National Oilwell Varco 2015 Annual Report Download - page 54

Download and view the complete annual report

Please find page 54 of the 2015 National Oilwell Varco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 123

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123

Table of Contents
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 Company’s customers could also deteriorate and they may be unable to pay these
receivables, and additional allowances could be required. At December 31, 2015 and 2014, allowance for bad debts totaled $159 million and $125 million,
or 5.2% and 2.7% of gross accounts receivable, respectively.
Historically, the Company’s charge-offs and provisions for the allowance for doubtful accounts have been immaterial to the Company’s consolidated
financial statements. However, because of the risk factors mentioned above, changes in 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
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, 2015 and 2014, inventory reserves totaled $500 million and $370 million, or 9.7%
and 6.7% of gross inventory, respectively. 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 based on estimated future
undiscounted cash flows. 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. 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.
During the third quarter of 2015, the Company incurred $55 million in impairment charges on identified intangible assets with finite lives that were impaired
and written off.
53