##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark one)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2006
 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
    
    (IRS Employerof incorporation or organization)
    
    Identification No.)
 10000 Richmond Avenue
Houston, Texas
77042-4200
 (Address of principal executive offices)
 (713) 346-7500
 (Registrants telephone number, including area code)
  Common Stock, par value $.01
    
    New York Stock Exchange(Title of Class)
    
    (Exchange on which registered)
 None
  þ o
  o þ
  þ o
 o
  þ o o
 o þ
  Documents Incorporated by Reference




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TABLE OF CONTENTS  ITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESSIGNATURESEXHIBIT INDEXSubsidiaries of the RegistrantConsent of Ernst & Young LLPCertification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to Section 906Certification Pursuant to Section 906    Table of Contents  
 ITEM 1. BUSINESS
 General
   http://www.nov.com
  Rig Technology
  Petroleum Services & Supplies
  Distribution Services
  1




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Years ended December 31,2006
    
    
    2005
    
    
    2004Revenue:Rig Technology
    
    $
    3,584.9
    
    
    $
    2,216.8
    
    
    $
    1,085.5Petroleum Services &
Supplies
    
    
    2,425.0
    
    
    
    1,645.8
    
    
    
    505.5Distribution Services
    
    
    1,369.6
    
    
    
    1,074.5
    
    
    
    905.1Eliminations
    
    
    (353.7
    )
    
    
    (292.6
    )
    
    
    (178.0
    )Total Revenue
    
    $
    7,025.8
    
    
    $
    4,644.5
    
    
    $
    2,318.1
   Influence of Oil and Gas Activity Levels on the Companys Business
        2




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Overview of Oil and Gas Well Drilling and Servicing Processes
      3




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4




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Rig Technology
   Land Rig Packages Ideal Rig Rapid Rig
 Top Drives
 Drilling Motors.
 Rotary Equipment
 Pipe Handling Systems
   Pipe Handling Tools
 5




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Mud Pumps.
 Hoisting Systems
 Cranes.
 Motion Compensation Systems
 Blow-out Preventers
 ®
 Derricks and substructures.
 Coiled Tubing Equipment
 6




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Wireline Equipment
  Facilities.
 Customers and Competition.
  Petroleum Services & Supplies
  7




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Tubular Coating ® 2 2
 Tubular Inspection.
  8




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ä
 Mill Systems and Sales.
 Fiberglass & Composite Tubulars. ®
 Coiled Tubing.
 Pipeline Inspection
 Downhole Tools. TM TM
 TM TM
  9




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Solids Control
   Instrumentation   
 Pumps & Expendables
  10




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Customers and Competition.
  Distribution Services
     Customers and Competition.
 11




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2006 Acquisitions and Other Investments
  Operating
    
    Date ofAcquisition
    
    Form
    
    Segment
    
    TransactionsRetsco Oilfield Field Equipment, Ltd.
    
    Asset
    
    Petroleum Services & Supply
    
    February 2006Soil Recovery A/S
    
    Stock
    
    Petroleum Services & Supply
    
    March 2006D.M.I. est SARL
    
    Asset
    
    Petroleum Services & Supply
    
    April 2006Core Motion, Inc.
    
    License
    
    Rig Technology
    
    August 2006In-Situ Oilfield Services Limited
    
    Asset
    
    Petroleum Services & Supply
    
    September 2006Longhorn Machine, L.P.
    
    Asset
    
    Rig Technology
    
    September 2006Rolligon, Ltd.
    
    Asset
    
    Rig Technology
    
    November 2006FITIRI, Inc.
    
    Asset
    
    Petroleum Services & Supply
    
    November 2006Toolbox Drilling Solutions Limited
    
    Stock
    
    Petroleum Services & Supply
    
    December 2006NQL Energy Services Inc.
    
    Stock
    
    Petroleum Services & Supply
    
    December 2006
  Seasonal Nature of the Companys Business
     Marketing & Distribution Network
  12




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Research and New Product Development and Intellectual Property
    13




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Engineering and Manufacturing
     Raw Materials
  Backlog
   December 31, 2006
    
    $6.0 billionDecember 31, 2005
    
    2.3 billionDecember 31, 2004
    
    0.6 billion *
 
 *
    
    excludes Varco backlog Employees
  14




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ITEM 1A. RISK FACTORS
 You should carefully consider the risks described below, in addition to other information contained
or incorporated by reference herein. Realization of any of the following risks could have a
material adverse effect on our business, financial condition, cash flows and results of operations.
 We
are dependent upon the level of activity in the oil and gas industry, which is volatile .
  
    
    the ability of the members of the Organization of Petroleum Exporting Countries, or
OPEC, to maintain price stability through voluntary production limits, the level of
production by non-OPEC countries and worldwide demand for oil and gas;
    
    level of production from known reserves;
    
    cost of exploring for and producing oil and gas;
    
    level of drilling activity and drilling rig dayrates;
    
    worldwide economic activity;
    
    national government political requirements;
    
    development of alternate energy sources; and
    
    environmental regulations.
  Volatile oil and gas prices affect demand for our products.
   Competition in our industry could ultimately lead to lower revenues and earnings.
  
    
    price changes;
    
    new product and technology introductions; and
    
    improvements in availability and delivery.
 15




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We have aggressively expanded our businesses and intend to maintain an aggressive growth strategy.
  Our operating results have fluctuated during recent years and these fluctuations may continue.
  
    
    fluctuations in the oil and gas industry;
    
    competition;
    
    the ability to service the debt obligations of the Company;
    
    the ability to identify strategic acquisitions at reasonable prices;
    
    the ability to manage and control operating costs of the Company;
    
    fluctuations in political and economic conditions in the United States and abroad; and
    
    the ability to protect our intellectual property rights.
 There are risks associated with our presence in international markets, including political or
economic instability and currency restrictions.
   The results of our operations are subject to market risk from changes in foreign currency exchange
rates.
  16




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An
impairment of goodwill could reduce our earnings.
  We could be adversely affected if we fail to comply with any of the numerous federal, state and
local laws, regulations and policies that govern environmental protection, zoning and other matters
applicable to our businesses.
  Our businesses expose us to potential environmental liability.
  
    
    personal injury or loss of life;
    
    severe damage to or destruction of property; or
    
    environmental damage and suspension of operations.
  
    
    negligence;
    
    strict liability;
    
    breach of contract with customers; or
    
    as a result of our contractual agreement to indemnify our customers in the normal course
of business, which is normally the case.
 We may not have adequate insurance for potential environmental liabilities.
  
    
    we may not be able to continue to obtain insurance on commercially reasonable terms;
    
    we may be faced with types of liabilities that will not be covered by our insurance;
    
    our insurance carriers may not be able to meet their obligations under the policies; or
    
    the dollar amount of any liabilities may exceed our policy limits.
  There are risks associated with certain contracts for our drilling equipment.
  
    
    our failure to adequately estimate costs for making this drilling equipment;
    
    our inability to deliver equipment that meets contracted technical requirements;
    
    our inability to maintain our quality standards during the design and manufacturing process;
    
    our inability to secure parts made by third party vendors at reasonable costs and within
required timeframes;
    
    unexpected increases in the costs of raw materials; and
    
    our inability to manage unexpected delays due to weather, shipyard access, labor
shortages or other factors beyond our control.
  17




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GLOSSARY OF OILFIELD TERMS
 (Sources: Company management; A Dictionary for the Petroleum
Industry, The University of Texas at Austin, 2001.)API
    
    Abbr: American Petroleum InstituteAnnular Blowout Preventer
    
    A large valve, usually installed above the ram blowout preventers,
that forms a seal in the annular space between the pipe and the
wellbore or, if no pipe is present, in the wellbore itself.Annulus  

Automatic Pipe Handling 
Systems (Automatic Pipe 
Racker)
    
    The open space around pipe in a wellbore through which fluids may pass.

A device used on a drilling rig to automatically remove and insert
drill stem components from and into the hole. It replaces the need for
a person to be in the derrick or mast when tripping pipe into or out
of the hole.Automatic Roughneck
    
    A large, self-contained pipe-handling machine used by drilling crew
members to make up and break out tubulars. The device combines a
spinning wrench, torque wrench, and backup wrenches.Beam pump
    
    Surface pump that raises and lowers sucker rods continually, so as to
operate a downhole pump.Bit
    
    The cutting or boring element used in drilling oil and gas wells. The
bit consists of a cutting element and a circulating element. The
cutting element is steel teeth, tungsten carbide buttons, industrial
diamonds, or polycrystalline diamonds (PDCs). These teeth, buttons, or
diamonds penetrate and gouge or scrape the formation to remove it. The
circulating element permits the passage of drilling fluid and utilizes
the hydraulic force of the fluid stream to improve drilling rates. In
rotary drilling, several drill collars are joined to the bottom end of
the drill pipe column, and the bit is attached to the end of the drill
collars. Drill collars provide weight on the bit to keep it in firm
contact with the bottom of the hole. Most bits used in rotary drilling
are roller cone bits, but diamond bits are also used extensively.Blowout
    
    An uncontrolled flow of gas, oil or other well fluids into the
atmosphere. A blowout, or gusher, occurs when formation pressure
exceeds the pressure applied to it by the column of drilling fluid. A
kick warns of an impending blowout.Blowout Preventer (BOP)
    
    Series of valves installed at the wellhead while drilling to prevent
the escape of pressurized fluids.Blowout Preventer (BOP) Stack
    
    The assembly of well-control equipment including preventers, spools,
valves, and nipples connected to the top of the wellhead.Closed Loop Drilling Systems
    
    A solids control system in which the drilling mud is reconditioned and
recycled through the drilling process on the rig itself.Coiled Tubing
    
    A continuous string of flexible steel tubing, often hundreds or
thousands of feet long, that is wound onto a real, often dozens of
feet in diameter. The reel is an integral part of the coiled tubing
unit, which consists of several devices that ensure the tubing can be
safely and efficiently inserted into the well from the surface.
Because tubing can be lowered into a well without having to make up
joints of tubing, running coiled tubing into the well is faster and
less expensive than running conventional tubing. Rapid advances in the
use of coiled tubing make it a popular way in which to run tubing into
and out of a well. Also called reeled tubing.Cuttings
    
    Fragments of rock dislodged by the bit and brought to the surface in
the drilling mud. Washed and dried cutting samples are analyzed by
geologist to obtain information about the formations drilled.
 18




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Directional Well
    
    Well drilled in an orientation other than vertical in order to access
broader portions of the formation.Drawworks
    
    The hoisting mechanism on a drilling rig.
It is essentially a large winch that spools
off or takes in the drilling line and thus
raises or lowers the drill stem and bit.Drill Pipe Elevator (Elevator)
    
    On conventional rotary rigs and top-drive
rigs, hinged steel devices with manual
operating handles that crew members latch
onto a tool joint (or a sub). Since the
elevators are directly connected to the
traveling block, or to the integrated
traveling block in the top drive, when the
driller raises or lowers the block or the
top-drive unit, the drill pipe is also
raised or lowered.Drilling jars
    
    A percussion tool operated manually or
hydraulically to deliver a heavy downward
blow to free a stuck drill stem.Drilling mud
    
    A specially compounded liquid circulated
through the wellbore during rotary drilling
operations.Drilling riser
    
    A conduit used in offshore drilling through
which the drill bit and other tools are
passed from the rig on the waters surface
to the sea floor.Drill stem
    
    All members in the assembly used for rotary
drilling from the swivel to the bit,
including the Kelly, the drill pipe and
tool joints, the drill collars, the
stabilizers, and various specialty items.Formation
    
    A bed or deposit composed throughout of
substantially the same kind of rock; often
a lithologic unit. Each formation is given
a name, frequently as a result of the study
of the formation outcrop at the surface and
sometimes based on fossils found in the
formation.Hardbanding
    
    A special wear-resistant material often
applied to tool joints to prevent abrasive
wear to the area when the pipe is being
rotated downhole.Iron roughneck
    
    A floor-mounted combination of a spinning
wrench and a torque wrench. The Iron
Roughneck moves into position hydraulically
and eliminates the manual handling involved
with suspended individual tools.Jack-up rig
    
    A mobile bottom-supported offshore drilling
structure with columnar or open-truss legs
that support the deck and hull. When
positioned over the drilling site, the
bottoms of the legs penetrate the seafloor.Jar
    
    A mechanical device placed near the top of
the drill stem which allows the driller to
strike a very heavy blow upward or downward
on stuck pipe.Joint
    
    1) In drilling, a single length (from 16
feet to 45 feet, or 5 meters to 14.5
meters, depending on its range length) of
drill pipe, drill collar, casing or tubing
that has threaded connections at both ends.
Several joints screwed together constitute
a stand of pipe. 2) In pipelining, a
single length (usually 40 feet-12 meters)
of pipe. 3) In sucker rod pumping, a
single length of sucker rod that has
threaded connections at both ends.Kelly
    
    The heavy steel tubular device, four- or
six-sided, suspended from the swivel
through the rotary table and connected to
the top joint of drill pipe to turn the
drill stem as the rotary table returns. It
has a bored passageway that permits fluid
to be circulated into the drill stem and up
the annulus, or vice versa. Kellys
manufactured to API specifications are
available only in four- or six-sided
versions, are either 40 or 54 feet (12 to
16 meters) long, and have diameters as
small as 21/2 inches (6
centimeters) and as large as 6 inches (15
centimeters).Kelly bushing
    
    A special device placed around the kelly
that mates with the kelly flats and fits
into the master bushing of the rotary
table. The kelly bushing is designed so
that the kelly is free to move up or down
through it. The bottom of the bushing may
be shaped to fit the opening in
 19




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the master
bushing or it may have pins that fit into
the master bushing. In either case, when
the kelly bushing is inserted into the
master bushing and the master bushing is
turned, the kelly bushing also turns. Since
the kelly bushing fits onto the kelly, the
kelly turns, and since the kelly is made up
to the drill stem, the drill stem turns.
Also called the drive bushing.Kelly spinner
    
    A pneumatically operated device mounted on
top of the kelly that, when actuated,
causes the kelly to turn or spin. It is
useful when the kelly or a joint of pipe
attached to it must be spun up, that is,
rotated rapidly for being made up.Kick
    
    An entry of water, gas, oil, or other
formation fluid into the wellbore during
drilling. It occurs because the pressure
exerted by the column of drilling fluid is
not great enough to overcome the pressure
exerted by the fluids in the formation
drilled. If prompt action is not taken to
control the kick, or kill the well, a
blowout may occur.Making-up
    
    1. To assemble and join parts to form a complete unit (e.g., to
make up a string of drill pipe). 2. To screw together two
threaded pieces. Compare break out. 3. To mix or prepare (e.g.,
to make up a tank of mud). 4. To compensate for (e.g., to make
up for lost time).Manual tongs (Tongs)
    
    The large wrenches used for turning when making up or breaking out drill pipe,
casing, tubing, or other pipe; variously called casing tongs, pipe tongs, and so
forth, according to the specific use. Power tongs or power wrenches are pneumatically
or hydraulically operated tools that serve to spin the pipe up tight and, in some
instances to apply the final makeup torque.Master bushing
    
    A device that fits into the rotary table to accommodate the slips and drive the kelly
bushing so that the rotating motion of the rotary table can be transmitted to the
kelly. Also called rotary bushing.Motion compensation 
equipment
    
    Any device (such as a bumper sub or heave compensator) that serves to maintain
constant weight on the bit in spite of vertical motion of a floating offshore
drilling rig.Mud pump
    
    A large, high-pressure reciprocating pump used to circulate the mud on a drilling rig.Plug gauging
    
    The mechanical process of ensuring that the inside threads on a piece of drill pipe
comply with API standards.Pressure control equipment
    
    1. The act of preventing the entry of formation fluids into a wellbore. 2. The act
of controlling high pressures encountered in a well.Pressure pumping
    
    Pumping fluids into a well by applying pressure at the surface.Ram blowout preventer
    
    A blowout preventer that uses rams to seal off pressure on a hole that is with or
without pipe. Also called a ram preventer.Ring gauging
    
    The mechanical process of ensuring that the outside threads on a piece of drill pipe
comply with API standards.Riser
    
    A pipe through which liquids travel upward.Riser pipe
    
    The pipe and special fitting used on floating offshore drilling rigs to established a
seal between the top of the wellbore, which is on the ocean floor, and the drilling
equipment located above the surface of the water. A riser pipe serves as a guide for
the drill stem from the drilling vessel to the wellhead and as a conductor or
drilling fluid from the well to the vessel. The riser consists of several sections of
pipe and includes special devices to compensate for any movement of the drilling rig
caused by waves. Also called marine riser pipe, riser joint.
 20




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Rotary table
    
    The principal piece of equipment in the rotary table assembly; a turning device used
to impart rotational power to the drill stem while permitting vertical movement of
the pipe for rotary drilling. The master bushing fits inside the opening of the
rotary table; it turns the kelly bushing, which permits vertical movement of the
kelly while the stem is turning.Rotating blowout
preventer
 (Rotating Head)
    
    A sealing device used to close off the annular space around the kelly in drilling
with pressure at the surface, usually installed above the main blowout preventers. A
rotating head makes it possible to drill ahead even when there is pressure in the
annulus that the weight of the drilling fluid is not overcoming; the head prevents
the well from blowing out. It is used mainly in the drilling of formations that have
low permeability. The rate of penetration through such formations is usually rapid.Safety clamps
    
    A clamp placed very tightly around a drill collar that is suspended in the rotary
table by drill collar slips. Should the slips fail, the clamp is too large to go
through the opening in the rotary table and therefore prevents the drill collar
string from falling into the hole. Also called drill collar clamp.Shaker
    
    See Shale ShakerShale shaker
    
    A piece of drilling rig equipment that uses a vibrating screen to remove cuttings
from the circulating fluid in rotary drilling operations. The size of the openings in
the screen should be selected carefully to be the smallest size possible to allow 100
per cent flow of the fluid. Also called a shaker.Slim-hole completions
(Slim-hole Drilling)
    
    Drilling in which the size of the hole is smaller than the conventional hole diameter
for a given depth. This decrease in hole size enables the operator to run smaller
casing, thereby lessening the cost of completion.Slips
    
    Wedge-shaped pieces of metal with serrated inserts (dies) or other gripping
elements, such as serrated buttons, that suspend the drill pipe or drill
collars in the master bushing of the rotary table when it is necessary to
disconnect the drill stem from the kelly or from the top-drive units drive
shaft. Rotary slips fit around the drill pipe and wedge against the master
bushing to support the pipe. Drill collar slips fit around a drill collar and
wedge against the master bushing to support the drill collar. Power slips are
pneumatically or hydraulically actuated devices that allow the crew to dispense
with the manual handling of slips when making a connection.Solids
    
    See CuttingsSpinning wrench
    
    Air-powered or hydraulically powered wrench used to spin drill pipe in making
or breaking connections.Spinning-in
    
    The rapid turning of the drill stem when one length of pipe is being joined to
another. Spinning-out refers to separating the pipe.Stand
    
    The connected joints of pipe racked in the derrick or mast when making a trip.
On a rig, the usual stand is about 90 feet (about 27 meters) long (three
lengths of drill pipe screwed together), or a treble.String 

Sucker rod 

Tensioner
    
    The entire length of casing, tubing, sucker rods, or drill pipe run into a hole.

A special steel pumping rod. Several rods screwed together make up the link
between the pumping unit on the surface and the pump at the bottom of the well.
  
A system of devices installed on a floating offshore drilling rig to maintain a
constant tension on the riser pipe, despite any vertical motion made by the
rig. The guidelines must also be tensioned, so a separate tensioner system is
provided for them.Thermal desorption
    
    The process of removing drilling mud from cuttings by applying heat directly to
drill cuttings.
 21




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Top drive
    
    A device similar to a power swivel that is used in place of the rotary table to
turn the drill stem. It also includes power tongs. Modern top drives combine
the elevator, the tongs, the swivel, and the hook. Even though the rotary table
assembly is not used to rotate the drill stem and bit, the top-drive system
retains it to provide a place to set the slips to suspend the drill stem when
drilling stops.Torque wrench
    
    Spinning wrench with a gauge for measuring the amount of torque being applied
to the connection.Trouble cost
    
    Costs incurred as a result or unanticipated complications while drilling a
well. These cost are often referred to as contingency costs during the planning
phase of a well.Well completion
    
    1. The activities and methods of preparing a well for the production of oil
and gas or for other purposes, such as injection; the method by which one or
more flow paths for hydrocarbons are established between the reservoir and the
surface. 2. The system of tubulars, packers, and other tools installed beneath
the wellhead in the production casing; that is, the tool assembly that provides
the hydrocarbon flow path or paths.Well stimulation
    
    Any of several operations used to increase the production of a well, such as
acidizing or fracturing.Well workover
    
    The performance of one or more of a variety of remedial operations on a
producing oilwell to try to increase production oilwell to try to increase
production. Examples of workover jobs are deepening, plugging back, pulling and
resetting liners, and squeeze cementing.Wellbore
    
    A borehole; the hole drilled by the bit. A wellbore may have casing in it or it
may be open (uncased); or part of it may be cased, and part of it may be open.
Also called a borehole or hole.Wireline
    
    A slender, rodlike or threadlike piece of metal usually small in diameter, that
is used for lowering special tools (such as logging sondes, perforating guns,
and so forth) into the well. Also called slick line.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  22




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ITEM 2. PROPERTIES
  Building
    
    Property
    
    

    
    LeaseSize (Square
    
    Size
    
    Owned/

    
    TerminationLocation
    
    Description
    
    Feet)
    
    (Acres)
    
    Leased

    
    DateRig Technology:Lanzhou, China
    
    Mfg. Plant (Drilling Equipment) &
    
    1,370,957
    
    38
    
    Building

    
    10/20/20Administrative Offices
    
    
    
    
    
    Owned
*Houston, Texas
    
    West Little York Manufacturing
    
    619,000
    
    34
    
    OwnedFacility, Repair, Service,Administrative & Sales OfficesPampa, Texas
    
    Mfg. Plant
    
    548,000
    
    400
    
    OwnedHouston, Texas
    
    Mfg. Plant (Drilling Machinery and Equip)
    
    417,000
    
    
    
    Leased

    
    VariousCarquefou, France
    
    Mfg. Plant (Offshore Equipment)
    
    213,000
    
    
    
    OwnedHouston, Texas
    
    Mfg. Plant (Braking Systems)
    
    200,000
    
    24
    
    OwnedHouston, Texas
    
    Mfg. Plant (Electrical Power Systems)
    
    184,000
    
    11
    
    OwnedHouston, Texas
    
    Mfg. Plant (Drilling Rigs and Components)
    
    178,000
    
    
    
    OwnedFort Worth, Texas
    
    Coiled Tubing Manufacturing Facility,
    
    167,999
    
    31
    
    Leased

    
    01/31/14Warehouse, Administrative & SalesOfficesKristiansand, Norway
    
    Mfg. (Drilling  and Offshore Equipment)
    
    157,000
    
    
    
    OwnedOrange, California
    
    Manufacturing & Office Facility - 759
    
    126,000
    
    9
    
    Building

    
    04/30/12N. Eckhoff
    
    
    
    
    
    Owned
*Aberdeen, Scotland
    
    Pressure Control Manufacturing,
    
    107,974
    
    8
    
    Leased

    
    08/31/19Administrative & SalesAnderson, Texas
    
    Rolligon Mfg. Facility,
    
    105,000
    
    35
    
    Leased

    
    11/06/11Administrative & Sales OfficesConroe, Texas
    
    Mfg., Administration & Sales
    
    86,000
    
    
    
    Leased

    
    12/31/21Molde, Norway
    
    Mfg. (Marine Handling Equipment)
    
    78,000
    
    
    
    OwnedMexicali, Mexico
    
    Mfg. Plant
    
    76,402
    
    
    
    Leased

    
    04/01/14Calgary, Alberta, Canada
    
    Mfg. (Coiled Tubing  and Wireline Units)
    
    76,000
    
    
    
    OwnedEtten-Leur,
Netherlands
    
    Mfg. Plant/Sales (Drilling Equipment)
    
    75,000
    
    6
    
    OwnedDuncan, Oklahoma
    
    Nitrogen Units Manufacturing
    
    67,600
    
    13
    
    OwnedFacility, Warehouse & OfficesHouston, Texas
    
    Brittmore Shaffer Repair & Service
    
    66,500
    
    6
    
    Leased

    
    11/01/11FacilityAberdeen, Scotland
    
    Systems & Shaffer Sales, Service &
    
    63,000
    
    6
    
    OwnedDistribution FacilityEdmonton, Alberta,
Canada
    
    Mfg. (Drilling Machinery and Equip.)
    
    61,000
    
    
    
    OwnedNisku, Alberta,
Canada
    
    Mfg. (Drilling Machinery and Equip.)
    
    60,000
    
    
    
    OwnedCalgary, Alberta,
    
    Coiled Tubing Manufacturing Facility,Canada
    
    Administrative & Sales Offices
    
    48,040
    
    3
    
    OwnedStavanger, Norway
    
    Drilling Equipment Work Shop,
    
    41,333
    
    1
    
    Leased

    
    06/01/09Warehouse & Customer Service CenterTulsa, Oklahoma
    
    Pumping Manufacturing Facility,
    
    40,700
    
    4
    
    Leased

    
    12/31/07Warehouse & OfficesTuas, Singapore
    
    Coiled Tubing & Wireline Products
    
    35,300
    
    2
    
    Building

    
    04/15/14Manufacturing & Administrative Facility
    
    
    
    
    
    Owned
    *
 23




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##### Table of Contents



Building
    
    Property
    
    
    
    LeaseSize (Square
    
    Size
    
    Owned/
    
    TerminationLocation
    
    Description
    
    Feet)
    
    (Acres)
    
    Leased
    
    DateSingapore
    
    Systems Offices, Service & Distribution Facility
    
    35,079
    
    1
    
    Building
    
    07/01/40Owned*Orange, California
    
    Administrative Offices743 N. Eckhoff
    
    35,000
    
    2
    
    Leased
    
    04/30/12Great Yarmouth, 
England
    
    Coiled Tubing & Nitrogen Units 
Manufacturing, Administrative & Sales Offices
    
    29,000
    
    2
    
    Leased
    
    08/22/11Petroleum Services
& Supplies:Al Khobar, Saudi
    
    Reclamation, Inspection Facility &Arabia
    
    Offices
    
    340,203
    
    8
    
    Leased
    
    11/30/10Houston, Texas
    
    Sheldon Road: Inspection Facility
    
    335,993
    
    192
    
    OwnedHouston, Texas
    
    Holmes Road Complex: Manufacturing,
    
    300,000
    
    50
    
    OwnedWarehouse, Corporate Offices, CoatingManufacturing Plant & PipelineServicesLittle Rock, Arkansas
    
    Fiberglass Tubular Manufacturing 
Plant, R&D Lab, Administrative Offices
    
    262,784
    
    44
    
    Leased
    
    01/01/07Cedar Park, Texas
    
    Instrumentation Manufacturing
    
    260,000
    
    40
    
    OwnedFacility, Administrative & SalesOfficesManchester, England
    
    Mfg. (Pumps and expendable parts)
    
    244,000
    
    
    
    OwnedYopal, Colombia
    
    Inspection  and Solids Control Warehouse &
    
    215,280
    
    5
    
    OwnedStorageSand Springs,
Oklahoma
    
    Fiberglass Tubular Manufacturing Plant
    
    189,173
    
    7
    
    OwnedAmelia, Louisiana
    
    Coating Plant & Inspection Facility
    
    179,574
    
    84
    
    Leased
    
    12/31/16Houston, Texas
    
    QT Coiled Tubing Manufacturing
    
    172,472
    
    27
    
    OwnedFacility, Warehouse and OfficesHouston, Texas
    
    Coating  Plant & Inspection Facility
    
    168,683
    
    49
    
    OwnedTulsa, Oklahoma
    
    Mfg. (Pumps and expendable parts)
    
    165,000
    
    
    
    OwnedEdmonton, Alberta,
Canada
    
    Mfg. (Downhole Tools)
    
    162,000
    
    
    
    OwnedConroe, Texas
    
    Solids Control & Pressure Control
    
    160,000
    
    30
    
    OwnedManufacturing Facility, Warehouse,Administrative & Sales Offices &Engineering LabsWichita, Kansas
    
    Fiberglass Tubular Manufacturing Plant
    
    129,746
    
    15
    
    OwnedNisku, Alberta,
    
    Trucking, Rod Plant, Inspection & Storage
    
    121,545
    
    155
    
    OwnedCanada
    
    FacilityMcAlester, Oklahoma
    
    Mfg. (Pumps)
    
    120,000
    
    
    
    OwnedNisku, Alberta,
    
    Coating Plant, Inspection & Drill Pipe
    
    114,000
    
    47
    
    OwnedCanada
    
    FacilityNisku, Alberta,
Canada
    
    Mfg. Downhole Tools
    
    105,000
    
    
    
    OwnedAmelia, Louisiana
    
    Coating Plant, Inspection & Storage
    
    102,000
    
    90
    
    Building
    
    05/31/11Facilities
    
    
    
    
    
    Owned*Casper, Wyoming
    
    Inspection Facility
    
    91,720
    
    29
    
    OwnedMidland, Texas
    
    Coating Plant
    
    87,000
    
    25
    
    OwnedHouston, Texas
    
    Mfg. (Downhole Tools)
    
    86,175
    
    
    
    Leased
    
    12/31/18Houston, Texas
    
    Highway 90: Coating Plant
    
    83,000
    
    43
    
    Leased
    
    07/31/11San Antonio, Texas
    
    Fiberglass Tubular Manufacturing Plant,
    
    82,700
    
    20
    
    OwnedR & D Lab, Administrative OfficesBig Spring, Texas
    
    Fiberglass Tubular Manufacturing
    
    78,600
    
    12
    
    OwnedPlant & Administrative OfficesAberdeen, Scotland
    
    Solids Control Manufacturing Facility
    
    77,400
    
    6
    
    OwnedAssembly, Administrative & SalesHouston, Texas
    
    Engineering/Technical Research Center
    
    76,000
    
    6
    
    OwnedBogota, Colombia
    
    Solids Control & Inspection Yard & Warehouse
    
    69,966
    
    
    
    Leased
    
    08/01/07
 24




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##### Table of Contents



Building
    
    Property
    
    
    
    LeaseSize (Square
    
    Size
    
    Owned/
    
    TerminationLocation
    
    Description
    
    Feet)
    
    (Acres)
    
    Leased
    
    DateNavasota, Texas
    
    Coating Plant, Inspection Pipe Storage
    
    65,000
    
    
    
    Building
    
    06/30/13Owned*Marble Falls, Texas
    
    Mfg. (Expendable parts)
    
    65,000
    
    
    
    OwnedStafford, Texas
    
    Mfg. and Service of Downhole tools
    
    65,000
    
    
    
    OwnedLeduc, Alberta, Canada
    
    MDT, Shaffer,  Chimo, Alberta Instruments, Varco Services & Warehouse Facility
    

 64,056
    
    5
    
    OwnedSu Zhou, Peoples
Republic of China
    
    Fiberglass Tubular Manufacturing Plant
    
    60,000
    
    4
    
    OwnedLone Star, Texas
    
    Inspection Facility
    
    56,700
    
    80
    
    OwnedNeiva, Columbia
    
    Inspection Yard & Warehouse
    
    54,898
    
    1
    
    Leased
    
    02/01/08Aberdeen, Scotland
    
    Inspection Facility, Coating Plant,
    
    53,425
    
    10
    
    OwnedManufacturing, Administrative & SalesCoevorden, Netherlands
    
    Inspection Reclamation & Repair Facility
    
    53,361
    
    2
    
    Leased
    
    12/04/09Harvey, Louisiana
    
    Coating Plant & Inspection Facility
    
    53,000
    
    7
    
    Owned &
    
    09/30/07LeasedHouston, Texas
    
    Mfg. (Pumps and expendable parts)
    
    51,000
    
    
    
    Leased
    
    12/31/10Tuas, Singapore
    
    Coating Plant & Inspection Facility
    
    50,644
    
    8
    
    Building
    
    06/09/09Owned*Houston, Texas
    
    Warehouse, Distribution and Administration
    
    48,000
    
    
    
    Leased
    
    02/01/11Odessa, Texas
    
    Coating Plant & Inspection Facility
    
    45,332
    
    10
    
    OwnedLittle Rock, Arkansas
    
    Fiberglass Tubular Manufacturing Plant
    
    45,000
    
    
    
    Leased
    
    10/01/09Berlaimont, France
    
    Coating Plant
    
    44,000
    
    16
    
    OwnedCelle, Germany
    
    Inspection Facility, Administrative &
    
    43,560
    
    12
    
    Building
    
    2049Engineering Offices
    
    
    
    
    
    Owned*Casper, Wyoming
    
    Inspection Facility
    
    41,030
    
    40
    
    OwnedEdmond, Oklahoma
    
    Coating Plant
    
    40,000
    
    19
    
    OwnedFarmington, New
Mexico
    
    Inspection Storage Facilities
    
    37,725
    
    50
    
    Leased
    
    03/31/14Odessa, Texas
    
    Inspection Facility
    
    33,910
    
    50
    
    OwnedEdmonton, Alberta,
    
    Sucker Rod Inspection & Oilwell Engine Reclamation
    

    32,550
    
    10
    
    Leased
    
    04/30/13CanadaDistribution:Houston, Texas
    
    Distribution and Warehouse
    
    124,000
    
    
    
    Owned/ Leased
    
    12/31/21Corporate:Houston, Texas
    
    Administration Offices
    
    196,000
    
    Office Building
    
    Leased
    
    12/01/17Houston, Texas
    
    Corporate Administrative Office
    
    115,000
    
    Office  Building
    
    Leased
    
    10/31/15Houston, Texas
    
    Administrative Offices
    
    48,000
    
    Office Building
    
    Leased
    
    10/31/15
 
 *
    
    Building owned but real estate leased.   25




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##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  26




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##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  2006
    
    2005High
    
    Low
    
    High
    
    Low1st Quarter
    
    
    76.54
    
    
    
    57.00
    
    
    
    50.21
    
    
    
    33.232nd Quarter
    
    
    71.85
    
    
    
    56.50
    
    
    
    48.52
    
    
    
    39.743rd Quarter
    
    
    68.08
    
    
    
    56.33
    
    
    
    67.45
    
    
    
    46.704th Quarter
    
    
    68.12
    
    
    
    52.08
    
    
    
    66.52
    
    
    
    55.18
   PERFORMANCE GRAPH
  
 Cumulative Total Return12/01
    
    
    12/02
    
    
    12/03
    
    
    12/04
    
    
    12/05
    
    
    12/06National Oilwell Varco
    
    
    
    100.00
    
    
    
    
    105.97
    
    
    
    
    108.49
    
    
    
    
    171.23
    
    
    
    
    304.22
    
    
    
    
    296.85S&P 500
    
    
    
    100.00
    
    
    
    
    77.90
    
    
    
    
    100.24
    
    
    
    
    111.15
    
    
    
    
    116.61
    
    
    
    
    135.03S&P Oil & Gas Equipment & Services
    
    
    
    100.00
    
    
    
    
    88.51
    
    
    
    
    110.41
    
    
    
    
    145.60
    
    
    
    
    216.30
    
    
    
    
    249.92
  
 ITEM 6. SELECTED FINANCIAL DATA
 Year Ended December 31,2006
    
    

2005 (1)
    
    
    2004
    
    
    2003
    
    

2002 (2)(dollars in millions, except per share data)Operating Data:Revenue
    
    $
    7,025.8
    
    
    $
    4,644.5
    
    
    $
    2,318.1
    
    
    $
    2,004.9
    
    
    $
    1,521.9Operating profit
    
    
    1,111.1
    
    
    
    476.8
    
    
    
    176.0
    
    
    
    164.1
    
    
    
    127.7Income before taxes
    
    
    1,049.2
    
    
    
    430.0
    
    
    
    138.9
    
    
    
    121.8
    
    
    
    106.7Net income
    
    $
    684.0
    
    
    $
    286.9
    
    
    $
    115.2
    
    
    $
    79.7
    
    
    $
    67.1Net income per shareBasic
    
    $
    3.90
    
    
    $
    1.83
    
    
    $
    1.34
    
    
    $
    0.94
    
    
    $
    0.83Diluted
    
    $
    3.87
    
    
    $
    1.81
    
    
    $
    1.33
    
    
    $
    0.94
    
    
    $
    0.82Other Data:Depreciation and amortization
    
    $
    160.6
    
    
    $
    114.6
    
    
    $
    44.0
    
    
    $
    39.2
    
    
    $
    25.0Capital expenditures
    
    $
    200.4
    
    
    $
    105.0
    
    
    $
    39.0
    
    
    $
    32.4
    
    
    $
    24.8Balance Sheet Data:Working capital
    
    $
    2,300.4
    
    
    $
    1,811.0
    
    
    $
    711.0
    
    
    $
    763.0
    
    
    $
    734.8Total assets
    
    
    9,019.3
    
    
    
    6,678.5
    
    
    
    2,576.5
    
    
    
    2,213.1
    
    
    
    1,942.5Long-term debt, less current maturities
    
    
    834.7
    
    
    
    835.6
    
    
    
    350.0
    
    
    
    594.0
    
    
    
    594.6Stockholders equity
    
    
    5,023.5
    
    
    
    4,194.2
    
    
    
    1,270.2
    
    
    
    1,059.2
    
    
    
    899.3
 
 (1)
    
    Financial results of Varco International, Inc. (Varco) have been included in our consolidated
financial statements beginning March 11, 2005, the date the Varco merger was completed and Varco
common shares were exchanged for our common shares. Financial information for prior periods and
dates may not be comparable with 2005 due to the impact of this business combination on our
financial position and results of operation. See Note 3 of the Notes to the Consolidated Financial
Statements for a description of the Varco merger and related adjusted financial information.
Results for the year ended December 31, 2005 include integration costs associated with the Varco
merger of $31.7 million and stock-based compensation costs of $15.6 million related to the
amortization expense of options assumed in the Varco merger.(2)
    
    In December 2002, we acquired Hydralift ASA, a Norwegian based company, for an
aggregate purchase price of approximately $300 million. The results of Hydralifts operations have
been included in our income statements since the acquisition date. 27




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General Overview
   Operating Environment Overview
  %
    
    
    %2006 vs.
    
    
    2006 vs.2006*
    
    
    2005*
    
    
    2004*
    
    
    2005
    
    
    2004Active Drilling Rigs:U.S.
    
    
    1,648
    
    
    
    1,381
    
    
    
    1,190
    
    
    
    19.3
    %
    
    
    38.5
    %Canada
    
    
    470
    
    
    
    458
    
    
    
    369
    
    
    
    2.6
    %
    
    
    27.4
    %International
    
    
    925
    
    
    
    908
    
    
    
    836
    
    
    
    1.9
    %
    
    
    10.6
    %Worldwide
    
    
    3,043
    
    
    
    2,747
    
    
    
    2,395
    
    
    
    10.8
    %
    
    
    27.1
    %Active Workover Rigs:U.S.
    
    
    1,572
    
    
    
    1,354
    
    
    
    1,236
    
    
    
    16.1
    %
    
    
    27.2
    %Canada
    
    
    626
    
    
    
    654
    
    
    
    615
    
    
    
    (4.3
    %)
    
    
    1.8
    %North America
    
    
    2,198
    
    
    
    2,008
    
    
    
    1,851
    
    
    
    9.5
    %
    
    
    18.7
    %West Texas Intermediate
Crude Prices (per barrel)
    
    $
    66.00
    
    
    $
    56.65
    
    
    $
    41.44
    
    
    
    16.5
    %
    
    
    59.3
    %Natural Gas Prices ($/mmbtu)
    
    $
    6.74
    
    
    $
    8.83
    
    
    $
    5.88
    
    
    
    (23.7
    %)
    
    
    14.6
    %
 
 *
    
    Averages for the years indicated.
See sources below.  28




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www.bakerhughes.com www.eia.doe.gov
   Executive Summary
   29




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Oil & Gas Equipment and Services Market
          30




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Segment Performance
      31




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Outlook
  32




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33




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Results of Operations
 Years Ended December 31, 2006 and December 31, 2005
  Years Ended December 31,
    
    
    Variance2006
    
    
    2005
    
    
    $
    
    
    %Revenue:Rig Technology
    
    $
    3,584.9
    
    
    $
    2,216.8
    
    
    $
    1,368.1
    
    
    
    61.7
    %Petroleum Services & Supplies
    
    
    2,425.0
    
    
    
    1,645.8
    
    
    
    779.2
    
    
    
    47.3
    %Distribution Services
    
    
    1,369.6
    
    
    
    1,074.5
    
    
    
    295.1
    
    
    
    27.5
    %Eliminations
    
    
    (353.7
    )
    
    
    (292.6
    )
    
    
    (61.1
    )
    
    
    20.9
    %Total Revenue
    
    $
    7,025.8
    
    
    $
    4,644.5
    
    
    $
    2,381.3
    
    
    
    51.3
    %Operating Profit:Rig Technology
    
    $
    621.4
    
    
    $
    247.7
    
    
    $
    373.7
    
    
    
    150.9
    %Petroleum Services & Supplies
    
    
    556.4
    
    
    
    300.1
    
    
    
    256.3
    
    
    
    85.4
    %Distribution Services
    
    
    96.1
    
    
    
    46.6
    
    
    
    49.5
    
    
    
    106.2
    %Unallocated expenses and eliminations
    
    
    (123.7
    )
    
    
    (70.3
    )
    
    
    (53.4
    )
    
    
    76.0
    %Integration costs and stock-based
compensation
    
    
    (39.1
    )
    
    
    (47.3
    )
    
    
    8.2
    
    
    
    (17.3
    %)Total Operating Profit
    
    $
    1,111.1
    
    
    $
    476.8
    
    
    $
    634.3
    
    
    
    133.0
    %Operating Profit %:Rig Technology
    
    
    17.3
    %
    
    
    11.2
    %Petroleum Services & Supplies
    
    
    22.9
    %
    
    
    18.2
    %Distribution Services
    
    
    7.0
    %
    
    
    4.3
    %Total Operating Profit %
    
    
    15.8
    %
    
    
    10.3
    %
 Rig Technology
    Petroleum Services & Supplies
  34




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Distribution Services
    Unallocated expenses and eliminations
  Integration costs and stock-based compensation
  Interest and financial costs
  Other income (expense), net
  Provision for income taxes
  35




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##### Table of Contents



Years Ended December 31, 2005 and December 31, 2004
  Years Ended December 31,
    
    
    Variance2005
    
    
    2004
    
    
    $
    
    
    %Revenue:Rig Technology
    
    $
    2,216.8
    
    
    $
    1,085.5
    
    
    $
    1,131.3
    
    
    
    104.2
    %Petroleum Services & Supplies
    
    
    1,645.8
    
    
    
    505.5
    
    
    
    1,140.3
    
    
    
    225.6
    %Distribution Services
    
    
    1,074.5
    
    
    
    905.1
    
    
    
    169.4
    
    
    
    18.7
    %Eliminations
    
    
    (292.6
    )
    
    
    (178.0
    )
    
    
    (114.6
    )
    
    
    64.4
    %Total Revenue
    
    $
    4,644.5
    
    
    $
    2,318.1
    
    
    $
    2,326.4
    
    
    
    100.4
    %Operating Profit:Rig Technology
    
    $
    247.7
    
    
    $
    102.4
    
    
    $
    145.3
    
    
    
    141.9
    %Petroleum Services & Supplies
    
    
    300.1
    
    
    
    62.7
    
    
    
    237.4
    
    
    
    378.6
    %Distribution Services
    
    
    46.6
    
    
    
    29.6
    
    
    
    17.0
    
    
    
    57.4
    %Unallocated expenses and eliminations
    
    
    (70.3
    )
    
    
    (18.7
    )
    
    
    (51.6
    )
    
    
    275.9
    %Integration costs and stock-based
compensation
    
    
    (47.3
    )
    
    
    
    
    
    
    (47.3
    )
    
    
    Total Operating Profit
    
    $
    476.8
    
    
    $
    176.0
    
    
    $
    300.8
    
    
    
    170.9
    %Operating Profit %:Rig Technology
    
    
    11.2
    %
    
    
    9.4
    %Petroleum Services & Supplies
    
    
    18.2
    %
    
    
    12.4
    %Distribution Services
    
    
    4.3
    %
    
    
    3.3
    %Total Operating Profit %
    
    
    10.3
    %
    
    
    7.6
    %
 Operations
  36




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Unallocated Expenses and Eliminations
  Stock-based compensation
   Integration costs
  Interest and financial costs
  Provision for income taxes
  Liquidity and Capital Resources
    37




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##### Table of Contents



Payment Due by PeriodLess than 1
    
    
    
    
    
    
    
    
    
    
    After 5Total
    
    
    Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    YearsTotal debt
    
    $
    840.3
    
    
    $
    5.6
    
    
    $
    126.0
    
    
    $
    357.8
    
    
    $
    350.9Operating leases
    
    
    231.8
    
    
    
    57.1
    
    
    
    77.1
    
    
    
    39.3
    
    
    
    58.3Total contractual obligations
    
    $
    1,072.1
    
    
    $
    62.7
    
    
    $
    203.1
    
    
    $
    397.1
    
    
    $
    409.2Standby letters of credit
    
    $
    833.6
    
    
    $
    405.9
    
    
    $
    259.9
    
    
    $
    167.6
    
    
    $
    0.2
   Critical Accounting Estimates
  Revenue Recognition under Long-term Construction Contracts
  
    
    the contracts include custom designs for customer specific applications;
    
    the structural design is unique and requires significant engineering efforts; and
 38




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##### Table of Contents




    
    construction projects often have progress payments.
   Allowance for Doubtful Accounts
   Inventory Reserves
   39




---



##### Table of Contents



Impairment of Long-Lived Assets (Excluding Goodwill)
   Goodwill Impairment
   Income Taxes
   40




---



##### Table of Contents



Accounting for
Contingencies
     Recently Issued Accounting Standards
    41




---



##### Table of Contents



ForwardLooking Statements
  42




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Foreign Currency Exchange Rates
      43




---



##### Table of Contents



Hedge Classification
    
    Currency
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    TotalCash FlowUSD
    
    $
    129.0
    
    
    $
    1.1
    
    
    $
    
    
    
    $
    
    
    
    $
    130.1Fair ValueEUR
    
    $
    102.9
    
    
    $
    31.6
    
    
    $
    3.7
    
    
    $
    
    
    
    $
    138.2GBP
    
    
    13.7
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    14.1KRW
    
    
    0.7
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    1.3SGD
    
    
    3.1
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    4.1USD
    
    
    818.1
    
    
    
    220.0
    
    
    
    70.9
    
    
    
    1.4
    
    
    
    1,110.4$
    938.5
    
    
    $
    253.6
    
    
    $
    74.6
    
    
    $
    1.4
    
    
    $
    1,268.1Balance SheetEUR
    
    $
    1.2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1.2SDG
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0USD
    
    
    76.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76.8$
    79.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    79.0Total
    
    
    
    
    
    $
    1,146.5
    
    
    $
    254.7
    
    
    $
    74.6
    
    
    $
    1.4
    
    
    $
    1,477.2
   Interest Rate Risk
   
 ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
  44




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES
       
   
 ITEM 9B. OTHER INFORMATION
  45




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
    Number of securitiesremaining available forNumber of securities to be
    
    
    
    
    
    
    future issuance under equityissued upon exercise of
    
    
    Weighted-average exercise
    
    
    compensation plansoutstanding options, warrants
    
    
    price of outstanding
    
    
    (excluding securitiesand rights
    
    
    options, warrant and rights
    
    
    reflected in column (a)(c))Plan Category
    
    (a)
    
    
    (b)
    
    
    (1)Equity compensation
plans approved by
security holders
    
    
    5,284,883
    
    
    $
    46.56
    
    
    
    5,124,000Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5,284,883
    
    
    $
    46.56
    
    
    
    5,124,000
 
 (1)
    
    Shares could be issued other than upon the exercise of stock options, warrants or rights;
however, none are anticipated during 2007. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  46




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  (1)
    
    Financial Statements
The following financial statements are presented in response to Part II, Item 8:
 PageConsolidated Balance Sheets
    
    
    53Consolidated Statements of Income
    
    
    54Consolidated Statements of Cash Flows
    
    
    55Consolidated Statements of Stockholders Equity and Comprehensive Income
    
    
    56Notes to Consolidated Financial Statements
    
    
    57(2) Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts
    
    
    80
  (3)
    
    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).21.1
    
    Subsidiaries of the Registrant23.1
    
    Consent of Ernst & Young LLP24.1
    
    Power of Attorney (included on signature page hereto).
 47




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##### Table of Contents



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. 48




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SIGNATURES
  NATIONAL OILWELL VARCO, INC.Dated: February 26, 2007
    By:
    /s/ MERRILL A. MILLER, JR.Merrill A. Miller, Jr.Chairman, President and Chief Executive Officer   Signature
    
    Title
    
    Date/s/ MERRILL A. MILLER, JR.

Merrill A. Miller, Jr.
    
    Chairman, President and Chief Executive
Officer
    
    February 26, 2007/s/ CLAY C. WILLIAMS

Clay C. Williams
    
    Senior Vice President and Chief Financial
Officer
    
    February 26, 2007/s/ ROBERT W. BLANCHARD

Robert W. Blanchard
    
    Vice President, Corporate Controller and
Chief Accounting Officer
    
    February 26, 2007/s/ GREG L. ARMSTRONG

Greg L. Armstrong
    
    Director
    
    February 26, 2007/s/ ROBERT E. BEAUCHAMP

Robert E. Beauchamp
    
    Director
    
    February 26, 2007/s/ BEN A. GUILL

Ben A. Guill
    
    Director
    
    February 26, 2007/s/ DAVID D. HARRISON

David D. Harrison
    
    Director
    
    February 26, 2007/s/ ROGER L. JARVIS

Roger L. Jarvis
    
    Director
    
    February 26, 2007/s/ ERIC L. MATTSON

Eric L. Mattson
    
    Director
    
    February 26, 2007/s/ JEFFERY A. SMISEK

Jeffery A. Smisek
    
    Director
    
    February 26, 2007
 49




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    /s/ Merrill A. Miller, Jr.

Merrill A. Miller, Jr.Chairman, President and Chief Executive Officer/s/ Clay C. Williams

Clay C. WilliamsSenior Vice President andChief Financial OfficerHouston, TexasFebruary 26, 2007
 50




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 51




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
        
 52




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##### Table of Contents



NATIONAL OILWELL VARCO, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    957.4
    
    
    $
    209.4Receivables, net
    
    
    1,614.6
    
    
    
    1,139.2Inventories, net
    
    
    1,828.8
    
    
    
    1,198.3Costs in excess of billings
    
    
    308.9
    
    
    
    341.9Deferred income taxes
    
    
    101.6
    
    
    
    58.6Prepaid and other current assets
    
    
    154.3
    
    
    
    50.8Total current assets
    
    
    4,965.6
    
    
    
    2,998.2Property, plant and equipment, net
    
    
    1,022.1
    
    
    
    877.6Deferred income taxes
    
    
    56.1
    
    
    
    52.2Goodwill
    
    
    2,244.7
    
    
    
    2,117.7Intangibles, net
    
    
    705.2
    
    
    
    611.5Other assets
    
    
    25.6
    
    
    
    21.3$
    9,019.3
    
    
    $
    6,678.5LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    505.2
    
    
    $
    568.2Accrued liabilities
    
    
    1,420.2
    
    
    
    432.0Billings in excess of costs
    
    
    564.4
    
    
    
    98.1Current portion of long-term debt and short-term borrowings
    
    
    5.6
    
    
    
    5.7Accrued income taxes
    
    
    169.8
    
    
    
    83.2Total current liabilities
    
    
    2,665.2
    
    
    
    1,187.2Long-term debt
    
    
    834.7
    
    
    
    835.6Deferred income taxes
    
    
    389.0
    
    
    
    373.3Other liabilities
    
    
    71.4
    
    
    
    63.7Total liabilities
    
    
    3,960.3
    
    
    
    2,459.8Commitments and contingenciesMinority interest
    
    
    35.5
    
    
    
    24.5Stockholders equity:Common stock  par value $.01; 175,571,663 and 174,362,488 shares
issued and outstanding at December 31, 2006 and December 31, 2005
    
    
    1.8
    
    
    
    1.7Additional paid-in capital
    
    
    3,461.7
    
    
    
    3,400.9Deferred stock-based compensation
    
    
    
    
    
    
    (16.5
    )Accumulated other comprehensive income (loss)
    
    
    46.1
    
    
    
    (21.8
    )Retained earnings
    
    
    1,513.9
    
    
    
    829.95,023.5
    
    
    
    4,194.2$
    9,019.3
    
    
    $
    6,678.5
  53




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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenue:Sales
    
    $
    5,472.5
    
    
    $
    3,605.5
    
    
    $
    2,137.8Services
    
    
    1,553.3
    
    
    
    1,039.0
    
    
    
    180.3Total
    
    
    7,025.8
    
    
    
    4,644.5
    
    
    
    2,318.1Cost of revenue:Cost of sales
    
    
    4,230.4
    
    
    
    2,905.1
    
    
    
    1,700.6Cost of services
    
    
    1,034.8
    
    
    
    752.2
    
    
    
    113.7Total
    
    
    5,265.2
    
    
    
    3,657.3
    
    
    
    1,814.3Gross profit
    
    
    1,760.6
    
    
    
    987.2
    
    
    
    503.8Selling, general, and administrative
    
    
    641.6
    
    
    
    478.7
    
    
    
    327.8Integration costs
    
    
    7.9
    
    
    
    31.7
    
    
    
    Operating profit
    
    
    1,111.1
    
    
    
    476.8
    
    
    
    176.0Interest and financial costs
    
    
    (48.7
    )
    
    
    (52.9
    )
    
    
    (38.4
    )Interest income
    
    
    18.1
    
    
    
    4.9
    
    
    
    3.5Other income (expense), net
    
    
    (31.3
    )
    
    
    1.2
    
    
    
    (2.2
    )Income before income taxes and minority interest
    
    
    1,049.2
    
    
    
    430.0
    
    
    
    138.9Provision for income taxes
    
    
    355.7
    
    
    
    138.9
    
    
    
    21.6Income before minority interest
    
    
    693.5
    
    
    
    291.1
    
    
    
    117.3Minority interest in income of consolidated
subsidiaries
    
    
    9.5
    
    
    
    4.2
    
    
    
    2.1Net income
    
    $
    684.0
    
    
    $
    286.9
    
    
    $
    115.2Net income per share:Basic
    
    $
    3.90
    
    
    $
    1.83
    
    
    $
    1.34Diluted
    
    $
    3.87
    
    
    $
    1.81
    
    
    $
    1.33Weighted average shares outstanding:Basic
    
    
    175.2
    
    
    
    156.4
    
    
    
    85.8Diluted
    
    
    176.8
    
    
    
    158.3
    
    
    
    86.5
  54




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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash flow from operating activities:Net income
    
    $
    684.0
    
    
    $
    286.9
    
    
    $
    115.2Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    160.6
    
    
    
    114.6
    
    
    
    44.0Tax benefit from exercise of nonqualified stock options
    
    
    
    
    
    
    29.7
    
    
    
    3.4Excess benefit from the exercise of stock options
    
    
    (13.5
    )
    
    
    
    
    
    
    Other
    
    
    58.4
    
    
    
    18.7
    
    
    
    (11.8
    )Changes in assets and liabilities, net of acquisitions:Receivables
    
    
    (442.1
    )
    
    
    (293.9
    )
    
    
    (8.6
    )Inventories
    
    
    (619.9
    )
    
    
    (215.4
    )
    
    
    (105.8
    )Costs in excess of billings
    
    
    33.0
    
    
    
    (131.1
    )
    
    
    (106.4
    )Prepaid and other current assets
    
    
    (101.7
    )
    
    
    (8.6
    )
    
    
    27.4Accounts payable
    
    
    (93.5
    )
    
    
    68.1
    
    
    
    174.3Billings in excess of costs
    
    
    466.4
    
    
    
    94.5
    
    
    
    (17.7
    )Other assets/liabilities, net
    
    
    1,085.0
    
    
    
    114.0
    
    
    
    52.2Net cash provided by operating activities
    
    
    1,216.7
    
    
    
    77.5
    
    
    
    166.2Cash flow from investing activities:Purchases of property, plant and equipment
    
    
    (200.4
    )
    
    
    (105.0
    )
    
    
    (39.0
    )Cash acquired in Varco merger, net
    
    
    
    
    
    
    163.5
    
    
    
    Business acquisitions, net of cash acquired
    
    
    (329.7
    )
    
    
    (16.0
    )
    
    
    (2.8
    )Other
    
    
    
    
    
    
    (4.5
    )
    
    
    35.8Net cash provided (used) by investing activities
    
    
    (530.1
    )
    
    
    38.0
    
    
    
    (6.0
    )Cash flow from financing activities:Borrowing against lines of credit and other debt
    
    
    30.0
    
    
    
    418.8
    
    
    
    521.6Payments against lines of credit and other debt
    
    
    (35.1
    )
    
    
    (571.1
    )
    
    
    (631.5
    )Excess tax benefit from exercise of stock options
    
    
    13.5
    
    
    
    
    
    
    
    Proceeds from stock options exercised
    
    
    32.7
    
    
    
    111.9
    
    
    
    14.6Net cash provided (used) by financing activities
    
    
    41.1
    
    
    
    (40.4
    )
    
    
    (95.3
    )Effect of exchange rate changes on cash
    
    
    20.3
    
    
    
    (8.4
    )
    
    
    3.6Net increase in cash and cash equivalents
    
    
    748.0
    
    
    
    66.7
    
    
    
    68.5Cash and cash equivalents, beginning of period
    
    
    209.4
    
    
    
    142.7
    
    
    
    74.2Cash and cash equivalents, end of period
    
    $
    957.4
    
    
    $
    209.4
    
    
    $
    142.7Supplemental disclosures of cash flow information:Cash payments during the period for:Interest
    
    $
    56.2
    
    
    $
    61.5
    
    
    $
    34.0Income taxes
    
    $
    272.4
    
    
    $
    88.3
    
    
    $
    21.4
  55




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NATIONAL OILWELL VARCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(In millions)
 Unearned
    
    
    Accumulated OtherShares
    
    
    
    
    
    
    Additional Paid in
    
    
    Stock-Based
    
    
    ComprehensiveOutstanding
    
    
    Common Stock
    
    
    Capital
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Retained Earnings
    
    
    TotalBalance at December 31, 2003
    
    
    85.1
    
    
    $
    0.9
    
    
    $
    674.9
    
    
    $
    
    
    
    $
    (44.4
    )
    
    $
    427.8
    
    
    $
    1,059.2Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115.2
    
    
    
    115.2Other comprehensive incomeCurrency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71.3
    
    
    
    
    
    
    
    71.3Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    1.1Minimum liability of defined benefit plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.4
    
    
    
    
    
    
    
    5.4Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193.0Stock options exercised
    
    
    0.9
    
    
    
    
    
    
    
    14.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.6Tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    3.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.4Balance at December 31, 2004
    
    
    86.0
    
    
    $
    0.9
    
    
    $
    692.9
    
    
    $
    
    
    
    $
    33.4
    
    
    $
    543.0
    
    
    $
    1,270.2Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    286.9
    
    
    
    286.9Other comprehensive incomeCurrency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50.3
    )
    
    
    
    
    
    
    (50.3
    )Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.5
    )
    
    
    
    
    
    
    (8.5
    )Minimum liability of defined benefit plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.6
    
    
    
    
    
    
    
    3.6Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    231.7Stock issued and stock options assumed for
acquisition
    
    
    84.0
    
    
    
    0.8
    
    
    
    2,566.5
    
    
    
    (32.1
    )
    
    
    
    
    
    
    
    
    
    
    2,535.2Amortization of unearned stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15.6
    
    
    
    
    
    
    
    
    
    
    
    15.6Common stock issued
    
    
    4.4
    
    
    
    
    
    
    
    111.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111.8Tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    29.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29.7Balance at December 31, 2005
    
    
    174.4
    
    
    $
    1.7
    
    
    $
    3,400.9
    
    
    $
    (16.5
    )
    
    $
    (21.8
    )
    
    $
    829.9
    
    
    $
    4,194.2Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    684.0
    
    
    
    684.0Other comprehensive incomeCurrency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66.8
    
    
    
    
    
    
    
    66.8Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.0
    
    
    
    
    
    
    
    8.0Minimum liability of defined benefit plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.6
    )
    
    
    
    
    
    
    (6.6
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752.2Adoption of FAS158, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.3
    )Adoption of FAS123(R)
    
    
    
    
    
    
    
    
    
    
    (16.5
    )
    
    
    16.5
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    31.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31.2Common stock issued
    
    
    1.2
    
    
    
    0.1
    
    
    
    32.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32.7Tax benefit of options exercised
    
    
    
    
    
    
    
    
    
    
    13.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.5Balance at December 31, 2006
    
    
    175.6
    
    
    $
    1.8
    
    
    $
    3,461.7
    
    
    $
    
    
    
    $
    46.1
    
    
    $
    1,513.9
    
    
    $
    5,023.5
  56




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##### Table of Contents



NATIONAL OILWELL VARCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Basis of Presentation
 Nature of Business
  Basis of Consolidation
  2. Summary of Significant Accounting Policies
 Fair Value of Financial Instruments
  Derivative Financial Instruments
    57




---



##### Table of Contents



Inventories
  Property, Plant and Equipment
  Long-lived Assets
  Intangible Assets
  58




---



##### Table of Contents



PetroleumRig
    
    
    Services &
    
    
    Distribution
    
    
    Corporate /Technology
    
    
    Supplies
    
    
    Services
    
    
    Eliminations
    
    
    TotalBalance December 31, 2004
    
    $
    424.4
    
    
    $
    173.3
    
    
    $
    35.1
    
    
    $
    6.2
    
    
    $
    639.0Purchase price and other adjustments
    
    
    (6.4
    )
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    (6.8
    )Goodwill acquired during period
    
    
    719.8
    
    
    
    786.5
    
    
    
    
    
    
    
    
    
    
    
    1,506.3Translation adjustments
    
    
    (20.6
    )
    
    
    (0.6
    )
    
    
    0.3
    
    
    
    0.1
    
    
    
    (20.8
    )Balance December 31, 2005
    
    
    1,117.2
    
    
    
    959.2
    
    
    
    35.0
    
    
    
    6.3
    
    
    
    2,117.7Purchase price and other adjustments
    
    
    (14.3
    )
    
    
    (6.9
    )
    
    
    
    
    
    
    
    
    
    
    (21.2
    )Goodwill acquired during period
    
    
    37.8
    
    
    
    79.0
    
    
    
    
    
    
    
    
    
    
    
    116.8Translation adjustments
    
    
    27.6
    
    
    
    3.6
    
    
    
    0.2
    
    
    
    
    
    
    
    31.4Balance December 31, 2006
    
    $
    1,168.3
    
    
    $
    1,034.9
    
    
    $
    35.2
    
    
    $
    6.3
    
    
    $
    2,244.7
    PetroleumRig
    
    
    Services &
    
    
    Distribution
    
    
    Corporate /Technology
    
    
    Supplies
    
    
    Services
    
    
    Eliminations
    
    
    TotalBalance December 31, 2004
    
    $
    81.1
    
    
    $
    7.4
    
    
    $
    2.5
    
    
    $
    
    
    
    $
    91.0Additions to intangible assets
    
    
    217.4
    
    
    
    341.9
    
    
    
    
    
    
    
    
    
    
    
    559.3Amortization
    
    
    (12.7
    )
    
    
    (18.5
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (31.6
    )Translation
    
    
    (7.3
    )
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    (7.2
    )Balance December 31, 2005
    
    
    278.5
    
    
    
    330.8
    
    
    
    2.2
    
    
    
    
    
    
    
    611.5Additions to intangible assets
    
    
    0.5
    
    
    
    130.0
    
    
    
    
    
    
    
    
    
    
    
    130.5Amortization
    
    
    (18.0
    )
    
    
    (22.7
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    (41.0
    )Translation
    
    
    3.2
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    4.2Balance December 31, 2006
    
    $
    264.2
    
    
    $
    439.1
    
    
    $
    1.9
    
    
    $
    
    
    
    $
    705.2
  AccumulatedGross
    
    
    Amortization
    
    
    Net Book ValueDecember 31, 2006:Customer relationships
    
    $
    460.9
    
    
    $
    (45.5
    )
    
    $
    415.4Trademarks
    
    
    200.2
    
    
    
    (11.9
    )
    
    
    188.3Other
    
    
    121.1
    
    
    
    (19.6
    )
    
    
    101.5Total identified intangibles
    
    $
    782.2
    
    
    $
    (77.0
    )
    
    $
    705.2December 31, 2005:Customer relationships
    
    $
    353.2
    
    
    $
    (22.2
    )
    
    $
    331.0Trademarks
    
    
    193.9
    
    
    
    (4.6
    )
    
    
    189.3Other
    
    
    100.4
    
    
    
    (9.2
    )
    
    
    91.2Total identified intangibles
    
    $
    647.5
    
    
    $
    (36.0
    )
    
    $
    611.5
 59




---



##### Table of Contents



Foreign Currency
  Revenue Recognition
  Revenue Recognition under Long-term Construction Contracts
  
    
    the contracts include custom designs for customer specific applications;
    
    the structural design is unique and requires significant engineering efforts; and
    
    construction projects often have progress payments.
   Income Taxes
  Concentration of Credit Risk
  60




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##### Table of Contents



Stock-Based Compensation
       61




---



##### Table of Contents



Pro Forma Net Income
  Years Ended December 31,2005
    
    
    2004Net income, as reported
    
    $
    286.9
    
    
    $
    115.2Add:Total stock-based employee
compensation expense
included in net income, net
of related tax effects
    
    
    10.1
    
    
    
    Deduct:Total stock-based employee
compensation expense
determined under fair value
based method for all
awards, net of related tax
effects
    
    
    (15.3
    )
    
    
    (7.4
    )Pro forma net income
    
    $
    281.7
    
    
    $
    107.8Net income per common share:Basic, as reported
    
    $
    1.83
    
    
    $
    1.34Basic, pro forma
    
    $
    1.80
    
    
    $
    1.26Diluted, as reported
    
    $
    1.81
    
    
    $
    1.33Diluted, pro forma
    
    $
    1.78
    
    
    $
    1.25
 Environmental Liabilities
  Use of Estimates
  Net Income Per Share
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Numerator:Net income
    
    $
    684.0
    
    
    $
    286.9
    
    
    $
    115.2Denominator:Basicweighted average common shares outstanding
    
    
    175.2
    
    
    
    156.4
    
    
    
    85.8Dilutive effect of employee stock options
    
    
    1.6
    
    
    
    1.9
    
    
    
    0.7Diluted outstanding shares
    
    
    176.8
    
    
    
    158.3
    
    
    
    86.5Basic earnings per share
    
    $
    3.90
    
    
    $
    1.83
    
    
    $
    1.34Diluted earnings per share
    
    $
    3.87
    
    
    $
    1.81
    
    
    $
    1.33
 
 Recently Issued Accounting Standards
 62




---



##### Table of Contents



3. Varco Merger
   Shares issued to acquire the outstanding common stock of Varco (84.0 million
shares at $29.99 per share)
    
    $
    2,518.4Fair value of Varco stock options assumed
    
    
    48.9Unearned compensation related to stock options assumed
    
    
    (32.1
    )Merger related transaction costs
    
    
    44.1Total purchase price
    
    $
    2,579.3
    63




---



##### Table of Contents



Purchase Price Allocation
  Cash and marketable securities
    
    $
    163.5Trade receivables
    
    
    385.3Other current assets
    
    
    28.5Inventory
    
    
    377.1Property, plant and equipment
    
    
    598.4Goodwill, nondeductible
    
    
    1,469.4Customer relationships (useful lives of 12-18
years)
    
    
    345.8Trademarks (useful lives of 20-30 years)
    
    
    145.3Patents (useful life of 10 years)
    
    
    60.2Other non-current assets
    
    
    11.3Accounts payable and accrued liabilities
    
    
    (230.5
    )Income taxes payable
    
    
    (13.7
    )Debt
    
    
    (492.8
    )Deferred tax liabilities, net
    
    
    (213.3
    )Other non-current liabilities
    
    
    (54.0
    )Minority interest
    
    
    (1.2
    )Total purchase price
    
    $
    2,579.3
 Pro Forma Financial Information
   December 31,
2005Total revenues
    
    $
    4,952.4Net income
    
    $
    304.4Basic net income per share
    
    $
    1.76Diluted net income per share
    
    $
    1.74
 4. Other Acquisitions
   64




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##### Table of Contents




    
    Rolligon Ltd., a Texas-based manufacturer of coiled tubing support units and related
equipment.
    
    Soil Recovery A/S, a Danish-based designer and manufacturer of soil recovery units used
to process drilled cuttings for final disposal.
  All OtherNQL
    
    
    Acquisitions
    
    
    TotalCurrent assets, net of cash acquired
    
    $
    68.9
    
    
    $
    30.5
    
    
    $
    99.4Property, plant and equipment
    
    
    64.3
    
    
    
    13.6
    
    
    
    77.9Intangible assets
    
    
    126.6
    
    
    
    3.9
    
    
    
    130.5Goodwill
    
    
    60.1
    
    
    
    56.7
    
    
    
    116.8Total assets acquired
    
    
    319.9
    
    
    
    104.7
    
    
    
    424.6Current liabilities
    
    
    65.7
    
    
    
    19.4
    
    
    
    85.1Long term debt
    
    
    0.4
    
    
    
    9.4
    
    
    
    9.8Total liabilities
    
    
    66.1
    
    
    
    28.8
    
    
    
    94.9Cash consideration, net of cash
acquired
    
    $
    253.8
    
    
    $
    75.9
    
    
    $
    329.7
 2005
  2004
   2006
    
    
    2005
    
    
    2004Fair value of assets acquired, net of cash acquired
    
    $
    424.6
    
    
    $
    31.0
    
    
    $
    2.8Cash paid, net of cash acquired
    
    
    (329.7
    )
    
    
    (16.0
    )
    
    
    (2.8
    )Liabilities assumed and debt issued
    
    $
    94.9
    
    
    $
    15.0
    
    
    $
    Excess purchase price over fair value of assets
acquired
    
    $
    116.8
    
    
    $
    13.9
    
    
    $
    
 5. Inventories
  2006
    
    
    2005Raw materials and supplies
    
    $
    266.5
    
    
    $
    220.4Work in progress
    
    
    520.9
    
    
    
    267.5Finished goods and purchased products
    
    
    1,041.4
    
    
    
    710.4$
    1,828.8
    
    
    $
    1,198.3
 65




---



##### Table of Contents



6. Property, Plant and Equipment
  EstimatedUseful Lives
    
    
    2006
    
    
    2005Land and buildings
    
    5-35 Years
    
    $
    361.7
    
    
    $
    292.4Operating equipment
    
    3-15 Years
    
    
    774.5
    
    
    
    729.9Rental equipment
    
    3-12 Years
    
    
    259.9
    
    
    
    144.91,396.1
    
    
    
    1,167.2Less accumulated depreciation
    
    
    
    
    
    
    (374.0
    )
    
    
    (289.6
    )$
    1,022.1
    
    
    $
    877.6
 7. Accrued Liabilities
  2006
    
    
    2005Compensation
    
    $
    160.0
    
    
    $
    111.0Customer prepayments
    
    
    538.4
    
    
    
    76.8Warranty
    
    
    57.3
    
    
    
    24.9Interest
    
    
    11.9
    
    
    
    11.7Taxes (non income)
    
    
    34.1
    
    
    
    23.6Insurance
    
    
    39.1
    
    
    
    30.2Accrued purchase orders
    
    
    334.9
    
    
    
    29.3Hedge
commitments
    
    
    33.0
    
    
    
    Other
    
    
    211.5
    
    
    
    124.5Total
    
    $
    1,420.2
    
    
    $
    432.0
 8. Costs and Estimated Earnings on Uncompleted Contracts
  2006
    
    
    2005Costs incurred on uncompleted contracts
    
    $
    1,924.0
    
    
    $
    1,440.9Estimated earnings
    
    
    470.0
    
    
    
    300.62,394.0
    
    
    
    1,741.5Less: Billings to date
    
    
    2,649.5
    
    
    
    1,497.7$
    (255.5
    )
    
    $
    243.8Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    308.9
    
    
    $
    341.9Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (564.4
    )
    
    
    (98.1
    )$
    (255.5
    )
    
    $
    243.8
 66




---



##### Table of Contents



9. Long-Term Debt
  2006
    
    
    2005$100.0 million Senior Notes, interest at 7.5% payable semiannually, principal due
on February 15, 2008
    
    $
    101.9
    
    
    $
    103.6$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
    
    
    215.2
    
    
    
    218.7$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
    
    
    151.6
    
    
    
    151.8Other
    
    
    21.6
    
    
    
    17.2Total debt
    
    
    840.3
    
    
    
    841.3Less current portion
    
    
    5.6
    
    
    
    5.7Long-term debt
    
    $
    834.7
    
    
    $
    835.6
  2007
    
    $
    5.62008
    
    
    121.12009
    
    
    4.92010
    
    
    5.02011
    
    
    352.8Thereafter
    
    
    350.9$
    840.3
 Senior Notes
  Revolver Facilities
  Other
   67




---



##### Table of Contents



10. Employee Benefit Plans
    Pension benefits
    
    
    Postretirement benefitsFor the year
    
    2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Service cost  benefits earned during the period
    
    $
    3.8
    
    
    $
    3.4
    
    
    $
    2.9
    
    
    $
    
    
    
    $
    
    
    
    $
    0.1Interest cost on projected benefit obligation
    
    
    10.7
    
    
    
    10.0
    
    
    
    8.6
    
    
    
    1.0
    
    
    
    0.9
    
    
    
    0.5Expected return on plan assets
    
    
    (10.5
    )
    
    
    (9.2
    )
    
    
    (8.8
    )
    
    
    
    
    
    
    
    
    
    
    Net amortization and deferral
    
    
    0.8
    
    
    
    1.5
    
    
    
    1.5
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Curtailment/settlement gain
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    4.4
    
    
    $
    5.7
    
    
    $
    4.2
    
    
    $
    1.2
    
    
    $
    1.1
    
    
    $
    0.8
  Pension benefits
    
    
    Postretirement benefitsAt year end
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Benefit obligation at beginning of year
    
    $
    183.9
    
    
    $
    158.4
    
    
    $
    19.0
    
    
    $
    7.3Service cost
    
    
    3.8
    
    
    
    3.4
    
    
    
    
    
    
    
    Interest cost
    
    
    10.7
    
    
    
    10.0
    
    
    
    1.0
    
    
    
    0.9Actuarial loss (gain)
    
    
    17.8
    
    
    
    7.3
    
    
    
    (2.3
    )
    
    
    1.2Benefits paid
    
    
    (9.1
    )
    
    
    (6.6
    )
    
    
    (1.4
    )
    
    
    (1.2
    )Participant contributions
    
    
    0.8
    
    
    
    0.8
    
    
    
    
    
    
    
    Acquisitions
    
    
    
    
    
    
    27.4
    
    
    
    
    
    
    
    10.8Exchange rate loss (gain)
    
    
    21.5
    
    
    
    (16.8
    )
    
    
    
    
    
    
    Curtailments/settlements
    
    
    (0.4
    )
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    0.9
    
    
    
    
    
    
    
    0.7
    
    
    
    Benefit obligation at end of year
    
    $
    229.9
    
    
    $
    183.9
    
    
    $
    17.0
    
    
    $
    19.0Accumulated benefit obligation at end of year
    
    $
    214.7
    
    
    $
    170.8Fair value of plan assets at beginning of year
    
    $
    142.6
    
    
    $
    135.3
    
    
    $
    
    
    
    $
    Actual return
    
    
    11.8
    
    
    
    20.1
    
    
    
    
    
    
    
    Benefits paid
    
    
    (8.0
    )
    
    
    (5.8
    )
    
    
    (1.4
    )
    
    
    Contributions
    
    
    18.8
    
    
    
    7.1
    
    
    
    1.4
    
    
    
    Exchange rate (loss) gain
    
    
    18.2
    
    
    
    (14.1
    )
    
    
    
    
    
    
    Fair value of plan assets at end of year
    
    $
    183.4
    
    
    $
    142.6
    
    
    $
    
    
    
    $
    Funded status
    
    $
    (46.5
    )
    
    $
    (31.3
    )
    
    $
    (16.6
    )
    
    $
    (18.5
    )Unrecognized actuarial net loss
    
    
    32.0
    
    
    
    14.4
    
    
    
    2.2
    
    
    
    4.4Prior service costs not yet recognized
    
    
    0.9
    
    
    
    0.1
    
    
    
    (0.7
    )
    
    
    0.1Accrued benefit cost
    
    $
    (13.6
    )
    
    $
    (16.8
    )
    
    $
    (15.1
    )
    
    $
    (14.0
    )
 68




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##### Table of Contents



Pension benefits
    
    
    Postretirement benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Current assets
    
    $
    
    
    
    $
    0.7
    
    
    $
    
    
    
    $
    Non current assets
    
    
    0.9
    
    
    
    0.1
    
    
    
    
    
    
    
    Non current liabilities
    
    
    (47.4
    )
    
    
    (41.9
    )
    
    
    (16.6
    )
    
    
    (14.0
    )Accumulated other comprehensive income
    
    
    32.9
    
    
    
    24.3
    
    
    
    1.5
    
    
    
    Accrued benefit cost
    
    $
    (13.6
    )
    
    $
    (16.8
    )
    
    $
    (15.1
    )
    
    $
    (14.0
    )
  Before
    
    
    
    
    
    
    AfterApplication of
    
    
    
    
    
    
    Application ofSFAS 158
    
    
    Adjustments
    
    
    SFAS 158Noncurrent assets
    
    $
    26.7
    
    
    $
    (25.8
    )
    
    $
    0.9Noncurrent liabilities
    
    
    (89.4
    )
    
    
    25.4
    
    
    
    (64.0
    )Accumulated other comprehensive income
    
    
    34.0
    
    
    
    0.4
    
    
    
    34.4$
    (28.7
    )
    
    $
    
    
    
    $
    (28.7
    )
 Defined Benefit Pension Plans
   Years ending December 31,2006
    
    2005Discount rate:United States plan
    
    
    5.97
    %
    
    
    5.66
    %International plans
    
    
    4.75 - 5.25
    %
    
    
    5.66
    %Salary increase:United States plan
    
    
    N/A
    
    
    
    4.0
    %International plans
    
    
    2.25  3.00
    %
    
    
    2.0  2.75
    %
  Years ending December 31,2006
    
    
    2005
    
    
    2004Discount rate:United States plan
    
    
    5.66
    %
    
    
    6.0
    %
    
    
    6.25
    %International plans
    
    
    5.66
    %
    
    
    6.0
    %
    
    
    6.0
    %Salary increase:United States plan
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AInternational plans
    
    
    2.00  2.75
    %
    
    
    2.5  2.75
    %
    
    
    2.5
    %Expected return on assets:United States plan
    
    
    7.75
    %
    
    
    8.5
    %
    
    
    8.5
    %International plans
    
    
    5.25  6.85
    %
    
    
    6.25  7.17
    %
    
    
    6.5  7.75
    %
   69




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##### Table of Contents



2006
    
    2005United States
    
    International
    
    United States
    
    InternationalEquity securities
    
    
    60.2
    %
    
    
    48.3
    %
    
    
    59.5
    %
    
    
    48.6
    %Fixed income
    
    
    
    
    
    
    
    
    
    
    35.5
    %
    
    
    Debt securities
    
    
    38.8
    %
    
    
    34.4
    %
    
    
    
    
    
    
    34.1
    %Real estate
    
    
    
    
    
    
    5.0
    %
    
    
    
    
    
    
    5.1
    %Other
    
    
    1.0
    %
    
    
    12.3
    %
    
    
    5.0
    %
    
    
    12.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   For year ending 2006
    
    For year ending 2005United States
    
    International
    
    United States
    
    InternationalProjected benefit obligation
    
    $
    29.4
    
    
    $
    109.2
    
    
    $
    31.1
    
    
    $
    87.6Accumulated benefit obligation
    
    
    29.4
    
    
    
    102.2
    
    
    
    30.8
    
    
    
    80.1Fair value of assets
    
    
    16.5
    
    
    
    74.7
    
    
    
    14.3
    
    
    
    59.8
  For year ending 2006
    
    For year ending 2005United States
    
    International
    
    United States
    
    InternationalAccumulated benefit obligation
    
    $
    29.4
    
    
    $
    102.2
    
    
    $
    30.8
    
    
    $
    80.1Change in minimum liability
included in other
comprehensive income, net of
tax
    
    
    (0.5
    )
    
    
    (6.4
    )
    
    
    0.2
    
    
    
    3.4
   United States
    
    InternationalPlan
    
    Plans2007
    
    $
    2.6
    
    
    $
    5.72008
    
    
    2.7
    
    
    
    5.82009
    
    
    2.8
    
    
    
    6.22010
    
    
    2.7
    
    
    
    6.52011
    
    
    2.6
    
    
    
    6.9Subsequent five years
    
    
    11.4
    
    
    
    43.6
 70




---



##### Table of Contents



Defined Benefit Healthcare Plans ($ in millions)
 Year endingDecember 31,Fiscal Period January 1 to December 31
    
    2006
    
    2005Disclosure AssumptionsFor determining benefit obligations at year-endDiscount rate
    
    
    5.97
    %
    
    
    5.66
    %Salary increase
    
    
    5.0
    %
    
    
    5.0
    %For determining net periodic cost for yearDiscount rate
    
    
    5.66
    %
    
    
    5.78-6.0
    %Salary increase
    
    
    5.0
    %
    
    
    5.0
    %Expected return on assets
    
    
    N/A
    
    
    
    N/AMeasurement date
    
    
    9/30/2006
    
    
    
    9/30/2005Effect of 1% annual increase in health care cost trend rate:Aggregate of the Service Cost and Interest Cost  Dollar change
    
    $
    0.09
    
    
    $
    0.08APBO  Dollar Change
    
    $
    1.430
    
    
    $
    1.590Effect of 1% annual decrease in health care cost trend rate:Aggregate of the Service Cost and Interest Cost  Dollar change
    
    $
    (0.08
    )
    
    $
    (0.07
    )APBO  Dollar Change
    
    $
    (1.233
    )
    
    $
    (1.363
    )Cash Flows:Employer contribution (expected during fiscal year beginning in 2006)
    
    
    
    
    
    $
    1.4Estimated future benefit payments during fiscal year ending:2007
    
    
    
    
    
    $
    1.42008
    
    
    
    
    
    
    1.42009
    
    
    
    
    
    
    1.42010
    
    
    
    
    
    
    1.42011
    
    
    
    
    
    
    1.4Subsequent five years
    
    
    
    
    
    
    6.6
  71




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##### Table of Contents



11. Accumulated Other Comprehensive Income (Loss)
  CumulativeChange in
    
    
    Currency
    
    
    DerivativePension
    
    
    Translation
    
    
    FinancialLiability
    
    
    Adjustment
    
    
    Instruments
    
    
    TotalBalance at December 31, 2003
    
    $
    (17.4
    )
    
    $
    (27.8
    )
    
    $
    0.8
    
    
    $
    (44.4
    )Current period activity
    
    
    8.0
    
    
    
    71.3
    
    
    
    1.5
    
    
    
    80.8Tax effect
    
    
    (2.6
    )
    
    
    
    
    
    
    (0.4
    )
    
    
    (3.0
    )Balance at December 31, 2004
    
    
    (12.0
    )
    
    
    43.5
    
    
    
    1.9
    
    
    
    33.4Current period activity
    
    
    4.7
    
    
    
    (49.0
    )
    
    
    (11.8
    )
    
    
    (56.1
    )Tax effect
    
    
    (1.1
    )
    
    
    (1.3
    )
    
    
    3.3
    
    
    
    0.9Balance at December 31, 2005
    
    
    (8.4
    )
    
    
    (6.8
    )
    
    
    (6.6
    )
    
    
    (21.8
    )Adoption of FAS 158, net of tax
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Current period activity
    
    
    (9.3
    )
    
    
    61.2
    
    
    
    11.3
    
    
    
    63.2Tax effect
    
    
    2.7
    
    
    
    5.6
    
    
    
    (3.3
    )
    
    
    5.0Balance at December 31, 2006
    
    $
    (15.3
    )
    
    $
    60.0
    
    
    $
    1.4
    
    
    $
    46.1
 12. Commitments and Contingencies
     2007
    
    $
    57.12008
    
    
    44.62009
    
    
    32.52010
    
    
    22.12011
    
    
    17.2Thereafter
    
    
    58.3Total future lease commitments
    
    $
    231.8
 13. Common Stock
  72




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##### Table of Contents



Stock Options
     Years Ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    Exerciseshares
    
    
    Price
    
    
    shares
    
    
    Price
    
    
    shares
    
    
    PriceShares under option at beginning
of year
    
    
    4,340,842
    
    
    
    30.36
    
    
    
    3,732,316
    
    
    $
    26.69
    
    
    
    3,610,571
    
    
    $
    23.83Granted
    
    
    2,340,000
    
    
    
    66.58
    
    
    
    5,292,074
    
    
    
    28.88
    
    
    
    1,142,500
    
    
    
    28.22Cancelled
    
    
    (207,698
    )
    
    
    46.86
    
    
    
    (452,098
    )
    
    
    27.95
    
    
    
    (96,570
    )
    
    
    27.91Exercised
    
    
    (1,193,213
    )
    
    
    27.15
    
    
    
    (4,231,450
    )
    
    
    25.41
    
    
    
    (924,185
    )
    
    
    17.28Shares under option at end of year
    
    
    5,279,931
    
    
    
    46.56
    
    
    
    4,340,842
    
    
    
    30.36
    
    
    
    3,732,316
    
    
    $
    26.69Exercisable at end of year
    
    
    1,344,149
    
    
    
    27.70
    
    
    
    913,558
    
    
    $
    23.77
    
    
    
    1,657,162
    
    
    $
    29.66
  Options Outstanding
    
    Options ExercisableWeighted-AvgRange of
    
    Remaining
    
    
    
    
    
    Weighted-Avg
    
    
    
    
    
    Weighted-AvgExercise Price
    
    Contractual Life
    
    Shares
    
    Exercise Price
    
    Shares
    
    Exercise Price$9.05 to $19.39
    
    
    4.12
    
    
    
    170,064
    
    
    
    15.73
    
    
    
    170,064
    
    
    
    15.73$20.07 to $36.34
    
    
    7.11
    
    
    
    1,874,002
    
    
    
    28.94
    
    
    
    889,449
    
    
    
    25.79$37.60 to $66.58
    
    
    8.73
    
    
    
    3,235,865
    
    
    
    58.38
    
    
    
    284,636
    
    
    
    40.83Totals
    
    
    8.00
    
    
    
    5,279,931
    
    
    
    46.56
    
    
    
    1,344,149
    
    
    
    27.70
   Assumptions
    
    2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.6
    %
    
    
    3.7
    %
    
    
    2.7
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    Expected option life (years)
    
    
    3.75
    
    
    
    5.00
    
    
    
    5.00Expected Volatility
    
    
    39
    %
    
    
    46
    %
    
    
    51
    %
  73




---



##### Table of Contents



Year Ended
    
    Year EndedDecember 31, 2006
    
    December 31, 2005Expected volatility
    
    
    39.37
    %
    
    
    46.0
    %Risk-free interest rate
    
    
    4.56
    %
    
    
    3.68
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Expected term (in years)
    
    
    3.75
    
    
    
    5.0Forfeiture rate
    
    
    1.09
    %
    
    
    5.0
    %
     Weighted AverageRemainingWeighted Average
    
    
    Contractual Term
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    (years)
    
    
    Intrinsic ValueOutstanding at December 31,
2005
    
    
    4,340,842
    
    
    $
    30.36Granted
    
    
    2,340,000
    
    
    $
    66.58Exercised
    
    
    (1,193,213
    )
    
    $
    27.15Cancelled
    
    
    (207,698
    )
    
    $
    46.86Outstanding at December 31,
2006
    
    
    5,279,931
    
    
    $
    46.56
    
    
    
    8.00
    
    
    $
    89,407,875Vested or expected to vest
    
    
    5,222,379
    
    
    $
    46.56
    
    
    
    8.00
    
    
    $
    88,433,329Exercisable at December 31,
2006
    
    
    1,344,149
    
    
    $
    27.70
    
    
    
    6.30
    
    
    $
    45,044,731
   74




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##### Table of Contents



14. Income Taxes
  December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Domestic
    
    $
    627.1
    
    
    $
    213.6
    
    
    $
    51.5Foreign
    
    
    422.1
    
    
    
    216.4
    
    
    
    87.4$
    1,049.2
    
    
    $
    430.0
    
    
    $
    138.9
  December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    255.8
    
    
    $
    70.5
    
    
    $
    9.8State
    
    
    14.4
    
    
    
    2.8
    
    
    
    (3.3
    )Foreign
    
    
    99.3
    
    
    
    67.6
    
    
    
    21.8369.5
    
    
    
    140.9
    
    
    
    28.3Deferred:Federal
    
    
    (36.5
    )
    
    
    2.6
    
    
    
    (12.8
    )State
    
    
    (2.0
    )
    
    
    (0.7
    )
    
    
    2.2Foreign
    
    
    24.7
    
    
    
    (3.9
    )
    
    
    3.9(13.8
    )
    
    
    (2.0
    )
    
    
    (6.7
    )$
    355.7
    
    
    $
    138.9
    
    
    $
    21.6
  Years EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Federal income tax at statutory rate
    
    $
    367.2
    
    
    $
    150.5
    
    
    $
    48.6Foreign income tax rate differential
    
    
    (28.6
    )
    
    
    (13.3
    )
    
    
    (2.3
    )State income tax, net of federal
benefit
    
    
    9.3
    
    
    
    1.4
    
    
    
    1.0Tax benefit of foreign sales income
    
    
    (5.2
    )
    
    
    (6.8
    )
    
    
    (3.1
    )Nondeductible expenses
    
    
    7.3
    
    
    
    5.0
    
    
    
    1.3Foreign dividends net of FTCs
    
    
    3.4
    
    
    
    6.2
    
    
    
    3.2Change in deferred tax valuation
allowance
    
    
    2.7
    
    
    
    (4.4
    )
    
    
    (20.3
    )Prior year taxes
    
    
    (3.0
    )
    
    
    (2.1
    )
    
    
    (7.2
    )Other
    
    
    2.6
    
    
    
    2.4
    
    
    
    0.4$
    355.7
    
    
    $
    138.9
    
    
    $
    21.6
 75




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##### Table of Contents



December 31,
    
    
    December 31,2006
    
    
    2005Deferred tax assets:Allowances and operating liabilities
    
    $
    115.4
    
    
    $
    62.4Net operating loss carryforwards
    
    
    28.5
    
    
    
    11.8Foreign tax credit carryforwards
    
    
    0.6
    
    
    
    4.8Capital loss carryforwards
    
    
    0.2
    
    
    
    0.2Other
    
    
    19.8
    
    
    
    33.5Total deferred tax assets
    
    
    164.5
    
    
    
    112.7Valuation allowance for deferred tax assets
    
    
    (6.8
    )
    
    
    (1.9
    )157.7
    
    
    
    110.8Deferred tax liabilities:Tax over book depreciation
    
    
    89.0
    
    
    
    98.2Intangible assets
    
    
    210.0
    
    
    
    215.5Deferred income
    
    
    55.4
    
    
    
    15.6Other
    
    
    34.6
    
    
    
    44.0Total deferred tax liabilities
    
    
    389.0
    
    
    
    373.3Net deferred tax asset (liability)
    
    $
    (231.3
    )
    
    $
    (262.5
    )
        76




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##### Table of Contents



15. Business Segments and Geographic Areas
  Rig Technology:
 Petroleum Services & Supplies:
 Distribution Services:
   77




---



##### Table of Contents



Geographic Areas:
 United
    
    
    
    
    
    
    
    
    
    UnitedStates
    
    Canada
    
    Norway
    
    Kingdom
    
    Other
    
    TotalDecember 31, 2006Revenues
    
    $
    3,985.1
    
    
    $
    714.9
    
    
    $
    987.2
    
    
    $
    402.2
    
    
    $
    936.4
    
    
    $
    7,025.8Long-lived assets
    
    
    596.3
    
    
    
    115.8
    
    
    
    42.1
    
    
    
    88.7
    
    
    
    179.2
    
    
    
    1,022.1December 31, 2005Revenues
    
    $
    2,646.6
    
    
    $
    653.6
    
    
    $
    394.8
    
    
    $
    298.0
    
    
    $
    651.5
    
    
    $
    4,644.5Long-lived assets
    
    
    584.1
    
    
    
    82.7
    
    
    
    32.6
    
    
    
    57.1
    
    
    
    121.1
    
    
    
    877.6December 31, 2004Revenues
    
    $
    1,303.6
    
    
    $
    403.1
    
    
    $
    274.1
    
    
    $
    99.7
    
    
    $
    237.6
    
    
    $
    2,318.1Long-lived assets
    
    
    126.1
    
    
    
    33.2
    
    
    
    33.1
    
    
    
    24.4
    
    
    
    38.3
    
    
    
    255.1
 Business Segments:
 PetroleumServices &
    
    Distribution
    
    Unallocated/Rig Technology
    
    Supplies
    
    Services
    
    Eliminations
    
    TotalDecember 31, 2006Revenues
    
    $
    3,584.9
    
    
    $
    2,425.0
    
    
    $
    1,369.6
    
    
    $
    (353.7
    )
    
    $
    7,025.8Operating profit
    
    
    608.5
    
    
    
    545.6
    
    
    
    94.0
    
    
    
    (137.0
    )
    
    
    1,111.1Capital expenditures
    
    
    46.8
    
    
    
    138.5
    
    
    
    3.7
    
    
    
    11.4
    
    
    
    200.4Depreciation and amortization
    
    
    48.1
    
    
    
    100.9
    
    
    
    5.3
    
    
    
    6.3
    
    
    
    160.6Goodwill
    
    
    1,168.3
    
    
    
    1,034.9
    
    
    
    35.2
    
    
    
    6.3
    
    
    
    2,244.7Total assets
    
    
    4,936.8
    
    
    
    3,248.3
    
    
    
    592.7
    
    
    
    241.5
    
    
    
    9,019.3December 31, 2005Revenues
    
    $
    2,216.8
    
    
    $
    1,645.8
    
    
    $
    1,074.5
    
    
    $
    (292.6
    )
    
    $
    4,644.5Operating profit
    
    
    238.4
    
    
    
    281.0
    
    
    
    46.6
    
    
    
    (89.2
    )
    
    
    476.8Capital expenditures
    
    
    22.9
    
    
    
    72.6
    
    
    
    3.7
    
    
    
    5.8
    
    
    
    105.0Depreciation and amortization
    
    
    35.4
    
    
    
    68.9
    
    
    
    5.4
    
    
    
    4.9
    
    
    
    114.6Goodwill
    
    
    1,117.2
    
    
    
    959.2
    
    
    
    35.0
    
    
    
    6.3
    
    
    
    2,117.7Total assets
    
    
    3,310.3
    
    
    
    2,717.5
    
    
    
    479.7
    
    
    
    171.0
    
    
    
    6,678.5December 31, 2004Revenues
    
    $
    1,085.5
    
    
    $
    505.5
    
    
    $
    905.1
    
    
    $
    (178.0
    )
    
    $
    2,318.1Operating profit
    
    
    102.4
    
    
    
    62.7
    
    
    
    29.6
    
    
    
    (18.7
    )
    
    
    176.0Capital expenditures
    
    
    15.3
    
    
    
    19.5
    
    
    
    2.3
    
    
    
    1.9
    
    
    
    39.0Depreciation and amortization
    
    
    16.2
    
    
    
    18.5
    
    
    
    6.8
    
    
    
    2.5
    
    
    
    44.0Goodwill
    
    
    424.4
    
    
    
    173.3
    
    
    
    35.1
    
    
    
    6.2
    
    
    
    639.0Total assets
    
    
    1,329.5
    
    
    
    720.4
    
    
    
    386.5
    
    
    
    140.1
    
    
    
    2,576.5
 78




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##### Table of Contents



16. Quarterly Financial Data (Unaudited)
  Second
    
    Third
    
    FourthFirst Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalYear ended December 31, 2006Revenues
    
    $
    1,511.8
    
    
    $
    1,657.4
    
    
    $
    1,777.9
    
    
    $
    2,078.7
    
    
    $
    7,025.8Gross Profit
    
    
    349.8
    
    
    
    400.7
    
    
    
    442.7
    
    
    
    567.4
    
    
    
    1,760.6Net income
    
    
    120.3
    
    
    
    147.9
    
    
    
    176.6
    
    
    
    239.2
    
    
    
    684.0Net income per basic share
    
    
    0.69
    
    
    
    0.84
    
    
    
    1.01
    
    
    
    1.36
    
    
    
    3.90Net income per diluted share
    
    
    0.68
    
    
    
    0.84
    
    
    
    1.00
    
    
    
    1.35
    
    
    
    3.87Year ended December 31, 2005Revenues
    
    $
    814.9
    
    
    $
    1,215.7
    
    
    $
    1,236.5
    
    
    $
    1,377.4
    
    
    $
    4,644.5Gross Profit
    
    
    161.8
    
    
    
    255.2
    
    
    
    258.7
    
    
    
    311.5
    
    
    
    987.2Net income
    
    
    35.6
    
    
    
    61.2
    
    
    
    88.5
    
    
    
    101.6
    
    
    
    286.9Net income per basic share
    
    
    0.34
    
    
    
    0.35
    
    
    
    0.51
    
    
    
    0.58
    
    
    
    1.83Net income per diluted share
    
    
    0.33
    
    
    
    0.35
    
    
    
    0.50
    
    
    
    0.58
    
    
    
    1.81
 79




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##### Table of Contents



SCHEDULE II
 NATIONAL OILWELL VARCO, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2006, 2005, and 2004
 Additions(Deductions)
    
    ChargeBalance
    
    charged to
    
    offs
    
    Balancebeginning
    
    costs and
    
    and
    
    end ofof year
    
    expenses
    
    other
    
    year(in millions)Allowance for doubtful accounts:2006
    
    $
    17.4
    
    
    $
    17.3
    
    
    $
    (4.3
    )
    
    $
    30.42005
    
    
    12.8
    
    
    
    7.8
    
    
    
    (3.2
    )
    
    
    17.42004
    
    
    18.3
    
    
    
    4.0
    
    
    
    (9.5
    )
    
    
    12.8Allowance for excess and obsolete inventories:2006
    
    $
    56.8
    
    
    $
    36.9
    
    
    $
    (7.6
    )
    
    $
    86.12005
    
    
    41.2
    
    
    
    24.0
    
    
    
    (8.4
    )
    
    
    56.82004
    
    
    45.3
    
    
    
    15.6
    
    
    
    (19.7
    )
    
    
    41.2Valuation allowance for deferred tax assets:2006
    
    $
    1.9
    
    
    $
    2.7
    
    
    $
    2.2
    
    
    $
    6.82005
    
    
    16.8
    
    
    
    (4.4
    )
    
    
    (10.5
    )
    
    
    1.92004
    
    
    36.9
    
    
    
    (20.3
    )
    
    
    0.2
    
    
    
    16.8
 80




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    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).21.1
    
    Subsidiaries of the Registrant23.1
    
    Consent of Ernst & Young LLP24.1
    
    Power of Attorney (included on signature page hereto).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.