NOV Inc. — Form 10-Q Summary
Business context and reporting period
National Oilwell Varco, Inc. (NOV) designs and supplies equipment, components and services for oil and gas drilling, completion and production. This filing covers the quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial-statement amounts are in millions unless noted.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,646 | $3,306 | $5,559 | $12,035 |
| Gross profit (margin) | $79 (4.8%) | $672 (20.3%) | $358 | $2,675 |
| Operating profit (loss) | $(1,186) | $234 | $(1,645) | $1,242 |
| Net income (loss) attributable to NOV | $(1,362) | $155 | $(1,698) | $754 |
| Diluted EPS | $(3.62) | $0.41 | $(4.53) | $1.92 |
- Q3 GAAP operating loss included $972 million of goodwill and intangible impairment and total “other items” of $1.078 billion. Excluding other items, operating loss was $108 million, or 6.6% of revenue, versus adjusted operating profit of $346 million (10.5%) a year earlier; adjusted diluted EPS was $(0.34) versus $0.61.
- For the first nine months, operating cash flow was $807 million versus $718 million in 2015. Investing cash use was $277 million; financing cash use was $1.116 billion. Capital expenditures were $221 million.
- At September 30, cash was $1.510 billion and total debt $3.216 billion, compared with $2.080 billion and $3.909 billion at December 31, 2015. Net debt was approximately $1.706 billion. Current assets were $8.711 billion and current liabilities $2.615 billion.
- The company reported $4.5 billion available under its credit facility, no commercial-paper borrowings, and compliance with its 60% debt-to-capitalization covenant (reported ratio: 17.8%). Approximately $1.368 billion of cash was held by foreign subsidiaries; most was intended to remain invested outside the United States.
Material changes versus comparable periods
- Q3 revenue fell 50% year over year; nine-month revenue fell 54%. Management attributed the declines to lower drilling and completion activity, reduced customer spending, and pricing pressure.
- All four segments had lower Q3 revenue year over year. Rig Systems revenue fell 69%; Rig Aftermarket 44%; Wellbore Technologies 37%; and Completion & Production Solutions 32%. Rig Aftermarket remained profitable in Q3; the other three segments reported operating losses.
- Rig Systems recorded the $972 million impairment after a weaker outlook for offshore newbuild rigs. The company combined its Rig Offshore and Rig Land reporting units during the quarter. Goodwill declined to $6.015 billion from $6.980 billion at year-end 2015.
- Q3 cash dividends were $0.05 per share versus $0.46 in Q3 2015; nine-month dividends were $0.56 versus $1.38 per share.
Outlook, commentary and risks
- Management remained cautious for the rest of 2016, citing low commodity prices, excess service capacity and equipment, customer spending restraint, and limited visibility beyond 2016. It expected no meaningful increase in global drilling activity during 2016 and anticipated continued cost controls and operational resizing.
- Management described potential recovery timing as segment-dependent: Completion & Production Solutions could benefit as previously drilled wells are completed; Wellbore Technologies and Rig Aftermarket may recover with new drilling; new rig orders may lag.
- Rig Systems capital-equipment backlog was $2.8 billion at quarter-end, down 65% year over year; management expected about $300 million of backlog revenue for the remainder of 2016 and $2.5 billion in 2017 and later. Completion & Production Solutions backlog was $812 million, down 31%; expected revenue was about $340 million for the remainder of 2016 and $470 million in 2017 and later.
- Tax expense was $120 million in Q3 despite a pretax loss; the nine-month tax benefit was $119 million. The effective tax rates were affected by nondeductible goodwill impairment, foreign tax rates and a valuation allowance, including $213 million against foreign tax credits not expected to be used before expiration.
- Risks include further oilfield downturn or pricing pressure, offshore project delays or cancellations, and customer financial distress. The filing notes that Brazil investigations have disrupted shipyard customers and may cause delivery delays, contract suspensions, cancellations, disputes and reduced backlog. NOV also reported ongoing U.S. government inquiries into export-trade compliance dating to 2008; it was negotiating a potential resolution and expected any agreed penalty to be within established accruals, but could not predict outcomes if no resolution is reached.
- Foreign-exchange exposure is managed partly with forward contracts; the company reported $17 million of pretax losses in accumulated other comprehensive income and noted that further hedge losses could arise if forecast transactions cease to be probable. No formal company-wide earnings guidance is provided in the filing.
Most important facts for investors to verify
- Whether the offshore downturn, rig oversupply and project delays lead to further impairment, cancellations or backlog reductions.
- Whether expected backlog conversion occurs on schedule, especially the offshore- and international-heavy Rig Systems backlog.
- Cash generation and liquidity trends, including the location and availability of foreign cash, debt maturities, and credit-facility access.
- The realization of deferred tax assets and foreign tax credits, and any further valuation-allowance changes.
- Developments in the export-compliance inquiry, Brazil-related customer disruptions and other contingencies.