National Oilwell Varco 2010 Annual Report Download - page 46

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 Companys inventory consists of specialized spare parts, work in process, and raw materials to support ongoing
manufacturing operations and the Companys 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 Companys
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 Companys 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, 2010 and 2009, inventory reserves totaled $270 million and $206 million, or 7.4% and 5.9% of gross inventory, respectively.
While inventory reserves and accruals have not had a material impact on the Companys financial results for the periods covered in this report,
changes in worldwide oil and gas activity, or the development of new technologies which make older drilling technologies obsolete, could require
the Company to record additional allowances to reduce the value of its inventory. Such changes in our estimates could be material under weaker
market conditions or outlook.
Impairment of Long-Lived Assets (Excluding Goodwill 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 Companys
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 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 Companys
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 Companys 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: sustained declines in worldwide rig counts
below current analysts forecasts, collapse of spot and futures prices for oil and gas, significant 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 significant declines in the Companys 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 $5.8 billion of goodwill and $0.6 billion of other intangible assets with indefinite lives as of December 31,
2010. 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, 2010 and 2008. 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 Companys 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 Companys
consolidated income statement for the year ended December 31, 2009. 46