DNOW Inc. (NOW Inc.) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. DNOW distributes energy and industrial products and provides supply-chain services through U.S., Canadian and international segments.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $370 million | $776 million | $974 million | $1,561 million |
| Operating income (loss) | $(29) million | $17 million | $(362) million | $40 million |
| Net income (loss) | $(30) million | $14 million | $(361) million | $32 million |
| Diluted EPS | $(0.27) | $0.12 | $(3.30) | $0.29 |
| EBITDA excluding other costs (non-GAAP) | $(15) million | $27 million | $(13) million | $58 million |
- Q2 revenue fell 52.3% year over year; first-half revenue fell 37.6%. Q2 operating margin was approximately (7.8)% versus 2.2% a year earlier; first-half margin was approximately (37.2)% versus 2.6%, based on reported, rounded figures.
- Cost of products was $302 million in Q2 and $789 million for the first half. Implied gross margin was approximately 18.4% and 19.0%, respectively, compared with approximately 19.7% and 19.9% in the prior-year periods.
- First-half operating cash flow was $74 million, versus $49 million in 2019. Investing activities provided $20 million, including $25 million of proceeds from a business sale; capital expenditures were $5 million. Financing activities used $4 million. Cash increased to $269 million from $183 million at year-end 2019.
- At June 30, DNOW had no revolving-credit borrowings and reported $256 million of facility availability and 97% excess availability. It reported compliance with covenants. Current assets were $898 million and current liabilities $278 million.
Material changes and drivers
- All three segments reported lower Q2 revenue: U.S. $260 million, down 57.0%; Canada $41 million, down 44.6%; International $69 million, down 28.9%. U.S. and Canada recorded operating losses of $24 million and $5 million; International operating results were approximately break-even.
- First-half results included $320 million of impairment charges: $230 million of goodwill, $84 million of intangible assets and $6 million of other long-lived assets. Goodwill was fully impaired by June 30. Impairments followed lower market capitalization and adverse oil-market and COVID-19 conditions; valuation estimates used significant Level 3 assumptions.
- Second-quarter worldwide average rig count was down 42.5% from Q2 2019, while the U.S. count was down 60.0%. Management attributed revenue declines primarily to reduced drilling, completions and project activity, alongside softer demand and lower commodity prices.
- On January 31, 2020, DNOW sold a previously held-for-sale U.S. cutting-tools business, receiving $25 million in net proceeds and recognizing a loss of less than $1 million.
Outlook, risks and other items
Management provided no numerical earnings or revenue guidance. It said the outlook remained dependent on oil and gas prices, drilling and completions, customer spending and global demand, with substantial uncertainty about the duration and effects of COVID-19 and the pace of economic recovery. DNOW said it was cutting costs, accelerating structural changes and using technology to optimize operations; further actions could result in charges in future periods.
- Key stated risks include prolonged weak oil and gas demand or prices, COVID-related operational and workforce disruption, reduced customer activity, foreign-exchange movements and steel-price exposure. Q2 average WTI was $27.79 per barrel, down 53.5% year over year.
- First-half foreign-currency translation loss was $31 million in other comprehensive loss. The company uses short-term foreign-currency forward contracts and does not hedge its net investments in foreign operations.
- DNOW reported ongoing legal and regulatory matters but said any ultimate liability not already accrued was not expected to materially affect financial position, cash flow or results. It also disclosed approximately $10 million of outstanding standby letters of credit and surety bonds and did not consider payment probable.
- Disclosure controls and procedures were assessed as effective; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether operating demand, rig counts, commodity prices and customer spending recover, and how quickly COVID-19 effects abate.
- Whether cost reductions can offset continued revenue pressure, and whether additional restructuring or impairment charges arise.
- Availability under the borrowing-base facility, covenant headroom and the sustainability of liquidity if operating cash generation weakens.
- The assumptions underlying goodwill and long-lived-asset valuations, inventory reserves and expected credit-loss allowances.
- How business-sale proceeds, foreign-currency exposure and remaining contingent or legal matters affect future cash flows.