NOV Inc. quarterly report, Q3 FY2017

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NOV Inc. — Form 10-Q Summary

Business context and reporting period

NOV is an oilfield equipment manufacturer and technology provider serving drilling, well completion and production markets. This unaudited quarterly report covers the three and nine months ended September 30, 2017. Unless otherwise noted, amounts are in U.S. dollars and millions.

Financial performance and position

  • Third-quarter revenue: $1.835 billion, up 11% from $1.646 billion in Q3 2016. Gross profit was $285 million, or approximately 15.5% of revenue, versus $79 million, or 4.8%, a year earlier.
  • Profitability: GAAP operating loss was $7 million (0.4% operating margin), compared with a $1.186 billion loss in Q3 2016. Net loss attributable to NOV was $26 million, or $0.07 per diluted share, versus $1.362 billion, or $3.62 per share. The prior-year quarter included a $972 million goodwill impairment and other operating items; management reported Q3 2017 operating loss excluding other items of $7 million.
  • Nine-month results: Revenue was $5.335 billion, down 4% from $5.559 billion. Operating loss was $166 million versus $1.645 billion; net loss attributable to NOV was $223 million, or $0.59 per diluted share, versus $1.698 billion, or $4.53 per share. The 2016 comparison included $972 million of goodwill impairment.
  • Segment trends in Q3: Wellbore Technologies revenue rose 32% year over year to $693 million and reached operating break-even. Completion & Production Solutions revenue increased 26% to $682 million, with $44 million operating profit. Rig Systems revenue fell 30% to $330 million but returned to $11 million operating profit. Rig Aftermarket revenue declined 3% to $311 million; operating profit declined 11% to $64 million.
  • Cash flow: Operating activities provided $511 million in the first nine months, compared with $807 million in 2016. Investing used $184 million, including $127 million of capital expenditures and $85 million for acquisitions. Financing used $52 million. Cash increased $314 million to $1.722 billion.
  • Margins and cost actions: Q3 operating margin was negative 0.4%; management’s operating loss excluding other items was also $7 million. NOV said it had closed or was closing 385 locations over three years and reduced annual expenses in specified cost categories by approximately $3.0 billion.
  • Debt and liquidity: Total debt was $3.213 billion, broadly unchanged from year-end 2016; cash was $1.722 billion. NOV had $3.0 billion available under its new unsecured revolving credit facility and reported an 18.5% debt-to-capitalization ratio, below its 60% covenant limit. A $500 million note at 1.35% was due December 1, 2017. Approximately $1.370 billion of cash was held by foreign subsidiaries; NOV said it intended to reinvest those funds abroad.
  • Dividends: The Q3 dividend was $0.05 per share, unchanged year over year. Dividends for the first nine months were $0.15 per share, versus $0.56 in 2016.

Material changes versus prior comparable period

Results improved substantially from 2016, when the downturn drove a $972 million goodwill impairment and severe operating losses. Q3 2017 revenue growth was led by Wellbore Technologies and Completion & Production Solutions, while Rig Systems remained pressured by fewer offshore project shipments. For the nine-month period, revenue and operating cash flow were lower year over year despite much smaller losses. Cash dividends paid also fell, from $211 million to $57 million.

Outlook, commentary, risks and unusual items

  • Management was cautious about the remainder of 2017: it cited persistent excess crude and refined-product inventories, uncertain commodity-price recovery and customers moderating capital spending. It expected offshore activity could continue declining through Q4 2017 and into 2018, while believing offshore activity was approaching a bottom.
  • Capital-equipment backlog at September 30 was $2.0 billion in Rig Systems and $974 million in Completion & Production Solutions. NOV estimated revenue from those backlogs of approximately $245 million and $415 million, respectively, for the rest of 2017; these are backlog conversion estimates, not overall revenue guidance.
  • Rig Systems received $84 million of Q3 orders and recorded $101 million of cancellations. The cancellations related to an agreement covering two jackup equipment orders, with customer commitments on other packages and retention of down payments and other consideration.
  • Risks include oil and gas prices and activity, customer capital spending, offshore project economics, foreign exchange, and possible order delays, suspensions or cancellations. NOV described Brazil investigations as adversely affecting shipyard customers and potentially delaying deliveries and payments, with possible further contract disputes or backlog reductions.
  • NOV said recorded contingent liabilities reflected matters considered probable and that the ultimate total potential loss could not be determined; management did not expect unprovided liabilities to materially affect financial position, cash flow or results. It also reported $731 million of letters of credit under bilateral facilities.
  • Foreign-exchange forward contracts were used for hedging, not speculation. The filing notes that forecast changes or project delays could make hedged transactions no longer probable and lead to additional gains or losses. A 10% currency movement could affect estimated net income by $3 million on transactional exposures.
  • NOV continued implementation work for new accounting standards, including revenue recognition. It anticipated modified-retrospective adoption of the revenue standard and did not expect material timing or other effects for most businesses, while still evaluating certain revenue streams.

Important facts for investors to verify

  • Whether the $500 million note due December 1, 2017 was refinanced or repaid, and the subsequent effect on cash, debt and facility usage.
  • Whether backlog converts on the disclosed schedule, particularly given the offshore and international exposure and order cancellations.
  • Whether improving North American activity translates into sustained revenue growth and positive operating margins across segments.
  • Whether operating cash flow remains adequate as working-capital effects change and dividends, acquisitions and capital spending continue.
  • Potential effects of Brazil-related disputes, customer delays or cancellations, and other contingencies; the filing does not quantify the total potential loss.
  • The availability and practical accessibility of foreign-held cash, including any tax cost if repatriated, and the company’s future dividend decisions.