DNOW Inc. (NOW): Q1 2021 Form 10-Q Summary
Business context and reporting period
NOW Inc., which operates primarily under the DistributionNOW and DNOW brands, distributes energy and industrial products and provides supply-chain services and digital procurement solutions. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. The company reports U.S., Canada and International segments.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $361 million | $604 million |
| Gross profit and gross margin | $75 million; 20.8% | $117 million; 19.4% |
| Operating loss | $8 million | $333 million |
| Net loss | $10 million | $331 million |
| Loss per share, diluted | $0.09 | $3.03 |
| Operating cash flow | $(4) million | $6 million |
| Investing cash flow | $(7) million | $22 million provided |
Revenue fell 40.2%. Cost of products was $286 million, and warehousing, selling and administrative expense was $79 million. Impairment charges were $4 million, compared with $320 million in Q1 2020. Adjusted EBITDA, a non-GAAP measure excluding other costs, was $1 million (0.3% of revenue), versus $2 million (0.3%).
At March 31, cash and cash equivalents were $374 million, down from $387 million at year-end 2020. Current assets were $882 million and current liabilities $298 million. The company reported no revolver borrowings and approximately $224 million available under its credit facility, with 97% excess availability as defined by the facility; it was in compliance with covenants. Long-term operating lease liabilities were $22 million. Q1 cash declined $13 million overall; working-capital growth, particularly a $45 million increase in receivables, contributed to operating cash use.
Material changes and segment results
All three segments recorded lower revenue year over year, while operating results improved substantially, largely because the prior-year period included significant impairments and because operating expenses were lower. U.S. revenue was $252 million, down 42.9%, with a $13 million operating loss. Canada revenue was $58 million, down 25.6%, with $4 million operating profit. International revenue was $51 million, down 40.0%, with $1 million operating profit. Management attributed weaker sales to lower U.S. drilling and completion activity, Canadian rig count and project activity, and softer international project activity.
During Q1, the company completed a U.S. acquisition for an estimated $10 million, comprising $6 million cash (net of cash acquired) and $4 million contingent consideration. It recorded $7 million of goodwill and $2 million of intangible assets; valuations were preliminary. After quarter-end, it closed the Flex Flow acquisition for an initial $90 million cash payment plus contingent consideration based on profitability thresholds.
Outlook, risks and unusual items
No quantified earnings or revenue guidance was provided. Management said results remain dependent on commodity prices, global drilling and completion activity, customer spending, energy demand and storage levels. It cited continuing uncertainty about COVID-19’s duration and economic effects, and plans to keep optimizing costs, operations and digital channels. Management also identified energy-transition investment as an opportunity to expand products, services and customer relationships.
Key risks identified include energy-market volatility and customer demand, COVID-19 disruption, steel-price changes, foreign-exchange movements, acquisition integration and financing, regulation, and potential impairment charges. The company recorded a $4 million impairment in Q1 2021, including charges related to held-for-sale assets and operating right-of-use assets. It also disclosed legal and regulatory matters and approximately $12 million of standby letters of credit and surety bonds; management did not expect these contingencies to materially affect the company. A board member who was a minority shareholder and executive of GR Energy Services recused himself from Flex Flow acquisition discussions and negotiations.
Important facts for investors to verify
- Whether revenue and margins recover as drilling, project activity and customer spending evolve.
- Whether positive adjusted EBITDA translates into sustained GAAP profitability and operating cash generation.
- The cash and contingent-consideration impact of the Flex Flow acquisition, and the performance of the acquired business.
- Revolver borrowing-base availability, covenant headroom and liquidity after acquisition spending.
- Potential additional restructuring, impairment, legal, regulatory or environmental costs; the filing does not quantify possible losses for certain contingencies.