NOV Inc. (formerly National Oilwell Varco) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The interim statements are unaudited.
Business context and results
NOV supplies equipment, products and services to the upstream oil and gas industry through Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission. Results reflect stronger activity and acquisitions, against a backdrop of sharply lower natural-gas prices and a sequential decline in worldwide rig count.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $4,734 | $3,513 | $9,037 | $6,659 |
| Gross profit | $1,306 | $1,083 | $2,573 | $2,058 |
| Operating profit | $879 | $708 | $1,756 | $1,317 |
| Operating margin | 18.6% | 20.2% | 19.4% | 19.8% |
| Net income attributable to NOV | $605 | $481 | $1,211 | $888 |
| Diluted EPS | $1.42 | $1.13 | $2.84 | $2.10 |
| Cash dividends per share | $0.12 | $0.11 | $0.24 | $0.22 |
- Q2 revenue grew 35% year over year; NOV-attributable net income rose 26%. Sequentially, revenue increased 10%, while net income attributable to NOV decreased $1 million from Q1 2012.
- Q2 gross margin was approximately 27.6%, compared with 30.8% a year earlier. GAAP operating margin was 18.6%, versus 20.2%. Management reported Q2 operating profit of $907 million and margin of 19.2% excluding $28 million of transaction costs; adjusted diluted EPS was $1.46.
- Segment Q2 revenue and operating margin: Rig Technology $2,405 million and 23.0%; Petroleum Services & Supplies $1,776 million and 22.0%; Distribution & Transmission $780 million and 5.9%.
- Six-month operating cash flow was negative $317 million, versus positive $887 million in 2011. Working-capital changes used $1,947 million, primarily reflecting increased activity, inventory buildup, project costs ahead of milestone billing and higher tax payments.
- Six-month investing cash use was $2,250 million, including $2,014 million for acquisitions and $253 million for capital expenditures. Financing provided $955 million, principally from credit-facility borrowings.
- At June 30, cash was $1,917 million and total debt $1,448 million, a net cash position of approximately $469 million. Current assets were $13,014 million and current liabilities $6,481 million. Cash included $1,712 million held outside the U.S.
Material changes and notable items
- During the first half, NOV completed nine acquisitions for $2,014 million net of cash acquired, including NKT, Enerflow and Wilson. The purchase-price allocation was preliminary and included $801 million of goodwill. Acquisition activity increased goodwill and intangibles; six acquired businesses contributed for only part of Q2.
- After quarter-end, NOV completed its CE Franklin acquisition on July 19 for approximately $235 million. Management expected the Wilson and CE Franklin contributions to add approximately $500 million of Q3 revenue at about a 5% operating profit margin.
- Rig Technology backlog was $11.3 billion at June 30, up 46.8% year over year. Management expected $3.9 billion to convert to revenue in the remainder of 2012 and $4.9 billion in 2013.
- Debt increased from $510 million at year-end 2011 to $1,448 million, including $935 million drawn on the revolving facility. The company had $85 million of remaining availability after facility borrowings and letters of credit.
- Q2 included $28 million of transaction costs; the six-month total was $32 million. NOV reversed $8 million of previously recognized stock compensation after certain 2009 performance awards did not vest.
Outlook, risks and contingencies
- Management expected Rig Technology margins to stabilize in the mid-20% range, while noting that lower-margin acquired subsea businesses and softness in North American land-rig, workover and pressure-pumping markets could weigh on results.
- Management warned that pricing and volumes in Petroleum Services & Supplies and Distribution & Transmission could come under pressure in the second half of 2012 as overall rig activity softened. Q2 average natural-gas prices were $2.28 per mmbtu, down 47.7% year over year; WTI averaged $93.42 per barrel, down 8.6%.
- Management said cash on hand, operating cash generation and credit access should fund operations, working capital, capital spending, debt service and dividends. The $2 billion revolving facility expires April 21, 2013; $350 million of senior notes mature in November 2012. NOV was in compliance with its maximum debt-to-capitalization covenant at quarter-end.
- Risks include oil and gas price volatility, global economic and European sovereign-debt uncertainty, acquisition integration, financing availability and foreign-exchange movements. NOV reported a net $57 million fair-value liability on foreign-currency forward contracts; it does not use derivatives for speculation.
- NOV reported government inquiries concerning export-trade-law compliance, including inquiries involving acquired Ameron conduct predating the acquisition. Management anticipated any negotiated penalties would be within established accruals and not material, but said outcomes and effects could not be predicted if resolution was not reached. Other contingencies were not expected to materially affect results, subject to the stated uncertainties.
- One customer accounted for 10% of Q2 and first-half 2012 revenue. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether acquisitions, including CE Franklin, deliver expected revenue, margins and integration benefits.
- Whether the $11.3 billion backlog converts on schedule and at margins consistent with management’s expectations.
- Working-capital trends and the recovery of operating cash flow after the first-half cash use.
- Plans to repay or refinance the November 2012 notes and address the April 2013 revolving-facility expiry, alongside limited remaining facility availability.
- Developments in export-compliance inquiries, and exposure to customer concentration, commodity prices and second-half North American activity.