DNOW Lifts Adjusted EBITDA to $76 Million as Margins Harden

DNOW Inc. (NYSE:DNOW) grew third-quarter adjusted EBITDA to $76 million from $60 million in the second quarter, on revenue of $1.34 billion, up 2.3% sequentially. The energy and industrial distributor generated $120 million in operating cash flow for the quarter and cut net debt by $95 million, it reported Nov. 5.

President and CEO David Cherechinsky said on the earnings call that DNOW is prioritizing more profitable business rather than pursuing sales volume at the expense of margins. He outlined potential 2027 adjusted EBITDA scenarios of $300 million to $350 million, while stressing that customers have not yet provided budgets and the figures are not a formal forecast.

How did margins hold up against freight costs?

Third-quarter adjusted gross margin rose to 21.2% from 20.8% in the second quarter. CFO Mark Johnson attributed the improvement to a more favorable geographic and sector mix and progress on margin initiatives, which offset higher logistics costs.

Freight remains the irritant. Johnson said higher fuel costs and a shortage of drivers are pushing transportation expenses higher. DNOW can pass some of those costs to customers, he said, although recovery may take time. Cherechinsky said the company has intensified its focus on higher-margin products and transactions, seeking recovery through customer pricing, contractual freight mechanisms, vendor support and logistics efficiencies.

Selling, general and administrative expenses declined $6 million sequentially to $232 million. Net income attributable to DNOW was $26 million, or 14 cents per diluted share; adjusted net income was $34 million, or 18 cents per diluted share.

Which segments drove growth?

Revenue increased across all three geographic segments. The details:

• U.S. revenue rose $16 million sequentially to $1.1 billion.
• Canada revenue increased 19% to $56 million as activity recovered after the seasonal breakup period.
• International revenue rose 3% to $156 million.

Gas utility revenue climbed 4% from the second quarter to its highest quarterly level in three years, Cherechinsky said. Downstream and industrial revenue grew 10% sequentially as customers prepared for turnaround work, while midstream revenue rose by about $20 million.

International growth absorbed roughly $15 million in project delays, Johnson said. Cherechinsky noted up to half of the delayed work could occur in the fourth quarter, with the remainder in 2027 or later; one wind power project previously expected to ship in the third quarter is now slated for 2027.

DNOW has recovered the midstream revenue lost during its enterprise resource planning (ERP) system transition and is at or near recovery in gas utilities, Cherechinsky said. All upstream and midstream locations have moved from MRC Global's platform to SAP, with further SAP moves planned for the new year while the Oracle system used by gas utilities and downstream operations continues to improve.

What is the cash picture?

Operating cash flow reached $158 million for the first nine months of 2026, and DNOW now expects the full-year figure to approach $200 million, the top end of previous guidance. Inventory fell $74 million sequentially to $988 million and accounts receivable declined $11 million to $878 million. After $14 million in capital expenditures, quarterly free cash flow was $106 million.

The company ended the quarter with $265 million in net debt and a net leverage ratio (net debt divided by trailing 12-month adjusted EBITDA) of 1.1 times. It repurchased $17 million of shares during the quarter, bringing nine-month repurchases to $92 million.

Johnson said first-year cost synergies should approximate $32 million, against an original year-one exit-rate estimate of $17 million. System-improvement costs fell by about $1 million from the second quarter, Cherechinsky said.

What comes next?

DNOW expects fourth-quarter revenue to fall by a high-single-digit percentage sequentially, with adjusted EBITDA targeted at 4.5% of revenue. Cherechinsky cited fewer business days, holidays and customers nearing the end of their annual budgets; modest international growth and downstream recovery should partially offset the decline.

For 2027, annualizing third-quarter adjusted EBITDA yields a theoretical starting point of about $300 million, though the third quarter is typically the strongest. Reaching $350 million could depend on growth in upstream, gas utilities and midstream, further revenue recovery and margin improvement. If revenue grows 6% to 7%, cash flow could be lower, Cherechinsky cautioned, as DNOW adds inventory and receivables to support growth.