National Oilwell Varco 2012 Annual Report Download - page 50

Index to Financial Statements
During the second quarter of 2009, the worldwide average rig count was 2,009 rigs, down 41% from the fourth quarter 2008 average of 3,395 and down 25% from the first
quarter 2009 average of 2,681. The second quarter 2009 average rig count represented the lowest quarterly average in the past six years. In addition, the Companys updated
forecast was behind the Companys previous forecast completed at the beginning of 2009. While operating profit for the first quarter of 2009 was in line with the Companys
first quarter 2009 operating profit forecast, the Companys consolidated operating profit for the second quarter of 2009 was below its second quarter 2009 forecast. As a result
of the substantial decline in the worldwide rig count, and the decline in actual/forecasted results compared to the original 2009 forecast, the Company concluded that events or
circumstances had occurred indicating that goodwill and other indefinite-lived intangible assets might be impaired as described under Accounting Standards Codification
(ASC) Topic 350 Intangibles  Goodwill and Other.
Therefore, the Company performed its interim impairment test of goodwill for all its reporting units at the end of the second quarter of 2009. The implied fair value of
goodwill is determined by deducting the fair value of a reporting units identifiable assets and liabilities from the fair value of that reporting unit as a whole. Fair value of the
reporting units is determined in accordance with ASC Topic 820 Fair Value Measurements and Disclosures using significant unobservable inputs, or level 3 in the fair
value hierarchy. These inputs are based on internal management estimates, forecasts and judgments, using a combination of three methods: discounted cash flow, comparable
companies, and representative transactions. While the Company primarily uses the discounted cash flow method to assess fair value, the Company uses the comparable
companies and representative transaction methods to validate the discounted cash flow analysis and further support managements expectations, where possible.
The discounted cash flow is based on managements short-term and long-term forecast of operating performance for each reporting unit. The two main assumptions used in
measuring goodwill impairment, which bear the risk of change and could impact the Companys goodwill impairment analysis, include the cash flow from operations from
each of the Companys individual business units and the weighted average cost of capital. The starting point for each of the reporting units cash flow from operations is the
detailed annual plan or updated forecast. The detailed planning and forecasting process takes into consideration a multitude of factors including worldwide rig activity,
inflationary forces, pricing strategies, customer analysis, operational issues, competitor analysis, capital spending requirements, working capital needs, customer needs to
replace aging equipment, increased complexity of drilling, new technology, and existing backlog among other items which impact the individual reporting unit projections.
Cash flows beyond the specific operating plans were estimated using a terminal value calculation, which incorporated historical and forecasted financial cyclical trends for
each reporting unit and considered long-term earnings growth rates. The financial and credit market volatility directly impacts our fair value measurement through our
weighted average cost of capital that we use to determine our discount rate. During times of volatility, significant judgment must be applied to determine whether credit
changes are a short-term or long-term trend.
Projections for the remainder of 2009 also reflected declines compared to the original 2009 annual forecast. The Company updated its 2009 operating forecast, long-term
forecast, and discounted cash flows based on this information. The goodwill impairment analysis that we performed during the second quarter of 2009 did not result in
goodwill impairment as of June 30, 2009.
Other indefinite-lived intangible assets, representing trade names management intends to use indefinitely, were valued using significant unobservable inputs (level 3) and are
tested for impairment using the Relief from Royalty Method, a form of the Income Approach. An impairment is measured and recognized based on the amount the book value
of the indefinite-lived intangible assets exceeds its estimated fair value as of the date of the impairment test. Included in the impairment test are assumptions, for each trade
name, regarding the related revenue streams attributable to the trade names which are determined consistent with the forecasting process described above, the royalty rate, and
the discount rate applied. Based on the Companys indefinite-lived intangible asset impairment analysis performed during the second quarter of 2009, the Company incurred
an impairment charge of $147 million in the Petroleum Services & Supplies segment related to a partial impairment of the Companys Grant Prideco trade name. The
impairment charge was primarily the result of the substantial decline in worldwide rig counts through June 2009, declines in forecasts in rig activity for the remainder of 2009,
2010, and 2011 compared to rig count forecast at the beginning of 2009 and a decline in the revenue forecast for the drill pipe business unit for the remainder of 2009, 2010,
and 2011.
During the fourth quarter of 2009, the Company further updated its impairment testing using current operating forecasts and discounted cash flows. In the third and fourth
quarters of 2009, both rig activity and commodity prices began to increase. Rig count increased 4% to an average of 2,130 in the third quarter and increased another 13% to an
average of 2,397 in the fourth quarter. Average West Texas Intermediate Crude prices reached $76.06 in the fourth quarter of 2009, an increase of 28% from an average of
$59.44 in the second quarter of 2009. In addition, by the end of the fourth quarter, average natural gas prices increased to $4.34, a 17% increase from the second quarter 2009
average of $3.71.
The Company performed its annual impairment analysis for its goodwill and indefinite-lived assets during the fourth quarter of 2010 and 2011 resulting in no impairment. The
valuation techniques used in the annual test were consistent with those used during previous testing. The inputs used in the annual test were updated for current market
conditions and forecasts.
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