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NOW Inc. On Cusp of Reserve Reversal Equal to 126% of Last Decade’s Op Income
A second reserve significantly below the historical average is also under scrutiny.
February 16, 2023
NOW Inc. (DNOW), an energy products distributor, plans to reverse “all or some” of its $173 million Deferred Tax Asset (DTA) valuation allowance if commodity prices are sustained over the next twelve months. The company says it has not yet determined the exact timing or reversal amount.
The reserve is the equivalent of 159.6% and 126.2% of NOW’s cumulative operating income over the past five and ten years, respectively.
It’s not the only reserve receiving attention.
NOW’s inventory reserve fell from 11.3% of gross inventory in 2021 to 5% in 2022. The decline caught the attention of NOW’s auditor, Ernst & Young, which flagged inventory reserve accounting as a critical audit matter.
The reasonableness of estimated reserve percentage, according to EY, is one of the items that caused the firm to scrutinize the matter.
In the previous five years, NOW’s estimated reserve percentage ranged between 4.4%-13%, and averaged 8.6%.
Shares of NOW are up 50.1% over the past year.
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