Business Context and Reporting Period
DXP Enterprises, Inc. filed its Form 10-K for the fiscal year ended December 31, 2021. DXP distributes maintenance, repair and operating products and services and provides customized pumping solutions through three segments: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The company operated approximately 170 locations and employed 2,490 people across the United States, Canada and Dubai.
Fiscal 2021 results benefited from economic recovery and acquisitions, although supply-chain disruptions, labor and product availability constraints, COVID-19 uncertainty and continued volatility in energy markets remained significant factors.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Sales | $1,113.9 million | $1,005.3 million | +10.8% |
| Gross profit | $328.5 million | $277.2 million | +18.5% |
| Gross margin | 29.5% | 27.6% | +190 basis points |
| Operating income (loss) | $39.9 million | $(27.7) million | Improved $67.5 million |
| Net income (loss) attributable to DXP | $16.5 million | $(29.3) million | Returned to profitability |
| Diluted EPS | $0.83 | $(1.65) | Improved |
| Adjusted EBITDA | $70.2 million | $59.0 million | +19.1% |
| Adjusted EBITDA margin | 6.3% | 5.9% | +40 basis points |
| Cash flow from operations | $37.1 million | $109.7 million | Down $72.6 million |
| Free cash flow | $32.8 million | $103.1 million | Down $70.3 million |
Segment Sales
| Segment | 2021 Sales | Year-over-year change |
|---|---|---|
| Service Centers | $816.5 million | +23.2% |
| Innovative Pumping Solutions | $139.6 million | $(48.4) million, or -25.7% |
| Supply Chain Services | $157.8 million | +2.1% |
Acquisitions contributed approximately $147.5 million of 2021 sales. Excluding acquired businesses, consolidated sales declined approximately 2.0% year over year. IPS backlog increased to $96.9 million at December 31, 2021 from $46.6 million at December 31, 2020.
Balance Sheet, Debt and Liquidity
- Cash and restricted cash totaled approximately $49.1 million at year-end, compared with $119.4 million at December 31, 2020.
- Total debt was $326.7 million, consisting primarily of the Term Loan B; no borrowings were outstanding under the $135 million ABL revolving facility.
- ABL availability was approximately $131.7 million after outstanding letters of credit.
- The Term Loan B bears a floating rate and had an interest rate of approximately 5.75% to 5.8% at year-end; it matures in December 2027.
- The ABL facility matures August 29, 2022. Management stated that operating cash flow should meet normal working-capital needs but that additional financing may be required for acquisitions.
- The company reported compliance with its financial covenants. The December 31, 2021 Fixed Charge Coverage Ratio was 2.74 to 1.00 and the Secured Leverage Ratio was 3.71 to 1.00.
- DXP repurchased approximately 1.2 million shares for $33.5 million during 2021, leaving approximately $51.5 million available under the repurchase authorization at year-end.
Material Changes Versus the Prior Comparable Period
- Sales increased 10.8%, primarily from acquisitions and higher Service Centers activity. Organic sales declined approximately 1.9%.
- Gross margin expanded to 29.5%, reflecting improved product mix, higher-margin IPS work and stronger Service Centers margins.
- Operating results improved materially because 2020 included $59.9 million of impairment and other charges; no comparable charge was recorded in 2021.
- IPS sales declined substantially because of lower oil and gas customer capital spending and the continuing effects of the pandemic, despite improved IPS gross margin.
- Operating cash generation and free cash flow declined as the company rebuilt inventory and funded higher accounts receivable associated with increased activity.
- DXP completed acquisitions of Carter & Verplanck, Process Machinery and Premier Water for aggregate consideration of approximately $65.1 million, including cash, stock and future consideration.
- Goodwill and intangible assets increased to $387.7 million from $341.9 million, primarily due to acquisitions. No goodwill impairment was recorded in 2021, compared with $36.4 million in 2020.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific numerical revenue or earnings guidance. Management expects to pursue internal growth and additional acquisitions, including expansion of geographic reach, product offerings, customer relationships and supply-chain solutions.
- COVID-19 recovery and potential future variants could disrupt customer demand, employee availability, suppliers and operations.
- Supply-chain disruption, transportation costs, labor shortages and product availability could pressure sales, margins and working capital.
- Energy-market exposure remains material; lower or volatile oil and gas prices could reduce customer capital and operating expenditures.
- The company depends on manufacturer distribution authorizations that may be canceled with little or no notice and faces substantial competition.
- Approximately $387.7 million of goodwill and intangible assets is subject to impairment risk if projected cash flows, valuations or market conditions deteriorate.
- IPS revenue is recognized over time using percentage-of-completion accounting. Estimates of costs to complete, contract changes, inflation, labor and materials can materially affect reported revenue and profit.
- Management and the auditor identified material weaknesses in internal control over financial reporting related to aged accounts-payable items and management review of complex percentage-of-completion revenue contracts. The company had begun remediation, but the weaknesses were not considered remediated as of year-end.
- The auditor issued an unqualified opinion on the financial statements but concluded that internal control over financial reporting was not effective as of December 31, 2021.
- DXP had no interest-rate hedges at year-end. A 100-basis-point change in short-term rates was estimated to affect annual pretax interest expense by approximately $3.3 million.
- Subsequent to year-end, DXP acquired Drydon Equipment and Burlingame Engineers on March 2, 2022 for combined consideration of approximately $6.1 million.
Investor Verification Priorities
- Verify the sustainability of organic sales, margin expansion and the recovery in Service Centers activity after separating acquisition effects.
- Assess IPS backlog conversion, project profitability and the accuracy of percentage-of-completion estimates.
- Monitor liquidity surrounding the August 2022 ABL maturity and the company’s ability to refinance or extend the facility.
- Evaluate debt-service capacity, floating-rate exposure and compliance with tightening secured-leverage thresholds.
- Review remediation and auditor testing of the material weaknesses in accounts payable and revenue recognition controls.
- Assess acquisition integration, contingent consideration and the carrying value of goodwill and other intangible assets.
- Track working-capital requirements, inventory rebuilding and whether operating cash flow recovers from the 2021 decline.
- Review exposure to oil and gas spending, COVID-19-related disruptions, supplier authorization changes, cybersecurity incidents and uninsured claims.