National Oilwell Varco 2010 Annual Report Download - page 38

increased four percent from the fourth quarter of 2009. Orders for two deepwater floating rigs and several jackup drilling packages, higher
pressure pumping and stimulation equipment demand, and orders for FPSO equipment which came with the Companys acquisition of APL in
December 2010, contributed to total order additions to backlog of $1,408 million during the fourth quarter, up 17 percent from the third quarter.
Revenue out of backlog of $1,271 million increased 10 percent sequentially. Interest in offshore rig construction appears to be increasing with a
number of announcements of newbuild projects made by drillers since year end. Additionally the Company submitted tenders for up to 28
deepwater rigs for Petrobras to shipyards and drilling contractors during 2010, which are to be built in Brazil. The Company expects to book
some orders from these tenders in the first half of 2011, but the tender awards remain subject to acceptance by Petrobras, and further delays are
possible. These tenders require a high and rising level of local Brazilian content in the construction of new rigs.
The Petroleum Services & Supplies segment generated $4.2 billion in revenue and $585 million in operating profit, or 14.0 percent of sales, for
the full year 2010. Compared to the prior year revenue increased 12 percent, and operating profit flow-through was 30 percent. For the fourth
quarter of 2010, the segment generated total sales of $1,137 million, up four percent from the third quarter of 2010 and up 21 percent from the
fourth quarter of 2009. Operating profit was $170 million or 15.0 percent of sales during the fourth quarter of 2010. Year-over-year operating
profit flow-through from the fourth quarter of 2009 to the fourth quarter of 2010 was 31 percent, and sequential operating profit flow-through
was 13 percent from the third quarter to the fourth quarter of 2010, lower than expected due to a variety of product mix changes across the
segment, start up costs in new operations in the Middle East and Brazil, and slightly higher incentive compensation accruals in the fourth quarter.
Modest sequential revenue growth was evenly spread across most major areas, albeit with mix shifts from product to product. Brazil, Russia and
the Middle East posted some of the largest sequential gains, along with good sequential improvement in the U.S. centered in the liquids rich shale
plays like the Bakken and the Eagle Ford. NOV Downhole posted strong sequential sales growth on higher sales in the Eastern Hemisphere,
Canada, and U.S. shales, with drilling motors and borehole enlargement tools in particularly high demand. Drill pipe orders slowed slightly this
quarter as dwindling budgets and holidays slowed inquiries late in the year, but the first few weeks of 2011 have seen orders pick back up. Drill
pipe margins improved in the fourth quarter due to a lower mix of Chinese drill pipe sales.
The Distribution Services segment generated $1.5 billion in revenue and $78 million in operating profit or 5.0 percent of sales during 2010.
Revenues improved 15 percent from 2009, and operating profit flow-through was 14 percent from 2009 to 2010. For the fourth quarter of 2010
revenues were $423 million, up 28 percent from the fourth quarter of 2009 and down slightly from the third quarter of 2010. Operating profit of
$30 million for the fourth quarter produced operating margins of 7.1 percent for the quarter, and operating profit flow-through was a very strong
24 percent from the fourth quarter of 2009. Revenues from the U.S. declined sequentially with lower sales into the Gulf Coast oil spill cleanup
effort, but this was mostly offset by higher sales in Canada, where drilling activity increased seasonally, and higher international sales of artificial
lift equipment and industrial equipment sales in Europe and Australia. The segment also benefitted from an acquisition in the Caspian region
closed during the fourth quarter. Approximately 78 percent of the groups fourth quarter sales were into North American markets and 23 percent
were into international markets.
Outlook
While the credit market downturn, global recession, and lower commodity prices presented challenges to our business in 2009, we believe we are
seeing signs of stabilization and recovery in many of our markets. Specifically we are encouraged by higher drilling activity in North America,
and steadily higher international drilling activity. Order levels for new drilling rigs declined significantly in 2009 as compared to 2008 due to
credit market conditions and softer rig activity, but we began to see improvement in the second half of 2010 due to dayrate stabilization for
certain classes of newer technology rigs, lower rig construction costs, and improving availability of financing, including easier payment terms
from shipyards. We expect lower backlogs to lead to modest declines in Rig Technology revenues and margins over the next few quarters before
new offshore rig construction projects can translate into higher revenues.
Our outlook for the Companys 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. Many products are beginning to see higher steel, alloy, resin and fiberglass costs impact their
business, and are attempting to raise prices to offset rising costs. Continuing tight iron ore supplies to the steel mills could adversely affect
margins as the year unfolds.
The Company believes it is well positioned to continue to manage through the current economic recovery, 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
future periods. 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 also present opportunities for the Company to effect new organic growth and
acquisition initiatives. 38