DNOW Inc. (NOW Inc.) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited and presented in U.S. dollars; amounts below are in millions unless noted. NOW Inc. distributes energy and industrial products and provides supply-chain services across the United States, Canada, and international markets.
Financial performance and liquidity
- Second-quarter revenue: $651, up 29.9% from $501 in Q2 2016. Six-month revenue was $1,282, up 22.2% from $1,049.
- Profitability: Q2 operating loss was $14 versus $57 a year earlier; net loss was $17 versus $44. For the first half, operating loss was $35 versus $122 and net loss was $40 versus $107. Q2 diluted loss per share was $0.16 versus $0.40; first-half diluted loss per share was $0.37 versus $0.99.
- Margins: Operating loss margin improved to 2.2% of revenue in Q2 from 11.4% in Q2 2016, and to 2.7% for the first half from 11.6%. Gross margin, calculated as revenue less cost of products, was approximately 19.0% in Q2 versus 16.6%; first-half gross margin was approximately 18.6% versus 16.2%.
- Non-GAAP measure: EBITDA excluding other costs was a loss of $2 in Q2 and $11 for the first half, compared with losses of $42 and $93, respectively, in 2016. The filing cautions that this measure is not GAAP and has analytical limitations.
- Cash flow: Operating activities used $74 in the first half, compared with providing $155 in the prior-year period. Higher receivables and inventory used $61 and $50, respectively, partly offset by a $37 increase in accounts payable and accrued liabilities. Investing activities used $2; financing activities provided $63.
- Liquidity and debt: Cash was $97 at June 30, 2017, down from $106 at year-end. Revolver borrowings were $128, versus $65 at year-end; reported facility availability was $437. The company reported compliance with all financial covenants. Approximately $77 of cash was held by foreign subsidiaries and was intended to remain permanently reinvested.
- Balance sheet: Current assets were $1,065 and current liabilities $386; total assets were $1,698 and total liabilities $522. Stockholders’ equity was $1,176.
Material changes and segment results
- U.S. revenue rose 42.7% in Q2 and 32.6% for the first half, primarily reflecting stronger rig activity and contribution from the 2016 Power Service acquisition. U.S. operating losses narrowed to $16 in Q2 and $42 for the first half.
- Canada revenue increased 43.6% in Q2 and 48.3% for the first half. The segment returned to operating profit: $2 in Q2 and $5 for the first half, compared with losses in 2016.
- International revenue declined 16.5% in Q2 and 21.1% for the first half, reflecting completed projects that did not recur and a softer offshore rig market. The segment recorded zero operating profit in Q2 and $2 for the first half, helped by lower bad-debt charges and cost savings.
- Warehousing, selling and administrative expense declined to $138 in Q2 from $140 and to $273 for the first half from $292. Cost of products increased with higher sales volumes, although inventory charges were lower.
Outlook, risks, and unusual items
- The company gave no numerical revenue or earnings guidance. Management said results remain dependent on global rig counts, drilling and completion spending, oil prices, and U.S. oil storage levels. It emphasized expense control, capital discipline, and retaining flexibility as demand changes.
- Management stated that cash, expected operating cash flow, and revolver availability should be sufficient for operations, working capital, and other anticipated requirements. However, first-half operating cash use reflected growth-related working-capital investment.
- Management estimated reasonably possible losses of $0–$14, primarily in the International segment and related to one customer’s receivables; it accrued its best estimate. The filing says the ultimate liability for other claims and legal matters could not be determined, but management did not expect them to materially affect financial position, cash flow, or results.
- Key risks include energy-market volatility, customer demand, foreign-exchange movements, steel prices, borrowing costs, acquisition integration, and potential goodwill or intangible-asset impairment. A hypothetical 10% foreign-exchange move was estimated to change first-half net loss by less than $1; a one-percentage-point interest-rate change was estimated to affect quarterly cash interest expense by less than $1.
- Adoption of the new revenue standard was planned for Q1 2018; management’s preliminary assessment was that a material financial-statement impact was not expected, subject to ongoing contract review. The company expected the new lease standard to increase reported assets and liabilities when adopted.
Important facts for investors to verify
- Whether higher sales convert into positive operating cash flow as receivables and inventory normalize.
- Progress in restoring profitability in the U.S. segment and the sustainability of improved margins across segments.
- Collection and loss outcomes for the international customer receivable exposure, including the disclosed $0–$14 range.
- Revolver availability, covenant compliance, and the effect of increased borrowings and variable interest rates.
- Actual adoption effects of the revenue and lease accounting standards, and any material changes in market conditions or impairment assessments.