DXP Enterprises(DXPE) - 2020 Q3 - Quarterly Report

Part I: Financial Information Financial Statements The company reported a significant net loss in Q3 and first nine months of 2020, driven by sales decline and a $48.4 million impairment charge, despite increased operating cash flow Statements of Operations and Comprehensive Income%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) DXP reported a net loss of $34.8 million in Q3 2020 and $27.0 million for the nine months, driven by a 32.7% sales decrease and a $48.4 million impairment charge Q3 and Nine Months 2020 vs 2019 Performance (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Sales | $220,193 | $327,178 | $772,577 | $971,721 | | Gross Profit | $61,301 | $92,704 | $214,982 | $268,891 | | Impairment & Other Charges | $48,401 | $0 | $48,401 | $0 | | Income (Loss) from Operations | ($40,846) | $21,717 | ($23,178) | $59,380 | | Net Income (Loss) | ($34,775) | $13,150 | ($27,047) | $33,687 | | Diluted EPS | ($1.95) | $0.71 | ($1.52) | $1.84 | Balance Sheets%20Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to $736.7 million as of Sep 30, 2020, primarily due to a $27.7 million goodwill reduction, while cash increased to $97.3 million Balance Sheet Comparison (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash | $97,287 | $54,203 | | Goodwill | $166,375 | $194,052 | | Total Assets | $736,718 | $788,220 | | Total Liabilities | $413,164 | $443,272 | | Total Equity | $323,554 | $344,948 | Statements of Cash Flows%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased to $92.2 million for the first nine months of 2020, driven by working capital management Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $92,240 | $7,485 | | Net Cash used in Investing Activities | ($20,525) | ($14,212) | | Net Cash used in Financing Activities | ($27,942) | ($5,444) | | Net Change in Cash | $43,052 | ($11,958) | Notes to Financial Statements%20Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail the $48.4 million impairment charge due to COVID-19 and oil price collapse, segment performance, debt structure, and recent acquisitions, including increased ABL revolver capacity - The company performed an interim goodwill impairment test during Q3 2020 due to a significant decline in its market capitalization, driven by the collapse of oil prices and the COVID-19 pandemic[30] Impairment and Other Charges - Q3 2020 (in thousands) | Charge Type | Amount | | :--- | :--- | | Long-lived asset impairments | $4,775 | | Goodwill impairments | $36,435 | | Inventory and work-in-progress costs | $7,191 | | Total | $48,401 | - Goodwill impairment of $36.4 million was recorded, with $16.0 million for the Innovative Pumping Solutions unit and $20.5 million for the Canadian reporting unit[31][34][35] - In March 2020, the company increased its asset-backed revolving line of credit (ABL Revolver) by $50 million to a total of $135 million. As of September 30, 2020, borrowing capacity was $114.3 million[59] - The company completed two acquisitions in early 2020: Pumping Systems, Inc. ("PSI") and Turbo Machinery Repair ("Turbo") for a total consideration of $16.2 million in cash and stock[73][74][75] Management's Discussion and Analysis (MD&A) Management attributes the 32.7% Q3 sales decline to COVID-19 and oil price collapse, implementing cost cuts and enhancing liquidity, while generating strong operating cash flow despite net loss Current Market Conditions and Outlook The business faced significant impacts from COVID-19 and oil price declines, leading to capital spending cuts, with DXP implementing mitigation efforts and maintaining an essential business status - The COVID-19 outbreak drove a sharp erosion in demand for crude oil, and a failure by OPEC+ to agree on production cuts in March decimated oil prices, leading to severe capital spending budget cuts by customers[84] - Mitigation efforts include increasing the ABL revolver to $135 million, reducing discretionary expenditures, and suspending the company's matching contributions to retirement plans[85] - DXP has been exempted as an 'essential' business under various government orders, allowing warehouses and regional distribution centers to remain open with enhanced safety measures[86] Results of Operations Q3 2020 sales fell 32.7% to $220.2 million, with Innovative Pumping Solutions down 73.4%, leading to a $40.8 million operating loss due to sales decline and a $48.4 million impairment charge Sales by Business Segment - Q3 2020 vs Q3 2019 (in thousands) | Segment | Q3 2020 | Q3 2019 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Service Centers | $164,900 | $193,727 | ($28,827) | (14.9)% | | Innovative Pumping Solutions | $21,876 | $82,169 | ($60,293) | (73.4)% | | Supply Chain Services | $33,417 | $51,282 | ($17,865) | (34.8)% | | Total DXP Sales | $220,193 | $327,178 | ($106,985) | (32.7)% | - The sales decrease in the Service Centers segment was primarily due to reduced demand for metal working, safety supply products, and bearings from customers in the OEM oil and gas markets[93] - Selling, General & Administrative (SG&A) expenses decreased by $17.2 million (24.3%) due to lower payroll, incentive compensation, and other cost reduction actions[100] - Operating income decreased by $62.6 million to a loss of $40.8 million, primarily due to the decline in sales and the $48.4 million impairment charge[104] Liquidity and Capital Resources As of Sep 30, 2020, the company maintained strong liquidity with $97.4 million cash and $114.3 million ABL facility availability, with operating cash flow reaching $92.2 million for the nine months - As of September 30, 2020, the company had cash and cash equivalents of $97.4 million and credit facility availability of $114.3 million[123] Net Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Operating Activities | $92,240 | $7,485 | | Investing Activities | ($20,525) | ($14,212) | | Financing Activities | ($27,942) | ($5,444) | - The $84.8 million year-over-year increase in cash from operations was primarily driven by collections of trade accounts receivables and decreased inventory purchases[127] - In May 2020, the company entered into an "at the market" equity distribution agreement to sell up to $37.5 million in common stock, raising net proceeds of approximately $1.1 million during the nine-month period[130] Quantitative and Qualitative Disclosures about Market Risk The company's exposures to market risk have not materially changed since December 31, 2019 - The company's exposures to market risk have not changed materially since December 31, 2019[140] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[142] - There were no changes in internal control over financial reporting during the nine months ended September 30, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[143] Part II: Other Information Legal Proceedings The company is involved in various legal proceedings but believes their resolution will not materially adversely affect its financial position, cash flows, or operations - While unable to predict the outcome of various legal proceedings, DXP believes the ultimate resolution will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations[147] Risk Factors Key risks include business disruptions from the COVID-19 pandemic, a cyber-attack in August 2020, vulnerability to sustained low oil prices, and potential loss of key personnel - The COVID-19 pandemic has caused and could continue to cause supply chain disruptions, decreased customer demand, and lower oil prices, negatively impacting the business[150][151] - The company's computer network was the target of a cyber-attack in August 2020. While the costs to remedy were not material, it highlights the vulnerability to such threats[149] - A significant portion of revenue depends on expenditures in the oil and gas industry; sustained low oil prices could continue to adversely affect revenues[157] - The unexpected loss of the executive management team or other key employees, with risk heightened by the COVID-19 pandemic, could adversely impact the company[153][155] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2020, the company repurchased common stock shares solely to satisfy tax withholding obligations for employee equity awards, not as part of a public program - In Q3 2020, the company withheld 1,202 shares of common stock, at an average price of $19.14, to satisfy tax withholding obligations for employee equity awards[159] Default upon Senior Securities The company reported no defaults upon senior securities during the period - None[161] Mine Safety Disclosures The company reported no mine safety disclosures for the period - None[162] Other Information The company reported no other information for the period - None[164] Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, CEO and CFO certifications, and financial data in iXBRL format - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002[167][168] - Financial statements and notes were submitted in Inline eXtensible Business Reporting Language (iXBRL) format[169]