National Oilwell Varco 2011 Annual Report Download - page 40

Index to Financial Statements
The Petroleum Services & Supplies segment generated $5.7 billion in revenue and $1.1 billion in operating profit, or 19.0% of sales, for the full year 2011. Compared to the
prior year revenue increased 35%, and operating leverage or flow-through (the change in operating profit divided by the change in revenue) was 33%. For the fourth quarter of
2011 the segment generated total sales of $1,570 million in the fourth quarter of 2011, up 8% from the third quarter of 2011 and up 38 % from the fourth quarter of 2010.
Operating profit was $295 million or 18.8% of sales during the fourth quarter of 2011. Year-over-year operating leverage or flow-through from the fourth quarter of 2010 to
the fourth quarter of 2011 was 29%. The Ameron acquisition was completed on October 5, 2011 and its composite pipe segment is being integrated into the groups fiberglass
and composite pipe products. Sequential revenue growth was evenly spread across most major areas, albeit with mix shifts from product to product. Europe, Russia and the
Far East posted some of the largest sequential gains, along with good sequential improvement in the U.S. centered in the liquids rich shale plays like the Bakken and the Eagle
Ford. Wellsite Services and Downhole tools posted strong sequential sales growth on higher sales in the Eastern Hemisphere, Canada, and U.S. shales. Drill pipe orders were
steady for the quarter, but margins were down as more greentubes were purchased from third party suppliers at higher prices, rather than from the Companys joint venture
supplier of greentubes.
The Distribution & Transmission segment generated $1.9 billion in revenue and $135 million in operating profit or 7.2% of sales during 2011. Revenues improved 21% from
2010, and flow-through or operating leverage was 17% from 2010 to 2011. For the fourth quarter of 2011 revenues were $560 million, up 17% from the third quarter of 2011
and up 32% from the fourth quarter of 2010. Operating profit of $45 million for the fourth quarter produced operating margins of 8.0% for the quarter, and operating leverage
or flow-through was 10% from the third quarter of 2011 and 11% from the fourth quarter of 2010. Results for the fourth quarter included the Ameron Water Transmission and
Infrastructure Products segments from October 5, 2011 onward, which were modestly dilutive to the groups margins. The legacy distribution portion of the segment saw
revenues up slightly, with strong flow-throughs, due to excellent performance in Canada. International was up slightly and the US was down slightly due to rig moves towards
liquids plays, together with related drill site construction delays and weather issues in a few markets. Approximately 74% of the groups fourth quarter sales were into North
American markets and 26% into international markets.
Outlook
Following the credit market downturn, global recession, and lower commodity prices of 2009, we saw signs of stabilization and recovery in many of our markets in 2010 and
into 2011, led by higher drilling activity in North America and slowly improving international drilling activity. Order levels for new drilling rigs has rebounded sharply, and
the Rig Technology segment continues to experience a high level of interest in new capital equipment. Rig dayrates appear to be improving for certain classes of newer
technology rigs, and appear to be trending higher for deepwater offshore rigs. We expect lower pricing in our backlog to lead to modest declines in Rig Technology margins in
the first half of 2012, until recently won offshore rig construction orders begin to generate revenues at higher margins.
Our outlook for the Companys Petroleum Services & Supplies segment and Distribution & Transmission segment remains closely tied to the rig count, particularly in North
America. If the oil rig count growth seen over the past few quarters continues to increase and more than offset gas rig declines, we expect these segments to benefit from
higher demand for the services, consumables and capital items they supply. However, if continued curtailment of gas drilling leads overall rig counts lower, as has been the
case for the past few months, then pricing and volumes may come under pressure.
The Company believes it is well positioned, and should benefit from its strong balance sheet and capitalization, access to credit, and a high level of contracted orders which
are expected to continue to generate earnings during 2012. The Company has a long history of cost-control and downsizing in response to depressed market conditions, and of
executing strategic acquisitions during difficult periods. Such a period may present opportunities to the Company to effect new organic growth and acquisition initiatives, and
we remain hopeful that a downturn will generate new opportunities.
Still the recovery of the world economy continues to move forward with a great deal of uncertainty as the world watches the sovereign debt crises in several European
countries unfold, market turbulence and general global economic worries. If such global economic uncertaintanties develop adversely, world oil and gas prices could be
impacted which in turn could negatively impact the worldwide rig count and the Companys future financial results.
39