DXP Enterprises, Inc. — 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. Operations are reported through Service Centers (SC), Innovative Pumping Solutions (IPS), and Supply Chain Services (SCS). This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with restated 2020 periods.
The filing states that the 2020 comparable periods and prior financial statements were restated for errors involving aged unvouchered purchase orders, business-combination consideration, direct-ship sales cutoff, credit-card accruals, inventory obsolescence and other items.
Financial results and key metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Sales | $285.7 million | $251.4 million | $531.3 million | $552.4 million |
| Gross profit | $85.3 million | $70.1 million | $156.9 million | $153.2 million |
| Gross margin | 29.8% | 27.9% | 29.5% | 27.7% |
| Operating income | $14.8 million | $7.1 million | $21.1 million | $18.5 million |
| Operating margin | 5.2% | 2.8% | 4.0% | 3.3% |
| Net income attributable to DXP | $8.1 million | $2.4 million | $8.5 million | $8.5 million |
| Diluted EPS | $0.41 | $0.13 | $0.42 | $0.45 |
- Second-quarter sales increased 13.6%, while six-month sales decreased 3.8%.
- Second-quarter gross profit increased 21.7% and operating income more than doubled year over year. Six-month gross profit increased 2.4% and operating income increased 14.2%.
- Interest expense increased to $5.3 million in the second quarter and $10.6 million for the six months, primarily due to the higher debt balance following the December 2020 refinancing.
- Effective tax rates were 17.4% for the second quarter and 26.7% for the six-month period, compared with 23.1% and 23.0%, respectively, in the restated 2020 periods.
Cash flow, debt and liquidity
| Metric | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|
| Operating cash flow | $16.2 million | $61.8 million |
| Investing cash flow | $(44.7) million | $(19.2) million |
| Financing cash flow | $(12.0) million | $(17.1) million |
| Net change in cash | $(40.2) million | $24.4 million |
- Cash and restricted cash totaled $79.3 million at June 30, 2021, down from $119.4 million at December 31, 2020.
- The Term Loan B had $328.4 million of borrowings, including current maturities, and the ABL Revolver had no borrowings outstanding.
- Available ABL borrowing capacity was $131.3 million, net of letters of credit. The ABL facility matures in August 2022.
- Management stated that the company was compliant with its debt covenants and believed cash from operations would meet normal working-capital requirements for the next 12 months.
- Accounts receivable increased to $193.7 million and inventories increased to $103.4 million from $166.9 million and $97.1 million, respectively, at year-end 2020.
Material changes versus the prior comparable period
- SC second-quarter sales increased 36.3% to $209.6 million, including sales from recent acquisitions. SCS sales increased 6.1% to $39.3 million.
- IPS second-quarter sales declined 39.3% to $36.7 million, primarily because of reduced oil and gas capital spending. For the six months, IPS sales declined 54.0% to $60.0 million.
- Second-quarter gross margin improved 197 basis points, and six-month gross margin improved 180 basis points, reflecting volume, product mix and improved IPS project margins.
- The company completed the $49.7 million acquisition of Carter & Verplanck, LLC (CVI) on April 30, 2021, funded with approximately $40.8 million of cash and $8.9 million of DXP common stock. CVI contributed $5.2 million of sales and $1.1 million of net income during the six months.
- DXP repurchased approximately 1.0 million shares for $29.2 million at an average price of $28.77 per share. The repurchase program authorized up to $85.0 million or 1.5 million shares; $55.8 million remained available at June 30, 2021.
- Operating cash flow fell by $45.6 million, primarily because of increased receivables associated with acquisitions and higher business activity.
Guidance, outlook, risks and unusual items
- Management described industrial and manufacturing markets as gradually normalizing but still below pre-pandemic levels. SC and SCS activity was expected to improve, with potential interim setbacks and continued choppiness.
- Management expected IPS activity to remain affected by reduced oil and gas capital spending during the remainder of 2021, although improving commodity prices and easing pandemic restrictions were viewed as potential supports.
- COVID-19 remained a significant uncertainty, including risks from variants, government restrictions, supply-chain disruption, labor and raw-material availability, and transportation constraints.
- The company disclosed material weaknesses in internal control over financial reporting and concluded that its disclosure controls and procedures were ineffective as of June 30, 2021. The weaknesses related to aged accounts-payable clearing, journal-entry review and business-combination accounting.
- Management reported remediation efforts including outside advisors, reassessment of accounts-payable application controls and purchase-order training, with additional enhancements planned through the remainder of 2021.
- Subsequent acquisitions included Process Machinery, completed July 1, 2021 for approximately $10 million, and Premier Water, completed in September 2021 for approximately $6 million, funded with cash and stock.
- The company was party to ordinary-course legal proceedings but did not expect their resolution to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Investor verification checklist
- Review the restatement schedules and the related Form 10-K/A to understand the impact on historical earnings, liabilities, goodwill and retained earnings.
- Monitor remediation of the disclosed material weaknesses and whether subsequent filings conclude that internal controls and disclosure controls are effective.
- Verify debt amortization, covenant compliance, interest-rate exposure and the August 2022 ABL maturity.
- Assess whether operating cash flow recovers after the sharp decline caused by working-capital investment and acquisition activity.
- Evaluate the integration, performance and funding of CVI and the subsequent Process Machinery and Premier Water acquisitions.
- Track IPS exposure to oil and gas capital spending, COVID-19 developments, supply-chain constraints and potential additional share repurchases or acquisition financing.