National Oilwell Varco 2003 Annual Report Download - page 15

14
One of our primary metrics is the capital equipment backlog. New orders are added to backlog
only when we receive a firm customer purchase order for major drilling rig components or a
signed contract related to a construction project. The Products and Technology capital equipment
backlog was $339 million at December 31, 2003, $364 million at December 31, 2002 and $385
million at December 31, 2001. Backlog at December 31, 2002 includes $170 million acquired in
late December through the purchase of Hydralift ASA. Backlog from Hydralift is also contained
in the December 31, 2003 amount but quantification is not possible due to the overlap with
products from our other operations. Substantially all of the current backlog is expected to be
shipped by mid-year 2005.
Year 2002 versus 2001
Products and Technology revenues in 2002 were $203.6 million (18%) lower than the previous
year as moderate oil and gas prices failed to sustain the 2001 levels of market activity in all
product areas. Revenues from backlog were down $64 million while related spare parts and
expendable parts were lower than 2001 by $38 million. Sales and rentals of downhole motors and
fishing tools decreased by approximately $74 million, impacted by its strong dependence on the
North American market. Operating income fell $44 million in 2002 when compared to the prior
year, impacted by the margin reduction due to the significantly lower volume. Changes in sales
price did not have any significant effect on revenues compared to the prior year. The absence of
amortization of goodwill in 2002, as required per the new accounting guidance, favorably
impacted operating income by $10.4 million. Reductions in compensation expense also
contributed approximately $11.0 million in operating income when compared to the prior year.
Revenues from the mid-December 2002 acquisition of Hydralift ASA, and the consolidation of
our Chinese joint venture, each contributed $8.0 million in revenues and $0.3 million and $2.2
million in operating income, respectively.
Distribution Services
Year 2003 versus 2002
Revenues for the Distribution Services segment increased $105.8 million (15%) over the prior
year. North American revenues recorded the largest gains, reflecting the increase in the number of
operating rigs. According to the Baker Hughes rig count report, the average number of rigs
operating in 2003 in the United States and Canada were 1,032, and 372 - increases of 202 and 106
over the prior year. Canadian revenues were up $37 million, or 24%, while the U.S. revenues
improved $51 million, or 14%. We expanded our presence in the international market as we
recorded revenue gains of $18 million (12%) over the year 2002, primarily due to an alliance in
Indonesia and our new operations in Mexico. Our base margin % remained flat as our customers
remained sensitive to price changes, which had no significant effect on 2003 revenues.
Substantially all of the 2003 revenue growth was in the maintenance, repair and operating
supplies (“MRO”) products. Despite the revenue increase, operating income in 2003 fell $11.6
million to a disappointing $6.5 million. This reduction was primarily due to recording a $6.3
million pre-tax charge related to a clearing account problem uncovered in our purchasing system
that had accumulated over a three year period. This amount relates to periods prior to 2003 and
we have not restated prior periods as the impact is not considered material. A key financial metric
for this low-margin business is “% of operating expenses to revenue,” which remained flat at 18%
for 2003. In November 2003, we acquired Corlac Equipment Ltd., a Canadian pump distributor,
and their 2003 revenues and operating income were not significant.