DNOW Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed February 17, 2022. The filing also reports fourth-quarter 2021 results. NOW Inc. (NYSE: DNOW) distributes energy and industrial products and provides procurement and supply-chain services through about 180 locations worldwide.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $1.632 billion | $1.619 billion |
| Gross profit, calculated as revenue less cost of products | $357 million; 21.9% margin | $292 million; 18.0% margin |
| Operating profit (loss) | $9 million; 0.6% margin | $(420) million |
| Net income (loss) | $5 million; $0.05 diluted EPS | $(427) million; $(3.91) diluted EPS |
| EBITDA excluding other costs, non-GAAP | $45 million; 2.8% of revenue | $(47) million; (2.9%) of revenue |
| Cash from operating activities | $30 million | $189 million |
| Cash and cash equivalents at year-end | $313 million | $387 million |
Fourth-quarter 2021 revenue was $432 million, up 35.4% year over year. Net income was $12 million ($0.11 diluted EPS), versus a $44 million loss; operating profit was $7 million, versus a $37 million loss.
FY2021 operating cash flow fell by $159 million year over year, mainly as working capital used $33 million of cash, compared with $170 million provided in 2020. Investing activities used $96 million, primarily for acquisitions; capital expenditures were $5 million. No revolving-credit borrowings were outstanding at year-end. Under the $500 million facility, availability was approximately $359 million (approximately $248 million excluding certain cash deposits); the facility matures December 14, 2026. The company reported compliance with covenants. Total liabilities were $392 million, including $39 million of lease liabilities.
Changes versus prior year
- Revenue increased $13 million, or 0.8%, despite a $37 million decline in International revenue. U.S. revenue rose $10 million and Canada rose $40 million.
- Operating results improved substantially, chiefly because impairment and other charges fell to $7 million from $321 million, and warehousing, selling and administrative expenses declined $50 million to $341 million amid workforce reductions and improved efficiencies.
- Canada operating profit was $17 million versus a $60 million loss; International reached break-even versus a $79 million loss. U.S. reported an $8 million operating loss versus $281 million.
- Cash declined $74 million during 2021. Receivables rose to $304 million from $198 million, while inventory decreased to $250 million from $262 million.
Outlook, risks and unusual items
- Management provided no revenue or earnings guidance. It expects 2022 capital expenditures of approximately $15 million.
- Outlook remains dependent on oil and gas prices, drilling and completion activity, customer spending, storage levels and global demand. Management cited continuing uncertainty from COVID-19 and said it would continue cost optimization and pursue energy-transition opportunities.
- Two 2021 acquisitions had aggregate consideration of approximately $119 million: $96 million cash and estimated contingent consideration of $23 million. The year-end contingent-consideration liability was $13 million; possible undiscounted outcomes ranged from $0 to $45 million. Acquired goodwill was $67 million, primarily in U.S. Process Solutions.
- The effective tax rate was 54.8%, reflecting low pretax income and tax expense on Canadian earnings that could not be offset by benefits on losses elsewhere. The company maintained a full valuation allowance against deferred tax assets and reported a three-year cumulative loss position.
- Key exposures include energy-market volatility, inflation and supplier cost increases, steel prices, supply-chain availability, foreign exchange, customer credit, cybersecurity, international operations, and environmental and product-liability claims. Management said pending ordinary-course legal matters were not expected to have a material adverse effect; approximately $11 million of letters of credit and surety bonds were outstanding.
- The auditor gave an unqualified opinion on the financial statements and internal controls. The critical audit matter concerned business-combination accounting, including contingent consideration and acquired-asset valuations.
Important facts for investors to verify
- Whether the operating recovery and margin improvement persist without the large year-over-year reduction in impairment charges.
- Whether the rise in receivables and working-capital use converts into cash as activity grows.
- Acquisition performance, purchase-price allocation, and potential contingent payments, including the broad earn-out outcome range.
- Deferred-tax-asset recoverability and the effect of future profitability or tax-jurisdiction mix on reported earnings.
- Actual 2022 capital spending and operating trends relative to management’s market-dependent outlook.