DNOW Inc. (NOW Inc.) — 2014 Form 10-K
Business context and reporting period. NOW Inc. is a global distributor of energy and industrial products and supply-chain services, operating in the U.S., Canada and internationally. The filing covers the year ended December 31, 2014; Q4 figures are also reported. NOW completed its spin-off from National Oilwell Varco (NOV) on May 30, 2014. Accordingly, 2014 results combine pre-spin-off results historically derived from NOV with post-spin-off consolidated results; comparisons may be affected by allocations and new stand-alone public-company costs.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $4,105 million | $4,296 million |
| Operating profit | $181 million; 4.4% margin | $224 million; 5.2% margin |
| Net income | $116 million | $147 million |
| Diluted EPS | $1.06 | $1.37 |
| EBITDA (non-GAAP) | $198 million; 4.8% margin | $239 million; 5.6% margin |
| Cash from operations | $108 million | $317 million |
- Revenue fell 4.4% year over year, while operating profit declined 19.2% and net income fell 21.1%. Higher stand-alone, spin-off and ERP implementation costs contributed to weaker profitability.
- Q4 revenue was $1,006 million, down 3.4% from $1,041 million; operating profit was $26 million (2.6% margin), versus $50 million (4.8%); net income was $16 million versus $34 million. Q4 diluted EPS was $0.14 versus $0.32.
- At year-end, cash was $195 million (2013: $101 million), working capital was $1,427 million (2013: $1,299 million), total assets were $2,596 million, and stockholders’ equity was $1,966 million. The filing reports no borrowings under its $750 million revolving credit facility; $2 million of letters of credit were outstanding. It reported covenant compliance.
- Operating cash flow declined to $108 million, with receivables and inventories increasing by $200 million and $116 million, respectively, partly offset by a $261 million increase in accounts payable and accrued liabilities. Investing cash outflow was $67 million, including $39 million of capital spending and $36 million for acquisitions.
- Cost of products was $3,286 million, implying gross profit of $819 million, or approximately 20.0% of revenue, compared with approximately 18.6% in 2013. Operating and warehousing costs rose to $425 million from $412 million; SG&A rose to $213 million from $161 million.
Material changes and operating drivers
- U.S. revenue declined 2.4% to $2,793 million and operating profit fell to $89 million from $134 million. Management cited lower pipe sales, deliberate emphasis on higher-margin business, a pipe-yard relocation, ERP work and spin-off-related disruption.
- Canada revenue decreased 13.5% to $669 million, including an approximately $48 million adverse currency effect and ERP-related disruption. Operating profit remained $47 million, with margin improving to 7.0% from 6.1%.
- International revenue declined 2.6% to $643 million as certain large 2013 export and valve orders did not recur; operating profit increased to $45 million from $43 million.
- Average worldwide rig count rose 4.9% in 2014, but WTI crude averaged $93.26 per barrel, down 4.7% from 2013. The stronger U.S. dollar reduced reported revenue in Canada and other international markets. Foreign-currency translation produced a $45 million loss in other comprehensive income.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It described 2015 as uncertain, planned to manage quarter by quarter, and said it would continue long-term initiatives and consider strategic acquisitions. Expected 2015 capital expenditures were approximately $15 million, primarily for UAE facilities.
- Management highlighted sharp post-year-end market deterioration: as of February 6, 2015, U.S. rig count was 21.8% below the 2014 average; WTI as of February 9 was 43.2% below the 2014 average. These conditions could reduce customer spending and demand.
- Key exposures include oil and gas prices and activity, steel prices and inventory values, customer credit and purchasing levels, foreign exchange, competition, supply availability, ERP execution, cybersecurity, and international political, regulatory and compliance risks.
- Goodwill was $346 million and other intangible assets were $73 million; no goodwill impairment was recorded in 2014. Inventory reserves increased to $39 million from $31 million, making inventory valuation a notable area to monitor under weaker conditions.
- The company reported no material off-balance-sheet arrangements. Ordinary-course legal matters were accrued at an immaterial amount; management did not expect ultimate liabilities to materially affect results, cash flow or financial position. Environmental compliance costs historically were not material, and management identified no pending environmental matter expected to have a material effect.
- NOW paid no dividend and stated it did not intend to declare one at that time. It had $120 million of foreign cash and reported $187 million of unremitted foreign earnings considered permanently reinvested; repatriation could trigger additional taxes. Spin-off tax matters and indemnities, including potential tax-free status obligations, remain relevant contingencies.
Important facts for investors to verify
- Whether the post-year-end fall in oil prices and U.S. rig counts led to further revenue, margin, cash-flow or inventory-reserve pressure.
- Whether receivables and inventory convert to cash and whether operating cash flow recovers after the 2014 working-capital outflow.
- How much of the elevated operating and SG&A costs reflects temporary ERP and separation costs versus ongoing stand-alone expenses, and whether the ERP disruption has been resolved.
- Whether the revolver remains undrawn, covenant headroom remains adequate, and acquisition plans or foreign-cash tax considerations change liquidity needs.
- Whether the spin-off tax treatment and related NOV indemnities, tax settlements and other contingent obligations are resolved as expected.