NOV Inc. (National Oilwell Varco) — 2018 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2018; it is not a standalone fourth-quarter filing. NOV supplies equipment, technology and services to the upstream oil and gas industry through Wellbore Technologies, Completion & Production Solutions, and Rig Technologies. Results are highly sensitive to oilfield activity and customer spending. Worldwide average rig count rose 8.9% in 2018, while average WTI crude prices increased 27.6% from 2017.
Financial results and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $8.453 billion | $7.304 billion |
| Gross profit | $1.444 billion (17.1% margin) | $892 million (12.2% margin) |
| Operating profit (loss) | $211 million (2.5% margin) | $(277) million |
| Net loss attributable to NOV | $(31) million; $(0.08) per share | $(237) million; $(0.63) per share |
| Adjusted EBITDA | $910 million | $611 million |
| Cash from operations | $521 million | $832 million |
| Capital expenditures | $244 million | $192 million |
| Cash and total debt at year-end | $1.427 billion; $2.711 billion | $1.437 billion; $2.712 billion |
| Working capital | $4.938 billion | $4.863 billion |
Revenue increased 15.7%. Revenue grew in all three segments: Wellbore Technologies 25.5% to $3.235 billion, Completion & Production Solutions 9.7% to $2.931 billion, and Rig Technologies 14.3% to $2.575 billion. Each segment reported positive operating profit, reversing losses in Wellbore Technologies and Rig Technologies in 2017. Despite positive operating income, NOV recorded a net loss: the $63 million tax provision against $41 million of pretax income produced a reported 153.7% effective tax rate, while other expense was $99 million, primarily reflecting higher foreign-exchange losses.
Fourth-quarter revenue was $2.398 billion, up 11% sequentially and 22% year over year. NOV reported $12 million of net income attributable to the company, or $0.03 per diluted share. Adjusted EBITDA was $279 million, versus $245 million in Q3 2018 and $197 million in Q4 2017; Q4 pre-tax other items were $21 million.
Cash, debt and liquidity
Operating cash flow declined $311 million year over year, with working-capital changes using $400 million of cash in 2018, compared with providing $448 million in 2017. Investing activities used $457 million, including $280 million for acquisitions and $244 million for capital expenditures. Financing activities used $30 million, including $76 million of dividends. NOV paid quarterly dividends of $0.05 per share throughout 2018.
At year-end, NOV had $3.0 billion available under its revolving credit facility, no commercial-paper borrowings, and a debt-to-capitalization ratio of 16.3%, within its 60% covenant limit. Approximately $979 million of cash was held by foreign subsidiaries. Total contractual obligations included $2.711 billion of debt and $732 million of operating lease commitments.
Material changes, outlook and risks
- Backlog: Completion & Production Solutions backlog fell 16% to $894 million; Rig Technologies backlog rose 63% to $3.1 billion. Management expected about $0.8 billion of revenue from each segment’s backlog in 2019. Rig Technologies expected another $2.3 billion in 2020 and thereafter; Completion & Production Solutions expected $122 million in 2020 and thereafter.
- Near-term outlook: Following the sharp oil-price decline in Q4 2018, customers indicated reduced spending early in 2019. Management anticipated lower Q1 revenue across segments, especially in North America, with potential stronger activity in the second half if economic, supply-demand and geopolitical conditions improved. This is management’s outlook, not a quantified full-year revenue or earnings forecast.
- Acquisitions and investment: NOV completed eight acquisitions and other investments in 2018 for $280 million in aggregate cash investment, net of cash acquired. It expects to continue pursuing acquisitions, subject to availability and financing.
- Operating and market risks: Demand depends on volatile commodity prices, drilling and completion activity, customer capital spending and access to credit. Other exposures include international political, currency and regulatory risks; tariffs and raw-material costs; contract execution and customer cancellation risk; environmental, product-liability and cybersecurity risks; and competition and technology changes. About 60% of 2018 revenue was generated outside the United States.
- Assets, taxes and contingencies: NOV carried $6.264 billion of goodwill; its 2018 impairment test found the Floating Production Systems business unit had less valuation headroom, and further offshore-market deterioration could trigger impairment of approximately $277 million of goodwill. Inventory reserves were $644 million, or 17.7% of gross inventory. Unrecognized tax benefits totaled $98 million. The filing describes Brazil-related uncertainty following termination of 16 drillship supply contracts; NOV recorded no charge from the settlements. Other legal matters remain, and the ultimate exposure may differ from accrued estimates.
- Accounting and audit: NOV expected adoption of the new lease standard in Q1 2019 to add approximately $500–$650 million of assets and liabilities to the balance sheet. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether the anticipated early-2019 spending slowdown and Q1 revenue pressure materialized, and how activity developed later in 2019.
- Backlog conversion, new order trends, project profitability and customer creditworthiness—particularly for Rig Technologies’ large international backlog.
- Cash generation and working-capital requirements, including the sustainability of dividends and planned acquisition spending.
- Tax provision drivers, foreign tax-credit valuation allowances, and the outcome of tax audits and unrecognized tax positions.
- Goodwill impairment sensitivity, especially the Floating Production Systems unit, and the adequacy of inventory and legal-contingency reserves.