NOW(DNOW) - 2021 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the quarter Item 1. Financial Statements This section presents the unaudited consolidated financial statements of NOW Inc. for the quarter ended March 31, 2021, including balance sheets, statements of operations, comprehensive income (loss), cash flows, and stockholders' equity, along with detailed notes explaining accounting policies, revenue recognition, segment information, and other financial disclosures Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (in millions): | Metric | March 31, 2021 | December 31, 2020 | | :---------------------- | :------------- | :---------------- | | Cash and cash equivalents | $374 | $387 | | Receivables, net | $245 | $198 | | Inventories, net | $247 | $262 | | Total current assets | $882 | $861 | | Property, plant and equipment, net | $89 | $98 | | Goodwill | $7 | — | | Total assets | $1,026 | $1,008 | | Accounts payable | $200 | $172 | | Accrued liabilities | $92 | $95 | | Total current liabilities | $298 | $272 | | Total liabilities | $334 | $309 | | Total stockholders' equity | $692 | $699 | - Total assets increased by $18 million, primarily driven by an increase in receivables, net, partially offset by decreases in cash and inventories. Goodwill increased by $7 million due to an acquisition[7] - Total liabilities increased by $25 million, mainly due to an increase in accounts payable. Total stockholders' equity decreased by $7 million[7] Consolidated Statements of Operations This statement details the company's revenues, expenses, and net loss over a specific reporting period Consolidated Statements of Operations Highlights (Three Months Ended March 31, in millions, except per share data): | Metric | 2021 | 2020 | | :-------------------------- | :------ | :------ | | Revenue | $361 | $604 | | Cost of products | $286 | $487 | | Warehousing, selling and administrative | $79 | $130 | | Impairment charges | $4 | $320 | | Operating loss | $(8) | $(333) | | Loss before income taxes | $(9) | $(333) | | Income tax provision (benefit) | $1 | $(2) | | Net loss | $(10) | $(331) | | Basic loss per common share | $(0.09) | $(3.03) | | Diluted loss per common share | $(0.09) | $(3.03) | - Revenue decreased by $243 million (40.2%) year-over-year. Net loss significantly improved by $321 million, from $(331) million in Q1 2020 to $(10) million in Q1 2021[10] - Operating loss improved from $(333) million in Q1 2020 to $(8) million in Q1 2021, primarily due to a substantial reduction in impairment charges from $320 million to $4 million[10] Consolidated Statements of Comprehensive Income (Loss) This statement presents the net loss and other comprehensive income (loss) components for the period Consolidated Statements of Comprehensive Income (Loss) Highlights (Three Months Ended March 31, in millions): | Metric | 2021 | 2020 | | :--------------------------------- | :---- | :----- | | Net loss | $(10) | $(331) | | Foreign currency translation adjustments | $1 | $(39) | | Comprehensive loss | $(9) | $(370) | - Comprehensive loss improved significantly from $(370) million in Q1 2020 to $(9) million in Q1 2021, driven by the improved net loss and a positive shift in foreign currency translation adjustments[14] Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, in millions): | Metric | 2021 | 2020 | | :-------------------------------------- | :---- | :--- | | Net cash provided by (used in) operating activities | $(4) | $6 | | Net cash provided by (used in) investing activities | $(7) | $22 | | Net cash provided by (used in) financing activities | $(2) | $(2) | | Net change in cash and cash equivalents | $(13) | $19 | | Cash and cash equivalents, end of period | $374 | $202 | - Net cash from operating activities shifted from $6 million provided in Q1 2020 to $4 million used in Q1 2021, primarily due to an increase in working capital[17] - Net cash used in investing activities was $7 million in Q1 2021, compared to $22 million provided in Q1 2020, mainly due to a $6 million business acquisition[17] Consolidated Statements of Stockholders' Equity This statement outlines changes in the company's equity accounts over the reporting period Changes in Stockholders' Equity (Three Months Ended March 31, 2021, in millions): | Item | Amount | | :--------------------------- | :----- | | Balance at December 31, 2020 | $699 | | Net loss | $(10) | | Stock-based compensation | $2 | | Exercise of stock options | $1 | | Shares withheld for taxes | $(1) | | Other comprehensive income | $1 | | Balance at March 31, 2021 | $692 | - Total stockholders' equity decreased by $7 million from December 31, 2020, to March 31, 2021, primarily due to the net loss, partially offset by stock-based compensation and other comprehensive income[21] Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations of the accounting policies, significant estimates, and other disclosures supporting the financial statements - NOW Inc. is a global distributor of energy and industrial products, operating under the DistributionNOW and DNOW brands, serving approximately 80 countries. The company also offers a DigitalNOW® platform for e-commerce, data management, and supply chain optimization[24] - The unaudited consolidated financial information is prepared in accordance with GAAP for interim financial information and Article 10 of SEC Regulation S-X, and should be read with the latest Form 10-K[25] - Revenue is primarily from product sales, recognized at a point in time when the customer obtains control. The allowance for doubtful accounts totaled $26 million as of March 31, 2021, down from $28 million at December 31, 2020[31][35] - Contract liabilities, primarily deferred revenues, totaled $17 million as of March 31, 2021, a decrease from $19 million at December 31, 2020, with approximately $7 million of deferred revenue recognized in Q1 2021[37] - Property, plant and equipment, net, decreased to $89 million. The company reclassified $3 million of assets as held-for-sale and recognized a $4 million impairment charge in Q1 2021[39] - Accrued liabilities totaled $92 million as of March 31, 2021, down from $95 million at December 31, 2020[40] - The company had no borrowings against its $750 million revolving credit facility as of March 31, 2021, with approximately $224 million in availability and 97% excess availability. All debt covenants were in compliance[42] - Accumulated other comprehensive loss improved from $(145) million at December 31, 2020, to $(144) million at March 31, 2021, due to $1 million in other comprehensive income[45] Segment Revenue and Operating Profit (Three Months Ended March 31, in millions): | Segment | 2021 Revenue | 2020 Revenue | 2021 Operating Profit (Loss) | 2020 Operating Profit (Loss) | | :------------ | :----------- | :----------- | :--------------------------- | :--------------------------- | | United States | $252 | $441 | $(13) | $(204) | | Canada | $58 | $78 | $4 | $(58) | | International | $51 | $85 | $1 | $(71) | | Total | $361 | $604 | $(8) | $(333) | - The effective tax rate for Q1 2021 was (5.5%), compared to 0.6% for Q1 2020, influenced by foreign tax rates, non-deductible expenses, state income taxes, and changes in valuation allowance[48] - Basic and diluted loss per share was $(0.09) for Q1 2021, a significant improvement from $(3.03) for Q1 2020[52] - Stock-based compensation expense was $2 million in Q1 2021, up from less than $1 million in Q1 2020. The company granted 750,296 stock options and 332,326 RSAs/RSUs in Q1 2021[54][56] - The company completed an acquisition in Q1 2021 for an estimated net purchase price of $10 million, recognizing $7 million goodwill and $2 million intangible assets, expanding engineering and construction services[67] - Subsequent to March 31, 2021, the company acquired the Flex Flow business from GR Energy Services for an initial cash consideration of $90 million plus contingent consideration[71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the quarter ended March 31, 2021, discussing industry trends, segment performance, liquidity, and capital resources, alongside an executive summary and outlook Forward-Looking Statements This section cautions investors about risks and uncertainties that could cause actual results to differ from projections - Actual results may differ materially from forward-looking statements due to various factors, including changes in oil and gas prices, energy markets, customer demand, M&A integration, capital market volatility, COVID-19 disruptions, regulatory changes, and competition[73] - Investors are cautioned to review 'Risk Factors' in the company's Form 10-K for additional factors that could cause actual results to differ[73] Company Overview This section describes NOW Inc.'s global distribution business, operational scope, and digital platform offerings - NOW Inc. is a global distributor to the oil and gas and industrial markets, operating under the DistributionNOW and DNOW brands with a legacy of over 150 years[74] - The company operates through approximately 195 locations and 2,400 employees worldwide, offering digital procurement channels and a broad product range including MRO supplies, pipe, valves, and various equipment[74][77] - The DigitalNOW® platform provides e-commerce, data management, and supply chain optimization, supporting operations in major oil and gas regions globally and serving customers in approximately 80 countries[75][79][80] Summary of Reportable Segments This section outlines the company's operational structure across its U.S., Canada, and International business segments - The company operates through three reportable segments: U.S., Canada, and International[85] - The U.S. segment has approximately 130 locations, offering high-value solutions and engineering/design services to upstream, midstream, downstream energy, and industrial markets[86][87] - The Canada segment has about 40 locations, primarily serving energy exploration, production, mining, and drilling, including composite pipe installation expertise. The International segment operates in approximately 20 countries with 25 locations, providing products and supply chain solutions in major oil and gas development areas[88][89] Operating Environment Overview This section discusses the key external factors influencing the company's performance, including oil and gas market indicators - Company results are dependent on worldwide oil and gas drilling and completions, well remediation activity, crude oil and natural gas prices, capital spending by oilfield service companies, and global oil and gas inventory levels[92] Key Industry Indicators (Averages for the Quarters Indicated): | Indicator | 1Q21 | 1Q20 | % 1Q21 v 1Q20 | 4Q20 | % 1Q21 v 4Q20 | | :-------------------------------------- | :------ | :------ | :------------ | :------ | :------------ | | Active Drilling Rigs: | | | | | | | U.S. | 392 | 785 | (50.1%) | 310 | 26.5% | | Canada | 139 | 195 | (28.7%) | 92 | 51.1% | | International | 698 | 1,074 | (35.0%) | 663 | 5.3% | | Worldwide | 1,229 | 2,054 | (40.2%) | 1,065 | 15.4% | | West Texas Intermediate Crude Prices (per barrel) | $57.79 | $45.76 | 26.3% | $42.45 | 36.1% | | Natural Gas Prices ($/MMBtu) | $3.56 | $1.91 | 86.4% | $2.53 | 40.7% | | Hot-Rolled Coil Prices ($/short ton) | $1,113.52 | $580.32 | 91.9% | $701.34 | 58.8% | Industry Trends This section analyzes recent movements in key industry indicators such as rig counts and commodity prices - Worldwide quarterly average rig count increased 15.4% in Q1 2021 compared to Q4 2020, with U.S. rigs up 26.5% and Canada up 51.1%[103] - Average West Texas Intermediate Crude prices increased 36.1% to $57.79 per barrel, natural gas prices increased 40.7% to $3.56 per MMBtu, and Hot-Rolled Coil prices increased 58.8% to $1,113.52 per short ton in Q1 2021 compared to Q4 2020[103] - As of April 2021, U.S. rig count continued to rise to 439 rigs, WTI Crude to $63.16 per barrel, and Hot-Rolled Coil to $1,320.00 per short ton, indicating continued market recovery[104] Executive Summary This section provides a high-level overview of the company's financial performance for the quarter - For the three months ended March 31, 2021, NOW Inc. generated a net loss of $10 million on $361 million in revenue[106] - Compared to Q1 2020, revenue decreased by $243 million (40.2%), but net loss improved significantly by $321 million, and operating loss improved from $333 million to $8 million[106] Outlook This section discusses the company's future expectations, strategic initiatives, and market dependencies - The company's outlook remains tied to crude oil and natural gas commodity prices, global drilling and completions activity, and overall oil and gas spending[107] - Significant uncertainty persists regarding the impact and duration of the COVID-19 pandemic on the economy and global oil and gas demand, with recovery dependent on vaccine administration[108] - The company plans to continue optimizing operations, advancing strategic goals, and managing costs through structural changes and technology to increase productivity and grow revenue, including expanding into energy transition investments[109][110] Results of Operations This section analyzes the company's revenue, expenses, and profitability across its segments for the reporting period Segment Revenue and Operating Profit (Three Months Ended March 31, in millions): | Segment | 2021 Revenue | 2020 Revenue | 2021 Operating Profit (Loss) | 2020 Operating Profit (Loss) | | :------------ | :----------- | :----------- | :--------------------------- | :--------------------------- | | United States | $252 | $441 | $(13) | $(204) | | Canada | $58 | $78 | $4 | $(58) | | International | $51 | $85 | $1 | $(71) | | Total | $361 | $604 | $(8) | $(333) | - U.S. segment revenue declined 42.9% to $252 million due to decreased drilling and completions activity, but operating loss improved by $191 million to $(13) million, largely due to a $184 million reduction in impairment charges[111][112] - Canada segment revenue declined 25.6% to $58 million. Operating profit improved by $62 million to $4 million, primarily due to $60 million fewer impairment charges in Q1 2021[115][116] - International segment revenue declined 40.0% to $51 million. Operating profit improved by $72 million to $1 million, mainly due to $72 million fewer impairment charges in Q1 2021[117][118] - Cost of products decreased to $286 million in Q1 2021 from $487 million in Q1 2020, primarily reflecting lower revenue. Warehousing, selling and administrative expenses decreased to $79 million from $130 million due to improved operating efficiencies[119][120] - Impairment charges were significantly reduced to $4 million in Q1 2021 from $320 million in Q1 2020. Other expense increased to $1 million due to unfavorable foreign exchange rate impacts[121][122] - The effective tax rate was (5.5%) for Q1 2021, compared to 0.6% for Q1 2020, influenced by various tax-related items[123] Non-GAAP Financial Measure and Reconciliation This section presents and reconciles non-GAAP financial measures used to assess the company's performance - The company discloses EBITDA excluding other costs as a non-GAAP financial measure to provide supplemental information regarding ongoing economic performance and facilitate comparisons[125][126] EBITDA Excluding Other Costs Reconciliation (Three Months Ended March 31, in millions): | Metric | 2021 | 2020 | | :--------------------------------- | :---- | :--- | | GAAP net loss | $(10) | $(331) | | Interest, net | — | — | | Income tax provision (benefit) | $1 | $(2) | | Depreciation and amortization | $6 | $10 | | Other costs (primarily impairment) | $4 | $325 | | EBITDA excluding other costs | $1| $2 | | EBITDA % excluding other costs | 0.3% | 0.3% | Liquidity and Capital Resources This section details the company's financial flexibility, cash position, and funding sources for its operations and investments - The company expects cash on hand, cash from operations, and its revolving credit facility to be sufficient to fund operating, investing, and financing activities[128] - Cash and cash equivalents were $374 million as of March 31, 2021, with $94 million held by foreign subsidiaries, which are generally indefinitely reinvested[129] - No borrowings were outstanding against the revolving credit facility, with approximately $224 million in availability and 97% excess availability. All debt covenants were in compliance[130] Net Cash Flows (Three Months Ended March 31, in millions): | Activity | 2021 | 2020 | | :---------------------------------------- | :---- | :--- | | Net cash provided by (used in) operating activities | $(4) | $6 | | Net cash provided by (used in) investing activities | $(7) | $22 | | Net cash provided by (used in) financing activities | $(2) | $(2) | - Net cash used in operating activities was $4 million in Q1 2021, driven by increased working capital. Net cash used in investing activities was $7 million, primarily due to a $6 million acquisition[131][132] Capital Spending This section outlines the company's investment activities, including acquisitions and future capital expenditure plans - Subsequent to March 31, 2021, the company completed the Flex Flow business acquisition for an initial cash consideration of $90 million, expanding its offering in surface-mounted horizontal pumping systems[137] - The company intends to pursue additional acquisitions, primarily funded by cash flow from operations and the revolving credit facility[138] Off-Balance Sheet Arrangements This section describes the company's contractual obligations and commitments not recorded on the balance sheet - The company is party to off-balance sheet arrangements such as standby letters of credit and performance bonds, which are not expected to have a material adverse effect on its financial condition or results[139] Critical Accounting Policies and Estimates This section highlights the significant accounting judgments and assumptions that impact the financial statements - Key accounting estimates include allowance for doubtful accounts, inventory reserves, goodwill, purchase price allocation of acquisitions, vendor consideration, stock-based compensation, and income taxes[140] - Actual results may differ materially from these estimates, which are based on historical experience and future expectations[140] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily from changes in interest rates and foreign currency exchange rates, and its strategies for managing these risks, including the use of derivative instruments Foreign Currency Exchange Rate Risk This section assesses the company's exposure to fluctuations in foreign currency exchange rates and its mitigation strategies - The company is exposed to foreign currency exchange rate fluctuations due to global operations, with approximately 30% of net sales outside the U.S. and significant exposure to the Canadian dollar, British pound, and Australian dollar[144] - A weakening U.S. dollar benefits the company, while a strengthening U.S. dollar adversely affects it. Foreign currency translation adjustments resulted in a $1 million gain in Q1 2021[144][145] - Foreign currency transaction losses of less than $1 million were reported in Q1 2021. The company may use foreign currency forward contracts to economically hedge risk but does not hedge net investments in foreign operations[146][147] - A hypothetical 10% change in foreign currency rates would result in a less than $1 million change in net loss for Q1 2021[149] Commodity Steel Pricing This section addresses the company's sensitivity to steel price volatility and its inventory management approach - The business is sensitive to steel prices, particularly steel tubular prices, which impact product pricing[150] - This risk is mitigated by actively managing inventory levels to meet demand while limiting overstocking[150] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's controls designed to ensure timely and accurate financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021[153] Changes in Internal Control Over Financial Reporting This section reports on any material modifications to the company's internal controls during the quarter - There were no changes in internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[154] PART II - OTHER INFORMATION This section includes additional information such as exhibits filed with the quarterly report Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including various agreements, corporate documents, incentive plans, and certifications - Exhibits include the Separation and Distribution Agreement, Amended and Restated Certificate of Incorporation and Bylaws, Tax Matters Agreement, Employee Matters Agreement, Master Distributor and Service Agreements, Employment Agreements for Executive Officers, Incentive Compensation Plan documents, Credit Agreement, and various certifications (e.g., Rule 13a-14a, Section 906 Sarbanes-Oxley Act, XBRL documents)[156]