DNOW Inc. (NOW) — Form 10-Q Summary
Period: Quarter ended September 30, 2019; comparisons are with the third quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. NOW distributes energy and industrial products and provides supply-chain services across the United States, Canada, and international markets.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $751 | $822 | $2,312 | $2,363 |
| Operating profit | $14 | $26 | $54 | $51 |
| Operating margin | 1.9% | 3.2% | 2.3% | 2.2% |
| Net income | $10 | $20 | $42 | $36 |
| Diluted EPS | $0.09 | $0.18 | $0.38 | $0.33 |
| Operating cash flow | Not separately provided | Not separately provided | $150 | $(2) |
| EBITDA excluding other costs (non-GAAP) | $24 | $33 | $82 | $78 |
| EBITDA margin excluding other costs (non-GAAP) | 3.2% | 4.0% | 3.5% | 3.3% |
Q3 gross profit, calculated as revenue less cost of products, was $150 million (20.0% of revenue), versus $168 million (20.4%) a year earlier. Nine-month gross profit was $461 million (19.9%), versus $473 million (20.0%).
Financial position and liquidity
- At September 30, 2019, cash was $113 million, current assets $1.148 billion, and current liabilities $470 million; the resulting current ratio was approximately 2.4x.
- Total assets were $1.790 billion and stockholders’ equity was $1.267 billion. The balance sheet reported no long-term debt, compared with $132 million at December 31, 2018.
- The $750 million secured revolving credit facility had no borrowings and approximately $507 million of availability; excess availability was 98%. The company reported compliance with all covenants. It had $8 million of letters of credit under the facility.
- Nine-month investing cash outflow was $17 million, including $7 million for property and equipment and $8 million for acquisitions. Financing cash outflow was $136 million, primarily reflecting repayments in excess of revolver borrowings. Cash declined $3 million from year-end.
- ASC 842 adoption in January 2019 resulted in recognition of operating lease right-of-use assets and liabilities. At quarter-end, total reported lease liabilities were $74 million.
Changes versus comparable periods
- Q3 revenue fell $71 million, or 8.6%, year over year; nine-month revenue fell $51 million, or 2.2%. Q3 net income halved to $10 million, while nine-month net income increased $6 million to $42 million.
- Q3 operating profit declined $12 million, mainly reflecting lower U.S. revenue, while lower operating expenses partly offset the decline. Nine-month operating profit rose $3 million as improved U.S. results offset weaker Canada results.
- U.S. Q3 revenue decreased 10.0% and Canada revenue decreased 10.8%; international revenue increased 2.0%. Nine-month revenue declined in all three segments, with the largest percentage decline in Canada.
- Operating cash flow improved substantially from the prior-year period, supported by working-capital cash releases, including $45 million from lower inventory and $18 million from lower receivables. Accounts payable and accrued liabilities used $26 million of cash.
Outlook, risks, and notable items
- Management gave no specific numeric revenue or earnings guidance. It said outlook remains tied to global rig counts and oil and gas spending, particularly in North America, and expects to adjust operations to market activity.
- Management cited customer budget uncertainty and oil-price volatility. In Q3, compared with Q2, U.S. rig count fell 7.0%, WTI prices fell 5.7%, natural gas prices fell 7.0%, and hot-rolled steel prices fell 12.7%. U.S. rig count and commodity prices weakened further in October, according to the filing.
- Other identified risks include customer demand, energy-market and economic conditions, steel pricing, foreign exchange, competition, acquisition integration, borrowing costs, regulation, and potential goodwill or intangible-asset impairment. The company estimated that a hypothetical 10% currency-rate change would have changed nine-month net income by approximately $1 million.
- The company completed two U.S. acquisitions in Q2 for approximately $8 million net cash consideration, recording preliminary goodwill of $6 million and intangibles of $2 million. Acquisition costs were less than $1 million.
- Legal claims, audits, and threatened actions were disclosed; management stated that any ultimate liability not already accrued was not expected to materially affect financial position, cash flow, or results. Approximately $12 million of standby letters of credit and surety bonds were outstanding, with no payment considered probable.
- Disclosure controls were assessed as effective; the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower North American rig activity and commodity prices persist and how they affect revenue and operating margins.
- Drivers of the Q3 margin decline, including segment-level gross margins, inventory charges, and expense reductions.
- Whether the strong nine-month operating cash flow is repeatable, given its reliance on inventory and receivables reductions.
- Current revolver borrowing-base availability, covenant headroom, and lease obligations; the filing’s facility availability is subject to limitations.
- Potential developments in legal, regulatory, environmental, acquisition, and goodwill-impairment matters, including outcomes not presently quantifiable.