NOV Inc. (National Oilwell Varco) — Q1 2016 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2016, NOV reported results amid a sharp contraction in oilfield activity and customer spending. Its businesses cover Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion & Production Solutions. Unless noted, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2,189 | $4,820 |
| Gross profit / gross margin | $244 / 11.1% | $1,177 / 24.4% |
| Operating income (loss) / margin | $(189) / (8.6)% | $570 / 11.8% |
| Net income (loss) attributable to NOV | $(119) | $310 |
| Diluted earnings (loss) per share | $(0.32) | $0.76 |
| Operating cash flow | $621 | $114 |
| Capital expenditures | $84 | $130 |
- Revenue fell 55% year over year. Management cited lower activity, volumes, and pricing pressure. Non-GAAP operating loss excluding other items was $48 million, or 2.2% of revenue; comparable Q1 2015 operating profit excluding other items was $692 million, or 14.4%.
- Operating cash flow benefited substantially from a $610 million net cash release from operating assets and liabilities, primarily lower receivables, inventory, and costs in excess of billings. Investing used $103 million; financing used $861 million. Cash declined $321 million during the quarter.
- At March 31, cash was $1,759 million and total debt was $3,379 million, versus $2,080 million and $3,909 million, respectively, at year-end 2015. Cash less debt was approximately $(1,620) million. NOV had $4,290 million available under its $4.5 billion credit facility and reported compliance with its covenants; its debt-to-capitalization ratio was 17.1% against a 60% maximum.
- Current assets were $10,048 million and current liabilities $3,435 million. Approximately $1,635 million of cash was held outside the U.S. and could incur additional tax if repatriated.
- The quarterly dividend was $0.46 per share in Q1. On April 11, 2016, the board approved a reduction to $0.05 per share per quarter.
Material changes and segment results
- All four segments had steep year-over-year revenue declines. Rig Systems revenue was $926 million and operating profit $67 million; Rig Aftermarket revenue was $391 million and profit $69 million.
- Wellbore Technologies reported revenue of $631 million and an operating loss of $91 million. Completion & Production Solutions reported revenue of $558 million and an operating loss of $38 million.
- Rig Systems capital-equipment backlog was $3.31 billion, down 68% from a year earlier. NOV removed $2.1 billion of orders from backlog following customer funding and market concerns; the contracts remain in place and enforceable. Management expected $1.2–$1.3 billion of Rig Systems backlog revenue for the remainder of 2016.
- Completion & Production Solutions backlog was $994 million, down 32% year over year; expected backlog revenue was approximately $791 million in 2016 and $203 million in 2017 and thereafter.
- Q1 operating results included $141 million of restructuring and other items, mainly voluntary early-retirement costs, severance, and facility closures. The Q1 2015 comparable charge was $122 million. NOV reported a $1.634 billion goodwill and intangible impairment in Q4 2015, not Q1 2016.
Outlook, risks, and unusual items
- Management was cautious for the remainder of 2016, expecting customers to constrain capital spending, defer maintenance, and use existing spare parts. It did not expect a meaningful increase in drilling activity during 2016 and said visibility beyond midyear was limited.
- Management described potential recovery timing as different by segment: Completion & Production Solutions could benefit as already-drilled wells are completed; Wellbore Technologies and Rig Aftermarket were expected to strengthen as new drilling resumes; Rig Systems newbuild orders could recover later.
- Average worldwide active rigs fell 41% year over year in Q1; the U.S. average fell 60%. Average WTI was $33.18 per barrel, down 32% year over year. The filing identified low commodity prices, oversupply of service capacity, reduced customer spending, and pricing pressure as key risks.
- Brazil-related investigations and customer funding difficulties could delay or suspend shipyard deliveries, impair collections, lead to attempted cancellations, and reduce backlog. NOV also disclosed ongoing U.S. government inquiries concerning export-trade compliance; it anticipated any negotiated penalty would be within existing accruals, but outcomes and timing were uncertain.
- Foreign-currency forward contracts had a net fair-value liability of $101 million. NOV recognized $16 million of losses after certain forecast transactions became unlikely to occur on schedule; further project delays or changes in activity could trigger additional hedge de-designations and losses.
- The Q1 tax provision was a benefit of $118 million, and the reported effective tax rate was 50.0%; the company used a discrete-period method because an annual effective rate could not be reliably estimated.
Important facts for investors to verify
- Whether the severe activity and revenue declines persist, and whether cost reductions can restore operating profitability.
- Whether customers secure financing for removed Rig Systems orders and whether backlog converts into the revenue management expected.
- The cash-flow quality and sustainability of working-capital releases, particularly as receivables and inventory are collected or consumed.
- The effects of the dividend reduction, cash held overseas, debt maturities, and ongoing access to credit and commercial-paper markets.
- Developments in Brazil-related customer contracts, export-compliance inquiries, and the potential for additional derivative losses.