NOV Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2015; financial statements are unaudited. NOV designs, manufactures and supports equipment and services for oil and gas drilling, completion and production. The four reporting segments are Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. Comparisons are for continuing operations; the distribution business was spun off as NOW Inc. in May 2014.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.306B | $5.587B | $12.035B | $15.731B |
| Gross profit / margin | $672M / 20.3% | $1.528B / 27.3% | $2.675B / 22.2% | $4.268B / 27.1% |
| Operating profit / margin | $234M / 7.1% | $988M / 17.7% | $1.242B / 10.3% | $2.700B / 17.2% |
| Net income attributable to NOV | $155M | $699M | $754M | $1.907B |
| Diluted EPS | $0.41 | $1.62 | $1.92 | $4.43 |
| Operating cash flow | Not separately stated | Not separately stated | $718M | $1.789B |
Q3 operating profit excluding disclosed other items was $346M, or 10.5% of sales; non-GAAP diluted EPS was $0.61. These measures exclude specified charges and are not GAAP results.
At September 30, cash was $1.846B, total debt $3.983B, and net debt approximately $2.137B. Current assets were $12.933B and current liabilities $5.193B. The $4.5B revolving facility had $3.470B available after commercial paper and facility letters of credit; NOV reported covenant compliance. About $1.777B of cash was held outside the U.S.
Nine-month capital expenditures were $332M, dividends paid $537M, and share repurchases $2.221B. Cash declined $1.690B from year-end 2014. NOV repurchased 44.0M shares during the nine months and completed its $3B repurchase program in Q3. The quarterly dividend was $0.46 per share.
Material changes versus comparable periods
- Q3 revenue fell 41% and net income attributable to NOV fell 78% year over year; management also reported sequential declines of 15% in revenue and 46% in net income versus Q2 2015.
- All four segments reported lower year-over-year Q3 revenue. Wellbore Technologies recorded an operating loss of $7M; Completion & Production Solutions earned only $3M. Rig Aftermarket was the most profitable segment by margin at 25.4%.
- Worldwide average active rig count was down 39.8% year over year in Q3; average WTI crude oil was $46.50 per barrel, down 52.4%. Management attributed weaker demand and margins to lower oil prices, reduced customer spending, idle rigs and pricing pressure.
- Q3 included $112M of pre-tax other items, including impairment, early-retirement, severance, facility-closure, acquisition-related and legal costs. The company separately reported a $55M finite-lived intangible impairment charge.
- Total debt increased from $3.166B at December 31, 2014, while cash decreased from $3.536B. The company funded significant repurchases partly with commercial paper borrowings.
Outlook, risks and contingencies
- Management was cautious on the remainder of 2015 and did not provide broad earnings or revenue guidance. It expected Rig Systems revenue from backlog to exceed new orders, implying a book-to-bill ratio well below one; delays and cancellations could further reduce backlog.
- At September 30, Rig Systems backlog was $8.0B, down 44% year over year; expected revenue from backlog was approximately $1.1B in the final three months of 2015 and $6.9B in 2016 and thereafter. Completion & Production Solutions backlog was $1.171B, down 44%; expected revenue was approximately $470M in Q4 2015 and $701M in 2016 and thereafter.
- Twenty-two drilling-equipment packages were tied to Brazilian shipyard projects. Investigations, customer financing pressures and delivery suspensions could cause delays, contract breaches or cancellations. Shipyard customers had not attempted to cancel NOV agreements as of the filing.
- Management cited a strong balance sheet, credit access and contracted orders as resources to navigate the downturn, while continuing cost controls and evaluating capital allocation, facilities, machinery and headcount. It cautioned that sustained low commodity prices or rig counts could lead to further asset impairments; goodwill and indefinite-lived intangible assets totaled approximately $9.0B.
- Foreign currency exposure was significant: NOV reported a $41M foreign-exchange loss for the first nine months, and a $296M net liability fair value on foreign-currency forwards. It warned that forecast changes or project delays could require hedge de-designations and additional losses.
- Export-trade compliance inquiries by U.S. agencies remained under discussion for potential resolution. Management expected any agreed fine or penalty to fall within established accruals and not materially affect results, but said outcomes were uncertain if no resolution were reached. Brazil-related investigations and other legal, regulatory, environmental and international-market risks could affect deliveries, collections, backlog and financial results.
- The company stated it believed cash, operating cash flow, commercial paper and available credit would fund foreseeable needs. Future dividends remain at the board’s discretion. Adoption impact of the new revenue-recognition standard was still being assessed.
Most important facts to verify
- Whether rig activity, oil prices and customer capital spending stabilize, and how quickly this changes NOV’s orders, margins and backlog conversion.
- Progress, financing and delivery status of Brazilian shipyard projects, including any contract suspensions, cancellations or payment delays.
- Cash generation and liquidity after the substantial buyback and dividend outflows, including commercial-paper refinancing and cash held overseas.
- Potential additional impairments, especially in Wellbore Technologies and other businesses sensitive to prolonged market weakness.
- Final outcome of export-compliance inquiries and the size or timing of any penalties, as well as the effect of currency exposures and hedges.