DNOW Inc. — 2015 Form 10-K Summary
Business context and reporting period
NOW Inc. (NYSE: DNOW) is a global distributor of energy and industrial products and supply-chain services, operating through U.S., Canada and International reportable segments. This annual report covers the year ended December 31, 2015; fourth-quarter figures are also summarized. The 2014 comparison includes pre-spin-off combined results and post-spin-off consolidated results, so it is not fully comparable as a stand-alone-company period.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $3.010 billion | $4.105 billion |
| Operating profit (loss) | $(510) million; (16.9)% margin | $181 million; 4.4% margin |
| Net income (loss) | $(502) million | $116 million |
| Diluted earnings (loss) per share | $(4.68) | $1.06 |
| Operating cash flow | $324 million | $108 million |
| Cash and cash equivalents, year-end | $90 million | $195 million |
| Working capital, year-end | $985 million | $1.427 billion |
| Long-term debt, year-end | $108 million | None reported |
- Cost of products was $2.508 billion. Gross profit was approximately $502 million, or 16.7% of revenue, versus approximately $819 million, or 20.0%, in 2014 (calculated from reported revenue and cost of products).
- Non-GAAP EBITDA excluding other costs was a loss of $65 million (2.2% of revenue), versus $199 million (4.8%) in 2014. The 2015 measure excludes $413 million of other costs, primarily the $393 million goodwill impairment; the company cautions that this measure is not GAAP.
- Cash flow from operations included a $300 million net cash benefit from changes in operating assets and liabilities, including lower receivables and inventory, partly offset by reduced payables. Investing used $523 million, including $515 million net of cash acquired for acquisitions. Financing provided $106 million, primarily net revolving-credit-facility borrowings.
- At December 31, 2015, the company reported $985 million of working capital and had $108 million drawn on its $750 million revolving facility. Approximately $64 million of cash was held by foreign subsidiaries and was considered permanently reinvested. The company reported compliance with facility covenants as of year-end based on the subsequent amendment.
Material changes versus the prior comparable period
- Revenue declined 26.7% year over year. U.S. revenue fell 27.4%, Canada 43.5%, and International 5.9%. U.S. and Canadian declines reflected sharply lower activity; currency translation also reduced Canadian and International revenue. Acquisitions partly offset the International decline.
- Worldwide average rig count fell 34.7% in 2015; U.S. rig count fell 47.5%. Average WTI crude prices declined 47.8%, natural gas prices 40.0%, and hot-rolled coil steel prices 29.1% versus 2014.
- The company recorded $393 million of goodwill impairment in 2015, including $138 million in the fourth quarter. The remaining goodwill balance was $205 million, compared with $346 million at year-end 2014. The company warned further adverse market conditions could cause additional impairment.
- Eight acquisitions were completed for approximately $544 million in cash consideration, or $515 million net of cash acquired. Acquired businesses contributed approximately $341 million of revenue and a $171 million net loss in 2015, including acquisition-related accounting and operating effects.
- Year-end receivables declined to $485 million from $851 million and inventory to $693 million from $949 million. The allowance for doubtful accounts increased to $38 million from $19 million; inventory reserves rose to $44 million from $39 million.
Fourth-quarter results
Fourth-quarter 2015 revenue was $644 million, down 36.0% from $1.006 billion in fourth-quarter 2014. The company reported an operating loss of $184 million, versus operating profit of $26 million, and a net loss of $249 million, versus net income of $16 million. The quarter included $138 million of goodwill impairment. Diluted loss per share was $2.33.
Outlook, risks and unusual items
- Management described 2016 as uncertain, citing weak oil prices, falling rig counts, cost reductions by energy customers and elevated political risk. It provided no specific revenue or earnings guidance. It planned to control costs and working capital, manage operations to market conditions, and continue pursuing strategic acquisitions.
- Expected 2016 capital expenditures were approximately $10 million, primarily for equipment used in ongoing operations. Management said cash, expected operating cash flow and revolving-facility availability should fund operations and anticipated needs.
- On January 20, 2016, after year-end, the company amended its credit facility: it suspended the minimum interest-coverage covenant until elected otherwise, added a minimum asset-coverage covenant, reduced the maximum capitalization ratio from 50% to 45%, and increased borrowing and commitment-fee margins. It also pledged substantially all U.S. assets and approximately 65% of first-tier foreign-subsidiary equity. Borrowings above 75% of commitments are subject to an additional fixed-charge-ratio condition.
- The U.S. valuation allowance against deferred tax assets increased by $129 million, reflecting uncertainty about realization following recent U.S. losses. The 2015 effective tax rate was 3.0%, affected by nondeductible goodwill impairment and the valuation allowance.
- Management estimated reasonably possible losses for certain matters at between zero and $25 million, primarily related to one International-segment customer receivable; the company stated that it accrued its best estimate. Ordinary-course legal matters were not expected by management to have a material effect. Environmental compliance costs historically had not been material.
- Foreign-currency translation losses were $89 million in 2015. The company identified energy spending, customer credit, steel prices, competition, acquisition integration, cybersecurity and international regulatory and political conditions as risks.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and no identified material weaknesses.
Important facts for investors to verify
- Goodwill impairment assumptions, the remaining $205 million goodwill balance and sensitivity to continued market deterioration.
- Collectability of receivables, especially the International customer exposure, and adequacy of the increased doubtful-account and inventory reserves.
- Liquidity and covenant headroom under the amended secured credit facility, including the consequences of pledged assets and higher borrowing costs.
- Whether operating cash flow remains sustainable as working-capital reductions unwind or further sales declines affect collections and purchasing.
- Acquisition integration and profitability, given acquired businesses’ reported $171 million net loss and the substantial goodwill and intangible assets recorded.
- Potential tax consequences of foreign cash and approximately $180 million of undistributed foreign earnings if repatriation plans change.