Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
NOV Inc. (“NOV” or the “Company”) is a leading independent equipment and technology provider to the global energy industry. Originally founded in 1862, NOV and its predecessor companies have spent 161 years helping transform oil and gas field development and improving its cost-effectiveness, efficiency, safety, and environmental impact. Over the past few decades, the Company has pioneered and refined key technologies to improve the economic viability of frontier resources, including unconventional and deepwater oil and gas. More recently, by applying its deep expertise and technology, the company has helped advance the transition toward sustainable energy.
NOV’s extensive proprietary technology portfolio supports the industry’s full-field drilling, completion, and production needs. With unmatched cross-segment capabilities, scope, and scale, NOV continues to develop and introduce technologies that further enhance the economics and efficiencies of energy production, with a focus on automation, predictive analytics, and condition-based maintenance.
NOV serves major-diversified, national, and independent service companies, contractors, and energy producers in 62 countries, operating under three segments: Wellbore Technologies, Completion & Production Solutions, and Rig Technologies.
Unless indicated otherwise, results of operations are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain reclassifications have been made to prior period financial information in order to conform with current period presentation. The Company discloses Adjusted EBITDA (defined as operating profit excluding depreciation, amortization, gains and losses on sales of fixed assets and, when applicable, Other Items) in its periodic earnings press releases and other public disclosures to provide investors additional information about the results of ongoing operations. See Non-GAAP Financial Measures and Reconciliations in Results of Operations for an explanation of our use of non-GAAP financial measures and reconciliations to their corresponding measures calculated in accordance with GAAP.
Wellbore Technologies
The Company’s Wellbore Technologies segment designs, manufactures, rents, and sells a variety of equipment and technologies used to perform drilling operations, and offers services that optimize their performance, including: solids control and waste management equipment and services, drilling fluids, premium drillpipe, wired pipe, drilling optimization services, tubular inspection and coating services, instrumentation, downhole tools, and drill bits.
Wellbore Technologies focuses on oil and gas companies and supports drilling contractors, oilfield service companies, and oilfield equipment rental companies. Demand for the segment’s products and services depends on the level of oilfield drilling activity by oil and gas companies, drilling contractors, and oilfield service companies.
Completion & Production Solutions
The Company’s Completion & Production Solutions segment integrates technologies for well completions and oil and gas production.
The segment designs, manufactures, and integrates technologies for well completions, oil and gas production, and industrial markets. This includes equipment and technologies needed for 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; cementing products for pumping, mixing, transport, and storage; onshore production, including fluid processing, composite pipe, surface transfer and progressive cavity pumps, and artificial lift systems; and offshore production, including integrated production systems and subsea production technologies.
Completion & Production Solutions supports service companies and oil and gas companies. Demand for the segment’s products depends on the level of oilfield completions and workover activity by oilfield service companies and drilling contractors, and capital spending plans by oil and gas companies and oilfield service companies.
The segment also designs and manufactures equipment for industrial markets. This includes specialized, technology-driven progressive cavity pumps and mixers for a wide breadth of industrial end markets with high failure costs, premium pole products to support connectivity, lighting, and power for municipal and residential applications including 5G, smart-city infrastructure, roads and highways, and energy-grid modernization. Demand for these products is driven by general industrial activity and infrastructure spend.
Rig Technologies
The Company’s Rig Technologies segment manufactures and supports the capital equipment and integrated systems needed to drill oil and gas wells on land and offshore as well as other marine-based markets, including offshore wind vessels. The segment designs, manufactures and sells land rigs, offshore drilling equipment packages, including installation and commissioning services, and drilling rig components that mechanize and automate the drilling process and rig functionality. Equipment and technologies the segment provides to customers include: substructures, derricks, and masts; cranes; jacking systems; pipe lifting, racking, rotating, and assembly systems;
17
fluid transfer technologies, such as mud pumps; pressure control equipment, including blowout preventers; power transmission systems, including drives and generators; rig instrumentation and control systems; mooring, anchor, and deck handling machinery; major equipment components for offshore wind construction vessels; and pipelay and construction systems. The segment also provides spare parts, repair, and rentals as well as comprehensive remote equipment monitoring, technical support, field service, and customer training through an extensive network of aftermarket service and repair facilities strategically located in major areas of drilling operations around the world.
Rig Technologies supports land and offshore drillers. Demand for the segment’s products depends on drilling contractors’ and oil and gas companies’ capital spending plans, specifically capital expenditures on rig construction and refurbishment; and secondarily on the overall level of oilfield drilling activity, which drives demand for spare parts, service, and repair for the segment’s large installed base of equipment. The segment also designs and builds equipment for wind turbine installation companies, where demand is dependent on global investment into offshore wind energy developments.
Critical Accounting Policies and Estimates
In our annual report on Form 10-K for the year ended December 31, 2022, we identified our most critical accounting policies. In preparing the financial statements, we make assumptions, estimates and judgments that affect the amounts reported. We periodically evaluate our estimates and judgments that are most critical in nature which are related to revenue recognition under long-term construction contracts; inventory reserves; impairment of goodwill and income taxes. Our estimates are based on historical experience and on our future expectations that we believe are reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results are likely to differ from our current estimates and those differences may be material.
EXECUTIVE SUMMARY
For the first quarter ended March 31, 2023, the Company generated revenues of $1.96 billion, a decrease of 5 percent compared to the fourth quarter of 2022 and an increase of 27 percent compared to the first quarter of 2022. Net income for the first quarter of 2023 was $126 million, or 6.4 percent of sales, which included $4 million of credits in Other Items. Adjusted EBITDA (operating profit excluding depreciation, amortization, gains and losses on sales of fixed assets and, when applicable, Other Items) decreased sequentially to $195 million, or 9.9 percent of sales.
Segment Performance
Wellbore Technologies
Wellbore Technologies generated revenues of $745 million in the first quarter of 2023, a decrease of 2 percent from the fourth quarter of 2022 and an increase of 23 percent from the first quarter of 2022. Operating profit was $96 million, or 12.9 percent of sales. Adjusted EBITDA decreased $13 million sequentially and increased $32 million from the prior year to $133 million, or 17.9 percent of sales. Results were negatively impacted during the quarter by continued supply chain challenges that disrupted the Segment’s drill pipe operations.
Completion & Production Solutions
Completion & Production Solutions generated revenues of $718 million in the first quarter of 2023, a decrease of 3 percent from the fourth quarter of 2022 and an increase of 35 percent from the first quarter of 2022. Operating profit was $44 million, or 6.1 percent of sales, and included a credit of $1 million in Other Items. Adjusted EBITDA decreased $12 million sequentially and increased $44 million from the prior year to $54 million, or 7.5 percent of sales. Results reflect typical seasonal declines in certain product lines and markets, partially offset by an improving rate of execution on projects, which contributed to a 37% increase in revenue out of backlog compared to the first quarter of 2022.
New orders booked during the quarter totaled $407 million, representing a book-to-bill of 96 percent when compared to the $422 million of orders shipped from backlog. As of March 31, 2023, backlog for capital equipment orders for Completion & Production Solutions was $1,601 million, a decrease of $1 million from the fourth quarter of 2022 and an increase of $237 million from the first quarter of 2022.
Rig Technologies
Rig Technologies generated revenues of $550 million in the first quarter of 2023, a decrease of 11 percent from the fourth quarter of 2022, and an increase of 25 percent from the first quarter of 2022. Operating profit was $53 million, or 9.6 percent of sales, and included a credit of $3 million of Other Items. Adjusted EBITDA decreased $19 million sequentially and increased $33 million from the prior year to $69 million, or 12.5 percent of sales. Steadily improving demand for drilling equipment and aftermarket parts and services only partially offset the effect of strong capital equipment shipments in the fourth quarter that did not repeat and seasonal declines in the Segment’s aftermarket operations.
18
New orders booked during the quarter totaled $251 million, representing a book-to-bill of 140 percent when compared to the $179 million of orders shipped from backlog. As of March 31, 2023, backlog for capital equipment orders for Rig Technologies was $2,876 million, an increase of $83 million from the fourth quarter of 2022 and a decrease of $17 million from the first quarter of 2022.
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 combined with 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.
Tightening of government fiscal policies, concerns regarding a global recession, ongoing global supply chain disruptions, and rising inflationary costs may drive volatility and could pressure commodity prices near-term; however, management believes diminished global oil and gas production capacity, along with rising energy security risks will continue to spur increased oilfield activity and demand for the Company’s equipment and technology.
NOV remains committed to improving organizational efficiencies while focusing on the development and commercialization of innovative products and services, including technologies to reduce environmental impact of oil and gas operations, and technologies to accelerate the energy transition that are responsive to the longer-term needs of NOV’s customers. We believe this strategy will further advance the Company’s competitive position in all market conditions.
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 other oilfield service companies and drilling contractors, and worldwide oil and gas inventory levels. Key industry indicators for the first quarter of 2023 and 2022, and the fourth quarter of 2022 include the following:
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|
|
|
% |
|
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% |
|
|
|
|
|
|
|
|
|
|
|
|
1Q23 |
|
|
1Q23 |
|
|
|
1Q23* |
|
|
1Q22* |
|
|
4Q22* |
|
|
1Q22 |
|
|
4Q22 |
|
Active Drilling Rigs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
761 |
|
|
|
633 |
|
|
|
775 |
|
|
|
20.2 |
% |
|
|
(1.8 |
)% |
Canada |
|
|
223 |
|
|
|
198 |
|
|
|
190 |
|
|
|
12.6 |
% |
|
|
17.4 |
% |
International |
|
|
915 |
|
|
|
823 |
|
|
|
907 |
|
|
|
11.2 |
% |
|
|
0.9 |
% |
Worldwide |
|
|
1,899 |
|
|
|
1,654 |
|
|
|
1,872 |
|
|
|
14.8 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Texas Intermediate Crude Prices (per barrel) |
|
$ |
76.08 |
|
|
$ |
94.54 |
|
|
$ |
82.79 |
|
|
|
(19.5 |
)% |
|
|
(8.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Prices ($/mmbtu) |
|
$ |
2.65 |
|
|
$ |
4.62 |
|
|
$ |
5.51 |
|
|
|
(42.6 |
)% |
|
|
(51.9 |
)% |
* Averages for the quarters indicated. See sources below.
The Company is also becoming increasingly engaged with energy transition related opportunities and is currently involved in projects related to wind energy, geothermal power, rare earth metal extraction, biogas production, and carbon sequestration. Additionally, the Company is investing in developing technologies and solutions that will support other energy transition related industry verticals. Management expects to see continued growth in these areas as low carbon power becomes a larger portion of the global energy supply.
19
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, 2023, on a quarterly basis:
Industry Trends Rig Counts and Oil Prices Total Number of Rigs 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 $140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $ West Texas Int. (Price per Barrel) 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 Total Rings 2,110 2,262 2,260 2,260 2,210 2,197 2,071 2,053 1,255 Canada 105 208 177 185 83 132 139 196 25 US 1,037 1,051 1,072 1,046 989 920 821 784 396 International 968 1,003 1,011 1,029 1,138 1,145 1,111 1,073 834 W.TX Int. ($) $68.03 $69.76 $59.08 $54.83 $59.78 $56.37 $56.92 $4
.99 $2
Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); West Texas Intermediate Crude Oil and Natural Gas Prices: Department of Energy, Energy Information Administration (www.eia.doe.gov).
The worldwide quarterly average rig count increased 1 percent (from 1,872 to 1,899), and the U.S. decreased 2 percent (from 775 to 761), in the first quarter of 2023 compared to the fourth quarter of 2022. The average per barrel price of West Texas Intermediate Crude Oil decreased 8 percent (from $82.79 per barrel to $76.08 per barrel) and natural gas prices decreased 52 percent (from $5.51 per mmbtu to $2.65 per mmbtu) in the first quarter of 2023 compared to the fourth quarter of 2022.
At April 14, 2023, there were 859 rigs actively drilling in North America, which decreased 13 percent from the first quarter average of 984 rigs. The price for West Texas Intermediate Crude Oil was $82.52 per barrel at April 14, 2023, an increase of 8 percent from the first quarter of 2023 average. The price for natural gas was $2.11 per mmbtu at April 14, 2023, a decrease of 20 percent from the first quarter of 2023 average.
20
Results of Operations
Financial results by operating segment are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
Revenue: |
|
|
|
|
|
|
Wellbore Technologies |
|
$ |
745 |
|
|
$ |
608 |
|
Completion & Production Solutions |
|
|
718 |
|
|
|
530 |
|
Rig Technologies |
|
|
550 |
|
|
|
441 |
|
Eliminations |
|
|
(51 |
) |
|
|
(31 |
) |
Total revenue |
|
$ |
1,962 |
|
|
$ |
1,548 |
|
|
|
|
|
|
|
|
Operating profit (loss): |
|
|
|
|
|
|
Wellbore Technologies |
|
$ |
96 |
|
|
$ |
39 |
|
Completion & Production Solutions |
|
|
44 |
|
|
|
(22 |
) |
Rig Technologies |
|
|
53 |
|
|
|
11 |
|
Eliminations and corporate costs |
|
|
(67 |
) |
|
|
(49 |
) |
Total operating profit (loss) |
|
$ |
126 |
|
|
$ |
(21 |
) |
Wellbore Technologies
Three months ended March 31, 2023 and 2022. Revenue from Wellbore Technologies was $745 million for the three months ended March 31, 2023, compared to $608 million for the three months ended March 31, 2022, an increase of $137 million or 23 percent.
Operating profit from Wellbore Technologies was $96 million for the three months ended March 31, 2023 compared to an operating profit of $39 million for the three months ended March 31, 2022, an increase of $57 million.
Completion & Production Solutions
Three months ended March 31, 2023 and 2022. Revenue from Completion & Production Solutions was $718 million for the three months ended March 31, 2023, compared to $530 million for the three months ended March 31, 2022, an increase of $188 million or 35 percent.
Operating profit from Completion & Production Solutions was $44 million for the three months ended March 31, 2023 compared to an operating loss of $22 million for the three months ended March 31, 2022, an increase of $66 million.
The Completion & Productions Solutions 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 $1,601 million at March 31, 2023, an increase of $237 million from backlog of $1,364 million at March 31, 2022. 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 72 percent of backlog to become revenue during the rest of 2023 and the remainder thereafter. At March 31, 2023, approximately 56 percent of the capital equipment backlog was for offshore products and approximately 71 percent of the capital equipment backlog was destined for international markets.
Rig Technologies
Three months ended March 31, 2023 and 2022. Revenue from Rig Technologies was $550 million for the three months ended March 31, 2023, compared to $441 million for the three months ended March 31, 2022, an increase of $109 million or 25 percent.
Operating profit from Rig Technologies was $53 million for the three months ended March 31, 2023 compared to $11 million for the three months ended March 31, 2022, an increase of $42 million.
The Rig Technologies 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 drilling rig components or a signed contract related to a construction project. The capital equipment backlog was $2,876 million at March 31, 2023, a decrease of $17 million from backlog of $2,893 million at March 31, 2022. Although numerous factors can affect the timing of revenue out of backlog (including, but not limited to, customer change
21
orders and supplier accelerations or delays), the Company reasonably expects approximately 24 percent of backlog to become revenue during the rest of 2023 and the remainder thereafter. At March 31, 2023, approximately 31 percent of the capital equipment backlog was for offshore products and approximately 96 percent of the capital equipment backlog was destined for international markets.
Eliminations and corporate costs
Eliminations and corporate costs were $67 million for the three months ended March 31, 2023, compared to $49 million for the three months ended March 31, 2022. Sales from one segment to another generally are priced at estimated equivalent commercial selling prices; however, segments originating an external sale are credited with the full profit to the company. Eliminations include intercompany transactions conducted between the three reporting segments that are eliminated in consolidation. Intrasegment transactions are eliminated within each segment.
Other expense, net
Other expense, net was $16 million for the three months ended March 31, 2023, compared to $2 million for the three months ended March 31, 2022, respectively. The change in income was primarily due to fluctuations in foreign currencies.
Provision for income taxes
The effective tax rate for the three months ended March 31, 2023 was 13.8%, compared to (39.3)% for the same period in 2022. 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
This Form 10-Q contains certain non-GAAP financial measures that management believes are useful tools for internal use and the investment community in evaluating NOV’s overall financial performance. These non-GAAP financial measures are broadly used to value and compare companies in the oilfield services and equipment industry. Not all companies define these measures in the same way. In addition, these non-GAAP financial measures are not a substitute for financial measures prepared in accordance with GAAP and should therefore be considered only as supplemental to such GAAP financial measures.
The Company defines Adjusted EBITDA as operating profit excluding depreciation, amortization, gains and losses on sales of fixed assets and, when applicable, Other Items. Management believes this is important information to provide because it is used by management to evaluate the Company’s operational performance and trends between periods and manage the business. Management also believes this information may be useful to investors and analysts to gain a better understanding of the Company’s results of ongoing operations. Adjusted EBITDA is not intended to replace GAAP financial measures, such as Net Income.
22
The following tables set forth the reconciliation of Adjusted EBITDA to its most comparable GAAP financial measure (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
|
2022 |
|
Operating profit (loss): |
|
|
|
|
|
|
|
|
|
Wellbore Technologies |
|
$ |
96 |
|
|
$ |
39 |
|
|
$ |
110 |
|
Completion & Production Solutions |
|
|
44 |
|
|
|
(22 |
) |
|
|
50 |
|
Rig Technologies |
|
|
53 |
|
|
|
11 |
|
|
|
80 |
|
Eliminations and corporate costs |
|
|
(67 |
) |
|
|
(49 |
) |
|
|
(78 |
) |
Total operating profit (loss) |
|
$ |
126 |
|
|
$ |
(21 |
) |
|
$ |
162 |
|
|
|
|
|
|
|
|
|
|
|
Other items, net: |
|
|
|
|
|
|
|
|
|
Wellbore Technologies |
|
$ |
— |
|
|
$ |
23 |
|
|
$ |
(1 |
) |
Completion & Production Solutions |
|
|
(1 |
) |
|
|
16 |
|
|
|
— |
|
Rig Technologies |
|
|
(3 |
) |
|
|
6 |
|
|
|
(11 |
) |
Corporate |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
Total other items |
|
$ |
(4 |
) |
|
$ |
45 |
|
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(Gain)/Loss on Sales of Fixed Assets: |
|
|
|
|
|
|
|
|
|
Wellbore Technologies |
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
Completion & Production Solutions |
|
|
(5 |
) |
|
|
— |
|
|
|
1 |
|
Rig Technologies |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Corporate |
|
|
1 |
|
|
|
2 |
|
|
|
— |
|
Total (gain)/loss on sales of fixed assets |
|
$ |
(4 |
) |
|
$ |
5 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization: |
|
|
|
|
|
|
|
|
|
Wellbore Technologies |
|
$ |
37 |
|
|
$ |
37 |
|
|
$ |
37 |
|
Completion & Production Solutions |
|
|
16 |
|
|
|
16 |
|
|
|
15 |
|
Rig Technologies |
|
|
19 |
|
|
|
18 |
|
|
|
19 |
|
Corporate |
|
|
5 |
|
|
|
3 |
|
|
|
5 |
|
Total depreciation & amortization |
|
$ |
77 |
|
|
$ |
74 |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
Wellbore Technologies |
|
$ |
133 |
|
|
$ |
101 |
|
|
$ |
146 |
|
Completion & Production Solutions |
|
|
54 |
|
|
|
10 |
|
|
|
66 |
|
Rig Technologies |
|
|
69 |
|
|
|
36 |
|
|
|
88 |
|
Eliminations and corporate costs |
|
|
(61 |
) |
|
|
(44 |
) |
|
|
(69 |
) |
Total Adjusted EBITDA |
|
$ |
195 |
|
|
$ |
103 |
|
|
$ |
231 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
GAAP net income (loss) attributable to Company |
|
$ |
126 |
|
|
$ |
(50 |
) |
|
$ |
104 |
|
Noncontrolling interests |
|
|
(1 |
) |
|
|
1 |
|
|
|
(5 |
) |
Provision for income taxes |
|
|
20 |
|
|
|
14 |
|
|
|
42 |
|
Interest expense |
|
|
21 |
|
|
|
19 |
|
|
|
21 |
|
Interest income |
|
|
(8 |
) |
|
|
(1 |
) |
|
|
(7 |
) |
Equity income in unconsolidated affiliates |
|
|
(48 |
) |
|
|
(6 |
) |
|
|
(36 |
) |
Other expense, net |
|
|
16 |
|
|
|
2 |
|
|
|
43 |
|
(Gain)/Loss on Sales of Fixed Assets |
|
|
(4 |
) |
|
|
5 |
|
|
|
1 |
|
Depreciation and amortization |
|
|
77 |
|
|
|
74 |
|
|
|
76 |
|
Other items, net |
|
|
(4 |
) |
|
|
45 |
|
|
|
(8 |
) |
Total Adjusted EBITDA |
|
$ |
195 |
|
|
$ |
103 |
|
|
$ |
231 |
|
23
Liquidity and Capital Resources
Overview
At March 31, 2023, the Company had cash and cash equivalents of $774 million and total debt of $1,732 million. At December 31, 2022, cash and cash equivalents were $1,069 million and total debt was $1,730 million. As of March 31, 2023, approximately $611 million of the $774 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. If opportunities to invest in the U.S. are greater than available cash balances that are not subject to income tax, rather than repatriating cash, the Company may choose to borrow against its revolving credit facility.
The Company has a revolving credit facility with a borrowing capacity of $2.0 billion through October 30, 2024, and a borrowing capacity of $1.7 billion from October 31, 2024, to October 30, 2025. The Company has the right to increase the commitments under this agreement to an aggregate amount of up to $3.0 billion upon the consent of only those lenders holding any such increase. Interest under the multicurrency facility is based upon SOFR, NIBOR or CDOR plus 1.25% subject to a ratings-based grid or the U.S. prime rate. The credit facility contains a financial covenant regarding maximum debt-to-capitalization ratio of 60%. As of March 31, 2023, the Company was in compliance with a debt-to-capitalization ratio of 27.0% and had no outstanding letters of credit issued under the facility, resulting in $2.0 billion of available funds.
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. Interest under the bank line of credit is based upon SOFR plus 1.40%. The bank line of credit contains a financial covenant regarding maximum debt-to-equity ratio of 75%. As of March 31, 2023, the joint venture was in compliance. The facility construction was completed in the fourth quarter of 2022, the Company will not have future borrowings on the line of credit, with repayments beginning December 2022 and final payment no later than June 2032. As of March 31, 2023, the Company had $114 million in borrowings related to this line of credit. The Company has $10 million in payments related to this line of credit due in the next twelve months.
The Company’s outstanding debt at March 31, 2023 consisted primarily of $1,090 million in 3.95% Senior Notes, $495 million in 3.60% Senior Notes, and other debt of $147 million. The Company was in compliance with all covenants at March 31, 2023. Long-term lease liabilities totaled $556 million at March 31, 2023.
The Company had $464 million of outstanding letters of credit at March 31, 2023, primarily in the U.S. and Norway, that are under various bilateral letter of credit facilities. Letters of credit are issued as bid bonds, advanced payment bonds and performance bonds.
The following table summarizes our net cash used in continuing operating activities, continuing investing activities and continuing financing activities for the periods presented (in millions):
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Three Months Ended |
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March 31, |
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2023 |
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2022 |
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Net cash used in operating activities |
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$ |
(202 |
) |
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$ |
(103 |
) |
Net cash used in investing activities |
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(52 |
) |
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(49 |
) |
Net cash used in financing activities |
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(41 |
) |
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(36 |
) |
Significant uses of cash during the first three months of 2023
•Cash flows used in operating activities were $202 million, primarily driven by changes in the primary components of our working capital (receivables, inventories, accounts payable, and accrued liabilities).
•Capital expenditures were $57 million.
•We paid $20 million in dividends to shareholders.
Other
The effect of the change in exchange rates on cash flows was immaterial for the first three months of 2023, and an increase of $3 million for the first three months of 2022.
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.
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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. We continue to expect to fund future cash acquisitions primarily with cash flow from operations and borrowings, including the unborrowed portion of the revolving credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us.
New Accounting Pronouncements
See Note 16 for recently adopted and recently issued accounting standards.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward-looking information. Some of the information in this document contains, or has incorporated by reference, forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements typically are identified by use of terms such as “may,” “believe,” “plan,” “will,” “expect,” “anticipate,” “estimate,” “should,” “forecast,” and similar words, although some forward-looking statements are expressed differently. We may also provide oral or written forward-looking information in other materials we release to the public. Forward-looking information involves risk and uncertainties and reflects our best judgment based on current information. You should be aware that our actual results could differ materially from results anticipated in the forward-looking statements due to a number of factors, including but not limited to changes in oil and gas prices, customer demand for our products and worldwide economic activity, including matters related to recent Russian sanctions. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements. We undertake no obligation to update any such factors or forward-looking statements to reflect future events or developments. You should also consider carefully the statements under “Risk Factors,” as disclosed in our Annual Report on Form 10-K for the year-end December 31, 2022, as updated in Part II, Item 1A of our Quarterly Reports on Form 10-Q, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements, and additional disclosures we make in our press releases and Forms 10-Q, and 8-K. We also suggest that you listen to our quarterly earnings release conference calls with financial analysts.
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