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National Oilwell Varco, Inc. (NOV) provides equipment and components for oil and gas drilling and production; oilfield services; and supply chain integration services to the upstream oil and gas industry worldwide. The company reported earnings before the market opened on 31Jan14 and on the surface everything looked good with the company reporting fourth quarter earnings of $1.56 per share (beating estimates by $0.17) on revenue of $6.17 billion (beating analysts' estimates by $310 million). What I'd like to at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenue (millions)

4Q13

4Q12

Y/Y

Rig Technology

$ 3,310

$ 2,896

14%

Petroleum Services & Supplies

$ 1,925

$ 1,770

9%

Distribution & Transmission

$ 1,253

$ 1,268

-1%

Eliminations

$ (316)

$ (249)

27%

Total

$ 6,172

$ 5,685

9%

Compared to last year total revenue has increased by 9%. Rig Technology (the segment of the company responsible for providing oil drillers with drilling solutions) saw revenues increase 14% and accounts for 54% of total revenues. Eliminations resulted in losses that increased 27%.

Income Statement

Income Statement

4Q13

4Q12

Y/Y

Total Revenue

$ 6,172

$ 5,685

9%

Gross profit

$ 1,500

$ 1,410

6%

Gross profit margin

24%

25%

-2%

Selling, general, and administrative

$ 527

$ 456

16%

Other costs

$ 16

$ 51

-69%

Operating profit

$ 957

$ 903

6%

Interest and financial costs

$ (27)

$ (21)

29%

Interest income

$ 4

$ 2

100%

Equity income in unconsolidated affiliates

$ 16

$ 15

7%

Other income, net

$ (17)

$ (28)

39%

Income before income taxes

$ 933

$ 871

7%

Provision for income taxes

$ 272

$ 203

34%

Net income

$ 661

$ 668

-1%

Net income attributable to noncontrolling interests

$ 3

$ -

N/A

Net income attributable to company

$ 658

$ 668

-1%

Avg. basic outstanding shares

427

426

0%

Avg. diluted outstanding shares

429

428

0%

Earnings per basic share

$ 1.54

$ 1.57

-2%

Earnings per diluted share

$ 1.53

$ 1.56

-2%

Looking at the income statement at first glance might be a bit unappealing as you look at the bottom lines and notice that earnings decreased by 2% from last year. Selling, general and administrative expenses increased 16% while other costs decreased 69% which allowed operating profits to increase 6% from the prior year. Interest and financial costs increased 29% while interest income increased 100%. Other net income increased 39% helping income before income taxes increase 7%. Provision for income taxes increased an astonishing 34% which made net income decrease 1% overall. Net income attributable to noncontrolling interests increased by $3 million but wasn't enough to budget net income attributable to the company and remained at a decrease of 1%. Overall earnings show a decrease of 2% according to GAAP accounting. The increased provision for taxes is what ultimately hurt the company in my opinion, but operating profits and revenue were great.

Balance Sheet

Balance Sheet

4Q13

4Q12

Y/Y

Cash and cash equivalents

$ 3,436

$ 3,319

4%

Receivables, net

$ 4,896

$ 4,320

13%

Inventories, net

$ 5,603

$ 5,891

-5%

Costs in excess of billings

$ 1,539

$ 1,225

26%

Deferred income taxes

$ 373

$ 349

7%

Prepaid and other current assets

$ 576

$ 574

0%

Total current assets

$16,423

$15,678

5%

Property, plant and equipment, net

$ 3,408

$ 2,945

16%

Deferred income taxes

$ 372

$ 413

-10%

Goodwill

$ 9,049

$ 7,172

26%

Intangibles, net

$ 5,055

$ 4,743

7%

Investment in unconsolidated affiliates

$ 390

$ 393

-1%

Other assets

$ 115

$ 140

-18%

Total assets

$34,812

$31,484

11%

Accounts payable

$ 1,275

$ 1,200

6%

Accrued liabilities

$ 2,763

$ 2,571

7%

Billings in excess of costs

$ 1,771

$ 1,189

49%

Current portion of long-term debt and short-term borrowings

$ 1

$ 1

0%

Accrued income taxes

$ 556

$ 355

57%

Deferred income taxes

$ 312

$ 333

-6%

Total current liabilities

$ 6,678

$ 5,649

18%

Long-term debt

$ 3,149

$ 3,148

0%

Deferred income taxes

$ 2,292

$ 1,997

15%

Other liabilities

$ 363

$ 334

9%

Total liabilities

$12,482

$11,128

12%

Common stock

$ 4

$ 4

0%

Additional paid-in capital

$ 8,907

$ 8,743

2%

Accumulated other comprehensive income

$ (4)

$ 107

-104%

Retained earnings

$ 13,323

$ 11,385

17%

Total stockholders' equity

$ 22,230

$ 20,239

10%

Noncontrolling interests

$ 100

$ 117

-15%

Total stockholders' equity

$22,330

$20,356

10%

Liabilities and stockholders' equity

$34,812

$31,484

11%

On the asset side of things, net receivables increased 13% and costs in excess of billings increased 26% helping overall current assets increase 5% from 2012. Property, plant and equipment increased 16% while goodwill increased 26%. Even though other assets decreased 18% total assets increased 11%. On the liability side of things billings in excess of costs increased 49% and accrued income taxes increased 57% to increase total current liabilities by 18%. A 15% increase in deferred income taxes caused total liabilities to increase 12% from the prior year. A 104% decrease in accumulated other comprehensive income and 17% gain in retained earnings helped total stockholders' equity increase 10% from the prior year. Noncontrolling interests decreased 15% and didn't really contribute much to the 10% increase in total stockholders' equity. Total liabilities and stockholders' equity have increased 11% from 2012.

Conclusion

The company reported earnings which were 2% lower (GAAP basis) than a year before on 9% more revenue while the share price was up 5.26% in the past year excluding dividends. The share count has remained neutral for the entire year. I believe this to be an indication that management thinks the stock price may just be lofty up here. I definitely don't like that earnings decreased on a year-over-year basis while revenue was up. On a fundamental basis, I believe this company is inexpensively valued with respect to 2014 earnings. The stock was up 1.85% the day of earnings in the face of an S&P500 which lost 0.65%. Although the company beat analyst estimates, the earnings per share were less than last year. The main reason for the drop in earnings was the increase in SG&A costs. Though there continues to be strong demand for oilfield equipment, I remain neutral on the stock and will just hold my shares.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: National Oilwell Varco Earnings Decrease 2%, But Is It A Buy?