DNOW Inc. (NOW) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial figures are in millions except per-share data. NOW distributes energy and industrial products and provides supply-chain services across the U.S., Canada and international markets.
Financial performance
- Q3 revenue: $439, up 34.7% from $326 in Q3 2020. Net income was $5, or $0.05 per diluted share, versus a net loss of $22, or $0.20 per share.
- Nine-month revenue: $1,200, down 7.7% from $1,300. Net loss was $7, or $0.06 per share, compared with a $383 loss, or $3.50 per share, in 2020.
- Operating results: Q3 operating profit was $10 versus a $21 loss; nine-month operating profit was $2 versus a $383 loss. Approximate operating margins were 2.3% and 0.2%, respectively, compared with negative 6.4% and 29.5% in the comparable 2020 periods.
- Product costs and gross margin: Cost of products was $343 in Q3 and $944 for nine months. Approximate gross margins were 21.9% for Q3 and 21.3% for nine months, compared with 19.0% in each corresponding 2020 period. Warehousing, selling and administrative expense was $86 in Q3 and $250 for nine months.
- Cash flow: Operating activities provided $28 for the first nine months, versus $133 in 2020. Investing activities used $99, including $96 net cash for acquisitions; capital expenditures were $4. Cash declined $75 during the period to $312.
- Liquidity and debt: Current assets were $874 and current liabilities $375 at September 30. Cash was $312. There were no revolver borrowings, and approximately $248 of availability remained; the company reported compliance with its covenants. Long-term operating lease liabilities were $17. The filing does not report material outstanding derivative instruments.
- Non-GAAP measure: EBITDA excluding other costs was $15, or 3.4% of revenue, in Q3, versus negative $15, or negative 4.6%, in Q3 2020. For nine months it was $22, or 1.8%, versus negative $28, or negative 2.2%.
Material changes and business developments
- Q3 revenue increased across all three segments: U.S. $312 (up 36.8%), Canada $68 (up 61.9%) and International $59 (up 5.4%). Nine-month revenue declined in the U.S. to $860 and International to $163, while Canada rose to $177.
- All segments reported Q3 operating profit: U.S. $4, Canada $5 and International $1. Nine-month segment profits were Canada $11 and International $3; the U.S. recorded a $12 loss.
- NOW completed two acquisitions for approximately $119 total consideration, including $96 cash and an estimated $23 contingent consideration. The acquisitions expanded U.S. pumping-system rental, sales and service offerings and engineering and construction services. Preliminary purchase accounting recorded $66 goodwill and $11 intangible assets.
- The Flex Flow acquisition involved GR Energy Services, whose minority shareholder, president and CEO was a former NOW director. The filing says he recused himself from related board discussions and negotiations and resigned from the board in August 2021 for personal reasons, not due to disagreement with the company.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Management said results remain dependent on commodity prices, drilling and completion activity, energy spending, demand and production trends. It intends to continue optimizing operations, pursuing strategic goals and adapting costs to market activity.
- Management cited uncertainty about COVID-19 and its economic and energy-demand effects. It also described energy-transition investment as an opportunity to serve existing customers and broaden its offering.
- Q3 industry indicators improved: worldwide rig count averaged 1,421, up 13.0% from Q2; WTI averaged $70.62 per barrel and natural gas $4.36 per MMBtu. Hot-rolled coil averaged $1,817 per short ton, up 24.4% from Q2, presenting potential product-pricing and inventory risks.
- Other principal risks include oil and gas market volatility, customer demand, acquisition integration, competition, regulatory changes, foreign exchange and possible future impairment or restructuring charges. The company reported approximately $11 of standby letters of credit and surety bonds; it did not consider payment probable. It stated that pending claims and legal matters were not expected to materially affect financial position, cash flow or results, while noting ultimate losses cannot be determined.
Key facts for investors to verify
- Whether the Q3 revenue and margin recovery can continue, given the nine-month revenue decline and sensitivity to energy-market activity.
- Whether working-capital needs and acquisition spending affect cash generation; operating cash flow was $28 versus $133 a year earlier.
- How acquired businesses perform and whether contingent consideration, including amounts dependent on profitability, changes materially.
- Whether higher steel prices, foreign-exchange movements, COVID-related disruption or other disclosed risks alter costs, demand or outlook.
- Whether the reported $248 revolver availability and covenant compliance remain intact as business conditions evolve.