NOV Inc. (National Oilwell Varco) — 2012 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2012; fourth-quarter figures are also summarized. NOV supplies equipment, products, services and distribution solutions to the oil and gas industry through Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission. Results are strongly exposed to drilling and production activity, customer capital spending and commodity prices.
Financial performance
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $20.041 billion | $14.658 billion | +36.7% |
| Operating profit | $3.557 billion | $2.937 billion | +21.1% |
| Operating margin | 17.7% | 20.0% | Down 2.3 percentage points |
| Net income attributable to NOV | $2.491 billion | $1.994 billion | +24.9% |
| Diluted EPS | $5.83 | $4.70 | +24% |
| Operating cash flow | $620 million | $2.143 billion | Down $1.523 billion |
| Capital expenditures | $583 million | $483 million | +$100 million |
Revenue and net income rose, supported by higher international activity and acquisitions. Operating margin fell despite higher operating profit, reflecting segment mix, lower-margin acquired businesses and pressure in Rig Technology and Distribution & Transmission. Cash generation was notably weaker: operating assets and liabilities used $2.536 billion, principally as receivables, inventories and contract costs grew with activity.
At year-end, cash and equivalents were $3.319 billion, total debt $3.149 billion, working capital $10.029 billion and total assets $31.484 billion. The $3.5 billion revolving facility had no borrowings at year-end, with $2.562 billion available after letters of credit. The company paid $209 million in dividends; annual dividends per share were $0.49.
Segments and changes versus prior year
| Segment | 2012 revenue | 2012 operating profit | Operating margin | Revenue change |
|---|---|---|---|---|
| Rig Technology | $10.107 billion | $2.335 billion | 23.1% (2011: 26.4%) | +29.8% |
| Petroleum Services & Supplies | $6.967 billion | $1.501 billion | 21.5% (2011: 19.0%) | +23.2% |
| Distribution & Transmission | $3.927 billion | $185 million | 4.7% (2011: 7.2%) | +109.7% |
Distribution & Transmission’s sharp revenue increase primarily reflected the Wilson and CE Franklin acquisitions. Its lower margin also reflected acquired businesses and purchase-accounting charges. Petroleum Services & Supplies improved margin on volume, pricing and cost reductions, though North American activity and pricing weakened later in the year. Rig Technology’s margin declined as earlier, higher-margin backlog projects ran off and product mix shifted.
Fourth quarter, outlook and material items
Fourth-quarter revenue was $5.685 billion, net income attributable to NOV was $668 million and diluted EPS was $1.56. Revenue increased 33% and net income 16% year over year. The quarter included $51 million of pre-tax other costs and a net $69 million tax benefit related to U.S. foreign tax credits. NOV reported adjusted fourth-quarter diluted EPS of $1.49 excluding the tax benefit and other costs; full-year adjusted EPS was $5.91 versus $4.77 in 2011. These are non-GAAP measures.
Rig Technology backlog reached $11.9 billion, up from $10.2 billion a year earlier; about $7.4 billion was scheduled to convert to revenue in 2013. Backlog was predominantly offshore (91%) and international (94%), but NOV cautioned that orders may be delayed, cancelled or unprofitable. Management anticipated continued international activity but North American pricing and volume pressure, particularly in land drilling, workover and pressure-pumping markets. No specific full-year revenue or earnings guidance was provided.
NOV completed 17 acquisitions in 2012 for $2.880 billion net of cash acquired. It issued $3.0 billion of senior notes in November and repaid $350 million of 2012 notes. On February 20, 2013, after year-end, it completed the approximately $2.5 billion cash acquisition of Robbins & Myers, funded with about $1.4 billion drawn on the revolver and $1.1 billion of cash.
Risks, contingencies and unusual items
- Demand and margins depend on volatile oil and gas prices, global rig activity, customer financing and capital budgets; gas weakness and falling North American activity were already pressuring some markets.
- Large construction backlog creates execution, cost-estimation, supplier, schedule and customer-credit risks. Percentage-of-completion accounting depends on estimates of project costs and progress.
- Acquisition pace, integration, increased debt and substantial goodwill and intangible assets create execution and impairment risks. Goodwill was $7.172 billion; no impairment was recorded in 2012.
- One customer, Samsung Heavy Industries, represented 10% of 2012 revenue. Approximately 59% of revenue was generated outside the United States, exposing NOV to currency, political, regulatory and country risks.
- Government inquiries concerning export-trade compliance remained unresolved; NOV was negotiating a potential resolution and expected any fine within established accruals, but said the outcome and timing were uncertain. Other ordinary-course claims were not expected by management to have a material effect.
- Environmental regulation, potential environmental liabilities, foreign-exchange exposure and customer concentration are additional disclosed risks. NOV reported $128 million in unrecognized tax benefits.
Important facts for investors to verify
- Whether backlog converts on schedule and at expected margins, especially given its offshore and international concentration.
- Whether cash flow recovers as working-capital investment moderates; reconcile earnings growth with the sharp decline in operating cash flow.
- Post-acquisition leverage, revolver utilization and integration results, including Robbins & Myers, which closed after the reporting date.
- Underlying segment profitability after acquisition-related costs and the Q4 tax benefit; distinguish GAAP results from management’s non-GAAP adjusted EPS.
- Progress and potential financial consequences of the export-compliance inquiries, as well as customer concentration and oilfield demand risks.