DNOW Inc. (NOW Inc.) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. NOW distributes energy and industrial products and provides supply-chain services through U.S., Canadian and international operations. The 2014 comparison reflects combined pre-spin-off results; NOW became independent in May 2014, so standalone costs and financing may affect comparability.
Financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $863 million | $1,077 million |
| Operating income (loss) | $(8) million | $62 million |
| Operating margin | (0.9%) | 5.8% |
| Net income (loss) | $(10) million | $41 million |
| Diluted EPS | $(0.09) | $0.38 |
| Operating cash flow | $(13) million | $3 million |
| Investing cash flow | $(186) million | $(6) million |
Revenue fell 19.9% year over year. Cost of products was $708 million, down 18.5%; warehousing, selling and administrative expense rose to $163 million from $146 million, mainly reflecting costs of operating as a standalone public company. Management’s non-GAAP EBITDA excluding other costs was $4 million (0.5% of revenue), versus $66 million (6.1%) a year earlier; Q1 2015 included $9 million of other costs, primarily acquisition-related items and severance.
At March 31, cash was $122 million, down from $195 million at year-end; current assets were $1.907 billion and current liabilities $526 million. Long-term debt was $135 million, borrowed under a $750 million revolving facility, with $2 million of letters of credit outstanding. The company reported covenant compliance. Operating cash use reflected a $139 million decrease in accounts payable and accrued liabilities, partly offset by cash releases from receivables, inventory and prepaid assets. Capital expenditures were $3 million.
Segment results and material changes
- United States: Revenue of $601 million, down 14.6%; operating loss of $12 million versus $30 million operating profit. Management cited lower rig activity and standalone-company costs.
- Canada: Revenue of $116 million, down 39.3%; operating profit of $3 million versus $16 million. Lower rig activity was partly offset by cost reductions.
- International: Revenue of $146 million, down 19.8%; operating profit of $1 million versus $16 million. Lower revenue, including nonrecurring prior-year projects, was partly offset by acquisition contributions.
NOW completed three acquisitions for aggregate consideration of approximately $214 million; cash paid net of acquired cash was $183 million. Preliminary purchase accounting recorded $92 million of goodwill and $52 million of intangible assets. Acquisitions contributed $30 million of incremental international revenue, according to management. Total assets were $2.609 billion versus $2.596 billion at year-end; goodwill increased to $429 million and intangibles to $123 million.
Foreign currency translation loss was $39 million, contributing to comprehensive loss of $49 million. The company reported $4 million of other expense, primarily related to exchange-rate changes, and a 19.0% effective tax rate versus 33.8% in Q1 2014.
Outlook, risks and contingencies
Management gave no specific numeric earnings or revenue guidance. It described 2015 as uncertain, noted limited visibility on market recovery, and said it would manage quarter to quarter while pursuing strategic acquisitions and longer-term objectives. Results depend on worldwide rig counts, oil and gas activity and prices, customer demand, steel prices, and broader economic and political conditions. Management reported significant rig-count declines and continued weakness in commodity prices; U.S. rig count at April 24, 2015 was 932, below the Q1 average of 1,380.
- Management estimated reasonably possible losses of zero to $22 million in the International segment, primarily related to receivables from one customer; the ultimate outcome may differ materially.
- Acquisition contingent consideration may reach $6 million through February 2018; $4 million was recorded as a long-term liability at quarter-end.
- Approximately $83 million of cash was held by foreign subsidiaries and could incur additional taxes if repatriated; management said it intended to permanently reinvest it and had no current repatriation plans.
- Other stated risks include acquisition integration, potential goodwill or intangible impairments, foreign-exchange exposure, borrowing costs, regulation and environmental requirements. Management said recorded legal contingency accruals were immaterial and that unaccrued matters were not expected to materially affect results, while noting loss estimates are uncertain.
Key facts for investors to verify
- Whether demand and rig-count trends stabilize, particularly in North America, and how they affect revenue and margins.
- Whether cost reductions and standalone operating changes can offset continued revenue pressure.
- Acquisition integration, final purchase-price allocations, acquired-business performance and any contingent consideration changes.
- Collectability of the international customer receivable and the potential loss range of up to $22 million.
- Liquidity, revolving-credit borrowings, covenant compliance and the availability of cash held overseas.
- Effects of currency movements, including the $39 million translation loss, and any impairment or other unusual charges.