DXP Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products and services and provides custom pump packages, pump remanufacturing and branded private-label pumps. Operations are organized into Service Centers (SC), Innovative Pumping Solutions (IPS) and Supply Chain Services (SCS). This unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $319.4 million | $245.6 million | Up 30.1% |
| Gross profit | $94.9 million | $71.6 million | Up 32.5% |
| Gross margin | 29.7% | 29.2% | Up 50 basis points |
| Income from operations | $21.6 million | $6.2 million | Up $15.3 million |
| Operating margin | 6.7% | 2.5% | Up 420 basis points |
| Net income attributable to DXP | $12.6 million | $0.4 million | Significant increase |
| Diluted EPS | $0.65 | $0.02 | Up $0.63 |
| Net cash from operating activities | $2.7 million | $8.6 million | Down $5.9 million |
Segment sales were $218.8 million for SC, $53.1 million for IPS and $47.6 million for SCS. IPS sales increased 128.3%, primarily from higher oil and gas project activity and recent water and wastewater acquisitions. SC sales rose 17.4% and SCS sales rose 32.2% as industrial activity improved and pandemic restrictions eased.
As of March 31, 2022, cash was $36.6 million, restricted cash was $0.1 million and total current assets were $412.6 million. Accounts receivable were $228.2 million and inventories were $111.9 million. Total debt was approximately $325.9 million, consisting of $325.9 million of Term Loan B borrowings before debt issuance costs; the ABL Revolver had no borrowings outstanding. The company reported $132.2 million of ABL availability, net of letters of credit, and compliance with its debt covenants.
Total liabilities were $542.2 million and total equity was $360.1 million. Cash and restricted cash decreased by $12.4 million during the quarter, ending at $36.7 million.
Material Changes Versus the Prior Comparable Period
- Sales increased $73.8 million, reflecting higher activity across all three segments; acquired businesses contributed $13.1 million of sales.
- Gross margin improved modestly, while operating margin expanded substantially because revenue growth exceeded the increase in SG&A.
- SG&A increased 12.1% to $73.3 million, driven by acquired-business expenses, payroll, incentive compensation and benefits.
- Operating cash flow declined because increased project activity required additional working capital, including costs incurred before customer billings.
- Investing cash flow shifted to a $6.1 million use, primarily due to acquisitions, compared with $0.6 million of investing cash inflow in the prior year, which included proceeds from an asset sale.
- Financing cash use increased to $9.3 million, including $6.8 million paid toward a prior share-repurchase obligation and $1.5 million for current-quarter treasury-stock purchases.
- Effective tax rate decreased to 21.0% from 90.9% in the prior-year quarter, partly because the prior-year rate was unusually high relative to the low level of pretax income.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative full-year revenue or earnings guidance. Management expects SC and SCS results to continue improving as industrial markets recover, while acknowledging potential setbacks from new COVID-19 variants or other economic headwinds. Management expects increased oil and gas activity to benefit IPS during 2022, although demand remained below pre-pandemic levels.
- Inflation, labor constraints and supply-chain disruptions increased costs; management stated that price increases and other measures mitigated some effects.
- The Russia-Ukraine conflict has no direct company exposure, but may affect inflation, supply chains, energy prices and global economic conditions.
- COVID-19-related demand, labor, transportation and supply-chain effects remain uncertain.
- The ABL facility was scheduled to mature in August 2022; management intended to amend and extend it before maturity.
- DXP completed the Drydon and Burlingame acquisitions on March 1, 2022 for aggregate consideration of approximately $9.0 million. The acquisitions contributed approximately $1.8 million of first-quarter sales in the filing's acquisition disclosure and generated approximately $4.7 million of preliminary goodwill.
- On May 3, 2022, after quarter-end, DXP acquired Cisco Air Systems for approximately $45 million, funded with $29 million of cash, approximately $5 million of DXP stock and approximately $11 million drawn on the ABL.
- The company revised presented prior-period information for errors in translating Canadian goodwill. Management concluded the errors were not material to previously issued financial statements, but the revision reduced December 31, 2021 goodwill and equity by $12.0 million.
- Disclosure controls and procedures were not effective at March 31, 2022 because of material weaknesses involving unmatched purchase-order receipts and percentage-of-completion accounting. Remediation is expected to continue through the remainder of 2022.
- Legal proceedings arise in the ordinary course; management does not expect them to have a material adverse effect, although outcomes and financial impacts cannot be predicted.
Important Facts for Investors to Verify
- Confirm the timing and terms of the ABL amendment or refinancing before its August 2022 maturity.
- Monitor leverage, covenant compliance, interest costs and liquidity after the Cisco acquisition and approximately $11 million ABL draw.
- Assess whether project-related working-capital needs and contract assets continue to suppress operating cash flow.
- Evaluate the remediation of the material weaknesses, particularly percentage-of-completion revenue and contract-asset accounting.
- Reconcile acquisition contributions, purchase-price allocations, contingent consideration and future amortization expense.
- Track exposure to oil and gas capital spending, industrial production, inflation, labor availability, supply-chain disruption and geopolitical developments.
- Review the revised Canadian goodwill and translation adjustments in future filings for consistency and additional corrections.