NOV Inc. Form 10-K Summary
Business context and reporting period
National Oilwell Varco (NOV) designs, manufactures and services equipment and technologies for oil and gas drilling, completions and production. This annual report covers the year ended December 31, 2014; amounts are in U.S. dollars. Results reflect four segments: Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions.
NOV spun off its distribution business as NOW Inc. on May 30, 2014. NOW’s results are presented as discontinued operations, and prior-period segment information was recast. Accordingly, continuing-operations revenue excludes NOW.
Financial results and key metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $21.44 billion | $19.22 billion |
| Operating profit | $3.61 billion | $3.20 billion |
| Operating margin | 16.9% | 16.6% |
| Income from continuing operations | $2.46 billion | $2.18 billion |
| Diluted continuing-operations EPS | $5.70 | $5.09 |
| Net income attributable to NOV | $2.50 billion | $2.33 billion |
| Cash from continuing operating activities | $2.53 billion | $3.08 billion |
| Capital expenditures | $699 million | $614 million |
| Cash and cash equivalents at year-end | $3.54 billion | $3.44 billion |
| Total debt at year-end | $3.17 billion | $3.15 billion |
| Working capital | $8.79 billion | $9.75 billion |
Gross profit was $5.81 billion, or about 27.1% of revenue, compared with $5.10 billion, or about 26.6%, in 2013. NOV paid $703 million in dividends and repurchased $779 million of stock in 2014. Approximately $2.98 billion of year-end cash was held outside the U.S.; $2.48 billion remained available under the revolving credit facility after letters of credit.
Segment revenue and operating profit were: Rig Systems $9.85 billion and $2.00 billion; Rig Aftermarket $3.22 billion and $882 million; Wellbore Technologies $5.72 billion and $937 million; and Completion & Production Solutions $4.65 billion and $690 million. Rig Systems’ year-end backlog was $12.5 billion, down 17% year over year; Completion & Production Solutions backlog was $1.8 billion, up 12%.
Material changes versus prior periods
- Revenue increased 11.5% and operating profit increased 12.9% year over year. All four segments reported higher revenue.
- Operating cash flow fell to $2.53 billion from $3.08 billion, principally as working capital used $794 million, including inventory growth and higher receivables and project costs ahead of customer billings.
- Rig Systems revenue rose 16.5% and operating profit rose 25.2%; Rig Aftermarket revenue rose 19.7% and operating profit rose 21.0%.
- Wellbore Technologies revenue rose 9.8%, but its operating margin fell to 16.4% from 17.6%, including a $104 million impairment of indefinite-lived trade names. Completion & Production Solutions revenue rose 7.8% and operating profit rose 12.6%.
- Fourth-quarter revenue was $5.71 billion, up 8% year over year. Continuing-operations income was $597 million, down 5% year over year; reported diluted EPS was $1.39. Excluding identified other items, diluted EPS was $1.69 versus $1.49 a year earlier.
- The distribution spin-off and share repurchases contributed to a reduction in shares outstanding. Accumulated other comprehensive loss widened to $834 million, mainly reflecting foreign-currency translation and derivative movements.
Outlook, commentary, risks and unusual items
- Management was cautious on 2015 as falling oil prices and lower rig counts pressured customers. It expected Rig Systems revenue from backlog to exceed new orders, with book-to-bill well below one, and expected Rig Aftermarket sales of parts, repairs and services to decline year over year.
- Management expected drilling activity to continue declining in early 2015. Customers could defer maintenance and upgrades or use inventory from idle rigs, weighing on Wellbore Technologies and Completion & Production Solutions. NOV cited its balance sheet, available credit and contracted backlog as support through the downturn.
- Oil prices fell sharply in the second half of 2014. NOV reported average WTI of $93.26 per barrel for 2014, but $73.16 in the fourth quarter; North American active rigs were 21% below year-end levels by February 6, 2015.
- Material risks include oil and gas activity and price volatility, backlog execution and customer cancellations, competition, acquisition integration, international and currency exposure, environmental requirements, and potential goodwill or intangible impairment. About 70% of 2014 revenue was from outside the U.S.
- NOV reported $8.5 billion of goodwill and about $536 million of indefinite-lived trade names at year-end. Its annual test found no goodwill impairment, but recorded the $104 million trade-name impairment after lower oil prices and weaker 2015 forecasts.
- NOV continued to negotiate a resolution of government inquiries into its compliance with U.S. export trade laws, stating that any anticipated penalty was expected to be within established accruals and not material. The filing also identifies tax risk that the NOW spin-off could be treated as taxable, despite tax opinions received.
- Other notable items include $156 million of 2014 operating-profit adjustments identified as “other items,” a $36 million spin-off cost in continuing operations, and $291 million spent on 2014 acquisitions. Ordinary-course legal matters were not expected by management to have a material effect.
Most important facts for investors to verify
- Whether 2015 order intake and backlog conversion support the outlook, particularly the expected Rig Systems book-to-bill below one and falling Rig Systems backlog.
- How quickly oil prices and customer activity affect segment revenue, margins, working capital and operating cash flow.
- Whether the $104 million impairment signals further risk to NOV’s substantial goodwill and intangible-asset balances.
- Cash location, available credit after letters of credit, debt maturities (including $152 million due in 2015), and the funding of dividends and the remaining share-repurchase authorization.
- Developments in the export-compliance inquiry and the tax treatment of the NOW spin-off.
- Execution of long-term contracts, including cost estimates, customer credit, cancellations and project billing; contract estimates and backlog are not guaranteed to be realized at stated profitability.