10-Q 1 dnow-20220331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-36325

 

NOW INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-4191184

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

7402 North Eldridge Parkway,

Houston, Texas 77041

(Address of principal executive offices)

(281) 823-4700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

DNOW

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

As of April 28, 2022, the registrant had 110,708,514 shares of common stock (excluding 1,179,512 unvested restricted shares), par value $0.01 per share, outstanding.

 

1

 


 

NOW INC.

TABLE OF CONTENTS

 

Part I - Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2022 and 2021

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three months ended March 31, 2022 and 2021

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2022 and 2021

 

6

 

 

 

 

 

 

 

Consolidated Statements of Stockholders' Equity (Unaudited) for the three months ended March 31, 2022 and 2021

 

7

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

26

 

2

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

NOW INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

March 31, 2022

 

 

December 31, 2021

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

293

 

 

$

313

 

Receivables, net

 

 

341

 

 

 

304

 

Inventories, net

 

 

296

 

 

 

250

 

Prepaid and other current assets

 

 

16

 

 

 

16

 

Total current assets

 

 

946

 

 

 

883

 

Property, plant and equipment, net

 

 

106

 

 

 

111

 

Deferred income taxes

 

 

1

 

 

 

 

Goodwill

 

 

67

 

 

 

67

 

Intangibles, net

 

 

8

 

 

 

9

 

Other assets

 

 

34

 

 

 

34

 

Total assets

 

$

1,162

 

 

$

1,104

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

279

 

 

$

235

 

Accrued liabilities

 

 

109

 

 

 

112

 

Other current liabilities

 

 

7

 

 

 

22

 

Total current liabilities

 

 

395

 

 

 

369

 

Long-term operating lease liabilities

 

 

15

 

 

 

17

 

Deferred income taxes

 

 

1

 

 

 

 

Other long-term liabilities

 

 

5

 

 

 

6

 

Total liabilities

 

 

416

 

 

 

392

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Preferred stock - par value $0.01; 20 million shares authorized;
   
no shares issued and outstanding

 

 

 

 

 

 

Common stock - par value $0.01; 330 million shares authorized;
   
110,669,457 and 110,558,831 shares issued and outstanding at March 31, 2022
   and December 31, 2021, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

2,063

 

 

 

2,061

 

Accumulated deficit

 

 

(1,173

)

 

 

(1,203

)

Accumulated other comprehensive loss

 

 

(145

)

 

 

(147

)

Total stockholders' equity

 

 

746

 

 

 

712

 

Total liabilities and stockholders' equity

 

$

1,162

 

 

$

1,104

 

 

See notes to unaudited consolidated financial statements.

3

 


 

NOW INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In millions, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Revenue

 

$

473

 

 

$

361

 

Operating expenses:

 

 

 

 

 

 

Cost of products

 

 

366

 

 

 

286

 

Warehousing, selling and administrative

 

 

84

 

 

 

79

 

Impairment and other charges

 

 

 

 

 

4

 

Operating profit (loss)

 

 

23

 

 

 

(8

)

Other income (expense)

 

 

10

 

 

 

(1

)

Income (loss) before income taxes

 

 

33

 

 

 

(9

)

Income tax provision

 

 

3

 

 

 

1

 

Net income (loss)

 

$

30

 

 

$

(10

)

Earnings (loss) per share:

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

0.27

 

 

$

(0.09

)

Diluted earnings (loss) per common share

 

$

0.27

 

 

$

(0.09

)

Weighted-average common shares outstanding, basic

 

 

111

 

 

 

110

 

Weighted-average common shares outstanding, diluted

 

 

111

 

 

 

110

 

 

See notes to unaudited consolidated financial statements.

4

 


 

NOW INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Net income (loss)

$

30

 

 

$

(10

)

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustments

 

2

 

 

 

1

 

Comprehensive income (loss)

$

32

 

 

$

(9

)

 

See notes to unaudited consolidated financial statements.

5

 


 

NOW INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In millions)

 

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

$

30

 

 

$

(10

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

4

 

 

 

6

 

Provision for inventory

 

2

 

 

 

5

 

Impairment and other charges

 

 

 

 

4

 

Other, net

 

(7

)

 

 

5

 

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

 

 

 

 

 

Receivables

 

(36

)

 

 

(45

)

Inventories

 

(47

)

 

 

11

 

Prepaid and other current assets

 

1

 

 

 

 

Accounts payable, accrued liabilities and other, net

 

31

 

 

 

20

 

Net cash provided by (used in) operating activities

 

(22

)

 

 

(4

)

Cash flows from investing activities:

 

 

 

 

 

Business acquisitions, net of cash acquired

 

 

 

 

(6

)

Purchases of property, plant and equipment

 

 

 

 

(1

)

Other, net

 

2

 

 

 

 

Net cash provided by (used in) investing activities

 

2

 

 

 

(7

)

Cash flows from financing activities:

 

 

 

 

 

Payments relating to finance leases and other, net

 

(1

)

 

 

(2

)

Net cash provided by (used in) financing activities

 

(1

)

 

 

(2

)

Effect of exchange rates on cash and cash equivalents

 

1

 

 

 

 

Net change in cash and cash equivalents

 

(20

)

 

 

(13

)

Cash and cash equivalents, beginning of period

 

313

 

 

 

387

 

Cash and cash equivalents, end of period

$

293

 

 

$

374

 

 

See notes to unaudited consolidated financial statements.

6

 


 

NOW INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In millions)

 

 

 

 

 

Additional

 

 

Retained

 

 

Accum. Other

 

 

Total

 

 

Common

 

 

Paid-In

 

 

Earnings

 

 

Comprehensive

 

 

Stockholders’

 

 

Stock

 

 

Capital

 

 

(Deficit)

 

 

Income (Loss)

 

 

Equity

 

December 31, 2020

$

1

 

 

$

2,051

 

 

$

(1,208

)

 

$

(145

)

 

$

699

 

Net loss

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

(10

)

Stock-based compensation

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Exercise of stock options

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Shares withheld for taxes

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

March 31, 2021

$

1

 

 

$

2,053

 

 

$

(1,218

)

 

$

(144

)

 

$

692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

$

1

 

 

$

2,061

 

 

$

(1,203

)

 

$

(147

)

 

$

712

 

Net income

 

 

 

 

 

 

 

30

 

 

 

 

 

 

30

 

Stock-based compensation

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

March 31, 2022

$

1

 

 

$

2,063

 

 

$

(1,173

)

 

$

(145

)

 

$

746

 

 

See notes to unaudited consolidated financial statements.

7

 


 

NOW INC.

Notes to Unaudited Consolidated Financial Statements

1. Organization and Basis of Presentation

Nature of Operations

NOW Inc. (“NOW” or the “Company”) is a holding company headquartered in Houston, Texas that was incorporated in Delaware on November 22, 2013. NOW operates primarily under the DistributionNOW and DNOW brands. NOW is a global distributor of energy products as well as products for industrial applications through its locations in the United States (“U.S.”), Canada and internationally which are geographically positioned to serve the energy and industrial markets in approximately 80 countries. Additionally, through the Company’s 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. The Company’s 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. NOW also provides supply chain and materials management solutions to the same markets where the Company sells products. NOW’s supplier network consists of thousands of vendors in approximately 40 countries.

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 in the United States (“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 the Company’s 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 ended March 31, 2022, are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported and contingent amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables and payables approximated fair value because of the relatively short maturity of these instruments. Cash equivalents include only those investments having a maturity date of three months or less at the time of purchase. See Note 12 “Derivative Financial Instruments” for the fair value of derivative financial instruments.

Recently Issued Accounting Standards

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Entities that elect the relief are required to disclose the nature of the optional expedients and exceptions that are adopted and the reasons for the adoptions. The guidance is effective upon issuance and the expedients and exceptions may be applied prospectively through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 but does not expect the adoption of this standard to have a material effect on its consolidated financial statements.

 

 

8

 


 

2. Revenue

The Company’s primary source of revenue is the sale of energy products and an extensive selection of products for industrial applications based upon purchase orders or contracts with customers. The majority of revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped, delivered or picked up by the customer. The Company does not grant extended payment terms. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to proper government authorities. Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods and are recorded in cost of products.

The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product returns, trade discounts and allowances. The Company accrues for variable consideration using the expected value method. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

See Note 7 “Business Segments” for disaggregation of revenue by reporting segments. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed on contracts with an original expected duration of more than one year. The Company’s contracts are predominantly short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in Accounting Standards Codification (“ASC”) Topic 606 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less.

Receivables

Receivables are recorded when the Company has an unconditional right to consideration. Receivables are recorded and carried at the original invoiced amount less the allowance for doubtful accounts (“AFDA”). The estimated AFDA reflects the Company’s immediate recognition of current expected credit losses by incorporating the historical loss experience, as well as current and future market conditions that are reasonably available. Judgments in the estimate of AFDA include global economic and business conditions, oil and gas industry and market conditions, customer’s financial conditions and accounts receivable past due. As of March 31, 2022 and December 31, 2021, AFDA totaled $24 million and $25 million, respectively.

Contract Assets and Liabilities

Contract assets primarily consist of retainage amounts held as a form of security by customers until the Company satisfies its remaining performance obligations. As of March 31, 2022 and December 31, 2021, contract assets were $1 million for both periods and were included in receivables, net in the consolidated balance sheets. The Company generally accounts for the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less; however, these expenses are not material.

Contract liabilities primarily consist of deferred revenues recorded when customer payments are received or due in advance of satisfying performance obligations, including amounts which are refundable, and other accrued customer liabilities. Revenue recognition is deferred to a future period until the Company completes its obligations contractually agreed with customers. As of March 31, 2022 and December 31, 2021, contract liabilities were $32 million and $27 million, respectively, and were included in accrued liabilities in the consolidated balance sheets. For the three months ended March 31, 2022, the increase in contract liabilities was primarily related to net customer deposits of approximately $11 million, partially offset by recognizing revenue of approximately $6 million that was deferred as of December 31, 2021.

9

 


 

3. Property, Plant and Equipment, net

Property, plant and equipment consist of (in millions):

 

 

Estimated
Useful Lives

 

March 31, 2022

 

 

December 31, 2021

 

Information technology assets

 

1-7 Years

 

$

48

 

 

$

48

 

Operating equipment (1)

 

2-15 Years

 

 

126

 

 

 

129

 

Buildings and land (2)

 

5-35 Years

 

 

92

 

 

 

91

 

Construction in progress

 

 

 

 

3

 

 

 

3

 

Total property, plant and equipment

 

 

 

 

269

 

 

 

271

 

Less: accumulated depreciation

 

 

 

 

(163

)

 

 

(160

)

Property, plant and equipment, net

 

 

 

$

106

 

 

$

111

 

 

(1)
Includes finance lease right-of-use assets.
(2)
Land has an indefinite life.

4. Accrued Liabilities

Accrued liabilities consist of (in millions):

 

 

March 31, 2022

 

 

December 31, 2021

 

Compensation and other related expenses

 

$

28

 

 

$

35

 

Contract liabilities

 

 

32

 

 

 

27

 

Taxes (non-income)

 

 

10

 

 

 

12

 

Current portion of operating lease liabilities

 

 

15

 

 

 

15

 

Other

 

 

24

 

 

 

23

 

Total

 

$

109

 

 

$

112

 

 

5. Debt

On December 14, 2021, the Company entered into an amendment to its existing senior secured revolving credit facility with a syndicate of lenders with Wells Fargo Bank, National Association, serving as the administrative agent (as amended, the “Credit Facility”).

Effective with the amendment, the Credit Facility provides for a $500 million global revolving credit facility, of which up to $50 million is available for the Company’s Canadian subsidiaries, and the maturity is extended to December 14, 2026. The Company has the right, subject to certain conditions, to increase the aggregate principal amount of commitments under the credit facility by $250 million. The Credit Facility also provides a letter of credit sub-facility of $25 million. The obligations under the Credit Facility are secured by substantially all the assets of the Company and its subsidiaries. The Credit Facility contains customary covenants, representations and warranties and events of default. The Company will be required to maintain a fixed charge coverage ratio of at least 1.00:1.00 as of the end of each fiscal quarter if excess availability under the Credit Facility falls below the greater of 10% of the borrowing base or $40 million.

Borrowings under the Credit Facility will bear an interest rate at the Company’s option, at (i) the base rate plus an applicable margin based on the Company’s fixed charge coverage ratio (and if applicable, the Company’s leverage ratio); or (ii) the greater of LIBOR for the applicable interest period and zero, plus an applicable margin based on the Company’s fixed charge coverage ratio (and if applicable, the Company’s leverage ratio). As part of the amendment, when the fixed charge coverage ratio (as defined in the Credit Facility) is less than or equal to 1.50 to 1.00, the applicable rate for borrowings of base rate loans and Eurocurrency rate loans decreases by 0.250%. The Credit Facility includes a commitment fee on the unused portion of commitments that ranges from 25 to 37.5 basis points. Commitment fees incurred during the period were included in other income (expense) in the consolidated statements of operations.

Availability under the Credit Facility is determined by a borrowing base comprised of eligible receivables, eligible inventory and certain pledged deposits in the U.S and Canada. As of March 31, 2022, the Company had no borrowings against the Credit Facility and approximately $436 million in availability (as defined in the Credit Facility) resulting in the excess availability (as defined in the Credit Facility) of 99%, subject to certain limitations. The Company is not obligated to repay borrowings against the current Credit Facility until the expiration date.

The Company issued $5 million in letters of credit under the Credit Facility primarily for casualty insurance expiring in June 2023.

10

 


 

6. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) are as follows (in millions):

 

 

Foreign Currency

 

 

 

Translation Adjustments

 

Balance at December 31, 2021

 

$

(147

)

Other comprehensive gain

 

 

2

 

Balance at March 31, 2022

 

$

(145

)

 

The Company’s reporting currency is the U.S. dollar. A majority of the Company’s international entities in which there is a substantial investment have the local currency as their functional currency. As a result, foreign currency translation adjustments resulting from the process of translating the entities’ financial statements into the reporting currency are reported in other comprehensive income or loss in accordance with ASC Topic 830, “Foreign Currency Matters.”

7. Business Segments

Operating results by reportable segment are as follows (in millions):

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

United States

$

334

 

 

$

252

 

Canada

 

82

 

 

 

58

 

International

 

57

 

 

 

51

 

Total revenue

$

473

 

 

$

361

 

Operating profit (loss):

 

 

 

 

 

United States

$

14

 

 

$

(13

)

Canada

 

7

 

 

 

4

 

International

 

2

 

 

 

1

 

Total operating profit (loss)

$

23

 

 

$

(8

)

 

8. Income Taxes

The effective tax rate for the three months ended March 31, 2022, was 9.1% compared to (5.5%) for the corresponding period of 2021. In general, the effective tax rate differs from the U.S. statutory rate due to recurring items, such as differing tax rates on income earned in foreign jurisdictions, nondeductible expenses, state income taxes and the change in valuation allowance recorded against deferred tax assets. For the three months ended March 31, 2022, the effective tax rate was primarily driven by the recognition of tax expense from earnings in Canada offset by current year realization of deferred tax assets and corresponding release of valuation allowance in the U.S. The current geopolitical conditions and the COVID-19 pandemic have had an impact on the global supply chain and create continuing uncertainty in the Company’s short-term results. Consequently, the Company is continuing to rely on the discrete-period method for calculating its interim period tax provision for the three months ended March 31, 2022. The Company will evaluate its use of this method each quarter until such time as a return to the annualized estimated effective tax rate method is deemed appropriate.

The Company is subject to taxation in the U.S., various states and foreign jurisdictions. The Company has significant operations in the U.S. and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally open in the U.S. for the tax years ending after 2017 and outside the U.S. for the tax years ending after 2015.

9. Earnings (Loss) Per Share

For the three months ended March 31, 2022, approximately 4 million of potentially dilutive shares were excluded from the computation of diluted earnings per share due to their antidilutive effect. For the three months ended March 31, 2021, approximately 6 million of potentially dilutive shares were excluded from the computation of diluted earnings per share due to the Company recognizing a net loss.

11

 


 

Basic and diluted earnings (loss) per share are as follows (in millions, except share data):

 

Three Months Ended March 31,

 

 

2022

 

 

2021

 

Numerator:

 

 

 

 

 

Net income (loss) attributable to the Company

$

30

 

 

$

(10

)

Less: net income attributable to participating securities

 

 

 

 

 

Net income (loss) attributable to the Company's stockholders

$

30

 

 

$

(10

)

Denominator:

 

 

 

 

 

Weighted average basic common shares outstanding

 

110,602,943

 

 

 

110,071,365

 

Effect of dilutive securities

 

219,574

 

 

 

 

Weighted average diluted common shares outstanding

 

110,822,517

 

 

 

110,071,365

 

Earnings (loss) per share attributable to the Company's stockholders:

 

 

 

 

 

Basic

$

0.27

 

 

$

(0.09

)

Diluted

$

0.27

 

 

$

(0.09

)

Under ASC Topic 260, “Earnings Per Share”, the two-class method requires a portion of net income attributable to the Company to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents, if declared. Net loss is not allocated to unvested awards in periods the Company determines that those shares are not obligated to participate in losses. For the periods that the Company recognized net income, net income attributable to the Company allocated to these participating securities was excluded from net income attributable to the Company’s stockholders in the numerator of the earnings per share computation.

10. Stock-based Compensation and Outstanding Awards

The Company has a stock-based compensation plan known as the NOW Inc. Long-Term Incentive Plan (the “Plan”). Under the Plan, the Company’s employees are eligible to be granted stock options, restricted stock awards (“RSAs”), restricted stock units and phantom shares (“RSUs”), and performance stock awards (“PSAs”).

For the three months ended March 31, 2022, the Company granted 664,274 shares of RSAs and RSUs with a weighted average fair value of $9.62 per share and PSAs to senior management employees with potential payouts varying from zero to 701,668 shares. The RSAs and RSUs vest on the third anniversary of the date of grant. The PSAs can be earned based on performance against established metrics over a three-year performance period set by the Company’s Compensation Committee of the Board of Directors. The PSAs are divided into three independent parts that are subject to separate performance metrics: (i) one-half of the PSAs have a Total Shareholder Return (“TSR”) metric, (ii) one-quarter of the PSAs have an EBITDA metric, and (iii) one-quarter of the PSAs have a Return on Capital Employed (“ROCE”) metric.

Performance against the TSR metric is determined by comparing the performance of the Company’s TSR with the TSR performance of designated peer companies for the three-year performance period. Performance against the EBITDA metric is determined by comparing the performance of the Company’s actual EBITDA average for each of the three-years of the performance period against the EBITDA metrics set. Performance against the ROCE metric is determined by comparing the performance of the Company’s actual ROCE average for each of the three-years of the performance period against the ROCE metrics set.

Stock-based compensation expense recognized for the three months ended March 31, 2022, and 2021 totaled $2 million for both periods.

11. Commitments and Contingencies

The Company is involved in various claims, regulatory agency audits and pending or threatened legal actions involving a variety of matters with entities such as suppliers, customers, parties to acquisitions and divestitures, government authorities and other external parties. The Company regularly reviews and records the estimated probable liability in an amount believed to be sufficient and continues to periodically reexamine the estimates of probable liabilities and any associated expenses to make appropriate adjustments to such estimates as necessary. These estimated liabilities are based on the Company’s assessment of the nature of these matters, their progress toward resolution, the advice of legal counsel and outside experts as well as management’s intention and past experience regarding the valuation of these claims. The Company has also assessed the potential for additional losses above the amounts accrued as well as potential losses for matters that are not probable but are reasonably possible. The total potential loss on these matters cannot be determined. While the Company has established estimates it believes to be reasonable under the facts known, the outcomes of litigation and similar disputes are often difficult to reliably predict and may result in decisions or settlements that are contrary to, or in excess of, the Company's expectations.

12

 


 

The Company’s business is affected both directly and indirectly by governmental laws and regulations relating to the oilfield service industry in general, as well as by environmental and safety regulations that specifically apply to the Company’s business. Although the Company has not incurred material costs in connection with its compliance with such laws, there can be no assurance that other developments, such as new environmental laws, regulations and enforcement policies hereunder may not result in additional, presently unquantifiable costs or liabilities to the Company. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible, but not probable. Estimating reasonably possible losses also requires the analysis of multiple possible outcomes that often depend on judgments about potential actions by third parties.

The Company maintains credit arrangements with several banks providing for standby letters of credit, including bid and performance bonds, and other bonding requirements. As of March 31, 2022, the Company was contingently liable for approximately $12 million of outstanding standby letters of credit and surety bonds. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid.

In 2021, the Company completed an acquisition which included a contingent consideration arrangement that required additional consideration to be paid based on the achievement of a specified performance target over the earn-out period of one year. The fair value of contingent consideration liability included in other current liabilities in the consolidated balance sheet as of December 31, 2021, was approximately $13 million. As of March 31, 2022, the earn-out period was completed and the Company calculated the contingent consideration threshold was not achieved and the contingent liability was removed, resulting in a benefit of approximately $13 million, recognized in other income (expense) in the consolidated statement of operations. However, the Company is currently in disagreement with the sellers on aspects of the agreement. The Company does not believe at this time that resolution of the matter will have a material impact on its consolidated financial statements, but the final outcome has not been determined.

12. Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The Company has entered into certain financial derivative instruments to manage this risk.

The derivative financial instruments the Company has entered into are forward exchange contracts which have terms of less than one year to economically hedge foreign currency exchange rate risk on recognized nonfunctional currency monetary accounts. The purpose of the Company’s foreign currency hedging activities is to economically hedge the Company’s risk from changes in the fair value of nonfunctional currency denominated monetary accounts.

The Company records all derivative financial instruments at their fair value in its consolidated balance sheets. None of the derivative financial instruments that the Company holds are designated as either a fair value hedge or cash flow hedge and the gain or loss on the derivative instrument is recorded in earnings. The Company has determined that the fair value of its derivative financial instruments are computed using level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on publicly available foreign exchange rates at each financial reporting date. As of March 31, 2022 and December 31, 2021, the fair value of the Company’s foreign currency forward contracts totaled an asset of less than $1 million and a liability of less than $1 million in both periods. The Company's foreign currency forward contract assets were included in prepaid and other current assets in the consolidated balance sheets and the Company's foreign contract liabilities were included in other current liabilities in the consolidated balance sheets.

For the three months ended March 31, 2022 and 2021, the Company recorded a loss of less than $1 million and a gain of less than $1 million, respectively, related to changes in fair value. All gains and losses were included in other income (expense) in the consolidated statements of operations. The notional principal associated with those contracts was $7 million and $9 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, the Company’s financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when the Company’s financial instruments are in net liability positions. The Company does not use derivative financial instruments for trading or speculative purposes.

13

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, geopolitical conditions (including the Ukraine conflict and its regional and global impact) 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 175 locations and approximately 2,300 employees worldwide, we offer a complementary suite of digital procurement channels that, in conjunction with our locations, 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 South America, the North Sea, the Middle East, Asia Pacific, portions of the former Soviet Union and Africa. 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 approximately 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.

14

 


 

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, Netherlands, Norway, Oman, 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 7 “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.

United States

We have approximately 115 locations in the U.S., which are geographically positioned to best serve the upstream, midstream and downstream energy and industrial markets.

We offer higher value solutions in key product lines in the U.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.

Canada

We have a network of approximately 40 locations in the Canadian oilfield, predominantly in the oil rich provinces of Alberta, Saskatchewan, Manitoba and other targeted locations across the country. Our Canada segment primarily serves energy exploration, production, mining and drilling business, offering customers many of the same products and value-added solutions that we perform in the U.S. In Canada, we also provide training for, and supervise the installation of, jointed and spoolable composite pipe. This product line is supported by inventory, as well as 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 20 locations outside the U.S. and Canada, which are strategically located in major oil and gas development areas. Our approach in these markets is similar to our approach in North 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.

In February 2022, Russia invaded Ukraine and is still engaged in active armed conflict against the country. As a result, governments in the European Union, the United States, the United Kingdom, Switzerland, and other countries have enacted additional sanctions against Russia and Russian interests. These sanctions include controls on the export, re-export, and in-country transfer in Russia of certain goods, supplies, and technologies, and the imposition of restrictions on doing business with certain state-owned Russian customers and other investments and business activities in Russia. In order to comply with these sanctions, we began to wind down our operations in Russia. As of March 31, 2022, Russia represented less than one percent of our net book value of assets, and no impairment has occurred. However, the conflict in Ukraine and related sanctions could potentially impact our assets in Russia, which could cause us to take a charge related to those assets.

15

 


 

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 in the United States (“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 months ended March 31, 2022, 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 2022 and 2021 and the fourth quarter of 2021 include the following:

 

 

 

 

 

 

 

 

 

%

 

 

 

 

 

%

 

 

 

 

 

 

 

 

 

1Q22 v

 

 

 

 

 

1Q22 v

 

 

 

1Q22*

 

 

1Q21*

 

 

1Q21

 

 

4Q21*

 

 

4Q21

 

Active Drilling Rigs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

633

 

 

 

392

 

 

 

61.5

%

 

 

559

 

 

 

13.2

%

Canada

 

 

198

 

 

 

139

 

 

 

42.4

%

 

 

161

 

 

 

23.0

%

International

 

 

823

 

 

 

698

 

 

 

17.9

%

 

 

817

 

 

 

0.7

%

Worldwide

 

 

1,654

 

 

 

1,229

 

 

 

34.6

%

 

 

1,537

 

 

 

7.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West Texas Intermediate Crude Prices (per barrel)

 

$

94.45

 

 

$

57.79

 

 

 

63.4

%

 

$

77.45

 

 

 

21.9

%

Natural Gas Prices ($/MMBtu)

 

$

4.66

 

 

$

3.56

 

 

 

30.9

%

 

$

4.77

 

 

 

(2.3

%)

Hot-Rolled Coil Prices (steel) ($/short ton)

 

$

1,383.09

 

 

$

1,113.52

 

 

 

24.2