NOW Inc.'s Revenue Decline Continues

By Markets Fool.com

Image source: Getty Images.

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While both oil prices and rig counts rebounded last quarter, it didn't have a positive impact on DistributionNOW's (NYSE: DNOW)financial results. Instead, the company's results continued to decline, with slumping revenue and widening losses. Further, given the mixed signals the oil market is sending, the company is not sure when conditions will improve.

Drilling down into the numbers

DistributionNow (NOW) reported second-quarter revenue of $501 million, which is down 9% from last quarter and 33% lower than the year-ago quarter. Revenue across all three of its business segments declined both sequentially and year over year:

Revenue by Segment

Q2 2016

Q2 2015

Q1 2016

United States

$337 million

$496 million

$357 million

Canada

$55 million

$89 million

$63 million

International

$109 million

$165 million

$128 million

Data source: DistributionNow.

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Revenue in the U.S. was down 6% over last quarter, and down 8% after stripping out the benefit of acquisitions. The decline was significantly below that of the rig count, which plunged another 24% during the quarter. Further, acquisition-adjusted sales were down 41% over the past year, which has outpaced the 54% slump in the rig count.

Sales in Canada were down 13% sequentially, and are down 38% over the past year. Driving this decline is the historically low oil and gas activity levels in Canada, evidenced by the stunning 70% drop in the rig count over the first quarter.

International revenue slumped 15% sequentially, and is now down 34% over the past year. Acquisitions partially offset this decline, adding about $20 million in revenue. However, overshadowing this incremental revenue is the deteriorating offshore market, as well as the fact its customers are "cannibalizing excess inventory."

Slumping revenue weighed on the company's profitability. For the quarter, the company reported a loss of $44 million, or $0.40 per share, which is more than double last year's loss of $19 million, or $0.18 per share. That's less than the $63 million, or $0.59 per share, the company lost last quarter. On a slightly more positive note, the company generated $66 million in cash flow from operating activities, though that's less than the $89 million the company produced last quarter, and the $94 million from the year-ago quarter.

A look at the outlook

At the moment, the prospects for the future are uncertain. CEO Robert Workman said that:

Oil prices surged in the second quarter compared to the first, generating an uptick in rig activity during the back half of the quarter. However, the market remains uncertain as oil prices have since retreated back into the $40 range. Despite these mixed signals, we remain focused on removing costs from our customers' supply chain, tightly managing our healthy balance sheet, and diligently integrating recent acquisitions.

As Workman pointed out, surging oil prices in the quarter led producers to start putting rigs back to work by the quarter's end. However, prices have come back down in recent weeks, with oil down more than 20% from its peak, which is a new bear market. That slump could cause producers to hold off buying new equipment and parts until there's a solid floor underneath the price of crude.

Until that happens, NOW's focus is on controlling what it can control, which are its costs. This has enabled the company to continue generating cash flow, which is keeping its balance sheet in tip-top shape.

Investor takeaway

NOW's second-quarter results were not all that great, which is expected, given the current harsh conditions in the oil market. The company is still generating cash flow, which not only provides support during these tough times, but gives it the flexibility to continue to make acquisitions that should pay off when conditions finally improve.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NOW. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.