NOV Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. NOV supplies equipment and technology to the upstream oil and gas industry. Financial amounts are in millions of U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,154 | $1,835 | $6,055 | $5,335 |
| Gross profit / margin | $393 / 18.2% | $285 / 15.5% | $1,035 / 17.1% | $725 / 13.6% |
| Operating profit (loss) / margin | $73 / 3.4% | $(7) / (0.4)% | $124 / 2.0% | $(166) / (3.1)% |
| Net income (loss) attributable to NOV | $1 | $(26) | $(43) | $(223) |
| Adjusted EBITDA | $245 | $167 | $631 | $414 |
| Operating cash flow | Not separately presented for the quarter | $300 | $511 |
- Q3 revenue rose 17% year over year; nine-month revenue rose 13%. Operating results improved, but Q3 net income attributable to NOV was near break-even.
- Q3 segment revenue and operating profit: Wellbore Technologies $847 and $40; Completion & Production Solutions $735 and $46; Rig Technologies $637 and $58. Corporate costs and eliminations were $71.
- Cash and cash equivalents were $1,293 at September 30, down from $1,437 at year-end 2017. Total debt was $2,714, leaving net debt of approximately $1,421. Current assets of $7,221 exceeded current liabilities of $2,276.
- Nine-month investing cash use was $392, including $280 for acquisitions and $173 for capital expenditures. Dividends paid were $57; the quarterly dividend was $0.05 per share.
Material changes and operating trends
- Compared with Q3 2017, revenue increased in all three segments. Wellbore Technologies’ operating profit improved to $40 from break-even; Rig Technologies’ increased to $58 from $18. Completion & Production Solutions’ operating profit was $46 versus $44.
- Nine-month operating profit improved to $124 from a $166 loss, with Wellbore Technologies returning to profit and Rig Technologies improving. Adjusted EBITDA increased to $631 from $414.
- Cash from operations fell to $300 from $511. Working-capital movements used $327 of cash in 2018 versus providing $48 in 2017; inventory increased during the period. NOV also sold $248 of receivables through factoring, receiving $246 in proceeds.
- Q3 Adjusted EBITDA was $245, up from $226 in Q2 and $167 a year earlier. Management reported higher steel and labor costs limiting Wellbore operating leverage; Completion & Production faced weaker North American stimulation-equipment demand and ongoing offshore softness; Rig Technologies benefited from aftermarket sales but had lower land-rig sales from inventory.
Outlook, risks and unusual items
- Management expected continued spending growth by land-drilling customers, but a slower recovery in North American pressure pumping. Offshore activity showed early signs of renewed investment and could improve into 2019. Management expressed longer-term optimism but provided no specific consolidated financial guidance.
- Capital equipment backlog was $880 for Completion & Production Solutions and $3.40 billion for Rig Technologies. Segment estimates indicate expected backlog revenue of about $437 and $282, respectively, for the rest of 2018; timing and conversion remain uncertain. Rig Technologies’ quarterly book-to-bill was 59%; Completion & Production’s was 85%.
- Liquidity included $1,293 in cash and $3.0 billion available under the revolving credit facility; NOV reported compliance with its debt-to-capitalization covenant, at 16.3% versus a 60% maximum. About $936 of cash was held by foreign subsidiaries.
- Foreign-exchange losses in earnings were approximately $30 for the first nine months, compared with a $4 gain in 2017. Currency translation reduced other comprehensive income by $219 during the nine months. Management noted exposure to exchange rates, commodity prices, customer spending, trade restrictions and tariffs, and regulatory and litigation matters.
- Pending claims and proceedings include matters where adverse parties seek material damages. NOV said it had reserves for probable contingencies; ultimate loss on certain matters could not be determined. It believed other unprovided liabilities would not materially affect results, while acknowledging potential insurance limitations.
- NOV expected adoption of lease accounting in Q1 2019 to add approximately $500–$750 to balance-sheet assets and liabilities, without affecting the credit-facility covenant calculation. Accounting for the 2017 U.S. tax law was still being finalized; the company said it expected to complete this in Q4 2018.
Important facts for investors to verify
- Whether operating cash generation improves, given the year-over-year decline, working-capital use and receivables factoring.
- Backlog conversion, new orders and book-to-bill—especially Rig Technologies’ large international and offshore backlog and its delivery schedule.
- Whether revenue recovery translates into sustained margins amid higher steel and labor costs and uneven land, completion and offshore demand.
- Cash availability and debt capacity, including the location and tax treatment of foreign-held cash and ongoing acquisition funding plans.
- Potential effects of foreign-exchange volatility, tax-law finalization, litigation and regulatory matters, and the forthcoming lease-accounting balance-sheet increase.