NOV Inc. Form 10-Q Summary
Business context and reporting period
NOV designs and supplies oilfield equipment, technology and services through Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. This unaudited filing covers the quarter and six months ended June 30, 2017; financial figures are in millions of U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,759 | $1,724 | $3,500 | $3,913 |
| Gross profit | $231 | $35 | $440 | $279 |
| Operating loss | $(62) | $(270) | $(159) | $(459) |
| Net loss attributable to NOV | $(75) | $(217) | $(197) | $(336) |
| Diluted loss per share | $(0.20) | $(0.58) | $(0.52) | $(0.90) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $279 | $749 |
- Q2 gross margin was approximately 13.1%, versus 2.0% a year earlier; GAAP operating margin was (3.5%), versus (15.7%). Excluding disclosed other items, operating loss was $32 million, or (1.8%) of revenue, compared with $153 million, or (8.9%), in Q2 2016. These are company-reported non-GAAP comparisons.
- Cash and cash equivalents were $1,530 at June 30, 2017, up from $1,408 at year-end 2016. Total debt was unchanged at $3,214, including $506 current and $2,708 long-term. Cash less total debt was approximately $1,684 net debt.
- Current assets were $7,741 and current liabilities $2,851. The company reported $279 of operating cash flow, $148 of investing cash outflow and $31 of financing cash outflow for the first half. Capital spending was $85; acquisitions used $82.
- First-half operating cash flow fell from $749 in 2016. Management attributed the comparison mainly to lower cash benefits from working-capital movements: net operating asset and liability changes provided $13, versus $805 in the prior-year period.
Changes, segments and unusual items
- Q2 revenue increased 2% year over year, while NOV’s attributable net loss narrowed by $142. First-half revenue declined 11% year over year, while the attributable net loss narrowed by $139.
- Rig Systems Q2 revenue fell 39% year over year to $346 and the segment recorded a $7 operating loss, reflecting fewer offshore project shipments and lower manufacturing throughput. Rig Aftermarket revenue declined 6% to $341, but operating profit rose 23% to $76, with improved product mix.
- Wellbore Technologies revenue increased 20% to $614 and its operating loss narrowed to $24, supported by North American activity and operating efficiencies. Completion & Production Solutions revenue increased 21% to $652 and returned to operating profit of $27, as activity improved.
- Q2 operating loss included $30 of other items, primarily severance, facility closures, write-downs and related items; first-half other items totaled $57. The 2016 comparison included $117 for Q2 and $258 for the first half. Q2 adjusted loss per share was $(0.14), versus $(0.30) in Q2 2016.
- The effective tax rate was 15.9% for Q2 and 10.6% for the first half, compared with 35.8% and 41.6% in 2016. Current market losses and related deferred-tax valuation allowances contributed to the lower rates.
Outlook, risks and contingencies
- Management was cautious about the second half of 2017, citing bloated global oil and refined-product inventories, uncertainty about sustainable commodity-price recovery, customer capital-spending restraint and possible further offshore declines. It saw North American land activity improving, international markets stabilizing and offshore activity approaching a bottom.
- At June 30, capital equipment backlog was $2.2 billion in Rig Systems and $881 million in Completion & Production Solutions. NOV expected approximately $480 million and $616 million, respectively, of revenue from those backlogs during the remainder of 2017. These are expectations, not guarantees; timing may change.
- NOV had $1,530 of cash, including $1,258 held by foreign subsidiaries; management said $1,238 would be subject to a 35% U.S. tax rate, offset by available foreign tax credits, if repatriated. The company intended to reinvest these funds abroad. It reported $3.0 billion available under its new five-year revolving facility, no commercial paper borrowings and compliance with its 60% maximum debt-to-capitalization covenant (reported ratio: 18.6%). A $500 million senior note principal was due December 1, 2017.
- Brazilian investigations affecting shipyard customers have contributed to delivery delays, suspended performance and cancellations, and could lead to further contract disputes, delayed payments or reduced backlog. The filing also cites broader oilfield-market, customer-demand, currency, regulatory and environmental risks.
- NOV said recorded contingent liabilities covered matters believed probable; it could not determine total potential losses, but did not expect the cited cases to materially affect financial position or results beyond established accruals. The company also disclosed possible additional losses and ongoing legal, regulatory and other matters.
- Foreign-exchange hedges had a net fair-value asset of $5 at quarter-end. NOV recognized losses when certain forecast cash-flow hedges were discontinued because expected transactions were no longer considered likely within the specified period; further forecast delays or activity changes could result in additional losses.
- The board declared a $0.05-per-share dividend paid June 30. Future dividends remain discretionary. NOV reported closing, or in the process of closing, 374 locations over three years and reducing annual expenses by approximately $3.0 billion.
Important facts for investors to verify
- Whether North American activity and improving segment results can offset weak rig-equipment and offshore demand, and whether market recovery is sustainable.
- Backlog conversion, order intake, customer cancellations or delays, especially for offshore and international projects and Brazilian shipyard contracts.
- Cash generation and working-capital trends, the December 2017 note repayment, and continued covenant compliance and access to credit.
- The availability and potential tax cost of foreign-held cash, and the effect of tax valuation allowances on future results.
- The nature and possible financial impact of contingencies, hedge de-designations and other disclosed risks; the filing does not quantify total potential losses for all matters.