NOV Inc. - Annual Report: 2007 (Form 10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE YEAR ENDED DECEMBER 31, 2007
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-12317
NATIONAL OILWELL VARCO, INC.
(Exact name of registrant as specified in its charter)
Delaware | 76-0475815 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
7909 Parkwood Circle Drive, Houston, Texas 77036-6565
(Address of principal executive offices)
(713) 346-7500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 | New York Stock Exchange | |
(Title of Class) | (Exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15 (d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of voting and non-voting common stock held by non-affiliates of the
registrant as of June 30, 2007 was $18.5 billion. As of February 20, 2008, there were 356,988,724
shares of the Companys common stock ($0.01 par value) outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement in connection with the 2008 Annual Meeting of Stockholders are
incorporated in Part III of this report.
TABLE OF CONTENTS
Table of Contents
ITEM 1. BUSINESS
General
National Oilwell Varco, Inc. (NOV or the Company), a Delaware corporation incorporated in 1995,
is a leading worldwide provider of equipment and components used in oil and gas drilling and
production operations, oilfield services, and supply chain integration services to the upstream oil
and gas industry. The Company conducts operations in approximately 700 locations across six continents.
On March 11, 2005, we acquired all of the outstanding shares of Varco International, Inc. (Varco)
with the issuance of 0.8363 shares of National-Oilwell, Inc. common stock for each Varco common
share (the Merger). The Company then changed its name from National-Oilwell, Inc. to National
Oilwell Varco, Inc. We have included the financial results of Varco in our consolidated financial
statements beginning March 11, 2005, the date Varco common shares were exchanged for NOV common
shares. We believe that the Merger has better positioned us to compete more effectively in the
global marketplace and provide greater scale to increase service to our customers, increase our
investment in research and development to accelerate innovation, and increase shareholder value.
The fiscal year ending December 31, 2006 represented the first full year of operations of the
combined entities.
On December 16, 2007, we agreed to acquire 100% of the outstanding shares of Grant Prideco, Inc.
for a combination of $23.20 cash per share and 0.4498 shares of National Oilwell Varco, Inc. common
stock. Consummation of the merger requires approval by the stockholders of Grant Prideco and also
approval from various regulatory agencies. We anticipate completion of the merger during the
second quarter of 2008.
The Companys principal executive offices are located at 7909 Parkwood Circle Drive, Houston, Texas
77036, its telephone number is (713) 346-7500, and its Internet website address is
http://www.nov.com. The Companys annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, and all amendments thereto, are available free of charge on
its Internet website. These reports are posted on its website as soon as reasonably practicable
after such reports are electronically filed with the Securities and Exchange Commission (SEC).
The Companys Code of Ethics is also posted on our website.
The Company has a long tradition of pioneering innovations which improve the cost-effectiveness,
efficiency, safety and environmental impact of oil and gas operations. The Companys common stock
is traded on the New York Stock Exchange under the symbol NOV. The Company operates through three
business segments: Rig Technology, Petroleum Services & Supplies, and Distribution Services.
Rig Technology
Our Rig Technology segment designs, manufactures, sells and services complete systems for the
drilling, completion, and servicing of oil and gas wells. The segment offers a comprehensive line
of highly-engineered equipment that automates complex well construction and management operations,
such as offshore and onshore drilling rigs; derricks; pipe lifting, racking, rotating and assembly
systems; coiled tubing equipment and pressure pumping units; well workover rigs; wireline winches;
and cranes. Demand for Rig Technology products is primarily dependent on capital spending plans by
drilling contractors, oilfield service companies, and oil and gas companies, and secondarily on the
overall level of oilfield drilling activity, which drives demand for spare parts for the segments
large installed base of equipment. We have made strategic acquisitions and other investments during
the past several years in an effort to expand our product offering and our global manufacturing
capabilities, including adding additional operations in the United States, Canada, Norway, the
United Kingdom, China, Belarus, and India.
Petroleum Services & Supplies
Our Petroleum Services & Supplies segment provides a variety of consumable goods and services used
to drill, complete, remediate and workover oil and gas wells and service pipelines, flowlines and
other oilfield tubular goods. The segment manufactures, rents and sells a variety of products and
equipment used to perform drilling operations, including transfer pumps, solids control systems,
drilling motors and other downhole tools, rig instrumentation systems, and mud pump consumables.
Demand for these services and supplies is determined principally by the level of oilfield drilling
and workover activity by drilling contractors, major and independent oil and gas companies, and
national oil companies. Oilfield tubular services include the provision of inspection and internal
coating services and equipment for drill pipe, linepipe, tubing, casing and pipelines; and the
design, manufacture and sale of coiled tubing pipe and advanced composite pipe for application in
highly corrosive environments. The segment sells its tubular goods and services to oil and gas
companies; drilling contractors; pipe distributors, processors and manufacturers; and pipeline
operators. This segment has benefited from several strategic acquisitions and other investments
completed during the past few years, including adding additional operations in the United States,
Canada, the United Kingdom, China, Kazakhstan, Mexico, Russia, Argentina, India, Bolivia, the
Netherlands, Singapore, Malaysia, Vietnam, and the United Arab Emirates.
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Distribution Services
Our Distribution Services segment provides maintenance, repair and operating supplies (MRO) and
spare parts to drill site and production locations worldwide. In addition to its comprehensive
network of field locations supporting land drilling operations throughout North America, the
segment supports major offshore drilling contractors through locations in Mexico, the Middle East,
Europe, Southeast Asia and South America. Distribution Services employs advanced information
technologies to provide complete procurement, inventory management and logistics services to its
customers around the globe. Demand for the segments services are determined primarily by the
level of drilling, servicing, and oil and gas production activities.
The following table sets forth the contribution to the Companys total revenues of its three
operating segments for December 31, 2007, 2006 and 2005 (in millions):
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Revenue: |
||||||||||||
Rig Technology |
$ | 5,744.7 | $ | 3,584.9 | $ | 2,216.8 | ||||||
Petroleum Services & Supplies |
3,061.0 | 2,425.0 | 1,645.8 | |||||||||
Distribution Services |
1,423.7 | 1,369.6 | 1,074.5 | |||||||||
Eliminations |
(440.4 | ) | (353.7 | ) | (292.6 | ) | ||||||
Total Revenue |
$ | 9,789.0 | $ | 7,025.8 | $ | 4,644.5 | ||||||
See Note 15 to our Consolidated Financial Statements included in this Annual Report on Form 10-K
for financial information by segment and a geographical breakout of revenues and long-lived assets.
The Company has included a glossary of oilfield terms at the end of Item 1 of this Annual Report.
Influence of Oil and Gas Activity Levels on the Companys Business
The oil and gas industry in which the Company participates has historically experienced significant
volatility. Demand for the Companys services and products depends primarily upon the general level
of activity in the oil and gas industry worldwide, including the number of drilling rigs in
operation, the number of oil and gas wells being drilled, the depth and drilling conditions of
these wells, the volume of production, the number of well completions and the level of well
remediation activity. Oil and gas activity is in turn heavily influenced by, among other factors,
oil and gas prices worldwide. High levels of drilling and well-remediation activity generally spur
demand for the Companys products and services used to drill and remediate oil and gas wells.
Additionally, high levels of oil and gas activity increase cash flows available for drilling
contractors, oilfield service companies, and manufacturers of oil country tubular goods to invest
in capital equipment that the Company sells.
Beginning in early 2004, increasing oil and gas prices led to steadily rising levels of drilling
activity throughout the world. Concerns about the long-term availability of oil and gas supply
also began to build. Consequently, the worldwide rig count increased 15% in 2005, 11% in 2006, and
2% in 2007. As a result of higher cash flows realized by many drilling contractors and other
oilfield service companies, as well as the long-term concerns about supply-demand imbalance and the
need to replace aging equipment, market conditions for capital equipment purchases have improved
significantly since 2005 and 2006, resulting in higher backlogs for the Company at the end of 2007
compared to the end of 2005 and 2006. Backlog for the Company was at approximately $9.0 billion at
December 31, 2007 compared to approximately $6.0 billion and $2.3 billion for December 31, 2006 and
2005, respectively.
In 2007, most of the Companys Rig Technology revenue resulted from major capital expenditures of
drilling contractors, well servicing companies, and oil companies on rig construction and
refurbishment, and well servicing equipment. These capital expenditures are influenced by the
amount of cash flow that contractors and service companies generate from drilling, completion, and
remediation activity; as well as by the availability of financing, the outlook for future drilling
and well servicing activity, and other factors. Generally the Company believes the demand for
capital equipment lags increases in the level of drilling activity. The remainder of the Rig
Technology segments revenue in 2007 was related to the sale of spare parts and consumables, the
provision of equipment-repair services, and the rental of equipment, which the Company believes are
generally determined directly by the level of drilling and well servicing activity.
The majority of the Companys Petroleum Services & Supplies revenue is closely tied to drilling
activity, although a portion is related to the sale of capital equipment to drilling contractors,
which may somewhat lag the level of drilling activity. Portions of the segments revenue that are
not tied to drilling activity include (i) the sale of progressive cavity pumps and solids control
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equipment for use in industrial applications; (ii) the performance of in-service pipeline
inspections; (iii) the sale of fiberglass and composite tubing to industrial customers, which is
generally unrelated to drilling or well remediation activity but may be tied somewhat to oil and
gas prices; and (iv) the sale of pipe inspection equipment to the manufacturers of oil country
tubular goods, which is indirectly related to drilling activity.
The Companys revenue from Distribution Services is almost entirely driven by drilling activity and
oil and gas production activities.
Drilling and well servicing activity can fluctuate significantly in a short period of time. The
willingness of oil and gas operators to make capital investments to explore for and produce oil and
natural gas will continue to be influenced by numerous factors over which the Company has no
control, including: the ability of the members of the Organization of Petroleum Exporting Countries
(OPEC) to maintain oil price stability through voluntary production limits of oil; the level of
oil production by non-OPEC countries; supply and demand for oil and natural gas; general economic
and political conditions; costs of exploration and production; the availability of new leases and
concessions; and governmental regulations regarding, among other things, environmental protection,
taxation, price controls and product allocations. The willingness of drilling contractors and well
servicing companies to make capital expenditures for the type of specialized equipment the Company
provides is also influenced by numerous factors over which the Company has no control, including:
the general level of oil and gas well drilling and servicing; rig dayrates; access to external
financing; outlook for future increases in well drilling and well remediation activity; steel
prices and fabrication costs; and government regulations regarding, among other things,
environmental protection, taxation, and price controls.
Overview of Oil and Gas Well Drilling and Servicing Processes
Oil and gas wells are usually drilled by drilling contractors using a drilling rig. A bit is
attached to the end of a drill stem, which is assembled by the drilling rig and its crew from
30-foot joints of drill pipe and specialized drilling components known as downhole tools. Using
the conventional rotary drilling method, the drill stem is turned from the rotary table of the
drilling rig by torque applied to the kelly, which is screwed into the top of the drill stem.
Increasingly, drilling is performed using a drilling motor, which is attached to the bottom of the
drill stem and provides rotational force directly to the bit, rather than such force being supplied
by the rotary table. The use of a drilling motor permits the drilling contractor to drill
directionally, including horizontally. The Company sells and rents drilling motors and downhole
tools through its Petroleum Services & Supplies segment.
During drilling, heavy drilling fluids or drilling muds are pumped down the drill stem and forced
out through jets in the bit. The drilling mud returns to the surface through the space between the
borehole wall and the drill stem, carrying with it the drill cuttings drilled out by the bit. The
drill cuttings are removed from the mud by a solids control system (which can include shakers,
centrifuges and other specialized equipment) and disposed of in an environmentally sound manner.
The solids control system permits the mud, which is often comprised of expensive chemicals, to be
continuously reused and recirculated back into the hole.
Through its Rig Technology segment, the Company sells the large mud pumps that are used to pump
drilling mud through the drill stem. Through its Petroleum Services & Supplies business, the
Company sells transfer pumps and mud pump consumables; sells and rents solids control equipment;
and provides solids control and waste management services. Many operators internally coat the
drill stem to improve its hydraulic efficiency and protect it from corrosive fluids sometimes
encountered during drilling, and inspect and assess the integrity of the drill pipe from time to
time. The Company provides drill pipe inspection and coating services, and applies hardbanding
material to drill pipe to improve its wear characteristics. These services are provided through
the Companys Petroleum Services & Supplies segment.
As the hole depth increases, the kelly must be removed frequently so that additional 30-foot joints
of drill pipe can be added to the drill stem. When the bit becomes dull or the equipment at the
bottom of the drill stem including the drilling motors otherwise requires servicing, the entire
drill stem is pulled out of the hole and disassembled by disconnecting the joints of drill pipe.
These are set aside or racked, the old bit is replaced or service is performed, and the drill
stem is reassembled and lowered back into the hole (a process called tripping). During drilling
and tripping operations, joints of drill pipe must be screwed together and tightened (made up),
and loosened and unscrewed (spun out). The Companys Rig Technology business provides drilling
equipment to manipulate and maneuver the drill pipe in this manner. When the hole has reached
certain depths, all of the drill pipe is pulled out of the hole and larger diameter pipe known as
casing is lowered into the hole and permanently cemented in place in order to protect against
collapse and contamination of the hole. The casing is typically inspected before it is lowered
into the hole, a service the Companys Petroleum Services & Supplies business provides. The
Companys Rig Technology segment manufactures pressure pumping equipment that is used to cement the
casing in place.
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The raising and lowering of the drill stem while drilling or tripping, and the lowering of casing
into the wellbore, are accomplished with the rigs hoisting system. A conventional hoisting system
is a block and tackle mechanism that works within the drilling rigs derrick. The lifting of this
mechanism is performed via a series of pulleys that are attached to the drawworks at the base of
the derrick. The Companys Rig Technology segment sells and installs drawworks and pipe hoisting
systems.
During the course of normal drilling operations, the drill stem passes through different geological
formations, which exhibit varying pressure characteristics. If this pressure is not contained, oil,
gas and/or water would flow out of these formations to the surface. The two means of containing
these pressures are (i) primarily the circulation of drilling muds while drilling and (ii)
secondarily the use of blowout preventers should the mud prove inadequate and in an emergency
situation. The Companys Rig Technology group sells and services blowout preventers.
Drilling muds are carefully designed to exhibit certain qualities that optimize the drilling
process. In addition to containing formation pressure, they must (i) provide power to the drilling
motor, (ii) carry drilled solids to the surface, (iii) protect the drilled formations from being
damaged, and (iv) cool the drill bit. Achieving these objectives often requires a formulation
specific to a given well and can involve the use of expensive chemicals as well as natural
materials such as certain types of clay. The fluid itself is often oil or more-expensive synthetic
mud. Given this expense, it is highly desirable to reuse as much of the drilling mud as possible.
Solids control equipment such as shale shakers, centrifuges, cuttings dryers, and mud cleaners help
accomplish this objective. The Companys Petroleum Services & Supplies group rents, sells,
operates and services this equipment. Drilling muds are formulated based on expected drilling
conditions. However, as the hole is drilled, the drill stem may encounter a high pressure zone
where the mud density is inadequate to maintain sufficient pressure. Should efforts to weight up
the mud in order to contain such a pressure kick fail, a blowout could result, whereby reservoir
fluids would flow uncontrolled into the well. To prevent blowouts to the surface of the well, a
series of high-pressure valves known as blowout preventers (BOPs) are positioned at the top of
the well and, when activated, form tight seals that prevent the escape of fluids. When closed,
conventional BOPs prevent normal rig operations. Therefore, the BOPs are activated only if
drilling mud and normal well control procedures cannot safely contain the pressure. BOPs have been
designed to contain pressures of up to 20,000 psi.
The operations of the rig and the condition of the drilling mud are closely monitored by various
sensors, which measure operating parameters such as the weight on the rigs hook, the incidence of
pressure kicks, the operation of the drilling mud pumps, etc. Through its Petroleum Services &
Supplies business, the Company sells and rents drilling rig instrumentation packages that perform
these monitoring functions.
During the drilling and completion of a well, there exists an ongoing need for various consumables
and spare parts. While most of these items are small, in the aggregate they represent an important
element of the process. Since it is impractical for each drilling location to have a full supply
of these items, drilling contractors and well service companies tend to rely on third parties to
stock and deliver these items. The Company provides this capability through its Distribution
Services segment, which stocks and sells spares and consumables made by third parties, as well as
spares and consumables made by the Company.
After the well has reached its total depth and the final section of casing has been set, the
drilling rig is moved off of the well and the well is prepared to begin producing oil or gas in a
process known as well completion. Well completion usually involves installing production tubing
concentrically in the casing. Due to the corrosive nature of many produced fluids, production
tubing is often inspected and coated, services offered by the Companys Petroleum Services &
Supplies business. Sometimes operators choose to use corrosion resistant composite materials (which
the Company offers through its Petroleum Services & Supplies business), or corrosion-resistant
alloys, or operators sometimes pump fluids into wells to inhibit corrosion.
From time to time, a producing well may undergo workover procedures to extend its life and increase
its production rate. Workover rigs are used to disassemble the wellhead, tubing and other
completion components of an existing well in order to stimulate or remediate the well. Workover
rigs are similar to drilling rigs in their capabilities to handle tubing, but are usually smaller
and somewhat less sophisticated. The Company offers a comprehensive range of workover rigs through
its Rig Technology segment. Tubing and sucker rods removed from a well during a well remediation
operation are often inspected to determine their suitability to be reused in the well, which is a
service the Companys Petroleum Services & Supplies business provides.
Frequently coiled tubing units or wireline units are used to accomplish certain well remediation
operations or well completions. Coiled tubing is a recent advancement in petroleum technology
consisting of a continuous length of reeled steel tubing which can be injected concentrically into
the production tubing all the way to the bottom of most wells. It permits many operations to be
performed without disassembling the production tubing, and without curtailing the production of the
well. Wireline winch units are devices that utilize single-strand or multistrand wires to perform
well-remediation operations, such as lowering tools and transmitting data to the surface. Through
the Rig Technology group, the Company sells and rents various types of coiled tubing equipment, and
wireline equipment and tools. The Company also manufactures and sells coiled tubing pipe through
its Petroleum Services & Supplies segment.
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Rig Technology
The Company has a long tradition of pioneering innovations in drilling and well servicing equipment
which improve the efficiency, safety, and cost of drilling and well servicing operations. The Rig
Technology group designs, manufactures and sells a wide variety of top drives, automated pipe
handling systems, motion compensation systems, rig controls, BOPs, handling tools, drawworks,
risers, rotary tables, mud pumps, cranes, drilling motors and other drilling equipment for both the
onshore and offshore markets. The Rig Technology group also manufactures entire rig packages, both
drilling and workover, in addition to well servicing equipment such as coiled tubing units,
pressure pumping equipment, and wireline winches.
The Rig Technology group sells directly to drilling contractors, shipyards and other rig
fabricators, well servicing companies, national oil companies, major and independent oil and gas
companies, supply stores, and pipe-running service providers. Demand for its products, several of
which are described below, is strongly dependent upon capital spending plans by oil and gas
companies and drilling contractors, and the level of oil and gas well drilling activity.
Land Rig Packages. NOV designs, manufactures, assembles, upgrades, and supplies equipment sets
to a variety of land drilling rigs, including those specifically designed to operate in harsh
environments such as the Arctic Circle and the desert. Our key land rig product names include the
Ideal Rig and Rapid Rig®. NOVs recent rig packages are designed to be safer and fast
moving, to utilize AC technology, and to reduce manpower required to operate a rig.
Top Drives. The Top Drive Drilling System (TDS), originally introduced by NOV in 1982,
significantly alters the traditional drilling process. The TDS rotates the drill stem from its top,
rather than by the rotary table, with a large electric motor affixed to rails installed in the
derrick that traverses the length of the derrick to the rig floor. Therefore, the TDS eliminates
the use of the conventional rotary table for drilling. Components of the TDS also are used to
connect additional joints of drill pipe to the drill stem during drilling operations, enabling
drilling with three joints of drill pipe compared to traditionally drilling with one joint of drill
pipe. Additionally, the TDS facilitates horizontal and extended reach drilling.
Drilling Motors. NOV has helped lead the application of AC motor technology in the oilfield
industry. We are now transitioning from buying motors from third parties to building them in our
own facilities and further developing motor technology, including the introduction of permanent
magnet motor technology to the industry. These permanent magnet motors are being used in top
drives, cranes, mud pumps, winches, and drawworks.
Rotary Equipment. The alternative to using a TDS to rotate the drill stem is to use a rotary
table, which rotates the pipe at the floor of the rig. The Rig Technology group produces rotary
tables as well as kelly bushings and master bushings for most sizes of kellys and makes of rotary
tables. In 1998, NOV introduced the Rotary Support Table for use on rigs with a TDS. The Rotary
Support Table is used in concert with the TDS to completely eliminate the need for the larger
conventional rotary table.
Pipe Handling Systems. Pipe racking systems are used to handle drill pipe, casing and tubing on
a drilling rig. Vertical pipe racking systems move drill pipe and casing between the well and a
storage (racking) area on the rig floor. Horizontal racking systems are used to handle tubulars
while stored horizontally (for example, on the pipe deck of an offshore rig) and transport tubulars
up to the rig floor and into a vertical position for use in the drilling process.
Vertical pipe racking systems are used predominantly on offshore rigs and are found on almost all
floating rigs. Mechanical vertical pipe racking systems greatly reduce the manual effort involved
in pipe handling. Pipe racking systems, introduced by NOV in 1985, provide a fully automated
mechanism for handling and racking drill pipe during drilling and tripping operations, spinning and
torquing drill pipe, and automatic hoisting and racking of disconnected joints of drill pipe. These
functions can be integrated via computer controlled sequencing, and operated by a driller in an
environmentally secure cabin. An important element of this system is the Iron Roughneck, which was
originally introduced by NOV in 1976 and is an automated device that makes pipe connections on the
rig floor and requires less direct involvement of rig floor personnel in potentially dangerous
operations. The Automated Roughneck is an automated microprocessor-controlled version of the Iron
Roughneck.
Horizontal pipe transfer systems were introduced by NOV in 1993. They include the Pipe Deck Machine
(PDM), which is used to manipulate and move tubulars while stored in a horizontal position; the
Pipe Transfer Conveyor (PTC), which transports sections of pipe to the rig floor; and a Pickup
Laydown System (PLS), which raises the pipe to a vertical position for transfer to a vertical
racking system. These components may be employed separately, or incorporated together to form a
complete horizontal racking system, known as the Pipe Transfer System (PTS).
Pipe Handling Tools. The Companys pipe handling tools are designed to enhance the safety,
efficiency and reliability of pipe handling operations. Many of these tools have provided
innovative methods of performing the designated task through mechanization of functions previously
performed manually. The Rig Technology group manufactures various tools used to grip,
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hold, raise, and lower pipe, and in the making up and breaking out of drill pipe, workstrings,
casing and production tubulars including spinning wrenches, manual tongs, torque wrenches and kelly
spinners.
Mud Pumps. Mud pumps are high pressure pumps located on the rig that force drilling mud down the
drill pipe, through the drill bit, and up the space between the drill pipe and the drilled
formation (the annulus) back to the surface. These pumps, which generate pressures of up to 7,500
psi, must therefore be capable of displacing drilling fluids several thousand feet down and back up
the well bore. The conventional mud pump design, known as the triplex pump, uses three
reciprocating pistons oriented horizontally. Recently, NOV has introduced the HEX Pump, which uses
six pumping cylinders, versus the three used in the triplex pump. Along with other design
features, the greater number of cylinders reduces pulsations (or surges) and increases the output
available from a given footprint. Reduced pulsation is desirable where downhole measurement
equipment is being used during the drilling process, as is often the case in directional drilling.
Hoisting Systems. Hoisting systems are used to raise or lower the drill stem while drilling or
tripping, and to lower casing into the wellbore. The drawworks is the heart of the hoisting system.
It is a large winch that spools off or takes in the drilling line, which is in turn connected to
the drill stem at the top of the derrick. The drawworks also plays an important role in keeping
the weight on the drill bit at a desired level. This task is particularly challenging on offshore
drilling rigs, which are subject to wave motion. To address this, NOV has introduced the Active
Heave Drilling (AHD) Drawworks. The AHD Drawworks uses computer-controlled motors to compensate
for the motion experienced in offshore drilling operations.
Cranes. NOV provides a comprehensive range of crane solutions, with purpose-built products for all
segments of the oil and gas industry as well as many other markets. The Company encompasses a broad
collection of brand names with international recognition, and includes a large staff of engineers
specializing in the design of cranes and related equipment. The product range extends from small
cargo-handling cranes to the worlds largest marine cranes. In all, the Company provides over
twenty crane product lines that include standard model configurations as well as custom-engineered
and specialty cranes.
Motion Compensation Systems. Traditionally, motion compensation equipment is located on top of the
drilling rig and serves to stabilize the bit on the bottom of the hole, increasing drilling
effectiveness of floating offshore rigs by compensating for wave and wind action. The AHD
Drawworks, discussed above, was introduced to eliminate weight and improve safety, removing the
compensator from the top of the rig and integrating it into the drawworks system. In addition to
the AHD Drawworks, NOV has introduced an Active Heave Compensation (AHC) System that goes beyond
the capabilities of the AHD Drawworks to handle the most severe weather. Additionally, NOV
tensioning systems provide continuous axial tension to the marine riser pipe (larger diameter pipe
which connects floating drilling rigs to the well on the ocean floor) and guide lines on floating
drilling rigs, tension leg platforms and jack-up drilling rigs.
Blowout Preventers. BOPs are devices used to seal the space (annulus) between the drill pipe and
the borehole to prevent blowouts (uncontrolled flows of formation fluids and gases to the surface).
The Rig Technology group manufactures a wide array of BOPs used in various situations. Ram and
annular BOPs are back-up devices that are activated only if other techniques for controlling
pressure in the wellbore are inadequate. When closed, these devices prevent normal rig operations.
Ram BOPs seal the wellbore by hydraulically closing rams (thick heavy blocks of steel) against each
other across the wellbore. Specially designed packers seal around specific sizes of pipe in the
wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs seal the wellbore by
hydraulically closing a rubber packing unit around the drill pipe or kelly or by sealing against
itself if nothing is in the hole. NOVs Pressure Control While Drilling (PCWD)® BOP,
introduced in 1995, allows operators to drill at pressures up to 2,000 psi without interrupting
normal operations, and can act as a normal spherical BOP at pressures up to 5,000 psi.
In 1998, NOV introduced the NXT® ram type BOP which eliminates door bolts, providing
significant weight, rig-time, and space savings. Its unique features make subsea operation more
efficient through faster ram configuration changes without tripping the BOP stack. In 2004, NOV
introduced the LXT, which features many of the design elements of the NXT, but is targeted at the
land market. In 2005, the Company began commercializing technology related to a continuous
circulation device. This device enables drilling contractors to make and break drill pipe
connections without stopping the circulation of drilling fluids, which helps increase drilling
efficiency.
Derricks and Substructures. Drilling activities are carried out from a drilling rig. A drilling
rig consists of one or two derricks; the substructure that supports the derrick(s); and the rig
package, which consists of the various pieces of equipment discussed above. The Rig Technology
segment designs, fabricates and services derricks used in both onshore and offshore applications,
and substructures used in onshore applications. The Rig Technology group also works with shipyards
in the fabrication of substructures for offshore drilling rigs.
Coiled Tubing Equipment. Coiled tubing consists of flexible steel tubing manufactured in a
continuous string and spooled on a reel. It can extend several thousand feet in length and is run
in and out of the wellbore at a high rate of speed by a hydraulically operated coiled tubing unit.
A coiled tubing unit is typically mounted on a truck or skid (steel frames on which portable
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equipment is mounted to facilitate handling with cranes or flatbed trucks) and consists of a
hydraulically operated tubing reel or drum, an injector head which pushes or pulls the tubing in or
out of the wellbore, and various power and control systems. Coiled tubing is typically used with
sophisticated pressure control equipment which permits the operator to continue to safely produce
the well. The Rig Technology group manufactures and sells both coiled tubing units and the
ancillary pressure control equipment used in these operations. Through its acquisition of Rolligon
in late 2006, the Company enhanced its portfolio by adding additional pressure pumping and coiled
tubing equipment products.
Currently, most coiled tubing units are used in well remediation and completion applications. The
Company believes that advances in the manufacturing process of coiled tubing, tubing fatigue
protection and the capability to manufacture larger diameter and increased wall thickness coiled
tubing strings have resulted in increased uses and applications for coiled tubing products. For
example, some well operators are now using coiled tubing in drilling applications such as slim hole
reentries of existing wells. NOV engineered and manufactured the first coiled tubing units built
specifically for coiled tubing drilling in 1996.
Generally, the Rig Technology group supplies customers with the equipment and components necessary
to use coiled tubing, which the customers typically purchase separately. The groups coiled tubing
product line consists of coiled tubing units, coiled tubing pressure control equipment, pressure
pumping equipment, snubbing units (which are units that force tubulars into a well when pressure is
contained within the wellbore), nitrogen pumping equipment and cementing, stimulation, fracturing
and blending equipment.
Wireline Equipment. NOVs wireline products include wireline drum units, which consist of a
spool or drum of wireline cable, mounted in a mobile vehicle or skid, which works in conjunction
with a source of power (an engine mounted in the vehicle or within a separate power pack skid).
The wireline drum unit is used to spool wireline cable into or out of a well, in order to perform
surveys inside the well, sample fluids from the bottom of the well, retrieve or replace components
from inside the well, or to perform other well remediation or survey operations. The wireline used
may be slickline, which is conventional steel cable used to convey tools in or out of the well,
or electric line, which contains an imbedded single-conductor or multi-conductor electrical line
which permits communication between the surface and electronic instruments attached to the end of
the wireline at the bottom of the well.
Wireline units are usually used in conjunction with a variety of other pressure control equipment
which permit safe access into wells while they are flowing and under pressure at the surface. The
company engineers and manufactures a broad range of pressure control equipment for wireline
operations, including wireline blowout preventers, strippers, packers, lubricators and grease
injection units. Additionally, the Company makes wireline rigging equipment such as mast trucks.
Facilities. The Company conducts Rig Technology manufacturing operations at major facilities in
Houston, Galena Park, Sugar Land, Conroe, Anderson, Fort Worth and Pampa, Texas; Tulsa and Duncan,
Oklahoma; Orange, California; Calgary, Nisku and Edmonton, Canada; Mexicali, Mexico; Kristiansand
and Stavanger, Norway; Etten-Leur, the Netherlands; Carquefou, France; Lanzhou and Shanghai, China;
Jebel Ali, UAE; Minsk, Belarus; and Dehradun, India. The Rig Technology group maintains sales and
service offices in most major oilfield markets, either directly or through agents.
Customers and Competition. The Rig Technology segment sells directly to drilling contractors,
other rig fabricators, well servicing companies, pressure pumping companies, national oil
companies, major and independent oil and gas companies, supply stores, and pipe-running service
providers. Demand for its products is strongly dependent upon capital spending plans by oil and gas
companies and drilling contractors, and the level of oil and gas well drilling activity.
The products of the Rig Technology group are sold in highly competitive markets and its sales and
earnings can be affected by competitive actions such as price changes, new product development, or
improved availability and delivery. The groups primary competitors are Access Oil Tools; Aker
Kvaerner AS; American Block; Bomco; Canrig (a division of Nabors Industries); Cavins Oil Tools;
Cameron; DenCon Oil Tools; Forum Oilfield Technologies; General Electric; Hong Hua; IDM; LTI (a division of Rowan Companies);
M&I Electric; Tesco Corporation; Wirth M&B GmbH; Stewart & Stevenson, Inc.; ASEP; Crown Energy
Technologies; Huntings, Ltd.; Vanoil; Parveen Industries; and Weatherford International, Inc.
Management believes that the principal competitive factors affecting its Drilling Equipment
business are performance, quality, reputation, customer service, availability of products, spare
parts, and consumables, breadth of product line and price.
Petroleum Services & Supplies
The Company provides a broad range of support equipment, spare parts, consumables and services
through the Petroleum Services & Supplies segment. The Petroleum Services & Supplies group sells
directly to drilling contractors; well servicing companies; oil and gas producers; national oil
companies; tubular processors, manufacturers and distributors; oilfield distributors; and pipeline
operators.
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The Petroleum Services & Supplies group provides a variety of tubular services, composite tubing,
and coiled tubing to oil and gas producers, national oil companies, drilling contractors, well
servicing companies, pipeline operators, and tubular processors, manufacturers and distributors.
These include inspection and reclamation services for drill pipe, casing, production tubing, sucker
rods and line pipe at drilling and workover rig locations, at yards owned by its customers, at
steel mills and processing facilities that manufacture tubular goods, and at facilities which it
owns. The group also provides internal coating of tubular goods at several coating plants worldwide
and through licensees in certain locations. Additionally, the Company designs, manufactures and
sells high pressure fiberglass and composite tubulars for use in corrosive applications and coiled
tubing for use in well servicing applications; and provides in-service inspection of oil, gas and
product transmission pipelines through its application of instrumented survey tools (smart pigs)
which it engineers, manufactures and operates.
The Companys customers rely on tubular inspection services to avoid failure of tubing, casing,
flowlines, pipelines and drill pipe. Such tubular failures are expensive and in some cases
catastrophic. The Companys customers rely on internal coatings of tubular goods to prolong the
useful lives of tubulars and to increase the volumetric throughput of in-service tubular goods. The
Companys customers sometimes use fiberglass or composite tubulars in lieu of conventional steel
tubulars, due to the corrosion-resistant properties of fiberglass and other composite materials.
Tubular inspection and coating services are used most frequently in operations in high-temperature,
deep, corrosive oil and gas environments. In selecting a provider of tubular inspection and tubular
coating services, oil and gas operators consider such factors as reputation, experience, technology
of products offered, reliability and price.
The Companys Petroleum Services & Supplies group also provides products and services that are used
in the course of drilling oil and gas wells. The Downhole Tools business sells and rents drilling
motors and specialized downhole tools that are incorporated into the drill stem during drilling
operations (Downhole Tools), and are also used during fishing, well intervention, re-entry, and
well completion operations. The Solids Control business is engaged in the provision of
highly-engineered equipment, products and services which separate and manage drill cuttings
produced by the drilling process (Solids Control). Drill cuttings are usually contaminated with
petroleum or drilling fluids, and must be disposed of in an environmentally sound manner.
Additionally, efficient separation of drill cuttings enables the re-use of often costly drilling
fluids. The Instrumentation business rents and sells proprietary drilling rig instrumentation
packages and control systems which monitor various processes throughout the drilling operation,
under the name MD®/Totco® (Instrumentation). The Pumps & Expendables
business provides centrifugal, reciprocating, and progressing cavity pumps and pump expendables
(Pumps & Expendables) into the global oil and gas and industrial markets.
Tubular Coating. The Company develops, manufactures and applies its proprietary tubular coatings,
known as Tube-Kote® coatings, to new and used tubulars. Tubular coatings help prevent
corrosion of tubulars by providing a tough plastic shield to isolate steel from corrosive oilfield
fluids such as CO2, H2S and brine. Delaying or preventing corrosion extends
the life of existing tubulars, reduces the frequency of well remediation and reduces expensive
interruptions in production. In addition, coatings are designed to increase the fluid flow rate
through tubulars by decreasing or eliminating paraffin and scale build-up, which can reduce or
block oil flow in producing wells. The smooth inner surfaces of coated tubulars often increase the
fluid through-put on certain high-rate oil and gas wells by reducing friction and turbulence. The
Companys reputation for supplying quality internal coatings is an important factor in its
business, since the failure of coatings can lead to expensive production delays and premature
tubular failure. In 2005, NOV created a 60%-owned joint venture in China with the Huabei Petroleum
Administration Bureau, which coats Chinese produced drill pipe using NOVs proprietary coatings.
In 2007, the joint venture opened a second coating plant in Jiangyin City, China.
Tubular Inspection. Newly manufactured pipe sometimes contains serious defects that are not
detected at the mill. In addition, pipe can be damaged in transit and during handling prior to use
at the well site. As a result, exploration and production companies often have new tubulars
inspected before they are placed in service to reduce the risk of tubular failures during drilling,
completion, or production of oil and gas wells. Used tubulars are inspected by the Company to
detect service-induced flaws after the tubulars are removed from operation. Used drill pipe and
used tubing inspection programs allow operators to replace defective lengths, thereby prolonging
the life of the remaining pipe and saving the customer the cost of unnecessary tubular replacements
and expenses related to tubular failures.
Tubular inspection services employ all major non-destructive inspection techniques, including
electromagnetic, ultrasonic, magnetic flux leakage and gamma ray. These inspection services are
provided both by mobile units which work at the wellhead as used tubing is removed from a well, and
at fixed site tubular inspection locations. The group provides an ultrasonic inspection service for
detecting potential fatigue cracks in the end area of used drill pipe, the portion of the pipe that
traditionally has been the most difficult to inspect. Tubular inspection facilities also offer a
wide range of related services, such as API thread inspection, ring and plug gauging, and a
complete line of reclamation services necessary to return tubulars to useful service, including
tubular cleaning and straightening, hydrostatic testing and re-threading.
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In addition, the Company applies hardbanding material to drill pipe, to enhance its wear
characteristics and reduce downhole casing wear as a result of the drilling process. In 2002, the
Company introduced its proprietary line of hardbanding material, TCS 8000ä. The group also
cleans, straightens, inspects and coats sucker rods at 11 facilities throughout the Western
Hemisphere. Additionally, new sucker rods are inspected before they are placed into service, to
avoid premature failure, which can cause the oil well operator to have to pull and replace the
sucker rod.
Mill Systems and Sales. The Company engineers and fabricates inspection equipment for steel
mills, which it sells and rents. The equipment is used for quality control purposes to detect
defects in the pipe during the high-speed manufacturing process. Each piece of mill inspection
equipment is designed to customer specifications and is installed and serviced by the Company.
Fiberglass & Composite Tubulars. When compared to conventional carbon steel and even
corrosion-resistant alloys, resin-impregnated fiberglass and other modern plastic composites often
exhibit superior resistance to corrosion. Some producers manage the corrosive fluids sometimes
found in oil and gas fields by utilizing composite or fiberglass tubing, casing and line pipe in
the operations of their fields. In 1997, the Company acquired Fiber Glass Systems, a leading
provider of high pressure fiberglass tubulars used in oilfield applications, to further serve the
tubular corrosion prevention needs of its customers. Fiber Glass Systems has manufactured
fiberglass pipe since 1968 under the name Star®, and was the first manufacturer of
high-pressure fiberglass pipe to be licensed by the API in 1992. Through acquisitions and
investments in technologies, the Company has extended its fiberglass and composite tubing offering
into industrial and marine applications, in addition to its oilfield market.
Coiled Tubing. Coiled tubing provides a number of significant functional advantages over the
principal alternatives of conventional drill pipe and workover pipe. Coiled tubing allows faster
tripping, since the coiled tubing can be reeled quickly on and off a drum and in and out of a
wellbore. In addition, the small size of the coiled tubing unit compared to an average workover rig
or drilling rig reduces preparation time at the well site. Coiled tubing permits a variety of
workover and other operations to be performed without having to pull the existing production tubing
from the well and allows ease of operation in horizontal or highly deviated wells. Thus, operations
using coiled tubing can be performed much more quickly and, in many instances, at a significantly
lower cost. Finally, use of coiled tubing generally allows continuous production of the well,
eliminating the need to temporarily stop the flow of hydrocarbons. As a result, the economics of a
workover are improved because the well can continue to produce hydrocarbons and thus produce
revenues while the well treatments are occurring. Continuous production also reduces the risk of
formation damage which can occur when the flow of fluids is stopped or isolated. Under normal
operating conditions, the coiled tubing string must be replaced every three to four months. NOV
designs, manufactures, and sells coiled tubing under the Quality Tubing brand name at its mill in
Houston, Texas.
Pipeline Inspection. In-service inspection services for oil and gas pipelines identify anomalies
in pipelines without removing or dismantling the pipelines or stopping the product flow, giving
customers a convenient and cost-effective method of identifying potential defects. The Petroleum
Services & Supplies group inspects pipelines by launching a sophisticated survey instrument into
the pipeline. Propelled by the product flow, the instrument uses electromagnetics, ultrasonics, and
mechanical measurements received on digital and analog media to monitor the severity and location
of internal and external pitting-type corrosion as well as other mechanical anomalies in the
pipeline, providing a basis for evaluation and repair by the customer. Once the test is complete,
the survey instrument is returned to the Company, refurbished and used for future pipeline
inspections.
Downhole Tools. NOV designs, manufacturers and services a wide array of downhole motors used in
straight hole, directional, slim hole, and coiled tubing drilling applications. These motors are
sold or leased under the brand names TrudrillTM, VectorTM,
BlackMax®, and PrescottTM. This business also maintains a wide variety of
motor power sections, which it incorporates into its own motors and also sells to third parties.
Downhole drilling motors utilize hydraulic horsepower from the drilling fluid pumped down the drill
stem to develop torque at the bit. Motors are capable of achieving higher rotary velocities than
can generally be achieved using conventional surface rotary equipment. Motors are often used in
conjunction with high speed PDC bits to improve rates of penetration.
The Downhole Tools group also manufactures and sells drilling jars and fishing tools, which are
marketed under the GriffithTM and Bowen® brand names. Drilling jars are
placed in the drill string, where they can be used to generate a sudden, jarring motion to free the
drill string should it become stuck in the wellbore during the drilling process. This jarring
motion is generated using hydraulic and/or mechanical force provided at the surface. In the event
that a portion of the drill string becomes stuck and cannot be jarred loose, fishing tools are run
into the wellbore on the end of the drill string to retrieve the portion that is stuck.
NOV acquired NQL Energy Services, Inc. (NQL) in late 2006 for approximately $300 million in cash.
NQL manufactures, leases, sells and services downhole tools including drilling motors, jars,
shock tools, reamers, and EM-MWD systems in 23 locations across seven countries. NOV acquired
the assets of Gammaloy Holdings, L.P. in 2007. Gammaloy manufactures, sells and rents
non-magnetic drill collars and other related products. These transactions have expanded NOVs
downhole tools portfolio and increased exposure to directional drilling services.
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Solids Control. The Solids Control product line uses a variety of technologies to separate drill
cuttings from drilling fluids, and to transport, dry and refine drill cuttings for safe disposal
under the Brandt NOV brand name. The Company believes the regulatory and industry trends toward
minimizing the environmental impact of drilling operations in a number of environmentally sensitive
oil and gas producing regions will lead to greater demand for solids control products and waste
management services. Waste management services cover many areas associated with the drilling of a
well including solids removal, solids transport, solids treatment and solids disposal. The Company
further believes the trend towards more technically complex drilling, including highly deviated
directional wells and slim-hole completions, will favorably impact the demand for solids control
technology because of its ability to reduce costly downhole problems. As environmental constraints
are increased and as awareness of environmental protection grows, the Company believes that its
drill cuttings separation, cuttings transport and treating processes will experience increased
demand.
The Company has a history of introducing new solids control products and services obtained both
through its internal development and through acquiring or licensing technologies from others.
Current product offerings are circular, elliptical and linear motion shale shakers and shale shaker
screens that comply with the November 2004 API Recommended Practice 13C, degassers, desanders,
desilters, high speed/high capacity centrifuges and conventional centrifuges, thermal desorption
units, cuttings conveyance systems and closed loop drilling fluids systems at its facilities in
Conroe and Houston, Texas; Aberdeen, Scotland; Leduc, Canada; Trinidad; Singapore; and Dubai, UAE.
Through development of new product offerings and strategic acquisitions the Company has become a
leading provider of thermal desorption cuttings processing services to the drilling industry.
Similar efforts have been successful in developing a broad range of services, including centrifugal
dryers, and the Brandt NOV FreeFlow system.
Instrumentation. The Companys Instrumentation business provides drilling rig operators real
time measurement and monitoring of critical parameters required to improve rig safety and
efficiency. In 1999, the Company introduced its RigSense® Wellsite Information System, which
combines leading hardware and software technologies into an integrated drilling rig package. Access
of drilling data is provided to offsite locations, enabling company personnel to monitor drilling
operations from an office environment, through a secure link. Systems are both sold and rented,
and are comprised of hazardous area sensors placed throughout the rig to measure critical drilling
parameters; all networked back to a central command station for review, recording and
interpretation. This allows key rig personnel to perform individual jobs more effectively. The
Company has evolved from data collection to a leading drilling information provider by using
state-of-the-art satellite communications to increase operational efficiencies between drilling
rigs and their corporate office. The Company offers unique business integration services to
directly integrate information into business applications that improves accuracy and assists
drilling contractors in managing their drilling business. Cost of compliance for Sarbanes-Oxley is
minimized through the Companys DrillSuite and RigMS offerings. Reports on drilling activities and
processes are now provided from the rig site as a part of the DrillSuite business solution to
assist the drilling contractor in managing their business of drilling. DrillSuite allows
contractors to streamline administration by eliminating manual entry of data, promotes accurate
payroll processing and invoicing, and includes asset tracking and preventive maintenance management
through its RigMS solution. The real time information provided also allows the Company to advance
the drilling process using advanced drilling algorithms and electronic controls such as our Wildcat
Auto Drilling System for better execution of the well plan, enhanced rates of penetration, reduced
program costs, and improved wellbore quality. Complimenting the Companys surface solutions is a
portfolio of Down-Hole Instrumentation (DHI) products for both straight-hole and directional
markets. Key advancements in this area include the introduction of the Companys time saving
ETotco Electronic Drift Recorder, which serves as an electronic equivalent to the traditional
mechanical drift tool that helped to launch the Company in 1929. As a pioneer in down-hole
electromagnetic (EM) communications for MWD tools, the Company serves the market of independent
directional drillers with sales and rental business models via its BlackStar® EM MWD
group. The EM advantage allows the benefits of MWD operations to be realized for drilling
situations where traditional mud-pulsed communications are problematic with respect to wellbore
quality.
Pumps & Expendables. The Companys Pumps & Expendables business designs, manufactures, and sells
pumps that are used in oil and gas drilling operations and production applications. These pumps
include reciprocating, centrifugal, and progressive cavity pumps. (High pressure mud pumps are
sold within the Rig Technology segment.) These pumps are sold as individual units and unitized
packages with drivers, controls and piping. This group also manufactures fluid end expendables
(liners, valves, pistons, and plungers) fluid end modules, and a complete line of dies and inserts
for pipe handling. The group offers popular industry brand names like Wheatley, Gaso, and Omega
reciprocating pumps, acquired in 2000; Halco Centrifugal Pumps, acquired in 2002; Petroleum
Expendable Products (PEP), acquired in 1997; and Phoenix Energy Products, acquired in 1998.
The group, through its Mono/Monoflo® business, is also a worldwide leader in the design
and manufacture of a wide range of progressive cavity pumps, grinders and screens used in various
industrial applications. Mono/Monoflo also manufactures a broad range of oilfield products which
include fluid transfer, artificial lift and power sections.
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The group also manufactures a line of commodity and high end valves and chokes used in both
production and drilling applications. Additionally these products are used in the fabrication of
choke and kill manifolds as well as standpipe manifolds.
The group manufactures its pump products in Houston, Odessa and Marble Falls, Texas; Tulsa and
McAlester, Oklahoma; Scott, Louisiana; Manchester, England; Melbourne, Australia; and Buenos Aires,
Argentina.
Customers and Competition. Customers for the Petroleum Services & Supplies tubular services
include major and independent oil and gas companies, national oil companies, drilling and workover
contractors, oilfield equipment and product distributors and manufacturers, oilfield service
companies, pipeline operators, steel mills, and other industrial companies. The Companys
competitors include, among others, Ameron International Corp, EDO Corporation, Pipeline Integrity
International Ltd. (a division of General Electric), ShawCor Ltd., Smith International, Inc.,
Franks International, Inc., H. Rosen Engineering, GmbH; T.D. Williamson, Inc.; Baker Hughes
Incorporated; Diascan; Magpie; Weatherford International Ltd.; Patterson Tubular Services; and
Precision Tube (a division of Tenaris). In addition, the group competes with a number of smaller
regional competitors in tubular inspection. Certain foreign jurisdictions and government-owned
petroleum companies located in some of the countries in which this group operates have adopted
policies or regulations that may give local nationals in these countries certain competitive
advantages. Within the Companys corrosion control products, certain substitutes such as
non-metallic tubulars, inhibitors, corrosion resistant alloys, cathodic protection systems, and
non-metallic liner systems also compete with the Companys products. Management believes that the
principal competitive factors affecting this business are performance, quality, reputation,
customer service, availability of products, spare parts, and consumables, breadth of product line
and price.
The primary customers for drilling services offered by the Petroleum Services & Supplies group
include drilling contractors, well servicing companies, major and independent oil and gas
companies, and national oil companies. Competitors in drilling services include Smith International
(SWACO); Derrick Manufacturing Corp.; Fluid Systems; Oil Tools Pte. Ltd; Peak Energy Services,
Ltd.; Petron Industries, Inc.; Epoch (a division of Nabors Industries); Pason Systems, Inc.;
Robbins & Myers; Kem-Tron, Inc.; Double Life Corporation, Inc.; Oteco, Inc.; Southwest Oilfield
Products; Forum Oilfield Technologies; P-Quip Oilfield Products; and a number of regional
competitors. The Petroleum Services & Supplies group sells drilling services into highly
competitive markets. Management believes that on-site service is becoming an increasingly important
competitive element in this market, and that the principal competitive factors affecting the
business are performance, quality, reputation, customer service, product availability and
technology, breadth of product line and price.
Distribution Services
Through its network of over 180 locations worldwide, the Distribution Services group provides
supply chain management services to drilling contractors and operators around the world. This
group stocks and sells consumable maintenance, repair and operating supplies and spare parts that
are needed throughout the drilling, completion and production process. The supplies and equipment
stocked by our distribution service centers vary by location. Each distribution point generally
offers a large line of oilfield products including valves, fittings, flanges, spare parts for
oilfield equipment and miscellaneous expendable items. This groups procurement and supply chain
solutions for customers that choose to outsource these functions generate a quarter of this groups
revenues.
A new industry value offering by the Distribution Services group is the installation, staffing and
management of supply stores on offshore drilling rigs. When NOV assumes the responsibility of
operating these stores, it installs its own ERP system onboard to access NOVs distribution
locations around the world, its base of thousands of vendors globally and NOVs global inventory.
This relieves the average offshore drilling rigs balance sheet, provides substantially better
accounting of these expense items, extends payment on part of the driller until the item is
actually issued from the onboard supply store, and removes risk of ownership from the buyer.
Drillers reduce lead-times since NOVs materials planning process now has access to real-time
demand patterns specific to the rig. This also enables standardization between rigs and across the
industry. In todays world of tight supply, critical spares can be more efficiently managed
between rigs in centralized NOV locations, eliminating the need to carry expensive just-in-case
duplicate assets on every rig. While the benefits are substantial for smaller/new drilling
contractors, or rigs in remote locations around the world, large established drilling companies
also benefit from more effective supply chain management and reduced total cost of ownership.
NOVs e-Distribution solutions leverage the flexible infrastructure of SAP to extend the
customers investment in systems and address the total cost of ownership by streamlining the
acquisition process from requisition to procurement to payment, by digitally managing approval
routing and workflow, and by providing robust reporting functionality.
Approximately 77% of the Distribution Services groups sales in 2007 were in the United States and
Canada. The remainder comes from key international markets in Latin America, the North Sea, Middle
East, Africa and the Far East.
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Strategically the group enhanced its alliances with oil and gas companies and certain drilling
contractors, and is continually expanding its offerings, like setting up and operating supply
stores on offshore rigs, to increase its revenues and offer differentiating value propositions.
Additionally the group continues to leverage its extensive purchasing power to reduce the costs of
the goods it purchases. The group is strategically expanding its sourcing network into low cost
countries globally.
Customers and Competition. The primary customers for Distribution Services include drilling
contractors, well servicing companies, major and independent oil and gas companies, and national
oil companies. Competitors in Distribution Services include Wilson Supply (a division of Smith
International), CE Franklin, McJunkin Red Man, and a number of regional competitors.
2007 Acquisitions and Other Investments
In 2007, the Company made the following acquisitions and outside investments:
Operating | Date of | |||||
Acquisition | Form | Segment | Transactions | |||
Gammaloy Holdings, L.P.
|
Asset | Petroleum Services & Supply | April 2007 | |||
Molde Produksjonssenter AS
|
Stock | Rig Technology | April 2007 | |||
Moineaus S.A.I.C.
|
Stock | Petroleum Services & Supply | June 2007 | |||
Hiram Industries, Inc.
|
Asset | Petroleum Services & Supply | June 2007 | |||
Sampwell Testing Services, Ltd./New Era
Machining, Ltd.
|
Stock/Asset | Petroleum Services & Supply | July 2007 | |||
CTES, LP
|
Asset | Rig Technology | July 2007 | |||
Sara Services and Engineers Pvt. Ltd.
|
Stock | Rig Technology | July 2007 | |||
Kreiter Geartech
|
Asset | Rig Technology | October 2007 |
In 2007, the Company paid an aggregate purchase price of $325.0 million ($323.9 million in net cash
and $1.1 million of notes payable) for acquisitions and outside investments including final payment
for NQL Energy Services, Inc. purchased in 2006.
Seasonal Nature of the Companys Business
Historically, the level of some of the Companys businesses has followed seasonal trends to some
degree. In general the Rig Technology group has not experienced significant seasonal fluctuation
although orders for new equipment may be modestly affected by holiday schedules. There can be no
guarantee that seasonal effects will not influence future sales in this segment.
In Canada, the Petroleum Services & Supplies segment has typically realized high first quarter
activity levels, as operators take advantage of the winter freeze to gain access to remote drilling
and production areas. In past years, certain Canadian businesses within Petroleum Services &
Supplies and Distribution Services have declined during the second quarter due to warming weather
conditions which resulted in thawing, softer ground, difficulty accessing drill sites, and road
bans that curtailed drilling activity (Canadian Breakup). However, these businesses have
typically rebounded in the third and fourth quarter. Petroleum Services & Supplies activity in
both the U.S. and Canada sometimes increases during the third quarter and then peaks in the fourth
quarter as operators spend the remaining drilling and/or production capital budgets for that year.
Petroleum Services & Supplies revenues in the Rocky Mountain region sometimes decline in the late
fourth quarter or early first quarter due to harsh winter weather.
Within Petroleum Services & Supplies, the Pipeline Inspection business has typically experienced
reduced activity during the first quarter of the calendar year. The high winter demand for gas and
petroleum products in the northern hemisphere and the consequent curtailment of pipeline
maintenance and inspection programs often results in less opportunity to perform pipeline
inspection during this time. The segments fiberglass and composite tubulars business in China has
typically declined in the first quarter due to the impact of weather on manufacturing and
installation operations, and due to business slow downs associated with the Chinese New Year.
The Company anticipates that the seasonal trends described above will continue. However, there can
be no guarantee that spending by the Companys customers will continue to follow patterns seen in
the past or that spending by other customers will remain the same as in prior years.
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Marketing & Distribution Network
Substantially all of our Rig Technology capital equipment and spare parts sales, and a large
portion of our smaller pumps and parts sales, are made through our direct sales force and
distribution service centers. Sales to foreign state-owned oil companies are typically made in
conjunction with agent or representative arrangements. Products within our Petroleum Service &
Supplies segment are rented and sold worldwide through our own sales force and through commissioned
representatives. Distribution Services sales are made through our network of distribution service
centers.
The Rig Technology segments customers include drilling contractors, shipyards and other rig
fabricators, well servicing companies, pressure pumpers, national oil companies, major and
independent oil and gas companies, supply stores, and pipe-running service providers. Demand for
its products is strongly dependent upon capital spending plans by oil and gas companies and
drilling contractors, and the level of oil and gas well drilling activity. Rig Technology
purchases can represent significant capital expenditures, and are often sold as part of a rig
fabrication or major rig refurbishment package. Sometimes these packages cover multiple rigs, and
often the Company bids jointly with other related product and services providers, such as rig
fabrication yards and rig design firms.
The Petroleum Services & Supplies groups customers for tubular services include major and
independent oil and gas companies, national oil companies, oilfield equipment and product
distributors and manufacturers, drilling and workover contractors, oilfield service companies,
pressure pumpers, pipeline operators, pipe mills, manufacturers and processors, and other
industrial companies. Certain tubular inspection and tubular coating products and services often
are incorporated as a part of a tubular package sold by tubular supply stores to end users. The
Company primarily has direct operations in the international marketplace, but operates through
agents in certain markets.
The Petroleum Services & Supplies groups customers for drilling services are predominantly major
and independent oil and gas companies, national oil companies, drilling contractors, well servicing
companies, providers of drilling fluids, and other oilfield service companies. This group operates
sales and distribution facilities at strategic locations worldwide to service areas with high
drilling activity. Strategically located service and engineering facilities provide specialty
repair and maintenance services to customers. Sales of capital equipment are sometimes made through
rig fabricators, and often are bid as part of a rig fabrication package or rig refurbishment
package. Sometimes these packages cover multiple rigs, and often the Company bids jointly with
other related service providers.
Distribution Services sales are made through our network of distribution service centers. Customers
for our products and services include drilling and other service contractors, exploration and
production companies, supply companies and nationally owned or controlled drilling and production
companies.
The Companys foreign operations, which include significant operations in Canada, Europe, the Far
East, the Middle East, Africa and Latin America, are subject to the risks normally associated with
conducting business in foreign countries, including foreign currency exchange risks and uncertain
political and economic environments, which may limit or disrupt markets, restrict the movement of
funds or result in the deprivation of contract rights or the taking of property without fair
compensation. Government-owned petroleum companies located in some of the countries in which the
Company operates have adopted policies (or are subject to governmental policies) giving preference
to the purchase of goods and services from companies that are majority-owned by local nationals. As
a result of such policies, the Company relies on joint ventures, license arrangements and other
business combinations with local nationals in these countries. In addition, political
considerations may disrupt the commercial relationship between the Company and such
government-owned petroleum companies. Although the Company has not experienced any significant
problems in foreign countries arising from nationalistic policies, political instability, economic
instability or currency restrictions, there can be no assurance that such a problem will not arise
in the future. See Note 15 of the Notes to the Consolidated Financial Statements for information
regarding geographic revenue information.
Research and New Product Development and Intellectual Property
The Company believes that it has been a leader in the development of new technology and equipment
to enhance the safety and productivity of drilling and well servicing processes and that its sales
and earnings have been dependent, in part, upon the successful introduction of new or improved
products. Through its internal development programs and certain acquisitions, the Company has
assembled an extensive array of technologies protected by a substantial number of trade and service
marks, patents, trade secrets, and other proprietary rights.
As of December 31, 2007, the Company held a substantial number of United States patents and had
several patent applications pending. Expiration dates of such patents range from 2008 to 2027. As
of this date, the Company also had foreign patents and patent applications pending relating to
inventions covered by the United States patents. Additionally, the Company maintains a substantial
number of trade and service marks and maintains a number of trade secrets.
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Although the Company believes that this intellectual property has value, competitive products with
different designs have been successfully developed and marketed by others. The Company considers
the quality and timely delivery of its products, the service it provides to its customers and the
technical knowledge and skills of its personnel to be more important than its intellectual property
in its ability to compete. While the Company stresses the importance of its research and
development programs, the technical challenges and market uncertainties associated with the
development and successful introduction of new products are such that there can be no assurance
that the Company will realize future revenues from new products.
Engineering and Manufacturing
The manufacturing processes for the Companys products generally consist of machining, welding and
fabrication, heat treating, assembly of manufactured and purchased components and testing. Most
equipment is manufactured primarily from alloy steel, and the availability and price of alloy steel
castings, forgings, purchased components and bar stock is critical to the production and timing of
shipments. Primary manufacturing facilities for the Rig Technology segment are located in Houston,
Galena Park, Sugar Land, Conroe, Anderson, Fort Worth and Pampa, Texas; Duncan and Tulsa, Oklahoma;
Orange, California; Calgary, Nisku and Edmonton, Canada; Mexicali, Mexico; Aberdeen, Scotland;
Kristiansand, and Stavanger, Norway; Etten-Leur, the Netherlands; Carquefou, France; Singapore;
Perth, Australia; Lanzhou and Shanghai, China; Jebel Ali, UAE; and Dehradun, India.
The Companys Petroleum Services & Supplies segment manufactures or assembles the equipment and
products which it rents and sells to customers, and which it uses in providing services. Downhole
tools are manufactured at facilities in Houston, Texas; Nisku and Edmonton, Alberta; Jebel Ali,
UAE; and Singapore. Solids control equipment and screens are manufactured at facilities in Houston
and Conroe, Texas; New Iberia, Louisiana; Aberdeen, Scotland; Nisku, Canada; Trinidad; and Macae,
Brazil. Instrumentation equipment is manufactured at Cedar Park and Houston, Texas facilities.
Pumps are manufactured at facilities in Houston, Odessa and Marble Falls, Texas; McAlester and
Tulsa, Oklahoma; Manchester, England; Melbourne, Australia; and Buenos Aires, Argentina.
The group manufactures tubular inspection equipment and instrumented pipeline inspection tools at
its Houston, Texas facility for resale, and renovates and repairs equipment at its manufacturing
facilities in Houston, Texas; Celle, Germany; Nisku, Canada; and Aberdeen, Scotland. Fiberglass
and composite tubulars and fittings are manufactured at facilities in San Antonio and Big Spring,
Texas; Little Rock, Arkansas; Tulsa, Oklahoma; Wichita, Kansas; and Harbin and Suzhou, China
facilities, while tubular coatings are manufactured in its Houston, Texas facility, or through
restricted sale agreements with third party manufacturers.
Certain of the Companys manufacturing facilities and certain of the Companys products have
various certifications, including, ISO 9001, API, APEX and ASME.
Raw Materials
The Company believes that materials and components used in its servicing and manufacturing
operations and purchased for sales are generally available from multiple sources. The prices paid
by the Company for its raw materials may be affected by, among other things, energy, steel and
other commodity prices; tariffs and duties on imported materials; and foreign currency exchange
rates. The Company experienced higher steel prices and greater difficulty securing necessary steel
supplies in 2004 and 2005 than it experienced during the preceding several years. In 2006 and
2007, the price for mild steel and standard grades stabilized while specialty alloy prices
continued to rise driven primarily by escalation in the price of the alloying agents. However,
toward the end of 2007, the Company began to see price escalations in all grades of steel. The
Company has generally been successful in its effort to mitigate the financial impact of higher raw
materials costs on its operations by applying surcharges to and adjusting prices on the products it
sells. Furthermore, NOV continued to expand its supply base in 2006 and 2007 throughout the world
to address our customers needs. Higher prices and lower availability of steel and other raw
material the Company uses in its business may adversely impact future periods.
Backlog
The Company monitors its backlog of orders within its Rig Technology group to guide its planning.
Backlog includes orders greater than $250,000 for most items and orders for wireline units in
excess of $75,000, and which require more than three months to manufacture and deliver.
Backlog measurements are made on the basis of written orders which are firm, but may be cancelable
by the customer. Most require reimbursement to the Company for costs incurred in such an event.
There can be no assurance that the backlog amounts will ultimately be realized as revenue, or that
the Company will earn a profit on backlog work. Our backlog for equipment at December 31, 2007,
2006 and 2005 was $9.0 billion, $6.0 billion and $2.3 billion, respectively.
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Employees
At December 31, 2007, the Company had a total of 31,198 employees, of which 4,467 were temporary
employees. Approximately 178 employees in the Companys fiberglass tubulars plant in Little Rock,
Arkansas, and 115 employees of the Companys downhole tools product line, are subject to collective
bargaining agreements. Additionally, certain of the Companys employees in certain foreign
locations are subject to collective bargaining agreements.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, in addition to other information contained
or incorporated by reference herein. Realization of any of the following risks could have a
material adverse effect on our business, financial condition, cash flows and results of operations.
Risks Related to the Grant Prideco Merger and the Related Transactions
On
December 16, 2007, we agreed to acquire 100% of the outstanding shares of Grant Prideco, Inc.
for a combination of $23.20 cash per share and 0.4498 shares of National Oilwell Varco, Inc. common
stock. Consummation of the merger requires approval by the stockholders of Grant Prideco and also
approval from various regulatory agencies. We anticipate completion of the merger during the
second quarter of 2008; however, we cannot assure you that the
acquisition will be completed at this time or at all.
We may not be able to successfully integrate the operations of the two companies and realize the
anticipated benefits of the Grant Prideco merger.
Achieving the benefits we expect from the merger will depend in large part on integrating our
technology, operations and personnel in a timely and efficient manner to minimize the impact on
customers, employees and management. Integration of the two previously independent companies will
be a complex, time consuming and costly process. Failure to timely and successfully integrate these
companies may have a material adverse effect on the combined companys business, financial
condition and results of operations. The difficulties of combining the companies will present
challenges to the combined companys management, including:
| operating a significantly larger combined company with operations in more geographic areas and with more business lines; | ||
| integrating personnel with diverse backgrounds and organizational cultures; | ||
| coordinating sales and marketing functions; | ||
| retaining key employees, customers or suppliers; | ||
| preserving the research and development, collaboration, distribution, marketing, promotion and other important relationships of National Oilwell Varco and Grant Prideco; | ||
| integrating the internal controls and procedures that National Oilwell Varco will be required to maintain under the Sarbanes-Oxley Act of 2002; and | ||
| consolidating other corporate and administrative functions. |
The combined company will also be exposed to other risks that are commonly associated with
transactions similar to the merger, such as unanticipated liabilities and costs, some of which may
be material, and diversion of managements attention. As a result, we cannot assure you that we
will realize any of the anticipated benefits of the merger, including anticipated cost savings, and
failure to do so could adversely affect the business of the combined company after the merger.
The costs of the Grant Prideco merger could adversely affect combined financial results.
We expect the total merger-related costs, including executive severance but exclusive of other
employee benefit costs, to be approximately $110 million, consisting primarily of executive
severance, financial advisory, legal and accounting fees, financial printing costs and other
related charges. The amount of these expenses is a preliminary estimate and is subject to change.
In addition, the combined company will incur certain integration costs, including, but not limited
to, costs associated with consolidating administrative and operational functions and the closure of
certain facilities. If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to the stockholders of both companies resulting from the issuance of
shares in connection with the merger, the combined companys financial results, including earnings
per share, could be adversely affected.
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National Oilwell Varco shareholders will be diluted by the Grant Prideco merger
The merger will dilute the ownership positions of the present stockholders of National Oilwell
Varco. Based on the number of Grant Prideco shares outstanding as of December 17, 2007, National
Oilwell Varco will issue to Grant Prideco shareholders approximately 56.3 million shares of
National Oilwell Varco common stock in the merger. As a result, National Oilwell Varco
stockholders and Grant Prideco stockholders will own approximately 86% and 14%, respectively, of
the combined companys common stock outstanding after the completion of the merger, based on the
common stock of National Oilwell Varco and Grant Prideco outstanding as of December 17, 2007.
Failure to complete the Grant Prideco merger or delays in completing the Grant Prideco merger could
negatively impact National Oilwell Varcos and Grant Pridecos stock prices and future business and
operations.
If the merger is not completed for any reason, National Oilwell Varco and Grant Prideco may be
subject to a number of material risks, including the following:
| the individual companies will not realize the benefits expected from becoming part of a combined company, including potentially enhanced financial and competitive position; | ||
| under certain circumstances, Grant Prideco may be required to pay National Oilwell Varco a termination fee of $185.0 million, and under certain other circumstances, either of the companies may be required to reimburse the other party for up to $5.0 million in merger-related expenses; | ||
| the price of common stock of National Oilwell Varco or Grant Prideco may decline to the extent that the current market price of the common stock reflects a market assumption that the merger will be completed; and | ||
| some costs related to the merger, such as legal, accounting and financial advisor fees, must be paid even if the merger is not completed. |
Whether or not the Grant Prideco merger is completed, the pendency of the transaction could cause
disruptions in the businesses of National Oilwell Varco, which could have an adverse effect on
their businesses and financial results.
In response to the announcement of the merger, National Oilwell Varcos customers may delay or
defer purchasing decisions. Any delay or deferral of purchasing decisions by customers could
negatively affect the business and results of operations of National Oilwell Varco, regardless of
whether the merger is ultimately completed. Similarly, current and prospective employees of
National Oilwell Varco may experience uncertainty about their future roles with the companies until
after the merger is completed or if the merger is not completed. This may adversely affect the
ability of National Oilwell Varco to attract and retain key management, marketing and technical
personnel. In addition, the diversion of the attention of the companies respective management
teams away from the day-to-day operations during the pendency of the transaction could have an
adverse effect on the financial condition and operating results of either company.
National Oilwell Varco and Grant Prideco could be required to divest, hold separate or license
assets to complete the Grant Prideco merger.
We cannot complete the merger until the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (HSR) or any other applicable waiting period has expired or is otherwise
terminated. On February 6, 2008 National Oilwell Varco and Grant
Prideco refiled antitrust documents relating to the merger with the FTC and the DOJ. National Oilwell Varco and Grant Prideco have also made, or are in the process of
making, the required filings relating to the merger with various government authorities in a number
of foreign jurisdictions in which one or both companies have sufficient market presence to require
filings. We continue to work with these various governmental agencies to obtain regulatory
clearance to complete the merger. As a prerequisite to obtaining the expiration or termination of
this waiting period, or to avoid an injunction by the Department of Justice or another governmental
entity, whether foreign or domestic, National Oilwell Varco, Grant Prideco or both companies may be
required to divest, hold separate or license certain assets. Although each of National Oilwell
Varco and Grant Prideco have agreed to use their reasonable best efforts to obtain the expiration
or termination of this waiting period and to obtain any other governmental clearance or approvals
under federal, state or foreign antitrust laws, neither National Oilwell Varco nor Grant Prideco is
required to divest, hold separate or license any of their respective businesses, product lines or
assets, take or agree to take any other action or agree to any limitation, that would reasonably be
expected to have a material adverse effect on the financial condition, results of operations or
prospects of National Oilwell Varco or Grant Prideco or that is not conditioned upon completion of
the merger.
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Divestitures or licensing of assets can be time consuming and may delay or prevent completion of
the proposed merger. Because there may be a limited number of potential buyers or licensees for the
assets subject to divestiture or license and because potential buyers will likely be aware of the
circumstances of the sale or license, these assets could be sold or licensed at prices or rates
lower than their fair market values or the prices National Oilwell Varco or Grant Prideco paid for
these assets. Asset divestitures or licenses of National Oilwell Varcos or Grant Pridecos assets
could also significantly reduce the value of the combined company, eliminate potential cost savings
opportunities or lessen the anticipated benefits of the merger.
If National Oilwell Varco or Grant Prideco fails to obtain all required consents and waivers, third
parties may terminate or alter existing contracts.
Certain agreements with suppliers, customers, licensors or other business partners may require
National Oilwell Varco or Grant Prideco to obtain the approval or waiver of these other parties in
connection with the merger. National Oilwell Varco and Grant Prideco have agreed to use reasonable
efforts to secure the necessary approvals and waivers. However, we cannot assure you that National
Oilwell Varco and/or Grant Prideco will be able to obtain all of the necessary approvals and
waivers, and failure to do so could have a material adverse effect on the business of the combined
company after the merger.
Certain litigation against Grant Prideco, its directors and National Oilwell Varco has been
instituted. This litigation could delay or prevent the Grant Prideco merger. Similar litigation
could also be instituted in the future.
As of
February 28, 2008, National Oilwell Varco and Grant Prideco are
aware of five lawsuits that have been filed in connection with the proposed merger. All five cases
were filed in the district court of Harris County, Texas.
The plaintiffs in these lawsuits are stockholders of Grant Prideco. They allege, among other
things, breaches of fiduciary duties of the directors of Grant Prideco owed to the stockholders of
Grant Prideco in connection with the proposed merger. In one of the complaints, the plaintiffs also allege
aiding and abetting of the breaches by National Oilwell Varco. The plaintiffs seek to enjoin the
merger and ask for other legal and equitable relief. National Oilwell Varco and Grant Prideco
believe that these lawsuits are without merit and intend to defend against them. This litigation
could, however, delay or prevent the proposed merger. It is also possible that additional suits
seeking to enjoin the proposed merger could be filed. Any such suit could delay or prevent the
proposed merger.
Risks Related to National Oilwell Varco
We are dependent upon the level of activity in the oil and gas industry, which is volatile.
The oil and gas industry historically has experienced significant volatility. Demand for our
services and products depends primarily upon the number of oil rigs in operation, the number of oil
and gas wells being drilled, the depth and drilling conditions of these wells, the volume of
production, the number of well completions, capital expenditures of other oilfield service
companies and the level of workover activity. Drilling and workover activity can fluctuate
significantly in a short period of time, particularly in the United States and Canada. The
willingness of oil and gas operators to make capital expenditures to explore for and produce oil
and natural gas and the willingness of oilfield service companies to invest in capital equipment
will continue to be influenced by numerous factors over which we have no control, including:
| the ability of the members of the Organization of Petroleum Exporting Countries, or OPEC, to maintain price stability through voluntary production limits, the level of production by non-OPEC countries and worldwide demand for oil and gas; | ||
| level of production from known reserves; | ||
| cost of exploring for and producing oil and gas; | ||
| level of drilling activity and drilling rig dayrates; | ||
| worldwide economic activity; | ||
| national government political requirements; | ||
| development of alternate energy sources; and | ||
| environmental regulations. |
If there is a significant reduction in demand for drilling services, in cash flows of drilling
contractors, well servicing companies, or production companies or in drilling or well servicing rig
utilization rates, then demand for the products and services of the Company will decline.
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Volatile oil and gas prices affect demand for our products.
Oil and gas prices have been volatile since 1990. In general, oil prices approximated $18-22 per
barrel from 1991 through 1997, experienced a decline into the low teens in 1998 and 1999, and have
generally ranged between $25-100 per barrel since 2000. Spot gas prices generally ranged between
$1.80-2.60 per mmbtu of gas from 1991 through 1999, then experienced severe spikes into the $10
range in 2001 and 2003. Absent occasional spikes and dips due to imbalances in supply and demand,
prices have generally ranged between $5.00-10.00 per mmbtu during the last two years.
Expectations for future oil and gas prices cause many shifts in the strategies and expenditure
levels of oil and gas companies and drilling contractors, particularly with respect to decisions to
purchase major capital equipment of the type we manufacture. Oil and gas prices, which are
determined by the marketplace, may fall below a range that is acceptable to our customers, which
could reduce demand for our products.
Competition in our industry could ultimately lead to lower revenues and earnings.
The oilfield products and services industry is highly competitive. We compete with national,
regional and foreign competitors in each of our current major product lines. These competitors may
have greater financial, technical, manufacturing and marketing resources than us, and may be in a
better competitive position. The following competitive actions can each affect our revenues and
earnings:
| price changes; | ||
| new product and technology introductions; and | ||
| improvements in availability and delivery. |
In addition, certain foreign jurisdictions and government-owned petroleum companies located in some
of the countries in which we operate have adopted policies or regulations which may give local
nationals in these countries competitive advantages. Competition in our industry could lead to
lower revenues and earnings.
We have aggressively expanded our businesses and intend to maintain an aggressive growth strategy.
We have aggressively expanded and grown our businesses during the past several years, through
acquisitions and investment in internal growth. We anticipate that we will continue to pursue an
aggressive growth strategy but we cannot assure you that attractive acquisitions will be available
to us at reasonable prices or at all. In addition, we cannot assure you that we will successfully
integrate the operations and assets of any acquired business with our own or that our management
will be able to manage effectively the increased size of the Company or operate any new lines of
business. Any inability on the part of management to integrate and manage acquired businesses and
their assumed liabilities could adversely affect our business and financial performance. In
addition, we may need to incur substantial indebtedness to finance future acquisitions. We cannot
assure you that we will be able to obtain this financing on terms acceptable to us or at all.
Future acquisitions may result in increased depreciation and amortization expense, increased
interest expense, increased financial leverage or decreased operating income for the Company, any
of which could cause our business to suffer.
Our operating results have fluctuated during recent years and these fluctuations may continue.
We have experienced fluctuations in quarterly operating results in the past. We cannot assure you
that we will realize expected earnings growth or that earnings in any particular quarter will not
fall short of either a prior fiscal quarter or investors expectations. The following factors, in
addition to others not listed, may affect our quarterly operating results in the future:
| fluctuations in the oil and gas industry; | ||
| competition; | ||
| the ability to service the debt obligations of the Company; | ||
| the ability to identify strategic acquisitions at reasonable prices; | ||
| the ability to manage and control operating costs of the Company; | ||
| fluctuations in political and economic conditions in the United States and abroad; and | ||
| the ability to protect our intellectual property rights. |
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There are risks associated with our presence in international markets, including political or
economic instability and currency restrictions.
Approximately 59% of our revenues in 2007 were derived from operations outside the United States
(based on revenue destination). Our foreign operations include significant operations in Canada,
Europe, the Middle East, Africa, Southeast Asia, South America and other international markets. Our
revenues and operations are subject to the risks normally associated with conducting business in
foreign countries, including uncertain political and economic environments, which may limit or
disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or
the taking of property without fair compensation. Government-owned petroleum companies located in
some of the countries in which we operate have adopted policies, or are subject to governmental
policies, giving preference to the purchase of goods and services from companies that are
majority-owned by local nationals. As a result of these policies, we may rely on joint ventures,
license arrangements and other business combinations with local nationals in these countries. In
addition, political considerations may disrupt the commercial relationships between us and
government-owned petroleum companies.
Under broad powers granted to the President of Venezuela by the National Assembly on January 31,
2007, the Venezuelan government began asserting closer government control over its oil and gas
reserves. The Company generated revenue of $69.6 million from its Venezuelan operations in 2007,
and as of December 31, 2007 had a net equity investment in Venezuela of $53.7 million. These
political events could adversely affect our operations in Venezuela (where we have operated for
nearly 40 years) and financial results in the future.
The results of our operations are subject to market risk from changes in foreign currency exchange
rates.
We earn revenues, pay expenses and incur liabilities in countries using currencies other than the
U.S. dollar, including the Canadian dollar, the Euro, the British Pound and the Norwegian Kroner.
Approximately 59% of our 2007 revenue was derived from sales outside the United States. Because
our consolidated financial statements are presented in U.S. dollars, we must translate revenues,
income and expenses into U.S. dollars at exchange rates in effect during or at the end of each
reporting period. Thus, increases or decreases in the value of the U.S. dollar against other
currencies in which our operations are conducted will affect our revenues and operating income.
Because of the geographic diversity of our operations, weaknesses in some currencies might be
offset by strengths in others over time. We also use derivative financial instruments to further
reduce our net exposure to currency exchange fluctuations. We had forward contracts with a
notional amount of $4,104.1 million (with a fair value of $103.0 million) as of December 31, 2007
to reduce the impact of foreign currency exchange rate movements. We are also subject to risks
that the counterparties to these contracts fail to meet the terms of our foreign currency
contracts. We cannot assure you that fluctuations in foreign currency exchange rates would not
affect our financial results.
An impairment of goodwill could reduce our earnings.
We recorded approximately $2.4 billion of goodwill on the consolidated balance sheet as of December
31, 2007. Goodwill is recorded when the purchase price of a business exceeds the fair market value
of the tangible and separately measurable intangible net assets. Generally accepted accounting
principles requires us to test goodwill for impairment on an annual basis or when events or
circumstances occur indicating that goodwill might be impaired. If we were to determine that any of
our remaining balance of goodwill was impaired, we would record an immediate charge to earnings
with a corresponding reduction in stockholders equity and increase in balance sheet leverage as
measured by debt to total capitalization.
We could be adversely affected if we fail to comply with any of the numerous federal, state and
local laws, regulations and policies that govern environmental protection, zoning and other matters
applicable to our businesses.
Our businesses are subject to numerous federal, state and local laws, regulations and policies
governing environmental protection, zoning and other matters. These laws and regulations have
changed frequently in the past and it is reasonable to expect additional changes in the future. If
existing regulatory requirements change, we may be required to make significant unanticipated
capital and operating expenditures. We cannot assure you that our operations will continue to
comply with future laws and regulations. Governmental authorities may seek to impose fines and
penalties on us or to revoke or deny the issuance or renewal of operating permits for failure to
comply with applicable laws and regulations. Under these circumstances, we might be required to
reduce or cease operations or conduct site remediation or other corrective action which could
adversely impact our operations and financial condition.
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Our businesses expose us to potential environmental liability.
Our businesses expose us to the risk that harmful substances may escape into the environment, which
could result in:
| personal injury or loss of life; | ||
| severe damage to or destruction of property; or | ||
| environmental damage and suspension of operations. |
Our current and past activities, as well as the activities of our former divisions and
subsidiaries, could result in our facing substantial environmental, regulatory and other
liabilities. These could include the costs of cleanup of contaminated sites and site closure
obligations. These liabilities could also be imposed on the basis of one or more of the following
theories:
| negligence; | ||
| strict liability; | ||
| breach of contract with customers; or | ||
| as a result of our contractual agreement to indemnify our customers in the normal course of business, which is normally the case. |
We may not have adequate insurance for potential environmental liabilities.
While we maintain liability insurance, this insurance is subject to coverage limits. In addition,
certain policies do not provide coverage for damages resulting from environmental contamination. We
face the following risks with respect to our insurance coverage:
| we may not be able to continue to obtain insurance on commercially reasonable terms; | ||
| we may be faced with types of liabilities that will not be covered by our insurance; | ||
| our insurance carriers may not be able to meet their obligations under the policies; or | ||
| the dollar amount of any liabilities may exceed our policy limits. |
Even a partially uninsured claim, if successful and of significant size, could have a material
adverse effect on our consolidated financial statements.
There are risks associated with certain contracts for our drilling equipment.
As of December 31, 2007, we had a backlog of approximately $9 billion of drilling equipment to be
manufactured, assembled, tested and delivered by our Rig Technology group. The following factors,
in addition to others not listed, could reduce our margins on these contracts, adversely affect our
position in the market and subject us to contractual penalties:
| our failure to adequately estimate costs for making this drilling equipment; | ||
| our inability to deliver equipment that meets contracted technical requirements; | ||
| our inability to maintain our quality standards during the design and manufacturing process; | ||
| our inability to secure parts made by third party vendors at reasonable costs and within required timeframes; | ||
| unexpected increases in the costs of raw materials; and | ||
| our inability to manage unexpected delays due to weather, shipyard access, labor shortages or other factors beyond our control. |
Such developments could have a material adverse effect on our consolidated financial statements.
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GLOSSARY OF OILFIELD TERMS
(Sources: Company management; A Dictionary for the Petroleum Industry, The University of Texas at Austin, 2001.) | ||
API
|
Abbr: American Petroleum Institute | |
Annular Blowout Preventer
|
A large valve, usually installed above the ram blowout preventers, that forms a seal in the annular space between the pipe and the wellbore or, if no pipe is present, in the wellbore itself. | |
Annulus
|
The open space around pipe in a wellbore through which fluids may pass. | |
Automatic Pipe Handling Systems (Automatic Pipe Racker) |
A device used on a drilling rig to automatically remove and insert drill stem components from and into the hole. It replaces the need for a person to be in the derrick or mast when tripping pipe into or out of the hole. | |
Automatic Roughneck
|
A large, self-contained pipe-handling machine used by drilling crew members to make up and break out tubulars. The device combines a spinning wrench, torque wrench, and backup wrenches. | |
Beam pump
|
Surface pump that raises and lowers sucker rods continually, so as to operate a downhole pump. | |
Bit
|
The cutting or boring element used in drilling oil and gas wells. The bit consists of a cutting element and a circulating element. The cutting element is steel teeth, tungsten carbide buttons, industrial diamonds, or polycrystalline diamonds (PDCs). These teeth, buttons, or diamonds penetrate and gouge or scrape the formation to remove it. The circulating element permits the passage of drilling fluid and utilizes the hydraulic force of the fluid stream to improve drilling rates. In rotary drilling, several drill collars are joined to the bottom end of the drill pipe column, and the bit is attached to the end of the drill collars. Drill collars provide weight on the bit to keep it in firm contact with the bottom of the hole. Most bits used in rotary drilling are roller cone bits, but diamond bits are also used extensively. | |
Blowout
|
An uncontrolled flow of gas, oil or other well fluids into the atmosphere. A blowout, or gusher, occurs when formation pressure exceeds the pressure applied to it by the column of drilling fluid. A kick warns of an impending blowout. | |
Blowout Preventer (BOP)
|
Series of valves installed at the wellhead while drilling to prevent the escape of pressurized fluids. | |
Blowout Preventer (BOP) Stack
|
The assembly of well-control equipment including preventers, spools, valves, and nipples connected to the top of the wellhead. | |
Closed Loop Drilling Systems
|
A solids control system in which the drilling mud is reconditioned and recycled through the drilling process on the rig itself. | |
Coiled Tubing
|
A continuous string of flexible steel tubing, often hundreds or thousands of feet long, that is wound onto a reel, often dozens of feet in diameter. The reel is an integral part of the coiled tubing unit, which consists of several devices that ensure the tubing can be safely and efficiently inserted into the well from the surface. Because tubing can be lowered into a well without having to make up joints of tubing, running coiled tubing into the well is faster and less expensive than running conventional tubing. Rapid advances in the use of coiled tubing make it a popular way in which to run tubing into and out of a well. Also called reeled tubing. | |
Cuttings
|
Fragments of rock dislodged by the bit and brought to the surface in the drilling mud. Washed and dried cutting samples are analyzed by geologist to obtain information about the formations drilled. |
21
Table of Contents
Directional Well
|
Well drilled in an orientation other than vertical in order to access broader portions of the formation. | |
Drawworks
|
The hoisting mechanism on a drilling rig. It is essentially a large winch that spools off or takes in the drilling line and thus raises or lowers the drill stem and bit. | |
Drill Pipe Elevator (Elevator)
|
On conventional rotary rigs and top-drive rigs, hinged steel devices with manual operating handles that crew members latch onto a tool joint (or a sub). Since the elevators are directly connected to the traveling block, or to the integrated traveling block in the top drive, when the driller raises or lowers the block or the top-drive unit, the drill pipe is also raised or lowered. | |
Drilling jars
|
A percussion tool operated manually or hydraulically to deliver a heavy downward blow to free a stuck drill stem. | |
Drilling mud
|
A specially compounded liquid circulated through the wellbore during rotary drilling operations. | |
Drilling riser
|
A conduit used in offshore drilling through which the drill bit and other tools are passed from the rig on the waters surface to the sea floor. | |
Drill stem
|
All members in the assembly used for rotary drilling from the swivel to the bit, including the Kelly, the drill pipe and tool joints, the drill collars, the stabilizers, and various specialty items. | |
Formation
|
A bed or deposit composed throughout of substantially the same kind of rock; often a lithologic unit. Each formation is given a name, frequently as a result of the study of the formation outcrop at the surface and sometimes based on fossils found in the formation. | |
Hardbanding
|
A special wear-resistant material often applied to tool joints to prevent abrasive wear to the area when the pipe is being rotated downhole. | |
Iron roughneck
|
A floor-mounted combination of a spinning wrench and a torque wrench. The Iron Roughneck moves into position hydraulically and eliminates the manual handling involved with suspended individual tools. | |
Jack-up rig
|
A mobile bottom-supported offshore drilling structure with columnar or open-truss legs that support the deck and hull. When positioned over the drilling site, the bottoms of the legs penetrate the seafloor. | |
Jar
|
A mechanical device placed near the top of the drill stem which allows the driller to strike a very heavy blow upward or downward on stuck pipe. | |
Joint
|
1) In drilling, a single length (from 16 feet to 45 feet, or 5 meters to 14.5 meters, depending on its range length) of drill pipe, drill collar, casing or tubing that has threaded connections at both ends. Several joints screwed together constitute a stand of pipe. 2) In pipelining, a single length (usually 40 feet-12 meters) of pipe. 3) In sucker rod pumping, a single length of sucker rod that has threaded connections at both ends. | |
Kelly
|
The heavy steel tubular device, four- or six-sided, suspended from the swivel through the rotary table and connected to the top joint of drill pipe to turn the drill stem as the rotary table returns. It has a bored passageway that permits fluid to be circulated into the drill stem and up the annulus, or vice versa. Kellys manufactured to API specifications are available only in four- or six-sided versions, are either 40 or 54 feet (12 to 16 meters) long, and have diameters as small as 2 1/2 inches (6 centimeters) and as large as 6 inches (15 centimeters). | |
Kelly bushing
|
A special device placed around the kelly that mates with the kelly flats and fits into the master bushing of the rotary table. The kelly bushing is designed so that the kelly is free to move up or down through it. The bottom of the bushing may be shaped to fit the opening in |
22
Table of Contents
the master bushing or it may have pins that fit into the master bushing. In either case, when the kelly bushing is inserted into the master bushing and the master bushing is turned, the kelly bushing also turns. Since the kelly bushing fits onto the kelly, the kelly turns, and since the kelly is made up to the drill stem, the drill stem turns. Also called the drive bushing. | ||
Kelly spinner
|
A pneumatically operated device mounted on top of the kelly that, when actuated, causes the kelly to turn or spin. It is useful when the kelly or a joint of pipe attached to it must be spun up, that is, rotated rapidly for being made up. | |
Kick
|
An entry of water, gas, oil, or other formation fluid into the wellbore during drilling. It occurs because the pressure exerted by the column of drilling fluid is not great enough to overcome the pressure exerted by the fluids in the formation drilled. If prompt action is not taken to control the kick, or kill the well, a blowout may occur. | |
Making-up
|
1. To assemble and join parts to form a complete unit (e.g., to make up a string of drill pipe). 2. To screw together two threaded pieces. Compare break out. 3. To mix or prepare (e.g., to make up a tank of mud). 4. To compensate for (e.g., to make up for lost time). | |
Manual tongs (Tongs)
|
The large wrenches used for turning when making up or breaking out drill pipe, casing, tubing, or other pipe; variously called casing tongs, pipe tongs, and so forth, according to the specific use. Power tongs or power wrenches are pneumatically or hydraulically operated tools that serve to spin the pipe up tight and, in some instances to apply the final makeup torque. | |
Master bushing
|
A device that fits into the rotary table to accommodate the slips and drive the kelly bushing so that the rotating motion of the rotary table can be transmitted to the kelly. Also called rotary bushing. | |
Motion compensation equipment |
Any device (such as a bumper sub or heave compensator) that serves to maintain constant weight on the bit in spite of vertical motion of a floating offshore drilling rig. | |
Mud pump
|
A large, high-pressure reciprocating pump used to circulate the mud on a drilling rig. | |
Plug gauging
|
The mechanical process of ensuring that the inside threads on a piece of drill pipe comply with API standards. | |
Pressure control equipment
|
1. The act of preventing the entry of formation fluids into a wellbore. 2. The act of controlling high pressures encountered in a well. | |
Pressure pumping
|
Pumping fluids into a well by applying pressure at the surface. | |
Ram blowout preventer
|
A blowout preventer that uses rams to seal off pressure on a hole that is with or without pipe. Also called a ram preventer. | |
Ring gauging
|
The mechanical process of ensuring that the outside threads on a piece of drill pipe comply with API standards. | |
Riser
|
A pipe through which liquids travel upward. | |
Riser pipe
|
The pipe and special fitting used on floating offshore drilling rigs to established a seal between the top of the wellbore, which is on the ocean floor, and the drilling equipment located above the surface of the water. A riser pipe serves as a guide for the drill stem from the drilling vessel to the wellhead and as a conductor or drilling fluid from the well to the vessel. The riser consists of several sections of pipe and includes special devices to compensate for any movement of the drilling rig caused by waves. Also called marine riser pipe, riser joint. |
23
Table of Contents
Rotary table
|
The principal piece of equipment in the rotary table assembly; a turning device used to impart rotational power to the drill stem while permitting vertical movement of the pipe for rotary drilling. The master bushing fits inside the opening of the rotary table; it turns the kelly bushing, which permits vertical movement of the kelly while the stem is turning. | |
Rotating blowout preventer (Rotating Head) |
A sealing device used to close off the annular space around the kelly in drilling with pressure at the surface, usually installed above the main blowout preventers. A rotating head makes it possible to drill ahead even when there is pressure in the annulus that the weight of the drilling fluid is not overcoming; the head prevents the well from blowing out. It is used mainly in the drilling of formations that have low permeability. The rate of penetration through such formations is usually rapid. | |
Safety clamps
|
A clamp placed very tightly around a drill collar that is suspended in the rotary table by drill collar slips. Should the slips fail, the clamp is too large to go through the opening in the rotary table and therefore prevents the drill collar string from falling into the hole. Also called drill collar clamp. | |
Shaker
|
See Shale Shaker | |
Shale shaker
|
A piece of drilling rig equipment that uses a vibrating screen to remove cuttings from the circulating fluid in rotary drilling operations. The size of the openings in the screen should be selected carefully to be the smallest size possible to allow 100 per cent flow of the fluid. Also called a shaker. | |
Slim-hole completions (Slim-hole Drilling) |
Drilling in which the size of the hole is smaller than the conventional hole diameter for a given depth. This decrease in hole size enables the operator to run smaller casing, thereby lessening the cost of completion. | |
Slips
|
Wedge-shaped pieces of metal with serrated inserts (dies) or other gripping elements, such as serrated buttons, that suspend the drill pipe or drill collars in the master bushing of the rotary table when it is necessary to disconnect the drill stem from the kelly or from the top-drive units drive shaft. Rotary slips fit around the drill pipe and wedge against the master bushing to support the pipe. Drill collar slips fit around a drill collar and wedge against the master bushing to support the drill collar. Power slips are pneumatically or hydraulically actuated devices that allow the crew to dispense with the manual handling of slips when making a connection. | |
Solids
|
See Cuttings | |
Spinning wrench
|
Air-powered or hydraulically powered wrench used to spin drill pipe in making or breaking connections. | |
Spinning-in
|
The rapid turning of the drill stem when one length of pipe is being joined to another. Spinning-out refers to separating the pipe. | |
Stand
|
The connected joints of pipe racked in the derrick or mast when making a trip. On a rig, the usual stand is about 90 feet (about 27 meters) long (three lengths of drill pipe screwed together), or a treble. | |
String
|
The entire length of casing, tubing, sucker rods, or drill pipe run into a hole. | |
Sucker rod
|
A special steel pumping rod. Several rods screwed together make up the link between the pumping unit on the surface and the pump at the bottom of the well. | |
Tensioner
|
A system of devices installed on a floating offshore drilling rig to maintain a constant tension on the riser pipe, despite any vertical motion made by the rig. The guidelines must also be tensioned, so a separate tensioner system is provided for them. | |
Thermal desorption
|
The process of removing drilling mud from cuttings by applying heat directly to drill cuttings. |
24
Table of Contents
Top drive
|
A device similar to a power swivel that is used in place of the rotary table to turn the drill stem. It also includes power tongs. Modern top drives combine the elevator, the tongs, the swivel, and the hook. Even though the rotary table assembly is not used to rotate the drill stem and bit, the top-drive system retains it to provide a place to set the slips to suspend the drill stem when drilling stops. | |
Torque wrench
|
Spinning wrench with a gauge for measuring the amount of torque being applied to the connection. | |
Trouble cost
|
Costs incurred as a result of unanticipated complications while drilling a well. These costs are often referred to as contingency costs during the planning phase of a well. | |
Well completion
|
1. The activities and methods of preparing a well for the production of oil and gas or for other purposes, such as injection; the method by which one or more flow paths for hydrocarbons are established between the reservoir and the surface. 2. The system of tubulars, packers, and other tools installed beneath the wellhead in the production casing; that is, the tool assembly that provides the hydrocarbon flow path or paths. | |
Well stimulation
|
Any of several operations used to increase the production of a well, such as acidizing or fracturing. | |
Well workover
|
The performance of one or more of a variety of remedial operations on a producing oilwell to try to increase production. Examples of workover jobs are deepening, plugging back, pulling and resetting liners, and squeeze cementing. | |
Wellbore
|
A borehole; the hole drilled by the bit. A wellbore may have casing in it or it may be open (uncased); or part of it may be cased, and part of it may be open. Also called a borehole or hole. | |
Wireline
|
A slender, rodlike or threadlike piece of metal usually small in diameter, that is used for lowering special tools (such as logging sondes, perforating guns, and so forth) into the well. Also called slick line. |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
25
Table of Contents
ITEM 2. PROPERTIES
The
Company owned or leased approximately 700 facilities worldwide as of December 31, 2007,
including the following principal manufacturing, service, distribution and administrative
facilities:
Building | ||||||||||||||||
Size | Property | Lease | ||||||||||||||
(Square | Size | Owned/ | Termination | |||||||||||||
Location | Description | Feet) | (Acres) | Leased | Date | |||||||||||
Rig Technology: |
||||||||||||||||
Lanzhou, China
|
Mfg. Plant (Drilling Equipment) & Administrative Offices | 945,836 | 44 | Building Owned* | 10/20/20 | |||||||||||
Houston, Texas
|
West Little York Manufacturing Facility, Repair, Service, Administrative & Sales Offices | 619,000 | 34 | Owned | ||||||||||||
Pampa, Texas
|
Mfg. Plant | 548,000 | 400 | Owned | ||||||||||||
Houston, Texas
|
Mfg. Plant (Drilling Machinery and Equip) | 417,000 | Leased | Various | ||||||||||||
Houston, Texas
|
Bammel Facility Repair, Service, Parts, Administrative & Sales Offices | 377,750 | 18.5 | Leased | 10/30/21 | |||||||||||
Fort Worth, Texas
|
Coiled Tubing Manufacturing Facility, Warehouse, Administrative & Sales Offices | 297,000 | 24 | Owned | ||||||||||||
Carquefou, France
|
Mfg. Plant (Offshore Equipment) | 213,000 | Owned | |||||||||||||
Houston, Texas
|
Mfg. Plant (Braking Systems) | 200,000 | 24 | Owned | ||||||||||||
Houston, Texas
|
Mfg. Plant (Electrical Power Systems) | 184,000 | 11 | Owned | ||||||||||||
Houston, Texas
|
Mfg. Plant (Drilling Rigs and Components) | 178,000 | Owned | |||||||||||||
Kristiansand, Norway
|
Mfg. (Drilling and Offshore Equipment) | 159,429 | Owned | |||||||||||||
Aberdeen, Scotland
|
Pressure Control Manufacturing, Administrative & Sales | 143,859 | 5 | Leased | 08/31/18 | |||||||||||
Orange, California
|
Manufacturing & Office Facility - 759 N. Eckhoff | 126,000 | 9 | Building Owned* | 04/30/12 | |||||||||||
Anderson, Texas
|
Rolligon Mfg. Facility, Administrative & Sales Offices | 105,000 | 35 | Leased | 11/06/11 | |||||||||||
Conroe, Texas
|
Mfg., Administration & Sales | 86,000 | Leased | 12/31/21 | ||||||||||||
Molde, Norway
|
Mfg. (Marine Handling Equipment) | 78,000 | Owned | |||||||||||||
Mexicali, Mexico
|
Mfg. Plant | 76,402 | Leased | 04/01/14 | ||||||||||||
Calgary, Canada
|
Mfg. (Coiled Tubing and Wireline Units) | 76,000 | Owned | |||||||||||||
Etten-Leur,
Netherlands
|
Mfg. Plant/Sales (Drilling Equipment) | 75,000 | 6 | Owned | ||||||||||||
Duncan, Oklahoma
|
Nitrogen Units Manufacturing Facility, Warehouse & Offices | 67,600 | 13 | Owned | ||||||||||||
Houston, Texas
|
Brittmore Mfg. Plant (Electrical Power Systems) | 66,500 | 6 | Leased | 11/01/11 | |||||||||||
Aberdeen, Scotland
|
Rig Solutions Facility | 63,076 | 3 | Leased | ||||||||||||
Aberdeen, Scotland
|
Systems & Shaffer Sales, Service & Distribution Facility | 63,000 | 6 | Owned | ||||||||||||
Edmonton, Canada
|
Mfg. (Drilling Machinery and Equip.) | 61,000 | Owned | |||||||||||||
Nisku, Canada
|
Mfg. (Drilling Machinery and Equip.) | 60,000 | Owned | |||||||||||||
Minsk, Belarus
|
Coiled Tubing Manufacturing Facility, Administrative & Sales Offices | 49,800 | 1 | Leased | 10/31/08 | |||||||||||
Calgary, Canada
|
Coiled Tubing Manufacturing Facility, Administrative & Sales Offices | 48,040 | 5 | Owned |
26
Table of Contents
Building | ||||||||||||||||
Size | Property | Lease | ||||||||||||||
(Square | Size | Owned/ | Termination | |||||||||||||
Location | Description | Feet) | (Acres) | Leased | Date | |||||||||||
Stavanger, Norway
|
Drilling Equipment Work Shop, Warehouse & Customer Service Center | 41,333 | 1 | Leased | 06/01/09 | |||||||||||
Dehradun, India
|
Mfg. Plant & Admin. Offices (Unit I) | 41,086 | 2 | Owned | ||||||||||||
Tulsa, Oklahoma
|
Pumping Manufacturing Facility, Warehouse & Offices | 40,700 | 4 | Leased | 12/31/08 | |||||||||||
Dehradun, India
|
Mfg. Plant & Admin. Offices (Unit II) | 37,826 | 2 | Owned | ||||||||||||
Singapore
|
Wireline Products Manufacturing & Offices | 35,300 | 2 | Building Owned* | 04/15/14 | |||||||||||
Singapore
|
Systems Offices, Service & Distribution Facility | 35,079 | 1 | Building Owned* | 07/01/40 | |||||||||||
Orange, California
|
Administrative Offices743 N. Eckhoff | 35,000 | 2 | Leased | 04/30/12 | |||||||||||
Great Yarmouth,
|
Coiled Tubing & Nitrogen Units | 34,400 | 2 | Leased | 08/22/11 | |||||||||||
England
|
Manufacturing, Administrative & Sales Offices | |||||||||||||||
Houston, Texas
|
Technical College & Training Offices | 33,600 | Leased | 12/01/17 | ||||||||||||
Petroleum Services & Supplies: | ||||||||||||||||
Al Khobar, Saudi
Arabia
|
Reclamation, Inspection Facility & Offices | 340,203 | 8 | Leased | 11/30/10 | |||||||||||
Houston, Texas
|
Sheldon Road: Inspection Facility | 335,993 | 192 | Owned | ||||||||||||
Houston, Texas
|
Holmes Road Complex: Manufacturing, Warehouse, Corporate Offices, Coating Manufacturing Plant & Pipeline Services | 300,000 | 50 | Owned | ||||||||||||
Little Rock, Arkansas
|
Fiberglass Tubular Manufacturing Plant, R&D Lab, Administrative Offices | 262,784 | 44 | Owned | ||||||||||||
Cedar Park, Texas
|
Instrumentation Manufacturing Facility, Administrative & Sales Offices | 260,000 | 40 | Owned | ||||||||||||
Harbin, China
|
Fiberglass Tubular Manufacturing Plant, Administrative Offices | 260,000 | 11 | Owned | ||||||||||||
Manchester, England
|
Mfg. (Pumps and expendable parts) | 244,000 | Owned | |||||||||||||
Conroe, Texas
|
Solids Control Manufacturing Facility, Warehouse, Administrative & Sales Offices & Engineering Labs | 222,000 | 37 | Owned | ||||||||||||
Sand Springs,
Oklahoma
|
Fiberglass Tubular Manufacturing Plant & Administrative Offices | 189,173 | 7 | Owned | ||||||||||||
Jebel Ali, Dubai
|
Mfg. (Downhole Tools) & Distribution Warehouse | 180,000 | Leased | 01/29/21 | ||||||||||||
Amelia, Louisiana
|
Coating Plant & Inspection Facility | 179,574 | 84 | Leased | 12/31/16 | |||||||||||
Houston, Texas
|
QT Coiled Tubing Manufacturing Facility, Warehouse and Offices | 172,472 | 27 | Owned | ||||||||||||
San Antonio, Texas
|
Fiberglass Tubular Manufacturing Plant, R & D Lab, Administrative Offices | 170,500 | 20 | Owned | ||||||||||||
Houston, Texas
|
Coating Plant & Inspection Facility | 168,683 | 49 | Owned | ||||||||||||
Tulsa, Oklahoma
|
Mfg. (Pumps and expendable parts) | 165,000 | Owned | |||||||||||||
Edmonton, Canada
|
Mfg. (Downhole Tools) | 162,000 | Owned | |||||||||||||
Wichita, Kansas
|
Fiberglass Tubular Manufacturing Plant | 129,746 | 15 | Owned | ||||||||||||
Su Zhou, China
|
Fiberglass Tubular Manufacturing Plant, Administrative Offices | 125,000 | 5 | Owned | ||||||||||||
Nisku, Canada
|
Trucking, Rod Plant, Inspection & Storage Facility | 122,398 | 155 | Owned | ||||||||||||
McAlester, Oklahoma
|
Mfg. (Pumps) | 120,000 | Owned | |||||||||||||
Big Spring, Texas
|
Fiberglass Tubular Manufacturing Plant & Administrative Offices | 118,600 | 12 | Owned | ||||||||||||
Nisku, Canada
|
Coating Plant, Inspection & Drill Pipe Facility | 110,990 | 47 | Owned | ||||||||||||
Nisku, Canada
|
Mfg. Downhole Tools | 105,000 | Owned |
27
Table of Contents
Building | ||||||||||||||||
Size | Property | Lease | ||||||||||||||
(Square | Size | Owned/ | Termination | |||||||||||||
Location | Description | Feet) | (Acres) | Leased | Date | |||||||||||
Amelia, Louisiana
|
Coating Plant, Inspection & Storage Facilities | 102,000 | 90 | Building Owned* | 05/31/11 | |||||||||||
Casper, Wyoming
|
Inspection Facility | 91,720 | 29 | Owned | ||||||||||||
Midland, Texas
|
Coating Plant | 87,000 | 25 | Owned | ||||||||||||
Houston, Texas
|
Mfg. (Downhole Tools) | 86,175 | Leased | 12/31/18 | ||||||||||||
Houston, Texas
|
Highway 90: Coating Plant | 83,000 | 43 | Leased | 07/31/11 | |||||||||||
Aberdeen, Scotland
|
Solids Control Manufacturing Facility Assembly, Administrative & Sales | 77,400 | 6 | Owned | ||||||||||||
Houston, Texas
|
Engineering/Technical Research Center | 76,000 | 6 | Owned | ||||||||||||
Bogota, Colombia
|
Solids Control & Inspection Yard & Warehouse | 69,966 | Leased | 08/31/08 | ||||||||||||
Navasota, Texas
|
Coating Plant, Inspection Pipe Storage | 65,000 | Building Owned* | 06/30/13 | ||||||||||||
Marble Falls, Texas
|
Mfg. (Expendable parts) | 65,000 | Owned | |||||||||||||
Stafford, Texas
|
Mfg. and Service of Downhole tools | 65,000 | Owned | |||||||||||||
Leduc, Canada
|
MDT, Shaffer, Chimo, Alberta Instruments, Varco Services & Warehouse Facility | 64,056 | 5 | Owned | ||||||||||||
Gladbeck, Germany
|
Coating Plant | 68,641 | 4 | Owned | ||||||||||||
Lone Star, Texas
|
Inspection Facility | 56,700 | 80 | Owned | ||||||||||||
Neiva, Colombia
|
Inspection Yard & Warehouse | 54,898 | 1 | Leased | 02/01/08 | |||||||||||
Aberdeen, Scotland
|
Inspection Facility, Coating Plant, Manufacturing, Administrative & Sales | 53,425 | 10 | Owned | ||||||||||||
Coevorden,
Netherlands
|
Inspection Reclamation & Repair Facility | 53,361 | 2 | Leased | 12/04/09 | |||||||||||
Harvey, Louisiana
|
Coating Plant & Inspection Facility | 53,000 | 7 | Owned & Leased | 04/20/08 | |||||||||||
Houston, Texas
|
Mfg. (Pumps and expendable parts) | 51,000 | Leased | 12/31/10 | ||||||||||||
Tuas, Singapore
|
Inspection Facility | 50,644 | 8 | Building Owned* | 06/09/19 | |||||||||||
Houston, Texas
|
Mfg. (Rotors, Starters & Artificial Lifts) | 50,000 | Owned | |||||||||||||
Houston, Texas
|
Warehouse (Pumps and expendable parts) | 48,000 | Leased | 07/31/16 | ||||||||||||
Odessa, Texas
|
Coating Plant & Inspection Facility | 45,332 | 10 | Owned | ||||||||||||
Little Rock, Arkansas
|
Fiberglass Tubular Manufacturing Plant | 45,000 | 1.5 | Leased | 10/01/09 | |||||||||||
Hebei, China
|
Coating Plant | 45,000 | 13 | Leased | 04/26/25 | |||||||||||
Berlaimont, France
|
Coating Plant | 44,000 | 16 | Owned | ||||||||||||
Celle, Germany
|
Inspection Facility, Administrative & Engineering Offices | 43,560 | 12 | Building Owned* | 2049 | |||||||||||
Casper, Wyoming
|
Inspection Facility | 41,030 | 40 | Owned | ||||||||||||
Edmond, Oklahoma
|
Coating Plant | 40,000 | 19 | Owned | ||||||||||||
Farmington, New
Mexico
|
Inspection Storage Facilities | 37,725 | 50 | Leased | 03/31/14 | |||||||||||
Oklahoma City,
Oklahoma
|
Inspection Facility | 36,000 | 21 | Owned | ||||||||||||
Macae, Brazil
|
Inspection Yard & Rig Service Facility | 34,445 | 5 | Owned | ||||||||||||
Odessa, Texas
|
Inspection Facility | 33,910 | 50 | Owned | ||||||||||||
Edmonton, Canada
|
Oilwell Engine Reclamation | 32,550 | 10 | Leased | 04/30/13 | |||||||||||
Yopal, Colombia
|
Inspection and Solids Control Warehouse & Storage | 27,674 | 5 | Owned | ||||||||||||
Distribution: |
||||||||||||||||
Houston, Texas
|
Distribution and Warehouse | 124,000 | Building Owned* | 12/31/21 | ||||||||||||
Edmonton, Canada
|
Redistribution Center | 100,000 | Leased | 01/31/14 |
28
Table of Contents
Building | ||||||||||||||||
Size | Property | Lease | ||||||||||||||
(Square | Size | Owned/ | Termination | |||||||||||||
Location | Description | Feet) | (Acres) | Leased | Date | |||||||||||
Lloydminster, Canada
|
Applied Products Facility | 100,000 | Leased | 05/31/19 | ||||||||||||
Corporate: |
||||||||||||||||
Houston, Texas
|
Administrative Offices | 196,000 | Office Building | Leased | 12/01/17 | |||||||||||
Houston, Texas
|
Administrative Offices | 140,430 | Office Building | Leased | 05/31/17 | |||||||||||
Houston, Texas
|
Corporate Administrative Office | 115,000 | Office Building | Leased | 10/31/15 | |||||||||||
Houston, Texas
|
Administrative Offices | 48,000 | Office Building | Leased | 10/31/15 |
* | Building owned but land leased. |
We own or lease 228 repair and manufacturing facilities that refurbish and manufacture new
equipment and parts, and approximately 190 distribution service centers, and 276 service centers
that provide inspection and equipment rental worldwide.
We own undeveloped acreage next to several of our facilities, including over 100 acres of
undeveloped property located in Houston, Texas. Machinery, equipment, buildings, and other
facilities owned and leased are considered by management to be adequately maintained and adequate
for our operations.
ITEM 3. LEGAL PROCEEDINGS
We have various claims, lawsuits and administrative proceedings that are pending or threatened, all
arising in the ordinary course of business, with respect to commercial, product liability and
employee matters. Although no assurance can be given with respect to the outcome of these or any
other pending legal and administrative proceedings and the effect such outcomes may have, we
believe any ultimate liability resulting from the outcome of such claims, lawsuits or
administrative proceedings will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended December 31, 2007.
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol NOV. The
following table sets forth, for the calendar periods indicated, the range of high and low closing
prices for the common stock, as reported by the NYSE. All periods reflect a two-for-one stock
split effected as a 100 percent stock dividend in September 2007.
2007 | 2006 | |||||||||||||||
High | Low | High | Low | |||||||||||||
1st Quarter |
$ | 39.36 | $ | 27.00 | $ | 38.27 | $ | 28.50 | ||||||||
2nd Quarter |
54.47 | 39.10 | 35.93 | 28.25 | ||||||||||||
3rd Quarter |
73.67 | 51.56 | 34.04 | 28.17 | ||||||||||||
4th Quarter |
79.28 | 63.09 | 34.06 | 26.04 |
As of February 15, 2008, there were 1,889 holders of record of our common stock. Many stockholders
choose to own shares through brokerage accounts and other intermediaries rather than as holders of
(excluding individual participants in securities positions listing) record so the actual number of
stockholders is unknown but significantly higher. We have never paid cash dividends, and none are
anticipated during 2008.
On August 22, 2007, the Companys Board of Directors approved a two-for-one stock split in the form
of a stock dividend to the Companys stockholders of record on September 7, 2007, with distribution
of shares on September 28, 2007. The total number of authorized common stock shares and associated
par value were unchanged by this action. All per-share amounts in the financial statements reflect
the stock split for all periods presented. The effect of the common stock split is reflected on
the Consolidated Balance Sheet in Common stock and Additional paid-in capital.
The information relating to our equity compensation plans required by Item 5 is incorporated by
reference to such information as set forth in Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters contained herein.
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PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on our common stock to the S&P 500
Index and the S&P Oil & Gas Equipment & Services Index. The total shareholder return assumes $100
invested on December 31, 2002 in National Oilwell Varco, the S&P 500 Index and the S&P Oil & Gas
Equipment & Services Index. It also assumes reinvestment of all dividends. The peer group is
weighted based on the market capitalization of each company. The results shown in the graph below
are not necessarily indicative of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among National Oilwell Varco, Inc., The S&P 500 Index
And The S&P Oil & Gas Equipment & Services Index
Among National Oilwell Varco, Inc., The S&P 500 Index
And The S&P Oil & Gas Equipment & Services Index
![(GRAPH)](https://www.sec.gov/Archives/edgar/data/0001021860/000095012908001367/h54397h5439701.gif)
* | $100 invested on 12/31/02 in stock or index-including investment of dividends. Fiscal year ending December 31. | |
Copyright© 2008, Standard & Poors, a division of The McGraw-Hill Companies, Inc. All rights reserved www.researchdatagroup.com/S&P .htm |
Cumulative Total Return | ||||||||||||||||||||||||||||||||
12/02 | 12/03 | 12/04 | 12/05 | 12/06 | 12/07 | |||||||||||||||||||||||||||
National Oilwell Varco |
100.00 | 102.38 | 161.58 | 287.09 | 280.13 | 672.71 | ||||||||||||||||||||||||||
S&P500 |
100.00 | 128.68 | 142.69 | 149.70 | 173.34 | 182.87 | ||||||||||||||||||||||||||
S&P Oil & Gas Equipment & Services |
100.00 | 124.74 | 164.49 | 244.37 | 282.35 | 417.59 | ||||||||||||||||||||||||||
This information shall not be deemed to be ''soliciting material or to be ''filed with the
Commission or subject to Regulation 14A (17 CFR 240.14a-1-240.14a-104), other than as provided in
Item 201(e) of Regulation S-K, or to the liabilities of section 18 of the Exchange Act (15 U.S.C.
78r).
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ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31, | ||||||||||||||||||||
2007 | 2006 | 2005 (1) | 2004 | 2003 | ||||||||||||||||
(dollars in millions, except per share data) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Revenue |
$ | 9,789.0 | $ | 7,025.8 | $ | 4,644.5 | $ | 2,318.1 | $ | 2,004.9 | ||||||||||
Operating profit |
2,044.4 | 1,111.1 | 476.8 | 176.0 | 164.1 | |||||||||||||||
Income before taxes |
2,028.9 | 1,049.2 | 430.0 | 138.9 | 121.8 | |||||||||||||||
Net income |
$ | 1,337.1 | $ | 684.0 | $ | 286.9 | $ | 115.2 | $ | 79.7 | ||||||||||
Net income per share |
||||||||||||||||||||
Basic |
$ | 3.77 | $ | 1.95 | $ | 0.92 | $ | 0.67 | $ | 0.47 | ||||||||||
Diluted |
$ | 3.76 | $ | 1.93 | $ | 0.91 | $ | 0.67 | $ | 0.47 | ||||||||||
Other Data: |
||||||||||||||||||||
Depreciation and amortization |
$ | 214.1 | $ | 160.6 | $ | 114.6 | $ | 44.0 | $ | 39.2 | ||||||||||
Capital expenditures |
$ | 251.8 | $ | 200.4 | $ | 105.0 | $ | 39.0 | $ | 32.4 | ||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 3,567.1 | $ | 2,300.4 | $ | 1,811.0 | $ | 711.0 | $ | 763.0 | ||||||||||
Total assets |
$ | 12,114.9 | $ | 9,019.3 | $ | 6,678.5 | $ | 2,576.5 | $ | 2,213.1 | ||||||||||
Long-term debt, less current maturities |
$ | 737.9 | $ | 834.7 | $ | 835.6 | $ | 350.0 | $ | 594.0 | ||||||||||
Stockholders equity |
$ | 6,661.4 | $ | 5,023.5 | $ | 4,194.2 | $ | 1,270.2 | $ | 1,059.2 |
(1) | Financial results of Varco International, Inc. (Varco) have been included in our consolidated financial statements beginning March 11, 2005, the date the Varco merger was completed and Varco common shares were exchanged for our common shares. Financial information for prior periods and dates may not be comparable with 2005 due to the impact of this business combination on our financial position and results of operation. See Note 3 of the Notes to the Consolidated Financial Statements for a description of the Varco merger and related adjusted financial information. Results for the year ended December 31, 2005 include integration costs associated with the Varco merger of $31.7 million and stock-based compensation costs of $15.6 million related to the amortization expense of options assumed in the Varco merger. |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General Overview
The Company is a leading worldwide provider of highly engineered drilling and well-servicing
equipment, products and services to the exploration and production segments of the oil and gas
industry. With operations in approximately 700 locations across six continents, we design, manufacture and
service a comprehensive line of drilling and well servicing equipment; sell and rent drilling
motors, specialized downhole tools, and rig instrumentation; perform inspection and internal
coating of oilfield tubular products; provide drill cuttings separation, management and disposal
systems and services; provide expendables and spare parts used in conjunction with our large
installed base of equipment; and provide supply chain management services through our distribution
network. We also manufacture coiled tubing, provide in-service pipeline inspections, manufacture
high pressure fiberglass and composite tubing, and sell and rent advanced in-line inspection
equipment to makers of oil country tubular goods. We have a long tradition of pioneering
innovations which improve the cost-effectiveness, efficiency, safety, and environmental impact of
oil and gas operations.
Our revenues and operating results are directly related to the level of worldwide oil and gas
drilling and production activities and the profitability and cash flow of oil and gas companies and
drilling contractors, which in turn are affected by current and anticipated prices of oil and gas.
Oil and gas prices have been and are likely to continue to be volatile. See Risk Factors. We
conduct our operations through three business segments: Rig Technology, Petroleum Services &
Supplies and Distribution Services. See Item 1. Business for a discussion of each of these
business segments.
Operating Environment Overview
Our results are dependent on, among other things, the level of worldwide oil and gas drilling, well
remediation activity, the price of crude oil and natural gas, capital spending by other oilfield
service companies and drilling contractors, pipeline maintenance activity, and the worldwide oil
and gas inventory levels. Key industry indicators for the past three years include the following:
% | % | |||||||||||||||||||
2007 vs. | 2007 vs. | |||||||||||||||||||
2007* | 2006* | 2005* | 2006 | 2005 | ||||||||||||||||
Active Drilling Rigs: |
||||||||||||||||||||
U.S. |
1,767 | 1,648 | 1,381 | 7.2 | % | 28.0 | % | |||||||||||||
Canada |
344 | 470 | 458 | (26.8 | %) | (24.9 | %) | |||||||||||||
International |
1,005 | 925 | 908 | 8.6 | % | 10.7 | % | |||||||||||||
Worldwide |
3,116 | 3,043 | 2,747 | 2.4 | % | 13.4 | % | |||||||||||||
West Texas Intermediate |
$ | 72.33 | $ | 66.00 | $ | 56.65 | 9.6 | % | 27.7 | % | ||||||||||
Crude Prices (per barrel) |
||||||||||||||||||||
Natural Gas Prices ($/mmbtu) |
$ | 6.97 | $ | 6.74 | $ | 8.83 | 3.4 | % | (21.1 | %) |
* | Averages for the years indicated. See sources below. |
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The following table details the U.S., Canadian, and international rig activity and West Texas
Intermediate Oil prices for the three years ended December 31, 2007 on a quarterly basis:
![(BAR GRAPH)](https://www.sec.gov/Archives/edgar/data/0001021860/000095012908001367/h54397h5439702.gif)
Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); West Texas Intermediate Crude Price:
Department of Energy, Energy Information Administration (www.eia.doe.gov).
Natural gas prices increased slightly in 2007 in comparison to 2006, and oil prices generally
increased throughout 2007. The average price per barrel of West Texas Intermediate Crude reached
historic heights in 2007, peaking at just over $99 in November. The 2007 average price for the
year was the highest ever-annual average oil price at $72.33 per barrel, an increase of 9.6% over
the average price for 2006. Natural gas prices were $6.97 per mmbtu, an increase of 3.4% compared
to the 2006 average. Higher oil prices led to stronger rig activity worldwide, increasing 2.4% for
the full year in 2007 compared to 2006.
At February 15, 2008, there were 1,773 rigs actively drilling in the U.S., compared to 1,782 rigs
at December 28, 2007. The company believes that most current industry projections are forecasting
commodity prices to remain strong, and, as a result, U.S. and international drilling rig activity
is expected to continue at a high level. However, numerous events could significantly alter these
projections including political tensions in the Middle East, the acceleration or deceleration of
the recovery of the U.S. and world economies, a build-up in the world inventory levels, or numerous
other events or circumstances.
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Executive Summary
National Oilwell Varco generated earnings of $1,337.1 million or $3.76 per fully diluted share in
its fiscal year ended December 31, 2007, on revenues of $9,789.0 million. Earnings per share
increased 95 percent and revenue increased 39 percent from the Companys 2006 earnings and
revenues, respectively, as we experienced rising demand for our products and services through the
year. Our backlog for capital equipment increased 50 percent throughout the year, despite steadily
rising shipments out of backlog, due principally to growing numbers of new offshore drilling rig
construction projects initiated during 2007 which placed orders with the Company.
Oil & Gas Equipment and Services Market
Oil and gas prices have increased significantly over the past five years and remain near historic
highs, which have led to high levels of exploration and development drilling in many oil and gas
basins around the globe. The count of rigs actively drilling during 2007 as measured by Baker
Hughes (a good measure of the level of oilfield activity and spending) increased 2.4 percent from
2006, representing the fifth straight year of increasing average annual rig count. Year-to-year
growth in domestic, Latin American and Eastern Hemisphere drilling activity was partly offset by
Canadian activity declines. Activity in the U.S. and the Eastern Hemisphere grew modestly
throughout the year, while Canada declined sharply during the second quarter, as it typically does,
and remained weak throughout the second half of 2007. Latin American drilling activity was
essentially flat throughout the year.
The level of drilling activity underway is the highest seen since the early 1980s, which is
fueling high demand for oilfield services. Much of the new incremental drilling activity is
occurring in harsh environments, and employs increasingly sophisticated technology to find and
produce reserves. Higher utilization of drilling rigs has tested the capability of the worlds
fleet of rigs, much of which is old and of limited capability. Technology has advanced
significantly since most of the existing rig fleet was built. The industry invested little during
the late 1980s and 1990s on new drilling equipment, but drilling technology progressed steadily
nonetheless, as the Company and its competitors continued to invest in new and better ways of
drilling. As a consequence, the safety, reliability, and efficiency of new, modern rigs surpass
the performance of most of the older rigs at work today.
The rise in demand for drilling rigs has driven rig dayrates higher over the past few years, which
has increased cash flows and available financing to drilling contractors. Many have invested in
new rigs or placed older rigs back into service. The Company has played an important role in
providing both new rigs as well as the equipment, consumables and services needed to reactivate
many older rigs. Oil and gas producers demand top performance from drilling rigs, particularly at
the premium dayrates that are being paid today. As a result of this trend, the Company has
benefited from incremental demand for new products (such as our small iron roughnecks for land
rigs, our LXT BOPs, our Safe-T-Lite pump liner systems, among others) to upgrade certain rig
functions to make them safer and more efficient.
Drilling rigs are now being pushed to drill deeper wells, more complex wells, highly deviated wells
and horizontal wells; tasks which require larger rigs with more capabilities. Higher dayrates
magnify the opportunity cost of rig downtime, and rigs are being pushed to maximize revenue days
for their drilling contractor owners. The drilling process effectively consumes the mechanical
components of a rig, which wear out and need periodic repair or replacement. This process has been
accelerated by very high rig utilization and wellbore complexity. Drilling consumes rigs; more
complex and challenging drilling consumes rigs faster.
Changing methods of drilling have further benefited the Companys business. Increasingly,
hydraulic power in addition to conventional mechanical rotary power is being used to apply
torque to the drill bit. This is done using downhole drilling motors powered by drilling fluids.
We are a major provider of downhole drilling motors, and we have seen demand for this application
of our drilling motors increase over the last few years. This trend has also increased demand for
our high pressure mud pumps, which create the hydraulic power in the drilling fluid which drive the
drilling motors.
While the increasingly efficient equipment provided by us has mitigated the effect, high activity
levels have increased demand for personnel in the oilfield. Consequently, the Company, its
customers and its suppliers have experienced wage inflation in certain markets. Hiring experienced
drilling crews has been challenging for the drilling industry; however, we believe crews generally
prefer working on newer, more modern rigs. Our products which save labor and increase efficiency
(such as its automatic slips and pipe handling equipment) also make the rig crews jobs safer and
easier, and make the rig a more desirable place to work.
The world is actively building nearly 170 new offshore rigs, and schedules call for 27 new
drillships, 45 new semisubmersibles, and 80 new jackup rigs to be delivered into the fleet by the
end of 2011. The 628 offshore rig fleet they will join is old; the average age is approximately 25
years. The existing fleet was engineered and constructed prior to many technical advancements,
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and we believe that the newer rigs offer considerably higher efficiency, safety, and capability,
and that many will effectively replace a portion of the existing fleet. Additionally, the large
number of floating rig construction projects will add new capacity required to press exploration
into new deepwater frontiers.
Land rig construction is strong, and new orders brisk, with most interest directed towards
international markets where customers are adopting newer rig technologies. Our domestic land rig
backlog has fallen by about half from peak 2006 levels due to lower dayrates in the U.S. as
compared to early 2007; however, newer, better rigs are consistently posting meaningfully higher
dayrates and utilization than older rigs in the domestic market. We believe the retooling of the
U.S. land rig market will continue as favorable operator experience with higher technology rigs
will continue to pull more of these into the marketplace.
Overall we expect to continue to sell into three important trends in the rig fleet worldwide: the
secular buildout of additional deepwater capabilities, the retooling of the jackup fleet with
newer, more capable rigs, and the replacement of older land rigs with improved technology.
Segment Performance
Revenues for the Rig Technology group in 2007 were $5,744.7 million, up 60 percent from 2006 group
revenues of $3,584.9 million. Operating profit was $1,393.6 million or 24.3 percent of revenue in
2007, compared to $608.5 million or 17.0 percent of sales in 2006. Operating profit flow-through
or leverage (the period-to-period increase in operating profit divided by the increase in revenue)
was 36 percent from 2006 to 2007. The 2007 results benefited from higher new rig construction
volumes, higher sales of aftermarket goods and services, rising manufacturing efficiencies and
improving pricing, partly offset by higher employee and material costs.
The Companys Rig Technology group reported a backlog of capital equipment orders totaling $9,003.5
million at December 31, 2007, up 50 percent from December 31, 2006. The group was awarded $7,080.1
million in new capital equipment orders in 2007, an increase of 18 percent over orders won in 2006.
Fourth quarter 2007 orders of $2,192.1 million were the largest quarterly order level ever
achieved by the group, and year-ending backlog achieved record levels as well. The Company has the
capability to supply up to $50 million of equipment for a jackup rig, more than $250 million of
equipment for a new floating rig, and effectively all of a new land rig (which can range in price
from less than $1 million for a well service rig to over $50 million for a large harsh environment
rig). Backlog for drilling equipment at December 31, 2007 was approximately 85 percent offshore
and 15 percent land rig equipment. The delivery of this equipment is typically tied to the
construction schedule of the rig, which can take as long as four years to complete. While
substantially all of the current backlog will be delivered by the end of 2009, a portion extends
out as far as 2011. Approximately 88 percent of the drilling equipment in backlog is destined for
international markets.
The Companys Rig Technology group manufacturing base relies on a combination of internal and
external capabilities, and we have significantly increased the output of our manufacturing plants
in response to the high demand. This has been accomplished by optimizing the manufacturing
infrastructure between Varco and National Oilwell to enhance efficiency following the March 2005
merger, the rollout of Quick Response Manufacturing (QRM) and lean manufacturing techniques across
a number of facilities, and a 37 percent increase in capital expenditures in the group as compared
to 2006. We are also providing our vendors with longer range forecasts to assist their planning,
placing longer term orders to match our backlog, and qualifying new suppliers throughout North
America, Europe and Asia.
The Companys Petroleum Services & Supplies generated $3,061.0 million in revenue in 2007, an
increase of 26 percent from 2006 revenues of $2,425.0 million, due to rising demand for oilfield
goods and services the group provides, the impact of acquisitions, and several international
expansion initiatives launched by the group including new facilities opened in the Middle East and
Far East. Additionally the group benefited from investments made in its coiled tubing and
composite pipe manufacturing infrastructure last year. The groups operating profit for the year
was $731.6 million or 23.9 percent of sales, an increase from 2006 operating profit of $545.6
million or 22.5 percent of sales. The group generated 29 percent operating profit flow-through
from 2006 to 2007.
Margins for the Petroleum Services & Supplies group improved in 2007 as a result of the higher
volumes and better pricing, offset by higher personnel and materials costs. The strong results
were broad-based, with all major product and service lines up year-over-year. Domestic and
international revenues continued to grow throughout the year; however, results in Canada softened
on a seasonally-adjusted basis as many of our customers in Canada reduced activity in response to
lower gas prices, a stronger Canadian dollar, and higher royalty expenses in Alberta. The groups
mix of non-North American revenue rose steadily throughout the year, from 38 percent in the first
quarter to 43 percent in the fourth quarter, as overseas business grew. The flattening of the rig
count in the U.S., and the declining level of activity in Canada compared to the prior year,
reduced overall pricing leverage in North America; however, pricing trends remain very regional and
product line specific, with pricing of certain products continuing to increase.
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The Companys Distribution Services group generated revenues of $1,423.7 million in 2007, a four
percent increase from 2006 revenues of $1,369.6 million. Operating profit was $94.0 million,
unchanged from the prior year. Operating margins were 6.6 percent, down slightly from 2006
operating margins of 6.9 percent. The group generated no incremental operating profit flow-through
in 2007, due mostly to a sharp decline in business in its Canadian operations. Revenue growth in
overseas markets fully offset lower Canadian sales, but startup costs in several new international
locations led to lower flow-throughs from these areas. Domestic operations posted good
year-over-year growth at strong flow-throughs, but the business began to experience increasing
domestic price pressure through the second half of 2007.
Strategic alliance agreements with new customers fueled much of the Distribution Services groups
international growth. Once in place the strategic alliances provide the group a stable platform of
business around which it can open new locations at lower risk and cost. The group has expanded
around the world by following our customers rigs into new regions. The group is also selling more
MRO supplies internally to legacy Varco organizations, which increased our leverage through greater
purchase volumes.
Outlook
We believe that the outlook for the Company for 2008 remains positive, as historically high
commodity prices are expected to keep overall oil and gas activity high, and as the Company enters
2008 with a record level of backlog for capital equipment for its Rig Technology group.
Oil prices and supply remain subject to significant political risk in many international regions.
The growth of China and other emerging economies has added significant demand to the oil markets,
and new sources of supply continue to prove challenging to find and produce economically. The
Company expects the high oil prices that have resulted to sustain high levels of oilfield activity
in 2008, provided the worlds major economies remain strong, and OPEC discipline keeps oil prices
high. High commodity prices, drilling activity levels, and drilling rig dayrates are expected to
continue to fuel demand for the Companys Rig Technology group. The supply of offshore rigs
remains tight in many markets, and quotation activity for the Rig Technology group remains brisk.
In particular, the Company expects recent deepwater lease awards and announcements of discoveries
in Brazil to continue to fuel a high level of interest in floating drilling rig construction
projects. Additionally, interest in new international land rigs remains very high, while domestic
rig demand has stabilized.
Our outlook for the Companys Petroleum Services & Supplies segment remains good, given
continuation of high levels of drilling across the U.S., Middle East, North Africa, the Far East,
Latin America and the North Sea. While Canadian activity remains slow, we believe the long term
outlook there is good given the difficulties the industry has faced in meaningfully growing gas
production across North America. Gas production from resource plays (coal bed methane, tight sands
and shales) has increased to about 40 percent of total U.S. gas production, and is believed to
exhibit higher decline rates than conventional reservoirs.
The Companys Distribution Services segment operates in very competitive markets, but we are
targeting further international expansion underpinned by new strategic alliances in 2008 to fuel
additional growth. The business also continues to be challenged by weak demand in Canada.
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Results of Operations
Years Ended December 31, 2007 and December 31, 2006
The following table summarizes the Companys revenue and operating profit by operating segment in
2007 and 2006 (in millions):
Years Ended December 31, | Variance | |||||||||||||||
2007 | 2006 | $ | % | |||||||||||||
Revenue: |
||||||||||||||||
Rig Technology |
$ | 5,744.7 | $ | 3,584.9 | $ | 2,159.8 | 60.2 | % | ||||||||
Petroleum Services & Supplies |
3,061.0 | 2,425.0 | 636.0 | 26.2 | % | |||||||||||
Distribution Services |
1,423.7 | 1,369.6 | 54.1 | 4.0 | % | |||||||||||
Eliminations |
(440.4 | ) | (353.7 | ) | (86.7 | ) | 24.5 | % | ||||||||
Total Revenue |
$ | 9,789.0 | $ | 7,025.8 | $ | 2,763.2 | 39.3 | % | ||||||||
Operating Profit: |
||||||||||||||||
Rig Technology |
$ | 1,393.6 | $ | 608.5 | $ | 785.1 | 129.0 | % | ||||||||
Petroleum Services & Supplies |
731.6 | 545.6 | 186.0 | 34.1 | % | |||||||||||
Distribution Services |
94.0 | 94.0 | | | ||||||||||||
Unallocated expenses and eliminations |
(174.8 | ) | (137.0 | ) | (37.8 | ) | 27.6 | % | ||||||||
Total Operating Profit |
$ | 2,044.4 | $ | 1,111.1 | $ | 933.3 | 84.0 | % | ||||||||
Operating Profit %: |
||||||||||||||||
Rig Technology |
24.3 | % | 17.0 | % | ||||||||||||
Petroleum Services & Supplies |
23.9 | % | 22.5 | % | ||||||||||||
Distribution Services |
6.6 | % | 6.9 | % | ||||||||||||
Total Operating Profit % |
20.9 | % | 15.8 | % | ||||||||||||
Rig Technology
Rig Technology revenue for the year ended December 31, 2007 was $5,744.7 million, an increase of
$2,159.8 million (60.2%) compared to 2006. The increase is due to the growing market for capital
equipment, as evidenced by backlog growth, price increases implemented in 2006, and increases in
spare parts and service revenue. The increase in orders and backlog resulted from increased rig
construction projects and higher capital investment by drilling contractors in 2007 as compared to
2006.
Operating profit from Rig Technology was $1,393.6 million for the year ended December 31, 2007, an
increase of $785.1 million (129.0%) over the same period of 2006. The increase in operating profit
was largely due to the increased activity and pricing discussed above.
The Rig Technology group monitors its capital equipment backlog to plan its business. New orders
are added to backlog only when we receive a firm written order for major drilling rig components or
a signed contract related to a construction project. The capital equipment backlog was $9.0 billion
at December 31, 2007, an increase of $3.0 billion (50.0%) over backlog of $6.0 billion at
December 31, 2006. Substantially all of the current backlog will be delivered by the end of 2009.
Petroleum Services & Supplies
Revenue from Petroleum Services & Supplies was $3,061.0 million for 2007 compared to $2,425.0
million for 2006, an increase of $636.0 million (26.2%). The increase was attributable to the
higher demand for all products and services offered by the segment. Downhole tools sales and
rentals, drill pipe coating services, and inspection equipment sales achieved revenue increases
ranging from 40% to 72%.
Operating profit from Petroleum Services & Supplies was $731.6 million for 2007 compared to $545.6
million for 2006, an increase of $186.0 million (34.1%). The increase was attributable to higher
profitability across virtually all product lines, driven
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by higher volumes discussed above. Operating profit dollar increases ranging from 48% to 144% were
achieved from downhole tool sales and rentals, drill pipe coating services and pipeline
inspections.
Distribution Services
Revenue from Distribution Services totaled $1,423.7 million, an increase of $54.1 million (4.0%)
from the prior period. The number of drilling rigs actively searching for oil and gas is a key
metric for this business segment. Worldwide rig count increased 2.4% in 2007 compared to 2006,
with increases of 7.2% and 8.6% in the U.S. and international rig activity, offset almost entirely
by a 26.8% decline in Canada rig activity. The Companys Distribution Services segment efforts to
expand in international markets along with the increasing international market activity resulted in
a 22% increase in international revenue. The international revenue growth over the prior period
reflects additional large contract awards, the extension of US-based contracts into the
international arena, increased volume from our global alliance customers and increased export
activity.
Operating income remained the same in 2007 at $94.0 million while margins decreased slightly to
6.6% of revenue in 2007 compared to 6.9% of revenue in 2006. The decrease in margin was primarily
due to weak demand in Canada and resulting lower operating profit in Canada.
Unallocated expenses and eliminations
Unallocated expenses and eliminations were $174.8 million for the year ended December 31, 2007
compared to $137.0 million for 2006. The increase in operations costs was primarily due to greater
inter-segment profit eliminations, an increase in employee compensation expense and greater
stock-based compensation expense. The stock-based compensation expense was $43.1 million and $31.2
million for the years ended December 31, 2007 and 2006, respectively. The 2006 results also
included $7.9 million of integration costs related to the 2005 merger with Varco.
Interest and financial costs
Interest and financial costs were $50.3 million for 2007 compared to $48.7 million for 2006. The
increase was primarily due to unfavorable interest rate movements on the Companys outstanding
interest rate swap agreements.
Other income (expense), net
Other income (expense), net was an expense of $17.8 million and $31.3 million for the years ended
December 31, 2007 and December 31, 2006, respectively. The decrease in expense was primarily due
to a net foreign exchange loss which was $7.0 million for the year ended December 31, 2007, as
compared to a net foreign exchange loss of $21.0 million for the year ended December 31, 2006. The
2007 foreign exchange losses were primarily due to the strengthening in Norwegian Kroner, British
Pound Sterling, and Euro currencies compared to the U.S. Dollar. See Item 7A. Quantitative and
Qualitative Disclosures About Market Risk Foreign Currency Exchange Rates.
Provision for income taxes
The effective tax rate for the year ended December 31, 2007 was 33.3% compared to 33.9% for 2006.
The lower 2007 tax rate was due primarily to a higher percentage of earnings in foreign
jurisdictions with lower tax rates, favorable resolution of uncertain tax positions associated with
prior years and increased tax benefits in the US from manufacturing activities. These benefits
were partially offset by increased state income tax in the US from the new Texas Margins tax,
incremental US tax on repatriated foreign earnings and the loss of tax benefits in the US
associated with export sales in 2006 that was fully terminated for 2007. The US laws granting this
export tax benefit were modified as part of the American Jobs Creation Act of 2004 and this benefit
is no longer available. A new tax benefit associated with US manufacturing operations passed into
law under the same Act will be phased in over a five year period beginning in 2005. Whereas the
timing of the phase out of the export tax benefit and the phase in of the manufacturing tax benefit
may differ, we expect the tax reduction associated with the new manufacturing deduction, when fully
implemented, to be similar in amount to the export benefit. We anticipate our tax rate for 2008 to
be in the range of approximately 32% to 34% for continuing operations.
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Years Ended December 31, 2006 and December 31, 2005
The following table summarizes the Companys revenue and operating profit by operating segment in
2006 and 2005. The actual results include results from Varco operations from the acquisition date
of March 11, 2005 (in millions):
Years Ended December 31, | Variance | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
Revenue: |
||||||||||||||||
Rig Technology |
$ | 3,584.9 | $ | 2,216.8 | $ | 1,368.1 | 61.7 | % | ||||||||
Petroleum Services & Supplies |
2,425.0 | 1,645.8 | 779.2 | 47.3 | % | |||||||||||
Distribution Services |
1,369.6 | 1,074.5 | 295.1 | 27.5 | % | |||||||||||
Eliminations |
(353.7 | ) | (292.6 | ) | (61.1 | ) | 20.9 | % | ||||||||
Total Revenue |
$ | 7,025.8 | $ | 4,644.5 | $ | 2,381.3 | 51.3 | % | ||||||||
Operating Profit: |
||||||||||||||||
Rig Technology |
$ | 608.5 | $ | 238.4 | $ | 370.1 | 155.2 | % | ||||||||
Petroleum Services & Supplies |
545.6 | 281.0 | 264.6 | 94.2 | % | |||||||||||
Distribution Services |
94.0 | 46.6 | 47.4 | 101.7 | % | |||||||||||
Unallocated expenses and eliminations |
(137.0 | ) | (89.2 | ) | (47.8 | ) | 53.6 | % | ||||||||
Total Operating Profit |
$ | 1,111.1 | $ | 476.8 | $ | 634.3 | 133.0 | % | ||||||||
Operating Profit %: |
||||||||||||||||
Rig Technology |
17.0 | % | 10.8 | % | ||||||||||||
Petroleum Services & Supplies |
22.5 | % | 17.1 | % | ||||||||||||
Distribution Services |
6.9 | % | 4.3 | % | ||||||||||||
Total Operating Profit % |
15.8 | % | 10.3 | % | ||||||||||||
Rig Technology
Rig Technology revenue for the year ended December 31, 2006 was $3,584.9 million, an increase of
$1,368.1 million (61.7%) compared to 2005. The increase can be attributed to the growing market
for capital equipment, as evidenced by backlog growth, price increases implemented in 2005 and
2006, increases in spare parts and service revenue, and the merger with Varco, which was completed
effective March 11, 2005. The increase in orders and backlog can be attributed to increased rig
construction projects and higher capital investment by drilling contractors in 2006 as compared to
2005.
Operating profit from Rig Technology was $608.5 million for the year ended December 31, 2006, an
increase of $370.1 million (155.2%) over the same period of 2005. The increase in operating profit
was largely due to the increased activity and pricing discussed above and the 2005 merger with
Varco. Additionally, 2005 operating profit included a second quarter charge of $21.7 million taken
on a large Kazakhstan rig fabrication project as a result of additional costs attributed to higher
rig-up and material costs than originally planned.
The Rig Technology group monitors its capital equipment backlog to plan its business. New orders
are added to backlog only when we receive a firm written order for major drilling rig components or
a signed contract related to a construction project. The capital equipment backlog was $6.0 billion
at December 31, 2006, an increase of $3.7 billion (161.2%) over backlog of $2.3 billion at
December 31, 2005. Substantially all of the current backlog will be delivered by the end of 2009.
Petroleum Services & Supplies
Revenue from Petroleum Services & Supplies was $2,425.0 million for 2006 compared to $1,645.8
million for 2005, an increase of $779.2 million (47.3%). In part, the increase was attributable to
the addition of product lines acquired from Varco, which totaled approximately $192.9 million. The
remaining increase was attributable to the higher demand for all products and services offered by
the segment. Solids control equipment sales and rentals, rig instrumentation packages, drill pipe
coating services, fiberglass pipe, and pumping products achieved revenue increases ranging from 35%
to 50%. These increases were the result of strong North America and worldwide drilling markets, as
reflected by rig count increases of 15% and 11%, respectively, for 2006 compared to 2005.
Petroleum Services & Supplies also benefited from price increases implemented during 2005.
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Operating profit from Petroleum Services & Supplies was $545.6 million for 2006 compared to $281.0
million for 2005, an increase of $264.6 million (94.2%). The incremental operating profit from the
addition of product lines acquired from Varco was approximately $28.4 million. The majority of the
remaining increase was attributable to higher profitability across virtually all product lines,
driven by higher volumes and improved pricing discussed above. Operating profit dollar increases
ranging from 73% to 103% were achieved from downhole tool sales and rentals, sales of pumping
products, inspection services, and solids control equipment sales and rentals.
Distribution Services
Revenue from Distribution Services totaled $1,369.6 million, an increase of $295.1 million (27.5%)
from the prior period. The number of drilling rigs actively searching for oil and gas is a key
metric for this business segment. According to the Baker Hughes rig count report, the average
number of rigs operating in the world in 2006 was up 11% over the prior period. The average rig
count in North America in 2006 was up 15% over the prior period to 2,118 rigs with our North
American revenues up $196.9 million (27%). In the International market, revenues increased 26%
while international rig count activity increased by 2%. The international revenue growth over the
prior period reflects additional large contract awards, the extension of US-based contracts into
the international arena, increased volume from our global alliance customers and increased export
activity.
From a product perspective, maintenance, repair and operating supply (MRO) commodities in 2006
experienced a 33% increase over 2005. Sales of our manufactured products increased nearly 40%
largely in the second half of the year. Margins were up considerably for MRO goods, driven by
strategic bulk purchases and positioning of key commodities. OEM product margins were largely flat
due to a large portion of these revenues locked in at fixed margins on committed contracts.
Operating income increased $47.4 million in 2006 to $94.0 million or 6.9% of revenue. Improved
supplier rebates coupled with increased operating efficiencies largely achieved by absorbing the
revenue increase across an already established distribution infrastructure and expense base were
the main contributors to operating income improvement.
Unallocated expenses and eliminations
Unallocated expenses and eliminations were $137.0 million for the year ended December 31, 2006
compared to $89.2 million for 2005. The increase in operations costs was primarily due to greater
inter-segment profit eliminations. In addition, stock-based compensation expense was $31.2 million
for 2006 as compared to $15.6 million for 2005. The integration costs related to the Varco merger
were $7.9 million and $31.7 million for the years ended 2006 and 2005, respectively.
Interest and financial costs
Interest and financial costs were $48.7 million for 2006 compared to $52.9 million for 2005. The
decrease was primarily due to favorable interest rate movements on the Companys outstanding
interest rate swap agreements and repayment of the Companys $150 million 6.875% Senior Notes on
July 1, 2005. See summary of outstanding debt at December 31, 2006 under Liquidity and Capital
Resources.
Other income (expense), net
Other income (expense), net was an expense of $31.3 million and income of $1.2 million for the
years ended December 31, 2006 and December 31, 2005, respectively. The increase in expense was
primarily due to a net foreign exchange loss which was $21.0 million for the year ended December
31, 2006, as compared to a net foreign exchange gain of $2.9 million for the year ended December
31, 2005. The 2006 foreign exchange losses were primarily due to the strengthening in Norwegian
Kroner, British Pound Sterling, and Euro currencies compared to the U.S. Dollar. See Item 7A.
Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Rates.
Provision for income taxes
The effective tax rate for the year ended December 31, 2006 was 33.9% compared to 32.3% for 2005.
The higher 2006 tax rate was due primarily to increased state income tax expenses and charges for
increases in valuation allowances related to separate company operating losses that may not be
deductible in the future. The tax rates also reflect a lower percentage of earnings in foreign
jurisdictions with lower tax rates and reduced benefits in the US associated with export sales in
2006 compared to 2005. The US laws granting this tax benefit were modified as part of the American
Jobs Creation Act of 2004 and this benefit will no longer be available after 2006. A new tax
benefit associated with US manufacturing operations passed into law under the same Act will be
phased in over a five year period beginning in 2005.
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Liquidity and Capital Resources
At December 31, 2007, the Company had cash and cash equivalents of $1,841.8 million, and total debt
of $890.7 million. At December 31, 2006, cash and cash equivalents were $957.4 million and total
debt was $840.3 million. The increase in cash holdings was primarily a result of increased
operating activities and securing project orders that require large down payments and early payment
terms. The Companys outstanding debt at December 31, 2007 consisted of $200.0 million of 5.65%
Senior Notes due 2012, $200.0 million of 7.25% Senior Notes due 2011, $150.0 million of 6.5% Senior
Notes due 2011, $150.0 million of 5.5% Senior Notes due 2012, $100.0 million of 7.5% Senior Notes
due 2008, and other debt of $90.7 million.
Cash provided by operating activities in 2007 was $1,188.0 million compared to cash provided by
operating activities of $1,216.7 million in 2006. Cash was used by operations primarily through
increases in inventories of $757.6 million, receivables of $464.8 million, cost in excess of
billings of $334.6 million and prepaid and other current assets of $143.6 million. These negative
cash flows were offset by net income of $1,337.1 million, billings in excess of costs of $831.6
million and non-cash charges of $214.1 million. Receivables increased due to greater revenue,
pricing and activity in 2007 compared to 2006, while inventory increased due to continued higher
costs, activity, growing backlog orders, and customer prepayments. Billings in excess of costs
increased due to early payment terms in relation to construction projects.
For the year ended December 31, 2007, cash used by investing activities was $574.9 million compared
to $530.1 million used for 2006. We used $323.9 million to complete eight acquisitions during 2007
and the final payment for NQL Energy Services, Inc. Capital spending of $251.8 million was
primarily related to rental assets associated with the Companys Petroleum Services & Supplies
operations and capital expansion related to increased capacity for manufacturing operations.
For the year ended December 31, 2007, cash provided by financing activities was $149.6 million
compared to $41.1 million in 2006. Cash was provided by financing activities through proceeds from
stock options exercised of $91.3 million, excess tax benefit from exercise of stock options of
$22.9 million and net borrowings of $35.4 million.
We believe cash generated from operations and amounts available under the credit facilities and
from other sources of debt will be sufficient to fund operations, working capital needs, capital
expenditure requirements and financing obligations. We also believe increases in capital
expenditures caused by any need to increase manufacturing capacity can be funded from operations or
through debt financing. In addition, the Company is negotiating to replace the existing $500
million unsecured credit facility with $3 billion of unsecured
credit facilities. We expect the facilities
to consist of a $2 billion five-year revolving credit facility, and a $1 billion, 364-day
revolving credit facility. A portion of the proceeds will be used to finance the Grant Prideco
transaction, with the credit facility closing concurrent with the Grant Prideco transaction
closing.
A summary of the Companys outstanding contractual obligations at December 31, 2007 is as follows
(in millions):
Payment Due by Period | ||||||||||||||||||||
Less than 1 | After 5 | |||||||||||||||||||
Total | Year | 1-3 Years | 4-5 Years | Years | ||||||||||||||||
Total debt |
$ | 890.7 | $ | 152.8 | $ | 33.8 | $ | 703.7 | $ | 0.4 | ||||||||||
Operating leases |
378.6 | 94.4 | 123.5 | 64.6 | 96.1 | |||||||||||||||
Total contractual obligations |
$ | 1,269.3 | $ | 247.2 | $ | 157.3 | $ | 768.3 | $ | 96.5 | ||||||||||
Standby letters of credit |
$ | 1,712.4 | $ | 719.9 | $ | 735.2 | $ | 257.3 | $ | | ||||||||||
As of December 31, 2007, the Company had $ 53.6 million of unrecognized tax benefits. This
represents the tax benefits associated with various tax positions taken, or expected to be taken,
on domestic and international tax returns that have not been recognized in our financial statements
due to uncertainty regarding their resolution. Due to the uncertainty of the timing of future cash
flows associated with these unrecognized tax benefits, we are unable to make reasonably reliable
estimates of the period of cash settlement, if any, with the respective taxing authorities.
Accordingly, unrecognized tax benefits have been excluded from the contractual obligations table
above. For further information related to unrecognized tax benefits, see Note 14, Income Tax, to
the consolidated financial statements included herein.
We intend to pursue additional acquisition candidates, but the timing, size or success of any
acquisition effort and the related potential capital commitments cannot be predicted. The Company
expects to increase its capital spending approximately 20% in 2008 to
exceed $300 million. We
expect to fund future cash acquisitions and capital spending primarily with cash flow from
operations and borrowings, including the unborrowed portion of the credit facility or new debt
issuances, but may also issue additional equity either directly or in connection with acquisitions.
There can be no assurance that additional financing for acquisitions will be available at terms
acceptable to us.
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Inflation has had an impact on certain of our operations in recent years. We believe that the
higher costs for energy, steel and other commodities experienced in 2007 have largely been
mitigated by increased prices and component surcharges for the products we sell. However, higher
steel, labor, energy or other commodity prices may adversely impact future periods.
Critical Accounting Estimates
In preparing the financial statements, we make assumptions, estimates and judgments that affect the
amounts reported. We periodically evaluate our estimates and judgments that are most critical in
nature which are related to revenue recognition under long-term construction contracts; allowance
for doubtful accounts; inventory reserves; impairments of long-lived assets (excluding goodwill);
goodwill impairment and income taxes. Our estimates are based on historical experience and on our
future expectations that we believe are reasonable. The combination of these factors forms the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results are likely to differ from our current estimates and
those differences may be material.
Revenue Recognition under Long-term Construction Contracts
The Company uses the percentage-of-completion method to account for certain long-term construction
contracts in the Rig Technology group. These long-term construction contracts include the
following characteristics:
| the contracts include custom designs for customer specific applications; | ||
| the structural design is unique and requires significant engineering efforts; and | ||
| construction projects often have progress payments. |
This method requires the Company to make estimates regarding the total costs of the project,
progress against the project schedule and the estimated completion date, all of which impact the
amount of revenue and gross margin the Company recognizes in each reporting period. The Company
prepares detailed cost to complete estimates at the beginning of each project, taking into account
all factors considered likely to affect gross margin. Significant projects and their related costs
and profit margins are updated and reviewed at least quarterly by senior management. Factors that
may affect future project costs and margins include shipyard access, weather, production
efficiencies, availability and costs of labor, materials and subcomponents and other factors as
mentioned in Risk Factors. These factors can significantly impact the accuracy of the Companys
estimates and materially impact the Companys future reported earnings.
Historically, the Companys estimates have been reasonably dependable regarding the recognition of
revenues and gross profits on percentage of completion contracts, excluding $21.7 million of losses
recorded in 2005 resulting from changes in cost estimates relating to two rigs delivered to
Kazakhstan as discussed in Managements Discussion and Analysis of Financial Condition and Results
of Operations. Excluding these losses, and based upon an analysis of percentage of completion
contracts for all open contracts outstanding at December 31, 2006 and 2005, adjustments
(representing the differences between the estimated and actual results) to all outstanding
contracts resulted in changes to gross profit margins of 0.3% ($4.3 million on $1.6 billion of
outstanding contracts) and 1.1% ($12.1 million on $1.1 billion of outstanding contracts,
respectively). While the Company believes that its estimates on outstanding contracts at December
31, 2007 and in future periods will continue to be reasonably dependable under percentage of
completion accounting, the factors identified in the preceding paragraph could result in
significant adjustments in future periods. The Company has recorded revenue on outstanding
contracts (on a contract-to-date basis) of $3.8 billion at December 31, 2007.
Allowance for Doubtful Accounts
The determination of the collectibility of amounts due from customer accounts requires the Company
to make judgments regarding future events and trends. Allowances for doubtful accounts are
determined based on a continuous process of assessing the Companys portfolio on an individual
customer and overall basis. This process consists of a thorough review of historical collection
experience, current aging status of the customer accounts, and financial condition of the Companys
customers. Based on a review of these factors, the Company will establish or adjust allowances for
specific customers and the accounts receivable portfolio as a whole. A substantial portion of the
Companys revenues come from international oil companies, international shipyards, international
oilfield service companies, and government-owned or government-controlled oil companies. Therefore,
the Company has significant receivables in many foreign jurisdictions. If worldwide oil and gas
drilling activity or changes in economic conditions in foreign jurisdictions deteriorate, the
creditworthiness of the Companys customers could also deteriorate and they may be unable to pay
these receivables, and additional allowances could be required. At December 31, 2007 and 2006,
allowance for bad debts totaled $44.8 million and $30.4 million, or 2.1% and 1.8% of gross accounts
receivable, respectively.
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Historically, the Companys charge-offs and provisions for the allowance for doubtful accounts have
been immaterial to the Companys consolidated financial statements. However, because of the risk
factors mentioned above, changes in our estimates could become material in future periods.
Inventory Reserves
Inventory is carried at the lower of cost or estimated net realizable value. The Company
determines reserves for inventory based on historical usage of inventory on-hand, assumptions about
future demand and market conditions, and estimates about potential alternative uses, which are
usually limited. The Companys inventory consists of specialized spare parts, work in process, and
raw materials to support ongoing manufacturing operations and the Companys large installed base of
specialized equipment used throughout the oilfield. Customers rely on the Company to stock these
specialized items to ensure that their equipment can be repaired and serviced in a timely manner.
The Companys estimated carrying value of inventory therefore depends upon demand driven by oil and
gas drilling and well remediation activity, which depends in turn upon oil and gas prices, the
general outlook for economic growth worldwide, available financing for the Companys customers,
political stability in major oil and gas producing areas, and the potential obsolescence of various
types of equipment we sell, among other factors. At December 31, 2007 and 2006, inventory reserves
totaled 3.7% and 4.5% of gross inventory, respectively. Recent high demand and a strong outlook
for oilfield equipment sales provide the basis for the Companys December 31, 2007 and 2006
estimates regarding the future usage and realizable value of inventory.
While inventory reserves and accruals have not had a material impact on the Companys financial
results for the periods covered in this report, changes in worldwide oil and gas activity, or the
development of new technologies which make older drilling technologies obsolete, could require the
Company to record additional allowances to reduce the value of its inventory. Such changes in our
estimates could be material under weaker market conditions or outlook.
Impairment of Long-Lived Assets (Excluding Goodwill)
Long-lived assets, which include property, plant and equipment and identified intangible assets,
comprise a significant amount of the Companys total assets. The Company makes judgments and
estimates in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and estimated useful lives.
Additionally, the carrying values of these assets are reviewed for impairment periodically or
whenever events or changes in circumstances indicate that the carrying amounts may not be
recoverable. An impairment loss is recorded in the period in which it is determined that the
carrying amount is not recoverable. This requires the Company to make long-term forecasts of its
future revenues and costs related to the assets subject to review. These forecasts require
assumptions about demand for the Companys products and services, future market conditions and
technological developments. The forecasts are dependent upon assumptions regarding oil and gas
prices, the general outlook for economic growth worldwide, available financing for the Companys
customers, political stability in major oil and gas producing areas, and the potential obsolescence
of various types of equipment we sell, among other factors. Significant and unanticipated changes
to these assumptions or the intended use of these assets could require a provision for impairment
in a future period. There have been no impairment charges of long-lived assets for the years ended
December 31, 2007, 2006 and 2005.
Goodwill Impairment
The
Company has approximately $2.4 billion of goodwill on its consolidated balance sheet as of
December 31, 2007. Generally accepted accounting principles require the Company to test goodwill
for impairment on an annual basis or whenever events or circumstances occur indicating that
goodwill might be impaired. Events or circumstances which could indicate a potential impairment of
goodwill could include (but are not limited to) a significant reduction in worldwide oil and gas
prices or drilling; a significant reduction in profitability or cash flow of oil and gas companies
or drilling contractors; a significant reduction in worldwide well remediation activity; a
significant reduction in capital investment by other oilfield service companies; or a significant
increase in worldwide inventories of oil or gas. The timing and magnitude of any goodwill
impairment charge, which could be material, would depend on the timing and severity of the event or
events triggering the charge and would require a high degree of management judgment.
The Company performs a review of goodwill for impairment annually or earlier if indicators of
potential impairment exist. The annual impairment tests are performed during the fourth quarter of
each year. If it is determined that goodwill is impaired, that impairment is measured based on the
amount by which the book value of goodwill exceeds its implied fair value. The implied fair value
of goodwill and identified intangibles is determined by deducting the fair value of a reporting
units identifiable assets and liabilities from the fair value of that reporting unit as a whole.
Additional impairment assessments may be performed on an interim basis if the Company encounters
events or changes in circumstances that would indicate that, more likely than not, the carrying
amount of goodwill and identified intangibles has been impaired. Fair value of the reporting units
is determined based on
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internal management estimates, using a combination of three methods: discounted cash flow,
comparable companies, and representative transactions. Changes in the assumptions used in the fair
value calculation could result in an estimated reporting unit fair value that is below the carrying
value, which may give rise to an impairment of goodwill. In addition to the annual review, the
Company also tests for impairment should an event occur or circumstances change that may indicate a
reduction in the fair value of a reporting unit below its carrying value. The Company had no
impairment of goodwill for the years ended December 31, 2007, 2006 and 2005.
Income Taxes
The Company is a U.S. registered company and is subject to income taxes in the U.S. The Company
operates through various subsidiaries in a number of countries throughout the world. Income taxes
have been provided based upon the tax laws and rates of the countries in which the Company operates
and income is earned.
The Companys annual tax provision is based on expected taxable income, statutory rates and tax
planning opportunities available in the various jurisdictions in which it operates. The
determination and evaluation of the annual tax provision and tax positions involves the
interpretation of the tax laws in the various jurisdictions in which the Company operates. It
requires significant judgment and the use of estimates and assumptions regarding significant future
events such as the amount, timing and character of income, deductions and tax credits. Changes in
tax laws, regulations, and treaties, foreign currency exchange restrictions or the Companys level
of operations or profitability in each jurisdiction could impact the tax liability in any given
year. The Company also operates in many jurisdictions where the tax laws relating to the pricing
of transactions between related parties are open to interpretation, which could potentially result
in aggressive tax authorities asserting additional tax liabilities with no offsetting tax recovery
in other countries.
The Company maintains liabilities for estimated tax exposures in jurisdictions of operation. The
annual tax provision includes the impact of income tax provisions and benefits for changes to
liabilities that the Company considers appropriate, as well as related interest. Tax exposure
items primarily include potential challenges to intercompany pricing and certain tax credits which
may not ultimately be sustained. These exposures are resolved primarily through the settlement of
audits within these tax jurisdictions or by judicial means. The Company is subject to audits by
federal, state and foreign jurisdictions which may result in proposed assessments. The Company
believes that an appropriate liability has been established for estimated exposures under the
guidance in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which is an
interpretation of the Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. However, actual results may differ materially from these estimates. The Company
reviews these liabilities quarterly and to the extent audits or other events result in an
adjustment to the liability accrued for a prior year, the effect will be recognized in the period
of the event.
The Company currently has recorded valuation allowances that the Company intends to maintain until
it is more likely than not the deferred tax assets will be realized. Other than valuation
allowances associated with tax attributes acquired through acquisitions, income tax expense
recorded in the future will be reduced to the extent of decreases in the Companys valuation
allowances. The realization of remaining deferred tax assets is primarily dependent on future
taxable income. Any reduction in future taxable income including but not limited to any future
restructuring activities may require that the Company record an additional valuation allowance
against deferred tax assets. An increase in the valuation allowance would result in additional
income tax expense in such period and could have a significant impact on future earnings. If a
change in a valuation allowance occurs, which was established in connection with an acquisition,
such adjustment may impact goodwill rather than the income tax provision.
The Company has not provided for deferred taxes on the unremitted earnings of certain subsidiaries
that are permanently reinvested. Should the Company make a distribution from the unremitted
earnings of these subsidiaries, the Company may be required to record additional taxes. Unremitted
earnings of these subsidiaries were $1,580.0 million and $1,116.3 million at December 31, 2007 and
2006, respectively. The Company makes an annual determination whether to permanently reinvest
these earnings. If, as a result of these reassessments, the Company distributes these earnings in
the future, additional tax liability would result, offset by any available foreign tax credits.
The Company does not believe it is possible to reasonably estimate the potential impact of changes
to the assumptions and estimates identified because the resulting change to our tax liability, if
any, is dependent on numerous factors which cannot be reasonably estimated. These include, among
others, the amount and nature of additional taxes potentially asserted by local tax authorities;
the willingness of local tax authorities to negotiate a fair settlement through an administrative
process; the impartiality of the local courts; and the potential for changes in the tax paid to one
country to either produce, or fail to produce, an offsetting tax change in other countries.
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Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 establishes a
framework for fair value measurements in the financial statements by providing a single definition
of fair value, provides guidance on the methods used to estimate fair value and increases
disclosures about estimates of fair value. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the effect, if any, SFAS 157 will have on our
financial disclosures as well as our consolidated financial position, cash flows, and results from
operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans An amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS 158). SFAS 158 requires employers to recognize the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in its statement
of financial position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity for fiscal years ending after
December 15, 2006. The requirement to measure plan assets and benefit obligations as of the end of
the employers fiscal year is effective for fiscal years ending after December 15, 2008. The
Company adopted the provisions of SFAS 158 recognizing the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in the statement of financial position
and recognized changes in the funded status in the year in which they occurred through
comprehensive income effective December 31, 2006 with no material impact on the Consolidated
Financial Statements. We did not elect early adoption of the requirement to measure plan assets
and benefit obligations as of our fiscal year end. See Note 10 of the Notes to the Consolidated
Financial Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 provides entities with an option to measure many
financial assets and liabilities and certain other items at fair value as determined on an
instrument by instrument basis. The Company has not yet evaluated the impact, if any, this
standard might have on the Companys consolidated financial statements once it becomes effective on
January 1, 2008.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R). SFAS 141R
provides revised guidance on how acquirers recognize and measure the consideration transferred,
identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired
in a business combination. SFAS 141R also expands required disclosures surrounding the nature and
financial effects of business combinations. SFAS 141R is effective, on a prospective basis, for
fiscal years beginning after December 15, 2008. The Company does expect that this new standard
will impact certain aspect of its accounting for business combinations on a prospective basis,
including the determination of fair values assigned to certain purchased assets and liabilities.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160). SFAS 160 establishes requirements for ownership interests in subsidiaries
held by parties other than the Company (previously called minority interests) be clearly
identified, presented, and disclosed in the consolidated statement of financial position within
equity, but separate from the parents equity. All changes in the parents ownership interests are
required to be accounted for consistently as equity transactions and any noncontrolling equity
investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS 160 is
effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However,
presentation and disclosure requirements must be retrospectively applied to comparative financial
statements. The Company is currently assessing the impact of SFAS 160 on its consolidated financial
position and results of operations.
ForwardLooking Statements
Some of the information in this document contains, or has incorporated by reference,
forward-looking statements. Statements that are not historical facts, including statements about
our beliefs and expectations, are forward-looking statements. Forward-looking statements typically
are identified by use of terms such as may, will, expect, anticipate, estimate, and
similar words, although some forward-looking statements are expressed differently. You should be
aware that our actual results could differ materially from results anticipated in the
forward-looking statements due to a number of factors, including but not limited to changes in oil
and gas prices, customer demand for our products and worldwide economic activity. You should also
consider carefully the statements under Risk Factors which address additional factors that could
cause our actual results to differ from those set forth in the forward-looking statements. Given
these uncertainties, current or prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. We undertake no obligation to update any such factors or
forward-looking statements to reflect future events or developments.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to changes in foreign currency exchange rates and interest rates. Additional
information concerning each of these matters follows:
Foreign Currency Exchange Rates
We have extensive operations in foreign countries. The net assets and liabilities of these
operations are exposed to changes in foreign currency exchange rates, although such fluctuations
generally do not affect income since their functional currency is typically the local currency.
These operations also have net assets and liabilities not denominated in the functional currency,
which exposes us to changes in foreign currency exchange rates that do impact income. During the
years ended December 31, 2007, 2006 and 2005, the Company reported foreign currency gains (losses)
of ($7.0) million, ($21.0) million, and $2.9 million, respectively. The gains (losses) were
primarily due to exchange rate fluctuations related to monetary asset balances denominated in
currencies other than the functional currency. The 2007 foreign exchange loss is primarily the
result in the strengthening of the following major currencies against the U.S. dollar: British
Pound 1.9%, Canadian Dollar 18.8%, Euro 11.6% and the Norwegian Kroner 13.0%. Further
strengthening of these currencies against the U.S. dollar may continue to create similar losses in
future periods to the extent we maintain net assets and liabilities not denominated in the
functional currency of the countries using the above currencies as their functional currency.
Certain revenues in foreign countries are denominated in U.S. dollars, and therefore, changes in
foreign currency exchange rates impact our earnings to the extent that costs associated with those
U.S. dollar revenues are denominated in the local currency. Similarly, some of our revenues are
denominated in foreign currencies, but have associated U.S. dollar costs, which also gives rise to
foreign currency exchange rate exposure. In order to mitigate that risk, we may utilize foreign
currency forward contracts to better match the currency of our revenues and associated costs. We
do not use foreign currency forward contracts for trading or speculative purposes.
At December 31, 2007, we had entered into foreign currency forward contracts with notional amounts
aggregating $1,024.2 million to hedge cash flow exposure to currency fluctuations in various
foreign currencies. These exposures arise when local currency operating expenses are not in
balance with local currency revenue collections. Based on quoted market prices as of December 31,
2007 and 2006 for contracts with similar terms and maturity dates, we have recorded a gain of $11.2
million and $1.0 million, respectively, to adjust these foreign currency forward contracts to their
fair market value. This gain is included in other comprehensive income in the consolidated balance
sheet. It is expected that $6.4 million of the gain will be reclassified into earnings within the
next 12 months. At December 31, 2007, the Company has cash flow hedges in place through the first quarter of
2011. A gain from ineffectiveness of $4.6 million is included in earnings related to these foreign
currency contracts as of December 31, 2007. Ineffectiveness for 2006 and 2005 was not material.
At December 31, 2007, the Company had foreign currency forward contracts with notional amounts
aggregating $1,579.1 million designated and qualifying as fair value hedges to hedge exposure to
currency fluctuations in various foreign currencies. Based on quoted market prices as of December
31, 2007 and 2006 for contracts with similar terms and maturity dates, we recorded a gain of $79.9
million and $25.0 million, respectively, to adjust these foreign currency forward contracts to
their fair market value. This gain is offset by designated losses on the firm commitments. A loss
from ineffectiveness of ($0.6) million is included in earnings related to these foreign currency
contracts as of December 31, 2007. Ineffectiveness for 2006 and 2005 was not material.
At December 31, 2007, the Company had foreign currency forward contracts with notional amounts
aggregating $279.2 million to offset exposures to the currency fluctuation of nonfunctional
currency balance sheet accounts, primarily consisting of account receivables and account payables,
and are not designated as hedges. Therefore, changes in the fair value of these contracts are
recorded each period in current earnings.
At December 31, 2007, the Company had foreign currency forward contracts with notional amounts
aggregating $1,221.6 million designated and qualifying as net investment hedges of our Norwegian
operations. Based on market prices as of December 31, 2007 for contracts with similar terms and
maturity dates, we have recorded a gain of $7.5 million, net of tax of $4.4 million to adjust these
foreign contracts to their fair market value. This gain is included in other comprehensive income
in the consolidated balance sheet.
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The maturity of the above forward contracts by currency is (in millions):
Hedge Classification | Currency | 2008 | 2009 | 2010 | 2011 | Total | ||||||||||||||||||
Cash Flow |
||||||||||||||||||||||||
DKK | $ | 7.6 | $ | | $ | | $ | | $ | 7.6 | ||||||||||||||
EUR | 31.0 | 35.3 | 11.8 | | 78.1 | |||||||||||||||||||
GBP | 2.9 | 15.5 | | | 18.4 | |||||||||||||||||||
SEK | 0.6 | | | | 0.6 | |||||||||||||||||||
SGD | 0.4 | 0.3 | | | 0.7 | |||||||||||||||||||
USD | 269.6 | 524.9 | 118.9 | 5.4 | 918.8 | |||||||||||||||||||
$ | 312.1 | $ | 576.0 | $ | 130.7 | $ | 5.4 | $ | 1,024.2 | |||||||||||||||
Fair Value |
||||||||||||||||||||||||
EUR | $ | 170.1 | $ | 26.7 | $ | 0.6 | $ | | $ | 197.4 | ||||||||||||||
GBP | 11.7 | | | | 11.7 | |||||||||||||||||||
KRW | 1.0 | | | | 1.0 | |||||||||||||||||||
SGD | 5.9 | 1.3 | | | 7.2 | |||||||||||||||||||
USD | 1,005.0 | 353.4 | 2.1 | 1.3 | 1,361.8 | |||||||||||||||||||
$ | 1,193.7 | $ | 381.4 | $ | 2.7 | $ | 1.3 | $ | 1,579.1 | |||||||||||||||
Balance Sheet |
||||||||||||||||||||||||
EUR | $ | 0.1 | $ | | $ | | $ | | $ | 0.1 | ||||||||||||||
GBP | 0.1 | | | | 0.1 | |||||||||||||||||||
SDG | 0.7 | | | | 0.7 | |||||||||||||||||||
USD | 276.8 | 1.5 | | | 278.3 | |||||||||||||||||||
$ | 277.7 | $ | 1.5 | $ | | $ | | $ | 279.2 | |||||||||||||||
Net Investment |
||||||||||||||||||||||||
CAD | $ | 601.4 | $ | | $ | | $ | | $ | 601.4 | ||||||||||||||
NOK | 620.2 | | | | 620.2 | |||||||||||||||||||
$ | 1,221.6 | $ | | $ | | $ | | $ | 1,221.6 | |||||||||||||||
Total |
$ | 3,005.1 | $ | 958.9 | $ | 133.4 | $ | 6.7 | $ | 4,104.1 | ||||||||||||||
The Company had other financial market risk sensitive instruments denominated in foreign currencies
totaling $87.7 million as of December 31, 2007 excluding trade receivables and payables, which
approximate fair value. These market risk sensitive instruments consisted of cash balances and
overdraft facilities. The Company estimates that a hypothetical 10% movement of all applicable
foreign currency exchange rates on these financial market risk sensitive instruments could affect
net income by $5.7 million.
The counterparties to forward contracts are major financial institutions. The credit ratings and
concentration of risk of these financial institutions are monitored on a continuing basis. In the
unlikely event that the counterparties fail to meet the terms of a foreign currency contract, our
exposure is limited to the foreign currency rate differential.
We assess the functional currencies of our operating units to ensure that the appropriate
currencies are utilized in accordance with the guidance of SFAS No. 52, Foreign Currency
Translation. Effective January 1, 2008, we changed the functional currency of our Rig Technology
unit in Norway from the Norwegian Kroner to the U.S. dollar to more appropriately reflect the
primary economic environment in which they operate. This change was precipitated by significant
changes in the economic facts and circumstances, including: the increased order rate for large
drilling platforms and components technology, the use of our Norway unit as our preferred project
manager of these projects, increasing revenue and cost base in U.S. dollars, and the implementation
of an international cash pool. As a Norwegian Kroner functional unit, Norway was subject to
increasing foreign currency exchange risk as a result of these changes in its economic environment
and was dependent upon significant hedging transactions to offset its non-functional currency
positions. At December 31, 2007, our Norway operations had derivatives with $2,550.5 million in
notional value with a fair value of $91.3 million as compared to $1,394.6 million and $48.5 million
at December 31, 2006, respectively, to mitigate foreign currency exchange risk against the U.S.
dollar, our reporting currency. Effective with the change in the functional currency, the Company
terminated these hedges. The related net position of $108.8 million associated with the terminated
hedges will be recognized into earnings in the future periods the forecasted transactions affect
earnings. The Company has subsequent to January 1, 2008, entered into new hedges to cover the
exposures as a result of the changes to U.S. dollar functional.
48
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Interest Rate Risk
At
December 31, 2007, our long term borrowings consisted of $100 million in 7.5% Senior Notes, $150
million in 6.5% Senior Notes, $200 million in 7.25% Senior Notes, $200 million in 5.65% Senior
Notes and $150 million in 5.5% Senior Notes. We had $90.7 million of other borrowings at December
31, 2007. We occasionally have borrowings under our other credit facilities, and a portion of
these borrowings could be denominated in multiple currencies which could expose us to market risk
with exchange rate movements. These instruments carry interest at a pre-agreed upon percentage
point spread from either LIBOR, NIBOR or EURIBOR, or at the prime interest rate. Under our credit
facilities, we may, at our option, fix the interest rate for certain borrowings based on a spread
over LIBOR, NIBOR or EURIBOR for 30 days to 6 months. Our objective is to maintain a portion of our
debt in variable rate borrowings for the flexibility obtained regarding early repayment without
penalties and lower overall cost as compared with fixed-rate borrowings.
As of December 31, 2007, we had three interest rate swap agreements with an aggregate notional
amount of $100 million associated with our 2008 Senior Notes. Under this agreement, we receive
interest at a fixed rate of 7.5% and pay interest at a floating rate of six-month LIBOR plus a
weighted average spread of approximately 4.675%. The swap agreements will settle semi-annually and
will terminate in February 2008. The swap agreements originally entered into by Varco were
recorded at their fair market value at the date of the Merger and no longer qualify as effective
hedges under FAS 133. The swaps have been marked-to-market for periods subsequent to the Merger
and any change in their value has been reported as an adjustment to interest expense. The change
in the fair market value of the interest swap agreements resulted in a $0.3 million decrease in
interest expense for the period ended December 31, 2007.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Attached hereto and a part of this report are financial statements and supplementary data listed in
Item 15.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
(i) Evaluation of disclosure controls and procedures
As required by SEC Rule 13a-15(b), we have evaluated, under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report. Our disclosure controls and procedures are designed to provide reasonable
assurance that the information required to be disclosed by the Company in reports that it files
under the Exchange Act is accumulated and communicated to the Companys management, including our
principal executive officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure and is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC. Our principal executive officer and
principal financial officer have concluded that our current disclosure controls and procedures were
effective as of December 31, 2007 at the reasonable assurance level.
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002, our Chief Executive Officer and Chief
Financial Officer have provided certain certifications to the Securities and Exchange Commission.
These certifications are included herein as Exhibits 31.1 and 31.2.
(ii) Internal Control Over Financial Reporting
(a) Managements annual report on internal control over financial reporting.
The Companys management report on internal control over financial reporting is set forth in this
annual report on Page 55 and is incorporated herein by reference.
(b) Changes in internal control
49
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There were no changes in the Companys internal control over financial reporting that occurred
during the Companys last fiscal quarter covered by this report that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
ITEM 9B. | OTHER INFORMATION |
None.
50
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PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Incorporated by reference to the definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders.
ITEM 11. | EXECUTIVE COMPENSATION |
Incorporated by reference to the definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Incorporated by reference to the definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of our fiscal year ended December 31, 2007, with
respect to compensation plans under which our common stock may be issued:
Number of securities | ||||||||||||
remaining available for | ||||||||||||
Number of securities to be | future issuance under equity | |||||||||||
issued upon exercise of | Weighted-average exercise | compensation plans | ||||||||||
outstanding options, warrants | price of outstanding | (excluding securities | ||||||||||
and rights | options, warrant and rights | reflected in column (a) (c)) | ||||||||||
Plan Category | (a) | (b) | (1) | |||||||||
Equity compensation
plans approved by
security holders |
8,409,702 | $ | 29.12 | 7,014,404 | ||||||||
Equity compensation
plans not approved
by security holders |
| | | |||||||||
Total |
8,409,702 | $ | 29.12 | 7,014,404 | ||||||||
(1) | Shares could be issued other than upon the exercise of stock options, warrants or rights; however, none are anticipated during 2008. |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Incorporated by reference to the definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Incorporated by reference to the definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders.
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Table of Contents
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Financial Statements and Exhibits
(1) | Financial Statements | ||
The following financial statements are presented in response to Part II, Item 8: |
Page | ||
Consolidated Balance Sheets |
58 | |
Consolidated Statements of Income |
59 | |
Consolidated Statements of Cash Flows |
60 | |
Consolidated Statements of Stockholders Equity and Comprehensive Income |
61 | |
Notes to Consolidated Financial Statements |
62 |
(2) | Financial Statement Schedule |
Schedule II Valuation and Qualifying Accounts |
87 |
All schedules, other than Schedule II, are omitted because they are not applicable, not required or
the information is included in the financial statements or notes thereto.
(3) | Exhibits |
2.1
|
Amended and Restated Agreement and Plan of Merger, effective as of August 11, between National-Oilwell, Inc. and Varco International, Inc. (4). | |
2.2
|
Agreement and Plan of Merger, effective as of December 16, 2007, between National Oilwell Varco, Inc., NOV Sub, Inc., and Grant Prideco, Inc. (9) | |
3.1
|
Amended and Restated Certificate of Incorporation of National-Oilwell, Inc. (Exhibit 3.1) (1). | |
3.2
|
Amended and Restated By-laws of National Oilwell Varco, Inc. (Exhibit 3.1) (10). | |
10.1
|
Employment Agreement dated as of January 1, 2002 between Merrill A. Miller, Jr. and National Oilwell. (Exhibit 10.1) (2). | |
10.2
|
Employment Agreement dated as of January 1, 2002 between Dwight W. Rettig and National Oilwell, with similar agreement with Mark A. Reese. (Exhibit 10.2) (2). | |
10.3
|
Form of Amended and Restated Executive Agreement of Clay C. Williams. (Exhibit 10.12) (3). | |
10.4
|
National Oilwell Varco Long-Term Incentive Plan (5)*. | |
10.5
|
Form of Employee Stock Option Agreement (Exhibit 10.1) (7) | |
10.6
|
Form of Non-Employee Director Stock Option Agreement (Exhibit 10.2) (7). | |
10.7
|
Amended and Restated Credit Agreement, dated as of June 21, 2005, among National Oilwell Varco, Inc., the financial institutions signatory thereto, including Wells Fargo Bank, National Association, in their capacities as lenders thereunder, as US administrative agent for the lenders, as Lead Arranger and Sole Book Runner, DnB NOR Bank ASA, as Norwegian Administrative Agent, DnB NOR Bank ASA and the Bank of Nova Scotia as Co-Documentation Agents, and Comerica Bank and JPMorgan Chase Bank, N.A. as Co-Syndication Agents. (Exhibit 10.1) (6). | |
10.8
|
Form of Performance-Based Restricted Stock (18 Month) Agreement (Exhibit 10.1) (8). | |
10.9
|
Form of Performance-Based Restricted Stock (36 Month) Agreement (Exhibit 10.2) (8). |
52
Table of Contents
21.1
|
Subsidiaries of the Registrant | |
23.1
|
Consent of Ernst & Young LLP | |
24.1
|
Power of Attorney (included on signature page hereto). | |
31.1
|
Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended | |
31.2
|
Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended | |
32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Compensatory plan or arrangement for management or others | |
(1) | Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on August 11, 2000. | |
(2) | Filed as an Exhibit to our Annual Report on Form 10-K filed on March 28, 2002. | |
(3) | Filed as an Exhibit to Varco International, Inc.s Quarterly Report on Form 10-Q filed on May 6, 2004. | |
(4) | Filed as Annex A to our Registration Statement on Form S-4 filed on September 16, 2004. | |
(5) | Filed as Annex D to our Amendment No. 1 to Registration Statement on Form S-4 filed on January 31, 2005. | |
(6) | Filed as an Exhibit to our Current Report on Form 8-K filed on June 23, 2005. | |
(7) | Filed as an Exhibit to our Current Report on Form 8-K filed on February 23, 2006. | |
(8) | Filed as an Exhibit to our Current Report on Form 8-K filed on March 27, 2007. | |
(9) | Filed as Annex A to our Registration Statement on Form S-4 filed on January 28, 2008. | |
(10) | Filed as an Exhibit to our Current Report on Form 8-K filed on February 21, 2008. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NATIONAL OILWELL VARCO, INC. |
||||
Dated: February 28, 2008 | By: | /s/ MERRILL A. MILLER, JR. | ||
Merrill A. Miller, Jr. | ||||
Chairman, President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Each person whose signature appears below in so signing, constitutes and appoints Merrill A.
Miller, Jr. and Clay C. Williams, and each of them acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to execute and cause to be filed with the Securities and Exchange
Commission any and all amendments to this report, and in each case to file the same, with all
exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all
that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue
hereof.
Signature | Title | Date | ||
/s/ MERRILL A. MILLER, JR.
|
Chairman, President and Chief Executive Officer | February 28, 2008 | ||
/s/ CLAY C. WILLIAMS
|
Senior Vice President and Chief Financial Officer | February 28, 2008 | ||
/s/ ROBERT W. BLANCHARD
|
Vice President, Corporate Controller and Chief Accounting Officer | February 28, 2008 | ||
/s/ GREG L. ARMSTRONG
|
Director | February 28, 2008 | ||
Greg L. Armstrong |
||||
/s/ ROBERT E. BEAUCHAMP
|
Director | February 28, 2008 | ||
Robert E. Beauchamp |
||||
/s/ BEN A. GUILL
|
Director | February 28, 2008 | ||
Ben A. Guill |
||||
/s/ DAVID D. HARRISON
|
Director | February 28, 2008 | ||
David D. Harrison |
||||
/s/ ROGER L. JARVIS
|
Director | February 28, 2008 | ||
Roger L. Jarvis |
||||
/s/ ERIC L. MATTSON
|
Director | February 28, 2008 | ||
Eric L. Mattson |
||||
/s/ JEFFERY A. SMISEK
|
Director | February 28, 2008 | ||
Jeffery A. Smisek |
54
Table of Contents
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
National Oilwell Varco, Inc.s management is responsible for establishing and maintaining adequate
internal control over financial reporting. National Oilwell Varco, Inc.s internal control system
was 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.
Internal control over financial reporting cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
Management has used the framework set forth in the report entitled Internal ControlIntegrated
Framework published by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission to evaluate the effectiveness of the Companys internal control over financial
reporting. Management has concluded that the Companys internal control over financial reporting
was effective as of December 31, 2007.
The
effectiveness of our internal control over financial reporting as of
December 31, 2007, has been audited by Ernst & Young
LLP, the independent registered public accounting firm who also has
audited the Companys consolidated financial statements included
in this Annual Report on Form 10-K.
/s/ Merrill A. Miller, Jr.
|
||
Chairman, President and Chief Executive Officer |
||
/s/ Clay C. Williams
|
||
Senior Vice President and
Chief Financial Officer |
||
Houston, Texas |
||
February 28, 2008 |
55
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
National Oilwell Varco, Inc.
National Oilwell Varco, Inc.
We have audited the accompanying consolidated balance sheets of National Oilwell Varco, Inc. as of
December 31, 2007 and 2006 and the related consolidated statements of income, stockholders equity
and comprehensive income, and cash flows for each of the three years in the period ended December
31, 2007. Our audits also included the financial statement schedule listed in the index at Item
15(a). These financial statements and schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of National Oilwell Varco, Inc. at December
31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2007, in conformity with U.S generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As
discussed in Note 14 to the consolidated financial statements, effective January 1, 2007, the
Company adopted FASB Interpretations FIN 48: Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 and, as discussed
in Note 2 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based
Payment, and, as discussed in Note 10, effective December 31, 2006
the Company adopted Statement of Financial Accounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106, and 132(R).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), National Oilwell Varco, Inc.s internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 28, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 28, 2008
February 28, 2008
56
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
National Oilwell Varco, Inc.
National Oilwell Varco, Inc.
We have
audited National Oilwell Varco, Inc.s internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
National Oilwell Varco, Inc.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 Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys 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
companys 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 companys 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.
In our
opinion, National Oilwell Varco, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of National
Oilwell Varco, Inc. as of
December 31, 2007 and 2006 and the related consolidated
statements of income, stockholders equity,
and cash flows for each of the three years in the period ended December 31, 2007, and our report
dated February 28, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 28, 2008
February 28, 2008
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
December 31, | ||||||||
2007 | 2006 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,841.8 | $ | 957.4 | ||||
Receivables, net |
2,099.8 | 1,614.6 | ||||||
Inventories, net |
2,574.7 | 1,828.8 | ||||||
Costs in excess of billings |
643.5 | 308.9 | ||||||
Deferred income taxes |
131.5 | 101.6 | ||||||
Prepaid and other current assets |
302.5 | 154.3 | ||||||
Total current assets |
7,593.8 | 4,965.6 | ||||||
Property, plant and equipment, net |
1,197.3 | 1,022.1 | ||||||
Deferred income taxes |
55.6 | 56.1 | ||||||
Goodwill |
2,445.1 | 2,244.7 | ||||||
Intangibles, net |
774.1 | 705.2 | ||||||
Other assets |
49.0 | 25.6 | ||||||
$ | 12,114.9 | $ | 9,019.3 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 604.0 | $ | 505.2 | ||||
Accrued liabilities |
1,761.4 | 1,420.2 | ||||||
Billings in excess of costs |
1,396.1 | 564.4 | ||||||
Current portion of long-term debt and short-term borrowings |
152.8 | 5.6 | ||||||
Accrued income taxes |
112.4 | 169.8 | ||||||
Total current liabilities |
4,026.7 | 2,665.2 | ||||||
Long-term debt |
737.9 | 834.7 | ||||||
Deferred income taxes |
564.3 | 389.0 | ||||||
Other liabilities |
61.8 | 71.4 | ||||||
Total liabilities |
5,390.7 | 3,960.3 | ||||||
Commitments and contingencies |
||||||||
Minority interest |
62.8 | 35.5 | ||||||
Stockholders equity: |
||||||||
Common stock par value $.01; 356,867,498 and 351,143,326 shares
issued and outstanding at December 31, 2007 and December 31, 2006 |
3.6 | 3.5 | ||||||
Additional paid-in capital |
3,617.2 | 3,460.0 | ||||||
Accumulated other comprehensive income |
195.0 | 46.1 | ||||||
Retained earnings |
2,845.6 | 1,513.9 | ||||||
6,661.4 | 5,023.5 | |||||||
$ | 12,114.9 | $ | 9,019.3 | |||||
The accompanying notes are an integral part of these statements.
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Revenue: |
||||||||||||
Sales |
$ | 7,873.3 | $ | 5,472.5 | $ | 3,605.5 | ||||||
Services |
1,915.7 | 1,553.3 | 1,039.0 | |||||||||
Total |
9,789.0 | 7,025.8 | 4,644.5 | |||||||||
Cost of revenue: |
||||||||||||
Cost of sales |
5,675.3 | 4,230.4 | 2,905.1 | |||||||||
Cost of services |
1,283.5 | 1,034.8 | 752.2 | |||||||||
Total |
6,958.8 | 5,265.2 | 3,657.3 | |||||||||
Gross profit |
2,830.2 | 1,760.6 | 987.2 | |||||||||
Selling, general, and administrative |
785.8 | 641.6 | 478.7 | |||||||||
Integration costs |
| 7.9 | 31.7 | |||||||||
Operating profit |
2,044.4 | 1,111.1 | 476.8 | |||||||||
Interest and financial costs |
(50.3 | ) | (48.7 | ) | (52.9 | ) | ||||||
Interest income |
52.6 | 18.1 | 4.9 | |||||||||
Other income (expense), net |
(17.8 | ) | (31.3 | ) | 1.2 | |||||||
Income before income taxes and minority interest |
2,028.9 | 1,049.2 | 430.0 | |||||||||
Provision for income taxes |
675.8 | 355.7 | 138.9 | |||||||||
Income before minority interest |
1,353.1 | 693.5 | 291.1 | |||||||||
Minority interest in income of consolidated subsidiaries |
16.0 | 9.5 | 4.2 | |||||||||
Net income |
$ | 1,337.1 | $ | 684.0 | $ | 286.9 | ||||||
Net income per share: |
||||||||||||
Basic |
$ | 3.77 | $ | 1.95 | $ | 0.92 | ||||||
Diluted |
$ | 3.76 | $ | 1.93 | $ | 0.91 | ||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
354.4 | 350.4 | 312.8 | |||||||||
Diluted |
355.4 | 353.6 | 316.5 | |||||||||
The accompanying notes are an integral part of these statements.
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flow from operating activities: |
||||||||||||
Net income |
$ | 1,337.1 | $ | 684.0 | $ | 286.9 | ||||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||||||
Depreciation and amortization |
214.1 | 160.6 | 114.6 | |||||||||
Stock-based compensation |
43.1 | 31.2 | 15.6 | |||||||||
Tax benefit from exercise of nonqualified stock options |
| | 29.7 | |||||||||
Excess benefit from the exercise of stock options |
(22.9 | ) | (13.5 | ) | | |||||||
Other |
63.8 | 27.2 | 3.1 | |||||||||
Changes in assets and liabilities, net of acquisitions: |
||||||||||||
Receivables |
(464.8 | ) | (442.1 | ) | (293.9 | ) | ||||||
Inventories |
(757.6 | ) | (619.9 | ) | (215.4 | ) | ||||||
Costs in excess of billings |
(334.6 | ) | 33.0 | (131.1 | ) | |||||||
Prepaid and other current assets |
(143.6 | ) | (101.7 | ) | (8.6 | ) | ||||||
Accounts payable |
84.2 | (93.5 | ) | 68.1 | ||||||||
Billings in excess of costs |
831.6 | 466.4 | 94.5 | |||||||||
Other assets/liabilities, net |
337.6 | 1,085.0 | 114.0 | |||||||||
Net cash provided by operating activities |
1,188.0 | 1,216.7 | 77.5 | |||||||||
Cash flow from investing activities: |
||||||||||||
Purchases of property, plant and equipment |
(251.8 | ) | (200.4 | ) | (105.0 | ) | ||||||
Cash acquired in Varco merger, net |
| | 163.5 | |||||||||
Business acquisitions, net of cash acquired |
(323.9 | ) | (329.7 | ) | (16.0 | ) | ||||||
Other |
0.8 | | (4.5 | ) | ||||||||
Net cash provided (used) by investing activities |
(574.9 | ) | (530.1 | ) | 38.0 | |||||||
Cash flow from financing activities: |
||||||||||||
Borrowing against lines of credit and other debt |
47.0 | 30.0 | 418.8 | |||||||||
Payments against lines of credit and other debt |
(11.6 | ) | (35.1 | ) | (571.1 | ) | ||||||
Excess tax benefit from exercise of stock options |
22.9 | 13.5 | | |||||||||
Proceeds from stock options exercised |
91.3 | 32.7 | 111.9 | |||||||||
Net cash provided (used) by financing activities |
149.6 | 41.1 | (40.4 | ) | ||||||||
Effect of exchange rate changes on cash |
121.7 | 20.3 | (8.4 | ) | ||||||||
Net increase in cash and cash equivalents |
884.4 | 748.0 | 66.7 | |||||||||
Cash and cash equivalents, beginning of period |
957.4 | 209.4 | 142.7 | |||||||||
Cash and cash equivalents, end of period |
$ | 1,841.8 | $ | 957.4 | $ | 209.4 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash payments during the period for: |
||||||||||||
Interest |
$ | 56.8 | $ | 56.2 | $ | 61.5 | ||||||
Income taxes |
$ | 703.4 | $ | 272.4 | $ | 88.3 |
The accompanying notes are an integral part of these statements.
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(In millions)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(In millions)
Accumulated | ||||||||||||||||||||||||||||
Additional | Unearned | Other | ||||||||||||||||||||||||||
Shares | Common | Paid in | Stock-Based | Comprehensive | Retained | |||||||||||||||||||||||
Outstanding | Stock | Capital | Compensation | Income (Loss) | Earnings | Total | ||||||||||||||||||||||
Balance at December 31, 2004 |
172.0 | $ | 1.7 | $ | 692.1 | $ | | $ | 33.4 | $ | 543.0 | $ | 1,270.2 | |||||||||||||||
Net income |
| | | | | 286.9 | 286.9 | |||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||
Currency translation adjustments |
| | | | (50.3 | ) | | (50.3 | ) | |||||||||||||||||||
Derivative financial instruments |
| | | | (8.5 | ) | | (8.5 | ) | |||||||||||||||||||
Change in defined benefit plans |
| | | | 3.6 | | 3.6 | |||||||||||||||||||||
Comprehensive income |
231.7 | |||||||||||||||||||||||||||
Stock issued and stock options
assumed for acquisition |
168.0 | 1.7 | 2,565.6 | (32.1 | ) | | | 2,535.2 | ||||||||||||||||||||
Amortization of unearned
stock-based compensation |
| | | 15.6 | | | 15.6 | |||||||||||||||||||||
Common stock issued |
8.7 | 0.1 | 111.7 | | | | 111.8 | |||||||||||||||||||||
Tax benefit of options exercised |
| | 29.7 | | | | 29.7 | |||||||||||||||||||||
Balance at December 31, 2005 |
348.7 | $ | 3.5 | $ | 3,399.1 | $ | (16.5 | ) | $ | (21.8 | ) | $ | 829.9 | $ | 4,194.2 | |||||||||||||
Net income |
| | | | | 684.0 | 684.0 | |||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||
Currency translation adjustments |
| | | | 66.8 | | 66.8 | |||||||||||||||||||||
Derivative financial instruments |
| | | | 8.0 | | 8.0 | |||||||||||||||||||||
Change in defined benefit plans |
| | | | (6.6 | ) | | (6.6 | ) | |||||||||||||||||||
Comprehensive income |
752.2 | |||||||||||||||||||||||||||
Adoption of FAS158, net of tax |
| | | | (0.3 | ) | | (0.3 | ) | |||||||||||||||||||
Adoption of FAS123(R) |
| | (16.5 | ) | 16.5 | | | | ||||||||||||||||||||
Stock-based compensation expense |
| | 31.2 | | | | 31.2 | |||||||||||||||||||||
Common stock issued |
2.4 | | 32.7 | | | | 32.7 | |||||||||||||||||||||
Tax benefit of options exercised |
| | 13.5 | | | | 13.5 | |||||||||||||||||||||
Balance at December 31, 2006 |
351.1 | $ | 3.5 | $ | 3,460.0 | $ | | $ | 46.1 | $ | 1,513.9 | $ | 5,023.5 | |||||||||||||||
Net income |
| | | | | 1,337.1 | 1,337.1 | |||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||
Currency translation adjustments |
| | | | 136.6 | | 136.6 | |||||||||||||||||||||
Derivative financial instruments |
| | | | 17.7 | | 17.7 | |||||||||||||||||||||
Change in defined benefit plans |
| | | | (5.4 | ) | | (5.4 | ) | |||||||||||||||||||
Comprehensive income |
1,486.0 | |||||||||||||||||||||||||||
Adoption of FIN48 |
| | | | | (5.4 | ) | (5.4 | ) | |||||||||||||||||||
Stock-based compensation expense |
| | 43.1 | | | | 43.1 | |||||||||||||||||||||
Common stock issued |
4.8 | 0.1 | 91.2 | | | | 91.3 | |||||||||||||||||||||
Tax benefit of options exercised |
| | 22.9 | | | | 22.9 | |||||||||||||||||||||
Balance at December 31, 2007 |
355.9 | $ | 3.6 | $ | 3,617.2 | $ | | $ | 195.0 | $ | 2,845.6 | $ | 6,661.4 | |||||||||||||||
The accompanying notes are an integral part of these statements.
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NATIONAL OILWELL VARCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Nature of Business
We design, construct, manufacture and sell comprehensive systems, components, and products used in
oil and gas drilling and production, provide oilfield services and supplies, and distribute
products and provide supply chain integration services to the upstream oil and gas industry. Our
revenues and operating results are directly related to the level of worldwide oil and gas drilling
and production activities and the profitability and cash flow of oil and gas companies, drilling
contractors and oilfield service companies, which in turn are affected by current and anticipated
prices of oil and gas. Oil and gas prices have been and are likely to continue to be volatile.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of National Oilwell Varco,
Inc. and its majority-owned subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation. Investments that are not wholly-owned, but where we exercise
control, are fully consolidated with the equity held by minority owners and their portion of net
income (loss) reflected as minority interest in the accompanying consolidated financial statements.
Investments in unconsolidated affiliates, over which we exercise significant influence, but not
control, are accounted for by the equity method. Investments in which we exercise no control or
significant influence would be accounted for under the cost method. Certain reclassifications have
been made to the 2006 and 2005 consolidated financial statements in order for them to conform with
the 2007 presentation.
2. Summary of Significant Accounting Policies
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash equivalents, receivables, and
payables approximated fair value because of the relatively short maturity of these instruments.
Cash equivalents include only those investments having a maturity date of three months or less at
the time of purchase. The carrying values of other financial instruments approximate their
respective fair values.
Derivative Financial Instruments
We record all derivative financial instruments at their fair value in our consolidated balance
sheet. Except for certain balance sheet hedges and interest rate swap agreements discussed below,
all derivative financial instruments we hold are designated as either cash flow or fair value
hedges and are highly effective in offsetting movements in the underlying risks. Accordingly,
gains and losses from changes in the fair value of designated derivative financial instruments are
deferred and recognized in earnings as revenues or costs of sales as the underlying transactions
occur. Any ineffective portion of the change in the fair value is recorded in earnings as
incurred.
We use foreign currency forward contracts to mitigate our exposure to changes in foreign currency
exchange rates on recognized nonfunctional currency monetary accounts, forecasted transactions and
firm sale and purchase commitments to better match the local currency cost components of
non-functional currency transactions. Such arrangements typically have terms between two and 24
months, but may have longer terms depending on the project and our backlog. We may also use
interest rate contracts to mitigate our exposure to changes in interest rates on anticipated
long-term debt issuances. We do not use derivative financial instruments for trading or
speculative purposes.
At December 31, 2007, we had entered into foreign currency forward contracts with notional amounts
aggregating $1,024.2 million designated and qualifying as cash flow hedges to hedge exposure to
currency fluctuations in various foreign currencies. These exposures arise when local currency
operating expenses are not in balance with local currency revenue collections. Based on quoted
market prices as of December 31, 2007 for contracts with similar terms and maturity dates, we have
recorded a gain of $11.2 million, net of tax of $4.0 million, to adjust these foreign currency
forward contracts to their fair market value. This gain is included in other comprehensive income
in the consolidated balance sheet. It is expected that $6.4 million of this gain will be
reclassified into earnings within the next 12 months. At
December 31, 2007, the Company has cash flow hedges
in place through the first quarter of 2011. A gain from ineffectiveness of $4.6 million is
included in earnings related to these foreign currency contracts for the year ending December 31,
2007. Ineffectiveness for 2006 and 2005 was not material.
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At December 31, 2007, the Company had foreign currency forward contracts with notional amounts
aggregating $1,579.1 million designated and qualifying as fair value hedges to hedge exposure to
currency fluctuations in various foreign currencies. Based on quoted market prices as of December
31, 2007 for contracts with similar terms and maturity dates, we recorded a gain of $79.9 million
to adjust these foreign currency forward contracts to their fair market value. This gain offsets
designated losses on firm commitments. At December 31, 2007, the Company has fair value hedges in place
through the first quarter of 2011. A loss from ineffectiveness of ($0.6) million is included in
earnings related to these foreign currency contracts for the year ending December 31, 2007.
Ineffectiveness for 2006 and 2005 was not material.
At December 31, 2007, the Company had foreign currency forward contracts with notional amounts
aggregating $279.2 million to offset exposures to currency fluctuation of nonfunctional currency
balance sheet accounts, primarily consisting of accounts receivable and accounts payable and are
not designated as hedges. Therefore, changes in the fair value of these contracts are recorded
each period in current earnings.
At December 31, 2007, the Company had foreign currency forward contracts with notional amounts
aggregating $1,221.6 million designated and qualifying as net investment hedges of our Norwegian
operations. Based on market prices as of December 31, 2007 for contracts with similar terms and
maturity dates, we have recorded a gain of $7.5 million, net of tax of $4.4 million to adjust these
foreign contracts to their fair market value. This gain is included in other comprehensive income
in the consolidated balance sheet and was settled in 2008.
We assess the functional currencies of our operating units to ensure that the appropriate
currencies are utilized in accordance with the guidance of SFAS No. 52, Foreign Currency
Translation. Effective January 1, 2008, we changed the functional currency of our Rig Technology
unit in Norway from the Norwegian Kroner to the U.S. dollar to more appropriately reflect the
primary economic environment in which they operate. This change was precipitated by significant
changes in the economic facts and circumstances including, the increased order rate for large
drilling platforms and components technology, the use of our Norway unit as our preferred project
manager of these projects, increasing revenue and cost base in U.S. dollars, and the implementation
of an international cash pool. As a Norwegian Kroner functional unit, Norway was subject to
increasing foreign currency exchange risk as a result of these changes in its economic environment
and was dependent upon significant hedging transactions to offset its non-functional currency
positions. At December 31, 2007, our Norway operations had derivatives with $2,550.5 million in
notional value with a fair value of $91.3 million as compared to $1,394.6 million and $48.5 million
at December 31, 2006, respectively, to mitigate foreign currency exchange risk against the U.S.
dollar, our reporting currency. Effective with the change in the functional currency the Company
terminated these hedges, the related net position of $108.8 million associated with the terminated
hedges will be recognized into earnings in the future period(s) the forecasted transactions affect
earnings.
Inventories
Inventories consist of raw materials, work-in-process and oilfield and industrial finished
products, manufactured equipment and spare parts. Inventories are stated at the lower of cost or
market using the first-in, first-out or average cost methods. Allowances for excess and obsolete
inventories are determined based on our historical usage of inventory on-hand as well as our future
expectations related to our installed base and the development of new products. The allowance,
which totaled $99.3 million and $86.1 million at December 31, 2007 and 2006, is the amount
necessary to reduce the cost of the inventory to its estimated realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major improvements that
extend the lives of property and equipment are capitalized while minor replacements, maintenance
and repairs are charged to operations as incurred. Disposals are removed at cost less accumulated
depreciation with any resulting gain or loss reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of individual items. Depreciation
expense was $153.1 million, $119.2 million and $83.0 million for the years ended December 31, 2007,
2006 and 2005. The estimated useful lives of the major classes of property, plant and equipment
are included in Note 6 to the consolidated financial statements.
Long-lived Assets
We record impairment losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of those assets. The carrying value of
assets used in operations that is not recoverable is reduced to fair value if lower than carrying
value. In determining the fair market value of the assets, we consider market trends and recent
transactions involving sales of similar assets, or when not available, discounted cash flow
analysis.
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Intangible Assets
On at least an annual basis, we assess whether goodwill is impaired. Our annual impairment tests
are performed at the beginning of the fourth quarter of each year and have indicated no impairment.
If we determine that goodwill is impaired, we measure that impairment based on the amount by
which the book value of goodwill exceeds its implied fair value. The implied fair value of goodwill
is determined by deducting the fair value of a reporting units identifiable assets and liabilities
from the fair value of that reporting unit as a whole. Additional impairment assessments may be
performed on an interim basis if we encounter events or changes in circumstances that would
indicate that, more likely than not, the carrying amount of goodwill has been impaired. Fair value
of the reporting units is determined based on internal management estimates using a combination of
three methods: discounted cash flows, comparable companies and representative transactions.
Goodwill is identified by segment as follows (in millions):
Petroleum | ||||||||||||||||||||
Rig | Services & | Distribution | Corporate / | |||||||||||||||||
Technology | Supplies | Services | Eliminations | Total | ||||||||||||||||
Balance December 31, 2005 |
$ | 1,117.2 | $ | 959.2 | $ | 35.0 | $ | 6.3 | $ | 2,117.7 | ||||||||||
Purchase price and other adjustments |
(14.3 | ) | (6.9 | ) | | | (21.2 | ) | ||||||||||||
Goodwill acquired during period |
37.8 | 79.0 | | | 116.8 | |||||||||||||||
Translation adjustments |
27.6 | 3.6 | 0.2 | | 31.4 | |||||||||||||||
Balance December 31, 2006 |
1,168.3 | 1,034.9 | 35.2 | 6.3 | 2,244.7 | |||||||||||||||
Purchase price and other adjustments |
(27.9 | ) | 29.8 | | | 1.9 | ||||||||||||||
Goodwill acquired during period |
44.8 | 96.8 | | | 141.6 | |||||||||||||||
Translation adjustments |
45.5 | 7.5 | 3.9 | | 56.9 | |||||||||||||||
Balance December 31, 2007 |
$ | 1,230.7 | $ | 1,169.0 | $ | 39.1 | $ | 6.3 | $ | 2,445.1 | ||||||||||
During 2006 we recorded adjustments reducing goodwill by $22.1 million related to the finalization
of Varco purchase accounting.
Identified intangible assets with determinable lives consist primarily of customer relationships,
trademarks, trade names, patents, and technical drawings acquired in acquisitions, and are being
amortized on a straight-line basis over the estimated useful lives of 2-30 years. Amortization
expense of identified intangibles is expected to be approximately $60 million in each of the next
five years.
Identified intangible assets are identified by segment as follows (in millions):
Petroleum | ||||||||||||||||||||
Rig | Services & | Distribution | Corporate / | |||||||||||||||||
Technology | Supplies | Services | Eliminations | Total | ||||||||||||||||
Balance December 31, 2005 |
$ | 278.5 | $ | 330.8 | $ | 2.2 | $ | | $ | 611.5 | ||||||||||
Additions to intangible assets |
0.5 | 130.0 | | | 130.5 | |||||||||||||||
Amortization |
(18.0 | ) | (22.7 | ) | (0.3 | ) | | (41.0 | ) | |||||||||||
Translation |
3.2 | 1.0 | | | 4.2 | |||||||||||||||
Balance December 31, 2006 |
264.2 | 439.1 | 1.9 | | 705.2 | |||||||||||||||
Additions to intangible assets |
38.7 | 75.5 | | | 114.2 | |||||||||||||||
Amortization |
(20.7 | ) | (39.6 | ) | (0.3 | ) | | (60.6 | ) | |||||||||||
Translation |
6.6 | 8.4 | 0.3 | | 15.3 | |||||||||||||||
Balance December 31, 2007 |
$ | 288.8 | $ | 483.4 | $ | 1.9 | $ | | $ | 774.1 | ||||||||||
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Identified intangible assets by major classification consist of the following (in millions):
Accumulated | ||||||||||||
Gross | Amortization | Net Book Value | ||||||||||
December 31, 2007: |
||||||||||||
Customer relationships |
$ | 554.1 | $ | (81.9 | ) | $ | 472.2 | |||||
Trademarks |
214.6 | (22.8 | ) | 191.8 | ||||||||
Other |
143.0 | (32.9 | ) | 110.1 | ||||||||
Total identified intangibles |
$ | 911.7 | $ | (137.6 | ) | $ | 774.1 | |||||
December 31, 2006: |
||||||||||||
Customer relationships |
$ | 460.9 | $ | (45.5 | ) | $ | 415.4 | |||||
Trademarks |
200.2 | (11.9 | ) | 188.3 | ||||||||
Other |
121.1 | (19.6 | ) | 101.5 | ||||||||
Total identified intangibles |
$ | 782.2 | $ | (77.0 | ) | $ | 705.2 | |||||
Foreign Currency
The functional currency for most of our foreign operations is the local currency. The cumulative
effects of translating the balance sheet accounts from the functional currency into the U.S. dollar
at current exchange rates are included in accumulated other comprehensive income. Revenues and
expenses are translated at average exchange rates in effect during the period. Certain other
foreign operations use the U.S. dollar as the functional currency. Accordingly, financial
statements of these foreign subsidiaries are remeasured to U.S. dollars for consolidation purposes
using current rates of exchange for monetary assets and liabilities and historical rates of
exchange for nonmonetary assets and related elements of expense. Revenue and expense elements are
remeasured at rates that approximate the rates in effect on the transaction dates. For all
operations, gains or losses from remeasuring foreign currency transactions into the functional
currency are included in income. Net foreign currency transaction gains (losses) were ($7.0)
million, ($21.0) million and $2.9 million for the years ending December 31, 2007, 2006 and 2005,
respectively, and are included in other income (expense) in the accompanying statement of
operations.
As previously discussed, effective January 1, 2008, we changed the functional currency of our Rig
Technology unit in Norway from the Norwegian Kroner to the U.S. dollar to more appropriately
reflect the primary economic environment in which they currently operate.
Revenue Recognition
The Companys products and services are sold based upon purchase orders or contracts with the
customer that include fixed or determinable prices and that do not generally include right of
return or other similar provisions or other significant post delivery obligations. Except for
certain construction contracts described below, the Company records revenue at the time its
manufacturing process is complete, the customer has been provided with all proper inspection and
other required documentation, title and risk of loss has passed to the customer, collectibility is
reasonably assured and the product has been delivered. Customer advances or deposits are deferred
and recognized as revenue when the Company has completed all of its performance obligations related
to the sale. The Company also recognizes revenue as services are performed. The amounts billed for
shipping and handling cost are included in revenue and related costs are included in costs of
sales.
Revenue Recognition under Long-term Construction Contracts
The Company uses the percentage-of-completion method to account for certain long-term construction
contracts in the Rig Technology group. These long-term construction contracts include the
following characteristics:
| the contracts include custom designs for customer specific applications; | ||
| the structural design is unique and requires significant engineering efforts; and | ||
| construction projects often have progress payments. |
This method requires the Company to make estimates regarding the total costs of the project,
progress against the project schedule and the estimated completion date, all of which impact the
amount of revenue and gross margin the Company recognizes in each reporting period. The Company
prepares detailed cost estimates at the beginning of each project. Significant projects and their
related costs and profit margins are updated and reviewed at least quarterly by senior management.
Factors that
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may affect future project costs and margins include shipyard access, weather,
production efficiencies, availability and costs of
labor, materials and subcomponents and other factors. These factors can impact the accuracy of the
Companys estimates and materially impact the Companys current and future reported earnings.
The asset, Costs in excess of billings, represents revenues recognized in excess of amounts
billed. The liability, Billings in excess of costs, represents billings in excess of revenues
recognized.
Service and Product Warranties
The Company provides service and warranty policies on certain of its products. The Company accrues
liabilities under service and warranty policies based upon specific claims and a review of
historical warranty and service claim experience in accordance with SFAS 5. Adjustments are made to
accruals as claim data and historical experience change. In addition, the Company incurs
discretionary costs to service its products in connection with product performance issues and
accrues for them when they are encountered.
The changes in the carrying amount of service and product warranties are as follows (in millions):
Balance at December 31, 2005 |
$ | 24.9 | ||
Net provisions for warranties issued during the year |
54.2 | |||
Payments |
(22.5 | ) | ||
Foreign currency translation |
0.7 | |||
Balance at December 31, 2006 |
$ | 57.3 | ||
Net provisions for warranties issued during the year |
78.2 | |||
Payments |
(45.9 | ) | ||
Foreign currency translation |
1.9 | |||
Balance at December 31, 2007 |
$ | 91.5 | ||
Income Taxes
The liability method is used to account for income taxes. Deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in effect when the
differences are expected to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to amounts which are more likely than not to be realized.
Concentration of Credit Risk
We grant credit to our customers, which operate primarily in the oil and gas industry.
Concentrations of credit risk are limited because we have a large number of geographically diverse
customers, thus spreading trade credit risk. We control credit risk through credit evaluations,
credit limits and monitoring procedures. We perform periodic credit evaluations of our customers
financial condition and generally do not require collateral, but may require letters of credit for
certain international sales. Credit losses are provided for in the financial statements. Allowances
for doubtful accounts are determined based on a continuous process of assessing the Companys
portfolio on an individual customer and overall basis. This process consists of a thorough review
of historical collection experience, current aging status of the customer accounts, and financial
condition of the Companys customers. Based on a review of these factors, the Company will
establish or adjust allowances for specific customers and the accounts receivable portfolio as a
whole. Accounts receivable are net of allowances for doubtful accounts of approximately $44.8
million and $30.4 million at December 31, 2007 and 2006, respectively.
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for its stock option plans using the intrinsic
value method of accounting provided under APB Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25) and related interpretations, as permitted by FASB Statement No. 123,
Accounting for Stock-Based Compensation, (SFAS 123) under which no compensation expense was
recognized for stock option grants. Stock-based compensation was a pro forma disclosure in the
financial statement footnotes and continues to be for periods prior to January 1, 2006.
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Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, (SFAS 123(R)) using the modified-prospective
transition method. Under this transition method,
compensation cost recognized in 2007 includes: a) compensation cost for all share-based payments
granted prior to January 1, 2007, but for which the requisite service period had not been completed
as of January 1, 2007 based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and b) compensation cost for all share-based payments granted subsequent to
January 1, 2007 based on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R).
Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions
resulting from the exercise of options as operating cash flows in the Statement of Consolidated
Cash Flows. SFAS 123(R) requires the cash flows resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be classified as financing
cash flows.
The Company provides compensation benefits to employees and non-employee directors under
share-based payment arrangements, including various employee stock option plans.
Total compensation cost that has been charged against income for all share-based compensation
arrangements was $43.1 million and $31.2 million for 2007 and 2006, respectively. The total income
tax benefit recognized in the income statement for all share-based compensation arrangements was
$13.2 million and $8.6 million for 2007 and 2006, respectively.
Pro Forma Net Income
The following table provides pro forma net income and income per share had the Company applied the
fair value method of SFAS 123(R) for the year ended December 31, 2005 (in millions, except per
share data):
Year Ended | ||||
December 31, | ||||
2005 | ||||
Net income, as reported |
$ | 286.9 | ||
Add: |
||||
Total stock-based employee compensation expense included in
net income, net of related tax effects |
10.1 | |||
Deduct: |
||||
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects |
(15.3 | ) | ||
Pro forma net income |
$ | 281.7 | ||
Net income per common share: |
||||
Basic, as reported |
$ | 0.92 | ||
Basic, pro forma |
$ | 0.90 | ||
Diluted, as reported |
$ | 0.91 | ||
Diluted, pro forma |
$ | 0.89 | ||
Environmental Liabilities
When environmental assessments or remediations are probable and the costs can be reasonably
estimated, remediation liabilities are recorded on an undiscounted basis and are adjusted as
further information develops or circumstances change.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect reported and
contingent amounts of assets and liabilities as of the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Such estimates include but
are not limited to, estimated losses on accounts receivable, estimated realizable value on excess
and obsolete inventory, contingencies, estimated liabilities for litigation exposures and
liquidated damages, estimated warranty costs, estimates related to
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pension accounting, and
estimates related to deferred tax assets and liabilities, including valuation allowances on
deferred tax assets. Actual results could differ from those estimates.
Contingencies
The Company accrues for costs relating to litigation claims and other contingent matters, including
liquidated damage liabilities, when such liabilities become probable and reasonably estimable.
Such estimates may be based on advice from third parties or on managements judgment, as
appropriate. Revisions to contingent liability reserves are reflected in income in the period in
which different facts or information become known or circumstances change that affect the Companys
previous assumptions with respect to the likelihood or amount of loss. Amounts paid upon the
ultimate resolution of contingent liabilities may be materially different from previous estimates
and could require adjustments to the estimated reserves to be recognized in the period such new
information becomes known.
Net Income Per Share
The following table sets forth the computation of weighted average basic and diluted shares
outstanding (in millions, except per share data):
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Numerator: |
||||||||||||
Net income |
$ | 1,337.1 | $ | 684.0 | $ | 286.9 | ||||||
Denominator: |
||||||||||||
Basicweighted average common shares outstanding |
354.4 | 350.4 | 312.8 | |||||||||
Dilutive effect of employee stock options and other unvested stock awards |
1.0 | 3.2 | 3.7 | |||||||||
Diluted outstanding shares |
355.4 | 353.6 | 316.5 | |||||||||
Basic earnings per share |
$ | 3.77 | $ | 1.95 | $ | 0.92 | ||||||
Diluted earnings per share |
$ | 3.76 | $ | 1.93 | $ | 0.91 | ||||||
In addition, we had stock options outstanding that were anti-dilutive totaling 0.1 million at
December 31, 2007, 4.6 million at December 31, 2006 and nil at December 31, 2005.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 establishes a
framework for fair value measurements in the financial statements by providing a single definition
of fair value, provides guidance on the methods used to estimate fair value and increases
disclosures about estimates of fair value. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the effect, if any, SFAS 157 will have on our
financial disclosures as well as our consolidated financial position, cash flows, and results from
operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans An amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS 158). SFAS 158 requires employers to recognize the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in its statement
of financial position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity for fiscal years ending after
December 15, 2006. The requirement to measure plan assets and benefit obligations as of the end of
the employers fiscal year is effective for fiscal years ending after December 15, 2008. The
Company adopted the provisions of SFAS 158 recognizing the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in the statement of financial position
and recognized changes in the funded status in the year in which they occurred through
comprehensive income effective December 31, 2006 with no material impact on the Consolidated
Financial Statements. We did not elect early adoption of the requirement to measure plan assets
and benefit obligations as of our fiscal year end. See Note 10 of the Notes to the Consolidated
Financial Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 provides entities with an option to measure many
financial assets and liabilities and certain other items at fair value as determined on an
instrument by instrument basis. The Company has not yet evaluated the impact, if any, this
standard might have on the Companys consolidated financial statements once it becomes effective on
January 1, 2008.
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In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R). SFAS 141R
provides revised guidance on how acquirers recognize and measure the consideration transferred,
identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired
in a business combination. SFAS 141R also expands required disclosures surrounding the nature and
financial effects of business combinations. SFAS 141R is effective, on a prospective basis, for
fiscal
years beginning after December 15, 2008. The Company does expect that this new standard will
impact certain aspects of its accounting for business combinations on a prospective basis,
including the determination of fair values assigned to certain purchased assets and liabilities.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160). SFAS 160 establishes requirements for ownership interests in subsidiaries
held by parties other than the Company (previously called minority interests) be clearly
identified, presented, and disclosed in the consolidated statement of financial position within
equity, but separate from the parents equity. All changes in the parents ownership interests are
required to be accounted for consistently as equity transactions and any noncontrolling equity
investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS 160 is
effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However,
presentation and disclosure requirements must be retrospectively applied to comparative financial
statements. The Company is currently assessing the impact of SFAS 160 on its consolidated financial
position and results of operations.
3. Varco Merger
All share quantities, share ratios, share prices and Black-Scholes assumptions in this footnote are
historical and have not been adjusted to reflect the Companys two-for-one stock split effected as
a 100 percent stock dividend in September 2007, unless otherwise noted.
Pursuant to our Amended and Restated Agreement and Plan of Merger with Varco International, Inc.
(Varco), a Delaware corporation, effective as of August 11, 2004 (the Agreement Date), we
issued 0.8363 shares of National Oilwell common stock for each Varco common share on March 11, 2005
(the Merger) and changed our name to National Oilwell Varco, Inc. We have included the financial
results of Varco in our consolidated financial statements beginning March 11, 2005 (the Merger
Date), the date Varco common shares were exchanged for National Oilwell common shares.
The Merger has been accounted for as a purchase business combination. Assets acquired and
liabilities assumed were recorded at their fair values as of March 11, 2005. The total purchase
price is $2,579.3 million, including the fair value of Varco stock options assumed and merger
related transaction costs, and is comprised of (in millions):
Shares
issued to acquire the outstanding common stock of Varco (84.0 million shares at $29.99 per share) |
$ | 2,518.4 | ||
Fair value of Varco stock options assumed |
48.9 | |||
Unearned compensation related to stock options assumed |
(32.1 | ) | ||
Merger related transaction costs |
44.1 | |||
Total purchase price |
$ | 2,579.3 | ||
The fair value of shares issued was determined using an average price of $29.99, which represented
the average closing price of our common stock from five trading days before to five trading days
after the Agreement Date. The fair value of options assumed was calculated using the Black-Scholes
valuation model with the following assumptions as of the Merger Date: expected life from vest date
ranging from 0.64 years to 3.6 years, risk-free interest rate of 2.0% - 3.1%, expected volatility
of 34% to 47% and no dividend yield. In accordance with our Agreement and Plan of Merger, the
number of Varco options exchanged was determined by multiplying the number of Varco options
outstanding at closing by 0.8363. Approximately 2.2 million of the 4.0 million Varco options
outstanding were fully vested as of the Merger. The portion of the intrinsic value of unvested
Varco options related to future service has been allocated to unearned compensation cost and is
being amortized using the remaining vesting period of 2.3 years. Stock-based compensation expense
of $15.6 million related to the amortization of the unvested options was recognized in the year
ended December 31, 2005. The $16.5 million of unearned stock-based compensation on the companys
balance sheet at December 31, 2005 was reclassified to paid-in-capital upon the adoption of SFAS
123(R).
Merger related transaction costs include severance and other external costs directly related to the
Merger.
Integration costs of $31.7 million in 2005 were comprised of $11.9 million for severance cost,
$11.2 million for discontinued inventory, $4.8 million for combining operations and $3.8 million of
other. Integration costs of $7.9 million in the first quarter of 2006 were comprised of $6.6
million for discontinued inventory, $0.5 million for combining operations and $0.8 million of
other.
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Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of
operations of National-Oilwell and Varco, on a pro forma basis, as though the companies had been
combined as of January 1, 2005. The pro forma financial information is presented for informational
purposes only and may not be indicative of the results of operations that would have been achieved
if the Merger had taken place at January 1, 2005. The pro forma financial information for the year
ended December 31, 2005 includes certain merger-related items of $47.3 million such as charges
associated with integration expenses, stock-based compensation charges for unvested options
assumed, and severance expenses recorded by National-Oilwell in its statements of operations
related to change in control provisions that were triggered as part of our Agreement and Plan of
Merger in March 2005. The pro forma financial information includes the business combination
accounting effect on historical Varco revenues, adjustments to depreciation on acquired property,
and amortization charges from acquired intangible assets, and related tax effects.
The unaudited pro forma financial information below combines the historical results for
National-Oilwell for the year ended December 31, 2005 and the historical results for Varco for the
year ended December 31, 2005 (in millions):
Year Ended | ||||
December 31, | ||||
2005 | ||||
Total revenues |
$ | 4,952.4 | ||
Net income |
$ | 304.4 | ||
Basic net income per share (1) |
$ | 0.88 | ||
Diluted net income per share (1) |
$ | 0.87 | ||
(1) | - Restated to reflect a two-for-one stock split effected as a 100 percent stock dividend in September 2007. |
4. Other Acquisitions
On
December 16, 2007, we agreed to combine our wholly-owned subsidiary, NOV Sub, Inc., with Grant
Prideco, Inc. by merging Grant Prideco with and into NOV Sub, with NOV Sub continuing as the
surviving corporation. Consummation of the merger requires approval by the stockholders of Grant
Prideco and also approval from various regulatory agencies. We anticipate completion of the merger
will occur in the second quarter of 2008.
2007
The Company completed eight acquisitions for an aggregate purchase price of $286.9 million
consisting of cash of $285.8 million and notes payable of $1.1 million. These
acquisitions included:
| Gammaloy Holdings, L.P., a Texas-based manufacturer of downhole tools. | ||
| Kreiter Geartech, a Texas-based manufacturer of gearing products. | ||
| Sara Services and Engineers Pvt. Ltd., an India-based manufacturer of oil field equipment. |
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The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition of the 2007 acquisitions (in millions):
Total | ||||
Current assets, net of cash acquired |
$ | 49.9 | ||
Property, plant and equipment |
48.9 | |||
Intangible assets |
114.2 | |||
Goodwill |
141.6 | |||
Total assets acquired |
354.6 | |||
Current liabilities |
37.4 | |||
Long term debt |
20.0 | |||
Total liabilities |
57.4 | |||
Minority interest |
11.4 | |||
Cash consideration, net of cash acquired |
$ | 285.8 | ||
Based on preliminary independent third-party valuations, the Company allocated $114.2 million to
intangible assets (13.1 year weighted-average life), comprised of: $93.9 million of customer
relationships (13.0 year weighted-average life), $9.1 million of trademarks (9.3 year
weighted-average life), and $11.2 million of other intangible assets (19.5 year weighted-average
life). These preliminary valuations are subject to change based on the final valuations by the
Companys independent valuation experts.
In January 2007, the Company also acquired the remaining 13% of NQL Energy Services, Inc.s
outstanding shares for $38.1 million.
2006
In December 2006, the Company acquired 87% of the outstanding shares of NQL Energy Services Inc.
(NQL), a provider of downhole tools, technology and services used primarily in drilling
applications in the oil and gas and utility industries on a worldwide basis, for an aggregate cash
purchase price of approximately $253.8 million. Based on independent third-party valuations, the
Company allocated $126.6 million to intangible assets (12.1 year weighted-average life), comprised
of: $107.5 million of customer relationships (15.5 year weighted-average life), $3.1 million of
trademarks (5.2 year weighted-average life), and $16.0 million of other intangible assets (5.5 year
weighted-average life). The remaining 13% of NQLs outstanding shares were acquired in January
2007. Due to this subsequent event, the $38.1 million purchase price of the remaining shares is
included in current liabilities on the December 31, 2006 balance sheet. This acquisition
complements our comprehensive offering of downhole tools.
The Company also completed nine additional acquisitions for an aggregate purchase price of $85.3
million consisting of cash of $75.9 million and notes and accrued payables of $9.4 million. These
acquisitions included:
| Rolligon Ltd., a Texas-based manufacturer of coiled tubing support units and related equipment. | ||
| Soil Recovery A/S, a Danish-based designer and manufacturer of soil recovery units used to process drilled cuttings for final disposal. |
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition of the 2006 acquisitions (in millions):
All Other | ||||||||||||
NQL | Acquisitions | Total | ||||||||||
Current assets, net of cash acquired |
$ | 68.9 | $ | 30.5 | $ | 99.4 | ||||||
Property, plant and equipment |
64.3 | 13.6 | 77.9 | |||||||||
Intangible assets |
126.6 | 3.9 | 130.5 | |||||||||
Goodwill |
60.1 | 56.7 | 116.8 | |||||||||
Total assets acquired |
319.9 | 104.7 | 424.6 | |||||||||
Current liabilities |
65.7 | 19.4 | 85.1 | |||||||||
Long term debt |
0.4 | 9.4 | 9.8 | |||||||||
Total liabilities |
66.1 | 28.8 | 94.9 | |||||||||
Cash consideration, net of cash acquired |
$ | 253.8 | $ | 75.9 | $ | 329.7 | ||||||
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2005
Excluding the Varco Merger, the Company paid an aggregate purchase price of $20.7 million ($16.0
million in cash and $4.7 million of notes payable) for acquisitions and equity investments in 2005.
Each of the acquisitions were accounted for using the purchase method of accounting and,
accordingly, the results of operations of each business is included in the consolidated results of
operations from the date of acquisition. A summary of the acquisitions follows (in millions):
2007 | 2006 | 2005 | ||||||||||
Fair value of assets acquired, net of cash acquired |
$ | 354.6 | $ | 424.6 | $ | 31.0 | ||||||
Cash paid, net of cash acquired |
(285.8 | ) | (329.7 | ) | (16.0 | ) | ||||||
Liabilities assumed, debt issued and minority interest |
$ | 68.8 | $ | 94.9 | $ | 15.0 | ||||||
Excess purchase price over fair value of net assets acquired |
$ | 141.6 | $ | 116.8 | $ | 13.9 | ||||||
5. Inventories
At December 31, inventories consist of (in millions):
2007 | 2006 | |||||||
Raw materials and supplies |
$ | 420.4 | $ | 266.5 | ||||
Work in progress |
939.2 | 520.9 | ||||||
Finished goods and purchased products |
1,215.1 | 1,041.4 | ||||||
$ | 2,574.7 | $ | 1,828.8 | |||||
6. Property, Plant and Equipment
At December 31, property, plant and equipment consist of the following (in millions):
Estimated | ||||||||||||
Useful Lives | 2007 | 2006 | ||||||||||
Land and buildings |
5-35 Years | $ | 412.3 | $ | 361.7 | |||||||
Operating equipment |
3-15 Years | 927.3 | 774.5 | |||||||||
Rental equipment |
3-12 Years | 370.5 | 259.9 | |||||||||
1,710.1 | 1,396.1 | |||||||||||
Less accumulated depreciation |
(512.8 | ) | (374.0 | ) | ||||||||
$ | 1,197.3 | $ | 1,022.1 | |||||||||
7. Accrued Liabilities
At December 31, accrued liabilities consist of (in millions):
2007 | 2006 | |||||||
Compensation |
$ | 214.7 | $ | 160.0 | ||||
Customer prepayments |
500.3 | 538.4 | ||||||
Warranty |
91.5 | 57.3 | ||||||
Interest |
13.8 | 11.9 | ||||||
Taxes (non income) |
47.3 | 34.1 | ||||||
Insurance |
42.4 | 39.1 | ||||||
Accrued purchase orders |
582.5 | 334.9 | ||||||
Fair value of derivatives |
111.3 | 33.0 | ||||||
Other |
157.6 | 211.5 | ||||||
Total |
$ | 1,761.4 | $ | 1,420.2 | ||||
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8. Costs and Estimated Earnings on Uncompleted Contracts
At December 31, costs and estimated earnings on uncompleted contracts consist of (in millions):
2007 | 2006 | |||||||
Costs incurred on uncompleted contracts |
$ | 3,167.2 | $ | 1,924.0 | ||||
Estimated earnings |
1,208.3 | 470.0 | ||||||
4,375.5 | 2,394.0 | |||||||
Less: Billings to date |
5,128.1 | 2,649.5 | ||||||
$ | (752.6 | ) | $ | (255.5 | ) | |||
Costs and estimated earnings in excess of billings on uncompleted contracts |
$ | 643.5 | $ | 308.9 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
(1,396.1 | ) | (564.4 | ) | ||||
$ | (752.6 | ) | $ | (255.5 | ) | |||
9. Long-Term Debt
At December 31, debt consists of (in millions):
2007 | 2006 | |||||||
$100.0 million Senior Notes, interest at 7.5% payable semiannually, principal due
on February 15, 2008 |
$ | 100.2 | $ | 101.9 | ||||
$150.0 million Senior Notes, interest at 6.5% payable semiannually, principal due
on March 15, 2011 |
150.0 | 150.0 | ||||||
$200.0 million Senior Notes, interest at 7.25% payable semiannually, principal due
on May 1, 2011 |
211.7 | 215.2 | ||||||
$200.0 million Senior Notes, interest at 5.65% payable semiannually, principal due
on November 15, 2012 |
200.0 | 200.0 | ||||||
$150.0 million Senior Notes, interest at 5.5% payable semiannually, principal due
on November 19, 2012 |
151.3 | 151.6 | ||||||
Other |
77.5 | 21.6 | ||||||
Total debt |
890.7 | 840.3 | ||||||
Less current portion |
152.8 | 5.6 | ||||||
Long-term debt |
$ | 737.9 | $ | 834.7 | ||||
Principal payments of debt for years subsequent to 2007 are as follows (in millions):
2008 |
$ | 152.8 | ||
2009 |
28.7 | |||
2010 |
5.1 | |||
2011 |
352.8 | |||
2012 |
350.9 | |||
Thereafter |
0.4 | |||
$ | 890.7 | |||
Senior Notes
The unsecured Senior Notes contain reporting covenants, and the credit facility contains financial
covenants regarding maximum debt to capitalization and minimum interest coverage. We were in
compliance with all covenants at December 31, 2007.
Revolver Facilities
On June 21, 2005, we amended and restated our existing $150 million revolving credit facility with
a syndicate of lenders to provide the Company a $500 million unsecured revolving credit facility.
This facility will expire in July 2010. The Company has
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the right to increase the facility by an amount not greater than $250 million, (to $750 million),
at any time during the term of this facility, and to extend the term of the facility for an
additional year during the final 90 days of the facility. At December 31, 2007, there were no
borrowings against this facility, and there were $360 million in outstanding letters of credit.
Interest under this multicurrency facility is based upon LIBOR, NIBOR or EURIBOR plus 0.30% subject
to a ratings-based grid, or the prime rate.
At December 31, 2007, there were $140 million of funds available under the revolving credit
facility. The Company also has $1,352 million of additional outstanding letters of credit at
December 31, 2007, primarily in Norway, that are essentially under various bilateral committed
letters of credit. The increase in letters of credit is the result of significant down payments
from our customers, which in turn require our issuing to our customers advance payment guarantees
in the form of letters of credit. Other letters of credit are issued as bid bonds and performance
bonds.
Other
Other debt includes approximately $21.6 million in promissory notes due to former owners of
businesses acquired who remain employed by the company.
10. Employee Benefit Plans
We have benefit plans covering substantially all of our employees. Defined-contribution benefit
plans cover most of the U.S. and Canadian employees, and benefits are based on years of service, a
percentage of current earnings and matching of employee contributions. Employees in our Norwegian
operations can elect to participate in a defined-contribution plan in lieu of a local defined
benefit plan. For the years ended December 31, 2007, 2006 and 2005, expenses for
defined-contribution plans were $30.7 million, $16.8 million, and $19.9 million, and all funding is
current.
Certain retired or terminated employees of predecessor or acquired companies participate in a
defined benefit plan in the United States. None of the participants in this plan are eligible to
accrue benefits. In addition, approximately 353 U.S. retirees and spouses participate in defined
benefit health care plans of predecessor or acquired companies that provide postretirement medical
and life insurance benefits. Active employees are ineligible to participate in any of these defined
benefit plans. Our subsidiaries in the United Kingdom and Norway also have defined benefit pension
plans covering virtually all of their employees.
Net periodic benefit cost for our defined benefit pension plans in the United States, the United
Kingdom and Norway was as follows (in millions):
Pension benefits | Postretirement benefits | |||||||||||||||||||||||
For the year | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
Service cost benefits earned during the period |
$ | 5.1 | $ | 3.8 | $ | 3.4 | $ | | $ | | $ | | ||||||||||||
Interest cost on projected benefit obligation |
12.2 | 10.7 | 10.0 | 1.0 | 1.0 | 0.9 | ||||||||||||||||||
Expected return on plan assets |
(12.5 | ) | (10.5 | ) | (9.2 | ) | | | | |||||||||||||||
Net amortization and deferral |
1.9 | 0.8 | 1.5 | 0.1 | 0.2 | 0.2 | ||||||||||||||||||
Curtailment/settlement gain |
| (0.4 | ) | | | | | |||||||||||||||||
Net periodic benefit cost |
$ | 6.7 | $ | 4.4 | $ | 5.7 | $ | 1.1 | $ | 1.2 | $ | 1.1 | ||||||||||||
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The change in benefit obligation, plan assets and the funded status of the defined benefit pension
plans in the United States, United Kingdom, and Norway and defined postretirement plans in the
United States, using a measurement date of September 30, 2007 or 2006, follows (in millions):
Pension benefits | Postretirement benefits | |||||||||||||||
At year end | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Benefit obligation at beginning of year |
$ | 229.9 | $ | 183.9 | $ | 17.0 | $ | 19.0 | ||||||||
Service cost |
5.1 | 3.8 | | | ||||||||||||
Interest cost |
12.2 | 10.7 | 1.0 | 1.0 | ||||||||||||
Actuarial loss (gain) |
(0.7 | ) | 17.8 | (1.3 | ) | (2.3 | ) | |||||||||
Benefits paid |
(10.4 | ) | (9.1 | ) | (1.3 | ) | (1.4 | ) | ||||||||
Participant contributions |
0.9 | 0.8 | | | ||||||||||||
Exchange rate loss (gain) |
10.0 | 21.5 | | | ||||||||||||
Curtailments/settlements |
(0.7 | ) | (0.4 | ) | | | ||||||||||
Other |
| 0.9 | (1.4 | ) | 0.7 | |||||||||||
Benefit obligation at end of year |
$ | 246.3 | $ | 229.9 | $ | 14.0 | $ | 17.0 | ||||||||
Accumulated benefit obligation at end of year |
$ | 222.7 | $ | 214.7 | ||||||||||||
Fair value of plan assets at beginning of year |
$ | 183.4 | $ | 142.6 | $ | | $ | | ||||||||
Actual return |
14.7 | 11.8 | | | ||||||||||||
Benefits paid |
(9.2 | ) | (8.0 | ) | (1.3 | ) | (1.4 | ) | ||||||||
Company contributions |
9.9 | 18.0 | 1.3 | 1.4 | ||||||||||||
Participants contributions |
0.9 | 0.8 | | | ||||||||||||
Exchange rate (loss) gain |
6.4 | 18.2 | | | ||||||||||||
Fair value of plan assets at end of year |
$ | 206.1 | $ | 183.4 | $ | | $ | | ||||||||
Funded status |
$ | (41.9 | ) | $ | (46.5 | ) | $ | (13.7 | ) | $ | (16.6 | ) | ||||
Unrecognized actuarial net loss |
28.6 | 32.0 | 0.7 | 2.2 | ||||||||||||
Prior service costs not yet recognized |
0.8 | 0.9 | (0.7 | ) | (0.7 | ) | ||||||||||
Accrued benefit cost |
$ | (12.5 | ) | $ | (13.6 | ) | $ | (13.7 | ) | $ | (15.1 | ) | ||||
Amounts recognized in the consolidated balance sheets consist of (in millions):
Pension benefits | Postretirement benefits | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Current assets |
$ | | $ | | $ | | $ | | ||||||||
Non current assets |
0.9 | 0.9 | | | ||||||||||||
Non current liabilities |
(42.8 | ) | (47.4 | ) | (13.7 | ) | (16.6 | ) | ||||||||
Accumulated other comprehensive income |
29.4 | 32.9 | | 1.5 | ||||||||||||
Accrued benefit cost |
$ | (12.5 | ) | $ | (13.6 | ) | $ | (13.7 | ) | $ | (15.1 | ) | ||||
Defined Benefit Pension Plans
Assumed long-term rates of return on plan assets, discount rates and rates of compensation
increases vary for the different plans according to the local economic conditions.
The assumption rates used for benefit obligations are as follows:
Years ending December 31, | ||||||||
2007 | 2006 | |||||||
Discount rate: |
||||||||
United States plan |
6.34 | % | 5.97 | % | ||||
International plans |
5.50 - 5.75 | % | 4.75 - 5.25 | % | ||||
Salary increase: |
||||||||
United States plan |
N/A | N/A | ||||||
International plans |
2.50 - 4.50 | % | 2.25 - 3.00 | % |
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The assumption rates used for net periodic benefit costs are as follows:
Years ending December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Discount rate: |
||||||||||||
United States plan |
5.97 | % | 5.66 | % | 6.0 | % | ||||||
International plans |
4.75 - 5.25 | % | 5.66 | % | 6.0 | % | ||||||
Salary increase: |
||||||||||||
United States plan |
N/A | N/A | N/A | |||||||||
International plans |
2.25 - 3.00 | % | 2.00 2.75 | % | 2.5 2.75 | % | ||||||
Expected return on assets: |
||||||||||||
United States plan |
7.75 | % | 7.75 | % | 8.5 | % | ||||||
International plans |
5.17 - 6.86 | % | 5.25 6.85 | % | 6.25 7.17 | % |
In determining the overall expected long-term rate of return for plan assets, the Company takes
into consideration the historical experience as well as future expectations of the asset mix
involved. As different investments yield different returns, each asset category is reviewed
individually and then weighted for significance in relation to the total portfolio.
The weighted-average asset allocations at December 31, 2007 and 2006, by asset category are as
follows:
2007 | 2006 | |||||||||||||||
United States | International | United States | International | |||||||||||||
Equity securities |
61.0 | % | 46.3 | % | 60.2 | % | 48.3 | % | ||||||||
Fixed income |
| | | | ||||||||||||
Debt securities |
38.8 | % | 32.7 | % | 38.8 | % | 34.4 | % | ||||||||
Real estate |
| 4.8 | % | | 5.0 | % | ||||||||||
Other |
0.2 | % | 16.2 | % | 1.0 | % | 12.3 | % | ||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
In the U.S., our investment strategy includes a balanced approach with target allocation
percentages of 60% equity investments and 40% debt securities. Our target allocation percentages in
the United Kingdom plans are 50-60% equity securities and 40-50% debt securities. The Norwegian
target investment allocation percentage is 100% insurance contracts. Our pension investment
strategy worldwide prohibits a direct investment in our own stock.
Information for pension plans with projected benefit obligations in excess of plan assets (in
millions):
For year ending 2007 | For year ending 2006 | |||||||||||||||
United States | International | United States | International | |||||||||||||
Projected benefit obligation |
$ | 10.5 | $ | 216.5 | $ | 29.4 | $ | 116.1 | ||||||||
Accumulated benefit obligation |
10.5 | 192.4 | 29.4 | 107.5 | ||||||||||||
Fair value of assets |
| 183.1 | 16.5 | 80.5 |
Information for pension plans with accumulated benefit obligations in excess of plan assets (in
millions):
For year ending 2007 | For year ending 2006 | |||||||||||||||
United States | International | United States | International | |||||||||||||
Projected benefit obligation |
$ | 10.5 | $ | 24.4 | $ | 29.4 | $ | 109.2 | ||||||||
Accumulated benefit obligation |
10.5 | 22.3 | 29.4 | 102.2 | ||||||||||||
Fair value of assets |
| | 16.5 | 73.5 |
In 2008, the Company expects to contribute $2.0 million in the U.S. and $6.8 million
internationally to its pension plans and $1.3 million to its other postretirement benefit plans.
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In addition, the following benefit payments, which reflect expected future service, as appropriate,
are expected to be paid (in millions):
United States | International | |||||||
Plan | Plans | |||||||
2008 |
$ | 2.7 | $ | 6.0 | ||||
2009 |
2.7 | 6.2 | ||||||
2010 |
2.7 | 6.5 | ||||||
2011 |
2.6 | 6.9 | ||||||
2012 |
2.5 | 7.3 | ||||||
Subsequent five years |
10.6 | 46.6 |
11. Accumulated Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) are as follows (in millions):
Cumulative | ||||||||||||||||
Change in | Currency | Derivative | ||||||||||||||
Defined | Translation | Financial | ||||||||||||||
Benefit Plans | Adjustment | Instruments | Total | |||||||||||||
Balance at December 31, 2004 |
$ | (12.0 | ) | $ | 43.5 | $ | 1.9 | $ | 33.4 | |||||||
Current period activity |
4.7 | (49.0 | ) | (11.8 | ) | (56.1 | ) | |||||||||
Tax effect |
(1.1 | ) | (1.3 | ) | 3.3 | 0.9 | ||||||||||
Balance at December 31, 2005 |
(8.4 | ) | (6.8 | ) | (6.6 | ) | (21.8 | ) | ||||||||
Adoption of FAS 158, net of tax |
(0.3 | ) | | | (0.3 | ) | ||||||||||
Current period activity |
(9.3 | ) | 61.2 | 11.3 | 63.2 | |||||||||||
Tax effect |
2.7 | 5.6 | (3.3 | ) | 5.0 | |||||||||||
Balance at December 31, 2006 |
(15.3 | ) | 60.0 | 1.4 | 46.1 | |||||||||||
Current period activity |
(8.3 | ) | 210.6 | 25.3 | 227.6 | |||||||||||
Tax effect |
2.9 | (74.0 | ) | (7.6 | ) | (78.7 | ) | |||||||||
Balance at December 31, 2007 |
$ | (20.7 | ) | $ | 196.6 | $ | 19.1 | $ | 195.0 | |||||||
12. Commitments and Contingencies
We are involved in various claims, regulatory agency audits and pending or threatened legal actions
involving a variety of matters. The total liability on these matters at December 31, 2007 cannot be
determined; however, in our opinion, any ultimate liability, to the extent not otherwise provided
for, should not materially affect our financial position, cash flow or results of operations.
Our business is affected both directly and indirectly by governmental laws and regulations relating
to the oilfield service industry in general, as well as by environmental and safety regulations
that specifically apply to our business. Although we have not incurred material costs in connection
with our compliance with such laws, there can be no assurance that other developments, such as new
environmental laws, regulations and enforcement policies thereunder may not result in additional,
presently unquantifiable, costs or liabilities to us.
The Company leases certain facilities and equipment under operating leases that expire at various
dates through 2049. These leases generally contain renewal options and require the lessee to pay
maintenance, insurance, taxes and other operating expenses in addition to the minimum annual
rentals. Rental expense related to operating leases approximated $128.4 million, $95.4 million, and
$59.1 million in 2007, 2006 and 2005, respectively.
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Future minimum lease commitments under noncancellable operating leases with initial or remaining
terms of one year or more at December 31, 2007 are payable as follows (in millions):
2008 |
$ | 94.4 | ||
2009 |
70.5 | |||
2010 |
53.0 | |||
2011 |
37.6 | |||
2012 |
27.0 | |||
Thereafter |
96.1 | |||
Total future lease commitments |
$ | 378.6 | ||
13. Common Stock
National Oilwell Varco has authorized 500 million shares of $.01 par value common stock. We also
have authorized 10 million shares of $.01 par value preferred stock, none of which is issued or
outstanding.
On August 22, 2007, the Companys Board of Directors approved a two-for-one stock split in the form
of a stock dividend to the Companys stockholders of record on September 7, 2007, with distribution
of shares on September 28, 2007. The total number of authorized common stock shares and associated
par value were unchanged by this action. All per-share amounts in the financial statements reflect
the stock split for all periods presented unless indicated otherwise.
Stock Options
Under the terms of National Oilwell Varcos Long-Term Incentive Plan, as amended, 15 million shares
of common stock are authorized for the grant of options to officers, key employees, non-employee
directors and other persons. Options granted under our stock option plan generally vest over a
three-year period starting one year from the date of grant and expire ten years from the date of
grant. The purchase price of options granted may not be less than the closing market price of
National Oilwell Varco common stock on the date of grant. At December 31, 2007, approximately 7.0
million shares were available for future grants.
We also have inactive stock option plans that were acquired in connection with the acquisitions of
IRI International Corporation in 2000 and Varco International, Inc. in March 2005. We converted
the outstanding stock options under these plans to options to acquire our common stock and no
further options are being issued or are outstanding under these plans. Stock option information
summarized below includes amounts for the National Oilwell Varco Long-Term Incentive Plan and stock
plans of acquired companies.
Options outstanding at December 31, 2007 under the stock option plans have exercise prices between
$4.53 and $49.07 per share, and expire at various dates from February 11, 2008 to June 6, 2017.
The following summarizes options activity:
Years Ended December 31, | ||||||||||||||||||||||||
2007 | 2006 | 2005 | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Number of | Exercise | Number of | Exercise | Number of | Exercise | |||||||||||||||||||
shares | Price | shares | Price | shares | Price | |||||||||||||||||||
Shares under option at beginning
of year |
10,559,862 | $ | 23.28 | 8,681,684 | $ | 15.18 | 7,464,632 | $ | 13.35 | |||||||||||||||
Granted |
2,381,300 | 35.55 | 4,680,000 | 33.29 | 10,584,148 | 14.44 | ||||||||||||||||||
Cancelled |
(301,608 | ) | 30.55 | (415,396 | ) | 23.43 | (904,196 | ) | 13.98 | |||||||||||||||
Exercised |
(4,735,722 | ) | 19.28 | (2,386,426 | ) | 13.58 | (8,462,900 | ) | 12.71 | |||||||||||||||
Shares under option at end of year |
7,903,832 | $ | 29.12 | 10,559,862 | $ | 23.28 | 8,681,684 | $ | 15.18 | |||||||||||||||
Exercisable at end of year |
1,619,374 | $ | 19.55 | 2,688,298 | $ | 13.85 | 1,827,116 | $ | 11.87 | |||||||||||||||
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The following summarizes information about stock options outstanding as of December 31, 2007:
Options Outstanding | Options Exercisable | ||||||||||||||||||||
Weighted-Avg | |||||||||||||||||||||
Range of | Remaining | Weighted-Avg | Weighted-Avg | ||||||||||||||||||
Exercise Price | Contractual Life | Shares | Exercise Price | Shares | Exercise Price | ||||||||||||||||
$4.53 to $9.42 |
3.69 | 287,995 | $ | 8.48 | 287,995 | $ | 8.48 | ||||||||||||||
$10.04 to $19.47 |
6.60 | 1,820,511 | 17.18 | 781,793 | 15.40 | ||||||||||||||||
$20.25 to $49.07 |
8.50 | 5,795,326 | 33.89 | 549,586 | 31.25 | ||||||||||||||||
Totals |
7.89 | 7,903,832 | $ | 29.12 | 1,619,374 | $ | 19.55 | ||||||||||||||
The weighted-average fair value of options granted during 2007, 2006 and 2005 was approximately
$11.99, $11.90 and $8.43 (excluding options assumed in the Varco merger) per share, respectively,
as determined using the Black-Scholes option-pricing model. The total intrinsic value of options
exercised during 2007 and 2006 was $114.2 million and $49.6 million, respectively.
Upon adoption of SFAS 123(R), we began recording expense related to the value of employee stock
options on the date of grant using the Black Scholes model. Prior to the adoption of SFAS 123(R),
the value of each employee stock option was estimated on the date of grant using the Black-Scholes
model for the purpose of the pro forma financial information in accordance with SFAS 123. The
determination of fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of
highly complex and subjective variables. These variables include, but are not limited to, the
expected stock price volatility over the term of the awards, and actual and projected employee
stock option exercise activity. The use of the Black Scholes model requires the use of extensive
actual employee exercise activity data and the use of a number of complex assumptions including
expected volatility, risk-free interest rate, expected dividends and expected term.
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Expected volatility |
38.6 | % | 39.4 | % | 46.0 | % | ||||||
Risk-free interest rate |
4.6 | % | 4.6 | % | 3.7 | % | ||||||
Expected dividends |
| | | |||||||||
Expected term (in years) |
3.5 | 3.8 | 5.0 |
We used the actual volatility for traded options on our stock since March 11, 2005 (the Varco
merger date) as the expected volatility assumption required in the Black Scholes model, which is
consistent with SFAS 123(R) and SAB 107. Prior to the first quarter of fiscal 2006, we used our
historical stock price volatility in accordance with SFAS 123 for purposes of our pro forma
information.
The risk-free interest rate assumption is based upon observed interest rates appropriate for the
term of our employee stock options. The dividend yield assumption is based on the history and
expectation of dividend payouts. The estimated expected term is based on actual employee exercise
activity for the past ten years.
As stock-based compensation expense recognized in the Consolidated Statement of Income in 2007 is
based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated
based on historical experience.
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The following summary presents information regarding outstanding options as of December 31, 2007
and changes during 2007 with regard to options under all stock option plans:
Weighted Average | ||||||||||||||||
Remaining | ||||||||||||||||
Weighted Average | Contractual Term | Aggregate | ||||||||||||||
Shares | Exercise Price | (years) | Intrinsic Value | |||||||||||||
Outstanding at December 31, 2006 |
10,559,862 | $ | 23.28 | |||||||||||||
Granted |
2,381,300 | $ | 35.55 | |||||||||||||
Exercised |
(4,735,722 | ) | $ | 19.28 | ||||||||||||
Cancelled |
(301,608 | ) | $ | 30.55 | ||||||||||||
Outstanding at December 31, 2007 |
7,903,832 | $ | 29.12 | 7.89 | $ | 350,472,298 | ||||||||||
Vested or expected to vest |
7,544,998 | $ | 29.12 | 7.89 | $ | 354,560,856 | ||||||||||
Exercisable at December 31, 2007 |
1,619,374 | $ | 19.55 | 6.13 | $ | 87,299,339 | ||||||||||
As of December 31, 2007, total unrecognized compensation cost related to nonvested stock options
was $60.1 million. This cost is expected to be recognized over a weighted average period of
2.0 years. The total fair value of stock vested in 2007 and 2006 was approximately $33.5 million
and $22.1 million, respectively. Cash received from option exercises for 2007 and 2006 was $91.3
million and $32.7 million, respectively. The actual tax benefit realized for the tax deductions
from option exercises totaled $34.2 million and $15.2 million, for 2007 and 2006, respectively.
Cash used to settle equity instruments granted under all share-based payment arrangements for 2007
and 2006 was not material in both periods.
The impact of adopting SFAS 123(R) on January 1, 2006, on the Companys income before income taxes,
net income and basic and diluted earnings per share for 2007 was not material.
Restricted Shares
During 2007, the Company began issuing restricted stock award (RSA) with no exercise price to
officers and key employees in addition to stock options. The company granted restricted shares to
key employees on March 1, 2007 at $35.23. These shares will not vest until the third anniversary of
the date of the grant, at which time they will be 100% vested. The company also granted
performance-based restricted shares to senior management and officers on March 26, 2007 at $39.04.
Of the total amount of 400,500 performance-based shares granted, 133,500 will be 100% vested 18
months from date of grant, with a performance condition of the Companys operating income level
growth from January 1, 2007 to June 30, 2008 needing to exceed the median operating income level
growth of a designated peer group over the same period. The remaining 267,000 performance-based
shares will be 100% vested 36 months from date of grant, with a performance condition of the
Companys operating income level growth from January 1, 2007 to December 31, 2009 needing to exceed
the median operating income level growth of a designated peer group over the same period.
The following summary presents information regarding outstanding restricted shares as of December
31, 2007, and changes during 2007.
Weighted Average Grant | ||||||||||||||||
Restricted Shares | Units | Date Fair Value | ||||||||||||||
Non Vested at January 1, 2007 |
72,000 | $ | 29.13 | |||||||||||||
Granted |
1,028,402 | $ | 37.06 | |||||||||||||
Vested |
| | ||||||||||||||
Forfeited |
(39,400 | ) | $ | 37.40 | ||||||||||||
Non Vested at December 31, 2007 |
1,061,002 | $ | 36.56 |
The weighted-average grant day fair value of RSAs granted during the years ended 2007, 2006 and
2005 was $37.06, nil and $29.13 per share, respectively. There were no RSAs that vested during
years ended 2007, 2006 and 2005. As of December 31, 2007, there was $23.9 million of unrecognized
compensation cost related to non-vested RSA which is expected to be recognized over a
weighted-average period of 2.0 years.
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14. Income Taxes
The domestic and foreign components of income before income taxes were as follows (in millions):
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Domestic |
$ | 1,243.5 | $ | 627.1 | $ | 213.6 | ||||||
Foreign |
785.4 | 422.1 | 216.4 | |||||||||
$ | 2,028.9 | $ | 1,049.2 | $ | 430.0 | |||||||
The components of the provision for income taxes consisted of (in millions):
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 490.2 | $ | 255.8 | $ | 70.5 | ||||||
State |
38.8 | 14.4 | 2.8 | |||||||||
Foreign |
136.0 | 99.3 | 67.6 | |||||||||
665.0 | 369.5 | 140.9 | ||||||||||
Deferred: |
||||||||||||
Federal |
(66.0 | ) | (36.5 | ) | 2.6 | |||||||
State |
(3.3 | ) | (2.0 | ) | (0.7 | ) | ||||||
Foreign |
80.1 | 24.7 | (3.9 | ) | ||||||||
10.8 | (13.8 | ) | (2.0 | ) | ||||||||
$ | 675.8 | $ | 355.7 | $ | 138.9 | |||||||
The difference between the effective tax rate reflected in the provision for income taxes and the
U.S. federal statutory rate was as follows (in millions):
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Federal income tax at statutory rate |
$ | 710.1 | $ | 367.2 | $ | 150.5 | ||||||
Foreign income tax rate differential |
(65.9 | ) | (28.6 | ) | (13.3 | ) | ||||||
State income tax, net of federal benefit |
23.1 | 9.3 | 1.4 | |||||||||
Tax benefit of foreign sales income |
| (5.2 | ) | (6.8 | ) | |||||||
Nondeductible expenses |
9.5 | 7.3 | 5.0 | |||||||||
Tax benefit of manufacturing deduction |
(10.5 | ) | (1.2 | ) | (0.6 | ) | ||||||
Foreign dividends net of FTCs |
9.0 | 3.4 | 6.2 | |||||||||
Change in deferred tax valuation allowance |
2.5 | 2.7 | (4.4 | ) | ||||||||
Other |
(2.0 | ) | 0.8 | 0.9 | ||||||||
$ | 675.8 | $ | 355.7 | $ | 138.9 | |||||||
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At December 31, significant components of our deferred tax assets and liabilities were as follows
(in millions):
2007 | 2006 | |||||||
Deferred tax assets: |
||||||||
Allowances and operating liabilities |
$ | 152.1 | $ | 115.4 | ||||
Net operating loss carryforwards |
8.2 | 28.5 | ||||||
Postretirement benefits |
16.5 | 0.6 | ||||||
Capital loss carryforwards |
6.9 | 0.2 | ||||||
Other |
17.8 | 19.8 | ||||||
Total deferred tax assets |
201.5 | 164.5 | ||||||
Valuation allowance for deferred tax assets |
(14.4 | ) | (6.8 | ) | ||||
187.1 | 157.7 | |||||||
Deferred tax liabilities: |
||||||||
Tax over book depreciation |
94.7 | 89.0 | ||||||
Intangible assets |
218.0 | 210.0 | ||||||
Deferred income |
166.3 | 55.4 | ||||||
Other |
85.3 | 34.6 | ||||||
Total deferred tax liabilities |
564.3 | 389.0 | ||||||
Net deferred tax asset (liability) |
$ | (377.2 | ) | $ | (231.3 | ) | ||
On July 13, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax positions taken or expected to be
taken on a return. Under FIN 48, the impact of an uncertain income tax position, in managements
opinion, on the income tax return must be recognized at the largest amount that is more-likely-than
not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position
will not be recognized if it has a less than 50% likelihood of being sustained. Additionally, FIN
48 provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 became effective January 1, 2007 for the
Company. As required, the Company has recorded the cumulative effect of adopting FIN 48 as an
adjustment to the January 1, 2007 beginning balance of retained earnings.
The total amount of unrecognized tax benefits as of the date of adoption was $54.5 million. As a
result of the implementation of FIN 48, the Company recognized a $9.3 million increase in the
liability for unrecognized tax benefits and a $0.6 million increase for accrued interest and
penalty which was accounted for as follows (in millions):
Reduction in Retained Earnings (cumulative effect) |
$ | 5.4 | ||
Additional Goodwill |
4.5 | |||
Increase in Liability |
$ | 9.9 | ||
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
millions):
Balance at January 1, 2007 |
$ | 54.5 | ||
Additions based on tax positions related to the current year |
2.2 | |||
Additions for tax positions of prior years |
1.3 | |||
Reductions for tax positions of prior years |
(10.0 | ) | ||
Settlements |
(0.6 | ) | ||
Reductions for lapse of applicable statutes of limitations |
(0.4 | ) | ||
Balance at December 31, 2007 |
$ | 47.0 | ||
Included in the balance of unrecognized tax benefits at January 1, 2007 and December 31, 2007 are
$30.5 million and $29.5 million of tax benefits, respectively, that, if recognized in future
periods, would impact the Companys effective tax rate. Also included in the balance of
unrecognized tax benefits at January 1, 2007 and December 31, 2007 are $24.0 million and $17.5
million of tax benefits, respectively, that, if recognized, would result in a decrease to goodwill
in purchase business combinations. The reduction in the balance of unrecognized tax benefits
resulted from the completion in the U.S. of prior year audits and appeals. These unrecognized tax
benefits are included in the balance of Accrued Income Taxes in the balance sheet as of December
31, 2007.
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The Company does not anticipate that the total unrecognized tax benefits will significantly change
due to the settlement of audits or the expiration of statutes of limitation within 12 months of
this reporting date.
To the extent penalties and interest would be assessed on any underpayment of income tax, such
accrued amounts have been classified as a component of income tax expense in the financial
statements. This is an accounting policy election made by the Company that is a continuation of
the Companys historical policy and will continue to be consistently applied in the future. During
the year ended December 31, 2007, the Company recognized $2.7 million of additional interest and
penalties related to uncertain tax positions as part of income tax expense. As of December 31,
2007, the Company has accrued approximately $4.6 million of interest and penalties relating to
unrecognized tax benefits. These interest and penalties are included in the balance of Accrued
Income Taxes in the balance sheet as of December 31, 2007.
The Company is subject to taxation in the United States, various states and foreign jurisdictions.
The Company has significant operations in the United States, Canada, the United Kingdom, the
Netherlands and Norway. Tax years that remain subject to examination by major tax jurisdictions
vary by legal entity, but are generally open in the U.S. for the tax years ending after 2003 and
outside the U.S. for the tax years ending after 2001. Norway also remains open for the 2001 tax
year.
During the quarter ended June 30, 2007 the Internal Revenue Service completed its audit of the
Companys 2003 tax year. There were no adjustments resulting from this examination that will have
a material impact on the Companys financial position, cash flows or results of operations.
In the United States, the Company has $20.3 million of net operating loss carryforwards as of
December 31, 2007, which expire at various dates through 2026. The potential benefit of $7.1
million has been recorded with $5.8 million valuation allowance. Future income tax payments will
be reduced when the Company ultimately realizes the benefit of these net operating losses. If
the Company ultimately realizes the benefit of these net operating loss carryforwards, the
valuation allowance of $5.8 million would reduce future income tax expense.
During 2007 the Company recorded $42.5 million in net deferred tax liabilities with a corresponding
increase in goodwill related to NQL purchase accounting. During 2006 the Company recorded $32.1
million in deferred tax assets with a corresponding reduction in goodwill related to the
finalization of Varco purchase accounting.
Also in the United States, the Company has $0.7 million of excess foreign tax credits as of
December 31, 2007, which expire at various dates through 2017. These credits have been allotted a
valuation allowance and would be realized as a reduction of future income tax payments. If the
Company ultimately realizes the benefit of these excess foreign tax credits, the valuation
allowance of $0.1 million would reduce future income tax expense and $0.6 million would reduce
goodwill.
Also in the United States, the company has $19.3 million of capital loss carryforwards as of
December 31, 2007, which will expire in 2009. The related potential benefit of $6.8 million has
been recorded with a valuation allowance of $6.8 million. These capital losses are not available
to reduce future operating income but if realized will reduce future capital gains and will result
in a reduction of goodwill.
Outside the United States, the company has $3.6 million of net operating loss carryforwards as of
December 31, 2007. Of this amount, $3.2 million will expire at various dates through 2016 and $0.4
million is available indefinitely. The related potential benefit available of $1.1 million has
been recorded with a valuation allowance of $0.9 million. If the Company ultimately realizes the
benefit of these net operating losses, the valuation allowance of $0.9 million would reduce income
tax expense.
Also outside the United States, the company has $0.7 million of capital loss carryforwards as of
December 31, 2007, which can be carried forward indefinitely. The related potential benefit of
$0.2 million has been recorded with a full valuation allowance of $0.2 million. These capital
losses are not available to reduce future operating income but if realized will reduce future
capital gains and will result in a reduction of future income tax expense.
The deferred tax valuation allowance increased $7.6 million and $4.9 million for the periods ending
December 31, 2007 and 2006, respectively. Of the net increase recorded in 2007, $2.5 million was
recorded as an increase of income tax expense, $1.7 million was recorded as a decrease in deferred
tax assets and $6.8 million was recorded as an increase in goodwill. Of the net increase recorded
in 2006, $2.7 was recorded as an increase in income tax expense, $1.6 million was recorded as an
increase in deferred tax assets and $0.6 as an increase of goodwill. The increase recorded in 2007
resulted from losses sustained in the U.S. by a subsidiary that reports its taxes separately from
the consolidated group and from capital losses obtained in the acquisition of NQL which were
originally incurred in the U.S. The increase recorded in 2006 resulted from losses sustained in
the U.S. by a subsidiary that reports its taxes separately from the consolidated group.
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Undistributed earnings of the Companys foreign subsidiaries amounted to $1,580.0 million and
$1,116.3 million at December 31, 2007 and 2006, respectively. Those earnings are considered to be
permanently reinvested and no provision for U.S. federal and state income taxes has been made.
Distribution of these earnings in the form of dividends or otherwise could result in either U.S.
federal taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable in
various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax
liability is not practical; however, unrecognized foreign tax credit carryforwards would be
available to reduce some portion of the U.S. liability. Withholding taxes of approximately $67.9
million would be payable upon remittance of all previously unremitted earnings at December 31,
2007.
Because of the number of tax jurisdictions in which the Company operates, its effective tax rate
can fluctuate as operations and the local country tax rates fluctuate. The Company is also subject
to audits by federal, state and foreign jurisdictions which may result in proposed assessments. The
Companys future tax provision will reflect any favorable or unfavorable adjustments to its
estimated tax liabilities when resolved. The Company is unable to predict the outcome of these
matters. However, we believe that none of these matters will have a material adverse effect on the
results of operations or financial condition of the Company.
In October of 2004, the American Jobs Creation Act of 2004 (the Jobs Act) was signed into law
which introduced a special one-time dividends received deduction on the repatriation of foreign
earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are net. The Act
provides for a special one-time deduction of 85 percent of certain foreign earnings that are
repatriated in either the Companys last tax year that began before the enactment date, or the
first tax year that begins during the one-year period beginning on the date of enactment. The
maximum amount of the Companys foreign earnings that qualify for temporary deduction is $408.2
million. The Company repatriated none of its foreign earnings in 2005 under the repatriation
provisions of the Jobs Act.
15. Business Segments and Geographic Areas
The Companys operations consist of three reportable segments: Rig Technology, Petroleum Services &
Supplies and Distribution Services.
Rig Technology: Our Rig Technology Group designs, manufactures, sells and services complete rig
systems for the drilling, completion, and remediation of oil and gas wells. The Group offers a
comprehensive line of highly-engineered machinery which automates complex well construction and
management operations, such as offshore and onshore drilling rigs; pipe racking, rotating and
assembly systems; coiled tubing equipment and pressure pumping units; well workover rigs; wireline
winches; and cranes.
Petroleum Services & Supplies: Our Petroleum Services & Supplies Group provides a variety of
consumable goods and services used to drill, complete, remediate and workover oil and gas wells,
and manage pipelines, flowlines and other oilfield tubular goods. The Group manufactures, rents
and sells a variety of products and equipment used to perform drilling operations; including solids
control systems, drilling motors, rig instrumentation systems, and drilling mud pump consumables.
Distribution Services: Our Distribution Services segment provides maintenance, repair and
operating supplies and spare parts to drill site and production locations worldwide. In addition
to its comprehensive network of field locations supporting upstream activity throughout North
America, the segment supports major land and offshore operations through locations in Mexico, the
Middle East, Africa, Europe, Southeast Asia and South America. Distribution Services employs
advanced information technologies to provide complete procurement, inventory management and
logistics services to its customers around the globe.
The accounting policies of the reportable segments are the same as those described in the summary
of significant accounting policies of the Company. The Company evaluates performance of each
reportable segment based upon its operating income, excluding non-recurring items.
No single customer accounted for 10% or more of consolidated revenues during the three years ended
December 31, 2007.
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Summarized financial information is as follows (in millions):
Geographic Areas:
United | United | |||||||||||||||||||||||
States | Canada | Norway | Kingdom | Other | Total | |||||||||||||||||||
December 31, 2007 |
||||||||||||||||||||||||
Revenues |
$ | 5,555.5 | $ | 700.5 | $ | 1,698.8 | $ | 496.8 | $ | 1,337.4 | $ | 9,789.0 | ||||||||||||
Long-lived assets |
690.1 | 136.8 | 43.7 | 96.5 | 230.2 | 1,197.3 | ||||||||||||||||||
December 31, 2006 |
||||||||||||||||||||||||
Revenues |
$ | 3,985.1 | $ | 714.9 | $ | 987.2 | $ | 402.2 | $ | 936.4 | $ | 7,025.8 | ||||||||||||
Long-lived assets |
596.3 | 115.8 | 42.1 | 88.7 | 179.2 | 1,022.1 | ||||||||||||||||||
December 31, 2005 |
||||||||||||||||||||||||
Revenues |
$ | 2,646.6 | $ | 653.6 | $ | 394.8 | $ | 298.0 | $ | 651.5 | $ | 4,644.5 | ||||||||||||
Long-lived assets |
584.1 | 82.7 | 32.6 | 57.1 | 121.1 | 877.6 |
Business Segments:
Petroleum | ||||||||||||||||||||
Services & | Distribution | Unallocated/ | ||||||||||||||||||
Rig Technology | Supplies | Services | Eliminations | Total | ||||||||||||||||
December 31, 2007 |
||||||||||||||||||||
Revenues |
$ | 5,744.7 | $ | 3,061.0 | $ | 1,423.7 | $ | (440.4 | ) | $ | 9,789.0 | |||||||||
Operating profit |
1,393.6 | 731.6 | 94.0 | (174.8 | ) | 2,044.4 | ||||||||||||||
Capital expenditures |
63.8 | 159.6 | 5.5 | 22.9 | 251.8 | |||||||||||||||
Depreciation and amortization |
53.7 | 147.9 | 5.0 | 7.5 | 214.1 | |||||||||||||||
Goodwill |
1,230.7 | 1,169.0 | 39.1 | 6.3 | 2,445.1 | |||||||||||||||
Total assets |
7,096.8 | 3,964.5 | 651.8 | 401.8 | 12,114.9 | |||||||||||||||
December 31, 2006 |
||||||||||||||||||||
Revenues |
$ | 3,584.9 | $ | 2,425.0 | $ | 1,369.6 | $ | (353.7 | ) | $ | 7,025.8 | |||||||||
Operating profit |
608.5 | 545.6 | 94.0 | (137.0 | ) | 1,111.1 | ||||||||||||||
Capital expenditures |
46.8 | 138.5 | 3.7 | 11.4 | 200.4 | |||||||||||||||
Depreciation and amortization |
48.1 | 100.9 | 5.3 | 6.3 | 160.6 | |||||||||||||||
Goodwill |
1,168.3 | 1,034.9 | 35.2 | 6.3 | 2,244.7 | |||||||||||||||
Total assets |
4,936.8 | 3,248.3 | 592.7 | 241.5 | 9,019.3 | |||||||||||||||
December 31, 2005 |
||||||||||||||||||||
Revenues |
$ | 2,216.8 | $ | 1,645.8 | $ | 1,074.5 | $ | (292.6 | ) | $ | 4,644.5 | |||||||||
Operating profit |
238.4 | 281.0 | 46.6 | (89.2 | ) | 476.8 | ||||||||||||||
Capital expenditures |
22.9 | 72.6 | 3.7 | 5.8 | 105.0 | |||||||||||||||
Depreciation and amortization |
35.4 | 68.9 | 5.4 | 4.9 | 114.6 | |||||||||||||||
Goodwill |
1,117.2 | 959.2 | 35.0 | 6.3 | 2,117.7 | |||||||||||||||
Total assets |
3,310.3 | 2,717.5 | 479.7 | 171.0 | 6,678.5 |
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16. Quarterly Financial Data (Unaudited)
Summarized quarterly results, were as follows (in millions, except per share data):
First | Second | Third | Fourth | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Total | ||||||||||||||||
Year ended December 31, 2007 |
||||||||||||||||||||
Revenues |
$ | 2,165.7 | $ | 2,384.9 | $ | 2,579.5 | $ | 2,658.9 | $ | 9,789.0 | ||||||||||
Gross Profit |
615.0 | 683.8 | 740.3 | 791.1 | 2,830.2 | |||||||||||||||
Net income |
275.9 | 318.5 | 366.0 | 376.7 | 1,337.1 | |||||||||||||||
Net income per basic share |
0.78 | 0.90 | 1.03 | 1.06 | 3.77 | |||||||||||||||
Net income per diluted share |
0.78 | 0.89 | 1.02 | 1.05 | 3.76 | |||||||||||||||
Year ended December 31, 2006 |
||||||||||||||||||||
Revenues |
$ | 1,511.8 | $ | 1,657.4 | $ | 1,777.9 | $ | 2,078.7 | $ | 7,025.8 | ||||||||||
Gross Profit |
349.8 | 400.7 | 442.7 | 567.4 | 1,760.6 | |||||||||||||||
Net income |
120.3 | 147.9 | 176.6 | 239.2 | 684.0 | |||||||||||||||
Net income per basic share |
0.34 | 0.42 | 0.50 | 0.68 | 1.95 | |||||||||||||||
Net income per diluted share |
0.34 | 0.42 | 0.50 | 0.68 | 1.93 |
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SCHEDULE II
NATIONAL OILWELL VARCO, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2007, 2006 and 2005
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2007, 2006 and 2005
Additions | ||||||||||||||||
(Deductions) | Charge | |||||||||||||||
Balance | charged to | offs | ||||||||||||||
beginning | costs and | and | Balance end of | |||||||||||||
of year | expenses | other | year | |||||||||||||
(in millions) | ||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
2007 |
$ | 30.4 | $ | 16.2 | $ | (1.8 | ) | $ | 44.8 | |||||||
2006 |
17.4 | 17.3 | (4.3 | ) | 30.4 | |||||||||||
2005 |
12.8 | 7.8 | (3.2 | ) | 17.4 | |||||||||||
Allowance for excess and obsolete inventories: |
||||||||||||||||
2007 |
$ | 86.1 | $ | 33.9 | $ | (20.7 | ) | $ | 99.3 | |||||||
2006 |
56.8 | 36.9 | (7.6 | ) | 86.1 | |||||||||||
2005 |
41.2 | 24.0 | (8.4 | ) | 56.8 | |||||||||||
Valuation allowance for deferred tax assets: |
||||||||||||||||
2007 |
$ | 6.8 | $ | 2.6 | $ | 5.0 | $ | 14.4 | ||||||||
2006 |
1.9 | 2.7 | 2.2 | 6.8 | ||||||||||||
2005 |
16.8 | (4.4 | ) | (10.5 | ) | 1.9 | ||||||||||
Warranty reserve: |
||||||||||||||||
2007 |
$ | 57.3 | $ | 78.2 | $ | (44.0 | ) | $ | 91.5 | |||||||
2006 |
24.9 | 54.2 | (21.8 | ) | 57.3 | |||||||||||
2005 |
22.4 | 27.1 | (24.6 | ) | 24.9 |
87
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Exhibit Index
2.1
|
Amended and Restated Agreement and Plan of Merger, effective as of August 11, between National-Oilwell, Inc. and Varco International, Inc. (4). | |
2.2
|
Agreement and Plan of Merger, effective as of December 16, 2007, between National Oilwell Varco, Inc., NOV Sub, Inc., and Grant Prideco, Inc. (9) | |
3.1
|
Amended and Restated Certificate of Incorporation of National-Oilwell, Inc. (Exhibit 3.1) (1). | |
3.2
|
Amended and Restated By-laws of National Oilwell Varco, Inc. (Exhibit 3.1) (10). | |
10.1
|
Employment Agreement dated as of January 1, 2002 between Merrill A. Miller, Jr. and National Oilwell. (Exhibit 10.1) (2). | |
10.2
|
Employment Agreement dated as of January 1, 2002 between Dwight W. Rettig and National Oilwell, with similar agreement with Mark A. Reese. (Exhibit 10.2) (2). | |
10.3
|
Form of Amended and Restated Executive Agreement of Clay C. Williams. (Exhibit 10.12) (3). | |
10.4
|
National Oilwell Varco Long-Term Incentive Plan (5)*. | |
10.5
|
Form of Employee Stock Option Agreement (Exhibit 10.1) (7) | |
10.6
|
Form of Non-Employee Director Stock Option Agreement (Exhibit 10.2) (7). | |
10.7
|
Amended and Restated Credit Agreement, dated as of June 21, 2005, among National Oilwell Varco, Inc., the financial institutions signatory thereto, including Wells Fargo Bank, National Association, in their capacities as lenders thereunder, as US administrative agent for the lenders, as Lead Arranger and Sole Book Runner, DnB NOR Bank ASA, as Norwegian Administrative Agent, DnB NOR Bank ASA and the Bank of Nova Scotia as Co-Documentation Agents, and Comerica Bank and JPMorgan Chase Bank, N.A. as Co-Syndication Agents. (Exhibit 10.1) (6). | |
10.8
|
Form of Performance-Based Restricted Stock (18 Month) Agreement (Exhibit 10.1) (8). | |
10.9
|
Form of Performance-Based Restricted Stock (36 Month) Agreement (Exhibit 10.2) (8). | |
21.1
|
Subsidiaries of the Registrant | |
23.1
|
Consent of Ernst & Young LLP | |
24.1
|
Power of Attorney (included on signature page hereto). | |
31.1
|
Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended | |
31.2
|
Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended |
Table of Contents
32.1
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Compensatory plan or arrangement for management or others | |
(1) | Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on August 11, 2000. | |
(2) | Filed as an Exhibit to our Annual Report on Form 10-K filed on March 28, 2002. | |
(3) | Filed as an Exhibit to Varco International, Inc.s Quarterly Report on Form 10-Q filed on May 6, 2004. | |
(4) | Filed as Annex A to our Registration Statement on Form S-4 filed on September 16, 2004. | |
(5) | Filed as Annex D to our Amendment No. 1 to Registration Statement on Form S-4 filed on January 31, 2005. | |
(6) | Filed as an Exhibit to our Current Report on Form 8-K filed on June 23, 2005. | |
(7) | Filed as an Exhibit to our Current Report on Form 8-K filed on February 23, 2006. | |
(8) | Filed as an Exhibit to our Current Report on Form 8-K filed on March 27, 2007. | |
(9) | Filed as Annex A to our Registration Statement on Form S-4 filed on January 28, 2008. | |
(10) | Filed as an Exhibit to our Current Report on Form 8-K filed on February 21, 2008. |