NOV Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
NOV supplies equipment, technology and services to the upstream oil and gas industry through Wellbore Technologies, Completion & Production Solutions, and Rig Technologies. This unaudited quarterly report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted.
Financial performance and condition
- Revenue: Q2 revenue was $2.132 billion, up 1% year over year; first-half revenue was $4.072 billion, up 4%. Q2 gross profit was $62 million (2.9% margin), versus $355 million (16.9%) a year earlier. First-half gross profit was $318 million (7.8% margin), versus $642 million (16.5%).
- Profit and impairments: Q2 net loss attributable to NOV was $5.389 billion, or $14.11 per diluted share, compared with net income of $24 million, or $0.06 per share, in Q2 2018. First-half net loss attributable to NOV was $5.466 billion, versus a $44 million loss in first-half 2018. Q2 operating loss was $5.728 billion, including $5.373 billion of non-cash asset impairment charges. The charge comprised $3.099 billion for goodwill, $87 million for indefinite-lived intangibles, and $2.187 billion for long-lived assets. The filing also identifies $302 million of inventory charges and an $89 million voluntary early retirement program charge.
- Adjusted EBITDA: Management-reported, non-GAAP Q2 Adjusted EBITDA was $195 million, or 9.1% of revenue, versus $226 million a year earlier; first-half Adjusted EBITDA was $335 million versus $386 million. Management excludes depreciation, amortization and, when applicable, “other items”; this measure is not a substitute for GAAP results.
- Segments: Q2 revenue was $850 million for Wellbore Technologies (+7% year over year), $663 million for Completion & Production Solutions (-10%), and $671 million for Rig Technologies (+3%). Each segment reported a large GAAP operating loss because of impairment and other charges. Sequentially, management reported higher Adjusted EBITDA in all three segments. Completion & Production Solutions booked $548 million of orders and had $1.22 billion of capital-equipment backlog; Rig Technologies booked $310 million and had $3.17 billion of backlog.
- Cash flow and liquidity: First-half operating cash flow was negative $111 million, versus positive $110 million in 2018; investing cash outflow was $156 million and financing cash outflow was $39 million. Cash declined to $1.121 billion from $1.427 billion at year-end 2018. NOV reported $3.0 billion available under its revolving credit facility, with no commercial-paper borrowings or facility-issued letters of credit. It sold $216 million of receivables, receiving $214 million in cash.
- Debt and balance sheet: Long-term notes were $2.483 billion. Including $696 million of long-term and $116 million of current lease liabilities, reported debt and lease liabilities totaled $3.179 billion. The company was compliant with its debt covenant, reporting a 24.6% debt-to-capitalization ratio against a 60% maximum. Total assets declined to $14.349 billion from $19.796 billion, mainly reflecting impairments; goodwill fell to $3.206 billion from $6.264 billion and net intangibles to $900 million from $3.020 billion.
- Dividends: The company paid $0.05 per share in Q2. Future dividends remain at the board’s discretion.
Material changes and outlook
- Management cited weaker-than-expected industry indicators in Q2, including a decade-low Oil Services Index reading, falling rig counts, capital discipline by producers, and reduced access to capital. NOV said it reduced its outlook, triggering impairment testing and the substantial asset write-downs.
- Management expects slowly improving international and offshore activity and market-share gains to partly offset near-term North American land-market weakness. It remains optimistic about longer-term supply and demand fundamentals but emphasized significant uncertainty and ongoing cost and efficiency efforts. The filing gives no specific company-wide revenue or earnings guidance.
- At June 30, remaining performance obligations were $2.545 billion; NOV expected to recognize approximately 23% in 2019 and 77% thereafter. It expected to convert approximately 59% of Completion & Production Solutions capital-equipment backlog and 16% of Rig Technologies backlog into revenue during the remainder of 2019.
- Risks include further deterioration in oil and gas markets and potential additional impairments; customer financial distress or bankruptcies; foreign-exchange exposure; trade, customs and regulatory uncertainty, including Brexit; and litigation, product liability, intellectual-property and compliance matters. NOV stated that reserves cover contingencies it considers probable, while outcomes and possible additional losses remain uncertain.
Important facts for investors to verify
- Whether the market assumptions, cash-flow forecasts and discount rates underlying the $5.373 billion impairment remain reasonable, and whether further impairment is possible.
- Whether order intake and reported backlog convert to revenue on the stated timelines, particularly given market uncertainty.
- Whether operating cash flow improves and the company maintains liquidity, covenant compliance and its dividend amid weak industry conditions.
- The effects of inventory reserves and charges, receivables factoring, foreign-held cash, and potential legal or regulatory losses on future cash flow and earnings.