Business context and reporting period
NOW Inc. (NYSE: DNOW) distributes energy and industrial products and provides supply-chain and digital procurement solutions. This Form 10-Q covers the quarter and six months ended June 30, 2021. Amounts are in millions of dollars except per-share data and percentages.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $400 | $370 | $761 | $974 |
| Gross profit, approximate | $85 | $68 | $160 | $185 |
| Gross margin, approximate | 21.3% | 18.4% | 21.0% | 19.0% |
| Operating profit (loss) | $0 | $(29) | $(8) | $(362) |
| Net loss | $(2) | $(30) | $(12) | $(361) |
| Loss per share, diluted | $(0.02) | $(0.27) | $(0.11) | $(3.30) |
| EBITDA excluding other costs (non-GAAP) | $6 | $(15) | $7 | $(13) |
Q2 operating results were approximately breakeven; the filing reports operating profit as nil. Gross profit and margins above are calculated from reported revenue less cost of products and are approximate due to rounded figures. Warehousing, selling and administrative expense was $85 million in Q2 and $164 million for the half-year, versus $97 million and $227 million in the comparable 2020 periods.
For the six months, operating cash flow was $4 million, down from $74 million. Investing cash outflow was $98 million, including $96 million net cash paid for acquisitions; financing cash outflow was $1 million. Cash fell to $293 million from $387 million at year-end. At June 30, current assets were $831 million and current liabilities $341 million; total assets were $1.07 billion and stockholders’ equity $696 million.
The company had no revolver borrowings and reported approximately $235 million of availability under its $750 million secured revolving credit facility, with 98% excess availability; it was in covenant compliance. It also reported $19 million of long-term operating lease liabilities and $16 million of current operating lease liabilities. No material funded debt was reported.
Material changes versus prior periods
- Q2 revenue rose 8.1% year over year, while six-month revenue declined 21.9%. Q2 net loss improved by $28 million and six-month net loss by $349 million.
- The six-month comparison was substantially affected by $320 million of impairment charges in 2020, versus $4 million in 2021. Lower operating expenses and inventory charges also supported improvement.
- Q2 U.S. and Canada revenue increased 13.8% and 24.4%, respectively; International revenue declined 23.2%. For the six months, revenue fell in all three segments, with International down 32.5%.
- Working-capital investment, including a $63 million increase in receivables, contributed to lower operating cash flow. The company completed two acquisitions for approximately $119 million of total estimated consideration, including $96 million cash and $23 million estimated contingent consideration.
Outlook, risks and unusual items
Management provided no quantified earnings or revenue guidance. It said results remain dependent on oil and gas prices, drilling and completions activity, customer spending and demand, and acknowledged continued uncertainty about COVID-19 and its economic and energy-market effects. Management plans to continue cost optimization, structural changes and digital-channel development, and views energy-transition investment as an opportunity to expand products, services and customer relationships.
Key risks cited include commodity and energy-market volatility, customer demand, COVID-19 disruption, acquisition integration, competition, regulation, borrowing costs, foreign-exchange movements and possible asset impairments. Steel-price volatility can affect product pricing and inventory exposure. Management noted that future operational responses may result in charges.
The Flex Flow acquisition closed April 1, 2021 and involved a company director who was a minority shareholder, president and CEO of the seller; he recused himself from related board discussions and negotiations. Acquisition purchase-price allocations, including $66 million of preliminary goodwill and $11 million of acquired intangibles, remain subject to change. Contingent consideration may be remeasured and could materially affect results. The company also reported legal and regulatory matters and approximately $10 million of standby letters of credit and surety bonds; it did not believe payment was probable or that the matters would materially affect its financial position. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and operating performance continue to recover across segments, especially International, and whether cost reductions are sustainable.
- Whether operating cash flow improves as receivables and other working-capital needs evolve.
- Acquisition integration, final purchase-price allocation and the amount and timing of contingent consideration payments.
- Revolver availability, borrowing-base terms and covenant headroom if business conditions weaken.
- Potential effects of commodity and steel-price changes, COVID-19, foreign exchange, legal matters and asset impairment risks.