What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-29 compared with 2024-04-26 · 91 added, 71 removed, 186 unchanged (47% of the section changed)

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Energy Equipment

The Company’s Energy Equipment segment manufactures and supports the capital equipment and integrated systems needed for oil and gas exploration and production, both onshore and offshore, as well as for other marine-based and industrial markets.

The segment designs, manufactures, and integrates technologies for drilling and producing oil and gas wells.

This includes equipment and technologies needed for drilling, including land rigs, offshore drilling equipment packages, drilling rig components, and software control systems that mechanize and automate the drilling process and rig functionality;

hydraulic fracture stimulation, including pressure

pumping trucks, blenders, sanders, hydration units, injection units, flowline, and manifolds;

hydraulic fracture stimulation, including pressure pumping trucks, blenders, sanders, hydration units, injection units, flowline, and manifolds;

well intervention, including coiled tubing units, coiled tubing, and wireline units and tools;

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industrial markets, where the segment provides pumps and mixers for a wide breadth of industrial end markets;

and other energy transition markets, where it is applying its gas processing expertise to provide solutions that aid in hydrogen production and carbon sequestration.

and other energy transition markets, where it is applying its gas processing expertise to provide solutions that aid in wind power development, hydrogen production and carbon sequestration.

Critical Accounting Policies and Estimates

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EXECUTIVE SUMMARY

For the first quarter ended March 31, 2024, the Company generated revenues of $2.16 billion, an increase of 10 percent compared to the first quarter of 2023.

Net income was $119 million, or 5.5 percent of sales, a decrease of $7 million compared to the first quarter of 2023 primarily due to higher tax rate and lower income from unconsolidated entities.

Operating profit was $162 million, or 7.5 percent of sales.

The company recorded a net pre-tax credit of $3 million within Other Items.

For the second quarter ended June 30, 2024, the Company generated revenues of $2.22 billion, an increase of 6 percent compared to the second quarter of 2023.

Net income was $226 million, or 10.2 percent of sales, an increase of $71 million compared to the second quarter of 2023.

Operating profit increased $132 million from the prior year to $313 million, or 14.1 percent of sales.

The company recorded a net credit of $118 million within Other Items, primarily related to gains from the divestiture of its Pole Products business.

Adjusted EBITDA (operating profit excluding depreciation, amortization, gains and losses on sales of fixed assets and, when applicable, Other Items) increased 15 percent year-over-year to $281 million, or 12.7 percent of sales.

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Energy Products and Services

Energy Products and Services generated revenues of $1,017 million in the first quarter of 2024, an increase of eight percent from the first quarter of 2023.

Operating profit was $121 million, or 11.9 percent of sales.

Adjusted EBITDA increased $20 million from the prior year to $174 million, or 17.1 percent of sales.

Growing demand from international and offshore markets in addition to market share gains in North America helped drive improved revenue and profitability.

Energy Products and Services generated revenues of $1,050 million in the second quarter of 2024, an increase of 2 percent from the second quarter of 2023.

Operating profit decreased $28 million from the prior year to $128 million, or 12.2 percent of sales, and included $1 million in Other Items.

Adjusted EBITDA decreased $14 million from the prior year to $184 million, or 17.5 percent of sales.

Revenue improved from strong demand in international and offshore markets, which more than offset declining North American activity.

A less favorable sales mix led to the lower level of profitability compared to the prior year.

Energy Equipment

Energy Equipment generated revenues of $1,178 million in the first quarter of 2024, an increase of 12 percent from the first quarter of 2023.

Operating profit was $95 million, or 8.1 percent of sales, and included a credit of $4 million in Other Items.

Energy Equipment generated revenues of $1,204 million in the second quarter of 2024, an increase of 8 percent from the second quarter of 2023.

Operating profit increased $151 million from the prior year to $232 million, or 19.3 percent of sales, and included a $119 million net credit of Other Items.

Adjusted EBITDA increased $43 million from the prior year to $142 million, or 11.8 percent of sales.

Improved revenue and profitability were primarily the result of strong execution on the segment's capital equipment backlog and improved demand for aftermarket products and services.

New orders booked during the quarter totaled $390 million, representing a book-to-bill of 77 percent when compared to the $507 million of orders shipped from backlog.

Outlook for capital equipment remains positive with a sizeable order the segment expected to book in the first quarter slipping into the early part of the second quarter while final adjustments are made to product specifications.

As of March 31, 2024, backlog for capital equipment orders for Energy Equipment was $3,955 million, an increase of $115 million from the first quarter of 2023.

Higher revenue and profitability, excluding the gain from the divestiture of its Pole Products business, were the result of improved demand for aftermarket products and services, strong execution on the segment's improving capital equipment backlog, and cost savings initiatives.

New orders booked during the quarter totaled $977 million, an increase of $466 million when compared to the $511 million of new orders booked during the second quarter of 2023.

Orders shipped from backlog in the second quarter of 2024 was $553 million, representing a book-to-bill of 177 percent, compared to the $505 million orders shipped and a book-to-bill of 101 percent in the second quarter of 2023.

As of June 30, 2024, backlog for capital equipment orders for Energy Equipment was $4,331 million, an increase of $472 million from the second quarter of 2023.

Oil & Gas Equipment and Services Market and Outlook

Despite the recent volatility in commodity prices, management believes the industry is in the early stages of an extended recovery that began in 2021 with the gradual reopening of global economies following the COVID-19 pandemic.

Improving economic activity, driven by pent-up consumer and industrial demand and government economic stimulus, drove higher consumption of commodities, pulled significant volumes of oil and gas out of global inventories, and exposed diminished productive capacity resulting from years of underinvestment in the oil and gas industry.

Geopolitical risks, among other macro environment uncertainties, may drive volatility and could pressure commodity prices near-term;

Despite the recent declines in U.S.

drilling activity resulting from lower natural gas prices and consolidation among North American oil and gas producers, management believes the industry remains in the early stages of an extended recovery.

Macro environment and geopolitical uncertainties drive volatility and pressure commodity prices near-term;

however, management believes diminished global oil and gas production capacity and rising energy security risks will continue to spur increased oilfield activity and demand for the Company’s equipment and technology.

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Operating Environment Overview

The Company’s results are dependent on, among other things, the level of worldwide oil and gas drilling, well remediation activity, the prices of crude oil and natural gas, capital spending by exploration and production companies and drilling contractors, worldwide oil and gas inventory levels and, to a lesser degree, the level of investment in wind, solar and geothermal energy products.

Key industry indicators for the first quarter of 2024 and 2023, and the fourth quarter of 2023 include the following:

Key industry indicators for the second quarter of 2024 and 2023, and the first quarter of 2024 include the following:

% increase (decrease)

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Management expects to see continued growth in these areas as low carbon power becomes a larger portion of the global energy supply.

The following table details the U.S., Canadian, and international rig activity and West Texas Intermediate Crude Oil prices for the past nine quarters ended March 31, 2024, on a quarterly basis:

The following table details the U.S., Canadian, and international rig activity and West Texas Intermediate Crude Oil prices for the past nine quarters ended June 30, 2024, on a quarterly basis:

Baker Hughes, Inc.

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US Department of Energy, Energy Information Administration (www.eia.doe.gov).

The worldwide quarterly average rig count increased 2 percent (from 1,769 to 1,797) in the first quarter of 2024 compared to the fourth quarter of 2023, mainly attributable to Canada.

The average per barrel price of West Texas Intermediate Crude Oil decreased 1 percent (from $78.41 per barrel to $77.56 per barrel) and natural gas prices decreased 22 percent (from $2.74 per mmbtu to $2.13 per mmbtu) in the first quarter of 2024 compared to the fourth quarter of 2023.

At April 12, 2024, there were 758 rigs actively drilling in North America, comprised of U.S.

and Canada, which decreased 9 percent from the first quarter average of 832 rigs.

The price for West Texas Intermediate Crude Oil was $85.66 per barrel at April 12, 2024, an increase of 10 percent from the first quarter of 2024 average.

The price for natural gas was $1.77 per mmbtu at April 12, 2024, a decrease of 17 percent from the first quarter of 2024 average.

The worldwide quarterly average rig count decreased 6 percent (from 1,797 to 1,695) in the second quarter of 2024 compared to the first quarter of 2024, mainly attributable to Canada.

The average per barrel price of West Texas Intermediate Crude Oil increased 5 percent (from $77.56 per barrel to $81.71 per barrel) and natural gas prices decreased 2 percent (from $2.13 per mmbtu to $2.08 per mmbtu) in the second quarter of 2024 compared to the first quarter of 2024.

At July 12, 2024, there were 773 rigs actively drilling in North America, comprised of U.S.

and Canada, which increased 5 percent from the second quarter average of 739 rigs.

The price for West Texas Intermediate Crude Oil was $82.21 per barrel at July 12, 2024, an increase of 1 percent from the second quarter of 2024 average.

The price for natural gas was $2.33 per mmbtu at July 12, 2024, an increase of 12 percent from the second quarter of 2024 average.

Results of Operations

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Three Months Ended

Six Months Ended

Energy Products and Services

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Energy Products and Services

t hree months ended March 31, 2024 and 2023.

Revenue from Energy Products and Services was $1,017 million for the three months ended March 31, 2024, compared to $941 million for the three months ended March 31, 2023, an increase of $76 million or 8 percent.

Operating profit from Energy Products and Services was $121 million for the three months ended March 31, 2024 compared to an operating profit of $112 million for the three months ended March 31, 2023, an increase of $9 million.

Growing demand from international and offshore markets, market share gains in North America and an acquisition during the quarter helped drive improved revenue and profitability.

t hree and six months ended June 30, 2024 and 2023.

Revenue from Energy Products and Services was $1,050 million for the three months ended June 30, 2024, compared to $1,029 million for the three months ended June 30, 2023, an increase of $21 million or 2 percent.

For the six months ended June 30, 2024, revenue from Energy Products and Services was $2,067 million compared to $1,970 million for the six months ended June 30, 2023, an increase of $97 million or 5 percent.

Revenue improved primarily due to strong demand in international markets, which helped drive international revenue growth of 5 percent in the second quarter of 2024 and 6 percent year-to-date when compared to the prior year.

Despite a decrease in drilling activity, North America revenue grew 3 percent in the second quarter of 2024 and 5 percent year-to-date due to market share gains as well as contributions from our new artificial lift business that was acquired in the first quarter of 2024.

Operating profit from Energy Products and Services was $128 million for the three months ended June 30, 2024, compared to an operating profit of $156 million for the three months ended June 30, 2023, a decrease of $28 million.

For the six months ended June 30, 2024, operating profit from Energy Products and Services was $249 million compared to operating profit of $268 million for the six months ending June 30, 2023, a decrease of $19 million.

The decrease in profitability was due to a less favorable sales mix, including a 23 percent decline in sales of drill pipe in the second quarter of 2024 and an 8 percent decline year-to-date when compared to the prior year.

Energy Equipment

t hree months ended March 31, 2024 and 2023.

Revenue from Energy Equipment was $1,178 million for the three months ended March 31, 2024, compared to $1,052 million for the three months ended March 31, 2023, an increase of $126 million or 12 percent.

Operating profit from Energy Equipment was $95 million for the three months ended March 31, 2024 compared to an operating profit of $71 million for the three months ended March 31, 2023, an increase of $24 million.

Improved revenue and profitability were primarily the result of strong execution on the segment's capital equipment backlog and improved demand for aftermarket products and services.

t hree and six months ended June 30, 2024 and 2023.

Revenue from Energy Equipment was $1,204 million for the three months ended June 30, 2024, compared to $1,117 million for the three months ended June 30, 2023, an increase of $87 million or 8 percent.

For the six months ending June 30, 2024, revenue from Energy Equipment was $2,382 million compared to $2,169 million for the six months ending June 30, 2023, an increase of $213 million or 10 percent.

The increase in revenue is attributable to an increase in sales in both the international land and offshore markets.

Revenue improved from international sales by 14 percent in the second quarter of 2024 and 17 percent year-to-date when compared to the prior year and offshore sales increased by 10 percent in the second quarter of 2024 and by 21 percent year-to-date when compared to the prior year.

The increase in sales to these markets is a result of strong demand for aftermarket products and services and execution on the segment’s improving capital equipment backlog.

The increases in the international land and offshore markets more than offset a decline in sales into the North American land market and the effect of divesting the segment’s Pole Products business during the second quarter of 2024.

Our North American sales decreased 8 percent in the second quarter of 2024 and 6 percent year-to-date when compared to the prior year primarily related to declines in North America activity in our completions products.

The divestiture of the segment’s Pole Products business during the quarter reduced revenues by 2 percent and 1 percent for the three months and six months ended June 30, 2024.

Operating profit from Energy Equipment was $232 million for the three months ended June 30, 2024, compared to an operating profit of $81 million for the three months ended June 30, 2023, an increase of $151 million.

For the six months ended June 30, 2024, operating profit from Energy Equipment was $327 million compared to operating profit of $152 million for the six months ending June 30, 2023, an increase of $175 million.

Higher profitability for the three and six months ended June 30, 2024 was the result of a $131 million gain from the divestiture of the segment's Pole Products business and higher margin sales primarily driven by improved demand for aftermarket products and services.

Strong execution on the segment's improving capital equipment backlog also contributed to the increase in profitability.

The Energy Equipment segment monitors its capital equipment backlog to plan its business.

New orders are added to backlog only when the Company receives a firm written order for major completion and production components or a contract related to a construction project.

The capital equipment backlog was $3,955 million at March 31, 2024, an increase of $115 million from backlog of $3,840 million at March 31, 2023.

The capital equipment backlog was $4,331 million at June 30, 2024, an increase of $472 million from backlog of $3,859 million at June 30, 2023.

Although numerous factors can affect the timing of revenue out of backlog (including, but not limited to, customer change orders and supplier accelerations or delays), the Company reasonably expects approximately 25 percent of backlog to become revenue during the rest of 2024 and the remainder thereafter.

At March 31, 2024, approximately 43 percent of the capital equipment backlog was for offshore products and approximately 93 percent of the capital equipment backlog was destined for international markets.

At June 30, 2024, approximately 45 percent of the capital equipment backlog was for offshore products and approximately 92 percent of the capital equipment backlog was destined for international markets.

Eliminations and corporate costs

Eliminations and corporate costs were $54 million for the three months ended March 31, 2024, compared to $57 million for the three months ended March 31, 2023.

Eliminations and corporate costs were $47 million and $101 million for the three and six months ended June 30, 2024, compared to $56 million and $113 million for the three and six months ended June 30, 2023.

Sales from one segment to another generally are priced at estimated equivalent commercial selling prices;

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Intrasegment transactions are eliminated within each segment.

Eliminations declined 19 percent when compared to the second quarter of 2023 due to lower intrasegment activity but remained relatively flat for year-to-date intrasegment activity when compared to 2023.

Corporate costs declined 5 percent from the second quarter of 2023 and 12 percent year-to-date due to our cost savings initiatives and workforce reductions.

Interest and financial costs and Interest Income

Interest and financial costs were $22 million and $46 million for the three and six months ended June 30, 2024, compared to $21 million and $42 million for the three and six months ended June 30, 2023.

The increase in interest and financial costs were primarily due to debt borrowings on the revolving credit facility in the first quarter of 2024.

Interest income remained flat year-over-year at $8 million and $16 million for the three and six months ended June 30, 2024, and June 30, 2023.

Equity income in unconsolidated affiliates

Equity income in unconsolidated affiliates was $8 million and $37 million for the three and six months ended June 30, 2024, compared to $37 million and $85 million for the three and six months ended June 30, 2023.

A decline in sales of almost 30 percent from the second quarter of 2023 and 17 percent year-to-date, with a relatively flat cost structure, led to lower profitability year-over-year for our largest investment in unconsolidated affiliates.

Other expense, net

Other expense, net was $10 million for the three months ended March 31, 2024, compared to $16 million for the three months ended March 31, 2023.

The change in expense was primarily due to fluctuations in foreign currencies.

Other expense, net was $14 million and $24 million for the three and six months ended June 30, 2024, compared to $29 million and $45 million for the three and six months ended June 30, 2023, respectively.

The change in expense was primarily due to larger foreign currency fluctuations in the prior year, particularly with the currency devaluation in Argentina.

Provision for income taxes

The effective tax rate for the three months ended March 31, 2024 was 26.7%, compared to 13.8% for the same period in 2023.

The effective tax rate for 2024 was negatively impacted by a mix of earnings in higher tax rate jurisdictions, losses in certain jurisdictions with no tax benefit, and a shortfall related to previously recognized stock compensation deductibility, partially offset by the reduction of valuation allowances related to U.S.

The effective tax rate for the three and six months ended June 30, 2024 was 23.9% and 24.9%, compared to 10.8% and 12.1% for the same period in 2023.

The effective tax rate for 2024 was negatively impacted by a mix of earnings in higher tax rate jurisdictions, losses in certain jurisdictions with no tax benefit, and adjustments to the carrying value of deferred tax assets, partially offset by the reduction of valuation allowances related to U.S.

and state deferred tax assets.

The effective tax rate for 2023 was positively impacted by the utilization of previously unrealized loss carryforwards and tax credits as well as favorable adjustments related to changes in certain exchange rates, partially offset by losses in certain jurisdictions with no tax benefit.

The effective tax rate for 2023 was positively impacted by the utilization of previously unrealized loss carryforwards and tax credits as well as favorable adjustments related to changes in certain exchange rates, partially offset by current year losses in certain jurisdictions with no tax benefit.

Non-GAAP Financial Measures and Reconciliations

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Adjusted EBITDA and Adjusted EBITDA % are not intended to replace GAAP financial measures, such as Net Income and Operating Profit %.

Additionally, Excess Free Cash Flow does not represent the Company's residual cash flow available for discretionary expenditures, as the calculation of these measures does not account for certain debt service requirements or other non-discretionary expenditures.

The following tables set forth the reconciliation of Adjusted EBITDA to its most comparable GAAP financial measure (in millions):

Three Months Ended

Six Months Ended

Operating profit:

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Noncontrolling interests

Provision (benefit) for income taxes

Provision for income taxes

Interest expense

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Liquidity and Capital Resources

At March 31, 2024, the Company had cash and cash equivalents of $468 million and total debt of $1,808 million.

At June 30, 2024, the Company had cash and cash equivalents of $827 million and total debt of $1,748 million.

At December 31, 2023, cash and cash equivalents were $816 million and total debt was $1,725 million.

As of March 31, 2024, approximately $453 million of the $468 million of cash and cash equivalents was held by our foreign subsidiaries and the earnings associated with this cash could be subject to foreign withholding taxes and incremental U.S.

As of June 30, 2024, approximately $533 million of the $827 million of cash and cash equivalents was held by our foreign subsidiaries and the earnings associated with this cash could be subject to foreign withholding taxes and incremental U.S.

taxation if transferred among countries or repatriated to the U.S.

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The credit facility contains a financial covenant regarding maximum debt-to-capitalization ratio of 60%.

As of March 31, 2024, the Company was in compliance with a debt-to-capitalization ratio of 24.5% and had $50 million of outstanding borrowings under the facility, resulting in $1.95 billion of available funds.

As of June 30, 2024, the Company was in compliance with a debt-to-capitalization ratio of 23.6% and had no borrowings or letters of credits issued under the facility, resulting in $2.0 billion of available funds.

Additionally, a consolidated joint venture of the Company borrowed $120 million against a $150 million bank line of credit for the construction of a facility in Saudi Arabia.

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The bank line of credit contains a financial covenant regarding maximum debt-to-equity ratio of 75%.

As of March 31, 2024, the joint venture was in compliance.

As of June 30, 2024, the joint venture was in compliance.

The facility construction was completed in the fourth quarter of 2022, and the joint venture will not have future borrowings on the line of credit.

The line of credit repayment schedule began in December 2022 with final payment no later than June 2032.

As of March 31, 2024, the Company had $104 million in borrowings related to this line of credit.

As of June 30, 2024, the Company had $99 million in borrowings related to this line of credit.

The Company has $11 million in payments related to this line of credit due in the next twelve months.

The Company’s outstanding debt at March 31, 2024 consisted of $1,091 million in 3.95% Senior Notes, $496 million in 3.60% Senior Notes, and other debt of $221 million.

The Company was in compliance with all covenants at March 31, 2024.

Long-term lease liabilities totaled $564 million at March 31, 2024.

The Company had $472 million of outstanding letters of credit at March 31, 2024, primarily in Norway and the United States, that are under various bilateral letter of credit facilities.

The Company’s outstanding debt at June 30, 2024 consisted of $1,091 million in 3.95% Senior Notes, $496 million in 3.60% Senior Notes, and other debt of $161 million.

The Company was in compliance with all covenants at June 30, 2024.

Long-term lease liabilities totaled $553 million at June 30, 2024.

The Company had $457 million of outstanding letters of credit at June 30, 2024, primarily in Norway and the United States, that are under various bilateral letter of credit facilities.

Letters of credit are issued as bid bonds, advanced payment bonds and performance bonds.

The following table summarizes our net cash used in continuing operating activities, continuing investing activities and continuing financing activities for the periods presented (in millions):

Three Months Ended

Net cash used in operating activities

The following table summarizes our net cash provided by (used in) continuing operating activities, continuing investing activities and continuing financing activities for the periods presented (in millions):

Six Months Ended

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Significant uses of cash during the first three months of 2024

• Cash flows used in operating activities were $78 million, primarily driven by changes in the primary components of our working capital (receivables, inventories, accounts payable, and accrued liabilities).

Net cash used in financing activities

Significant uses of cash during the first six months of 2024

• Cash flows provided by operating activities were $354 million, primarily driven by changes in the primary components of our working capital (receivables, inventories, accounts payable, and accrued liabilities).

• Capital expenditures were $151 million.

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• Payments of $50 million in dividends to our shareholders.

The effect of the change in exchange rates on cash flows was a decrease of $2 million for the first three months of 2024, and immaterial for the first three months of 2023.

• Share repurchases were $37 million.

The effect of the change in exchange rates on cash flows was a decrease of $4 million for the first six months of 2024, and a decrease of $2 million for the first six months of 2023.

We believe that cash on hand, cash generated from operations and amounts available under our credit facilities and from other sources of debt will be sufficient to fund operations, lease payments, working capital needs, capital expenditure requirements, dividends and financing obligations.

Through a return of capital framework, we expect to return at least 50 percent of excess free cash flow (defined as cash flow from operations, less capital expenditures and other investments, including acquisitions) through a combination of steady, quarterly base dividends, opportunistic stock buybacks, and an annual supplemental dividend to true-up to shareholders on an annual basis.

Associated with the plan, our Board of Directors authorized a share repurchase program for up to $1.0 billion of the currently outstanding shares of our common stock over a period of 36 months, and we have announced that we expect to increase our quarterly cash dividend on its common stock from $0.05 per share to $0.075 per share, a 50 percent increase.

The first quarterly dividend of $0.075 per share is anticipated to be paid out during the quarter ended June 30, 2024.

Subject to the approval of our Board of Directors, the Company also intends to declare a supplemental dividend during the second quarter ended June 30, 2025.

The amount of such supplemental dividend is expected to be a minimum of 50% of the our Excess Free Cash Flow less capital returned to shareholders via base dividends and share repurchases during 2024.

The declaration and payment of any future dividend is subject to the sole discretion of the our Board of Directors and will depend on our earnings, financial condition, capital requirements, level of indebtedness, applicable statutory and contractual restrictions and other considerations that the Board of Directors deems relevant.

Under the share repurchase program, we may repurchase shares from time to time through open market purchases, in privately negotiated transactions or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, in accordance with applicable securities laws and other restrictions, including Rule 10b-18.

The timing and total amount of any stock repurchases will depend upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices and other considerations.

NOV repurchased 2.0 million shares of common stock at an average price of $18.50 per share and also increased its base dividend by 50 percent during the second quarter.

The Company expects to return at least 50% of Excess Free Cash Flow (defined as cash flow from operations less capital expenditures and other investments, including acquisitions), through a combination of steady, quarterly base dividends, opportunistic stock buybacks, and an annual supplemental dividend to true-up returns to shareholders on an annual basis.

We may pursue additional acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis