NOV Inc. (National Oilwell Varco) — Form 10-Q Summary
Business context and reporting period
Quarter and six months ended June 30, 2014. NOV designs and supplies equipment, systems, and services for the oil and gas drilling and production industry. On May 30, 2014, it spun off its distribution business as NOW Inc.; that business is presented as discontinued operations for all periods. Effective April 1, NOV reorganized continuing operations into Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data. Continuing-operations results are the primary basis for comparison.
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Revenue | $5,255 | $4,680 | +12% |
| Gross profit / margin | $1,455 / 27.7% | $1,173 / 25.1% | Margin +2.6 percentage points |
| Operating profit / margin | $913 / 17.4% | $713 / 15.2% | +28%; margin +2.2 points |
| Income from continuing operations | $609 | $494 | +23% |
| Diluted continuing-operations EPS | $1.42 | $1.15 | Up $0.27 |
| Company-attributable net income, including discontinued operations | $619 | $531 | +17% |
- For the first six months, revenue was $10,144 million versus $9,056 million; operating profit was $1,712 million versus $1,406 million; and income from continuing operations was $1,157 million versus $953 million.
- Management’s non-GAAP operating profit, excluding specified other items, was $945 million in Q2, or 18.0% of revenue, compared with $770 million and 16.5% in Q2 2013. Diluted EPS excluding other items was $1.47 versus $1.24. These are non-GAAP measures.
- Six-month cash from continuing operations was $1,270 million versus $739 million. Continuing investing used $642 million, including $300 million of capital expenditures and $102 million for acquisitions. Continuing financing used $263 million, including $309 million of dividends. Cash increased $449 million to $3,885 million.
- At June 30, cash was $3,885 million and total debt $3,148 million, giving cash in excess of debt of $737 million. The $3.5 billion revolver had no borrowings; $2,369 million remained available after letters of credit. The company reported compliance with its maximum debt-to-capitalization covenant. Current assets were $16,003 million and current liabilities $6,915 million.
- Quarterly dividend was $0.46 per share, versus $0.26 a year earlier. The board retains discretion over future dividends. Approximately $3,628 million of cash was held outside the United States and could incur additional taxes if repatriated.
Material changes and segment performance
- All four continuing segments grew Q2 revenue year over year. Rig Systems revenue was $2,372 million and operating profit $501 million; Rig Aftermarket $785 million and $217 million; Wellbore Technologies $1,446 million and $263 million; Completion & Production Solutions $1,127 million and $157 million.
- Rig Systems benefited from demand and capacity utilization, but management cited mix, lower-margin acquisitions, growth spending, and compressed customer delivery schedules as pressures on margins over time. Rig Aftermarket’s six-month margin declined to 26.6% from 27.1%, partly due to slow-moving inventory reserves and expansion initiatives. Wellbore Technologies’ six-month margin improved to 17.8% from 15.0%; Completion & Production Solutions’ rose to 13.8% from 12.8%.
- Rig Systems capital-equipment backlog reached a record $15.4 billion at June 30, up from $12.9 billion a year earlier; 93% was offshore and 94% international. Completion & Production Solutions backlog was $2.1 billion, up from $1.5 billion; 66% was offshore.
- The spin-off removed NOW’s assets and liabilities from NOV’s balance sheet, including $2,446 million of assets and $505 million of liabilities immediately before separation. Q2 discontinued-operations revenue was $624 million and income was $11 million; Q2 2013 was $1,070 million and $37 million. The periods are not directly comparable because NOW was spun off during Q2 2014.
Outlook, risks, contingencies, and unusual items
- NOV gave no numeric earnings or revenue guidance. Management expressed confidence in its balance sheet, credit access, installed base, global infrastructure, and record contracted orders. It expected activity to remain supportive in many markets, while noting that softer deepwater rig day rates could reduce near-term orders; Wellbore Technologies and Completion & Production Solutions remain particularly tied to rig counts, especially in North America.
- After quarter-end, U.S. and EU sanctions affecting Russia’s energy, defense, and banking industries were announced. NOV reported Russian sales of approximately $60 million in Q2 and $100 million for six months, and a net investment of about $140 million; future sales restrictions or impairment depend on the duration and scope of sanctions.
- Q2 included $32 million of pre-tax “other items,” primarily acquisition-related costs, purchase-accounting amortization, spin-off costs, and certain legal costs. Six-month other items were $50 million. Spin-off costs included in continuing operations were $25 million for Q2 and $34 million for six months.
- NOV and acquired Robbins & Myers were negotiating resolutions of export-control investigations with U.S. agencies. Management expected potential penalties to be within established accruals and not material, but warned that outcomes and effects could not be predicted if no resolution is reached. Other claims and regulatory matters were also disclosed; the filing says potential losses beyond recognized accruals cannot be determined.
- Samsung Heavy Industries accounted for 8% of revenue in Q2 and the first half of 2014, versus 12% in the comparable 2013 periods. Management identified oil and gas prices, customer demand, global economic activity, acquisition integration, foreign exchange, and regulatory or environmental requirements as risks. The effective tax rate was 31.8% for Q2, versus 30.6%.
Most important facts for investors to verify
- Whether the record Rig Systems backlog converts to revenue and cash as scheduled, and how offshore order trends and delivery costs affect margins.
- The ongoing impact of Russia sanctions on sales, operations, and NOV’s approximately $140 million Russian net investment.
- Final outcomes and potential costs of the export-control investigations, along with adequacy of related accruals.
- Cash accessibility and tax implications for the substantial balance held outside the United States, and continuing liquidity after the NOW spin-off.
- Segment trends beneath consolidated growth, particularly Rig Aftermarket margin pressure and demand/mix in Completion & Production Solutions.