NOV Inc. 2013 Form 10-K Summary
Business context and reporting period
National Oilwell Varco, Inc. (NOV) provides equipment, products, services and supply-chain solutions to the global oil and gas industry. This 10-K covers the year ended December 31, 2013, including fourth-quarter results. NOV reported through Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission. The business is sensitive to oil and gas activity, customer capital spending and commodity prices.
Financial and operating metrics
Unless indicated otherwise, figures are in U.S. dollars; financial amounts are in millions.
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $22,869 | $20,041 |
| Operating profit / margin | $3,423 / 15.0% | $3,557 / 17.7% |
| Net income attributable to NOV | $2,327 | $2,491 |
| Diluted EPS | $5.44 | $5.83 |
| Operating cash flow | $3,397 | $620 |
| Capital expenditures | $669 | $583 |
| Cash and cash equivalents, year-end | $3,436 | $3,319 |
| Total debt, year-end | $3,150 | $3,149 |
| Working capital, year-end | $9,745 | $10,029 |
Revenue grew 14.1%, while operating profit fell 3.8%, net income attributable to NOV fell 6.6%, and diluted EPS fell 6.7%. Operating cash flow rose sharply from 2012, principally because operating assets and liabilities provided $488 million in 2013, versus using $2,536 million in 2012; collections, milestone and advance billings, and lower inventory contributed. Investing used $2,964 million, including $2,397 million for acquisitions. Financing used $305 million, including $389 million of dividends. Cash exceeded total debt by approximately $286 million at year-end. Cash held outside the U.S. was approximately $3,102 million and could incur additional tax if repatriated.
At year-end, NOV had $16.2 billion of Rig Technology backlog, up from $11.9 billion in 2012; about 93% was offshore and 94% destined for international markets. Approximately $8.5 billion was scheduled for 2014 revenue. NOV had $2,553 million available under its $3.5 billion revolving facility after letters of credit issued under that facility.
Fourth-quarter results and segment performance
Q4 2013 revenue was $6,172 million, net income attributable to NOV was $658 million, and diluted EPS was $1.53. Revenue increased 9% year over year and 9% sequentially; net income was down $10 million year over year and up $22 million sequentially. Q4 operating profit was $957 million, a 15.5% GAAP margin; excluding $16 million of other costs, adjusted operating profit was $973 million, or 15.8% of sales. Adjusted diluted EPS was $1.56.
| 2013 segment | Revenue | Operating profit | Operating margin |
|---|---|---|---|
| Rig Technology | $11,716 million | $2,522 million | 21.5% |
| Petroleum Services & Supplies | $7,184 million | $1,212 million | 16.9% |
| Distribution & Transmission | $5,117 million | $247 million | 4.8% |
Rig Technology revenue increased 15.9%, supported by offshore and international demand, backlog shipments and the Robbins & Myers acquisition; operating profit rose 8.0%, but margin declined from 23.1% amid lower-priced project mix, acquisitions and execution costs. Petroleum Services & Supplies revenue rose 3.1%, while operating profit fell 19.3% as weaker North American activity, pricing pressure, facility under-absorption and integration costs weighed on margins. Distribution & Transmission revenue grew 30.3%, primarily from acquisitions; operating profit rose 33.5%, with margin edging up to 4.8%.
Material changes, outlook and risks
- NOV acquired Robbins & Myers in February 2013 for $2.378 billion, net of cash acquired. Total 2013 acquisition cash outlay was $2.397 billion. Acquisition effects make year-to-year comparisons less comparable.
- The board authorized exploration of a tax-efficient spin-off of the distribution business, expected in the first half of 2014, subject to regulatory, tax, contractual and board conditions. The contemplated separation would create NOW Inc. as a separate public company.
- Management saw sustained interest in offshore rig equipment and increasing international activity, but highlighted soft North American land markets, pressure on pricing and volumes, low gas and natural-gas-liquids prices, compressed project schedules and execution costs. No specific full-year 2014 earnings or revenue guidance is provided in the filing text.
- Key exposures include volatile oil and gas activity and prices, customer spending and financing, competition, raw-material costs, foreign exchange, international political and regulatory conditions, environmental and climate regulation, and project cost or delivery overruns. Approximately 65% of 2013 revenue was generated outside the U.S.
- Samsung Heavy Industries accounted for 9% of 2013 revenue (10% in 2012); loss of or reduced business from this customer could adversely affect results. Goodwill was $9.049 billion at year-end; no impairment was recorded, although management identified one trade name with relatively limited valuation headroom.
- NOV continued negotiating with U.S. agencies concerning export-trade compliance inquiries; it expected any agreed NOV penalty to be within established accruals but could not predict the outcome if no resolution is reached. Robbins & Myers also had an unresolved export-control investigation involving past shipments; the company similarly expected a settlement within accruals. Other ordinary-course legal proceedings were not expected by management to have a material effect.
- A $102 million legal-settlement gain was recognized in Q3 2013. Q4 2012 included a net $69 million tax benefit related to foreign tax credits. These items affect comparisons; the filing’s adjusted measures exclude specified nonrecurring items.
Important facts for investors to verify
- Whether the planned distribution spin-off was completed, its final terms, tax treatment and effect on NOV’s remaining business and capital structure.
- Backlog conversion, order cancellations, project execution costs and margins—particularly given the offshore and international concentration of backlog.
- Whether North American pricing and activity pressure continued to reduce Petroleum Services & Supplies profitability.
- Robbins & Myers integration performance, acquisition-related costs and the returns on the substantial acquisition spending.
- Resolution and final financial impact of export-compliance matters, and any material developments in other contingencies.
- Cash availability and tax implications of foreign-held cash, debt and letter-of-credit commitments, and the sustainability of cash generation and dividends.