NOV Inc. (National Oilwell Varco) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. NOV supplies equipment, technology and services to the upstream oil and gas industry, through Wellbore Technologies, Completion & Production Solutions, and Rig Technologies. Financial amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $1,940 | $1,795 |
| Gross profit / gross margin | $256 / 13.2% | $287 / 16.0% |
| Operating loss / operating margin | $(48) / (2.5%) | $(1) / (0.1%) |
| Net loss attributable to NOV | $(77) | $(68) |
| Diluted loss per share | $(0.20) | $(0.18) |
| Adjusted EBITDA | $140 | $160 |
| Cash used in operating activities | $(38) | $(129) |
Revenue increased 8% year over year, but gross profit fell and the operating loss widened. Adjusted EBITDA is a non-GAAP measure. Cash used in investing activities was $107 million, including $65 million for acquisitions and $43 million of capital expenditures; financing activities used $20 million, including $19 million of dividends. Cash declined to $1.270 billion from $1.427 billion at year-end.
At March 31, NOV reported $2.483 billion of senior notes and $843 million of lease liabilities, or $3.326 billion of total debt and lease obligations as presented in the MD&A. It had no commercial paper borrowings and $3.0 billion available under its revolving credit facility; it reported compliance with its 60% maximum debt-to-capitalization covenant, with a ratio of 16.7%. Cash and cash equivalents included $887 million held by foreign subsidiaries.
Segments and material changes
- Wellbore Technologies: Revenue of $807 million, up 14% year over year; operating profit was $19 million versus $12 million. Management attributed the improvement primarily to increased activity.
- Completion & Production Solutions: Revenue of $581 million, down 13%; operating loss of $35 million versus $16 million operating profit. Management cited deferred deliveries, equipment deliveries pulled forward to year-end, and weak order intake in late 2018 and early 2019. Quarterly orders were $470 million, with a 149% book-to-bill; backlog was $1.04 billion.
- Rig Technologies: Revenue of $603 million, up 25%; operating profit of $31 million versus $18 million. Backlog was $3.14 billion, up 53% from a year earlier; quarterly orders were $271 million, with a 110% book-to-bill.
Sequentially, the first-quarter downturn was pronounced: operating results moved from $87 million of operating profit and $279 million of Adjusted EBITDA in Q4 2018 to a $48 million operating loss and $140 million of Adjusted EBITDA in Q1 2019. Management linked the slowdown to customer budget uncertainty, year-end pull-forward of deliveries, seasonal weakness, and North American pricing pressure.
Operating cash flow improved from the prior-year quarter’s $129 million use, but working-capital movements still used $166 million, including inventory growth and lower accrued liabilities; receivables provided a partial offset. NOV also sold $141 million of receivables through factoring arrangements, receiving $140 million in cash proceeds.
Outlook, risks and notable items
- Management anticipated sequential improvement in all three segments in Q2 2019, citing improving bookings and commodity prices through Q1. This is management’s outlook, not quantified earnings guidance.
- For firm remaining performance obligations, NOV expected to recognize approximately $715 million of revenue in 2019 and $966 million in 2020 and later. Segment backlog schedules separately indicated expected remaining-2019 revenue of about $840 million for Completion & Production Solutions and $658 million for Rig Technologies; timing may vary.
- Management described longer-term market fundamentals as promising but the near-term outlook as uncertain. Key sensitivities include oil and gas prices, drilling and completion activity, customer capital spending, and global economic conditions.
- Disclosed risks include international trade and customs restrictions, Brexit-related supply-chain and regulatory uncertainty, litigation and regulatory matters, foreign-exchange exposure, and the possibility that actual contingent liabilities exceed recorded reserves. NOV stated that it had accrued amounts for contingencies considered probable and that it could not determine total potential losses.
- NOV adopted lease accounting (ASC 842) on January 1, 2019, recognizing $789 million of lease right-of-use assets at quarter-end; adoption had no material effect on retained earnings. The company also reported deferred tax asset valuation allowances for losses and credits.
Most important facts for investors to verify
- Whether the anticipated Q2 sequential segment improvement occurred, and whether it translated into improved operating margins and cash generation.
- Whether Completion & Production Solutions’ order recovery and both equipment backlogs convert to revenue on the expected schedule.
- How inventory, accrued liabilities, factoring activity and other working-capital changes affect operating cash flow.
- The trajectory of total debt and lease obligations, cash held overseas, credit-facility availability, and covenant compliance.
- Developments in trade, regulatory and legal matters, and any changes to contingent-loss estimates or tax valuation allowances.