DNOW Inc. (NOW Inc.) — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited combined results for the three months ended March 31, 2014, compared with Q1 2013; balance-sheet figures are compared with December 31, 2013. NOW distributed energy and industrial products and services through U.S., Canada and International segments. The statements are historical carve-out financials derived from National Oilwell Varco (NOV), including allocated corporate expenses, and may not reflect costs as a standalone public company. NOV approved the planned spin-off on May 1, 2014; distribution was expected May 30, 2014.
Key financial results
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $1,077 million | $1,072 million; up 0.5% |
| Operating profit and margin | $62 million; 5.8% | $58 million; 5.4% |
| Net income | $41 million; approximately 3.8% of revenue | $41 million |
| EBITDA and margin (non-GAAP) | $66 million; 6.1% | $64 million; 6.0% |
| Operating cash flow | $3 million | $20 million |
| Capital expenditures | $6 million | $19 million |
| Cash at period end | $175 million | $101 million at December 31, 2013; $146 million at Q1 2013 end |
Cost of products was $869 million; operating and warehousing costs were $102 million, and SG&A was $44 million. The effective tax rate was 33.8%, versus 31.7%. No debt was reported on the March 31 balance sheet. Current assets were $1,826 million and current liabilities $420 million; approximately $120 million of cash was held by foreign subsidiaries and management said it intended to permanently reinvest those funds.
Changes and segment performance
- International revenue rose 25.5% to $182 million and operating profit doubled to $16 million, driven by Asia growth and valve projects, with limited incremental operating costs.
- U.S. revenue decreased 1.1% to $704 million, mainly because of lower pipe-project revenue. Operating profit fell 9.1% to $30 million; the margin declined to 4.3% from 4.6%, partly due to spin-off preparation costs.
- Canada revenue declined 11.2% to $191 million, primarily reflecting a weaker Canadian dollar. Operating profit was $16 million versus $17 million, while the margin improved to 8.4% from 7.9% following facility consolidation synergies.
- SG&A increased $5 million year over year, reflecting spin-off and standalone-organization preparation. Receivables increased $93 million, while accounts payable increased $49 million; management linked these movements primarily to legal-entity conversion and ERP implementation.
Cash, outlook and risks
Operating cash flow fell to $3 million, with the receivables increase offset in part by higher payables and income taxes payable. Financing provided $78 million, including parent-company contributions, compared with $8 million in Q1 2013. Investing used $6 million, versus $19 million, as prior-year spending included ERP and facility consolidation. Management said cash, operating cash generation and expected access to revolving credit should support operations, working capital, capital spending and acquisitions.
On April 18, 2014, NOW entered into a five-year senior unsecured credit facility of up to $750 million, available after separation and satisfaction of customary conditions. It includes $150 million letter-of-credit and $50 million swingline sublimits, with a conditional option to increase commitments by $250 million. Financial covenants include a maximum capitalization ratio of 50% and minimum interest coverage of 3.00x.
Management viewed the spin-off as an opportunity to expand markets, products and geographies, and planned to migrate substantially all operations to one ERP platform during 2014. Results remain sensitive to rig activity, oil and gas prices, customer spending, steel prices, foreign exchange and global economic conditions. Management noted stressed pricing and volumes in North America and generally increasing activity in many international markets. Legal claims and regulatory matters were disclosed; total potential loss could not be determined, though management did not expect unaccrued liabilities to materially affect results, cash flow or financial position. New environmental or safety requirements could create unquantifiable costs. Forward-looking statements are subject to these and other risks, including acquisition integration and demand changes.
Important facts for investors to verify
- Whether the spin-off occurred as expected and the final distribution, transition-services and NOV relationship terms.
- Standalone operating costs versus the allocated costs in these combined statements, and the ongoing effect of spin-off expenses.
- Availability and actual use of the $750 million facility after separation, including borrowing costs and covenant headroom.
- Whether working-capital movements associated with ERP implementation and legal-entity conversion reverse, and whether operating cash flow improves.
- International growth sustainability, North American activity and pricing trends, foreign-exchange exposure, and any material change in legal or environmental contingencies.