NOV Inc. Form 10-Q Summary
Business context and reporting period
National Oilwell Varco, Inc. (NOV) filed for the quarter ended June 30, 2015. The company supplies equipment, technology and services to the oil and gas industry through Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. The comparisons below are continuing operations; NOV spun off its distribution business as NOW Inc. on May 30, 2014.
Financial results
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Revenue | $3,909 | $5,255 | Down 26% |
| Gross profit / margin | $855 / 21.9% | $1,455 / 27.7% | Margin down 5.8 points |
| Operating profit / margin | $438 / 11.2% | $913 / 17.4% | Profit down 52% |
| Continuing-operations income | $286 | $609 | Down 53% |
| Diluted continuing-operations EPS | $0.74 | $1.42 | Down 48% |
Management’s non-GAAP operating profit excluding other items was $455 million, or 11.6% of revenue, versus $945 million, or 18.0%, a year earlier. Non-GAAP diluted operating EPS was $0.77 versus $1.47. The filing reports net income attributable to NOV of $289 million for Q2; continuing-operations income was $286 million, with the difference reflecting noncontrolling interests.
- For the six months ended June 30, revenue was $8,729 million versus $10,144 million; operating profit was $1,008 million versus $1,712 million; and income from continuing operations was $599 million versus $1,157 million.
- Q2 segment operating margins were Rig Systems 20.3% (21.1% prior year), Rig Aftermarket 21.8% (27.6%), Wellbore Technologies 4.0% (18.2%), and Completion & Production Solutions 8.9% (13.9%).
- Six-month cash from continuing operating activities was $308 million versus $1,270 million. Capital expenditures were $234 million; net cash used in investing was $272 million and net cash used in financing was $997 million. Cash declined by $992 million to $2,544 million.
- At June 30, cash was $2,544 million and total debt was $4,305 million, including $1,140 million of commercial paper. Long-term debt was $4,154 million. Cash exceeded debt by $1,761 million, though approximately $2,466 million of cash was held outside the U.S.
- Current assets were $14,167 million and current liabilities $5,672 million. NOV had $3,159 million available under its $4.5 billion revolving facility after commercial paper and facility-issued letters of credit; it was in compliance with its debt-to-capitalization covenant.
- Share repurchases totaled $1,777 million for the first half (33.1 million shares); cash dividends were $363 million. The board’s quarterly dividend was $0.46 per share.
Material changes and management commentary
The sharp decline in oil prices and drilling activity weighed on demand, pricing, revenue and margins. Average worldwide rig count in Q2 was 2,178, down 36.0% year over year; the U.S. count was down 50.9%. Customers reduced capital and operating spending and drew on equipment and consumables from idle rigs. Q2 revenue also fell 19% sequentially from Q1, and management reported continuing-operations income down 9% sequentially.
Rig Systems revenue declined on fewer land-rig shipments and delayed offshore deliveries, although sequential margin improved with project execution, logistics and supply-chain efficiencies. Wellbore Technologies was particularly pressured by lower activity and pricing. Rig Aftermarket faced lower volumes, spare-parts mix and older-inventory charges. Completion & Production Solutions was affected by weaker sales in higher-margin pressure-pumping and fiberglass-pipe businesses.
Capital-equipment backlog was $9.0 billion in Rig Systems, down 42% year over year, and $1.189 billion in Completion & Production Solutions, down 45%. NOV estimated revenue from backlog in the second half of 2015 of approximately $2.4 billion and $800 million, respectively. Backlog timing and realization are uncertain.
Outlook, risks and unusual items
- Management was cautious on the second half of 2015, expecting no substantial near-term drilling recovery, lower year-over-year Rig Aftermarket sales, and Rig Systems revenue out of backlog exceeding new orders, implying a full-year book-to-bill ratio well below one. No full-year earnings or revenue guidance was provided.
- Brazil investigations and customer financing stress could delay or suspend delivery of 22 drilling-equipment packages for floating rigs, affect backlog, and lead to cancellation attempts or contract breaches. NOV said its shipyard customers had not attempted to cancel its contracts as of the filing.
- Management warned that continued low commodity prices and rig counts could trigger impairment charges. Goodwill was approximately $8.5 billion; the filing also notes prior impairment of certain Wellbore Technologies trade names and ongoing monitoring of goodwill and indefinite-lived assets.
- Operating profit included $17 million of Q2 and $139 million of first-half “other items,” including early-retirement, severance, facility-closure, acquisition-related, spin-off and legal costs. Other expense included currency-related losses and a first-quarter write-down of Venezuelan assets.
- Foreign-currency forward contracts had a net fair-value liability of $287 million. NOV recorded $20 million of Q2 losses after discontinuing certain cash-flow hedges because forecast transactions were no longer probable on schedule; further delays or reductions in forecast activity could cause additional losses. The company reported a $35 million foreign-exchange loss for the first half.
- NOV was negotiating a potential resolution of U.S. government inquiries concerning export-trade-law compliance. Management expected any agreed administrative penalty to be within established accruals, but said outcomes and effects could not be predicted if no resolution is reached. The filing also discusses other claims and regulatory matters, with no material loss estimate stated for them.
- Management believed cash, operating cash flow and available credit would fund operations, capital needs, debt service and dividends. However, first-half operating cash generation was substantially lower year over year, and share repurchases were partly funded through commercial-paper borrowings.
Most important facts for investors to verify
- Whether oil prices and rig activity stabilize, and how that translates into orders, pricing, margins and customer spending.
- Whether the $10.2 billion combined Rig Systems and Completion & Production Solutions backlog converts to revenue as estimated, especially the Brazil-related orders and offshore projects.
- Cash conversion and working-capital trends, including customer prepayments, receivables, inventory and the effect of continued lower activity.
- Debt, commercial-paper usage, credit-facility availability, the covenant position, and the extent to which cash held abroad is available for U.S. needs.
- Potential impairment exposure for goodwill and other intangible assets under prolonged weak market conditions.
- Developments in the export-compliance inquiries, Brazil investigations and related contract contingencies, as well as any further hedge de-designations or foreign-exchange losses.