NOV Inc. (formerly National Oilwell Varco) — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; unaudited. The company designs and sells oilfield equipment, provides petroleum services and supplies, and distributes maintenance and operating products to the upstream oil and gas industry. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $3,032 | $3,481 | Down 13% |
| Gross profit | $962 | $1,039 | Down 7% |
| Operating profit | $637 | $720 | Down 12% |
| Operating margin | 21.0% | 20.7% | Up 0.3 percentage points |
| Net income attributable to NOV | $422 | $470 | Down 10% |
| Diluted EPS | $1.01 | $1.13 | Down 11% |
| Operating cash flow | $95 | $785 | Down $690 |
Gross margin was approximately 31.7%, compared with 29.8% in Q1 2009. Consolidated net income was $419 million; the $422 million attributable to NOV reflects a $3 million loss attributable to noncontrolling interests. The effective tax rate was 32.0%, versus 32.5%.
Segments and material changes
- Rig Technology: Revenue of $1,886 million, down 14% year over year; operating profit of $581 million, down 4%, while margin improved to 30.8% from 27.6%. Lower project costs, revised cost estimates and manufacturing efficiencies supported margins. Q1 orders were $618 million; capital-equipment backlog was $5.4 billion, down 43% from a year earlier.
- Petroleum Services & Supplies: Revenue of $923 million, down 9%; operating profit of $113 million, down 31%; margin declined to 12.2% from 16.2%. Lower drill-pipe activity, pricing pressure and reduced volumes weighed on results, though North American activity improved.
- Distribution Services: Revenue of $334 million, down 18%; operating profit of $11 million, down 56%; margin declined to 3.3% from 6.1%. Lower volumes and pricing pressure were partly offset by stronger Canadian sales.
Management said revenue fell 3% sequentially from Q4 2009, while attributable net income rose 7%. Excluding the Venezuela charges, operating profit was $648 million, or 21.4% of sales, and increased $26 million sequentially. Segment margins improved sequentially, supported by project execution and cost reductions.
Cash, debt and liquidity
- Cash and equivalents were $2,608 million at March 31, 2010, versus $2,622 million at year-end 2009. Total debt was $880 million, versus $883 million; cash exceeded debt by approximately $1.7 billion.
- Current assets were $9,545 million and current liabilities $3,744 million. Working capital was approximately $5.8 billion; the current ratio was approximately 2.6.
- The company had no borrowings on its $2 billion revolving facility, with $1,416 million available after letters of credit. Additional letters of credit outstanding under other facilities were $1,808 million. NOV reported compliance with debt covenants.
- Operating cash flow was $95 million; investing cash outflow was $65 million, including $31 million of capital expenditures and $46 million for acquisitions. Financing cash outflow was $36 million, primarily reflecting $42 million of dividends paid. Cash declined $14 million during the quarter.
- Management attributed weak operating cash flow mainly to a $583 million net use of cash from changes in operating assets and liabilities. Customer financing from prepayments and billings in excess of costs, net of costs in excess of billings, declined $670 million from year-end as backlog revenue was recognized.
Outlook, risks and unusual items
- Management saw signs of market stabilization, with improving North American and international rig activity. It expected lower Rig Technology backlog to result in modest revenue and margin declines over coming quarters before potential new offshore projects contribute.
- Management said Petroleum Services & Supplies and Distribution Services depend heavily on rig activity, particularly in North America. Canadian spring breakup was expected to weigh on Q2 results; higher steel costs could pressure margins later in 2010.
- NOV was pursuing a tender for up to 28 offshore floating rigs in Brazil, but did not expect many related orders before 2011. Conversion of bids into orders depended on dayrates, commodity prices and economic conditions.
- Q1 included $38 million of pretax Venezuela charges: $27 million for devaluation of monetary assets after the bolivar was devalued from 2.15 to 4.3 per U.S. dollar, and $11 million for receivable write-downs amid deteriorating business conditions. The after-tax effect was reported as $0.09 per share; the company said its remaining net investment in Venezuela was approximately $42 million.
- Rig Technology backlog was 87% offshore and 91% international. Since Q3 2008, $424 million of orders had been removed for cancellations, adjustments or customer changes; management did not expect further material cancellations but cautioned there was no assurance.
- One shipyard customer represented 21% of Q1 2010 revenue, versus 12% a year earlier, creating customer concentration exposure. Significant cash balances were held in foreign subsidiaries and could incur additional taxes if repatriated.
- Unrecognized tax benefits were $123 million, including a $73 million increase for a foreign tax position; a corresponding deferred tax asset was recorded, with no earnings impact. Management said potential tax payments could be claimed as U.S. foreign tax credits.
- Foreign exchange movements, including Venezuela’s devaluation, and commodity prices, customer demand, credit conditions, project execution, acquisitions and global economic activity were identified as risks. Management stated that cash, operating cash flow and available borrowing capacity should be sufficient for expected needs. Future dividends remain at the board’s discretion.
Key facts for investors to verify
- Whether improving rig counts and new orders offset the expected near-term decline in Rig Technology backlog revenue and margins.
- Whether cash conversion recovers after the sharp operating cash-flow decline and the reduction in customer project financing.
- Whether pricing, volume and steel-cost trends stabilize or further pressure Petroleum Services & Supplies and Distribution Services margins.
- Exposure to the concentrated shipyard customer, potential project cancellations and execution of the Brazil rig tender.
- Further developments in Venezuela, including asset exposure, receivable recoveries and foreign-exchange effects; also monitor tax contingencies and foreign-currency risks.