NOV Inc. - Quarter Report: 2008 March (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008 |
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) |
(I.R.S. Employer Identification No.) |
7909 Parkwood Circle Drive
Houston, Texas
77036-6565
Houston, Texas
77036-6565
(713) 346-7500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant 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 | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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
As of May 5, 2008 the registrant had 415,173,926 shares of common stock, par value $.01 per share,
outstanding.
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL OILWELL VARCO, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,139.4 | $ | 1,841.8 | ||||
Receivables, net |
2,258.6 | 2,099.8 | ||||||
Inventories, net |
2,821.4 | 2,574.7 | ||||||
Costs in excess of billings |
766.2 | 643.5 | ||||||
Deferred income taxes |
156.5 | 131.5 | ||||||
Prepaid and other current assets |
323.0 | 302.5 | ||||||
Total current assets |
8,465.1 | 7,593.8 | ||||||
Property, plant and equipment, net |
1,262.6 | 1,197.3 | ||||||
Deferred income taxes |
67.7 | 55.6 | ||||||
Goodwill |
2,525.4 | 2,445.1 | ||||||
Intangibles, net |
761.0 | 774.1 | ||||||
Other assets |
18.7 | 49.0 | ||||||
Total assets |
$ | 13,100.5 | $ | 12,114.9 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 663.6 | $ | 604.0 | ||||
Accrued liabilities |
1,960.2 | 1,761.4 | ||||||
Billings in excess of costs |
1,605.4 | 1,396.1 | ||||||
Current portion of long-term debt and short-term borrowings |
5.6 | 152.8 | ||||||
Accrued income taxes |
263.1 | 112.4 | ||||||
Total current liabilities |
4,497.9 | 4,026.7 | ||||||
Long-term debt |
737.4 | 737.9 | ||||||
Deferred income taxes |
604.4 | 564.3 | ||||||
Other liabilities |
65.0 | 61.8 | ||||||
Total liabilities |
5,904.7 | 5,390.7 | ||||||
Commitments and contingencies |
||||||||
Minority interest |
63.6 | 62.8 | ||||||
Stockholders equity: |
||||||||
Common stock par value $.01; 357,815,569 and
356,867,498 shares
issued and outstanding at March 31, 2008 and December 31, 2007 |
3.6 | 3.6 | ||||||
Additional paid-in capital |
3,644.2 | 3,617.2 | ||||||
Accumulated other comprehensive income |
242.7 | 195.0 | ||||||
Retained earnings |
3,241.7 | 2,845.6 | ||||||
Total stockholders equity |
7,132.2 | 6,661.4 | ||||||
Total liabilities and stockholders equity |
$ | 13,100.5 | $ | 12,114.9 | ||||
See notes to unaudited consolidated financial statements.
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In millions, except per share data)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In millions, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Revenue |
$ | 2,685.4 | $ | 2,165.7 | ||||
Cost of revenue |
1,888.8 | 1,550.7 | ||||||
Gross profit |
796.6 | 615.0 | ||||||
Selling, general, and administrative |
228.1 | 187.9 | ||||||
Operating profit |
568.5 | 427.1 | ||||||
Interest and financial costs |
(10.0 | ) | (12.3 | ) | ||||
Interest income |
15.7 | 9.1 | ||||||
Other income (expense), net |
13.5 | (2.9 | ) | |||||
Income before income taxes and minority interest |
587.7 | 421.0 | ||||||
Provision for income taxes |
188.1 | 140.7 | ||||||
Income before minority interest |
399.6 | 280.3 | ||||||
Minority interest in income of consolidated subsidiaries |
2.0 | 4.4 | ||||||
Net income |
$ | 397.6 | $ | 275.9 | ||||
Net income per share: |
||||||||
Basic |
$ | 1.12 | $ | 0.78 | ||||
Diluted |
$ | 1.11 | $ | 0.78 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
356.1 | 351.8 | ||||||
Diluted |
358.6 | 355.1 | ||||||
See notes to unaudited consolidated financial statements.
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Cash flow from operating activities: |
||||||||
Net income |
$ | 397.6 | $ | 275.9 | ||||
Adjustments to reconcile net income to net cash provided
(used) by operating activities: |
||||||||
Depreciation and amortization |
61.5 | 47.3 | ||||||
Excess tax benefit from exercise of stock options |
(2.4 | ) | (9.1 | ) | ||||
Other |
24.1 | 12.0 | ||||||
Changes in assets and liabilities, net of acquisitions: |
||||||||
Receivables |
(153.0 | ) | (69.9 | ) | ||||
Inventories |
(224.0 | ) | (167.9 | ) | ||||
Costs in excess of billings |
(122.7 | ) | (65.9 | ) | ||||
Prepaid and other current assets |
(20.5 | ) | (32.4 | ) | ||||
Accounts payable |
55.4 | 67.2 | ||||||
Billings in excess of costs |
209.4 | 168.9 | ||||||
Other assets/liabilities, net |
377.9 | 38.1 | ||||||
Net cash provided by operating activities |
603.3 | 264.2 | ||||||
Cash flow from investing activities: |
||||||||
Purchases of property, plant and equipment |
(54.3 | ) | (48.0 | ) | ||||
Businesses acquisitions, net of cash acquired |
(129.1 | ) | (38.1 | ) | ||||
Other |
| 0.3 | ||||||
Net cash used by investing activities |
(183.4 | ) | (85.8 | ) | ||||
Cash flow from financing activities: |
||||||||
Borrowing against lines of credit and other debt |
0.5 | 0.4 | ||||||
Payments against lines of credit and other debt |
(147.3 | ) | (1.5 | ) | ||||
Proceeds from stock options exercised |
11.2 | 42.2 | ||||||
Excess tax benefit from exercise of stock options |
2.4 | 9.1 | ||||||
Net cash provided (used) by financing activities |
(133.2 | ) | 50.2 | |||||
Effect of exchange rates on cash |
10.9 | 4.2 | ||||||
Increase in cash equivalents |
297.6 | 232.8 | ||||||
Cash and cash equivalents, beginning of period |
1,841.8 | 957.4 | ||||||
Cash and cash equivalents, end of period |
$ | 2,139.4 | $ | 1,190.2 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash payments during the period for: |
||||||||
Interest |
$ | 9.4 | $ | 9.5 | ||||
Income taxes |
$ | 32.0 | $ | 108.8 |
See notes to unaudited consolidated financial statements.
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NATIONAL OILWELL VARCO, INC.
Notes to Consolidated Financial Statements (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
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. Actual results could differ
from those estimates.
The accompanying unaudited consolidated financial statements present information in accordance with
accounting principles generally accepted in the United States for interim financial information and
the instructions to Form 10-Q and applicable rules of Regulation S-X. They do not include all
information or footnotes required by accounting principles generally accepted in the United States
for complete consolidated financial statements and should be read in conjunction with our 2007
Annual Report on Form 10-K.
In our opinion, the consolidated financial statements include all adjustments, all of which are of
a normal, recurring nature, necessary for a fair presentation of the results for the interim
periods. 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.
See Note 11. The results of operations for the three
months ended March 31, 2008 are not necessarily indicative of the results to be expected for the
full year.
2. Subsequent Event Grant Prideco Acquisition
On April 21, 2008, the Company completed its previously announced acquisition of Grant Prideco,
Inc., for a combination of approximately 56.8 million shares of National Oilwell Varco, Inc. common
stock and $2.9 billion in cash. Total purchase price approximated $7.2 billion. In connection
with the transaction, the Company also issued $150.8 million of 6 1/8% Senior Notes due 2015 in
exchange for outstanding Grant Prideco notes assumed in the acquisition. To finance the cash
portion of the Grant Prideco acquisition, the Company expanded its revolving line of credit to $3.0
billion, on which it borrowed approximately $2.0 billion at closing.
3. Inventories, net
Inventories consist of (in millions):
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
Raw materials and supplies |
$ | 409.1 | $ | 420.4 | ||||
Work in process |
1,129.7 | 939.2 | ||||||
Finished goods and purchased products |
1,282.6 | 1,215.1 | ||||||
Inventories, net |
$ | 2,821.4 | $ | 2,574.7 | ||||
4. Accrued Liabilities
Accrued liabilities consist of (in millions):
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
Compensation |
$ | 158.5 | $ | 214.7 | ||||
Customer prepayments |
524.8 | 500.3 | ||||||
Warranty |
93.9 | 91.5 | ||||||
Interest |
14.2 | 13.8 | ||||||
Taxes (non income) |
33.7 | 47.3 | ||||||
Insurance |
45.9 | 42.4 | ||||||
Accrued purchase orders |
730.9 | 582.5 | ||||||
Fair value of derivatives |
111.4 | 111.3 | ||||||
Other |
246.9 | 157.6 | ||||||
Accrued liabilities |
$ | 1,960.2 | $ | 1,761.4 | ||||
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5. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of (in millions):
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
Costs incurred on uncompleted contracts |
$ | 3,054.4 | $ | 3,167.2 | ||||
Estimated earnings |
1,287.6 | 1,208.3 | ||||||
4,342.0 | 4,375.5 | |||||||
Less: Billings to date |
5,181.2 | 5,128.1 | ||||||
$ | (839.2 | ) | $ | (752.6 | ) | |||
Costs and estimated earnings in excess of billings on uncompleted contracts |
$ | 766.2 | $ | 643.5 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
(1,605.4 | ) | (1,396.1 | ) | ||||
$ | (839.2 | ) | $ | (752.6 | ) | |||
6. Comprehensive Income
The components of comprehensive income are as follows (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Net income |
$ | 397.6 | $ | 275.9 | ||||
Currency translation adjustments |
27.1 | 23.1 | ||||||
Derivative financial instruments |
20.9 | | ||||||
Change in defined benefit plans |
(0.3 | ) | (9.0 | ) | ||||
Comprehensive income |
$ | 445.3 | $ | 290.0 | ||||
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7. Business Segments
Operating results by segment are as follows (in millions):
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Revenue: |
||||||||
Rig Technology |
$ | 1,602.9 | $ | 1,219.8 | ||||
Petroleum Services & Supplies |
829.8 | 691.8 | ||||||
Distribution Services |
365.7 | 351.9 | ||||||
Elimination |
(113.0 | ) | (97.8 | ) | ||||
Total Revenue |
$ | 2,685.4 | $ | 2,165.7 | ||||
Operating Profit: |
||||||||
Rig Technology |
$ | 406.0 | $ | 268.8 | ||||
Petroleum Services & Supplies |
195.2 | 171.0 | ||||||
Distribution Services |
18.8 | 24.9 | ||||||
Unallocated expenses and eliminations |
(51.5 | ) | (37.6 | ) | ||||
Total operating profit |
$ | 568.5 | $ | 427.1 | ||||
Operating profit %: |
||||||||
Rig Technology |
25.3 | % | 22.0 | % | ||||
Petroleum Services & Supplies |
23.5 | % | 24.7 | % | ||||
Distribution Services |
5.1 | % | 7.1 | % | ||||
Total Operating Profit % |
21.2 | % | 19.7 | % | ||||
8. Debt
Debt consists of (in millions):
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
$100.0 million Senior Notes, interest at 7.5% payable semiannually, principal due
on February 15, 2008 |
$ | | $ | 100.2 | ||||
$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 |
210.8 | 211.7 | ||||||
$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 |
151.2 | 151.3 | ||||||
Other |
31.0 | 77.5 | ||||||
Total debt |
743.0 | 890.7 | ||||||
Less current portion |
5.6 | 152.8 | ||||||
Long-term debt |
$ | 737.4 | $ | 737.9 | ||||
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Senior Notes
Our $100 million of 7.5% unsecured Senior Notes were repaid on February 15, 2008 using available
cash balances. The 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 March 31, 2008.
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, five-year unsecured revolving credit
facility. At March 31, 2008, there were no borrowings against this facility, and there were $377
million in outstanding letters of credit, resulting in $123 million of funds available under this
revolving credit facility. 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.
The Company also had $1,754 million of additional outstanding letters of credit at March 31, 2008,
primarily in Norway, that are essentially under various bilateral committed letters of credit
facilities. 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.
On April 21, 2008, the Company replaced its existing $500 million unsecured revolving credit
facility with an aggregate of $3.0 billion of unsecured credit facilities and borrowed $2.0 billion
to finance the cash portion of the Grant Prideco acquisition. These facilities consist of a $2.0
billion, five-year revolving credit facility and a $1.0 billion, 364-day revolving credit facility.
Other
Other debt includes approximately $21.6 million in promissory notes due to former owners of
businesses acquired who remain employed by the company.
9. Tax
The effective tax rate for the three month period ended March 31, 2008 was 32.0%, compared to 33.4%
for the same period in 2007. The lower 2008 rate reflects increasing benefits in the US from the
tax incentive for manufacturing activities and a net incremental benefit resulting from the
movement in exchange rates after the change of the functional currency to the U.S. dollar for our
operations in Norway. This net benefit included a tax benefit in Norway of $23.1 million resulting
from realized foreign exchange losses on U.S. dollar denominated assets and liabilities and a $13.7
million loss, which was reported as income tax expense, from the remeasurement into U.S. dollars of
foreign currency denominated deferred tax assets and liabilities in the balance sheet.
The Company accounts for uncertainty in income taxes in accordance with 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.
During the three month period ended March 31, 2008, the Company recognized no material changes in
the balance of unrecognized tax benefits. 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.
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 jurisdiction
vary by legal entity, but are generally open in the U.S. for the tax years after 2003 and outside
the U.S. for the tax years ending after 2001. Norway also remains open for the 2001 tax year.
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.
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10. Stock-Based Compensation
The Company has a stock-based compensation plan known as the National Oilwell Varco, Inc Long-Term
Incentive Plan (the Plan). The Plan provides for the granting of stock options,
performance-based share awards, restricted stock, phantom shares, stock payments and stock
appreciation rights. The number of shares authorized under the Plan is 15 million. As of March
31, 2008, there remain 5,244,773 shares available for future grants under the Plan, all of which
are available for grants of stock options, performance-based share awards, restricted stock,
phantom shares, stock payments and stock appreciation rights. Total stock-based compensation for
all share-based compensation arrangements under the Plan was $13.4 million and $8.9 million for the
three months ended March 31, 2008 and 2007, respectively. The total income tax benefit recognized
in the income statement for all share-based compensation arrangements under the Plan was $4.2
million and $2.9 million for the three months ended March 31, 2008 and 2007, respectively.
During the three months ended March 31, 2008, the Company granted 1,340,900 stock options, 325,300
restricted stock award shares and 185,000 performance-based restricted stock award shares. The
stock options were granted February 19, 2008 with an exercise price of $64.16. These options vest
over a three-year period from grant date. The restricted stock award shares were also granted
February 19, 2008. These shares will not vest until the third anniversary of the date of the
grant, at which time they will be 100% vested. The performance-based restricted stock award shares
were granted February 19, 2008. The performance-based restricted stock award shares granted will
be 100% vested 36 months from date of grant, with a performance condition of the Companys average
operating income growth, measured on a percentage basis, from January 1, 2008 through December 31,
2010 exceeding the median operating income level growth of a designated peer group over the same
period.
11. Derivative Financial Instruments
We record all derivative financial instruments at their fair value in our consolidated balance
sheet. Except for certain balance sheet hedges 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 and options 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 March 31, 2008, we had entered into foreign currency forward contracts with notional amounts
aggregating $2,351.2 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 March 31, 2008 for contracts with similar terms and maturity dates, we have
recorded a gain of $34.2 million, net of tax of $13.0 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 $31.7 million of this gain will be
reclassified into earnings within the next 12 months. Ineffectiveness was not material on these
foreign currency forward contracts for the periods ended March 31, 2008 or 2007. The Company
currently has cash flow hedges in place through the fourth quarter of 2010.
At March 31, 2008, the Company had foreign currency forward contracts with notional amounts
aggregating $133.6 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 March 31,
2008 for contracts with similar terms and maturity dates, we recorded a gain of $10.0 million to
adjust these foreign currency forward contracts to their fair market values. This gain offsets
designated losses on firm commitments. The Company currently has fair value hedges in place
through the fourth quarter of 2010. Ineffectiveness was not material on these foreign currency
forward contracts for the periods ended March 31, 2008 or 2007.
At March 31, 2008, the Company had foreign currency forward contracts with notional amounts
aggregating $194.1 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 values of these contracts are recorded
each period in current earnings.
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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. Of
the related net position of $108.8 million associated with the terminated hedges at January 1,
2008, $23.6 million has been recognized into earnings at March 31, 2008.
12. 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):
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Numerator: |
||||||||
Net income |
$ | 397.6 | $ | 275.9 | ||||
Denominator: |
||||||||
Basicweighted average common shares outstanding |
356.1 | 351.8 | ||||||
Dilutive effect of employee stock options and other unvested stock awards |
2.5 | 3.3 | ||||||
Diluted outstanding shares |
358.6 | 355.1 | ||||||
Basic earnings per share |
$ | 1.12 | $ | 0.78 | ||||
Diluted earnings per share |
$ | 1.11 | $ | 0.78 | ||||
13. 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. In February 2008, the FASB issued FSP 157-2, which
delays the effective date of SFAS 157 for all nonfinancial assets and liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually) until fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years. The Company adopted the provisions of SFAS 157 for financial assets and liabilities
as of January 1, 2008. The Company has determined that our financial assets and liabilities (primarily derivatives)
are
level 2 in the fair value hierarchy. At March 31, 2008, the fair value of the Companys foreign currency
forward contracts discussed in Note 11 totaled $55.8 million. There was no significant impact to the Companys consolidated
financial statements from the adoption of SFAS 157. The Company is currently evaluating the
potential impact that the application of SFAS 157 to its nonfinancial assets and liabilities will
have on its consolidated financial statements.
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. On January 1, 2008, the Company adopted the requirement to measure plan
assets and benefit obligations as of its fiscal year end and took a $1.5 million charge to retained
earnings.
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. On January 1, 2008, the Company adopted SFAS 159 and elected not
to measure any of its current eligible assets and liabilities at fair value.
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
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basis, for fiscal years beginning after December 15, 2008. The Company expects 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.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 amends and expands
the disclosure requirements for derivative instruments and hedging activities, with the intent to
provide users of financial statements with an enhanced understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are accounted for, and
how derivative instruments and related hedged items affect an entitys financial statements. SFAS
161 is effective for fiscal years and interim periods beginning after November 15, 2008. The
Company has not yet evaluated the impact, if any, this standard might have on the Companys
disclosures to its consolidated financial statements.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
National Oilwell Varco, Inc. (the Company) is a worldwide leader in the design, manufacture and
sale of equipment and components used in oil and gas drilling and production, the provision of
oilfield services, and supply chain integration services to the upstream oil and gas industry. The
following describes our business segments:
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.
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 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.
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Executive Summary
National Oilwell Varco generated earnings of $397.6 million or $1.11 per fully diluted share in its
first quarter ended March 31, 2008, on revenues of $2,685.4 million. Earnings per share increased
42 percent and revenue increased 24 percent from the Companys first quarter 2007 earnings and
revenues, respectively, as we continued to experience rising demand for our products and services.
Our backlog for capital equipment increased 55 percent year-over-year due to growing numbers of new
offshore drilling rig construction projects 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 the first quarter of 2008 as
measured by Baker Hughes (a good measure of the level of oilfield activity and spending) increased
2.4 percent from the first quarter of 2007, and has increased 82 percent since 2002. Year-to-year
first quarter growth in domestic, Latin American and Eastern Hemisphere drilling activity were
partly offset by Canadian activity declines. Activity in the U.S. declined slightly from the
fourth quarter of 2007, while Canada increased significantly and seasonally from the fourth quarter
of 2007 to the first quarter of 2008. Most other markets saw modest increases in activity from the
fourth quarter of 2007, except Africa, where rig activity declined 9 percent sequentially.
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 top drives, our LXT BOPs, and our 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 easier, and
make the rig a more desirable place to work.
The world is actively building many new offshore rigs, and schedules call for 85 new floating rigs
and 95 new jackup rigs to be delivered into the fleet by the end of 2011. The 635 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, and we believe that the newer
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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 inquiries, both international and domestic, are up sharply, but our backlog for land
equipment dipped slightly in the first quarter, due partly to a large decline in pressure pumping
equipment for North America. Nevertheless, customer enthusiasm for our technology continues to
build, in our opinion, due to the great operational success of the modern, AC-powered,
electronically controlled rigs we sell. Therefore, we believe that contracts for more new land
rigs will be placed soon, particularly for international markets. Outlook for North America has
improved, due to substantially higher gas prices in the US and Canada. Inquiries for rig equipment
and oilfield services for North America, particularly for shale plays, have increased. Most
incremental domestic demand is focused on shallower rigs with small footprints, for the Appalachia
region. We believe the retooling of the U.S. land rig market will continue as favorable operator
experience with higher technology rigs vis-a-vis old mechanical 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
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.
Grant Prideco Acquisition
On April 21, 2008, the Company completed its previously announced acquisition of Grant Prideco,
Inc., for a combination of approximately 56.8 million shares of National Oilwell Varco, Inc. common
stock and $2.9 billion in cash. In connection with the transaction the Company also issued $150.8
million of 6 1/8% Senior Notes due 2015 in exchange for outstanding Grant Prideco notes. To
finance the cash portion of the Grant Prideco acquisition we expanded our revolving line of credit
to $3.0 billion, on which we borrowed approximately $2.0 billion at closing. We will receive
approximately $800 million in cash consideration (estimated $538 million after tax) from Vallourec
& Mannesmann Holdings, Inc. upon the completion of its previously announced acquisition of certain
business lines of Grant Prideco, which is expected to occur during the second quarter of 2008.
Segment Performance
Rig Technology generated $1,602.9 million in revenue and $406.0 million in operating profit in the
first quarter of 2008, yielding an operating margin of 25.3 percent. The group generated
year-over-year operating leverage (incremental operating profit divided by incremental revenue) of
36 percent on the 31 percent increase in revenue. Sales were up slightly but operating profit
declined slightly from the fourth quarter of 2007, due in part to a reduction in the mix of spare
parts sales sequentially within non-backlog revenue. Sales out of backlog declined 4 percent
sequentially to $1,131.9 million, due to fewer shipments of workover rigs, well stimulation units,
power swivels, and mud pumps, partly offset by higher sequential revenues on offshore projects.
Based on projects as of March 31, 2008, we expect revenues out of backlog to total approximately
$4.4 billion for the remaining three quarters of 2008 and $4.2 billion for 2009. Our $9.9 billion
ending backlog for Rig Technology at March 31, 2008 was approximately 90 percent international and
10 percent domestic, and 88 percent offshore and 12 percent land. Our Rig Technology segment is
facing rising steel and foreign currency related costs, which accelerated this quarter, but
operationally the group is focused on improving performance principally through better efficiency.
The Petroleum Services & Supplies segment generated record revenues of $829.8 million, up about one
percent from fourth quarter 2007 results and up 20 percent from the prior year. Operating profit
was $195.2 million, an increase of $6.0 million from the fourth quarter, and operating margins were
23.5 percent, a slight improvement from the fourth quarter. Operating leverage or flowthrough was
49 percent sequentially and 18 percent compared to the first quarter of 2007. Sequential
improvements in margins were driven by a surprisingly strong seasonal improvement in services
across North America. The groups international sales were down slightly sequentially, partly
offsetting these gains. Revenue growth in the Middle East and Latin America failed to overcome
lower sales in the North Sea and continental Europe due to weather, and lower sales in the Far East
due to project delays. International expansion initiatives continued, and we expect to continue to
invest in the startup of a number of these. The group generated greater sales of drilling
expendables, pump liners and valves. In recent quarters inventories of these consumables have been
cannibalized from idle rigs, leading to pricing pressure, but these excess inventories appear to be
dwindling. Higher demand for power sections for downhole drilling motors to support horizontal
drilling drove revenue gains for the group. Horizontal and directional drilling continues to
steadily gain share as a percentage of total drilling activity in the U.S., and, along with
pressure pumping, is a critical factor driving the compelling economics of the shale gas plays
unfolding across North America. Our pipe inspection and coating products posted sequential gains,
and the group benefited from a large sale of fiberglass pipe into the tar sands in Canada. Rig
instrumentation products also posted solid sequential gains, but solids control services and
equipment declined slightly on lower equipment sales, and rough North Sea
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weather. Sales of coiled tubing also declined sequentially, due to lower demand from the pressure
pumpers in the U.S., and higher steel costs are pressuring margins. Most business units are
attempting to raise prices, but face rising costs related to steel, labor and other inputs.
Our Distribution Services segment revenues were $365.7 million in the first quarter of 2008, level
with the fourth quarter of 2007 and up four percent from the first quarter of 2007. Operating
profit declined $2.1 million sequentially to $18.8 million, and operating margins were 5.1 percent,
down both sequentially and year-over-year. Seasonal revenue gains in Canada and higher sequential
international sales failed to fully offset revenue declines in the U.S. from the fourth quarter of
2007 to the first quarter of 2008. Competitive pricing pressures in North America continued to
mount during the first quarter. Generally lower drilling rig dayrates have led many domestic
drilling contractors to bid out more of their daily consumables supply work, which has reduced
pricing and margins. In the U.S., the group had fewer supplies sold into well hookups in the
Rockies during the first quarter. In Canada, the groups operations continue to restructure to
improve margins. International revenues increased in the first quarter over the fourth quarter due
to the opening of several new locations in recent quarters, most notably in the Middle East.
Africa and Asia-Pacific also posted strong quarters, partly offset by softer sequential results in
Venezuela and Europe. Costs associated with international expansion initiatives continued through
the first quarter.
Outlook
We believe that the outlook for the Company for the remainder of 2008 remains positive, as
historically high commodity prices are expected to keep overall oil and gas activity high, and as
the Company enters the second quarter of 2008 with a record level of backlog for capital equipment
for its Rig Technology group.
Oil prices and supply remains 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 sharply higher oil prices that have resulted to sustain high levels of oilfield
activity in 2008, provided the worlds major economies remain reasonably strong. 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, and inquiries regarding domestic rig
construction have risen very recently. Demand for pressure pumping equipment softened during the
quarter, and is expected to remain lower for at least the next few months.
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 outlook
there has improved due to higher gas prices.
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, but we
continue to restructure there to improve profitability.
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Operating Environment Overview
The Companys results are dependent on, among other things, the level of worldwide oil and gas
drilling, well remediation activity, the prices of crude oil and natural gas, capital spending by
other oilfield service companies and drilling contractors, pipeline maintenance activity, and
worldwide oil and gas inventory levels. Key industry indicators for the first quarter of 2008 and
2007, and the fourth quarter of 2007 include the following:
% | % | |||||||||||||||||||
1Q08 v | 1Q08 v | |||||||||||||||||||
1Q08* | 1Q07* | 4Q07* | 1Q07 | 4Q07 | ||||||||||||||||
Active Drilling Rigs: |
||||||||||||||||||||
U.S. |
1,771 | 1,732 | 1,790 | 2.3 | % | (1.1 | %) | |||||||||||||
Canada |
507 | 532 | 356 | (4.7 | %) | 42.4 | % | |||||||||||||
International |
1,046 | 982 | 1,017 | 6.5 | % | 2.9 | % | |||||||||||||
Worldwide |
3,324 | 3,246 | 3,163 | 2.4 | % | 5.1 | % | |||||||||||||
West Texas Intermediate
Crude Prices (per barrel) |
$ | 97.87 | $ | 58.14 | $ | 90.85 | 68.3 | % | 7.7 | % | ||||||||||
Natural Gas Prices ($/mmbtu) |
$ | 8.64 | $ | 7.20 | $ | 6.99 | 20.0 | % | 23.6 | % |
* | Averages for the quarters indicated. See sources below. |
The following table details the U.S., Canadian, and international rig activity and West Texas
Intermediate Oil prices for the past nine quarters ended March 31, 2008 on a quarterly basis:
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0001021860/000095012908002907/h56713h5671301.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).
The worldwide and U.S. quarterly average rig count increased 2.4% (from 3,246 to 3,324) and 2.3%
(from 1,732 to 1,771), respectively, in the first quarter of 2008 compared to the first quarter of
2007. The average per barrel price of West Texas Intermediate Crude increased 68.3% (from $58.14
per barrel to $97.87 per barrel) and natural gas prices increased 20.0% (from $7.20 per mmbtu to
$8.64 per mmbtu) in the first quarter of 2008 compared to the first quarter of 2007.
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U.S. rig activity at April 25, 2008 was 1,842 rigs compared to the first quarter average of 1,771
rigs. The price for West Texas Intermediate Crude was at $119.64 per barrel as of April 25, 2008.
The Company believes that current industry projections are forecasting commodity prices to remain
strong. However, numerous events could significantly alter these projections including political
tensions in the Middle East, the acceleration or deceleration of the U.S. and world economies, a
build up in world oil inventory levels, or numerous other events or circumstances.
Results of Operations
Operating results by segment are as follows.
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Revenue: |
||||||||
Rig Technology |
$ | 1,602.9 | $ | 1,219.8 | ||||
Petroleum Services & Supplies |
829.8 | 691.8 | ||||||
Distribution Services |
365.7 | 351.9 | ||||||
Eliminations |
(113.0 | ) | (97.8 | ) | ||||
Total Revenue |
$ | 2,685.4 | $ | 2,165.7 | ||||
Operating Profit: |
||||||||
Rig Technology |
$ | 406.0 | $ | 268.8 | ||||
Petroleum Services & Supplies |
195.2 | 171.0 | ||||||
Distribution Services |
18.8 | 24.9 | ||||||
Unallocated expenses and eliminations |
(51.5 | ) | (37.6 | ) | ||||
Total Operating Profit |
$ | 568.5 | $ | 427.1 | ||||
Operating Profit %: |
||||||||
Rig Technology |
25.3 | % | 22.0 | % | ||||
Petroleum Services & Supplies |
23.5 | % | 24.7 | % | ||||
Distribution Services |
5.1 | % | 7.1 | % | ||||
Total Operating Profit % |
21.2 | % | 19.7 | % | ||||
Rig Technology
Three Months Ended March 31, 2008 and 2007. Rig Technology revenue in the first quarter of 2008
was $1,602.9 million, an increase of $383.1 million (31%) compared to the same period of 2007. The
increase can be attributed to the growing market for capital equipment, as evidenced by backlog
growth over the past several years.
Operating profit from Rig Technology was $406.0 million for the quarter ended March 31, 2008, an
increase of $137.2 million (51%) over the same period of 2007. The increase in operating profit
was the result of higher pricing on rig equipment and continued improvement in operating
efficiency.
Petroleum Services & Supplies
Three Months Ended March 31, 2008 and 2007. Revenue from Petroleum Services & Supplies was $829.8
million for the first quarter of 2008 compared to $691.8 million for the first quarter of 2007, an
increase of $138.0 million (20%). The increase is attributable to higher demand for virtually all
products and services offered by the segment.
Operating profit from Petroleum Services & Supplies was $195.2 million for the first quarter of
2008 compared to $171.0 million for the first quarter of 2007, an increase of $24.2 million
(14.2%). The increase was attributable to higher profitability across all products, driven by
higher volumes and improved pricing and increased efficiency in manufacturing segments.
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Distribution Services
Three Months Ended March 31, 2008 and 2007. Revenue from Distribution Services was $365.7
million, an increase of $13.8 million (4%) during the first quarter of 2008 over the comparable
2007 period. The increase can be attributed to the greater number of rigs operating worldwide
during the first quarter, which was 2.4% higher than the same period for 2007. Rigs operating in
the U.S. and international markets remained strong but were offset by a decline in Canada.
Operating profit of $18.8 million in the first quarter of 2008 decreased $6.1 million over the
prior year results due to lower rig day rates in the domestic drilling market.
Unallocated expenses and eliminations
Unallocated expenses and eliminations were $51.5 million for the three months ended March 31, 2008,
compared to $37.6 million for the same period of 2007. The increase in unallocated expenses and
eliminations was primarily due to greater inter-segment profit eliminations and incentive
compensation.
Interest and financial costs
Interest and financial costs were $10.0 million for the three months ended March 31, 2008, compared
to $12.3 million for the three months ended March 31, 2007. The decrease in interest costs for
2008 compared to 2007 was due to lower debt levels.
Other income (expense), net
Other income (expense), net was income of $13.5 million for the three months ended March 31, 2008,
compared to expense of $2.9 million for the same period of 2007. This increase in income was
primarily due to a net foreign exchange gain which was $15.3 million for the three months ended
March 31, 2008, as compared to a net foreign exchange loss of $1.3 million for the same period of
2007. The strengthening of the Norwegian currency against the U.S. dollar was the leading
contributor to the foreign exchange gain in 2008.
Provision for income taxes
The effective tax rate for the three month period ended March 31, 2008 was 32.0%, compared to 33.4%
for the same period in 2007. The lower 2008 rate reflects increasing benefits in the U.S. from the
tax incentive for manufacturing activities and a net incremental benefit resulting from the
movement in exchange rates after the change of the functional currency to the U.S. dollar for our
operations in Norway. This net benefit included a tax benefit in Norway of $23.1 million resulting
from realized foreign exchange losses on U.S. dollar denominated assets and liabilities and a $13.7
million loss, which was reported as income tax expense, from the remeasurement into U.S. dollars of
foreign currency denominated deferred tax assets and liabilities in the balance sheet.
Liquidity and Capital Resources
At March 31, 2008, the Company had cash and cash equivalents of $2,139.4 million, and total debt of
$743.0 million. At December 31, 2007, cash and cash equivalents were $1,841.8 million and total
debt was $890.7 million. The Companys outstanding debt at March 31, 2008 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, and other debt
of $43.0 million.
For the first three months of 2008, cash provided by operating activities was $603.3 million
compared to cash provided by operating activities of $264.2 million in the same period of 2007.
Cash was provided by operations primarily through net income of $397.6 million plus non-cash
charges of $61.5 million, increases in accounts payable of $55.4 million, increases in billings in
excess of costs of $209.4 million, and increases in other assets/liabilities, net of $377.9
million. The increase in other assets/liabilities, net and billings in excess of costs were mainly
due to increases in customer deposits and higher billings on rig construction projects. These
positive cash flows were offset by increases in receivables of $153.0 million, increases in costs
in excess of billings of $122.7 million and increases in inventories of $224.0 million.
Receivables and costs in excess of billings increased due to greater revenue and activity in the
first three months of 2008 compared to the fourth quarter of 2007, while inventory increased due to
growing backlog orders.
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For the first three months of 2008, cash used by investing activities was $183.4 million compared
to cash used of $85.8 million for the same period of 2007. Capital expenditures totaled
approximately $54.3 million in the first three months of 2008, primarily related to the Petroleum
Services & Supplies service and rental businesses.
For the first three months of 2008, cash used by financing activities was $133.2 million compared
to cash provided of $50.2 million for the same period of 2007. Cash payments against lines of
credit and other debt was $147.3. Cash proceeds from exercised stock options was $11.2 million for
the first three months of 2008.
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 facility is available for general corporate purposes
and acquisitions, including letters of credit and performance bonds. The Company has the right to
increase the facility to $750 million and to extend the term of the facility for an additional
year. At March 31, 2008, there were no borrowings against this facility. At March 31, 2008, there
were $377 million in outstanding letters of credit in this facility. 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. The Company also has $1,754 million of additional outstanding letters of
credit at March 31, 2008, primarily in Norway, that are not under the Companys senior credit
facility. This increased letter of credit exposure 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.
On April 21, 2008, the Company replaced its existing $500 million unsecured revolving credit
facility with an aggregate of $3.0 billion of unsecured credit facilities and borrowed $2.0 billion
to finance the cash portion of the Grant Prideco acquisition. These facilities consist of a $2.0
billion, five-year revolving credit facility and a $1.0 billion, 364-day revolving credit facility.
The Companys cash balance as of March 31, 2008 was $2,139.4 million. We believe that cash on
hand, 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 any significant increases in
capital expenditures caused by any need to increase manufacturing capacity can be funded from
operations or through debt financing.
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. We expect to
fund future cash acquisitions 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.
We believe that the higher costs for labor, energy, steel and other commodities experienced
in 2007 and 2008 have largely been mitigated by increased prices and component surcharges for the
products we sell. However, higher steel, energy or other commodity prices may adversely impact
future periods.
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. In February 2008, the FASB issued FSP 157-2, which
delays the effective date of SFAS 157 for all nonfinancial assets and liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually) until fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years. The Company adopted the provisions of SFAS 157 for financial assets and liabilities
as of January 1, 2008. The Company has determined that our financial assets and liabilities (primarily derivatives)
are
level 2 in the fair value hierarchy. At March 31, 2008, the fair value of the Companys foreign currency
forward contracts discussed in Note 11 totaled $55.8 million. There was no significant impact to the Companys consolidated
financial statements from the adoption of SFAS 157. The Company is currently evaluating the
potential impact that the application of SFAS 157 to its nonfinancial assets and liabilities will
have on its consolidated financial statements.
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
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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. On January 1, 2008, the Company adopted the requirement to measure plan assets and
benefit obligations as of its fiscal year end and took a $1.5 million charge to retained earnings.
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. On January 1, 2008, the Company adopted SFAS 159 and elected not
to measure any of its currently eligible assets and liabilities at fair value.
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 expects 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.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 amends and expands
the disclosure requirements for derivative instruments and hedging activities, with the intent to
provide users of financial statements with an enhanced understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are accounted for, and
how derivative instruments and related hedged items affect an entitys financial statements. SFAS
161 is effective for fiscal years and interim periods beginning after November 15, 2008. The
Company has not yet evaluated the impact, if any, this standard might have on the Companys
disclosures to its consolidated financial statements.
Forward-Looking 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. All statements
herein regarding expected merger synergies are forward-looking statements. 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, difficulties encountered in integrating mergers and acquisitions,
and worldwide economic activity. You should also consider carefully the statements under Risk
Factors, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007,
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 3. 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. We recorded a
foreign exchange gain in our income statement of approximately $15.3 million in the first three
months of 2008, compared to a foreign exchange loss of $1.3 million in the same period of the prior
year. These movements are primarily due to exchange rate fluctuations related to monetary asset
balances denominated in currencies other than the functional currency. Further strengthening of
currencies against the U.S. dollar may continue to create similar movement in future periods to the
extent we maintain net assets and liabilities not denominated in the functional currency of the
countries using the local currency as their functional currency.
Some of our 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 March 31, 2008, we had entered into foreign currency forward contracts with notional amounts
aggregating $2,351.2 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 March 31,
2008 and 2007 for contracts with similar terms and maturity dates, we have recorded a gain of $34.2
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 $31.7 million of the gain will be reclassified into earnings within the
next 12 months. Ineffectiveness was not material on these foreign currency forward contracts for
the periods ended March 31, 2008 or 2007. The Company currently has cash flow hedges in place
through the fourth quarter of 2010.
At March 31, 2008, the Company had foreign currency forward contracts with notional amounts
aggregating $133.6 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 March 31,
2008 and 2007 for contracts with similar terms and maturity dates, we recorded a gain of $10.0
million and $32.8 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.
Ineffectiveness was not material on these foreign currency forward contracts for the periods ended
March 31, 2008 or 2007.
At March 31, 2008, the Company had foreign currency forward contracts with notional amounts
aggregating $194.1 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, 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. Of
the related net position of $108.8 million associated with the terminated hedges at January 1,
2008, $23.6 million has been recognized into earnings at March 31, 2008.
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The maturity of the above forward contracts by currency is:
Hedge Classification | Currency | 2008 | 2009 | 2010 | Total | |||||||||||||||
Cash Flow |
DKK | $ | 28.9 | $ | 10.1 | $ | | $ | 39.0 | |||||||||||
EUR | 376.5 | 78.2 | 1.2 | 455.9 | ||||||||||||||||
GBP | 30.1 | 13.4 | | 43.5 | ||||||||||||||||
NOK | 899.6 | 634.3 | 122.5 | 1,656.4 | ||||||||||||||||
SEK | 3.9 | 2.8 | 0.8 | 7.5 | ||||||||||||||||
USD | 142.7 | 6.2 | | 148.9 | ||||||||||||||||
$ | 1,481.7 | $ | 745.0 | $ | 124.5 | $ | 2,351.2 | |||||||||||||
Fair Value |
||||||||||||||||||||
EUR | $ | 4.1 | $ | 0.6 | $ | | $ | 4.7 | ||||||||||||
KRW | 0.9 | | | 0.9 | ||||||||||||||||
USD | 101.2 | 24.1 | 2.7 | 128.0 | ||||||||||||||||
$ | 106.2 | $ | 24.7 | $ | 2.7 | $ | 133.6 | |||||||||||||
Balance Sheet |
||||||||||||||||||||
EUR | $ | 2.9 | $ | | $ | | $ | 2.9 | ||||||||||||
GBP | 0.8 | | | 0.8 | ||||||||||||||||
NOK | 137.5 | 0.4 | 0.5 | 138.4 | ||||||||||||||||
USD | 52.0 | | | 52.0 | ||||||||||||||||
$ | 193.2 | $ | 0.4 | $ | 0.5 | $ | 194.1 | |||||||||||||
Total |
$ | 1,781.1 | $ | 770.1 | $ | 127.7 | $ | 2,678.9 | ||||||||||||
The Company had other financial market risk sensitive instruments denominated in foreign currencies
totaling $42.7 million as of March 31, 2008 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 other financial market risk sensitive instruments could
affect net income by $2.8 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.
Interest Rate Risk
At March 31, 2008 our long term borrowings consisted of $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 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.
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Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures. The Companys disclosure controls and procedures
are designed to provide reasonable assurance that the information required to be disclosed by the
Company in the reports it files under the Exchange Act is accumulated and communicated to the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures and is recorded,
processed, summarized and reported within the time period specified in the rules and forms of the
Securities and Exchange Commission. Based upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures
are effective as of the end of the period covered by this report at a reasonable assurance level.
There has been no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II OTHER INFORMATION
Item 6. Exhibits
Reference is hereby made to the Exhibit Index commencing on Page 25.
SIGNATURE
Pursuant to the requirements 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.
Date: May 9, 2008 | By: | /s/ Clay C. Williams | ||
Clay C. Williams | ||||
Senior Vice President and Chief Financial Officer (Duly Authorized Officer, Principal Financial and Accounting Officer) |
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INDEX TO EXHIBITS
(a) 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. (8) | |
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) (9). | |
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) (6) | |
10.6
|
Form of Non-Employee Director Stock Option Agreement (Exhibit 10.2) (6). | |
10.7
|
Form of Performance-Based Restricted Stock (18 Month) Agreement (Exhibit 10.1) (7). | |
10.8
|
Form of Performance-Based Restricted Stock (36 Month) Agreement (Exhibit 10.2) (7). | |
10.9
|
Five-Year Credit Agreement, dated as of April 21, 2008, among National Oilwell Varco, Inc., the financial institutions signatory thereto, including Wells Fargo Bank, N.A., in their capacities as Administrative Agent, Co-Lead Arranger and Joint Book Runner, DnB Nor Bank ASA, as Co-Lead Arranger and Joint Book Runner, and Fortis Capital Corp., The Bank of Nova Scotia and the Bank of Tokyo Mitsubishi UFJ, Ltd., as Co-Documentation Agents. (10). | |
10.10
|
364-Day Credit Agreement, dated as of April 21, 2008, among National Oilwell Varco, Inc., the financial institutions signatory thereto, including Wells Fargo Bank, N.A., in their capacities as Administrative Agent, Co-Lead Arranger and Joint Book Runner, DnB Nor Bank ASA, as Co-Lead Arranger and Joint Book Runner, and Fortis Capital Corp., The Bank of Nova Scotia and the Bank of Tokyo Mitsubishi UFJ, Ltd., as Co-Documentation Agents. (10). | |
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 February 23, 2006. | |
(7) | Filed as an Exhibit to our Current Report on Form 8-K filed on March 27, 2007. | |
(8) | Filed as Annex A to our Registration Statement on Form S-4 filed on January 28, 2008. | |
(9) | Filed as an Exhibit to our Current Report on Form 8-K filed on February 21, 2008. | |
(10) | Filed as an Exhibit to our Current Report on Form 8-K filed on April 22, 2008. |
We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to
the U.S. Securities and Exchange Commission, upon request, all constituent instruments defining the
rights of holders of our long-term debt not filed herewith.
25