NOV Inc. (then National Oilwell Varco) — Q3 2009 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2009. The company supplies drilling and production equipment, oilfield services and consumables, and distribution services. Results reflect a sharp industry downturn, including lower drilling activity and commodity prices; 2008 comparisons also include Grant Prideco only from its April 2008 acquisition date.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $3,087m | $3,611m | $9,578m | $9,621m |
| Operating profit | $601m | $790m | $1,707m | $2,050m |
| Operating margin | 19.5% | 21.9% | 17.8% | 21.3% |
| Net income attributable to company | $385m | $548m | $1,075m | $1,367m |
| Diluted EPS | $0.92 | $1.31 | $2.58 | $3.48 |
Q3 revenue declined 15% year over year and company-attributable net income fell 30%. Against Q2 2009, revenue increased 3% and company-attributable net income increased 75%; management attributed the improvement partly to higher sales and margins and the non-recurrence of Q2 impairment, restructuring/transaction and retirement-program charges, as well as a higher Q2 tax rate.
- Segment results, Q3: Rig Technology revenue was $2,000m and operating profit $577m, a 28.9% margin. Petroleum Services & Supplies revenue was $882m and operating profit $82m, a 9.3% margin. Distribution Services revenue was $306m and operating profit $7m, a 2.3% margin.
- Cash flow, nine months: Operating activities provided $1,969m versus $1,706m a year earlier. Investing activities used $319m versus $2,339m; financing activities used $25m versus providing $568m. Capital expenditures were $186m. Cash rose by $1,649m to $3,192m.
- Balance sheet at September 30: Cash was $3,192m; total debt was $884m, including $875m long-term debt. Cash exceeded debt by approximately $2,308m. Current assets were $10,407m and current liabilities $4,989m. The company reported $1,411m available under its revolving credit facilities after letters of credit; it had no borrowings under those facilities and was in compliance with covenants.
Material changes and unusual items
- Rig Technology revenue rose 4% year over year in Q3, supported by backlog execution, while its margin improved to 28.9%. Petroleum Services & Supplies revenue fell 33% and Distribution Services revenue fell 39%, reflecting reduced activity, lower pricing and customer spending.
- Rig Technology backlog was $7.3bn at quarter end, down from $11.8bn a year earlier. Management identified approximately $334m of backlog projects as at risk and reported $72m of discontinued orders in Q3. About 89% of backlog was for offshore equipment and 93% for international markets.
- Nine-month results included a $147m noncash impairment of the Grant Prideco trade name in Petroleum Services & Supplies and a $46m voluntary early retirement charge. Goodwill testing identified no impairment as of June 30, 2009.
- The company completed five acquisitions for $392m, net of cash acquired, during the first nine months and sold 45% of certain IntelliServ operations to form a joint venture.
- One customer accounted for 16.7% of nine-month revenue. The customer is a shipyard serving drillship owners and drilling contractors.
Outlook, commentary and risks
Management remained cautious but saw signs of market stabilization. It expected no significant Q4 turnaround in new rig orders, while believing 2010 could improve if rig tenders convert to orders, dayrates hold, commodity prices remain high and economic conditions do not worsen. For Q4, it expected Petroleum Services & Supplies revenue to decline slightly and Distribution Services revenue to rise slightly, with margins for both approximately stable. Rig Technology was expected to have lower Q4 revenue and margins as backlog revenue declined sequentially, partly offset by non-backlog gains. The company expected a 32%–33% tax rate for the remainder of 2009.
- Q3 average worldwide rig count was 2,130, down 39% year over year; average WTI was $68.20 per barrel and natural gas was $3.17 per mmbtu, down 42% and 65%, respectively, year over year.
- Management’s impairment analyses use significant unobservable assumptions, including forecast cash flows and discount rates. A further 20% revenue decline in the specified forecast periods could produce an estimated $79m pretax noncash impairment of indefinite-lived intangibles; a 100-basis-point increase in the discount rate could produce an estimated $36m charge, each under the stated sensitivity assumptions.
- Foreign-exchange losses were approximately $62m for the first nine months. The company also recognized $21m of additional tax provision for prior-year Norwegian income. Cash held in foreign subsidiaries could incur additional tax if transferred or repatriated.
- Other risks include continued weak drilling demand and pricing, project cancellations or delays, customer concentration, acquisition funding and integration, foreign-exchange exposure, and potential further impairment if market assumptions deteriorate. The filing reports $59m of unrecognized tax benefits; it does not quantify the ultimate outcome of tax examinations or other contingencies.
Key facts for investors to verify
- Whether new offshore rig tenders convert to orders and whether the $7.3bn backlog is executed on schedule, including the projects management considers at risk.
- Whether weakness in Petroleum Services & Supplies and Distribution Services stabilizes as management expected, and whether pricing pressure continues.
- How impairment assumptions, rig activity and commodity prices evolve, and whether additional intangible-asset or goodwill charges arise.
- The sustainability and composition of operating cash flow, including working-capital movements, and the availability of credit after letters of credit.
- The exposure from the major customer, foreign-currency movements, Norwegian tax matters and cash held overseas.