DNOW Inc. (NOW Inc.) — Q3 2022 Form 10-Q
Business and period: Global distributor of energy and industrial products and supply-chain solutions, operating through U.S., Canada and International segments. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $577 million | $439 million | $1,589 million | $1,200 million |
| Gross profit (revenue less cost of products) | $139 million | $96 million | $374 million | $256 million |
| Operating profit | $44 million | $10 million | $96 million | $2 million |
| Net income attributable to NOW Inc. | $40 million | $5 million | $96 million | $(7) million |
| Diluted EPS | $0.35 | $0.05 | $0.85 | $(0.06) |
| Operating margin | 7.6% | 2.3% | 6.0% | 0.2% |
| EBITDA excluding other costs, non-GAAP | $53 million; 9.2% margin | $17 million; 3.9% margin | $128 million; 8.1% margin | $28 million; 2.3% margin |
Q3 revenue rose 31.4% year over year; nine-month revenue increased 32.4%. Gross margins were approximately 24.1% in Q3 2022 versus 21.9% in Q3 2021, and 23.5% versus 21.3% for the nine-month periods. The nine-month effective tax rate was 7.6%, versus (117.1%) in 2021.
Cash, liquidity and capital
- Nine-month operating cash flow was negative $6 million, compared with positive $28 million in 2021, primarily reflecting working-capital investment as activity grew. Receivables increased $110 million and inventory increased $122 million in cash-flow terms.
- Investing cash outflow was $26 million, including $21 million for an acquisition and $7 million of capital expenditures. Financing cash outflow was $5 million, including $4 million of share repurchases.
- Cash and cash equivalents were $267 million at September 30, 2022, down from $313 million at year-end 2021. Total current assets were $1,054 million and current liabilities $458 million.
- No revolver borrowings were outstanding. The $500 million secured revolving facility matures December 14, 2026; reported availability was approximately $481 million (approximately $368 million excluding certain cash deposits). The company reported covenant compliance. It had $4 million of letters of credit under the facility.
- The company reported no conventional debt borrowings. Total liabilities were $476 million, including lease and other liabilities. The $13 million of standby letters of credit and surety bonds are contingent obligations, not reported borrowings.
Segments and material changes
- U.S.: Q3 revenue increased 39.4% to $435 million and operating profit rose to $31 million from $4 million, reflecting stronger drilling and completions activity and improved product margins, partly offset by higher employee costs.
- Canada: Q3 revenue increased 26.5% to $86 million and operating profit rose to $10 million from $5 million, supported by higher rig activity, partly offset by foreign exchange and higher employee costs.
- International: Q3 revenue declined 5.1% to $56 million, while operating profit improved to $3 million from $1 million. Nine-month operating results were a $4 million loss versus $3 million profit in 2021, including $10 million of foreign-currency translation losses reclassified to expense upon liquidation of certain subsidiaries.
- Other income for the first nine months included an approximately $13 million benefit from reducing acquisition contingent consideration; the company is in disagreement with the sellers about aspects of the agreement. The benefit was partly offset by unfavorable foreign exchange effects.
- Steel prices and foreign exchange affected performance. The company cited lower steel prices during Q3 versus Q2 and unfavorable currency impacts on Canadian and International results.
Outlook, risks and contingencies
No quantified financial guidance was provided. Management said results remain tied to commodity prices, drilling and completion activity, customer spending, energy demand and production trends. It expects energy demand to grow over the next several years and views energy-transition investment as an opportunity to supply existing products and develop new offerings. Management emphasized continued market volatility from inflation, recession concerns, supply constraints, geopolitical conflict, COVID-19 effects and changing production limits.
- The company stated that cash, expected operating cash generation and revolver availability should be sufficient for operations, working capital, capital expenditures and the repurchase program.
- An $80 million share-repurchase authorization runs through December 31, 2024. Through September 30, the company repurchased 376,838 shares for $4 million.
- Legal matters, regulatory audits and other claims are ongoing; total potential losses could not be determined. The company also reported $13 million of standby letters of credit and surety bonds and said payment was not considered probable based on available information.
- Foreign exchange is a material exposure: approximately one-fourth of nine-month sales were outside the U.S. A hypothetical 10% currency change would have changed nine-month net income by an estimated $2 million. The company uses short-term forward contracts for certain exposures and does not hedge net investments in foreign operations.
- Management identified oil and gas prices and activity, customer demand, acquisition integration, borrowing costs, supply-chain disruption, regulation, litigation, currency and steel-price volatility among the risks that could cause actual results to differ from expectations.
Important facts for investors to verify
- Whether revenue growth and margin improvement persist as drilling activity, commodity prices and product pricing change.
- Whether working-capital growth converts into operating cash flow and whether receivables and inventory remain recoverable and appropriately valued.
- The recurring earnings impact of the $13 million contingent-consideration benefit and the $10 million foreign-currency liquidation charge.
- Actual use and funding of the repurchase authorization, and remaining liquidity under the borrowing-base facility and its covenant conditions.
- Developments in the acquisition seller dispute, other legal matters, and the potential effect of foreign exchange, steel prices and macroeconomic conditions.