NOV Inc. annual report, FY2015

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NOV Inc. (National Oilwell Varco) — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. NOV supplies equipment, products, and services to the global oil and gas industry through Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. Comparisons reflect continuing operations; the distribution business was spun off as NOW Inc. in May 2014.

Financial results and key metrics

  • Revenue: $14.757 billion, down 31.2% from $21.440 billion in 2014. Sales were $11.707 billion and services revenue was $3.050 billion.
  • Profitability: Gross profit was $3.063 billion, versus $5.809 billion. GAAP operating loss was $390 million (2.6% operating margin), compared with $3.613 billion of operating profit in 2014. The $1.689 billion goodwill and intangible-asset impairment was a major contributor. Excluding disclosed “other items,” operating profit was $1.634 billion and diluted EPS was $2.80; these are non-GAAP measures.
  • Net income and Q4: Net loss attributable to NOV was $769 million, or $1.99 per diluted share, versus income of $2.502 billion, or $5.82 per diluted share, in 2014. Fourth-quarter revenue was $2.722 billion and the continuing-operations loss was $1.522 billion; diluted loss per share was $4.06. Q4 adjusted diluted EPS was $0.23, versus $0.61 in Q3 and $1.69 in Q4 2014.
  • Segments: 2015 revenue and operating profit (loss) were Rig Systems $6.964 billion and $1.206 billion; Rig Aftermarket $2.515 billion and $605 million; Wellbore Technologies $3.718 billion and $(1.613) billion; and Completion & Production Solutions $3.365 billion and $161 million. All segments had lower revenue year over year.
  • Cash flow and investment: Cash from continuing operations was $1.332 billion, down from $2.525 billion. Capital expenditures were $453 million, compared with $699 million; acquisition spending was $86 million. Cash and cash equivalents were $2.080 billion at year-end, including approximately $2.034 billion held outside the U.S.
  • Debt and liquidity: Total debt was $3.930 billion, up from $3.166 billion; long-term debt was $3.928 billion. Working capital was $7.552 billion. The $4.5 billion revolving credit facility had $3.607 billion available after commercial paper borrowings; the company reported compliance with covenants.
  • Capital returns: NOV paid $710 million in dividends and repurchased 44.0 million shares for $2.221 billion in 2015, completing its $3 billion repurchase program. Annual dividends were $1.84 per share.

Material changes versus 2014

  • The oil and gas downturn drove lower customer spending and activity: average worldwide rig count fell 35%, U.S. rig count fell 47.5%, and average WTI crude oil price fell 47.8% to $48.71 per barrel.
  • Revenue declined across the segments: Rig Systems 29%, Rig Aftermarket 22%, Wellbore Technologies 35%, and Completion & Production Solutions 28%. The company moved from operating profit of $3.613 billion to an operating loss of $390 million.
  • Wellbore Technologies recorded a $1.658 billion annual impairment, including goodwill and an indefinite-lived trade name; the company reported $1.689 billion total goodwill and intangible-asset impairment for the year. Goodwill declined to $6.980 billion from $8.539 billion.
  • Rig Systems backlog fell to $6.1 billion from $12.5 billion; Completion & Production Solutions backlog fell to $969 million from $1.780 billion. NOV terminated seven Brazil drillship supply contracts, reducing Rig Systems backlog by $1.2 billion, with no settlement charge recorded.
  • Inventory reserves rose to $500 million from $370 million, and the doubtful-account allowance increased to $159 million from $125 million. Total debt increased while cash balances declined.

Outlook, risks, contingencies, and notable items

  • Management was cautious on 2016: customers were expected to limit capital spending, defer maintenance, use existing spares, and face pricing pressure. Visibility beyond early 2016 was limited, and management did not expect a meaningful near-term increase in drilling activity.
  • Management expected different recovery timing by segment: Completion & Production Solutions could benefit as already-drilled wells are completed; Wellbore Technologies and Rig Aftermarket recovery depends more on renewed drilling; new rig orders may come later. Rig Systems expected approximately $2.2 billion of 2016 revenue from backlog; Completion & Production Solutions expected approximately $778 million.
  • Brazil-related investigations and customer financing or project delays could further delay, suspend, or cancel deliveries and payments; remaining Brazil backlog was $1.8 billion for 15 rigs. Customers’ contracts generally do not allow cancellation for convenience, but the filing reports more frequent suspensions, delays, and attempted cancellations.
  • Other key risks include continued oil-price and activity weakness; contract cost, delivery, and collection risks; foreign exchange and political risks; environmental, product-liability, and regulatory exposure; and potential further impairment of goodwill or intangible assets. Approximately 75% of 2015 revenue was generated outside the U.S.
  • NOV was negotiating a potential resolution of U.S. government inquiries concerning export-trade-law compliance. Management anticipated any administrative penalty would fall within existing accruals, but said the outcome and impact could not be predicted if negotiations did not proceed as expected. Ordinary-course claims and proceedings were not expected by management to have a material adverse effect.
  • The filing states that management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2015.

Investor facts to verify

  • Whether 2016 backlog converts to revenue as expected, particularly the offshore and Brazil projects, and whether further delays, cancellations, or collection issues arise.
  • The durability of adjusted operating profit and cash generation amid lower volumes, pricing pressure, and customer maintenance deferrals; compare non-GAAP results with GAAP results and the exclusions used.
  • Whether additional goodwill, intangible-asset, inventory, or receivables charges are required if activity and customer credit conditions deteriorate.
  • Debt maturities, commercial-paper funding, availability under the revolving facility, and the effect of cash held abroad on liquidity and repatriation taxes.
  • The status and potential financial consequences of the export-compliance inquiry and Brazil-related investigations and contracts.