NOV Inc. (National Oilwell Varco) — Q2 2009 Form 10-Q
Business context and reporting period
Reports the three and six months ended June 30, 2009. NOV designs and supplies drilling and production equipment, oilfield services and consumables, and supply-chain services. Its segments are Rig Technology, Petroleum Services & Supplies, and Distribution Services. Comparisons with 2008 are affected by Grant Prideco, acquired April 21, 2008; reported 2008 results include its operations only from the acquisition date.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue ($ millions) | 3,010 | 3,325 | 6,491 | 6,010 |
| Gross profit ($ millions) | 875 | 981 | 1,914 | 1,778 |
| Operating profit ($ millions) | 386 | 691 | 1,106 | 1,260 |
| Operating margin | 12.8% | 20.8% | 17.0% | 21.0% |
| Net income attributable to NOV ($ millions) | 220 | 421 | 690 | 819 |
| Diluted EPS | $0.53 | $1.04 | $1.65 | $2.15 |
Q2 revenue fell 9% year over year and 14% sequentially; net income attributable to NOV fell 48% year over year and 53% sequentially. The reported Q2 result includes a $147 million intangible impairment, $46 million voluntary retirement charge, and $8 million transaction costs. Excluding impairment, transaction, and retirement charges, management reported Q2 operating profit of $589 million, or 19.6% of revenue, versus $778 million, or 22.6%, in Q2 2008 (with a full-quarter Grant Prideco contribution in the comparative).
For the six months, operating cash flow was $1.285 billion, capital expenditures were $143 million, and cash increased $743 million to $2.286 billion. Cash and equivalents at June 30 exceeded total debt of $881 million; long-term debt was $873 million. No borrowings were outstanding on revolving facilities, and $1.364 billion remained available after letters of credit under those facilities. NOV reported compliance with debt covenants.
At June 30, total assets were $21.939 billion, current assets $9.910 billion, and current liabilities $5.167 billion. Total stockholders’ equity was $13.605 billion. Six-month receivables declined to $2.603 billion from $3.136 billion at year-end 2008; inventory was broadly stable at $3.825 billion.
Material changes and segment performance
- Market contraction: Average worldwide rig count was 2,009 in Q2, down 35.5% year over year and 25.1% from Q1. U.S. and Canadian activity fell particularly sharply. Lower activity and pricing pressured services and distribution businesses.
- Rig Technology: Q2 revenue was $1.917 billion and reported operating profit $534 million. Backlog declined to $8.7 billion from $11.8 billion at its September 2008 peak. Management said the segment was relatively protected by backlog; 88% of backlog was offshore and 92% destined for international markets.
- Petroleum Services & Supplies: Q2 revenue was $913 million; reported operating loss was $51 million, including the $147 million impairment. Excluding specified charges, management cited operating profit of $96 million and a 10.5% margin. North American price declines reached 30%–40% in some product lines.
- Distribution Services: Q2 revenue was $305 million and reported operating profit $10 million; management cited a 3.3% margin excluding retirement charges. Revenue fell 28% year over year amid lower North American activity and pricing pressure.
- Acquisitions and goodwill: NOV completed five acquisitions for $389 million net of cash acquired. Interim testing found no goodwill impairment, but NOV recorded a partial $147 million impairment of the Grant Prideco trade name.
Outlook, commentary, and risks
Management remained cautious for the rest of 2009 given the global recession, credit constraints, falling commodity prices, and weaker drilling. It expected new-rig orders to decline during 2009, while expressing optimism about possible Brazilian deepwater floating-rig orders. For Q3, management expected Petroleum Services & Supplies revenue to fall slightly, Distribution Services revenue to rise slightly, and both segments’ margins to remain approximately stable. Rig Technology was expected to be less affected because of its backlog. NOV expected its tax rate to return to 32%–33% for the remainder of the year, versus 37.3% in Q2, which included $21 million of additional Norwegian tax provisions.
Management said the $46 million voluntary retirement program charge was expected to generate approximately $33 million of annual savings. About $320 million of the June backlog was considered at risk; Q2 included removal of $108 million of defaulted orders and a $16 million gain from customer payments. NOV cautioned that further deterioration in rig activity, commodity prices, or economic conditions could cause additional impairment. Its sensitivity analysis indicated possible non-cash intangible impairment of about $79 million under a further 20% revenue decline for three years, or about $36 million if the discount rate rose 100 basis points. Foreign-exchange losses were $56 million for the first half, compared with a $7 million gain in the prior-year period. A single shipyard customer represented 15.6% of six-month revenue.
Important facts for investors to verify
- Whether rig activity, commodity prices, and customer capital spending recover as management’s outlook assumes, and the resulting effect on segment revenue and margins.
- Backlog conversion, cancellations or customer defaults, and the status of the approximately $320 million of projects identified as at risk.
- Assumptions behind goodwill and trade-name valuations, including forecasts, discount rates, and the potential for additional impairment.
- Customer concentration and exposure to North American gas drilling, pricing pressure, foreign exchange, and international cash repatriation taxes.
- Acquisition integration, future acquisition funding, and realization of the expected $33 million annual retirement-program savings.