DNOW Inc. (NOW Inc.) — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial amounts below are in millions, except per-share data. DNOW was spun off from National Oilwell Varco (NOV) on May 30, 2014; 2014 results include pre-separation combined results and post-separation consolidated results, while 2013 results reflect the business before the spin-off. Comparisons therefore are not fully on a like-for-like standalone basis.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $952 | $1,070 | $2,029 | $2,142 |
| Operating profit | $43 | $53 | $105 | $111 |
| Operating margin | 4.5% | 5.0% | 5.2% | 5.2% |
| Net income | $27 | $33 | $68 | $74 |
| EPS, basic / diluted | $0.25 / $0.25 | $0.31 / $0.31 | $0.64 / $0.63 | $0.69 / $0.69 |
| EBITDA (non-GAAP) | $49 | $58 | $115 | $122 |
- Q2 revenue fell 11.0% year over year and net income fell 18.2%; six-month revenue declined 5.3% and net income 8.1%.
- Q2 operating margin decreased 0.5 percentage points. Six-month margin was unchanged at 5.2%.
- By segment, Q2 revenue was down in the U.S. (10.8%) and Canada (27.3%), but up internationally (5.8%). International operating profit rose to $13 from $7; U.S. operating profit declined to $28 from $41, and Canada to $2 from $5.
- Q2 cost of products decreased 13.2%, primarily due to product mix. SG&A increased to $45 from $40, largely reflecting spin-off and public-company preparation costs.
Cash, liquidity and capital
- Cash and cash equivalents were $236 at June 30, versus $101 at December 31, 2013. Current assets were $1,946 and current liabilities $508.
- Six-month operating cash flow was $70, down from $128 in 2013. Working-capital movements included a $111 use from receivables and $39 from inventory, partly offset by a $141 source from accounts payable. The filing attributes major receivable/payable movements partly to legal-entity reorganization and ERP implementation.
- Investing cash outflow was $10 versus $35, including $18 of capital expenditures. Financing provided $74, principally from net contributions from NOV; 2013 financing used $108.
- No revolving-facility borrowings or letters of credit were outstanding at June 30. The five-year unsecured revolver provides up to $750, with a possible $250 increase subject to conditions; it expires in April 2019. DNOW reported compliance with its covenants. The balance sheet reported no debt borrowings.
- Approximately $116 of cash was held by foreign subsidiaries; repatriation could result in additional tax, and the company stated it intended to permanently reinvest those funds.
Business changes, outlook and risks
- DNOW distributes energy and industrial products and services through U.S., Canada and International segments, operating in more than 20 countries and over 300 locations. Its shares began regular-way NYSE trading under ticker DNOW on June 2, 2014.
- Management said ERP deployment and separation work disrupted operations and temporarily weakened the relationship between results and rig counts. U.S. results were also affected by a central pipe-yard relocation, reduced project revenue, employee training and a new quoting system. Canadian declines reflected projects deferred to future periods, ERP challenges and currency effects. International growth reflected strength in Asia and valve projects.
- Management expressed confidence in the company’s balance sheet, global infrastructure and opportunities to grow as an independent distributor, and expects cash, operating cash flow and available credit to support operations, working capital, capital spending and potential acquisitions. No specific earnings or revenue guidance was provided.
- Results remain exposed to drilling activity, oil and gas prices, customer spending, steel prices, foreign-exchange movements, global economic conditions and competition. Management noted that weaker oil prices could reduce activity, particularly among North American operators. Acquisition timing and financing availability are uncertain.
- Legal claims and regulatory matters are ongoing; the company said the total potential loss could not be determined but did not expect unrecorded liabilities to materially affect results, cash flow or financial position. The company also faces environmental and safety regulatory risks. NOV indemnifies DNOW for income-tax liabilities from pre-separation periods under the Tax Matters Agreement.
- Historical pre-separation results include allocated NOV corporate costs and exclude debt and interest costs DNOW might have incurred as a standalone company; future standalone costs may differ. The company reported effective disclosure controls, while noting ERP implementation required modifications to internal controls over financial reporting.
Most important facts for investors to verify
- How quickly ERP and separation-related disruption subsides, and whether U.S. and Canadian revenue and margins recover.
- Whether operating cash flow improves as receivables, inventory and payables normalize; the six-month cash-flow result was materially influenced by working capital.
- The sustainable level of standalone SG&A and other costs compared with historical NOV-allocated expenses.
- Cash availability and potential tax consequences associated with foreign-held cash, plus continued compliance with revolver covenants.
- Exposure to rig-count, commodity-price, steel-price and foreign-exchange changes, and developments in legal, regulatory and environmental matters.