Despite some seasonal headwinds, NOW Inc. (NYSE:DNOW) finally returned to profitability in the fourth quarter after adjusting for some one-time charges. That put the cap on what has been a transformative year for the company as it made great strides in recovering from a steep downturn in the oil market. With those market conditions on the upswing, the oil-field equipment distributor expects 2018 to be even better. 

NOW results: The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$669 million

$538 million

24%

Adjusted net income

$1 million

($31 million)

N/M

Adjusted EPS

$0.01

($0.29)

N/M

Data source: NOW Inc. EPS = earnings per share.

Three levels of rusty orange drilling pipes stacked on top of the other

Image source: Getty Images.

What happened with NOW this quarter? 

NOW's cost-cutting efforts are paying off:

  • While revenue leaped 24% versus the fourth quarter of last year, sales did slip from the third quarter, falling 4% due in part to some seasonality as the industry slows down when the weather cools off.
  • Year-over-year sales were up across all of NOW's geographic regions. Revenue from U.S. customers led the way, rebounding 29% to $488 million, followed by a 16% increase in sales to Canada and a 12% jump in sales to other international customers. That said, seasonal slowdowns due to a lower rig count caused sales in the U.S. to dip 4% sequentially, while Canadian revenue fell 12%. Revenue from other international customers only fractionally offset those declines after rising 1%.
  • In spite of the seasonally weaker revenue, underlying profitability improved both versus the year-ago period and sequentially when NOW reported an adjusted loss of $3 million, or $0.03 per share. Meanwhile, the company continued its recent trend of posting positive EBITDA, which came in at $13 million for the quarter. That's up from $5 million last quarter and a significant improvement from the negative $31 million of EBITDA in the year-ago period. For the full year, EBITDA was $7 million, which was a vast improvement from the negative $164 million from 2016.
  • NOW recorded a $10 million pre-tax gain from the sale of a property, which helped prop up earnings in the fourth quarter.

What management had to say 

As CEO Robert Workman pointed out: 

Through the downturn, we emerged a stronger, leaner and more agile organization. The year 2017 was transformative for DNOW in that we added $541 million in revenues, while continuing to lower costs, becoming a business more than 25% larger than it was in 2016. Incrementals were greater than 30%, signifying a solid financial recovery for DNOW and positioning us to capitalize on a growing market in 2018.

A main focus has been to drive out costs and improve operations to expand margins. Those efforts continued to work in NOW's favor as its gross margins were 19.1% last quarter, up nearly 30% versus last year. Continued margin improvement is the company's top priority, by focusing on several initiatives to push it higher in the coming year.

Looking forward 

NOW is optimistic about what it sees up ahead. The company pointed out several future drivers on its conference call that should boost results in 2018. In the U.S., for example, there is an increasing number of midstream projects underway, which when combined with higher oil prices should fuel revenue growth in the coming quarters. Meanwhile, Canadian activity should rebound sharply in the first quarter as the sector recovers from freezing winter weather. Finally, international drilling activities are expected to bounce back 4.6% this year across several geographic regions, including an anticipated 10% gain in offshore drilling activities.

These factors led the company to believe that revenue will grow by a low double-digit percentage this year, with upside to a mid-teens rate if the industry recovery accelerates or NOW completes some acquisitions.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NOW. The Motley Fool has a disclosure policy.