DXP Enterprises(DXPE) - 2019 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for DXP Enterprises, Inc Financial Statements The unaudited condensed consolidated financial statements show revenue and net income growth, increased total assets due to lease accounting, and slightly decreased operating cash flow Condensed Consolidated Statements of Operations and Comprehensive Income%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) This statement details the company's sales, gross profit, operating income, and net income for the three and nine months ended September 30, 2019 and 2018 Q3 & Nine Months 2019 Financial Performance (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Sales | $327,178 | $308,028 | $971,721 | $905,191 | | Gross Profit | $92,704 | $84,070 | $268,891 | $245,631 | | Income from Operations | $21,717 | $16,813 | $59,380 | $48,022 | | Net Income Attributable to DXP | $13,109 | $8,397 | $33,859 | $24,510 | | Diluted EPS | $0.71 | $0.46 | $1.84 | $1.33 | Condensed Consolidated Balance Sheets%20Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's assets, liabilities, and equity as of September 30, 2019, and December 31, 2018 Balance Sheet Summary (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash | $28,436 | $40,304 | | Inventories | $131,916 | $114,830 | | Operating lease ROU assets | $67,296 | $— | | Total Assets | $791,554 | $699,962 | | Long-term debt, net | $235,576 | $236,979 | | Long-term operating lease liabilities | $49,602 | $— | | Total Liabilities | $449,163 | $391,708 | | Total Equity | $342,391 | $308,254 | Condensed Consolidated Statements of Cash Flows%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2019 and 2018 Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,485 | $9,842 | | Net cash used in investing activities | ($14,212) | ($15,971) | | Net cash used in financing activities | ($5,444) | ($2,994) | | Net change in cash and restricted cash | ($11,958) | ($9,189) | Condensed Consolidated Statements of Equity%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Equity) This statement details changes in the company's total equity, primarily driven by net income, for the period - Total equity increased from $308.3 million at December 31, 2018, to $342.4 million at September 30, 2019. The increase was primarily driven by net income of $33.7 million for the nine-month period[19] Notes to Unaudited Condensed Consolidated Financial Statements%20Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes provide additional information and explanations regarding the company's business segments, accounting policies, and significant transactions - DXP Enterprises is a distributor of MRO products and services, organized into three business segments: Service Centers (SC), Supply Chain Services (SCS), and Innovative Pumping Solutions (IPS)[21] - Effective January 1, 2019, the company adopted the new lease accounting standard (ASC 842), resulting in the recognition of right-of-use (ROU) assets and lease liabilities of approximately $72 million each on the balance sheet[32][39] - As of September 30, 2019, the company had a contingent consideration liability of $2.9 million related to the acquisition of Application Specialties Inc. (ASI), which is measured at fair value using Level 3 inputs[54] Segment Revenue and Operating Income (in thousands) | Segment | Q3 2019 Revenue | Q3 2018 Revenue | 9M 2019 Op. Income | 9M 2018 Op. Income | | :--- | :--- | :--- | :--- | :--- | | Service Centers (SC) | $193,727 | $187,763 | $67,281 | $58,353 | | Innovative Pumping Solutions (IPS) | $82,169 | $76,662 | $28,924 | $24,109 | | Supply Chain Services (SCS) | $51,282 | $43,603 | $10,980 | $12,196 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, liquidity, and capital resources, highlighting sales growth and improved gross profit margins Results of Operations This section analyzes the company's sales, gross profit, and operating income performance for the three and nine months ended September 30, 2019 Q3 2019 vs Q3 2018 Performance | Metric | Q3 2019 | Q3 2018 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Sales | $327.2M | $308.0M | +$19.2M | +6.2% | | Gross Profit % | 28.3% | 27.3% | +104 bps | - | | Operating Income | $21.7M | $16.8M | +$4.9M | +29.2% | - Q3 2019 sales growth was driven by all segments: Supply Chain Services (+17.6%), Innovative Pumping Solutions (+7.2%), and Service Centers (+3.2%), largely due to increased capital spending by oil and gas producers[85][87][88][89] Nine Months 2019 vs Nine Months 2018 Performance | Metric | 9M 2019 | 9M 2018 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Sales | $971.7M | $905.2M | +$66.5M | +7.3% | | Gross Profit % | 27.7% | 27.1% | +54 bps | - | | Operating Income | $59.4M | $48.0M | +$11.4M | +23.7% | - For the first nine months of 2019, sales increased across all segments: Supply Chain Services (+18.5%), Innovative Pumping Solutions (+8.9%), and Service Centers (+4.2%)[99][100][102] Liquidity and Capital Resources This section details the company's cash position, borrowings, and cash flow activities, emphasizing operating cash flow as the primary capital source - As of September 30, 2019, the company had $28.6 million in cash and cash equivalents and $238.1 million in bank and other borrowings. The primary source of capital is cash flow from operations[113][114] Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Operating | $7,485 | $9,842 | | Investing | ($14,212) | ($15,971) | | Financing | ($5,444) | ($2,994) | - The decrease in cash from operations was primarily due to the timing of payments for trade accounts payable and inventory purchases. Cash used in investing was mainly for property and equipment purchases of $14.2 million[116][117] - The amount available for borrowing under the credit facility increased to $81.0 million as of September 30, 2019, from $79.3 million at year-end 2018[119] Quantitative and Qualitative Disclosures about Market Risk The company reports no material changes in its market risk exposures since the end of the prior fiscal year - There have been no material changes to the company's market risk exposures since the year ended December 31, 2018[127] Controls and Procedures Management concluded that disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of September 30, 2019[128] - The ineffectiveness is due to a material weakness in internal control over financial reporting previously identified in the 2018 Form 10-K, specifically related to the control environment and monitoring of certain accounts[129][131] - The company is committed to and continues to implement remediation plans to address the underlying causes of the material weaknesses[132] PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, other miscellaneous items, and a list of exhibits filed with the report Legal Proceedings The company is involved in various legal proceedings, none of which are expected to have a material adverse effect on its financial condition - DXP is party to various legal proceedings arising in the ordinary course of business, which are not expected to have a material adverse effect on the company's financial condition[137] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes have occurred from the risk factors disclosed in the company's 2018 Form 10-K[138] Other Items (2-5) The company reported no unregistered sales of equity securities, defaults, mine safety disclosures, or other information for the period - The company reported "None" for Item 2 (Unregistered Sales of Equity Securities), Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information)[140][142][143][145] Exhibits This section lists the exhibits filed with or incorporated by reference into the Form 10-Q, including corporate governance documents and certifications - The report lists exhibits filed, including CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and Interactive Data Files (101)[149][150][151]