NOV Inc. - Annual Report: 2009 (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, 2009
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 | (IRS Employer | |
of incorporation or organization) | Identification No.) |
7909 Parkwood Circle Drive, Houston, Texas 77036-6565
(Address of principal executive offices)
(Address of principal executive offices)
(713) 346-7500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). 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. þ
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
The aggregate market value of voting and non-voting common stock held by non-affiliates of the
registrant as of June 30, 2009 was $13.7 billion. As of February 16, 2010, there were 418,452,756
shares of the Companys common stock ($0.01 par value) outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement in connection with the 2010 Annual Meeting of Stockholders are
incorporated in Part III of this report.
TABLE OF CONTENTS
Table of Contents
FORM 10-K
PART I
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 over 825 locations across six continents.
On April 21, 2008 we acquired 100% of the outstanding shares of Grant Prideco, Inc. (Grant
Prideco) for a total purchase price of $7.2 billion of cash and NOV common stock. We have included
the financial results of Grant Prideco in our Consolidated Financial Statements beginning on April
21, 2008, the date Grant Prideco common shares were exchanged for National Oilwell Varco common
shares and cash. The Grant Prideco operations are included in the Petroleum Services & Supplies
segment.
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 its 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; rig instrumentation systems; coiled tubing equipment and pressure pumping units; well
workover rigs; wireline winches; wireline trucks; 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, India, Turkey,
the Netherlands, Singapore, Brazil, and South Korea.
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 drill pipe, wired drill pipe, transfer
pumps, solids control systems, drilling motors, drilling fluids, drill bits, reamers and other
downhole tools, 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,
line pipe, 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
additional operations in the United States, Canada, the United Kingdom, China, Kazakhstan, Mexico,
Russia, Argentina, India, Bolivia, the Netherlands, Singapore, Malaysia, Vietnam, Brazil, 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 is determined primarily by the level
of drilling, servicing, and oil and gas production activities.
The following table sets forth the contribution to our total revenues of our three operating
segments (in millions):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue: |
||||||||||||
Rig Technology |
$ | 8,093 | $ | 7,528 | $ | 5,745 | ||||||
Petroleum
Services & Supplies |
3,745 | 4,651 | 3,061 | |||||||||
Distribution Services |
1,350 | 1,772 | 1,424 | |||||||||
Eliminations |
(476 | ) | (520 | ) | (441 | ) | ||||||
Total Revenue |
$ | 12,712 | $ | 13,431 | $ | 9,789 | ||||||
See Note 15 to the 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.
We have included a glossary of oilfield terms at the end of Item 1. Business 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 spurs
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 11% in 2006, 2% in 2007, and 7% in
2008. 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 2006 and 2007, resulting in higher backlogs for the Company at the end of 2008
compared to the end of 2006 and 2007. However, as a result of the financial crisis and
significantly lower commodity prices, the worldwide drilling rig count declined 31% in 2009 and
customers were far less willing to commit to major capital equipment purchases in 2009. As a
result, our order rates were substantially lower in 2009. Backlog for the Company was
approximately $6.4 billion at December 31, 2009 compared to approximately $11.1 billion and
$9.0 billion for December 31, 2008 and 2007, respectively.
In 2008 and 2009, 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. Most of
the remainder of the Rig Technology segments revenue are 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
equipment for
use in industrial applications, and (ii) 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.
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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; access to external financing; and governmental regulations regarding, among other
things, environmental protection, climate change, 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.
See additional discussion on current worldwide economic environment and related oil and gas
activity levels in Item 1A. Risk Factors and Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
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, drill bits, downhole tools and
drill pipe 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 re-circulated 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, waste management and drilling fluids 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. Additionally, the
Companys Petroleum Services & Supplies segment manufactures and sells drill pipe.
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.
The raising and lowering of the drill stem while drilling or tripping, and the lowering of casing
into the wellbore, is 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.
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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 (BOPs). 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 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 Rig Technology segment,
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 multi-strand wires to perform
well remediation operations, such as lowering tools and transmitting data to the surface. Through
the Rig Technology segment, 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 segment 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 segment 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. The Rig Technology segment 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). 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
Drake Rig, 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).
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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, tochold,
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.
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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. 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. Reports on drilling activities and processes are now provided
from the rig site as a part of the DrillSuite business solution to allow 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. Complementing 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 the Company has offered since 1929.
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, semi-trailer or skid (steel frames on which
portable tocequipment is mounted to facilitate handling with cranes for offshore use) 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 perform workover
operations on a live 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
re-entries 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 slick line, which is conventional single-strand 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, Cedar Park, Anderson, Fort Worth and Pampa, Texas;
Duncan, Oklahoma; Orange, California; Edmonton, Canada; Aberdeen, Scotland; Kristiansand, and
Stavanger, Norway; Etten-Leur and Groot-Ammers, the Netherlands; Carquefou, France; Singapore;
Lanzhou and Shanghai, China; Jebel Ali, Dubai; and Ulsan, South Korea. For a more detailed listing
of significant facilities see Item 2. Properties. The Rig Technology group maintains sales and
service offices in most major oilfield markets, either directly or through agents.
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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
Solutions AS; American Block; Bomco; Canrig (a division of Nabors Industries); Cavins Oil Tools;
Cameron; DenCon Oil Tools; Forum Oilfield Technologies; General Electric; Hitec Drilling Products;
Hong Hua; Huisman; IDM; LTI (a division of Rowan Companies); M&I Electric; Tesco Corporation; Wirth
M&B GmbH; Stewart & Stevenson, Inc.; Crown Energy Technologies; Huntings, Ltd.; Vanoil; Parveen
Industries; and Weatherford International, Inc. Management believes that the principal competitive
factors affecting its Rig Technology 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 and provides a variety of tubular services, composite tubing, and coiled tubing to oil and
gas producers, national oil companies, drilling contractors, well servicing companies, 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 connections for large diameter conductor pipe.
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 bits,
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 Wellsite Services business provides products and
services such as drilling fluids, highly-engineered solids control equipment, waste handling and
treatment, completion fluids, power generation equipment, and other ancillary well site equipment
and services. Wellsite Services is also engaged in Barium Sulfate (barite) mining operations in
the State of Nevada. Barite is an inert powder material used as the primary weighting agent in
drilling fluids. Additionally, efficient separation of drill cuttings enables the re-use of often
costly drilling fluids. 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.
Solids Control and Waste Management. The Company 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.
Fluids Services. The Company acquired the Spirit group of companies in May 2009 (Spirit) and
Ambar in January 2010. Both are engaged in the provision of drilling fluids, completion fluids and
other related services. This division is also engaged in barite mining operations. Drilling
fluids are designed and used to maintain well bore stability while drilling, control downhole
pressure, drill bit lubrication, and as a drill cuttings displacement medium. Completion fluids
are used to clean the well bore and stimulate production.
Portable Power. The acquisition of Welch Sales and Service, Inc. in 2008 placed Wellsite Services
in the power generation and temperature control business. The Portable Power division provides
rental equipment for use in the upstream oil and gas industry, refinery and petrochemical,
construction, events, disaster relief and other industries.
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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 CO 2 , H 2 S 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.
In addition to our TK® coatings, we also have complementary corrosion control products and services
including TK® Liners, TuboWrap, and KC-IPC Connections. TK Liners are fiberglass-reinforced tubes
which are inserted into steel line pipe. This safeguards the pipe against corrosion and extends
the life of the pipeline. In conjunction with the Thru-Kote® connection system customers can weld
a sleeve for a continuous fiberglass lined pipeline. Tubo-Wrap is a high performance external
coating that protects the pipe during installation and from corrosion once the pipeline is in
place. KC-IPC Connections use a modified American Petroleum Institute (API) coupling to create a
gas-tight seal that prevents corrosion and turbulence in the critical connections of tubulars
while protecting the internal plastic coating at the highly loaded contact points.
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.
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 8000 ä. 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.
Machining Services. In 2005, we acquired Turner Oilfield Services and expanded our product
offering into thread repair, tool joint rebuilding and sub manufacturing. Since then we have made
strategic acquisitions of Hendershot and Mid-South and have expanded our machining services
internally to develop a one-stop-shop concept for our drill pipe customers. Thread repair
services include rotary shouldered and premium connections. We are licensed to perform thread
repair services for API and proprietary connections. Tool joint rebuilding is a unique process to
restore worn drill pipe tool joints, drill collars and heavy weight drill pipe to the original
specifications to extend the service life of those assets. We manufacture downhole tools and are
API licensed for this process in several locations.
In November 2009, we acquired South Seas Inspection (S) Pte. Ltd., (SSI) and certain assets of
its Brazilian affiliate. SSI provides a wide array of oilfield services including rig and derrick
construction, derrick inspection and maintenance, drops surveys and load testing at the rig through
the use of rope access technicians. This acquisition adds multiple new services and allows us to
grow this business by leveraging existing relationships and infrastructure. These operations are
based out of Singapore with branch offices in Baku, Azerbaijan and Aktau, Kazkhstan as well as a
representative office in Vietnam. The highly trained workforce is completely mobile and provides
these services worldwide.
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.
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Drill Pipe Products. The Company manufactures and sells a variety of drill stem products used for
the drilling of oil and gas wells. The principal products sold by this segment are: (i) drill pipe,
(ii) drill collars and heavyweight drill pipe and (iii) drill stem accessories including tool
joints. Drill pipe is the principal tool, other than the rig, required for the drilling of an oil
or gas well. Its primary purpose is to connect the above-surface drilling rig to the drill bit. A
drilling rig will typically have an inventory of 10,000 to 30,000 feet of drill pipe depending on
the size and service requirements of the rig. Joints of drill pipe are connected to each other with
a welded-on tool joint to form what is commonly referred to as the drill string or drill stem.
When a drilling rig is operating, motors mounted on the rig rotate the drill pipe and drill bit. In
addition to connecting the drilling rig to the drill bit, drill pipe provides a mechanism to steer
the drill bit and serves as a conduit for drilling fluids and cuttings. Drill pipe is a capital
good that can be used for the drilling of multiple wells. Once a well is completed, the drill pipe
may be used again and again to drill other wells until the drill pipe becomes damaged or wears out.
In recent years, the depth and complexity of the wells our customers drill, as well as the
specifications and requirements of the drill pipe they purchase, have substantially increased. A
majority of the drill pipe we sell is required to meet specifications exceeding minimum API
standards. We offer a broad line of premium drilling products designed for the offshore,
international and domestic drilling markets. Our premium drilling products include our proprietary
lines of XT® and TurboTorqueTM connections and large diameter drill pipe that delivers
hydraulic performance superior to standard sizes.
Drill collars are used in the drilling process to place weight on the drill bit for better control
and penetration. Drill collars are located directly above the drill bit and are manufactured from a
solid steel bar to provide necessary weight.
Heavyweight drill pipe is a thick-walled seamless tubular product that is less rigid than a drill
collar. Heavyweight drill pipe provides a gradual transition between the heavier drill collar and
the lighter drill pipe.
We also provide subs, pup joints (short and odd-sized tubular products) and other drill stem
accessories. These products all perform special functions within the drill string as part of the
drilling process.
NOV IntelliServ. NOV IntelliServ is a joint venture between the Company and Schlumberger, Ltd. in
which the Company holds a 55% interest and maintains operational control. NOV IntelliServ provides
wellbore data transmission services that enable high-speed communication up and down the drill
string throughout drilling and completion operations that are undertaken during the construction of
oil and gas wells. NOV IntelliServs core product, The IntelliServ® Broadband Network, was
commercialized in February 2006 and incorporates various proprietary mechanical and electrical
components into our premium drilling tubulars to enable data transmission rates that are currently
up to 20,000 times faster than mud pulse, the current industry standard. The IntelliServ®
Broadband Network also permits virtually unlimited real-time actuation of drilling tools and
sensors at the bottom of the drill string, a process that conventionally requires the time
consuming return of tools to the surface. NOV IntelliServ offers its products and services on a
rental basis to oil and gas operators.
Voest-Alpine Tubulars (VAT). VAT is a joint venture between the Company and the Austrian based
Voestalpine Group. The Company has a 50.01% investment in the joint venture which is located in
Kindberg, Austria. VAT owns a tubular mill with an annual capacity of approximately 380,000 metric
tons and is the primary supplier of green tubes for our U.S. based production. In addition to
producing green tubes, VAT produces seamless tubular products for the OCTG market and non-OCTG
products used in the automotive, petrochemical, construction, mining, tunneling and transportation
industries.
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
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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.
NOV Downhole. The NOV Downhole business unit combines a wide array of drilling and intervention
tool product lines with the drill bit, coring services, borehole enlargement and drilling
dynamics/drilling optimization service lines previously consolidated within the ReedHycalog
business unit of Grant Prideco.
The broad spectrum of bottom hole assembly (BHA) components offered by NOV Downhole is unique
within the industry and is the result of National Oilwell Varcos strategic consolidation of
several key acquisitions, including: NQL Energy Services, Inc., a leading manufacturer and
provider of downhole drilling tools; Gammaloy Holdings, L.P., a manufacturer and provider of
non-magnetic drill collars and other related products; and the ReedHycalog, Corion, and Andergauge
business units of Grant Prideco, a global leader in the design, manufacture and provision of drill
bits, variable gauge stabilizers, hydraulically and mechanically actuated under-reamers, specialty
coring services and downhole vibration mitigation services.
NOV Downhole manufactures fixed cutter and roller cone drill bits and services its customer base
through a technical sales and marketing network in virtually every significant oil and gas
producing region of the world. It provides fixed-cutter bit technology under various brand names
including TReX®, Raptorä, SystemMatchedä and Rotary Steerable. One of its most
significant fixed cutter drill bit innovations is the TReX, Raptor, and Duraforce family of cutter
technologies which significantly increase abrasion resistance (wear life) without sacrificing
impact resistance (toughness). This technology provides a diamond surface that maintains a sharp,
low-wear cutting edge that produces drilling results that exceed conventional standards for
polycrystalline diamond (PDC) bit performance.
The Company produces roller-cone bits for a wide variety of oil and gas drilling applications.
Roller-cone bits consist of three rotating cones that have cutting teeth, which penetrate the
formation through a crushing action as the cones rotate in conjunction with the rotation of the
drill pipe. This cutting mechanism, while less efficient than fixed-cutter bits, is more versatile
in harder formations, or where the geology is changing. We manufacture roller-cone bits with milled
teeth and with tungsten carbide insert teeth, which have a longer life in harder formations. We
also manufacture a unique patented line of bits using a powder-metal forging technology sold under
the brand TuffCutterä. We market our roller-cone products and technology globally under
various brand names including RockForce, Titan and TuffCutter.
NOV Downhole 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 NOV Downhole brand name. The Company also maintains a wide variety of motor power
sections, including its proprietary PowerPlus and HemiDril rotors and stators which it
incorporates into its own motors as well as 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 NOV Downhole 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.
Through its Coring Services business line, NOV Downhole offers coring solutions that enable the
extraction of actual rock samples from a drilled well bore and allow geologists to examine the
formations at the surface. One of the coring services utilized is NOVs unique Corion Express®
system which allows the customer to drill and core a well without tripping pipe. Corion Express
utilizes wireline retrievable drilling and coring elements which allow the system to transform from
a drilling assembly to a coring assembly and also to wireline retrieve the geological core. This
capability enables customers to save significant time and expense during the drilling and coring
process.
NOV Downhole offers a wide variety of industry leading technologies to enable customers to enlarge
the diameter of a drilled hole below a restriction (typically a casing string) via its Borehole
Enlargement business line. Borehole enlargement services are typically utilized in deep water
drilling where customers wish to maximize the size of each successive casing string in order to
preserve a relatively large completion hole size through which to produce hydrocarbons from the
reservoir. Borehole enlargement is also employed where customers wish to reduce the fluid velocity
and pressure within the well-bore annulus to reduce the risk of formation erosion or accidental
fracture. NOV Borehole Enlargement provides bi-centered drill bits, expandable reamers (marketed
under the AnderReamer brand name) and associated equipment along with well-site service
technicians who deliver 24 hour support during hole enlargement operations.
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NOV Downhole offers drilling optimization services via its Advanced Drilling Solutions (ADS)
business line. ADS services incorporate various downhole vibration measurement and mitigation
tools along with dedicated, highly trained personnel who interpret such data and provide drilling
parameter guidance intended to improve drilling efficiency and reduce drilling risk.
Pumps & Expendables. The Companys Pumps & Expendables business designs, manufactures, and sells
pumps that are used in oil and gas drilling operations, well service operations, production
applications, as well as industrial applications. These pumps include reciprocating positive
displacement and centrifugal 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 also manufactures a line of commodity and high end valves, chokes, and flow line
equipment used in both production and drilling applications. Additionally these products are used
in the fabrication of choke and kill standpipe, cement, and production manifolds. The group
manufactures its pump products in Houston, Odessa and Marble Falls, Texas; Tulsa and McAlester,
Oklahoma; Scott, Louisiana; Newcastle, England; Dehradun, India and Buenos Aires, Argentina.
XL Systems. Our XL Systems product line offers the customer an integrated package of large-bore
tubular products and services for offshore wells. This product line includes our proprietary line
of wedge thread marine connections on large-bore tubulars and related engineering and design
services. We provide this product line for drive pipe, jet strings and conductor casing. We also
offer weld-on connections and service personnel in connection with the installation of these
products. In early 2007, we completed development of our new high-strength Viper weld-on connector
that we believe will permit us to penetrate traditional markets that do not require the enhanced
performance of our proprietary wedge-thread design.
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, steel mills, and other industrial companies. The Companys competitors include, among
others, Ameron International Corp; EDO Corporation; ShawCor Ltd.; Smith International, Inc.;
Franks International; Inc.; Baker Hughes Incorporated; Halliburton Company; Weatherford
International Ltd.; Patterson Tubular Services; Vallourec & Mannesmann; 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); Baker Hughes Incorporated; Halliburton Company; Derrick Manufacturing Corp.; Fluid
Systems; Oil Tools Pte. Ltd; Peak Energy Services, Ltd.; Varel; United Diamond; Roper; Robbins &
Myers; Southwest 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.
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Distribution Services
The Distribution Services group is a market leader in the provision of supply chain management
services to drilling contractors and exploration and production companies around the world. Through
its network of over 200 Distribution Service Center locations worldwide, this group stocks and
sells a large line of oilfield products including consumable maintenance, repair and operating
supplies, valves, fittings, flanges and spare parts that are needed throughout the drilling,
completion and production process. The supplies and equipment stocked by our Distribution Service
Centers are customized to meet a wide variety of customer demands.
Distributions supply chain solutions for customers that choose to outsource the functions of
procurement, inventory & warehouse management, logistics, business process, and performance metrics
reporting generate a quarter of this groups revenues. In this solution offering, they leverage the
flexible infrastructure of their SAP ERP system to streamline the acquisition process from
requisition to procurement to payment, by digitally managing approval routing & workflow, and by
providing robust reporting functionality.
NOV RigStore is a cutting-edge industry value offering by the Distribution Services group whereby
they provide the installation, staffing and management of supply stores on offshore drilling rigs.
With the NOV RigStore business model, Distribution Services installs its own ERP system onboard in
order to access and leverage Distributions global inventory, hundreds of support locations, and
thousands of vendors across multiple product lines. This business model relieves the average
offshore drilling rigs balance sheet by providing improved accounting of these expense items,
lower capital costs, extended payment on part of the driller until the item is actually issued from
the onboard supply store, and removed risk of ownership from the customer. Whether it is a smaller,
new drilling contractor or larger, established drilling company the benefits of effective supply
chain management and reduced total cost of ownership are substantial.
Distribution Services also now provides unique one-stop-shop value propositions in the Exploration
and Production market in key areas of artificial lift, measurement & controls, valving & actuation,
and flow optimization. Through focused effort, they have built expertise in providing applications
engineering, systems & parts integration, optimization solutions, and after-sales service & support
in the aforementioned areas. Distribution Services is rapidly diversifying by adding new artificial
lift technologies, as well as measurement & controls competencies to become the biggest global
provider of equipment and services in the E&P space.
Approximately 70% of the Distribution Services groups sales in 2009 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. The Distribution Services group has now expanded into oilfields in
over 20 countries. Approximately 23% of Distribution Services revenues are from the resale of
goods manufactured by other segments within the Company and the balance are sales of goods
manufactured by third parties.
The group works to strategically increase its revenue and enhance its alliances with customers by
continuous expansion of product and service solutions and creation of differentiating value
propositions. Additionally the group leverages its extensive purchasing power to reduce the cost of
the goods. 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.
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2009 Acquisitions and Other Investments
In 2009, the Company made the following acquisitions and outside investments:
Acquisition | Form | Operating Segment | Date of Transaction | |||
ASEP Group Holding B.V.
|
Stock | Rig Technology | April 2009 | |||
ANS (1001) Ltd. (Anson)
|
Stock | Petroleum Services & Supplies | April 2009 | |||
Spirit Drilling Fluids Ltd.
|
Asset | Petroleum Services & Supplies | May 2009 | |||
Spirit Minerals L.P.
|
Asset | Petroleum Services & Supplies | May 2009 | |||
Rincon de los Sauces Inspection
Operation
|
Asset | Petroleum Services & Supplies | June 2009 | |||
Western Thunderhorse
|
Asset | Petroleum Services & Supplies | September 2009 | |||
South Seas Inspection
|
Stock | Petroleum Services & Supplies | November 2009 | |||
Hochang Machinery Industries Co., Ltd.
|
Stock | Rig Technology | December 2009 | |||
Stork MSW
|
Stock | Petroleum Services & Supplies | December 2009 |
The Company paid an aggregate purchase price of $573 million, net of cash acquired for acquisitions
and outside investments in 2009. In September 2009, the Company sold 45 percent of certain of its
IntelliServ operations and created the IntelliServ Joint Venture (IntelliServ). IntelliServ
provides drilling technology that enables downhole drilling conditions to be measured, evaluated
and monitored.
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. 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 slowdowns 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.
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 oil companies are often made with or through 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 directly 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.
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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 material
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. As discussed in the Executive Summary, the Venezuelan government devalued its
currency in 2010. See Note 15 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, 2009, the Company held a substantial number of United States patents and had
several patent applications pending. Expiration dates of such patents range from 2010 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.
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 as important as 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.
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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, Cedar Park, Anderson, Fort Worth and Pampa, Texas; Duncan,
Oklahoma; Orange, California; Edmonton, Canada; Aberdeen, Scotland; Kristiansand, and Stavanger,
Norway; Etten-Leur and Groot-Ammers, the Netherlands; Carquefou, France; Singapore; Lanzhou and
Shanghai, China; Jebel Ali, Dubai; and Ulsan, South Korea.
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; Manchester, England; Jebel Ali, Dubai; and
Singapore. Drill Bits are manufactured at facilities in Conroe, Texas; Stonehouse, U.K; and Jurong,
Singapore. Drill Stem technology development and drill pipe are manufactured at facilities in
Navasota, Texas; Veracruz, Mexico; Jurong, Singapore; and Baimi Town, Jiangyan and Jiangsu, China
facilities. Solids control equipment and screens are manufactured at facilities in Houston and
Conroe, Texas; New Iberia, Louisiana; Aberdeen, Scotland; Trinidad; Shah Alum and Puncak Alam,
Malaysia; and Macae, Brazil. Pumps are manufactured at facilities in Houston, Odessa and Marble
Falls, Texas; McAlester and Tulsa, Oklahoma; Manchester and Newcastle, England; Melbourne,
Australia; and Buenos Aires, Argentina. The IntelliServ Group manufactures or assembles equipment
in Provo, Utah. The group manufactures tubular inspection equipment and tools at its Houston,
Texas facility for resale, and renovates and repairs equipment at its manufacturing facilities in
Houston, Texas; Celle, Germany; Singapore; and Aberdeen, Scotland. Fiberglass and composite
tubulars and fittings are manufactured at facilities in San Antonio, 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 that continued into 2008.
During 2008, steel prices stabilized and the Company began to experience some declines in steel
prices late in 2008 and throughout 2009. 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, 2007 and 2008 throughout the world to address our customers needs. The
steel price declines that NOV experienced in later 2008 continued through most of 2009. In the
later part of 2009 the rate of decline slowed due to some offsetting pressure from increased costs
of alloying agents. In 2010, NOV expects flat to slight increases in steel pricing. 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 segment 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 defaulted
upon by the customer in some instances. 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, 2009, 2008 and 2007 was $6.4 billion, $11.1 billion and $9.0 billion,
respectively.
Employees
At December 31, 2009, the Company had a total of 36,802 employees, of which 4,379 were temporary
employees. Approximately 104 employees in the Companys fiberglass tubulars plant in Little Rock,
Arkansas, and 110 employees of the Companys downhole tools product line in Houston and Conroe,
Texas, are subject to collective bargaining agreements. Additionally, certain of the Companys
employees in various foreign locations are subject to collective bargaining agreements.
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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.
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.
Volatile oil and gas prices affect demand for our products.
Oil and gas prices have been volatile since 1972. 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. In 2008, oil prices were extremely
volatile oil prices rose to $147 per barrel in July 2008 only to fall into the $35-$45 per barrel
range in December 2008. In 2009, oil prices continued to be volatile, rising from the $30 per
barrel range to the $70 per barrel range during the year. 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 $4.50-$12.00 per mmbtu during 2005-2008. In 2009, spot gas
prices continued to be volatile, dropping into the $3 per mmbtu range during the year.
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.
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Worldwide financial and credit crisis could have a negative effect on our operating results and
financial condition.
Events in 2008 and 2009 constrained credit markets and sparked a serious global banking crisis.
The slowdown in worldwide economic activity caused by the global recession reduced demand for
energy and resulted in lower oil and natural gas prices. Any prolonged reduction in oil and
natural gas prices will reduce oil and natural gas drilling activity and result in a corresponding
decline in the demand for our products and services, which could adversely impact our operating
results and financial condition. Furthermore, many of our customers access the credit markets to
finance their oil and natural gas drilling activity. If the recent crisis and recession reduce the
availability of credit to our customers, they may reduce their drilling and production
expenditures, thereby decreasing demand for our products and services. Any such reduction in
spending by our customers could adversely impact our operating results and financial condition.
There are risks associated with certain contracts for our drilling equipment.
As of December 31, 2009, we had a backlog of approximately $6.4 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 or 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. |
The Companys existing contracts for rig equipment generally carry significant down payment and
progress billing terms favorable to the ultimate completion of these projects and do not allow
customers to cancel projects for convenience. However, unfavorable market conditions or financial
difficulties experienced by our customers may result in cancellation of contracts or the delay or
abandonment of projects.
Any such developments could have a material adverse effect on our operating results and financial
condition.
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. Certain of 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
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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 that
we will realize 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. |
There are risks associated with our presence in international markets, including political or
economic instability, currency restrictions, and trade and economic sanctions.
Approximately 73% of our revenues in 2009 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, Latin 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.
Our operations outside the United States could also expose us to trade and economic sanctions or
other restrictions imposed by the United States or other governments or organizations. The U.S.
Department of Justice (DOJ), the U.S. Securities and Exchange Commission and other federal
agencies and authorities have a broad range of civil and criminal penalties they may seek to impose
against corporations and individuals for violations of trading sanctions laws, the Foreign Corrupt
Practices Act and other federal statutes. Under trading sanctions laws, the DOJ may seek to impose
modifications to business practices, including cessation of business activities in sanctioned
countries, and modifications to compliance programs, which may increase compliance costs. If any
of the risks described above materialize, it could adversely impact our operating results and
financial condition.
We have received federal grand jury subpoenas and subsequent inquiries from governmental agencies
requesting records related to our compliance with export trade laws and regulations. We have
cooperated fully with agents from the Department of Justice, the Bureau of Industry and Security,
the Office of Foreign Assets Control, and U.S. Immigration and Customs Enforcement in responding to
the inquiries, and we have conducted our own internal review of this matter. At the conclusion of
our internal review in the fourth quarter of 2009, we identified possible areas of concern and
discussed these areas of concern with the relevant agencies. We are currently negotiating a
potential resolution with the agencies involved related to these matters. We currently anticipate
that any administrative fine or penalty agreed to as part of a resolution would be
within established accruals, and would not have a material effect on our financial position or
results of operations. To the extent a resolution is not negotiated as anticipated, we cannot
predict the timing or effect that any resulting government actions may have on our financial
position or results of operations. As a result of our internal review and in an effort to prevent
any future compliance issues of this nature, we have reviewed and are in the process of enhancing
our compliance procedures and training.
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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 sterling, the Norwegian
krone and the South Korean won. Approximately 73% of our 2009 revenue was derived from sales
outside the United States. Because our Consolidated Financial Statements are presented in U.S.
dollars, we must translate revenues 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 use derivative financial
instruments to mitigate our net exposure to currency exchange fluctuations. We had forward
contracts with a notional amount of $2,850 million (with a fair value of $49 million) as of
December 31, 2009 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 or other indefinite lived intangible assets could reduce our earnings.
The Company has approximately $5.5 billion of goodwill and $0.6 billion of other intangible assets
with indefinite lives as of December 31, 2009. Generally accepted accounting principles require the
Company to test goodwill and other indefinite lived intangible assets 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 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. If we were to determine that any of our remaining balance of
goodwill or other indefinite lived intangible assets was impaired, we would record an immediate
charge to earnings with a corresponding reduction in stockholders equity; resulting in an increase
in balance sheet leverage as measured by debt to total capitalization.
See additional discussion on Goodwill and Other Indefinite Lived Intangible Assets in Critical
Accounting Estimates of Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations.
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.
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. |
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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.
The adoption of climate change legislation or regulations restricting emissions of greenhouse gases
could increase our operating costs or reduce demand for our products.
Environmental advocacy groups and regulatory agencies in the United States and other countries have
been focusing considerable attention on the emissions of carbon dioxide, methane and other
greenhouse gases and their potential role in climate change. The adoption of laws and regulations
to implement controls of greenhouse gases, including the imposition of fees or taxes, could
adversely impact our operations and financial condition. The U.S. Congress is currently working on
legislation to control and reduce emissions of greenhouse gases in the United States, which
includes establishing cap-and-trade programs. In addition to the pending climate legislation, the
U.S. Environmental Protection Agency has proposed regulations that would require permits for and
reductions in greenhouse gas emissions for certain facilities, and may issue final rules this year.
These changes in the legal and regulatory environment could reduce oil and natural gas drilling
activity and result in a corresponding decline in the demand for our products and services, which
could adversely impact our operating results and financial condition.
The Company had revenues of 16.6% of total revenue from one of its customers for the year ended
December 31, 2009.
The loss of this customer or a significant reduction in its purchases could adversely affect our
future revenues and earnings.
22
Table of Contents
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 raise 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. | |
Directional Well
|
Well drilled in an orientation other than vertical in order to access broader portions of the formation. |
23
Table of Contents
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. | |
FPSO
|
A Floating Production Storage and Offloading vessel used to receive hydrocarbons from subsea wells, and then produce and store the hydrocarbons until they can be offloaded to a tanker or pipeline. | |
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. | |
Hydraulic Fracturing
|
The process of creating fractures in a formation by pumping fluids, at high pressures, into the reservoir, which allows or enhances the flow of hydrocarbons. | |
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. |
24
Table of Contents
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 2.5 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 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
|
Equipment used in: 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. |
25
Table of Contents
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. | |
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. |
26
Table of Contents
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. | |
Tiebacks (Subsea)
|
A series of flowlines and pipes that connect numerous subsea wellheads to a single collection point. | |
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. | |
Wellhead
|
The termination point of a wellbore at surface level or subsea, often incorporating various valves and control instruments. | |
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 oil well 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.
27
Table of Contents
ITEM 2. PROPERTIES
The Company owned or leased over 825 facilities worldwide as of December 31, 2009, including the
following principal manufacturing, service, distribution and administrative facilities:
Building | Property | Lease | ||||||||||||
Size | Size | Owned / | Termination | |||||||||||
Location | Description | (SqFt) | (Acres) | Leased | Date | |||||||||
Rig Technology: |
||||||||||||||
Lanzhou, China
|
Manufacturing Plant (Drilling Equipment) & Administrative Offices) | 945,836 | 44 | Building Owned* | 10/20/2020 | |||||||||
Pampa, Texas
|
Manufacturing Plant | 549,095 | 500 | Owned | ||||||||||
Houston, Texas
|
Manufacturing Plant of Drilling Equipment | 424,925 | 33 | Leased | 4/30/2014 | |||||||||
Ulsan, South Korea
|
Fabrication of Drilling Equipment | 380,068 | 51 | Owned | ||||||||||
Houston, Texas
|
Bammel Facility, Repairs, Service, Parts, Administrative & Sales Offices | 377,750 | 19 | Leased | 6/30/2022 | |||||||||
Houston, Texas
|
West Little York Manufacturing Facility, Repairs, Service, Administrative & Sales Offices | 368,450 | 34 | Owned | ||||||||||
Fort Worth, Texas
|
Coiled Tubing Manufacturing Facility, Warehouse, Administrative & Sales Offices | 233,173 | 24 | Owned | ||||||||||
Sugar Land, Texas
|
Manufacturing Plant, Warehouse & Administrative Offices | 223,345 | 24 | Owned | ||||||||||
Cedar Park, Texas
|
Instrumentation Manufacturing Facility, Administrative & Sales Offices | 215,778 | 40 | Owned | ||||||||||
Carquefou, France
|
Manufacturing Plant of Offshore Equipment | 213,000 | Owned | |||||||||||
Galena Park, Texas
|
Manufacturing Plant (Drilling Rigs & Components) & Administrative Offices | 191,913 | 22 | Owned | ||||||||||
Aberdeen, Scotland
|
Pressure Control Manufacturing, Administrative & Sales Offices | 188,200 | 5 | Leased | 8/31/2018 | |||||||||
Houston, Texas
|
Manufacturing Plant of Drilling Rigs & Components, Admin & Sales Offices | 170,040 | 11 | Owned | ||||||||||
Kristiansand,
Norway
|
Warehouse & Administrative/Sales Offices | 167,200 | 1 | Owned | ||||||||||
Orange, California
|
Manufacturing & Office Facility | 158,268 | 9 | Building Owned* | 12/31/2012 | |||||||||
Singapore
|
Manufacturing, Repairs, Service, Field Service/Training, Administrative & Sales Offices | 149,605 | 3 | Leased | 1/5/2024 | |||||||||
Anderson, Texas
|
Rolligon Manufacturing Facility, Administrative & Sales Offices | 145,727 | 77 | Leased | 11/6/2011 | |||||||||
Houston, Texas
|
Administrative Offices (Westchase) | 125,494 | 4 | Leased | 9/30/2020 | |||||||||
Duncan, Oklahoma
|
Nitrogen Units Manufacturing Facility, Warehouse & Offices | 93,800 | 14 | Owned | ||||||||||
Conroe, Texas
|
Manufacturing Plant, Administrative & Sales Offices | 86,909 | 13 | Leased | 1/7/2022 | |||||||||
Molde, Norway
|
Manufacturing Facility of Drilling Equipment | 78,000 | 1 | Owned | ||||||||||
Etten Leur,
Netherlands
|
Manufacturing Plant & Sales Offices (Drilling Equipment) | 75,000 | 6 | Owned | ||||||||||
Shanghai, China
|
Inspection, assembly & testing of rig equipment | 74,244 | 3 | Owned | ||||||||||
Sogne, Norway
|
Warehouse and Offices | 70,959 | 4 | Leased | 12/31/2017 | |||||||||
Edmonton, Canada
|
Manufacturing Plant (Drilling Machinery & Equipment) | 70,346 | 18 | Owned | ||||||||||
Stavanger, Norway
|
Manufacturing Facility of Drilling Equipment | 41,333 | 1 | Leased | 6/1/2010 | |||||||||
Jebel Ali, Dubai
|
Repair & Overhaul of Drilling Equipment), Warehouse & Sales Office | 31,633 | 2 | Owned | ||||||||||
Aracaju, Brazil
|
Fabrication of Drilling Equipment | 11,195 | 1 | Leased | 8/31/2010 | |||||||||
New Iberia,
Louisiana
|
Riser Repair Facility | 10,000 | 2 | Leased | M-T-M |
28
Table of Contents
Building | Property | Lease | ||||||||||||
Size | Size | Owned / | Termination | |||||||||||
Location | Description | (SqFt) | (Acres) | Leased | Date | |||||||||
Petroleum Services & Supplies: |
||||||||||||||
Navasota, Texas
|
Manufacturing Facility & Administrative Offices | 562,112 | 196 | Owned | ||||||||||
Conroe, Texas
|
Manufacturing Facility of Drill Bits and Downhole Tools, Administrative & Sales Offices | 341,800 | 35 | Owned | ||||||||||
Houston, Texas
|
Sheldon Road Inspection Facility | 319,365 | 192 | Owned | ||||||||||
Veracruz, Mexico
|
Manufacturing Facility of Tool Joints, Warehouse & Administrative Offices | 303,400 | 42 | Leased | M-T-M | |||||||||
Houston, Texas
|
Holmes Rd Complex: Manufacturing, Warehouse, Coating Manufacturing Plant & Corporate Offices | 300,000 | 50 | Owned | ||||||||||
Little Rock, Arkansas
|
Manufacturing Facility of Fiber Glass Products | 271,924 | 44 | Owned | ||||||||||
Houston, Texas
|
Manufacturing, Service, Warehouse & Administrative Offices (WGB) | 245,319 | 14 | Leased | 3/31/2018 | |||||||||
Houston, Texas
|
QT Coiled Tubing Manufacturing Facility, Warehouse & Offices | 238,428 | 26 | Owned | ||||||||||
Durham, England
|
Manufacturing Facility, Warehouse & | 183,100 | 13 | Leased | 3/30/2066 | |||||||||
Administrative Offices | ||||||||||||||
Jebel Ali Free Zone, Dubai
|
Manufacturing Facility of Downhole Tools, | 180,000 | 1 | Leased | 1/29/2021 | |||||||||
Distribution Warehouse | ||||||||||||||
Conroe, Texas
|
Solids Control Manufacturing Facility, Warehouse, Administrative & Sales Offices, and Engineering Labs | 153,750 | 35 | Owned | ||||||||||
McAlester, Oklahoma
|
Manufacturing Facility of Pumps, Service & | 139,359 | 25 | Owned | ||||||||||
Administrative Offices | ||||||||||||||
San Antonio, Texas
|
Manufacturing Facility of Fiber Glass Products | 120,084 | 20 | Owned | ||||||||||
Edmonton, Canada
|
Manufacturing Facility, Repairs, Assembly, Warehouse & Administrative Offices | 112,465 | 11 | Owned | ||||||||||
Jurong, Singapore
|
Manufacturing Plant of Roller Cone Drill Bits, Shop, Warehouse & Administrative Offices | 109,663 | 5 | Leased | 5/15/2011 | |||||||||
Provo, Utah
|
Manufacturing Facility of Drilling Products, Fabrication, Warehouse & Administrative Offices | 109,026 | 15 | Owned | ||||||||||
Aberdeenshire, Scotland
|
Solids Control Manufacturing Facility, | 107,250 | 6 | Owned | ||||||||||
Assembly, Administrative & Sales Offices | ||||||||||||||
Larose, Louisiana
|
Generator Rentals & Service, Assembly, Warehouse & Administrative Offices | 72,993 | 11 | Leased | 6/30/2016 | |||||||||
Stonehouse, U.K.
|
Manufacturing Facility, Inspection Plant & | 71,000 | 4 | Owned | ||||||||||
Premium Threading Shop | ||||||||||||||
Groot-Ammers,
Netherlands
|
Workshop, Warehouse & Offices | 61,859 | 3 | Leased | 12/31/2018 | |||||||||
Beaumont, Texas
|
Pipe Threading Facility, Fabrication, Warehouse & Administrative Offices | 42,786 | 40 | Owned | ||||||||||
Dubai
|
Service Facility of Solids Control Equipment, Screens & Spare Parts, Inventory Warehouse, Sales, Rentals & Administrative Offices | 14,569 | 1 | Leased | 10/31/2012 | |||||||||
Rio de Janeiro,
Brazil
|
Service and Repair Center, and Distribution Operations | 12,116 | 1 | Leased | M-T-M |
29
Table of Contents
Building | Property | Lease | ||||||||||||
Size | Size | Owned / | Termination | |||||||||||
Location | Description | (SqFt) | (Acres) | Leased | Date | |||||||||
Distribution: |
||||||||||||||
Manchester, England
|
Manufacturing, Assembly & Testing of PC Pumps and Expendable Parts, Administrative & Sales Offices | 244,000 | 11 | Owned | ||||||||||
Houston, Texas
|
Distribution and Warehouse | 120,423 | 19 | Building Owned* | 12/31/2021 | |||||||||
Lloydminster, Canada
|
Lloydminster Distribution Operations; Applied | 114,100 | 23 | Leased | 5/31/2019 | |||||||||
Products Facility | ||||||||||||||
Edmonton, Canada
|
Redistribution Center | 100,000 | 7 | Leased | 1/31/2014 | |||||||||
Corporate: |
||||||||||||||
Houston, Texas
|
Corporate and Shared Administrative Offices | 337,019 | 14 | Leased | 5/31/2017 |
* | Building owned but land leased. |
We own or lease more than 145 repair and manufacturing facilities that refurbish and
manufacture new equipment and parts, and approximately 215 distribution service centers, and 465
service centers that provide inspection and equipment rental worldwide.
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. See Note 12 to the Consolidated Financial
Statements.
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, 2009.
30
Table of Contents
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.
2009 | 2008 | |||||||||||||||||||||||||||||||
First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | |||||||||||||||||||||||||
Common stock sale price: |
||||||||||||||||||||||||||||||||
High |
$ | 33.64 | $ | 40.08 | $ | 44.38 | $ | 49.82 | $ | 76.81 | $ | 91.55 | $ | 90.43 | $ | 47.06 | ||||||||||||||||
Low |
$ | 22.35 | $ | 29.27 | $ | 29.55 | $ | 40.89 | $ | 51.49 | $ | 60.17 | $ | 45.61 | $ | 17.86 | ||||||||||||||||
Cash dividends per share |
$ | | $ | | $ | | $ | 1.10 | $ | | $ | | $ | | $ | |
As of February 16, 2010, there were 3,204 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.
On November 11, 2009 National Oilwell Varcos Board of Directors approved a special one-time cash
dividend of $1.00 per share of common stock along with the commencement of a regular quarterly
dividend of $0.10 per share. The special cash dividend and the first quarterly dividend were paid
on December 16, 2009 to each stockholder of record on December 2, 2009. The declaration and
payment of future dividends is at the discretion of the Companys Board of Directors and will be
dependent upon the Companys results of operations, financial condition, capital requirements and
other factors deemed relevant by the Board of Directors.
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. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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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Table of Contents
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, 2004 in National Oilwell Varco, Inc., 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
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0001021860/000095012310017647/h69020h6902001.gif)
* | $100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. |
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
12/04 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | |||||||||||||||||||||||||||
National Oilwell Varco, Inc.
|
100.00 | 177.67 | 173.36 | 416.32 | 138.51 | 256.26 | ||||||||||||||||||||||||||
S&P 500
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||||||||||
S&P Oil & Gas Equipment & Services
|
100.00 | 148.56 | 171.65 | 253.87 | 103.64 | 165.61 | ||||||||||||||||||||||||||
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, | ||||||||||||||||||||
2009 | 2008 (1) | 2007 | 2006 | 2005 (2) | ||||||||||||||||
(in millions, except per share data) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Revenue |
$ | 12,712 | $ | 13,431 | $ | 9,789 | $ | 7,026 | $ | 4,645 | ||||||||||
Operating profit |
2,315 | 2,918 | 2,044 | 1,111 | 477 | |||||||||||||||
Income before taxes |
2,208 | 2,961 | 2,029 | 1,049 | 430 | |||||||||||||||
Net income attributable to Company |
$ | 1,469 | $ | 1,952 | $ | 1,337 | $ | 684 | $ | 287 | ||||||||||
Net income per share |
||||||||||||||||||||
Basic |
$ | 3.53 | $ | 4.91 | $ | 3.77 | $ | 1.95 | $ | 0.92 | ||||||||||
Diluted |
$ | 3.52 | $ | 4.90 | $ | 3.76 | $ | 1.93 | $ | 0.91 | ||||||||||
Cash dividends per share |
$ | 1.10 | $ | | $ | | $ | | $ | | ||||||||||
Other Data: |
||||||||||||||||||||
Depreciation and amortization |
$ | 490 | $ | 402 | $ | 214 | $ | 161 | $ | 115 | ||||||||||
Capital expenditures |
$ | 250 | $ | 379 | $ | 252 | $ | 200 | $ | 105 | ||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | 5,424 | $ | 4,034 | $ | 3,567 | $ | 2,300 | $ | 1,811 | ||||||||||
Total assets |
$ | 21,532 | $ | 21,479 | $ | 12,115 | $ | 9,019 | $ | 6,679 | ||||||||||
Long-term debt, less current maturities |
$ | 876 | $ | 870 | $ | 738 | $ | 835 | $ | 836 | ||||||||||
Total Company stockholders equity |
$ | 14,113 | $ | 12,628 | $ | 6,661 | $ | 5,024 | $ | 4,194 |
(1) | Financial results of Grant Prideco have been included in our Consolidated Financial Statements beginning April 21, 2008, the date the Grant Prideco merger was completed and each of Grant Pridecos common shares were exchanged for .4498 shares of our common stock and $23.20 in cash. Financial information for prior periods and dates may not be comparable with 2008 due to the impact of this business combination on our financial position and results of operation. See Note 3 to the Consolidated Financial Statements for a description of the Grant Prideco merger and related adjusted financial information. | |
(2) | 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 other periods may not be comparable with 2005 due to the impact of this business combination on our financial position and results of operation. Results for the year ended December 31, 2005 include integration costs associated with the Varco merger of $32 million and stock-based compensation costs of $16 million related to the amortization expense of options assumed in the Varco merger. |
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Table of Contents
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 over 825 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, 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, and the worldwide oil and gas inventory levels. Key
industry indicators for the past three years include the following:
% | % | |||||||||||||||||||
2009 v | 2009 v | |||||||||||||||||||
2009* | 2008* | 2007* | 2008 | 2007 | ||||||||||||||||
Active Drilling Rigs: |
||||||||||||||||||||
U.S. |
1,086 | 1,878 | 1,767 | (42.2 | %) | (38.5 | %) | |||||||||||||
Canada |
221 | 379 | 344 | (41.7 | %) | (35.8 | %) | |||||||||||||
International |
997 | 1,079 | 1,005 | (7.6 | %) | (0.8 | %) | |||||||||||||
Worldwide |
2,304 | 3,336 | 3,116 | (30.9 | %) | (26.1 | %) | |||||||||||||
West Texas Intermediate
Crude Prices (per barrel) |
$ | 61.65 | $ | 99.63 | $ | 72.33 | (38.1 | %) | (14.8 | %) | ||||||||||
Natural Gas Prices
($/mmbtu) |
$ | 3.95 | $ | 8.86 | $ | 6.97 | (55.4 | %) | (43.3 | %) |
* | 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 past nine quarters ended December 31, 2009 on a quarterly basis:
![(INDUSTRY TRENDS LOGO)](https://www.sec.gov/Archives/edgar/data/0001021860/000095012310017647/h69020h6902002.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 average price per barrel of West Texas Intermediate Crude was $61.65 per barrel in 2009, a
decrease of 38.1% over the average price for 2008 of $99.63 per barrel. Average natural gas prices
were $3.95 per mmbtu, a decrease of 55.4% compared to the 2008 average of $8.86 per mmbtu. Lower
oil prices led to reduced rig activity worldwide, decreasing 30.9% for the full year in 2009
compared to 2008. Average crude oil prices for the fourth quarter of 2009 was $76.06 per barrel
and natural gas was $4.34 per mmbtu.
At February 5, 2010, there were 1,335 rigs actively drilling in the U.S., compared to 1,189 rigs at
December 31, 2009; an increase of 12.3% from year-end 2009 levels. The price of oil and gas had
dropped to $71.15 per barrel and $5.52 per mmbtu, respectively, at February 5, 2010 representing
10.4% (oil) and 5.2% (gas) declines from the end of 2009.
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EXECUTIVE SUMMARY
National Oilwell Varco produced $1.5 billion in net income or $3.52 per fully diluted share in
2009. Revenues of $12.7 billion declined five percent from 2008 as stated, but declined nine
percent when including full-year 2008 pro forma sales for Grant Prideco, which the Company acquired
in April 2008. Operating profit was $2.3 billion in 2009, compared to $2.9 billion in 2008.
Generally 2009 was a more challenging year than 2008, as a worldwide recession led to lower demand
for oil and gas and lower commodity prices, which led in turn to lower oil and gas drilling
activity. This development negatively affected many of our businesses, but was partly offset by
results from our Rig Technology segment which carried a high level of contracted work into the
year, and produced higher year-over-year revenues. Profitability was adversely affected by
intangible asset impairment, transaction, voluntary early retirement and other restructuring
charges in 2009 that totaled $234 million pre-tax or $0.37 per dilutive share after tax. Excluding
these items earnings would have been $3.89 per diluted share.
For its fourth quarter ended December 31, 2009, National Oilwell Varco generated earnings of $394
million or $0.94 per fully diluted share, on revenues of $3.1 billion. Compared to the fourth
quarter of 2008 revenue declined 18 percent and net income attributable to the Company declined 33
percent. Compared to the third quarter of 2009 revenue increased two percent and net income
attributable to the Company increased two percent. Fourth quarter 2009 operating profit was $622
million or 19.8 percent of sales, compared to $618 million or 20.0 percent of sales in the third
quarter of 2009, and $877 million or 23.0 percent of sales in the fourth quarter of 2008, excluding
transaction and restructuring charges from all periods. Year-over-year quarterly declines across
all segments were a result of lower activity and pricing in most oilfield markets. The modest
sequential improvement in the fourth quarter of 2009 was driven by higher sequential activity in
North American markets driving better results from the Companys Petroleum Services & Supplies and
Distribution Services segments, offset by slightly lower results from Rig Technology.
Oil & Gas Equipment and Services Market
Worldwide developed economies turned down sharply late in 2008 as looming housing-related asset
write-downs at major financial institutions paralyzed credit markets and sparked a serious global
banking crisis. Major central banks have responded vigorously, but credit and financial markets
have not yet fully recovered, and a credit-driven worldwide economic recession deepened during the
second quarter. Asset and commodity prices, including oil and gas prices, have declined sharply.
After rising steadily for six years to peak at around $147 per barrel earlier in 2008, oil prices
collapsed back to average $42.91 per barrel during the first quarter of 2009, but have been
recovering steadily to average $76.06 per barrel during the fourth quarter of 2009. Higher oil and
gas prices over the past several years led to high levels of exploration and development drilling
in many oil and gas basins around the globe by 2008, but activity slowed sharply in 2009 with lower
oil and gas prices and tightening credit availability.
The count of rigs actively drilling in the U.S. as measured by Baker Hughes (a good measure of the
level of oilfield activity and spending) peaked at 2,031 rigs in September 2008, but decreased to a
low of 876 in June 2009. Rig count has increased to 1,335 in February 2010, and averaged 1,108
rigs during the fourth quarter of 2009. Many oil and gas operators reliant on external financing
to fund their drilling programs significantly curtailed their drilling activity earlier in the
year, but drilling appears to be recovering across North America as gas prices firmed above $4.00
per mmbtu (the fourth quarter average was $4.34 per mmbtu). Most international activity is driven
by oil exploration and production by national oil companies, which has historically been less
susceptible to short-term commodity price swings, but the international rig count has exhibited
modest declines nonetheless, falling from its September 2008 peak of 1,108 to 986 in September
2009, but recently climbing back to 1,047 in January 2010. During the year the Company saw its
Petroleum Services & Supplies and its Distribution Services margins affected most acutely by a
drilling downturn, through both volume and price declines; nevertheless, both of these segments saw
prices stabilize and revenues recover modestly from the third quarter to the fourth quarter. The
Companys Rig Technology segment was less impacted through the year owing to its high level of
contracted backlog and strong execution during the year.
Recent downturns followed an extended period of high drilling activity which fueled strong demand
for oilfield services between 2003 and 2008. Incremental drilling activity through the upswing
shifted toward harsh environments, employing increasingly sophisticated technology to find and
produce reserves. Higher utilization of drilling rigs 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. 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. The drilling process effectively consumes the
mechanical components of a rig, which wear out and need periodic repair or replacement. This
process was accelerated by very high rig utilization and wellbore complexity. Drilling consumes
rigs; more complex and challenging drilling consumes rigs faster.
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The industry responded by launching many new rig construction projects since 2005 to: 1.) retool
the existing fleet of jackup rigs (according to Offshore Data Services, 72 percent of the existing
457 jackup rigs are more than 25 years old); 2.) replace older mechanical and DC electric land rigs
with improved AC power, electronic controls, automatic pipe handling and rapid rigup and rigdown
technology; and 3.) build out additional deepwater floating drilling rigs, including
semisubmersibles and drillships, to employ recent advancements in deepwater drilling to exploit
unexplored deepwater basins. 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, and
that declining dayrates may accelerate the retirement of older rigs. As a result of these trends
the Companys Rig Technology segment grew its backlog of capital equipment orders from $0.9 billion
at March 31, 2005, to $11.8 billion at September 30, 2008. However, as a result of the credit
crisis and slowing drilling activity, orders have declined below amounts flowing out of backlog as
revenue, causing the backlog to decline to $6.4 billion at December 31, 2009.
The land rig backlog comprised 11 percent, and equipment destined for offshore operations comprised
89 percent of the total backlog as of December 31, 2009. Equipment destined for international
markets totaled 92 percent of the backlog. The Company believes that its existing contracts for
rig equipment are very strong in that they carry significant down payment and progress billing
terms favorable to the ultimate completion of these projects, and generally do not allow customers
to cancel projects for convenience. During 2009 the Company removed $259 million in discontinued
orders on cancelled projects and project change orders requested by customers. We do not expect
the credit crisis or softer market to result in additional material cancellation of contracts or
abandonment of major projects; however, there can be no assurance that such discontinuance of
projects will not occur. The Company had approximately $274 million of projects in its December
31, 2009 backlog that it considers at risk.
Segment Performance
Rig Technology generated a record $8.1 billion in revenue and $2.3 billion in operating profit in
2009, producing operating margins for the segment of 28.2 percent, excluding transaction and
restructuring charges. The segment generated 55 percent operating profit leverage or flow-through
(the change in operating profit divided by the change in revenue period-to-period) on eight percent
higher sales as compared to 2008, excluding charges. Revenue out of backlog of $6.2 billion
increased 18 percent from the prior year. Execution of the backlog orders was very strong, which
led to higher margin performance for the Rig Technology segment in the third quarter due to
excellent cost control, deflation in certain inputs, greater experience building and commissioning
rigs which enables better efficiencies, and somewhat better foreign currency exchange movements.
As a result our estimated costs to complete projects declined steadily through 2009. As of
December 31, 2009 the scheduled outflow of revenue from backlog is expected to be approximately
$4.6 billion in 2010, and $1.5 billion for 2011, and $0.3 billion in 2012. From 2005 through the
current quarter, the segment has delivered over 70 newly built offshore rigs. Aftermarket spare
parts and services revenue was $1.4 billion in 2009 or 17 percent of total segment sales. The
balance of Rig Technology revenues were smaller capital items which the Company does not book into
its backlog. These items were adversely affected by lower purchases by many land contractors in
view of markedly softer drilling demand during the year. Demand for offshore rigs and equipment is
strongest in Brazil, owing to significant drilling equipment needs to develop new ultradeepwater
discoveries, and the segment also continues to pursue a variety of new offshore rig, intervention
vessel, FPSO and platform upgrade opportunities in other markets. However, tight credit markets
and fewer committed term contracts for rigs by oil and gas companies as compared to market
conditions in 2006-2008 are adversely affecting new orders. Demand for land rig and well
stimulation equipment has also been very slow, except for the Middle East and certain Latin
American markets, but resumed late in the year in the U.S. Additionally, demand for coiled tubing
units and pressure pumping equipment for both North America and international markets also
recovered late in the year.
The Petroleum Services & Supplies segment generated revenues of $3.7 billion and operating profit
of $0.5 billion or 12.1 percent of sales in 2009, excluding impairment, transaction and
restructuring charges. Revenues declined 29 percent from 2008, when including pro forma revenue
for Grant Prideco, and decremental operating leverage or flow-through was 55 percent from 2008,
excluding charges, due to a high level of price discounting on most products and services through
the year. Prices appeared to stabilize during the fourth quarter of 2009, settling roughly 25
percent below peak pricing levels of 2008 (although some products and services are at greater, and
some at lesser, levels of discounting). Sharply rising North American rig counts led to modestly
tightening supplies of many of the segments products, which contributed to the stabilization. As
working rigs were stacked during 2009 their owners tended to cannibalize consumables and smaller
capital items from these rather than purchase goods from the Company. During the fourth quarter
some of these rigs were restocked with new goods, which led to new orders for the Company and
benefitted its fourth quarter results in North America. International demand remained somewhat
stable, and did not turn down as sharply earlier in the year as gas-driven North American drilling.
Drill pipe sales remain challenged due to the large amount of idle drill pipe inventory remaining
with drilling contractors. Nevertheless, drill pipe margins have remained good due to lower costs
and a positive mix shift toward premium drill pipe, for new offshore rigs being delivered, and for
complex horizontal and extended reach drilling programs onshore. We do not expect drill pipe
demand to recover significantly until inventories are depleted through consumption, late in 2010 at
the earliest. In total the Petroleum Services & Supplies segment generated approximately 47
percent of its sales into North American markets, and 53 percent of its sales into international
markets, during 2009.
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The Distribution Services segment generated total sales of $1.4 billion in 2009, down 24 percent
from 2008 sales. Operating profit excluding transaction and restructuring charges was $50 million
or 3.7 percent of sales. Decremental operating leverage or flow-through was 19 percent on the $422
million sales decline from the prior year, higher than the segments historical average, due
largely to price discounting in North America, which comprised 70 percent of the segments revenue
in 2009. The segments lower results were driven by a much lower level of drilling activity, which
led to intense price pressure and lower volumes for the group. International results were
generally much more stable in 2009 as compared to 2008, as higher sales of artificial lift products
into Latin America helped offset declines elsewhere. The segment posted 8 percent higher quarterly
sequential results in the fourth quarter of 2009 as the North American rig count moved up sharply
and customers ordered MRO supplies for rigs going back to work. Specifically new unconventional
shale gas fields in the Marcellus, Haynesville, Bakken and other areas led most of the recovery.
Outlook
The credit market downturn, global recession, and lower commodity prices presented significant
challenges to our business in 2009. Consequently we remain cautious in our outlook for 2010, but
we believe we are seeing signs of stabilization in many of our markets, and are encouraged by
limited demand growth in North America seen late in the year. Order levels for new drilling rigs
declined significantly in 2009 as compared to 2008, but we continue to bid a number of large
projects, including up to 28 new offshore floating rigs to be built in Brazil. We are hopeful that
these will translate into more orders during the coming year, assuming, among other things, that
rig dayrates generally hold up well; that commodity prices remain high; and that broad economic
conditions do not deteriorate further. North American land gas drilling activity, particularly by
independent gas producers reliant on external financing, fell sharply early in 2009, but we believe
better commodity prices are leading to recovery as we enter 2010. Our outlook for international
markets, which are more driven by national oil company activity and are historically less volatile,
remains good owing to high and stable oil price levels established through the second half of 2009.
Our outlook for the Companys Petroleum Services & Supplies segment and Distribution Services
segment remains closely tied to the rig count, particularly in North America. If the rig count
continues to increase we expect these segments to benefit from higher demand for the services,
consumables and capital items they supply. The Rig Technology segment was less affected by the
downturn during 2009 due to the strength of its backlog, but as the backlog has declined we expect
to see revenues and margins decline through 2010 as well.
On January 8, 2010, the Venezuelan government announced a currency devaluation which included a two
tier exchange rate system. The Company has net assets employed in Venezuela of approximately $80
million, and generated revenue and operating profit of approximately $75 million and $10 million,
respectively, in 2009. We expect to incur a pre-tax charge between $20 million and $30 million in
the first quarter of 2010 related to the impact of the currency devaluation and changes to social
regulations impacting our operations in Venezuela.
The Company believes it is well positioned to continue to manage through this downturn, and should
benefit from its strong balance sheet and capitalization, access to credit, and a high level of
contracted orders which are expected to continue to generate earnings in the coming year. The
Company has a long history of cost-control and downsizing in response to depressed market
conditions, and of executing strategic acquisitions during difficult periods. Such a period may
present opportunities to the Company to effect new organic growth and acquisition initiatives, and
we remain hopeful that a downturn will generate new opportunities.
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Results of Operations
Years Ended December 31, 2009 and December 31, 2008
The following table summarizes the Companys revenue and operating profit by operating segment in
2009 and 2008. The actual results include results from Grant Prideco operations from the
acquisition date of April 21, 2008 (in millions):
Years Ended December 31, | Variance | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Revenue: |
||||||||||||||||
Rig Technology |
$ | 8,093 | $ | 7,528 | $ | 565 | 7.5 | % | ||||||||
Petroleum Services & Supplies |
3,745 | 4,651 | (906 | ) | (19.5 | %) | ||||||||||
Distribution Services |
1,350 | 1,772 | (422 | ) | (23.8 | %) | ||||||||||
Eliminations |
(476 | ) | (520 | ) | 44 | (8.5 | %) | |||||||||
Total Revenue |
$ | 12,712 | $ | 13,431 | $ | (719 | ) | (5.4 | %) | |||||||
Operating Profit: |
||||||||||||||||
Rig Technology |
$ | 2,283 | $ | 1,970 | $ | 313 | 15.9 | % | ||||||||
Petroleum Services & Supplies |
301 | 1,044 | (743 | ) | (71.2 | %) | ||||||||||
Distribution Services |
50 | 130 | (80 | ) | (61.5 | %) | ||||||||||
Unallocated expenses and eliminations |
(319 | ) | (226 | ) | (93 | ) | 41.2 | % | ||||||||
Total Operating Profit |
$ | 2,315 | $ | 2,918 | $ | (603 | ) | (20.7 | %) | |||||||
Operating Profit %: |
||||||||||||||||
Rig Technology |
28.2 | % | 26.2 | % | ||||||||||||
Petroleum Services & Supplies |
8.0 | % | 22.4 | % | ||||||||||||
Distribution Services |
3.7 | % | 7.3 | % | ||||||||||||
Total Operating Profit % |
18.2 | % | 21.7 | % | ||||||||||||
Rig Technology
Rig Technology revenue for the year ended December 31, 2009 was $8,093 million, an increase of
$565 million (7.5%) compared to 2008. Revenue out of backlog increased $934 million or 18% from
2008 due to an increase in the number of large rig projects delivered this year. Non-backlog
revenue decreased $369 million or 17% compared to 2008, largely due to lower spare parts and
capital equipment sales as North American land drillers and pressure pumpers decreased their
capital spending in 2009.
Operating profit from Rig Technology was $2,283 million for the year ended December 31, 2009, an
increase of $313 million (15.9%) over the same period of 2008. Operating profit percentage
increased to 28.2%, up from 26.2% in 2008 primarily due to the increased manufacturing efficiencies
and revision of cost estimates on large rig projects as a result of favorable pricing from vendors.
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 $6.4 billion
at December 31, 2009, a decrease of $4.7 billion (42.3%) from backlog of $11.1 billion at
December 31, 2008. Approximately $4.6 billion of the current backlog is expected to be delivered
in 2010.
Petroleum Services & Supplies
Revenue from Petroleum Services & Supplies was $3,745 million for 2009 compared to $4,651 million
for 2008, a decrease of $906 million (19.5%). The decrease was primarily attributable to a 42%
decline in North American average rig count activity in 2009 compared to 2008.
Operating profit from Petroleum Services & Supplies was $301 million for 2009 compared to
$1,044 million for 2008, a decrease of $743 million (71.2%). Operating profit percentage decreased
to 8.0% down from 22.4% in 2008. The decrease was primarily due to reduced North American rig count
activity combined with strong price competition. In addition, a $147 million impairment charge was
incurred on the carrying value of a trade name associated with this segment in the second quarter
of 2009.
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Table of Contents
Distribution Services
Revenue from Distribution Services totaled $1,350 million for 2009, a decrease of $422 million
(23.8%) from 2008. The decrease in revenue is mainly concentrated in the North American region as
average drilling activity declined 42% in 2009 compared to the prior year.
Operating profit decreased in 2009 to $50 million compared to $130 million in 2008. Operating
profit percentage decreased to 3.7% in 2009 from 7.3% in 2008 as a result of strong price
competition and volume declines as North American rig activity declined.
Unallocated expenses and eliminations
Unallocated expenses and eliminations were $319 million for the year ended December 31, 2009
compared to $226 million for 2008. The increase in unallocated expenses and eliminations was
primarily due to the voluntary retirement costs of $46 million. Acquisition costs also contributed
to the increase from 2008.
Interest and financial costs
Interest and financial costs were $53 million for 2009 compared to $67 million for 2008. The
decrease in interest and financial costs were primarily a direct result of the repayment of
borrowings on the Companys credit facility used to purchase Grant Prideco, the repayment of the
Companys 7.5% Senior Notes and the repayment of a portion of the Companys 6.125% Senior Notes.
These repayments occurred during 2008 causing lower debt levels in 2009.
Equity Income in Unconsolidated Affiliate
Equity income in unconsolidated affiliate was $47 million for 2009 compared to $42 million for 2008
and was related to the April 21, 2008 acquisition of Grant Prideco. The income was related to the
equity earnings from the Companys 50.01% investment in Voest-Alpine Tubulars (VAT) located in
Kindberg, Austria.
Other income (expense), net
Other income (expense), net was expense, net of $110 million in 2009 compared to income, net of
$23 million in 2008. The 2009 expense was primarily due to a net foreign exchange loss of
$79 million, as compared to a net foreign exchange gain of $50 million in 2008. The 2009 foreign
exchange losses were primarily due to adjustments of our hedge positions as a result of the current
economic environment and the strengthening of the Euro, the British pound sterling, Canadian dollar
and Norwegian krone 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, 2009 was 33.3% compared to 33.5% for 2008.
The tax rate includes $21 million of additional tax provision recognized in the second quarter 2009
on prior year income in Norway. These additional taxes resulted from foreign currency gains on
dollar-denominated accounts that were realized for Norwegian tax purposes. The Company expects its
income tax rate to be in the 30% to 32% range in 2010.
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Years Ended December 31, 2008 and December 31, 2007
The following table summarizes the Companys revenue and operating profit by operating segment in
2008 and 2007. The actual results include results from Grant Prideco operations from the
acquisition date of April 21, 2008 (in millions):
Years Ended December 31, | Variance | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Revenue: |
||||||||||||||||
Rig Technology |
$ | 7,528 | $ | 5,745 | $ | 1,783 | 31.0 | % | ||||||||
Petroleum Services & Supplies |
4,651 | 3,061 | 1,590 | 51.9 | % | |||||||||||
Distribution Services |
1,772 | 1,424 | 348 | 24.4 | % | |||||||||||
Eliminations |
(520 | ) | (441 | ) | (79 | ) | 17.9 | % | ||||||||
Total Revenue |
$ | 13,431 | $ | 9,789 | $ | 3,642 | 37.2 | % | ||||||||
Operating Profit: |
||||||||||||||||
Rig Technology |
$ | 1,970 | $ | 1,394 | $ | 576 | 41.3 | % | ||||||||
Petroleum Services & Supplies |
1,044 | 732 | 312 | 42.6 | % | |||||||||||
Distribution Services |
130 | 94 | 36 | 38.3 | % | |||||||||||
Unallocated expenses and eliminations |
(226 | ) | (176 | ) | (50 | ) | 28.4 | % | ||||||||
Total Operating Profit |
$ | 2,918 | $ | 2,044 | $ | 874 | 42.8 | % | ||||||||
Operating Profit %: |
||||||||||||||||
Rig Technology |
26.2 | % | 24.3 | % | ||||||||||||
Petroleum Services & Supplies |
22.4 | % | 23.9 | % | ||||||||||||
Distribution Services |
7.3 | % | 6.6 | % | ||||||||||||
Total Operating Profit % |
21.7 | % | 20.9 | % | ||||||||||||
Rig Technology
Rig Technology revenue for the year ended December 31, 2008 was $7,528 million, an increase of
$1,783 million (31.0%) compared to 2007. Revenue out of backlog increased $1,217 million or 29.8%
from 2007 due to the growing market for capital equipment, as evidenced by backlog growth during
the first three quarters of 2008. The increase in orders and backlog resulted from continued
capital investments by drilling contractors in 2008, primarily related to the international
offshore market. Non-backlog revenue increased $567 million or 34.1% over 2007, largely due to
increased spare parts sales and service revenues related to the increased drilling activity during
the year.
Operating profit from Rig Technology was $1,970 million for the year ended December 31, 2008, an
increase of $576 million (41.3%) over the same period of 2007. The increase in operating profit was
largely due to the increased activity discussed above as well as improved pricing on large rig
contracts and aftermarket products.
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
$11.1 billion at December 31, 2008, an increase of $2.1 billion (23.3%) over backlog of
$9.0 billion at December 31, 2007.
Petroleum Services & Supplies
Revenue from Petroleum Services & Supplies was $4,651 million for 2008 compared to $3,061 million
for 2007, an increase of $1,590 million (51.9%). The increase was mostly attributable to the
acquisition of Grant Prideco which contributed sales of $1,435 million since the acquisition date
of April 21, 2008. Higher demand for most of the products and services offered by the segment also
contributed to the higher revenue compared to 2007. Rig count in North America and international
markets during 2008 were up 6.9% and 7.3%, respectively, compared to 2007 averages, prompting
higher demand from our services group.
Operating profit from Petroleum Services & Supplies was $1,044 million for 2008 compared to
$732 million for 2007, an increase of $312 million (42.6%). Grant Prideco contributed $297 million
of operating profit since April 21, 2008. Included in the Grant Prideco
operating profit was $89 million of expense recorded in cost of revenue that resulted from the fair
value step-up of inventory as part of the purchase accounting valuation of Grant Prideco. The
increase was also attributable to higher profitability across most product lines.
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Distribution Services
Revenue from Distribution Services totaled $1,772 million in 2008, an increase of $348 million
(24.4%) 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 7.1% in 2008 compared to 2007,
with increases of 10.3%, 7.3% and 6.3% in Canada, international and the U.S. rig activity,
respectively. The Companys Distribution Services segment continued efforts to expand in
international markets resulted in a 25% increase in international revenue. The expansion primarily
consisted of opening rig stores or facilities that maintain levels of consumables used on rigs, in
centrally located areas. In addition, the Company has begun to open stores on individual rigs.
After opening its first rig store in 2007, the Company opened eight additional stores during 2008
continuing the efforts to expand its presence both in the U.S. and internationally.
Operating income increased in 2008 to $130 million compared to $94 million in 2007. Margins
increased slightly to 7.3% of revenue in 2008 compared to 6.6% of revenue in 2007. The increase in
margin was primarily due to the cost reduction actions taken in Canada to offset the weakening
demand seen in the later part of 2007 combined with the increase in profit margins from
international locations.
Unallocated expenses and eliminations
Unallocated expenses and eliminations were $226 million for the year ended December 31, 2008
compared to $176 million for 2007. The increase in unallocated expenses and eliminations was
primarily due to greater inter-segment profit eliminations and greater stock-based compensation
expense. The stock-based compensation expense was $61 million and $43 million for the years ended
December 31, 2008 and 2007, respectively. The 2008 results also included $11 million of
integration costs related to the 2008 acquisition of Grant Prideco.
Interest and financial costs
Interest and financial costs were $67 million for 2008 compared to $50 million for 2007. The
increase was primarily due to the borrowings related to the merger with Grant Prideco.
Equity Income in Unconsolidated Affiliate
Equity income in unconsolidated affiliate was $42 million for 2008 and was related to the April 21,
2008 acquisition of Grant Prideco. The income was related to the equity earnings from the
Companys 50.01% investment in Voest-Alpine Tubulars (VAT) located in Kindberg, Austria. The
Companys investment in VAT is accounted for under the equity method of accounting due to the
minority owner having substantive participating rights. Step-up depreciation and amortization of
$8 million was recorded in 2008 related to VAT and charges of $11 million were recorded related to
inventory step-up.
Other income (expense), net
Other income (expense), net was an income, net of $23 million and an expense of $18 million for the
years ended December 31, 2008 and December 31, 2007, respectively. The 2008 income was primarily
due to a net foreign exchange gain which was $50 million for the year ended December 31, 2008, as
compared to a net foreign exchange loss of $7 million for the year ended December 31, 2007. The
2008 foreign exchange gains were primarily due to the weakening of the British pound sterling,
Canadian dollar and Norwegian krone 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, 2008 was 33.5% compared to 33.3% for 2007.
The 2008 rate reflects increasing benefits in the U.S. from the tax incentive for manufacturing
activities and a higher percentage of earnings in foreign jurisdictions with lower tax rates. This
was partially offset by additional tax provisions related to the Companys decision to repatriate
earnings from certain foreign subsidiaries during the year and net higher tax expense in Norway
related to movement in exchange rates after the change of the functional currency to the U.S.
dollar. The net additional tax expense in Norway included a $46 million charge resulting from
realized foreign exchange gains on U.S. dollar denominated assets and liabilities. This was
partially offset by a $30 million benefit for the same period, which was reported as provision for
income tax, from the remeasurement into U.S. dollars of foreign currency denominated deferred tax
assets and liabilities in the balance sheet.
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Liquidity and Capital Resources
At December 31, 2009, the Company had cash and cash equivalents of $2,622 million, and total debt
of $883 million. At December 31, 2008, cash and cash equivalents were $1,543 million and total debt
was $874 million. A portion of the consolidated cash balances are maintained in accounts in various
foreign subsidiaries and, if such amounts were transferred among countries or repatriated to the
U.S., such amounts may be subject to additional tax obligations. The Companys outstanding debt at
December 31, 2009 consisted of $200 million of 5.65% Senior Notes due 2012, $200 million of 7.25%
Senior Notes due 2011, $150 million of 6.5% Senior Notes due 2011, $150 million of 5.5% Senior
Notes due 2012, $151 million of 6.125% Senior Notes due 2015, and other debt of $32 million.
The Company had $2,073 million of additional outstanding letters of credit at December 31, 2009,
primarily in Norway, that are essentially under various bilateral committed letter of credit
facilities. Other letters of credit are issued as bid bonds and performance bonds. The Senior
Notes contain reporting covenants and the credit facility contains a financial covenant regarding
maximum debt to capitalization. We were in compliance with all covenants at December 31, 2009.
There were no borrowings against the Companys unsecured credit facility, and there were $588
million in outstanding letters of credit issued under the facility, resulting in $1,412 million of
funds available under the Companys unsecured revolving credit facility at December 31, 2009.
The following table summarizes our net cash flows provided by operating activities, net cash used
in investing activities and net cash provided by (used in) financing activities for the periods
presented (in millions):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net cash provided by operating activities |
$ | 2,095 | $ | 2,294 | $ | 1,188 | ||||||
Net cash used in investing activities |
(552 | ) | (2,473 | ) | (575 | ) | ||||||
Net cash provided by (used in) financing
activities |
(491 | ) | (74 | ) | 150 |
Operating Activities
Net cash flow provided by operating activities in 2009 decreased $199 million to $2,095 million
compared to cash provided by operating activities of $2,294 million in the same period of 2008.
Before changes in operating assets and liabilities, net of acquisitions, cash was provided by
operations primarily through net income of $1,473 million plus non-cash charges of $704 million and
dividends from unconsolidated affiliates of $86 million less $47 million in equity income from the
Companys unconsolidated affiliate. Net changes in operating assets and liabilities, net of
acquisitions, used cash of $22 million during 2009, compared to $147 million used during 2008.
Investing Activities
Net cash used in investing activities in 2009 was $552 million compared to net cash used in
investing of $2,473 million for the same period of 2008. The primary reason for the decrease in
cash used in investing activities in 2009 related to a decrease in size of business acquisitions,
net of cash acquired, to approximately $573 million compared to $3,008 million used in 2008 which
included the purchase of the business and operating assets of Grant Prideco. Sale of equity
interest provided $251 million of cash in 2009 compared to business divestitures of $801 million
received in 2008 related to the disposition of certain Grant Prideco tubular businesses. In
addition, the Company used $250 million for capital expenditures in 2009, compared to $379 million
in 2008, received $19 million less in dividends from its unconsolidated affiliate compared to 2008,
and included $86 million of the dividends from unconsolidated affiliate received in 2009 in
operating activities.
Financing Activities
Net cash used in financing activities in 2009 was $491 million compared to net cash used in
financing activities of $74 million for the same period of 2008. The cash used in financing
activities in 2009 primarily related to $460 million in cash dividends paid during the last month
of 2009. In addition, cash used in financing activities in 2009 related to $47 million cash
payments on debt primarily acquired in 2009 acquisitions, offset by cash proceeds from borrowings
in the amount of $7 million as well as exercised stock options and excess tax benefit from the
exercise of stock options in the amount of $9 million. The borrowings and payments of debt in 2008
primarily relates to the financing of the Grant Prideco acquisition. For 2009, the Company used
its cash on hand to fund its acquisitions.
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The effect of the change in exchange rates on cash flows was a positive $27 million and a negative
$46 million in 2009 and 2008, respectively.
We believe cash on hand, cash generated from operations and amounts available under the credit
facility and from other sources of debt will be sufficient to fund operations, working capital
needs, capital expenditure requirements and financing obligations. At December 31, 2009, the
Company had $1,412 million of available funds under its revolving credit facility. We also believe
increases in capital expenditures caused by any need to increase manufacturing capacity can be
funded from operations or through existing available debt financing.
A summary of the Companys outstanding contractual obligations at December 31, 2009 is as follows
(in millions):
Payment Due by Period | ||||||||||||||||||||
Less than | After | |||||||||||||||||||
Total | 1 Year |
1-3 Years |
4-5 Years |
5 Years |
||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Total debt |
$ | 883 | $ | 7 | $ | 717 | $ | 6 | $ | 153 | ||||||||||
Operating leases |
553 | 122 | 156 | 96 | 179 | |||||||||||||||
Total Contractual
Obligations |
$ | 1,436 | $ | 129 | $ | 873 | $ | 102 | $ | 332 | ||||||||||
Commercial Commitments: |
||||||||||||||||||||
Standby letters of credit |
$ | 2,661 | $ | 1,762 | $ | 721 | $ | 176 | $ | 2 | ||||||||||
As of December 31, 2009, the Company had $58 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 to the
Consolidated Financial Statements included in this Report.
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 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.
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 and
other indefinite-lived intangible assets); goodwill and other indefinite-lived intangible assets
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. |
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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. Based upon an analysis of
percentage of completion contracts for all open contracts outstanding at December 31, 2008 and
2007, adjustments (representing the differences between the estimated and actual results) to all
outstanding contracts resulted in net changes to gross profit margins of 1% ($53 million on
$5.4 billion of outstanding contracts) and 0.8% ($31 million on $3.8 billion of outstanding
contracts), respectively. While the Company believes that its estimates on outstanding contracts at
December 31, 2009 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 $8.6 billion at December 31, 2009.
Allowance for Doubtful Accounts
The determination of the collectability 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 basis taking into account current market conditions and trends. 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. 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, 2009 and 2008,
allowance for bad debts totaled $95 million and $73 million, or 4.3% and 2.3% of gross accounts
receivable, respectively.
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, 2009 and 2008, inventory reserves
totaled $206 million and $123 million, or 5.9% and 3.1% of gross inventory, respectively.
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.
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Impairment of Long-Lived Assets (Excluding Goodwill and Other Indefinite-Lived Intangible Assets)
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.
The carrying values of these assets are reviewed for impairment at least annually or more
frequently 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. We estimate the fair value of these intangible and fixed assets
using an income approach. 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. The financial and credit market volatility
directly impacts our fair value measurement through our income forecast as well as our
weighted-average cost of capital, both key assumptions used in our calculation. Changes to these
assumptions, including, but not limited to: further sustained declines in worldwide rig counts
below current analysts forecasts, further collapse of spot and futures prices for oil and gas,
significant additional deterioration of external financing for our customers, higher risk premiums
or higher cost of equity, or any other significant adverse economic news could require a provision
for impairment in a future period. Due to further significant declines in the Companys stock price
and oil and gas commodity prices, coupled with unprecedented turbulence in the credit markets, the
Company determined a triggering event occurred in the fourth quarter of 2008. The Company
performed an impairment analysis at December 31, 2008 which did not result in an impairment charge.
Goodwill and Other Indefinite-Lived Intangible Assets
The Company has approximately $5.5 billion of goodwill and $0.6 billion of other intangible assets
with indefinite lives as of December 31, 2009. Generally accepted accounting principles require the
Company to test goodwill and other indefinite-lived intangible assets for impairment at least
annually or more frequently whenever events or circumstances occur indicating that goodwill or
other indefinite-lived intangible assets might be impaired. Events or circumstances which could
indicate a potential impairment include, but not limited to: further sustained declines in
worldwide rig counts below current analysts forecasts, further collapse of spot and futures prices
for oil and gas, significant additional deterioration of external financing for our customers,
higher risk premiums or higher cost of equity. The annual impairment test is performed during the
fourth quarter of each year. Based on its analysis, the Company did not report any impairment of
goodwill and other indefinite-lived intangible assets for the years ended December 31, 2008 and
2007. As described below, the Company concluded that an indicator of impairment occurred in the
second quarter of 2009 and updated its impairment testing at June 30, 2009. Based on its updated
analysis, the Company concluded that it did not incur an impairment of goodwill for the period
ended June 30, 2009. However, based on the Companys indefinite-lived intangible asset impairment
analysis performed during the second quarter of 2009, the Company concluded that it incurred an
impairment charge to certain indefinite-lived intangible assets of $147 million at June 30, 2009.
The $147 million impairment charge is included in the Companys consolidated income statement for
the year ended December 31, 2009.
During the second quarter of 2009, the worldwide average rig count was 2,009 rigs, down 41% from
the fourth quarter 2008 average of 3,395 and down 25% from the first quarter 2009 average of 2,681.
The second quarter 2009 average rig count represented the lowest quarterly average in the past six
years. In addition, the Companys updated forecast was behind the Companys previous forecast
completed at the beginning of 2009. While operating profit for the first quarter of 2009 was in
line with the Companys first quarter 2009 operating profit forecast, the Companys consolidated
operating profit for the second quarter of 2009 was below its second quarter 2009 forecast. As a
result of the substantial decline in the worldwide rig count, and the decline in actual/forecasted
results compared to the original 2009 forecast, the Company concluded that events or circumstances
had occurred indicating that goodwill and other indefinite-lived intangible assets might be
impaired as described under Accounting Standards Codification (ASC) Topic 350 Intangibles -
Goodwill and Other.
Therefore, the Company performed its interim impairment test of goodwill for all its reporting
units at the end of the second quarter of 2009. 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. Fair value of the reporting units is determined in
accordance with ASC Topic 820 Fair Value Measurements and Disclosures using significant
unobservable inputs, or level 3 in the fair value hierarchy. These inputs are based on internal
management estimates, forecasts and judgments, using a combination of three methods: discounted
cash flow, comparable companies, and representative transactions. While the Company primarily uses
the discounted cash flow method to assess fair value, the Company uses the comparable companies and
representative transaction methods to validate the discounted cash flow analysis and further
support managements expectations, where possible.
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The discounted cash flow is based on managements short-term and long-term forecast of operating
performance for each reporting unit. The two main assumptions used in measuring goodwill
impairment, which bear the risk of change and could impact the Companys goodwill impairment
analysis, include the cash flow from operations from each of the Companys individual business
units and the weighted average cost of capital. The starting point for each of the reporting units
cash flow from operations is the detailed annual plan or updated forecast. The detailed planning
and forecasting process takes into consideration a multitude of factors including worldwide rig
activity, inflationary forces, pricing strategies, customer analysis, operational issues,
competitor analysis, capital spending requirements, working capital needs, customer needs to
replace aging equipment, increased complexity of drilling, new technology, and existing backlog
among other items which impact the individual reporting unit projections. Cash flows beyond the
specific operating plans were estimated using a terminal value calculation, which incorporated
historical and forecasted financial cyclical trends for each reporting unit and considered
long-term earnings growth rates. The financial and credit market volatility directly impacts our
fair value measurement through our weighted average cost of capital that we use to determine our
discount rate. During times of volatility, significant judgment must be applied to determine
whether credit changes are a short-term or long-term trend.
Projections for the remainder of 2009 also reflected declines compared to the original 2009 annual
forecast. The Company updated its 2009 operating forecast, long-term forecast, and discounted cash
flows based on this information. The goodwill impairment analysis that we performed during the
second quarter of 2009 did not result in goodwill impairment as of June 30, 2009.
Other indefinite-lived intangible assets, representing trade names management intends to use
indefinitely, were valued using significant unobservable inputs (level 3) and are tested for
impairment using the Relief from Royalty Method, a form of the Income Approach. An impairment is
measured and recognized based on the amount the book value of the indefinite-lived intangible
assets exceeds its estimated fair value as of the date of the impairment test. Included in the
impairment test are assumptions, for each trade name, regarding the related revenue streams
attributable to the trade names which are determined consistent with the forecasting process
described above, the royalty rate, and the discount rate applied. Based on the Companys
indefinite-lived intangible asset impairment analysis performed during the second quarter of 2009,
the Company incurred an impairment charge of $147 million in the Petroleum Services & Supplies
segment related to a partial impairment of the Companys Grant Prideco trade name. The impairment
charge was primarily the result of the substantial decline in worldwide rig counts through June
2009, declines in forecasts in rig activity for the remainder of 2009, 2010, and 2011 compared to
rig count forecast at the beginning of 2009 and a decline in the revenue forecast for the drill
pipe business unit for the remainder of 2009, 2010, and 2011.
During the fourth quarter of 2009, the Company further updated its impairment testing using current
operating forecasts and discounted cash flows. In the third and fourth quarters of 2009, both rig
activity and commodity prices began to increase. Rig count increased 4% to an average of 2,130 in
the third quarter and increased another 13% to an average of 2,397 in the fourth quarter. Average
West Texas Intermediate Crude prices reached $76.06 in the fourth quarter of 2009, an increase of
28% from an average of $59.44 in the second quarter of 2009. In addition, by the end of the fourth
quarter, average natural gas prices increased to $4.34, a 17% increase from the second quarter 2009
average of $3.71.
The impairment analysis that we performed during the fourth quarter of 2009 resulted in no
impairment of the Companys goodwill and no additional impairment for the Companys other
indefinite-lived intangible assets for the year ended December 31, 2009.
Along with the normal impairment analysis, the Company performed a sensitivity analysis on the
projected results, the goodwill and the other indefinite-lived intangible asset impairment analysis
assuming revenue for each individual reporting unit for goodwill and each individual
indefinite-lived intangible asset decreased an additional 20% from the current projections for
2010, 2011 and 2012, while holding all other factors constant and no impairment was identified.
Additionally, if the Company were to increase its discount rate 100 basis points, while keeping all
other assumptions constant, there would be no impairments in any of the goodwill associated with
the Companys reporting units or any of the Companys indefinite-lived intangible assets. While
the Company does not believe that these events (20% drop in additional revenue for the next three
years or 100 basis point increases in weighted average costs of capital) or changes are likely to
occur, it is reasonably possible these events could transpire if market conditions worsen and if
the market fails to continue to recover in 2010 and/or 2011. Any significant changes to these
assumptions and factors could have a material impact on the Companys goodwill impairment analysis.
Inherent in our projections are key assumptions relative to how long the current downward cycle
might last.
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 ASC Topic 450 Contingencies
(ASC Topic 450). 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. At December 31, 2009
and 2008, service and product warranties totaled $217 million and $114 million, respectively.
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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 operating expenses
that may not be deductible in foreign jurisdictions. 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 ASC Topic 740 Income Taxes (ASC Topic 740). 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. 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.
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 $2,764 million and $2,255 million at December 31, 2009 and
2008, 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.
Recently Issued Accounting Standards
In April 2009 the FASB issued ASC Topic 805, Business Combinations (ASC Topic 805). ASC Topic
805 amends the provisions for the initial recognition and measurement, subsequent measurement and
accounting, and disclosures for assets and liabilities arising from contingencies in business
combinations. ASC Topic 805 is effective for contingent assets and contingent liabilities acquired
in business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The Company expects ASC Topic 805
will have a future impact on its consolidated financial statements, but the nature and magnitude of
the specific effects will depend upon the nature, term and size of the acquired contingencies.
In April 2009, the FASB issued ASC Topic 825, Financial Instruments (ASC Topic 825). ASC Topic
825 extends the annual disclosure requirements regarding the fair value of financial instruments to
interim financial statements of publicly traded companies. ASC Topic 825 is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. On June 1, 2009, the Company adopted ASC Topic 825. There was no
significant impact to the Companys Consolidated Financial Statements from the adoption of ASC
Topic 825.
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In May 2009, the FASB issued ASC Topic 855, Subsequent Events (ASC Topic 855). ASC Topic 855
requires the disclosure of the date through which an entity has evaluated subsequent events and the
basis for that date. ASC Topic 855 is effective for fiscal years and interim periods ending after
June 15, 2009. On June 1, 2009, the Company adopted ASC Topic 855. There was no significant impact
to the Companys Consolidated Financial Statements from the adoption of ASC Topic 855.
In June 2009, the FASB issued ASC Topic 105, Generally Accepted Accounting Standards (ASC Topic
105). The ASC is now the source of authoritative U.S. GAAP recognized by the FASB to be applied
by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date,
ASC Topic 105 superseded all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the ASC has become
non-authoritative. ASC Topic 105 became effective for financial statements issued for interim and
annual periods ending after September 15, 2009.
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 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 impact income. During the years
ended December 31, 2009, 2008 and 2007, the Company reported foreign currency gains (losses) of
($79) million, $50 million, and ($7) million, respectively. The gains and losses are primarily due
to exchange rate fluctuations related to monetary asset balances denominated in currencies other
than the functional currency and in 2009 adjustments to our hedged positions as a result of the
current economic environment. Strengthening of currencies against the U.S. dollar may create
losses 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 give 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.
The following table details the Companys foreign currency exchange risk grouped by functional
currency and their expected maturity periods as of December 31, 2009 (in millions except for
rates):
As of December 31, 2009 | December 31, | |||||||||||||||||||
Functional Currency | 2010 | 2011 | 2012 | Total | 2008 | |||||||||||||||
CAD Buy USD/Sell CAD: |
||||||||||||||||||||
Notional amount to buy (in Canadian dollars) |
291 | | | 291 | 527 | |||||||||||||||
Average CAD to USD contract rate |
1.0418 | | | 1.0418 | 1.1843 | |||||||||||||||
Fair Value at December 31, 2009 in U.S.
dollars |
2 | | | 2 | 14 | |||||||||||||||
Sell USD/Buy CAD: |
||||||||||||||||||||
Notional amount to sell (in Canadian dollars) |
69 | | | 69 | 241 | |||||||||||||||
Average CAD to USD contract rate |
1.1109 | | | 1.1109 | 1.1196 | |||||||||||||||
Fair Value at December 31, 2009 in U.S.
dollars |
4 | | | 4 | (18 | ) | ||||||||||||||
EUR Buy USD/Sell EUR: |
||||||||||||||||||||
Notional amount to buy (in euros) |
98 | | | 98 | 11 | |||||||||||||||
Average USD to EUR contract rate |
1.4356 | | | 1.4356 | 1.4397 | |||||||||||||||
Fair Value at December 31, 2009 in U.S.
dollars |
| | | | | |||||||||||||||
Sell USD/Buy EUR: |
||||||||||||||||||||
Notional amount to buy (in euros) |
90 | 1 | | 91 | 245 | |||||||||||||||
Average USD to EUR contract rate |
1.3892 | 1.4324 | | 1.3896 | 1.3986 | |||||||||||||||
Fair Value at December 31, 2009 in U.S.
dollars |
4 | | | 4 | 1 | |||||||||||||||
KRW Sell EUR/Buy KRW: |
||||||||||||||||||||
Notional amount to buy (in South Korean won) |
4,777 | 273 | | 5,050 | | |||||||||||||||
Average KRW to EUR contract rate |
1.633 | 1.743 | | 1.6390 | | |||||||||||||||
Fair Value at December 31, 2009 in U.S.
dollars |
| | | | |
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As of December 31, 2009 | December 31, | |||||||||||||||||||
Functional Currency | 2010 | 2011 | 2012 | Total | 2008 | |||||||||||||||
Sell USD/Buy KRW: |
||||||||||||||||||||
Notional amount to buy (in South Korean won) |
88,183 | 61,779 | 3,264 | 153,226 | | |||||||||||||||
Average KRW to USD contract rate |
1.019 | 1.084 | 1.118 | 1.0460 | | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
(12 | ) | (6 | ) | | (18 | ) | | ||||||||||||
GBP Buy USD/Sell GBP: |
||||||||||||||||||||
Notional amount to buy (in British Pounds
Sterling) |
11 | | | 11 | | |||||||||||||||
Average USD to GBP contract rate |
1.5880 | | | 1.5880 | | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
| | | | | |||||||||||||||
Sell USD/Buy GBP: |
||||||||||||||||||||
Notional amount to buy (in British Pounds
Sterling) |
2 | | | 2 | 34 | |||||||||||||||
Average USD to GBP contract rate |
1.5313 | | | 1.5313 | 1.5647 | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
| | | | (4 | ) | ||||||||||||||
USD Buy DKK/Sell USD: |
||||||||||||||||||||
Notional amount to buy (in U.S. dollars) |
44 | | | 44 | 47 | |||||||||||||||
Average DKK to USD contract rate |
5.1219 | | | 5.1219 | 5.4968 | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
(1 | ) | | | (1 | ) | 2 | |||||||||||||
Buy EUR/Sell USD: |
||||||||||||||||||||
Notional amount to buy (in U.S. dollars) |
374 | 8 | | 382 | 749 | |||||||||||||||
Average USD to EUR contract rate |
1.4588 | 1.4150 | | 1.4578 | 1.3791 | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
(7 | ) | | | (7 | ) | 14 | |||||||||||||
Buy GBP/Sell USD: |
||||||||||||||||||||
Notional amount to buy (in U.S. dollars) |
76 | | | 76 | 108 | |||||||||||||||
Average USD to GBP contract rate |
1.6348 | | | 1.6348 | 1.5623 | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
(2 | ) | | | (2 | ) | (8 | ) | ||||||||||||
Buy NOK/Sell USD: |
||||||||||||||||||||
Notional amount to buy (in U.S. dollars) |
783 | 311 | | 1,094 | 1,325 | |||||||||||||||
Average NOK to USD contract rate |
6.2161 | 6.2541 | | 6.2269 | 6.5338 | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
49 | 18 | | 67 | (101 | ) | ||||||||||||||
Sell DKK/Buy USD: |
||||||||||||||||||||
Notional amount to buy (in U.S. dollars) |
6 | | | 6 | | |||||||||||||||
Average DKK to USD contract rate |
5.0009 | | | 5.0009 | | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
| | | | | |||||||||||||||
Sell EUR/Buy USD: |
||||||||||||||||||||
Notional amount to sell (in U.S. dollars) |
53 | 3 | | 56 | 76 | |||||||||||||||
Average USD to EUR contract rate |
1.4444 | 1.2715 | | 1.4324 | 1.3777 | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
| | | | (2 | ) | ||||||||||||||
Sell NOK/Buy USD: |
||||||||||||||||||||
Notional amount to sell (in U.S. dollars) |
408 | | | 408 | 589 | |||||||||||||||
Average NOK to USD contract rate |
5.8307 | | | 5.8307 | 5.8647 | |||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
| | | | 104 | |||||||||||||||
Other Currencies |
||||||||||||||||||||
Fair Value at December 31, 2009 in U.S. dollars |
1 | (1 | ) | | | | ||||||||||||||
Total Fair Value at December 31, 2009 in U.S. dollars |
38 | 11 | | 49 | 2 | |||||||||||||||
The Company had other financial market risk sensitive instruments denominated in foreign
currencies totaling $75 million as of December 31, 2009 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 million.
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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
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 ASC Topic 830 Foreign Currency
Matters. Effective January 1, 2008, we changed the functional currency of our Rig Technology unit
in Norway from the Norwegian krone 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 denominated in U.S. dollars. As a Norwegian krone 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 foreign currency forward contracts with notional
amounts aggregating $2,551 million with a fair value of $91 million 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 gain position of
$109 million associated with the terminated hedges has been deferred and is being recognized into
earnings in the future period(s) the forecasted transactions affect earnings, of which $10 million
remains to be recognized into future earnings at December 31, 2009. 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. At December 31, 2009, our Norway operations had derivatives with $2,024 million
in notional value with a fair value of $58 million, included in the table above.
Interest Rate Risk
At December 31, 2009 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, $150 million in 5.5% Senior
Notes and $151 million in 6.125% Senior Notes. We occasionally have borrowings under our credit
facility, 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 LIBOR, NIBOR or EURIBOR, or at the prime interest
rate. Under our credit facility, 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.
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. Exhibits and Financial Statement Schedules.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
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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, 2009 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 59 and is incorporated herein by reference.
(b) Changes in internal control
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.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference to the definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the definitive Proxy Statement for the 2010 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 2010 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, 2009, with
respect to compensation plans under which our common stock may be issued:
Number of securities | Weighted-average | Number of securities | ||||||||||
to be issued upon | exercise price of | remaining available for equity | ||||||||||
exercise of warrants | outstanding | compensation plans (excluding | ||||||||||
and rights | rights | securities reflected in column (a)) (c) | ||||||||||
Plan Category | ( a ) | ( b ) | (1) | |||||||||
Equity compensation plans approved
by security holders |
10,255,982 | $ | 34.19 | 11,979,694 | ||||||||
Equity compensation plans not approved
by security holders |
| | | |||||||||
Total |
10,255,982 | $ | 34.19 | 11,979,694 | ||||||||
(1) | Shares could be issued through equity instruments other than stock options, warrants or rights; however, none are anticipated during 2010. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference to the definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.
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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 | ||||
62 | ||||
63 | ||||
64 | ||||
65 | ||||
66 | ||||
(2) Financial Statement Schedule |
||||
95 |
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, 2004 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. (Exhibit 10.1) (10) | |
10.10 | First Amendment to Employment Agreement dated as of December 22, 2008 between Merrill A. Miller, Jr. and National Oilwell Varco. (Exhibit 10.1) (11) |
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10.11 | Second Amendment to Executive Agreement, dated as of December 22, 2008 of Clay Williams and National Oilwell Varco. (Exhibit 10.2) (11) | |
10.12 | First Amendment to Employment Agreement dated as of December 22, 2008 between Mark A. Reese and National Oilwell Varco. (Exhibit 10.3) (11) | |
10.13 | First Amendment to Employment Agreement dated as of December 22, 2008 between Dwight W. Rettig and National Oilwell Varco. (Exhibit 10.4) (11) | |
10.14 | Employment Agreement dated as of December 22, 2008 between Robert W. Blanchard and National Oilwell Varco. (Exhibit 10.5) (11) | |
10.15 | First Amendment to National Oilwell Varco Long-Term Incentive Plan. (12)* | |
10.16 | Second Amendment to Employment Agreement dated as of December 31, 2009 between Merrill A. Miller, Jr. and National Oilwell Varco. (Exhibit 10.1) (13) | |
10.17 | Third Amendment to Executive Agreement, dated as of December 31, 2009, of Clay Williams and National Oilwell Varco. (Exhibit 10.2) (13) | |
10.18 | Second Amendment to Employment Agreement dated as of December 31, 2009 between Mark A. Reese and National Oilwell Varco. (Exhibit 10.3) (13) | |
10.19 | Second Amendment to Employment Agreement dated as of December 31, 2009 between Dwight W. Rettig and National Oilwell Varco. (Exhibit 10.4) (13) | |
10.20 | First Amendment to Employment Agreement dated as of December 31, 2009 between Robert W. Blanchard and National Oilwell Varco. (Exhibit 10.5) (13) | |
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. | |
101 | The following materials from our Annual Report on Form 10-K for the period ended December 31, 2009 formatted in eXtensible Busine Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements Cash Flows, and (iv) Notes to the Consolidated Financial Statements, tagged as block text. (13) |
* | Compensatory plan or arrangement for management or others. |
56
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(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. | |
(11) | Filed as an Exhibit to our Current Report on Form 8-K filed on December 23, 2008. | |
(12) | Filed as Appendix I to our Proxy Statement filed on April 1, 2009. | |
(13) | Filed as an Exhibit to our Current Report on Form 8-K filed on January 5, 2010. | |
(14) | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of | |
Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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.
57
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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 26, 2010 | 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 26, 2010 | ||
/s/ CLAY C. WILLIAMS
|
Executive Vice President and Chief Financial Officer | February 26, 2010 | ||
/s/ ROBERT W. BLANCHARD
|
Vice President, Corporate Controller and Chief Accounting Officer | February 26, 2010 | ||
/s/ GREG L. ARMSTRONG
|
Director | February 26, 2010 | ||
/s/ ROBERT E. BEAUCHAMP
|
Director | February 26, 2010 | ||
/s/ BEN A. GUILL
|
Director | February 26, 2010 | ||
/s/ DAVID D. HARRISON
|
Director | February 26, 2010 | ||
/s/ ROGER L. JARVIS
|
Director | February 26, 2010 | ||
/s/ ERIC L. MATTSON
|
Director | February 26, 2010 | ||
/s/ JEFFERY A. SMISEK
|
Director | February 26, 2010 |
58
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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, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009, has
been audited by Ernst & Young LLP, the independent registered public accounting firm which also has
audited the Companys Consolidated Financial Statements included in this Annual Report on
Form 10-K.
/s/ Merrill A. Miller, Jr.
Merrill A. Miller, Jr.
Chairman, President and Chief Executive Officer
Merrill A. Miller, Jr.
Chairman, President and Chief Executive Officer
/s/ Clay C. Williams
Clay C. Williams
Executive Vice President and Chief Financial Officer
Clay C. Williams
Executive Vice President and Chief Financial Officer
Houston, Texas
February 26, 2010
February 26, 2010
59
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, 2009 and 2008, 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, 2009. 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 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of National Oilwell Varco, Inc. at December 31, 2009
and 2008, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2009, 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 1 to the consolidated financial statements, the
Company changed its method of accounting for noncontrolling interests
beginning on January 1, 2009.
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, 2009, 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 26, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 26, 2010
Houston, Texas
February 26, 2010
60
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 National Oilwell Varco, Inc.s internal control over financial reporting as of December
31, 2009, based on criteria established in Internal ControlIntegrated 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, 2009, 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, 2009 and 2008 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, 2009, and our report
dated February 26, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Houston, Texas
February 26, 2010
Houston, Texas
February 26, 2010
61
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(In millions, except share data)
December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 2,622 | $ | 1,543 | ||||
Receivables, net |
2,187 | 3,136 | ||||||
Inventories, net |
3,490 | 3,806 | ||||||
Costs in excess of billings |
740 | 618 | ||||||
Deferred income taxes |
290 | 271 | ||||||
Prepaid and other current assets |
269 | 283 | ||||||
Total current assets |
9,598 | 9,657 | ||||||
Property, plant and equipment, net |
1,836 | 1,677 | ||||||
Deferred income taxes |
92 | 126 | ||||||
Goodwill |
5,489 | 5,225 | ||||||
Intangibles, net |
4,052 | 4,300 | ||||||
Investment in unconsolidated affiliate |
393 | 421 | ||||||
Other assets |
72 | 73 | ||||||
Total assets |
$ | 21,532 | $ | 21,479 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 584 | $ | 852 | ||||
Accrued liabilities |
2,267 | 2,376 | ||||||
Billings in excess of costs |
1,090 | 2,161 | ||||||
Current portion of long-term debt and short-term borrowings |
7 | 4 | ||||||
Accrued income taxes |
226 | 230 | ||||||
Total current liabilities |
4,174 | 5,623 | ||||||
Long-term debt |
876 | 870 | ||||||
Deferred income taxes |
2,091 | 2,134 | ||||||
Other liabilities |
163 | 128 | ||||||
Total liabilities |
7,304 | 8,755 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock par value $.01; 418,451,731 and 417,350,924 shares issued
and outstanding at December 31, 2009 and December 31, 2008 |
4 | 4 | ||||||
Additional paid-in capital |
8,214 | 7,989 | ||||||
Accumulated other comprehensive income (loss) |
90 | (161 | ) | |||||
Retained earnings |
5,805 | 4,796 | ||||||
Total Company stockholders equity |
14,113 | 12,628 | ||||||
Noncontrolling interests |
115 | 96 | ||||||
Total stockholders equity |
14,228 | 12,724 | ||||||
Total liabilities and stockholders equity |
$ | 21,532 | $ | 21,479 | ||||
The accompanying notes are an integral part of these statements.
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Table of Contents
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue |
||||||||||||
Sales |
$ | 10,812 | $ | 11,162 | $ | 7,873 | ||||||
Services |
1,900 | 2,269 | 1,916 | |||||||||
Total |
12,712 | 13,431 | 9,789 | |||||||||
Cost of revenue |
||||||||||||
Cost of sales |
7,297 | 7,784 | 5,675 | |||||||||
Cost of services |
1,631 | 1,575 | 1,284 | |||||||||
Total |
8,928 | 9,359 | 6,959 | |||||||||
Gross profit |
3,784 | 4,072 | 2,830 | |||||||||
Selling, general and administrative |
1,322 | 1,154 | 786 | |||||||||
Intangible asset impairment |
147 | | | |||||||||
Operating profit |
2,315 | 2,918 | 2,044 | |||||||||
Interest and financial costs |
(53 | ) | (67 | ) | (50 | ) | ||||||
Interest income |
9 | 45 | 53 | |||||||||
Equity income in unconsolidated affiliate |
47 | 42 | | |||||||||
Other income (expense), net |
(110 | ) | 23 | (18 | ) | |||||||
Income before income taxes |
2,208 | 2,961 | 2,029 | |||||||||
Provision for income taxes |
735 | 993 | 676 | |||||||||
Net income |
1,473 | 1,968 | 1,353 | |||||||||
Net income attributable to noncontrolling interests |
4 | 16 | 16 | |||||||||
Net income attributable to Company |
$ | 1,469 | $ | 1,952 | $ | 1,337 | ||||||
Net income attributable to Company per share: |
||||||||||||
Basic |
$ | 3.53 | $ | 4.91 | $ | 3.77 | ||||||
Diluted |
$ | 3.52 | $ | 4.90 | $ | 3.76 | ||||||
Weighted average shares outstanding: |
||||||||||||
Basic |
416 | 397 | 354 | |||||||||
Diluted |
417 | 399 | 355 | |||||||||
The accompanying notes are an integral part of these statements.
63
Table of Contents
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 1,473 | $ | 1,968 | $ | 1,353 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
490 | 402 | 214 | |||||||||
Stock-based compensation |
68 | 67 | 43 | |||||||||
Excess tax benefit from the exercise of stock options |
(1 | ) | (37 | ) | (23 | ) | ||||||
Equity income in unconsolidated affiliate |
(47 | ) | (42 | ) | | |||||||
Dividend from unconsolidated affiliate |
86 | | | |||||||||
Intangible asset impairment |
147 | | | |||||||||
Other |
(99 | ) | 82 | 48 | ||||||||
Change in operating assets and liabilities, net of acquisitions: |
||||||||||||
Receivables |
1,033 | (626 | ) | (465 | ) | |||||||
Inventories |
468 | (643 | ) | (758 | ) | |||||||
Costs in excess of billings |
(122 | ) | 25 | (335 | ) | |||||||
Prepaid and other current assets |
23 | 230 | (144 | ) | ||||||||
Accounts payable |
(361 | ) | 95 | 84 | ||||||||
Billings in excess of costs |
(1,071 | ) | 765 | 832 | ||||||||
Other assets/liabilities, net |
8 | 8 | 339 | |||||||||
Net cash provided by operating activities |
2,095 | 2,294 | 1,188 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property, plant and equipment |
(250 | ) | (379 | ) | (252 | ) | ||||||
Business acquisitions, net of cash acquired |
(573 | ) | (3,008 | ) | (324 | ) | ||||||
Business divestitures, net of cash disposed |
| 801 | | |||||||||
Sale of equity interest, net |
251 | | | |||||||||
Dividend from unconsolidated affiliate |
8 | 113 | | |||||||||
Other, net |
12 | | 1 | |||||||||
Net cash used in investing activities |
(552 | ) | (2,473 | ) | (575 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Borrowings against lines of credit and other debt |
7 | 2,731 | 47 | |||||||||
Payments against lines of credit and other debt |
(47 | ) | (2,920 | ) | (11 | ) | ||||||
Dividends paid |
(460 | ) | | | ||||||||
Excess tax benefits from exercise of stock options |
1 | 37 | 23 | |||||||||
Proceeds from stock options exercised |
8 | 78 | 91 | |||||||||
Net cash provided by (used in) financing activities |
(491 | ) | (74 | ) | 150 | |||||||
Effect of exchange rates on cash |
27 | (46 | ) | 122 | ||||||||
Increase (decrease) in cash equivalents |
1,079 | (299 | ) | 885 | ||||||||
Cash and cash equivalents, beginning of period |
1,543 | 1,842 | 957 | |||||||||
Cash and cash equivalents, end of period |
$ | 2,622 | $ | 1,543 | $ | 1,842 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash payments during the period for: |
||||||||||||
Interest |
$ | 56 | $ | 76 | $ | 57 | ||||||
Income taxes |
$ | 929 | $ | 1,261 | $ | 703 |
The accompanying notes are an integral part of these statements.
64
Table of Contents
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 | Total | |||||||||||||||||||||||||||||||
Additional | Other | Company | Total | |||||||||||||||||||||||||||||
Shares | Common | Paid in | Comprehensive | Retained | Stockholders | Noncontrolling | Stockholders | |||||||||||||||||||||||||
Outstanding | Stock | Capital | Income (Loss) | Earnings | Equity | Interests | Equity | |||||||||||||||||||||||||
Balance at December 31, 2006 |
351 | $ | 3 | $ | 3,460 | $ | 46 | $ | 1,514 | $ | 5,023 | $ | 36 | $ | 5,059 | |||||||||||||||||
Net income |
| | | | 1,337 | 1,337 | 16 | 1,353 | ||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Currency translation adjustments |
| | | 136 | | 136 | | 136 | ||||||||||||||||||||||||
Derivative financial instruments |
| | | 18 | | 18 | | 18 | ||||||||||||||||||||||||
Change in defined benefit plans |
| | | (5 | ) | | (5 | ) | | (5 | ) | |||||||||||||||||||||
Comprehensive income |
1,486 | 1,502 | ||||||||||||||||||||||||||||||
Adoption of FIN48 |
| | | | (5 | ) | (5 | ) | | (5 | ) | |||||||||||||||||||||
Noncontrolling interest contribution |
| | | | | | 11 | 11 | ||||||||||||||||||||||||
Stock-based compensation |
| | 43 | | | 43 | | 43 | ||||||||||||||||||||||||
Common stock issued |
5 | | 91 | | | 91 | | 91 | ||||||||||||||||||||||||
Excess tax benefit of options exercised |
| | 23 | | | 23 | | 23 | ||||||||||||||||||||||||
Balance at December 31, 2007 |
356 | $ | 3 | $ | 3,617 | $ | 195 | $ | 2,846 | $ | 6,661 | $ | 63 | $ | 6,724 | |||||||||||||||||
Net income |
| | | | 1,952 | 1,952 | 16 | 1,968 | ||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Currency translation adjustments |
| | | (176 | ) | | (176 | ) | | (176 | ) | |||||||||||||||||||||
Derivative financial instruments |
| | | (160 | ) | | (160 | ) | | (160 | ) | |||||||||||||||||||||
Change in defined benefit plans |
| | | (20 | ) | | (20 | ) | | (20 | ) | |||||||||||||||||||||
Comprehensive income |
1,596 | 1,612 | ||||||||||||||||||||||||||||||
Adoption of FAS158, net of tax |
| | | | (2 | ) | (2 | ) | | (2 | ) | |||||||||||||||||||||
Stock issued in acquisition |
57 | 1 | 4,190 | | | 4,191 | | 4,191 | ||||||||||||||||||||||||
Acquired noncontrolling interests |
| | | | | | 25 | 25 | ||||||||||||||||||||||||
Dividends to noncontrolling interests |
| | | | | | (8 | ) | (8 | ) | ||||||||||||||||||||||
Stock-based compensation |
| | 67 | | | 67 | | 67 | ||||||||||||||||||||||||
Common stock issued |
4 | | 78 | | | 78 | | 78 | ||||||||||||||||||||||||
Excess tax benefit of options exercised |
| | 37 | | | 37 | | 37 | ||||||||||||||||||||||||
Balance at December 31, 2008 |
417 | $ | 4 | $ | 7,989 | $ | (161 | ) | $ | 4,796 | $ | 12,628 | $ | 96 | $ | 12,724 | ||||||||||||||||
Net income |
| | | | 1,469 | 1,469 | 4 | 1,473 | ||||||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||||||
Currency translation adjustments |
| | | 100 | | 100 | | 100 | ||||||||||||||||||||||||
Derivative financial instruments |
| | | 160 | | 160 | | 160 | ||||||||||||||||||||||||
Change in defined benefit plans |
| | | (9 | ) | | (9 | ) | | (9 | ) | |||||||||||||||||||||
Comprehensive income |
1,720 | 1,724 | ||||||||||||||||||||||||||||||
Cash dividends, $1.10 per common share |
| | | | (460 | ) | (460 | ) | | (460 | ) | |||||||||||||||||||||
Dividends to noncontrolling interests |
| | | | | | (13 | ) | (13 | ) | ||||||||||||||||||||||
Noncontrolling interest contribution |
| | | | | | 28 | 28 | ||||||||||||||||||||||||
Gain on sale of equity interest, net of tax |
| | 148 | | | 148 | | 148 | ||||||||||||||||||||||||
Stock-based compensation |
| | 68 | | | 68 | | 68 | ||||||||||||||||||||||||
Common stock issued |
1 | | 8 | | | 8 | | 8 | ||||||||||||||||||||||||
Excess tax benefit of options exercised |
| | 1 | | | 1 | | 1 | ||||||||||||||||||||||||
Balance at December 31, 2009 |
418 | $ | 4 | $ | 8,214 | $ | 90 | $ | 5,805 | $ | 14,113 | $ | 115 | $ | 14,228 | |||||||||||||||||
The accompanying notes are an integral part of these statements.
65
Table of Contents
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 noncontrolling interests in the accompanying consolidated financial
statements. On January 1, 2009, the Company adopted ASC Topic 810, Consolidations and
reclassified noncontrolling interests in the amount $96 million from the mezzanine section to
equity in the December 31, 2008 balance sheet. Investments in unconsolidated affiliates, over
which we exercise significant influence, but not control, are accounted for by the equity method.
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
The Financial Accounting Standards Board (FASB) issued ASC Topic 815, Derivatives and Hedging.
(ASC Topic 815) This Standard requires companies to recognize all of its derivative instruments
as either assets or liabilities in the statement of financial position at fair value. The
accounting changes in the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship and further, on the
type of hedging relationship. For those derivative instruments that are designated and qualify as
hedging instruments, a company must designate the hedging instrument, based upon the exposure being
hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign
operation.
The Company is exposed to certain risks relating to its ongoing business operations. The primary
risks managed by using derivative instruments are foreign currency exchange rate risk, and interest
rate risk. Forward contracts against various foreign currencies are entered into to manage the
foreign currency exchange rate risk on forecasted revenue and expenses denominated in currencies
other than the functional currency of the operating unit (cash flow hedge). Other forward exchange
contracts against various foreign currencies are entered into to manage the foreign currency
exchange rate risk associated with certain firm commitments denominated in currencies other than
the functional currency of the operating unit (fair value hedge). In addition the Company will
enter into non-designated forward contracts against various foreign currencies to manage the
foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts
(non-designated hedge). Interest rate swaps are entered into to manage interest rate risk
associated with the Companys fixed and floating-rate borrowings.
The Company records all derivative financial instruments at their fair value in our consolidated
balance sheet. Except for certain non-designated 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. Such arrangements typically have terms
between two and 24 months, but may have longer terms depending on the underlying cash flows being
hedged, typically related to the projects in our backlog. We may also use interest rate contracts
to mitigate our exposure to changes in interest rates on anticipated long-term debt issuances.
At December 31, 2009, the Company has determined that its financial assets of $104 million and
liabilities of $55 million (primarily
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currency related derivatives) are level 2 in the fair value hierarchy. At December 31, 2009, the
fair value of the Companys foreign currency forward contracts totaled $49 million.
As of December 31, 2009, the Company did not have any interest rate swaps and our financial
instruments do not contain any credit-risk-related or other contingent features that could cause
accelerated payments when our financial instruments are in net liability positions. We do not use
derivative financial instruments for trading or speculative purposes.
Cash Flow Hedging Strategy
For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that is subject to a particular currency
risk), the effective portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in the same line item
associated with the forecasted transaction and in the same period or periods during which the
hedged transaction affects earnings (e.g., in revenues when the hedged transactions are cash
flows associated with forecasted revenues). The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future cash flows of the
hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the
assessment of effectiveness, are recognized in the Consolidated Statements of Income during the
current period.
As of December 31, 2009, the Company had the following outstanding foreign currency forward
contracts that were entered into to hedge nonfunctional currency cash flows from forecasted
revenues and costs:
Currency | ||||
Foreign Currency | Denomination | |||
(in millions) | ||||
British Pound Sterling |
£ | 39 | ||
Danish Krone |
DKK | 180 | ||
Euro |
| 199 | ||
Norwegian Krone |
NOK | 6,097 | ||
U.S. Dollar |
$ | 224 | ||
Korean Won |
KRW | 2,317 |
Fair Value Hedging Strategy
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the
exposure to changes in the fair value of an asset or a liability or an identified portion thereof
that is subject to a particular risk), the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in the
same line item associated with the hedged item in current earnings (e.g., in revenue when the
hedged item is a contracted sale).
The Company enters into forward exchange contracts to hedge certain firm commitments of revenue and
costs that are denominated in currencies other than the functional currency of the operating unit.
The purpose of the Companys foreign currency hedging activities is to protect the Company from
risk that the eventual U.S. dollar-equivalent cash flows from the sale of products to customers
will be adversely affected by changes in the exchange rates.
As of December 31, 2009, the Company had the following outstanding foreign currency forward
contracts that were entered into to hedge nonfunctional currency fair values of firm commitments of
revenues and costs:
Currency | ||||
Foreign Currency | Denomination | |||
(in millions) | ||||
U.S. Dollar |
$ | 52 |
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Non-designated Hedging Strategy
For derivative instruments that are non-designated, the gain or loss on the derivative instrument
is recognized in the same line item associated with the hedged item in current earnings.
The Company enters into forward exchange contracts to hedge certain nonfunctional currency monetary
accounts. The purpose of the Companys foreign currency hedging activities is to protect the
Company from risk that the eventual U.S. dollar-equivalent cash flows from the nonfunctional
currency monetary accounts will be adversely affected by changes in the exchange rates.
As of December 31, 2009, the Company had the following outstanding foreign currency forward
contracts that hedge the fair value of nonfunctional currency monetary accounts:
Currency | ||||
Foreign Currency | Denomination | |||
(in millions) | ||||
British Pound Sterling |
£ | 10 | ||
Danish Krone |
DKK | 77 | ||
Euro |
| 106 | ||
Norwegian Krone |
NOK | 3,096 | ||
Swedish Krone |
SEK | 5 | ||
U.S. Dollar |
$ | 501 | ||
Korean Won |
KRW | 2,812 |
As of December 31, 2009, the Company has the following fair values of its derivative instruments
and their balance sheet classifications (in millions):
December 31, 2009 | ||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||
Balance Sheet | Fair | Balance Sheet | Fair | |||||||||
Location | Value | Location | Value | |||||||||
Derivatives designated as hedging instruments under ASC Topic 815 |
||||||||||||
Foreign exchange contracts
|
Prepaid and other current assets | $ | 56 | Accrued liabilities | $ | 39 | ||||||
Foreign exchange contracts
|
Other Assets | 17 | Other Liabilities | 7 | ||||||||
Total derivatives designated as hedging instruments under ASC Topic 815 |
$ | 73 | $ | 46 | ||||||||
Derivatives not designated as hedging instruments under ASC Topic 815 |
||||||||||||
Foreign exchange contracts
|
Prepaid and other current assets | $ | 30 | Accrued liabilities | $ | 8 | ||||||
Foreign exchange contracts
|
Other Assets | 1 | Other Liabilities | 1 | ||||||||
Total derivatives not designated as hedging instruments under ASC Topic 815 |
$ | 31 | $ | 9 | ||||||||
Total derivatives
|
$ | 104 | $ | 55 | ||||||||
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Location of Gain (Loss) | ||||||||||||||||
Recognized in Income on | Amount of Gain (Loss) | |||||||||||||||
Location of Gain (Loss) | Derivative (Ineffective | Recognized in Income on | ||||||||||||||
Reclassified from | Amount of Gain (Loss) | Portion and Amount | Derivative (Ineffective | |||||||||||||
Derivatives in ASC Topic 815 | Amount of Gain (Loss) | Accumulated OCI into | Reclassified from | Excluded from | Portion and Amount | |||||||||||
Cash Flow Hedging | Recognized in OCI on | Income | Accumulated OCI into | Effectiveness | Excluded from | |||||||||||
Relationships | Derivative (Effective Portion) (a) | (Effective Portion) | Income (Effective Portion) | Testing) | Effectiveness Testing) (b) | |||||||||||
December 31, 2009 | December 31, 2009 | December 31, 2009 | ||||||||||||||
Revenue | 26 | |||||||||||||||
Foreign exchange contracts |
164 | Cost of revenue | (42 | ) | Other income (expense), net | (24 | ) | |||||||||
Total |
164 | (16 | ) | (24 | ) | |||||||||||
Derivatives in ASC Topic 815 | Location of Gain (Loss) | Amount of Gain (Loss) | ASC Topic 815 | Location of Gain (Loss) | Recognized in Income on | |||||||||
Fair Value | Recognized in Income | Recognized in Income on | Fair Value Hedge | Recognized in Income on | Related Hedged | |||||||||
Hedging Relationships | on Derivative | Derivative | Relationships | Related Hedged Item | Items | |||||||||
December 31, 2009 | December 31, 2009 | |||||||||||||
Foreign exchange contracts |
Revenue | 7 | Firm commitments | Revenue | (7 | ) | ||||||||
Foreign exchange contracts |
Cost of revenue | (13 | ) | Firm commitments | Cost of revenue | 13 | ||||||||
Total |
(6 | ) | 6 | |||||||||||
Derivatives Not Designated as | Location of Gain (Loss) | Amount of Gain (Loss) | ||||
Hedging Instruments under | Recognized in Income | Recognized in Income on | ||||
ASC Topic 815 | on Derivative | Derivative | ||||
Foreign exchange contracts |
Other income (expense), net | 3 | ||||
Total |
3 | |||||
(a) | The Company expects that $(18) million of the Accumulated Other Comprehensive Income (Loss) will be reclassified into earnings within the next twelve months with an offset by gains from the underlying transactions resulting in no impact to earnings or cash flow. | |
(b) | The amount of gain (loss) recognized in income represents $(24) million related to the ineffective portion of the hedging relationships for the year ended December 31, 2009 and $4 million related to the amount excluded from the assessment of the hedge effectiveness for the year ended December 31, 2009. |
We assess the functional currencies of our operating units to ensure that the appropriate
currencies are utilized in accordance with the guidance of ASC Topic 830 Foreign Currency Matters
(ASC Topic 830). Effective January 1, 2008, we changed the functional currency of our Rig
Technology unit in Norway from the Norwegian krone 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 denominated in U.S. dollars. As a Norwegian krone 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
nonfunctional currency positions.
At December 31, 2007, our Norway operations had foreign currency forward contracts with notional
amounts aggregating $2,551 million with a fair value of $91 million 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 gain position of
$109 million associated with the terminated hedges was deferred and is being recognized into
earnings in the future period(s) the forecasted transactions affect earnings, of which $10 million
remains to be recognized into future earnings at December 31, 2009. The Company has, subsequent to
January 1, 2008, entered into new hedges to cover the exposures as a result of the change to U.S.
dollar functional. At December 31, 2009, our Norway operations had derivatives with $2,024 million
in notional value with a fair value asset of $58 million.
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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 $206 million and $123 million at December 31, 2009 and 2008, respectively, 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 $249 million, $222 million and $153 million for the years ended December 31, 2009, 2008
and 2007, respectively. 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 are 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.
Intangible Assets
The Company has approximately $5.5 billion of goodwill and $4.1 billion of identified intangible
assets as of December 31, 2009. Generally accepted accounting principles require the Company to
test goodwill and other indefinite-lived intangible assets for impairment at least annually or more
frequently whenever events or circumstances occur indicating that such assets might be impaired.
Goodwill is identified by segment as follows (in millions):
Petroleum | ||||||||||||||||
Rig | Services & | Distribution | ||||||||||||||
Technology | Supplies | Services | Total | |||||||||||||
Balance at December 31, 2007 |
$ | 1,231 | $ | 1,175 | $ | 39 | $ | 2,445 | ||||||||
Reorganization of segments |
232 | (256 | ) | 24 | | |||||||||||
Goodwill acquired during period |
| 2,812 | 3 | 2,815 | ||||||||||||
Translation adjustments |
(5 | ) | (26 | ) | (4 | ) | (35 | ) | ||||||||
Balance at December 31, 2008 |
1,458 | 3,705 | 62 | 5,225 | ||||||||||||
Goodwill acquired during period |
97 | 143 | | 240 | ||||||||||||
Translation and other
adjustments |
12 | 7 | 5 | 24 | ||||||||||||
Balance at December 31, 2009 |
$ | 1,567 | $ | 3,855 | $ | 67 | $ | 5,489 | ||||||||
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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 $250 million in each
of the next five years. Included in intangible assets are approximately $643 million of
indefinite-lived trade names.
Identified intangible assets are identified by segment as follows (in millions):
Petroleum | ||||||||||||||||
Rig | Services & | Distribution | ||||||||||||||
Technology | Supplies | Services | Total | |||||||||||||
Balance at December 31, 2007 |
$ | 289 | $ | 483 | $ | 2 | $ | 774 | ||||||||
Reorganization of segments |
97 | (105 | ) | 8 | | |||||||||||
Additions to intangible
assets |
7 | 3,716 | | 3,723 | ||||||||||||
Amortization |
(31 | ) | (147 | ) | (1 | ) | (179 | ) | ||||||||
Translation |
(1 | ) | (14 | ) | (3 | ) | (18 | ) | ||||||||
Balance at December 31, 2008 |
361 | 3,933 | 6 | 4,300 | ||||||||||||
Additions to intangible
assets |
86 | 37 | | 123 | ||||||||||||
Asset impairment |
| (147 | ) | | (147 | ) | ||||||||||
Amortization |
(36 | ) | (204 | ) | (1 | ) | (241 | ) | ||||||||
Translation |
5 | 11 | 1 | 17 | ||||||||||||
Balance at December 31, 2009 |
$ | 416 | $ | 3,630 | $ | 6 | $ | 4,052 | ||||||||
Identified intangible assets by major classification consist of the following (in millions):
Accumulated | Net Book | |||||||||||
Gross | Amortization | Value | ||||||||||
December 31, 2008: |
||||||||||||
Customer relationships |
$ | 2,751 | $ | (210 | ) | $ | 2,541 | |||||
Trademarks |
584 | (40 | ) | 544 | ||||||||
Indefinite-lived trade names |
790 | | 790 | |||||||||
Other |
494 | (69 | ) | 425 | ||||||||
Total identified intangibles |
$ | 4,619 | $ | (319 | ) | $ | 4,300 | |||||
December 31, 2009: |
||||||||||||
Customer relationships |
$ | 2,819 | $ | (366 | ) | $ | 2,453 | |||||
Trademarks |
619 | (73 | ) | 546 | ||||||||
Indefinite-lived trade names |
643 | | 643 | |||||||||
Other |
531 | (121 | ) | 410 | ||||||||
Total identified
intangibles |
$ | 4,612 | $ | (560 | ) | $ | 4,052 | |||||
Asset Impairment
During the second quarter of 2009, the worldwide average rig count was 2,009 rigs, down 41% from
the fourth quarter 2008 average of 3,395 and down 25% from the first quarter 2009 average of 2,681.
The second quarter 2009 average rig count represented the lowest quarterly average in the past six
years. In addition, the Companys updated forecast was behind the Companys previous forecast
completed at the beginning of 2009. While operating profit for the first quarter of 2009 was in
line with the Companys first quarter 2009 operating profit forecast, the Companys consolidated
operating profit for the second quarter of 2009 was below its second quarter 2009 forecast. As a
result of the substantial decline in the worldwide rig count, and the decline in actual/forecasted
results compared to the original 2009 forecast, the Company concluded that events or circumstances
had occurred indicating that goodwill and other indefinite-lived intangible assets might be
impaired as described in ASC Topic 350, Intangibles Goodwill and Other (ASC Topic 350).
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Therefore, the Company performed its interim impairment test of goodwill for its reporting units at
the end of the second quarter of 2009. 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. Fair value of the reporting units is determined in
accordance with ASC Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820), using
significant unobservable inputs, or level 3 in the fair value hierarchy. These inputs are based on
internal management estimates, forecasts and judgments, using a combination of three methods:
discounted cash flow, comparable companies, and representative transactions. While the Company
primarily uses the discounted cash flow method to assess fair value, the Company uses the
comparable companies and representative transaction methods to validate the discounted cash flow
analysis and further support managements expectations, where possible.
The discounted cash flow is based on managements short-term and long-term forecast of operating
performance for each reporting unit. The two main assumptions used in measuring goodwill
impairment, which bear the risk of change and could impact the Companys goodwill impairment
analysis, include the cash flow from operations from each of the Companys individual business
units and the weighted average cost of capital. The starting point for each of the reporting units
cash flow from operations is the detailed annual plan or updated forecast. The detailed planning
and forecasting process takes into consideration a multitude of factors including worldwide rig
activity, inflationary forces, pricing strategies, customer analysis, operational issues,
competitor analysis, capital spending requirements, working capital needs, customer needs to
replace aging equipment, increased complexity of drilling, new technology, and existing backlog
among other items which impact the individual reporting unit projections. Cash flows beyond the
specific operating plans were estimated using a terminal value calculation, which incorporated
historical and forecasted financial cyclical trends for each reporting unit and considered
long-term earnings growth rates. The financial and credit market volatility directly impacts our
fair value measurement through our weighted average cost of capital that we use to determine our
discount rate. During times of volatility, significant judgment must be applied to determine
whether credit changes are a short-term or long-term trend.
Projections for the remainder of 2009 also reflected declines compared to the original 2009 annual
forecast. The Company updated its 2009 operating forecast, long-term forecast, and discounted cash
flows based on this information. The goodwill impairment analysis that we performed during the
second quarter of 2009 did not result in goodwill impairment as of June 30, 2009.
Other indefinite-lived intangible assets, representing trade names management intends to use
indefinitely, were valued using significant unobservable inputs (level 3) and are tested for
impairment using the Relief from Royalty Method, a form of the Income Approach. An impairment is
measured and recognized based on the amount the book value of the indefinite-lived intangible
assets exceeds its estimated fair value as of the date of the impairment test. Included in the
impairment test are assumptions, for each trade name, regarding the related revenue streams
attributable to the trade names, which are determined in a manner consistent with the forecasting
process described above, the royalty rate, and the discount rate applied. Based on the Companys
indefinite-lived intangible asset impairment analysis performed during the second quarter of 2009,
the Company incurred an impairment charge of $147 million in the Petroleum Services & Supplies
segment related to a partial impairment of the Companys Grant Prideco trade name. The impairment
charge was primarily the result of the substantial decline in worldwide rig counts through June
2009, declines in forecasts in rig activity for the remainder of 2009, 2010, and 2011 compared to
rig count forecast at the beginning of 2009, and a decline in the revenue forecast for the drill
pipe business unit for the remainder of 2009, 2010, and 2011.
The Company performed its annual impairment analysis for its goodwill and indefinite-lived assets
during the fourth quarter of 2009 which resulted in no further impairment. The valuation techniques
used in the annual test were consistent with the methodologies described above. The inputs used in
the annual test were updated for current market conditions and forecasts.
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 (loss). 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 ($79)
million, $50 million and ($7) million for the years ending December 31, 2009, 2008 and 2007,
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 krone to the U.S. dollar to more appropriately reflect the primary economic
environment in which they currently operate.
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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 and drill pipe sales 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,
collectability 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 cost 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 segment. 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 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.
Drill Pipe Sales
For drill pipe sales, if requested in writing by the customer, delivery may be satisfied through
delivery to the Companys customer storage location or to a third-party storage facility. For sales
transactions where title and risk of loss have transferred to the customer but the supporting
documentation does not meet the criteria for revenue recognition prior to the products being in the
physical possession of the customer, the recognition of the revenues and related inventory costs
from these transactions are deferred until the customer takes physical possession.
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 ASC Topic 450 Contingencies
(ASC Topic 450). 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.
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The changes in the carrying amount of service and product warranties are as follows (in millions):
Balance at December 31, 2007 |
$ | 92 | ||
Net provisions for warranties issued during the year |
77 | |||
Amounts incurred |
(54 | ) | ||
Foreign currency translation |
(1 | ) | ||
Balance at December 31, 2008 |
$ | 114 | ||
Net provisions for warranties issued during the year |
144 | |||
Amounts incurred |
(62 | ) | ||
Foreign currency translation and other |
21 | |||
Balance at December 31, 2009 |
$ | 217 | ||
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 basis 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 basis taking into account current market conditions and trends.
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.
Accounts receivable are net of allowances for doubtful accounts of approximately $95 million and
$73 million at December 31, 2009 and 2008, respectively.
Stock-Based Compensation
Compensation expense for the Companys stock-based compensation plans is measured using the fair
value method required by ASC Topic 718 Compensation Stock Compensation (ASC Topic 718).
Under this guidance the fair value of stock option grants and restricted stock is amortized to
expense using the straight-line method over the shorter of the vesting period or the remaining
employee service period.
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 $68 million, $61 million and $43 million for 2009, 2008 and 2007, respectively.
The total income tax benefit recognized in the income statement for all share-based compensation
arrangements was $21 million, $19 million and $13 million for 2009, 2008 and 2007, respectively.
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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 costs and related margins of
projects accounted for under percentage- of-completion (POC), estimated realizable value on
excess and obsolete inventory, contingencies, estimated liabilities for litigation exposures and
liquidated damages, estimated warranty costs, estimates related to tocpension accounting, estimates
related to the fair value of reporting units for purposes of assessing goodwill and other
indefinite-lived intangible assets for impairment 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 liabilities are reflected in income in the period in which different facts
or information become known or circumstances change that affect the Companys previous judgments
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.
In circumstances where the most likely outcome of a contingency can be reasonably estimated, we
accrue a liability for that amount. Where the most likely outcome cannot be estimated, a range of
potential losses is established and if no one amount in that range is more likely than others, the
low end of the range is accrued.
Net
Income Attributable to Company 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, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Numerator: |
||||||||||||
Net income
attributable to Company |
$ | 1,469 | $ | 1,952 | $ | 1,337 | ||||||
Denominator: |
||||||||||||
Basicweighted average common shares
outstanding |
416 | 397 | 354 | |||||||||
Dilutive effect of employee stock
options
and other unvested stock awards |
1 | 2 | 1 | |||||||||
Diluted outstanding shares |
417 | 399 | 355 | |||||||||
Basic
earnings attributable to Company per share |
$ | 3.53 | $ | 4.91 | $ | 3.77 | ||||||
Diluted
earnings attributable to Company per share |
$ | 3.52 | $ | 4.90 | $ | 3.76 | ||||||
Cash dividends per share |
$ | 1.10 | $ | | $ | | ||||||
In addition, we had stock options outstanding that were anti-dilutive totaling 4.0 million, 0.4
million, and 0.1 million at December 31, 2009, 2008 and 2007, respectively.
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Recently Issued Accounting Standards
In April 2009 the FASB issued ASC Topic 805, Business Combinations (ASC Topic 805). ASC Topic
805 amends the provisions for the initial recognition and measurement, subsequent measurement and
accounting, and disclosures for assets and liabilities arising from contingencies in business
combinations. ASC Topic 805 is effective for contingent assets and contingent liabilities acquired
in business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The Company expects ASC Topic 805
will have a future impact on its consolidated financial statements, but the nature and magnitude of
the specific effects will depend upon the nature, term and size of the acquired contingencies.
In April 2009, the FASB issued ASC Topic 825, Financial Instruments (ASC Topic 825). ASC Topic
825 extends the annual disclosure requirements regarding the fair value of financial instruments to
interim financial statements of publicly traded companies. ASC Topic 825 is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. On June 1, 2009, the Company adopted ASC Topic 825. There was no
significant impact to the Companys Consolidated Financial Statements from the adoption of ASC
Topic 825.
In May 2009, the FASB issued ASC Topic 855, Subsequent Events (ASC Topic 855). ASC Topic 855
requires the disclosure of the date through which an entity has evaluated subsequent events and the
basis for that date. ASC Topic 855 is effective for fiscal years and interim periods ending after
June 15, 2009. On June 1, 2009, the Company adopted ASC Topic 855. There was no significant impact
to the Companys Consolidated Financial Statements from the adoption of ASC Topic 855.
In June 2009, the FASB issued ASC Topic 105, Generally Accepted Accounting Standards (ASC Topic
105). The ASC is now the source of authoritative U.S. GAAP recognized by the FASB to be applied
by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date,
ASC Topic 105 superseded all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the ASC has become
non-authoritative. ASC Topic 105 became effective for financial statements issued for interim and
annual periods ending after September 15, 2009.
3. Grant Prideco Merger
Pursuant to the Agreement and Plan of Merger with Grant Prideco, Inc. (Grant Prideco) (the
Merger), a Delaware Corporation, effective December 16, 2007 (the Agreement Date), the Company
issued .4498 shares of National Oilwell Varco, Inc. common stock and $23.20 in cash (the Exchange
Ratio) for each Grant Prideco common share outstanding on April 21, 2008 (the Merger Date)
totaling approximately 57 million shares and $2.9 billion in cash. The Company has included the
financial results of Grant Prideco in its Consolidated Financial Statements beginning on the Merger
Date, the date Grant Prideco common shares were exchanged for National Oilwell Varco common shares
and cash. The Grant Prideco operations are included in the Petroleum Services & Supplies segment.
Prior to its acquisition, Grant Prideco was a world leader in drill stem technology development and
drill pipe manufacturing, sales and service and a global leader in drill bit and specialty tools,
manufacturing, sales and service. The Company believes the Merger with Grant Prideco advanced its
strategic goal of providing more products and services to its customers and that Grant Pridecos
product range added new growth opportunities to the Company and benefited its customers needs
worldwide.
The Merger was accounted for as a purchase business combination. Assets acquired and liabilities
assumed were recorded at their fair values as of April 21, 2008. The fair value of shares issued
was determined using an average price of $72.74, which represents the average closing price of the
Companys common stock for a five-day period beginning two available trading days before the public
announcement of the transaction. The total purchase price is $7,199 million, including Grant
Prideco stock options assumed and acquisition related transaction costs and is comprised of (in
millions):
Shares issued totaled approximately 57 million shares at $72.74 per share |
$ | 4,135 | ||
Cash paid at $23.20 per share |
2,932 | |||
Grant Prideco stock options assumed |
56 | |||
Merger related transaction costs |
76 | |||
Total purchase price |
$ | 7,199 | ||
For all Grant Prideco stock options and restricted stock granted prior to 2008, vesting was
accelerated under the terms of the stock option and restricted stock agreements; therefore, there
was no modification of the awards as defined under SFAS 123(R). For stock options and restricted
stock granted by Grant Prideco in 2008, 320,500 Grant Prideco stock options and 388,000 shares of
restricted stock were replaced with 250,402 National Oilwell Varco stock options and 303,212 shares
of National Oilwell Varco restricted stock, respectively. For the 2008 Grant Prideco grants,
vesting was not accelerated in connection with the Merger, under the terms of the stock option and
restricted stock agreements, except for certain recipients of the 2008 Grant Prideco restricted
stock grant.
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Merger related costs of $76 million include severance and other external costs directly related to
the Merger.
Transaction costs of $11 million for the year ending December 31, 2008 were comprised of $6 million
for accelerated vesting of stock-based compensation, $4 million for bridge loan fees and $1 million
of other costs and are included in selling, general and administrative expense in the Consolidated
Statements of Income.
Purchase Price Allocation
Under the purchase method of accounting, the total purchase price was allocated to Grant Pridecos
net tangible and identifiable intangible assets based on their fair values as of April 21, 2008.
The excess of the purchase price over the net tangible and identifiable intangible assets was
recorded as goodwill. The following table, set forth below, displays the total purchase price
allocated to Grant Pridecos net tangible and identifiable intangible assets based on their fair
values as of April 21, 2008 (in millions):
Cash and cash equivalents |
$ | 171 | ||
Receivables |
420 | |||
Assets held for sale, net |
784 | |||
Inventories |
611 | |||
Prepaid and other current assets |
210 | |||
Property, plant and equipment |
392 | |||
Goodwill |
2,775 | |||
Intangibles |
3,696 | |||
Investment in unconsolidated affiliate |
512 | |||
Other assets |
98 | |||
Accounts payable and accrued liabilities |
(316 | ) | ||
Accrued income taxes |
(627 | ) | ||
Long-term debt |
(176 | ) | ||
Deferred income taxes |
(1,305 | ) | ||
Minority interest |
(25 | ) | ||
Other liabilities |
(21 | ) | ||
Total purchase price |
$ | 7,199 | ||
Under purchase accounting, a fair value step up adjustment of $89 million was made to inventory and
was charged to Cost of sales as the applicable inventory sold. Cost of sales included $89 million
of these inventory charges for the year ended December 31, 2008.
Additionally, the Company identified other intangible assets associated with tradenames, patents,
and customer relationships, and the fair values assigned were $1.2 billion, $0.3 billion, and $2.2
billion, respectively. The initial range of useful lives associated with trade names, patents, and
customer relationships were 40 years to an indefinite life, 5 to 15 years and 16 to 17 years,
respectively. Of the $1.2 billion associated with trade names, $0.8 billion was initially
identified as having an indefinite life.
Disposition of Certain Grant Prideco Businesses
Prior to the Merger, Grant Prideco had entered into a definitive Purchase and Sale Agreement with
Vallourec S.A. and Vallourec & Mannesman Holdings, Inc. (collectively referred to as Vallourec)
to sell four of its tubular businesses for approximately $800 million in cash, subject to final
working capital adjustments and standard closing conditions (including regulatory approval). The
transaction closed May 16, 2008. The amount included in Assets held for sale, net included in
the preliminary purchase price allocation above, relates to this disposition. Additionally, $256
million is included above in Accrued income taxes for taxes related to the disposition.
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Unaudited Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of
operations of National Oilwell Varco and Grant Prideco, on a pro forma basis, as though the
companies had been combined as of the beginning of 2008. 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 the beginning of 2008. The pro forma
financial information for the year ended December 31, 2008 includes the business combination
accounting effect on historical Grant Prideco revenues, adjustments to depreciation on acquired
property, amortization charges from acquired intangible assets, financing costs on new debt in
connection with the merger and related tax effects for the year ended December 31, 2008 (in
millions, except per share data):
Total revenues |
$ | 14,035 | ||
Net income attributable to Company |
$ | 2,080 | ||
Basic net income attributable to Company per share |
$ | 5.02 | ||
Diluted net income attributable to Company per share |
$ | 4.99 | ||
4. Other Acquisitions and Investments
2009
The Company completed nine acquisitions for an aggregate purchase price of $573 million, net of
cash acquired. These acquisitions included:
| The shares of ASEP Group Holding B.V., a Netherlands-based manufacturer of well service equipment. | ||
| The shares of ANS (1001) Ltd. (Anson), a U.K.-based manufacturer of pumps and fluid expendibles. | ||
| The business and assets of Spirit Drilling Fluids Ltd., a U.S.-based company that provides drilling fluids and related well-site services to exploration and production companies. | ||
| The business and assets of Spirit Minerals L.P., a U.S.-based company that mines, processes and distributes barite to the oil and gas drilling fluid industry. | ||
| The shares of South Seas Inspection (S) Pte. Ltd., a Singapore-based inspection, repair and maintenance provider to the oil and gas industry. | ||
| The shares of Hochang Machinery Industries Co., Ltd., a South Korean-based manufacturing and fabrication business. |
The following table summarizes the preliminary fair values of the assets acquired and liabilities
assumed at the date of acquisition of the 2009 acquisitions (in millions):
Current assets, net of cash acquired |
$ | 404 | ||
Property, plant and equipment |
149 | |||
Intangible assets |
115 | |||
Goodwill |
198 | |||
Other assets |
5 | |||
Total assets acquired |
871 | |||
Current liabilities |
242 | |||
Long-term debt |
48 | |||
Other liabilities |
8 | |||
Total liabilities |
298 | |||
Cash consideration, net of cash acquired |
$ | 573 | ||
The Company allocated $115 million to intangible assets (11 year weighted-average life), comprised
of: $60 million of customer
relationships (9 year weighted-average life), $46 million of trademarks (18 year weighted-average
life), and $9 million of other intangible assets (7 year weighted-average life).
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In September 2009, the Company sold 45% of certain of its IntelliServ operations and created the
IntelliServ Joint Venture (IntelliServ). IntelliServ provides drilling technology that enables
downhole drilling conditions to be measured, evaluated and monitored.
2008
In addition to the Grant Prideco Merger, the Company completed nine acquisitions for an aggregate
purchase price of $171 million net of cash acquired. These acquisitions included:
| Welch Power Source, L.L.C., a Louisiana-based manufacturer of power generation equipment. | ||
| CKS, a France-based solids control company. | ||
| Mid-South Machine, Inc., a Louisiana-based machine shop. |
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition of the 2008 acquisitions (in millions):
Current assets, net of cash acquired |
$ | 33 | ||
Property, plant and equipment |
61 | |||
Intangible assets |
38 | |||
Goodwill |
76 | |||
Total assets acquired |
208 | |||
Current liabilities |
11 | |||
Long-term debt |
26 | |||
Total liabilities |
37 | |||
Cash consideration, net of cash acquired |
$ | 171 | ||
The Company allocated $38 million to intangible assets (9 year weighted-average life), comprised
of: $30 million of customer relationships (15 year weighted-average life), $1 million of trademarks
(16 year weighted-average life), and $7 million of other intangible assets (4 year weighted-average
life).
2007
The Company completed eight acquisitions for an aggregate purchase price of $287 million consisting
of cash of $286 million and notes payable of $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):
Current assets, net of cash acquired |
$ | 50 | ||
Property, plant and equipment |
49 | |||
Intangible assets |
114 | |||
Goodwill |
142 | |||
Total assets acquired |
355 | |||
Current liabilities |
38 | |||
Long-term debt |
20 | |||
Total liabilities |
58 | |||
Minority interest |
11 | |||
Cash consideration, net of cash acquired |
$ | 286 | ||
Based on independent third-party valuations, the Company allocated $114 million to intangible
assets (13 year weighted-average life), comprised of: $94 million of customer relationships
(13 year weighted-average life), $9 million of trademarks (9 year weighted-average life), and
$11 million of other intangible assets (20 year weighted-average life).
In January 2007, the Company also acquired the remaining 13% of NQL Energy Services, Inc.s
outstanding shares for $38 million.
Each of the acquisitions were accounted for using the purchase method of accounting and,
accordingly, the results of operations of each business are included in the consolidated results of
operations from the date of acquisition. Excluding the Grant Prideco merger, a summary of the
acquisitions follows (in millions):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Fair value of assets acquired, net of cash acquired |
$ | 871 | $ | 208 | $ | 355 | ||||||
Cash paid, net of cash acquired |
(573 | ) | (171 | ) | (286 | ) | ||||||
Liabilities assumed, debt issued and minority interest |
$ | 298 | $ | 37 | $ | 69 | ||||||
Excess purchase price over fair value of net assets
acquired |
$ | 198 | $ | 76 | $ | 142 | ||||||
5. Inventories, net
Inventories consist of (in millions):
December 31, | ||||||||
2009 | 2008 | |||||||
Raw materials and supplies |
$ | 704 | $ | 739 | ||||
Work in process |
1,307 | 1,326 | ||||||
Finished goods and purchased products |
1,479 | 1,741 | ||||||
Total |
$ | 3,490 | $ | 3,806 | ||||
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6. Property, Plant and Equipment
Property, plant and equipment consist of the following (in millions):
Estimated | December 31, | |||||||||||
Useful Lives | 2009 | 2008 | ||||||||||
Land and buildings |
5-35 Years | $ | 678 | $ | 544 | |||||||
Operating equipment |
3-15 Years | 1,429 | 1,259 | |||||||||
Rental equipment |
3-12 Years | 594 | 527 | |||||||||
2,701 | 2,330 | |||||||||||
Less: Accumulated Depreciation |
(865 | ) | (653 | ) | ||||||||
$ | 1,836 | $ | 1,677 | |||||||||
7. Accrued Liabilities
Accrued liabilities consist of (in millions):
December 31, | ||||||||
2009 | 2008 | |||||||
Compensation |
$ | 272 | $ | 258 | ||||
Customer prepayments and billings |
500 | 912 | ||||||
Warranty |
217 | 114 | ||||||
Interest |
11 | 11 | ||||||
Taxes (non income) |
95 | 76 | ||||||
Insurance |
58 | 50 | ||||||
Accrued vendor costs |
853 | 688 | ||||||
Fair value of derivatives |
61 | 59 | ||||||
Other |
200 | 208 | ||||||
Total |
$ | 2,267 | $ | 2,376 | ||||
8. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of (in millions):
December 31, | ||||||||
2009 | 2008 | |||||||
Costs incurred on uncompleted contracts |
$ | 6,276 | $ | 4,397 | ||||
Estimated earnings |
3,735 | 2,183 | ||||||
10,011 | 6,580 | |||||||
Less: Billings to date |
10,361 | 8,123 | ||||||
$ | (350 | ) | $ | (1,543 | ) | |||
Costs and estimated earnings in excess of
billings on uncompleted contracts |
$ | 740 | $ | 618 | ||||
Billings in excess of costs and estimated
earnings on uncompleted contracts |
(1,090 | ) | (2,161 | ) | ||||
$ | (350 | ) | $ | (1,543 | ) | |||
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9. Long-Term Debt
Debt consists of (in millions):
December 31, | ||||||||
2009 | 2008 | |||||||
Senior Notes, interest at 6.5% payable semiannually,
principal due on March 15, 2011 |
$ | 150 | $ | 150 | ||||
Senior Notes, interest at 7.25% payable semiannually,
principal due on May 1, 2011 |
205 | 208 | ||||||
Senior Notes, interest at 5.65% payable semiannually,
principal due on November 15, 2012 |
200 | 200 | ||||||
Senior Notes, interest at 5.5% payable semiannually,
principal due on November 19, 2012 |
151 | 151 | ||||||
Senior Notes, interest at 6.125% payable semiannually,
principal due on August 15, 2015 |
151 | 151 | ||||||
Other |
26 | 14 | ||||||
Total debt |
883 | 874 | ||||||
Less current portion |
7 | 4 | ||||||
Long-term debt |
$ | 876 | $ | 870 | ||||
Principal payments of debt for years subsequent to 2009 are as follows (in millions):
2010 |
$ | 7 | ||
2011 |
362 | |||
2012 |
355 | |||
2013 |
5 | |||
2014 |
1 | |||
Thereafter |
153 | |||
$ | 883 | |||
Senior Notes
In connection with the merger of Grant Prideco, the Company completed an exchange offer relative to
the $175 million of 6.125% Senior Notes due 2015 previously issued by Grant Prideco. On April 21,
2008, $151 million of Grant Prideco Senior Notes were exchanged for National Oilwell Varco Senior
Notes. The National Oilwell Varco Senior Notes have the same interest rate, interest payment
dates, redemption terms and maturity as the Grant Prideco Senior Notes. In November 2008, the
Company repurchased $23 million of the unexchanged Grant Prideco Senior Notes.
Revolving Credit Facilities
On April 21, 2008, the Company replaced its existing $500 million unsecured revolving credit
facility with an aggregate of $3 billion of unsecured credit facilities and borrowed $2 billion to
finance the cash portion of the Grant Prideco acquisition. These facilities consisted of a $2
billion, five-year revolving credit facility and a $1 billion, 364-day revolving credit facility
which was terminated early in February 2009. At December 31, 2009, there were no borrowings
against the remaining credit facility, and there were $588 million in outstanding letters of credit
issued under this facility, resulting in $1,412 million of funds available under this revolving
credit facility. Interest under this multicurrency facility is based upon LIBOR, NIBOR or EURIBOR
plus 0.26% subject to a ratings-based grid, or the prime rate.
The Company also had $2,073 million of additional outstanding letters of credit at December 31,
2009, primarily in Norway, that are
essentially under various bilateral committed letter of credit facilities. Other letters of credit
are issued as bid bonds and performance bonds. The Senior Notes contain reporting covenants and the
credit facility contains a financial covenant regarding maximum debt to capitalization. The
Company was in compliance with all covenants at December 31, 2009.
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Other
Other debt includes approximately $3 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, 2009, 2008 and 2007, expenses for
defined-contribution plans were $39 million, $37 million, and $31 million, respectively, 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 777 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 plans aggregated $12 million, $7 million and $8
million for the years ended December 31, 2009, 2008 and 2007, respectively.
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 December 31, 2009 and December 31, 2008, is as follows
(in millions):
Pension benefits | Postretirement benefits |
|||||||||||||||
At year end | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Benefit obligation at beginning of year |
$ | 214 | $ | 246 | $ | 20 | $ | 14 | ||||||||
Service cost |
5 | 5 | | | ||||||||||||
Interest cost |
14 | 12 | 2 | 1 | ||||||||||||
Actuarial loss (gain) |
19 | (6 | ) | 1 | 5 | |||||||||||
Benefits paid |
(10 | ) | (13 | ) | (2 | ) | (2 | ) | ||||||||
Participants contributions |
1 | 1 | | | ||||||||||||
Exchange rate loss (gain) |
19 | (50 | ) | 18 | | |||||||||||
Acquisitions/divestitures, net |
| 17 | | | ||||||||||||
Other |
| 2 | | 2 | ||||||||||||
Benefit obligation at end of year |
$ | 262 | $ | 214 | $ | 39 | $ | 20 | ||||||||
Accumulated benefit obligation at end of year |
$ | 244 | $ | 198 | ||||||||||||
Fair value of plan assets at beginning of year |
$ | 153 | $ | 206 | $ | | $ | | ||||||||
Actual return |
21 | (23 | ) | | | |||||||||||
Benefits paid |
(10 | ) | (13 | ) | (2 | ) | (2 | ) | ||||||||
Company contributions |
12 | 17 | 2 | 2 | ||||||||||||
Participants contributions |
1 | 1 | | | ||||||||||||
Exchange rate (loss) gain |
16 | (50 | ) | | | |||||||||||
Acquisitions/divestitures, net |
| 16 | | | ||||||||||||
Other |
| (1 | ) | | | |||||||||||
Fair value of plan assets at end of year |
$ | 193 | $ | 153 | $ | | $ | | ||||||||
Funded status |
(69 | ) | (61 | ) | (39 | ) | (20 | ) | ||||||||
Unrecognized actuarial net loss |
63 | 52 | 7 | 6 | ||||||||||||
Prior service costs not yet recognized |
1 | 1 | (1 | ) | (1 | ) | ||||||||||
Accrued benefit cost |
$ | (5 | ) | $ | (8 | ) | $ | (33 | ) | $ | (15 | ) | ||||
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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 Ended December 31, | ||||||||
2009 | 2008 | |||||||
Discount rate: |
||||||||
United States plan |
5.26% | 6.23% | ||||||
International plans |
5.25% 5.75% | 5.75% 6.50% | ||||||
Salary increase: |
||||||||
United States plan |
N/A | N/A | ||||||
International plans |
2.50% 4.25% | 2.50% 4.50% |
The assumption rates used for net periodic benefit costs are as follows:
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Discount rate: |
||||||||||||
United States plan |
6.23% | 6.34% | 5.97% | |||||||||
International plans |
5.75% 6.50% | 5.50% 5.75% | 4.75% 5.25% | |||||||||
Salary increase: |
||||||||||||
United States plan |
N/A | N/A | N/A | |||||||||
International plans |
2.50% 4.50% | 2.50% 4.50% | 2.25% 3.00% | |||||||||
Expected return on assets: |
||||||||||||
United States plan |
7.75% | 7.75% | 7.75% | |||||||||
International plans |
6.00% 6.85% | 5.50% 6.86% | 5.17% 6.86% |
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 majority of our plans have projected benefit obligations in excess of plan assets.
The Company expects to pay future benefit amounts on its defined benefit plans ranging from $15
million to $20 million for each of the next five years and aggregate payments of $152 million.
Plan Assets
The Company and its investment advisers collaboratively reviewed market opportunities using
historic and statistical data, as well as the actuarial valuation reports for the plans, to ensure
that the levels of acceptable return and risk are well-defined and monitored. Currently, the
Companys management believes that there are no significant concentrations of risk associated with
plan assets. Our pension investment strategy worldwide prohibits a direct investment in our own
stock.
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The following table presents information about the plan assets measured at fair value as of
December 31, 2009, aggregated by the level in the fair value hierarchy within which those
measurements fall (in millions):
Fair Value Measurements | ||||||||||||||||
Asset Category | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Equity securities |
$ | 70 | $ | | $ | 70 | $ | | ||||||||
Bonds |
53 | | 53 | | ||||||||||||
Mutual funds |
36 | 16 | 20 | | ||||||||||||
Other (insurance
contracts) |
32 | | | 32 | ||||||||||||
191 | 16 | 143 | 32 | |||||||||||||
Cash |
2 | | 2 | | ||||||||||||
Total |
$ | 193 | $ | 16 | $ | 145 | $ | 32 | ||||||||
The following table outlines the rollforward of the fair value measurement Companys Level 3 plan
assets using significant unobservable inputs for the year ended December 31, 2009 (in millions):
Level 3 | ||||
Plan | ||||
Assets | ||||
Beginning balance as of January 1, 2009 |
$ | 24 | ||
Actual return on plan assets still held at reporting date |
2 | |||
Purchases, sales and settlements |
1 | |||
Currency impact |
5 | |||
Ending balance as of December 31, 2009 |
$ | 32 | ||
11. Accumulated Other Comprehensive Income (Loss)
The components of accumulated 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, 2006 |
$ | (15 | ) | $ | 60 | $ | 1 | $ | 46 | |||||||
Current period activity |
(8 | ) | 211 | 25 | 228 | |||||||||||
Tax effect |
3 | (75 | ) | (7 | ) | (79 | ) | |||||||||
Balance at December 31, 2007 |
$ | (20 | ) | $ | 196 | $ | 19 | $ | 195 | |||||||
Current period activity |
(30 | ) | (265 | ) | (241 | ) | (536 | ) | ||||||||
Tax effect |
10 | 89 | 81 | 180 | ||||||||||||
Balance at December 31, 2008 |
$ | (40 | ) | $ | 20 | $ | (141 | ) | $ | (161 | ) | |||||
Current period activity |
(14 | ) | 150 | 223 | 359 | |||||||||||
Tax effect |
5 | (50 | ) | (63 | ) | (108 | ) | |||||||||
Balance at December 31, 2009 |
$ | (49 | ) | $ | 120 | $ | 19 | $ | 90 | |||||||
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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, 2009 cannot be
determined; however, in our opinion, any ultimate liability, to the extent not otherwise provided
for, will 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 hereunder may not result in additional,
presently unquantifiable, costs or liabilities to us.
We have received federal grand jury subpoenas and subsequent inquiries from governmental agencies
requesting records related to our compliance with export trade laws and regulations. We have
cooperated fully with agents from the Department of Justice, the Bureau of Industry and Security,
the Office of Foreign Assets Control, and U.S. Immigration and Customs Enforcement in responding to
the inquiries, and we have conducted our own internal review of this matter. At the conclusion of
our internal review in the fourth quarter of 2009, we identified possible areas of concern and
discussed these areas of concern with the relevant agencies. We are currently negotiating a
potential resolution with the agencies involved related to these matters. We currently anticipate
that any administrative fine or penalty agreed to as part of a resolution would be
within established accruals, and would not have a material effect on our financial position or
results of operations. To the extent a resolution is not negotiated as anticipated, we cannot
predict the timing or effect that any resulting government actions may have on our financial
position or results of operations. As a result of our internal review and in an effort to prevent
any future compliance issues of this nature, we have reviewed and are in the process of enhancing
our compliance procedures and training.
The Company leases certain facilities and equipment under operating leases that expire at various
dates through 2066. 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 $199 million, $184 million, and
$128 million in 2009, 2008 and 2007, respectively.
Future minimum lease commitments under noncancellable operating leases with initial or remaining
terms of one year or more at December 31, 2009 are payable as follows (in millions):
terms of one year or more at December 31, 2009 are payable as follows (in millions):
2010 |
$ | 122 | ||
2011 |
88 | |||
2012 |
68 | |||
2013 |
52 | |||
2014 |
44 | |||
Thereafter |
179 | |||
Total future lease commitments |
$ | 553 | ||
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 November 11, 2009 National Oilwell Varcos Board of Directors approved a special one-time cash
dividend of $1.00 per share of common stock along with the commencement of a regular quarterly
dividend of $0.10 per share. The special cash dividend and the first quarterly dividend was paid
on December 16, 2009 to each stockholder of record on December 2, 2009. The declaration and
payment of future dividends is at the discretion of the Companys Board of Directors and will be
dependent upon the Companys results of operations, financial condition, capital requirements and
other factors deemed relevant by the Board of Directors.
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, 25.5 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
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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, 2009, approximately 12 million shares were
available for future grants.
We also have inactive stock option plans that were acquired in connection with the acquisitions of
Varco International, Inc. in 2005 and Grant Prideco in 2008. We converted the outstanding stock
options under these plans to options to acquire our common stock and no further options are being
issued 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, 2009 under the stock option plans have exercise prices between $8.83
and $73.98 per share, and expire at various dates from January 25, 2010 to May 13, 2019.
The following summarizes options activity:
Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | |||||||||||||||||||
of | Exercise | of | Exercise | of | Exercise | |||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Shares under option at beginning
of year |
7,547,822 | $ | 37.24 | 7,903,832 | $ | 29.12 | 10,559,862 | $ | 23.28 | |||||||||||||||
Granted |
3,234,400 | 26.03 | 2,993,000 | 48.59 | 2,381,300 | 35.55 | ||||||||||||||||||
Cancelled |
(156,356 | ) | 29.79 | (218,560 | ) | 30.90 | (301,608 | ) | 30.55 | |||||||||||||||
Exercised |
(369,884 | ) | 40.86 | (3,130,450 | ) | 27.08 | (4,735,722 | ) | 19.28 | |||||||||||||||
Shares under option at end of year |
10,255,982 | $ | 34.19 | 7,547,822 | $ | 37.24 | 7,903,832 | $ | 29.12 | |||||||||||||||
Exercisable at end of year |
5,308,465 | $ | 33.14 | 3,110,462 | $ | 26.17 | 1,619,374 | $ | 19.55 | |||||||||||||||
The following summarizes information about stock options outstanding as of December 31,
2009:
Weighted-Avg | Options Outstanding | Options Exercisable | ||||||||||||||||||
Remaining | Weighted-Avg | Weighted-Avg | ||||||||||||||||||
Range of Exercise Price | Contractual Life | Shares | Exercise Price | Shares | Exercise Price | |||||||||||||||
8.33 15.00 |
3.75 | 549,519 | $ | 11.53 | 549,519 | $ | 11.53 | |||||||||||||
15.92 33.29 |
8.20 | 4,028,199 | 24.69 | 853,599 | 19.97 | |||||||||||||||
33.57 73.98 |
7.01 | 5,678,264 | 43.12 | 3,905,347 | 39.06 | |||||||||||||||
Total |
7.30 | 10,255,982 | $ | 34.19 | 5,308,465 | $ | 33.14 | |||||||||||||
The weighted-average fair value of options granted during 2009, 2008 and 2007 was
approximately $11.89, $22.16 and $11.99 (excluding options assumed in the Grant Prideco merger) per
share, respectively, as determined using the Black-Scholes option-pricing model. The total
intrinsic value of options exercised during 2009 and 2008 was $6 million and $155 million,
respectively.
Upon adoption of ASC Topic 718, 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 ASC Topic 718,
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 ASC Topic 718. 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.
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Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Valuation Assumptions: |
||||||||||||
Expected volatility |
63.5 | % | 41.8 | % | 38.6 | % | ||||||
Risk-free interest rate |
1.8 | % | 2.9 | % | 4.6 | % | ||||||
Expected dividends |
$ | | $ | | $ | | ||||||
Expected term (in
years) |
3.4 | 3.6 | 3.5 |
We used the actual volatility for traded options for the past 10 years prior to option date as the
expected volatility assumption required in the Black Scholes model.
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 2009 is
based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC
Topic 718 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.
The following summary presents information regarding outstanding options as of December 31, 2009
and changes during 2009 with regard to options under all stock option plans:
Weighted | ||||||||||||||||
Weighted- | Remaining | |||||||||||||||
Average | Contractual | |||||||||||||||
Exercise | Term | Aggregate | ||||||||||||||
Shares | Price | (years) | Intrinsic Value | |||||||||||||
Outstanding at December 31, 2008 |
7,547,822 | $ | 37.24 | |||||||||||||
Granted |
3,234,400 | $ | 26.05 | |||||||||||||
Exercised |
(369,884 | ) | $ | 40.86 | ||||||||||||
Cancelled |
(156,356 | ) | $ | 29.79 | ||||||||||||
Outstanding at December 31, 2009 |
10,255,982 | $ | 34.19 | 7.30 | $ | 134,531,875 | ||||||||||
Vested or expected to vest |
9,930,867 | $ | 34.19 | 7.30 | $ | 130,267,214 | ||||||||||
Exercisable at December 31, 2009 |
5,308,465 | $ | 33.14 | 6.05 | $ | 70,499,357 | ||||||||||
As of December 31, 2009, total unrecognized compensation cost related to nonvested stock options
was $40 million. This cost is expected to be recognized over a weighted-average period of
two years. The total fair value of stock options vested in 2009, 2008 and 2007 was approximately
$40 million, $43 million and $34 million, respectively. Cash received from option exercises for
2009, 2008 and 2007 was $8 million, $78 million and $91 million, respectively. The actual tax
benefit realized for the tax deductions from option exercises totaled $2 million, $46 million and
$34 million for 2009, 2008 and 2007, respectively. Cash used to settle equity instruments granted
under all share-based payment arrangements for 2009, 2008 and 2007 was not material for any period.
Restricted Shares
The Company issues restricted stock awards (RSA) with no exercise price to officers and key
employees in addition to stock options. The Company granted 434,400 restricted shares valued at
$25.96 to key employees on February 20, 2009. 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 309,000 performance-based restricted shares valued at $25.96 to senior management and
officers on February 20, 2009. These shares will not vest until the third anniversary of the date
of the grant, at which time they will be 100% vested, with a performance condition of the Companys
operating income level growth from January 1, 2009 to December 31, 2011 needing to exceed the
median operating income level growth of a designated peer group over the same period. The estimated
forfeiture rate of RSAs is factored into the share-based compensation expense the Company
recognizes.
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The following summary presents information regarding outstanding restricted shares as of December
31, 2009, 2008 and 2007, and changes during 2009 and 2008:
Weighted-Average | ||||||||
Grant Date | ||||||||
Restricted Shares | Units | Fair Value | ||||||
Nonvested at December 31,
2007 |
1,061,002 | $ | 36.56 | |||||
Granted |
755,535 | $ | 64.33 | |||||
Vested |
(307,905 | ) | $ | 68.12 | ||||
Forfeited |
(48,136 | ) | $ | 42.32 | ||||
Nonvested at December 31,
2008 |
1,460,496 | $ | 47.34 | |||||
Granted |
762,692 | $ | 26.02 | |||||
Vested |
(7,322 | ) | $ | 36.05 | ||||
Forfeited |
(34,622 | ) | $ | 41.52 | ||||
Nonvested at December 31,
2009 |
2,181,244 | $ | 40.51 | |||||
The weighted-average grant day fair value of RSAs granted during the years ended 2009, 2008 and
2007 was $26.02, $64.16 and $37.06 (excluding RSAs assumed in the Grant Prideco merger) per share,
respectively. There were 7,322, 307,905 and nil RSAs that vested during 2009, 2008 and 2007,
respectively. As of December 31, 2009, there was $27 million of unrecognized compensation cost
related to nonvested RSAs, which is expected to be recognized over a weighted-average period of
two years.
14. Income Taxes
The domestic and foreign components of income before income taxes were as follows (in millions):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Domestic |
$ | 761 | $ | 1,577 | $ | 1,244 | ||||||
Foreign |
1,447 | 1,384 | 785 | |||||||||
$ | 2,208 | $ | 2,961 | $ | 2,029 | |||||||
The components of the provision for income taxes consisted of (in millions):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 526 | $ | 691 | $ | 490 | ||||||
State |
35 | 55 | 39 | |||||||||
Foreign |
348 | 280 | 136 | |||||||||
Total current income tax provision |
909 | 1,026 | 665 | |||||||||
Deferred: |
||||||||||||
Federal |
(249 | ) | (93 | ) | (66 | ) | ||||||
State |
(5 | ) | (2 | ) | (3 | ) | ||||||
Foreign |
80 | 62 | 80 | |||||||||
Total deferred income tax
provision |
(174 | ) | (33 | ) | 11 | |||||||
Total income tax provision |
$ | 735 | $ | 993 | $ | 676 | ||||||
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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, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Federal income tax at U.S. statutory rate |
$ | 773 | $ | 1,037 | $ | 710 | ||||||
Foreign income tax rate differential |
(120 | ) | (125 | ) | (66 | ) | ||||||
State income tax, net of federal benefit |
18 | 34 | 23 | |||||||||
Nondeductible expenses |
30 | 12 | 10 | |||||||||
Tax benefit of manufacturing deduction |
(17 | ) | (17 | ) | (11 | ) | ||||||
Foreign dividends net of foreign tax credits |
10 | 46 | 9 | |||||||||
Change in deferred tax valuation allowance |
| | 3 | |||||||||
Other |
41 | 6 | (2 | ) | ||||||||
Total income tax provision |
$ | 735 | $ | 993 | $ | 676 | ||||||
Significant components of our deferred tax assets and liabilities were as follows (in millions):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Deferred tax assets: |
||||||||||||
Allowances and operating liabilities |
$ | 343 | $ | 364 | $ | 152 | ||||||
Net operating loss carryforwards |
7 | 6 | 8 | |||||||||
Postretirement benefits |
12 | 12 | 17 | |||||||||
Capital loss carryforwards |
| 3 | 7 | |||||||||
Other |
28 | 22 | 17 | |||||||||
Total deferred tax assets |
390 | 407 | 201 | |||||||||
Valuation allowance for
deferred tax assets |
(8 | ) | (10 | ) | (14 | ) | ||||||
382 | 397 | 187 | ||||||||||
Deferred tax liabilities: |
||||||||||||
Tax over book depreciation |
168 | 146 | 95 | |||||||||
Intangible assets |
1,413 | 1,542 | 218 | |||||||||
Deferred income |
363 | 215 | 166 | |||||||||
Other |
147 | 231 | 85 | |||||||||
Total deferred tax liabilities |
2,091 | 2,134 | 564 | |||||||||
Net deferred tax liability |
$ | 1,709 | $ | 1,737 | $ | 377 | ||||||
ASC Topic 740 Income Taxes (ASC Topic 740) prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected to be taken on a
return. Under ASC Topic 740, 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, ASC
Topic 740 provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure. The balance of unrecognized tax benefits at December 31, 2009 and
2008 are $58 million and $61 million, respectively. These unrecognized tax benefits, if
recognized in future periods, would impact the Companys effective tax rate. Included in the
change in the balance of unrecognized tax benefits for the period ended December 31, 2009 was an
increase of $10 million of unrecognized tax benefits associated with potential challenges to
intercompany pricing and certain operating expenses that may not be deductible in foreign
jurisdictions and a $13 million reduction in the balance of unrecognized tax benefits resulting
primarily from the completion in the U.S. of prior year audits and appeals. This net decrease of
$3 million in the balance of unrecognized tax benefits impacted the Companys effective tax rate in
the current year. These unrecognized tax benefits are included in the balance of Accrued Income
Taxes in the balance sheet as of December 31, 2009.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
millions):
2009 | 2008 | 2007 | ||||||||||
Unrecognized tax benefit at beginning of year |
$ | 61 | $ | 47 | $ | 55 | ||||||
Additions based on tax positions related to the current year |
10 | 9 | 2 | |||||||||
Additions for tax positions of prior years |
| 9 | 1 | |||||||||
Reductions for tax positions of prior years |
(12 | ) | (4 | ) | (10 | ) | ||||||
Settlements |
| | (1 | ) | ||||||||
Reductions for lapse of applicable statutes of limitations |
(1 | ) | | | ||||||||
Unrecognized tax benefit at end of year |
$ | 58 | $ | 61 | $ | 47 | ||||||
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, 2009, the Company recognized $3 million of additional interest and
penalties related to uncertain tax positions as part of income tax expense. As of December 31,
2009, the Company has accrued approximately $11 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, 2009.
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 2005 and
outside the U.S. for the tax years ending after 2003.
In the United States, the Company has $19 million of net operating loss carryforwards as of
December 31, 2009, which expire at various dates through 2029. The potential benefit of $7 million
has been recorded with a $7 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 $7 million would reduce future income tax expense.
Also in the United States, the Company has $1 million of excess foreign tax credits as of December
31, 2009, which expire at various dates through 2017. These credits have been allotted a full
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 $1 million would reduce future income tax expense.
The deferred tax valuation allowance decreased $2 million for the period ending December 31, 2009
and was recorded as a decrease in deferred tax assets.
During 2008, the Company recorded $1,480 million in net deferred tax liabilities with a
corresponding increase in goodwill related to Grant Prideco purchase accounting.
Undistributed earnings of certain of the Companys foreign subsidiaries amounted to $2,764 million
and $2,255 million at December 31, 2009 and 2008, 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 $126
million would be payable upon remittance of all previously unremitted earnings at December 31,
2009.
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.
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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 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; rig instrumentation systems; coiled tubing equipment and pressure
pumping units; well workover rigs; wireline winches; and cranes.
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 flowlines and other oilfield tubular goods. The segment manufactures, rents and sells a
variety of products and equipment used to perform drilling operations, including drill pipe,
transfer pumps, solids control systems, drilling motors, drill bits, reamers and other downhole
tools, and 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 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.
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. During the
second quarter of 2008, certain products previously reported in the Petroleum Services & Supplies
segment were transferred to the Companys other two segments, due to a realignment of management
responsibilities. Prior periods have not been restated for this change as the impact of the change
was not material to any of the Companys segments.
The Company had revenues of 16.6% of total revenue from one of its customers for the year ended
December 31, 2009. This customer is a shipyard acting as a general contractor for its customers,
who are drillship owners and drilling contractors. This shipyards customers have specified that
the Companys drilling equipment be installed on their drillships and have required the shipyard to
issue contracts to the Company.
Geographic Areas:
The following table presents consolidated revenues by country based on sales destination of the use
of the products or services (in millions):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
United States |
$ | 3,444 | $ | 4,369 | $ | 3,983 | ||||||
South Korea |
2,830 | 291 | | |||||||||
Singapore |
801 | 856 | 562 | |||||||||
Norway |
629 | 603 | 677 | |||||||||
United Kingdom |
578 | 497 | 348 | |||||||||
Canada |
550 | 751 | 619 | |||||||||
Other Countries |
3,880 | 6,064 | 3,600 | |||||||||
Total |
$ | 12,712 | $ | 13,431 | $ | 9,789 | ||||||
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The following table presents long-lived assets by country based on the location (in millions):
December 31, | ||||||||
2009 | 2008 | |||||||
United States |
$ | 1,082 | $ | 1,050 | ||||
Canada |
116 | 107 | ||||||
Norway |
41 | 44 | ||||||
United Kingdom |
110 | 89 | ||||||
Other Countries |
487 | 387 | ||||||
Total |
$ | 1,836 | $ | 1,677 | ||||
Business Segments:
Petroleum | ||||||||||||||||||||
Rig | Services & | Distribution | Unallocated/ | |||||||||||||||||
Technology | Supplies | Services | Eliminations | Total | ||||||||||||||||
December 31, 2009 |
||||||||||||||||||||
Revenues |
$ | 8,093 | $ | 3,745 | $ | 1,350 | $ | (476 | ) | $ | 12,712 | |||||||||
Operating profit |
2,283 | 301 | 50 | (319 | ) | 2,315 | ||||||||||||||
Capital expenditures |
61 | 161 | 3 | 25 | 250 | |||||||||||||||
Depreciation and amortization |
90 | 374 | 8 | 18 | 490 | |||||||||||||||
Goodwill |
1,567 | 3,855 | 67 | | 5,489 | |||||||||||||||
Total assets |
7,203 | 11,601 | 781 | 1,947 | 21,532 | |||||||||||||||
December 31, 2008 |
||||||||||||||||||||
Revenues |
$ | 7,528 | $ | 4,651 | $ | 1,772 | $ | (520 | ) | $ | 13,431 | |||||||||
Operating profit |
1,970 | 1,044 | 130 | (226 | ) | 2,918 | ||||||||||||||
Capital expenditures |
79 | 272 | 4 | 24 | 379 | |||||||||||||||
Depreciation and amortization |
90 | 290 | 9 | 13 | 402 | |||||||||||||||
Goodwill |
1,458 | 3,705 | 62 | | 5,225 | |||||||||||||||
Total assets |
9,048 | 11,153 | 650 | 628 | 21,479 | |||||||||||||||
December 31, 2007 |
||||||||||||||||||||
Revenues |
$ | 5,745 | $ | 3,061 | $ | 1,424 | $ | (441 | ) | $ | 9,789 | |||||||||
Operating profit |
1,394 | 732 | 94 | (176 | ) | 2,044 | ||||||||||||||
Capital expenditures |
64 | 160 | 6 | 22 | 252 | |||||||||||||||
Depreciation and amortization |
54 | 148 | 5 | 7 | 214 | |||||||||||||||
Goodwill |
1,231 | 1,175 | 39 | | 2,445 | |||||||||||||||
Total assets |
7,097 | 3,965 | 652 | 401 | 12,115 |
The Companys 2008 financial statements include Grant Prideco from April 21, 2008, the Merger Date,
which includes additional amortization and depreciation of $114 million from the step up to fair
market value of Grant Pridecos assets and liabilities for the year ended December 31, 2008. The
Grant Prideco product lines are reported within the Petroleum Services & Supplies segment.
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16. Quarterly Financial Data (Unaudited)
Summarized quarterly results, were as follows (in millions, except per share data). The 2008
results include Grant Prideco operations from the Merger Date:
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Year ended December 31, 2009 |
||||||||||||||||
Revenues |
$ | 3,481 | $ | 3,010 | $ | 3,087 | $ | 3,134 | ||||||||
Gross profit |
1,039 | 875 | 891 | 979 | ||||||||||||
Net income attributable to Company |
470 | 220 | 385 | 394 | ||||||||||||
Net income attributable to Company per basic share |
1.13 | 0.53 | 0.93 | 0.95 | ||||||||||||
Net income attributable to Company per diluted
share |
1.13 | 0.53 | 0.92 | 0.94 | ||||||||||||
Cash dividends per share |
| | | 1.10 | ||||||||||||
Year ended December 31, 2008 |
||||||||||||||||
Revenues |
$ | 2,685 | $ | 3,325 | $ | 3,611 | $ | 3,810 | ||||||||
Gross profit |
797 | 981 | 1,100 | 1,194 | ||||||||||||
Net income attributable to Company |
398 | 421 | 548 | 585 | ||||||||||||
Net income attributable to Company per basic share |
1.12 | 1.05 | 1.32 | 1.41 | ||||||||||||
Net income attributable to Company per diluted
share |
1.11 | 1.04 | 1.31 | 1.40 | ||||||||||||
Cash dividends per share |
| | | |
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SCHEDULE II
NATIONAL OILWELL VARCO, INC.
VALUATION AND QUALIFYING ACCOUNTS
NATIONAL OILWELL VARCO, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2009, 2008 and 2007
(in millions)
(in millions)
Additions | ||||||||||||||||
(Deductions) | ||||||||||||||||
Balance | charged to | Charge | Balance | |||||||||||||
beginning | costs and | offs and | end of | |||||||||||||
of year | expenses | other | year | |||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
2009 |
$ | 73 | $ | 53 | $ | (31 | ) | $ | 95 | |||||||
2008 |
45 | 25 | 3 | 73 | ||||||||||||
2007 |
30 | 16 | (1 | ) | 45 | |||||||||||
Allowance for excess and obsolete inventories: |
||||||||||||||||
2009 |
$ | 123 | $ | 100 | $ | (17 | ) | $ | 206 | |||||||
2008 |
99 | 27 | (3 | ) | 123 | |||||||||||
2007 |
86 | 34 | (21 | ) | 99 | |||||||||||
Valuation allowance for deferred tax assets: |
||||||||||||||||
2009 |
$ | 10 | $ | | $ | (2 | ) | $ | 8 | |||||||
2008 |
14 | | (4 | ) | 10 | |||||||||||
2007 |
7 | 3 | 4 | 14 | ||||||||||||
Warranty reserve: |
||||||||||||||||
2009 |
$ | 114 | $ | 144 | $ | (41 | ) | $ | 217 | |||||||
2008 |
92 | 81 | (59 | ) | 114 | |||||||||||
2007 |
57 | 78 | (43 | ) | 92 |
95