Dxp Enterprises Inc 10-Q for FY2021 Q1
Dxp Enterprises Inc (DXPE)
10-Q
2021-05-10
For: 2021-03-31
View Original
Added on
April 04, 2026
About this 10-Q
Dxp Enterprises Inc filed this 10-Q on May 10, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $245.62M
- down 18.4% from $300.98M a year earlier
- Net income
- $340K
- down 94.0% from net income of $5.71M a year earlier
- Diluted EPS
- $0.02
- down 93.5% from $0.31 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| [ | ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended | |||||||||
or
| [ | ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to | |||||||||
Commission file number 0-21513
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
| (Address of principal executive offices, including zip code) | ||||||||||||||
(713 ) 996-4700
| (Registrant's telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol | Name of Exchange on which Registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [☐ ] Emerging growth company [☐ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [☐ ] No [X]
Number of shares of registrant's Common Stock outstanding as of April 30, 2021: 19,206,923 par value $0.01 per share.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
DESCRIPTION
| Item | Page | |||||||
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share amounts) (unaudited)
| Three Months Ended March 31, | ||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||
| Sales | $ | $ | ||||||||||||||||||
| Cost of sales | ||||||||||||||||||||
| Gross profit | ||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||
| Income from operations | ||||||||||||||||||||
| Other income | ( | ( | ||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Net loss attributable to noncontrolling interest | ( | ( | ||||||||||||||||||
| Net income attributable to DXP Enterprises, Inc. | ||||||||||||||||||||
| Preferred stock dividend | ||||||||||||||||||||
| Net income attributable to common shareholders | $ | $ | ||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||
| Currency translation adjustments | ( | |||||||||||||||||||
| Comprehensive income | $ | $ | ||||||||||||||||||
| Basic | $ | $ | ||||||||||||||||||
| Diluted | $ | $ | ||||||||||||||||||
| Weighted average common shares outstanding : | ||||||||||||||||||||
| Basic | ||||||||||||||||||||
| Diluted | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) (unaudited)
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts Receivable, net of allowance of $ | |||||||||||
| Inventories | |||||||||||
| Costs and estimated profits in excess of billings | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Federal income taxes receivable | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Operating lease ROU assets | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt | $ | $ | |||||||||
| Trade accounts payable | |||||||||||
| Accrued wages and benefits | |||||||||||
| Customer advances | |||||||||||
| Billings in excess of costs and estimated profits | |||||||||||
| Short-term operating lease liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of unamortized debt issuance costs | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Shareholders' Equity: | |||||||||||
Series A and B preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total DXP Enterprises, Inc. Equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total Equity | |||||||||||
| Total liabilities and Equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | $ | |||||||||
| Less: net loss attributable to non-controlling interest | ( | ( | |||||||||
| Net income | |||||||||||
| Reconciliation of net income to net cash provided (used in) by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangible assets | |||||||||||
| Gain on sale of property and equipment | ( | ||||||||||
| Provision for credit losses | ( | ||||||||||
| Fair value adjustment on contingent consideration | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Stock compensation expense | |||||||||||
| Deferred income taxes | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade accounts receivable | ( | ( | |||||||||
| Costs and estimated profits in excess of billings | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Trade accounts payable and accrued expenses | |||||||||||
| Billings in excess of costs and estimated profits | ( | ||||||||||
| Other long-term liabilities | ( | ||||||||||
| Net cash provided by (used in) operating activities | $ | $ | ( | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Proceeds from the sale of property and equipment | |||||||||||
| Acquisition of business, net of cash acquired | ( | ||||||||||
| Net cash provided by (used in) investing activities | $ | $ | ( | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Principal debt payments | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Payment for employee taxes withheld from stock awards | ( | ( | |||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||
| Effect of foreign currency on cash | ( | ||||||||||
| Net change in cash and restricted cash | ( | ||||||||||
| Cash and restricted cash at beginning of period | |||||||||||
| Cash and restricted cash at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands) (unaudited)
| Series A preferred stock | Series B preferred stock | Common stock | Paid-in capital | Retained earnings | Non controlling interest | Accum other comp loss | Total equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends paid | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Compensation expense for restricted stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax related items for share based awards | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Issuance of shares of common stock | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Series A preferred stock | Series B preferred stock | Common stock | Paid-in capital | Retained earnings | Non controlling interest | Accum other comp loss | Total equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Preferred dividends paid | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Compensation expense for restricted stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax related items for share based awards | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
6
DXP ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
Basis of Presentation
The Company's financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE"). The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of results expected for the full fiscal year. In the opinion of management, these condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2021 and March 31, 2020, condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, condensed consolidated statements of cash flows for the three months ended March 31, 2021 and March 31, 2020, and condensed consolidated statement of equity for the three months ended March 31, 2021 and March 31, 2020. All such adjustments represent normal recurring items.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on the financial statements.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 4 - LEASES
7
Supplemental cash flow information related to leases was as follows (in thousands):
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||
| Lease | 2021 | 2020 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for lease liabilities | ||||||||||||||
| Operating leases | ||||||||||||||
Supplemental balance sheet information related to leases was as follows (in thousand):
| Lease | Classification | March 31, 2021 | March 31, 2020 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating | Operating lease right-of-use assets | $ | $ | |||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current operating | Short-term operating lease liabilities | |||||||||||||||||||
| Non-current operating | Long-term operating lease liabilities | |||||||||||||||||||
| Total operating lease liabilities | $ | $ | ||||||||||||||||||
During the three months ended March 31, 2021, the Company paid $0.5 million in current and future lease obligations to entities invested in by the Company’s Chief Executive Officer.
NOTE 5 – INVENTORIES
The carrying values of inventories are as follows (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Obsolescence reserve | ( | ( | |||||||||
| Inventories | $ | $ | |||||||||
NOTE 6 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
Under our customized pump production contracts in our IPS segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “Cost and estimated profits in excess of billings” on our condensed consolidated balance sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our condensed consolidated balance sheets.
8
| March 31, 2021 | December 31, 2020 | ||||||||||
| Costs incurred on uncompleted contracts | $ | $ | |||||||||
| Estimated profits, thereon | |||||||||||
| Total | |||||||||||
| Less: billings to date | |||||||||||
| Net | $ | $ | |||||||||
Such amounts were included in the accompanying condensed Consolidated Balance Sheets for March 31, 2021 and December 31, 2020 under the following captions (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Costs and estimated profits in excess of billings | $ | $ | |||||||||
| Billings in excess of costs and estimated profits | ( | ( | |||||||||
| Translation adjustment | ( | ||||||||||
| Net | $ | $ | |||||||||
During the three months ended March 31, 2021, $0.9 million of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments.
NOTE 7 – INCOME TAXES
Our effective tax rate from continuing operations was a tax expense of 90.9 percent for the three months ended March 31, 2021 compared to a tax expense of 23.3 percent for the three months ended March 31, 2020. Compared to the U.S. statutory rate for the three months ended March 31, 2021, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded due to tax authorities’ aggressive auditing of research and development tax credits. The effective tax was decreased by research and development tax credits and other credits. Compared to the U.S. statutory rate for the three months ended March 31, 2020, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and was partially offset by research and development tax credits, foreign tax credits, and other tax credits.
To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts would be classified as a component of income tax provision (benefit) in the financial statements consistent with the Company’s policy.
NOTE 8 – LONG-TERM DEBT
The components of the Company's long-term debt consisted of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
Carrying Value (1) | Fair Value | Carrying Value (1) | Fair Value | ||||||||||||||||||||
| ABL Revolver | $ | $ | $ | $ | |||||||||||||||||||
| Term Loan B | |||||||||||||||||||||||
| Total long-term debt | |||||||||||||||||||||||
| Less: current portion | ( | ( | ( | ( | |||||||||||||||||||
| Long-term debt less current maturities | $ | $ | $ | $ | |||||||||||||||||||
(1) Carrying value amounts do not include unamortized debt issuance costs of $9.1 million and $9.6 million for March 31, 2021 and December 31, 2020, respectively.
Credit Agreements
On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $135.0 million asset-backed revolving line of credit (the "ABL Revolver") a $50.0 million increase above the $85.0 million original revolver. The Increase Agreement amends and supplements that certain Loan and Security Agreement, dated as of August 29,
9
2017. As of March 31, 2021, the Company had no amount outstanding under the ABL Revolver and had $131.2 million of borrowing capacity, net of the impact of outstanding letters of credit.
On December 23, 2020, DXP entered into a new seven year , $330 million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan.
The fair value measurements used by the Company are considered Level 2 inputs, as defined in the fair value hierarchy. The fair value estimates were based on quoted prices for identical or similar securities.
The Company was in compliance with all financial covenants under the ABL Revolver and Term Loan B Agreements as of March 31, 2021.
NOTE 9 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | $ | |||||||||||||||||||||
| Convertible preferred stock dividend | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | $ | |||||||||||||||||||||
| Per share amount | $ | $ | |||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Assumed conversion of convertible preferred stock | |||||||||||||||||||||||
| Total dilutive shares | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | $ | |||||||||||||||||||||
| Convertible preferred stock dividend | |||||||||||||||||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | $ | |||||||||||||||||||||
| Per share amount | $ | $ | |||||||||||||||||||||
NOTE 10 - COMMITMENTS AND CONTINGENCIES
NOTE 11 - SEGMENT REPORTING
10
re-manufactures pumps and manufactures branded private label pumps. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management.
The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of inter-segment eliminations.
The following table sets out financial information related to the Company's segments excluding amortization (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| SC | IPS | SCS | Total | SC | IPS | SCS | Total | ||||||||||||||||||||||||||||||||||||||||
Product sales1 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Inventory services2 | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Staffing services3 | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Pump production4 | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
1Product sales that are recognized at a point in time.
2 Inventory management services that are recognized over the contract life.
3Staffing services that are invoiced on a day-rate basis.
4Custom pump production is recognized over time.
The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Operating income for reportable segments | $ | $ | |||||||||||||||||||||
| Adjustment for: | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Impairment and other charges | |||||||||||||||||||||||
| Corporate expenses | |||||||||||||||||||||||
| Income (loss) from operations | $ | $ | |||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Other (income) expense, net | ( | ( | |||||||||||||||||||||
| Income (loss) before income taxes | $ | $ | |||||||||||||||||||||
NOTE 12 - SUBSEQUENT EVENTS
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management discussion and analysis ("MD&A") of the financial condition and results of operations of DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") for the three months ended March 31, 2021 should be read in conjunction with our previous Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, and the consolidated financial statements and notes thereto included in such reports. The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements include without limitation those about the Company’s expectations regarding the impact of the COVID-19 pandemic and the impact of low commodity prices of oil and gas; the Company’s business, the Company’s future profitability, cash flow, liquidity, and growth. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "might", "estimates", "will", "should", "could", "would", "suspect", "potential", "current", "achieve", "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and actual results may vary materially from those discussed in the forward-looking statements or historical performance as a result of various factors. These factors include the effectiveness of management's strategies and decisions, our ability to implement our internal growth and acquisition growth strategies, general economic and business conditions specific to our primary customers, changes in government regulations, our ability to effectively integrate businesses we may acquire, new or modified statutory or regulatory requirements, availability of materials and labor, inability to obtain or delay in obtaining government or third-party approvals and permits, non-performance by third parties of their contractual obligations, unforeseen hazards such as weather conditions, acts or war or terrorist acts and the governmental or military response thereto, cyber-attacks adversely affecting our operations, other geological, operating and economic considerations and declining prices and market conditions, including reduced oil and gas prices and supply or demand for maintenance, repair and operating products, equipment and service, decreases in oil and natural gas prices, decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors, economic risks related to the impact of COVID-19, our ability to manage changes and the continued health or availability of management personnel, and our ability to obtain financing on favorable terms or amend our credit facilities as needed. This Report identifies other factors that could cause such differences. We cannot assure that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2021. We assume no obligation and do not intend to update these forward-looking statements. Unless the context otherwise requires, references in this Report to the "Company", "DXP", "we" or "our" shall mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries.
CURRENT MARKET CONDITIONS AND OUTLOOK
General
The pandemic continued to have a significant impact on our business in the first quarter of 2021. The marketplace broadly, and the Company specifically, continued to operate with certain modifications to balance re-opening with employee and customer safety. However, most of the markets in which we operate continued to normalize in the quarter and re-open. This improved the outlook of the manufacturing and construction customers that support our traditional branch and onsite business. Although the rate of improvement remains gradual and the overall activity level remains below pre-pandemic levels, DXP is seeing a modest improvement from monthly lows experienced in July of 2020.
COVID-19 Pandemic Impact
The COVID-19 pandemic has impacted and is likely to continue impacting our businesses and operations as well as the operations of our customers and suppliers. From a customer perspective, business re-openings, production and related activity throughout the quarter varied based on geography, industry and regional COVID-19 pandemic conditions. The Company's major operational facilities and infrastructure (i.e., distribution centers, branches, and on-site logistic partners) are remaining operational with limited disruptions, while adhering to strict safety and social-distancing protocols. In addition, the Company has
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prioritized maintaining all facilities safe for customers and employees to work and interact. Many of our employees, depending on local conditions and regulations, have returned to a work-from-office environment, and we expect that trend to continue in the near term.
To date, the Company has been able to absorb the pandemic impact with minimal workforce reductions or furloughs, which positions the Company for accelerated growth post-pandemic. The oil and gas industry continues to be impacted by the COVID-19 pandemic, but there are signs that the world is beginning to re-open and that overall economic and demand recovery is building. Demand for oil has increased globally as oil inventories were down in March 2021 near their five-year averages, and the Organization of Petroleum Exporting Countries and the expanded alliance, collectively known as OPEC+, actions continued to support commodity prices. We see these as positive signs for our businesses tied to capital budgets and oil markets in general.
As of the end of the first quarter of 2021, we have remained undrawn on our $135 million bank revolver; and it remains available for use in the event a need arises. In response to easing restrictions and the continued vaccination efforts, we continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that we have remained nimble and are poised to remain opportunistic during the recovery.
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RESULTS OF OPERATIONS
(in thousands, except percentages and per share data)
DXP is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS"). The Service Centers are engaged in providing maintenance, repair and operating ("MRO") products, equipment and integrated services, including technical expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery. The Service Centers provide a wide range of MRO products and services in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The SCS segment provides a wide range of MRO products and manages all or part of our customer's supply chain function, and inventory management. The IPS segment fabricates and assembles integrated pump system packages custom made to customer specifications, remanufactures pumps and manufactures branded private label pumps.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | % | 2020 | % | ||||||||||||||||||||
| Sales | $ | 245,616 | 100.0 | % | $ | 300,983 | 100.0 | % | |||||||||||||||
| Cost of sales | 174,007 | 70.8 | % | 216,998 | 72.1 | % | |||||||||||||||||
| Gross profit | $ | 71,609 | 29.2 | % | $ | 83,985 | 27.9 | % | |||||||||||||||
| Selling, general and administrative expenses | 65,397 | 26.6 | % | 73,070 | 24.3 | % | |||||||||||||||||
| Impairment and other charges | — | — | % | — | — | % | |||||||||||||||||
| Income (loss) from operations | $ | 6,212 | 2.5 | % | $ | 10,915 | 3.6 | % | |||||||||||||||
| Other (income) expense, net | (430) | (0.2) | % | (834) | (0.3) | % | |||||||||||||||||
| Interest expense | 5,243 | 2.1 | % | 4,377 | 1.5 | % | |||||||||||||||||
| Income (loss) before income taxes | $ | 1,399 | 0.6 | % | $ | 7,372 | 2.4 | % | |||||||||||||||
| Provision for income taxes (benefit) | 1,271 | 0.5 | % | 1,724 | 0.6 | % | |||||||||||||||||
| Net income (loss) | $ | 128 | 0.1 | % | $ | 5,648 | 1.8 | % | |||||||||||||||
| Net income (loss) attributable to noncontrolling interest | (212) | — | (62) | — | |||||||||||||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | 340 | 0.1 | % | $ | 5,710 | 1.8 | % | |||||||||||||||
| Per share amounts attributable to DXP Enterprises, Inc. | |||||||||||||||||||||||
| Basic earnings (loss) per share | 0.02 | $ | 0.32 | ||||||||||||||||||||
| Diluted earnings (loss) per share | 0.02 | $ | 0.31 | ||||||||||||||||||||
Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020
SALES. Sales for the three months ended March 31, 2021 decreased $55.4 million, or 18.4%, to approximately $245.6 million from $301.0 million for the prior year's corresponding period. Sales from businesses acquired in December 2020 accounted for $28.4 million of the sales for the three months ended March 31, 2021. This overall sales decrease is the result of a decrease in sales in our IPS and SCS segments of $46.8 million and $12.4 million, partially offset by an increase in sales of $3.8 million in our SC segment. The fluctuations in sales are further explained in our business segment discussions below.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | Change | Change% | ||||||||||||||||||||
| Sales by Business Segment | (in thousands, except change%) | ||||||||||||||||||||||
| Service Centers | $ | 186,398 | $ | 182,585 | $ | 3,813 | 2.1 | % | |||||||||||||||
| Innovative Pumping Solutions | 23,245 | 70,021 | (46,776) | (66.8) | % | ||||||||||||||||||
| Supply Chain Services | 35,973 | 48,377 | (12,404) | (25.6) | % | ||||||||||||||||||
| Total DXP Sales | $ | 245,616 | $ | 300,983 | $ | (55,367) | (18.4) | % | |||||||||||||||
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Service Centers segment. Sales for the Service Centers segment increased by approximately $3.8 million, or 2.1% for the three months ended March 31, 2021 compared to the prior year's corresponding period. Excluding $28.4 million of first quarter 2021 Service Centers segment sales from businesses acquired in December 2020, Service Centers segment sales for the first quarter decreased $24.6 million, or 13.5% from the prior year's corresponding period. This sales decrease is primarily the result of decreased sales of metal working, safety supply products and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic.
Innovative Pumping Solutions segment. Sales for the IPS segment decreased by $46.8 million, or 66.8% for the three months ended March 31, 2021 compared to the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to the negative economic impacts of the COVID-19 pandemic.
Supply Chain Services segment. Sales for the SCS segment decreased by $12.4 million, or 25.6%, for the three months ended March 31, 2021, compared to the prior year's corresponding period. The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the negative economic impacts of the COVID-19 pandemic.
GROSS PROFIT. Gross profit as a percentage of sales for the three months ended March 31, 2021 increased by approximately 125 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired in December 2020, gross profit as a percentage of sales increased by approximately 105 basis points. The increase in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 616 basis point increase in the gross profit percentage in our IPS segment, a 52 basis point increase in the gross profit percentage in our SC segment and a 22 basis point increase in the gross profit percentage in our SCS segment.
Innovative Pumping Solutions segment. As a percentage of sales, the first quarter gross profit percentage for the IPS segment increased approximately 616 basis points from the prior year's corresponding period. The increase in gross profit percentage is due to a mix shift (higher margin international work and domestic water and wastewater projects) as well as the shipment of negative gross profit percentage work completing in 2020. Gross profit dollars decreased $12.1 million primarily as a result of a decrease in utilization as a result of significantly reduced capital expenditure budgets by our customers associated with the negative economic impacts of the COVID-19 pandemic.
Service Centers segment. As a percentage of sales, the first quarter gross profit percentage for the Service Centers increased approximately 71 basis points and increased approximately 52 basis points, adjusting for the businesses acquired, from the prior year's corresponding period. This was primarily as a result of sales mix and price increases from vendors. Gross profit for the Service Centers segment excluding businesses acquired decreased $6.3 million, or 11.9%, during the first quarter of 2021 compared to the prior year’s corresponding period. The decrease in gross profit is primarily the result of the decline in sales due to the items discussed above.
Supply Chain Services segment. Gross profit as a percentage of sales for the SCS segment increased approximately 22 basis points compared to the prior year's corresponding period. Gross profit for the first quarter of 2020 decreased $2.7 million or 24.9% compared to the prior year's corresponding period, primarily the result of the decline in sales due to the items discussed above.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the three months ended March 31, 2021 decreased by approximately $7.7 million, or 10.5%, to $65.4 million from $73.1 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $4.9 million. Excluding expenses from businesses acquired in December 2020, SG&A for the quarter decreased by $12.6 million, or 17.2%. The overall decrease in SG&A is primarily the result of decreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of decreased business activity and cost reduction actions associated with the COVID-19 pandemic and depressed demand in oil and gas markets.
OPERATING INCOME. Operating income for the first quarter of 2021 decreased by $4.7 million to $6.2 million, from $10.9 million in the prior year's corresponding period. This decrease in operating income is primarily related to the above mentioned decrease in sales.
INTEREST EXPENSE. Interest expense for the first quarter of 2021 increased $0.9 million compared with the prior year's corresponding period primarily due to a higher principal balance for the three months ended March 31, 2021 compared to the
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prior year's corresponding period as a result of the Company entering into a new term loan in December 2020 partially offset by lower LIBOR rates for the three months ended March 31, 2021.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 90.9 percent for the three months ended March 31, 2021 compared to a tax expense of 23.3 percent for the three months ended March 31, 2020. Compared to the U.S. statutory rate for the three months ended March 31, 2020, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions which required an increase in reserves. The effective tax rate was partially offset by research and development tax credits and other tax credits.
LIQUIDITY AND CAPITAL RESOURCES
General Overview
As of March 31, 2021, we had cash and cash equivalents of $127.5 million and credit facility availability of $131.2 million. We have a $135.0 million asset-based loan facility, offset by letters of credit of $3.8 million, that is due to mature in August 2022, under which we had no borrowings outstanding as of March 31, 2021 and a Term Loan B with $329.2 million in borrowings.
Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of financing. As a distributor of MRO products and services and fabricator of custom pumps and packages, working capital can fluctuate as a result of changes in inventory levels, accounts receivable and costs in excess of billings for project work. Additional cash is required for capital items for information technology, warehouse equipment, leasehold improvements, pump manufacturing equipment and safety services equipment. We also require cash to pay our lease obligations and to service our debt.
The following table summarizes our net cash flows generated by or used in operating activities, net cash provided by or used in investing activities and net cash used in financing activities for the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net Cash Provided by (Used in): | |||||||||||
| Operating Activities | $ | 10,552 | $ | (1,612) | |||||||
| Investing Activities | 617 | (17,388) | |||||||||
| Financing Activities | (1,365) | (742) | |||||||||
| Effect of Foreign Currency | 204 | (1,730) | |||||||||
| Net Change in Cash | $ | 10,008 | $ | (21,472) | |||||||
Operating Activities
The Company generated $10.6 million of cash in operating activities during the three months ended March 31, 2021 compared to $1.6 million use of cash during the prior year's corresponding period. The $12.2 million increase in the amount of cash provided between the two periods was primarily driven by the collections of receivables associated with trade accounts receivables and reductions in long-term project work which resulted in lower costs in-excess of billings.
Investing Activities
For the three months ended March 31, 2021, net cash provided by investing activities was $0.6 million compared to $17.4 million use of cash during the prior year’s corresponding period. This $18.0 million increase was primarily driven by the purchase of PSI and Turbo in the first quarter of 2020. For the three months ended March 31, 2021, purchases of property and equipment decreased to approximately $0.7 million compared to $3.2 million in 2020 primarily due to reduced capital spending as a result of company-wide cost cutting measures in response to the COVID-19 pandemic. The current quarter also benefited from the sale of a corporate asset totaling $1.3 million.
Financing Activities
For the three months ended March 31, 2021, net cash used in financing activities was $1.4 million, compared to net cash used in financing activities of $0.7 million during the prior year’s corresponding period. The activity in the period was primarily attributed to Term Loan B required prepayments of $0.8 million in 2021 compared to $0.6 million in 2020 and tax withholding payments for employee stock awards of $0.5 million in 2021 compared to $0.1 million in 2020.
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On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $135.0 million asset-backed revolving line of credit (the "ABL Revolver"), a $50.0 million increase from the $85.0 million available under the original revolver. During the three months ended March 31, 2021, the amount available to be borrowed under our credit facility decreased to $131.2 million compared to $131.9 million at December 31, 2020.
We believe this is adequate funding to support working capital needs within the business.
Funding Commitments
We intend to pursue additional acquisition targets, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be determined with certainty. We continue to expect to fund future acquisitions primarily with cash flows from operations and borrowings, including the undrawn portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us.
We believe our cash generated from operations will meet our normal working capital needs during the next twelve months. However, we may require additional debt outside of our credit facilities or equity financing to fund potential acquisitions. Such additional financings may include additional bank debt or the public or private sale of debt or equity securities. In connection with any such financing, we may issue securities that substantially dilute the interests of our shareholders.
DISCUSSION OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
Critical accounting and business policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's subjective or complex judgments. These policies have been discussed with the Audit Committee of the Board of Directors of DXP.
The Company's condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The accompanying Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE"). The accompanying unaudited Condensed Consolidated Financial Statements have been prepared on substantially the same basis as our annual Consolidated Financial Statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2020. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of results expected for the full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 - Recent Accounting Pronouncements to the Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk, see Item 7A, 'Quantitative and Qualitative Disclosures About Market Risk,' of our Annual Report on Form 10-K for the year ended December 31, 2020. Our exposures to market risk have not changed materially since December 31, 2020.
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ITEM 4: CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is reported, processed, and summarized within the time periods specified in the SEC’s rules and forms. As of March 31, 2021, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of March 31, 2021.
Changes in Internal Control over Financial Reporting
There are no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors as previously disclosed in “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K for the year end December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
A summary of our purchases of DXP Enterprises, Inc. common stock during the first quarter of fiscal year 2021 is as
follows:
| Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||
| Jan 1 - Jan 31 | 17,443 | $ | 22.23 | — | $ | — | |||||||||||
Feb 1 - Feb 28 | 835 | $ | 24.61 | — | $ | — | |||||||||||
Mar 1 - Mar 31 | 3,578 | $ | 30.45 | — | $ | — | |||||||||||
| Total | 21,856 | $ | 23.67 | — | $ | — | |||||||||||
| (1) | Represents shares employees elected to have withheld to satisfy their tax liabilities related to restricted stock vested. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award | ||||||||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
| 3.3 | |||||
| * 10.1 | |||||
| * 22.1 | |||||
| * 31.1 | |||||
| *101 | |||||
| *104 | |||||
Exhibits designated by the symbol * are filed or furnished with this Quarterly Report on Form 10-Q. All exhibits not so designated are incorporated by reference to a prior filing with the Commission as indicated.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DXP ENTERPRISES, INC.
(Registrant)
By: /s/ Kent Yee
Kent Yee
Senior Vice President and Chief Financial Officer
(Duly Authorized Signatory and Principal Financial Officer)
Dated: May 10, 2021
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