DNOW INC. Forward-Looking Statements
Some of the information in this document contains, or has incorporated by
reference, forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward-looking statements.
Forward-looking statements typically are identified by use of terms such as
"may," "believe," "anticipate," "expect," "plan," "predict," "estimate," "will
be" or other similar words and phrases, although some forward-looking statements
are expressed differently. You should be aware that our actual results could
differ materially from results anticipated in the forward-looking statements due
to a number of factors, including, but not limited to, changes in oil and gas
prices, changes in the energy markets, customer demand for our products,
significant changes in the size of our customers, difficulties encountered in
integrating mergers and acquisitions, general volatility in the capital markets,
disruptions caused by COVID-19, changes in applicable government regulations,
increased borrowing costs, competition between us and our former parent company,
NOV, the triggering of rights and obligations in connection with our spin-off
and separation from NOV or any litigation arising out of or related thereto,
impairments in long-lived assets and worldwide economic activity. You should
also consider carefully the statements under "Risk Factors," as disclosed in our
Form 10-K, which address additional factors that could cause our actual results
to differ from those set forth in the forward-looking statements. Given these
uncertainties, current or prospective investors are cautioned not to place undue
reliance on any such forward-looking statements. We undertake no obligation to
update any such factors or forward-looking statements to reflect future events
or developments.
Company Overview
We are a global distributor to the oil and gas and industrial markets with a
legacy of over 150 years. We operate primarily under the DistributionNOW and
DNOW brands. Through our network of approximately 200 locations and
approximately 2,600 employees worldwide, we stock and sell a comprehensive
offering of energy products as well as an extensive selection of products for
industrial applications. Our energy product offering is consumed throughout all
sectors of the oil and gas industry - from upstream drilling and completion,
exploration and production, midstream infrastructure development to downstream
petrochemical and petroleum refining - as well as in other industries, such as
chemical processing, mining, and utilities. The industrial distribution end
markets include refineries and engineering and construction firms. We also
provide supply chain and materials management solutions to the same markets
where we sell products.
Our global product offering includes consumable maintenance, repair and
operating ("MRO") supplies, pipe, valves, fittings, flanges, gaskets, fasteners,
electrical, instrumentation, artificial lift, pumping solutions, valve actuation
and modular process, measurement and control equipment. We also offer
procurement, warehouse and inventory management solutions as part of our supply
chain and materials management offering. We have developed expertise in
providing application systems, work processes, parts integration, optimization
solutions and after-sales support.
Our solutions include outsourcing portions or entire functions of our customers'
procurement, inventory and warehouse management, logistics, point of issue
technology, project management, business process and performance metrics
reporting. These solutions allow us to leverage the infrastructure of our SAP™
Enterprise Resource Planning ("ERP") system and other technologies to streamline
our customers' purchasing process, from requisition to procurement to payment,
by digitally managing workflow, improving approval routing and providing robust
reporting functionality.
We support land and offshore operations for the major oil and gas producing
regions around the world through our network of locations. Our key markets,
beyond North America , include Latin America , the North Sea , the Middle East ,
Asia Pacific and the former Soviet Union . Products sold through our locations
support greenfield expansion upstream capital projects, midstream infrastructure
and transmission and MRO consumables used in day-to-day production. We provide
downstream energy and industrial products for petroleum refining, chemical
processing, LNG terminals, power generation utilities and customer on-site
locations.
We stock or sell more than 300,000 stock keeping units through our branch
network. Our supplier network consists of thousands of vendors in approximately
40 countries. From our operations in over 20 countries we sell to customers
operating in approximately 80 countries. The supplies and equipment stocked by
each of our branches are customized to meet varied and changing local customer
demands. The breadth and scale of our offering enhances our value proposition to
our customers, suppliers and shareholders.
We employ advanced information technologies, including a common ERP platform
across most of our business, to provide complete procurement, materials
management and logistics coordination to our customers around the globe. Having
a common ERP platform allows immediate visibility into our inventory assets,
operations and financials worldwide, enhancing decision making and efficiency.
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-------------------------------------------------------------------------------- Demand for our products is driven primarily by the level of oil and gas drilling, completions, servicing, production, transmission, refining and petrochemical activities. It is also influenced by the global supply and demand for energy, the economy in general and geopolitics. Several factors drive spending, such as investment in energy infrastructure, the North American conventional and shale plays, market expectations of future developments in the oil, natural gas, liquids, refined products, petrochemical, plant maintenance and other industrial and energy sectors. We have expanded globally, through acquisitions and organic investments, intoAustralia ,Azerbaijan ,Brazil ,Canada ,China ,Colombia ,Egypt ,England ,India ,Indonesia ,Kazakhstan ,Kuwait ,Mexico ,Netherlands ,Norway ,Oman ,Russia ,Saudi Arabia ,Scotland ,Singapore , theUnited Arab Emirates andthe United States .
Summary of Reportable Segments
We operate through three reportable segments:United States ("U.S."),Canada and International. The segment data included in our Management's Discussion and Analysis ("MD&A") are presented on a basis consistent with our internal management reporting. Segment information appearing in Note 9 "Business Segments" of the notes to the unaudited consolidated financial statements (Part I, Item 1 of this Form 10-Q) is also presented on this basis.
We have approximately 135 locations in the
We offer higher value solutions in key product lines in theU.S. which broaden and deepen our customer relationships and related product line value. Examples of these include artificial lift, pumps, valves and valve actuation, process equipment, fluid transfer products, measurement and controls, spoolable pipe, along with many other products required by our customers, which enable them to focus on their core business while we manage their supply chain. We also provide additional value to our customers through the design, assembly, fabrication and optimization of products and equipment essential to the safe and efficient production, transportation and processing of oil and gas. In order to align with the updates to the operational and management structure, we combined theU.S. Supply Chain and U.S. Energy reporting units within theU.S. segment, during the third quarter of 2020.
We have a network of approximately 40 locations in the Canadian oilfield, predominantly in the oil rich provinces ofAlberta andSaskatchewan inWestern Canada . OurCanada segment primarily serves the energy exploration, production, mining and drilling business, offering customers many of the same products and value-added solutions that we perform in theU.S. InCanada , we also provide training for, and supervise the installation of, jointed and spoolable composite pipe. This product line is supported by inventory and product and installation expertise to serve our customers.
International
We operate in approximately 20 countries and serve the needs of our international customers from approximately 25 locations outside theU.S. andCanada , which are strategically located in major oil and gas development areas. Our approach in these markets is similar to our approach inNorth America , as our customers turn to us to provide inventory and support closer to their drilling and exploration activities. Our long legacy of operating in many international regions, combined with significant expansion into several key markets, provides a competitive advantage as few of our competitors have a presence in most of the global energy producing regions. 18
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Basis of Presentation
All significant intercompany transactions and accounts have been eliminated. The unaudited consolidated financial information included in this report has been prepared in accordance with GAAP for interim financial information and Article 10 of SEC Regulation S-X. The principles for interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the financial statements included in the Company's most recent Annual Report on Form 10-K. In the opinion of our management, the consolidated financial statements include all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and nine months endedSeptember 30, 2020 are not necessarily indicative of the results to be expected for the full year.
Operating Environment Overview
Our results are dependent on, among other factors, the level of worldwide oil
and gas drilling and completions, well remediation activity, crude oil and
natural gas prices, capital spending by operators, oilfield service companies
and contractors and worldwide oil and gas inventory levels. Key industry
indicators for the third quarter of 2020 and 2019 and the second quarter of 2020
include the following:
% %
3Q20 v 3Q20 v
3Q20* 3Q19* 3Q19 2Q20* 2Q20
Active Drilling Rigs:
U.S. 254 920 (72.4 %) 396 (35.9 %)
Canada 48 132 (63.6 %) 25 92.0 %
International 731 1,144 (36.1 %) 834 (12.4 %)
Worldwide 1,033 2,196 (53.0 %) 1,255 (17.7 %)
West Texas Intermediate Crude
Prices (per barrel) $ 40.89 $ 56.37 (27.5 %) $ 27.79 47.1 %
Natural Gas Prices ($/MMBtu) $ 2.00 $ 2.38 (16.0 %) $ 1.71 17.0 %
Hot-Rolled Coil Prices (steel)
($/short ton) $ 516.89 $ 577.09 (10.4 %) $ 514.83 0.4 %
* Averages for the quarters indicated. See sources on following page.
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The following table details the
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Sources: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); Effective June
2019 , the Baker Hughes International Rig Count now includes the number of active
drilling rigs in the country of Ukraine and the historical periods will not be
updated; West Texas Intermediate Crude and Natural Gas Prices: Department of
Energy , Energy Information Administration (www.eia.doe.gov); Hot-Rolled Coil
Prices: SteelBenchmarker™ Hot Roll Coil USA (www.steelbenchmarker.com)
The worldwide quarterly average rig count declined 17.7% (from 1,255 rigs to
1,033 rigs) and the U.S. declined 35.9% (from 396 rigs to 254 rigs) in the third
quarter of 2020 compared to the second quarter of 2020. The average price per
barrel of West Texas Intermediate Crude increased 47.1% (from $27.79 per barrel
to $40.89 per barrel), and natural gas prices increased 17.0% (from $1.71 per
MMBtu to $2.00 per MMBtu) in the third quarter of 2020 compared to the second
quarter of 2020. The average price per short ton of Hot-Rolled Coil increased
0.4% (from $514.83 per short ton to $516.89 per short ton) in the third quarter
of 2020 compared to the second quarter of 2020.
U.S. rig count at October 16, 2020 was 282 rigs, up 28 rigs from the third
quarter 2020 average. The price for West Texas Intermediate Crude was $40.70 per
barrel at October 16, 2020 , down 0.5% from the third quarter 2020 average. The
price for natural gas was $2.16 per MMBtu at October 16, 2020 , up 8.0% from the
third quarter 2020 average. The price for Hot-Rolled Coil was $616.00 per short
ton at October 12, 2020 , up 19.2% from the third quarter 2020 average.
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Executive Summary
For the three and nine months endedSeptember 30, 2020 , the Company generated a net loss of$22 million and$383 million on$326 million and$1,300 million in revenue, respectively. For the three and nine months endedSeptember 30, 2020 , revenue decreased$425 million or 56.6% and$1,012 million or 43.8%, respectively, when compared to the corresponding periods of 2019. For the three and nine months endedSeptember 30, 2020 , net income declined$32 million and$425 million , respectively, when compared to the corresponding periods of 2019.
For the three and nine months ended
Outlook
Our outlook for the Company remains tied to oil and gas commodity prices, global oil and gas drilling and completions activity, oil and gas spending, and global demand for oil, its refined petroleum products, and gas. Oil prices and oil storage levels are primary catalysts determining customer activity. During the first nine months of the year, the macro environment changed rapidly and dramatically. The rising global oil supply and sudden demand shock from COVID-19 drove significant declines in oil prices and significant builds of oil inventory. Continuing to the date of this filing, significant uncertainty still exists concerning the magnitude of the impact and duration of the COVID-19 pandemic and its impact on the economy and global oil and gas demand. The future outlook for oil and gas demand and supply appears equally uncertain and is expected to largely be driven by the pace of economic recovery from the COVID-19 pandemic and supply response that materializes. Amid these dynamics, we will continue to optimize our operations, advance our strategic goals and manage the Company based on market conditions. To navigate this challenging environment, we have taken decisive actions to cut costs, accelerate structural changes and deploy various technologies to optimize processes and increase productivity. We have prioritized cost transformation and warehousing, selling and administrative expense reductions as a key response to declining activity. We will continue to optimize our operations and adapt to market activity as appropriate to positionDNOW for the challenges ahead. As market conditions evolve, our response may result in various charges in future periods. Results of Operations
Operating results by reportable segment are as follows (in millions):
Three Months Ended September 30 ,
Nine Months Ended
2020 2019 2020 2019
Revenue:
United States $ 228 $ 567 $ 929 $ 1,772
Canada 42 83 161 243
International 56 101 210 297
Total revenue $ 326 $ 751 $ 1,300 $ 2,312
Operating profit (loss):
United States $ (22 ) $ 9 $ (250 ) $ 44
Canada 3 4 (60 ) 7
International (2 ) 1 (73 ) 3
Total operating profit (loss) $ (21 ) $ 14 $ (383 ) $ 54
United States
For the three and nine months ended September 30, 2020 , revenue was $228 million
and $929 million , a decline of $339 million or 59.8% and $843 million or 47.6%,
respectively, when compared to the corresponding periods of 2019. The decreases
in the periods were primarily driven by the decline in U.S. drilling and
completions activity.
For the three and nine months ended September 30, 2020 , the U.S. generated an
operating loss of $22 million and $250 million , a decline of $31 million and
$294 million , respectively, when compared to the corresponding periods of 2019.
For the three and nine months ended September 30, 2020 , operating profit
declined due to a decrease in revenue discussed above coupled with an increase
in inventory charges, partially offset by reduced operating expenses.
Additionally, for the nine months ended September 30, 2020 , operating profit was
negatively impacted by $188 million of impairment charges.
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For the three and nine months endedSeptember 30, 2020 , revenue was$42 million and$161 million , a decline of$41 million or 49.4% and$82 million or 33.7%, respectively, when compared to the corresponding periods of 2019. The decreases in the periods were primarily driven by the declines in rig count and project activity. For the three and nine months endedSeptember 30, 2020 ,Canada generated an operating profit of$3 million and loss of$60 million , a decline of$1 million and$67 million , respectively, when compared to the corresponding periods of 2019. For the three and nine months endedSeptember 30, 2020 , operating profit declined due to the reductions in revenue discussed above, partially offset by a decline in operating expenses which included the impact fromCanada Emergency Wage Subsidy. Additionally, for the nine months endedSeptember 30, 2020 , operating profit was negatively impacted by$60 million of impairment charges.
International
For the three and nine months endedSeptember 30, 2020 , revenue was$56 million and$210 million , a decline of$45 million or 44.6% and$87 million or 29.3%, respectively, when compared to the corresponding periods of 2019. For the three and nine months endedSeptember 30, 2020 , the decreases in revenue were driven by softer project activity. For the three and nine months endedSeptember 30, 2020 , the International segment generated an operating loss of$2 million and$73 million , a decline of$3 million and$76 million , respectively, when compared to the corresponding periods of 2019. For the three months endedSeptember 30, 2020 , operating profit declined due to a reduction in revenue discussed above, partially offset by a reduction in operating expenses. For the nine months endedSeptember 30, 2020 , operating profit declined due to the reduction in revenue discussed above coupled with approximately$72 million of impairment charges and increased bad debt charges. Cost of products For the three and nine months endedSeptember 30, 2020 , cost of products was$264 million and$1,053 million , respectively, compared to$601 million and$1,851 million , respectively, for the corresponding periods in 2019. For the three and nine months endedSeptember 30, 2020 , the decreases were primarily due to lower revenue in the periods. Cost of products includes the cost of inventory sold and related items, such as vendor consideration, inventory allowances, amortization of intangibles and inbound and outbound freight.
Warehousing, selling and administrative expenses
For the three and nine months endedSeptember 30, 2020 , warehousing, selling and administrative expenses were$83 million and$310 million , respectively, compared to$136 million and$407 million , respectively, for the corresponding periods of 2019. For the three and nine months endedSeptember 30, 2020 , operating expenses declined due to improved operating efficiencies. Additionally, for the nine months endedSeptember 30, 2020 , the decline in operating expenses was partially offset by an increase in separation charges. Warehousing, selling and administrative expenses include general corporate expenses, depreciation and branch, distribution center and regional expenses (including costs such as compensation, benefits and rent).
Impairment charges
For the three and nine months endedSeptember 30, 2020 , impairment charges were nil and$320 million , respectively, compared to nil in both periods for the corresponding periods of 2019. The Company recognized$230 million of goodwill impairment,$84 million of intangible asset impairment and$6 million of impairment for other long-lived assets for the nine months endedSeptember 30, 2020 . Other expense
For the three and nine months ended
Provision for income taxes
The effective tax rates for the three and nine months endedSeptember 30, 2020 , were (4.1%) and 0.6%, respectively, compared to 15.2% and 8.3%, respectively, for the same periods in 2019. Compared to theU.S. statutory rate, the effective tax rate was impacted by recurring items, such as differing tax rates on income earned in certain foreign jurisdictions, nondeductible expenses, state income taxes and the change in valuation allowance recorded against deferred tax assets. 22
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Non-GAAP Financial Measure and Reconciliation
In an effort to provide investors with additional information regarding our
results of operations as determined by GAAP, we disclose non-GAAP financial
measures. The primary non-GAAP financial measure we disclose is earnings before
interest, taxes, depreciation and amortization, excluding other costs ("EBITDA
excluding other costs"). This financial measure excludes the impact of certain
amounts and is not calculated in accordance with GAAP. A reconciliation of this
non-GAAP financial measure, to its most comparable GAAP financial measure, is
included below.
We use EBITDA excluding other costs internally to evaluate and manage the Company's operations because we believe it provides useful supplemental information regarding the Company's ongoing economic performance. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results.
The following table sets forth the reconciliations of EBITDA excluding other costs to the most comparable GAAP financial measures (in millions):
Three Months Ended September 30 ,
Nine Months Ended
2020 2019 2020 2019
GAAP net income (loss) (1) $ (22 ) $ 10 $ (383 ) $ 42
Interest, net - 1 - 4
Income tax provision 1 2 (2 ) 4
(benefit)
Depreciation and
amortization 6 10 23 30
Other costs (2) - 1 334 2
EBITDA excluding other
costs $ (15 ) $ 24 $ (28 ) $ 82
EBITDA % excluding other (4.6 %) 3.2 % (2.2 %) 3.5 %
costs (3)
(1) We believe that net income (loss) is the financial measure
calculated and presented in accordance with GAAP that is most
directly comparable to EBITDA excluding other costs. EBITDA
excluding other costs measures the Company's operating performance
without regard to certain expenses. EBITDA excluding other costs is
not a presentation made in accordance with GAAP and the Company's
computation of EBITDA excluding other costs may vary from others in
the industry. EBITDA excluding other costs has importantlimitations
as an analytical tool and should not be considered in isolation or
as a substitute for analysis of the Company's results as reported
under GAAP.
(2) Other costs included $320 million of impairment charges and $14
million in net separation and transaction-related expenses which
were included in operating loss for the nine months ended
September 30, 2020 .
(3) EBITDA % excluding other costs is defined as EBITDA excluding other
costs divided by Revenue.
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Liquidity and Capital Resources
We assess liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. We expect resources to be available to reinvest in existing businesses, strategic acquisitions and capital expenditures to meet short and long-term objectives. We believe that cash on hand, cash generated from expected results of operations and amounts available under our revolving credit facility will be sufficient to fund operations, anticipated working capital needs and other cash requirements, including capital expenditures. As ofSeptember 30, 2020 andDecember 31, 2019 , we had cash and cash equivalents of$325 million and$183 million , respectively. As ofSeptember 30, 2020 , approximately$70 million of our cash and cash equivalents were maintained in the accounts of our various foreign subsidiaries. With the exception of the Company's pre-2018 earnings inCanada and theUnited Kingdom , the Company's foreign earnings continue to be indefinitely reinvested. The Company makes a determination each period concerning its intent and ability to indefinitely reinvest the cash held by its foreign subsidiaries. For the nine months endedSeptember 30, 2020 , we repatriated$19 million from our Canadian operations. No additional income taxes have been provided for other foreign earnings as these amounts continue to be indefinitely reinvested. Future changes to our indefinite reinvestment assertion could result in additionalU.S. federal and state taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable in various foreign jurisdictions, where applicable. As ofSeptember 30, 2020 , we had no borrowings against our revolving credit facility, and had$209 million in availability (as defined in the Credit Agreement) resulting in the excess availability (as defined in the Credit Agreement) of 97%, subject to certain restrictions. Borrowings that result in the excess availability dropping below the greater of 12.5% of the borrowing base or$60 million are conditioned upon compliance with or waiver of a minimum fixed charge ratio (as defined in the Credit Agreement). The credit facility contains usual and customary affirmative and negative covenants for credit facilities of this type including financial covenants. As ofSeptember 30, 2020 , we were in compliance with all covenants. We continuously monitor compliance with debt covenants. A default, if not waived or amended, would prevent us from taking certain actions, such as incurring additional debt.
The following table summarizes our net cash flows provided by or used in operating activities, investing activities and financing activities for the periods presented (in millions):
Nine Months Ended
2020 2019
Net cash provided by (used in) operating activities $ 133 $ 150 Net cash provided by (used in) investing activities 19 (17 ) Net cash provided by (used in) financing activities (6 ) (136 ) Operating Activities For the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$133 million compared to$150 million provided in the corresponding period of 2019. For the nine months endedSeptember 30, 2020 , net cash provided by operating activities was driven by$383 million of net loss primarily offset by$320 million of impairment charges and a net increase of$116 million from changes in working capital.
Investing Activities
For the nine months endedSeptember 30, 2020 , net cash provided by investing activities was$19 million compared to$17 million used in the corresponding period of 2019. For the nine months endedSeptember 30, 2020 , the Company received$25 million in cash upon the closing of a business disposition, partially offset by$7 million cash used in purchases of property, plant and equipment. Financing Activities For the nine months endedSeptember 30, 2020 , net cash used in financing activities was$6 million compared to$136 million used in the corresponding period of 2019. The activity in the period was attributed to the Company making payments relating to its finance lease arrangements.
Other
For the nine months ended
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-------------------------------------------------------------------------------- We intend to pursue additional acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We continue to expect to fund future cash acquisitions primarily with cash flow from operations and the usage of the available portion of the revolving credit facility. There can be no assurance that additional financing will be available at terms acceptable to us.
Off-Balance Sheet Arrangements
We are often party to certain transactions that require off-balance sheet arrangements such as standby letters of credit and performance bonds and guarantees that are not reflected in our consolidated balance sheets. These arrangements are made in our normal course of business and they are not reasonably likely to have a current or future material adverse effect on our financial condition, results of operations, liquidity or cash flows.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies and estimates that we use
in the preparation of our consolidated financial statements, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in our Annual Report on Form 10-K. In preparing the financial
statements, the Company makes assumptions, estimates and judgments that affect
the amounts reported. The Company periodically evaluates its estimates and
judgments that are most critical in nature, which are related to allowance for
doubtful accounts, inventory reserves, goodwill, purchase price allocation of
acquisitions, vendor consideration, stock-based compensation and income taxes.
Its estimates are based on historical experience and on its future expectations
that the Company believes are reasonable. The combination of these factors forms
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results are
likely to differ from our current estimates and those differences may be
material.
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