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 Inc., formerlyNational Oilwell Varco, Inc. ("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 a network of approximately 195 locations and approximately 2,400 employees worldwide, we offer a complementary suite of digital procurement channels, in conjunction with our locations, that provides products to the energy and industrial markets around the world.
Additionally, through our growing DigitalNOW® platform, customers can leverage world-class technology across ecommerce, data management and supply chain optimization applications to solve a wide array of complex operational and product sourcing challenges to assist in maximizing their return on assets.
Our energy product offering is consumed throughout all sectors of the energy
industry - from upstream drilling and completion, exploration and production,
midstream infrastructure development to downstream petroleum refining and
petrochemicals - as well as in other industries, such as chemical processing,
mining, utilities and renewables. The industrial distribution end markets
include engineering and construction firms that perform capital and maintenance
projects for their end user clients. 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, warehouse and inventory 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 all 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, liquefied natural gas terminals, power generation utilities
operations 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.
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We employ advanced information technologies, including a common ERP platform
across most of our business, to provide complete procurement, warehouse and
inventory 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.
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, into
Australia , Azerbaijan , Brazil , Canada , China , Colombia , Egypt , England , India ,
Indonesia , Kazakhstan , Kuwait , Mexico , Netherlands , Norway , Oman , Russia , Saudi
Arabia , Scotland , Singapore , the United Arab Emirates and the United States
("U.S.").
Summary of Reportable Segments
We operate through three reportable segments:U.S. ,Canada and International. The segment data included in our Management's Discussion and Analysis are presented on a basis consistent with our internal management reporting. Segment information appearing in Note 8 "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 130 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 and production equipment, fluid transfer products, measurement and controls, spoolable and coated steel-pipe and composite pipe, along with many other products required by our customers, which enable them to focus on their core business while we manage varying degrees of their supply chain. We also provide additional value to our customers through the engineering, design, construction, assembly, fabrication and optimization of products and equipment essential to the safe and efficient production, transportation and processing of oil and gas.
We have a network of approximately 40 locations in the Canadian oilfield, predominantly in the oil rich provinces ofAlberta ,Saskatchewan ,Manitoba and other targeted locations across the country. 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 products and supply chain solutions 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. 16
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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 accounting principles generally accepted inthe United States ("GAAP") for interim financial information and Article 10 ofSEC 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 months endedMarch 31, 2021 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 oilfield service companies and drilling
contractors, and the worldwide oil and gas inventory levels. Key industry
indicators for the first quarter of 2021 and 2020 and the fourth quarter of 2020
include the following:
% %
1Q21 v 1Q21 v
1Q21* 1Q20* 1Q20 4Q20* 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)
$ 2.53 40.7 % Hot-Rolled Coil Prices (steel) ($/short ton)$ 1,113.52 $ 580.32 91.9 %$ 701.34 58.8 %
* 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 increased 15.4% (from 1,065 rigs to
1,229 rigs) and the U.S. increased 26.5% (from 310 rigs to 392 rigs) in the
first quarter of 2021 compared to the fourth quarter of 2020. The average price
per barrel of West Texas Intermediate Crude increased 36.1% (from $42.45 per
barrel to $57.79 per barrel), and natural gas prices increased 40.7% (from $2.53
per MMBtu to $3.56 per MMBtu) in the first quarter of 2021 compared to the
fourth quarter of 2020. The average price per short ton of Hot-Rolled Coil
increased 58.8% (from $701.34 per short ton to $1,113.52 per short ton) in the
first quarter of 2021 compared to the fourth quarter of 2020.
U.S. rig count at April 16, 2021 was 439 rigs, up 47 rigs from the first quarter
2021 average. The price for West Texas Intermediate Crude was $63.16 per barrel
at April 16, 2021 , up 9.3% from the first quarter 2021 average. The price for
natural gas was $2.63 per MMBtu at April 16, 2021 , down 26.1% from the first
quarter 2021 average. The price for Hot-Rolled Coil was $1,320.00 per short ton
at April 12, 2021 , up 18.5% from the first quarter 2021 average.
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Executive Summary
For the three months endedMarch 31, 2021 , the Company generated a net loss of$10 million on$361 million in revenue. For the three months endedMarch 31, 2021 , revenue decreased$243 million or 40.2%, and net loss improved$321 million when compared to the corresponding period of 2020.
For the three months ended
Outlook
Our outlook for the Company remains tied to crude oil and natural gas commodity prices, global oil and gas drilling and completions activity, oil and gas spending, and global demand for oil, its refined petroleum products, crude oil, natural gas liquids and natural gas production and decline rates. Crude oil prices and natural gas as well as crude oil and natural gas storage levels are primary catalysts determining customer activity. 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 approved vaccines produced and administered on a global basis, which will impact the magnitude, pace and timing of an economic recovery from the COVID-19 pandemic. 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 undergone a significant cost transformation by making decisive actions to cut costs, accelerate structural changes and deploy various technologies to optimize processes, increase productivity and grow revenue through expanding digital channels. We will continue to optimize our operations and adapt to market activity as appropriate to position the Company for the challenges ahead. As market conditions evolve, our response may result in various charges in future periods. We see the rise in energy transition investments as an opportunity for us to supply many of the current products and services we provide, as well as an opportunity to partner and source from new suppliers to expand our offering, to meet our customers' needs for their energy transition investments. A number of our larger customers are leading the investments in energy transition projects where we expect to continue to supply them while expanding our offerings to meet their changing requirements. We are also targeting new customers that are not traditional oil and gas customers, those that will play a part in the future of energy transition. Results of Operations
Operating results by reportable segment are as follows (in millions):
Three Months Ended March 31,
2021 2020
Revenue:
United States $ 252 $ 441
Canada 58 78
International 51 85
Total revenue $ 361 $ 604
Operating profit (loss):
United States $ (13 ) $ (204 )
Canada 4 (58 )
International 1 (71 )
Total operating loss $ (8 ) $ (333 )
United States
For the three months ended March 31, 2021 , revenue was $252 million , a decline
of $189 million or 42.9% when compared to the corresponding period of 2020. The
decrease in the period was primarily driven by the decline in U.S. drilling and
completions activity.
For the three months ended March 31, 2021 , the U.S. generated an operating loss
of $13 million , an improvement of $191 million when compared to the
corresponding period of 2020. For the three months ended March 31, 2021 ,
operating loss narrowed primarily due to a $184 million reduction in impairment
charges and reduced operating expenses, partially offset by the decrease in
revenue discussed above.
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For the three months endedMarch 31, 2021 , revenue was$58 million , a decline of$20 million or 25.6% when compared to the corresponding period of 2020. The decrease in the period was primarily driven by the declines in rig count and project activity. For the three months endedMarch 31, 2021 ,Canada generated an operating profit of$4 million , an improvement of$62 million when compared to the corresponding period of 2020. For the three months endedMarch 31, 2021 , operating profit improved primarily due to$60 million in impairment charges in the first quarter of 2020 that did not repeat and reduced operating expenses, partially offset by the decrease in revenue discussed above.
International
For the three months ended
For the three months endedMarch 31, 2021 , the International segment generated an operating profit of$1 million , an improvement of$72 million when compared to the corresponding period of 2020. For the three months endedMarch 31, 2021 , operating profit improved primarily due to$72 million in impairment charges in the first quarter of 2020 that did not repeat and reduced operating expenses, partially offset by the decrease in revenue discussed above.
Cost of products
For the three months endedMarch 31, 2021 , cost of products was$286 million compared to$487 million for the corresponding period in 2020. For the three months endedMarch 31, 2021 , the decrease was primarily due to lower revenue in the period. 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 months endedMarch 31, 2021 , warehousing, selling and administrative expenses were$79 million compared to$130 million for the corresponding period of 2020. For the three months endedMarch 31, 2021 , operating expenses declined due to improved operating efficiencies. Warehousing, selling and administrative expenses include branch location, distribution center and regional expenses (including costs such as compensation, benefits and rent) as well as corporate general selling and administrative expenses.
Impairment charges
For the three months ended
Other expense
For the three months endedMarch 31, 2021 , other expense was$1 million compared to nil for the corresponding period of 2020. For the three months endedMarch 31, 2021 , other expense increased primarily due to unfavorable foreign exchange rate impacts. Provision for income taxes The effective tax rate for the three months endedMarch 31, 2021 was (5.5%) compared to 0.6% for the same period in 2020. 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. 20
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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 March 31,
2021 2020
GAAP net loss (1) $ (10 ) $ (331 )
Interest, net - -
Income tax provision (benefit) 1 (2 )
Depreciation and amortization 6 10
Other costs (2) 4 325
EBITDA excluding other costs $ 1 $ 2
EBITDA % excluding other costs (3) 0.3 % 0.3 %
(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 operatingperformance
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 primarily included impairment charges, as well as net
separation and transaction-related expenses, which were included in
operating loss.
(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 ofMarch 31, 2021 andDecember 31, 2020 , we had cash and cash equivalents of$374 million and$387 million , respectively. As ofMarch 31, 2021 ,$94 million of our cash and cash equivalents were maintained in the accounts of our various foreign subsidiaries. With the exception of the Company's 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. 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 ofMarch 31, 2021 , we had no borrowings against our revolving credit facility, and had approximately$224 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 ofMarch 31, 2021 , 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 (used in) operating activities, investing activities and financing activities for the periods presented (in millions):
Three Months Ended
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 ) Operating Activities For the three months endedMarch 31, 2021 , net cash used in operating activities was$4 million compared to$6 million provided by operating activities in the corresponding period of 2020. For the three months endedMarch 31, 2021 , net cash used in operating activities was primarily driven by the increase in working capital as a result of growing market activity.
Investing Activities
For the three months endedMarch 31, 2021 , net cash used in investing activities was$7 million compared to$22 million provided by investing activities in the corresponding period of 2020. For the three months endedMarch 31, 2021 , the Company used$6 million (net of cash acquired) to fund an acquisition.
Financing Activities
For the three months endedMarch 31, 2021 and 2020, net cash used in financing activities remained at$2 million in both periods. For the three months endedMarch 31, 2021 , the activity was primarily attributed to the Company making payments relating to its finance lease arrangements.
Other
For the three months endedMarch 31, 2021 , the effect of the change in exchange rates on cash and cash equivalents was nil compared to a decrease of$7 million for the corresponding period of 2020. 22
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Capital Spending
Subsequent toMarch 31, 2021 , we closed an acquisition from GR Energy Services of substantially all of the assets used in connection with its Flex Flow business ("Flex Flow Acquisition"), predominantly relating to the rental, sale and service of surface-mounted horizontal pumping systems and horizontal jet pumping systems in theU.S. The transaction consisted of an initial cash consideration of$90 million and additional contingent consideration if certain profitability thresholds are achieved during the one-year period following the closing of the transaction. Mr.J. Wayne Richards , who serves on the Company's Board of Directors, is a minority shareholder, President and Chief Executive Officer of GR Energy Services. Consistent with our related person transactions policy and code of conduct,Mr. Richards recused himself from all board discussions related to the Flex Flow Acquisition and did not participate in any negotiations with respect thereto. Furthermore,Mr. Richards will continue to recuse himself from any future matters related to Flex Flow business. Our Board, excludingMr. Richards , in consultation with its independent financial advisors, independently evaluated and approved the Flex Flow Acquisition and, together with our executive team, will make any required future determinations regarding the Flex Flow Acquisition. 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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