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10-Q

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 SEPTEMBER 30, 2021


☐	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.

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 October 27, 2021 the registrant had 110,558,831 shares of common stock (excluding 683,344 unvested restricted shares), par value $0.01 per share, outstanding.

NOW INC.

TABLE OF CONTENTS


Part I - Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020	3

	Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2021 and 2020	4

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, 2021 and 2020	5

	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2021 and 2020	6

	Consolidated Statements of Stockholders' Equity (Unaudited) for the three and nine months ended September 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	25

Item 4.	Controls and Procedures	27

Part II - Other Information

Item 6.	Exhibits	28

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NOW INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)


	September 30, 2021			December 31, 2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	312		$	387
Receivables, net		299			198
Inventories, net		244			262
Prepaid and other current assets		19			14
Total current assets		874			861
Property, plant and equipment, net		115			98
Deferred income taxes		1			1
Goodwill		66			—
Intangibles, net		11			—
Other assets		37			48
Total assets	$	1,104		$	1,008
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	243		$	172
Accrued liabilities		105			95
Other current liabilities		27			5
Total current liabilities		375			272
Long-term operating lease liabilities		17			25
Other long-term liabilities		13			12
Total liabilities		405			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 September 30, 2021 and December 31, 2020, respectively		1			1
Additional paid-in capital		2,059			2,051
Accumulated deficit		(1,215	)		(1,208	)
Accumulated other comprehensive loss		(146	)		(145	)
Total stockholders' equity		699			699
Total liabilities and stockholders' equity	$	1,104		$	1,008

See notes to unaudited consolidated financial statements.

NOW INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In millions, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenue	$	439		$	326		$	1,200		$	1,300
Operating expenses:
Cost of products		343			264			944			1,053
Warehousing, selling and administrative		86			83			250			310
Impairment charges		—			—			4			320
Operating profit (loss)		10			(21	)		2			(383	)
Other expense		(3	)		—			(5	)		(2	)
Income (loss) before income taxes		7			(21	)		(3	)		(385	)
Income tax provision (benefit)		2			1			4			(2	)
Net income (loss)	$	5		$	(22	)	$	(7	)	$	(383	)
Earnings (loss) per share:
Basic earnings (loss) per common share	$	0.05		$	(0.20	)	$	(0.06	)	$	(3.50	)
Diluted earnings (loss) per common share	$	0.05		$	(0.20	)	$	(0.06	)	$	(3.50	)
Weighted-average common shares outstanding, basic		111			109			110			109
Weighted-average common shares outstanding, diluted		111			109			110			109

See notes to unaudited consolidated financial statements.

NOW INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In millions)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Net income (loss)	$	5		$	(22	)	$	(7	)	$	(383	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(4	)		3			(1	)		(28	)
Comprehensive income (loss)	$	1		$	(19	)	$	(8	)	$	(411	)

See notes to unaudited consolidated financial statements.

NOW INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In millions)


	Nine Months Ended September 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(7	)	$	(383	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		18			23
Provision for inventory		8			30
Impairment charges		4			320
Other, net		19			27
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Receivables		(93	)		140
Inventories		11			112
Prepaid and other current assets		(3	)		(2	)
Accounts payable, accrued liabilities and other, net		71			(134	)
Net cash provided by (used in) operating activities		28			133
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		(4	)		(7	)
Other, net		1			1
Net cash provided by (used in) investing activities		(99	)		19
Cash flows from financing activities:
Payments relating to finance leases and other, net		(3	)		(6	)
Net cash provided by (used in) financing activities		(3	)		(6	)
Effect of exchange rates on cash and cash equivalents		(1	)		(4	)
Net change in cash and cash equivalents		(75	)		142
Cash and cash equivalents, beginning of period		387			183
Cash and cash equivalents, end of period	$	312		$	325

See notes to unaudited consolidated financial statements.

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
Net loss		—		—			(22	)		—			(22	)
Stock-based compensation		—		3			—			—			3
Other comprehensive income		—		—			—			3			3
September 30, 2020	$	1	$	2,050		$	(1,164	)	$	(156	)	$	731

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
Net income		—		—			5			—			5
Stock-based compensation		—		2			—			—			2
Other comprehensive loss		—		—			—			(4	)		(4	)
September 30, 2021	$	1	$	2,059		$	(1,215	)	$	(146	)	$	699

See notes to unaudited consolidated financial statements.

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 nine months ended September 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.

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 September 30, 2021 and December 31, 2020, AFDA totaled $25 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 September 30, 2021 and December 31, 2020, contract assets were less than $1 million and $1 million, respectively, 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 nine months ended September 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 September 30, 2021 and December 31, 2020, contract liabilities were $24 million and $19 million, respectively, and were included in accrued liabilities in the consolidated balance sheets. For the nine months ended September 30, 2021, the increase in contract liabilities was primarily related to net customer deposits of approximately $15 million, partially offset by recognizing revenue of approximately $10 million that was deferred as of December 31, 2020.

3. Property, Plant and Equipment, net

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


	Estimated Useful Lives	September 30, 2021			December 31, 2020
Information technology assets	1-7 Years	$	48		$	49
Operating equipment (1)	2-15 Years		129			101
Buildings and land (2)	5-35 Years		92			102
Construction in progress			3			1
Total property, plant and equipment			272			253
Less: accumulated depreciation			(157	)		(155	)
Property, plant and equipment, net		$	115		$	98

(1)

Includes finance lease right-of-use assets.

(2)

Land has an indefinite life.

As of September 30, 2021, $2 million of property, plant and equipment primarily 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 nine months ended September 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):


	September 30, 2021		December 31, 2020
Compensation and other related expenses	$	32	$	27
Contract liabilities		24		19
Taxes (non-income)		10		10
Current portion of operating lease liabilities		15		17
Other		24		22
Total	$	105	$	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 September 30, 2021, the Company had no borrowings against the Credit Facility and approximately $248 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.

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 loss		(1	)
Balance at September 30, 2021	$	(146	)

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
United States	$	312	$	228	$	860