NOV Inc. (formerly National Oilwell Varco) — Q2 2018 Form 10-Q
Business context and reporting period
NOV supplies equipment, technology and services to the upstream oil and gas industry through Wellbore Technologies, Completion & Production Solutions, and Rig Technologies. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are primarily with the corresponding 2017 periods. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2.106 billion | $1.759 billion | $3.901 billion | $3.500 billion |
| Gross profit | $355 million | $231 million | $642 million | $440 million |
| Operating profit (loss) | $52 million | ($62 million) | $51 million | ($159 million) |
| Net income (loss) attributable to NOV | $24 million | ($75 million) | ($44 million) | ($197 million) |
| Diluted EPS | $0.06 | ($0.20) | ($0.12) | ($0.52) |
| Adjusted EBITDA, non-GAAP | $226 million | $142 million | $386 million | $247 million |
- Q2 revenue rose 20% year over year; gross margin improved to approximately 16.9% from 13.1%, and operating margin was 2.5% versus negative 3.5%. Adjusted EBITDA is a company-defined non-GAAP measure.
- Q2 operating improvement reflected higher activity and results across all three segments. Six-month net loss included $50 million of other expense, primarily related to foreign currency fluctuations.
- For the first six months, operating cash flow was $110 million, down from $279 million. Investing used $360 million, including $280 million for acquisitions and $102 million in capital expenditures. Financing used $20 million, including $38 million of dividends. Cash fell $300 million to $1.137 billion.
- At June 30, cash was $1.137 billion and total debt $2.715 billion, leaving net debt of approximately $1.578 billion. Debt was nearly unchanged from year-end 2017. The $3.0 billion revolving facility was undrawn and available; NOV reported covenant compliance and a 16.3% debt-to-capitalization ratio against a 60% maximum. About $859 million of cash was held by foreign subsidiaries.
- Current assets were $7.008 billion and current liabilities $2.194 billion. Inventory increased to $3.158 billion from $3.003 billion at year-end; accrued liabilities declined to $950 million from $1.238 billion.
Material changes and segment trends
- Wellbore Technologies: Q2 revenue increased 29% to $793 million; operating profit was $38 million versus a $24 million loss. Management cited U.S. recovery and a seasonal Eastern Hemisphere rebound.
- Completion & Production Solutions: revenue increased 13% to $738 million and operating profit rose to $40 million from $27 million. Backlog was $955 million; quarterly orders of $398 million were below shipments from backlog of $418 million (95% book-to-bill).
- Rig Technologies: revenue increased 19% to $651 million and operating profit rose to $62 million from $6 million. Backlog was $3.5 billion. Net new orders were $2.03 billion, including $1.80 billion associated with the announced Saudi Aramco joint venture agreement.
- International revenue was $1.172 billion in Q2, versus $934 million in North America. Management said North American land activity was improving, while offshore conditions remained weak and international recovery was uneven.
- Currency translation produced a $223 million Q2 other comprehensive loss and a $187 million loss for the first half, contributing to accumulated other comprehensive loss of $1.298 billion. These translation effects are distinct from net income.
Outlook, risks and unusual items
- Management expected continued improvement in land-focused demand, but anticipated subdued offshore capital spending and a slower offshore recovery. No quantified company-wide revenue or earnings guidance is provided.
- Remaining performance obligations on qualifying contracts were $2.610 billion: approximately $775 million expected to be recognized in the remainder of 2018 and $1.835 billion in 2019 and thereafter. Segment capital-equipment backlog disclosures are separate; timing of conversion may vary.
- Management reported approximately $3.0 billion of annual cost reductions in salaries and other operating expenses and closure, or planned closure, of 420 locations over three years. The company said it would continue adjusting operations while investing in strategic products and acquisitions.
- Q2 had no net “other items” in the company’s Adjusted EBITDA reconciliation; first-half reconciliation included a $12 million credit. Other items may include restructuring, severance, asset or liability write-downs, and reversals of accruals.
- Risks include oil and gas prices and customer spending, persistent offshore equipment oversupply, foreign-exchange movements, trade restrictions and tariffs, localization requirements, acquisition execution and financing, and legal or regulatory matters. NOV said reserves covered contingencies considered probable, but total potential losses for certain matters could not be determined; some claims may be uninsured or excluded from coverage.
- The company was still completing its provisional accounting for the 2017 U.S. tax law changes. It reported a $19 million foreign-exchange loss in the first half and noted that exchange-rate shifts can affect earnings and cash flows. Future dividends remain at the board’s discretion.
Important facts for investors to verify
- Whether revenue growth and margin recovery persist, particularly in North American land markets, and how quickly offshore markets improve.
- Conversion, timing, cancellation risk, and profitability of the $3.5 billion Rig Technologies backlog, including the Saudi Aramco-related order, and the $955 million Completion & Production Solutions backlog.
- Cash generation and working-capital trends: first-half operating cash flow declined year over year, with inventory growth and accrued-liability reductions among the cash-flow drivers.
- Acquisition spending, foreign cash availability and taxation, debt capacity, and the effect of foreign-exchange volatility on earnings and equity.
- Updates to tax-law accounting, legal and regulatory contingencies, and any changes to the company’s risk factors or outlook.