##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 1-12317
 NATIONAL OILWELL VARCO, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    76-0475815(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 10000 Richmond Avenue
Houston, Texas
77042-4200
 (Address of principal executive offices)
 (713) 346-7500
 (Registrants telephone number, including area code)
  þ o
  þ o o
 o þ




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TABLE OF CONTENTS  PART I    FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II    OTHER INFORMATIONItem 6. ExhibitsSIGNATUREINDEX TO EXHIBITSCertification Pursuant to Rule 13a-14a and Rule 15d-14(a)Certification Pursuant to Rule 13a-14a and Rule 15d-14(a)Certification Pursuant to Section 906Certification Pursuant to Section 906    Table of Contents  
 PART I    FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 NATIONAL OILWELL VARCO, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,190.2
    
    
    $
    957.4Receivables, net
    
    
    1,682.1
    
    
    
    1,614.6Inventories, net
    
    
    1,993.1
    
    
    
    1,828.8Costs in excess of billings
    
    
    374.7
    
    
    
    308.9Deferred income taxes
    
    
    106.7
    
    
    
    101.6Prepaid and other current assets
    
    
    187.0
    
    
    
    154.3Total current assets
    
    
    5,533.8
    
    
    
    4,965.6Property, plant and equipment, net
    
    
    1,047.5
    
    
    
    1,022.1Deferred income taxes
    
    
    59.3
    
    
    
    56.1Goodwill
    
    
    2,278.1
    
    
    
    2,244.7Intangibles, net
    
    
    725.7
    
    
    
    705.2Other assets
    
    
    25.7
    
    
    
    25.6Total assets
    
    $
    9,670.1
    
    
    $
    9,019.3LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    572.5
    
    
    $
    505.2Accrued liabilities
    
    
    1,408.1
    
    
    
    1,420.2Billings in excess of costs
    
    
    733.3
    
    
    
    564.4Current portion of long-term debt and short-term borrowings
    
    
    107.8
    
    
    
    5.6Accrued income taxes
    
    
    193.4
    
    
    
    169.8Total current liabilities
    
    
    3,015.1
    
    
    
    2,665.2Long-term debt
    
    
    737.8
    
    
    
    834.7Deferred income taxes
    
    
    437.9
    
    
    
    389.0Other liabilities
    
    
    71.2
    
    
    
    71.4Total liabilities
    
    
    4,262.0
    
    
    
    3,960.3Commitments and contingenciesMinority interest
    
    
    39.8
    
    
    
    35.5Stockholders equity:Common stock  par value $.01; 177,290,970 and 175,571,663 shares
issued and outstanding at March 31, 2007 and December 31, 2006
    
    
    1.8
    
    
    
    1.8Additional paid-in capital
    
    
    3,521.9
    
    
    
    3,461.7Accumulated other comprehensive income
    
    
    60.2
    
    
    
    46.1Retained earnings
    
    
    1,784.4
    
    
    
    1,513.9Total stockholders equity
    
    
    5,368.3
    
    
    
    5,023.5Total liabilities and stockholders equity
    
    $
    9,670.1
    
    
    $
    9,019.3
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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In millions, except per share data)
 Three Months EndedMarch 31,2007
    
    
    2006Revenue
    
    $
    2,165.7
    
    
    $
    1,511.8Cost of revenue
    
    
    1,550.7
    
    
    
    1,162.0Gross profit
    
    
    615.0
    
    
    
    349.8Selling, general, and administrative
    
    
    187.9
    
    
    
    144.1Integration costs
    
    
    
    
    
    
    7.9Operating profit
    
    
    427.1
    
    
    
    197.8Interest and financial costs
    
    
    (12.3
    )
    
    
    (13.6
    )Interest income
    
    
    9.1
    
    
    
    1.7Other income (expense), net
    
    
    (2.9
    )
    
    
    (3.0
    )Income before income taxes and minority interest
    
    
    421.0
    
    
    
    182.9Provision for income taxes
    
    
    140.7
    
    
    
    61.3Income before minority interest
    
    
    280.3
    
    
    
    121.6Minority interest in income of consolidated
subsidiaries
    
    
    4.4
    
    
    
    1.3Net income
    
    $
    275.9
    
    
    $
    120.3Net income per share:Basic
    
    $
    1.57
    
    
    $
    0.69Diluted
    
    $
    1.55
    
    
    $
    0.68Weighted average shares outstanding:Basic
    
    
    175.9
    
    
    
    174.6Diluted
    
    
    177.6
    
    
    
    176.6
  3




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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
 Three Months EndedMarch 31,2007
    
    
    2006Cash flow from operating activities:Net income
    
    $
    275.9
    
    
    $
    120.3Adjustments to reconcile net income to net cash provided
(used) by operating activities:Depreciation and amortization
    
    
    47.3
    
    
    
    38.4Excess tax benefit from exercise of stock options
    
    
    (9.1
    )
    
    
    (5.2
    )Other
    
    
    12.0
    
    
    
    1.1Changes in assets and liabilities, net of acquisitions:Receivables
    
    
    (69.9
    )
    
    
    (65.3
    )Inventories
    
    
    (167.9
    )
    
    
    (155.2
    )Costs in excess of billings
    
    
    (65.9
    )
    
    
    (6.8
    )Prepaid and other current assets
    
    
    (32.4
    )
    
    
    (39.4
    )Accounts payable
    
    
    67.2
    
    
    
    37.4Billings in excess of costs
    
    
    168.9
    
    
    
    96.3Other assets/liabilities, net
    
    
    38.1
    
    
    
    65.0Net cash provided by operating activities
    
    
    264.2
    
    
    
    86.6Cash flow from investing activities:Purchases of property, plant and equipment
    
    
    (48.0
    )
    
    
    (30.2
    )Businesses acquisitions, net of cash acquired
    
    
    (38.1
    )
    
    
    (21.0
    )Other
    
    
    0.3
    
    
    
    Net cash used by investing activities
    
    
    (85.8
    )
    
    
    (51.2
    )Cash flow from financing activities:Borrowing against lines of credit and other debt
    
    
    0.4
    
    
    
    3.6Payments against lines of credit and other debt
    
    
    (1.5
    )
    
    
    (5.7
    )Proceeds from stock options exercised
    
    
    42.2
    
    
    
    13.2Excess tax benefit from exercise of stock options
    
    
    9.1
    
    
    
    5.2Net cash provided by financing activities
    
    
    50.2
    
    
    
    16.3Effect of exchange rates on cash
    
    
    4.2
    
    
    
    1.9Increase in cash equivalents
    
    
    232.8
    
    
    
    53.6Cash and cash equivalents, beginning of period
    
    
    957.4
    
    
    
    209.4Cash and cash equivalents, end of period
    
    $
    1,190.2
    
    
    $
    263.0Supplemental disclosures of cash flow information:Cash payments during the period for:Interest
    
    $
    9.5
    
    
    $
    8.9Income taxes
    
    $
    108.8
    
    
    $
    39.1
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NATIONAL OILWELL VARCO, INC.
Notes to Consolidated Financial Statements (Unaudited)
 1. Basis of Presentation
    2. Inventories, net
  March 31,
    
    
    December 31,2007
    
    
    2006Raw materials and supplies
    
    $
    268.6
    
    
    $
    266.5Work in process
    
    
    621.1
    
    
    
    520.9Finished goods and purchased products
    
    
    1,103.4
    
    
    
    1,041.4Total
    
    $
    1,993.1
    
    
    $
    1,828.8
 3. Accrued Liabilities
  March 31,
    
    
    December 31,2007
    
    
    2006Compensation
    
    $
    122.1
    
    
    $
    160.0Customer prepayments
    
    
    541.5
    
    
    
    538.4Warranty
    
    
    65.5
    
    
    
    57.3Interest
    
    
    15.6
    
    
    
    11.9Taxes (non income)
    
    
    28.9
    
    
    
    34.1Insurance
    
    
    43.5
    
    
    
    39.1Accrued purchase orders
    
    
    377.0
    
    
    
    334.9Hedge commitments
    
    
    43.9
    
    
    
    33.0Other
    
    
    170.1
    
    
    
    211.5Total
    
    $
    1,408.1
    
    
    $
    1,420.2
 5




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4. Costs and Estimated Earnings on Uncompleted Contracts
  March 31,
    
    
    December 31,2007
    
    
    2006Costs incurred on uncompleted contracts
    
    $
    1,682.7
    
    
    $
    1,924.0Estimated earnings
    
    
    500.5
    
    
    
    470.02,183.2
    
    
    
    2,394.0Less: Billings to date
    
    
    2,541.8
    
    
    
    2,649.5$
    (358.6
    )
    
    $
    (255.5
    )Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    374.7
    
    
    $
    308.9Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (733.3
    )
    
    
    (564.4
    )$
    (358.6
    )
    
    $
    (255.5
    )
 5. Comprehensive Income
  Three Months EndedMarch 31,2007
    
    
    2006Net income
    
    $
    275.9
    
    
    $
    120.3Currency translation adjustments
    
    
    23.1
    
    
    
    9.3Other
    
    
    (9.0
    )
    
    
    6.8Comprehensive income
    
    $
    290.0
    
    
    $
    136.4
 6




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6. Business Segments
  Three Months EndedMarch 31,2007
    
    
    2006Revenue:Rig Technology
    
    $
    1,219.8
    
    
    $
    715.3Petroleum Services & Supplies
    
    
    691.8
    
    
    
    541.0Distribution Services
    
    
    351.9
    
    
    
    326.5Elimination
    
    
    (97.8
    )
    
    
    (71.0
    )Total Revenue
    
    $
    2,165.7
    
    
    $
    1,511.8Operating Profit:Rig Technology
    
    $
    268.8
    
    
    $
    93.7Petroleum Services & Supplies
    
    
    171.0
    
    
    
    115.1Distribution Services
    
    
    24.9
    
    
    
    20.4Unallocated expenses and
eliminations
    
    
    (37.6
    )
    
    
    (31.4
    )Total operating profit
    
    $
    427.1
    
    
    $
    197.8Operating profit %:Rig Technology
    
    
    22.0
    %
    
    
    13.1
    %Petroleum Services & Supplies
    
    
    24.7
    %
    
    
    21.3
    %Distribution Services
    
    
    7.1
    %
    
    
    6.2
    %Total Operating Profit %
    
    
    19.7
    %
    
    
    13.1
    %
  7. Debt
  March 31,
    
    
    December 31,2007
    
    
    2006$100.0 million Senior Notes, interest at 7.5% payable semiannually, principal due
on February 15, 2008
    
    $
    101.5
    
    
    $
    101.9$150.0 million Senior Notes, interest at 6.5% payable semiannually, principal due
on March 15, 2011
    
    
    150.0
    
    
    
    150.0$200.0 million Senior Notes, interest at 7.25% payable semiannually, principal due
on May 1, 2011
    
    
    214.3
    
    
    
    215.2$200.0 million Senior Notes, interest at 5.65% payable semiannually, principal due
on November 15, 2012
    
    
    200.0
    
    
    
    200.0$150.0 million Senior Notes, interest at 5.5% payable semiannually, principal due
on November 19, 2012
    
    
    151.5
    
    
    
    151.6Other
    
    
    28.3
    
    
    
    21.6Total debt
    
    
    845.6
    
    
    
    840.3Less current portion
    
    
    107.8
    
    
    
    5.6Long-term debt
    
    $
    737.8
    
    
    $
    834.7
 7




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Senior Notes
  Revolver Facilities
  Other
   8. Tax
   Reduction in Retained Earnings (cumulative effect)
    
    $
    5.4Additional Goodwill
    
    
    4.5Increase in Liability
    
    $
    9.9
     8




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9. Stock-Based Compensation
 
  10. Derivative Financial Instruments
     9




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11. Net Income Per Share
  Three Months EndedMarch 31,2007
    
    
    2006Numerator:Net income
    
    $
    275.9
    
    
    $
    120.3Denominator:Basicweighted average common shares outstanding
    
    
    175.9
    
    
    
    174.6Dilutive effect of employee stock options and other unvested stock awards
    
    
    1.7
    
    
    
    2.0Diluted outstanding shares
    
    
    177.6
    
    
    
    176.6Basic earnings per share
    
    $
    1.57
    
    
    $
    0.69Diluted earnings per share
    
    $
    1.55
    
    
    $
    0.68
 12. Subsequent Event
  13. Recently Issued Accounting Standards
   10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  Rig Technology
  Petroleum Services & Supplies
  Distribution Services
  11




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Executive Summary
  Oil & Gas Equipment and Services Market
      12




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Segment Performance
  13




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Outlook
   14




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15




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Operating Environment Overview
  %
    
    
    %1Q07 v
    
    
    1Q07 v1Q07*
    
    
    1Q06*
    
    
    4Q06*
    
    
    1Q06
    
    
    4Q06Active Drilling Rigs:U.S.
    
    
    1,732
    
    
    
    1,520
    
    
    
    1,720
    
    
    
    13.9
    %
    
    
    0.7
    %Canada
    
    
    532
    
    
    
    665
    
    
    
    440
    
    
    
    (20.0
    %)
    
    
    20.9
    %International
    
    
    982
    
    
    
    895
    
    
    
    952
    
    
    
    9.7
    %
    
    
    3.2
    %Worldwide
    
    
    3,246
    
    
    
    3,080
    
    
    
    3,112
    
    
    
    5.4
    %
    
    
    4.3
    %Active Workover Rigs:U.S.
    
    
    1,485
    
    
    
    1,527
    
    
    
    1,523
    
    
    
    (2.8
    %)
    
    
    (2.5
    %)Canada
    
    
    753
    
    
    
    707
    
    
    
    577
    
    
    
    6.5
    %
    
    
    30.5
    %North America
    
    
    2,238
    
    
    
    2,234
    
    
    
    2,100
    
    
    
    0.2
    %
    
    
    6.6
    %West Texas Intermediate
    
    $
    58.14
    
    
    $
    63.18
    
    
    $
    59.96
    
    
    
    (8.0
    %)
    
    
    (3.0
    %)Crude Prices (per barrel)Natural Gas Prices ($/mmbtu)
    
    $
    7.20
    
    
    $
    7.71
    
    
    $
    6.65
    
    
    
    (6.6
    %)
    
    
    8.3
    %
 
 *
    
    Averages for the quarters indicated. See sources below.  
  16




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17




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Results of Operations
  Three Months EndedMarch 31,2007
    
    
    2006Revenue:Rig Technology
    
    $
    1,219.8
    
    
    $
    715.3Petroleum Services & Supplies
    
    
    691.8
    
    
    
    541.0Distribution Services
    
    
    351.9
    
    
    
    326.5Eliminations
    
    
    (97.8
    )
    
    
    (71.0
    )Total Revenue
    
    $
    2,165.7
    
    
    $
    1,511.8Operating Profit:Rig Technology
    
    $
    268.8
    
    
    $
    93.7Petroleum Services & Supplies
    
    
    171.0
    
    
    
    115.1Distribution Services
    
    
    24.9
    
    
    
    20.4Unallocated expenses and
eliminations
    
    
    (37.6
    )
    
    
    (31.4
    )Total Operating Profit
    
    $
    427.1
    
    
    $
    197.8Operating Profit %:Rig Technology
    
    
    22.0
    %
    
    
    13.1
    %Petroleum Services & Supplies
    
    
    24.7
    %
    
    
    21.3
    %Distribution Services
    
    
    7.1
    %
    
    
    6.2
    %Total Operating Profit %
    
    
    19.7
    %
    
    
    13.1
    %
  Rig Technology
 Three Months Ended March 31, 2007 and 2006.
  Petroleum Services & Supplies
 Three Months Ended March 31, 2007 and 2006.
  18




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Distribution Services
 Three Months Ended March 31, 2007 and 2006.
  Unallocated expenses and eliminations
  Interest and financial costs
  Other income (expense), net
  Provision for income taxes
  Liquidity and Capital Resources
    19




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Recently Issued Accounting Standards
   Forward-Looking Statements
  20




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Foreign Currency Exchange Rates
      21




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Hedge Classification
    
    Currency
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    TotalCash Flow
    
    USD
    
    $
    148.1
    
    
    $
    2.8
    
    
    $
    
    
    
    $
    
    
    
    $
    150.9Fair Value
    
    EUR
    
    $
    116.9
    
    
    $
    60.4
    
    
    $
    5.5
    
    
    $
    
    
    
    $
    182.8GBP
    
    
    15.1
    
    
    
    5.7
    
    
    
    0
    
    
    
    
    
    
    
    20.8KRW
    
    
    0.4
    
    
    
    0.6
    
    
    
    0
    
    
    
    
    
    
    
    1.0SGD
    
    
    6.8
    
    
    
    3.3
    
    
    
    1.2
    
    
    
    
    
    
    
    11.3USD
    
    
    879.6
    
    
    
    469.3
    
    
    
    127.1
    
    
    
    1.6
    
    
    
    1,477.6$
    1,018.8
    
    
    $
    539.3
    
    
    $
    133.8
    
    
    $
    1.6
    
    
    $
    1,693.5Balance Sheet
    
    EUR
    
    $
    0.6
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.6GBP
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7USD
    
    
    67.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67.9$
    69.2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    69.2Total
    
    
    
    $
    1,236.1
    
    
    $
    542.1
    
    
    $
    133.8
    
    
    $
    1.6
    
    
    $
    1,913.6
   Interest Rate Risk
   22




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Item 4. Controls and Procedures
   23




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PART II    OTHER INFORMATION
 
 Item 6. Exhibits
  
 SIGNATURE
  Date: May 7, 2007
    By:
    /s/ Clay C. WilliamsClay C. WilliamsSenior Vice President and Chief Financial Officer
(Duly Authorized Officer, Principal Financial and Accounting Officer) 24




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INDEX TO EXHIBITS
  2.1
    
    Amended and Restated Agreement and Plan of Merger, effective as of August 11, between National-Oilwell,
Inc. and Varco International, Inc. (4).3.1
    
    Amended and Restated Certificate of Incorporation of National-Oilwell, Inc. (Exhibit 3.1) (1).3.2
    
    Amended and Restated By-laws of National Oilwell Varco, Inc. (Exhibit 3.2) (7).10.1
    
    Employment Agreement dated as of January 1, 2002 between Merrill A. Miller, Jr. and National Oilwell.
(Exhibit 10.1) (2).10.2
    
    Employment Agreement dated as of January 1, 2002 between Dwight W. Rettig and National Oilwell, with
similar agreements with Kevin A. Neveu and Mark A. Reese. (Exhibit 10.2) (2).10.3
    
    Form of Amended and Restated Executive Agreement of Clay C. Williams and Haynes Smith. (Exhibit 10.12) (3).10.4
    
    National Oilwell Varco Long-Term Incentive Plan (5)*.10.5
    
    Form of Employee Stock Option Agreement (Exhibit 10.1) (8).10.6
    
    Form of Non-Employee Director Stock Option Agreement (Exhibit 10.2) (8).10.7
    
    Amended and Restated Credit Agreement, dated as of June 21, 2005, among National Oilwell Varco, Inc., the
financial institutions signatory thereto, including Wells Fargo Bank, National Association, in their
capacities as lenders thereunder, as US administrative agent for the lenders, as Lead Arranger and Sole
Book Runner, DnB NOR Bank ASA, as Norwegian Administrative Agent, DnB NOR Bank ASA and the Bank of Nova
Scotia as Co-Documentation Agents, and Comerica Bank and JPMorgan Chase Bank, N.A. as Co-Syndication
Agents. (Exhibit 10.1) (6).10.8
    
    Form of Performance-Based Restricted Stock (18 Month) Agreement (Exhibit 10.1) (9).10.9
    
    Form of Performance-Based Restricted Stock (36 Month) Agreement (Exhibit 10.2) (9).31.1
    
    Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended31.2
    
    Certification pursuant to Rule 13a-14a and Rule 15d-14(a) of the Securities and Exchange Act, as amended32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Compensatory plan or arrangement for management or others(1)
    
    Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on August 11, 2000.(2)
    
    Filed as an Exhibit to our Annual Report on Form 10-K filed on March 28, 2002.(3)
    
    Filed as an Exhibit to Varco International, Inc.s Quarterly Report on Form 10-Q filed on May
6, 2004.(4)
    
    Filed as Annex A to our Registration Statement on Form S-4 filed on September 16, 2004.(5)
    
    Filed as Annex D to our Amendment No. 1 to Registration Statement on Form S-4 filed on
January 31, 2005.(6)
    
    Filed as an Exhibit to our Current Report on Form 8-K filed on June 23, 2005.(7)
    
    Filed as an Exhibit to our Current Report on Form 8-K filed on November 18, 2005.(8)
    
    Filed as an Exhibit to our Current Report on Form 8-K filed on February 23, 2006.(9)
    
    Filed as an Exhibit to our Current Report on Form 8-K filed on March 27, 2007.  25