DNOW Inc. (NOW Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited and prepared under U.S. GAAP. Amounts below are in millions of dollars, except per-share data and percentages.
Business context
NOW Inc. distributes energy and industrial products and provides supply-chain services through its DistributionNOW and Wilson Export businesses. It operates in the United States, Canada and international markets. Results are influenced by oil and gas activity, industrial demand, commodity and steel prices, and foreign exchange rates.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $764 | $631 |
| Operating profit (loss) | $7 | ($21) |
| Operating margin | 0.9% | (3.3%) |
| Net income (loss) | $2 | ($23) |
| Diluted EPS | $0.02 | ($0.21) |
| Cash from operating activities | ($30) | ($21) |
| Capital expenditures | $1 | $1 |
| EBITDA excluding other costs (non-GAAP) | $16 | ($9) |
Revenue rose 21.1% year over year. Cost of products was $616 versus $517; warehousing, selling and administrative expense was $141 versus $135. Other expense was $4 versus $2. The effective tax rate was 24.1%, compared with 1.8%; management cited foreign tax rates, nondeductible items, state taxes, Tax Act effects and changes in the deferred-tax valuation allowance.
Segments and changes versus prior period
| Segment | Revenue, Q1 2018 | Revenue, Q1 2017 | Operating profit (loss), Q1 2018 | Operating profit (loss), Q1 2017 |
|---|---|---|---|---|
| United States | $562 | $439 | $3 | ($26) |
| Canada | $102 | $96 | $4 | $3 |
| International | $100 | $96 | $0 | $2 |
U.S. revenue grew 28.0%, primarily with higher rig activity; operating results improved on increased volume and flat operating expenses. Canada revenue increased 6.3%, attributed primarily to favorable currency effects, while higher product margins supported profit growth. International revenue rose 4.2%, largely on favorable currency effects, but increased bad-debt charges reduced segment operating profit to break-even.
Cash, debt and liquidity
At March 31, 2018, cash and cash equivalents were $80, down from $98 at December 31, 2017; approximately $68 was held by foreign subsidiaries. Current assets were $1,206 and current liabilities were $443. Receivables were $496 and inventory was $609. Total assets were $1,818, total liabilities $626, and stockholders’ equity $1,192.
Long-term revolving-credit borrowings were $175, compared with $162 at year-end. The company reported $452 of availability under its existing facility, $6 of facility letters of credit, and compliance with all financial covenants. Operating cash use of $30 primarily reflected increases in receivables ($74) and inventory ($22), partly offset by a $48 increase in accounts payable and accrued liabilities. Financing activities provided $13, chiefly reflecting net revolving-facility borrowing.
On April 30, 2018, after quarter-end, NOW replaced the existing facility with a new $750 global revolving facility, with potential capacity up to $1.0 billion, maturing in April 2023 unless extended. Availability is borrowing-base dependent; a fixed-charge coverage covenant applies if availability falls below a specified threshold.
Outlook, risks and unusual items
- Management provided no specific quantitative earnings or revenue guidance. Outlook remains tied to global rig counts and drilling and completion spending, particularly in North America. The company said it would continue expense and capital rationalization in weak markets and invest where activity is expanding.
- Management believes cash, expected operating cash generation and revolver availability will fund operations, working capital and capital requirements. It intends to pursue acquisitions, but timing, size, financing and success are uncertain.
- Management estimated reasonably possible losses of zero to $15, primarily in the international segment and related to receivables from one customer; it said its best estimate was accrued at March 31. It stated that the ultimate liability for other claims and proceedings was not expected to materially affect financial position, cash flow or results.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption had no material effect on revenue measurement or recognition and caused an immaterial increase in opening accumulated deficit; it added $5 of receivables and deferred revenue related to unconditional rights to payment.
- Tax Act accounting remained provisional. Q1 adjustments to provisional amounts were $9, with no net impact on the tax provision; the company said further refinement could change estimates. The company also disclosed goodwill impairment sensitivity to adverse energy-market conditions.
- Risks highlighted include oil and gas prices and activity, customer demand, steel prices, foreign exchange, interest rates, competition, regulation, acquisition integration and potential goodwill or intangible-asset impairment. A hypothetical 10% currency-rate change was estimated to affect net income by less than $1; a one-percentage-point interest-rate change was estimated to change quarterly cash interest expense by less than $1.
Important facts for investors to verify
- Current borrowing-base availability, covenant headroom and facility terms under the replacement credit agreement.
- Collection status and any subsequent developments regarding the international customer receivable and the disclosed potential-loss range.
- Whether increased sales translate into operating cash generation as receivables and inventory grow.
- Final effects of Tax Act accounting estimates and the company’s evolving tax-rate methodology.
- Market activity, margins and bad-debt trends across the U.S., Canada and international segments.