The NOW Inc. 401(k) and Retirement Savings Plan (the Plan) is subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
The Consent of Independent Registered Public Accounting Firm to the
incorporation by reference of the foregoing financial statements in the Registration Statement on Form
S-8
(No.
333-196529)
pertaining to the Plan is being filed as
Exhibit 23.1 to this Report.
NOW Inc. 401(k) and Retirement Savings Plan
Report of Independent Registered Public Accounting Firm
To the Benefits Plan Administrative Committee
NOW Inc. 401(k)
and Retirement Savings Plan
Opinion on the Financial Statements
We have audited the accompanying statements of net assets available for benefits of the NOW Inc. 401(k) and Retirement Savings Plan (the Plan) as of
December 31, 2017 and 2016, and the related statement of changes in net assets available for benefits for the year ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 2017 and 2016, and the changes in its net assets available for benefits for the year ended
December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Plans management. Our responsibility is to express an opinion on the Plans financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Plan in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Plan is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Plans internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
1
Supplemental Schedule
The accompanying supplemental schedule of assets (held at end of year) as of December 31, 2017, has been subjected to audit procedures performed in
conjunction with the audit of the Plans financial statements. The information in the supplemental schedule is the responsibility of the Plans management. Our audit procedures included determining whether the information reconciles to the
financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental schedule. In forming our opinion on the information,
we evaluated whether such information, including its form and content, is presented in conformity with the Department of Labors Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. In
our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole.
/s/ Ernst & Young
LLP
We have served as the Plans auditor since 2014.
Houston, Texas
June 28, 2018
2
Notes to Financial Statements
December 31, 2017
1. Description of
Plan
The following description of the NOW Inc. 401(k) and Retirement Savings Plan (the Plan) is provided for general information only. Participants
should refer to the
Summary Plan Description
for a more complete description of the Plans provisions, a copy of which is available from DNOW L.P., a wholly owned subsidiary of NOW Inc. (collectively referred to as the
Company).
General
The Plan is a defined
contribution plan covering substantially all domestic employees who have completed one hour of service, and is subject to the provisions of the Employment Retirement Income Security Act of 1974, as amended (ERISA).
Contributions
Participants may make both pretax and
after-tax
contributions to the Plan. The Plan allows pretax salary deferral contributions of 1% to 100% (less any
after-tax
contributions, required withholdings, or other
elected deductions) of compensation, subject to certain Internal Revenue Service (IRS) limitations. The Plan allows participants to designate their salary deferral contributions as Roth contributions.
After-tax
contributions may be made at 1% to 18% of eligible compensation. However, combined pretax and
after-tax
contributions, required withholdings, and other elected
deductions cannot exceed 100% of compensation. Participants age 50 and older may contribute additional pretax
catch-up
contributions, subject to IRS limitations. The Plan provides for the automatic enrollment
and payroll deduction of 4% of a new eligible employees compensation as soon as practical following 60 days after employment. These funds are directed to the employees target retirement date (upon which the employee reaches the age of
65).
5
NOW Inc. 401(k) and Retirement Savings Plan
Notes to Financial Statements (continued)
1. Description of Plan (continued)
The Company matches 100% of the first 4% of each participants contribution (the Employer Matching
Contribution). The Company may also make a discretionary contribution (the Employer Retirement Contribution) to the Plan. The amount of the Employer Retirement Contribution is determined based upon participants eligible salary and years of
service. For the period ended December 31, 2017, the Company contributed $4,728,716 of Employer Matching Contributions and $4,552,305 of Employer Retirement Contributions. Participants must have completed one year of service in order to receive
Employer Matching Contributions and Employer Retirement Contributions.
Each participant may direct the trustee to invest both the participants and
the Companys contributions in one or more of the investment options offered by the Plan.
Vesting
Participants are immediately 100% vested in their participant and employer contributions and the related earnings that have been credited to their accounts.
Benefit Payments
The Plan pays
lump-sum
benefits upon retirement, disability, death, or termination of employment.
In-service
withdrawals, subject to certain rules and restrictions, may also be made from
certain account balances.
6
NOW Inc. 401(k) and Retirement Savings Plan
Notes to Financial Statements (continued)
1. Description of Plan (continued)
Participant Loans
The Plan includes a loan provision that permits participants to borrow a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of the total
value of their Plan assets. The loans are payable in principal installments, plus interest, at prime plus one percent through payroll deductions and are due in one to five-year terms, unless the loan is used to acquire a principal residence, in
which case the loan term cannot exceed ten years. Repayments are made ratably through payroll deductions.
Participant loans are recorded on the financial
statements as notes receivable from participants at their unpaid principal balance plus any accrued but unpaid interest. Interest income on notes receivable from participants is recorded when it is earned. Related fees are recorded as administrative
expenses and are expensed when they are incurred. No allowance for credit losses has been recorded as of December 31, 2017. If a participant ceases to make loan repayments and the plan administrator deems the participant loan to be a
distribution, the participant loan balance is reduced and a benefit payment is recorded.
Administrative Expenses
Certain administrative expenses are paid from the Plans assets. All other Plan expenses are paid by the Company.
Plan Termination
Although it has not expressed any
intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. Participants are 100% vested in their accounts in any event. Assets would be
distributed to participants as prescribed by ERISA.
7
NOW Inc. 401(k) and Retirement Savings Plan
Notes to Financial Statements (continued)
2. Summary of Accounting Policies
Basis of Accounting
The accompanying financial statements
of the Plan have been prepared on the accrual basis of accounting. Benefit payments to participants are recorded upon distribution.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates that
affect the amounts reported in the financial statements, accompanying notes, and supplemental schedules. Actual results could differ from those estimates.
Investment Valuation and Income Recognition
Wells Fargo
Bank, N.A. serves as the Plans trustee and holds all investments of the Plan. Investments held by the Plan are stated at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (an exit price). See Note 3 for further discussion of fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned. Dividends are recorded on the record date. Net
appreciation includes the Plans gains and losses on investments bought and sold as well as held during the period.
Risks and Uncertainties
The Plan provides for investments in various investment securities that, in general, are exposed to various risks, such as interest rate, credit, and
overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially
affect the amounts reported in the statements of net assets available for benefits and participant account balances.
8
NOW Inc. 401(k) and Retirement Savings Plan
Notes to Financial Statements (continued)
3. Fair Value Measurements
The fair value framework establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date
for identical assets and liabilities.
Level 2 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. Level 2 inputs include the following:
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quoted prices for similar assets and liabilities in active markets;
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quoted prices for identical or similar assets or liabilities in markets that are not active;
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observable inputs other than quoted prices that are used in the valuation of the asset or liabilities (e.g., interest rate and yield curve quotes at commonly quoted intervals);
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inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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Level 3 Unobservable inputs for the asset or liability (i.e., supported by little or no market activity). Level 3
inputs include managements own assumption about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). Currently, there are no level 3 assets present within the plan.
The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant
to the fair value measure in its entirety.
9
NOW Inc. 401(k) and Retirement Savings Plan
Notes to Financial Statements (continued)
3. Fair Value Measurements (continued)
Following is a description of the valuation techniques and inputs used for each general type of assets
measured at fair value by the Plan:
Common stocks:
Valued at the closing price reported on the active market on which the
individual securities are traded.
Mutual funds:
Valued at the quoted NAV of shares held by the Plan at
year-end.
Common collective trust funds:
Valued at the NAV of shares held by the Plan at
year-end
as reported by the fund manager.
The methods described above may produce a fair value calculation that may not
be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following tables
set forth, by level within the fair value hierarchy, the Plans assets carried at fair value:
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Assets at Fair Value as of December 31, 2017
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Level 1
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Level 2
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Level 3
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Total
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Common stock
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$
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11,764,825
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$
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$
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$
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11,764,825
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Mutual funds
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177,781,469
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177,781,469
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Self-directed brokerage accounts
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1,131,216
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1,131,216
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Total assets at fair value
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$
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190,677,510
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$
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$
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$
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190,677,510
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Common collective trust funds, measured at NAV
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29,979,050
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Total investments
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$
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220,656,560
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10
NOW Inc. 401(k) and Retirement Savings Plan
Notes to Financial Statements (continued)
3. Fair Value Measurements (continued)
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Assets at Fair Value as of December 31, 2016
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Level 1
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Level 2
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Level 3
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Total
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Common stock
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$
|
13,990,453
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$
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$
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$
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13,990,453
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Mutual funds
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|
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154,799,834
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|
|
|
|
|
|
|
|
|
|
|
154,799,834
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Self-directed brokerage accounts
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|
|
1,134,130
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|
|
|
|
|
|
|
|
|
|
|
1,134,130
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|
|
|
|
|
|
|
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|
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|
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Total assets at fair value
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$
|
169,924,417
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$
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|
|
$
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|
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$
|
169,924,417
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|
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|
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Common collective trust funds, measured at NAV
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|
|
|
|
|
|
|
|
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33,696,521
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Total investments
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$
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203,620,938
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4. Common Collective Trusts
The Wells Fargo Stable Return Fund N, is a common collective trust fund established, operated and maintained by Wells Fargo Bank, N.A. with the objective of
providing a moderate level of stable income without principal volatility. Participant-directed redemptions have no restrictions; however, the Plan is required to provide a
one-year
redemption notice to
liquidate its entire share in the fund.
The Wells Fargo Short Term Investment Fund S is a common collective trust fund which invests primarily in short
term fixed income securities. There are currently no redemption restrictions on this investment.
5. Related-Party Transactions
Certain investments of the Plan are managed by Wells Fargo Bank, N.A., the trustee of the Plan; therefore, these transactions qualify as
party-in-interest
transactions. Additionally, a portion of the Plans assets are invested in the Companys common stock. Because the Company is the plan sponsor,
transactions involving the Companys common stock qualify as
party-in-interest
transactions. All of these transactions are exempt from the prohibited transactions
rules under ERISA.
11
NOW Inc. 401(k) and Retirement Savings Plan
Notes to Financial Statements (continued)
6. Income Tax Status
The Plan has received a determination letter from the IRS dated August 23, 2017, stating that the Plan is qualified under Section 401(a) of the Internal
Revenue Code (IRC) and; therefore, the related trust is exempt from taxation. Subsequent to the issuance of the determination letter, the Plan was amended and restated. Once qualified, the Plan is required to operate in conformity with the IRC to
maintain its qualified status. The plan administrator has indicated that it will take the necessary steps, if any, to bring the Plans operations into compliance with the IRC.
U.S. generally accepted accounting principles require plan management to evaluate uncertain tax positions taken by the Plan. The financial statement effects
of a tax position are recognized when the position is more likely than not, based on the technical merits, to be sustained upon examination by the IRS. The plan administrator has analyzed the tax positions taken by the Plan and has concluded that,
as of December 31, 2017, there are no uncertain positions taken or expected to be taken. The Plan has recognized no interest or penalties related to uncertain tax positions. The Plan is subject to routine audits by taxing jurisdictions;
however, there are currently no audits for any tax periods in progress.
7. Subsequent Events
Effective December 31, 2017, the Odessa Pumps & Equipment, Inc. 401(k) Plan (Odessa Pumps Retirement Plan) and the Power Services, Inc. 401(k)
Plan (Power Services Retirement Plan) were merged into the Plan as a result of the Companys acquisitions of Odessa Pumps & Equipment, Inc. and Power Services, Inc. in 2015 and 2016, respectively. The Odessa Pumps Retirement Plan
transferred net assets of approximately $16.6 million to the Plan on January 2, 2018 and the Power Services Plan transferred net assets of approximately $3.8 million to the Plan on January 3, 2018.
12
Supplemental Schedule