NOV Inc. (National Oilwell Varco) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The unaudited filing covers a global supplier of drilling and production equipment, oilfield services and supplies, and maintenance and repair products, operating through Rig Technology, Petroleum Services & Supplies, and Distribution Services. Financial amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $3.740 billion | $3.011 billion | $10.399 billion | $8.984 billion |
| Operating profit | $772 million | $596 million | $2.089 billion | $1.823 billion |
| Operating margin | 20.6% | 19.8% | 20.1% | 20.3% |
| Net income attributable to NOV | $532 million | $404 million | $1.420 billion | $1.227 billion |
| Diluted earnings per share | $1.25 | $0.96 | $3.35 | $2.93 |
| Cash dividends per share | $0.11 | $0.10 | $0.33 | $0.30 |
- Q3 revenue increased 24% year over year and 6% sequentially; net income attributable to NOV rose 32% year over year and 11% sequentially. Gross profit was $1.164 billion, a 31.1% gross margin, versus $945 million and 31.4% in Q3 2010.
- For the first nine months, revenue grew 16% and net income attributable to NOV grew 16%. Diluted EPS increased 14%.
- Q3 operating profit excluding $6 million of transaction costs was $778 million, or 20.8% of revenue; adjusted diluted EPS was $1.26. These are company-presented non-GAAP measures.
- Segments, Q3: Rig Technology revenue was $1.970 billion and operating profit $523 million (26.5% margin); Petroleum Services & Supplies revenue was $1.460 billion and operating profit $298 million (20.4%); Distribution Services revenue was $480 million and operating profit $37 million (7.7%). All three segments increased revenue and operating profit year over year.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1.521 billion, up from $735 million. Investing used $576 million, including $315 million for acquisitions and $317 million of capital expenditures; financing used $398 million, including repayment of $374 million of debt and $140 million of dividends.
- Cash and equivalents were $3.870 billion at September 30, up from $3.333 billion at year-end 2010. Total debt was $512 million, down from $887 million; cash exceeded debt by approximately $3.358 billion.
- No borrowings were outstanding on the $2 billion revolving credit facility. After $731 million of letters of credit, $1.269 billion remained available. A further $1.773 billion of letters of credit was outstanding under other facilities. NOV reported covenant compliance.
- Cash balances included funds held at foreign subsidiaries that could incur additional tax if transferred or repatriated. Management said cash, operating cash generation, and available credit should fund operations, capital needs, dividends, and obligations.
Material changes and operating drivers
- Rig Technology booked a record $3.9 billion of Q3 orders, including the company’s largest order to date, and backlog reached $10.3 billion. About 85% of backlog was for offshore equipment and 87% for international markets. Management cited strong demand for offshore rigs and well-stimulation equipment.
- Rig Technology’s nine-month operating profit fell 7% year over year despite higher revenue; margin declined to 26.6% from 30.0%. Management attributed the pressure to lower-margin contracts signed in 2009–2010 replacing older, higher-margin backlog.
- Petroleum Services & Supplies’ Q3 revenue rose 34% and operating margin improved to 20.4% from 15.1%, supported by North American activity, pricing, and volume. Distribution Services Q3 revenue rose 13% and margin increased to 7.7% from 5.7%.
- One customer, Samsung Heavy Industries, represented 13% of Q3 revenue and 12% of nine-month revenue. The shipyard contracts for equipment on behalf of drillship owners and drilling contractors.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance was provided. Management expected North American drilling activity to support the services and distribution businesses, while anticipating modest Rig Technology margin declines over the next few quarters as lower-priced backlog is delivered. It expected newer, higher-margin offshore orders to contribute later.
- Management identified global economic and European sovereign-debt uncertainty, oil and gas prices, customer spending, and worldwide rig activity as key risks. Rising steel, alloy, resin, and fiberglass costs could pressure margins if price increases do not offset them. Unrest was weighing on activity in North Africa and the Middle East.
- NOV recorded $17 million of Libyan asset write-downs in Q1 2011, mainly related to receivables affected by sanctions, inventory, and fixed assets. Nine-month adjusted operating profit also excludes $12 million of transaction costs; the filing’s reconciliation additionally identifies the Libya write-down.
- On October 5, 2011, after quarter-end, NOV completed its acquisition of Ameron International for approximately $777 million in cash. The filing does not provide a clear breakdown of the acquisition’s expected financing mix or pro forma financial effect.
- The effective tax rate was 32.3% for Q3 and 32.1% for the first nine months, versus 29.5% and 31.1%, respectively, in 2010. Unrecognized tax benefits totaled $117 million; the company did not anticipate a significant change within 12 months.
- Foreign currency forwards had a net fair-value liability of $13 million at quarter-end. NOV reported a $8 million foreign-exchange loss for the first nine months and noted that currency movements can affect earnings and other comprehensive income.
Important facts for investors to verify
- Whether the $10.3 billion Rig Technology backlog converts to revenue on schedule and at the expected margins.
- How much the Ameron acquisition was funded with cash or new borrowing, and its integration costs, synergies, and subsequent contribution to results.
- Whether higher input costs, changing contract mix, or softer commodity prices constrain segment margins and demand.
- The significance of customer concentration and continued exposure to foreign exchange, international political conditions, and tax or repatriation costs.
- Cash conversion and working-capital requirements: receivables and inventories increased during the nine-month period, while operating cash flow benefited from changes in contract billing balances.