DNOW Inc. (NOW Inc.) — Q3 2018 Form 10-Q
Business and period: Global distributor of energy and industrial products and provider of supply-chain services, operating through U.S., Canada and International segments. This unaudited filing covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts below are in millions, except per-share data and percentages.
Key financial results
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $822 | $697 | $2,363 | $1,979 |
| Operating profit (loss) | $26 | $(6) | $51 | $(41) |
| Operating margin | 3.2% | (0.9%) | 2.2% | (2.1%) |
| Net income (loss) | $20 | $(9) | $36 | $(49) |
| Diluted EPS | $0.18 | $(0.08) | $0.33 | $(0.45) |
| Operating cash flow | Not separately provided for Q3 | $(2) | $(107) |
- Q3 revenue increased 17.9%; nine-month revenue rose 19.4%. Operating results returned to profit in both periods, with nine-month net income improving by $85.
- U.S. led growth: Q3 revenue rose 24.5% to $630 and operating profit was $21, versus a $10 loss. Canada Q3 revenue fell 3.1% to $93, while operating profit increased to $5. International revenue rose 4.2% to $99, but segment operating profit was approximately break-even.
- Nine-month operating cash use narrowed to $2 from $107. Receivables increased $143 and inventory $21, substantially offset by a $76 increase in accounts payable and accrued liabilities. Capital expenditures were $5; investing cash use was $3.
- At September 30, cash was $91, current assets $1,272 and current liabilities $467. Long-term debt was $170; total liabilities were $644. Cash was down $7 from year-end 2017. Total stockholders’ equity was $1,217.
Material changes and management commentary
- Management attributed U.S. improvement primarily to higher volume as rig activity strengthened and to product-margin gains. Warehousing, selling and administrative expense rose modestly to $142 for Q3 and $422 for nine months.
- Worldwide average rig count was up 7.6% year over year in Q3; U.S. rig count increased 11.0%. Management said the outlook remains tied to global drilling and completion spending, particularly in North America, with oil prices and U.S. storage levels key drivers of U.S. rig activity. No specific financial guidance was provided.
- The company replaced its revolving facility on April 30, 2018 with a five-year, $750 facility. At quarter-end, borrowings were $170, stated availability was approximately $403 and excess availability was 69%, subject to facility limitations. The company reported compliance with covenants.
- Operating cash flow remained slightly negative despite the return to profitability, reflecting working-capital needs associated with higher sales and purchases. Management stated that cash, expected operating cash generation and facility availability should fund operations, working capital and capital requirements.
- Approximately $77 of the $91 cash balance was held by foreign subsidiaries and considered permanently reinvested; management reported no current plan to repatriate those funds.
Risks, contingencies and unusual items
- Management estimated reasonably possible losses of $0–$15, primarily in International and related to a customer receivable; it stated that its best estimate had been accrued but did not specify the accrued amount. The company said it did not expect legal matters to materially affect its financial position, cash flow or results.
- Key risks cited include oil and gas prices and activity, customer demand, competition, borrowing costs, foreign exchange, regulation, acquisition integration and potential goodwill or intangible impairment. The company recorded a $15 foreign-currency translation loss in other comprehensive income for the first nine months.
- The 2017 U.S. tax law effects were still being finalized. The filing describes provisional adjustments, including tax-asset valuation changes, and notes that final impacts could differ. Nine-month effective tax rate was 10.7%.
- Adoption of the revenue standard in 2018 had no material effect on revenue measurement or recognition; it resulted in $2 of additional receivables and deferred revenue. The company expected lease-standard adoption in Q1 2019 to materially increase balance-sheet assets and liabilities, with no material impact expected on earnings or cash flows.
- Forward contracts were used to economically hedge foreign-currency exposures, not for speculation. The company reported no material outstanding derivative instruments; their total notional was $24 at September 30.
Important facts for investors to verify
- Whether revenue growth and improved operating margins continue, particularly in the U.S., and whether International profitability recovers.
- Whether working-capital investment—especially receivables—converts into cash, given negative nine-month operating cash flow.
- Current borrowing-base availability, covenant headroom and variable-rate interest exposure under the new credit facility.
- The status and eventual resolution of the International customer receivable exposure, including the amount accrued against the stated potential-loss range.
- Final tax-law accounting and the balance-sheet impact of adopting the lease standard in 2019.