NOV Inc. (National Oilwell Varco) — Q3 2012 Form 10-Q
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2012. NOV designs and supplies equipment and services to the oil and gas industry across Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission. Financial amounts below are in millions of dollars unless noted.
Financial performance and liquidity
- Third-quarter revenue: $5,319, up 42% year over year. Net income attributable to NOV was $612, up 15%; diluted EPS was $1.43 versus $1.25.
- Nine-month results: Revenue was $14,356 versus $10,399; net income attributable to NOV was $1,823 versus $1,420; diluted EPS was $4.28 versus $3.35.
- Margins: Q3 gross profit was $1,371 (25.8% of revenue), and operating profit was $898 (16.9%), compared with 20.6% operating margin a year earlier. Excluding acquisition-related and other costs, Q3 operating profit was $946 and margin was 17.8%; adjusted diluted EPS was $1.52. These are non-GAAP measures.
- Segment operating margins, Q3: Rig Technology 23.5% (26.5% in Q3 2011); Petroleum Services & Supplies 22.3% (20.4%); Distribution & Transmission 3.2% (7.7%). Acquisitions contributed substantially to revenue growth and brought lower-margin businesses into the mix.
- Cash flow: Operations used $180 in the first nine months, versus $1,521 provided in 2011. Investing used $2,663, including $2,305 for acquisitions and $382 for capital expenditures. Financing provided $1,005. Cash fell to $1,702 from $3,535 at year-end 2011.
- Debt and liquidity: Debt totaled $1,529, including $1,015 drawn on the revolving facility, compared with $510 at year-end 2011. Cash exceeded reported debt by $173. The new five-year $3.5 billion facility had $1,572 available after borrowings and facility letters of credit; NOV reported covenant compliance. Approximately $1,596 of cash was held outside the U.S.
- Other metrics: Q3 dividend was $0.12 per share. Capital expenditures were expected to total approximately $600 for 2012.
Material changes versus comparable periods
- Q3 revenue increased $1,579 year over year; the largest percentage increase was in Distribution & Transmission, largely reflecting acquisitions. Rig Technology revenue rose 29% and Petroleum Services & Supplies rose 18% year over year.
- While operating profit increased, consolidated operating margin declined year over year. NOV attributed pressure in Rig Technology to lower-margin backlog projects and acquisitions; Distribution & Transmission margin was affected by acquisitions and purchase-accounting inventory costs.
- Operating cash flow swung to negative, principally due to working-capital investment, including higher inventory and costs in excess of billings, and income tax payments.
- Debt increased following revolving-credit borrowing used to fund working capital and acquisitions. NOV had $350 of senior notes due in the fourth quarter of 2012.
Outlook, commentary, risks, and unusual items
- Management expected Rig Technology margins to stabilize in the mid-20% range. It cited strong deepwater demand and a $11.7 billion capital-equipment backlog, about 87% offshore and 95% international; approximately $1.9 billion was scheduled for revenue in the remainder of 2012.
- Management described weakening North American activity and emerging pricing and volume pressure in services and supplies, alongside generally improving international activity. Low natural-gas prices, declining U.S. rig counts, oil-price volatility, and global economic uncertainty were identified as risks.
- NOV completed 12 acquisitions for $2.305 billion in the first nine months and completed further acquisitions for approximately $500 million after quarter-end. It also agreed to acquire Robbins & Myers for approximately $2.5 billion in cash; closing was subject to shareholder and regulatory approvals and could slip from the targeted Q4 2012 timing into 2013.
- Q3 results included $57 of pretax transaction and other costs; the filing’s non-GAAP adjustments primarily reflect acquisition-related purchase-accounting costs. The filing also reports $22 of Q3 other expense, citing foreign-exchange losses and higher bank charges and fees.
- NOV was negotiating a potential resolution of government inquiries concerning export-trade compliance. It also disclosed an OFAC inquiry relating to Ameron conduct before NOV acquired it. Management expected any agreed penalties to be within established accruals and not materially affect results, but stated that consequences could not be predicted if resolution were not reached as anticipated.
- One customer, Samsung Heavy Industries, accounted for 9% of Q3 revenue. NOV noted the shipyard acted as general contractor for drillship owners and contractors.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether working-capital needs, especially inventory and unbilled contract costs, convert into operating cash flow.
- Progress on the Robbins & Myers transaction, post-quarter acquisitions, and integration and purchase-accounting costs.
- Realized margins versus management’s mid-20% Rig Technology expectation, and the pace of North American demand and pricing changes.
- Availability under credit and letter-of-credit facilities, repayment of the $350 of notes due in Q4 2012, and the use or repatriation of overseas cash.
- Developments and potential financial consequences of the export-compliance and Ameron-related government inquiries.