Recommended
More Related Content
Similar to Weatherford International public limited company (hereinafter re.docx
Similar to Weatherford International public limited company (hereinafter re.docx (20)
More from celenarouzie
More from celenarouzie (20)
Recently uploaded
Recently uploaded (20)
Weatherford International public limited company (hereinafter re.docx
- 1. Weatherford International public limited company (hereinafter referred as to Weatherford or WFT) is a multinational oilfield company with headquarters in Baar, Switzerland. The company operates in virtually every oil and natural gas exploration and production region of the world. It operates in 100 counties and reviews its performance on geographic bases. WFT is a provider of the equipment and services to oil and natural gas exploration and production industry. According to the company’s 10-K report, it invests heavily in research and development in order to improve efficiency, productivity, quality of products and services, and its primary strategies are innovation, invention, integration, development, and commercialization. Company’s risk factors. Among the macroeconomic and industry specific factors, the company lists the following financial risk factors that affect its profitability: · Litigation: securities class action, settlements of violations, investigations by SEC and DOJ with regard to the failure to maintain effective internal controls over financial reporting, and shareholder suits. · Impairments of the company’s goodwill, long-lived assets, and intangible assets. · Gain/loss on sale of the non-core businesses and closure of the operating facilities. · Foreign currency translation risk. · Company’s credit rating. · Fluctuation of the effective tax rate. · Reduction of benefits as a result of the “redomestication” to Ireland. Ratio analysis. Liquidity Analysis 2015 2014 2013
- 2. 2012 Current Ratio 1.38 1.97 1.54 1.58 Cash Ratio 0.12 0.12 0.08 0.05 Cash to Debt Coverage 0.18 0.20 0.22 0.25 Working Capital $1,533,000 $3,917,000 $3,075,000 $3,319,000 Cash conversion cycle 243.10 180.77 207.77 210.31 Operating cycle 385.78 322.09 378.82 353.22 Form the liquidity ratios it is noticeable that the company’s working capital has decreased in the recent year by 61% and there is insufficient amount of cash coming form the operating activities. The company has a sufficient amount of current assets to cover its maturing obligations. However, only 12% of
- 3. its total assets consists of cash. It should be noted that WFT’s cash position declined over the last four years, this could be due to the increase in operating cycles, it now takes longer for the company to convert its inventory into cash. This implies, that the need in short-term financing of the operations might arise. Activity ratios can help to clarify the picture. Activity Ratios 2015 2014 2013 2012 AR turnover 3.76X 4.37X 3.98X 4.17X Days Sales Outstanding 97.06 83.61 91.79 87.50 Inventory turnover 1.26X 1.53X 1.27X 1.37X Days Inventory on Hands 288.71 238.48 287.03 265.72 AP turnover 2.56X 2.58X 2.13X 2.55X
- 4. Number of Days in AP 142.68 141.32 171.05 142.91 The decrease in the turnover ratios is obvious. These ratios affect the operation cycle. It is noticeable that in 2015 it took over 97 days for Weatherford to collect its revenue from the customers. The 10-K report states, that the company conducts business using fixed-fee or turn-key contract bases and recognizes revenue from the long-term contracts using the percentage-of-completion method. This, could be the reason for holding inventory for almost 300 days. However, it should be noted that the suppliers are paid every 142 days. Thus, the short-term financing needs might arise. Profitability Ratios 2015 2014 2013 2012 Asset turnover ratio 0.64X 0.79X 0.69X 0.67X Net Profit Margin -20.68% -3.61% -2.06% -4.93% Financial leverage 3.39 2.69 2.68 2.59 Return on Assets
- 5. -11.59% -2.64% -1.40% -3.41% Return on Equity -34.23% -7.08% -3.69% -8.17% Gross Profit Margin 14.97% 23.14% 19.40% 22.08% Operating Profit Margin -16.39% 3.39% 3.43% 1.96% Return on Total Capital -13.14% 3.49% 3.10% 1.71% Total Capital $11,765,000 $14,483,000 $16,889,000 $17,420,000 Operating Index -0.5 1.9 2.3 4.1 Tax Rate 0.00%
- 6. 0.00% 0.00% 0.00% DuPont Analysis RoE -44.70% -7.66% -3.83% -8.51% RoA -13.19% -2.85% -1.43% -3.29% Unfortunately, every investor will notice that Weatherford has been suffering losses in the last four years. This is reflected in the company’s profit margins. Although the 10-K report states that the company has been restructuring in order to increase efficiency of its operating activities. It is evident by the trend in the gross profit margin and sharp decline of the operating margin that WFT was unable to decrease its operating expenses. The only number that increased in the 2015 is the company’s financial leverage – by almost 25%. The negative results of the operating profits are reflected in depressed returns on assets and equity. Unfortunately, this decline in returns was sharp in the last three years. A great variability of the operating index suggest that the company’s financial health is rapidly decaying. Solvency Ratios 2015 2014 2013
- 7. 2012 Debt Ratio 0.70 0.63 0.63 0.61 Debt to Equity 1.71 1.07 1.06 0.98 Debt to Assets 0.50 0.40 0.40 0.38 Financial Leverage 3.39 2.69 2.68 2.59 Times Interest Earned 3.30 -1.01 -1.01 -0.61 Debt to Capital Ratio 0.63 0.52 0.52 0.49 CA/TA 37.63% 42.06% 39.92% 39.61%
- 8. CL/(TD+OE) 34.09% 27.66% 33.66% 32.72% Up until 2015 WFT’s management has maintained the debt ratio at a certain level. There is an evidence of the increase in amount of debt assumed by the company. This is supported by the common size analysis (not includes in the table above). The short-term borrowing and current portion of long-term debt account has increase over two-fold when compared to 2014. However, the fact that the proportion of current assets to the total assets and proportion o the current liabilities to the debt and equity suggests that the company is working towards improvement of its capital structure. Quality of the Income Statement. As it was mentioned in the MD&A in 2015 10-K report, the company has been involved in investigation, law suits, has suffered impairment of its assets, is going through the restructuring process, and is trying to mitigate the fast changes in the oil and natural gas markets. Thus, the expenses connected with these statements will have a negative effect on the company’s financial health, namely, its profitability would decline. The profitability issues were discussed in the earlier section. The focus of this section is on sustainable income. Below is the ProForma Income Statement for 2015 as well as the Income Statement for 2015. Annual Income Statement Report Date ProForma 2015 12/31/2015 Currency USD Audit Status
- 9. Not Qualified Consolidated Yes Scale Thousands Products revenues $3,573,000 3573000 Services revenues $5,860,000 5860000 Revenues $9,433,000 9433000 Cost of products $3,433,000 3433000 Cost of services $4,588,000 4588000 Research & development expenses $231,000 231000 Selling, general & administrative attributable to segments $1,353,000 1353000 Corporate general & administrative expenses $227,000 227000 Long-lived asset impairments 768000 Goodwill & equity investment impairment
- 10. 25000 Restructuring charges 232000 Sanctioned country loss contingency - U.S. government investigation loss 116000 Gain on sale of business -6000 Costs & expenses $9,832,000 10979000 Operating income (loss) -$399,000 -1546000 Interest income (expense), net -$468,000 -468000 Devaluation of Venezuelan Bolivar 85000 Other income (expense), net $3,000 3000 Income (loss) before income taxes -$864,000 -2096000 Total current income tax provision (benefits) - - Total deferred income tax provision (benefit)
- 11. - - Provision (benefit) for income taxes -$145,000 -145000 Net income (loss) -$1,009,000 -1951000 The items in red are considered as transitory accounts. These expenses are not sustainable and do not contribute towards the quality of income. Thus, by creating the ProForma statements, the analyst has a better understanding of company’s financial performance. It should be noted that liquidity and activity ratios are not affected by the changes in the Income Statement as they are based on the Balance Sheet. The ProForma income statement would have impact on the Profitability ratios and times interest earned ratio. These changes are marked in red in the table below. Profitability Ratios ProForma Solvency Ratios ProForma 2015 2015 2015 2015 Asset turnover ratio 0.64X 0.64X Debt Ratio 0.70
- 12. 0.70 Net Profit Margin -20.68% -10.70% Debt to Equity 1.71 1.71 Financial leverage 3.39 3.39 Debt to Assets 0.50 0.50 Return on Assets -11.59% -5.99% Financial Leverage 3.39 3.39 Return on Equity -34.23% -17.70% Times Interest Earned 3.30 0.85 Gross Profit Margin 14.97% 14.97% Debt to Capital Ratio 0.63 0.63 Operating Profit Margin -16.39% -4.23% CA/TA 37.63%
- 13. 37.63% Return on Total Capital -13.14% -3.39% CA/(TD+OE) 34.09% 34.09% Total Capital $11,765,000 $11,765,000 Financial Leverage Index 2.73 2.31 Operating Index -0.5 -1.77 Tax Rate 0.00% DuPont Analysis RoE -44.70% -23.12%
- 14. RoA -13.19% -6.82% Adjusted RoE* -44.70% -23.12% *There are no preferred dividends. Adjusted RoA -16.36% -9.99% Once transitory items are removed, the improvement of the financial performance of the company is noticeable. However, it is still in the negative area. The operating index has declined even further proving that WFT’s financial health is even worse than portrayed by the management. The company does not produce sufficient income to cover its operations and the present level of earnings is not sustainable. Obviously Weatherford is in deep financial trouble, and when considering company’s involvement in the litigations and investigations by the government agencies, it would be fair to say that WFT could be on the verge of bankruptcy in the nearest future.