DXP Enterprises(DXPE) - 2022 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION ITEM 1. Financial Statements This section provides the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and equity, along with comprehensive explanatory notes Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) Condensed Consolidated Statements of Operations and Comprehensive Income (Three Months Ended March 31, in thousands, except per share) | Metric (in thousands, except per share) | 2022 | 2021 | | :-------------------------------------- | :-------- | :------ | | Sales | $319,411 | $245,587| | Gross profit | $94,884 | $71,630 | | Income from operations | $21,559 | $6,233 | | Income before income taxes | $15,861 | $1,420 | | Net income | $12,529 | $159 | | Net income attributable to DXP | $12,642 | $371 | | Basic Earnings per share | $0.68 | $0.02 | | Diluted Earnings per share | $0.65 | $0.02 | | Comprehensive income | $14,198 | $1,650 | Unaudited Condensed Consolidated Balance Sheets%20Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (as of, in thousands) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------ | :------------- | :---------------- | | Total current assets | $412,565 | $404,574 | | Total assets | $902,315 | $894,227 | | Total current liabilities | $177,980 | $181,062 | | Total long-term liabilities | $364,208 | $366,438 | | Total liabilities | $542,188 | $547,500 | | Total DXP Enterprises, Inc. equity | $360,187 | $346,674 | | Total equity | $360,127 | $346,727 | Unaudited Condensed Consolidated Statements of Cash Flows%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, in thousands) | Cash Flow Activity (in thousands) | 2022 | 2021 | | :-------------------------------- | :-------- | :------ | | Net cash from operating activities| $2,680 | $8,577 | | Net cash (used in) investing activities | $(6,056) | $617 | | Net cash used in financing activities | $(9,322) | $(1,365)| | Net change in cash and restricted cash | $(12,430) | $8,033 | | Cash and restricted cash at end of period | $36,650 | $127,452| Unaudited Condensed Consolidated Statements of Equity%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Equity) Condensed Consolidated Statements of Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Balance at Mar 31, 2022 | | :----------------------------------- | :---------------------- | :---------------------- | | Total equity | $346,727 | $360,127 | | Net income | | $12,529 | | Currency translation adjustment | | $1,669 | | Purchase of treasury stock | | $(1,513) | Notes to Unaudited Condensed Consolidated Financial Statements%20Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) NOTE 1 - THE COMPANY This note describes DXP Enterprises, Inc.'s business as a distributor of MRO products and services, and a fabricator of pump solutions, operating through three segments - DXP Enterprises, Inc. distributes maintenance, repair, and operating (MRO) products and services, and provides integrated pump skid packages, pump remanufacturing, and private label pumps to industrial and energy customers[19] - The Company operates through three business segments: Service Centers (SC), Supply Chain Services (SCS), and Innovative Pumping Solutions (IPS)[19] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES This note outlines the basis of financial statement preparation, adhering to US GAAP, and references the annual report for comprehensive policy details - The financial statements are prepared in accordance with US GAAP and include wholly-owned subsidiaries and a variable interest entity (VIE)[20] - These unaudited condensed consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021[20] NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS This note discusses the expected impact of recent accounting pronouncements, including ASU 2020-04 and ASU 2021-08, on the Company's financial statements - ASU 2020-04 (Reference Rate Reform) is not expected to have a material impact on the Consolidated Financial Statements[22] - ASU 2021-08 (Business Combinations - Contract Assets and Liabilities) will be effective for fiscal years beginning after December 15, 2022, and is expected to impact future acquisitions involving project-based work[23][24] NOTE 4 - REVISION This note details the correction of an immaterial error in goodwill translation for Canadian subsidiaries, leading to revisions in prior period financial statements - Errors were identified in the translation of goodwill for Canadian subsidiaries, resulting in an overstatement of US dollar-based goodwill in prior years[27] - The errors were deemed immaterial to prior period consolidated financial statements, and corrections were made by revising the financial statements presented in this report[28] Impacts of Revisions on Financial Statements (as of December 31, 2021, in thousands) | Metric (in thousands) | As previously Reported | Adjustments | Revised | | :------------------------------ | :--------------------- | :---------- | :-------- | | Goodwill | $308,506 | $(11,965) | $296,541 | | Total Assets | $906,192 | $(11,965) | $894,227 | | Cumulative Translation Adjustment | $(17,317) | $(11,965) | $(29,282) | | Equity | $358,692 | $(11,965) | $346,727 | NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES This note explains the classification of financial assets and liabilities into fair value hierarchy levels and details the measurement of contingent consideration from acquisitions - The Company classifies financial assets and liabilities into Level 1, 2, or 3 based on the observability of inputs used in fair value measurement[34][35][36] - Contingent consideration from acquisitions (PMI, Burlingame, Drydon) is measured using Level 3 unobservable inputs, totaling $4.125 million as of March 31, 2022[37][38][40] NOTE 6 – INVENTORIES This note provides a breakdown of the Company's inventory balances, categorized into finished goods and work in process, as of the reporting dates Inventories (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :---------------- | :------------- | :---------------- | | Finished goods | $83,655 | $80,329 | | Work in process | $28,207 | $20,565 | | Total Inventories | $111,862 | $100,894 | NOTE 7 – CONTRACT ASSETS AND LIABILITIES This note defines contract assets and liabilities, explaining their origin from timing differences between revenue recognition and customer billing or advances - Contract assets ('Costs and estimated profits in excess of billings') arise when billing occurs subsequent to revenue recognition, primarily in the IPS segment[43] - Contract liabilities ('Billings in excess of costs and estimated profits') occur when customer advances or deposits are received before revenue recognition[43] Net Contract Assets and Liabilities (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------------- | :------------- | :---------------- | | Costs and estimated profits in excess of billings | $20,504 | $17,193 | | Billings in excess of costs and estimated profits | $(5,328) | $(3,581) | | Net | $15,167 | $13,613 | NOTE 8 – INCOME TAXES This note details the effective tax rate and the factors influencing it, including state and foreign taxes, non-deductible expenses, and R&D tax credits - The effective tax rate from continuing operations was 21.0% for the three months ended March 31, 2022, a significant decrease from 90.9% in the prior year period[47] - Factors influencing the effective tax rate include state and foreign taxes, nondeductible expenses, uncertain tax positions, and research and development tax credits[47] NOTE 9 – LONG-TERM DEBT This note provides details on the Company's long-term debt, including Term Loan B and ABL Revolver, and confirms compliance with financial covenants Long-Term Debt (in thousands) | Debt Type | March 31, 2022 (Carrying Value) | December 31, 2021 (Carrying Value) | | :-------------- | :------------------------------ | :--------------------------------- | | Term Loan B | $325,875 | $326,700 | | ABL Revolver | $0 | $0 | | Total long-term debt | $325,875 | $326,700 | - As of March 31, 2022, the Company had $132.2 million of borrowing capacity under its $135.0 million ABL Revolver, with no outstanding amounts[49] - The Company was in compliance with all financial covenants under the ABL Revolver and Term Loan B Agreements as of March 31, 2022, and December 31, 2021[52] NOTE 10 - EARNINGS PER SHARE DATA This note presents the basic and diluted earnings per share data for the three months ended March 31, for both current and prior year periods Earnings Per Share (Three Months Ended March 31) | EPS Type | 2022 | 2021 | | :------- | :---- | :---- | | Basic | $0.68 | $0.02 | | Diluted | $0.65 | $0.02 | NOTE 11 - COMMITMENTS AND CONTINGENCIES This note addresses the Company's involvement in legal proceedings, stating that their resolution is not expected to materially impact financial results - The Company is involved in various legal proceedings in the ordinary course of business, but the ultimate resolution is not expected to have a material adverse effect on its financial position, cash flows, or results of operations[54] NOTE 12 - SEGMENT REPORTING This note provides financial information by the Company's three reportable segments: Service Centers, Innovative Pumping Solutions, and Supply Chain Services - The Company's three reportable segments are Service Centers (MRO products and services), Innovative Pumping Solutions (custom pump packages, remanufacturing, private label pumps), and Supply Chain Services (MRO products and supply chain management)[55] Total Revenue by Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | | :------------------------------- | :-------- | :-------- | | Service Centers (SC) | $218,797 | $186,369 | | Innovative Pumping Solutions (IPS) | $53,058 | $23,245 | | Supply Chain Services (SCS) | $47,556 | $35,973 | | Total Revenue | $319,411 | $245,587 | Income from Operations by Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | | :------------------------------- | :-------- | :-------- | | Service Centers (SC) | $27,351 | $22,137 | | Innovative Pumping Solutions (IPS) | $7,069 | $947 | | Supply Chain Services (SCS) | $4,020 | $2,323 | | Total Operating Income for segments | $38,440 | $25,407 | NOTE 13 - BUSINESS ACQUISITIONS This note details the acquisitions of Drydon Equipment, Inc. and Burlingame Engineers, Inc., including the consideration transferred and the resulting goodwill - On March 1, 2022, DXP acquired Drydon Equipment, Inc. and certain assets of Burlingame Engineers, Inc., both serving the water and wastewater industry[60][61] - The total acquisition-date fair value of consideration transferred for both businesses was $9.0 million, consisting of cash, stock, and future consideration[62] - Goodwill for these transactions totaled approximately $4.7 million, primarily attributable to expected synergies and the assembled workforce[63][64] NOTE 14 - SHARE REPURCHASE This note outlines the Board-authorized share repurchase program and details the share repurchase activity during the first quarter of 2022 - The Board authorized a share repurchase program in May 2021 for up to $85.0 million or 1.5 million shares[68] Share Repurchase Activity (Three Months Ended March 31, 2022) | Metric | Value | | :---------------------- | :-------- | | Total shares purchased | 58.9 thousand | | Amount paid | $1,511 thousand | | Average price per share | $25.66 | NOTE 15 - SUBSEQUENT EVENT This note reports the acquisition of Cisco Air Systems, Inc. on May 3, 2022, and its funding sources - On May 3, 2022, the Company acquired Cisco Air Systems, Inc. for approximately $45 million, funded by cash, DXP stock, and a draw on the ABL[70] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section offers management's analysis of the Company's financial performance, market conditions, operational results, liquidity, and capital resources for the three months ended March 31, 2022 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This section highlights that the report contains forward-looking statements subject to various risks, including the COVID-19 pandemic, geopolitical conflicts, and supply chain issues - The report contains forward-looking statements regarding future performance, profitability, cash flow, liquidity, and growth, subject to various risks and uncertainties[74] - Key risk factors include the impact of the COVID-19 pandemic, the Ukrainian/Russia conflict, commodity prices (especially oil and gas), supply chain issues, and the ability to integrate acquisitions[74] CURRENT MARKET CONDITIONS AND OUTLOOK This section describes DXP's market position as an MRO distributor and pump fabricator, and discusses the impact of global economic factors on its segments - DXP is a business-to-business distributor of MRO products and services, and a fabricator of custom pump packages, primarily in North America[75] - The Company has no direct exposure to the Ukrainian-Russia conflict but is monitoring its broader impact on the global economy, including inflation, supply chains, and energy prices[76] - Significant inflationary pressures on commodity and labor markets due to economic recovery and supply chain issues are generally passed on to customers[77][79] - The Service Centers and Supply Chain Services segments expect continued improvement correlated with industrial production, with Q1 2022 sales up 19.8% over Q1 2021[83] - The Innovative Pumping Solutions segment saw a 128.3% sales increase in Q1 2022, benefiting from increased capital spending by oil and gas producers and recent acquisitions[84] RESULTS OF OPERATIONS This section analyzes the Company's financial performance, including sales, gross profit, operating income, and effective tax rate, for the three months ended March 31, 2022 Sales by Business Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | Change | Change % | | :------------------------------- | :-------- | :-------- | :-------- | :-------- | | Service Centers | $218,797 | $186,369 | $32,428 | 17.4 % | | Innovative Pumping Solutions | $53,058 | $23,245 | $29,813 | 128.3 % | | Supply Chain Services | $47,556 | $35,973 | $11,583 | 32.2 % | | Total DXP Sales | $319,411 | $245,587 | $73,824 | 30.1 % | - Overall sales increased by $73.8 million (30.1%) to $319.4 million for the three months ended March 31, 2022, with $13.1 million from acquired businesses[86] - Gross profit as a percentage of sales increased to 29.7% in Q1 2022 from 29.2% in Q1 2021, primarily due to increased project activity in the IPS segment[92] - Selling, General and Administrative (SG&A) expenses increased by $7.9 million (12.1%) to $73.3 million, with $2.2 million from acquisitions, driven by increased payroll and incentive compensation[96] - Operating income significantly increased by $15.3 million to $21.6 million, reflecting increased business activity across all segments[97] - The effective tax rate was 21.0% for Q1 2022, compared to 90.9% for Q1 2021, influenced by state/foreign taxes, non-deductible expenses, and R&D tax credits[99] LIQUIDITY AND CAPITAL RESOURCES This section assesses the Company's liquidity, including cash balances and credit facility availability, and analyzes cash flow activities from operations, investing, and financing - As of March 31, 2022, the Company had $36.7 million in cash and restricted cash, and $132.2 million in credit facility availability under its ABL Revolver[100] - Net cash provided by operating activities decreased to $2.7 million in Q1 2022 from $8.6 million in Q1 2021, primarily due to increased project work activity[102][103] - Net cash used in investing activities was $6.1 million in Q1 2022, compared to $0.6 million generated in Q1 2021, mainly due to the Drydon and Burlingame acquisitions[102][104] - Net cash used in financing activities increased to $9.3 million in Q1 2022 from $1.4 million in Q1 2021, driven by share repurchase installment payments and new share purchases[102][105] - The Company expects to fund future acquisitions primarily with cash flows from operations and borrowings, potentially including new debt or equity issuances[109][110] DISCUSSION OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES This section directs readers to the 2021 Annual Report on Form 10-K for a comprehensive discussion of the Company's significant accounting policies - The unaudited condensed financial statements are prepared in accordance with US GAAP and should be read in conjunction with the 2021 Annual Report on Form 10-K for a complete discussion of accounting policies[112] RECENT ACCOUNTING PRONOUNCEMENTS This section refers to Note 3 of the Condensed Consolidated Financial Statements for information on recent accounting pronouncements - Information regarding recent accounting pronouncements is provided in Note 3 to the Condensed Consolidated Financial Statements[113] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section confirms no material changes to the Company's quantitative and qualitative market risk disclosures since the 2021 Annual Report on Form 10-K - There have been no material changes to the Company's market risk exposures since December 31, 2021[114] ITEM 4. Controls and Procedures This section evaluates the effectiveness of disclosure controls and procedures, identifying material weaknesses in internal control over financial reporting and outlining remediation efforts Effectiveness of Disclosure Controls and Procedures This section concludes that the Company's disclosure controls were ineffective as of March 31, 2022, due to identified material weaknesses - The Company's disclosure controls and procedures were not effective as of March 31, 2022, due to identified material weaknesses in internal control over financial reporting[116] - Despite the material weaknesses, management concluded that the condensed consolidated financial statements are fairly stated in all material respects[117] Material Weaknesses in Internal Control Over Financial Reporting This section identifies material weaknesses related to ineffective controls over unvouchered purchase order receipts and the application of percentage-of-completion accounting - A material weakness was identified related to ineffective controls over the timely clearing of discrepancies from the three-way-match process for unvouchered purchase order receipts[118] - Another material weakness was identified concerning the application of percentage-of-completion (POC) accounting, specifically regarding the completeness, accuracy, and occurrence of revenue recognition for project-based contracts[119] REMEDIATION PLAN FOR MATERIAL WEAKNESSES This section outlines the Company's remediation plan, including process changes for unmatched items and a comprehensive plan for the POC accounting weakness - The Company has implemented process changes to limit the accumulation of unmatched items and is developing a comprehensive remediation plan for the POC accounting material weakness, expected to extend through fiscal year 2022[120] Changes in Internal Control Over Financial Reporting This section confirms that no other material changes in internal control over financial reporting were identified beyond the disclosed material weaknesses - Except for the material weaknesses described, no other changes in internal control over financial reporting were identified that materially affected or are reasonably likely to materially affect internal control over financial reporting[121] PART II: OTHER INFORMATION ITEM 1. Legal Proceedings This section confirms the Company's involvement in ordinary course legal proceedings, which are not expected to materially impact its financial position or results - Legal proceedings are not expected to have a material adverse effect on DXP's financial position, cash flows, or results of operations[125] ITEM 1A. Risk Factors This section reports no material changes to the risk factors previously disclosed in the Company's 2021 Annual Report on Form 10-K - No material changes to the risk factors have occurred since the 2021 Annual Report on Form 10-K[126] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the issuance of unregistered equity securities for acquisitions and summarizes common stock repurchase activities during Q1 2022 Recent Sales of Unregistered Securities This section reports the issuance of unregistered common shares as consideration for the Drydon and Burlingame acquisitions on March 1, 2022 - DXP issued 18,263 unregistered common shares for the acquisition of Drydon and 3,581 unregistered common shares for the acquisition of Burlingame on March 1, 2022[127][128] Issuer Purchases of Equity Securities This section summarizes the Company's common stock repurchase activities during the first quarter of 2022 and the remaining authorization under the program Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------- | :------------------------------- | :--------------------------- | | Jan 1 - Jan 31 | 58,927 | $25.66 | | Feb 1 - Feb 28 | 842 | $29.27 | | Mar 1 - Mar 31 | 4,646 | $28.30 | | Total (Q1 2022) | 64,415 | | - As of March 31, 2022, $49.982 million or 256 thousand shares remained available under the $85.0 million Share Repurchase Program[130] ITEM 3. Default upon Senior Securities This section confirms that no defaults upon senior securities occurred during the reporting period - There were no defaults upon senior securities[131] ITEM 4. Mine Safety Disclosures This section confirms that no mine safety disclosures are required for the reporting period - There are no mine safety disclosures[132] ITEM 5. Other Information This section indicates that no other information requires disclosure - No other information is reported[134] ITEM 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, agreements, certifications, and iXBRL financial information - The exhibits include Restated Articles of Incorporation, Bylaws, Indemnification Agreements, Subsidiary Guarantors, and certifications from the CEO and CFO[136][137][138] - Financial information for the quarter ended March 31, 2022, is provided in Inline eXtensible Business Reporting Language (iXBRL) format[139]