DXP Enterprises, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
DXP distributes maintenance, repair and operating products and provides services to energy and industrial customers. It also designs pump packages, remanufactures pumps and manufactures private-label pumps. Reportable segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $301.0 million | $311.2 million | Down 3.3% |
| Gross profit | $84.0 million | $84.2 million | Down 0.3% |
| Gross margin | 27.9% | 27.1% | Up 85 basis points |
| Income from operations | $10.9 million | $14.8 million | Down $3.9 million |
| Operating margin | 3.6% | 4.8% | Down 120 basis points |
| Net income attributable to DXP | $5.7 million | $7.3 million | Down 21.7% |
| Diluted EPS | $0.31 | $0.40 | Down $0.09 |
| Cash flow from operations | $(1.6) million | $(5.3) million | Improved $3.7 million |
| Capital expenditures | $3.2 million | $2.3 million | Up $0.9 million |
Cash and restricted cash totaled $32.9 million at March 31, 2020, compared with $54.3 million at December 31, 2019. Bank and other borrowings were approximately $237.8 million. Long-term debt had a carrying value of $243.8 million, including $2.5 million of current maturities, and the ABL Revolver had no outstanding balance. The company reported $131.6 million of available ABL borrowing capacity, net of letters of credit.
Accounts receivable were $194.1 million, inventories were $133.0 million and total assets were $791.7 million at March 31, 2020. Total liabilities were $439.5 million and total equity was $352.2 million.
Material changes versus the prior comparable period
- Sales declined $10.2 million, primarily due to lower activity and spending in oil and gas markets and COVID-19-related economic effects. Segment sales decreased 1.9% in Service Centers, 6.3% in Innovative Pumping Solutions and 3.9% in Supply Chain Services.
- Gross margin improved despite lower sales, principally because IPS gross margin increased approximately 435 basis points. IPS operating income increased 53.4% to $10.4 million.
- SG&A increased 5.3% to $73.1 million, driven by higher payroll, incentive compensation and related costs, including expenses from acquired businesses. SG&A increased faster than sales, reducing operating leverage.
- Interest expense decreased $0.7 million to $4.4 million, primarily because of lower LIBOR rates. The effective tax rate declined to 23.3% from 26.7%.
- Operating cash use improved to $1.6 million from $5.3 million, but investing cash use increased to $17.4 million due mainly to acquisitions.
- DXP acquired Pumping Systems, Inc. and Turbo Machinery Repair for total consideration of approximately $16.2 million, consisting of $14.2 million in cash and $2.0 million of common stock. The acquisitions contributed $5.2 million of Q1 sales.
- Cash declined $21.5 million during the quarter, including $14.2 million of acquisition cash payments, $3.2 million of capital expenditures and a $1.7 million unfavorable foreign-currency effect.
Guidance, outlook, risks and unusual items
Management did not provide specific numerical earnings or revenue guidance. It expects industry activity and customer spending to decrease through the remainder of 2020 as oil oversupply, low commodity prices and COVID-19-related demand destruction affect customers.
DXP increased its ABL Revolver from $85 million to $135 million on March 17, 2020. Management stated that available funding was adequate for normal working-capital needs and that cash generated from operations was expected to meet normal needs over the next twelve months, although additional financing could be required for acquisitions.
Management reduced discretionary expenditures and suspended company matching contributions to retirement plans. Additional measures, including financing or employee furloughs, could be considered. The company continued operating as an essential business and reported no significant supply-chain or transportation delays at the filing date.
- COVID-19 may reduce customer demand, disrupt suppliers and operations, increase employee-related risks and impair financial results or asset values.
- Sustained low or volatile oil and natural-gas prices could reduce customers’ capital and operating expenditures, particularly in IPS and Service Centers.
- Further deterioration could affect the carrying values of long-lived assets, inventory and segment goodwill.
- Acquisition integration, availability of financing, working-capital requirements and potential equity issuance may affect liquidity or shareholder dilution.
- The company recorded a $2.2 million contingent-consideration liability related to the ASI acquisition and recognized a $0.5 million fair-value gain during the quarter.
- The company paid $2.4 million in current and future lease obligations to entities invested in by its chief executive officer.
- Management reported compliance with all ABL Revolver and Term Loan B financial covenants as of March 31, 2020. Ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Actual Q2 and full-year effects of COVID-19, oil-price weakness and declining North American rig activity.
- Availability and covenant headroom under the $135 million ABL facility, including the effect of letters of credit and borrowing-base changes.
- Whether operating cash flow turns positive as sales decline and inventories, receivables and contract assets remain elevated.
- Performance and integration of PSI and Turbo, including acquisition-related costs and contingent consideration.
- Sustainability of the improved IPS gross margin and the company’s ability to control SG&A.
- Potential impairment or valuation changes affecting goodwill, intangible assets, inventory and other long-lived assets.
- Future acquisition financing needs and any resulting debt increases or equity dilution.