Business Context and Reporting Period
DXP Enterprises, Inc. distributes maintenance, repair and operating products and services and provides custom pump packages, pump remanufacturing and 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, 2021; comparable 2020 interim amounts were restated.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $289.5 million | $220.2 million | $820.8 million | $772.6 million |
| Gross profit | $86.9 million | $61.3 million | $243.9 million | $214.5 million |
| Gross margin | 30.0% | 27.8% | 29.7% | 27.8% |
| Income from operations | $11.2 million | $(40.8) million | $32.3 million | $(22.4) million |
| Net income attributable to DXP | $7.1 million | $(34.7) million | $15.6 million | $(26.2) million |
| Diluted EPS | $0.36 | $(1.95) | $0.78 | $(1.47) |
| Operating cash flow | Not separately provided | Not separately provided | $22.8 million | $92.2 million |
SG&A was $75.8 million in the quarter and $211.6 million for the nine months. Interest expense was $5.3 million and $15.8 million, respectively. The 2020 results included $48.4 million of impairment and other charges, with no comparable charge in 2021.
At September 30, 2021, cash and restricted cash totaled $63.1 million, accounts receivable were $205.8 million, inventories were $106.4 million and total assets were $913.0 million. Term Loan B carrying value was $327.5 million, including current maturities of $3.3 million. The ABL Revolver had no borrowings outstanding and approximately $131.0 million of availability net of letters of credit. The Company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 31.5% year over year, driven by Service Centers growth of 28.9%, Innovative Pumping Solutions growth of 66.6% and Supply Chain Services growth of 21.2%.
- Nine-month sales increased 6.2%. Service Centers sales rose 21.4%, while Innovative Pumping Solutions declined 36.7% and Supply Chain Services declined 2.6%.
- Profitability improved substantially, primarily because the prior-year period included the $48.4 million impairment and other charge. Q3 operating margin was 3.9%; nine-month operating margin was also 3.9%.
- Excluding acquired businesses, management reported lower third-quarter gross margin, particularly in Service Centers, due to volume and product mix. IPS margin improved because of higher-margin international and water and wastewater project work.
- Operating cash flow declined $69.4 million year over year to $22.8 million, primarily because of higher accounts receivable associated with acquisitions and increased business activity.
- Investing cash use increased to $66.3 million, including approximately $65.0 million for three acquisitions: Carter & Verplanck, Process Machinery and Premier Water. Approximately 422,000 common shares were issued as acquisition consideration.
- The Company repurchased approximately 1.0 million shares for $29.2 million during the nine months, leaving approximately $55.8 million available under the $85.0 million repurchase authorization.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management did not provide specific quantitative earnings or revenue guidance. It expects gradual improvement in Service Centers and Supply Chain Services as industrial markets normalize, but cautions that results may remain choppy with possible interim setbacks. Third-quarter sales in those segments were approximately $253.1 million, up approximately 27.6% year over year.
Management reported improving oil and natural gas demand and commodity prices, but stated that activity remained below pre-pandemic levels. IPS results remain exposed to oil and gas capital spending, commodity prices, environmental considerations and potential structural changes in energy demand.
- COVID-19 continues to create uncertainty concerning demand, supply chains, labor, transportation, facility operations and customer activity. Resurgent demand has strained global supply chains and raw-material and labor availability.
- The Company intends to pursue additional acquisitions and may use operating cash flow, borrowings or equity financing. Additional financing may not be available on acceptable terms and equity financing could dilute shareholders.
- The ABL Revolver was scheduled to mature in August 2022, while the Term Loan B has a seven-year term from December 2020.
- Previously issued financial information was restated for errors involving aged unvouchered purchase orders, landed-cost inventory accounting, direct-shipment cutoff, credit-card accruals, sales-tax accruals and acquisition accounting. The restated nine-month 2020 net loss attributable to DXP was $(26.2) million.
- Disclosure controls and procedures were ineffective as of September 30, 2021 because of material weaknesses involving aged accounts-payable exceptions, manual journal-entry review and business-combination accounting. Management described remediation actions, including outside advisors, revised controls and employee training, but effectiveness had not yet been demonstrated.
- The Company is party to ordinary-course legal proceedings and believes their ultimate resolution will not materially affect its financial position, cash flows or results of operations. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Verify the sustainability of reported earnings after excluding the $48.4 million prior-year impairment charge and considering higher SG&A and interest expense.
- Assess working-capital conversion and liquidity after the decline in operating cash flow, acquisition spending, share repurchases and remaining $20.4 million of repurchase installments recorded in current liabilities.
- Review Term Loan B terms, ABL maturity and borrowing capacity, including interest-rate exposure and covenant requirements.
- Evaluate acquisition integration, purchase-accounting estimates, goodwill of $308.9 million and the contribution of recently acquired businesses.
- Monitor the material weaknesses and remediation testing, particularly given the historical restatement and acquisition-accounting errors.
- Assess exposure to COVID-19 effects, supply-chain constraints, labor availability, industrial demand, oil and gas spending and commodity-price volatility.