NOW Inc. Earnings: Acquisitions Cant Overcome Oil Prices

Weak commodity prices are having a direct impact on oil and gas activity, and therefore on the results of energy-related companies. This impact was clearly noticeable in distribution specialistNOW Inc.'s first-quarter report, which was released before the opening bell on Thursday. The company reported a loss during the quarter as sales dropped significantly from the prior quarter due to a steep drop-off in energy-related activity.

Drilling down into the numbers NOW reported revenue of $863 million, down 14% from the prior quarter and nearly 20% below the first quarter of last year. Weakness in oil and gas drilling activity was the culprit here as the global rig count was down 19% from the fourth quarter.Incidentally, NOW's sales would have been down 19% from the prior quarter if not for a number of acquisitions it has completed over the past two quarters.

Revenue fell across all three of the company's geographical reporting segments:

Source: NOW press release. NOTE: In millions of dollars.

In the U.S., revenue was down 11% from the prior quarter and 15% from the first quarter of last year, but quarter-over-quarter revenue would have dropped 14% if not for acquisitions. This decline was driven solely by the nearly unprecedented 28% sequential drop in the U.S. rig count.

Revenue in Canada was down a much steeper 36% sequentially and 39% year over year. Canadian revenue was also affected by the deep decline in the nation's rig count, along with the weak Canadian dollar. Meanwhile, the company experienced a sharp sales decline in its fiberglass product and project-based orders, which are big-ticket items that customers either deferred or cut.

Finally, international revenue declined just 1% sequentially and 20% year over year. This decline was driven by reduced activity and customer spending, which was mostly offset by acquisitions completed in the quarter.

The steep drop in sales had a deep impact on NOW's profitability. The company reported a loss of $10 million,or $0.09 per share. However, about $9 million of that loss was related to acquisition and severance-related charges. After adjusting for these one-time items the company still lost $3 million, or $0.02 per share. That was well below the profit of $0.06 per share that analysts were expecting.

Details on the dealsNOW's recent acquisitions have partially mitigated the steep fall in sales linked to reduced oil and gas activity. So far it has completed seven transactions since being spun off last year from National Oilwell Varco. During the first quarter the company closed two deals and announced a third that closed in the second quarter.

The first was for U.K.-based distributor John MacLean & Sons Electrical, which strengthens the company's electrical product offering and its international presence. It followed that up with the acquisition of Machine Tools Supply, which is based in the U.S. This move enhances the company's supply chain solutions' international reach. Finally, the company's most recent deal was for a European-based company (which was not identified in NOW's earnings press release)that strengthens its product offerings in the U.S., U.K., and Europe.

Investor takeawayThe downturn in the oil industry had a noticeable impact on NOW's first-quarter results. However, the company has taken advantage of the downturn to acquire companies that broaden its product offerings around the globe. These acquisitions are helping to moderate the near-term decline while improving its strategic position so that it can thrive once conditions improve. The company still has a strong balance sheet and plans to continue to capitalize on attractive opportunities that are likely to emerge before that improvement kicks in.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends NOW. The Motley Fool owns shares of 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.

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