filings.toolsItem 8. Financial Statements and Supplementary Data.
120K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Halliburton Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Securities Exchange Act Rule 13a-15(f).
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2019 based upon criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment, we believe that, as of December 31, 2019, our internal control over financial reporting is effective. The effectiveness of Halliburton’s internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein.
HALLIBURTON COMPANY
by
| /s/ Jeffrey A. Miller | /s/ Lance Loeffler | |
| Jeffrey A. Miller | Lance Loeffler | |
| Chairman of the Board, President and | Executive Vice President and | |
| Chief Executive Officer | Chief Financial Officer |
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
Halliburton Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Halliburton Company and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 11, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 6 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the Realizability of Deferred Tax Assets
As discussed in Notes 1 and 11 to the consolidated financial statements, the Company had gross deferred tax assets of $3.3 billion and a related valuation allowance of $1.1 billion as of December 31, 2019.
We identified the evaluation of the realizability of deferred tax assets as a critical audit matter. This evaluation of the realizability of deferred tax assets, specifically related to net operating loss carryforwards and foreign tax credits, required subjective auditor judgment to assess the forecasts of future taxable income over the periods in which those temporary differences become deductible. Changes in assumptions regarding forecasted taxable income could have an impact on the Company’s evaluation of the realizability of the deferred tax assets.
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The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls related to the Company’s evaluation of the realizability of deferred tax assets, including controls related to the development of forecasts of future taxable income. We evaluated the assumptions used in the development of forecasts of future taxable income by comparing to historical actuals while considering current and anticipated future commodity prices or market events. We also evaluated the Company’s history of realizing deferred tax assets by evaluating the expiration of net operating loss carryforwards and foreign tax credits.
Assessment of the Fair Value of Property, Plant and Equipment
As discussed in Notes 1, 2, and 8 to the consolidated financial statements, the gross amount of property, plant and equipment as of December 31, 2019 was $19.9 billion and related accumulated depreciation of $12.6 billion. The Company recognizes impairment on property, plant and equipment when the undiscounted cash flows expected to result from the use and eventual disposition of the asset group is less than the carrying amount of the asset group. The Company recognized an impairment charge of $1.4 billion for the year ended December 31, 2019.
We identified the assessment of the Company’s estimate of the fair value of property, plant and equipment as a critical audit matter. There was a high degree of subjectivity in evaluating the significant assumptions used in determining the discounted cash flows needed to estimate the fair value of the asset groups, specifically the revenue growth rates, operating margin and the discount rate used.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate the discounted cash flows of the asset groups, including controls related to the significant assumptions. We evaluated the Company’s development of the revenue growth rates and operating margin assumptions by identifying and assessing the sources of data that management used in their assessment. We evaluated the revenue growth rates and operating margin for consistency with relevant historical data, changes in the business, and external industry data. In addition, we involved valuation professionals with specialized skills and knowledge to assist with evaluating the selected discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable companies.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 11, 2020
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
Halliburton Company:
Opinion on Internal Control Over Financial Reporting
We have audited Halliburton Company's and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 11, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 11, 2020
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| HALLIBURTON COMPANY Consolidated Statements of Operations | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31 | |||||||||
| Millions of dollars and shares except per share data | 2019 | 2018 | 2017 | ||||||
| Revenue: | |||||||||
| Services | $ | 16,884 | $ | 18,444 | $ | 15,408 | |||
| Product sales | 5,524 | 5,551 | 5,212 | ||||||
| Total revenue | 22,408 | 23,995 | 20,620 | ||||||
| Operating costs and expenses: | |||||||||
| Cost of services | 15,684 | 16,591 | 14,205 | ||||||
| Cost of sales | 4,439 | 4,418 | 4,138 | ||||||
| Impairments and other charges | 2,506 | 265 | 647 | ||||||
| General and administrative | 227 | 254 | 256 | ||||||
| Total operating costs and expenses | 22,856 | 21,528 | 19,246 | ||||||
| Operating income (loss) | (448 | ) | 2,467 | 1,374 | |||||
| Interest expense, net of interest income of $23, $44, and $112 | (569 | ) | (554 | ) | (593 | ) | |||
| Other, net | (105 | ) | (99 | ) | (99 | ) | |||
| Income (loss) from continuing operations before income taxes | (1,122 | ) | 1,814 | 682 | |||||
| Income tax provision | (7 | ) | (157 | ) | (1,131 | ) | |||
| Income (loss) from continuing operations | (1,129 | ) | 1,657 | (449 | ) | ||||
| Loss from discontinued operations, net | — | — | (19 | ) | |||||
| Net income (loss) | $ | (1,129 | ) | $ | 1,657 | $ | (468 | ) | |
| Net (income) loss attributable to noncontrolling interest | (2 | ) | (1 | ) | 5 | ||||
| Net income (loss) attributable to company | $ | (1,131 | ) | $ | 1,656 | $ | (463 | ) | |
| Amounts attributable to company shareholders: | |||||||||
| Income (loss) from continuing operations | $ | (1,131 | ) | $ | 1,656 | $ | (444 | ) | |
| Loss from discontinued operations, net | — | — | (19 | ) | |||||
| Net income (loss) attributable to company | $ | (1,131 | ) | $ | 1,656 | $ | (463 | ) | |
| Basic and diluted income (loss) per share attributable to company shareholders: | |||||||||
| Income (loss) from continuing operations | $ | (1.29 | ) | $ | 1.89 | $ | (0.51 | ) | |
| Loss from discontinued operations, net | — | — | (0.02 | ) | |||||
| Net income (loss) per share | $ | (1.29 | ) | $ | 1.89 | $ | (0.53 | ) | |
| Basic weighted average common shares outstanding | 875 | 875 | 870 | ||||||
| Diluted weighted average common shares outstanding | 875 | 877 | 870 | ||||||
| See notes to consolidated financial statements. |
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| HALLIBURTON COMPANY Consolidated Statements of Comprehensive Income (Loss) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Net income (loss) | $ | (1,129 | ) | $ | 1,657 | $ | (468 | ) | |
| Other comprehensive income (loss), net of income taxes: | |||||||||
| Defined benefit and other post retirement plans adjustment | (11 | ) | 131 | (22 | ) | ||||
| Other | 3 | (17 | ) | 7 | |||||
| Other comprehensive income (loss), net of income taxes | (8 | ) | 114 | (15 | ) | ||||
| Comprehensive income (loss) | $ | (1,137 | ) | $ | 1,771 | $ | (483 | ) | |
| Comprehensive (income) loss attributable to noncontrolling interest | (2 | ) | (1 | ) | 5 | ||||
| Comprehensive income (loss) attributable to company shareholders | $ | (1,139 | ) | $ | 1,770 | $ | (478 | ) | |
| See notes to consolidated financial statements. |
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| HALLIBURTON COMPANY Consolidated Balance Sheets | ||||||
|---|---|---|---|---|---|---|
| December 31 | ||||||
| Millions of dollars and shares except per share data | 2019 | 2018 | ||||
| Assets | ||||||
| Current assets: | ||||||
| Cash and equivalents | $ | 2,268 | $ | 2,008 | ||
| Receivables (net of allowances for bad debts of $776 and $738) | 4,577 | 5,234 | ||||
| Inventories | 3,139 | 3,028 | ||||
| Other current assets | 1,228 | 881 | ||||
| Total current assets | 11,212 | 11,151 | ||||
| Property, plant and equipment (net of accumulated depreciation of $12,630 and $13,153) | 7,310 | 8,873 | ||||
| Goodwill | 2,812 | 2,825 | ||||
| Deferred income taxes | 1,683 | 1,384 | ||||
| Operating lease right-of-use assets | 931 | — | ||||
| Other assets | 1,429 | 1,749 | ||||
| Total assets | $ | 25,377 | $ | 25,982 | ||
| Liabilities and Shareholders’ Equity | ||||||
| Current liabilities: | ||||||
| Accounts payable | $ | 2,432 | $ | 3,018 | ||
| Accrued employee compensation and benefits | 604 | 714 | ||||
| Taxes other than income | 310 | 248 | ||||
| Current portion of operating lease liabilities | 208 | — | ||||
| Other current liabilities | 1,324 | 822 | ||||
| Total current liabilities | 4,878 | 4,802 | ||||
| Long-term debt | 10,316 | 10,312 | ||||
| Operating lease liabilities | 825 | — | ||||
| Employee compensation and benefits | 525 | 483 | ||||
| Other liabilities | 808 | 841 | ||||
| Total liabilities | 17,352 | 16,438 | ||||
| Shareholders’ equity: | ||||||
| Common stock, par value $2.50 per share (authorized 2,000 shares, issued 1,068 and 1,069 shares) | 2,669 | 2,671 | ||||
| Paid-in capital in excess of par value | 143 | 211 | ||||
| Accumulated other comprehensive loss | (362 | ) | (355 | ) | ||
| Retained earnings | 11,989 | 13,739 | ||||
| Treasury stock, at cost (190 and 198 shares) | (6,427 | ) | (6,744 | ) | ||
| Company shareholders’ equity | 8,012 | 9,522 | ||||
| Noncontrolling interest in consolidated subsidiaries | 13 | 22 | ||||
| Total shareholders’ equity | 8,025 | 9,544 | ||||
| Total liabilities and shareholders’ equity | $ | 25,377 | $ | 25,982 | ||
| See notes to consolidated financial statements. |
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| HALLIBURTON COMPANY Consolidated Statements of Cash Flows | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Cash flows from operating activities: | |||||||||
| Net income (loss) | $ | (1,129 | ) | $ | 1,657 | $ | (468 | ) | |
| Adjustments to reconcile net income (loss) to cash flows from operating activities: | |||||||||
| Impairments and other charges | 2,506 | 265 | 647 | ||||||
| Cash impact of impairments and other charges - severance payments | (144 | ) | — | — | |||||
| Depreciation, depletion and amortization | 1,625 | 1,606 | 1,556 | ||||||
| Deferred income tax provision (benefit), continuing operations | (396 | ) | (267 | ) | 734 | ||||
| Changes in assets and liabilities: | |||||||||
| Receivables | 636 | (186 | ) | (1,350 | ) | ||||
| Accounts payable | (595 | ) | 483 | 753 | |||||
| Inventories | (202 | ) | (681 | ) | (29 | ) | |||
| Other operating activities | 144 | 280 | 625 | ||||||
| Total cash flows provided by (used in) operating activities | 2,445 | 3,157 | 2,468 | ||||||
| Cash flows from investing activities: | |||||||||
| Capital expenditures | (1,530 | ) | (2,026 | ) | (1,373 | ) | |||
| Proceeds from sales of property, plant and equipment | 190 | 218 | 158 | ||||||
| Payments to acquire businesses, net of cash acquired | (33 | ) | (187 | ) | (628 | ) | |||
| Other investing activities | (72 | ) | 2 | (84 | ) | ||||
| Total cash flows provided by (used in) investing activities | (1,445 | ) | (1,993 | ) | (1,927 | ) | |||
| Cash flows from financing activities: | |||||||||
| Dividends to shareholders | (630 | ) | (630 | ) | (626 | ) | |||
| Proceeds from issuance of common stock | 118 | 195 | 158 | ||||||
| Stock repurchase program | (100 | ) | (400 | ) | — | ||||
| Payments on long-term borrowings | (13 | ) | (445 | ) | (1,641 | ) | |||
| Other financing activities | (70 | ) | (139 | ) | (52 | ) | |||
| Total cash flows provided by (used in) financing activities | (695 | ) | (1,419 | ) | (2,161 | ) | |||
| Effect of exchange rate changes on cash | (45 | ) | (74 | ) | (52 | ) | |||
| Increase (decrease) in cash and equivalents | 260 | (329 | ) | (1,672 | ) | ||||
| Cash and equivalents at beginning of year | 2,008 | 2,337 | 4,009 | ||||||
| Cash and equivalents at end of year | $ | 2,268 | $ | 2,008 | $ | 2,337 | |||
| Supplemental disclosure of cash flow information: | |||||||||
| Cash payments (receipts) during the period for: | |||||||||
| Interest | $ | 534 | $ | 556 | $ | 594 | |||
| Income taxes | $ | 363 | $ | 178 | $ | (178 | ) | ||
| See notes to consolidated financial statements. |
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| HALLIBURTON COMPANY Consolidated Statements of Shareholders' Equity | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Company Shareholders’ Equity | |||||||||||||||||||||
| Millions of dollars | Common Stock | Paid-in Capital in Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest in Consolidated Subsidiaries | Total | ||||||||||||||
| Balance at December 31, 2016 | $ | 2,674 | $ | 201 | $ | (7,153 | ) | $ | 14,141 | $ | (454 | ) | $ | 39 | $ | 9,448 | |||||
| Comprehensive income (loss): | |||||||||||||||||||||
| Net loss | — | — | — | (463 | ) | — | (5 | ) | (468 | ) | |||||||||||
| Retained earnings adjustment for new accounting standard | — | — | — | (384 | ) | — | — | (384 | ) | ||||||||||||
| Other comprehensive loss | — | — | — | — | (15 | ) | — | (15 | ) | ||||||||||||
| Cash dividends ($0.72 per share) | — | — | — | (626 | ) | — | — | (626 | ) | ||||||||||||
| Stock plans | (1 | ) | 6 | 396 | — | — | — | 401 | |||||||||||||
| Other | — | — | — | — | — | (7 | ) | (7 | ) | ||||||||||||
| Balance at December 31, 2017 | $ | 2,673 | $ | 207 | $ | (6,757 | ) | $ | 12,668 | $ | (469 | ) | $ | 27 | $ | 8,349 | |||||
| Comprehensive income (loss): | |||||||||||||||||||||
| Net income | — | — | — | 1,656 | — | 1 | 1,657 | ||||||||||||||
| Other comprehensive income | — | — | — | — | 114 | — | 114 | ||||||||||||||
| Cash dividends ($0.72 per share) | — | — | — | (630 | ) | — | — | (630 | ) | ||||||||||||
| Stock plans | (2 | ) | 4 | 413 | — | — | — | 415 | |||||||||||||
| Stock repurchase program | — | — | (400 | ) | — | — | — | (400 | ) | ||||||||||||
| Other | — | — | — | 45 | — | (6 | ) | 39 | |||||||||||||
| Balance at December 31, 2018 | $ | 2,671 | $ | 211 | $ | (6,744 | ) | $ | 13,739 | $ | (355 | ) | $ | 22 | $ | 9,544 | |||||
| Comprehensive income (loss): | |||||||||||||||||||||
| Net loss | — | — | — | (1,131 | ) | — | 2 | (1,129 | ) | ||||||||||||
| Other comprehensive loss | — | — | — | — | (8 | ) | — | (8 | ) | ||||||||||||
| Cash dividends ($0.72 per share) | — | — | — | (630 | ) | — | — | (630 | ) | ||||||||||||
| Stock plans | (2 | ) | (67 | ) | 417 | — | — | — | 348 | ||||||||||||
| Stock repurchase program | — | — | (100 | ) | — | — | — | (100 | ) | ||||||||||||
| Other | — | (1 | ) | — | 11 | 1 | (11 | ) | — | ||||||||||||
| Balance at December 31, 2019 | $ | 2,669 | $ | 143 | $ | (6,427 | ) | $ | 11,989 | $ | (362 | ) | $ | 13 | $ | 8,025 | |||||
| See notes to consolidated financial statements. |
HAL 2019 FORM 10-K | 43
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
HALLIBURTON COMPANY
Notes to Consolidated Financial Statements
Note 1**. Description of Company and Significant Accounting Policies**
Description of Company
Halliburton Company is one of the world's largest providers of products and services to the energy industry. Its predecessor was established in 1919 and incorporated under the laws of the State of Delaware in 1924. We help our customers maximize asset value throughout the lifecycle of the reservoir - from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout the life of the asset. We serve major, national and independent oil and natural gas companies throughout the world and operate under two divisions, which form the basis for the two operating segments we report, the Completion and Production segment and the Drilling and Evaluation segment.
Use of estimates
Our financial statements are prepared in conformity with United States generally accepted accounting principles, requiring us to make estimates and assumptions that affect:
| - | the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and |
| - | the reported amounts of revenue and expenses during the reporting period. |
We believe the most significant estimates and assumptions are associated with the forecasting of our effective income tax rate and the valuation of deferred taxes, legal reserves, long-lived asset valuations, purchase price allocations, and allowance for bad debts. Ultimate results could differ from our estimates.
Basis of presentation
The consolidated financial statements include the accounts of our company and all of our subsidiaries that we control or variable interest entities for which we have determined that we are the primary beneficiary. All material intercompany accounts and transactions are eliminated. Investments in companies in which we do not have a controlling interest, but over which we do exercise significant influence, are accounted for using the equity method of accounting. If we do not have significant influence, we use the cost method of accounting. In addition, certain reclassifications of prior period balances have been made to conform to the current period presentation.
Revenue recognition
Our services and products are generally sold based upon purchase orders or contracts with our customers that include fixed or determinable prices but do not include right of return provisions or other significant post-delivery obligations. The vast majority of our service and product contracts are short-term in nature. We recognize revenue based on the transfer of control or our customers' ability to benefit from our services and products in an amount that reflects the consideration we expect to receive in exchange for those services and products. We also assess our customers' ability and intention to pay, which is based on a variety of factors, including our historical payment experience with and the financial condition of our customers. Rates for services are typically priced on a per day, per meter, per man-hour or similar basis. See Note 4 for further information on revenue recognition.
Research and development
We maintain an active research and development program. The program improves products, processes and engineering standards and practices that serve the changing needs of our customers, such as those related to high pressure and high temperature environments, and also develops new products and processes. Research and development costs are expensed as incurred and were $404 million in 2019, $390 million in 2018 and $360 million in 2017.
Cash equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost represents invoice or production cost for new items and original cost. Production cost includes material, labor and manufacturing overhead. The majority of our inventory is recorded on the average cost method. We regularly review inventory quantities on hand and record provisions for excess or obsolete inventory based primarily on historical usage, estimated product demand and technological developments.
HAL 2019 FORM 10-K | 44
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Allowance for bad debts
We establish an allowance for bad debts through a review of several factors, including historical collection experience, current aging status of the customer accounts and financial condition of our customers. Our policy is to write off bad debts when the customer accounts are determined to be uncollectible.
Property, plant and equipment
Other than those assets that have been written down to their fair values due to impairment, property, plant and equipment are reported at cost less accumulated depreciation, which is generally provided on the straight-line method over the estimated useful lives of the assets. Accelerated depreciation methods are used for tax purposes, wherever permitted. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Planned major maintenance costs are generally expensed as incurred. Expenditures for additions, modifications and conversions are capitalized when they increase the value or extend the useful life of the asset.
Goodwill and other intangible assets
We record as goodwill the excess purchase price over the fair value of the tangible and identifiable intangible assets acquired in a business acquisition. Changes in the carrying amount of goodwill are detailed below by reportable segment.
| Millions of dollars | Completion and Production | Drilling and Evaluation | Total | ||||||
| Balance at December 31, 2017: | $ | 1,922 | $ | 771 | $ | 2,693 | |||
| Current year acquisitions | 99 | 6 | 105 | ||||||
| Purchase price adjustments for previous acquisitions | 34 | (7 | ) | 27 | |||||
| Balance at December 31, 2018: | $ | 2,055 | $ | 770 | $ | 2,825 | |||
| Current year acquisitions | 6 | 5 | 11 | ||||||
| Purchase price adjustments for previous acquisitions | (1 | ) | (1 | ) | (2 | ) | |||
| Other | (21 | ) | (1 | ) | (22 | ) | |||
| Balance at December 31, 2019: | $ | 2,039 | $ | 773 | $ | 2,812 |
The reported amounts of goodwill for each reporting unit are reviewed for impairment on an annual basis, during the third quarter, and more frequently when circumstances indicate an impairment may exist. Due to the impairments and other charges recorded during the fourth quarter of 2019, we updated our goodwill impairment assessment through December 31, 2019. As a result of our goodwill impairment assessments performed in the years ended December 31, 2019, 2018 and 2017, we determined that the fair value of each reporting unit exceeded its net book value and, therefore, no goodwill impairments were deemed necessary. For further information on our goodwill impairment assessments, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates.”
We amortize other identifiable intangible assets with a finite life on a straight-line basis over the period which the asset is expected to contribute to our future cash flows, ranging from one year to twenty-eight years. The components of these other intangible assets generally consist of patents, license agreements, non-compete agreements, trademarks and customer lists and contracts.
Evaluating impairment of long-lived assets
When events or changes in circumstances indicate that long-lived assets other than goodwill may be impaired, an evaluation is performed. For assets classified as held for use, we first group individual assets based on the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets. We then compare estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group to its carrying amount. If the asset group's undiscounted cash flows are less than its carrying amount, we then determine the asset group's fair value by using a discounted cash flow analysis and recognize any resulting impairment. When an asset is classified as held for sale, the asset’s book value is evaluated and adjusted to the lower of its carrying amount or fair value less cost to sell. In addition, depreciation and amortization is ceased while it is classified as held for sale. See Note 2 for further information on impairments and other charges recorded in 2019.
Income taxes
We recognize the amount of taxes payable or refundable for the year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized.
HAL 2019 FORM 10-K | 45
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances.
We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes on continuing operations in our consolidated statements of operations.
Derivative instruments
At times, we enter into derivative financial transactions to hedge existing or projected exposures to changing foreign currency exchange rates and interest rates. We do not enter into derivative transactions for speculative or trading purposes. We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value and reflected through the results of operations. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against:
| - | the change in fair value of the hedged assets, liabilities or firm commitments through earnings; or |
| - | recognized in other comprehensive income until the hedged item is recognized in earnings. |
The ineffective portion of a derivative’s change in fair value is recognized in earnings. Recognized gains or losses on derivatives entered into to manage foreign currency exchange risk are included in “Other, net” on the consolidated statements of operations. Gains or losses on interest rate derivatives are included in “Interest expense, net.”
Foreign currency translation
Foreign entities whose functional currency is the United States dollar translate monetary assets and liabilities at year-end exchange rates, and nonmonetary items are translated at historical rates. Revenue and expense transactions are translated at the average rates in effect during the year, except for those expenses associated with nonmonetary balance sheet accounts, which are translated at historical rates. Gains or losses from remeasurement of monetary assets and liabilities due to changes in exchange rates are recognized in our consolidated statements of operations in “Other, net” in the year of occurrence.
Stock-based compensation
Stock-based compensation cost is measured at the date of grant, based on the calculated fair value of the award and is recognized as expense over the employee’s service period, which is generally the vesting period of the equity grant. Additionally, compensation cost is recognized based on awards ultimately expected to vest, therefore, we have reduced the cost for estimated forfeitures based on historical forfeiture rates. Forfeitures are estimated at the time of grant and revised in subsequent periods to reflect actual forfeitures. See Note 13 for additional information related to stock-based compensation.
HAL 2019 FORM 10-K | 46
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 2**. Impairments and Other Charges**
Market conditions negatively impacted our business during 2019, particularly in North America. We experienced continued pricing pressure and customer activity reductions for our products and services. The North America land rig count decreased 26% from its high point in early 2019 to its low point in December 2019, and we idled equipment throughout the year to adjust to changing activity levels. During the fourth quarter of 2019, the North America market continued to deteriorate with a 9% decrease in the average land rig count compared to the third quarter. Customer activity declined across all basins, affecting both our drilling and completions businesses, and pricing pressure persisted during the year-end tendering season.
As a result of these market conditions and our service delivery improvement strategy, we took actions during the fourth quarter of 2019 to proactively manage our equipment fleet, rationalize our portfolio of real estate facilities, and initiate reductions in our global workforce in an effort to mitigate the impact of market deterioration and better align our workforce with anticipated activity levels. As part of our real estate rationalization, we identified owned properties to sell and leased properties to abandon. We reviewed the recoverability of our long-lived assets and, based upon our impairment assessments, we determined the carrying amount of some of our long-lived assets exceeded their respective fair values.
We determined the fair value of our long-lived assets based on a discounted cash flow analysis, with the exception of real estate facilities classified as held for sale for which fair value was based on third party sales price estimates. These fair value assessments required the use of estimates which represent significant unobservable inputs. The discounted cash flow analysis utilized management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, the remaining useful life and service potential of the asset, and a discount rate based on our weighted average cost of capital. As such, these analyses incorporate inherent uncertainties about commodity prices, supply and demand for our services, and future market conditions that are difficult to predict in volatile economic environments. If market conditions worsen, our fair value assumptions of estimated future cash flows could be materially altered and we may be required to record additional asset impairments. Such a potential impairment charge could have a material adverse impact on our operating results.
As a result of the events described above, we recorded impairments and other charges of approximately $2.5 billion during the year ended December 31, 2019. The following table presents various pre-tax charges we recorded during the years ended December 31, 2019, 2018 and 2017 which are reflected within "Impairments and other charges" on our consolidated statements of operations.
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Long-lived asset impairments | $ | 1,603 | $ | — | $ | — | |||
| Inventory costs and write-downs | 458 | — | — | ||||||
| Severance | 172 | — | — | ||||||
| Joint ventures | 154 | — | — | ||||||
| Venezuela investment write-down | — | 265 | 647 | ||||||
| Other | 119 | — | — | ||||||
| Total impairments and other charges | $ | 2,506 | $ | 265 | $ | 647 |
Of the $2.5 billion of impairments and other charges recorded during the year ended December 31, 2019, approximately $1.6 billion was attributable to our Completion and Production segment and approximately $849 million was attributable to our Drilling and Evaluation segment. Long-lived asset impairments include impairments of property, plant and equipment, intangible assets, and real estate facilities. The $1.6 billion of long-lived asset impairments consists of the following: $759 million attributable to hydraulic fracturing equipment, the majority of which was located in North America; $243 million related to legacy drilling equipment; $215 million related to real estate properties owned and classified as held for sale; $139 million related to right-of-use assets associated with operating leases; $98 million related to intangible assets; and $148 million of other fixed asset impairments. Included within "Inventory costs and write-downs" in the table above are amounts associated with certain supply contracts, coupled with a write-down of some of our inventory which exceeded its market value. We also rationalized our portfolio of existing joint ventures and recorded resulting charges within "Joint ventures" in the table above.
HAL 2019 FORM 10-K | 47
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 3**. Business Segment and Geographic Information**
We operate under two divisions, which form the basis for the two operating segments we report: the Completion and Production segment and the Drilling and Evaluation segment. For more information about the product service lines included in each segment, see "Part I, Item 1. Business.” The business operations of our divisions are organized around four primary geographic regions: North America, Latin America, Europe/Africa/CIS and Middle East/Asia. Our equity in earnings and losses of unconsolidated affiliates that are accounted for using the equity method of accounting are included within cost of services and cost of sales on our statements of operations, which is part of operating income of the applicable segment.
Operations by business segment
The following tables present financial information on our business segments.
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Revenue: | |||||||||
| Completion and Production | $ | 14,031 | $ | 15,973 | $ | 13,077 | |||
| Drilling and Evaluation | 8,377 | 8,022 | 7,543 | ||||||
| Total revenue | $ | 22,408 | $ | 23,995 | $ | 20,620 | |||
| Operating income: | |||||||||
| Completion and Production | $ | 1,671 | $ | 2,278 | $ | 1,625 | |||
| Drilling and Evaluation | 642 | 745 | 726 | ||||||
| Total operations | 2,313 | 3,023 | 2,351 | ||||||
| Corporate and other (a) | (255 | ) | (291 | ) | (330 | ) | |||
| Impairments and other charges (b) | (2,506 | ) | (265 | ) | (647 | ) | |||
| Total operating income (loss) | $ | (448 | ) | $ | 2,467 | $ | 1,374 | ||
| Interest expense, net of interest income | $ | (569 | ) | $ | (554 | ) | $ | (593 | ) |
| Other, net | (105 | ) | (99 | ) | (99 | ) | |||
| Income (loss) from continuing operations before income taxes | $ | (1,122 | ) | $ | 1,814 | $ | 682 | ||
| Capital expenditures: | |||||||||
| Completion and Production | $ | 800 | $ | 1,364 | $ | 1,111 | |||
| Drilling and Evaluation | 728 | 657 | 261 | ||||||
| Corporate and other | 2 | 5 | 1 | ||||||
| Total | $ | 1,530 | $ | 2,026 | $ | 1,373 | |||
| Depreciation, depletion and amortization: | |||||||||
| Completion and Production | $ | 1,049 | $ | 1,058 | $ | 953 | |||
| Drilling and Evaluation | 552 | 512 | 563 | ||||||
| Corporate and other | 24 | 36 | 40 | ||||||
| Total | $ | 1,625 | $ | 1,606 | $ | 1,556 |
(a) Includes certain expenses not attributable to a particular business segment, such as costs related to support functions and corporate executives, operating lease assets, and also includes amortization expense associated with intangible assets recorded as a result of acquisitions.
(b) Impairments and other charges are as follows:
-For the year ended December 31, 2019, amount includes approximately $1.6 billion attributable to Completion and Production, $849 million attributable to Drilling and Evaluation, and $56 million attributable to Corporate and other.
-For the years ended December 31, 2018 and December 31, 2017, we recorded aggregate charges of $265 million and $647 million, respectively, to write-down our investment in Venezuela.
HAL 2019 FORM 10-K | 48
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| Total assets: | ||||||
| Completion and Production (a) | $ | 11,894 | $ | 13,231 | ||
| Drilling and Evaluation (a) | 8,059 | 8,037 | ||||
| Corporate and other (b) | 5,424 | 4,714 | ||||
| Total | $ | 25,377 | $ | 25,982 |
(a) Assets associated with specific segments primarily include receivables, inventories, property, plant and equipment, operating lease right-of-use assets, equity in and advances to related companies and goodwill.
(b) Corporate and other primarily include cash and equivalents and deferred tax assets.
Operations by geographic region
The following tables present information by geographic area. In 2019, 2018 and 2017, based on the location of services provided and products sold, 51%, 58% and 53%, respectively, of our consolidated revenue was from the United States. As of December 31, 2019 and December 31, 2018, 59% and 62% of our property, plant and equipment was located in the United States. No other country accounted for more than 10% of our revenue or property, plant and equipment during the periods presented.
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Revenue: | |||||||||
| North America | $ | 11,884 | $ | 14,431 | $ | 11,564 | |||
| Latin America | 2,364 | 2,065 | 2,116 | ||||||
| Europe/Africa/CIS | 3,285 | 2,945 | 2,781 | ||||||
| Middle East/Asia | 4,875 | 4,554 | 4,159 | ||||||
| Total | $ | 22,408 | $ | 23,995 | $ | 20,620 |
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| Net property, plant and equipment: | ||||||
| North America | $ | 4,666 | $ | 5,621 | ||
| Latin America | 754 | 937 | ||||
| Europe/Africa/CIS | 772 | 936 | ||||
| Middle East/Asia | 1,118 | 1,379 | ||||
| Total | $ | 7,310 | $ | 8,873 |
Note 4**. Revenue**
Revenue is recognized based on the transfer of control or our customers' ability to benefit from our services and products in an amount that reflects the consideration we expect to receive in exchange for those services and products. The vast majority of our service and product contracts are short-term in nature. In recognizing revenue for our services and products, we determine the transaction price of purchase orders or contracts with our customers, which may consist of fixed and variable consideration. We also assess our customers' ability and intention to pay, which is based on a variety of factors, including our historical payment experience with and the financial condition of our customers. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 20 to 60 days. Other judgments involved in recognizing revenue include an assessment of progress towards completion of performance obligations for certain long-term contracts, which involve estimating total costs to determine our progress towards contract completion and calculating the corresponding amount of revenue to recognize.
Disaggregation of revenue
We disaggregate revenue from contracts with customers into types of services or products, consistent with our two reportable segments, in addition to geographical area. Based on the location of services provided and products sold, 51%, 58% and 53% of our consolidated revenue was from the United States for the years ended December 31, 2019, 2018 and 2017, respectively. No other country accounted for more than 10% of our revenue. The following table presents information on our disaggregated revenue.
HAL 2019 FORM 10-K | 49
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Revenue by segment: | |||||||||
| Completion and Production | $ | 14,031 | $ | 15,973 | $ | 13,077 | |||
| Drilling and Evaluation | 8,377 | 8,022 | 7,543 | ||||||
| Total revenue | $ | 22,408 | $ | 23,995 | $ | 20,620 | |||
| Revenue by geographic region: | |||||||||
| North America | $ | 11,884 | $ | 14,431 | $ | 11,564 | |||
| Latin America | 2,364 | 2,065 | 2,116 | ||||||
| Europe/Africa/CIS | 3,285 | 2,945 | 2,781 | ||||||
| Middle East/Asia | 4,875 | 4,554 | 4,159 | ||||||
| Total revenue | $ | 22,408 | $ | 23,995 | $ | 20,620 |
Contract balances
We perform our obligations under contracts with our customers by transferring services and products in exchange for consideration. The timing of our performance often differs from the timing of our customer’s payment, which results in the recognition of receivables and deferred revenue. Deferred revenue represents advance consideration received from customers for contracts where revenue is recognized on future performance of service. Deferred revenue, as well as revenue recognized during the period relating to amounts included as deferred revenue at the beginning of the period, was not material to our consolidated financial statements.
Transaction price allocated to remaining performance obligations
Remaining performance obligations represent firm contracts for which work has not been performed and future revenue recognition is expected. We have elected the practical expedient permitting the exclusion of disclosing remaining performance obligations for contracts that have an original expected duration of one year or less. We have some long-term contracts related to software and integrated project management services such as lump sum turnkey contracts. For software contracts, revenue is generally recognized over time throughout the license period when the software is considered to be a right to access our intellectual property. For lump sum turnkey projects, we recognize revenue over time using an input method, which requires us to exercise judgment. Revenue allocated to remaining performance obligations for these long-term contracts is not material.
Note 5**. Receivables**
As of December 31, 2019, 36% of our net trade receivables were from customers in the United States. As of December 31, 2018, 43% of our net trade receivables were from customers in the United States. No other country or single customer accounted for more than 10% of our net trade receivables at these dates.
We routinely monitor the financial stability of our customers and employ an extensive process to evaluate the collectability of outstanding receivables. This process, which involves a high degree of judgment utilizing significant assumptions, includes analysis of our customers’ historical time to pay, financial condition and various financial metrics, debt structure, credit agency ratings, and production profile, as well as political and economic factors in countries of operations and other customer-specific factors.
The table below presents a rollforward of our global allowance for bad debts for 2017, 2018 and 2019.
| Millions of dollars | Balance at Beginning of Period | Provision (a) | Other (b) | Balance at End of Period (c) | ||||||||
| Year ended December 31, 2017 | $ | 175 | $ | 566 | $ | (16 | ) | $ | 725 | |||
| Year ended December 31, 2018 | 725 | 57 | (44 | ) | 738 | |||||||
| Year ended December 31, 2019 | 738 | 50 | (12 | ) | 776 |
(a) Represents increases to allowance for bad debts charged to costs and expenses, net of recoveries.
(b) Includes write-offs, balance sheet reclassifications, and other activity.
(c) The allowance for bad debts in all years is primarily comprised of a full reserve against accounts receivable with our primary customer in Venezuela.
HAL 2019 FORM 10-K | 50
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 6**. Leases**
We adopted a comprehensive new lease accounting standard effective January 1, 2019. The details of the significant changes to our accounting policies resulting from the adoption of the new standard are set out below. We adopted the standard using the optional modified retrospective transition method; accordingly, the comparative information as of December 31, 2018 and for the years ended December 31, 2018 and 2017 have not been adjusted and continue to be reported under the previous lease standard. Under the new lease standard, assets and liabilities that arise from all leases are required to be recognized on the balance sheet for lessees. Previously, only capital leases, which are now referred to as finance leases, were recorded on the balance sheet. The adoption of this standard resulted in the recognition of approximately $1.0 billion of operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheets as of January 1, 2019. The adoption of this standard did not materially impact our consolidated results of operations for the year ended December 31, 2019. See Note 17 for additional information about the new accounting standard.
Beginning January 1, 2019, for all leases with a term in excess of 12 months, we recognized a lease liability equal to the present value of the lease payments and a right-of-use asset representing our right to use the underlying asset for the lease term. For operating leases, lease expense for lease payments is recognized on a straight-line basis over the lease term, while finance leases include both an operating expense and an interest expense component. For all leases with a term of 12 months or less, we elected the practical expedient to not recognize lease assets and liabilities. We recognize lease expense for these short-term leases on a straight-line basis over the lease term.
We are a lessee for numerous operating leases, primarily related to real estate, transportation and equipment. The vast majority of our operating leases have remaining lease terms of 10 years or less, some of which include options to extend the leases, and some of which include options to terminate the leases. We generally do not include renewal or termination options in our assessment of the leases unless extension or termination for certain assets is deemed to be reasonably certain. The accounting for some of our leases may require judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rates to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options. We also have some lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. For certain equipment leases, such as offshore vessels and drilling rigs, we account for the lease and non-lease components separately.
The following tables illustrate the financial impact of our leases as of and for the year ended December 31, 2019, along with other supplemental information about our existing leases:
| Millions of dollars | Year Ended December 31, 2019 | ||
| Components of lease expense: | |||
| Finance lease cost: | |||
| Amortization of right-of-use assets | $ | 19 | |
| Interest on lease liabilities | 51 | ||
| Operating lease cost | 355 | ||
| Short-term lease cost | 110 | ||
| Sublease income | (5 | ) | |
| Total lease cost | $ | 530 |
For the years ended December 31, 2018 and 2017, total rentals on our operating leases under the previous lease standard, net of sublease rentals, were $680 million and $574 million, respectively.
HAL 2019 FORM 10-K | 51
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
| Millions of dollars | As of December 31, 2019 | ||
| Components of balance sheet: | |||
| Operating leases: | |||
| Operating lease right-of-use assets (non-current) | $ | 931 | |
| Current portion of operating lease liabilities | 208 | ||
| Operating lease liabilities (non-current) | 825 | ||
| Finance leases: | |||
| Other assets (non-current) | $ | 123 | |
| Other current liabilities | 19 | ||
| Other liabilities (non-current) | 124 |
During the year ended December 31, 2019, a $139 million impairment charge was recorded related to operating lease right-of-use assets. See Note 2 to the consolidated financial statements for further discussion on impairments and other charges.
| Millions of dollars except years and percentages | Year Ended December 31, 2019 | ||
| Other supplemental information: | |||
| Cash paid for amounts included in the measurement of lease liabilities: | |||
| Operating cash flows from operating leases | $ | 316 | |
| Operating cash flows from finance leases | 51 | ||
| Financing cash flows from finance leases | 24 | ||
| Right-of-use assets obtained in exchange for lease obligations: | |||
| Operating leases (a) | $ | 1,362 | |
| Finance leases | 74 | ||
| Weighted-average remaining lease term: | |||
| Operating leases | 9.5 years | ||
| Finance leases | 5.4 years | ||
| Weighted-average discount rate for operating leases | 4.4 | % |
(a) Primarily consists of operating lease right-of-use assets exchanged for lease obligations upon implementation of the
new lease accounting standard on January 1, 2019.
The following table summarizes the maturity of our operating and finance leases as of December 31, 2019:
| Millions of dollars | Operating Leases | Finance Leases | ||||
| 2020 | $ | 235 | $ | 61 | ||
| 2021 | 186 | 62 | ||||
| 2022 | 149 | 62 | ||||
| 2023 | 107 | 61 | ||||
| 2024 | 71 | 48 | ||||
| Thereafter | 442 | 82 | ||||
| Total lease payments | 1,190 | 376 | ||||
| Less imputed interest | (157 | ) | (233 | ) | ||
| Total | $ | 1,033 | $ | 143 |
As of December 31, 2018, future total rentals on our noncancellable operating leases under the previous lease standard were $975 million in the aggregate, which consisted of the following: $275 million in 2019; $146 million in 2020; $122 million in 2021; $100 million in 2022; $78 million in 2023; and $254 million thereafter.
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| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 7. Inventories
Inventories consisted of the following:
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| Finished products and parts | $ | 1,865 | $ | 1,947 | ||
| Raw materials and supplies | 1,147 | 934 | ||||
| Work in process | 127 | 147 | ||||
| Total | $ | 3,139 | $ | 3,028 |
All amounts in the table above are reported net of obsolescence reserves of $149 million at December 31, 2019 and $219 million at December 31, 2018.
Note 8. Property, Plant and Equipment
Property, plant and equipment were composed of the following:
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| Land | $ | 202 | $ | 252 | ||
| Buildings and property improvements | 3,167 | 3,461 | ||||
| Machinery, equipment and other | 16,571 | 18,313 | ||||
| Total | 19,940 | 22,026 | ||||
| Less accumulated depreciation | 12,630 | 13,153 | ||||
| Net property, plant and equipment | $ | 7,310 | $ | 8,873 |
During the year ended December 31, 2019, a $1.4 billion impairment charge was recorded related to property, plant and equipment. See Note 2 to the consolidated financial statements for further discussion on impairments and other charges.
Classes of assets are depreciated over the following useful lives:
| Buildings and Property Improvements | ||
| 2019 | 2018 | |
| 1 - 10 years | 12% | 11% |
| 11 - 20 years | 41% | 42% |
| 21 - 30 years | 22% | 22% |
| 31 - 40 years | 25% | 25% |
| Machinery, Equipment and Other | ||
| 2019 | 2018 | |
| 1 - 5 years | 43% | 34% |
| 6 - 10 years | 47% | 56% |
| 11 - 20 years | 10% | 10% |
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| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 9**. Debt**
Our total debt, including short-term borrowings and current maturities of long-term debt, consisted of the following:
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| 5.0% senior notes due November 2045 | $ | 2,000 | $ | 2,000 | ||
| 3.8% senior notes due November 2025 | 2,000 | 2,000 | ||||
| 3.5% senior notes due August 2023 | 1,100 | 1,100 | ||||
| 4.85% senior notes due November 2035 | 1,000 | 1,000 | ||||
| 7.45% senior notes due September 2039 | 1,000 | 1,000 | ||||
| 4.75% senior notes due August 2043 | 900 | 900 | ||||
| 6.7% senior notes due September 2038 | 800 | 800 | ||||
| 3.25% senior notes due November 2021 | 500 | 500 | ||||
| 4.5% senior notes due November 2041 | 500 | 500 | ||||
| 7.6% senior debentures due August 2096 | 300 | 300 | ||||
| 8.75% senior debentures due February 2021 | 185 | 185 | ||||
| 6.75% notes due February 2027 | 104 | 104 | ||||
| Other | 28 | 47 | ||||
| Unamortized debt issuance costs and discounts | (90 | ) | (92 | ) | ||
| Total | 10,327 | 10,344 | ||||
| Short-term borrowings and current maturities of long-term debt | (11 | ) | (32 | ) | ||
| Total long-term debt | $ | 10,316 | $ | 10,312 |
Senior debt
All of our senior notes and debentures rank equally with our existing and future senior unsecured indebtedness, have semiannual interest payments and have no sinking fund requirements. We may redeem all of our senior notes from time to time or all of the notes of each series at any time at the applicable redemption prices, plus accrued and unpaid interest. Our 6.75% notes due February 2027, 7.6% senior debentures due August 2096 and 8.75% senior debentures due February 2021 may not be redeemed prior to maturity.
Revolving credit facilities
We have a revolving credit facility with a capacity of $3.5 billion, which expires in March 2024. The facility is for working capital or general corporate purposes. The full amount of the revolving credit facility was available as of December 31, 2019.
Debt maturities
Our long-term debt matures as follows: $11 million in 2020, $697 million in 2021, $4 million in 2022, $1.1 billion in 2023, no amounts in 2024, and the remainder thereafter.
Note 10**. Commitments and Contingencies**
The Company is subject to various legal or governmental proceedings, claims or investigations, including personal injury, property damage, environmental and tax-related matters, arising in the ordinary course of business, the resolution of which, in the opinion of management, will not have a material adverse effect on our consolidated results of operations or consolidated financial position. There is inherent risk in any litigation, claim or investigation and no assurance can be given as to the outcome of these proceedings.
Guarantee arrangements
In the normal course of business, we have agreements with financial institutions under which approximately $2.1 billion of letters of credit, bank guarantees, or surety bonds were outstanding as of December 31, 2019. Some of the outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization. None of these off balance sheet arrangements either has, or is likely to have, a material effect on our consolidated financial statements.
HAL 2019 FORM 10-K | 54
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 11**. Income Taxes**
The components of the provision for income taxes on continuing operations were:
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Current income taxes: | |||||||||
| Federal | $ | 32 | $ | 19 | $ | 40 | |||
| Foreign | (426 | ) | (428 | ) | (423 | ) | |||
| State | (9 | ) | (15 | ) | (14 | ) | |||
| Total current | (403 | ) | (424 | ) | (397 | ) | |||
| Deferred income taxes: | |||||||||
| Federal | 383 | 286 | (678 | ) | |||||
| Foreign | (36 | ) | 9 | (31 | ) | ||||
| State | 49 | (28 | ) | (25 | ) | ||||
| Total deferred | 396 | 267 | (734 | ) | |||||
| Income tax provision | $ | (7 | ) | $ | (157 | ) | $ | (1,131 | ) |
The United States and foreign components of income (loss) from continuing operations before income taxes were as follows:
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| United States | $ | (1,517 | ) | $ | 1,097 | $ | 694 | ||
| Foreign | 395 | 717 | (12 | ) | |||||
| Total | $ | (1,122 | ) | $ | 1,814 | $ | 682 |
Reconciliations between the actual provision for income taxes on continuing operations and that computed by applying the United States statutory rate to income (loss) from continuing operations before income taxes were as follows:
| Year Ended December 31 | ||||||
| 2019 | 2018 | 2017 | ||||
| United States statutory rate | 21.0 | % | 21.0 | % | 35.0 | % |
| Impact of impairments and other charges | (20.9 | ) | — | — | ||
| Adjustments of prior year taxes | 13.0 | 2.0 | (2.3 | ) | ||
| Valuation allowance against tax assets | (10.7 | ) | (16.2 | ) | (6.2 | ) |
| State income taxes | (1.3 | ) | 1.9 | 1.7 | ||
| Impact of foreign income taxed at different rates | 0.8 | (3.0 | ) | (18.3 | ) | |
| Venezuela adjustment | — | 5.7 | 36.6 | |||
| Impact of U.S. tax reform | — | (2.6 | ) | 113.0 | ||
| Undistributed foreign earnings | — | — | 3.8 | |||
| Other items, net | (2.5 | ) | (0.1 | ) | 2.5 | |
| Total effective tax rate on continuing operations | (0.6 | )% | 8.7 | % | 165.8 | % |
During the year ended December 31, 2019, we recorded a total income tax provision of $7 million on a pre-tax loss of $1.1 billion, resulting in an effective tax rate of -0.6%. The effective tax rate for 2019 was primarily impacted by a $291 million tax benefit associated with the $2.5 billion of impairments and other charges recognized during the year, which primarily consisted of the tax effects of impairment charges taxed at various rates, offset by valuation allowances on deferred tax assets associated with market conditions that negatively impacted our business during the year. See Note 2 for further information. Our 2019 effective tax rate was also impacted by certain discrete tax adjustments related to prior year taxes, offset by additional valuation allowances recorded on deferred tax assets.
HAL 2019 FORM 10-K | 55
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
The primary components of our deferred tax assets and liabilities were as follows:
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| Gross deferred tax assets: | ||||||
| Net operating loss carryforwards | $ | 1,301 | $ | 1,466 | ||
| Foreign tax credit carryforwards | 877 | 728 | ||||
| Research and development tax credit carryforwards | 198 | 139 | ||||
| Employee compensation and benefits | 215 | 242 | ||||
| Accrued liabilities | 316 | 101 | ||||
| Other | 382 | 265 | ||||
| Total gross deferred tax assets | 3,289 | 2,941 | ||||
| Gross deferred tax liabilities: | ||||||
| Depreciation and amortization | 373 | 635 | ||||
| Operating lease right-of-use assets | 109 | — | ||||
| Undistributed foreign earnings | 2 | 2 | ||||
| Other | 56 | 64 | ||||
| Total gross deferred tax liabilities | 540 | 701 | ||||
| Valuation allowances | 1,082 | 913 | ||||
| Net deferred income tax asset | $ | 1,667 | $ | 1,327 |
At December 31, 2019, we had $1.5 billion of domestic and foreign tax-effected net operating loss carryforwards, with approximately $200 million estimated to be utilized against our unrecognized tax benefits. The ultimate realization of these deferred tax assets depends on the ability to generate sufficient taxable income in the appropriate taxing jurisdiction. $157 million of the net operating loss carryforwards will expire after taxable years ended from 2020 through 2024, $219 million will expire after taxable years ended from 2025 through 2029, and $755 million will expire after taxable years ended from 2030 through 2040. The remaining balance will not expire. Additionally, we had $967 million of foreign tax credit carryforwards that will expire from 2025 through 2029, which are offset by foreign branch deferred activity reflected in the above table, along with $198 million of research and development tax credit carryforwards that will expire from 2030 through 2040. During the year ended December 31, 2019, we increased our valuation allowance on deferred tax assets by $169 million related to $85 million associated with foreign deferred tax assets and $84 million associated with foreign tax credits.
In accordance with the Tax Cuts and Jobs Act of 2017, a company’s foreign earnings accumulated under the legacy tax laws are deemed to be repatriated into the United States. We have provided federal and state income tax related to this deemed repatriation. We have not provided incremental United States income taxes and foreign withholding taxes on undistributed earnings of foreign subsidiaries as of December 31, 2019. The Company generally does not provide for taxes related to its undistributed earnings because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested.
HAL 2019 FORM 10-K | 56
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
The following table presents a rollforward of our unrecognized tax benefits and associated interest and penalties.
| Millions of dollars | Unrecognized Tax Benefits | Interest and Penalties | |||||
| Balance at January 1, 2017 | $ | 427 | $ | 61 | |||
| Change in prior year tax positions | (108 | ) | — | ||||
| Change in current year tax positions | 24 | 2 | |||||
| Cash settlements with taxing authorities | (6 | ) | — | ||||
| Lapse of statute of limitations | (4 | ) | (3 | ) | |||
| Balance at December 31, 2017 | $ | 333 | $ | 60 | |||
| Change in prior year tax positions | 32 | 11 | |||||
| Change in current year tax positions | 63 | — | |||||
| Cash settlements with taxing authorities | (7 | ) | (2 | ) | |||
| Lapse of statute of limitations | (4 | ) | (2 | ) | |||
| Balance at December 31, 2018 | $ | 417 | (a) | $ | 67 | ||
| Change in prior year tax positions | 25 | 11 | |||||
| Change in current year tax positions | 29 | — | |||||
| Cash settlements with taxing authorities | (4 | ) | — | ||||
| Lapse of statute of limitations | (42 | ) | (8 | ) | |||
| Balance at December 31, 2019 | $ | 425 | (a)(b) | $ | 70 |
| (a) | Includes $25 million as of December 31, 2019 and $18 million as of December 31, 2018 in foreign unrecognized tax benefits that would give rise to a United States tax credit. As of December 31, 2019 and December 31, 2018, a net $271 million and $399 million without a net operating loss carryforward offset, respectively, of unrecognized tax benefits would positively impact the effective tax rate and be recognized as additional tax benefits in our statement of operations if resolved in our favor. |
| (b) | Includes $30 million that could be resolved within the next 12 months. |
We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. In most cases, we are no longer subject to state, local, or non-United States income tax examination by tax authorities for years before 2009. Tax filings of our subsidiaries, unconsolidated affiliates and related entities are routinely examined in the normal course of business by tax authorities. Currently, our United States federal tax filings for the tax years 2016 through 2018 are under review by the Internal Revenue Service (IRS). Tax years 2012 through 2015 have been closed by exam and approved by Joint Committee. Amended tax returns filed for tax years 2008 through 2011 are under review by the IRS.
Note 12**. Shareholders’ Equity**
Shares of common stock
The following table summarizes total shares of common stock outstanding:
| December 31 | ||||
| Millions of shares | 2019 | 2018 | ||
| Issued | 1,068 | 1,069 | ||
| In treasury | (190 | ) | (198 | ) |
| Total shares of common stock outstanding | 878 | 871 |
Our Board of Directors has authorized a program to repurchase a specified dollar amount of our common stock from time to time. The program does not require a specific number of shares to be purchased and the program may be effected through solicited or unsolicited transactions in the market or in privately negotiated transactions. The program may be terminated or suspended at any time. During the year ended December 31, 2019 we repurchased approximately 4.5 million shares of our common stock for a total cost of $100 million. There were 10.5 million repurchases made under the program during the year ended December 31, 2018. Approximately $5.2 billion remained authorized for repurchases as of December 31, 2019. From the inception of this program in February 2006 through December 31, 2019, we repurchased approximately 217 million shares of our common stock for a total cost of approximately $8.9 billion.
Preferred stock
Our preferred stock consists of five million total authorized shares at December 31, 2019, of which none are issued.
HAL 2019 FORM 10-K | 57
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Accumulated other comprehensive loss
Accumulated other comprehensive loss consisted of the following:
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| Defined benefit and other postretirement liability adjustments (a) | $ | (214 | ) | $ | (203 | ) |
| Cumulative translation adjustment | (82 | ) | (82 | ) | ||
| Other | (66 | ) | (70 | ) | ||
| Total accumulated other comprehensive loss | $ | (362 | ) | $ | (355 | ) |
(a) Included net actuarial losses for our international pension plans of $189 million at December 31, 2019 and $184 million at December 31, 2018.
Note 13**. Stock-based Compensation**
The following table summarizes stock-based compensation costs for the years ended December 31, 2019, 2018 and 2017.
| Year Ended December 31 | |||||||||
| Millions of dollars | 2019 | 2018 | 2017 | ||||||
| Stock-based compensation cost | $ | 257 | $ | 274 | $ | 290 | |||
| Tax benefit | (48 | ) | (51 | ) | (64 | ) | |||
| Stock-based compensation cost, net of tax | $ | 209 | $ | 223 | $ | 226 |
Our Stock and Incentive Plan, as amended (Stock Plan), provides for the grant of any or all of the following types of stock-based awards:
| - | stock options, including incentive stock options and nonqualified stock options; |
| - | restricted stock awards; |
| - | restricted stock unit awards; |
| - | stock appreciation rights; and |
| - | stock value equivalent awards. |
There are currently no stock appreciation rights, stock value equivalent awards, or incentive stock options outstanding. Under the terms of the Stock Plan, approximately 231 million shares of common stock have been reserved for issuance to employees and non-employee directors. At December 31, 2019, approximately 17 million shares were available for future grants under the Stock Plan. The stock to be offered pursuant to the grant of an award under the Stock Plan may be authorized but unissued common shares or treasury shares.
In addition to the provisions of the Stock Plan, we also have stock-based compensation provisions under our Restricted Stock Plan for Non-Employee Directors and our Employee Stock Purchase Plan (ESPP).
Each of the active stock-based compensation arrangements is discussed below.
Stock options
The majority of our options are generally issued during the second quarter of the year. All stock options under the Stock Plan are granted at the fair market value of our common stock at the grant date. Employee stock options generally vest ratably over a period of three years and expire 10 years from the grant date. Compensation expense for stock options is generally recognized on a straight line basis over the entire vesting period.
HAL 2019 FORM 10-K | 58
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
The following table represents our stock options activity during 2019.
| Number of Shares (in millions) | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (in millions) | ||||||
| Outstanding at January 1, 2019 | 21.2 | $ | 45.44 | ||||||
| Granted | 5.4 | 25.46 | |||||||
| Exercised | (0.2 | ) | 21.30 | ||||||
| Forfeited/expired | (1.1 | ) | 40.71 | ||||||
| Outstanding at December 31, 2019 | 25.3 | $ | 41.58 | 5.9 | $ | 1 | |||
| Exercisable at December 31, 2019 | 17.6 | $ | 45.56 | 4.6 | $ | — |
The total intrinsic value of options exercised was $2 million in 2019, $25 million in 2018 and $21 million in 2017. As of December 31, 2019, there was $37 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately two years.
Cash received from issuance of common stock was $118 million during 2019, $195 million during 2018 and $158 million during 2017, of which $6 million, $88 million and $53 million related to proceeds from exercises of stock options in 2019, 2018 and 2017, respectively. The remainder relates to cash proceeds from the issuance of shares related to our employee stock purchase plan.
The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility of options granted was a blended rate based upon implied volatility calculated on actively traded options on our common stock and upon the historical volatility of our common stock. The expected term of options granted was based upon historical observation of actual time elapsed between date of grant and exercise of options for all employees. The assumptions and resulting fair values of options granted were as follows:
| Year Ended December 31 | |||
| 2019 | 2018 | 2017 | |
| Expected term (in years) | 5.31 | 5.27 | 5.24 |
| Expected volatility | 31% | 28% | 32% |
| Expected dividend yield | 2.25 - 3.88% | 1.37 - 2.29% | 1.28 - 1.72% |
| Risk-free interest rate | 1.35 - 2.51% | 2.27 - 2.84% | 1.79 - 2.14% |
| Weighted average grant-date fair value per share | $5.91 | $11.56 | $13.11 |
Restricted stock
Restricted shares issued under the Stock Plan are restricted as to sale or disposition. These restrictions lapse periodically generally over a period of five years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value of the stock on the date of grant is amortized and charged to income on a straight-line basis over the requisite service period for the entire award.
HAL 2019 FORM 10-K | 59
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
The following table represents our restricted stock awards and restricted stock units granted, vested and forfeited during 2019.
| Number of Shares (in millions) | Weighted Average Grant-Date Fair Value per Share | ||||
| Nonvested shares at January 1, 2019 | 14.4 | $ | 46.01 | ||
| Granted | 9.8 | 24.75 | |||
| Vested | (4.7 | ) | 46.91 | ||
| Forfeited | (1.4 | ) | 40.34 | ||
| Nonvested shares at December 31, 2019 | 18.1 | $ | 34.72 |
The weighted average grant-date fair value of shares granted was $24.75 during 2019, $47.43 during 2018 and $45.99 during 2017. The total fair value of shares vested was $107 million during 2019, $219 million during 2018, and $204 million during 2017. As of December 31, 2019, there was $427 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock, which is expected to be recognized over a weighted average period of three years.
Employee Stock Purchase Plan
Under the ESPP, eligible employees may have up to 10% of their earnings withheld, subject to some limitations, to be used to purchase shares of our common stock. The ESPP contains four three-month offering periods commencing on January 1, April 1, July 1 and October 1 of each year. The price at which common stock may be purchased under the ESPP is equal to 85% of the lower of the fair market value of the common stock on the commencement date or last trading day of each offering period. Effective January 1, 2020, this purchase price threshold was changed from 85% to 90%. Under the ESPP, 74 million shares of common stock have been reserved for issuance, of which 54 million shares have been sold through the ESPP since the inception of the plan through December 31, 2019 and 20 million shares are available for future issuance. The stock to be offered may be authorized but unissued common shares or treasury shares.
The fair value of ESPP shares was estimated using the Black-Scholes option pricing model. The expected volatility was a one-year historical volatility of our common stock. The assumptions and resulting fair values were as follows:
| Year Ended December 31 | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Expected volatility | 34 | % | 25 | % | 29 | % | |||
| Expected dividend yield | 3.06 | % | 1.62 | % | 1.51 | % | |||
| Risk-free interest rate | 2.20 | % | 1.92 | % | 0.86 | % | |||
| Weighted average grant-date fair value per share | $ | 5.22 | $ | 8.86 | $ | 9.95 |
HAL 2019 FORM 10-K | 60
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 14. Income per Share
Basic income or loss per share is based on the weighted average number of common shares outstanding during the period. Diluted income per share includes additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued. Antidilutive securities represent potentially dilutive securities which are excluded from the computation of diluted income or loss per share as their impact was antidilutive.
A reconciliation of the number of shares used for the basic and diluted income per share computations is as follows:
| Year Ended December 31 | ||||||
| Millions of shares | 2019 | 2018 | 2017 | |||
| Basic weighted average common shares outstanding | 875 | 875 | 870 | |||
| Dilutive effect of awards granted under our stock incentive plans | — | 2 | — | |||
| Diluted weighted average common shares outstanding | 875 | 877 | 870 | |||
| Antidilutive shares: | ||||||
| Options with exercise price greater than the average market price | 24 | 14 | 6 | |||
| Options which are antidilutive due to net loss position | 1 | — | 2 | |||
| Total antidilutive shares | 25 | 14 | 8 |
Note 15**. Financial Instruments and Risk Management**
The carrying amount of cash and equivalents, receivables and accounts payable, as reflected in the consolidated balance sheets, approximates fair value due to the short maturities of these instruments.
The carrying amount and fair value of our total debt, including short-term borrowings and current maturities of long term debt, is as follows:
| December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||
| Millions of dollars | Level 1 | Level 2 | Total fair value | Carrying value | Level 1 | Level 2 | Total fair value | Carrying value | |||||||||||||||||
| Total debt | $ | 11,093 | $ | 868 | $ | 11,961 | $ | 10,327 | $ | 6,726 | $ | 4,041 | $ | 10,767 | $ | 10,344 |
Our debt categorized within level 1 on the fair value hierarchy is calculated using quoted prices in active markets for identical liabilities with transactions occurring on the last two days of period-end. Our debt categorized within level 2 on the fair value hierarchy is calculated using significant observable inputs for similar liabilities where estimated values are determined from observable data points on our other bonds and on other similarly rated corporate debt or from observable data points of transactions occurring prior to two days from period-end and adjusting for changes in market conditions. Differences between the periods presented in our level 1 and level 2 classification of our long-term debt relate to the timing of when transactions are executed. We have no debt categorized within level 3 on the fair value hierarchy based on unobservable inputs.
We are exposed to market risk from changes in foreign currency exchange rates and interest rates. We selectively manage these exposures through the use of derivative instruments, including forward foreign exchange contracts, foreign exchange options and interest rate swaps. The objective of our risk management strategy is to minimize the volatility from fluctuations in foreign currency and interest rates. We do not use derivative instruments for trading purposes. The fair value of our forward contracts, options and interest rate swaps was not material as of December 31, 2019 or December 31, 2018. The counterparties to our derivatives are primarily global commercial and investment banks.
HAL 2019 FORM 10-K | 61
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Foreign currency exchange risk
We have operations in many international locations and are involved in transactions denominated in currencies other than the United States dollar, our functional currency, which exposes us to foreign currency exchange rate risk. Techniques in managing foreign currency exchange risk include, but are not limited to, foreign currency borrowing and investing and the use of currency exchange instruments. We attempt to selectively manage significant exposures to potential foreign currency exchange losses based on current market conditions, future operating activities and the associated cost in relation to the perceived risk of loss. The purpose of our foreign currency risk management activities is to minimize the risk that our cash flows from the purchase and sale of products and services in foreign currencies will be adversely affected by changes in exchange rates.
We use forward contracts and options to manage our exposure to fluctuations in the currencies of certain countries in which we do business internationally. These instruments are not treated as hedges for accounting purposes, generally have an expiration date of one year or less and are not exchange traded. While these instruments are subject to fluctuations in value, the fluctuations are generally offset by the value of the underlying exposures being managed. The use of some of these instruments may limit our ability to benefit from favorable fluctuations in foreign currency exchange rates.
Derivatives are not utilized to manage exposures in some currencies due primarily to the lack of available markets or cost considerations (non-traded currencies). We attempt to manage our working capital position to minimize foreign currency exposure in non-traded currencies and recognize that pricing for the services and products offered in these countries should account for the cost of exchange rate devaluations. We have historically incurred transaction losses in non-traded currencies.
The notional amounts of open foreign exchange derivatives were $513 million at December 31, 2019 and $591 million at December 31, 2018. The notional amounts of these instruments do not generally represent amounts exchanged by the parties, and thus are not a measure of our exposure or of the cash requirements related to these contracts. The fair value of our foreign exchange derivatives as of December 31, 2019 and December 31, 2018 is included in “Other current assets” in our consolidated balance sheets and was immaterial. The fair value of these instruments is categorized within level 2 on the fair value hierarchy and was determined using a market approach with certain inputs, such as notional amounts hedged, exchange rates, and other terms of the contracts that are observable in the market or can be derived from or corroborated by observable data.
Interest rate risk
We are subject to interest rate risk on our existing long-term debt. Our short-term borrowings do not give rise to significant interest rate risk due to their short-term nature. We had fixed rate long-term debt totaling $10.3 billion at both December 31, 2019 and December 31, 2018. We maintain an interest rate management strategy that is intended to mitigate the exposure to changes in interest rates in the aggregate for our debt portfolio. We use interest rate swaps to effectively convert a portion of our fixed rate debt to floating LIBOR-based rates. Our interest rate swaps, which expire when the underlying debt matures, are designated as fair value hedges of the underlying debt and are determined to be highly effective. These derivative instruments are marked to market with gains and losses recognized currently in interest expense to offset the respective gains and losses recognized on changes in the fair value of the hedged debt.
As of December 31, 2019, we had an interest rate swap relating to one of our debt instruments with a total notional amount of $100 million. The fair value of this interest rate swap as of December 31, 2019 and December 31, 2018 is included in “Other assets” in our consolidated balance sheets and was immaterial. The fair value of this interest rate swap is categorized within level 2 on the fair value hierarchy and was determined using a market approach with inputs, such as the notional amount, LIBOR rate spread and settlement terms that are observable in the market or can be derived from or corroborated by observable data.
Credit risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash equivalents and trade receivables. It is our practice to place our cash equivalents in high quality investments with various institutions. Our trade receivables are from a broad and diverse group of customers and are generally not collateralized. As of December 31, 2019, 36% of our net trade receivables were from customers in the United States. As of December 31, 2018, 43% of our net trade receivables were from customers in the United States. We maintain an allowance for bad debts based upon several factors, including historical collection experience, current aging status of the customer accounts and financial condition of our customers. See Note 5 for further information.
We do not have any significant concentrations of credit risk with any individual counterparty to our derivative contracts. We select counterparties to those contracts based on our belief that each counterparty’s profitability, balance sheet and capacity for timely payment of financial commitments is unlikely to be materially adversely affected by foreseeable events.
HAL 2019 FORM 10-K | 62
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Note 16**. Retirement Plans**
Our company and subsidiaries have various plans that cover a significant number of our employees. These plans include defined contribution plans, defined benefit plans and other postretirement plans:
| - | our defined contribution plans provide retirement benefits in return for services rendered. These plans provide an individual account for each participant and have terms that specify how contributions to the participant’s account are to be determined rather than the amount of pension benefits the participant is to receive. Contributions to these plans are based on a percentage of pre-tax income, after-tax income, or discretionary amounts determined on an annual basis. Our expense for the defined contribution plans for continuing operations totaled $206 million in 2019, $193 million in 2018 and $173 million in 2017. |
| - | our defined benefit plans, which include both funded and unfunded pension plans, define an amount of pension benefit to be provided, usually as a function of age, years of service and/or compensation. The unfunded obligations and net periodic benefit cost of our United States defined benefit plans were not material for the periods presented; and |
| - | our postretirement plans other than pensions are offered to specific eligible employees. The accumulated benefit obligations and net periodic benefit cost for these plans were not material for the periods presented. |
Funded status
For our international pension plans, at December 31, 2019, the projected benefit obligation was $1.1 billion and the fair value of plan assets was $1.0 billion, which resulted in an unfunded obligation of $111 million. At December 31, 2018, the projected benefit obligation was $951 million and the fair value of plan assets was $832 million, which resulted in an unfunded obligation of $119 million. The accumulated benefit obligation for our international plans was $1.0 billion at December 31, 2019 and $878 million at December 31, 2018.
The following table presents additional information about our international pension plans.
| December 31 | ||||||
| Millions of dollars | 2019 | 2018 | ||||
| Amounts recognized on the Consolidated Balance Sheets | ||||||
| Other Assets | $ | 85 | $ | 39 | ||
| Accrued employee compensation and benefits | 7 | 8 | ||||
| Employee compensation and benefits | 189 | 150 | ||||
| Pension plans in which projected benefit obligation exceeded plan assets | ||||||
| Projected benefit obligation | $ | 214 | $ | 176 | ||
| Fair value of plan assets | 18 | 18 | ||||
| Pension plans in which accumulated benefit obligation exceeded plan assets | ||||||
| Accumulated benefit obligation | $ | 121 | $ | 105 | ||
| Fair value of plan assets | 18 | 18 |
Fair value measurements of plan assets
The fair value of our plan assets categorized within level 1 on the fair value hierarchy is based on quoted prices in active markets for identical assets. The fair value of our plan assets categorized within level 2 on the fair value hierarchy is based on significant observable inputs for similar assets. The fair value of our plan assets categorized within level 3 on the fair value hierarchy is based on significant unobservable inputs.
HAL 2019 FORM 10-K | 63
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
The following table sets forth the fair values of assets held by our international pension plans by level within the fair value hierarchy.
| Millions of dollars | Level 1 | Level 2 | Level 3 | Net Asset Value (a) | Total | ||||||||||
| Cash and equivalents | $ | — | $ | 151 | $ | — | $ | — | $ | 151 | |||||
| Equity funds (b) | — | 118 | — | — | 118 | ||||||||||
| Bond funds (c) | — | 292 | — | 99 | 391 | ||||||||||
| Alternatives funds (d) | — | — | — | 197 | 197 | ||||||||||
| Real estate funds (e) | — | 74 | — | 29 | 103 | ||||||||||
| Other investments (f) | 6 | 21 | 15 | — | 42 | ||||||||||
| Fair value of plan assets at December 31, 2019 | $ | 6 | $ | 656 | $ | 15 | $ | 325 | $ | 1,002 | |||||
| Cash and equivalents | $ | — | $ | 12 | $ | — | $ | — | $ | 12 | |||||
| Equity funds (b) | — | 137 | — | — | 137 | ||||||||||
| Bond funds (c) | — | 267 | 21 | 36 | 324 | ||||||||||
| Alternatives funds (d) | — | — | — | 209 | 209 | ||||||||||
| Real estate funds (e) | — | 80 | — | 28 | 108 | ||||||||||
| Other investments (f) | 6 | 21 | 15 | — | 42 | ||||||||||
| Fair value of plan assets at December 31, 2018 | $ | 6 | $ | 517 | $ | 36 | $ | 273 | $ | 832 |
(a) Represents investments measured at fair value using the Net Asset Value (NAV) per share practical expedient and thus has not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total value of our international pension plans assets.
(b) Strategy of equity funds is to invest in diversified funds of global common stocks.
(c) Strategy of bond funds is to invest in diversified funds of fixed income securities of varying geographies and credit quality.
(d) Strategy of alternative funds is to invest in a fund of diversifying investments, including but not limited to reinsurance, commodities and currencies.
(e) Strategy of real estate funds is to invest in diversified funds of real estate investment trusts and private real estate.
(f) Other investments primarily includes investments in insurance contracts.
Risk management practices for these plans include diversification by issuer, industry and geography, as well as the use of multiple asset classes and investment managers within each asset class. Our investment strategy for our United Kingdom pension plan, which constituted 79% of our international pension plans’ projected benefit obligation at December 31, 2019 and is no longer accruing service benefits, aims to achieve full funding of the benefit obligation, with the plan's assets increasingly composed of investments whose cash flows match the projected liabilities of the plan.
Net periodic benefit cost
Net periodic benefit cost for our international pension plans was $23 million in 2019, $32 million in 2018 and $30 million in 2017.
Actuarial assumptions
Certain weighted-average actuarial assumptions used to determine benefit obligations of our international pension plans at December 31 were as follows:
| 2019 | 2018 | |
| Discount rate | 2.5% | 3.3% |
| Rate of compensation increase | 6.0% | 5.8% |
Certain weighted-average actuarial assumptions used to determine net periodic benefit cost of our international pension plans for the years ended December 31 were as follows:
| 2019 | 2018 | 2017 | |
| Discount rate | 3.3% | 2.8% | 2.9% |
| Expected long-term return on plan assets | 4.4% | 4.1% | 4.2% |
| Rate of compensation increase | 5.8% | 5.5% | 4.8% |
HAL 2019 FORM 10-K | 64
| Table of Contents | Item 8 | Notes to Consolidated Financial Statements |
Assumed long-term rates of return on plan assets, discount rates for estimating benefit obligations and rates of compensation increases vary by plan according to local economic conditions. Where possible, discount rates were determined based on the prevailing market rates of a portfolio of high-quality debt instruments with maturities matching the expected timing of the payment of the benefit obligations. Expected long-term rates of return on plan assets were determined based upon an evaluation of our plan assets and historical trends and experience, taking into account current and expected market conditions.
Other information
Contributions. Funding requirements for each plan are determined based on the local laws of the country where such plan resides. In certain countries the funding requirements are mandatory, while in other countries they are discretionary. We currently expect to contribute $17 million to our international pension plans in 2020.
Benefit payments. Expected benefit payments over the next 10 years for our international pension plans are as follows: $42 million in 2020, $43 million in 2021, $47 million in 2022, $49 million in 2023, $53 million in 2024 and an aggregate $320 million in years 2025 through 2029.
Note 17**. New Accounting Pronouncements**
Standards adopted in 2019
Leases
Effective January 1, 2019, we adopted an accounting standard update issued by the Financial Accounting Standards Board (FASB) related to accounting for leases, which requires lessees to record assets and liabilities that arise for all leases on their balance sheet and expanded financial statement disclosures for both lessees and lessors. We adopted this standard using the optional modified retrospective transition method. As such, the comparative financial information has not been restated and continues to be reported under the lease standard in effect during those periods. We also elected other practical expedients provided by the new standard, including the package of practical expedients, the short-term lease recognition practical expedient in which leases with a term of 12 months or less are not recognized on the balance sheet, and the practical expedient to not separate lease and non-lease components for the majority of our leases. The adoption of this standard resulted in the recognition of approximately $1.0 billion of operating lease right-of-use assets and operating lease liabilities on our balance sheet as of January 1, 2019. Additionally, capital leases have been reclassified on our consolidated balance sheets as of December 31, 2018 to conform to current period presentation. This consisted of $88 million reclassified from property, plant and equipment to other assets and $109 million reclassified from long-term debt to other liabilities. The adoption of this standard did not materially impact our consolidated statements of operations for the year ended December 31, 2019. See Note 6 for further information about the new lease standard and our expanded lease disclosures.
HAL 2019 FORM 10-K | 65
| Table of Contents | Item 8 | Quarterly Financial Data |
| HALLIBURTON COMPANY Quarterly Financial Data (Unaudited) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter | |||||||||||||||
| Millions of dollars except per share data | First | Second | Third | Fourth | Year | ||||||||||
| 2019 | |||||||||||||||
| Revenue | $ | 5,737 | $ | 5,930 | $ | 5,550 | $ | 5,191 | $ | 22,408 | |||||
| Operating income (loss) | 365 | 303 | 536 | (1,652 | ) | (448 | ) | ||||||||
| Net income (loss) | 152 | 77 | 296 | (1,654 | ) | (1,129 | ) | ||||||||
| Net income (loss) attributable to company | 152 | 75 | 295 | (1,653 | ) | (1,131 | ) | ||||||||
| Basic and diluted net income (loss) per share | 0.17 | 0.09 | 0.34 | (1.88 | ) | (1.29 | ) | ||||||||
| Cash dividends paid per share | 0.18 | 0.18 | 0.18 | 0.18 | 0.72 | ||||||||||
| 2018 | |||||||||||||||
| Revenue | $ | 5,740 | $ | 6,147 | $ | 6,172 | $ | 5,936 | $ | 23,995 | |||||
| Operating income | 354 | 789 | 716 | 608 | 2,467 | ||||||||||
| Net income | 47 | 508 | 434 | 668 | 1,657 | ||||||||||
| Net income attributable to company | 46 | 511 | 435 | 664 | 1,656 | ||||||||||
| Basic and diluted net income per share | 0.05 | 0.58 | 0.50 | 0.76 | 1.89 | ||||||||||
| Cash dividends paid per share | 0.18 | 0.18 | 0.18 | 0.18 | 0.72 | ||||||||||
| Note: Results for 2019 include charges related to asset impairments and severance costs. See Note 2 for further information. Results for the first quarter of 2018 include charges related to the write-down of our remaining investment in Venezuela. |
HAL 2019 FORM 10-K | 66
| Table of Contents | Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure**.**
None.
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