DNOW Inc. (NOW Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. DNOW distributes energy and industrial products and provides supply-chain services across the U.S., Canada and international markets. Results are unaudited.
Financial results and liquidity
- Revenue: $604 million, down $181 million (23.1%) from $785 million in Q1 2019. Cost of products was $487 million versus $627 million; gross profit was $117 million, or approximately 19.4% of revenue, versus $158 million, or 20.1%.
- Profitability: Operating loss was $333 million versus operating profit of $23 million; net loss was $331 million versus net income of $18 million. Diluted loss per share was $3.03 versus earnings per share of $0.16. The Q1 2020 results included $320 million of impairment charges. Excluding specified other costs, the company reported non-GAAP EBITDA of $2 million (0.3% margin), versus $31 million (3.9%).
- Segments: U.S. revenue was $441 million (down 26.5%), Canada $78 million (down 9.3%), and International $85 million (down 14.1%). Each segment reported an operating loss, primarily reflecting impairments and, in some markets, weaker activity.
- Cash flow: Operating cash flow was positive $6 million, versus negative $20 million. Investing cash flow was positive $22 million, including $25 million in proceeds from a business sale and $3 million of capital expenditures. Financing cash outflow was $2 million. Cash rose to $202 million from $183 million.
- Liquidity and debt: The company reported no borrowings under its revolving credit facility, $392 million of facility availability and 98% excess availability; it was in compliance with covenants. Current assets were $1.020 billion and current liabilities $385 million. Total liabilities were $428 million and stockholders’ equity $768 million.
Material changes and unusual items
- The company recorded $230 million of goodwill impairment and $90 million of long-lived asset impairments, including $84 million of intangible assets, $4 million of property and equipment, and $2 million of operating right-of-use assets. The charges followed a significant market capitalization decline amid lower oil prices, COVID-19 demand impacts and uncertainty about customers’ plans.
- Revenue fell across all segments. Management cited reduced U.S. drilling and completions activity, lower Canadian project activity, and softer international activity and unfavorable foreign exchange effects.
- On January 31, 2020, DNOW sold a U.S. business serving aerospace and automotive customers; it received $25 million net cash proceeds and recorded a loss of less than $1 million.
- Adoption of the expected-credit-loss standard resulted in a $6 million after-tax cumulative adjustment to opening accumulated deficit. The allowance for doubtful accounts was $26 million at quarter-end.
- Foreign currency translation reduced other comprehensive income by $39 million.
Outlook, commentary and risks
- Management provided no quantitative earnings or revenue guidance. It said results remain dependent on commodity prices, drilling and completion activity, and customer spending; the outlook was highly uncertain due to COVID-19 and oil supply-demand conditions.
- Management described cost reductions, structural changes and technology-enabled process improvements as responses to lower activity, and said it would scale operations to market conditions. It expected a severance charge in Q2 2020, but could not estimate the amount; further charges, including inventory or other asset charges, were possible.
- The filing reported steep deterioration in market indicators: U.S. rig count averaged 785 in Q1 and was 465 on April 24; WTI averaged $45.76 per barrel in Q1 and was $15.99 on April 24. Management warned that prolonged low commodity prices and pandemic-related disruption could materially adversely affect operations, financial condition and cash flows.
- Other disclosed risks include supply-chain disruption, workforce availability, foreign-exchange exposure, steel-price sensitivity, legal and regulatory matters, and possible future impairment. The company said existing legal matters were not expected to materially affect its financial position, cash flow or results, while noting that ultimate liabilities could not be determined.
Key facts for investors to verify
- Whether post-quarter oil prices, rig counts and customer spending led to further revenue declines or asset impairments.
- How much of the $320 million impairment charge is noncash and whether future asset or inventory write-downs are likely.
- Whether cost actions, including anticipated severance, reduce expenses sufficiently as activity contracts.
- Availability under the borrowing base, covenant headroom and cash needs if operating cash flow weakens.
- Whether the $25 million divestiture proceeds and reported liquidity remain adequate under prolonged adverse market conditions.