NOV Inc. 2016 Form 10-K Summary
Business context and reporting period
NOV Inc. (formerly National Oilwell Varco, Inc.) filed its annual report for the year ended December 31, 2016. It supplies oilfield equipment, technology and services through Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. Results are highly sensitive to oil and gas prices, drilling activity, and customers’ capital spending. The figures below are in U.S. dollars; financial results are GAAP unless identified otherwise.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $7.251 billion | $14.757 billion |
| Operating profit (loss) | $(2.411) billion | $(390) million |
| Net income (loss) attributable to NOV | $(2.412) billion | $(769) million |
| Diluted loss per share | $(6.41) | $(1.99) |
| Operating cash flow from continuing operations | $960 million | $1.332 billion |
| Capital expenditures | $284 million | $453 million |
| Cash and cash equivalents at year-end | $1.408 billion | $2.080 billion |
| Total debt at year-end | $3.214 billion | $3.909 billion |
| Working capital at year-end | $4.829 billion | $7.552 billion |
| Cash dividends paid | $230 million | $710 million |
2016 revenue fell 50.9%; worldwide average rig count fell 31.8%. NOV reported a GAAP operating margin of (33.3)%. Its non-GAAP operating loss excluding specified other items was $381 million, or (5.3)% of revenue, versus $1.634 billion of operating profit, or 11.1%, in 2015. These adjustments exclude substantial impairments and other costs.
Year-end segment revenue and operating profit (loss): Rig Systems, $2.386 billion and $(969) million; Rig Aftermarket, $1.416 billion and $229 million; Wellbore Technologies, $2.199 billion and $(770) million; Completion & Production Solutions, $2.241 billion and $(266) million. Segment revenue totals differ from consolidated revenue because of intersegment eliminations.
For fourth-quarter 2016, revenue was $1.692 billion, up 3% sequentially and down 38% year over year. Net loss from continuing operations was $714 million, or $(1.90) per diluted share. GAAP operating loss was $766 million; operating loss excluding other items was $72 million, or (4.3)% of sales. Fourth-quarter 2015 included substantial impairment charges, affecting year-over-year comparisons.
Material changes, unusual items, and liquidity
- All four segments had lower full-year revenue. Rig Systems revenue dropped 65.7% and Rig Aftermarket 43.7% year over year; lower volumes and pricing pressure weighed on results.
- NOV recorded a $972 million goodwill impairment in Rig Systems in the third quarter. It also recorded a fourth-quarter inventory-reserve charge of approximately $582 million, primarily for obsolete and surplus inventory. Total inventory reserves rose to $1.017 billion, or 23.4% of gross inventory, from $500 million, or 9.7%, at the end of 2015.
- Rig Systems backlog declined to $2.5 billion from $6.1 billion. NOV removed $2.1 billion of orders from backlog in the first quarter amid customer and project financing concerns, including the SETE Brasil bankruptcy filing. Some contracts remain enforceable, but resumption depends on customers obtaining funding. Completion & Production Solutions backlog was $818 million, versus $969 million.
- Cash from continuing operations remained positive at $960 million, supported in part by working-capital reductions. Investing activities used $488 million, including $230 million for acquisitions and $284 million for capital expenditures. Financing activities used $1.141 billion, including debt repayment and dividends.
- Total debt was $3.214 billion, including $506 million due within one year; cash was $1.408 billion. NOV reported no commercial-paper borrowings and $4.5 billion available under its revolving credit facility, and said it complied with its debt covenants. Working capital decreased substantially year over year.
- Cash dividends fell to $0.61 per share for 2016 from $1.84 in 2015; the quarterly rate was reduced from $0.46 to $0.05 after the first quarter.
Outlook, commentary, and risks
Management described early signs of market improvement in the second half of 2016 but remained cautious about 2017, citing high global inventories, uncertain commodity-price sustainability, customer capital-spending restraint, and continuing pricing pressure. It expected international activity to approach a bottom in the first half of 2017, while offshore activity could continue declining through the year. Management anticipated Rig Aftermarket and parts of Wellbore Technologies could recover earlier than capital-equipment-focused businesses. It expected about $1.0 billion of Rig Systems backlog revenue and $770 million of Completion & Production Solutions backlog revenue in 2017; these are expectations, not guarantees.
Principal risks include a prolonged oilfield downturn; backlog cancellations, suspensions, delayed deliveries, cost overruns, and customer credit problems; offshore equipment oversupply; inventory obsolescence; further goodwill or asset impairments; foreign currency, geopolitical, sanctions, trade, tax, environmental, and regulatory exposures; and product-liability and litigation claims. Approximately 75% of 2016 revenue was generated outside the United States. About $1.157 billion of year-end cash was held by foreign subsidiaries, and NOV said its current plan was to reinvest those funds abroad.
In the fourth quarter, a subsidiary settled a Canadian product-liability claim for CAD 42 million, approximately $31 million. Insurers paid under a reservation of rights; NOV did not expect a material earnings impact. The company also reported that administrative fines and penalties resolving an export-compliance investigation were within existing accruals and had no material financial effect. Management stated that pending claims were not expected to have a material adverse effect, while noting outcomes remain uncertain.
Management and Ernst & Young concluded that internal control over financial reporting was effective at year-end; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether operating activity, pricing, and order trends support the company’s cautious recovery outlook, particularly in offshore markets.
- Whether reported backlog converts to revenue as anticipated, and whether customer funding issues lead to further cancellations or backlog removals.
- Whether inventory reserves, receivable allowances, and remaining goodwill withstand actual demand and recovery assumptions; goodwill was $6.067 billion at year-end.
- How NOV funds the $506 million of debt due within one year and sustains liquidity, dividends, and capital spending if cash generation weakens.
- Whether foreign cash can remain reinvested as planned, and whether tax valuation allowances or foreign tax-credit expirations create further charges.
- Developments in Brazilian projects and investigations, the Canadian claim’s insurance coverage, and other legal, regulatory, and product-liability exposures.