NOV Inc. — Form 10-Q Summary
Business context and period: NOV Inc. (National Oilwell Varco, Inc.) supplies equipment, technology and services to the upstream oil and gas industry. This unaudited filing covers the quarter and nine months ended September 30, 2020; amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,384 | $2,126 | $4,763 | $6,198 |
| Gross profit / margin | $139 / 10.0% | $151 / 7.1% | $500 / 10.5% | $469 / 7.6% |
| Operating loss | $(74) / (5.3%) | $(154) / (7.2%) | $(2,124) | $(5,930) |
| Net loss attributable to NOV | $(55) | $(244) | $(2,195) | $(5,710) |
| Diluted loss per share | $(0.14) | $(0.64) | $(5.72) | $(14.95) |
| Adjusted EBITDA | $71 / 5.1% of revenue | $262 | $333 | $597 |
Q3 revenue fell 35% year over year. Management said revenue declined from $1.50 billion in Q2 2020; Adjusted EBITDA fell $13 million sequentially. Q3 included $62 million of other items, including severance, facility closures, inventory charges and restructuring costs. Adjusted EBITDA is a non-GAAP measure.
Cash flow and liquidity: For the first nine months, operating cash flow was $740, versus $241 in 2019; investing cash use was $160, including $173 of capital expenditures; financing cash use was $256. Cash rose to $1,485 at September 30 from $1,171 at year-end 2019. NOV reported $1,824 of debt, down from $1,989, and $619 of lease liabilities. The $2.0 billion revolving facility was undrawn and fully available; the company reported compliance with its covenants and a 27.4% debt-to-capitalization ratio against a 60% maximum. Current assets were $5,376 and current liabilities $1,884. Approximately $911 of cash was held by foreign subsidiaries.
Balance-sheet changes: Total assets declined to $10,168 from $13,149 at year-end 2019, including goodwill falling to $1,493 from $2,807 and intangibles to $516 from $852. NOV’s retained earnings shifted from $690 to a deficit of $1,529, and total stockholders’ equity declined to $5,540 from $7,846.
Material changes and segment results
- Wellbore Technologies: Q3 revenue was $361, down 54% year over year; operating loss was $50. Management cited lower North American and international drilling activity. Adjusted EBITDA was $21.
- Completion & Production Solutions: Q3 revenue was $601, down 17%; operating profit was $25, including $23 of other items. International and offshore project execution partly offset weaker shorter-cycle businesses. Backlog was $789; quarterly orders were $169, a 43% book-to-bill.
- Rig Technologies: Q3 revenue was $449, down 31%; operating loss was $3, including $12 of other items. Backlog was $2.66 billion; quarterly orders were $57, a 29% book-to-bill. Marine Construction benefited from offshore wind opportunities.
Nine-month results remained heavily affected by asset impairments: $1,378 of goodwill and indefinite-lived intangible impairment and $513 of long-lived asset impairment were reported in the income statement. The company also recorded a $224 impairment on an investment in unconsolidated affiliates. Management attributed the prior-year comparison’s improvement in operating losses primarily to larger impairments in 2019.
Outlook, risks and unusual items
- Management expected industry activity and customer spending to remain depressed through the rest of 2020 and into early 2021, as COVID-19-related demand weakness persisted. It emphasized cost and organizational efficiency measures while continuing investment in products, including environmentally focused technologies.
- At September 30, remaining performance obligations were $3,718; NOV expected to recognize approximately $288 in 2020 and $3,430 in 2021 and thereafter. These figures exclude certain short-term, right-to-invoice and royalty arrangements.
- In August, NOV used cash to tender for $217.3 of its 2.60% senior notes, paying $226 including premium and interest, and recorded an $8.2 loss on extinguishment. Senior-note principal maturities include $182 due in 2022, $493 due in 2029 and $1,089 due in 2042.
- Tax benefits included $106 in Q3 and $206 for nine months related to CARES Act net-operating-loss carrybacks, plus a $90.3 benefit for an amended 2016 tax return. Tax valuation allowances and nondeductible goodwill impairments affected reported effective tax rates.
- No cash dividend was paid in Q3 2020, versus $0.05 per share in Q3 2019; future dividends are at the board’s discretion.
- Key risks include prolonged pandemic effects and weak oil demand, customer budget cuts, cancellations or force majeure claims, delayed or impaired collections and customer bankruptcies, supply-chain and workforce disruption, and further asset impairments. The filing also discusses litigation, regulatory, trade-compliance and Brexit risks; management says potential losses on contingencies cannot be determined, though it believes recorded reserves are sufficient for probable matters.
Important facts for investors to verify
- Whether depressed oilfield activity, customer spending and order intake persist, and how they affect segment revenue and margins.
- Backlog conversion timing, especially the low book-to-bill figures and the concentration of segment backlog in international markets.
- Cash-flow sustainability: nine-month operating cash flow benefited from working-capital movements, particularly strong receivable collections.
- Potential additional impairments and the sensitivity of asset valuations to market recovery, forecasts and discount rates.
- Availability and geographic accessibility of cash, covenant headroom, debt maturities, and the collection and timing of tax receivables.
- Whether pandemic-related customer defaults, contract disputes, operational interruptions or legal contingencies create losses beyond current reserves.