DNOW Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless noted. DNOW distributes energy and industrial products and provides supply-chain and digital solutions across the U.S., Canada and international markets.
Financial results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $563 million | $584 million |
| Operating profit | $28 million | $35 million |
| Net income attributable to DNOW | $21 million | $31 million |
| Diluted EPS | $0.19 | $0.28 |
| Operating margin | 5.0% | 6.0% |
| EBITDA excluding other costs (non-GAAP) | $39 million; 6.9% of revenue | $47 million; 8.0% of revenue |
| Cash provided by (used in) operations | $81 million | $(6) million |
| Cash and cash equivalents at period end | $188 million | $168 million at March 31, 2023 |
Gross profit was $129 million, or approximately 22.9% of revenue, versus $137 million, or approximately 23.5%, in Q1 2023. The effective tax rate was 27.6%, compared with 8.6%, primarily because a prior-year deferred-tax-asset valuation allowance release did not recur.
Balance sheet and liquidity
- At March 31, 2024, total assets were $1.594 billion, total liabilities $515 million and stockholders’ equity $1.079 billion. Cash was $188 million, down from $299 million at December 31, 2023.
- Current assets were $1.045 billion and current liabilities $462 million. Receivables were $410 million and inventories $428 million.
- No borrowings were outstanding on the $500 million secured revolving credit facility. Reported availability was approximately $465 million, with approximately $376 million excluding certain cash deposits. The facility matures December 14, 2026; DNOW reported compliance with its covenants.
- Operating cash flow of $81 million included a $39 million net decrease in working capital. Investing cash use was $188 million, primarily the $185 million acquisition. Financing cash use was $4 million. Ending cash declined by $111 million during the quarter.
Material changes and segment performance
- Revenue fell $21 million, or 3.6%, and attributable net income declined $10 million. Management cited weaker activity in Canada and weaker international project activity, partly offset by U.S. acquisition revenue.
- U.S. revenue rose 1.9% to $435 million; operating profit was unchanged at $23 million. Canada revenue fell 20.5% to $66 million and operating profit fell to $3 million from $8 million. International revenue fell 16.2% to $62 million and operating profit declined to $2 million from $4 million.
- Cost of products declined to $434 million from $447 million. Warehousing, selling and administrative expense was $101 million versus $102 million; lower litigation-related legal fees were partly offset by acquisition expenses.
- In Q1, DNOW acquired Whitco Supply, LLC for $185 million net of cash acquired. Preliminary purchase accounting included $53 million of goodwill and $30 million of intangible assets; acquisition-related costs were $3 million. The acquired results were included from the acquisition date, and the company said they did not materially affect consolidated results.
Outlook, risks and other notable items
- DNOW provided no numerical earnings or revenue guidance. Management said its outlook remains tied to commodity prices, drilling and completion activity, customer spending and global energy demand. It described its market outlook as constructive despite lower North American rig counts and said it will pursue energy-transition opportunities.
- Management identified commodity-price volatility, customer demand, acquisition integration, capital markets, borrowing costs, regulation, geopolitical conditions and global economic activity as factors that could cause results to differ materially from forward-looking statements.
- Industry indicators were mixed: Q1 worldwide rig count declined 5.4% year over year, U.S. wells completed declined 14.9%, and average natural-gas prices declined 19.6%; average WTI crude prices rose 1.9%. Steel prices increased 16.2% year over year.
- Cash held by foreign subsidiaries was $89 million. DNOW stated that changes to its indefinite-reinvestment assertion could result in additional taxes. Foreign-currency translation generated a $4 million loss in other comprehensive income; the company estimated a hypothetical 10% currency move would change quarterly net income by less than $1 million.
- The company described legal claims and regulatory matters but said total potential losses could not be determined. It had approximately $11 million of standby letters of credit and surety bonds outstanding and did not believe payment was probable.
- The $80 million share-repurchase authorization runs through December 31, 2024, with approximately $22 million remaining at quarter-end. DNOW reported 168,055 shares repurchased under the program during Q1; the quarter’s total share purchases also included 319,429 shares withheld for employee tax obligations.
Important facts for investors to verify
- Track whether the Whitco acquisition contributes expected revenue and profit, and monitor final purchase-price allocation and integration costs.
- Assess whether the declines in Canada and International activity persist and whether weaker North American drilling and completion activity affects U.S. results.
- Monitor cash conversion, working-capital movements, and the reduction in cash following the acquisition.
- Review changes in facility availability, borrowing-base capacity and covenant headroom, as well as the remaining share-repurchase authorization.
- Compare future margins and earnings with Q1’s lower operating margin, EBITDA excluding other costs and higher effective tax rate; note that EBITDA excluding other costs is a non-GAAP measure.