National Oilwell Varco 2003 Annual Report Download - page 33

Download and view the complete annual report

Please find page 33 of the 2003 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 60

  • 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

32
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Nature of Business
We design, manufacture and sell comprehensive systems, components, and products used in oil
and gas drilling and production, as well as distribute products and provide 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 and their portion
of net income (loss) reflected as minority interest in the accompanying financial statements.
Investments in unconsolidated affiliates, over which we exercise significant influence, but not
control, are accounted for by the equity method. Investments in which we exercise no control or
significant influence would be accounted for under the cost method. Certain reclassifications have
been made to the 2002 and 2001 consolidated financial statements in order for them to conform
with the 2003 presentation.
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 may also use
interest rate contracts to mitigate our exposure to changes in interest rates on anticipated long-