National-Oilwell Varco's Q1 2014 Results - Earnings Call Transcript

Apr.28.14 | About: National Oilwell (NOV)

National Oilwell Varco (NYSE:NOV)

Q1 2014 Earnings Conference Call

April 28, 2014 9:00 AM ET

Executives

Loren Singletary - VP, Investor and Industry Relations

Clay C Williams - President and Chief Operating Officer

Jeremy Thigpen – Senior Vice President and Chief Financial Officer

Analysts

Kurt Hallead – RBC Capital Markets LLC

Jim D. Crandell – Cowen & Co. LLC

Marshall Adkins – Raymond James & Associates

Brad Handler – Jefferies & Co.

Michael Kirk Lamotte – Guggenheim Securities LLC

Operator

Welcome to the First Quarter Financial Results Earnings Call. My name is Adriana, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Mr. Loren Singletary, Vice President of Investor and Industry Relations. Mr. Singletary, you may begin.

Loren Singletary

Thank you, Adriana, and welcome everyone to the National Oilwell Varco first quarter 2014 earnings conference call. With me today is Clay Williams, President and Chief Executive Officer of National Oilwell Varco; and Jeremy Thigpen, Senior Vice President and Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco’s financial results for its first quarter ended March 31, 2014, please note that some of the statements we make during this call may contain forecasts, projections, estimates, including, but not limited to, comments about our outlook for the Company’s business

These are forward-looking statements within the meaning of the federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business.

Further information regarding these, as well as supplemental financial and operating information, maybe found within our press release on our website at www.nov.com, or in our filings with the SEC. Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation.

Now, let me turn the call over to Clay.

Clay C. Williams

Thank you, Loren, and good morning, everyone. Earlier today, National Oilwell Varco announced that it earned $1.37 for fully diluted share and excluding transaction related charges, $1.40 for fully diluted share for its first quarter of 2014. Earnings improved 9% from the first quarter of 2013, but declined 10% sequentially from our strong fourth quarter results in 2013, excluding charges from all quarters.

Revenues were $5.8 billion in the quarter, but 9% from the prior year, and down 6% sequentially. Generally, our largest two segments saw a surge in product shipments late last year which did not repeat in the first quarter leading to slightly lower sequential results as we expected.

Overall, the company made steady progress on several fronts through the first quarter, including moving closer to the spin out of our distribution services group, which we will speak to more in a moment.

We are very pleased with another strong quarter for orders for drilling capital equipment. Rig Technology posted over $2.3 billion in orders, which exceeded our revenue out of backlog by about 5%. This led to a record $16.3 billion backlog for Rig technology. Offshore demand remained very strong. We won drilling equipment packages for three floaters and 17 jackup newbuilds during the first quarter.

Land demand also increased materially, mostly internationally, and we are encouraged by rising demand for drilling, workover, and well stimulation equipment for the resurgence U.S. land market. Our $2.3 billion of first quarter orders for Rig Technology were comprised of $1.2 billion, or 52% for packages for newbuild offshore rigs. We expect the second quarter to continue to be strong for offshore newbuild demand as well. But we expect demand for new offshore rigs to slow during the second half of the year as offshore day rates have come under pressure.

We do expect to win some offshore newbuilds orders in the second half, as our shipyard partners are continuing to quote to entrepreneurs targeting specific markets in Latin America and the North Sea, along with a few established drillers considering rigs for specific purposes like 20K. The 48% balance of first quarter orders, included land rigs, workover rigs, pressure pumping equipment, FPSO equipment, and assorted individual components for various rigs and vessels.

This other half of our order stream is carrying good momentum into 2014, and we expect it to partly offset offshore newbuild declines later in the year. Specifically, we are now seeing North American drillers resume buying equipment, while we continue to sell land rigs into the Middle East, Russia, and Latin America. Drillers the world over continue to retool the land rig fleet to newer, more modern levels of capability. While orders for AC power, quick move electronic control land rigs ebb and flow a bit, the direction is clear. These are the workhorses that make our industry steadily safer and more efficient and enable profitable unconventional resource production, and land drilling contractors appear to be increasingly convinced of their superior economic returns.

We’re also encouraged by recent orders for stimulation and pressure pumping equipment in North America. Frac spreads continue to be pushed order, pumping larger fracs into more stages at higher pressures, and many are now being run at 24-hours a day, consuming these fleets at a faster pace.

Our book-to-bill for pressure pumping, coiled tubing, and wireline products all handily exceeded one in the first quarter. Demand for floating production products, kit for FPSOs and flexible pipe mainly dipped this quarter, but we believe this is simply a function of timing and that FPSO demand will increase as we move through the year given our strong bidding activity.

So to summarize our order outlook for the remainder of 2014, we believe the second quarter will be in a range of one to one book-to-bill. And at the third and fourth quarters, we will gradually drift down leaving us with an ending backlog probably in the low teens, but probably our second highest year-ending backlog ever.

Backlogs at or near record levels throughout most of the year should continue to drive strong financial performance for the next several quarters. Our long-term outlook continues to be very robust. We have previously cited four major trends driving our prospects. One, the buildout of a fleet of deepwater rigs, two, the buildout of floating production systems to produce deepwater discoveries, three, the retooling and replacement of the jackup fleet, and four, the continued proliferation of unconventional shale technologies driving demand for a wide variety of NOV equipment products and services.

In our view, the energy needs of the 21st century will be satisfied by a combination of growing production from; one, deepwater frontiers, which had gone from effectively zero to about 9% of worldwide oil production in 20 years, and two, unconventional shale technologies, which have gone from effectively 0% to about 3% of worldwide liquids productions in six years. Although these two incremental sources of oil to-date comprise only one in eight barrels of supply, most of the other seven barrels are from conventional fields found in prior areas, which will decline.

And with most of the easy oil already discovered, future conventional sources will continue to become increasingly challenging to find. As economic growth steadily drives oil demand, we believe that growing production from; one, deepwater technology, which opened up vast horizontal expanses of the planet to production, and two, shale technology, which opened up vast vertical sections of the stratigraphic column to production will supply this demand, both oil and NGLs in greater and greater proportion through the 21st century.

Since the earliest days of the oil industry, companies have battled ferociously to emerge as the lowest marginal cost source, or at least not be the highest marginal cost source of the last incremental barrel. The high-cost barrel is the most disadvantage position on this battlefield. When economic cycles diminish demand, as they do from time to time, oil prices drop and the highest marginal cost position suffers the most.

Our winning and market forces continually test to resolve high marginal cost producers. The battle lines constantly ebb and flow as various combinations of innovation and geology lead winners to relative advantage and sometimes brief periods of respite from harsh market forces, at least until their fields decline or some other competitor finds better rocks and technology.

NOV is a unique supplier of critical components to the combatants on this battlefield. We understand that our success rests on the success of our customers, meaning lowering their marginal cost per barrel, either capital or capital or lifting cost or both. Both major new sources of incremental oil supply, deepwater and unconventionals require new toolkits, specialized deepwater rigs, floating production systems, subsea production systems, Tier 1 AC land rigs, drilling motors, premium drill pipe bits and hydrologic stimulation tools. Our products win demand in the marketplace by conferring lower cost and higher value to their users. That’s why we must continue to invest in promising technologies and ideas.

Unconventionals in particular are unique in a rate in which they consume iron. Long horizontal laterals were out fixed cutter bit, downhole motors and premium drill pipe far faster than vertical drilling, and they require specialty tools NOV provides, such as fluid hammers and agitators. Similarly, high-pressure massive 24 hour frac jobs were out frac leads and associated consumables like fluid ends, liners and pistons far faster than stimulation jobs like yesterday.

NOV is unique in our leading supply position into both of these major trends, and the trends themselves are unique in that they are more consumptive of specialized equipment as compared to sources of supply of yesterday. And we saw good evidence in the first quarter that the industry has largely burned through a success inventory or pressure pumping consumables, and we believe new capital orders are not far behind. History features as the new innovation cost and we changed this battle field sometimes in surprising ways.

History teaches us that new innovations constantly change battlefield sometimes in surprising ways. Who among us would’ve predicted that the U.S. would enjoy such a revival, becoming, once again, the fastest growing producer of oil for marginally productive shales, no less. Pad drilling, downspacing, new rig technologies and bigger frac jobs have an enabled shale producers to steadily improve their marginal cost positions and further improvements are to be expected. Likewise, while deepwater producers have struggled lately with project execution challenges and rising costs, these are certain to be remedied by time and innovation.

The deepwater drilling space faces startup challenges, which we believe are transient. A lot of new deepwater rigs have been launched recently with new crews, and these are operating under tighter operational requirements post Macondo. Crews will certainly give more experience and more efficient overtime. At NOV, we are helping by opening new technical training colleges to train both our own, as well as our customers’, personnel. We supply simulators to let drillers practice safe, efficient operations off-line.

We are investing heavily to ramp aftermarket spares and service capacity in proportion to our growing installed base to improve uptime, and we are preparing for further challenges the industry will face as the new rig fleet undergoes five-year SPS surveys.

A couple of years ago, NOV deployed capital in the floating production technologies used to produce deepwater fields, recognizing that FPSO construction projects are notoriously problematic to deliver on-time on budget. A recent industry study cited a sampling of nine FPSOs with cost on average 38% more than budget and were delivered an average of 14 months late.

We believe our success in transforming the deepwater rig fabrication supply chain and our experience working with shipyards uniquely positioned NOV to undertake the challenges of driving cost and risk down to these complex projects. We further believe the recent introspection of deepwater producers signals their explicit recognition of the structural shortcomings of the status quo.

NOV aspires to be an advocate of change, because we think we can pioneer a better way. Participants in both camps, shales and deepwater, are smart and adaptive, and the world needs oil supply from both camps to offset the relentless drum beat of production declines. Within this battle, NOV’s mission is to offer new and better ways of doing things to lower the marginal cost of barrels, to improve economic returns of our customers’ projects, reduce environmental impact and to improve the safety and efficiency of operations.

To this end, we announced our plans to reorganize our business along with customer-centric taxis, concurrent with the spin out of our new DistributionNow Company. Our new organization will enable us to focus more tightly on specific customer initiatives.

Beginning in the second quarter, we will begin reporting our result in four new segments. First our new rig system segment, which will primarily support offshore and land drillers, with consistent of land and offshore rig equipment, offshore packages, complete land rigs, replacement and upgrade rig capital components. We believe that the industry’s need to build out a new deepwater infrastructure, replacing an aging jackup fleet and upgrade a global land rig fleet will create tremendous growth opportunity for this segment.

Second, our new rig aftermarket segment, which will be closely tied to our rig system segment, will separately report sales of spare parts, repair services, training and other sales opportunities, focused on the maintenance of our substantial install base of drilling rigs worldwide. These two segments were jointly supply and maintain sophisticated modern drilling tools.

Third, our new wellbore technology segment will report products and services NOV provides which enhance drilling performance and reduce the environmental impact of drilling operations. This group will include bits, reamers, downhole drilling motors, premium drill pipe, solids control and waste management technologies, drilling fluids, tubular inspection and tubular coating services, drilling instrumentation and dynamic drilling systems.

Fourth and finally, our new completions and production solutions segment will report sales of well stimulation equipment and consumables, as well as composite flow-line products, flexible subsea pipe, conductor pipe, pumps and artificial lift products and floating production solutions. We will also include certain non-oilfield industrial products within this segment.

Within the next few weeks, we plan to publicly announce our historical financial results for the preceding five years within this new segment framework on a pro forma basis. This is designed to lend our investors long-term perspectives into NOV post the spin out of our distribution services group. We will also change how we report backlog including recasting our historical backlog through this historical period to conform to our new segments. I believe the new segment structural will lend greater transparency to the trends affecting our business and enable the investing public the better see our execution of our strategic plans.

We also believe this new structure will highlight the diverse portfolio of products, equipment and services NOV delivers. Finally, with regards to the spinout of DistributionNow, or NOW Inc., we filed our Form 10 last week and believe we are nearing the completion of the spinout, which we hope to affect in late May.

The new company, which will initially be debt free, has security commitment for $750 million revolving line of credit. We would encourage our investors to review our filings for this exciting new company including its risk factors, which are available on our website at www.nov.com. As a standalone company, DistributionNow will be uniquely positioned to prosecute supply chain services initiatives and selective acquisitions from a focused public company platform to better serve its global upstream and midstream customer base.

I am excited about the opportunities for this organization under the able leadership of CEO Robert Workman, CFO Dan Molinero, Chief Accounting Officer Dave Cherechinsky, and General Counsel Raymond Chang. It will also have an outstanding executive chairman, a guy named Pete Miller, who has a pretty good track record of building successful companies. Pete will step down as executive chairman of NOV at the time of the spin, so I want to take this opportunity to say thank you to an extraordinary business leader, mentor and friend. Very, very few CEOs have achieved Pete’s remarkable track record of success and Pete, we are grateful to you for your vision for this organization and for the industry reserve. So, on behalf of our 65,000 employees, congratulations and thank you, and very best wishes to you and all of our friends within Distribution now.

At this point, let me turn it Jeremy to provide more color on our first quarter results.

Jeremy Thigpen

Thanks, Clay. As Clay already mentioned, National Oilwell Varco generated earnings $1.37 for fully diluted share in its first quarter of 2014, on $5.8 billion in revenues. Excluding $19 million in pretax transaction charges, first quarter 2014 earnings were $1.40 per fully diluted share, down $0.16 per share, or 10% from the fourth quarter of 2013, but up $0.11 per share, or 9% from the first quarter of 2013.

Sales of $5.8 billion declined 6% sequentially, but on a year-over-year basis, revenues were up 9% despite the fact that the worldwide rig count only increased 2% over the same time period. Excluding transaction charges from all periods, operating profit for the quarter was $880 million, down 10% sequentially, but up 8% from the first quarter of last year.

Operating margins on this basis were 15.2% for the first quarter of 2014 compared to 15.8% for the fourth quarter of 2013 and 15.4% for the first quarter of last year. Sequentially, decremental leverage on the 6% decline in revenues was 24%. On a year-over-year basis, operating profit flowed through our leverage was 14% on the 9% increase in revenue.

Now, let’s turn to our segment operating results. The Rig Technology segment generated revenues of $3 billion in the first quarter, down 9% sequentially with as expected, almost the entire shortfall being driven by reductions in revenues from our land rig and well stimulation equipment businesses, which both benefited from large project shipments in the fourth quarter that did not recur in the first quarter.

Compared to the first quarter of 2013, rig tech revenues were up almost 15%, as capacity additions enabled us to convert 12% more revenue out of backlog as our ever growing installed based coupled with our recent investments in our aftermarket infrastructure enabled us to generate 25% more in aftermarket sales and as our floating production and subsea flexible strategies have produced strong year-over-year gains.

Operating profit for the segment was $635 million and operating margins were 21.1%, which were flat with the prior quarter despite the 9% decline in revenue. While pleased with this result, we continue to face the same margin challenges that we’ve discussed in the past, which include working through lower price backlog, more aggressive delivery schedules from our shipyard customers, new drill floor layouts coupled with new installation and commissioning personnel, unfavorable product mix and continued investments in long terms strategic growth initiatives and capacity expansions that are not yet fully operational, such as the flexibles plant in Brazil. Still we are confident that we are moving in a right direction on all front, and I would just like to take a moment to address each.

Regarding lower price backlog, beginning in the second quarter of last year, we assumed a more assertive position of orders for offshore equipment components and complete packages. And while I would describe the improvement as modest, we are already seeing the impact of this change manifest itself in higher-margin backlog and a favorable shift in customer financing. On the aggressive delivery schedules, over the past couple of years we’ve added manufacturing capacity to release some of the stress on our supply chain and over the same time frame we’ve significantly increased our installation and commissioning workforce.

As we become more comfortable and efficient with this new capacity as our new I&C teams come up the learning curve on these new drill floor layouts, we will realize efficiency gains. With respect to product mix, as we move through 2014 and into 2015, we should begin to see a more favorable product mix as demand returns for pressure pumping equipment and coiled tubing units, even more importantly, we continue to see mid teens percentage growth in our aftermarket revenues. While these gains will partially be offset by continued growth in our floating production business, as well as the conversion of Brazilian backlog, we’re still confident that the net result will be positive.

And finally, when talking about long-term strategic growth initiatives, the flexibles plant in Brazil, which is the single largest CapEx project in the history of NOV, has finally started commercial production, and we will begin generating revenues sometime in the second quarter.

So as stated on the fourth quarter conference call, we believe that we are taking the actions required to expand margins in the old Rig Tech segment as we move through 2014 and 2015, but again it will be a slow process.

Now, let’s transition the capital equipment orders for the first quarter of 2014 and our resulting backlog. As Clay already stated, for the quarter, we booked two semis and one drill ship, as well as 17 jackup packages. And we are pleased to once again win a majority of BOP work within these packages.

In addition to the strong orders offshore, we were specially pleased and encouraged to see continuing demand for new land rigs in Latin America and Middle East market and particularly pleased to see strengthening demand for new land rigs in the U.S.

In the quarter, we booked several complete land rigs for each of those three markets, as well as multiple equipment packages for other newbuilds. We also secured orders for new coiled tubing units destined for international markets and we’re starting to see some demand for new pressure pumping equipment in the U.S. again there, which is obviously very welcomed.

All of these new orders, which totaled $2.3 billion in the quarter, were mostly offset by revenues out of backlog of $2.2 billion resulting in a book-to-bill of just over one-times, and another record quarter ending backlog of $16.3 billion. Of the total backlog, approximately 92% is offshore and 94% is destined for international markets.

So overall, the quarter for Rig Technology turned out almost exactly as expected with revenue declining in a high single-digit percentage range, margins flat, and a book-to-bill slightly above one-times.

Looking into the second quarter of 2014, we expect orders for new offshore drilling equipment packages and land rig equipment packages to remain fairly steady. And while it might not happen in the second quarter, we believe that we could soon benefit from a resurgence in orders for well stimulation equipment in the U.S. We also believe that we could see a higher volume of orders for our floating and subsea related production equipment.

Overall, we think that the total order intake in the second quarter is going to once again approach one-to-one book-to-bill. And while this will certainly be an odd quarter as we transition to our new organizational structure and reporting segments, I can tell you that I think the revenues for the old Rig Tech segment on an apples-to-apples basis could improve in the mid single-digit percentage range sequentially, and that margins would likely continue to be challenged to expand, but might see a slight uptick on the incremental revenue.

The Petroleum Services & Supplies segment posted revenue of $1.8 billion, down 7% sequentially, but up 5% from the previous year. Sequentially, the decline in segment revenues was driven exclusively by the non-recurrence of some large year-end projects that were shipped in the fourth quarter of 2013.

On a year-over-year basis, we benefited from both a full quarter of Robbins & Myers and the fact that our customers had finally worked through the excess inventory that they carried into 2013. Operating profit for the quarter was $326 million, or 18.2% of sales, down 80 basis points sequentially and essentially flat down 10 basis points year-over-year.

On a sequential basis, the decremental flow-through was just under 30%, which is fairly consistent with the historical performance of this segment. As with Rig Technology, the quarter for the PS&S segment turned out almost exactly as expected, with revenue declining in the mid single-digit percentage range and margins contracting on the volume.

As we enter the second quarter of 2014, we believe that revenues for most of the products and services in our old Petroleum Services & Supplies segment could improve in the mid single-digit percentage range as seasonal declines in Canadian drilling activity should be more than offset by strength in the U.S. market and continued growth in our international businesses.

In the U.S. demand for our downhole technologies, including bps, downhole motors, and agitators is clearly on the rise, as this demand for fluid and expendables for both drilling and well service applications. We’re also starting to see incremental demand for coiled tubing, composite pipe, and even four-inch and five-inch drill pipe into the U.S. land market, which is very encouraging.

And while we expect margins to expand with the incremental volume, we believe that our flow-through on the incremental revenue could be somewhat challenged as we battle a few different issues, including ERP implementations in multiple businesses, underabsorbed facilities and underutilized assets in Canada due to breakup, slightly unfavorable product mix, and some continued pricing pressures in certain products.

The Distribution & Transmission segment posted revenues of $1.3 billion, up 2% sequentially and up 4% compared to the first quarter of 2013. The majority of the sequential growth for this segment was driven by a strengthening U.S. market, but the segment also enjoyed strong project sales in the Middle East. On the $1.3 billion in revenue, D&T generated $68 million in operating profit, or 5.3% in operating margin, which represented a 50 basis point improvement from the fourth quarter 2013, or 29% flow-through leverage on the 2% increase in revenue. On a year-over-year basis, operating margins were flat.

For Distribution & Transmission the quarter actually turned out a little better than expected. While we expected the low single-digit percentage growth, we are pleasantly surprised by the expansion in margin. With the implementation of SAP across the enterprise and a work associated with the spin, w thought that margins would be challenged. But as a direct result of the focus, hard work, and dedication of the entire D&T team, they have once again managed to overcome distractions and challenges to produce a solid result.

Looking into the second quarter of 2014, under our old segment reporting, we would expect Distribution & Transmission group revenues to remain relatively flat as the seasonal reduction in Canadian drilling activity as well as the absence of the large Middle East projects should be offset by strengthening U.S. market, and we think that margins could contract slightly sequentially, as we fully expect to both complete the rollout of SAP and finalize the spin both of which have the potential to be somewhat distracting and disruptive.

While on the topic of the spin, I would like to provide a brief update on some of the organizational changes that are currently underway with the National Oilwell Varco, before moving on to discuss some of the remaining income statement and balance sheet items. As previously mentioned, we hope to consummate the spinoff of our distribution business in late May.

Shortly following the spin, we will be filing two separate 8-Ks. The first 8-K will be related to the discontinued operations of the distribution business. The second will include five years of historical financial statements for the new reporting segment and will include the first quarter of 2014 financial statements.

A few weeks following the second 8-K, we will plan to file a revised 10-K for NOV remain Co’s 2013 and a revised 10-Q for NOV remain Co for the first quarter of 2014. While the spinoff of our distribution business and the subsequent restructuring have required a great deal of work. The entire organization is excited about the realignment of our businesses into Rig Systems, Rig aftermarket, Wellbore Technologies, and Completion & Production Solutions.

With these new segments, we believe that we will be much easier to understand and access, which should benefit all of National Oilwell Varco stakeholders. For suppliers and customers, the new segments will make it easier to navigate our organization to find the people, products, services and support that they require.

For employees, the new segment should help each employee to more eagerly and obviously connect his or her specific job to be overwriting objectives of NOV, which we expect to lead to improve the awareness and engagement. For investors, the new segment should provide more visibility to more of the market leading products and services that we provide, while also giving more clarity to the way in which we participate in each of the markets that we support.

It should also help investors to better understand the interrelatedness of our various businesses and the value that this brings to our customers and to National Oilwell Varco. In addition to being much easier to understand and access, we also believe that the reorganization will ultimately help drive improved operational and financial performance.

While we’ve always done a good job of working across businesses and segments to both recognize efficiencies where possible and to offer complete and integrated solutions to our customers, we believe that the realignment of our businesses will, in time better enable us to drive incremental improvements in both areas.

Now, let’s turn to National Oilwell Varco’s consolidated first quarter 2014 income statement. Gross margins only declined 10 basis points sequentially to 24.2% despite a 6% reduction in revenues. SG&A declined $7 million sequentially and represented 9% of Q1 revenues.

Transaction costs, primarily related to the Robbins & Myers acquisition and a distribution spinoff totaled $19 million in the quarter. Interest expense declined $1 million sequentially to $26 million and interest income was flat at $4 million.

Equity income in our Voest-Alpine JV was $14.5 million, which was consistent with the previous quarter. However, in the quarter, we booked $4 million loss attributable to a pair of joint ventures that we acquired with Ameron transaction. For the second quarter, we do not expect to incur such losses from the Ameron JVs, but we do expect for equity income from Voest-Alpine JV to decline slightly.

Other expense for the quarter was zero, which represented a $17 million delta sequentially as we benefited from favorable movements in currencies and we also recognized a gain on the sale of assets.

The effective tax rate for the second quarter was 30.6%, which was higher than the 29.2% rate that we posted in the fourth of 2013, but it is more consistent with the historical trends. Unallocated expenses and eliminations on our supplemental segment schedule was $149 million in the first quarter down $1 million sequentially. Depreciation and amortization was $195 million down $5 million from the fourth quarter. And EBITDA, excluding transaction charges was $1.1 billion or 18.9% of sales.

Turing to the balance sheet, National Oilwell Varco’s March 31, 2014 balance sheet employed working capital excluding cash and debt of $6.4 billion up $115 million from the previous quarter, but down $582 million from the previous year. In the quarter, inventory increased $56 million or 1% as all our PS&S businesses modestly added to their inventories to support heightening demand in the U.S. market.

Accounts receivable increased $414 million, or 8% sequentially despite the sequential decline in revenue. This build can be directly tied to our distribution business where the implementation of SAP has led to some slight delay in our collections process and our rig technologies segment where we have some payment delays from some of our larger, more established customers. In short, the growth is simply an issue of timing.

Fortunately, a large portion of this growth was offset by continued improvements in customer financing where prepayments and milestone invoicing on major projects outpaced cost incurred by $379 million.

In addition to the increase in working capital, we spent a $132 million on capital expenditures, made cash tax payment of $301 million, paid dividends totaling $111 million and cut bonus check based on 2013 performance. As a result, the company generated free cash flow of $252 million in the first quarter, resulting in a quarter ending cash balance of $3.7 billion and a net cash position of $539 million. Of the $3.7 billion in cash 12% of the balance was in the U.S. at March 31.

Now let me turn it back to Clay.

Clay C. Williams

Thank you, Jeremy. Before we open it up our questions, I want to say thank you to all our employees out there, we have a lot of terrific employees around the globe who have been work very, very hard to affect the spin of our distribution services business, which we are very excited about, as well is take care of all of our good customers around the globe and just I just want to say, once again, how grateful Jeremy, Loren and I are for the hard work that you do. That completes the e prepared remarks this morning, so at this point, we are prepared to open up for questions. Adriana?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Kurt Hallead from RBC Capital Market. Go ahead sir.

Kurt Hallead – RBC Capital Markets LLC

Thank you, hey good morning.

Clay C. Williams

Good morning, Kurt

Kurt Hallead – RBC Capital Markets LLC

Thanks for all that color and detail. Much appreciated. One follow-up I would have, or point of clarity I would ask for, would the your views on backlog ending the year. Your comment, I think, was in the low teens and, once again, just wanted to understand the semantics or definition of low teens. The way I would think about low teens would be $12 billion or $13 billion. $1 billion, that would appear to me to be way too slow, predicated on the other commentary about slightly declining order book as the year goes on. If you provide a little more clarity on that, that would be very, very helpful. Thanks?

Clay C. Williams

First, as you well know, our visibility to position around orders is always limited, Pert. Looking out into the second half of the year, we’re coming off at March 31, balance of $60.3 billion dollars. If we fall sort of the one-to-one book-to-bill for Q3 and Q4 a little bit. It certainly would be expected to drift down a little bit we were the low teens anything sells of 15. And right now that’s kind of our outlook. I’ll stress though, that we’re very encourage to see land orders picking up, stimulation equipment picking up. We are encouraged for improvement in our FPSO orders later in the year and so there is a lot of moving pieces here, but we are just trying to provide a little more color, I think 12 or 13 would will be lower than we would expected at this point. I think you’re probably looking at something in $14 billion, $15 billion range.

Kurt Hallead – RBC Capital Markets LLC

Okay, Great. Thanks. Appreciate that. The follow-up I would have would be -- what’s your take on the situation in Russia? There were sanctions, obviously, announced this morning. Might be a little bit too early for you to make that assessment, but it looks like Rosneft was one of the companies that was -- that sanctions were put on. I know you have a facility that’s being manufactured in Russia. Just trying to get a handle on how to risk assess that from that standpoint?

Clay C. Williams

I think we do. We’ve been investing in Russia and are building a facility to actually rig up plant rigs in that country. And that’s obviously quickly evolving situations there. So we’ve been watching it very, very closely. We have lots of customers in Russia, including Western companies that operate there. So, we will to see what the sanction, specifics around the sanctions in terms of the impact on our business. But, we’ve been a supplier of equipment into the Russian market for many, many years and have a pretty diverse customer base there.

Kurt Hallead – RBC Capital Markets LLC

Okay, thanks. Appreciate that.

Clay C. Williams

Yes. Thank you.

Operator

And our next question comes from Jim Crandell from Cowen. Go ahead Clar

Jim D. Crandell – Cowen & Co. LLC

Good morning guys.

Clay C. Williams

Good morning

Jeremy Thigpen

Good morning, Jim.

Jim D. Crandell – Cowen & Co. LLC

First, I would just like to second your comments, Clay, that you made about Pete and the outstanding job he’s done over the past dozen or so years as CEO. I have questions about the order outlook for three distinct areas, Clay, and I will just lay them out here and let you answer. One is, FPSOs and if you expect a better order picture there and how quickly you see that segment improving. Secondly is Russia, particularly in light of you building this new plant, we might see in terms of an improvement in land rig orders there. Then thirdly, well stimulation. If you could answer well stimulation in the context of how big was that last time, and how meaningful could that be to Nation in the next cycle?

Clay C. Williams

You bet, Jim. Last year, with regards to FPSOs, we ahead over $1 billion an FPSO related orders primarily turret mooring systems for vessels, along with flexible pipe that flex into those turret mooring systems. And in addition to those two major products, we also sell a lot of composite piping systems into FPSO vessels. Very strong year for orders and improving P&L results coming out of those orders so we’re very encouraged.

As I mentioned in my prepared comments, Q1 orders for FPSOs dipped down a little bit, but we do think that’s just a function of timing, we think both for flexible pipe as well as for vessels, our Q2 and Q3 are looking much better, and so we’re encouraged by that.

With regards to Russia as I just mentioned, we are investing in another facility there. We have manufacturing operations for many years in Belarus, which primarily supplies for Russian market. A couple of years ago, we opened another facility in Nizhnevartovsk. And so it’s a market that has a lot of potential. There are something on the order of 800 rigs operating in Russia and most of those are older technology and there is a growing recognition, I think most Russian oil companies for the need for new technology, much like their counterparts in North America and elsewhere around the globe.

And so, our idea is to expand our footprint in Russia, and in particular our aftermarket support of that fleet. Under our current plans, that particular facility was slated to open up and start producing revenue probably the second quarter of 2015, and very encouraged about the progress on the plant, sanctions notwithstanding, obviously we’re keeping a close eye on that as I just mentioned.

Finally, the well intervention and stimulation business as we mentioned, we are very encouraged there. We saw orders slow way down. Through 2013, we continued to deliver our backlog, and so the P&L for that business has been coming down. But last quarter, our Q4 2013 and then Q1 the quarter we just finished, we saw orders begin to pickup and are really encouraged for new capital equipment and also a lot of consumables that we see in that business. So that’s kind of what we are seeing across those landscapes here.

Jim D. Crandell – Cowen & Co. LLC

Okay. And Clay just there a brief follow-up, on your FPSO answer, are you seeing any progress with the customers in order willingness to try to order a standardized package?

Clay C. Williams

I would prefer to use the term configurable package Jim. What we’re trying to do standardized interfaces between modules and make the vessels overall more configurable. And yes, what we are running into at the senior level amongst many of our customers is this recognition that their prior projects haven’t gone particularly well economically. And it’s a combination of vessels running over their original AFP amounts plus the late first oil because of late delivery of those projects.

And arguably I think the project can be challenged, and so we are gaining an audience at the highest levels of a couple of the oil companies and are encouraged with a couple of specific two in particular specific projects that we’re bidding this concept into, and we think there will be more to come.

So it’s very early days, and we know from our drilling rig, transformation, experience, changing the status quo in this industry is a long-term effort to generate success. But we do think we have a better way and we actually think the recent concern that world companies are expressing publicly about their economic returns on these projects provides a good backdrop to go in and have those kind of conversations.

Jim D. Crandell – Cowen & Co. LLC

Okay, great. Thank you, Clay.

Clay C. Williams

Thanks, Jim.

Operator

And our next question comes from Marshall Adkins from Raymond James. Please go ahead, sir.

Marshall Adkins – Raymond James & Associates

Good morning, gentlemen.

Clay C. Williams

Good morning.

Jeremy Thigpen

Good morning, Marshall.

Marshall Adkins – Raymond James & Associates

Clay, you guys have a more than a pristine balance sheet and you’ve got a pretty substantial free cash flow. So I will go ahead and ask the question I’ve been getting on, any – what’s your latest in terms of thoughts about what we do with that cash here in the next year or two?

Clay C. Williams

Well, Marshall, historically we paid the dividend and we began paying a dividend in 2009, both a special on a regular. We doubled that dividend last year. So I would tell you in the past, our preferred method of returning cash to shareholders and I think that’s what you’re talking to, has been around the dividend, we agree we have a very strong level of cash flow. And in our meetings with our board upcoming in May, we plan on discussing a level of dividend with them and as well as other alternatives, including share buybacks or some other use of cash. And so we’ll see how that color turns out. But I would say that we’re looking hard at meaningful increase in the dividend again in that.

Jeremy Thigpen

But the other thing I would add to that Marshall, we intentionally took a pause from acquisitions following the Robbins & Myers acquisition in February of last year. We had – we consummated about 20 deals and about a 16 months, 17 months span, and needed some time to digest what we’d require. I said we’ve done that now. We gone through the integration of work, we’re just about done with the spin, which is consuming a lot of resources, but I think you’ll see us get a little more active in that market again. And deals are looking pretty good right now. I would say we got a pretty full pipeline most of them are smaller in nature. Most of them are internationally based, which is good, 88% of our cash at the end of the quarter is overseas.

So we will continue to look there as well and we still have a couple of fairly significant CapEx projects, including the Russian facility, we’re doing some work in Saudi, certainly some more work in Latin America primarily Brazil that will consumes some cash.

Marshall Adkins – Raymond James & Associates

All right. And the follow-up there, Jeremy, you mentioned you’re putting in an ERP system and SAP. A lot of times that creates some short-term disruption as it’s going in. Tell me how that’s progressing and where you stand on all that?

Jeremy Thigpen

Yes. We don’t have a common ERP platform across all of NOV. The Distribution & Transmission segment functioned on SAP prior to the acquisitions of Wilson and D Franklin. So they’re just going to the conversion process now to upgrade their SAP platform and then bring over the Wilson and Franklin businesses, that’s going extremely well. Obviously these are always somewhat disruptive, but we’ve had SAP in our business since 2000, I believe maybe it was 1999. So, we’ve got some strong subject matter exports around the world in that area.

In some of our PS&S segments – current PS&S segments, it’s not that we are implementing a common ERP across that whole segment, it’s each individual business within that segment who are kind of converting over to something – something a little more robust now that we are far more global and much larger and more complex. So I don’t expect any major disruption Marshall, certainly they’re going to be some little hiccups here, and but I don’t think it’s going to be anything material.

Marshall Adkins – Raymond James & Associates

It sounds good guys. Thank you.

Jeremy Thigpen

Thank you.

Operator

And your next question comes from Brad Handler from Jefferies. Please go ahead.

Brad Handler – Jefferies & Co.

Thanks. Good morning.

Clay C. Williams

Good morning, Brad.

Brad Handler – Jefferies & Co.

So I think you’ve outlined in some previous calls that your pace of delivery of offshore rigs is running right around the 50 plus mark, I guess it did last year, it is this year. It is into 2015, if I recall correctly?

Clay C. Williams

That is correct.

Brad Handler – Jefferies & Co.

That’s correct? Okay, good. Can you – what you have done so far, what you are in the process of tying together in terms of workforce addition, capacity addition from a plant standpoint, is that enough or should we expect continued initiatives along that vein as you kind of live with what choices you’ve made?

Clay C. Williams

I think we are building up to a level of capacity that’s fits kind of that level. If you look, back, Brad, over the last couple of years, orders began flowing in, in earnest late 2011, 2012, we rebuilt our backlog up to new record levels here more recently. We began to experience supply chain challenges in the first components that go into rigs, which are typically mud pumps. And the as we can’t work through those again those we get better of that, the next kind of way that we saw was rig floor equipments, derricks, finally BOPs last year with the source of some challenges. And then more lately it’s been IMC.

And so what you’ve seen is that as that – as the pigs kind of move through the snake, it’s tracked the equipment that has had to be delivered into this extraordinarily high-level of rigs that we are delivering. And why we are so confident, we know where is going to get a lot better, is that piece by piece is successfully challenged our supply chain issues and work through those short term challenges as we ramped up our capacity. We are addressing that, and we are fell like we are kind of in the last phases of it, a record level of installation commissioning work going on in shipyards right to accommodate a level of rig deliveries, which is effectively doubled our prior peak cut back in 2008 and 2009 and dealing with shorter deliver times and the like and we are making a little progress on a quarter-by-quarter.

So that’s the progression of things, which regards that last piece of the fabrication puzzle, the installation and commissioning. We now have six technical colleges around the globe, and are going to eight shortly to train our service technicians who both perform installation commissioning work on new build rigs as well as repair older rigs. It’s a virtual skill set, when we look out over the next four or five year we see a tremendous number of offshore rigs having to comeback in for their five year surveys. And so this is a workforce that we are training to handle the IMC work on new orders and we foresee a few years out then a portion of those will be redeployed into kind of next pressing challenge, which is to handle lot of rigs coming back into the shipyards to be sea overhauls and upgrades of the equipments that’s on those rigs. This is a workforce that we see a lot even pretty busy for the next several years.

Brad Handler – Jefferies & Co.

Make sense. Sure

Jeremy Thigpen

One thing to add to that would just be as you look at the capacity additions on a go forward what I think you might see is more regionally specific capacity edition, where you see places really strong in growing markets, Saudi Arabia where they push for more and more local content requirement. This is also obviously happened in Brazil and having in Russia you’ve seen in Argentina, it would be in Mexico. So I think if you see capacity additions on a go forward they will be smaller scale that nearly requiring same level of CapEx and far less disruptive, but it will be to capture new end growing markets. In that market support

Brad Handler – Jefferies & Co.

Makes sense, makes sense. So really to follow-up, and maybe it is going to be certainly broader than just that part of rig tech or the legacy rig tech. But in general, what you’ve just described is sort of leveraging what you have put into place, appreciating some smaller editions. Obviously, you have a lot of optimism around some improving mix over the course of time as some of the well stimulation equipment comes back. You get a little bit better pricing in backlog, as you described.

All things are sort of pointing to what you have described for us in the past, as an improving trend. But I guess is there any change to that thought, if we start to think about margins in rig tech over the course of the next couple of years, is there any acceleration to getting back to that mid-20s level, for example? Do see any signs that, that might, maybe because of the U.S. land market, that, that might happen a little bit more quickly than you have suggested to us in the past?

Do you see any signs of that might – because of the U.S.-led market that that might happen a little bit more quickly than you have suggested to us in the past?

Clay C. Williams

That’s certainly encouraging as we see other parts of Rig Tech business pickup and that will help us on that front. the main driver here though is just it’s continuing to gain experience on these new rig floor layouts we talked in previous calls without new class specifications for the crop of deepwater rigs that have been ordered recently before rig floor layouts. so we’ve again negated some of the learning curve effects from the 2008 cycle and we know from history across all of our businesses, once we’re making the second copy and the fifth copy and the tenth copy of something, we always get better at it, costs always come down and we’re moving into that phase for this new crop of rigs, too. so I would say that’s the main engine and the other improvements in other parts of our business are additive to that.

Brad Handler – Jefferies & Co.

Great. Okay, got it. thanks guys, appreciate that color.

Clay C. Williams

Operator

This will be our last question in our Q&A session. Our last question comes from Michael LaMotte from Guggenheim. Please go ahead.

Michael Kirk Lamotte – Guggenheim Securities LLC

Hey, guys.

Clay C. Williams

Hi, Michael.

Michael Kirk Lamotte – Guggenheim Securities LLC

Clay, did I hear the words share repurchases come from your – come forth from those lips?

Clay C. Williams

Michael, to be fair, we’ve always considered the share repurchases along with dividends and we’ll continue to look that, and so yes, and I’ll also do as a reminder, at Varco, prior to the merger, we had a share repurchase program. So we were pretty familiar with the math and the concept.

Michael Kirk Lamotte – Guggenheim Securities LLC

Yes.

Clay C. Williams

But to be fair, we have a track record in our paying dividend, and I think our recent thinking around the subject with our boards counsel has been more along the lines of dividends.

Michael Kirk Lamotte – Guggenheim Securities LLC

Got it, understood. Just wanted to make sure, there wasn’t a change there. I’m struck by looking at the Rig Tech business and thinking about how, in an up cycle, you are focused on making sure that your pricing is running ahead of your inflationary pressures, so that you can grow margin. And when you are sort of on the downside of working the rat through the snake, you are really focused on efficiency and delivery as the emphasis on margin. I’m wondering, as the volume scales back from 50 floaters a year delivery to something less than that, how do you manage the absorption issue, in terms of potential margin pressure?

Clay C. Williams

Thank you. That’s a great question. first point of clarification, 50 rigs as a year, that’s jackups plus floaters.

Michael Kirk Lamotte – Guggenheim Securities LLC

Right.

Clay C. Williams

But certainly cyclicality in our business is not news to us. and historically, this business has been up and down. And so we, I think are very, very good at managing both the ups and downs. the good news, for us, again is the fact that the five-year SPS cycle for these rigs kicks in, in earnest. and in fact in the year 2016, 2017 really ramps hard.

So even if the new build infrastructure slows down, we’re going to be very busy in the shipyards with rigs coming in a lot, and by the way, to provide further clarification around this, the vessels have to come in for whole inspections, for insurance, for Coast Guard certificate purposes and the like, every five years. And as part of that downtime in a shipyard, they will do a lot of work on the drilling equipment packages at the same time, because of the opportunity cost of being out of service for a month or two is so high.

So that drives a lot of work for us in surveying those rigs and repairing that equipment, and replacing and frequently upgrading equipment as part of those rigs. and so we see that our install based driving very bright prospects over the next few years. And so that will do a lot to help keep our folks very busy. So I think the aftermarket portion of our business, there is a lot to bring stability to – and otherwise work cyclical business.

Jeremy Thigpen

Another thought on that Michael is, when we made the decision to add capacity in our Rig Tech segment, we were operating at three ships, outsourcing way too much expedited freight, we added the capacity with the hope that we could bring down to a more balanced level of capacity in our plant, maybe two ships, not outsourcing as much, not expediting. And then we had a record level of orders last year. so we’re still operating at three ships.

Michael Kirk Lamotte – Guggenheim Securities LLC

Yes.

Jeremy Thigpen

We produced our outsourcing, certainly and certainly reduce the expediting in freight, but we’re not at optimal levels at this point of time. so a slight slowdown wouldn’t be the worst thing in the world from a margin standpoint and efficiency standpoint.

Michael Kirk Lamotte – Guggenheim Securities LLC

Okay, great. So really two – if I can summarize, just two real sources of leverage. One, the efficiency, Jeremy, and two, utilization doesn’t fall off necessarily with the volume, because of aftermarket coming back in.

Clay C. Williams

That’s right.

Michael Kirk Lamotte – Guggenheim Securities LLC

Great, thanks guys.

Clay C. Williams

Michael.

Michael Kirk Lamotte – Guggenheim Securities LLC

Yes.

Clay C. Williams

That subject to let me throw in and very optimistic about the land rig opportunity before us, and both in North America and elsewhere and this business shares a lot of resources between land and offshore as well. so this is particular area of strategic focus going forward. The need to continue to upgrade the land rig fleet, and so I think that will help provide additional source of work going forward.

Michael Kirk Lamotte – Guggenheim Securities LLC

Okay, great. thanks, Clay.

Clay C. Williams

Yes. thanks, Michael.

Loren Singletary

I want to thank all of you for joining us this morning. we look forward to speaking you about our second quarter results in July, when, is another reminder, we will be reporting along our new segment reporting lines. so thanks very much and have a great week.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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