DXP Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products and provides related services to energy and industrial customers. It also provides custom pump packages, pump remanufacturing and private-label pumps through three segments: Service Centers, Innovative Pumping Solutions and Supply Chain Services. This unaudited filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Sales | $327.2 million | $308.0 million | $971.7 million | $905.2 million |
| Gross profit | $92.7 million | $84.1 million | $268.9 million | $245.6 million |
| Gross margin | 28.3% | 27.3% | 27.7% | 27.1% |
| Operating income | $21.7 million | $16.8 million | $59.4 million | $48.0 million |
| Operating margin | 6.6% | 5.5% | 6.1% | 5.3% |
| Net income attributable to DXP | $13.1 million | $8.4 million | $33.9 million | $24.5 million |
| Diluted EPS | $0.71 | $0.46 | $1.84 | $1.33 |
- Q3 sales increased 6.2%; nine-month sales increased 7.3%.
- Q3 operating income increased 29.2%; nine-month operating income increased 23.7%.
- Q3 effective tax rate was 21.5%, versus 29.8% in the prior-year quarter. The nine-month rate was 24.0%, versus 26.9%.
- Cash provided by operating activities was $7.5 million for the nine months, compared with $9.8 million in 2018.
- Capital expenditures were $14.2 million, producing net investing cash use of $14.2 million. Financing cash use was $5.4 million.
- Cash and restricted cash declined to $28.6 million at September 30, 2019, from $40.5 million at December 31, 2018.
- Gross term loan debt was $245.0 million; net debt carrying value, including current maturities and debt issuance costs, was approximately $238.1 million. The $85 million ABL facility had no borrowings outstanding, with approximately $81.0 million available.
- The company reported compliance with all credit-facility covenants.
Material Changes Versus the Prior Comparable Period
- Service Centers revenue increased 3.2% in Q3 and 4.2% for the nine months, driven primarily by higher demand from oil and gas and related manufacturing customers.
- Innovative Pumping Solutions revenue increased 7.2% in Q3 and 8.9% for the nine months, supported by higher oil and gas capital spending, improved utilization and better pricing.
- Supply Chain Services revenue increased 17.6% in Q3 and 18.5% for the nine months, primarily from new locations and customers in medical device, aerospace, oil and gas, and food and beverage markets.
- Supply Chain Services margins declined because of new-customer implementation costs; segment operating income also declined despite higher revenue.
- SG&A increased 5.5% in Q3 and 6.0% for the nine months, primarily due to payroll, incentive compensation, related taxes, benefits and higher headcount, but declined as a percentage of sales.
- Working-capital investment reduced cash generation: accounts receivable increased to $210.1 million and inventories increased to $131.9 million from $191.8 million and $114.8 million, respectively, at year-end 2018.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $67.3 million of operating lease right-of-use assets and $67.3 million of lease liabilities at September 30, 2019. Management said the adoption materially affected the balance sheet but not operations or cash flows.
- The company paid $1.3 million to repay a promissory note and $1.4 million of contingent consideration related to the ASI acquisition. A $2.9 million ASI contingent-consideration liability remained at September 30, 2019.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal numerical earnings or revenue guidance. Management indicated that sales trends in the Service Centers and Innovative Pumping Solutions segments might continue or improve through the remainder of 2019 if U.S. crude oil production remained at levels experienced during the first nine months.
- Management believes operating cash flow will meet normal working-capital needs for the next twelve months and that existing liquidity is adequate. Future acquisitions may require additional debt or equity financing, potentially diluting shareholders.
- Key disclosed risks include exposure to oil and gas prices and capital spending, general economic conditions, availability of materials and labor, acquisition integration, financing availability, regulatory and permitting matters, third-party performance, cyberattacks and adverse weather or geopolitical events.
- DXP stated that its disclosure controls and procedures were not effective as of September 30, 2019 because of previously reported material weaknesses in the control environment, management review controls and monitoring of financial reporting. Remediation efforts were continuing.
- Ordinary-course legal proceedings were not expected to have a material adverse effect, although outcomes cannot be predicted.
- The filing states that no material changes occurred in previously disclosed risk factors and that no material subsequent events required recognition or disclosure.
Important Facts for Investors to Verify
- Whether oil and gas production, customer capital spending and MRO demand support the indicated revenue and margin trends.
- Whether working-capital growth, particularly receivables and inventories, improves cash conversion.
- The company’s ability to reduce leverage while funding capital expenditures, lease obligations and potential acquisitions.
- Progress toward remediation and independent validation of the disclosed material weaknesses in internal controls.
- The assumptions and probability of achievement underlying the $2.9 million Level 3 ASI contingent-consideration liability.
- The effect of new lease accounting, expected credit-loss accounting adoption in 2020, and other future accounting changes on reported balances and disclosures.