DNOW Inc. (NOW Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless otherwise stated. NOW is a global distributor of energy and industrial products and supply-chain services, operating through U.S., Canada and International segments.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $631 million | $548 million |
| Operating loss / margin | $21 million / (3.3%) | $65 million / (11.9%) |
| Net loss | $23 million | $63 million |
| Loss per diluted share | $0.21 | $0.59 |
| Operating cash flow | $(21) million | $89 million |
| Investing cash flow | $(2) million | Nil |
| Financing cash flow | $16 million | $(57) million |
| EBITDA excluding other costs (non-GAAP) | $(9) million; (1.4%) of revenue | $(51) million; (9.3%) |
Cost of products was $517 million versus $461 million. Warehousing, selling and administrative costs declined to $135 million from $152 million. Other expense was $2 million in both periods. The effective tax rate was 1.8%, versus 5.2%; the 2017 income tax benefit was reported as nil in rounded financial statements.
At March 31, 2017, cash and equivalents were $102 million (versus $106 million at December 31, 2016), total assets $1.663 billion, and total liabilities $488 million. Revolver borrowings were $82 million, up from $65 million at year-end; the company reported $467 million of facility availability and compliance with all financial covenants. The $750 million credit facility matures April 18, 2019. Current assets were $1.025 billion and current liabilities $399 million.
Material changes and operating drivers
- Revenue grew 15.1%, while net loss narrowed by $40 million and operating loss improved by $44 million. Management attributed the improvement to higher volume, lower inventory charges, reduced employee-related expenses, cost-cutting and lower receivables charges.
- U.S. revenue rose 23.0% to $439 million, including approximately $30 million of acquisition-related revenue; the segment still recorded a $26 million operating loss. Canada revenue increased 52.4% to $96 million and the segment returned to a $3 million operating profit. International revenue fell 25.0% to $96 million, but the segment reported $2 million operating profit.
- Management cited stronger North American activity: average U.S. and Canadian rig counts increased 33.2% and 82.3%, respectively, year over year. International rig count declined 7.6%. The filing also notes higher oil, natural gas and steel prices versus Q1 2016.
- Operating cash flow swung from $89 million provided to $21 million used. Increased receivables ($53 million use) and inventory ($11 million use), associated with higher sales and purchases, were partly offset by a $52 million source from accounts payable and accrued liabilities. Cash declined by $4 million during the quarter.
Outlook, risks and notable items
- No numerical earnings or revenue guidance was provided. Management said conditions appeared to have steadied in the second half of 2016 and continued improving into Q1 2017, describing the market as potentially at “bottom-of-cycle” conditions. Outlook remains linked to global rig counts, drilling and completion spending, especially in North America; oil prices and U.S. oil storage were identified as key drivers of U.S. rig demand.
- Management expects cash, operating cash generation and revolver availability to cover operations, working capital and capital needs. It intends to pursue acquisitions, but timing, size, financing and success are uncertain. Approximately $87 million of cash was held by foreign subsidiaries; repatriation could trigger additional taxes, and the company reported no current plan to repatriate it.
- Management estimated reasonably possible losses of $0–$15 million in the International segment, primarily relating to receivables from one customer, and said its best estimate had been accrued. It stated that other claims and legal matters were not expected to materially affect financial position, cash flow or results, while noting the ultimate exposure could not be determined.
- Other risks include oil and gas market volatility, customer demand, foreign exchange, steel prices, acquisition integration, borrowing costs, regulation and possible goodwill or intangible-asset impairment. A hypothetical 10% currency move was estimated to change quarterly net loss by less than $1 million; a one-percentage-point interest-rate move would change quarterly cash interest expense by less than $1 million.
- The June 2016 Power Service acquisition had a $179 million purchase price, including $119 million of goodwill; Q1 measurement-period adjustments increased goodwill by $2 million. Q1 investing cash flow included a $3 million payment related to a tax election for that acquisition.
- Revenue recognition standard Topic 606 was planned for adoption in Q1 2018; preliminary assessment indicated no material impact expected, subject to change. The company early adopted certain accounting standards in Q1 2017, including the goodwill impairment test simplification, with no material reported effect from the inventory standard adopted in the period.
Important facts for investors to verify
- Whether revenue growth and narrowing losses persist, particularly whether U.S. operations return to profitability and Canada sustains its improvement.
- Working-capital conversion and cash generation as receivables and inventory increase with activity.
- Revolver availability, covenant compliance and borrowing levels as business conditions and acquisition plans evolve.
- Resolution and ultimate loss exposure for the International customer receivable matter, within management’s estimated $0–$15 million range.
- How market recovery, foreign exchange, steel pricing and the Power Service acquisition affect future margins, cash flows and impairment risk.