National Oilwell Varco 2003 Annual Report Download - page 19

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Market Risk Disclosure
We are exposed to changes in foreign currency exchange rates and interest rates. Additional
information concerning each of these matters follows:
Foreign Currency Exchange Rates
We have operations in foreign countries, including Canada, Norway and the United Kingdom, as
well as operations in Latin America, China and other European countries. The net assets and
liabilities of these operations are exposed to changes in foreign currency exchange rates, although
such fluctuations generally do not affect income since their functional currency is the local
currency. These operations also have net assets and liabilities not denominated in the local
currency, which exposes us to changes in foreign currency exchange rates that do impact income.
We recorded foreign exchange losses in our income statement of approximately $7.2 million in
2003, compare to $0.3 million in the prior year. We do not believe that a hypothetical 10%
movement in these foreign currencies would have a material impact on our earnings.
Some of our revenues in foreign countries are denominated in US dollars, and therefore, changes
in foreign currency exchange rates impact our earnings to the extent that costs associated with
those US dollar revenues are denominated in the local currency. In order to mitigate that risk, we
may utilize foreign currency forward contracts to better match the currency of our revenues and
associated costs. We do not use foreign currency forward contracts for trading or speculative
purposes. The counterparties to these contracts are major financial institutions, which minimizes
counterparty credit risk.
Interest Rate Risk
Our long term borrowings consist of $150 million in 6.875% senior notes, $150 million in 6.5%
senior notes and $200 million in 5.65% senior notes. We also have borrowings under our other
facilities totaling $108.9 million at December 31, 2003 (weighted average interest rate of 2.8% at
December 31, 2003). A portion of the borrowings are denominated in multiple currencies which
could expose us to market risk with exchange rate movements. These instruments carry interest at
a pre-agreed upon percentage point spread from either the prime interest rate, LIBOR, NIBOR or
EURIBOR. Under our credit facilities, we may, at our option, fix the interest rate for certain
borrowings based on a spread over LIBOR, NIBOR or EURIBOR for 30 days to 6 months. Based
upon our December 31, 2003 borrowings under our variable rate facilities of $108.9 million, an
immediate change of one percent in the interest rate would cause a change in annual interest
expense of approximately $1.1 million. Our objective in maintaining a portion of our debt in
variable rate borrowings is the flexibility obtained regarding early repayment without penalties
and lower overall cost as compared with fixed-rate borrowings.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make certain estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Our
estimation process generally relates to potential bad debts, obsolete and slow moving inventory,
revenue recognition on long term contracts, value of intangible assets, and deferred income tax
accounting. Note 1 to the consolidated financial statements contains the accounting policies
governing each of these matters. Our estimates are based on historical experience and on our
future expectations that we believe to be reasonable under the circumstances. The combination of
these factors result in the amounts shown as carrying values of assets and liabilities in the