DNOW Inc. (NOW Inc.) — Form 10-Q summary
Business and period: NOW Inc. distributes energy and industrial products and provides supply-chain services through DistributionNOW and Wilson Export. This unaudited report covers the quarter and nine months ended September 30, 2015. The 2014 comparative results include NOV combined-business results before the May 30, 2014 spin-off and therefore are not fully comparable to NOW’s standalone results.
Financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months 2015 | Three months 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $753 | $1,070 | $2,366 | $3,099 |
| Operating income (loss) | $(291) | $50 | $(326) | $155 |
| Operating margin | (38.6%) | 4.7% | (13.8%) | 5.0% |
| Net income (loss) | $(224) | $32 | $(253) | $100 |
| Diluted EPS | $(2.09) | $0.30 | $(2.36) | $0.93 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $244 | $30 |
- Revenue and profitability: Revenue declined 29.6% in the quarter and 23.7% year to date. Cost of products was $636 million and $1,970 million, respectively. Warehousing, selling and administrative expense was $153 million and $467 million. The quarter included a $255 million estimated goodwill impairment ($202 million after tax); reported operating losses include this charge.
- Adjusted measure: EBITDA excluding other costs, a company-defined non-GAAP measure, was $(20) million for the quarter and $(33) million year to date, versus $53 million and $168 million in 2014. Corresponding margins were (2.7%) and (1.4%), versus 5.0% and 5.4%. The reconciliation excludes $260 million and $272 million of other costs, primarily the goodwill impairment.
- Cash flow and liquidity: Nine-month operating cash flow of $244 million reflected working-capital release, including $316 million from lower receivables and $183 million from lower inventories, partly offset by a $281 million decrease in accounts payable and accrued liabilities. Investing cash outflow was $402 million, including $397 million for acquisitions net of acquired cash; financing inflow was $118 million, including $120 million of revolver borrowings. Cash fell to $126 million from $195 million at year-end 2014. Current assets were $1,532 million and current liabilities $389 million at quarter-end.
- Debt: Long-term debt was $120 million, drawn under a $750 million unsecured revolving facility maturing in April 2019; a $4 million letter of credit was also outstanding. The company reported covenant compliance. Approximately $96 million of cash was held by foreign subsidiaries, with potential tax consequences if repatriated; NOW said it intended to permanently reinvest those funds.
- Other comprehensive loss and taxes: Foreign-currency translation loss was $72 million year to date, bringing accumulated other comprehensive loss to $117 million. The nine-month income-tax benefit was $79 million; the effective tax rate was 23.7%.
Material changes versus the prior comparable period
- The downturn in energy activity drove substantial revenue reductions, particularly in the U.S. and Canada. Quarter revenue fell 33.6% in the U.S. and 45.7% in Canada; International revenue rose 8.7%, partly reflecting acquisitions.
- U.S. operating results were especially weak: a $294 million quarterly operating loss, including $252 million of U.S. goodwill impairment. Excluding impairment, management cited lower volumes, pricing pressure and inventory charges. Canada and International remained modestly profitable for the quarter, but at lower margins than a year earlier.
- The company recorded a $255 million estimated goodwill impairment after oil prices, rig activity, forecasts and the company’s market value indicated impairment in two of four reporting units: U.S. Energy and International. The Step 2 measurement was incomplete, and the filing warned that fourth-quarter adjustments could be material.
- NOW completed six acquisitions for aggregate consideration of approximately $431 million in the first nine months. Acquisitions added estimated revenue of about $40 million U.S. and $70 million International in the quarter, and $90 million and $160 million, respectively, year to date. Goodwill and acquired intangible assets recognized were $221 million and $84 million, subject to preliminary purchase accounting.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Management said results remain tied to worldwide rig counts, especially North America, and described visibility on a market recovery as limited. It planned to manage quarter to quarter while pursuing long-term goals and strategic acquisitions.
- Market conditions remained adverse after quarter-end. The filing noted falling rig counts, oil and natural-gas prices, and operator capital-spending expectations, and said NOW expected to reassess goodwill impairment in the quarter ending December 31, 2015; additional impairment was possible.
- Key risks include further energy-market deterioration, pricing and steel-cost changes, acquisition integration and financing, foreign exchange, and goodwill or other asset impairment. The filing reported a reasonably possible loss range of $0–$25 million in the International segment, primarily related to one customer’s receivable, and stated that its best estimate had been accrued. Separately, contingent acquisition consideration had an estimated fair value of $3 million, with payments of up to $6 million tied to profitability milestones through February 2018.
- Management said litigation and other contingencies accrued at September 30 were immaterial and did not expect other ultimate liabilities to materially affect financial position, cash flow or results. It cautioned that environmental and safety regulation could create currently unquantifiable costs.
Important facts for investors to verify
- How the final goodwill impairment measurement and subsequent market deterioration affect fourth-quarter results and carrying values.
- Whether operating cash generation can persist after the substantial working-capital release, and how acquisition spending affects cash and revolver usage.
- Progress in stabilizing sales, margins and bad-debt exposure, especially in North America and the International customer exposure noted in the filing.
- Acquisition purchase-price allocation, integration performance and any milestone-based contingent payments; also note that the Challenger Industries purchase agreement remained subject to closing conditions.
- The effect of foreign-held cash, currency movements and the less comparable pre-spin-off 2014 reporting periods when assessing trends.