NOV Inc. (then National Oilwell Varco, Inc.) — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unless noted, financial amounts are in millions of U.S. dollars. The company designs and supplies equipment, products and services for the oil and gas industry through Rig Technology, Petroleum Services & Supplies (PSS), and Distribution Services.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Change |
|---|---|---|---|
| Revenue | $3,513 | $2,941 | +19% |
| Gross profit / margin | $1,083 / 30.8% | $928 / 31.6% | Margin down 0.8 percentage points |
| Operating profit / margin | $708 / 20.2% | $590 / 20.1% | +20% profit |
| Net income attributable to NOV | $481 | $401 | +20% |
| Diluted EPS | $1.13 | $0.96 | +$0.17 |
Sequentially from Q1 2011, revenue rose 12% and net income attributable to the company rose 18%. Excluding specified other costs, Q2 diluted EPS was $1.14 and operating margin was 20.3%; these are non-GAAP measures.
- First half: Revenue was $6,659 versus $5,973 in 2010; operating profit was $1,317 versus $1,227; net income attributable to NOV was $888 versus $823; diluted EPS was $2.10 versus $1.96.
- Cash flow, first half: Operating cash flow was $887, compared with $282 in 2010. Investing activities used $424, including $259 for acquisitions and $192 in capital expenditures. Financing activities used $378, including debt repayments and dividends. Cash increased by $107 to $3,440.
- Balance sheet at June 30: Total debt was $513, down from $887 at year-end 2010; cash was $3,440. The company had $1,441 available under its revolving credit facility after letters of credit, no borrowings on that facility, and reported compliance with its covenants. Additional letters of credit under other facilities totaled $1,716.
- Q2 cash dividends were $0.11 per share; first-half dividends paid were $93. Future dividends remain at the board’s discretion.
Material changes and segment performance
- Rig Technology: Q2 revenue of $1,894 rose 13% year over year; operating profit increased 2% to $514, while margin declined to 27.1% from 30.2%. The company attributed lower year-over-year margin to a mix shift toward lower-priced contracts. First-half revenue fell 2% and operating profit fell 14% year over year.
- PSS: Q2 revenue rose 32% to $1,359 and operating profit rose 80% to $249; margin increased to 18.3% from 13.4%. Strong U.S. activity supported results. First-half operating profit included a $15 Libya asset write-down.
- Distribution Services: Q2 revenue rose 16% to $423 and operating profit rose to $25 from $13; margin was 5.9% versus 3.6%. Seasonal Canadian weakness and startup costs affected sequential performance.
- Rig Technology capital-equipment backlog was $7.7 billion at June 30, up 59% year over year. Q2 orders were a record $3.0 billion. Approximately $2.8 billion of backlog was expected to convert to revenue in the second half of 2011.
Outlook, risks and unusual items
- Management described market recovery as continuing through the first half of 2011. It expected Rig Technology margins to decline modestly over the next few quarters as lower-priced backlog is delivered, before newer, higher-margin offshore orders contribute revenue. PSS and Distribution were expected to benefit if rig counts remained at or above then-current levels. The filing gives no specific earnings or revenue guidance.
- Management cited uncertainty around European sovereign debt, U.S. fiscal and credit conditions, global economic activity, and oil and gas prices as risks to drilling activity and results. Rising steel, alloy, resin and fiberglass costs could pressure margins; unrest in North Africa and the Middle East continued to constrain activity. Seasonal Canadian drilling disruption and U.S. flooding also affected Q2 operations.
- Q2 included $4 of transaction costs. First-half other costs included $17 of Libya asset write-downs and $6 of transaction costs. The company also reported higher foreign-exchange losses; the first-half income-statement foreign-exchange loss was approximately $16.
- One customer, Samsung Heavy Industries, represented 12% of revenue in Q2 and the first half of 2011. The company noted that the shipyard contracts for equipment specified by its drilling-contractor and drillship-owner customers.
- Subsequent event: After quarter-end, NOV agreed to acquire Ameron International for approximately $772, subject to shareholder, regulatory and other customary approvals.
- Other exposures disclosed include $117 of unrecognized tax benefits, $230 of accrued service and product warranties, and foreign-currency risk. Management estimated that a hypothetical 10% exchange-rate movement could affect net income by $17 for transactional exposures.
Most important facts for investors to verify
- Whether the $7.7 billion Rig Technology backlog converts on schedule and at margins consistent with management’s expectations.
- Whether commodity-cost inflation, seasonal effects and regional instability weigh on segment margins or activity.
- The approval, closing, financing and integration implications of the proposed Ameron acquisition.
- Working-capital needs and cash conversion as receivables and inventories increased; also consider that some cash is held in foreign subsidiaries and repatriation could create additional taxes.
- Customer concentration, letter-of-credit commitments and the status of tax, warranty and other contingent exposures.