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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2014
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
10. Derivative Financial Instruments

ASC Topic 815, “Derivatives and Hedging” (“ASC Topic 815”) requires a company to recognize all of its derivative instruments as either assets or liabilities in the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange rate risk. Forward contracts against various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenues and expenses denominated in currencies other than the functional currency of the operating unit (cash flow hedge). In addition, the Company will enter into non-designated forward contracts against various foreign currencies to manage the foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts (non-designated hedge).

The Company records all derivative financial instruments at their fair value in its Consolidated Balance Sheet. Except for certain non-designated hedges discussed below, all derivative financial instruments that the Company holds are designated as cash flow hedges and are highly effective in offsetting movements in the underlying risks. Such arrangements typically have terms between 2 and 24 months, but may have longer terms depending on the underlying cash flows being hedged, typically related to the projects in our backlog. The Company may also use interest rate contracts to mitigate its exposure to changes in interest rates on anticipated long-term debt issuances.

At March 31, 2014, the Company has determined that the fair value of its derivative financial instruments representing assets of $68 million and liabilities of $24 million (primarily currency related derivatives) are determined using level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on publicly available foreign exchange and interest rates at each financial reporting date. At March 31, 2014, the net fair value of the Company’s foreign currency forward contracts totaled a net asset of $44 million.

At March 31, 2014, the Company did not have any interest rate swaps and its financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when the Company’s financial instruments are in net liability positions. We do not use derivative financial instruments for trading or speculative purposes.

Cash Flow Hedging Strategy

To protect against the volatility of forecasted foreign currency cash flows resulting from forecasted revenues and expenses, the Company has instituted a cash flow hedging program. The Company hedges portions of its forecasted revenues and expenses denominated in nonfunctional currencies with forward contracts. When the U.S. dollar strengthens against the foreign currencies, the decrease in present value of future foreign currency revenues and expenses is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is subject to a particular currency risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Other Comprehensive Income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are cash flows associated with forecasted revenues). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, is recognized in the Consolidated Statements of Income during the current period.

 

The Company had the following outstanding foreign currency forward contracts that were entered into to hedge nonfunctional currency cash flows from forecasted revenues and expenses (in millions):

 

     Currency Denomination  

Foreign Currency

      March 31,  
2014		      December 31,
2013		  

Norwegian Krone

    NOK 10,172       NOK 10,503   

Euro

    € 500       € 406   

U.S. Dollar

    $ 443       $ 357   

Danish Krone

    DKK 266       DKK 278   

British Pound Sterling

    £ 52       £ 23   

Singapore Dollar

    SGD 36       SGD 17   

Canadian Dollar

    CAD 16       CAD 16   

Non-designated Hedging Strategy

The Company enters into forward exchange contracts to hedge certain nonfunctional currency monetary accounts. The purpose of the Company’s foreign currency hedging activities is to protect the Company from risk that the eventual U.S. dollar equivalent cash flows from the nonfunctional currency monetary accounts will be adversely affected by changes in the exchange rates.

For derivative instruments that are non-designated, the gain or loss on the derivative instrument subject to the hedged risk (i.e., nonfunctional currency monetary accounts) is recognized in other income (expense), net in current earnings.

The Company had the following outstanding foreign currency forward contracts that hedge the fair value of nonfunctional currency monetary accounts (in millions):

 

     Currency Denomination  

Foreign Currency

      March 31,  
2014		      December 31,
2013		  

Norwegian Krone

    NOK 3,866       NOK 3,257   

Russian Ruble

    RUB 1,786       RUB 2,149   

U.S. Dollar

    $ 801       $ 715   

Danish Krone

    DKK 383       DKK 177   

Euro

    € 381       € 310   

Singapore Dollar

    SGD 15       SGD 3   

British Pound Sterling

    £ 26       £ 14   

Swedish Krone

    SEK 11       SEK 4   

Canadian Dollar

    CAD 5       CAD 3   

 

The Company has the following gross fair values of its derivative instruments and their balance sheet classifications:

NATIONAL OILWELL VARCO, INC.

Fair Values of Derivative Instruments

(In millions)

 

   

Asset Derivatives

     Liability Derivatives  
        Fair Value         Fair Value  
    Balance Sheet   March 31,     December 31,     Balance Sheet   March 31,     December 31,  
   

Location

   2014     2013     Location   2014     2013  

Derivatives designated as hedging instruments under ASC Topic 815

            

Foreign exchange contracts

   Prepaid and other current assets   $ 33      $ 35      Accrued liabilities   $ 8      $ 18   

Foreign exchange contracts

   Other Assets     13        5      Other Liabilities     3        9   
   

 

 

    

 

 

      

 

 

    

 

 

  

Total derivatives designated as hedging instruments under ASC Topic 815

     $ 46      $ 40        $ 11      $ 27   
   

 

 

    

 

 

      

 

 

    

 

 

  

Derivatives not designated as hedging instruments under ASC Topic 815

            

Foreign exchange contracts

   Prepaid and other current assets   $ 21      $ 19      Accrued liabilities   $ 13      $ 13   

Foreign exchange contracts

   Other Assets     1        —        Other Liabilities     —          —     
   

 

 

    

 

 

      

 

 

    

 

 

  

Total derivatives not designated as hedging instruments under ASC Topic 815

     $ 22      $ 19        $ 13      $ 13   
   

 

 

    

 

 

      

 

 

    

 

 

  

Total derivatives

     $ 68      $ 59        $ 24      $ 40   
   

 

 

    

 

 

      

 

 

    

 

 

  

The Effect of Derivative Instruments on the Consolidated Statements of Income

($ in millions)

 

                                Location of Gain (Loss)            
                                Recognized in Income on   Amount of Gain (Loss)  
                Location of Gain (Loss)               Derivative (Ineffective   Recognized in Income on  
                Reclassified from   Amount of Gain (Loss)     Portion and Amount   Derivative (Ineffective  
Derivatives in ASC Topic 815   Amount of Gain (Loss)     Accumulated OCI into   Reclassified from     Excluded from   Portion and Amount  
Cash Flow Hedging   Recognized in OCI on     Income   Accumulated OCI into     Effectiveness   Excluded from  

Relationships

   Derivative (Effective Portion) (a)     (Effective Portion)   Income (Effective Portion)     Testing)   Effectiveness Testing) (b)  
    Three Months Ended
March 31,		         Three Months Ended
March 31,		         Three Months Ended
March 31,		  
    2014     2013         2014     2013         2014     2013  
      Revenue     13        2         

Foreign exchange contracts

     35        (61 )    Cost of revenue     (3 )      3      Other income (expense), net     13        3   
 

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

  

Total

     35        (61 )        10        5          13        3   
 

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

  

 

(a) The Company expects that $(19) million of the Accumulated Other Comprehensive Income (Loss) will be reclassified into earnings within the next twelve months with an offset by gains from the underlying transactions resulting in no impact to earnings or cash flow.
(b) The amount of gain (loss) recognized in income represents nil related to the ineffective portion of the hedging relationships for each of the three months ended March 31, 2014 and 2013, respectively, and $13 million and $3 million related to the amount excluded from the assessment of the hedge effectiveness for the three months ended March 31, 2014 and 2013, respectively.