NOV Inc. (then National Oilwell Varco, Inc.) — 2009 Form 10-K
Business context and reporting period. This filing reports the fiscal year ended December 31, 2009, and includes unaudited fourth-quarter results. NOV supplies drilling and production equipment, oilfield services and supplies, and distribution and supply-chain services through Rig Technology, Petroleum Services & Supplies, and Distribution Services. The 2008 comparison is not fully like-for-like: Grant Prideco results are included only from its April 21, 2008 acquisition date.
Financial performance and key metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $12.712 billion | $13.431 billion |
| Operating profit | $2.315 billion | $2.918 billion |
| Net income attributable to NOV | $1.469 billion | $1.952 billion |
| Diluted EPS | $3.52 | $4.90 |
| Operating margin | 18.2% | 21.7% |
| Operating cash flow | $2.095 billion | $2.294 billion |
| Capital expenditures | $250 million | $379 million |
- Revenue declined 5.4% as reported; management said the decline was 9% against 2008 pro forma revenue including Grant Prideco for the full year. Net income attributable to NOV fell about 25%.
- Gross profit was $3.784 billion, a 29.8% gross margin, versus $4.072 billion and 30.3% in 2008. The effective tax rate was 33.3%.
- Fourth-quarter revenue was $3.134 billion and net income attributable to NOV was $394 million, or $0.94 diluted EPS. Revenue and net income rose 2% sequentially, but fell 18% and 33%, respectively, year over year. Fourth-quarter operating margin was 19.8%, excluding transaction and restructuring charges, versus 23.0% on the same basis a year earlier.
- Segment results: Rig Technology revenue was $8.093 billion and operating profit $2.283 billion (28.2% margin); Petroleum Services & Supplies revenue was $3.745 billion and reported operating profit $301 million (8.0% margin); Distribution Services revenue was $1.350 billion and operating profit $50 million (3.7% margin). The Petroleum Services & Supplies result includes a $147 million intangible-asset impairment; management cited a 12.1% segment margin excluding specified impairment, transaction and restructuring charges.
Cash, debt and liquidity
- At year-end, cash and cash equivalents were $2.622 billion; total debt was $883 million, implying net cash of approximately $1.739 billion. Working capital was $5.424 billion.
- Operating cash flow was $2.095 billion; investing activities used $552 million and financing activities used $491 million. The latter included $460 million of dividends paid.
- NOV had $1.412 billion available under its unsecured revolving credit facility, with no borrowings outstanding under it, and reported compliance with debt covenants. It also had $2.073 billion of additional outstanding letters of credit, primarily in Norway.
- Year-end backlog was $6.4 billion, down 42.3% from $11.1 billion a year earlier. Approximately $4.6 billion was scheduled for delivery in 2010; management identified $274 million of backlog as at risk.
Changes, outlook, risks and unusual items
- The worldwide rig count declined 30.9% in 2009; average WTI crude prices fell 38.1% and average natural-gas prices fell 55.4% from 2008. Lower activity and pricing weighed most heavily on Petroleum Services & Supplies and Distribution Services. Rig Technology benefited from contracted backlog and execution, increasing revenue 7.5% and operating profit 15.9%.
- Management remained cautious on 2010. It saw signs of market stabilization and North American activity recovery, but expected Rig Technology revenue and margins to decline as backlog ran off. Services and distribution results were expected to depend closely on rig-count recovery. Management cited bids for major offshore projects, including potential Brazilian rigs, but gave no quantified earnings or revenue guidance.
- Pre-tax impairment, transaction, voluntary early-retirement and other restructuring charges totaled $234 million; management estimated their after-tax impact at $0.37 per diluted share. The $147 million trade-name impairment related to Grant Prideco. No goodwill impairment was recorded.
- Management expected a $20–$30 million pre-tax charge in first-quarter 2010 from Venezuela’s currency devaluation and changes to social regulations. It also forecast a 2010 tax rate of 30%–32%.
- Export-trade compliance inquiries: NOV reported federal grand jury subpoenas and agency inquiries, identified possible areas of concern in its internal review, and was negotiating a resolution. Management expected any agreed administrative penalty to be covered by existing accruals, while noting that a different outcome could not be predicted.
- Other risks include oilfield cyclicality, customer access to financing, project cost and cancellation exposure, competition and pricing pressure, foreign-exchange movements, environmental and regulatory liabilities, and impairment sensitivity. One customer accounted for 16.6% of 2009 revenue. NOV reported $5.5 billion of goodwill and $643 million of indefinite-lived trade names at year-end.
- The company initiated a regular quarterly dividend of $0.10 per share and paid a one-time $1.00 special dividend in December 2009; future dividends remain at the board’s discretion.
Important facts for investors to verify
- Reconcile reported 2008 comparisons with Grant Prideco’s partial-year consolidation and management’s pro forma comparison.
- Review backlog composition, delivery timing, cancellation provisions, the $274 million identified as at risk, and the margin assumptions for long-term contracts.
- Assess whether activity and pricing recover sufficiently to stabilize the two more activity-sensitive segments and offset Rig Technology backlog runoff.
- Track the export-compliance investigation and resolution, Venezuela-related charges, and any changes to environmental, legal or tax contingencies.
- Monitor cash conversion, receivable and inventory reserves, warranty accruals, customer concentration, and the company’s ability to sustain dividends and acquisition spending.