DNOW Inc. (NOW INC.) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless noted. Amounts are in millions of dollars, except per-share data. DNOW distributes energy and industrial products and provides supply-chain and digital procurement solutions across the U.S., Canada and international markets.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $594 | $539 | $1,178 | $1,012 |
| Operating profit | $36 | $29 | $71 | $52 |
| Net income attributable to NOW | $34 | $26 | $65 | $56 |
| EPS, diluted | $0.31 | $0.23 | $0.59 | $0.50 |
| EBITDA excluding other costs (non-GAAP) | $47 | $47 | $94 | $75 |
| EBITDA margin excluding other costs (non-GAAP) | 7.9% | 8.7% | 8.0% | 7.4% |
Approximate GAAP operating margin was 6.1% in Q2 2023 versus 5.4% in Q2 2022, and 6.0% for the first half versus 5.1%. Net margin attributable to NOW was approximately 5.7% and 4.8% for Q2, and 5.5% and 5.5% for the respective six-month periods. Cost of products was $460 million in Q2 and $907 million year to date; the filing does not separately report gross profit.
Cash flow and liquidity: First-half operating cash flow was $79 million, versus cash used of $51 million in 2022, with the improvement attributed mainly to $110 million less cash consumed by net working capital. Investing cash use was $43 million, including $33 million for acquisitions and $11 million for capital expenditures. Financing cash use was $47 million, primarily $44 million of share repurchases. Cash ended the period at $203 million, down from $212 million at year-end 2022.
Debt and balance sheet: DNOW reported no borrowings under its $500 million senior secured revolving credit facility and approximately $491 million of availability (approximately $381 million excluding certain cash deposits). The facility matures December 14, 2026; the company said it was in compliance with covenants. At June 30, current assets were $1.075 billion and current liabilities were $501 million. Total assets were $1.420 billion and total liabilities were $543 million. The balance sheet also included $26 million of long-term operating lease liabilities.
Changes versus prior period
- Q2 revenue rose 10.2%; first-half revenue rose 16.4%. Growth reflected U.S. activity and stronger international project activity, while Canada revenue declined.
- Q2 operating profit increased $7 million and first-half operating profit increased $19 million. International results improved substantially, including the absence of the $10 million foreign-currency liquidation charge recorded in Q2 2022.
- Q2 net income increased $8 million; first-half net income attributable to NOW increased $9 million. First-half 2022 other income included a benefit from reduced contingent consideration; 2023 recorded $1 million of other expense.
- First-half operating cash flow improved by $130 million, from $51 million used to $79 million provided, primarily reflecting lower working-capital cash use.
- Cash declined by $9 million during the first half, as operating cash generation was offset by acquisitions, capital spending and buybacks. Shares repurchased totaled 4.0 million for $44 million; approximately $29 million remained under the $80 million authorization.
Segments and management outlook
- U.S.: Q2 revenue increased 11.8% to $456 million, while operating profit decreased to $29 million from $32 million, mainly because of higher employee-related costs. First-half revenue increased 19.0% to $883 million and operating profit rose to $52 million.
- Canada: Q2 revenue decreased 8.3% to $66 million and operating profit fell to $3 million; management cited unfavorable foreign exchange. First-half revenue was down 3.2% to $149 million.
- International: Q2 revenue increased 22.0% to $72 million and segment operating profit improved to $4 million from a $9 million loss. First-half revenue increased 25.9% to $146 million and operating profit was $8 million.
- Management gave no specific numerical earnings or revenue guidance. It described its market outlook as constructive despite lower oil prices and North American rig counts in the first half, while noting that uncertainty may drive commodity-price volatility. The company expects energy demand to grow over the next several years and sees energy-transition investment as an opportunity to expand offerings.
- Two U.S. Process Solutions acquisitions closed in Q2 for approximately $33 million cash, adding $23 million of preliminary goodwill and $9 million of intangible assets.
Risks, contingencies and unusual items
- Results are exposed to oil and gas prices, drilling and completion activity, customer spending, economic conditions, steel prices, foreign exchange, geopolitical events and acquisition integration. The U.S. rig count was 675 on July 14, down from the Q2 average of 722.
- Management said commodity-price volatility and macroeconomic developments could cause significant changes in the forecast annual effective tax rate. The company used the discrete-period method for interim taxes; the first-half effective tax rate was 5.7%, versus 8.2% in 2022.
- The company is involved in legal claims and disputes and stated that total potential losses cannot be determined. A disagreement with sellers relating to a 2021 acquisition was not expected by management to have a material impact, though the outcome remained unresolved. Outstanding standby letters of credit and surety bonds totaled approximately $15 million; management did not believe payment was probable.
- First-half 2023 non-GAAP “other costs” included approximately $6 million of legal fees for non-routine litigation matters and separation and transaction-related charges. The filing also notes a less-than-$1 million share-repurchase excise tax impact for the first half.
- Foreign-currency forward contracts had a $16 million notional amount at June 30 and fair value below $1 million; they are used for economic hedging, not speculation. Management estimated that a hypothetical 10% currency-rate change would have changed first-half net income by $1 million.
Investor verification priorities
- Track whether U.S. and international revenue growth offsets weaker Canadian results, foreign-exchange effects and changes in rig activity.
- Assess whether operating margins and cash conversion hold up as employee costs, inventory and receivables change.
- Review acquisition integration, purchase-price allocation and returns on the $33 million Q2 acquisitions.
- Monitor the remaining share-repurchase authorization, cash levels and revolver availability alongside capital spending and any further acquisitions.
- Follow tax-rate volatility, litigation and acquisition-related contingencies, and commodity, steel-price and currency exposure.