NOW Inc. (NYSE: DNOW) — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 17, 2021. NOW Inc. is a global distributor of energy and industrial products and supply-chain services, operating through U.S., Canada and International segments.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $1.619 billion | $2.951 billion |
| Operating income (loss) | $(420) million | $(83) million |
| Net income (loss) | $(427) million | $(97) million |
| Diluted loss per share | $(3.91) | $(0.89) |
| Cash provided by operating activities | $189 million | $224 million |
| Cash and cash equivalents at year-end | $387 million | $183 million |
Revenue fell 45.1% year over year. Cost of products was $1.327 billion, implying gross profit of approximately $292 million and a gross margin of about 18.0%, versus approximately $586 million and 19.9% in 2019. Operating margin was approximately (25.9)%, compared with (2.8)% in 2019. EBITDA excluding other costs, a company-defined non-GAAP measure, was $(57) million, or (3.5)% of revenue, versus $87 million, or 2.9%, in 2019.
2020 operating cash flow included a $170 million net benefit from working-capital changes, including lower receivables and inventory. Capital expenditures were $8 million. Investing activities provided $22 million, including $26 million in divestiture proceeds; financing activities used $8 million.
Liquidity, debt and balance sheet
At year-end, the company reported $387 million in cash, no borrowings under its revolving credit facility and approximately $197 million of facility availability. It stated that it complied with all covenants. The $750 million facility is subject to a borrowing base and restrictions, including a fixed-charge coverage test if availability falls below specified thresholds. Lease liabilities totaled $53 million, including $11 million classified as finance lease liabilities. Total assets were $1.008 billion and stockholders’ equity was $699 million.
Receivables were $198 million and inventories were $262 million, both down substantially from 2019. The allowance for doubtful accounts was $28 million, or 12.4% of gross receivables, versus $16 million, or 4.1%, in 2019. Inventory reserves were $39 million, or 13.0% of gross inventory, versus $26 million, or 5.3%.
Material changes and unusual items
- Demand weakened sharply amid COVID-19, lower oil and gas prices, and reduced customer activity. U.S. rig counts averaged 436 in 2020, down 53.8% from 2019; worldwide counts fell 37.9%.
- Revenue declined in every segment: U.S. to $1.153 billion (down 48.5%), Canada to $209 million (down 34.5%), and International to $257 million (down 34.4%).
- Impairment charges rose to $321 million from $128 million. They included $230 million of goodwill impairment, $84 million of intangible-asset impairment, $6 million of other long-lived-asset impairment and $1 million related to divestitures. No goodwill remained at year-end.
- Warehousing, selling and administrative expenses decreased $150 million to $391 million, primarily from operating efficiencies and workforce reductions. Inventory charges were $54 million, reflecting discontinued product lines and lower market demand.
- The company recorded a $3 million settlement charge related to de-risking its U.K. defined-benefit pension plans. Its effective tax rate was 0.6%; a valuation allowance was recorded against deferred tax assets because the company had a three-year cumulative loss position.
Fourth-quarter performance
For Q4 2020, revenue was $319 million, down 50.1% from Q4 2019. Net loss was $44 million, or $(0.40) per diluted share, an improvement of $95 million in net loss year over year. Operating loss was $37 million, compared with $137 million in Q4 2019.
Outlook, risks and contingencies
Management provided no specific revenue or earnings guidance. It expected 2021 capital expenditures of approximately $10 million. Management said results would remain tied to commodity prices, drilling and completion activity, energy demand and the pace of economic recovery. It described ongoing uncertainty around the pandemic and global oil and gas demand, and cited cost reductions, operational optimization and digital-channel growth as responses.
Key risks include continued energy-market weakness and pandemic impacts, customer credit and collection risk, inventory obsolescence and pricing, supplier and steel-cost changes, foreign-exchange exposure, cybersecurity and operational disruption, and changing regulation. The company reported ordinary-course legal and regulatory matters that management did not believe would materially affect results. It had approximately $12 million of outstanding standby letters of credit and surety bonds and did not believe payment was probable. The filing also identifies potential LIBOR-transition effects on facility borrowings.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting with no material weaknesses identified by management.
Important facts for investors to verify
- Whether revenue and customer activity recover, particularly in the U.S., and how commodity prices and rig counts develop.
- How much operating cash flow is repeatable after the large working-capital release, and whether cash balances remain available under facility terms and covenants.
- Whether receivable and inventory reserves adequately reflect customer credit deterioration, slow-moving stock and potential price declines.
- Whether further impairments, tax-valuation-allowance changes or other unusual charges arise after the 2020 write-downs.
- Whether planned cost reductions and digital initiatives support margins as demand changes; the filing does not provide a clear earnings or revenue forecast.