DXP Enterprises, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
DXP Enterprises 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. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Results remained affected by the COVID-19 pandemic, reduced oil and gas capital spending and lower activity in certain industrial, aerospace and construction markets.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $245.6 million | $301.0 million | Down 18.4% |
| Gross profit | $71.6 million | $84.0 million | Down 14.7% |
| Gross margin | 29.2% | 27.9% | Up 125 basis points |
| Income from operations | $6.2 million | $10.9 million | Down 43.1% |
| Operating margin | 2.5% | 3.6% | Down 110 basis points |
| Net income | $0.1 million | $5.6 million | Substantially lower |
| Net income attributable to DXP | $0.3 million | $5.7 million | Substantially lower |
| Diluted EPS | $0.02 | $0.31 | Down $0.29 |
Interest expense increased to $5.2 million from $4.4 million, primarily because of the higher principal balance following the December 2020 refinancing. The effective tax rate increased to 90.9% from 23.3%, reflecting state and foreign taxes, nondeductible expenses and additional reserves related to uncertain research and development tax positions.
Cash flow from operations was $10.6 million, compared with cash used of $1.6 million in the prior-year quarter. Investing activities provided $0.6 million, including $1.3 million from the sale of property and equipment, while capital expenditures were $0.7 million. Financing activities used $1.4 million, primarily for $0.8 million of debt repayment and $0.5 million of employee stock-award tax withholding. Cash and restricted cash increased to $127.5 million from $117.4 million at December 31, 2020.
At March 31, 2021, total debt was approximately $329.2 million before debt issuance costs, consisting of the Term Loan B; no balance was outstanding under the $135.0 million ABL Revolver. Revolver availability was $131.2 million after letters of credit. DXP reported compliance with all financial covenants. Total liabilities were $516.5 million and total equity was $352.9 million.
Material changes versus the prior comparable period
- Service Centers revenue increased 2.1% to $186.4 million, primarily because of $28.4 million of revenue from businesses acquired in December 2020. Excluding those acquired businesses, segment revenue declined 13.5%.
- Innovative Pumping Solutions revenue declined 66.8% to $23.2 million because of reduced oil and gas capital spending and lower U.S. crude oil production.
- Supply Chain Services revenue declined 25.6% to $36.0 million, reflecting lower aerospace and oil and gas activity.
- Gross margin improved despite lower sales, driven by mix, vendor price increases and the completion in 2020 of negative-margin IPS work. IPS gross margin improved approximately 616 basis points.
- SG&A declined 10.5% to $65.4 million, or 17.2% excluding acquired businesses, due to lower payroll, incentive compensation and other cost-reduction actions.
- Operating income declined because the reduction in sales more than offset gross-margin improvement and lower SG&A.
- Operating cash flow improved by $12.2 million year over year, primarily from receivable collections and lower costs in excess of billings.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative earnings or revenue guidance. Management reported gradual normalization in many markets and a modest improvement from the July 2020 lows, but activity remained below pre-pandemic levels. Increased oil demand, lower inventories and OPEC+ actions were described as positive indicators for oil-related businesses.
Management believes cash generated from operations will meet normal working-capital needs for the next twelve months and that existing cash and revolver availability provide adequate funding. DXP intends to pursue additional acquisitions and expects to use operating cash flow, borrowings and potentially equity; additional financing may not be available on acceptable terms and could dilute shareholders.
Key risks include the continuing COVID-19 impact, oil and gas prices and capital spending, customer demand, supply and labor availability, acquisition integration, financing availability, regulatory changes, cybersecurity events, foreign-currency effects and economic conditions. The filing states that there were no material changes to previously disclosed risk factors.
On April 30, 2021, after quarter-end, DXP acquired Carter & Verplanck, LLC, a distributor serving the water and wastewater markets. The acquisition was funded with cash on hand and DXP common stock; the filing does not provide purchase price or expected financial impact.
Other notable items include $5.1 million of favorable currency translation adjustments, $0.5 million of payments to entities invested in by the chief executive officer for current and future lease obligations, and ordinary-course legal proceedings that management does not expect to have a material adverse effect.
Important facts for investors to verify
- Assess whether the sharp IPS and SCS revenue declines reflect temporary pandemic and capital-spending conditions or continuing structural weakness.
- Verify the sustainability of the improved gross margin and the extent to which it depends on product mix, pricing and nonrecurring project completion effects.
- Monitor leverage, Term Loan B amortization, interest expense, covenant compliance and the $131.2 million of revolver availability.
- Review working-capital trends, particularly inventory growth, receivables, contract assets and liabilities, and whether operating cash flow remains positive.
- Evaluate the integration, financing structure and potential dilution from the Carter & Verplanck acquisition.
- Investigate the 90.9% effective tax rate and any further exposure related to uncertain research and development tax credits.