific revenue or earnings guidance was stated.
- Execution and market risks: Estimated total losses on two legacy Iraq early-production facility contracts were $345 at September 30; the filing cites claims revenue and back charges in project estimates. Geopolitical disruption, including Libya, led to product-line exits and restructuring impairments. Lower oil prices, activity levels, pricing, and customer spending could affect demand.
- Currency exposure: Weatherford used the official Venezuelan rate of 6.30 bolivars per U.S. dollar and reported a $229 net monetary asset position in bolivars. Using the alternative SICAD 2 rate of 50 would have produced an estimated one-time charge of approximately $200. Argentina inflation and currency conditions were also being monitored.
- Legal and compliance matters: The company paid $253 in early 2014 to settle U.S. government matters concerning sanctions, the Iraq oil-for-food program, and FCPA issues. An independent monitor and retroactive export-control audit were ongoing; separate SEC/DOJ investigations related to historical internal-control weaknesses and restatements continued. Outcomes and potential additional losses were not estimable. A proposed $53 million shareholder class-action settlement was funded by insurers, with court approval pending.
- Other items: Q3 tax expense was $98 on pretax income of $187, with restructuring charges receiving no significant tax benefit. The company reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether reported cost savings translate into sustained operating margin and free-cash-flow improvement, given nine-month cash flow after capital expenditures was negative.
- Progress on debt reduction, remaining divestitures, and refinancing or repayment of the fully drawn term loan due April 2015.
- Final working-capital settlements and gains or losses on completed divestitures, plus the timing and proceeds of the Proserv investment sale announced after quarter-end.
- Changes in Iraq contract-loss estimates and the resolution of claims, back charges, and project disputes.
- Venezuelan exchange-rate policy and any need to remeasure the bolivar exposure; developments in Argentina inflation assessment.
- Outcomes of continuing government, shareholder, and securities-related matters, including compliance-monitor requirements and any additional financial exposure.