DXP ENTERPRISES INC annual report, FY2020

DXP Enterprises, Inc. — Fiscal 2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. The filing also provides unaudited fourth-quarter information. DXP distributes maintenance, repair and operating products and services and provides customized pumping solutions through Service Centers, Innovative Pumping Solutions and Supply Chain Services. Operations covered the United States, Canada and Dubai, with 168 locations and 2,550 employees at year-end.

Key Financial Metrics

Metric	2020	2019	Change
Sales	$1,005.3 million	$1,267.2 million	Down 20.7%
Gross profit	$279.3 million	$347.2 million	Down 19.6%
Gross margin	27.8%	27.4%	Up 38 basis points
SG&A	$246.3 million	$281.1 million	Down 12.4%
Operating income (loss)	$(26.9) million	$66.1 million	Declined $93.0 million
Net income (loss) attributable to DXP	$(28.7) million	$36.0 million	Declined $64.8 million
Diluted EPS	$(1.62)	$1.96	Declined $3.58
Adjusted EBITDA	$59.8 million	$93.6 million	Down 36.1%
Adjusted EBITDA margin	5.9%	7.4%	Down 150 basis points
Cash flow from operations	$107.7 million	$41.3 million	Up $66.4 million
Free cash flow	$101.1 million	$19.2 million	Up $81.9 million

Segment Performance

Service Centers: Sales of $662.6 million, down 13.1%; segment operating income before adjustments was $70.4 million.
Innovative Pumping Solutions: Sales of $188.0 million, down 38.1%; segment operating income before adjustments was $18.7 million. Backlog declined to $46.6 million from $101.1 million.
Supply Chain Services: Sales of $154.7 million, down 23.2%; segment operating income before adjustments was $13.2 million.

Balance Sheet, Debt and Liquidity

Cash and restricted cash totaled $117.4 million at December 31, 2020, versus $54.3 million at the prior year-end.
Total debt was $330.0 million, compared with $244.4 million at December 31, 2019. Debt represented 48.7% of total capitalization.
The $135 million asset-based revolving facility had no borrowings outstanding and $131.9 million of availability, net of letters of credit. It matures in August 2022.
On December 23, 2020, DXP refinanced its prior term loan with a new seven-year $330 million Term Loan B maturing in December 2027. The reported interest rate was approximately 5.75% to 5.8% at year-end.
DXP reported compliance with its debt covenants. The Fixed Charge Coverage Ratio was 3.45:1 and the Secured Leverage Ratio was 3.24:1 at December 31, 2020.
Operating cash flow benefited from collections of receivables and lower inventory purchases. Investing cash outflows included $115.2 million for acquisitions and $6.7 million of capital expenditures.

Material Changes Versus the Prior Comparable Period

Sales fell $261.9 million, primarily because of reduced oil and gas capital spending, lower crude oil production and COVID-19-related economic disruption.
Sales declined in all three segments, with the largest percentage decline in Innovative Pumping Solutions.
Gross margin improved modestly because of higher margins in IPS and SCS, partially offset by lower Service Centers margins.
SG&A declined due to lower payroll, incentive compensation, retirement-plan costs and other cost-reduction actions.
DXP recorded $59.9 million of impairment and other charges, including $36.4 million of goodwill impairments, $4.8 million of long-lived asset impairments and $18.7 million of inventory and work-in-progress charges.
Goodwill and intangible assets increased to $328.4 million after acquisitions, despite the impairment charges.
Cash generation improved substantially, but debt increased because of the refinancing and acquisition activity.

Acquisitions, Outlook and Unusual Items

DXP completed six 2020 acquisitions, including Total Equipment Company, APO Pumps & Compressors, Pumping Solutions, Corporate Equipment Company, Turbo Machinery Repair and Pumping Systems. Total consideration was approximately $144.6 million, including $115.2 million of cash and $29.4 million of stock.
Management expected industry activity and customer spending to remain volatile in the near term but anticipated gradual improvement as vaccinations increased and COVID-19-related oil demand destruction subsided.
Management continued to emphasize operational streamlining, efficiency improvements, internal growth and acquisition-led expansion. No specific financial revenue or earnings guidance was provided.
COVID-19 and the oil price collapse reduced customer demand, particularly in energy-related markets. DXP remained operational as an essential business and reported no significant supply-chain or transportation delays at the filing date.
Management suspended company matching contributions to retirement plans after the first quarter of 2020 and reduced discretionary spending.
An August 2020 cyberattack was disclosed; the company stated that confidential vendor, customer and employee data were not breached and remediation costs were not material.
DXP recognized an $18.4 million income tax benefit, including a $16.9 million benefit from federal and state research and development credits, partially offset by a $5.1 million uncertain tax position.
Quarterly fourth-quarter 2020 sales were $232.7 million, gross profit was $64.3 million and net loss attributable to DXP was $1.9 million, compared with fourth-quarter 2019 sales of $295.5 million, gross profit of $78.3 million and net income attributable to DXP of $2.2 million.

Principal Risks and Contingencies

Continued weakness or volatility in oil and gas prices, customer capital spending and broader industrial demand.
COVID-19-related demand, supply-chain, labor and operational disruptions.
Debt refinancing, floating-rate exposure and compliance with leverage and coverage covenants.
Integration and execution risks associated with acquisitions, including potential goodwill and intangible-asset impairment.
Loss or cancellation of manufacturer distribution authorizations, competitive pressures and inability to pass through supplier price increases.
Product liability, warranty, environmental, health and safety claims, including risks related to customized pump products.
Cybersecurity, information-system, foreign currency and foreign regulatory risks.
Operating lease commitments of $63.0 million and estimated debt interest payments of $131.7 million based on year-end assumptions.

Investor Verification Checklist

Verify the sustainability of the $107.7 million of operating cash flow and $101.1 million of free cash flow after the 2020 working-capital benefits.
Assess debt-service capacity under the $330 million Term Loan B, including floating-rate exposure and the December 2027 maturity.
Monitor compliance with progressively tighter secured-leverage requirements and available ABL liquidity.
Evaluate recovery in oil and gas, manufacturing and construction markets and the trajectory of IPS backlog.
Review acquisition integration, purchase-price allocations and the significant goodwill and intangible-asset balance.
Assess potential further impairments if energy markets or COVID-19 conditions deteriorate.
Review the $5.1 million uncertain tax position and the assumptions supporting the $16.9 million R&D tax-credit benefit.
Confirm related-party lease payments of approximately $3.1 million to entities controlled by the chief executive officer and family.