DXP Enterprises, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
DXP distributes maintenance, repair and operating products and services to energy and industrial customers, provides integrated pump packages and remanufacturing, and manufactures private-label pumps. Operations comprise Service Centers, Innovative Pumping Solutions and Supply Chain Services. This unaudited filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Financial performance and position
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Sales | $251.4 million | $333.3 million | $552.4 million | $644.5 million |
| Gross profit | $69.7 million | $92.0 million | $153.7 million | $176.2 million |
| Gross margin | 27.7% | 27.6% | 27.8% | 27.3% |
| Operating income | $6.8 million | $22.8 million | $17.7 million | $37.7 million |
| Operating margin | 2.7% | 6.9% | 3.2% | 5.8% |
| Net income attributable to DXP | $2.1 million | $13.5 million | $7.9 million | $20.8 million |
| Diluted EPS | $0.12 | $0.73 | $0.42 | $1.13 |
- Six-month net cash provided by operating activities was $61.8 million, versus $3.5 million used in the prior-year period. The improvement primarily reflected collections of receivables and reduced inventory purchases.
- Investing cash outflow was $19.2 million, including $14.2 million of cash consideration for the PSI and Turbo acquisitions and $5.1 million of capital expenditures.
- Financing cash outflow was $17.1 million, including $16.25 million of principal debt payments. DXP also received $1.1 million of net proceeds from an at-the-market common-stock offering.
- Cash and restricted cash increased to $78.8 million at June 30, 2020 from $54.3 million at December 31, 2019.
- Bank and other borrowings were approximately $222.6 million. Term Loan B carrying value was $228.1 million before debt issuance costs, and the ABL Revolver had no borrowings outstanding.
- The $135 million ABL Revolver had approximately $131.0 million of capacity after letters of credit. DXP reported compliance with all financial covenants.
- Accounts receivable declined to $154.8 million from $187.1 million at year-end 2019, while inventory increased to $131.8 million from $129.4 million.
Material changes versus the prior comparable period
- Second-quarter sales fell 24.6% year over year; six-month sales fell 14.3%. All three segments declined in the second quarter: Service Centers decreased 23.1%, Innovative Pumping Solutions 25.4%, and Supply Chain Services 29.1%.
- Management attributed the declines primarily to COVID-19-related economic disruption, low crude oil prices, reduced oil and gas capital spending, lower production activity and weaker aerospace demand.
- Gross margins improved modestly, but operating margins contracted sharply because SG&A declined less than sales and retained significant fixed-cost leverage. Second-quarter SG&A decreased 9.0%, while sales declined 24.6%.
- Six-month interest expense decreased to $8.3 million from $9.9 million because of lower LIBOR rates and lower debt balances.
- DXP acquired Pumping Systems, Inc. on January 1, 2020 and Turbo Machinery Repair on February 1, 2020. The acquisitions contributed $9.7 million of Service Centers sales during the first six months and had total purchase-price consideration of approximately $16.2 million, including $2.0 million of stock.
- On May 11, 2020, DXP authorized an at-the-market offering of up to $37.5 million. During the quarter, it sold 46,000 shares for approximately $1.1 million of net proceeds.
Guidance, outlook, commentary and risks
Management did not provide quantitative full-year earnings or revenue guidance. It expects industry activity and customer spending to decline through the remainder of 2020 as oil supplies remain elevated and COVID-19 continues to suppress demand. Management also expects Service Centers and Innovative Pumping Solutions activity to remain under pressure if U.S. crude oil production remains at first-half levels.
- Mitigation actions included increasing the ABL facility from $85 million to $135 million, reducing discretionary spending and suspending retirement-plan matching contributions. Additional financing, furloughs or other actions may be considered.
- DXP continued operating as an essential business; most warehouses and distribution centers remained open, and management reported no significant transportation or supply-chain delays through the filing date.
- Prolonged COVID-19 disruption and low oil prices could further reduce customer demand, impair operations, and affect the carrying values of long-lived assets, inventory and segment goodwill.
- Other risks include customer and supplier disruptions, oil and gas expenditure volatility, employee availability and health, acquisition integration, financing availability, cyberattacks and macroeconomic deterioration.
- DXP believes cash generated from operations will meet normal working-capital needs for the next twelve months, but additional debt or equity financing may be needed for acquisitions and could dilute shareholders.
- Legal proceedings are described as ordinary-course matters that management does not expect to have a material adverse effect, individually or in aggregate.
Important facts for investors to verify
- Whether oil and gas activity, rig counts and customer capital spending continued to decline after June 30, 2020 and how that affected each segment.
- Availability, maturity terms and covenant requirements of the ABL Revolver and Term Loan B, including the impact of future debt repayments.
- Whether operating cash flow remained strong after the substantial first-half benefit from receivables collections and reduced inventory purchases.
- Integration progress, profitability and cash requirements of the PSI and Turbo acquisitions.
- Potential impairment exposure for goodwill, intangible assets, inventory and other long-lived assets under prolonged market weakness.
- Use and potential dilution from the remaining $37.5 million at-the-market equity authorization.
- Future effects of COVID-19 on demand, employees, customers, suppliers and the company’s ability to maintain operations.