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, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Sales | $387.3 million | $289.5 million | $1,074.5 million | $820.8 million |
| Gross profit | $111.6 million | $86.9 million | $310.8 million | $243.9 million |
| Gross margin | 28.8% | 30.0% | 28.9% | 29.7% |
| Operating income | $26.5 million | $11.2 million | $74.0 million | $32.3 million |
| Operating margin | 6.9% | 3.9% | 6.9% | 3.9% |
| Net income attributable to DXP | $13.9 million | $7.1 million | $41.0 million | $15.6 million |
| Diluted EPS | $0.71 | $0.36 | $2.10 | $0.78 |
- Q3 sales increased 33.8%; nine-month sales increased 30.9%.
- Q3 operating income increased 137.3%; nine-month operating income increased 129.4%.
- Interest expense was $6.8 million in Q3 and $17.6 million for the nine months, up from $5.3 million and $15.8 million, respectively.
- Effective income tax rates were 28.1% for Q3 and 25.1% for the nine months, compared with an 8.9% benefit and 13.7% expense rate, respectively, in the prior-year periods.
- Cash provided by operating activities was $2.3 million for the nine months, down from $22.8 million. Accounts receivable increased to $283.5 million and inventories to $131.3 million at September 30, 2022.
- Cash and restricted cash totaled $17.1 million at September 30, 2022, versus $49.1 million at December 31, 2021.
- Debt carrying value was $364.8 million before unamortized debt issuance costs, including $40.6 million outstanding under the ABL Revolver and $324.2 million under Term Loan B. ABL availability was $91.7 million, net of letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales grew across all segments in Q3: Service Centers increased 22.4% to $260.1 million, Innovative Pumping Solutions increased 62.0% to $59.0 million, and Supply Chain Services increased 68.3% to $68.2 million.
- For the nine months, segment sales increased 20.0% in Service Centers, 76.2% in Innovative Pumping Solutions and 50.8% in Supply Chain Services.
- Gross margin declined despite higher gross profit. Management attributed the nine-month decline primarily to product mix, lower margins on certain Innovative Pumping Solutions work and the profitability of a new Supply Chain Services customer.
- SG&A increased 12.3% in Q3 and 11.9% for the nine months, partly reflecting acquired businesses, higher payroll and incentive compensation.
- DXP completed acquisitions of Sullivan Environmental Technologies, Cisco Air Systems, Drydon and Burlingame. Aggregate consideration was approximately $67.9 million, including $53.9 million of cash, $5.8 million of stock and $8.2 million of future consideration.
- The company amended and extended its ABL facility on July 19, 2022. The $135.0 million revolver now matures July 19, 2027.
- DXP repurchased 184,000 shares for $4.9 million during the nine months and had approximately $46.6 million remaining under its repurchase authorization at September 30, 2022.
- The filing revises prior-period presentation for errors involving translation of Canadian goodwill and a service-revenue classification issue. Management concluded the errors were not material to previously filed financial statements.
Guidance, Outlook, Risks and Unusual Items
- Management reported improving order activity as industrial markets strengthened and expects continued improvement, although new COVID-19 variants or other economic headwinds could cause setbacks.
- Management expects to benefit during 2022 from increased oil and gas activity and higher customer capital spending, while noting that demand remained below pre-pandemic levels.
- Inflation and supply-chain pressures increased product costs; management stated that price increases and other measures generally mitigated these effects.
- The Russia-Ukraine conflict presents potential risks through inflation, supply chains, energy prices and global economic conditions. DXP reported no direct exposure to Russia or Ukraine.
- The company expects adequate liquidity for normal working-capital needs over the next twelve months but may require additional debt or equity financing for acquisitions. Such financing could be unavailable or dilute shareholders.
- DXP’s disclosure controls were not effective at September 30, 2022 because of material weaknesses related to unmatched purchase-order receipts and percentage-of-completion accounting. Remediation was expected to continue through the remainder of fiscal 2022.
- Contingent consideration liabilities totaled $10.0 million at September 30, 2022, and a $2.1 million fair-value adjustment was recorded in other expense during the nine months.
- The company stated that ordinary-course legal proceedings are not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Verify the sustainability of revenue growth and segment margins, particularly the lower gross margins in Supply Chain Services and certain project mix effects in Innovative Pumping Solutions.
- Monitor operating cash conversion, receivables, inventories and contract assets, given the significant decline in operating cash flow.
- Review debt maturities, variable interest-rate exposure, covenant compliance and the remaining $91.7 million of ABL availability.
- Assess acquisition integration, goodwill and intangible-asset valuations, contingent consideration and the associated amortization burden.
- Track remediation of the two material weaknesses, especially controls over percentage-of-completion revenue and contract estimates.
- Evaluate exposure to industrial production, oil and gas capital spending, inflation, labor and supply-chain disruption, COVID-19 developments and geopolitical risks.