DNOW Inc. (NOW Inc.; NYSE: DNOW) — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparative periods ended June 30, 2014. Amounts are in U.S. dollars and millions, except per-share data. The 2014 comparison is not fully like-for-like: results before the May 30, 2014 spin-off were combined with NOV and included allocated corporate costs; the second-quarter 2014 results include only the post-separation period as a standalone company.
Business context and results
NOW distributes energy and industrial products and provides supply-chain services through U.S., Canadian, and international segments. Management cited sharply lower drilling activity and weak energy-market conditions as key pressures.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $750 | $952 | $1,613 | $2,029 |
| Gross profit (revenue less cost of products) | $124 | $193 | $279 | $401 |
| Operating income (loss) | $(27) | $43 | $(35) | $105 |
| Operating margin | (3.6%) | 4.5% | (2.2%) | 5.2% |
| Net income (loss) | $(19) | $27 | $(29) | $68 |
| Diluted EPS | $(0.18) | $0.25 | $(0.27) | $0.63 |
| EBITDA excluding other costs (non-GAAP) | $(17) | $49 | $(13) | $115 |
| EBITDA margin excluding other costs (non-GAAP) | (2.3%) | 5.1% | (0.8%) | 5.7% |
Revenue fell 21.2% in Q2 and 20.5% in the first half year over year. Cost of products declined with revenue and inventory-cost adjustments, while warehousing, selling and administrative expense rose to $151 million in Q2 and $314 million in the first half, reflecting standalone-company and acquisition-related costs. The effective tax rate was 33.9% for Q2 and 29.7% for the first half; the filing cites nondeductible expenses and valuation allowances on certain foreign tax-loss carryforwards.
Segments and material changes
| Segment | Q2 2015 revenue | Q2 2015 operating income (loss) | First-half revenue | First-half operating income (loss) |
|---|---|---|---|---|
| United States | $496 | $(23) | $1,097 | $(35) |
| Canada | $89 | $(5) | $205 | $(2) |
| International | $165 | $1 | $311 | $2 |
U.S. revenue declined 25.1% in Q2, primarily with lower rig counts; Canadian revenue declined 28.8%, affected by lower activity and a stronger U.S. dollar. International Q2 revenue was flat year over year, with acquisition contributions offsetting weaker drilling activity and customer spending. Segment operating results deteriorated across all three regions. Worldwide average rig count was down 36.0% versus Q2 2014; U.S. and Canadian counts fell about 51% each.
Cash flow, liquidity, debt, and acquisitions
- First-half operating cash flow was $81 million, versus $70 million in 2014. Working-capital movements included $217 million from lower receivables and $72 million from lower inventories, offset by a $218 million decrease in accounts payable and accrued liabilities.
- Investing cash outflow was $229 million, including $223 million net cash used for acquisitions; capital expenditures were $6 million. Financing cash inflow was $78 million, including $80 million borrowed under the revolving facility.
- Cash was $114 million at June 30, 2015, down from $195 million at year-end 2014. Approximately $90 million was held by foreign subsidiaries, which the company intended to permanently reinvest. Total assets were $2,473 million and stockholders’ equity was $1,922 million.
- Long-term debt was $80 million. The company had a $750 million unsecured revolving credit facility maturing in April 2019, with $2 million of letters of credit issued; it reported covenant compliance. Management said available cash, operating cash generation, and facility capacity should fund operations, working capital, and planned expenditures.
- Four acquisitions were completed in the first half for aggregate consideration of approximately $257 million, including $116 million of preliminary goodwill and $64 million of intangible assets. A July 31 acquisition of Odessa Pumps for approximately $170 million was a subsequent event. An agreement to buy Challenger Industries remained subject to closing conditions, including regulatory approval.
Outlook, risks, contingencies, and unusual items
Management gave no numerical earnings or revenue guidance. It described visibility into a market recovery as limited, said results remain tied to worldwide rig counts—particularly in North America—and planned to manage quarter to quarter while pursuing strategic acquisitions. It noted that July 2015 U.S. rig count and WTI prices were below Q2 averages.
- Key risks include sustained low oil and gas prices, reduced drilling and customer spending, acquisition integration, foreign-exchange movements, steel pricing, and possible goodwill or intangible-asset impairment. A Q2 goodwill impairment review indicated no impairment.
- Management estimated reasonably possible losses of zero to $25 million, primarily relating to one international customer’s receivable, and said it accrued its best estimate. It stated that other recorded contingent liabilities were immaterial and that unaccrued matters were not expected to materially affect the company, while noting that actual outcomes may vary.
- Foreign-currency forward contracts had a $122 million notional amount and a $6 million net liability at June 30; the related loss was included in other expense. First-half foreign-currency translation loss was $26 million in other comprehensive loss.
- Acquisition-related contingent consideration could reach $6 million; its estimated fair value was $3 million at June 30. The filing also identifies general litigation, regulatory, environmental, and safety exposures.
Important facts for investors to verify
- How much of the revenue and operating performance decline reflects reduced activity versus pricing, mix, currency, and acquisition contributions—and account for the non-comparable 2014 spin-off presentation.
- The collectability and exposure associated with the international customer receivable and the disclosed zero-to-$25 million possible-loss range.
- Whether cash generation and revolving-credit capacity can support planned acquisitions if weak energy-market conditions persist, and whether all debt covenants remain satisfied.
- Integration performance and final purchase-price allocations for recent acquisitions, including the Odessa Pumps transaction and the proposed Challenger Industries acquisition.
- Management reported that disclosure controls were effective; internal-control reporting was still subject to the transition period applicable to the newly public company.