NOV Inc. — Q1 2013 Form 10-Q
Business context and period: National Oilwell Varco, Inc. (NOV) designs and supplies equipment, products, and services for the oil and gas industry. This unaudited report covers the three months ended March 31, 2013; year-over-year comparisons are with Q1 2012 unless noted. NOV acquired Robbins & Myers (R&M) on February 20, 2013, so Q1 includes only a partial quarter of its results.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|
| Revenue | $5.307 billion | $4.303 billion |
| Gross profit | $1.264 billion | $1.267 billion |
| Operating profit | $751 million | $877 million |
| Net income attributable to NOV | $502 million | $606 million |
| Diluted EPS | $1.17 | $1.42 |
| Operating cash flow | $506 million | $(64) million |
| Capital expenditures | $168 million | $113 million |
- Revenue grew 23%, but gross profit was essentially flat and operating profit fell 14%; gross and operating margins contracted. GAAP operating margin was 14.2%, versus 20.4%.
- Management’s non-GAAP diluted EPS, excluding specified “other costs,” was $1.29 versus $1.44. Those costs totaled $73 million pretax in Q1 2013, including $65 million in operating costs and $8 million in other expense.
- Cash used in investing activities was $2.535 billion, primarily reflecting the $2.375 billion net cash acquisition of R&M, plus capital expenditures. Financing activities provided $1.162 billion, including $1.2 billion of net revolving-credit borrowings. Cash declined $878 million to $2.441 billion.
Balance sheet, debt, and liquidity
- At March 31, 2013, total assets were $33.556 billion and total liabilities were $12.877 billion. Cash was $2.441 billion, compared with $3.319 billion at December 31, 2012.
- Total debt rose to $4.349 billion from $3.149 billion, primarily to help fund R&M. NOV moved from net cash to net debt; management attributed the $2.078 billion shift primarily to the acquisition.
- The $3.5 billion revolving facility had $1.2 billion drawn and $777 million of letters of credit outstanding, leaving $1.523 billion available. NOV reported compliance with its maximum debt-to-capitalization covenant.
- Approximately $2.195 billion of cash was held outside the United States and could incur additional taxes if repatriated. Management said cash, operating cash generation, and available credit were expected to cover foreseeable operating and capital needs, debt service, and dividends.
Segments and material changes
| Segment | Revenue | Operating profit | Operating margin |
|---|
| Rig Technology | $2.628 billion; +16% | $550 million; +1% | 20.9%, down from 24.2% |
| Petroleum Services & Supplies | $1.701 billion; roughly flat | $255 million; down 34% | 15.0%, down from 22.8% |
| Distribution & Transmission | $1.227 billion; +118% | $63 million; +47% | 5.1%, down from 7.6% |
- Distribution & Transmission’s revenue increase mainly reflected the 2012 Wilson and CE Franklin acquisitions. R&M also contributed to results in multiple segments.
- Rig Technology benefited from offshore and international demand, but margins faced product-mix effects, acquired businesses, growth-related costs, and higher costs on key components. Its capital-equipment backlog reached a record $12.9 billion; $7.7 billion was scheduled for 2013 revenue.
- Petroleum Services & Supplies experienced North American activity and pricing pressure, lower sales in several product lines, and under-absorption at facilities. The company cited earlier-than-expected Canadian spring break-up as a factor.
- Q1 revenue was down $378 million and NOV-attributable net income down $166 million versus Q4 2012, according to management. Excluding other costs, diluted EPS was $1.29 versus $1.49 in Q4 2012.
Outlook, risks, and unusual items
- NOV expected strong orders for offshore drilling equipment and maintained a record backlog, but noted possible delays for additional Brazil offshore rig bookings. Management said Rig Technology margins could remain temporarily constrained, with an outlook influenced by softer North American land drilling, workover, and pressure-pumping markets.
- For Q2, management expected Petroleum Services & Supplies revenue to be relatively flat and margins flat to down; it also expected Distribution & Transmission revenue relatively flat and margins flat to down. These expectations reflected spring break-up, pricing pressure, acquired-business contributions, and integration costs. No specific full-year earnings guidance is provided in the filing text.
- Management cited North American drilling weakness, low gas prices, possible oil-price and economic weakness, customer spending reductions, and acquisition-integration challenges as risks. Results also depend on global drilling activity, commodity prices, and customer capital spending.
- Foreign currency translation reduced other comprehensive income by $117 million in Q1; NOV reported a $13 million foreign-exchange loss in income. The Venezuelan bolivar devaluation resulted in approximately $8 million of charges.
- NOV and acquired R&M had ongoing government inquiries or investigations concerning export-control or trade-law matters. The company anticipated potential penalties within established accruals and not material, but stated that outcomes and effects could not be predicted if settlements were not reached. Other claims and regulatory matters were also disclosed.
- One customer, Samsung Heavy Industries, accounted for 9% of Q1 revenue. NOV reported that disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether R&M’s preliminary purchase-price allocation, integration costs, and contribution to segment results change as valuations and integration progress.
- Whether the $12.9 billion Rig Technology backlog converts to revenue on schedule, and whether new orders and margins meet management’s expectations.
- Whether North American activity and pricing pressure continue to weigh on Petroleum Services & Supplies and Distribution & Transmission.
- Cash generation, debt levels, revolving-credit availability, and the tax consequences of cash held outside the United States.
- Developments and final liabilities in the export-compliance investigations, and any additional effects from currency movements or customer concentration.
