DXP Enterprises, Inc. — Q1 2024 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 private-label pumps. Its segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. The filing covers the unaudited three months ended March 31, 2024, compared with March 31, 2023.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Sales | $412.6 million | $424.3 million | Down 2.7% |
| Gross profit | $123.9 million | $125.0 million | Down 0.9% |
| Gross margin | 30.0% | 29.5% | Up 50 bps |
| Operating income | $29.1 million | $35.4 million | Down 17.7% |
| Operating margin | 7.1% | 8.3% | Down 120 bps |
| Net income | $11.3 million | $17.6 million | Down 35.6% |
| Diluted EPS | $0.67 | $0.95 | Down 29.5% |
| Adjusted EBITDA | $40.3 million | $43.1 million | Down 6.5% |
| Adjusted EBITDA margin | 9.8% | 10.2% | Down 40 bps |
| Operating cash flow | $27.0 million | $26.4 million | Up $0.5 million |
| Free cash flow | $24.1 million | $22.6 million | Up $1.5 million |
Cash was $139.7 million at March 31, 2024, compared with $173.1 million at December 31, 2023. Total debt was $547.3 million, consisting primarily of the Senior Secured Term Loan B; the ABL Revolver had no borrowings. ABL availability was $131.8 million after letters of credit. The company reported a fixed-charge coverage ratio of 2.28x and a secured leverage ratio of 2.27x, and stated that it complied with all financial covenants.
Material Changes Versus the Prior Comparable Period
- Sales declined $11.6 million, primarily from lower Service Centers sales of $17.4 million and Supply Chain Services sales of $5.1 million, partly offset by a $10.8 million increase in Innovative Pumping Solutions sales.
- IPS sales increased 21.0%, including $10.3 million from recent water and wastewater acquisitions. Service Centers sales decreased 5.7%; Supply Chain Services sales decreased 7.5%.
- SG&A increased 5.7% to $94.8 million, driven primarily by higher payroll, incentive compensation, related taxes and 401(k) expenses.
- Interest expense increased $4.0 million to $15.5 million, largely because of the additional $125 million Term Loan borrowing completed in the fourth quarter of 2023 and higher interest rates.
- DXP completed three acquisitions for total purchase consideration of $46.5 million, including $40.3 million of cash consideration, $8.2 million of acquired intangible assets and $27.2 million of goodwill.
- Share repurchases totaled approximately $16.8 million for 326,400 shares, compared with $9.1 million for 339,500 shares in Q1 2023. Approximately $9.6 million remained authorized under the repurchase program at March 31, 2024.
Guidance, Outlook, Risks and Unusual Items
Management reported improved recent order activity and expects to benefit from increased oil and gas activity during the remainder of 2024. It also expects continued growth from the water and wastewater platform through integration, scaling and additional bidding opportunities. Supply Chain Services performance is expected to depend on new customer additions or increased spending by existing customers.
Management believes available cash, operating cash flow and credit capacity are adequate for normal working-capital needs over the next twelve months. Future acquisitions may require additional debt or equity financing, and the availability and terms of such financing are not assured.
- Debt carries significant interest-rate exposure; the Term Loan B interest rate was 10.29% at March 31, 2024.
- The Term Loan B requires progressively lower secured-leverage limits, declining to 4.75x beginning June 30, 2026.
- Management identified existing material weaknesses in internal control over financial reporting. Disclosure controls were therefore not effective at March 31, 2024. Revenue-related controls were designed and implemented, but the weakness will not be considered remediated until sufficient operating and testing time has elapsed.
- Management cited risks involving economic conditions, industrial and energy demand, oil and gas prices, acquisitions and integration, labor and materials availability, cyberattacks, financing access and regulatory or operational disruptions.
- Contingent consideration liabilities totaled $13.7 million at March 31, 2024, with a maximum potential payment of $17.5 million under the arrangements.
- The company stated that ordinary-course legal proceedings are not expected to have a material adverse effect, although outcomes cannot be predicted.
Investor Verification Items
- Verify the sustainability of demand recovery in Service Centers and the expected oil and gas improvement.
- Assess acquisition integration, revenue contribution and returns from the water and wastewater platform.
- Monitor interest expense, floating-rate exposure, debt paydown and compliance with tightening leverage limits.
- Track whether the disclosed internal-control material weaknesses are remediated and independently tested.
- Reconcile cash consumption from acquisitions and share repurchases with operating cash flow and available liquidity.
- Review the remaining share repurchase authorization and the potential effect of future acquisition financing on leverage or shareholder dilution.