NOV Inc. — Q1 2018 Form 10-Q
Business context and reporting period
NOV is a provider of equipment, technology and services for the upstream oil and gas industry. This unaudited filing covers the three months ended March 31, 2018; financial amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $1,795 | $1,741 |
| Gross profit / margin | $287 / 16.0% | $209 / 12.0% |
| Operating loss / margin | $(1) / (0.1)% | $(97) / (5.6)% |
| Net loss attributable to NOV | $(68); $(0.18) per diluted share | $(122); $(0.32) per diluted share |
| Adjusted EBITDA (non-GAAP) | $160 | $105 |
| Cash from operating activities | $(129) | $111 |
| Capital expenditures | $39 | $42 |
- Revenue increased 3% year over year. Gross margin improved, and the operating loss narrowed substantially. Net loss also narrowed, though other expense increased to $47 from $15, primarily reflecting foreign-currency fluctuations.
- Operating cash outflow reflected a $258 use of cash from changes in operating assets and liabilities, including higher receivables and inventory and lower accrued liabilities. Cash and equivalents declined to $1,236 from $1,437 at year-end 2017.
- At March 31, total debt was $2,713, including $2,707 long term; cash less total debt was approximately $1,477 net debt. NOV had $3.0 billion available under its revolving credit facility, no borrowings under it, and was compliant with its 60% debt-to-capitalization covenant (reported ratio: 16.1%). It also had $567 of letters of credit under separate bilateral facilities.
- Current assets were $7,186 and current liabilities $2,132. Approximately $971 of cash was held by foreign subsidiaries.
Segments and material changes
- Wellbore Technologies: Revenue of $711, up 28% year over year; operating profit of $12 versus a $57 loss. Management attributed improvement primarily to the U.S. recovery.
- Completion & Production Solutions: Revenue of $670, up 3%; operating profit of $16 versus $8. Backlog was $1.01 billion, with $324 of new orders and an 84% book-to-bill ratio during the quarter.
- Rig Technologies: Revenue of $483, down 17%; operating profit rose to $18 from $13, helped by product mix. Backlog was $2.05 billion, down 12% from a year earlier.
- Compared with Q4 2017, revenue decreased $174 (9%), and the net loss increased $54. Management reported Q1 Adjusted EBITDA of $160 versus $197 in Q4 2017. Delivery deferrals and a slow start in some markets weighed on sequential performance.
Outlook, risks and unusual items
- Management described improving North American land activity but persistent uncertainty around commodity prices, subdued international recovery and difficult offshore conditions. It expected offshore activity could continue declining through the remainder of 2018, and said customer budgeting cycles deferred some deliveries into Q2.
- For capital-equipment backlog, NOV expected approximately $880 of Completion & Production Solutions revenue and $750 of Rig Technologies revenue during the remainder of 2018. The filing also disclosed $2.523 billion of remaining performance obligations, with approximately $895 expected to be recognized in 2018 and $1.628 billion in 2019 and thereafter. These are expectations, not guarantees.
- Q1 “other items” were a $12 credit, primarily from reversals of certain accruals, partially offset by restructuring and severance costs; Q1 2017 included $27 of expenses. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- The Tax Cuts and Jobs Act accounting remained provisional. NOV recorded a $242 tax benefit in 2017 from revaluing deferred tax liabilities; its provisional transition-tax estimate resulted in no additional tax expense. The company expected to complete its accounting during 2018.
- Risks include oil and gas prices and customer spending, oversupply and obsolescence of equipment, foreign-exchange movements, trade restrictions and tariffs, and legal or regulatory matters. NOV reported a $22 foreign-exchange loss in Q1 2018 versus a $1 gain in Q1 2017. It said recorded contingency reserves were considered sufficient for probable matters, while potential losses on certain matters could not be determined.
- The company stated its disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether operating cash flow improves as inventory, receivables and accrued-liability movements normalize.
- Whether reported backlog converts to revenue on the stated schedule, particularly given customer delivery deferrals and offshore exposure.
- Whether segment recovery and margins persist, and how much of Adjusted EBITDA reflects recurring operations versus other items.
- Final tax-accounting effects of the Tax Act, foreign-cash availability and any future financing or repatriation choices.
- Developments in litigation, regulatory, trade and foreign-exchange exposures, and any effect on liquidity or results.