NOV Inc. (NOV) — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2020. Filed April 28, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
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. The quarter coincided with a sharp oil-market downturn driven by COVID-19-related demand destruction and increased oil supply.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1,883 | $1,940 |
| Gross profit / gross margin | $224 / 11.9% | $256 / 13.2% |
| Operating loss | $1,950 | $48 |
| Net loss attributable to NOV | $2,047 | $77 |
| Loss per diluted share | $5.34 | $0.20 |
| Adjusted EBITDA | $178 | $140 |
| Cash from operating activities | $39 | $(38) |
| Capital expenditures | $68 | $43 |
Cash and cash equivalents were $1,115 at quarter-end, down from $1,171 at December 31, 2019. Balance-sheet debt was $2,002; lease liabilities totaled $761 ($115 current and $646 long-term). NOV reported $2.0 billion available under its revolving credit facility, no commercial paper borrowings, and compliance with its 60% maximum debt-to-capitalization covenant at a reported ratio of 29.2%. Approximately $744 of cash was held by foreign subsidiaries.
- Revenue declined 3% year over year. Wellbore Technologies revenue fell 14% to $691; Completion & Production Solutions rose 16% to $675; Rig Technologies fell 8% to $557.
- Reported operating loss included $1,378 of goodwill and indefinite-lived intangible impairments and $513 of long-lived asset impairments. The filing also reports a $224 impairment of an equity investment and $114 of inventory charges among segment “other items.”
- Q1 operating cash flow was positive versus an outflow a year earlier; management attributed working-capital support in part to strong receivables collections. Cash declined $56 during the quarter.
- The quarterly dividend was $0.05 per share, or $19 in total. The filing states future dividends remain at the Board’s discretion.
Material changes versus prior comparable period
Revenue and gross profit declined modestly, but the company moved from a $48 operating loss to a $1,950 operating loss, primarily reflecting impairment and other charges. Net loss attributable to NOV increased to $2,047 from $77. Excluding “other items” and depreciation and amortization, Adjusted EBITDA increased to $178 from $140; this is a non-GAAP measure. A $233 equity loss in unconsolidated affiliates also weighed on pretax results, including the disclosed $224 investment impairment.
Impairments reduced goodwill from $2,807 at year-end 2019 to $1,515 at March 31, 2020, and intangible assets from $852 to $534. Stockholders’ equity fell from $7,846 to $5,554, largely reflecting the quarterly loss and currency translation losses.
Outlook, management commentary and risks
- Management expected industry activity and customer spending to decline through the remainder of 2020 as COVID-19 reduced demand and oil-market oversupply persisted. WTI averaged $45.99 per barrel in Q1; on April 17 it was $18.27, while the U.S. rig count had fallen to 529 from a Q1 average of 784.
- NOV recorded $1,295 of goodwill impairment, $83 of indefinite-lived intangible impairment, and impairments to finite-lived intangibles, property and equipment, right-of-use assets, and an equity investment. Management warned further market deterioration could trigger additional impairments.
- Remaining performance obligations were $3,558; NOV expected to recognize about $937 in 2020 and $2,621 in 2021 and thereafter. Capital-equipment backlog was $1.19 billion for Completion & Production Solutions and $2.93 billion for Rig Technologies. The filing estimated respective backlog revenue of about $957 million and $530 million for the remainder of 2020; timing and realization are subject to change.
- COVID-19 and the oil downturn could lead to lower orders, project cancellations or delays, force majeure claims, customer payment delays or defaults, bankruptcies, supply-chain and workforce disruptions, legal claims, and additional impairments. NOV said these risks could materially affect results, liquidity and financial condition.
- Management considered cash, operating cash flows and borrowing capacity sufficient to fund operations and obligations, while noting it would continue adjusting its business to market conditions. NOV anticipated a $123 cash tax refund claim under the CARES Act for carrying back its 2019 U.S. net operating loss; receipt was not yet reported.
- The company reported $524 of letters of credit under bilateral facilities. It also disclosed ordinary-course litigation and regulatory matters, stating ultimate outcomes are uncertain and uninsured or uncovered claims could have material financial or reputational effects.
- The $500 million share repurchase authorization was canceled on April 9, 2020. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether customer demand, rig activity, backlog conversion and collections deteriorated further after quarter-end, including any cancellations, defaults or force majeure claims.
- The assumptions underlying impairment tests and whether additional impairments or inventory charges are required as market conditions evolve.
- Cash availability, debt and lease obligations, covenant headroom, letters of credit, and the timing and collectability of the anticipated $123 tax refund.
- Whether the Board maintains, reduces or suspends dividends, and the expected cash needs for restructuring, capital spending and operations.
- How the $3,558 of remaining performance obligations and segment backlogs convert into revenue, particularly the timing of international and offshore projects.