NOV 2010 Form 10-K Summary
Business context and reporting period
National Oilwell Varco, Inc. (the company identified as NOV in this filing) filed its annual report for the year ended December 31, 2010. It supplies equipment, products, services and supply-chain solutions to the upstream oil and gas industry through Rig Technology, Petroleum Services & Supplies, and Distribution Services. Results are closely tied to global drilling and production activity, commodity prices, and customer capital spending.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $12.156 billion | $12.712 billion |
| Operating profit | $2.447 billion | $2.315 billion |
| Operating margin | 20.1% | 18.2% |
| Net income attributable to NOV | $1.667 billion | $1.469 billion |
| Diluted earnings per share | $3.98 | $3.52 |
| Cash from operating activities | $1.542 billion | $2.095 billion |
- Gross profit was $3.832 billion, versus $3.784 billion in 2009. Capital expenditures were $232 million; depreciation and amortization was $507 million.
- At year-end, cash and equivalents were $3.333 billion, total debt was $887 million, and working capital was $5.999 billion. No revolver borrowings were outstanding; $1.523 billion remained available under the revolving facility after its letters of credit.
- Operating cash flow fell $553 million, mainly as customer financing on projects declined with the backlog and increased activity tied up working capital. Cash dividends paid were $172 million, down from $460 million in 2009.
Material changes versus prior comparable period
- Revenue declined 4.4%, while operating profit rose 5.7% and net income attributable to the company increased about 13%. Higher margins and improved performance in two segments offset weaker Rig Technology revenue.
- Rig Technology: revenue fell 13.9% to $6.965 billion and operating profit declined 9.6% to $2.064 billion. Margin improved to 29.6% from 28.2%, aided by project cost performance and manufacturing efficiencies.
- Petroleum Services & Supplies: revenue rose 11.7% to $4.182 billion; operating profit nearly doubled to $585 million. Margin increased to 14.0% from 8.0%. The 2009 comparison included a $147 million intangible-asset impairment.
- Distribution Services: revenue increased 14.5% to $1.546 billion and operating profit rose to $78 million from $50 million; margin improved to 5.0% from 3.7%.
- Rig Technology backlog was approximately $5.0 billion at year-end, down from $6.4 billion in 2009 and $11.1 billion in 2008. About $4.0 billion was expected to be delivered in 2011.
Outlook, commentary, risks and unusual items
- Management described improving drilling activity and order trends, but expected lower backlog to cause modest Rig Technology revenue and margin declines over the next few quarters before new offshore projects contribute. Petroleum Services & Supplies and Distribution Services outlook remained dependent on rig-count growth. The filing gives an expected 2011 tax rate of 30%–32%, but no company-wide earnings or revenue guidance.
- Worldwide rig count rose 29.6% in 2010 versus 2009. Average West Texas Intermediate crude was $79.40 per barrel, up 28.8%; average natural gas prices were $4.39 per MMBtu, up 11.1%.
- The Gulf of Mexico deepwater moratorium and permitting disruption reduced 2010 earnings by approximately $0.04 per diluted share, according to management. The moratorium was lifted in the fourth quarter, but activity remained below pre-incident levels.
- Samsung Heavy Industries accounted for 17% of revenue in both 2010 and 2009, creating significant customer concentration. Approximately 66% of 2010 revenue was generated outside the United States.
- Key risks include volatile oil and gas activity and prices, customer financing and project delays or cancellations, competition, rising steel and other input costs, foreign-exchange and political risks, environmental regulation and liability, and potential goodwill or intangible impairment. Goodwill was $5.790 billion; annual impairment testing in 2010 found no impairment.
- The company was negotiating a potential resolution with government agencies concerning export-trade-law inquiries. Management expected any agreed administrative penalty to be within established accruals and not materially affect results, but said the outcome and impact could not be predicted if negotiations did not proceed as anticipated. Other ordinary-course claims and proceedings were also reported; management did not expect them to have a material effect.
- 2010 unusual items included a $27 million charge following Venezuela’s currency devaluation and an additional $11 million receivables write-down. The company also completed acquisitions for $556 million, net of cash acquired, including Advanced Production and Loading PLC (APL); the purchase-price allocation was preliminary.
- The filing reports effective disclosure controls and internal control over financial reporting at year-end, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether new rig orders replenish the declining Rig Technology backlog, and whether the expected 2011 deliveries occur on schedule and at planned margins.
- Whether improving North American and international activity offsets input-cost inflation and pressure on segment margins.
- The status and potential financial consequences of the export-compliance inquiry, and any developments in environmental, product-liability or other contingencies.
- How the 17% Samsung Heavy Industries revenue concentration, overseas cash balances and acquisition integration affect future cash generation and risk.