DXP Enterprises, Inc. 2023 Q3 Form 10-Q Summary
Business context and reporting period
DXP Enterprises distributes maintenance, repair and operating products and services, provides integrated pump packages and remanufacturing, and manufactures private-label pumps. Its segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Sales | $419.2 million | $387.3 million | $1,271.6 million | $1,074.5 million |
| Gross profit / margin | $125.6 million / 29.9% | $111.6 million / 28.8% | $382.5 million / 30.1% | $310.8 million / 28.9% |
| Operating income / margin | $35.9 million / 8.6% | $26.5 million / 6.9% | $108.7 million / 8.6% | $74.0 million / 6.9% |
| Net income attributable to DXP | $16.2 million | $13.9 million | $52.8 million | $41.0 million |
| Diluted EPS | $0.93 | $0.71 | $2.94 | $2.10 |
| Adjusted EBITDA / margin | $44.0 million / 10.5% | $34.3 million / 8.9% | $132.4 million / 10.4% | $95.4 million / 8.9% |
| Free cash flow | $38.3 million | $(5.0) million | $56.7 million | $(1.2) million |
- Nine-month operating cash flow was $63.8 million, compared with $2.3 million in the prior-year period. Capital expenditures were $7.1 million, and investing cash outflow was $16.0 million, including $8.8 million for acquisitions.
- Cash and restricted cash were $27.3 million at September 30, 2023, down from $46.1 million at December 31, 2022. The company had no ABL Revolver borrowings and reported $131.9 million of availability, net of $3.1 million of letters of credit.
- Term Loan B carrying value was $424.9 million, with $4.4 million classified as current debt. The company reported compliance with all financial covenants.
- On October 13, 2023, after the reporting date, DXP borrowed an incremental $125 million under an amended Term Loan B. Total borrowings became $550 million, maturing October 30, 2030, at Term SOFR plus a 4.75% margin.
Material changes versus the prior comparable period
- Q3 sales increased 8.2%; nine-month sales increased 18.3%. Nine-month organic sales increased to $1,241.3 million from $1,036.3 million.
- Service Centers drove growth, with Q3 sales up 13.2% and nine-month sales up 21.7%. IPS Q3 sales were essentially flat but increased 8.5% for nine months. Supply Chain Services declined 3.5% in Q3 but increased 14.0% for nine months.
- Gross margin expanded by 110 basis points in Q3 and approximately 116 basis points for nine months, supported primarily by Service Centers and IPS. Management cited pricing actions, higher activity and improved market conditions.
- Interest expense increased by $5.9 million in Q3 and $18.5 million for nine months, reflecting the additional $105 million term-loan borrowing in late 2022 and higher interest rates.
- DXP repurchased 1.7 million shares for $54.7 million during the first nine months, including 618,282 shares for $21.5 million in Q3. Approximately $26.4 million remained available under the repurchase authorization at September 30.
- On May 1, 2023, DXP acquired Florida Valve EMD and Riordan for aggregate consideration of approximately $11.7 million, including $9.2 million paid in cash and $2.5 million of future consideration. The acquisitions contributed $11.2 million of nine-month IPS sales and were not material to consolidated results.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative earnings or sales guidance. Management expects continued benefit from oil and gas activity, recent water and wastewater acquisitions, and expansion of the DXP Water platform. Supply Chain Services is expected to depend on new customers and increased spending by existing customers.
- Management stated that inflationary product and labor costs were generally passed through to customers and that recent order activity improved. Results remain sensitive to industrial production, GDP, oil and gas prices, capital spending, customer demand, materials and labor availability, and interest rates.
- Contingent consideration liabilities totaled $8.9 million at September 30, 2023, with a maximum potential payment of $10.4 million. A $1.5 million fair-value adjustment was recorded in other expense during the nine-month period.
- The company revised the prior-year cash-flow presentation to correct duplicated ABL borrowing and repayment entries. The revision did not affect net income, EPS, balance sheets or equity.
- Disclosure controls and procedures were not effective at September 30, 2023 because of previously disclosed material weaknesses in internal control over financial reporting. Management implemented or enhanced controls and expected remediation of certain weaknesses by December 31, 2023, subject to sufficient testing.
- DXP disclosed ordinary-course legal proceedings but does not expect them to have a material adverse effect. No material changes to previously reported risk factors were identified.
Important facts investors should verify
- Confirm the effect of the October 2023 $125 million incremental borrowing on leverage, interest expense, mandatory repayments and covenant compliance.
- Assess whether operating cash flow and free cash flow can support acquisitions, share repurchases, capital expenditures and debt service.
- Track remediation and auditor or management conclusions regarding the material weaknesses in internal controls, particularly project revenue recognition, segregation of duties and three-way-match discrepancies.
- Evaluate the sustainability of margin expansion after separating pricing benefits, acquisition contributions and underlying organic volume growth.
- Review exposure to oil and gas activity, industrial demand, supply-chain conditions, higher interest rates and potential contingent consideration payments.