DNOW Inc. (NOW Inc.) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Comparisons are with the three months ended March 31, 2022 unless stated otherwise. Amounts are in U.S. dollars.
Business context
DNOW distributes energy and industrial products and provides procurement and supply-chain solutions through its U.S., Canada and International segments. The company operates in approximately 20 countries and serves customers in approximately 80. Demand is tied to energy and industrial activity, commodity prices, drilling and completions, and customer spending.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $584 million | $473 million; up 23.5% |
| Operating profit | $35 million | $23 million |
| Operating margin | About 6.0% | About 4.9% |
| Net income attributable to NOW Inc. | $31 million | $30 million |
| Diluted EPS | $0.28 | $0.27 |
| Operating cash flow | $(6) million | $(22) million |
| Capital expenditures | $5 million | $0 million |
| Cash and cash equivalents | $168 million at March 31 | $212 million at December 31, 2022 |
Cost of products was $447 million, leaving gross profit of $137 million and an approximate gross margin of 23.5%, versus $107 million and 22.6% in Q1 2022. Warehousing, selling and administrative expense rose to $102 million from $84 million, mainly reflecting employee costs supporting growth. The effective tax rate was 8.6%, compared with 9.1%.
Reported other income/expense was nil, versus $10 million of income in Q1 2022, primarily due to a prior-year benefit from a reduction in contingent consideration. The company reported non-GAAP EBITDA excluding other costs of $47 million, or 8.0% of revenue, versus $28 million, or 5.9%. The measure adds back, among other items, $4 million of litigation legal fees in 2023; the 2022 adjustment primarily reflected a $13 million contingent-consideration benefit.
Operating cash use improved year over year but working capital absorbed cash as receivables and inventory increased. Financing cash use was $34 million, primarily reflecting share repurchases. The company had no revolver borrowings, approximately $461 million of stated availability (approximately $387 million excluding certain cash deposits), and reported compliance with its covenants. Its $500 million secured revolving facility matures December 14, 2026. Total liabilities were $485 million; the filing reports no borrowings under the facility.
Material changes and segment results
- U.S. revenue rose 27.8% to $427 million and operating profit increased to $23 million from $14 million, driven by stronger drilling and completions activity and improved gross margins.
- Canada revenue increased 1.2% to $83 million; operating profit rose to $8 million from $7 million. Growth reflected higher rig activity, partly offset by foreign exchange.
- International revenue increased 29.8% to $74 million and operating profit rose to $4 million from $2 million, supported by stronger project activity and rig counts, partly offset by foreign exchange.
- Worldwide average rig count increased 14.8% year over year, while average WTI crude prices declined 19.4% and natural gas prices declined 43.1%. Compared with Q4 2022, U.S. rig count fell 1.8%, WTI declined 8.1%, and natural gas declined 52.3%.
- The company repurchased 3,261,691 shares under its program for a reported total cost of $36 million; approximately $37 million remained authorized at quarter end. Cash flow from financing reports $33 million of repurchases.
Outlook, risks and unusual items
No quantitative financial guidance was provided. Management said the outlook remains dependent on commodity prices, global drilling and completions, energy spending, and demand for oil and gas. It expects energy demand to grow over the next several years and sees energy-transition investment as an opportunity to expand products and services. Management also cited commodity-price volatility, geopolitical instability, regional bank instability and recession concerns, and said it would continue adapting operations to market conditions.
- Key risks include changes in oil and gas prices and customer demand, foreign exchange, steel pricing, increased borrowing costs, geopolitical conditions, regulation, acquisition integration, litigation, and global economic activity.
- The company had approximately $15 million of outstanding standby letters of credit and surety bonds; it did not consider payment probable. It said total potential loss from legal and other claims could not be determined.
- A disagreement with sellers regarding a 2021 acquisition remained unresolved; management did not expect a material financial-statement impact, but the outcome was undetermined.
- On May 1, 2023, after quarter end, the company completed two acquisitions for approximately $33 million in cash, subject to customary working-capital adjustments.
- Foreign subsidiaries held $95 million of cash at March 31. The company stated that certain foreign earnings were indefinitely reinvested; a change in that assertion could result in additional taxes.
Most important facts for investors to verify
- Whether revenue and margin growth are sustained if commodity prices or activity weaken, particularly in the U.S. segment.
- How working-capital investment affects cash generation, given negative operating cash flow despite higher profit.
- The exact share-repurchase totals and timing: the filing distinguishes program purchases, employee tax-withholding shares, treasury shares and cash paid.
- The effect and funding of the May 2023 acquisitions, and whether the unresolved acquisition-related seller disagreement or litigation creates additional costs.
- Whether foreign exchange, steel costs, and commodity-market changes materially alter results or the tax rate during 2023.