NOV Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. NOV designs and supplies equipment and services for oil and gas drilling and production, and provides distribution and supply-chain services. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $5,789 | $5,319 | $16,697 | $14,356 |
| Gross profit | $1,462 | $1,371 | $3,992 | $3,945 |
| Operating profit | $946 | $898 | $2,466 | $2,654 |
| Operating margin | 16.3% | 16.9% | 14.8% | 18.5% |
| Net income attributable to NOV | $636 | $612 | $1,669 | $1,823 |
| Diluted EPS | $1.49 | $1.43 | $3.90 | $4.28 |
Q3 revenue rose 9% year over year and company-attributable net income rose 4%. The quarter included a $102 million pre-tax legal-settlement gain in Rig Technology and $10 million of pre-tax other costs. Excluding these items, management reported operating profit of $853 million and a 14.7% margin, versus $946 million and 17.8% in Q3 2012; adjusted diluted EPS was $1.34 versus $1.52. These are company-reported non-GAAP measures.
For the first nine months, revenue increased about 16%, but operating profit declined about 7% and company-attributable net income declined about 8%. Diluted EPS was $3.90 versus $4.28. Nine-month operating profit excluding reported nonrecurring items was $2,495 million versus $2,734 million.
Segments and operating trends
- Rig Technology: Q3 revenue was $2,945 million and operating profit $706 million, including the $102 million settlement gain. Backlog reached a record $15.2 billion; 92% was offshore and 94% international. The company added $3.3 billion of orders during the quarter. Excluding the settlement gain, margins faced pressure from project mix, compressed delivery schedules, execution costs, acquisitions and growth investments.
- Petroleum Services & Supplies: Q3 revenue was $1,809 million, up 5% year over year, while operating profit fell 16% to $321 million and margin declined to 17.7% from 22.3%. Management cited North American pricing pressure, weaker activity and under-absorbed facilities.
- Distribution & Transmission: Q3 revenue was $1,342 million, up 2%, and operating profit was $74 million, compared with $42 million. Nine-month revenue growth was substantially affected by acquisitions.
On February 20, 2013, NOV acquired Robbins & Myers for $2,378 million net of cash acquired. Its preliminary allocation included $1,554 million of goodwill and $916 million of identifiable intangible assets. Results were consolidated from the acquisition date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1,879 million, versus cash used of $180 million in 2012. Investing cash outflow was $2,812 million, including $2,397 million for acquisitions and $484 million of capital expenditures. Financing cash inflow was $363 million.
- Cash declined to $2,741 million from $3,319 million at year-end 2012. Total debt rose to $3,749 million from $3,149 million; the company shifted from net cash of $170 million to net debt of about $1,008 million. Management attributed the change primarily to the Robbins & Myers acquisition.
- NOV had $600 million of commercial paper outstanding and $2,098 million of availability under its $3.5 billion revolving credit facility after outstanding facility letters of credit. It reported compliance with the facility’s debt-to-capitalization covenant. A further $3,194 million of letters of credit was outstanding under other facilities, primarily in Norway.
- Approximately $2,440 million of cash was held outside the United States and could incur additional tax obligations if transferred or repatriated. The quarterly dividend increased to $0.26 per share; nine-month dividends were $0.65 per share.
Outlook, risks and other material items
- Management expected Q4 Petroleum Services & Supplies revenue to improve in the low-to-mid single-digit percentage range, supported by seasonal Canadian activity and international project sales; it planned for a relatively flat-to-down U.S. land market. Distribution & Transmission revenue was expected to decline in the low-single-digit range. Rig Technology near-term margins were expected to remain challenged. No consolidated full-year numerical guidance is provided in the filing text.
- Management cited risks from oil and gas prices, drilling and customer spending, North American market weakness, pricing pressure, project execution schedules, acquisition integration, and global economic conditions. It noted continued international activity but an oversupplied North American land market and weak demand for certain pressure-pumping products.
- On September 24, 2013, NOV announced exploration of a tax-efficient spin-off of its distribution business, targeted for the first half of 2014. Completion remained subject to market conditions, regulatory approvals, separation arrangements and final board approval.
- NOV was negotiating potential resolutions of export-compliance inquiries involving the company and acquired businesses. Management expected any penalties to be within established accruals and not material, but stated that outcomes and timing could not be assured. An OFAC matter related to Ameron was settled during Q3 for an immaterial fine. Other claims and contingencies were assessed as not expected to materially affect results, subject to the uncertainties disclosed.
- Samsung Heavy Industries accounted for 9% of revenue in both the quarter and nine-month period, creating customer concentration. Currency exposure is material: NOV reported a $24 million foreign-exchange loss for the first nine months and an $8 million charge related to Venezuelan currency devaluation.
Key investor verification points
- Separate recurring operating performance from the $102 million settlement gain and acquisition-related costs; assess the continuing margin trend, particularly in Petroleum Services & Supplies.
- Track conversion, timing and profitability of the $15.2 billion equipment backlog, including offshore and international concentration.
- Review Robbins & Myers integration, preliminary purchase accounting, goodwill and intangible-asset amortization.
- Monitor debt, commercial-paper refinancing, offshore cash availability and the company’s substantial letters-of-credit commitments.
- Confirm progress, costs, approvals and final terms of the proposed distribution-business spin-off.
- Follow resolution of export-compliance inquiries, customer concentration, and exposure to oil and gas activity, foreign exchange and project execution risks.