DNOW Inc. (NOW) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. NOW distributes energy and industrial products and provides related supply-chain services through U.S., Canada and International segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $539 million | $400 million | $1,012 million | $761 million |
| Operating profit (loss) | $29 million | $0 million | $52 million | ($8 million) |
| Net income (loss) | $26 million | ($2 million) | $56 million | ($12 million) |
| Diluted EPS | $0.23 | ($0.02) | $0.50 | ($0.11) |
| Operating cash flow | Not provided by quarter | ($51 million) | $4 million |
- Revenue grew 34.8% in Q2 and 33.0% for the first half year over year. Q2 operating margin was approximately 5.4%, versus zero in Q2 2021; calculated gross margin was approximately 23.7%, up from 21.3%.
- First-half non-GAAP EBITDA excluding other costs was $75 million (7.4% of revenue), versus $11 million (1.4%) a year earlier. The measure excludes specified costs and is not GAAP.
- Cash and cash equivalents were $232 million at June 30, down from $313 million at year-end 2021. Current assets were $969 million and current liabilities $408 million. Total liabilities were $425 million; the company had no revolving-credit borrowings.
- First-half cash used in operations was driven primarily by working-capital growth: receivables increased cash use by $88 million and inventories by $87 million, partly offset by $46 million from accounts payable, accrued liabilities and other items. Investing cash use was $25 million, including a $21 million acquisition and $6 million of capital expenditures.
Material changes and segment results
- U.S. revenue rose 37.8% in Q2 to $408 million, with $32 million operating profit versus a $3 million loss. Canada revenue rose 41.2% to $72 million, with $6 million operating profit versus $2 million. International revenue rose 11.3% to $59 million, but the segment recorded a $9 million operating loss versus $1 million profit.
- Management attributed U.S. and Canadian growth mainly to stronger drilling and completion activity; International growth reflected rig activity and projects, partly offset by foreign exchange.
- At June 30, assets totaled $1.202 billion, up from $1.104 billion at December 31, 2021. Receivables rose to $389 million from $304 million and inventory to $331 million from $250 million, consistent with higher activity and working-capital needs.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said results remain tied to oil and gas prices, drilling and completion activity, customer spending and energy demand. It cited continued COVID-19, geopolitical and supply-chain uncertainty, including the Russia-Ukraine conflict, and said it will continue cost and process optimization.
- Q2 and first-half results included $10 million of impairment and other charges, primarily foreign-currency translation losses reclassified into earnings after substantially completing liquidation of certain foreign subsidiaries. First-half other income included a $13 million benefit from reducing contingent consideration related to a prior acquisition; NOW is in disagreement with the sellers over aspects of the agreement, and final resolution is pending.
- In Q2, NOW acquired a U.S. Process Solutions business for approximately $21 million cash. Preliminary purchase accounting included $12 million goodwill and $4 million intangible assets.
- The $500 million secured revolving credit facility matures December 14, 2026. Availability was approximately $454 million (approximately $342 million excluding certain cash deposits); the company reported 99% excess availability and compliance with covenants. It had $5 million of facility letters of credit and approximately $13 million of standby letters of credit and surety bonds outstanding.
- Other risks include potential litigation and regulatory matters for which total possible losses could not be determined, foreign-exchange exposure, steel-price sensitivity and uncertainty about customer demand. Management reported disclosure controls effective and no material change in internal control over financial reporting.
- On August 3, 2022, after quarter-end, the board authorized repurchases of up to $80 million of common stock through December 31, 2024.
Important facts for investors to verify
- Whether working-capital investment converts into operating cash flow as demand and sales expand.
- Whether International segment losses persist and what further costs or effects may arise from subsidiary liquidations and foreign exchange.
- The final outcome of the contingent-consideration seller disagreement and any revisions to the preliminary acquisition valuation.
- Actual use of the repurchase authorization, given cash needs, acquisitions and the facility’s borrowing-base and covenant terms.
- How commodity prices, rig activity, steel costs, geopolitical conditions and supply-chain disruptions affect customer demand and margins; the filing gives no quantified outlook.