DNOW Inc. annual report, FY2019

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DNOW Inc. (NYSE: DNOW) — 2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. NOW Inc. is a global distributor of energy and industrial products and supply-chain services, operating through U.S., Canada and International segments. The company filed the report on February 19, 2020.

Financial results and liquidity

  • FY 2019 revenue: $2.951 billion, down $176 million, or 5.6%, from 2018. The U.S. generated $2.240 billion, Canada $319 million and International $392 million.
  • FY profit and margins: Operating loss was $83 million, versus operating profit of $73 million in 2018; operating margin was negative 2.8%, versus positive 2.3%. Net loss was $97 million, or $0.89 per diluted share, compared with net income of $52 million, or $0.47 per diluted share. EBITDA excluding other costs, a non-GAAP measure, was $87 million (2.9% of revenue), compared with $109 million (3.5%).
  • Fourth quarter: Revenue was $639 million, down 16.4% from $764 million in Q4 2018. Operating loss was $137 million (negative 21.4% margin), versus operating profit of $22 million (2.9% margin). Net loss was $139 million, or $1.27 per diluted share, compared with net income of $16 million, or $0.14 per diluted share.
  • Cash flow: Operating activities provided $224 million in 2019, versus $73 million in 2018. Investing activities used $22 million; financing activities used $138 million, primarily reflecting net revolver repayments. Cash increased to $183 million from $116 million.
  • Liquidity and debt: Working capital was $671 million, down from $778 million. The company had no revolver borrowings at year-end and reported $413 million of availability under its credit facility; it was in compliance with covenants. Long-term debt was zero, versus $132 million in 2018. Year-end liabilities included $34 million of long-term operating lease liabilities; total operating and finance lease liabilities were $72 million.
  • Other balance-sheet measures: Total assets were $1.591 billion, including $245 million of goodwill and $90 million of net intangibles. Stockholders’ equity was $1.144 billion.

Material changes versus prior periods

  • Revenue fell 5.6% year over year, principally reflecting lower U.S. drilling and completions activity; Canadian revenue also declined with lower rig activity and unfavorable currency effects. International revenue was down slightly, with foreign exchange a factor.
  • Operating results deteriorated across all segments: U.S. operating loss was $6 million versus $57 million profit; Canada loss was $19 million versus $14 million profit; International loss was $58 million versus $2 million profit.
  • The company recorded $128 million of impairment charges in 2019 and none in 2018: $81 million of goodwill impairments ($54 million International and $27 million Canada), $38 million for acquired trade names, and $9 million for assets held for sale. Lower forecasts for rig activity and customer spending contributed to goodwill impairments.
  • Warehousing, selling and administrative expenses declined $16 million to $541 million, attributed mainly to lower bad-debt charges and improved operating efficiency. Cost of products declined $132 million to $2.365 billion, primarily alongside lower revenue.
  • Operating cash flow benefited from reductions in receivables and inventory, partially offset by lower accounts payable and accrued liabilities. Receivables and inventory were $370 million and $465 million at year-end, respectively, compared with $482 million and $602 million in 2018.

Outlook, risks and unusual items

  • Management expected lower North American activity in 2020 as drilling and completion activity declined. It planned to adjust operations to market conditions and continue operational optimization; no quantified revenue or earnings guidance was provided.
  • Management identified oil and gas prices, customer spending, rig activity and midstream infrastructure constraints as important business drivers. The filing also cited the coronavirus outbreak in early 2020 as a potential source of energy-market uncertainty.
  • In January 2020, the company sold a U.S. cutting-tools business for $28 million, subject to customary post-closing adjustments. It had classified the business as held for sale and recorded a $9 million impairment in 2019.
  • Other notable items included $7 million of severance and transaction costs in 2019, approximately half related to the CEO’s departure. The filing was signed by the Interim CEO.
  • Management cited risks from volatile commodity prices and customer spending, competition and margin pressure, foreign exchange, tariffs and steel prices, customer and supplier credit or concentration, cybersecurity and system disruptions, international operations, regulation, and possible further goodwill impairment. The company reported ordinary-course legal matters and stated it did not expect their ultimate liability to materially affect results or financial position.
  • The company adopted lease accounting guidance in 2019, recognizing $66 million of right-of-use assets and $67 million of related lease liabilities at adoption. It expected adoption of the credit-loss standard in 2020 to increase the allowance for doubtful accounts by less than $10 million, subject to change, without a material income-statement or cash-flow effect.
  • No dividends were declared in 2017–2019. Management said it intended to retain future earnings for the business. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management reported no material control weaknesses.

Important facts for investors to verify

  • Whether North American drilling and customer-spending weakness continued in 2020, and how that affected revenue and segment profitability.
  • Whether further goodwill or asset impairments were required, particularly for the Canada and International reporting units; estimates depend on forecast cash flows and discount rates.
  • The final sale proceeds and working-capital adjustments for the cutting-tools business, compared with the $28 million stated sale price.
  • Whether operating cash generation remained sustainable after the 2019 working-capital reductions, and whether revolver availability and covenant compliance were maintained.
  • The realized impact of currency movements, steel prices, tariffs and the expected credit-loss allowance on margins, inventory and receivables.