DNOW Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 30, 2014. Unless otherwise noted, amounts are in millions of dollars. NOW Inc. (trading as DNOW) is a global energy and industrial products distributor operating in the United States, Canada and International markets. It became an independent public company following its May 30, 2014 spin-off from National Oilwell Varco (NOV).
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,070 | $1,113 | $3,099 | $3,255 |
| Operating profit | $50 | $63 | $155 | $174 |
| Operating margin | 4.7% | 5.7% | 5.0% | 5.3% |
| Net income | $32 | $39 | $100 | $113 |
| Diluted EPS | $0.30 | $0.36 | $0.93 | $1.05 |
| EBITDA (non-GAAP) | $53 | $64 | $168 | $186 |
Q3 revenue fell 3.9% year over year; net income fell 17.9%. SG&A increased to $55 from $39, primarily reflecting costs of operating independently and spin-related activity. Cost of products declined broadly in line with revenue. The effective tax rate was 34.7% for Q3 and 35.3% for the nine-month period.
Segment results were mixed. Q3 U.S. revenue rose 2.2% to $748, but operating profit declined to $28. Canada revenue fell 9.4% to $173, while operating profit rose to $14. International revenue fell 21.6% to $149, and operating profit declined to $8; the comparison was affected by large non-recurring export and valve projects in Q3 2013.
Cash flow, liquidity and balance sheet
- Nine-month operating cash flow was $30, down from $207 in 2013. Receivables used $244 of cash and inventory used $49, partly offset by a $211 increase in accounts payable. The company attributed receivables and payables movements primarily to legal-entity reorganization and ERP implementation.
- Investing cash outflow was $24, including $32 of property and equipment purchases. Financing cash inflow was $74, reflecting net contributions from NOV; 2013 financing outflow was $224.
- Cash was $166 at September 30, up from $101 at December 31, 2013. Approximately $129 was held by foreign subsidiaries and was intended to remain permanently reinvested; repatriation could create additional tax liabilities.
- The company had no revolver borrowings and $2 of letters of credit outstanding under its $750 five-year unsecured revolving facility, expiring in April 2019. It reported compliance with financial covenants.
- Current assets were $2,032 and current liabilities $578. Total liabilities were $585. The balance sheet comparison is affected by the spin-off: September 2014 is consolidated, while December 2013 is presented on a combined basis.
Material changes, outlook and risks
- The 2014 nine-month results include combined NOV-derived results before the separation and NOW consolidated results afterward; they are not fully comparable with a wholly stand-alone company period. Pre-separation results include allocated NOV costs and exclude debt and interest costs NOW might have incurred independently.
- Management said ERP implementation and spin-off activities temporarily affected results and weakened the usual relationship between sales and rig activity. ERP issues disrupted U.S. operations and the Edmonton distribution center; the company said Q3 effects were less severe than in Q2.
- No numerical earnings or revenue guidance was provided. Management described its financial position as strong and cited opportunities to expand products, markets and geographies, while noting that outlook depends closely on rig counts, particularly in North America.
- Management warned that falling oil prices and economic weakness could pressure activity, especially among North American operators reliant on gas cash flows or external financing. WTI averaged $97.87 per barrel in Q3 versus $103.35 in Q2, and was $82.76 on October 20, 2014.
- Other disclosed risks include energy-market and customer-demand changes, steel-price exposure, foreign exchange fluctuations, acquisition execution and financing, increased borrowing costs, competition, spin-off-related obligations or litigation, and potential goodwill or intangible-asset impairment.
- Pending claims and legal matters were not quantified in aggregate; management said any ultimate liability not otherwise accrued was not expected to materially affect financial position, cash flow or results. NOV indemnifies the company for pre-separation income tax liabilities under the Tax Matters Agreement.
Important facts for investors to verify
- Whether ERP-related operational disruption and spin-off costs continued to affect subsequent revenue, margins and expenses.
- Whether the substantial receivables increase converted to cash, and how working-capital needs affected operating cash flow.
- How falling oil prices, rig activity and currency movements affected demand and segment performance after quarter-end.
- The extent of ongoing stand-alone costs, cash availability outside the U.S., and any related tax or liquidity implications.
- Comparability of reported results, particularly the nine-month 2014 period spanning both pre- and post-separation reporting.