National Oilwell Varco 2015 Annual Report Download - page 79

Download and view the complete annual report

Please find page 79 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
gas companies or drilling contractors; a significant sustained reduction in capital investment by drilling companies and oil and gas companies; or a
significant sustained increase in worldwide inventories of oil or gas.
The discounted cash flow is based on management’s 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 Company’s goodwill impairment analysis, include the cash flow from operations
from each of the Company’s individual business units and the weighted average cost of capital. The starting point for each of the reporting unit’s 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.
During the fourth quarter of 2015, the worldwide average rig count was 2,034 rigs, down 7% from the third quarter 2015 average of 2,188 and down 44%
from the fourth quarter 2014 average of 3,632. The fourth quarter 2015 average rig count represented the lowest quarterly average in the past six years. The
annual impairment test, as described in ASC Topic 350, “Intangibles—Goodwill and Other” (“ASC Topic 350”), is performed as of October 1 of each year.
Based on the Company’s annual impairment test performed in the fourth quarter of 2015, the calculated fair values for all of the Company’s reporting units
were in excess of the respective reporting unit’s carrying value, with two exceptions. Two reporting units within the Company’s Wellbore Technologies
segment, had a calculated fair value below carrying value, and were required to perform step two resulting in a $1,485 million write-down in goodwill.
The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s 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 discounted cash flow.
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 Company’s annual indefinite-lived intangible asset impairment analysis performed during the fourth quarter of 2015, the fair value for all of the
Company’s intangible assets with indefinite lives were in excess of the respective asset carrying values, with one exception. This intangible asset, which
represents a trade name within the Company’s Wellbore Technologies segment, had a calculated fair value approximately $149 million below its carrying
value.
In addition, 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.
78