NOV Inc. quarterly report, Q2 FY2023

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NOV Inc. — Q2 2023 Form 10-Q Summary

Business context and reporting period

NOV provides equipment and technology to the global energy industry through Wellbore Technologies, Completion & Production Solutions, and Rig Technologies. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; dollar amounts are in millions unless stated otherwise.

Financial performance and liquidity

  • Q2 revenue: $2,093, up 21% year over year and 7% sequentially. Gross profit was $457 (21.8% margin), versus $309 (17.9%) a year earlier. Operating profit was $181 (8.6% margin), versus $68 (3.9%).
  • Q2 earnings: Net income attributable to NOV was $155, or $0.39 per diluted share, versus $69, or $0.18, in Q2 2022. Adjusted EBITDA, a non-GAAP measure, was $245 (11.7% of revenue), versus $150 (8.7%). Q2 results included $7 of net credits in Other Items.
  • First-half results: Revenue was $4,055 versus $3,275; operating profit was $307 versus $47; and NOV-attributable net income was $281 versus $19. Adjusted EBITDA was $440 versus $253.
  • Q2 segment results: Wellbore Technologies revenue was $804 and operating profit $128; Completion & Production Solutions revenue was $753 and operating profit $53; Rig Technologies revenue was $606 and operating profit $64. Each segment’s revenue and operating profit increased year over year.
  • Cash flow: For the first half, operating cash flow was negative $274 versus negative $227 in 2022; investing cash flow was negative $128, including $133 of capital expenditures; and financing cash flow was negative $73, including $40 of dividends paid. Working-capital movements were a significant use of operating cash, including $393 for inventory and $161 for receivables.
  • Balance sheet at June 30: Cash was $592, down from $1,069 at year-end 2022; total debt was $1,728, nearly unchanged from $1,730. Cash less debt implies net debt of about $1,136, excluding lease liabilities. Current assets were $5,610 and current liabilities $2,385. Approximately $522 of cash was held by foreign subsidiaries.
  • Debt capacity: NOV reported $2.0 billion available under its revolving credit facility, no borrowings or letters of credit under that facility, and a 26.4% debt-to-capitalization ratio versus a 60% covenant maximum. The company also reported $481 of letters of credit under bilateral facilities and $568 of long-term lease liabilities.

Material changes versus comparable periods

  • Q2 revenue rose across all three segments; international and offshore demand, improved manufacturing throughput, and stronger project execution supported results. North American activity softened in some markets.
  • Completion & Production Solutions improved to a first-half operating profit of $97 from a $2 loss in the prior-year period. Rig Technologies’ first-half operating profit rose to $117 from $42.
  • First-half operating cash use increased despite substantially higher earnings, principally reflecting working-capital investment. Cash declined by $477 during the first half.
  • Other expense was $29 in Q2 and $45 for the first half, compared with zero and $2, respectively, in 2022; management attributed the increase primarily to foreign-currency fluctuations. NOV recorded a $35 first-half foreign-exchange loss, compared with a $5 gain in 2022.
  • Q2 2022 included $14 of net Other Items charges; first-half 2022 included $59 of net charges, including Russia-related impairment and other charges. Q2 2023 included $7 of net credits, primarily gains on previously reserved inventory.

Outlook, commentary, risks, and contingencies

  • Management described the oilfield industry as being in an early-stage extended recovery, while warning that recession concerns, tighter fiscal policy, inflation, supply-chain disruption, and commodity-price volatility could pressure near-term activity. It expects diminished production capacity and energy-security concerns to support oilfield demand. The filing provides no specific company-wide earnings or revenue guidance.
  • At June 30, remaining performance obligations were $4,210: NOV expected to recognize about $761 in 2023 and $3,449 in 2024 and thereafter. These amounts exclude certain royalty, service, and short-term contracts. Completion & Production Solutions backlog was $1,586, with about 55% expected to convert to revenue during the rest of 2023; Rig Technologies backlog was $2,893, with about 18% expected to convert during that period.
  • Q2 capital-equipment orders were $450 for Completion & Production Solutions (94% book-to-bill) and $222 for Rig Technologies (108% book-to-bill). The former’s backlog declined $15 sequentially; the latter’s increased $17.
  • Risks discussed include energy-market and customer-spending volatility, energy-transition policies, supply-chain and labor disruptions, inflation, trade restrictions and tariffs, foreign-exchange exposure, and geopolitical developments. A hypothetical 10% currency move could affect net income by an estimated $31 and other comprehensive income by $32.
  • NOV is pursuing litigation over drill-bit technology royalties. It accrued an additional $10 in Q2, bringing total accrued royalty receivables to $52; the amount may increase, and the outcome is uncertain.
  • Russian assets and liabilities remained classified as held for sale, subject to regulatory approvals. NOV had curtailed Russian activity and said the sale might incur additional costs or fail to complete on agreed terms.
  • The company paid a $51 Danish transfer-pricing assessment and recorded it as a long-term receivable while appealing. An IRS examination of 2017–2018 returns could result in $48 of additional tax expense if NOV is unsuccessful; the filing says foreign tax credit carryforwards would substantially offset the proposed adjustment.
  • Management said available cash, operating cash generation, and credit facilities should be sufficient for operations and obligations. It also noted that actual results may differ materially from estimates and forward-looking statements. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.

Most important facts for investors to verify

  1. Whether rising revenue and operating margins translate into positive operating cash flow as inventory and other working-capital needs evolve.
  2. How the $4.21 billion of remaining performance obligations and segment backlogs convert to revenue, particularly given expected 2023 conversion rates and order trends.
  3. The outcome and potential financial impact of the royalty litigation, including the recoverability and continued accrual of the $52 million receivable.
  4. Whether NOV completes the Russian business sale and recovers the Danish tax payment; monitor related regulatory and tax developments.
  5. Whether energy-market conditions, foreign-exchange movements, supply-chain constraints, and customer capital spending support or weaken management’s recovery outlook.