DXP Enterprises, Inc. 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, although it provides unaudited fourth-quarter data. DXP distributes maintenance, repair and operating products and provides supply-chain services and engineered pumping solutions through Service Centers, Supply Chain Services and Innovative Pumping Solutions. It operated approximately 155 locations and had 2,747 full-time employees at year-end.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $1,267.2 million | $1,216.2 million | +4.2% |
| Gross profit | $347.2 million | $332.2 million | +4.5% |
| Gross margin | 27.4% | 27.3% | +9 basis points |
| Operating income | $66.1 million | $68.5 million | -3.4% |
| Operating margin | 5.2% | 5.6% | -40 basis points |
| Net income attributable to DXP | $36.0 million | $35.6 million | +1.1% |
| Diluted EPS | $1.96 | $1.94 | +1.0% |
| EBITDA | $91.3 million | $95.8 million | -4.7% |
| EBITDA margin | 7.2% | 7.9% | -70 basis points |
| Cash flow from operations | $41.3 million | $35.8 million | +$5.5 million |
| Free cash flow | $19.2 million | $29.1 million | -$9.9 million |
Segment sales: Service Centers generated $762.3 million, or 60.2% of sales, up 1.6%; Innovative Pumping Solutions generated $303.7 million, or 24.0%, up 4.1%; and Supply Chain Services generated $201.3 million, or 15.9%, up 15.4%.
Fourth quarter: Sales were $295.5 million, gross profit was $78.3 million, net income attributable to DXP was $2.2 million and diluted EPS was $0.12, compared with fourth-quarter 2018 sales of $311.0 million, gross profit of $86.6 million, net income of $11.1 million and diluted EPS of $0.60.
Liquidity, Debt and Balance Sheet
- Cash and restricted cash totaled approximately $54.3 million at December 31, 2019, compared with $40.5 million at December 31, 2018.
- Total debt, net of issuance costs, was $237.9 million, compared with $240.4 million at year-end 2018. The debt was principally a senior secured Term Loan B with a stated maturity in August 2023.
- The $85.0 million ABL facility had no borrowings outstanding and approximately $81.6 million of availability, including the effect of letters of credit. The ABL matures in August 2022.
- The Term Loan B interest rate was 6.5% at year-end, and approximately $244.4 million of outstanding debt was exposed to floating interest rates before debt issuance costs.
- DXP reported a Fixed Charge Coverage Ratio of 2.92 to 1.00 and a Secured Leverage Ratio of 2.23 to 1.00, and stated that it was in compliance with applicable covenants.
- Total assets were $788.2 million and total equity was $344.9 million. Goodwill and intangible assets totaled $246.6 million, or approximately 31% of total assets.
- Maintenance capital expenditures for 2020 were expected to be $5 million to $10 million. Management stated that operating cash flow should meet normal working-capital needs, but additional financing could be required for acquisitions.
Material Changes and Management Commentary
- Revenue increased $51.0 million, led by SCS growth from new customer locations and higher sales to medical device, aerospace, oil and gas, and food and beverage customers.
- Gross margin improved modestly, primarily because IPS margin increased approximately 95 basis points due to higher utilization, capacity, pricing and engineered-to-order mix.
- Operating income declined despite higher sales because SG&A increased $17.3 million, or 6.6%, largely from payroll, incentive compensation, benefits and additional headcount. SG&A increased to 22.2% of sales from 21.7%.
- IPS operating income declined $5.0 million as higher personnel-related SG&A more than offset sales growth and margin improvement. SCS operating income declined $1.8 million, primarily due to new-customer implementation costs and higher SG&A. Service Centers operating income increased $6.1 million.
- Operating cash flow improved, but free cash flow declined because capital expenditures increased to $22.1 million from $9.3 million in 2018.
- IPS backlog declined to $101.1 million at December 31, 2019 from $124.2 million a year earlier.
- DXP adopted ASC 842 lease accounting in 2019, recording operating lease right-of-use assets and liabilities of approximately $66.2 million at year-end. The adoption materially affected the balance sheet but not operations or cash flow.
- Management stated that 2019 sales were entirely organic. The 2018 comparison included approximately $47.5 million of sales from the ASI acquisition.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal revenue or earnings guidance. It indicated that oil and gas-related sales might continue or improve in 2020 if oil and gas prices and drilling activity remained near 2019 levels, but noted signs of contraction in early 2020.
- The filing identified COVID-19, which had emerged by the filing date, as a potential source of supply-chain disruption, lower customer demand, lower oil prices and economic volatility; the ultimate impact was stated to be uncertain.
- Demand is sensitive to oil and gas capital and operating spending, drilling activity, industrial cycles and general economic conditions. The average WTI price declined to $56.98 per barrel in 2019 from $65.23 in 2018, while the worldwide average rig count declined modestly.
- Other significant risks include competition, loss or cancellation of supplier distribution rights, customer and product-mix pressure on margins, transportation disruptions, foreign-currency exposure, cyberattacks, product liability, environmental obligations, acquisition integration and goodwill impairment.
- A 100-basis-point change in short-term interest rates was estimated to affect annual interest expense by approximately $2.4 million before tax. DXP had no interest-rate hedges at year-end.
- Legal proceedings arising in the ordinary course were not expected by management to have a material adverse effect. The company had no material off-balance-sheet arrangements or unconsolidated special-purpose entities.
- Subsequent to year-end, DXP acquired Pumping Systems, Inc. on January 2, 2020 and Turbo Machinery Repair on January 31, 2020. Combined consideration was $16.3 million, consisting of $14.3 million in cash and $2.0 million in common stock.
- The company paid approximately $2.2 million in 2019 lease expense to entities controlled by CEO David Little and his family.
- Management and the auditor concluded that internal control over financial reporting was effective at December 31, 2019, following remediation of material weaknesses disclosed for 2018.
Investor Verification Items
- Verify the sustainability of earnings given the sharp fourth-quarter decline and the early-2020 contraction signals in oil and gas markets.
- Assess whether higher SG&A, particularly personnel costs and SCS implementation costs, can be reduced or absorbed by future revenue growth.
- Monitor IPS backlog, segment profitability and the conversion of backlog into cash flow.
- Evaluate leverage, floating-rate exposure, covenant headroom and the August 2022 ABL and August 2023 Term Loan maturities.
- Review the impact and integration results of the PSI and Turbo acquisitions, including cash usage and potential additional financing needs.
- Assess goodwill and intangible-asset concentration, including the $246.6 million carrying balance and future amortization.
- Track the effects of COVID-19, oil-price volatility, customer credit quality and supply-chain disruptions on demand and liquidity.
- Confirm the effectiveness of the internal-control remediation in subsequent filings and review related-party lease arrangements.