DNOW Inc. (NOW Inc.) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing was signed November 4, 2020. DNOW distributes energy and industrial products and provides supply-chain services across the U.S., Canada and international markets.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $326 million | $751 million | $1.300 billion | $2.312 billion |
| Operating profit (loss) | $(21) million | $14 million | $(383) million | $54 million |
| Net income (loss) | $(22) million | $10 million | $(383) million | $42 million |
| Diluted EPS | $(0.20) | $0.09 | $(3.50) | $0.38 |
- Q3 revenue fell 56.6% year over year; nine-month revenue declined 43.8%. Lower drilling, completions and project activity drove declines across all segments.
- Q3 operating margin was approximately (6.4%), versus 1.9% a year earlier. Nine-month operating loss included $320 million in impairment charges; excluding those charges, operating loss was $63 million.
- Cost of products was $264 million in Q3 and $1.053 billion for nine months. Warehousing, selling and administrative expense fell to $83 million and $310 million, respectively, from $136 million and $407 million.
- Non-GAAP EBITDA excluding other costs was $(15) million in Q3 and $(28) million for nine months, compared with $24 million and $82 million in the prior-year periods. The filing cautions this measure is not GAAP and has limitations.
- Operating cash flow was $133 million for nine months, versus $150 million in 2019. Working-capital changes contributed a net $116 million; cash flow also reflected the $383 million net loss, substantially offset by noncash impairment charges.
- Cash and cash equivalents were $325 million at September 30, up from $183 million at year-end 2019. Current assets were $878 million and current liabilities $264 million.
- No revolver borrowings were outstanding; reported availability was approximately $209 million, with 97% excess availability under the credit agreement. The company reported covenant compliance. It also had $7 million of letters of credit under the facility and approximately $10 million of contingent standby letters of credit and surety bonds.
- Total liabilities were $308 million; no funded debt was reported as outstanding. Long-term operating lease liabilities were $29 million.
Material changes and unusual items
- In Q1 2020, DNOW recorded $230 million of goodwill impairment and $90 million of long-lived-asset impairment. Goodwill was reduced to zero across its segments. The charges reflected lower market capitalization and oil-and-gas outlook amid the COVID-19 demand shock and oil-price decline.
- Inventory provisions were $30 million and doubtful-account provisions $8 million for the first nine months. The allowance for doubtful accounts rose to $29 million, including a $6 million adoption adjustment for the expected-credit-loss accounting standard.
- Segment revenue and nine-month operating results were: U.S. $929 million and $(250) million; Canada $161 million and $(60) million; International $210 million and $(73) million. Segment losses included impairment charges of $188 million, $60 million and approximately $72 million, respectively.
- Investing cash flow was positive $19 million, including $25 million of net proceeds from a business sale, partly offset by $7 million of capital expenditures. DNOW sold a U.S. held-for-sale business in January and classified a U.K. lighting business as held-for-sale; that business was sold in October, after quarter-end.
- The company adopted the expected-credit-loss standard on January 1, 2020, recording a $6 million cumulative-effect adjustment to opening accumulated deficit. Accumulated deficit reached $1.164 billion at September 30.
Outlook, commentary and risks
Management provided no numerical earnings or revenue guidance. It said results remain dependent on oil and gas prices, drilling and completion activity, customer spending, and global energy demand. The duration and economic effects of COVID-19, oil supply and demand, and the pace of recovery remained highly uncertain. Management said it was cutting costs, accelerating structural changes, improving productivity and adapting operations to market conditions; further charges could arise as actions evolve.
- Q3 worldwide rig count was down 53.0% year over year, while the U.S. count was down 72.4%. Rig activity continued to be weak despite a sequential Q3 increase in oil and gas prices from Q2.
- Principal disclosed risks include prolonged COVID-19 disruption, depressed or volatile commodity prices and customer demand, further impairment, foreign-exchange movements, steel-price exposure, competition, regulation and worldwide economic activity.
- Management stated that cash, expected operating cash flow and revolver availability should fund operations, working capital and capital needs. This expectation depends on operating performance and continued access to credit.
- Legal claims and regulatory matters are ongoing; management said it could not determine total potential losses but did not expect unaccrued liabilities to materially affect results or financial position. No material change to internal control over financial reporting was reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue, rig activity and customer spending stabilize, and whether cost reductions can restore operating profitability.
- The assumptions behind the $320 million impairment charge and the possibility of further asset or goodwill impairments.
- The sustainability of positive operating cash flow, given its reliance on working-capital releases, and the adequacy and quality of inventory and receivables reserves.
- Actual borrowing-base availability, covenant thresholds and compliance as business conditions change.
- Post-quarter sale details and final proceeds for the U.K. lighting business, including any working-capital or purchase-price adjustments.