DNOW Inc. (DNOW) Q3 2026 earnings review
DNOW lifts margins and cuts debt, but combined sales stall
DNOW's merger cleanup is lifting profit margins and cash flow even though combined sales are barely growing. The energy and industrial distributor grew revenue 2% from last quarter to $1,337 million, driven by a three-year high in gas utilities. Chief executive David Cherechinsky reported $76 million of Adjusted Ebitda, or 5.7% of sales, beating what the company's own plan pointed to as overhead fell and gross margins recovered. Inventory cuts freed up $120 million of operating cash and lowered net debt to $265 million.
| Combined sales vs pre-merger Q3 2025 (by our math) | +1.9% $1,337M vs $1,312M combined a year ago |
|---|---|
| Adjusted Ebitda margin, excluding one-offs | 5.7% beat the 5.0–5.5% target (up from 4.6% in Q2) |
| Operating cash flow | $120M $158M year-to-date vs $125–200M full-year plan |
| Net debt to trailing Adjusted Ebitda | 1.1x down from 1.7x in Q2 and 2.3x in Q1 |
⚖️ Verdict: 🟢 Bullish
The story got better because DNOW proved it can expand margins and pay down debt at the same time. Cutting $74 million of inventory in three months beat management's full second-half reduction target in a single quarter and erased the balance-sheet strain from early 2026. One caution: against the combined sales of DNOW and MRC Global before last November's merger, revenue rose less than 2% from a year ago by our math, and combined gross profit was slightly lower.
The question now is whether cost savings and customer win-backs can lift margins toward 6.5% in 2027, or whether price discounts and a flat oilfield market cap profitability near 5%. If DNOW is winning back profitable accounts, fourth-quarter margins will hold up through the winter slowdown; if discounts are doing the work, gross margin will stall near 21%. The fourth-quarter outlook on today's call and the sector revenue table in the quarterly filing will tell.
🐂 Bull Case
Lower Overhead and Better Gross Margin Lifted Profit
DNOW distributes pipe, valves and fittings to energy and industrial companies. After buying rival MRC Global in November 2025, its profit margins dropped because of computer system problems and merger costs. This quarter, chief executive David Cherechinsky said Adjusted Ebitda — operating cash profit excluding one-offs — reached $76 million, "nearly double our first quarter results, reflecting broad-based strength across the company".
- Adjusted Ebitda margin: 5.7% of revenue, beating the 5.0–5.5% target and up 1.1 percentage points from last quarter
- Gross margin: 19.8% (21.2% excluding one-offs), up 1.2 percentage points from last quarter
- Selling and administrative overhead: $232 million, down $6 million from last quarter and 0.9 percentage points lower as a share of sales
This matters because the company added $16 million of Adjusted Ebitda on $30 million of extra sales from last quarter, a 53% conversion rate by our math. Overhead shrank while revenue grew, showing that merger cost cuts and the fading of temporary software expenses are helping the bottom line.
What to watch: fourth-quarter Adjusted Ebitda margin against normal seasonal slowdowns. Holding the margin near 5% when winter weather slows pipeline and utility work would show the cost savings are permanent.
Inventory Cuts Drove Cash Flow and Cut Debt
Industrial distributors tie up cash in warehouse stock and unpaid customer bills. In the first quarter, DNOW burned $95 million of operating cash and took on debt as MRC Global's billing software stalled collections. Management then promised to shrink inventory by $25 million to $50 million across the second half of 2026 and generate $125 million to $200 million of operating cash for the full year.
The Houston group beat that inventory goal in a single quarter. Operating cash flow hit $120 million, "fueled by substantial improvements in working capital velocity", Cherechinsky said. Net inventories fell $74 million from June to $988 million, and are now down $204 million since December. Working capital excluding cash dropped to 17.6% of annualized sales by our math, down from 19.4% in the second quarter.
Nine-month operating cash flow reached $158 million, already near the middle of the full-year plan. That cash let DNOW pay down $97 million of long-term debt during the quarter, cutting net debt to 1.1 times trailing Adjusted Ebitda from 1.7 times in June.
What to watch: fourth-quarter receivables and inventory balances on the balance sheet. Further cash releases would let DNOW finish the year with net debt below one times annual cash profit.
Gas Utilities and Midstream Carry Sequential Growth
DNOW bought MRC Global to expand beyond oilfield drilling into gas utilities, pipelines (midstream) and refineries (downstream). Earlier this year, weak refinery spending held back growth, while pipeline and utility demand carried the business. This quarter, revenue rose 2.3% from the second quarter to $1,337 million, matching the company's plan for low-to-mid single-digit sequential growth.
Cherechinsky pointed to "solid growth in the downstream, industrial and midstream businesses, with the gas utilities business achieving its highest quarterly revenue in three years". That sequential gain in downstream and industrial eases a persistent drag ahead of next spring's refinery maintenance season, while gas utilities built on last quarter's $310 million mark.
What to watch: the exact sector revenue breakdown in the quarterly filing. It will show whether pipeline sales stayed above the $1 billion annual pace set in the second quarter.
🐻 Bear Case
Combined Sales Barely Grew From Pre-Merger Levels
Reported revenue more than doubled from $634 million a year ago because last year's third quarter did not include MRC Global. Cherechinsky pointed to "improving end-market fundamentals and positive outlook across our business". Because the merger closed in November 2025, comparing today's combined company against standalone DNOW a year ago hides how the two businesses actually performed together.
In the third quarter of 2025, DNOW recorded $634 million of revenue and MRC Global generated $678 million, for a combined $1,312 million before the deal closed. Against that combined base, this quarter's $1,337 million of sales represents growth of 1.9% from a year ago by our math, even though the year-ago quarter was already hurt by MRC Global's software outage.
Combined reported gross profit was $265 million this quarter, down 1.1% by our math from the $268 million the two companies earned separately a year ago ($143 million at DNOW and $125 million at MRC Global). Winning back the roughly two dozen customers who left during the software rollout is still replacing lost ground rather than expanding the combined business.
What to watch: U.S. upstream oilfield revenue in the quarterly filing's footnote table. A drop below last quarter's $395 million would show that sluggish U.S. drilling is offsetting customer win-backs.
Input Costs and Dilution Still Weigh on Earnings
DNOW faces tariff and steel price swings along with tight pricing as it tries to win back former MRC Global accounts. In late 2025, the distributor switched its U.S. inventory accounting to the last-in, first-out (LIFO) method, which runs current supplier cost increases straight through the income statement.
Higher inventory costs reduced reported gross profit by $11 million this quarter and $46 million over the first nine months. Even excluding those charges, the 21.2% gross margin and 5.7% Adjusted Ebitda margin remain well below standalone DNOW's 23.2% and 8.0% a year ago. Because the company issued 82 million shares to buy MRC Global, diluted share count rose 72% from a year ago to 182 million, pushing earnings per share excluding one-offs down 31% to $0.18.
What to watch: the LIFO inventory charge and gross margin in the fourth quarter. Another double-digit LIFO charge while gross margin stalls near 21% would show that supplier price hikes are outpacing what DNOW can charge customers.
Risks this quarter didn't answer
The earnings release did not include the detailed sector tables or integration milestones that management usually provides on the conference call and in the quarterly filing.
- U.S. upstream and midstream revenue: not broken out in the release; the quarterly filing's revenue footnote will show whether both held their second-quarter gains.
- SAP software conversions and temporary ERP costs: last quarter, 17 of 20 planned MRC Global branches had moved to SAP and temporary fix costs ran $8.5 million a quarter; the call will update both.
- Cost synergy run-rate and data-center sales: no update in the release on the $30 million year-end savings target or the $40–50 million data-center sales forecast.
- Legacy MRC Global liabilities: no update in the release on the roughly 444 insured asbestos lawsuits or the multi-state unclaimed property audit; the filing's contingencies footnote will cover them.
👓 Other Themes
Buybacks Slowed While Debt Paydown Took Priority
DNOW bought back $17 million of stock in the third quarter, bringing nine-month repurchases to $92 million, "exceeding the combined amount returned through share repurchases over the prior eleven quarters by 24 percent", Cherechinsky said. That pace slowed from $50 million in the first quarter and $25 million in the second as the distributor directed cash toward cutting long-term debt by $97 million.
💲 Other KPIs
Sales rose sequentially in all three regions. United States revenue grew 1.4% from the second quarter to $1,125 million (84% of the total). Canada rebounded 19.1% from its spring drilling breakup to $56 million, and International rose 3.3% to $156 million.
Free cash flow — operating cash flow minus capital spending on property and equipment — was $106 million, or 7.9% of revenue, after $124 million in the second quarter. Capital spending rose to $14 million from $9 million last quarter, bringing nine-month free cash flow to $127 million.
The company recorded a $3 million tax benefit on $23 million of pre-tax income, lifting reported net income to $26 million. In the second quarter, DNOW booked a $12 million tax expense on a $9 million pre-tax loss as full-year tax rate estimates shifted with inventory accounting charges.
🔮 Guidance
Unchanged in the release, which gives formal outlook numbers on the conference call. With $158 million of operating cash flow already banked through September, DNOW sits $33 million above the bottom of its full-year target with one quarter left.
❓ Key Questions
What is the fourth-quarter and updated full-year outlook?
DNOW issues its numerical outlook on the conference call rather than in the earnings release. Under last quarter's $5.0–5.1 billion full-year revenue target and ~4.5% Adjusted Ebitda margin plan, our math leaves $1,223 million of fourth-quarter revenue (down 8.5% sequentially) and a 4.3% margin.
What was combined revenue growth against last year's pro forma base?
Adding pre-merger DNOW and MRC Global gives $1,312 million of revenue in the third quarter of 2025, meaning sales grew 1.9% from a year ago by our math. Management stopped giving official pro forma comparisons after the first quarter.
How much revenue did U.S. upstream and midstream generate?
The earnings release only breaks out revenue by country. Investors need the quarterly filing's sector table to see if U.S. upstream held above $395 million and whether midstream kept its $1 billion annualized pace.
Have the remaining three MRC Global locations moved to SAP?
As of July, 17 of the 20 planned U.S. upstream and midstream branches had switched off MRC Global's troubled Oracle software onto DNOW's SAP system, and temporary fix costs ran $8.5 million per quarter.
How much of the $160 million buyback authorization remains?
DNOW has repurchased $92 million of stock in 2026 after buying $37 million in 2025, which leaves $31 million on the $160 million program if all 2025 purchases count toward it.