NOV Inc. (National Oilwell Varco) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless noted, financial amounts are in millions of U.S. dollars. NOV supplies equipment, components and services for oil and gas drilling, completion and production.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1,724 | $3,909 | $3,913 | $8,729 |
| Gross profit | $35 | $855 | $279 | $2,032 |
| Operating profit (loss) | $(270) | $438 | $(459) | $1,008 |
| Net income (loss) attributable to NOV | $(217) | $289 | $(336) | $599 |
| Diluted earnings (loss) per share | $(0.58) | $0.74 | $(0.90) | $1.51 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $749 | $308 |
- Q2 revenue fell 56% year over year and 21% sequentially; Q2 net loss widened by $506 versus the prior-year quarter and by $98 versus Q1 2016. Gross margin was approximately 2.0%, versus 21.9% in Q2 2015; reported operating margin was (15.7%), versus 11.2%.
- Excluding $117 of Q2 other items, non-GAAP operating loss was $153, or 8.9% of revenue, and non-GAAP diluted loss per share was $0.30. The filing identifies retirement-plan, severance, facility-closure and other costs among these items. Six-month other items totaled $258.
- Six-month operating cash flow benefited from $805 of net cash released by changes in operating assets and liabilities, including lower receivables, inventory and contract costs in excess of billings. Capital spending was $161; investing cash outflow was $194.
Segments and material changes
- All four segments reported lower Q2 revenue year over year. Rig Systems revenue was $564, down 71%; Rig Aftermarket was $364, down 45%; Wellbore Technologies was $511, down 47%; and Completion & Production Solutions was $538, down 38%.
- Rig Systems operating profit fell to $7 from $421. Rig Aftermarket remained profitable at $62, down from $153. Wellbore Technologies swung to a $146 operating loss from $48 profit; Completion & Production Solutions swung to a $33 loss from $85 profit.
- The worldwide average rig count fell 35.1% year over year to 1,413. NOV attributed weaker results to reduced drilling and customer capital spending, lower volumes, pricing pressure, postponed maintenance and customers using existing or cannibalized equipment.
- Rig Systems capital-equipment backlog was $2.9 billion at June 30, down 67% from $9.0 billion a year earlier. NOV removed $2.1 billion of orders from backlog in Q1 2016, citing customer and market developments including Sete Brasil’s bankruptcy filing authorization. Completion & Production Solutions backlog was $947, down 20% year over year.
Liquidity, debt and capital allocation
- At June 30, cash and equivalents were $1,661, total debt was $3,280 and net debt was approximately $1,619. At December 31, 2015, cash was $2,080 and debt was $3,909. Cash declined $419 during the first half.
- NOV reported $4,390 available under its $4.5 billion credit facility, with $110 of commercial paper borrowings supported by the facility. It was in compliance with its debt-to-capitalization covenant; the reported ratio was 16.8%, against a 60% maximum.
- Approximately $1,614 of cash was held by foreign subsidiaries; $1,459 would be subject to U.S. tax, net of available foreign tax credits, if repatriated. Management said it intended to permanently reinvest these funds abroad.
- First-half financing cash outflow was $990, including $785 of net payments on commercial paper borrowings and $192 of dividends paid. Q2 dividend was $0.05 per share, compared with $0.46 in Q2 2015. No share repurchases were made in the first half of 2016.
Outlook, risks and unusual items
- Management was cautious for the rest of 2016: it expected customers to constrain capital spending, reduce parts purchases and defer maintenance, and did not expect a meaningful increase in drilling activity during 2016. Visibility beyond 2016 was limited and recovery timing uncertain.
- Management expected approximately $700 of Rig Systems revenue from backlog in the remainder of 2016, and approximately $600 of Completion & Production Solutions backlog revenue in 2016 and $340 in 2017 and thereafter. These are backlog conversion expectations, not overall revenue guidance.
- NOV planned continued cost control and operational resizing. It intended to combine the Rig Offshore and Land reporting units in Q3 2016 and test both for goodwill impairment before the merger.
- Brazil investigations and related customer and shipyard disruptions may delay deliveries, suspend performance, prompt cancellations or contract disputes, and weaken collections and backlog. NOV also disclosed ongoing U.S. government inquiries regarding export-trade compliance dating from 2008; it was negotiating a potential resolution and expected any agreed penalty to be within established accruals, but warned outcomes could differ.
- Foreign currency exposure remains relevant: derivatives had a net liability fair value of $66 at June 30. NOV warned that delays or reductions in forecast transactions could lead to hedge de-designation losses. The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether drilling activity, commodity prices, customer spending and pricing stabilize, and how those trends affect each segment.
- Whether backlog converts on schedule, particularly Rig Systems’ offshore and international projects, and whether further orders are removed or canceled.
- The sustainability of operating cash flow, given the substantial first-half working-capital release, alongside cash needs, debt repayments and dividend decisions.
- Potential costs or delays tied to Brazil-related customer matters, export-compliance inquiries, warranty obligations and foreign-exchange hedges.
- The amount, nature and recurrence of restructuring and other items, and the outcome of planned goodwill impairment testing before the Rig Systems reporting-unit combination.