NOV Inc. (filed as National Oilwell Varco, Inc.) — 2017 Form 10-K
Business context and reporting period
The filing covers the year ended December 31, 2017; the company’s fourth quarter ended the same date. 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 dependent on oilfield activity, customer investment and commodity prices.
Financial performance and liquidity
- Full-year revenue: $7.304 billion, up 0.7% from $7.251 billion in 2016. Gross profit was $892 million (12.2% of revenue), versus a $101 million gross loss in 2016.
- Profitability: Operating loss was $277 million, compared with a $2.411 billion loss in 2016; net loss attributable to NOV was $237 million, or $0.63 per share, versus $2.412 billion, or $6.41 per share. Adjusted EBITDA, a non-GAAP measure, was $611 million versus $322 million.
- Fourth quarter: Revenue was $1.969 billion, up 7% sequentially and 16% year over year. Net loss was $14 million ($0.04 per share), compared with a $714 million loss in Q4 2016. Adjusted EBITDA was $197 million, versus $167 million in Q3 2017 and $102 million in Q4 2016. Q4 included $133 million of pre-tax “other items,” mainly restructuring and asset-related charges.
- Cash flow and investment: Operating cash flow was $832 million, down from $960 million. Capital expenditures were $192 million; acquisitions and investments used $86 million. Cash and cash equivalents were $1.437 billion at year-end.
- Debt and liquidity: Total debt was $2.712 billion, down from $3.214 billion; the company repaid $500 million of notes during 2017. A $3.0 billion revolving facility was fully available at year-end, and the company reported a 16.1% debt-to-capitalization ratio against a 60% covenant limit. Working capital was $4.863 billion. Annual dividends were $0.20 per share, down from $0.61.
Changes versus prior periods
Improving activity helped Wellbore Technologies revenue rise 17.2% to $2.577 billion and Completion & Production Solutions revenue rise 19.2% to $2.672 billion. Rig Technologies revenue fell 27.6% to $2.252 billion, reflecting lower volumes. All three segments improved operating results, although Wellbore Technologies and Rig Technologies still reported annual operating losses. The improvement in consolidated losses also reflects the absence of 2016’s $972 million Rig Technologies goodwill impairment and lower restructuring and inventory charges.
Worldwide average rig count rose 27% in 2017, while average WTI crude and natural gas prices increased 17.9% and 18.9%, respectively. The company said approximately 65% of 2017 revenue came from onshore businesses, compared with approximately 40% in 2014.
Outlook, risks and unusual items
- Management described recovery as uneven: North American land activity improved, international recovery remained uncertain, and offshore activity and equipment demand were expected to remain weak, potentially declining into 2018. No consolidated revenue or earnings guidance was provided.
- At year-end, Completion & Production Solutions backlog was $1.066 billion, up 30%; management expected approximately $953 million to convert to revenue in 2018. Rig Technologies backlog was $1.9 billion, down 24%, with approximately $0.8 billion expected to convert in 2018. Backlog is subject to delays, cancellations and cost or margin changes.
- The company recorded $114 million of inventory reserve additions in 2017; total inventory reserves were $800 million. Goodwill was $6.227 billion; annual impairment testing found reporting-unit fair values substantially above carrying values, but future downturns could trigger charges.
- The December 2017 U.S. tax law prompted a provisional $242 million tax benefit from remeasuring deferred tax liabilities. Accounting was not complete at filing, and the company was still assessing the law’s GILTI provisions.
- Risks include volatile oil and gas activity, offshore oversupply, foreign-market and currency exposure, customer contract delays or defaults, raw-material costs, regulation, environmental/product liability, cybersecurity, and goodwill or inventory impairment. NOV reported ordinary-course litigation and said it could not reasonably estimate aggregate possible losses; it did not expect pending matters to materially affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether the expected 2018 backlog conversions occurred, particularly for offshore and international projects.
- Whether operating cash flow and Adjusted EBITDA improve without relying on working-capital releases or add-backs for “other items.”
- How customer spending, rig activity and offshore equipment oversupply affect segment margins and demand.
- Final tax-law accounting, including any subsequent adjustments to the provisional tax benefit and treatment of foreign earnings.
- Developments in inventory reserves, goodwill impairment risk, and material legal or regulatory contingencies.