NOV Inc. (formerly National Oilwell Varco) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless indicated otherwise.
Business context
NOV supplies equipment, products and services to the worldwide oil and gas drilling and production industry. During the quarter, it reported three segments: Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission. Results are exposed to customer capital spending, drilling activity, commodity prices and global economic conditions.
Key financial results
| Metric | Q1 2014 | Comparable period | Change |
|---|---|---|---|
| Revenue | $5,777 | $5,307, Q1 2013 | +9% |
| Gross profit | $1,396 | $1,264, Q1 2013 | +$132 |
| Operating profit | $861 | $751, Q1 2013 | +15% |
| Operating margin | 14.9% | 14.2%, Q1 2013 | +0.7 percentage points |
| Net income attributable to NOV | $589 | $502, Q1 2013 | +17% |
| Diluted EPS | $1.37 | $1.17, Q1 2013 | +$0.20 |
| Operating cash flow | $488 | $506, Q1 2013 | -$18 |
| Capital expenditures | $131 | $168, Q1 2013 | -$37 |
Cash and cash equivalents were $3,688 at quarter-end, versus $3,436 at December 31, 2013. Total debt was $3,149, essentially unchanged from year-end, leaving cash above debt by approximately $539. No commercial paper or revolving-credit borrowings were outstanding. The company paid $111 in dividends, or $0.26 per share, versus $56 and $0.13 per share in Q1 2013. Operating cash flow less capital expenditures was approximately $357; this is a simple cash-flow measure, not a company-reported non-GAAP metric.
Segment performance and changes
- Rig Technology: Revenue of $3,009, up 15% year over year; operating profit of $634 and margin of 21.1%, versus 20.9%. Capital-equipment backlog reached a record $16.3 billion, up from $12.9 billion a year earlier; $7.2 billion was expected to convert to revenue during the rest of 2014.
- Petroleum Services & Supplies: Revenue of $1,789, up 5%; operating profit of $321, up 26%, with margin rising to 17.9% from 15.0%. Management attributed improvement mainly to higher volumes and lower integration costs.
- Distribution & Transmission: Revenue of $1,281, up 4%; operating profit fell to $55 from $63 and margin declined to 4.3% from 5.1%. Results included $13 of costs primarily related to the proposed spin-off.
Compared with Q4 2013, revenue fell $395, or 6%, and net income attributable to NOV fell $69, or 10%. Diluted EPS excluding specified other costs was $1.40, versus $1.56 in Q4 2013 and $1.29 in Q1 2013. This non-GAAP measure excludes costs including acquisition-related items, legal costs and spin-off costs; GAAP diluted EPS was $1.37, $1.53 and $1.17, respectively.
Liquidity, outlook, risks and unusual items
- Operating cash flow was lower year over year despite higher earnings. NOV said working-capital changes used $385, primarily reflecting slower collections in Distribution & Transmission after an SAP implementation and delayed payments from some large offshore customers. Customer prepayments and milestone billings partly offset the effect.
- Investing cash outflow was $126, compared with $2,535 in Q1 2013, when approximately $2.4 billion was used for the Robbins & Myers acquisition. Q1 2014 acquisition spending was $2.
- Management said cash, expected operating cash generation and available credit should fund operations, working capital, capital expenditures, debt service and dividends for the foreseeable future. The $3.5 billion revolving facility had $2,509 available after $991 of letters of credit; an additional $3,223 of letters of credit was outstanding under other facilities.
- Management described international activity as generally increasing, while North American pricing and volumes remained pressured, particularly for pressure-pumping, drilling and oilfield operators. It cited commodity-price weakness, customer spending reductions, execution costs and compressed delivery schedules as risks. Rig Technology margins may remain constrained by lower-priced backlog, acquisition mix and project costs; the company also cited potential support from contract pricing, added capacity and aftermarket demand.
- Foreign-currency exposures are material. NOV estimated that a hypothetical 10% movement in applicable exchange rates could affect net income by $48 for transactional exposures and future fair value by $59 for translation exposures. It reported a $5 foreign-exchange gain in Q1 2014, compared with a $13 loss in Q1 2013.
- Export-compliance investigations involving NOV and acquired Robbins & Myers remained under discussion with U.S. agencies. NOV expected potential penalties to be within established accruals and not materially affect results, but said outcomes and timing could not be predicted if settlements were not reached. Other claims and regulatory matters were also disclosed; additional losses could not be determined.
- After quarter-end, on May 1, NOV announced final approval of the spin-off of its distribution business as NOW Inc. The planned distribution was one NOW share for every four NOV shares, with a May 22 record date and expected May 30 distribution date. Beginning April 1, NOV reorganized its remaining businesses into four reporting segments, with new segment reporting planned for Q2.
Most important facts for investors to verify
- Whether the record $16.3 billion Rig Technology backlog converts on schedule and at acceptable margins.
- Whether collection delays and working-capital investment reverse, and whether operating cash flow improves.
- The completion, timing, costs and tax treatment of the NOW Inc. spin-off, and its effects on NOV’s reported results and capital structure.
- Developments and any final resolution of the export-compliance investigations and other contingencies.
- Actual segment margins and demand trends amid commodity-price, customer-spending and foreign-exchange volatility.