NOV Inc. (National Oilwell Varco) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. NOV designs and supplies drilling and production equipment, oilfield services and supplies, and distribution services to the upstream oil and gas industry. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $3,146 | $3,032 | +4% |
| Gross profit / margin | $975 / 31.0% | $962 / 31.7% | Margin down 0.7 percentage points |
| Operating profit / margin | $609 / 19.4% | $637 / 21.0% | Profit down 4%; margin down 1.6 points |
| Net income attributable to NOV | $407 | $422 | Down 4% |
| Diluted earnings per share | $0.96 | $1.01 | Down $0.05 |
| Operating cash flow | $(25) | $95 | Down $120 |
| Capital expenditures | $79 | $31 | Up $48 |
Management’s adjusted, non-GAAP measures exclude specified costs: operating profit was $628 (20.0% margin), and diluted EPS was $1.00, versus $648 (21.4%) and $1.10, respectively, in Q1 2010. Adjustments included $17 of Libyan asset write-downs and $2 of transaction costs in 2011; 2010 included $11 of devaluation costs.
Segments
- Rig Technology: Revenue $1,608, down 15% year over year; operating profit $419 and margin 26.1%, versus $581 and 30.8%. Lower backlog revenue and a shift toward lower-margin work weighed on results.
- Petroleum Services & Supplies: Revenue $1,265, up 37%; operating profit $231 and margin 18.3%, versus $113 and 12.2%. Higher North American activity and shale-related demand supported growth.
- Distribution Services: Revenue $410, up 23%; operating profit $27 and margin 6.6%, versus $11 and 3.3%. Higher volumes and cost efficiencies contributed.
Balance sheet, debt and liquidity
At March 31, 2011, cash and cash equivalents were $3,060, total debt was $715, and total stockholders’ equity was $16,401. At December 31, 2010, cash was $3,333 and debt was $887. NOV repaid $150 of 6.5% Senior Notes due March 2011. A further $200 of 7.25% Senior Notes was due May 1, 2011. The company reported no borrowings under its revolving credit facility and $1,571 available after letters of credit; it also had $1,479 of additional letters of credit, primarily in Norway. NOV said it complied with its debt covenants.
Current assets were $10,739 and current liabilities $4,132. Receivables were $2,757 and inventory $3,570. Management noted that a significant portion of cash was held at foreign subsidiaries and repatriation could create additional tax obligations.
Changes, outlook and risks
- Operating cash flow turned negative, primarily as higher activity increased receivables and inventory and as other working-capital items used cash. Investing cash use was $123, including $79 of capital spending and $51 for acquisitions; financing cash use was $144, including debt repayments and $46 of dividends.
- Rig Technology backlog was $6.2 billion at quarter-end, up 13% from March 2010. Q1 orders were $2.3 billion, described as the second-highest quarterly level in company history. Management expected about $3.7 billion of backlog to convert to revenue over the remaining three quarters of 2011.
- Management expected modest declines in Rig Technology revenue and margins over the next few quarters before new offshore construction projects contribute more revenue. It expected Petroleum Services & Supplies and Distribution Services to benefit if rig counts continued to rise.
- Rising steel, alloy, resin and fiberglass costs could pressure margins if price increases do not offset them. Results are exposed to oil and gas prices, drilling activity, customer demand, global economic conditions, foreign-exchange movements, acquisition integration and access to financing.
- Sanctions affecting Libya led to $17 of asset write-downs, mainly receivables, inventory and fixed assets. Other income/expense included a net expense of $19, with management citing higher foreign-exchange losses. NOV reported $117 of unrecognized tax benefits and no material quarterly change; it did not expect a significant change in the next 12 months.
- Management stated that cash, operating cash generation and available credit should be sufficient for operations, working capital, capital spending, dividends and financing needs. Future dividends remain at the board’s discretion. The filing gives no quantified full-year earnings or revenue guidance.
Important facts for investors to verify
- Whether the $200 million note due May 1, 2011 was repaid or refinanced after quarter-end, and the effect on liquidity.
- Whether the Rig Technology backlog converts on schedule and at margins consistent with management’s expectations.
- Whether working-capital investment—especially receivables and inventory—reverses into operating cash flow as activity grows.
- The continuing effect of Libya-related sanctions or other contingencies, and the extent to which higher input costs can be passed through to customers.
- How much reported earnings trends differ from the company’s non-GAAP results after excluded costs.