DXP Enterprises, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
DXP distributes maintenance, repair and operating products and services, provides integrated pump packages and remanufacturing, and manufactures private-label pumps. Its segments are Service Centers, Innovative Pumping Solutions, and Supply Chain Services. The filing covers the three months ended March 31, 2023; financial statements are unaudited.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $424.3 million | $319.4 million | +32.8% |
| Gross profit | $125.0 million | $94.9 million | +31.8% |
| Gross margin | 29.5% | 29.7% | Down 20 basis points |
| Income from operations | $35.4 million | $21.6 million | +64.2% |
| Operating margin | 8.3% | 6.7% | Up 160 basis points |
| Net income attributable to DXP | $17.6 million | $12.6 million | +39.1% |
| Diluted EPS | $0.95 | $0.65 | +46.2% |
| Operating cash flow | $26.4 million | $2.7 million | +$23.8 million |
Segment sales were $295.2 million for Service Centers, $62.0 million for Innovative Pumping Solutions, and $67.0 million for Supply Chain Services. Segment sales increased 34.9%, 16.8%, and 41.0%, respectively.
Cash and restricted cash totaled $58.4 million at March 31, 2023. The company had $427.0 million outstanding under its Term Loan B, no borrowings under its ABL Revolver, and $132.4 million of available ABL capacity after letters of credit. Total debt carrying value, before applicable debt issuance-cost presentation, was $427.0 million, including $4.4 million of current maturities.
Capital expenditures were $3.8 million. Financing cash uses included $1.1 million of principal repayments, $9.1 million of share repurchases, and $23 thousand of preferred dividends. Inventory increased to $109.4 million from $101.4 million at December 31, 2022, while accounts receivable declined to $311.4 million from $320.9 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher activity across all segments, price increases generally passed through to customers, a new Supply Chain Services customer, increased oil and gas-related spending, and contributions from 2022 acquisitions.
- Gross margin declined modestly, primarily because of lower Supply Chain Services margin and product mix in Service Centers. Innovative Pumping Solutions margin improved because of higher-margin water and wastewater projects and improved oil and gas margins.
- SG&A increased 22.3% to $89.6 million, but declined as a percentage of sales to 21.1% from 23.0%, supporting operating-margin expansion.
- Interest expense increased $6.4 million to $11.5 million, driven by the additional $105.0 million Term Loan B borrowing in the fourth quarter of 2022 and higher interest rates.
- The effective tax rate increased to 27.9% from 21.0%, reflecting state and foreign taxes, nondeductible expenses, and uncertain tax positions, partly offset by tax credits.
- DXP repurchased 339,535 shares for approximately $9.1 million, compared with 58,887 shares for approximately $1.5 million in Q1 2022. Approximately $71.9 million remained available under the $85.0 million repurchase authorization at March 31, 2023.
Guidance, outlook, risks, contingencies, and unusual items
Management reported improved recent order activity and expects industrial demand to remain correlated with production, capacity utilization, and GDP growth. It expects the benefit from vendor price increases to moderate during the second quarter and second half of 2023. Management expects increased oil and gas activity and continued growth in the water and wastewater platform during 2023.
Management believes liquidity is adequate for normal working-capital needs for the next twelve months. Future acquisitions are expected to be funded primarily through operating cash flow and borrowings, although additional debt or equity financing may be required and may dilute shareholders.
On May 1, 2023, after quarter-end, DXP acquired Florida Valve & Equipment and Environmental MD for approximately $3.0 million, and Riordan Materials Corporation for approximately $6.2 million, both funded with cash. Purchase price allocations were incomplete at filing.
Contingent acquisition consideration liabilities totaled $10.5 million at March 31, 2023, including a $342 thousand fair-value expense during the quarter. The company states that ordinary-course legal proceedings are not expected to have a material adverse effect.
Management identified material weaknesses in internal control over financial reporting involving unmatched purchase-order receipts, percentage-of-completion revenue accounting, segregation of duties, and staffing/resources. Disclosure controls were therefore deemed ineffective as of March 31, 2023. Remediation is ongoing and is expected to extend through the remainder of fiscal 2023. Management nevertheless concluded that the filed financial statements are fairly stated in all material respects.
Principal risks include economic and industrial-demand changes, oil and gas price and capital-spending volatility, inflation and supply-chain constraints, labor and materials availability, acquisition integration, cybersecurity, financing availability, geopolitical events, and the identified internal-control weaknesses. The filing reports no material changes to previously disclosed risk factors.
Investor verification items
- Verify the sustainability of 2023 revenue growth as the effect of price increases moderates.
- Monitor gross-margin performance, particularly in Supply Chain Services and Service Centers.
- Assess leverage, floating-rate exposure, and the effect of higher interest expense on cash generation.
- Review progress and any future adjustments related to the material weaknesses and remediation plan.
- Evaluate the cash impact, integration, and preliminary purchase accounting for the two May 2023 acquisitions.
- Track operating working capital, inventory growth, contract assets, and cash conversion.
- Confirm future share repurchases and remaining authorization relative to acquisition and debt-repayment needs.