NOV Inc. (National Oilwell Varco) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statement amounts are in millions of U.S. dollars, except per-share data. The filing is unaudited; quarterly results are not necessarily indicative of full-year results.
Business context and financial performance
NOV supplies equipment, products and services to the oil and gas industry through Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission. Results benefited from stronger drilling activity, offshore equipment demand, North American shale activity and contributions from acquisitions.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $4,303 | $3,146 | +37% |
| Gross profit / margin | $1,267 / 29.4% | $975 / 31.0% | Margin down 1.6 points |
| Operating profit / margin | $877 / 20.4% | $609 / 19.4% | Profit +44% |
| Net income attributable to NOV | $606 | $407 | +49% |
| Diluted EPS | $1.42 | $0.96 | +48% |
| Operating cash flow | $(64) | $(25) | Outflow increased |
| Capital expenditures | $113 | $79 | Increased |
Management-reported non-GAAP diluted EPS, excluding specified transaction and devaluation costs, was $1.44 versus $1.00. Adjusted operating margin was 20.5% versus 20.0%. These measures are not GAAP results.
Segments and material changes
- Rig Technology: Revenue $2,259 (+41%); operating profit $547 (+31%); margin 24.2%, down from 26.1%. Lower-margin projects in the backlog weighed on margins. Capital equipment backlog reached $10.4 billion, up 67.7% year over year; $5.2 billion was scheduled for revenue recognition during the rest of 2012.
- Petroleum Services & Supplies: Revenue $1,704 (+35%); operating profit $388 (+68%); margin improved to 22.8% from 18.3%, reflecting greater volume, favorable pricing and cost reductions.
- Distribution & Transmission: Revenue $564 (+38%); operating profit $43 (+59%); margin increased to 7.6% from 6.6%. Acquisitions and higher activity contributed to growth.
Company revenue rose 1% sequentially from Q4 2011 and attributable net income rose 6%, according to management. Rig Technology revenue and operating profit declined sequentially, while Petroleum Services & Supplies revenue improved. Samsung Heavy Industries accounted for 11% of Q1 2012 revenue, compared with 12% in Q1 2011.
Liquidity, debt and balance sheet
Cash and equivalents were $3,390 at March 31, 2012, down from $3,535 at year-end 2011; total debt was $510, unchanged. NOV had $351 of current debt, including $350 of senior notes due in November 2012, and $159 of long-term debt. Cash exceeded reported debt, though approximately $3,110 of cash was held outside the U.S. and repatriation could trigger additional taxes.
Current assets were $12,836 versus current liabilities of $5,445. The $2 billion revolving credit facility had no borrowings, $985 of letters of credit outstanding and $1,015 available; it expires April 21, 2013. The company was in compliance with its debt-to-capitalization covenant. Additional letters of credit under other facilities totaled $1,893.
Operating cash outflow of $64 reflected $918 of net cash used by changes in operating assets and liabilities, including a $492 inventory increase and a $217 increase in costs in excess of billings. Investing cash outflow was $160, including $113 of capital spending and $58 for acquisitions. Financing provided $58, including $88 of stock-option proceeds, partly offset by $51 of dividends. Cash declined by $145 to $3,390.
Outlook, risks and unusual items
- Management expected Rig Technology margins to stabilize in the mid-20% range, with modest improvement in the second half of 2012 from newer offshore orders. It cautioned that lower natural-gas prices could reduce pressure-pumping equipment demand.
- Management expected strong oil prices to support the services and distribution segments, while declining gas activity could pressure volumes and pricing later in the year. The filing provides no specific full-year revenue or EPS guidance.
- Risks include volatile oil and gas prices, falling North American gas drilling, global economic and European sovereign-debt uncertainty, customer capital-spending changes, acquisition integration and foreign-exchange movements. WTI averaged $102.88 per barrel in Q1; natural gas averaged $2.45 per mmbtu, down 41% year over year.
- After quarter-end, NOV completed its approximately $0.7 billion cash acquisition of NKT Flexibles on April 4, 2012. On April 10 it agreed to acquire Schlumberger’s Wilson distribution business for approximately $0.8 billion, subject to customary closing conditions and competition approval.
- Q1 included $4 of transaction costs in the non-GAAP reconciliation. The company reversed $8 of previously recognized stock compensation after performance conditions were not met. The effective tax rate was 30.8%, versus 31.9%; foreign-exchange tax effects in Norway reduced the rate.
- Unrecognized tax benefits totaled $131, of which $58 would reduce tax expense if realized. NOV reported a $5 foreign-exchange loss, compared with a $14 loss in Q1 2011, and estimated a hypothetical 10% currency move could affect net income by $33.
Important facts for investors to verify
- Whether the $10.4 billion Rig Technology backlog converts on schedule and at the margins assumed, including the planned $5.2 billion of 2012 revenue.
- How the $350 million of November 2012 note maturities and the April 2013 revolver expiry are addressed, and how much cash is practically available given its offshore location and potential repatriation taxes.
- Whether the Wilson acquisition closes and how the NKT and Wilson transactions affect cash, debt, integration costs and results.
- Whether weak natural-gas prices and falling gas rig activity weigh on pressure pumping, service volumes and pricing.
- Whether working-capital investment and negative quarterly operating cash flow persist despite higher earnings.
- Customer concentration, tax contingencies, foreign-exchange exposure and other commitments disclosed in the complete filing.