DNOW Inc. (NOW) — Q3 2017 Form 10-Q
Business context and reporting period
NOW is a global distributor of energy and industrial products and supply-chain services, operating through U.S., Canada and International segments. This unaudited filing covers the three and nine months ended September 30, 2017; amounts below are in millions except per-share data.
Key financial results
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $697 | $520 | $1,979 | $1,569 |
| Gross profit (revenue less cost of products) | $135 | $87 | $373 | $257 |
| Gross margin | 19.4% | 16.7% | 18.8% | 16.4% |
| Operating loss | $(6) | $(53) | $(41) | $(175) |
| Net loss | $(9) | $(56) | $(49) | $(163) |
| Loss per share, diluted | $(0.08) | $(0.53) | $(0.45) | $(1.52) |
| EBITDA excluding other costs (non-GAAP) | $5 | $(40) | $(6) | $(133) |
- Revenue increased 34.0% in Q3 and 26.1% for the first nine months year over year. Management attributed improvement chiefly to stronger North American activity, higher volume and, for U.S. year-to-date results, about $54 million in incremental revenue from an acquisition completed in 2016.
- Warehousing, selling and administrative expense was $141 million in Q3 versus $140 million and $414 million for nine months versus $432 million. Product costs rose with sales, while lower inventory charges supported improvement.
- Operating cash flow was $(107) million for nine months, versus $186 million generated in 2016. Increased receivables and inventory used $106 million and $81 million, respectively, partly offset by a $70 million increase in accounts payable and accrued liabilities. Investing cash flow was $(3) million; financing cash flow was $97 million.
- At September 30, cash was $99 million (down from $106 million at year-end 2016); current assets were $1,149 million and current liabilities $422 million. Long-term debt was $163 million, up from $65 million at year-end. Stockholders’ equity was $1,187 million.
- The company had $441 million of availability under its revolving credit facility, subject to restrictions, and reported compliance with all covenants. The $750 million facility expires April 18, 2019. Approximately $83 million of cash was held by foreign subsidiaries; management said it intended to reinvest it abroad and had no current repatriation plans.
Material changes and segment performance
- U.S. revenue rose 36.0% in Q3 and 33.8% for nine months; operating losses narrowed to $10 million and $52 million, respectively. Higher volume and improved product margins contributed.
- Canada revenue rose 43.3% in Q3 and 46.5% for nine months. The segment earned operating profit of $4 million and $9 million, compared with losses in both 2016 periods, helped by increased volume and lower inventory charges.
- International revenue increased 17.3% in Q3 but declined 11.3% for nine months. Q3 benefited from resumed European electrical projects and Middle East customer growth; the year-to-date decline reflected prior-year projects that did not recur and a softer offshore rig market. Segment operating results improved to break-even in Q3 and $2 million profit for nine months.
- Worldwide average rig count increased 36.8% year over year in Q3; U.S. and Canadian averages rose 97.3% and 71.9%. International rig count was up 1.2%.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said results remain tied to global rig counts and drilling and completion spending, particularly in North America. It plans to manage costs and capital in weak markets and invest where activity is expanding.
- Management believed cash, expected operating cash generation and revolver availability would be sufficient for operations, working capital and capital needs. However, nine-month operating cash flow was negative, mainly because of working-capital investment.
- Risks cited include oil and gas prices and activity, customer demand, steel prices, foreign exchange, interest rates and borrowing costs, competition, acquisition integration, regulation, and possible goodwill or intangible impairment. A hypothetical 10% currency movement was estimated to change nine-month net loss by less than $1 million; a one-percentage-point interest-rate change would change quarterly cash interest expense by less than $1 million.
- For reasonably possible losses, the company estimated a range of zero to $15 million, primarily related to one International-segment customer’s receivable, and said it accrued its best estimate. It stated that other claims and legal matters were not expected to materially affect financial position, cash flow or results, while noting estimates could change.
- Foreign-currency translation generated $38 million of other comprehensive income for nine months. The company had $26 million notional of foreign-exchange forwards at September 30; these were economic hedges, not designated accounting hedges.
- Management expected adoption of the revenue standard in Q1 2018 to have no material cumulative impact based on its preliminary assessment. The lease standard is expected to increase reported assets and liabilities when adopted.
Most important facts for investors to verify
- Whether improved North American activity and margins can sustain operating improvement, and whether International revenue weakness persists.
- Whether receivables and inventory convert to cash; working-capital movements drove the shift to negative operating cash flow.
- Revolver availability, covenant compliance and the company’s ability to manage debt as borrowings increased.
- Credit quality and ultimate recovery on the International customer receivable underlying the estimated $0–$15 million loss range.
- Future tax effects of foreign cash, foreign exchange and accounting-standard adoption; results for interim periods are not necessarily indicative of full-year results.