NOV Inc. quarterly report, Q3 FY2014

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NOV Inc. (formerly National Oilwell Varco) — Q3 2014 Form 10-Q

Business context and reporting period

Quarter ended September 30, 2014; amounts below are in U.S. dollars, generally millions unless noted. NOV designs, manufactures and sells equipment and provides services for the oil and gas industry. On May 30, 2014, it spun off its distribution business as NOW Inc.; that business is presented as discontinued operations. Effective April 1, NOV reorganized its continuing operations into Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. Comparisons with 2013 reflect the continuing business presentation.

Financial performance and position

  • Q3 revenue: $5.587 billion, up 15% year over year and 6% sequentially. Nine-month revenue was $15.731 billion, up 13% year over year.
  • Profit and margins: Q3 gross profit was $1.528 billion (27.3% of revenue), versus $1.360 billion (28.0%) a year earlier. Operating profit was $988 million (17.7%), versus $884 million (18.2%). Continuing-operations income was $701 million; income attributable to NOV was $699 million, or diluted continuing-operations EPS of $1.62, versus $1.40. Nine-month operating profit was $2.700 billion and income attributable to NOV was $1.907 billion, including discontinued operations.
  • Segment results: Q3 revenue and operating profit were Rig Systems $2.659 billion and $533 million; Rig Aftermarket $837 million and $229 million; Wellbore Technologies $1.469 billion and $278 million; and Completion & Production Solutions $1.191 billion and $185 million. Segment operating margins were 20.0%, 27.4%, 18.9%, and 15.5%, respectively.
  • Cash flow: Nine-month cash from continuing operations was $1.789 billion, compared with $1.670 billion in 2013. Continuing investing used $785 million, including $468 million of capital expenditures and $181 million for acquisitions; continuing financing used $393 million. Cash rose to $4.091 billion from $3.436 billion at year-end. Operating cash flow less capital expenditures was $1.321 billion.
  • Liquidity and debt: At September 30, cash was $4.091 billion and total debt was $3.146 billion, for net cash of approximately $945 million. Current assets were $16.670 billion and current liabilities $7.201 billion. No commercial paper or revolver borrowings were outstanding; $2.427 billion remained available under the $3.5 billion revolver after letters of credit. About $3.760 billion of cash was held outside the U.S. and could incur additional taxes if repatriated.
  • Capital returns: Q3 dividend was $0.46 per share; nine-month dividends paid totaled $507 million. The board authorized a share-repurchase program of up to $3 billion over 36 months; no shares had been repurchased by September 30.

Material changes versus comparable periods

  • Q3 revenue rose 15% and income from continuing operations rose 17% year over year. Nine-month continuing-operations income increased to $1.858 billion from $1.551 billion.
  • Rig Systems led growth: Q3 revenue increased 29% and operating profit 37% year over year. Rig Aftermarket revenue increased 18%; Completion & Production Solutions revenue increased 9%.
  • Wellbore Technologies Q3 operating profit declined 9% year over year, partly because the 2013 comparison included a $102 million legal-settlement gain.
  • Overall Q3 operating margin declined to 17.7% from 18.2%, although nine-month margin improved to 17.2% from 16.5%.
  • Nine-month cash from operations increased, while investing outflows fell sharply from 2013, which included approximately $2.4 billion for the Robbins & Myers acquisition. Dividends paid increased from $278 million to $507 million.
  • Other comprehensive loss included $310 million of currency translation loss in Q3; accumulated other comprehensive loss increased to $362 million from $4 million at year-end.

Outlook, commentary, risks and unusual items

  • Management described the balance sheet, credit access, global infrastructure, installed base, and contracted orders as supportive of the business, and said liquidity should be sufficient for operations, working capital, capital spending, debt service, and dividends. The filing gives no quantified earnings or revenue guidance.
  • Management noted that oil prices declined during Q3 and fell further afterward: WTI was $81.01 per barrel on October 24, versus a Q3 average of $97.78. It warned that lower commodity prices could reduce drilling and completion activity. Q3 average natural-gas prices were also down sequentially.
  • Rig Systems backlog was $14.3 billion at September 30, down from the $15.4 billion record at Q2 end; Q3 orders were $1.3 billion. Completion & Production Solutions backlog was $2.1 billion, up 40% year over year. Management cited margin pressure in Rig Systems from project mix, compressed delivery schedules, customized land-rig costs, and installation costs.
  • Q3 included $1 million of other operating items. Nine-month other items totaled $51 million, principally acquisition-related costs, purchase-accounting amortization, spin-off costs, and legal costs. The filing also reports a gain on sale of NOV’s Hawaii aggregates business in Q3 other income.
  • NOV remained in discussions with government agencies concerning export-trade-law inquiries; it anticipated any negotiated administrative fine or penalty would be within established accruals but said consequences were uncertain if no resolution were reached. Separately, R&M paid fines of $1.033 million to DOJ and $600,000 to BIS under a settlement; its Belgian subsidiary pleaded guilty and received five years’ probation.
  • Foreign-currency exposure is material: derivative liabilities were $186 million and net foreign-currency forward-contract fair value was a $150 million liability at quarter end. The filing describes hedging, but currency movements also affected reported comprehensive income.

Important facts for investors to verify

  • Assess how much of revenue and backlog is exposed to offshore projects, international markets, and customer capital-spending decisions; verify subsequent order and backlog trends.
  • Track oil and gas prices, rig activity, and their effects on North American and international demand, especially if commodity-price declines persist.
  • Review segment margins and the extent to which Rig Systems project costs, aftermarket mix, and lower-margin production products affect profitability.
  • Confirm cash availability and potential tax costs of accessing the substantial foreign-held cash balance; monitor the funding and execution of the $3 billion repurchase authorization.
  • Follow the outstanding export-compliance inquiry, tax exposures, warranty accruals, and foreign-exchange derivative positions for changes in potential liabilities or cash requirements.
  • Compare reported results with non-GAAP measures carefully: the filing’s adjusted results exclude specified items, and 2013 Wellbore results included a $102 million litigation gain.