DNOW Inc. (NOW Inc.) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial amounts are in millions unless noted. NOW distributes energy and industrial products and provides supply-chain services through U.S., Canada, and International segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $776 | $777 | $1,561 | $1,541 |
| Operating profit | $17 | $18 | $40 | $25 |
| Operating margin | 2.2% | 2.3% | 2.6% | 1.6% |
| Net income | $14 | $14 | $32 | $16 |
| Diluted EPS | $0.12 | $0.12 | $0.29 | $0.15 |
| EBITDA excluding other costs (non-GAAP) | $27 | $29 | $58 | $45 |
| EBITDA margin excluding other costs (non-GAAP) | 3.5% | 3.7% | 3.7% | 2.9% |
Q2 cost of products was $623 million and warehousing, selling and administrative expense was $136 million. The filing attributes the quarterly cost increase mainly to lower product margins; lower operating expense reflected improved efficiencies. Six-month operating profit improvement reflected higher U.S. volume and gross margins, along with lower operating expenses.
Cash flow and liquidity: First-half operating cash flow was $49 million, versus cash used of $25 million in 2018; investing cash use was $13 million, including $8 million for acquisitions, and financing cash use was $73 million. Cash fell to $80 million from $116 million at year-end 2018. At June 30, borrowings under the revolving facility were $62 million, with approximately $506 million available; the company reported covenant compliance and 88% excess availability under the facility’s definitions. Current assets were $1,195 million and current liabilities $468 million.
Debt and leases: Long-term debt was $62 million, down from $132 million at December 31, 2018. Lease adoption on January 1, 2019 added recognized lease obligations; total lease liabilities were $75 million at June 30 ($23 million current operating and $40 million long-term operating, plus finance lease liabilities). The company reported $80 million cash and $74 million of cash held by foreign subsidiaries.
Other key measures: Total assets were $1,849 million and stockholders’ equity $1,264 million. The six-month effective tax rate was 5.9%, compared with 9.3% in 2018. Foreign currency translation produced $11 million of first-half other comprehensive income.
Changes versus comparable periods
- Q2 revenue was essentially flat year over year; first-half revenue rose 1.3%. U.S. first-half revenue increased 3.7%, while Canada declined 9.6% and International declined 3.0%, with foreign exchange contributing to declines outside the U.S.
- Q2 operating profit and net income were each slightly lower or unchanged year over year; first-half operating profit rose from $25 million to $40 million and net income doubled from $16 million to $32 million.
- First-half operating cash flow improved by $74 million year over year, with working-capital movements and operating results contributing to the change.
- U.S. Q2 operating profit was flat at $16 million; Canada was flat at $1 million; International fell to breakeven from $1 million. First-half U.S. operating profit rose to $35 million, while Canada declined to $3 million and International improved to $2 million.
Outlook, risks, and notable items
- Outlook: No numerical earnings or revenue guidance was provided. Management said results remain tied to global rig counts and oil and gas spending, particularly in North America, and noted customer budget uncertainty amid oil-price volatility. It plans to adjust operations to market conditions and cited low capital requirements as an opportunity-supporting factor.
- Market risks: Demand depends on drilling, completion, production, infrastructure and industrial activity. Q2 worldwide rig count increased 3.3% versus Q2 2018, but U.S. rig count fell 4.7% and Canadian rig count fell 21.7%. WTI and natural gas prices were down 12.1% and 10.5%, respectively, year over year; steel prices were down 24.3%. Foreign exchange, steel pricing, and variable-rate borrowing are additional exposures.
- Acquisitions: Two U.S. acquisitions closed in Q2 for approximately $8 million net cash consideration. Preliminary purchase accounting recorded $6 million goodwill and $2 million intangible assets; estimates remain subject to refinement.
- Lease accounting: Adoption of ASC 842 resulted in recognition of $66 million of operating-lease right-of-use assets, net of deferred rent, and $67 million of related liabilities at adoption.
- Contingencies: The company is involved in claims, audits, and legal matters; management stated that any unaccrued ultimate liability is not expected to materially affect financial position, cash flow, or results. Approximately $12 million of standby letters of credit and surety bonds were outstanding, with payment not considered probable.
- Other: The company uses short-term foreign-currency forward contracts for economic hedging, not speculation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether U.S. demand and Process Solutions deliveries can offset weaker Canadian activity, currency effects, and uncertain customer budgets.
- How product margins, operating efficiency, and inventory charges evolve, given the modest Q2 operating-margin decline.
- Cash conversion and working-capital needs, including the decrease in cash and reliance on revolver availability.
- Whether acquisition purchase-price allocations change and whether future acquisitions require additional debt or equity financing.
- Potential effects of commodity and steel prices, foreign exchange, interest rates, and goodwill impairment conditions.
- The non-GAAP EBITDA measure’s reconciliation and limitations; it should not be treated as a substitute for GAAP results.