NOV Inc. (National Oilwell Varco) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unless otherwise noted, amounts are in millions of U.S. dollars. NOV designs and supplies equipment, products, and services for the oil and gas industry through Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $5,601 | $4,734 | $10,908 | $9,037 |
| Gross profit | $1,266 | $1,306 | $2,530 | $2,573 |
| Operating profit | $769 | $879 | $1,520 | $1,756 |
| Net income attributable to NOV | $531 | $605 | $1,033 | $1,211 |
| Diluted earnings per share | $1.24 | $1.42 | $2.41 | $2.84 |
| Operating margin | 13.7% | 18.6% | 13.9% | 19.4% |
| Cash dividends per share | $0.26 | $0.12 | $0.39 | $0.24 |
- Q2 revenue rose 18% year over year, but operating profit fell 13% and attributable net income fell 12%. Gross profit declined despite higher sales; gross margin was approximately 22.6%, versus 27.6% a year earlier.
- For the first six months, revenue increased 21%, while operating profit and attributable net income each declined about 13% year over year.
- Management’s non-GAAP operating profit excluding acquisition-related other costs was $826 million in Q2 (14.7% margin), compared with $907 million (19.2%) in Q2 2012. Adjusted diluted EPS was $1.33 versus $1.46. These are non-GAAP measures.
- Six-month operating cash flow was $870 million, compared with cash used of $317 million in 2012. Investing cash outflow was $2,664 million, including $2,390 million of net acquisition spending and $320 million of capital expenditures. Financing provided $828 million.
- At June 30, cash was $2,327 million and debt was $4,120 million, leaving net debt of $1,793 million; year-end 2012 had net cash of $170 million. NOV attributed the shift primarily to the Robbins & Myers acquisition. Approximately $2,080 million of cash was held outside the U.S.
- The $3.5 billion revolving facility had $970 million drawn and $858 million of letters of credit, leaving $1,672 million available. NOV reported compliance with its debt-to-capitalization covenant. It also had $2,641 million of additional letters of credit under other facilities.
Segments and material changes
- Rig Technology: Q2 revenue rose 18% to $2,833 million; operating profit increased 4% to $574 million, while margin declined to 20.3% from 23.0%. The segment cited lower-priced project mix, acquisition contributions, compressed customer delivery schedules, supply-chain constraints, and growth-related costs. Capital equipment backlog reached a record $13.9 billion, 93% offshore and 95% international.
- Petroleum Services & Supplies: Q2 revenue decreased 2% to $1,749 million; operating profit fell 30% to $273 million and margin declined to 15.6% from 22.0%. Management cited North American pricing pressure, lower activity, under-absorbed facilities, and integration costs.
- Distribution & Transmission: Q2 revenue increased 66% to $1,295 million, largely reflecting the Robbins & Myers, Wilson, and CE Franklin acquisitions. Operating profit rose to $58 million, but margin declined to 4.5% from 5.9%.
- Q2 included a full quarter of Robbins & Myers, acquired February 20, 2013 for $2.375 billion net of cash acquired. The preliminary allocation included $1.538 billion of goodwill and $969 million of intangible assets; goodwill was not expected to be tax-deductible.
Outlook, risks, and notable items
- For the remainder of 2013, NOV expected Rig Technology operating margin to remain in the 20%–21% range, citing mix, supply-chain congestion, project schedules, and capacity additions. It expected strong orders for drilling equipment packages and FPSOs.
- For Q3, management anticipated low-to-mid single-digit revenue growth in Petroleum Services & Supplies, with margins broadly consistent with Q2 and possible modest improvement later in the year. Distribution & Transmission revenue was expected to grow mid-single digits, with margins relatively flat. These are management expectations, not guarantees.
- Management identified risks from commodity-price and drilling-activity changes, especially weaker North American land markets, customer spending, acquisition integration, project execution, and global economic conditions. International activity was generally increasing, while North American activity and pricing remained pressured.
- Foreign currency translation and derivative movements reduced comprehensive income; accumulated other comprehensive income moved from $107 million at year-end to a loss of $201 million. NOV reported a $19 million foreign-exchange loss in the first half and an $8 million charge related to Venezuela’s currency devaluation. It used foreign-exchange derivatives for hedging, not speculation.
- NOV disclosed ongoing government inquiries and negotiations concerning export-control and trade-law matters involving NOV, acquired Ameron, and Robbins & Myers. It expected potential penalties to be within established accruals and not materially affect results, but noted that outcomes and timing could not be assured. Other probable contingencies were accrued at an immaterial amount; certain potential losses could not be determined.
- The board doubled the regular quarterly dividend to $0.26 per share; future dividends remain at board discretion. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Key facts for investors to verify
- Whether record backlog converts to revenue on schedule and at margins consistent with the 20%–21% Rig Technology outlook.
- How much of reported revenue growth and segment performance reflects acquisitions versus underlying activity, and whether integration costs or purchase-accounting charges persist.
- Whether North American pricing and activity stabilize, and the effect on Petroleum Services & Supplies and Distribution & Transmission margins.
- Debt, cash availability, acquisition funding needs, and the tax implications of cash held abroad.
- Progress and eventual financial impact of the export-compliance investigations and other contingencies.
- Currency exposure, particularly the reported derivative net liability and potential sensitivity of earnings to exchange-rate movements.