NOV Inc. (formerly National Oilwell Varco) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; selected fourth-quarter results are included. NOV supplies equipment, technology, and services to the upstream oil and gas industry through Wellbore Technologies, Completion & Production Solutions, and Rig Technologies.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $8.479 billion | $8.453 billion |
| Gross profit | $845 million | $1.444 billion |
| Operating income (loss) | $(6.279) billion | $211 million |
| Net income (loss) attributable to NOV | $(6.095) billion; $(15.96) per share | $(31) million; $(0.08) per share |
| Operating cash flow | $714 million | $521 million |
| Capital expenditures | $233 million | $244 million |
| Adjusted EBITDA (non-GAAP) | $885 million | $910 million |
Revenue was nearly flat year over year: North American weakness was offset by growth in international and offshore markets. Gross margin was approximately 10.0%, down from approximately 17.1% in 2018. The reported loss primarily reflects $6.631 billion of “Other Items,” including $3.509 billion of goodwill impairment, $103 million of indefinite-lived intangible impairment, $2.209 billion of other long-lived asset impairment, and $659 million of inventory-reserve charges.
Fourth-quarter revenue was $2.281 billion, up 7% sequentially but down 5% from fourth-quarter 2018. NOV reported a $385 million quarterly net loss. Fourth-quarter Adjusted EBITDA was $288 million, versus $262 million in the third quarter and $279 million a year earlier; fourth-quarter Other Items totaled $537 million.
Segments and material changes
- Wellbore Technologies: 2019 revenue of $3.214 billion, down 1%; operating loss of $3.551 billion, including $3.794 billion of Other Items. Fourth-quarter revenue declined 14% year over year, primarily due to lower North American drilling activity.
- Completion & Production Solutions: 2019 revenue of $2.771 billion, down 5%; operating loss of $1.934 billion, including $2.042 billion of Other Items. Year-end backlog rose 46% to $1.3 billion.
- Rig Technologies: 2019 revenue of $2.682 billion, up 4%; operating loss of $524 million, including $784 million of Other Items. Year-end backlog was $3.0 billion, down 4%.
Worldwide average rig count fell 1% in 2019; U.S. and Canadian rig counts declined 8.4% and 29.3%, respectively, while international activity increased 11.9%. Average WTI crude and natural gas prices fell 12% and 20%, respectively, versus 2018.
Cash, debt, and liquidity
At year-end, cash and cash equivalents were $1.171 billion, compared with $1.427 billion in 2018; debt was $1.989 billion, compared with $2.482 billion. NOV repaid $1 billion of 2.60% notes and issued $500 million of 3.60% notes due 2029. It reported $2.0 billion available under its revolving credit facility, no commercial-paper borrowings, and compliance with its debt covenants; the reported debt-to-capitalization ratio was 22.4%. Working capital was $3.866 billion, down from $4.938 billion. The company paid $77 million in dividends and reported a quarterly dividend of $0.05 per share.
Operating cash flow improved to $714 million. Investing cash use was $315 million, including $180 million for acquisitions, net of cash acquired. Financing cash use was $647 million. Approximately $795 million of year-end cash was held by foreign subsidiaries. The filing states that cash, operating cash generation, and available credit are expected to fund operations, capital spending, dividends, and financing obligations.
Outlook, risks, and contingencies
Management expected stronger international and offshore activity and NOV market-share gains to partly offset continued North American land-market weakness in 2020; it did not expect a meaningful North American land recovery before 2021. Longer-term optimism was tempered by an uncertain outlook. Management said it would continue streamlining operations and focus investment on customer needs, including environmentally friendly technologies.
Management expected approximately $1.1 billion of Completion & Production Solutions backlog and $0.6 billion of Rig Technologies backlog to convert to revenue in 2020. Remaining performance obligations were $4.286 billion, with approximately $1.084 billion expected as 2020 revenue. Backlog and performance-obligation conversion, timing, and profitability are not assured.
Key risks include volatile oil and gas prices and customer spending, ongoing North American weakness, international political and currency exposures, tariffs and supply-chain disruptions, competition and technology obsolescence, environmental and climate regulation, cybersecurity, and product, environmental, and personal-injury claims. The filing specifically identified the coronavirus outbreak in early 2020 as a potential risk. Further deterioration in market conditions could trigger additional asset impairments; several reporting units had limited fair-value headroom after 2019 impairment testing. NOV reported $38 million of unrecognized tax benefits and $502 million of standby letters of credit. It said its recorded reserves covered probable contingencies and that additional potential losses could not be determined; management did not expect unprovided ultimate liabilities to materially affect results, while acknowledging actual outcomes could differ.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified impairment valuation, inventory reserves, and revenue recognition on long-term construction contracts as critical audit matters.
Investor verification priorities
- Review the assumptions and sensitivity of the $6.631 billion of impairment and inventory charges, and the possibility of further write-downs.
- Assess whether Adjusted EBITDA and operating cash generation can hold up amid weak North American activity, and distinguish non-GAAP results from reported GAAP losses.
- Track backlog orders, cancellations, customer funding, and actual conversion to profitable revenue.
- Verify cash availability and geographic location, debt maturities, lease obligations, and continued covenant compliance.
- Monitor the status and potential exposure of legal, environmental, tax, and other contingencies, as well as the effect of early-2020 market and public-health developments.