Critical Accounting Estimates
In our annual report on Form 10-K for the year ended December 31, 2008, we identified our most critical accounting policies. In preparing the financial statements, we make assumptions, estimates and judgments that affect the amounts reported. We periodically evaluate our estimates and judgments that are most critical in nature which are related to revenue recognition under long-term construction contracts; allowance for doubtful accounts; inventory reserves; impairments of long-lived assets (excluding goodwill and other indefinite-lived intangible assets); goodwill and other indefinite-lived intangible assets and income taxes. Our estimates are based on historical experience and on our future expectations that we believe are reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results are likely to differ from our current estimates and those differences may be material.
Goodwill and Other Indefinite - Lived Intangible Assets The Company has approximately $5.3 billion of goodwill and $0.8 billion of other intangible assets with indefinite lives on its consolidated balance sheet as of March 31, 2009. The Company tests goodwill and other indefinite-lived intangible assets for impairment at least annually or more frequently whenever events or circumstances occur indicating that goodwill or other indefinite-lived intangible assets might be impaired. The annual impairment test is performed during the fourth quarter of each year. The Company performed its annual impairment analysis in the fourth quarter of 2008 and due to significant drops in both commodity prices and rig activity in the fourth quarter of 2008; the Company updated its impairment analysis as of December 31, 2008. Based on its analysis, the Company did not report any impairment of goodwill and other indefinite-lived intangible assets for the year ended December 31, 2008. The level of drilling activity during the first quarter of 2009 averaged 2,681 rigs, a decline of 21 percent compared to the average of 3,395 rigs working during the fourth quarter of 2008. However, the price of crude oil has improved in recent weeks, rising from $35-$40 per barrel through much of the first quarter to $50-$55 per barrel presently. Prices for future oil deliveries are higher ($63.77 per barrel for December 2010 deliveries, for example), and, likewise, future gas prices are considerably higher than current spot pricing ($6.74/mmbtu for December 2010 deliveries versus $3.55/mmbtu currently), indicating an expectation of recovery of commodity prices within the next several quarters. Based on these factors, the Company has not identified any impairment indicators since December 31, 2008.
The Company will continue to closely monitor indicators of impairment which could include, but are not limited to, further declines in worldwide rig activity, further declines in commodity prices or futures, or further significant economic declines. If such further deterioration of indicators occurs, and the Company believes that these negative trends are likely to persist for a prolonged period of time, then the Company's expected future earnings and cash flows from operations would be adversely impacted. This may result in impairment to either or both goodwill and indefinite-lived intangible assets, and such impairment may be material.

EXECUTIVE SUMMARY
National Oilwell Varco generated earnings of $470 million or $1.13 per fully diluted share in its first quarter ended March 31, 2009, on revenues of $3,481 million. Revenue increased 30 percent and net income attributable to the Company increased 18 percent from the first quarter of 2008, due in part to our acquisition of Grant Prideco, Inc., discussed below. Revenue declined nine percent and net income attributable to the Company declined 20 percent from the fourth quarter of 2008, due to a downturn in economic activity during the first quarter of 2009. Operating income was $720 million or 20.7 percent of sales for the first quarter, compared to $857 million or 22.5 percent of sales in the fourth quarter of 2008, and $569 million or 21.2 percent of sales in the first quarter of 2008.
Grant Prideco Acquisition
On April 21, 2008 the Company completed its acquisition of Grant Prideco, Inc. for a combination of approximately $3.0 billion in cash and the issuance of 56.9 million shares of National Oilwell Varco common stock. The Grant Prideco merger further strengthened National Oilwell Varco's position as manufacturer to the oilfield. Its drill bits and reamers are being integrated into the Company's offering of drilling motors, non-magnetic drill collars, jars and shock tools, to complement its comprehensive package of bottomhole assembly tools used to drill complex wellpaths. Additionally, Grant Prideco's drill pipe products are purchased and consumed by the Company's existing drilling contractor customer base. The Company believes that consumption of drill pipe per foot of hole drilled, or per rig running, has been increasing due to the rising complexity of wellpath designs. Overall the acquisition better positioned National Oilwell Varco to capitalize on continued application of horizontal, directional and extended-reach drilling, through both drill pipe and drill bit product sales. Integration of the business has proceeded well. The Company is introducing new drill pipe tracking products, and expanding OEM drill pipe repair and maintenance offerings through its worldwide network of pipe service operations. The Company is also consolidating a number of bit and downhole tool sales facilities worldwide, and leveraging combined manufacturing and marketing capabilities.
Oil & Gas Equipment and Services Market
Worldwide developed economies turned down sharply late in 2008 as looming housing-related asset write-downs at major financial institutions paralyzed credit markets and sparked a serious global banking crisis. Major central banks are responding vigorously, but credit and financial markets have not yet recovered, and a credit-driven worldwide economic recession deepened during the first quarter. Asset and commodity prices, including oil and gas prices, have declined sharply. After rising steadily for six years to peak at around $140 per barrel earlier in 2008, oil prices collapsed back to an average of $42.91 per barrel range during the first quarter. Higher oil and gas prices over the past several years have led to high levels of exploration and development drilling in many oil and gas basins around the globe, but this is slowing, at least in the near term. The count of rigs actively drilling in the U.S. as measured by Baker Hughes (a good measure of the level of oilfield activity and spending) peaked at 2,031 rigs in September 2008, but has decreased to 955 rigs as of April 2009, as a result of the lower commodity prices and tight credit. Many oil and gas operators reliant on external financing to fund their drilling programs are curtailing some of their drilling activity in view of tighter credit markets and lower commodity prices. So far this appears to be having the greatest impact on gas drilling across North America. Most international activity is driven by oil exploration and production by national oil companies, which has historically been less susceptible to short-term commodity price swings. Therefore we expect international drilling activity to be less impacted by the credit crisis, but the international rig count is showing some declines nonetheless, falling from its September 2008 peak of 1,108 to 1,012 in March 2009. During the first quarter of 2009 the Company saw its Petroleum Services & Supplies segment and its Distribution Services segment affected most acutely by a drilling downturn (revenues down 27 percent and down 16 percent, respectively, from the fourth quarter of 2008) while the Company's Rig Technology segment was less impacted in the short term owing to its high level of backlog (revenues improved five percent from the fourth quarter of 2008).
Recent downturns follow an extended period of high drilling activity which fueled strong demand for oilfield services since 2003. Incremental drilling activity through the upswing shifted toward harsh environments, employing increasingly sophisticated technology to find and produce reserves. Higher utilization of drilling rigs has tested the capability of the world's fleet of rigs, much of which is old and of limited capability. Technology has advanced significantly since most of the existing rig fleet was built. The industry invested little during the late 1980's and 1990's on new drilling equipment, but drilling technology progressed steadily nonetheless, as the Company and its competitors continued to invest in new and better ways of drilling. As a consequence, the safety, reliability, and efficiency of new, modern rigs surpass the performance of most of the older rigs at work today. Drilling rigs are now being pushed to drill deeper wells, more complex wells, highly deviated wells and horizontal wells, tasks which require larger rigs with more capabilities. The drilling process effectively consumes the mechanical components of a rig, which wear out and need periodic repair or replacement. This process has been accelerated by

very high rig utilization and wellbore complexity. Drilling consumes rigs; more complex and challenging drilling consumes rigs faster.
The industry responded by launching many new rig construction projects since 2005, to retool the existing fleet of jackup rigs (more than 75 percent of the existing 440 jackup rigs are more than 20 years old); to replace older mechanical and DC electric land rigs with improved AC power, electronic controls, automatic pipe handling and rapid rigup and rigdown technology; and to build out additional ultradeep floating drilling rigs, including semisubmersibles and drillships, to employ recent advancements in deepwater drilling to exploit unexplored deepwater basins. We believe that the newer rigs offer considerably higher efficiency, safety, and capability, and that many will effectively replace a portion of the existing fleet, and that declining dayrates may accelerate the retirement of older rigs. As a result of these trends the Company's Rig Technology segment grew its backlog of capital equipment orders from $0.9 billion at March 31, 2005, to $11.8 billion at September 30, 2008. However, as a result of the credit crisis and slowing drilling activity, orders have declined below amounts flowing out of backlog as revenue, causing the backlog to decline to $9.6 billion by March 31, 2009. These are the first backlog declines posted since National Oilwell and Varco merged in 2005. The Company expects the backlog to continue to decline during 2009 as revenue out of backlog is likely to exceed inbound new orders.
The land rig backlog comprised 12 percent and equipment destined for offshore operations comprised 88 percent of the total backlog as of March 31, 2009. Equipment destined for international markets totaled 91 percent of the backlog. The Company believes that its existing contracts for rig equipment are very strong in that they carry significant down payment and progress billing terms favorable to the ultimate completion of these projects, and generally do not allow customers to cancel projects for convenience. For this reason we do not expect the credit crisis or softer market conditions to result in material cancelation of contracts or abandonment of major projects; however, there can be no assurance that such discontinuance of projects will not occur, particularly if the credit crisis or economic downturn deepens significantly. The Company had approximately $380 million of projects in its March 31, 2009 backlog that it considers at risk.
Segment Performance
Rig Technology generated $2,199 million in revenue and $606 million in operating profit in the first quarter of 2009, yielding a record operating margin for the segment of 27.6 percent. The segment generated 44 percent operating leverage or flowthrough (the increase in operating profit divided by the increase in revenue) on five percent revenue growth from the fourth quarter of 2008, and 34 percent operating leverage on 37 percent revenue growth from the first quarter of 2008. The revenue growth from the fourth quarter was due to higher revenue out of backlog, which improved 15 percent sequentially to $1,688 million. As of March 31, 2009 the scheduled outflow of revenue from backlog is expected to be in the range of $3.8 billion for the remainder of 2009, $4.7 billion in 2010, and $1.1 billion for 2011. From 2005 through the current quarter, the segment has delivered a total of 54 newly built offshore rigs. Aftermarket spare parts and services revenue, and sales of smaller capital items which do not qualify for booking into the backlog, declined 18 percent from the fourth quarter. This was due mostly to lower purchases by North American land customers who are curtailing expenditures and cannibalizing spares and equipment from idle rigs to deploy onto working rigs.
The Petroleum Services & Supplies segment generated revenues of $1,014 million and operating profit of $164 million or 16.2 percent of sales in the first quarter of 2009. Revenues declined 27 percent from the fourth quarter of 2008, and decremental operating leverage was 48 percent on the sequential decline, leading to a sharp sequential decline in operating margins for the segment. On a combined adjusted basis for a full first quarter 2008 contribution from Grant Prideco, Inc. (including estimated fixed asset and intangible asset stepup impact but excluding transaction charges and inventory stepup amortization), the segment's revenues declined 23 percent from the prior year first quarter. Negative comparisons for both periods were due mostly to lower sales of drill pipe both year-over-year and sequentially, although the segment posted lower sales for substantially all of its products during the first quarter of 2009 as compared to both the first quarter of 2008 and the fourth quarter of 2008. Lower drill pipe sales were the result of many contractors redeploying drill pipe from idle rigs to active rigs, in lieu of purchasing new drill pipe. Lower drilling activity negatively impacted revenue and pricing for this group in most major oilfield markets around the world, with North America, the North Sea, and China posting some of the steepest declines. Approximately 54 percent of first quarter 2009 sales for the segment were in North America.
Distribution Services segment revenues were $408 million during the first quarter of 2009, a decrease of 16 percent from the fourth quarter of 2008. Sequential decremental operating leverage was 24 percent on the revenue declines, higher than the segment has typically experienced due to pricing pressure accompanying the volume declines. Compared to the first quarter of 2008, revenues increased 11 percent, at 14 percent operating leverage, during the first quarter of 2009. Sales in the U.S. and Canada declined in both the sequential and year-over-year-comparisons, but these were partly offset by higher international sales in the first quarter of 2009. Sales of Mono artificial lift products, particularly into Latin America, helped improve margins for these products. Approximately 69 percent of the segment's first quarter 2009 sales were in North America.

Outlook
The recent emergence of a serious banking crisis, a global recession, and lower commodity prices are presenting challenging prospects to our business. Consequently we are cautious in our outlook for the remainder of 2009, and believe we will see orders for new rigs fall in 2009 (although we are nevertheless optimistic that drilling contractors will place orders for new build floating rigs during the year for the Brazilian deepwater market). Drilling activity, particularly by independent gas producers reliant on external financing, has fallen sharply and we do not know when it will recover. As a result of the much lower rig count our outlook for the Company's Petroleum Services & Supplies segment and Distribution Services segment remains very guarded. We expect revenues for both groups to continue to decline in the second quarter. Decremental leverage for both groups is expected to be above our long term estimated levels (30 percent for Petroleum Services & Supplies; 10 percent for Distribution Services) due to rising pricing pressure we are experiencing, particularly in North America, which can be only partly offset by cost reduction measures we have taken. During the second quarter of 2009 we announced a voluntary retirement program and expect to report a $45 million to $60 million charge associated with enhanced retirement benefits we are offering to some of our long-tenured employees in the U.S. Our outlook for international markets, which are more driven by national oil company activity, are historically less volatile and expected to see better market conditions. The Rig Technology segment is expected to be less affected by the downturn due to the strength of its backlog.
The Company believes it is nevertheless well positioned to manage through this uncertain period, and should benefit from its strong balance sheet and capitalization, access to credit, and a high level of contracted orders which are expected to continue to generate earnings well into the downturn. The Company has a long history of cost-control and downsizing in response to depressed market conditions, and of executing strategic acquisitions during difficult periods. The Company completed four acquisitions, ASEP, Anson, Spirit Fluids, and Spirit Minerals since March 31, 2009 for an aggregate cash amount of approximately $375 million, and continues to pursue others. Steel prices have begun to decline in many areas, and the Company is reducing outsourcing, overtime, and discretionary expenditures in view of the market. Such a period may present opportunities to the Company to effect new organic growth and acquisition initiatives, and we remain hopeful that a downturn will generate new opportunities.

Operating Environment Overview
The Company's results are dependent on, among other things, the level of
worldwide oil and gas drilling, well remediation activity, the prices of crude
oil and natural gas, capital spending by other oilfield service companies and
drilling contractors, pipeline maintenance activity, and worldwide oil and gas
inventory levels. Key industry indicators for the first quarter of 2009 and
2008, and the fourth quarter of 2008 include the following:

                                                                                     %               %
                                                                                  1Q09 v          1Q09 v
                                      1Q09*          1Q08*          4Q08*          1Q08            4Q08
Active Drilling Rigs:
U.S.                                   1,326          1,771          1,898          (25.1 %)        (30.1 %)
Canada                                   329            507            408          (35.1 %)        (19.4 %)
International                          1,026          1,046          1,089           (1.9 %)         (5.8 %)

Worldwide                              2,681          3,324          3,395          (19.3 %)        (21.0 %)

West Texas Intermediate Crude
Prices (per barrel)                  $ 42.91        $ 97.87        $ 58.18          (56.2 %)        (26.2 %)

Natural Gas Prices ($/mmbtu)         $  4.57        $  8.64        $  6.40          (47.1 %)        (28.6 %)

* Averages for the quarters indicated. See sources below.

The following table details the U.S., Canadian, and international rig activity and West Texas Intermediate Oil prices for the past nine quarters ended March 31, 2009 on a quarterly basis:
[[Image Removed: (INDUSTRY TRENDS GRAPH)]] Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); West Texas Intermediate Crude and Natural Gas Prices: Department of Energy, Energy Information Administration (www.eia.doe.gov).
The worldwide and U.S. quarterly average rig count decreased 19.3% (from 3,324 to 2,681) and 25.1% (from 1,771 to 1,326), respectively, in the first quarter of 2009 compared to the first quarter of 2008. The average per barrel price of West Texas Intermediate Crude decreased 56.2% (from $97.87 per barrel to $42.91 per barrel) and natural gas prices decreased 47.1% (from $8.64 per mmbtu to $4.57 per mmbtu) in the first quarter of 2009 compared to the first quarter of 2008.

U.S. rig activity at May 1, 2009 was 945 rigs compared to the first quarter average of 1,326 rigs. The price for West Texas Intermediate Crude was at $53.20 per barrel as of May 1, 2009, increasing 24% from the first quarter 2009 average. The global financial credit crisis that began in 2008 has created a worldwide economic slowdown.
Results of Operations
Operating results by segment are as follows (in millions):

                                                     Three Months Ended
                                                          March 31,
                                                      2009          2008
           Revenue:
           Rig Technology                          $    2,199      $ 1,603
           Petroleum Services & Supplies                1,014          830
           Distribution Services                          408          366
           Elimination                                   (140 )       (114 )

           Total Revenue                           $    3,481      $ 2,685


           Operating Profit:
           Rig Technology                          $      606      $   406
           Petroleum Services & Supplies                  164          195
           Distribution Services                           25           19
           Unallocated expenses and eliminations          (75 )        (51 )

           Total Operating Profit                  $      720      $   569


           Operating Profit %:
           Rig Technology                                27.6 %       25.3 %
           Petroleum Services & Supplies                 16.2 %       23.5 %
           Distribution Services                          6.1 %        5.1 %
           Total Operating Profit %                      20.7 %       21.2 %

Rig Technology
Three Months Ended March 31, 2009 and 2008. Rig Technology revenue in the first quarter of 2009 was $2,199 million, an increase of $596 million (37%) compared to the same period in 2008. Backlog was $9.6 billion down 3% from the same period last year. Revenue out of backlog increased 49% offset by an 8% decrease in non-backlog revenue from the prior year period reflecting a decrease in capital spending by North American land drillers and pressure pumpers. Operating profit from Rig Technology was $606 million for the first quarter ended March 31, 2009, an increase of $200 million (49%) over the same period of 2008. Operating profit percentage increased to 27.6%, up from 25.3% for the same prior year period primarily driven by ongoing work on drillships and construction contracts.
Petroleum Services & Supplies
Three Months Ended March 31, 2009 and 2008. Revenue from Petroleum Services & Supplies was $1,014 million for the first quarter of 2009 compared to $830 million for the first quarter of 2008, an increase of $184 million (22%). The increase was primarily attributable to incremental revenues from the acquisition of Grant Prideco.
Operating profit from Petroleum Services & Supplies was $164 million for the first quarter of 2009 compared to $195 million for the same period in 2008, a . . .