DNOW Inc. (NOW Inc.) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is the three months ended March 31, 2021. DNOW distributes energy and industrial products and provides supply-chain and materials-management services across the U.S., Canada and international markets.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $473 million | $361 million |
| Gross profit | $107 million; 22.6% margin | $75 million; 20.8% margin |
| Operating profit (loss) | $23 million; 4.9% margin | $(8) million; (2.2)% margin |
| Net income (loss) | $30 million; $0.27 per diluted share | $(10) million; $(0.09) per diluted share |
| Adjusted EBITDA excluding other costs (non-GAAP) | $28 million; 5.9% of revenue | $3 million; 0.8% of revenue |
| Operating cash flow | $(22) million | $(4) million |
Revenue increased 31.0% year over year. Segment revenue was U.S. $334 million, Canada $82 million and International $57 million; each segment reported operating profit of $14 million, $7 million and $2 million, respectively. Management attributed growth primarily to increased drilling and completion activity, stronger project activity and improved U.S. product margins. Cost of products rose to $366 million from $286 million; selling, warehousing and administrative expense was $84 million versus $79 million.
Balance sheet and liquidity
- Cash and cash equivalents were $293 million at March 31, 2022, down from $313 million at December 31, 2021. Current assets were $946 million and current liabilities $395 million.
- DNOW had no borrowings under its $500 million revolving credit facility, with approximately $436 million of availability (approximately $289 million excluding certain cash deposits). The facility matures December 14, 2026; the company reported covenant compliance.
- Total liabilities were $416 million; these include operating lease liabilities. The filing reports no revolver borrowings.
- Operating cash use primarily reflected working-capital investment as market activity grew: receivables increased $36 million and inventories increased $47 million in the quarter. Investing activities provided $2 million; financing activities used $1 million.
Changes, outlook and risks
- Compared with Q1 2021, results improved from an operating and net loss to profit, with higher revenue and gross margin. Operating cash use increased by $18 million.
- Net income included a roughly $13 million benefit from reducing contingent consideration tied to a prior-year acquisition. DNOW said the earn-out threshold was not achieved, but it is in disagreement with the sellers; management did not expect a material impact from resolution, though the outcome was undetermined. Other income was $10 million, compared with $1 million of expense a year earlier.
- No numerical earnings or revenue guidance was provided. Management said its outlook remains tied to commodity prices, drilling and completion activity, customer spending and energy demand. It plans to continue cost transformation, operational optimization and investment in energy-transition opportunities.
- Management cited continuing COVID-19 and supply-chain uncertainty, Russia’s invasion of Ukraine and related sanctions, energy-market volatility, customer demand, borrowing costs, regulation and litigation as risks. DNOW began winding down Russian operations; Russia represented less than 1% of net asset book value at quarter-end, with no impairment recorded. Future asset charges remain possible.
- Closures of certain foreign subsidiaries could lead to accumulated currency translation losses being reclassified to earnings when liquidations are substantially complete. The company also disclosed approximately $12 million of standby letters of credit and surety bonds, which it did not believe were probable to be paid.
Important facts for investors to verify
- How much of the revenue and margin improvement reflects sustained activity and pricing versus temporary market conditions.
- Whether working-capital needs continue to consume cash as sales grow, particularly inventory and receivables.
- The final resolution of the acquisition earn-out dispute and any related payment or accounting effect.
- Potential charges associated with Russia, foreign-subsidiary closures, or other geopolitical and supply-chain disruptions.
- Future liquidity and covenant headroom under the borrowing-base facility; availability is subject to facility terms and restrictions.