National Oilwell Varco 2002 Annual Report Download - page 30

NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Nature of Business
We are a worldwide leader in the design, manufacture and sale of comprehensive systems,
components, and products used in oil and gas drilling and production, as well as in distributing
products and providing 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 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.
Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of National-Oilwell,
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 reflected as
minority interest in the accompanying balance sheet and their portion of net income (loss) is
included in other income (expense) in the accompanying statement of operations. Investments in
unconsolidated affiliates, over which we exercise significant influence, but not control, are
accounted for by the equity method.
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
We record all derivative financial instruments at their fair value in our consolidated balance sheet.
All derivative financial instruments we hold are designated as cash flow hedges and are highly
effective in offsetting movements in the underlying risks. Accordingly, gains and losses from
changes in the fair value of derivative financial instruments are deferred and recognized in
earnings as the underlying transactions occur. Because our derivative financial instruments are so
closely related to the underlying transactions, hedge ineffectiveness is insignificant.
We use foreign currency forward contracts to mitigate our exposure to changes in foreign
currency exchange rates on firm sale commitments to better match the local currency cost
components of our fixed US dollar contracts. Such arrangements typically have terms between
three months and one year, depending upon the customer’s purchase order. We also use, from
time to time, interest rate contracts to mitigate our exposure to changes in interest rates on
anticipated long-term debt issuances. These contracts are typically short term in nature. We do
not use derivative financial instruments for trading or speculative purposes.
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