NOV Inc. — Q3 2019 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. NOV supplies equipment, technology and services to the upstream oil and gas industry through Wellbore Technologies, Completion & Production Solutions, and Rig Technologies. Dollar amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,126 | $2,154 | $6,198 | $6,055 |
| Gross profit | $151 | $393 | $469 | $1,035 |
| Gross margin | 7.1% | 18.2% | 7.6% | 17.1% |
| Operating profit (loss) | $(154) | $73 | $(5,930) | $124 |
| Net income (loss) attributable to NOV | $(244) | $1 | $(5,710) | $(43) |
| Diluted loss per share | $(0.64) | $0.00 | $(14.95) | $(0.11) |
| Adjusted EBITDA (non-GAAP) | $262 | $245 | $597 | $631 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $241 | $300 |
Q3 Adjusted EBITDA was 12.3% of revenue and increased $67 million sequentially from Q2. The quarter’s $314 million of “other items” included $265 million of inventory charges, $12 million of long-lived asset impairment, and $37 million of severance, facility-closure and other costs. Adjusted EBITDA is a company-defined non-GAAP measure.
- Cash and liquidity: Cash was $1,313 at September 30, down from $1,427 at December 31, 2018. NOV had $3.0 billion available under its revolving credit facility, no commercial paper borrowings, and reported covenant compliance.
- Debt and leases: Long-term debt was $2,484, consisting of $1,395 of 2.60% notes due 2022 and $1,089 of 3.95% notes due 2042. Lease liabilities totaled $786; debt plus lease liabilities was reported as $3,270.
- Cash uses: Nine-month investing cash outflow was $268, including $166 of capital expenditures and $180 for acquisitions, net of cash acquired. Financing cash outflow was $73, including $58 of dividends.
- Dividend: $0.05 per share for Q3, unchanged from the prior-year quarter.
Material changes versus comparable periods
- Q3 revenue declined about 1% year over year, while gross profit fell to $151 from $393 and the company moved from operating profit of $73 to an operating loss of $154.
- Nine-month results were dominated by $5,385 of impairment charges: $3,186 for goodwill and indefinite-lived intangibles and $2,199 for long-lived assets. NOV also recorded $592 of inventory-loss provisions in the nine-month cash-flow reconciliation. The filing identifies $571 of nine-month inventory charges in its segment discussion.
- At September 30, goodwill was $3,236, down from $6,264 at year-end 2018; net intangibles were $866, down from $3,020. Stockholders’ equity fell to $8,129 from $13,889, largely reflecting impairments and losses.
- Segment Q3 revenue and operating results: Wellbore Technologies revenue was $793 (down 6% year over year) and operating profit was $42; Completion & Production Solutions revenue was $728 (down 1%) and operating loss was $24; Rig Technologies revenue was $649 (up 2%) and operating loss was $110. Segment operating results include specified “other items.”
- International and offshore activity provided some support, while North American activity weakened. Average U.S. rig count was down 12.5% year over year, and average WTI crude and natural gas prices were down about 19% year over year.
Outlook, commentary and risks
- Management described the market outlook as uncertain, citing producer capital discipline, weaker North American land activity, reduced customer access to capital, falling rig counts and lower commodity prices. It expects international and offshore improvement and product market-share gains to partly offset continued North American weakness.
- Management said it remains optimistic about longer-term market fundamentals but is streamlining operations and pursuing cost savings while continuing investment in products and technology. The filing does not provide formal consolidated revenue or earnings guidance.
- Remaining performance obligations were $2,603; NOV expected to recognize approximately 12% in Q4 2019 and the remainder thereafter. This measure excludes certain short-term, service and royalty arrangements.
- Capital-equipment backlog was $1.30 billion for Completion & Production Solutions, with about 34% expected to convert to revenue during the rest of 2019; and $3.14 billion for Rig Technologies, with about 9% expected to convert during the rest of 2019. Backlog timing is subject to change.
- Additional impairment remains possible if market conditions deteriorate; Wellsite Services had $174 of goodwill at quarter-end and was specifically identified as potentially vulnerable to further deterioration.
- Risks include oil and gas market cyclicality, customer spending and financing, foreign currency movements, trade and regulatory restrictions, Brexit-related disruption, litigation and other contingencies. Management said recorded reserves were considered sufficient for probable contingencies, but actual liabilities could exceed estimates.
Key facts for investors to verify
- Whether Q3 inventory charges and the large 2019 impairments are fully reflected in the non-GAAP adjustments, and how recurring operating performance compares with reported results.
- Whether cost reductions and international/offshore demand can offset continued weakness in North American land markets.
- Conversion, cancellations and timing of the reported performance obligations and segment backlogs.
- Cash generation, working-capital trends, and the sustainability of the dividend amid losses and acquisition spending.
- Potential further impairment, particularly for remaining goodwill and intangible assets, and developments in legal, regulatory and trade-related contingencies.