NOV Inc. (then National Oilwell Varco) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. Financial statements are unaudited and prepared under U.S. GAAP. Amounts are in millions of dollars except per-share data.
Business context and results
The company designs and supplies drilling and production equipment, oilfield services and consumables, and maintenance and supply-chain services. Its segments are Rig Technology, Petroleum Services & Supplies, and Distribution Services.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $3,011 | $3,087 | $8,984 | $9,578 |
| Gross profit | $945 | $891 | $2,835 | $2,805 |
| Operating profit | $596 | $601 | $1,823 | $1,707 |
| Net income attributable to company | $404 | $385 | $1,227 | $1,075 |
| Diluted EPS | $0.96 | $0.92 | $2.93 | $2.58 |
| Operating margin | 19.8% | 19.5% | 20.3% | 17.8% |
Q3 revenue declined about 2% year over year while company-attributable income rose about 5%. For the first nine months, revenue fell about 6%, but operating profit increased about 7% and attributable income increased about 14%. Q3 gross margin was approximately 31.4%, compared with 28.9% a year earlier. No intangible impairment was recorded in 2010; the prior-year nine-month period included a $147 million impairment charge.
Segment performance and material changes
- Rig Technology: Q3 revenue was $1,650, down 17% year over year; operating profit was $478 and margin was 29.0%. Lower deliveries from backlog weighed on sales, while project cost improvements and manufacturing efficiencies supported margins. Backlog was $4.9 billion at quarter-end, down from $6.4 billion at year-end 2009; Q3 orders of $1.175 billion slightly exceeded $1.157 billion of revenue recognized from backlog.
- Petroleum Services & Supplies: Q3 revenue rose 23% to $1,089 and operating profit doubled to $164; margin improved to 15.1% from 9.3%. Management attributed the improvement mainly to stronger North American activity, including shale drilling.
- Distribution Services: Q3 revenue rose 39% to $424 and operating profit increased to $24; margin was 5.7% versus 2.3%. Growth reflected higher rig activity and sales supporting the Gulf of Mexico oil-spill response.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $735, down from $1,969 in 2009. The filing attributes the decline mainly to about $930 million less net customer financing as backlog contracted, alongside working-capital investment; receivables used $238 million and inventory used $101 million of cash.
- Investing cash outflow was $170, including $140 of capital expenditures and $69 for acquisitions. Financing cash outflow was $123, including $126 of dividends paid.
- Cash and equivalents were $3,070 at September 30, versus $2,622 at December 31, 2009. Total debt was $870, versus $883; $354 was classified as current, primarily reflecting senior notes due in 2011. Cash exceeded reported debt by approximately $2.2 billion.
- There were no borrowings on the $2 billion revolving facility; $1,483 was available after outstanding letters of credit. The company also reported $1,213 of letters of credit under other facilities and was in compliance with debt covenants.
- Current assets were $10,326 and current liabilities were $3,872. The company said cash, operating cash flow and available credit should be sufficient for operations, working capital, capital expenditures, dividends and debt obligations.
Outlook, risks and unusual items
- Management anticipated modest declines in Rig Technology revenue and margins over the next few quarters as lower backlog converts, before potential new offshore projects contribute. It was bidding on as many as 28 Brazilian offshore rigs and expected any resulting orders mainly in 2011; this was not a firm earnings forecast.
- Management expected the Gulf of Mexico deepwater moratorium to reduce Q4 diluted EPS by about two cents, similar to its estimated Q3 impact. It noted that offshore contractors were delaying some purchases amid uncertainty over new pressure-control requirements. Gulf response-related Distribution Services sales had already declined significantly in Q4.
- Management viewed North American and international drilling activity as recovering, but flagged potential margin pressure from higher steel and other input costs and tight iron-ore supplies. The outlook remains sensitive to rig counts, commodity prices, customer capital spending and project execution.
- The company recorded $27 million of charges from Venezuela’s bolivar devaluation and $11 million for receivables written down amid deteriorating local business conditions. Its net investment in Venezuela was $34 million at quarter-end.
- Effective tax rates declined to 29.5% for Q3 and 31.1% for the nine-month period, helped by lower foreign tax rates and reversals of prior-year tax reserves. Unrecognized tax benefits were $121 million; a $73 million increase relating to a foreign tax position was offset by a corresponding deferred tax asset, with no earnings impact.
- The company disclosed federal agency inquiries concerning export-trade-law compliance, including a related SEC inquiry. It was negotiating a potential resolution and expected any administrative penalty to be within established accruals, but said the outcome and timing could differ.
- Samsung Heavy Industries accounted for 14% of Q3 revenue and 17% of nine-month revenue. The board approved a $0.10-per-share dividend paid in September; future dividends remain discretionary.
Important facts for investors to verify
- Whether Rig Technology orders stabilize and replace deliveries from the $4.9 billion backlog, and how backlog conversion affects margins.
- The duration and commercial effects of Gulf of Mexico permitting delays, pressure-control requirements and declining spill-response sales.
- Whether working-capital consumption and reduced customer advances continue to constrain operating cash flow.
- Progress and potential cost of the export-compliance agency inquiries, and any changes to the company’s stated expected resolution.
- Liquidity and refinancing plans for the $354 million current debt balance, alongside substantial letters of credit and international cash balances.