UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
(Address of principal executive offices)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 2, 2024, the registrant had
1
DNOW INC.
TABLE OF CONTENTS
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DNOW INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
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June 30, 2024 |
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December 31, 2023 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, net |
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Inventories, net |
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Prepaid and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Deferred income taxes |
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Goodwill |
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Intangibles, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Other current liabilities |
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Total current liabilities |
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Long-term operating lease liabilities |
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Other long-term liabilities |
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Total liabilities |
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Stockholders' equity: |
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Preferred stock - par value $ |
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Common stock - par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Accumulated other comprehensive loss |
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( |
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DNOW Inc. stockholders' equity |
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Noncontrolling interest |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See notes to unaudited consolidated financial statements.
3
DNOW INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In millions, except per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Revenue |
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$ |
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$ |
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$ |
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$ |
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Operating expenses: |
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Cost of products |
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$ |
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Warehousing, selling and administrative |
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Operating profit |
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Other income (expense) |
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( |
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Income before income taxes |
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Income tax provision |
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Net income |
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Net income attributable to noncontrolling interest |
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Net income attributable to DNOW Inc. |
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$ |
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$ |
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$ |
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$ |
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Earnings per share attributable to DNOW Inc. stockholders: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted-average common shares outstanding, basic |
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Weighted-average common shares outstanding, diluted |
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See notes to unaudited consolidated financial statements.
4
DNOW INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In millions)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net income |
$ |
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$ |
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$ |
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$ |
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Other comprehensive income: |
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Foreign currency translation adjustments |
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Comprehensive income |
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Comprehensive income attributable to noncontrolling interest |
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Comprehensive income attributable to DNOW Inc. |
$ |
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$ |
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$ |
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$ |
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See notes to unaudited consolidated financial statements.
5
DNOW INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
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Six Months Ended June 30, |
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2024 |
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2023 |
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Cash flows from operating activities: |
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Net income |
$ |
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$ |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Provision for inventory |
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Stock-based compensation |
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Deferred income taxes |
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Other, net |
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Change in operating assets and liabilities, net of effects of acquisitions: |
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Receivables |
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Inventories |
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Prepaid and other current assets |
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Accounts payable, accrued liabilities and other, net |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Business acquisitions, net of cash acquired |
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Purchases of property, plant and equipment |
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Other, net |
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Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Repurchases of common stock |
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( |
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Other, net |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
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( |
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Effect of exchange rates on cash and cash equivalents |
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( |
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Net change in cash and cash equivalents |
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( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
$ |
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$ |
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See notes to unaudited consolidated financial statements.
6
DNOW INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In millions)
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Attributable to DNOW Inc. Stockholders |
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Additional |
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Retained |
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Accum. Other |
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Total |
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Common |
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Paid-In |
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Earnings |
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Comprehensive |
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Treasury |
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Noncontrolling |
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Stockholders’ |
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Stock |
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Capital |
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(Deficit) |
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Income (Loss) |
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Stock |
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Interest |
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Equity |
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December 31, 2022 |
$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
— |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Common stock repurchased |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Common stock retired |
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— |
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( |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for taxes |
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— |
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( |
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— |
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— |
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— |
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— |
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( |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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March 31, 2023 |
$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Common stock repurchased |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Common stock retired |
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— |
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( |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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June 30, 2023 |
$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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$ |
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December 31, 2023 |
$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Common stock repurchased |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Common stock retired |
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— |
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( |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for taxes |
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— |
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( |
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— |
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— |
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— |
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— |
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( |
) |
Other comprehensive loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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March 31, 2024 |
$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Common stock repurchased |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Common stock retired |
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— |
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( |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive loss |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
) |
June 30, 2024 |
$ |
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$ |
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$ |
( |
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$ |
( |
) |
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$ |
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$ |
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$ |
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See notes to unaudited consolidated financial statements.
7
DNOW INC.
Notes to Unaudited Consolidated Financial Statements
1. Organization and Basis of Presentation
Nature of Operations
DNOW Inc. (“DNOW” or the “Company”) is a holding company headquartered in Houston, Texas that was incorporated in Delaware on November 22, 2013. We operate primarily under the DNOW brand along with several affiliated brands operating in local or regional markets that are tied to prior acquisitions. DNOW is a global distributor of energy products as well as products for industrial applications through its locations in the United States (“U.S.”), Canada and internationally which are geographically positioned to serve the energy and industrial markets in approximately
Basis of Presentation
The unaudited consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of SEC Regulation S-X. All significant intercompany transactions and accounts have been eliminated. Variable interest entities for which the Company is the primary beneficiary are fully consolidated with the equity held by the outside stockholders and their portion of net income (loss) reflected as noncontrolling interest in the accompanying consolidated financial statements. The principles for interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the financial statements included in the Company’s most recent Annual Report on Form 10-K. In the opinion of the Company’s management, the consolidated financial statements include all adjustments, which are of a normal recurring nature unless disclosed otherwise, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and six months ended June 30, 2024, are not necessarily indicative of the results to be expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported and contingent amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables and payables approximated fair value because of the relatively short maturity of these instruments. Cash equivalents include only those investments having a maturity date of three months or less at the time of purchase. See Note 14 “Derivative Financial Instruments” for the fair value of derivative financial instruments.
Purchase Price Allocation of Acquisitions
The Company allocates the fair value of the purchase price consideration of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of the acquired assets and liabilities, if any, is recorded as goodwill. The Company uses all available information to estimate fair values including quoted market prices, the carrying value of acquired assets, and widely accepted valuation techniques such as discounted cash flows. The Company engages third-party valuation advisors to assist in fair value determination of inventories, identifiable intangible assets and any other significant assets or liabilities when appropriate. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact the Company’s results of operations. See Note 15 “Acquisitions” for additional information.
Recently Issued Accounting Standards
In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280), which requires enhanced segment disclosures primarily focusing on significant segment expense disclosures for both interim and annual periods. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted and requires modified retrospective transition
8
method. The Company will not early adopt, and is currently assessing the impact of ASU 2023-07 in its consolidated financial statements and its disclosures. The Company does not expect the adoption of this standard to have material impact in its consolidated statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), which requires public companies to expand the income tax disclosures. The ASU requires entities to disclose more detailed information in their effective tax rate reconciliation and their cash taxes paid both in the U.S., state and foreign jurisdictions. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted for annual financial statements that have not yet been issued. The Company will not early adopt, and is currently assessing the impact of ASU 2023-09 in its consolidated financial statements and in its disclosures.
2. Revenue
The Company’s primary source of revenue is the sale of energy products and an extensive selection of products for industrial applications based upon purchase orders or contracts with customers. Substantially all of the Company's revenue is recognized at a point in time once the Company has determined that the customer has obtained control over the product. Control is typically deemed to have been transferred to the customer when the product is shipped, delivered or picked up by the customer. The Company does not grant extended payment terms. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to proper government authorities. Shipping and handling costs for product shipments occur prior to the customer obtaining control of the goods and are recorded in cost of products.
The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for products sold. Revenue is recorded at the transaction price net of estimates of variable consideration, which may include product returns, trade discounts and allowances. The Company accrues for variable consideration using the expected value method. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
See Note 9 “Business Segments” for disaggregation of revenue by reporting segments. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed on contracts with an original expected duration of more than one year. The Company’s contracts are predominantly short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in Accounting Standards Codification (“ASC”) Topic 606 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less.
Allowance for Credit Losses
Allowance for credit losses is estimated based on an evaluation of accounts receivable aging, and the related historical loss experience, as adjusted for current and expected future market conditions that are reasonably available. Judgments in the estimate of allowance for credit losses include global economic and business conditions, oil and gas industry and market conditions, customer’s financial conditions and accounts receivable past due. As of June 30, 2024 and December 31, 2023, the allowance for credit losses totaled $
Contract Assets and Liabilities
Contract assets primarily consist of retainage amounts held as a form of security by customers until the Company satisfies its remaining performance obligations. As of June 30, 2024 and December 31, 2023, contract assets were approximately $
Contract liabilities primarily consist of deferred revenues recorded when customer payments are received or due in advance of satisfying performance obligations, including amounts which are refundable, and other accrued customer liabilities. Revenue recognition is deferred to a future period until the Company completes its obligations contractually agreed with customers. As of June 30, 2024 and December 31, 2023, contract liabilities were $
9
3. Inventories, net
Inventories consist primarily of oilfield and industrial finished goods and work in process. Work in process primarily consists of inventory and labor related to customer specific engineered equipment. Finished goods are stated at the lower of cost or net realizable value and using average cost methods. Allowances for excess and obsolete inventories are determined based on the Company’s historical usage of inventory on hand as well as its future expectations.
Inventories consist primarily of (in millions):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Work in process |
|
$ |
|
|
$ |
|
||
Finished goods and other |
|
|
|
|
|
|
||
Total inventory |
|
|
|
|
|
|
||
Less: Inventory reserves |
|
|
( |
) |
|
|
( |
) |
Inventories, net |
|
$ |
|
|
$ |
|
||
Property, plant and equipment consist of (in millions):
|
|
Estimated |
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Information technology assets |
|
|
$ |
|
|
$ |
|
|||
Operating equipment (1) |
|
|
|
|
|
|
|
|||
Buildings and land (2) |
|
|
|
|
|
|
|
|||
Construction in progress |
|
|
|
|
|
|
|
|
||
Total property, plant and equipment |
|
|
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
|
|
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net |
|
|
|
$ |
|
|
$ |
|
||
5. Accrued Liabilities
Accrued liabilities consist of (in millions):
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
||
Compensation and other related expenses |
|
$ |
|
|
$ |
|
||
Contract liabilities |
|
|
|
|
|
|
||
Taxes (non-income) |
|
|
|
|
|
|
||
Current portion of operating lease liabilities |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
On
The Credit Facility provides for a $
10
Borrowings under the Credit Facility will bear an interest rate at the Company’s option, (i) for borrowings denominated in U.S. dollars, at (a) the base rate plus the applicable margin or (b) adjusted term SOFR for the applicable interest period, plus the applicable margin and (ii) for borrowings denominated in Canadian dollars, the Canadian Dollar Offered Rate plus the applicable margin. In each case, with such applicable margin being based on the Company’s fixed charge coverage ratio. The Credit Facility includes a commitment fee on the unused portion of commitments that ranges from
Availability under the Credit Facility is determined by a borrowing base comprised of eligible receivables, eligible inventory and certain cash deposits in the U.S. and Canada. As of June 30, 2024, the Company had
The Company issued $
7. Stockholders’ Equity
Share Repurchase Program
On August 3, 2022, the Company’s Board of Directors approved a share repurchase program, under which the Company is authorized to purchase up to $
Information regarding the shares repurchased was as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Total cost of shares repurchased (in millions) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Average price per share (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Number of shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Consolidated Variable Interest Entities ("VIE")
The Company holds a
The assets of the VIE can only be used to settle its own obligations and its creditors have no recourse to the Company’s assets. As of June 30, 2024 and December 31, 2023, the VIE’s assets were primarily current assets of $
8. Accumulated Other Comprehensive Income (Loss) ("AOCI")
The components of AOCI are as follows (in millions):
|
|
Foreign Currency Translation Adjustments |
|
|||||
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Beginning balance |
|
$ |
( |
) |
|
$ |
( |
) |
Net current-period other comprehensive income (loss) |
|
|
( |
) |
|
|
|
|
Ending balance |
|
$ |
( |
) |
|
$ |
( |
) |
11
The Company’s reporting currency is the U.S. dollar. A majority of the Company’s international entities in which there is a substantial investment have the local currency as their functional currency. As a result, foreign currency translation adjustments resulting from the process of translating the entities’ financial statements into the reporting currency are reported in other comprehensive income or loss in accordance with ASC Topic 830, “Foreign Currency Matters.”
9. Business Segments
Operating results by reportable segment are as follows (in millions):
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Canada |
|
|
|
|
|
|
|
|
|
|
|
||||
International |
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating profit: |
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Canada |
|
|
|
|
|
|
|
|
|
|
|
||||
International |
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating profit |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
10. Income Taxes
The effective tax rates for the three and six months ended June 30, 2024, were
The Company is subject to taxation in the U.S., various states, and foreign jurisdictions. The Company has significant operations in the U.S. and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally open in the U.S. for the tax years ending after 2019 and outside the U.S. for the tax years ending after 2017.
11. Earnings Per Share
For the three and six months ended June 30, 2024, less than
Basic and diluted earnings per share are as follows (in millions, except share data):
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income attributable to DNOW Inc. |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Less: net income attributable to participating securities |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income attributable to DNOW Inc. stockholders |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average basic common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average diluted common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share attributable to DNOW Inc. stockholders: |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Diluted |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Under ASC Topic 260, “Earnings Per Share”, the two-class method requires a portion of net income attributable to DNOW Inc. to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends
12
or dividend equivalents, if declared. Net income attributable to these participating securities was excluded from net income attributable to DNOW Inc. stockholders in the numerator of the earnings per share computation.
12. Stock-based Compensation and Outstanding Awards
The Company has a stock-based compensation plan known as the DNOW Inc. Long Term Incentive Plan (the “Plan”). The Plan provided for the grant of stock options, restricted stock awards (“RSAs”), restricted stock units and phantom shares (“RSUs”), and performance stock awards (“PSAs”). The Plan had a
For the six months ended June 30, 2024, the Company granted
Stock-based compensation expense for the three and six months ended June 30, 2024, totaled $
13. Commitments and Contingencies
The Company is involved in various claims, regulatory agency audits and pending or threatened legal actions involving a variety of matters with entities such as suppliers, customers, parties to acquisitions and divestitures, government authorities and other external parties. The Company regularly reviews and records the estimated probable liability in an amount believed to be sufficient and continues to periodically reexamine the estimates of probable liabilities and any associated expenses to make appropriate adjustments to such estimates as necessary. These estimated liabilities are based on the Company’s assessment of the nature of these matters, their progress toward resolution, the advice of legal counsel and outside experts as well as management’s intention and past experience regarding the valuation of these claims. The Company has also assessed the potential for additional losses above the amounts accrued as well as potential losses for matters that are not probable but are reasonably possible. The total potential loss on these matters cannot be determined. While the Company has established estimates it believes to be reasonable under the facts known, the outcomes of litigation and similar disputes are often difficult to reliably predict and may result in decisions or settlements that are contrary to, or in excess of, the Company's expectations.
The Company’s business is affected both directly and indirectly by governmental laws and regulations relating to the oilfield service industry in general, as well as by environmental and safety regulations that specifically apply to the Company’s business. Although the Company has not incurred material costs in connection with its compliance with such laws, there can be no assurance that other developments, such as new environmental laws, regulations and enforcement policies hereunder may not result in additional, presently unquantifiable costs or liabilities to the Company. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible, but not probable. Estimating reasonably possible losses also requires the analysis of multiple possible outcomes that often depend on judgments about potential actions by third parties.
The Company maintains credit arrangements with several banks providing for standby letters of credit, including bid and performance bonds, and other bonding requirements. As of June 30, 2024, the Company was contingently liable for approximately $
In connection with an acquisition in 2024, the Company is committed to total future retention payments of up to $
14. Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The Company has entered into certain financial derivative instruments to economically hedge the Company’s risk from changes in the fair value of non functional currency denominated monetary accounts. The Company's foreign currency forward contracts have terms of less than one year.
The Company records all derivative financial instruments at their fair value in its consolidated balance sheets. None of the derivative financial instruments that the Company holds are designated as either a fair value hedge or cash flow hedge and the gain or loss on the derivative instruments is recorded in earnings. The Company has determined that the fair value of its derivative financial instruments are computed using level 2 inputs (inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability) in the fair value hierarchy as the fair value is based on
13
publicly available foreign exchange rates at each financial reporting date. As of June 30, 2024 and December 31, 2023, the fair value of the Company’s foreign currency forward contracts totaled an asset of less than $
For the three and six months ended June 30, 2024, and 2023, the Company recorded a loss of less than $
As of June 30, 2024, the Company’s financial instruments do not contain any credit-risk-related or other contingent features that could cause accelerated payments when the Company’s financial instruments are in net liability positions. The Company does not use derivative financial instruments for trading or speculative purposes.
15. Acquisitions
For the six months ended June 30, 2024, the Company acquired Whitco Supply, LLC for a purchase price consideration of $
The Company completed its preliminary valuations as of the acquisition date of the acquired net assets and recognized goodwill of $
Following is the purchase price allocation detail (in millions):
|
|
As of June 30, 2024 |
|
|
Net purchase price, net of cash acquired |
|
$ |
|
|
|
|
|
|
|
Fair value of net assets acquired: |
|
|
|
|
Current assets other than cash |
|
$ |
|
|
Property, plant and equipment |
|
|
|
|
Trade names (estimate useful lives of |
|
|
|
|
Customer relationships (estimate useful lives of |
|
|
|
|
Current liabilities |
|
|
( |
) |
Total fair value of net assets acquired |
|
$ |
|
|
Goodwill (1) |
|
$ |
|
|
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Some of the information in this document contains, or has incorporated by reference, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements typically are identified by use of terms such as “may,” “believe,” “anticipate,” “expect,” “plan,” “predict,” “estimate,” “will be” or other similar words and phrases, although some forward-looking statements are expressed differently. You should be aware that our actual results could differ materially from results anticipated in the forward-looking statements due to a number of factors, including, but not limited to, changes in oil and gas prices, changes in the energy markets, customer demand for our products, significant changes in the size of our customers, difficulties encountered in integrating mergers and acquisitions, general volatility in the capital markets, ability to complete the share repurchase program, changes in applicable government regulations, increased borrowing costs, geopolitical conditions (including the Ukraine and Middle East conflicts and their regional and global impacts) or any litigation arising out of or related thereto, impairments in long-lived assets and worldwide economic activity. You should also consider carefully the statements under “Risk Factors,” as disclosed in our Form 10-K, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements. We undertake no obligation to update any such factors or forward-looking statements to reflect future events or developments.
Company Overview
We are a global distributor to the oil and gas and industrial markets with a legacy of over 160 years. We operate primarily under the DNOW brand along with several affiliated brands operating in local or regional markets that are tied to prior acquisitions. Through a network of approximately 170 locations and approximately 2,625 employees worldwide, we offer a complementary suite of digital procurement channels that, in conjunction with our locations, provides products to the energy and industrial markets around the world.
Additionally, through our growing DigitalNOW® platform, customers can leverage world-class technology across ecommerce, data visualization, data management and supply chain optimization applications to solve a wide array of complex operational and product sourcing challenges to assist in maximizing their return on assets.
Our product and service offerings are consumed throughout all sectors of the energy industry – from upstream drilling and completion, exploration and production (“E&P”), midstream transmission, gas and crude oil processing infrastructure development to downstream petroleum refining and petrochemicals – as well as in other industries, such as chemical processing, mining, water/wastewater, food and beverage, gas utilities and the evolution of energy transition markets inclusive of greenhouse gas reduction and emissions capture and storage, renewable fuels such as biofuels and renewable natural gas (“RNG”), wind, solar, production of hydrogen as a fuel to power equipment and select industrial markets. The industrial distribution end markets include engineering and construction firms that perform capital and maintenance projects for their end-user clients. We also provide supply chain and materials management solutions to the same markets where we sell products.
Our global product offering includes consumable maintenance, repair and operating (“MRO”) supplies, pipe, manual and automated valves, fittings, flanges, gaskets, fasteners, electrical, instrumentation, artificial lift, pumping solutions and modular process, production, measurement and control equipment. We also offer sourcing, procurement, warehouse and inventory management solutions as part of our supply chain and materials management offering. We have developed expertise in providing application systems, work processes, parts integration, optimization solutions and after-sales support that provide more efficient and productive solutions for our customers.
Our solutions include outsourcing portions or entire functions of our customers’ procurement, warehouse and inventory management, logistics, point of issue technology, project management, business process and performance metrics reporting. These solutions allow us to leverage the infrastructure of our SAP™ Enterprise Resource Planning (“ERP”) system and other technologies to streamline our customers’ purchasing process, from requisition to procurement to payment, by digitally managing workflow, improving approval routing and providing robust reporting functionality.
We support land and offshore operations for the major oil and gas producing regions around the world through our network of locations. Our key markets, beyond North America, include South America, Europe, the Middle East, Asia Pacific, Central Asia and West and North Africa. Products sold through our locations support greenfield expansion upstream capital projects, midstream infrastructure and transmission and MRO consumables used in day-to-day production. We provide downstream energy and industrial products for petroleum refining, chemical processing, liquefied natural gas (“LNG”) terminals, power generation utilities and customer on-site locations.
15
Our supplier network consists of thousands of vendors in approximately 40 countries. From our operations in 17 countries, we sell to customers operating in approximately 80 countries. The supplies and equipment stocked by each of our branches are customized to meet varied and changing local customer demands. The breadth and scale of our offering enhances our value proposition to our customers, suppliers and shareholders.
We employ advanced information technologies, including a common ERP platform across most of our business, to provide complete procurement, warehouse and inventory management and logistics coordination to our customers around the globe. Having a common ERP platform allows immediate visibility into our inventory assets, operations and financials worldwide, enhancing decision making and efficiency.
Demand for our products is driven primarily by the level of oil and gas drilling, completions, servicing, production, transmission, refining and petrochemical activities. It is also influenced by the global supply and demand for energy, the economy in general and geopolitics. Several factors drive spending, such as investment in energy infrastructure, the North American conventional and shale plays, Organization of Petroleum Exporting Countries (“OPEC”) and non-OPEC supply and investments, market expectations of future developments in the oil, natural gas, liquids, refined products, petrochemical, plant maintenance and other industrial, manufacturing and energy sectors.
We have expanded globally, through acquisitions and organic investments, in Australia, Brazil, Canada, Colombia, Egypt, England, India, Indonesia, Kazakhstan, Kuwait, Netherlands, Norway, Oman, Scotland, Singapore, the United Arab Emirates (“UAE”) and the United States (“U.S.”).
Summary of Reportable Segments
We operate through three reportable segments: U.S., Canada and International. The segment data included in our Management’s Discussion and Analysis are presented on a basis consistent with our internal management reporting. Segment information appearing in Note 9 “Business Segments” of the notes to the unaudited consolidated financial statements (Part I, Item 1 of this Form 10-Q) is also presented on this basis.
United States
We have approximately 110 locations in the U.S., which are geographically positioned to best serve the upstream, midstream, downstream, and renewable energy and industrial markets.
We offer higher value solutions in key product lines in the U.S. which broaden and deepen our customer relationships and related product line value. Examples of these include artificial lift, pumps, valves and valve actuation, process and production equipment, fluid transfer products, measurement and controls, spoolable and coated steel pipe and composite pipe, along with many other products required by our customers, which enable them to focus on their core business while we manage varying degrees of their supply chain. We also provide additional value to our customers through the engineering, design, construction, assembly, fabrication and optimization of products and equipment essential to the safe and efficient production, transportation and processing of oil and gas.
Canada
We have a network of approximately 40 locations in the Canadian oilfield, predominantly in the oil rich provinces of Alberta, Saskatchewan, Manitoba and other targeted locations across the country. Our Canada segment primarily serves energy exploration, production, mining and drilling businesses, offering customers many of the same products and value-added solutions that we perform in the U.S. In Canada, we also provide training for, and supervise the installation of, jointed and spoolable composite pipe. This product line is supported by inventory, as well as product and installation expertise to serve our customers.
International
We operate in 15 countries and serve the needs of our international customers from approximately 20 locations outside the U.S. and Canada, which are strategically located in major oil and gas development areas. Our approach in these markets is similar to our approach in North America, as our customers turn to us to provide products and supply chain solutions support closer to their drilling and exploration activities. Our long legacy of operating in many international regions, combined with expansion into several key markets, provides a competitive advantage as few of our competitors have a presence in most of the global energy producing regions.
16
Basis of Presentation
The unaudited consolidated financial information included in this report has been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of SEC Regulation S-X. All significant intercompany transactions and accounts have been eliminated. Variable interest entities for which the Company is the primary beneficiary are fully consolidated with the equity held by the outside stockholders and their portion of net income (loss) reflected as noncontrolling interest in the accompanying consolidated financial statements. The principles for interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the financial statements included in the Company’s most recent Annual Report on Form 10-K. In the opinion of our management, the consolidated financial statements include all adjustments, which are of a normal recurring nature unless disclosed otherwise, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and six months ended June 30, 2024, are not necessarily indicative of the results to be expected for the full year.
Operating Environment Overview
Our results are dependent on, among other factors, the level of worldwide oil and gas drilling and completions, well remediation activity, crude oil and natural gas prices, capital spending by oilfield service companies and drilling contractors, and the worldwide oil and gas inventory levels. Key industry indicators for the second quarter of 2024 and 2023 and the first quarter of 2024 include the following:
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|||||
|
|
|
|
|
|
|
|
2Q24 v |
|
|
|
|
|
2Q24 v |
|
|||||
|
|
2Q24* |
|
|
2Q23* |
|
|
2Q23 |
|
|
1Q24* |
|
|
1Q24 |
|
|||||
Active Drilling Rigs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. |
|
|
603 |
|
|
|
722 |
|
|
|
(16.5 |
%) |
|
|
623 |
|
|
|
(3.2 |
%) |
Canada |
|
|
137 |
|
|
|
115 |
|
|
|
19.1 |
% |
|
|
209 |
|
|
|
(34.4 |
%) |
International |
|
|
963 |
|
|
|
960 |
|
|
|
0.3 |
% |
|
|
965 |
|
|
|
(0.2 |
%) |
Worldwide |
|
|
1,703 |
|
|
|
1,797 |
|
|
|
(5.2 |
%) |
|
|
1,797 |
|
|
|
(5.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
West Texas Intermediate Crude Prices (per barrel) |
|
$ |
81.71 |
|
|
$ |
73.76 |
|
|
|
10.8 |
% |
|
$ |
77.56 |
|
|
|
5.4 |
% |
Natural Gas Prices ($/MMBtu) |
|
$ |
2.08 |
|
|
$ |
2.16 |
|
|
|
(3.7 |
%) |
|
$ |
2.13 |
|
|
|
(2.3 |
%) |
Hot-Rolled Coil Prices (steel) ($/short ton) |
|
$ |
796.03 |
|
|
$ |
1,065.28 |
|
|
|
(25.3 |
%) |
|
$ |
961.95 |
|
|
|
(17.2 |
%) |
U.S. Wells Completed |
|
|
2,756 |
|
|
|
3,185 |
|
|
|
(13.5 |
%) |
|
|
2,870 |
|
|
|
(4.0 |
%) |
* Averages for the quarters indicated, except for U.S. Wells Completed. See sources on following page.
17
The following table details the U.S., Canadian and international rig activity and West Texas Intermediate oil prices for the past nine quarters ended June 30, 2024:
Sources: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); West Texas Intermediate Crude and Natural Gas Prices: Department of Energy, Energy Information Administration (www.eia.gov); Hot-Rolled Coil Prices: SteelBenchmarker™ Hot Roll Coil USA (www.steelbenchmarker.com); U.S. Wells Completed: Department of Energy, Energy Information Administration (www.eia.gov) (As revised).
The worldwide quarterly average rig count declined 5.2% (from 1,797 rigs to 1,703 rigs) and the U.S. declined 3.2% (from 623 rigs to 603 rigs) in the second quarter of 2024 compared to the first quarter of 2024. The average price per barrel of West Texas Intermediate Crude increased 5.4% (from $77.56 per barrel to $81.71 per barrel), and average natural gas prices declined 2.3% (from $2.13 per MMBtu to $2.08 per MMBtu) in the second quarter of 2024 compared to the first quarter of 2024. The average price per short ton of Hot-Rolled Coil declined 17.2% (from $961.95 per short ton to $796.03 per short ton) in the second quarter of 2024 compared to the first quarter of 2024. U.S. Wells Completed declined 4.0% (from 2,870 completion count to 2,756 completion count) in the second quarter of 2024 compared to the first quarter of 2024.
U.S. rig count at July 26, 2024 was 589 rigs, down 14 rigs from the second quarter 2024 average. The price for West Texas Intermediate Crude was $78.58 per barrel at July 26, 2024, down 3.8% from the second quarter 2024 average. The price for natural gas was $1.98 per MMBtu at July 26, 2024, down 4.8% from the second quarter 2024 average. The price for Hot-Rolled Coil was $664.00 per short ton at July 22, 2024, down 16.6% from the second quarter 2024 average.
18
Executive Summary
For the three and six months ended June 30, 2024, the Company generated net income attributable to DNOW Inc. of $24 million and $45 million on $633 million and $1,196 million in revenue, respectively. For the three and six months ended June 30, 2024, revenue increased $39 million or 6.6% and $18 million or 1.5%, respectively, and net income attributable to DNOW Inc. declined $10 million and $20 million, respectively, when compared to the corresponding periods of 2023.
For the three and six months ended June 30, 2024, the Company generated an operating profit of $33 million and $61 million, respectively, compared to an operating profit of $36 million and $71 million, respectively, for the corresponding periods of 2023.
Outlook
Our outlook for the Company remains tied to crude oil and natural gas commodity prices, global oil and gas drilling and completions activity, oil and gas spending, and global demand for oil, its refined petroleum products, crude oil, natural gas liquids and natural gas production and decline rates. Crude oil and natural gas prices as well as crude oil and natural gas storage levels are primary catalysts for determining customer activity and we expect global oil and gas demand to grow over the next several years. In recent years, oil prices have remained volatile and economic uncertainty continues to drive commodity price volatility globally. Despite lower North American rig count resulting from enhancements in technology leading to increased rig efficiencies, we maintain a constructive outlook for our market. Amid these dynamics, we will continue to support our customers, optimize our operations, advance our strategic goals and manage the Company based on market conditions.
We see the evolution in energy transition investments to reduce atmospheric carbon, source carbon capture, storage and new energy streams as an opportunity for DNOW to supply many of the current products and services we provide, as well as an opportunity to partner and source from new suppliers to expand our offering and to meet our customers’ needs for their energy evolution investments. A number of our larger customers are leading the investments in energy evolution projects where we expect to continue to support them while expanding our product and solution offerings to meet their changing requirements. We are also targeting new customers that are not traditional oil and gas customers, but are those that will play a part in the future as our customers discover and invest in new sources of energy.
Results of Operations
The results of operations are presented before consideration of the noncontrolling interest. Operating results by reportable segment are as follows (in millions):
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
$ |
512 |
|
|
$ |
456 |
|
|
$ |
947 |
|
|
$ |
883 |
|
Canada |
|
56 |
|
|
|
66 |
|
|
|
122 |
|
|
|
149 |
|
International |
|
65 |
|
|
|
72 |
|
|
|
127 |
|
|
|
146 |
|
Total revenue |
$ |
633 |
|
|
$ |
594 |
|
|
$ |
1,196 |
|
|
$ |
1,178 |
|
Operating profit: |
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
$ |
28 |
|
|
$ |
29 |
|
|
$ |
51 |
|
|
$ |
52 |
|
Canada |
|
2 |
|
|
|
3 |
|
|
|
5 |
|
|
|
11 |
|
International |
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
8 |
|
Total operating profit |
$ |
33 |
|
|
$ |
36 |
|
|
$ |
61 |
|
|
$ |
71 |
|
United States
For the three and six months ended June 30, 2024, revenue was $512 million and $947 million, an increase of $56 million or 12.3% and $64 million or 7.2%, respectively, when compared to the corresponding periods of 2023. For the three and six months ended June 30, 2024, the increases were primarily driven by incremental revenue from an acquisition completed in the first quarter of 2024, partially offset by the weakening in U.S. drilling and completions activity.
For the three and six months ended June 30, 2024, the U.S. generated an operating profit of $28 million and $51 million, both relatively flat, when compared to the corresponding periods of 2023. For the three and six months ended June 30, 2024, operating profit was relatively flat primarily due to an increase in expenses related to an acquisition completed in the first quarter of 2024, including transaction-related charges for cost of inventory that was stepped-up to fair value during purchase accounting, partially offset by the increase in revenue discussed above.
19
Canada
For the three and six months ended June 30, 2024, revenue was $56 million and $122 million, a decline of $10 million or 15.2% and $27 million or 18.1%, respectively, when compared to the corresponding periods of 2023. For the three and six months ended June 30, 2024, the decreases were primarily driven by weaker project activity, coupled with unfavorable foreign exchange rate impacts.
For the three and six months ended June 30, 2024, Canada generated an operating profit of $2 million and $5 million, a decline of $1 million and $6 million, respectively, when compared to the corresponding periods of 2023. For the three and six months ended June 30, 2024, operating profit decreased primarily due to the decline in revenue discussed above.
International
For the three and six months ended June 30, 2024, revenue was $65 million and $127 million, a decrease of $7 million or 9.7% and $19 million or 13.0%, respectively, when compared to the corresponding periods of 2023. For the three and six months ended June 30, 2024, the decreases were primarily driven by weaker project activity.
For the three and six months ended June 30, 2024, the International segment generated an operating profit of $3 million and $5 million, a decline of $1 million and $3 million, respectively, when compared to the corresponding periods of 2023. For the three and six months ended June 30, 2024, operating profit decreased primarily due to the decline in revenue discussed above.
Cost of products
For the three and six months ended June 30, 2024, cost of products was $495 million and $929 million, respectively, compared to $460 million and $907 million, respectively, for the corresponding periods of 2023. For the three and six months ended June 30, 2024, the increases were primarily due to the increase in revenue in the period and transaction-related charges for cost of inventory that was stepped-up to fair value during purchase accounting related to an acquisition completed in the first quarter of 2024. Cost of products includes the cost of inventory sold and items, such as vendor consideration, inventory allowances, amortization of intangibles and inbound and outbound freight.
Warehousing, selling and administrative expenses
For the three and six months ended June 30, 2024, warehousing, selling and administrative expenses were $105 million and $206 million, respectively, compared to $98 million and $200 million, respectively, for the corresponding periods of 2023. For the three and six months ended June 30, 2024, the increases were primarily driven by an increase in expenses related to an acquisition completed in the first quarter of 2024, partially offset by a decrease in legal fees for litigation matters that were not ordinary or routine to the operations of the business. Warehousing, selling and administrative expenses include branch location, distribution center and regional expenses (including costs such as compensation, benefits and rent) as well as corporate general selling and administrative expenses.
Other income (expense)
For the three and six months ended June 30, 2024, the Company recorded expense of nil and income of $1 million, respectively, compared to expense of $1 million in both periods for the corresponding periods of 2023. For three and six months ended June 30, 2024, the improvements were primarily attributable to an increase in interest income.
Income tax provision
The effective tax rates for the three and six months ended June 30, 2024, were 24.2% and 25.8%, respectively, compared to 2.9% and 5.7%, respectively, for the corresponding periods of 2023. In general, the Company's effective tax rate differs from the U.S. statutory rate due to recurring items, such as differing tax rates on income earned in foreign jurisdictions, nondeductible expenses and state income taxes. The effective tax rates for the three and six months ended June 30, 2024, were higher than the effective tax rates for the three and six months ended June 30, 2023, due to realization of deferred tax assets that had a corresponding release of valuation allowance in the three and six months ended June 30, 2023, that did not recur in the corresponding periods in 2024.
20
Non-GAAP Financial Measure and Reconciliation
In an effort to provide investors with additional information regarding our results of operations as determined by GAAP, we disclose non-GAAP financial measures. The primary non-GAAP financial measure we disclose is earnings before interest, taxes, depreciation and amortization, excluding other costs (“EBITDA excluding other costs”). This financial measure excludes the impact of certain amounts and is not calculated in accordance with GAAP. A reconciliation of this non-GAAP financial measure, to its most comparable GAAP financial measure, is included below.
We use EBITDA excluding other costs internally to evaluate and manage the Company’s operations because we believe it provides useful supplemental information regarding the Company’s ongoing operating performance. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results.
The following table sets forth the reconciliations of EBITDA excluding other costs to the most comparable GAAP financial measures (in millions):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
GAAP net income attributable to DNOW Inc. (1) |
|
$ |
24 |
|
|
$ |
34 |
|
|
$ |
45 |
|
|
$ |
65 |
|
Net income attributable to noncontrolling interest |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
Interest expense (income), net |
|
|
(1 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
(1 |
) |
Income tax provision |
|
|
8 |
|
|
|
1 |
|
|
|
16 |
|
|
|
4 |
|
Depreciation and amortization |
|
|
9 |
|
|
|
6 |
|
|
|
16 |
|
|
|
12 |
|
Other costs: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock-based compensation |
|
|
4 |
|
|
|
4 |
|
|
|
6 |
|
|
|
7 |
|
Other (2) |
|
|
5 |
|
|
|
2 |
|
|
|
8 |
|
|
|
6 |
|
EBITDA excluding other costs |
|
$ |
50 |
|
|
$ |
47 |
|
|
$ |
89 |
|
|
$ |
94 |
|
EBITDA % excluding other costs (3) |
|
|
7.9 |
% |
|
|
7.9 |
% |
|
|
7.4 |
% |
|
|
8.0 |
% |
21
Liquidity and Capital Resources
We assess liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. We expect resources to be available to reinvest in existing businesses, strategic acquisitions and capital expenditures to meet short and long-term objectives. We believe that cash on hand, cash generated from expected results of operations and amounts available under our revolving credit facility will be sufficient to fund operations, anticipated working capital needs and other cash requirements, including capital expenditures and our share repurchase program.
As of June 30, 2024 and December 31, 2023, we had cash and cash equivalents of $197 million and $299 million, respectively. As of June 30, 2024, $90 million of our cash and cash equivalents were maintained in the accounts of our various foreign subsidiaries. During the first six months of 2024, we repatriated $3 million from our foreign subsidiaries. The Company makes a determination each period concerning its intent and ability to indefinitely reinvest the cash held by its foreign subsidiaries. The Company has not recorded deferred income taxes on undistributed foreign earnings that it considers to be indefinitely reinvested. Future changes to our indefinite reinvestment assertion could result in additional taxes (withholding and/or state taxes), offset by any available foreign tax credits.
We maintain a $500 million five-year senior secured revolving credit facility that will mature on December 14, 2026. Availability under the revolving credit facility is determined by a borrowing base comprised of eligible receivables, eligible inventory and certain cash deposits in the U.S. and Canada. As of June 30, 2024, we had no borrowings against our revolving credit facility, and had approximately $485 million in availability (as defined in the Credit Agreement) resulting in the excess availability (as defined in the Credit Agreement) of 99%, subject to certain restrictions. Availability excluding certain cash deposits was approximately $382 million. Borrowings that result in the excess availability dropping below the greater of 10% of the borrowing base or $40 million are conditioned upon compliance with or waiver of a minimum fixed charge ratio (as defined in the Credit Agreement). The credit facility contains usual and customary affirmative and negative covenants for credit facilities of this type including financial covenants. As of June 30, 2024, we were in compliance with all covenants. We continuously monitor compliance with debt covenants. A default, if not waived or amended, would prevent us from taking certain actions, such as incurring additional debt.
We are often party to certain transactions that require off-balance sheet arrangements such as standby letters of credit and performance bonds and guarantees that are not reflected in our consolidated balance sheets. These arrangements are made in our normal course of business and they are not reasonably likely to have a current or future material adverse effect on our financial condition, results of operations, liquidity or cash flows.
The following table summarizes our net cash flows provided by (used in) operating activities, investing activities and financing activities for the periods presented (in millions):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Net cash provided by (used in) operating activities |
|
$ |
102 |
|
|
$ |
79 |
|
Net cash provided by (used in) investing activities |
|
$ |
(188 |
) |
|
$ |
(43 |
) |
Net cash provided by (used in) financing activities |
|
$ |
(15 |
) |
|
$ |
(47 |
) |
Operating Activities
For the six months ended June 30, 2024, net cash provided by operating activities was $102 million compared to $79 million provided by operating activities in the corresponding period of 2023. For the six months ended June 30, 2024, net cash provided by operating activities was primarily driven by $46 million of net income; plus $45 million of reconciling adjustments, primarily depreciation, amortization, and deferred income taxes; and a net decrease of $11 million in working capital. For the six months ended June 30, 2024, the improvement in operating cash flow activities was primarily driven by $30 million lower cash consumption for net working capital compared to the corresponding period of 2023.
Investing Activities
For the six months ended June 30, 2024, net cash used in investing activities was $188 million compared to $43 million used in investing activities in the corresponding period of 2023. For the six months ended June 30, 2024, net cash used in investing activities was primarily related to business acquisitions of approximately $185 million, net of cash acquired.
Financing Activities
For the six months ended June 30, 2024, net cash used in financing activities was $15 million compared to $47 million used in financing activities in the corresponding period of 2023. For the six months ended June 30, 2024, net cash used in financing activities was primarily attributable to the Company's payment of $11 million for share repurchases.
22
Other
For the six months ended June 30, 2024, the effect of the change in exchange rates on cash and cash equivalents was a decrease of $1 million compared to an increase of $2 million for the corresponding period of 2023.
Capital Spending
We intend to pursue additional acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We continue to expect to fund future cash acquisitions primarily with cash on hand, cash flow from operations and the usage of the available portion of the revolving credit facility. There can be no assurance that additional financing will be available at terms acceptable to us.
Share Repurchase Program
On August 3, 2022, the Company’s Board of Directors approved a share repurchase program, under which the Company is authorized to purchase up to $80 million of its outstanding common stock through December 31, 2024. We expect to fund share repurchases primarily with cash on hand, cash flow from operations and the usage of the available portion of the revolving credit facility. The timing and amount of any repurchases will be made at our discretion, taking into account a number of factors, including market conditions. For the six months ended June 30, 2024, we repurchased 837,518 shares of our common stock for a total of approximately $11 million. As of June 30, 2024, we had approximately $13 million remaining under the program’s authorization, excluding 1% excise tax, as enacted under the Inflation Reduction Act of 2022.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies and estimates that we use in the preparation of our consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K. In preparing the financial statements, the Company makes assumptions, estimates and judgments that affect the amounts reported. The Company periodically evaluates its estimates and judgments that are most critical in nature, which are related to allowance for credit losses, inventory reserves, purchase price allocation of acquisitions and income taxes. Its estimates are based on historical experience and on its future expectations that the Company believes are reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results are likely to differ from our current estimates and those differences may be material.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks that are inherent in our financial instruments and arise from changes in interest rates and foreign currency exchange rates. We may enter into derivative financial instrument transactions to manage or reduce market risk but do not enter into derivative financial instrument transactions for speculative purposes. We do not currently have any material outstanding derivative instruments. See Note 14 “Derivative Financial Instruments” to the consolidated financial statements for additional information.
A discussion of our primary market risk exposure in financial instruments is presented below.
Foreign Currency Exchange Rate Risk
We have operations in foreign countries and transact business globally in multiple currencies. Our net assets as well as our revenues and costs and expenses denominated in foreign currencies, expose us to the risk of fluctuations in foreign currency exchange rates against the U.S. dollar. Because we operate globally and approximately one-fifth of our net sales for the six months ended June 30, 2024, were outside the U.S., foreign currency exchange rates can impact our financial position, results of operations and competitive position. We are a net receiver of foreign currencies and, therefore, benefit from a weakening of the U.S. dollar and are adversely affected by a strengthening of the U.S. dollar relative to the foreign currency. As of June 30, 2024, our most significant foreign currency exposure was to the Canadian dollar, followed by the British pound, with less significant foreign currency exposure to the Australian dollar.
The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while revenue, costs and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income (loss) as reported in the consolidated statements of comprehensive income (loss). Upon closure of a foreign subsidiary, the accumulated translation gains and losses relating to the foreign subsidiary are reclassified into earnings, reflected in impairment and other charges in the consolidated statements of operations. For the six months ended June 30, 2024, we reported a net foreign currency translation loss of $6 million.
Foreign currency exchange rate fluctuations generally do not materially affect our earnings since the functional currency is typically the local currency; however, our operations also have net assets not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact our net income as foreign currency transaction gains and losses. Foreign currency transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the consolidated statements of operations as a component of other income (expense). For the six months ended June 30, 2024 and 2023, we reported foreign currency transaction losses of nil and $1 million, respectively. Gains and losses are primarily due to exchange rate fluctuations related to monetary asset balances denominated in currencies other than the functional currency and fair value adjustments to economically hedged positions as a result of changes in foreign currency exchange rates.
Some of the revenues for our foreign operations are denominated in U.S. dollars and, therefore, changes in foreign currency exchange rates impact earnings to the extent that costs associated with those U.S. dollar revenues are denominated in the local currency. Similarly, some of our revenues for our foreign operations are denominated in foreign currencies, but have associated U.S. dollar costs, which also give rise to foreign currency exchange rate exposure. In order to mitigate those risks, we may utilize foreign currency forward contracts to better match the currency of the revenues and the associated costs. Although we may utilize foreign currency forward contracts to economically hedge certain foreign currency denominated balances or transactions, we do not currently hedge the net investments in our foreign operations. The counterparties to our forward contracts are major financial institutions. The credit ratings and concentration of risk of these financial institutions are monitored by us on a continuing basis. In the event that the counterparties fail to meet the terms of a foreign currency contract, our exposure is limited to the foreign currency rate differential.
The average foreign exchange rate for the first six months of 2024 compared to the average for the corresponding period of 2023 remained flat compared to the U.S. dollar based on the aggregated weighted average revenue of our foreign-currency denominated foreign operations. The Canadian dollar and Australian dollar decreased in relation to the U.S. dollar by less than 1% and approximately 3%, respectively, while the British pound increased in relation to the U.S dollar by approximately 3%.
We utilized a sensitivity analysis to measure the potential impact on earnings based on a hypothetical 10% change in foreign currency rates. A 10% change from the levels experienced during the first six months of 2024 of the U.S. dollar relative to foreign currencies that affected the Company would have resulted in less than $1 million change in net income for the same period.
Commodity Steel Pricing
Our business is sensitive to steel prices, which can impact our product pricing, with steel tubular prices generally having the highest degree of sensitivity. While we cannot predict steel prices, we mitigate this risk by managing our inventory levels, including maintaining sufficient quantity on hand to meet demand, while limiting the risk of overstocking.
24
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures and is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
25
PART II – OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents a summary of share repurchases made during the three months ended June 30, 2024:
Period |
|
Total number of shares purchased |
|
|
Average price paid per share (1) |
|
|
Total number of shares purchased as part of publicly announced program (2) |
|
|
Approximate dollar value of shares that may yet be purchased under the program (1)(2) |
|
||||
April 1 - 30, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
22 |
|
May 1 - 31, 2024 |
|
|
141,256 |
|
|
$ |
14.18 |
|
|
|
141,256 |
|
|
$ |
20 |
|
June 1 - 30, 2024 |
|
|
528,207 |
|
|
$ |
13.50 |
|
|
|
528,207 |
|
|
$ |
13 |
|
Total |
|
|
669,463 |
|
|
$ |
13.64 |
|
|
|
669,463 |
|
|
|
|
|
Item 5. Other Information
Insider Trading Arrangements and Policies
During the three months ended June 30, 2024, no director or officer of the Company
26
Item 6. Exhibits
(a) Exhibits
Exhibit No. |
|
Exhibit Description |
|
|
|
3.1 |
|
DNOW Inc. Amended and Restated Certificate of Incorporation (6) |
|
|
|
3.2 |
|
|
|
|
|
10.1 |
|
|
|
|
|
10.2 |
|
|
|
|
|
10.3 |
|
|
|
|
|
10.4 |
|
Form of Restricted Stock Award Agreement (3 year cliff vest) (3) |
|
|
|
10.5 |
|
|
|
|
|
10.6 |
|
Form of Amendment to Employment Agreement for Executive Officers (4) |
|
|
|
10.7 |
|
|
|
|
|
10.8 |
|
Employment Agreement between NOW Inc. and Chief Executive Officer David Cherechinsky (7) |
|
|
|
10.9 |
|
Employment Agreement between NOW Inc. and Chief Financial Officer Mark Johnson (7) |
|
|
|
10.10 |
|
|
|
|
|
10.11 |
|
|
|
|
|
10.12 |
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31.1 |
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31.2 |
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32.1 |
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS |
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Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
(1) Filed as an Exhibit to our Current Report on Form 8-K filed on May 30, 2014
(2) Filed as an Exhibit to our Amendment No.1 to Form 10, as amended, Registration Statement filed on April 8, 2014
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on May 7, 2015
(4) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on November 2, 2016
(5) Filed as an Exhibit to our Current Report on Form 8-K filed on May 1, 2018
(6) Filed as an Exhibit to our Current Report on Form 8-K filed on January 9, 2024
(7) Filed as an Exhibit to our Current Report on Form 8-K filed on June 2, 2020
(8) Filed as an Exhibit to our Current Report on Form 8-K/A filed on February 4, 2022
(9) Filed as an Exhibit to our Current Report on Form 8-K filed on January 3, 2023
(10) Filed as an Exhibit to our Form S-8 Registration Statement filed on May 24, 2024
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: August 7, 2024 |
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By: |
/s/ Mark B. Johnson |
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Mark B. Johnson |
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Senior Vice President and Chief Financial Officer |
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28
Exhibit 31.1
CERTIFICATION
I, David A. Cherechinsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DNOW Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its combined subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 7, 2024 |
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By: |
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/s/ David A. Cherechinsky |
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David A. Cherechinsky |
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President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Mark B. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DNOW Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its combined subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 7, 2024 |
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By: |
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/s/ Mark B. Johnson |
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Mark B. Johnson |
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Senior Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of DNOW Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, David A. Cherechinsky, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
The certification is given to the knowledge of the undersigned.
Date: August 7, 2024 |
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By: |
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/s/ David A. Cherechinsky |
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David A. Cherechinsky |
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President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of DNOW Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark B. Johnson, Senior Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
The certification is given to the knowledge of the undersigned.
Date: August 7, 2024 |
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By: |
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/s/ Mark B. Johnson |
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Mark. B. Johnson |
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Senior Vice President and Chief Financial Officer |