NOV Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. NOV manufactures oilfield equipment and provides technologies and services across drilling, completion, and production. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $1,741 | $2,189 | Down 20% |
| Gross profit / margin | $209 / 12.0% | $244 / 11.1% | Margin improved despite lower revenue |
| Operating loss / margin | $(97) / (5.6)% | $(189) / (8.6)% | Includes $27 and $141 of other items, respectively |
| Operating loss excluding other items | $(70) / (4.0)% | $(48) / (2.2)% | Underlying loss margin worsened |
| Net loss attributable to NOV | $(122) | $(119) | Basic and diluted loss per share was $(0.32) in both periods |
| Cash from operating activities | $111 | $621 | Down $510; working-capital cash contribution was substantially lower |
| Capital expenditures | $42 | $84 | Net cash used in investing activities was $42 versus $103 |
| Cash dividends per share | $0.05 | $0.46 | Cash dividends paid were $19 versus $173 |
At March 31, cash and equivalents were $1,479, total debt was $3,213, and total stockholders’ equity was $13,985. Current assets were $7,744 against current liabilities of $2,852. Cash increased $71 during the quarter. NOV reported $4,500 of availability under its revolving credit facility, no commercial-paper borrowings, and compliance with its 60% maximum debt-to-capitalization covenant; its reported ratio was 18.7%. Separately, $1,002 of letters of credit were outstanding under bilateral facilities.
Of reported cash, approximately $1,233 was held by foreign subsidiaries; $1,224 would be subject to U.S. tax, net of available foreign tax credits, if repatriated. Management said it currently intends to keep these funds permanently invested outside the United States.
Material changes and segment results
- Compared with Q1 2016, revenue declined 20%, while the GAAP operating loss narrowed. Excluding other items, the operating loss increased from $48 to $70. Other items were $27 in Q1 2017, $141 in Q1 2016, and $694 in Q4 2016, primarily relating to severance, facility closures, write-downs, and other costs.
- Rig Systems revenue fell 58% year over year to $393; operating profit fell to $9. Its capital-equipment backlog was $2.3 billion, down 30% year over year.
- Rig Aftermarket revenue declined 18% to $321; operating profit was $61, with a 19.0% margin.
- Wellbore Technologies revenue declined 12% to $555; operating loss was $57, versus $91 a year earlier.
- Completion & Production Solutions revenue rose 16% to $648 and returned to an $8 operating profit from a $38 loss. Its backlog was $751 million, down 24% year over year.
- Management reported Q1 revenue up 3% and net loss down 83% versus Q4 2016; the comparison reflects Q4’s $694 million of other items.
Outlook, risks, and unusual items
- Management was cautious on 2017: customer capital spending remained restrained, global crude and refined-product inventories were high, and offshore activity could continue to decline. North American drilling activity was recovering, while international activity appeared near a bottom.
- Management expected approximately $660 million of Rig Systems backlog revenue and $690 million of Completion & Production Solutions backlog revenue during the rest of 2017. The filing cautions that backlog conversion timing can vary. Remaining backlog was expected to be recognized mainly in 2018 and thereafter for Rig Systems, and mostly in 2018 for Completion & Production Solutions.
- The $500 million 1.35% senior-note principal was due December 1, 2017. The company’s $4.5 billion credit facility expires September 28, 2018. The filing states liquidity should be sufficient for anticipated needs, but does not provide a specific refinancing plan for the near-term note maturity.
- Brazilian investigations have delayed or suspended shipyard-customer deliveries and may lead to cancellations, contract disputes, reduced backlog, and collection or operating pressures. NOV said it manages delivery and milestone payments to mitigate financial exposure.
- Q1’s effective tax rate was 7%, versus 50% a year earlier. A valuation allowance on losses and tax credits contributed to the lower rate. The company recognized a $4 million increase in tax expense associated with adopting share-based-payment accounting guidance.
- NOV recognized $15 million of gains after certain forecast cash-flow hedges were discontinued because the forecast transactions were considered unlikely to occur within the specified period. It had $44 million of pre-tax hedge losses in accumulated other comprehensive loss and warned that further forecast delays or reductions could produce additional hedge losses.
- Future dividends are at the board’s discretion. The filing also identifies exposure to oil and gas activity and commodity prices, foreign exchange, customer spending and pricing, regulatory and environmental matters, and litigation. Management noted that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Track whether North American activity gains translate into revenue, margins, and cash generation, particularly as offshore and international markets remain weak.
- Verify backlog conversion, cancellations, and customer payment performance, including exposure to Brazilian shipyard projects.
- Assess refinancing or repayment plans for the $499 million senior-note carrying amount due in December 2017 and the availability of committed liquidity.
- Monitor operating cash flow and working-capital movements; Q1 operating cash flow fell sharply year over year.
- Review the sustainability of the tax rate, valuation allowances, overseas cash strategy, and discretionary dividend policy.
- Check whether forecast project changes trigger further hedge de-designations or losses, and whether contingency accruals remain adequate.