DNOW Inc. (NOW Inc.) — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. NOW Inc., operating primarily under the DNOW brand, distributes energy and industrial products and provides supply-chain and materials-management solutions. It reports U.S., Canada and International segments.
Key financial results
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $588 | $577 | $1,766 | $1,589 |
| Gross profit | $134 | $139 | $405 | $374 |
| Operating profit | $37 | $44 | $108 | $96 |
| Net income attributable to NOW Inc. | $35 | $40 | $100 | $96 |
| Diluted EPS | $0.32 | $0.35 | $0.90 | $0.85 |
| EBITDA excluding other costs (non-GAAP) | $46 | $53 | $140 | $128 |
| EBITDA margin excluding other costs (non-GAAP) | 7.8% | 9.2% | 7.9% | 8.1% |
- Q3 revenue increased 1.9%, while operating profit and attributable net income declined. Gross margin was approximately 22.8%, versus 24.1% a year earlier; operating margin was approximately 6.3%, versus 7.6%.
- Nine-month revenue grew 11.1%, and operating profit grew 12.5%. Gross margin was approximately 22.9%, versus 23.5%; operating margin was approximately 6.1%, versus 6.0%.
- Q3 segment revenue and operating profit: U.S. $448 and $29; Canada $68 and $6; International $72 and $2. For the nine months, the respective revenue/profit figures were U.S. $1,331/$81, Canada $217/$17 and International $218/$10.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $83, compared with cash use of $6 in 2022. Management attributed the improvement mainly to $70 less cash consumed by working capital year over year; working capital nevertheless consumed $67 in the 2023 period.
- Investing cash use was $47, including $33 for acquisitions and $15 in capital expenditures. Financing cash use was $54, primarily $49 of share repurchases. Cash declined to $194 at September 30, 2023, from $212 at year-end 2022.
- Current assets were $1,033 and current liabilities $423; the reported balances imply a current ratio of approximately 2.4. Inventory was $415, up from $381 at year-end.
- No borrowings were outstanding under the $500 revolving credit facility, which matures December 14, 2026. Availability was approximately $478, or $353 excluding certain cash deposits; the company reported covenant compliance. Cash includes $67 held by foreign subsidiaries.
- The company repurchased 4.46 million shares for $49 in the first nine months, leaving approximately $24 of authorization under the $80 million program through December 31, 2024. Shares outstanding were approximately 106.3 million at September 30.
Material changes and management commentary
- U.S. revenue growth reflected acquisitions and, for the nine-month period, modestly stronger activity; Q3 U.S. operating profit fell as product margins weakened. Canada revenue and profit declined, reflecting lower Q3 rig activity and unfavorable foreign exchange effects. International revenue increased with stronger project activity and rig counts.
- Two U.S. Process Solutions acquisitions were completed for approximately $33 cash. Preliminary purchase accounting included $22 of goodwill and $9 of intangible assets; the acquisitions did not materially affect consolidated results.
- Management maintained a constructive market outlook despite lower North American rig counts and cited expected longer-term oil and gas demand and energy-transition investment opportunities. The filing provides no numerical earnings or revenue guidance.
- Management noted commodity-price and macroeconomic uncertainty. Q3 average U.S. rig count was down 14.5% year over year; WTI averaged $82.30 per barrel and natural gas $2.59 per MMBtu, both below year-earlier averages. Results remain exposed to energy activity, customer demand, commodity prices and steel pricing.
Risks, contingencies and unusual items
- The company identified risks from oil and gas price and activity changes, geopolitical conditions, recession concerns, acquisition integration, borrowing costs, regulation, foreign exchange and steel-price volatility. A hypothetical 10% currency-rate change was estimated to change nine-month net income by $2.
- For the nine months, $6 of costs included in warehousing, selling and administrative expense related to litigation legal fees where the company is seeking damages, and separation and transaction-related charges; these were added back in its non-GAAP EBITDA measure. The filing says total potential losses on legal and other matters cannot be determined.
- Approximately $12 of standby letters of credit and surety bonds were outstanding; management did not consider payment probable. A $10 foreign-currency translation loss recognized in 2022 did not recur in 2023. The 2023 effective tax rate was 5.6%; management cautioned that commodity and macroeconomic volatility could cause significant changes to the estimated full-year rate.
Important facts for investors to verify
- Whether weaker product margins and lower Canadian activity persist, and how much future growth depends on acquisitions versus underlying demand.
- Working-capital trends, particularly inventory growth and the ability to sustain positive operating cash flow.
- Progress and remaining capacity under the share-repurchase program, alongside acquisition and capital-spending needs.
- Resolution and potential financial exposure from litigation and other contingencies, including the unusual legal and transaction-related costs.
- Credit-facility availability and covenant headroom, foreign-currency exposure, and any changes to tax assumptions or full-year outlook.