DXP Enterprises, Inc. — Q2 2022 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. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Financial Performance and Position
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Sales | $367.8 million | $285.7 million | $687.2 million | $531.3 million |
| Gross profit | $104.3 million | $85.3 million | $199.1 million | $156.9 million |
| Gross margin | 28.3% | 29.8% | 29.0% | 29.5% |
| Operating income | $25.9 million | $14.8 million | $47.5 million | $21.1 million |
| Operating margin | 7.0% | 5.2% | 6.9% | 4.0% |
| Net income attributable to DXP | $14.4 million | $8.1 million | $27.1 million | $8.5 million |
| Diluted EPS | $0.74 | $0.41 | $1.39 | $0.42 |
Q2 sales increased 28.7%, while six-month sales increased 29.4%. Operating income increased 74.6% in Q2 and 125.2% for the six-month period. Net income attributable to DXP increased 77.8% in Q2 and 218.9% for the six-month period. Interest expense was $5.6 million in Q2 and $10.8 million year to date. Effective tax rates were 25.5% for Q2 and 23.5% for the six-month period.
At June 30, 2022, cash was $20.6 million and total assets were $984.0 million. Accounts receivable were $273.3 million and inventories were $119.7 million. Total debt was approximately $354.2 million before debt issuance costs, consisting of $29.1 million under the ABL Revolver and $325.1 million under the Term Loan B. The company reported $103.0 million of available ABL capacity, net of letters of credit, and compliance with all debt covenants.
Operating cash flow was $5.7 million for the six months ended June 30, 2022, compared with $16.2 million in the prior-year period. Investing cash outflow was $46.0 million, including $44.1 million for acquisitions and $1.8 million for capital expenditures. Financing cash flow was $12.0 million, primarily reflecting a net ABL draw. Cash and restricted cash declined by $28.4 million to $20.7 million.
Material Changes Versus the Prior Comparable Period
- Service Centers sales increased 18.7% for the six-month period; Innovative Pumping Solutions increased 84.8%; and Supply Chain Services increased 41.4%.
- Growth reflected stronger industrial activity, increased oil and gas capital spending, improved customer operations following pandemic restrictions, a new diversified chemicals customer and acquisitions.
- Gross margin declined 150 basis points in Q2 and 50 basis points for the six-month period, primarily due to product mix and lower-margin oil and gas work.
- SG&A increased 11.2% in Q2 and 11.7% year to date, driven by acquired businesses, payroll, incentive compensation and higher activity levels.
- DXP acquired Cisco on May 2, 2022, and Drydon and Burlingame on March 1, 2022. Aggregate consideration was approximately $61.2 million, including $49.3 million of cash, $4.7 million of stock and $7.2 million of future consideration. The acquisitions generated approximately $34.5 million of six-month sales.
- The company corrected previously presented information for errors in translating Canadian goodwill and for a service-revenue classification error. Management concluded the errors were not material to prior financial statements; prior periods not presented will be revised as applicable.
Guidance, Outlook, Risks and Unusual Items
Management reported improving order activity and expects continued improvement in the Service Centers and Supply Chain Services segments, subject to potential setbacks from COVID-19 variants or economic weakness. Management expects to benefit from increased oil and gas activity in the Innovative Pumping Solutions segment during 2022. No specific quantitative earnings or revenue guidance was provided.
- Inflation, labor and supply-chain pressures increased input costs; management stated that price increases and other actions mitigated some adverse effects.
- The Russia-Ukraine conflict may affect inflation, supply chains, energy prices and global economic conditions. DXP reported no direct exposure to Russia or Ukraine.
- Results remain sensitive to industrial production, oil and gas prices, customer capital spending, pandemic developments, materials and labor availability, acquisition integration, cyberattacks and financing conditions.
- Contingent consideration liabilities totaled $9.8 million at June 30, 2022. A $1.7 million fair-value increase was recorded in other expense during the six months.
- Management disclosed material weaknesses in internal control related to unmatched purchase-order receipts and percentage-of-completion accounting. Disclosure controls were therefore not effective as of June 30, 2022. Remediation was expected to continue through the remainder of 2022.
- On July 19, 2022, DXP amended and extended its $135.0 million ABL Revolver to July 19, 2027, with potential increases of up to $50.0 million subject to conditions.
- Management believes liquidity is adequate for normal working-capital needs over the next 12 months, but additional debt or equity financing may be required for future acquisitions.
Investor Verification Checklist
- Verify whether revenue growth and improved operating margins continue after acquisition and price effects, particularly given the decline in gross margin.
- Assess working-capital needs and cash conversion, including the effect of project activity on contract assets and operating cash flow.
- Review debt maturities, interest-rate exposure, ABL availability and covenant compliance following the July 2022 refinancing.
- Monitor integration, performance and contingent consideration for Cisco, Drydon and Burlingame.
- Evaluate remediation of the disclosed internal-control material weaknesses and the accuracy of percentage-of-completion revenue and contract balances.
- Review exposure to oil and gas spending, inflation, supply-chain disruption, COVID-19 developments and geopolitical risks.