DNOW Inc. (NYSE: DNOW) — 2017 Form 10-K
Reporting period: Year ended December 31, 2017; the filing also reports fourth-quarter results. Filed February 14, 2018. NOW distributes energy and industrial products and provides supply-chain services through approximately 285 locations, with about 4,600 employees. Its reportable segments are the United States, Canada and International.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $2.648 billion | $2.107 billion |
| Operating loss | $41 million; margin (1.5%) | $222 million; margin (10.5%) |
| Net loss | $52 million; diluted loss per share $0.48 | $234 million; diluted loss per share $2.18 |
| Operating cash flow | Use of $115 million | Generation of $235 million |
| Cash and cash equivalents at year-end | $98 million | $106 million |
| Long-term debt at year-end | $162 million | $65 million |
| Working capital at year-end | $735 million | $612 million |
- Revenue increased 25.7% year over year. Cost of products was $2.147 billion, leaving a derived gross profit of approximately $501 million, or 18.9% of revenue; 2016 was approximately $345 million, or 16.4%.
- Non-GAAP EBITDA excluding other costs was $7 million (0.3% of revenue), versus a loss of $164 million (7.8%) in 2016. The company cautions this measure is not GAAP and has limitations.
- Fourth-quarter revenue was $669 million, up 24.3% from $538 million a year earlier. Operating result was approximately break-even versus a $47 million loss; net loss narrowed to $3 million from $71 million.
- Operating cash flow swung to a use of $115 million, principally as improved activity required $110 million more inventory and $64 million more receivables, partly offset by a $43 million increase in payables and accrued liabilities. Financing provided $94 million, primarily from net revolving-credit borrowings.
- The company had $429 million of facility availability at year-end, with reported excess availability of 72%, subject to credit-agreement restrictions. It was in covenant compliance. The facility matures in April 2019; $6 million of letters of credit were issued under it.
Changes and segment results
- U.S. revenue rose 32.5% to $1.914 billion, driven mainly by a 72% increase in average rig count and approximately $65 million of acquired revenue. The segment still recorded a $53 million operating loss, improved from $192 million.
- Canada revenue rose 38.0% to $356 million; operating profit was $13 million versus an $18 million loss. Higher rig activity and favorable currency translation contributed.
- International revenue declined 6.4% to $378 million as prior-year projects did not repeat, the U.S. dollar strengthened and offshore activity softened. Operating loss narrowed to $1 million from $12 million.
- The annual worldwide average rig count increased 27.4%; WTI crude averaged $50.88 per barrel, up 17.9%, and hot-rolled coil steel averaged $620.10 per short ton, up 19.1%.
Outlook, risks and unusual items
- Management said the business environment had strengthened since the second half of 2016 and expected rig counts, completion spending and midstream infrastructure activity to improve in 2018. Outlook remains dependent on oil and gas prices, drilling and completion spending, and downstream activity. Planned 2018 capital expenditures were approximately $10 million.
- Management emphasized long-term organic and acquisition-led growth, expense control and improved working-capital efficiency; no quantified revenue or earnings guidance was provided.
- A $10 million gain on sale of property was included in 2017 warehousing, selling and administrative results. No goodwill impairment was recorded in 2017, but International reporting-unit fair value exceeded carrying value by only approximately 8%, making it more exposed to adverse changes.
- The Tax Cuts and Jobs Act accounting was provisional. The company recorded a $33 million transition-tax charge and a $69 million charge for the U.S. tax-rate change, offset by foreign tax credits, net operating losses and valuation-allowance effects; it reported no net tax-provision impact from those items and did not expect material cash tax payable for the transition tax.
- Management estimated reasonably possible losses of zero to $15 million in the International segment, primarily related to receivables from one customer, and stated its best estimate had been accrued. Ordinary-course litigation and claims were not expected to materially affect the company, according to management.
- Key risks include dependence on volatile energy-market activity and commodity prices; customer credit and working-capital needs; supplier, steel-price and competitive pressures; foreign currency, political and regulatory exposure; cyber and operational disruptions; and possible tax, environmental, product-liability or legal costs.
- The company paid no common dividends and said it had no current intention to declare them. Auditors issued unqualified opinions on the financial statements and internal control; management reported effective controls and no identified material weaknesses.
Important facts for investors to verify
- Whether the recovery in revenue and segment operating performance can translate into sustained positive operating profit and cash generation.
- Whether inventory and receivables growth consumes further cash as activity improves, and whether working-capital efficiency meets management’s stated objective.
- The terms, covenant headroom and refinancing or renewal plan for the revolving facility maturing in April 2019.
- Whether International results and reporting-unit cash-flow assumptions support the relatively narrow goodwill valuation cushion.
- Final Tax Cuts and Jobs Act accounting, valuation-allowance changes and the realizability of tax assets and credits.
- Collection outcomes for the International customer receivable exposure and resolution of other contingencies.