NOV Inc. (National Oilwell Varco) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unless otherwise stated, financial amounts are in millions of U.S. dollars. The company designs and supplies drilling and production equipment, oilfield services, and MRO products through Rig Technology, Petroleum Services & Supplies, and Distribution Services.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $2,941 | $3,010 | $5,973 | $6,491 |
| Gross profit | $928 | $875 | $1,890 | $1,914 |
| Operating profit | $590 | $386 | $1,227 | $1,106 |
| Operating margin | 20.1% | 12.8% | 20.5% | 17.0% |
| Net income attributable to NOV | $401 | $220 | $823 | $690 |
| Diluted earnings per share | $0.96 | $0.53 | $1.96 | $1.65 |
| Operating cash flow | Not separately stated for the quarter | $282 | $1,285 |
Q2 revenue decreased about 2% year over year, while operating profit rose about 53% and attributable net income rose about 82%. For the first half, revenue fell about 8%, but operating profit increased about 11% and attributable net income about 19%. Gross margin was approximately 31.6% in Q2 2010 versus 29.1% a year earlier. Q2 results included no intangible impairment charge; Q2 2009 included a $147 million trade-name impairment and $8 million in transaction and restructuring costs.
Segments and material changes
- Rig Technology: Q2 revenue of $1,672 million, down 13% year over year; operating profit of $505 million and margin of 30.2%. Lower capital-equipment revenue from backlog was partly offset by improved project cost estimates and manufacturing efficiency.
- Petroleum Services & Supplies: Q2 revenue of $1,033 million, up 13%; operating profit of $138 million versus a $51 million loss in Q2 2009, which included the $147 million impairment. Higher U.S. activity supported demand.
- Distribution Services: Q2 revenue of $365 million, up 20%; operating profit of $13 million, with a 3.6% margin. U.S. activity and Gulf Coast oil-spill response work contributed to growth.
- Rig Technology backlog was $4.9 billion at June 30, down from a $11.8 billion peak in September 2008. About $2.4 billion was expected to convert to revenue in the second half of 2010.
- One customer accounted for 17% of Q2 revenue and 19% of first-half revenue, versus 20% and 16%, respectively, in the comparable 2009 periods.
Liquidity, debt and cash flows
- Cash and equivalents were $2,688 million at June 30, up from $2,622 million at year-end 2009. Total debt was $871 million, down from $883 million; cash exceeded debt by approximately $1.8 billion.
- Current debt was $352 million, largely reflecting senior notes due in 2011. The company had no borrowings on its $2 billion revolving facility and reported $1,444 million available after facility letters of credit. It also had $1,604 million of additional letters of credit under other facilities. NOV reported compliance with debt covenants.
- First-half operating cash flow fell to $282 million from $1,285 million. Management attributed the decrease primarily to roughly $790 million less net customer financing from prepayments and billings relative to costs, as backlog projects progressed, and a $205 million increase in receivables.
- First-half investing cash outflow was $108 million, including $62 million of acquisitions and $78 million of capital expenditures. Financing cash outflow was $82 million, including $84 million of dividends paid. Cash dividends were $0.10 per share in Q2; future dividends are at the board’s discretion.
Outlook, risks and unusual items
- Management cited improving North American and international drilling activity but expected lower Rig Technology backlog to lead to modest revenue and margin declines over the next few quarters. Two signed rig contracts were expected to enter backlog in Q3, subject to customer down payments, and were cancellable without penalty.
- Management expected the Gulf of Mexico deepwater moratorium and related permitting and pressure-control requirements to have a larger negative effect in the second half of 2010. Some product purchases were at risk. NOV reported a small Q2 impact, including discontinued work on affected rigs, partly offset by Gulf response-related sales.
- Management noted potential margin pressure from steel, alloy, resin and fiberglass costs, and from tight iron-ore supplies. It believed cash, operating cash flow and available credit would be sufficient for operations, working capital, capital expenditures, dividends and financing obligations.
- In Q1, Venezuela’s currency devaluation led to a $27 million charge on monetary assets and an additional $11 million receivables write-down. NOV reported a $38 million net investment in Venezuela at June 30.
- Foreign-exchange derivative liabilities had a net fair value of $61 million; the company reported a $14 million foreign-exchange loss in the first half, versus $56 million in the prior-year period. Derivatives were used for hedging, not trading.
- Unrecognized tax benefits were $117 million, including a $73 million foreign tax position, offset by a corresponding deferred tax asset with no earnings impact reported. The company was negotiating with government agencies concerning export-trade-law inquiries; it expected any agreed penalty to be within established accruals, but said the outcome and effects could differ.
- Other principal risks include commodity-price and customer-spending changes, international political and currency risks, acquisition integration, and possible project cancellations. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the $4.9 billion rig-equipment backlog converts as scheduled, and whether cancellations or contract changes increase.
- The pace and financial impact of the Gulf of Mexico moratorium, permitting changes, and new pressure-control requirements.
- Whether operating cash flow improves as customer prepayments and billings normalize and receivables are collected.
- Debt maturities, facility availability and letters-of-credit requirements, alongside the company’s dividend and acquisition plans.
- Developments in the export-compliance inquiry, tax exposures and Venezuela operations, and the effects of currency movements and input-cost inflation.