DXP Enterprises, Inc. — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
DXP Enterprises distributes maintenance, repair and operating products and services and provides custom pump packages, pump remanufacturing and branded private-label pumps. Its three segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. The filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Sales | $428.0 million | $367.8 million | $852.3 million | $687.2 million |
| Gross profit | $131.9 million | $104.3 million | $256.9 million | $199.1 million |
| Gross margin | 30.8% | 28.3% | 30.1% | 29.0% |
| Income from operations | $37.5 million | $25.9 million | $72.9 million | $47.5 million |
| Operating margin | 8.8% | 7.0% | 8.6% | 6.9% |
| Net income attributable to DXP | $19.1 million | $14.4 million | $36.6 million | $27.1 million |
| Diluted EPS | $1.06 | $0.74 | $2.01 | $1.39 |
| Interest expense | $11.9 million | $5.6 million | $23.4 million | $10.8 million |
| Cash flow from operations | Not separately provided | Not separately provided | $24.0 million | $5.7 million |
Q2 sales increased 16.4%, operating income increased 44.6%, and net income attributable to DXP increased 32.0%. Six-month sales increased 24.0%, operating income increased 53.5%, and net income attributable to DXP increased 35.3%. The six-month effective tax rate increased to 27.0% from 23.5%.
Segment Performance
- Service Centers: Q2 sales increased 18.9% to $298.4 million; six-month sales increased 26.3% to $593.7 million. Growth reflected higher demand for rotating equipment, bearings and power transmission products.
- Innovative Pumping Solutions: Q2 sales increased 9.8% to $63.4 million; six-month sales increased 13.2% to $125.4 million. Management cited higher oil and gas and renewable-sector capital spending and stronger water and wastewater activity.
- Supply Chain Services: Q2 sales increased 12.3% to $66.2 million; six-month sales increased 25.1% to $133.2 million. Results benefited from a new diversified chemical customer and growth in medical technology, food and beverage and oil and gas markets.
Liquidity, Debt and Cash Flow
- Cash and restricted cash were $15.6 million at June 30, 2023, compared with $46.1 million at December 31, 2022.
- Operating cash flow was $24.0 million for the six months, compared with $5.7 million in the prior-year period.
- Investing cash use was $14.1 million, including $5.6 million of capital expenditures and $8.5 million for acquisitions.
- Financing cash use was $40.2 million, primarily reflecting $33.6 million of share repurchases, $4.0 million of contingent consideration payments and $2.2 million of term-loan repayments.
- Term Loan B borrowings were $425.9 million, net long-term debt was $408.4 million on the balance sheet, and no borrowings were outstanding under the ABL Revolver.
- ABL availability was $132.3 million after letters of credit. The ABL matures in July 2027 and the term loan matures in December 2027; the term loan bears interest at SOFR plus a 5.25% margin.
- The company stated that it was in compliance with all financial covenants and believed it had adequate liquidity for normal working-capital needs over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Sales and margins improved across the company, with Q2 gross margin rising 250 basis points and six-month gross margin rising 116 basis points.
- SG&A increased 20.5% in Q2 and 21.3% for the six-month period, primarily due to higher payroll, incentive compensation, related taxes and 401(k) expenses.
- Interest expense more than doubled for the six-month period because of the additional $105 million term-loan borrowing in the fourth quarter of 2022 and higher interest rates.
- Cash generation from operations improved, but cash declined materially because of share repurchases, acquisitions, capital expenditures and debt-related payments.
- The company repurchased 1.09 million shares for $33.2 million during the first six months. Approximately $47.9 million remained available under the $85.0 million repurchase authorization at June 30, 2023.
- DXP acquired Florida Valve EMD and Riordan on May 1, 2023 for aggregate consideration of approximately $11.3 million, including $8.8 million of cash payments and $2.5 million of future consideration. Preliminary goodwill was approximately $7.9 million.
- Prior-period cash-flow presentation was revised for a nonmaterial error involving duplicated ABL borrowing and repayment entries. The revision did not affect net income, EPS or balance sheets.
Outlook, Risks and Unusual Items
Management reported improved order activity and expects to benefit from increased oil and gas activity and continued expansion of its water and wastewater platform. Management also expects Supply Chain Services performance to depend on new customer additions and increased spending by existing customers. The filing does not provide formal quantitative revenue or earnings guidance.
- Key risks include industrial and energy-market cyclicality, reduced oil and gas prices or capital spending, inflation, supply-chain and labor constraints, interest-rate increases, acquisition integration, financing availability, cybersecurity, regulatory changes and customer or supplier nonperformance.
- The company stated that inflationary cost increases were generally passed through to customers and that it had implemented mitigating strategies.
- Contingent consideration liabilities totaled $9.5 million at June 30, 2023; changes in fair value generated $0.8 million of expense during the six months.
- DXP disclosed existing material weaknesses in internal control over financial reporting. Disclosure controls were therefore not effective as of June 30, 2023. Remediation efforts are expected to continue through the remainder of 2023 and relate to unmatched-item reconciliations, percentage-of-completion accounting and segregation of duties.
- Management stated that ordinary-course legal proceedings are not expected to have a material adverse effect, but outcomes cannot be predicted.
Most Important Facts for Investors to Verify
- Whether improved sales and gross margins are sustainable after separating organic growth, pricing effects and acquisition contributions.
- The effect of higher SOFR-based borrowing costs on future earnings and cash flow.
- Progress and effectiveness of remediation for the disclosed material weaknesses in internal controls.
- Whether operating cash flow can support acquisitions, capital expenditures, debt service and continued share repurchases.
- Integration performance and contingent consideration obligations related to recent acquisitions.
- Compliance with debt covenants and the company’s ability to maintain adequate liquidity if market conditions weaken.