NOV Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
National Oilwell Varco, Inc. (NOV) reported unaudited results for the three months ended March 31, 2015. The company supplies equipment, components and services for oil and gas drilling, completion and production. Results reflect continuing operations following the May 2014 spin-off of its distribution business, NOW Inc.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $4.820 billion | $4.889 billion |
| Gross profit / gross margin | $1.177 billion / 24.4% | $1.290 billion / 26.4% |
| Operating profit / operating margin | $570 million / 11.8% | $799 million / 16.3% |
| Net income attributable to NOV | $310 million | $589 million, including $41 million from discontinued operations |
| Diluted EPS attributable to NOV | $0.76 | $1.37, including discontinued operations |
| Cash from continuing operating activities | $114 million | $485 million |
| Capital expenditures | $130 million | $125 million |
| Cash and total debt at quarter-end | $3.024 billion / $4.245 billion | — |
Cash from operations less capital expenditures was negative $16 million. At March 31, cash was down $512 million from year-end 2014; total debt had increased $1.079 billion, including $1.080 billion of commercial paper. NOV reported $1.982 billion of availability under its $3.5 billion revolving facility after commercial paper and facility letters of credit. Approximately $2.816 billion of cash was held outside the United States. Current assets were $15.299 billion and current liabilities were $6.667 billion.
GAAP results included $122 million of operating “other items,” principally acquisition-related costs, a voluntary early retirement program, spin-off costs and certain legal costs. NOV reported non-GAAP operating profit of $692 million (14.4% margin) and adjusted diluted EPS of $1.14, which also excluded a $9 million Venezuela asset write-down and the $69 million increase in uncertain tax positions.
Material changes versus comparable periods
- Year over year, revenue fell 1%, while operating profit fell 29% and NOV-attributable net income fell 47%. Operating margin declined to 11.8% from 16.3%.
- Cash from continuing operations fell to $114 million from $485 million. Management attributed working-capital use in part to lower project orders and costs outpacing customer prepayments and milestone billings.
- Rig Systems revenue rose 12% year over year to $2.523 billion, but margin fell to 17.8% from 20.0%. Its capital equipment backlog was $10.4 billion, down 31.6% from a year earlier.
- Rig Aftermarket revenue declined 4% to $719 million; operating profit was unchanged at $191 million. Wellbore Technologies revenue declined 8% and operating profit declined 64% to $79 million. Completion & Production Solutions revenue declined 5% and operating profit declined 42% to $79 million.
- Q1 2015 revenue was down 16% and continuing-operations income down 48% versus Q4 2014, according to management. The share count also fell following repurchases of 24.5 million shares for $1.330 billion; the quarter’s cash dividend was $0.46 per share, versus $0.26 a year earlier.
Outlook, commentary and risks
Management was cautious on 2015 as lower oil prices and drilling activity reduced customer spending. NOV expected Rig Systems revenue from backlog to exceed new orders for rigs and components, implying a book-to-bill ratio well below one. It expected Rig Aftermarket sales of parts, repairs and services to decline year over year, and remained cautious on Wellbore Technologies and Completion & Production Solutions. The filing provides no quantified full-year revenue or earnings guidance.
Management cited the industry downturn, customer inventory drawdowns, pricing pressure, order delays or cancellations, and delayed deliveries as key concerns. Worldwide average rig count fell 18.8% sequentially in Q1; WTI averaged $48.54 per barrel, down 33.7% from Q4 2014. Brazil-related investigations and financial stress at shipyard customers had delayed or suspended performance on contracts; NOV had 22 floating-rig equipment packages for Brazil in its orders. Management warned that further delays, suspensions, cancellations or customer financing problems could reduce backlog and harm results.
Other notable exposures include a $463 million net liability on foreign-currency forward contracts, a $418 million currency-translation loss in other comprehensive income, and a $22 million foreign-exchange loss in earnings. The effective tax rate was 37.6%, including the $69 million uncertain-tax-position increase; excluding discrete items, management reported a 28.9% rate. NOV was negotiating a potential resolution of U.S. export-trade-law inquiries and said any anticipated penalty was within established accruals, while noting that an unanticipated resolution could have uncertain effects. The filing also identifies international operating, sanctions, regulatory, environmental, litigation and commodity-price risks.
Most important facts for investors to verify
- Whether orders and backlog continue to weaken, especially the Rig Systems book-to-bill outlook and Brazil project delivery status.
- Whether the cash-flow decline and project working-capital demands persist, and how NOV funds buybacks, dividends and investment during the downturn.
- Whether segment margins, particularly in Wellbore Technologies and Completion & Production Solutions, stabilize as activity and pricing change.
- Developments in the Brazil investigations and customer financing, the export-compliance inquiry, and the foreign tax exposure.
- The company’s foreign-currency exposure and the effect of the $463 million net derivative liability as contracts and underlying transactions settle.