DNOW Inc. (NOW Inc.; NYSE: DNOW) — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022, including fourth-quarter results. DNOW distributes energy and industrial products and provides procurement and supply-chain services through U.S., Canada and International segments.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $2.136 billion | $1.632 billion |
| Gross profit and margin | $506 million; 23.7% | $357 million; 21.9% |
| Operating profit and margin | $131 million; 6.1% | $9 million; 0.6% |
| Net income attributable to NOW Inc. | $128 million; diluted EPS $1.13 | $5 million; diluted EPS $0.05 |
| EBITDA excluding other costs (non-GAAP) | $175 million; 8.2% of revenue | $45 million; 2.8% of revenue |
| Net cash from operating activities | $0 million | $30 million |
Gross profit and margins above are calculated from reported revenue and cost of products. Fourth-quarter 2022 revenue was $547 million, up 26.6% year over year; operating profit was $35 million versus $7 million, and net income was $32 million versus $12 million.
Annual revenue increased 30.9%. U.S. revenue rose 36.8% to $1.591 billion, Canada revenue rose 26.5% to $315 million, and International revenue rose 4.5% to $230 million. Operating profit improved substantially, led by U.S. results, reflecting higher activity and improved product margins.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $212 million at year-end, down from $313 million; $86 million was held in foreign subsidiaries.
- No borrowings were outstanding under the $500 million revolving credit facility; reported availability was approximately $482 million (approximately $352 million excluding certain cash deposits). The facility matures December 2026, and the company reported covenant compliance.
- Current assets were $1.017 billion and current liabilities $439 million. Total liabilities were $476 million; these include $49 million of lease liabilities. The filing reports no revolver borrowings.
- Operating cash flow was nil as increased receivables and inventory absorbed cash amid business growth. Investing cash use was $87 million, including $80 million for acquisitions; capital expenditures were $9 million.
- The company repurchased 653,819 shares for $7 million in 2022 under an $80 million authorization running through December 31, 2024. No common dividends were declared.
Outlook, unusual items and risks
- Management expects oil and gas demand to grow over the next several years, while emphasizing that results remain dependent on commodity prices, drilling and completion activity, customer spending and global demand. It provided no quantified revenue or earnings guidance; expected 2023 capital expenditures were approximately $15 million.
- Management cited inflation, recession concerns, supply-chain shortages, production limits and geopolitical conflict, including Russia’s invasion of Ukraine, as sources of volatility. It sees energy-transition investment as an opportunity to expand products and services.
- FY2022 included approximately $10 million of foreign-currency translation losses reclassified to earnings following substantial liquidation of foreign subsidiaries, and an approximately $13 million benefit from a reduction in contingent consideration liability. Adjusted EBITDA excludes specified items, including stock-based compensation; it is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- The effective tax rate was 7.2%, versus 54.8% in 2021. Management cited U.S. deferred-tax-asset realizations and a valuation-allowance release among the drivers, while also noting the company remained in a three-year cumulative loss position and retained a substantial valuation allowance.
- Key risks include sensitivity to energy activity and oil, gas and steel prices; working-capital demands; foreign-exchange movements; competition and customer or supplier concentration risks; acquisition integration; cyber and operational disruption; and environmental, product-liability and international regulatory exposures.
- The company disclosed approximately $13 million of outstanding standby letters of credit and surety bonds, which it did not believe were likely to require payment, and a disagreement with sellers relating to a 2021 acquisition; the final outcome of the latter was undetermined. Management did not expect ordinary-course legal matters to materially affect the company.
Important facts for investors to verify
- Whether growth in revenue and operating profit converts into positive operating cash flow as receivables and inventory expand.
- Current borrowing-base availability and covenant headroom under the revolving credit facility, particularly if working-capital needs rise.
- Performance and integration of the 2022 acquisitions; purchase-price allocations for two December acquisitions were preliminary and could be adjusted during the measurement period.
- Sustainability of product margins and demand if oil, gas or steel prices, rig activity or customer spending weaken.
- Future realizability of deferred tax assets and any change in the valuation allowance; the exact timing and amount of any adjustment were uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported no material weaknesses.