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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 JUNE 30, 2021

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 July 28, 2021 the registrant had 110,558,831 shares of common stock (excluding 686,683 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 June 30, 2021 (Unaudited) and December 31, 2020

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2021 and 2020 

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended June 30, 2021 and 2020 

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2021 and 2020 

 

6

 

 

 

 

 

 

 

Consolidated Statements of Stockholders' Equity (Unaudited) for the three and six months ended June 30, 2021 and 2020 

 

7

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

15

 

 

 

 

 

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)

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

293

 

 

$

387

 

Receivables, net

 

 

271

 

 

 

198

 

Inventories, net

 

 

250

 

 

 

262

 

Prepaid and other current assets

 

 

17

 

 

 

14

 

Total current assets

 

 

831

 

 

 

861

 

Property, plant and equipment, net

 

 

120

 

 

 

98

 

Deferred income taxes

 

 

1

 

 

 

1

 

Goodwill

 

 

66

 

 

 

 

Intangibles, net

 

 

12

 

 

 

 

Other assets

 

 

40

 

 

 

48

 

Total assets

 

$

1,070

 

 

$

1,008

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

217

 

 

$

172

 

Accrued liabilities

 

 

99

 

 

 

95

 

Other current liabilities

 

 

25

 

 

 

5

 

Total current liabilities

 

 

341

 

 

 

272

 

Long-term operating lease liabilities

 

 

19

 

 

 

25

 

Other long-term liabilities

 

 

14

 

 

 

12

 

Total liabilities

 

 

374

 

 

 

309

 

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;

   110,558,831 and 109,951,610 shares issued and outstanding at June 30, 2021

   and December 31, 2020, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

2,057

 

 

 

2,051

 

Accumulated deficit

 

 

(1,220

)

 

 

(1,208

)

Accumulated other comprehensive loss

 

 

(142

)

 

 

(145

)

Total stockholders' equity

 

 

696

 

 

 

699

 

Total liabilities and stockholders' equity

 

$

1,070

 

 

$

1,008

 

 

See notes to unaudited consolidated financial statements.

3

 


NOW INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In millions, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue

 

$

400

 

 

$

370

 

 

$

761

 

 

$

974

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

315

 

 

 

302

 

 

 

601

 

 

 

789

 

Warehousing, selling and administrative

 

 

85

 

 

 

97

 

 

 

164

 

 

 

227

 

Impairment charges

 

 

 

 

 

 

 

 

4

 

 

 

320

 

Operating profit (loss)

 

 

 

 

 

(29

)

 

 

(8

)

 

 

(362

)

Other expense

 

 

(1

)

 

 

(2

)

 

 

(2

)

 

 

(2

)

Loss before income taxes

 

 

(1

)

 

 

(31

)

 

 

(10

)

 

 

(364

)

Income tax provision (benefit)

 

 

1

 

 

 

(1

)

 

 

2

 

 

 

(3

)

Net loss

 

$

(2

)

 

$

(30

)

 

$

(12

)

 

$

(361

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per common share

 

$

(0.02

)

 

$

(0.27

)

 

$

(0.11

)

 

$

(3.30

)

Diluted loss per common share

 

$

(0.02

)

 

$

(0.27

)

 

$

(0.11

)

 

$

(3.30

)

Weighted-average common shares outstanding, basic

 

 

110

 

 

 

109

 

 

 

110

 

 

 

109

 

Weighted-average common shares outstanding, diluted

 

 

110

 

 

 

109

 

 

 

110

 

 

 

109

 

 

See notes to unaudited consolidated financial statements.

4

 


NOW INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net loss

$

(2

)

 

$

(30

)

 

$

(12

)

 

$

(361

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

2

 

 

 

8

 

 

 

3

 

 

 

(31

)

Comprehensive income (loss)

$

 

 

$

(22

)

 

$

(9

)

 

$

(392

)

 

See notes to unaudited consolidated financial statements.

5

 


NOW INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In millions)

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(12

)

 

$

(361

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

12

 

 

 

17

 

Provision for inventory

 

6

 

 

 

21

 

Impairment charges

 

4

 

 

 

320

 

Other, net

 

11

 

 

 

16

 

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

 

 

 

 

 

 

 

Receivables

 

(63

)

 

 

113

 

Inventories

 

9

 

 

 

68

 

Prepaid and other current assets

 

 

 

 

(4

)

Accounts payable, accrued liabilities and other, net

 

37

 

 

 

(116

)

Net cash provided by (used in) operating activities

 

4

 

 

 

74

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Business acquisitions, net of cash acquired

 

(96

)

 

 

 

Net proceeds from sale of business

 

 

 

 

25

 

Purchases of property, plant and equipment

 

(2

)

 

 

(5

)

Net cash provided by (used in) investing activities

 

(98

)

 

 

20

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments relating to finance leases and other, net

 

(1

)

 

 

(4

)

Net cash provided by (used in) financing activities

 

(1

)

 

 

(4

)

Effect of exchange rates on cash and cash equivalents

 

1

 

 

 

(4

)

Net change in cash and cash equivalents

 

(94

)

 

 

86

 

Cash and cash equivalents, beginning of period

 

387

 

 

 

183

 

Cash and cash equivalents, end of period

$

293

 

 

$

269

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Accrued purchases of property, plant and equipment

$

 

 

$

2

 

 

 

 

 

 

 

 

 

 

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, 2019

$

1

 

 

$

2,046

 

 

$

(775

)

 

$

(128

)

 

$

1,144

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

(6

)

Net loss

 

 

 

 

 

 

 

(331

)

 

 

 

 

 

(331

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

(39

)

 

 

(39

)

March 31, 2020

$

1

 

 

$

2,046

 

 

$

(1,112

)

 

$

(167

)

 

$

768

 

Net loss

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

(30

)

Stock-based compensation

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

June 30, 2020

$

1

 

 

$

2,047

 

 

$

(1,142

)

 

$

(159

)

 

$

747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Net loss

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Stock-based compensation

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Exercise of stock options

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

June 30, 2021

$

1

 

 

$

2,057

 

 

$

(1,220

)

 

$

(142

)

 

$

696

 

 

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 and six months ended June 30, 2021 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.

Reclassification

Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported results of operations.

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.

 


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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 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 receive in exchange for products sold. Revenue is recorded at the transaction price net of estimates of variable consideration, if any, 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 June 30, 2021 and December 31, 2020, AFDA totaled $26 million and $28 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 June 30, 2021, contract assets were de minimis 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. These expenses were not material for the three and six months ended June 30, 2021 and 2020.

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 June 30, 2021 and December 31, 2020, contract liabilities were $21 million and $19 million, respectively, and were included in accrued liabilities in the consolidated balance sheets. For the six months ended June 30, 2021, the increase in contract liabilities was primarily related to net customer deposits of approximately $12 million, partially offset by recognizing revenue of approximately $10 million that was deferred as of December 31, 2020.

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3. Property, Plant and Equipment, net

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

 

 

Estimated

Useful Lives

 

June 30, 2021

 

 

December 31, 2020

 

Information technology assets

 

1-7 Years

 

$

48

 

 

$

49

 

Operating equipment (1)

 

2-15 Years

 

 

130

 

 

 

101

 

Buildings and land (2)

 

5-35 Years

 

 

93

 

 

 

102

 

Construction in progress

 

 

 

 

3

 

 

 

1

 

Total property, plant and equipment

 

 

 

 

274

 

 

 

253

 

Less: accumulated depreciation

 

 

 

 

(154

)

 

 

(155

)

Property, plant and equipment, net

 

 

 

$

120

 

 

$

98

 

 

 

(1)

Includes finance lease right-of-use assets.

 

(2)

Land has an indefinite life.

As of June 30, 2021, $3 million of property, plant and equipment in the U.S. segment was held-for-sale and included in prepaid and other current assets in the consolidated balance sheets. For the three and six months ended June 30, 2021, the Company recognized nil and $4 million, respectively, of impairment charges relating to held-for-sale assets and operating right-of-use assets which were included in impairment charges in the consolidated statements of operations.

4. Accrued Liabilities

Accrued liabilities consist of (in millions):

 

 

June 30, 2021

 

 

December 31, 2020

 

Compensation and other related expenses

 

$

30

 

 

$

27

 

Contract liabilities

 

 

21

 

 

 

19

 

Taxes (non-income)

 

 

8

 

 

 

10

 

Current portion of operating lease liabilities

 

 

16

 

 

 

17

 

Other

 

 

24

 

 

 

22

 

Total

 

$

99

 

 

$

95

 

 

5. Debt

On April 30, 2018, the Company replaced its existing senior secured revolving credit facility and entered into a senior secured revolving credit facility (the “Credit Facility”) with a syndicate of lenders with Wells Fargo Bank, National Association serving as the administrative agent. The five-year Credit Facility provides for a $750 million global revolving credit facility (with a letter of credit sub-facility of $60 million and a swing line sub-facility of 10% of the facility amount), of which up to $100 million is available for the Company’s Canadian subsidiaries and $40 million for the Company’s UK subsidiaries. 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 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 12.5% of the borrowing base or $60 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). 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 expense in the consolidated statements of operations.

Availability under the Credit Facility is determined by a borrowing base comprised of eligible receivables and eligible inventory in the U.S and Canada. As of June 30, 2021, the Company had no borrowings against the Credit Facility and approximately $235 million in availability (as defined in the Credit Facility) resulting in the excess availability (as defined in the Credit Facility) of 98%, subject to certain limitations. The Company is not obligated to repay borrowings against the 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 2022.

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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, 2020

 

$

(145

)

Other comprehensive income

 

 

3

 

Balance at June 30, 2021

 

$

(142

)

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

296

 

 

$

260

 

 

$

548

 

 

$

701

 

Canada

 

51

 

 

 

41

 

 

 

109

 

 

 

119

 

International

 

53

 

 

 

69

 

 

 

104

 

 

 

154

 

Total revenue

$

400

 

 

$

370

 

 

$

761

 

 

$

974

 

Operating profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

$

(3

)

 

$

(24

)

 

$

(16

)

 

$

(228

)

Canada

 

2

 

 

 

(5

)

 

 

6

 

 

 

(63

)

International

 

1

 

 

 

 

 

 

2

 

 

 

(71

)

Total operating profit (loss)

$

 

 

$

(29

)

 

$

(8

)

 

$

(362

)

 

8. Income Taxes

The effective tax rates for the three and six months ended June 30, 2021 were (88.9%) and (14.8%), respectively, compared to 3.2% and 0.8%, respectively, for the corresponding periods of 2020. Compared to the U.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. Due to the continuing uncertainty in the Company’s industry, the Company continues to utilize the method of recording income taxes on a year-to-date effective tax rate for the three and six months ended June 30, 2021. 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 by major tax jurisdictions vary by legal entity but are generally open in the U.S. for the tax years ending after 2016 and outside the U.S. for the tax years ending after 2014.

9. Earnings (Loss) Per Share

For the three and six months ended June 30, 2021, approximately 6 million of potentially dilutive shares were excluded in both periods from the computation of diluted earnings per share due to the Company recognizing a net loss, compared to approximately 6 million for the corresponding periods of 2020.

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

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the Company's stockholders

$

(2

)

 

$

(30

)

 

$

(12

)

 

$

(361

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

110,419,322

 

 

 

109,337,545

 

 

 

110,246,306

 

 

 

109,294,719

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted common shares outstanding

 

110,419,322

 

 

 

109,337,545

 

 

 

110,246,306

 

 

 

109,294,719

 

Loss per share attributable to the Company's stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.02

)

 

$

(0.27

)

 

$

(0.11

)

 

$

(3.30

)

Diluted

$

(0.02

)

 

$

(0.27

)

 

$

(0.11

)

 

$

(3.30

)

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.

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 six months ended June 30, 2021, the Company granted 750,296 stock options with a weighted average fair value of $5.03 per share and 414,991 shares of RSAs and RSUs with a weighted average fair value of $10.40 per share. In addition, the Company granted PSAs to senior management employees with potential payouts varying from zero to 912,318 shares. These options vest over a three-year period from the grant date on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The RSAs and RSUs vest on the first and third anniversary of the date of grant. The PSAs can be earned based on performance against established metrics over a three-year performance period. 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 by the Company’s Compensation Committee of the Board of Directors. 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 by the Company’s Compensation Committee of the Board of Directors.

Stock-based compensation expense recognized for the three and six months ended June 30, 2021 totaled $2 million and $4 million, respectively, compared to $1 million for the corresponding periods of 2020.

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. 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; however, in the Company’s opinion, any ultimate liability, to the extent not otherwise recorded or accrued for, will not materially affect the Company’s financial position, cash flow or results of operations. 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 experience.

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

12

 


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 June 30, 2021, the Company was contingently liable for approximately $10 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.

12. Derivative Financial Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange rate risk. 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 non-functional currency monetary accounts. The purpose of the Company’s foreign currency economic hedging activities is to economically hedge the Company’s risk from changes in the fair value of non-functional 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 June 30, 2021 and December 31, 2020, the fair value of the Company’s foreign currency forward contracts totaled an asset of less than $1 million in both periods, which was included in prepaid and other current assets in the consolidated balance sheets; and totaled a liability of less than $1 million in both periods, which was included in other current liabilities in the consolidated balance sheets.

For the three and six months ended June 30, 2021, the Company recorded a gain of less than $1 million in both periods related to changes in fair value. For the three and six months ended June 30, 2020, the Company recorded a gain of less than $1 million and a loss of less than $1 million, respectively, related to changes in fair value. All gains and losses were included in other expense in the consolidated statements of operations. As of June 30, 2021 and December 31, 2020, the notional principal associated with those contracts was $8 million in both periods.

 

As of June 30, 2021, 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. Acquisitions

For the six months ended June 30, 2021, the Company completed two acquisitions for an aggregate purchase price consideration of approximately $119 million. The aggregate purchase price was comprised of $96 million of cash, subject to working capital adjustments, and an estimated $23 million of contingent consideration if certain financial and profitability thresholds are achieved following the closing of the transactions. These acquisitions primarily expanded the Company’s offering in the U.S. to provide the rental, sale and service of surface-mounted horizontal pumping systems and horizontal jet pumping systems, as well as, to provide engineering and construction services. The Company has included the financial results of the acquisitions in its consolidated financial statements from the date of each ac