DNOW Inc. (NOW INC.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. DNOW is a global distributor of energy and industrial products and provides supply-chain and materials-management services. It reports U.S., Canada and International segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $785 million | $764 million |
| Operating profit | $23 million; 2.9% margin | $7 million; 0.9% margin |
| Net income | $18 million | $2 million |
| Diluted EPS | $0.16 | $0.02 |
| EBITDA excluding other costs (non-GAAP) | $31 million; 3.9% of revenue | $16 million; 2.1% of revenue |
| Net cash used in operating activities | $20 million | $30 million |
| Cash and cash equivalents, March 31 | $87 million | — |
| Long-term debt, March 31 | $124 million | — |
Cost of products was $627 million versus $616 million; warehousing, selling and administrative expense declined to $135 million from $141 million. The effective tax rate was 6.5%, compared with 24.1%.
Liquidity and balance sheet
- Cash fell $29 million during the quarter, from $116 million at year-end 2018 to $87 million. Operating cash use reflected increases in receivables of $26 million and inventories of $34 million, primarily associated with higher sales and inventory.
- Investing cash flow was approximately zero; the company reported $1 million of accrued property and equipment purchases. Financing cash use was $10 million, mainly reflecting revolving-credit borrowings and repayments.
- Under its $750 million revolving credit facility, DNOW had $124 million drawn and approximately $444 million of availability at March 31. It reported covenant compliance. The facility’s fixed-charge coverage test applies if excess availability falls below the specified threshold.
- Adoption of lease accounting on January 1, 2019 added operating-lease right-of-use assets and liabilities to the balance sheet. At March 31, reported total lease liabilities were $70 million.
Changes versus the prior-year quarter
- Revenue rose 2.7%, while operating profit increased $16 million and net income increased $16 million. Management attributed the operating-profit improvement principally to higher U.S. volume and product-margin gains, as well as lower bad-debt charges in selling and administrative expenses.
- U.S. revenue increased 6.8% to $600 million and operating profit rose to $19 million. Canada revenue declined 15.7% to $86 million, with operating profit falling to $2 million; management cited lower Canadian rig activity and unfavorable foreign exchange. International revenue was down 1.0% to $99 million, while operating profit increased to $2 million.
- Cash used in operations improved by $10 million year over year, but the company still consumed operating cash. Long-term debt declined from $132 million at December 31, 2018 to $124 million at March 31, 2019.
Outlook, risks and notable items
- No numerical earnings or revenue guidance was provided. Management said outlook remains tied to global rig counts and oil-and-gas spending, particularly in North America; customers were reassessing budgets amid oil-price volatility. The company expects to adjust operations to market activity and believes cash, operating cash generation and credit availability will fund operations and anticipated needs.
- Industry indicators were mixed: Q1 2019 worldwide average rig count was nearly flat versus Q4 2018, while U.S. rig count declined 2.4%; average WTI and natural-gas prices fell 7.2% and 23.2%, respectively, from Q4. Management identifies oil and gas activity, commodity prices, customer demand, steel pricing, foreign exchange, competition and economic conditions as risks.
- DNOW reported $10 million of foreign-currency translation gains in other comprehensive income. It uses short-term forward contracts to economically hedge certain currency exposures and does not use derivatives for speculation.
- The filing discusses pending claims, regulatory audits and legal matters, but management said ultimate liability, to the extent not already accrued, was not expected to materially affect financial position, cash flow or results. It also reported approximately $10 million of contingent letters of credit and surety bonds and did not consider payment probable.
- The company intends to pursue acquisitions, but their timing, size and success are uncertain; financing may include cash flow, borrowings or equity. Management warned that adverse energy-market conditions could contribute to goodwill or intangible-asset impairment.
Key facts for investors to verify
- Whether improved U.S. profitability and consolidated margins are sustainable, particularly if rig activity or product margins weaken.
- Whether working-capital investment in receivables and inventory converts into operating cash flow in subsequent quarters.
- Current borrowing-base availability and covenant headroom under the revolving credit facility.
- How oil and gas prices, Canadian activity, foreign-exchange movements and steel prices affect segment results and inventory risk.
- Subsequent developments in legal or regulatory matters, acquisition plans, and any impairment indicators.