DXP ENTERPRISES INC
10-Ks and 10-Qs
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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, 2022: 18,642,621 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Sales | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Income from operations | |||||||||||
| Other (income) expense | ( | ||||||||||
| 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, 2022 | December 31, 2021 | ||||||||||
| 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 | |||||||||||
| Federal income taxes payable | |||||||||||
| 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 | ( | ( | |||||||||
Treasury stock, at cost | ( | ( | |||||||||
| 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| 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 | |||||||||||
| Restricted stock compensation expense | |||||||||||
| Deferred income taxes | |||||||||||
| Net change in operating assets and liabilities | ( | ||||||||||
| Net cash provided by 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 (used in) provided by investing activities | $ | ( | $ | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Principal debt payments | ( | ( | |||||||||
| Preferred Stock dividends paid | ( | ( | |||||||||
| Purchase of treasury stock | ( | ||||||||||
| 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 | $ | $ | |||||||||
| Supplemental schedule of non-cash investing and financing activities: | |||||||||||
Shares issued for acquisitions (Note 13) | $ | $ | |||||||||
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 | Treasury stock | Non controlling interest | Accum other comp loss | Total equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Preferred dividends paid | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Tax related items for share based awards | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Series A preferred stock | Series B preferred stock | Common stock | Paid-in capital | Retained earnings | Treasury stock | Non controlling interest | Accum other comp loss | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividends paid | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock compensation expense | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Tax related items for share based awards | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares of common stock | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||
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 unaudited 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, 2021. 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 April 5, 2022. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of results expected for the full fiscal year. In the opinion of management, these unaudited 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, 2022 and March 31, 2021, condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, condensed consolidated statements of cash flows for the three months ended March 31, 2022 and March 31, 2021, and condensed consolidated statements of equity for the three months ended March 31, 2022 and March 31, 2021. 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 evaluated the impact of this ASU and it does not expect a material impact on the Consolidated Financial Statements.
In October 2021, the FASB issued Accounting Standards Update (ASU) 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to address diversity in practice on how an acquirer should recognize and measure revenue contracts acquired in a business combination. ASU 2021-08 will require an acquirer to recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
For the Company, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The ASU should be applied prospectively to business combinations occurring on or after the effective date. Early adoption of ASU 2021-08 is permitted, including in an interim period. The Company expects the new Standard to have an impact for future acquisitions. From time to time the Company does acquire businesses that perform project-based work and therefore include Contract Assets and Liabilities.
7
NOTE 4 - REVISION
During the first quarter of 2022, we identified errors in the translation of the goodwill associated with our investment in our Canadian subsidiaries. We determined that we were not appropriately translating Canadian goodwill in consolidation since acquiring these businesses in 2012 and 2013. The failure to translate these balances resulted in an overstatement of US dollar-based goodwill for several years.
We assessed the materiality of the errors on prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the errors were not material to our prior period consolidated financial statements and therefore, amendments of previously filed consolidated financial statements are not required. In accordance with ASC 250, we have corrected the errors by revising the consolidated financial statements presented herein. Prior periods not presented herein will be revised, as applicable, in future filings.
The impacts of the revisions on the periods presented herein are provided in the following tables.
| Three Months Ended March 31, 2021 | ||||||||||||||
| As previously | ||||||||||||||
| Reported | Adjustments | Revised | ||||||||||||
| CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | ||||||||||||||
| Currency translation adjustments | $ | $ | $ | |||||||||||
| Total comprehensive income | $ | $ | $ | |||||||||||
| As previously | ||||||||||||||
| Reported | Adjustments | Revised | ||||||||||||
| BALANCE SHEET (AT DECEMBER 31, 2021): | ||||||||||||||
| Goodwill | $ | $ | ( | $ | ||||||||||
| Total Assets | $ | $ | ( | $ | ||||||||||
| Cumulative Translation Adjustment | $ | ( | $ | ( | $ | ( | ||||||||
| Equity | $ | $ | ( | $ | ||||||||||
| Total Liabilities & Equity | $ | $ | ( | $ | ||||||||||
| Accumulated Other Comprehensive Loss | ||||||||||||||
| As previously | ||||||||||||||
| Reported | Adjustments | Revised | ||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF EQUITY | ||||||||||||||
| Balance at December 31, 2020 | $ | ( | $ | ( | $ | ( | ||||||||
| Currency translation adjustment | $ | $ | $ | |||||||||||
| Balance at March 31, 2021 | $ | ( | $ | ( | $ | ( | ||||||||
| Balance at December 31, 2021 | $ | ( | $ | ( | $ | ( | ||||||||
8
NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories:
Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include managements assumptions about the likelihood of payment based on the established benchmarks and discount rates based on an internal rate of return analysis. The fair value measurement includes inputs that are Level 3 inputs as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumptions used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured each reporting period and reflected in our results of operations.
As of March 31, 2022, we recorded liabilities in other current and long-term liabilities for contingent consideration associated with the acquisition of PMI, Burlingame and Drydon of $1.4 million, $0.1 million and $2.6 million, respectively. See further discussion at Note 13 - Business Acquisitions. For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the three months ended March 31, 2022:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||
| Contingent Liability for Accrued Consideration | |||||
| (in thousands) | |||||
| Beginning balance at December 31, 2021 | $ | ||||
| Acquisitions and settlements | |||||
| Settlements | |||||
| Total remeasurement adjustments: | |||||
| Changes in fair value recorded in other (income) expense, net | |||||
| *Ending Balance at March 31, 2022 | $ | ||||
The amount of total (gains) or losses for the quarter included in earnings or changes to net assets, attributable to changes in unrealized losses relating to liabilities still held at March 31, 2022. | $ | ||||
| * Included in other current liabilities | |||||
9
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
| (in thousands, unaudited) | Fair value at March 31, 2022 | Valuation Technique | Significant Unobservable Inputs | ||||||||
| Contingent consideration: (PMI, Burlingame and Drydon acquisitions) | $ | Discounted cash flow | Annualized EBITDA and probability of achievement | ||||||||
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of PMI, Burlingame and Drydon are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results. The discount rate used in the calculation was 7.6 %. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement.
NOTE 6 – INVENTORIES
The carrying values of inventories are as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Inventories | $ | $ | |||||||||
NOTE 7 – CONTRACT ASSETS AND LIABILITIES
Under our customized pump production and long-term water and wastewater project 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 unaudited condensed consolidated balance sheets.
Costs and estimated profits on uncompleted contracts and related amounts billed were as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Costs incurred on uncompleted contracts | $ | $ | |||||||||
| Estimated profits, thereon | |||||||||||
| Total | |||||||||||
| Less: billings to date | |||||||||||
| Net | $ | $ | |||||||||
10
Such amounts were included in the accompanying unaudited condensed consolidated balance sheets for March 31, 2022 and December 31, 2021 under the following captions (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| 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, 2022, $2 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 8 – INCOME TAXES
Our effective tax rate from continuing operations was a tax expense of 21.0 percent for the three months ended March 31, 2022 compared to a tax expense of 90.9 percent for the three months ended March 31, 2021. Compared to the U.S. statutory rate for the three months ended March 31, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded due to tax authorities’ auditing of research and development tax credits. The effective tax rate decreased by research and development tax credits and other tax credits. 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’ auditing of research and development tax credits. The effective tax rate decreased by research and development 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 9 – LONG-TERM DEBT
The components of the Company's long-term debt consisted of the following (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
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 $7.5 million and $8.0 million for March 31, 2022 and December 31, 2021, 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, 2017. As of March 31, 2022, the Company had no amount outstanding under the ABL Revolver and had $132.2 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.
11
NOTE 10 - 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, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| 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 11 - COMMITMENTS AND CONTINGENCIES
NOTE 12 - SEGMENT REPORTING
The Company's reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, repair and operating MRO products, equipment and integrated services, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, re-manufactures pumps, manufactures branded private label pumps and provides products and process lines for the water and wastewater treatment industries. 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.
12
The following table sets out financial information related to the Company's segments excluding amortization (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| SC | IPS | SCS | Total | SC | IPS | SCS | Total | ||||||||||||||||||||||||||||||||||||||||
Product sales1 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Inventory services2 | |||||||||||||||||||||||||||||||||||||||||||||||
Staffing services3 | |||||||||||||||||||||||||||||||||||||||||||||||
Pump production and delivery4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Income from operations5 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
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 and delivery is recognized over time.
5Income from operations excludes amortization of intangibles and corporate expenses.
The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Operating income for reportable segments | $ | $ | ||||||||||||
| Adjustment for: | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Corporate expenses | ||||||||||||||
| Income from operations | $ | $ | ||||||||||||
| Interest expense | ||||||||||||||
| Other (income) expense, net | ( | |||||||||||||
| Income before income taxes | $ | $ | ||||||||||||
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NOTE 13 - BUSINESS ACQUISITIONS
On March 1, 2022, the Company completed the acquisition of Drydon Equipment, Inc. (“Drydon”), a distributor and manufacturers’ representative of pumps, valves, controls and process equipment focused on serving the water and wastewater industry in the Midwest. The acquisition of Drydon was funded with cash on hand as well as issuing DXP's common stock. The Company paid approximately $7.9 million in cash and stock. A majority of Drydon's sales are project-based work under the percentage-of-completion accounting model. As a result, Drydon has been included in the IPS segment. For the three months ended March 31, 2022, Drydon contributed sales of $1.4 million and net income of $0.7 million. Goodwill for the transaction totaled approximately $4.1 million.
On March 1, 2022, the Company completed the acquisition of certain assets of Burlingame Engineers, Inc. (“Burlingame”), a provider of water and wastewater equipment in the industrial and municipal sectors. The Company paid approximately $1.1 million in cash, stock and future consideration. For the three months ended March 31, 2022, Burlingame contributed sales of $0.4 million and net income of $6 thousand.
Pro forma revenue and net income have been excluded as the amounts would have been immaterial to the consolidated results of the Company for the current and prior year.
In aggregate, the acquisition-date fair value of the consideration transferred for the two businesses totaled $9.0 million, which consisted of the following:
Purchase Price Consideration (in millions) | Total Consideration | |||||||
| Cash payments | $ | |||||||
| Fair value of stock issued | ||||||||
| Future consideration | ||||||||
| Total purchase price consideration | $ | |||||||
The fair value of the 21,844 common shares issued was determined based on the closing market price of the Company’s common shares on the acquisition date, adjusted for holding restrictions following consummation.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
| (In thousands) | ||||||||
| Cash | $ | |||||||
| Accounts receivable | ||||||||
| Other receivables | ||||||||
| Inventory | ||||||||
| Non-compete agreements | ||||||||
| Customer relationships | ||||||||
| Property and equipment | ||||||||
| Other assets | ||||||||
| Assets acquired | $ | |||||||
| Current liabilities assumed | ( | |||||||
| Net assets acquired | $ | |||||||
| Total Consideration | ( | |||||||
| Goodwill | $ | |||||||
Of the $2 million of acquired intangible assets, $0.2 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years, coincident with the terms of the agreements. In addition, $1.8 million was assigned to customer relationships, and will be amortized over a period of 8 years. The goodwill total of approximately $4.7 million is
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attributable primarily to expected synergies and the assembled workforce of each entity and is generally deductible for tax purposes.
The fair value of accounts receivables acquired is $2.7 million, which approximated book value.
The Company recognized less than $300,000 of acquisition related costs that were expensed in the current period. These costs are included in the Condensed Consolidated Statements of Operations and Comprehensive Income in Selling, General and Administrative costs. The Company also recognized an immaterial amount in costs associated with issuing the shares issued as consideration in the business combination. Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity.
NOTE 14 - SHARE REPURCHASE
On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $85.0 million or 1.5 million shares of its outstanding common stock may be acquired in the open market over the next 24 months at the discretion of management. During the three months ended March 31, 2022, the Company repurchased 58.9 thousand shares of common stock for $1.5 million at an average price of $25.66 per share.
Total consideration paid to repurchase the shares was recorded in shareholders’ equity as treasury shares. Such consideration was funded with existing cash balances and an agreement to pay sellers over four equal quarterly installments beginning on June 15, 2021. The remaining one installment totaling $6.8 million was included in other current liabilities as of March 31, 2022.
| Three Months Ended March 31, | ||||||||
| (in thousands, except per share data) | 2022 | |||||||
| Total number of shares purchased | ||||||||
| Amount paid | $ | |||||||
| Average price paid per share | $ | |||||||
NOTE 15 - SUBSEQUENT EVENT
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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, 2022 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, the Ukrainian/Russia conflict and the impact on commodity prices; particularly 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 of 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 industry capital expenditure levels, which may result from decreased oil and natural gas prices or other factors, economic risks related to the long-term 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 April 5, 2022. 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
DXP Enterprises, Inc. is a business-to-business distributor of maintenance, repair and operating and production ("MRO") products and services to a variety of customers in different end markets primarily across North America. Additionally, we fabricate, remanufacture and assemble custom pump packages along with manufacturing branded private label pumps.
Ukrainian - Russia Conflict
In February 2022, Russia invaded Ukraine. DXP has no direct exposure to Russia or Ukraine, however, the Company continues to monitor any broader impact in the global economy, including inflation and cost pressures, supply chains and energy prices. The full impact of the conflict on the Company’s business and financial results remains uncertain and will depend on the severity and duration of the war and its impact on global economic conditions.
Inflation
As the world recovered and reopened during fiscal 2021, and continuing into the current fiscal year, the global commodity and labor markets experienced significant inflationary pressures attributable to economic recovery and supply chain issues tightening caused by the COVID-19 pandemic and the Ukrainian-Russia conflict mentioned above. These inflationary trends increased the cost of many of the products we buy. As a distributor, we often remain neutral to inflation as those costs are generally passed
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onto customers. The Company was able to implement these and other strategies designed to mitigate some of the adverse effects of higher costs during the first quarter of fiscal 2022 while also remaining price competitive.
COVID-19 Pandemic Impact
The COVID-19 pandemic began in the first quarter of 2020 and continued throughout the first quarter of fiscal 2022, causing significant disruptions in the U.S. and global markets. While the ongoing recovery continues, it has been accompanied by a resurgence in demand as industries return to regular operations, which continues to disrupt supply chains, transportation efficiency, product and labor availability. The full extent and long-term impacts on the Company’s business and financial results will depend on several uncertain and unpredictable developments including any continued spread of the virus and its variants, the availability and effectiveness of treatments and vaccines, imposition of protective public safety measures and the overall impact of government measures to combat the spread of the virus. We are not able to predict whether our customers will continue to operate at their current or historical levels, and such decreases in their operations would have a negative impact on our business. We are also unable to predict how long the COVID-19 pandemic will last and the impact of the pandemic on future demand for our products and services.
For additional discussion of the potential impact of the COVID-19 pandemic on our business, see Part I, Item 1A: Risk Factors in the Company’s 2021 Form 10-K.
Matters Affecting Comparability
There were 64 business days in the three months ended March 31, 2022 and 63 business days in the three months ended March 31, 2021.
Outlook
Service Centers & Supply Chain Services Segments
The replacement and mission-critical nature of our products and services within the Company's Service Centers and Supply Chain Services business segments and industrial and manufacturing environments and processes drives a demand and outlook that are correlated with global, national and regional industrial production, capacity utilization and long-term GDP growth. Long-term economic conditions remain uncertain with regard to COVID-19 and its impact on various end markets, however, recent order activity improved as markets strengthened and restrictions and mandates were lifted. In the first quarter of 2022, we had approximately $266.4 million in sales in our Service Centers and Supply Chain Services segment, an increase of approximately 19.8 percent over the first quarter of 2021. We expect financial results to continually improve with interim periods of potential setback should new variants arise or other economic headwinds prevail.
Innovative Pumping Solutions Segment
In the first quarter of 2022, we had approximately $53.1 million in sales in our Innovative Pumping Solutions segment, an increase of approximately $29.8 million over the first quarter of 2021, of which $9.1 million was associated with recent acquisitions in the water and wastewater market. Beginning in the latter half of 2021, we began to see an improvement in the demand for oil and natural gas as the roll out of the COVID-19 vaccinations gradually improved around the globe and pandemic restrictions eased. The increasing optimism related to oil & gas demand recovery led to higher commodity prices. Although demand levels remained below pre-pandemic levels, there is growing confidence of returning to 2019 levels in the coming years. In the first quarter of 2022, the Ukrainian-Russia conflict caused further disruption in the global oil and gas supply and spurred price increases around the world. These forces contributed to higher spend by oil and gas producers and thus an increase in oil & gas projects within our Innovative Pumping Solutions segment. We expect to benefit from the increased activity throughout 2022.
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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, | |||||||||||||||||||||||
| 2022 | % | 2021 | % | ||||||||||||||||||||
| Sales | $ | 319,411 | 100.0 | % | $ | 245,587 | 100.0 | % | |||||||||||||||
| Cost of sales | 224,527 | 70.3 | % | 173,957 | 70.8 | % | |||||||||||||||||
| Gross profit | $ | 94,884 | 29.7 | % | $ | 71,630 | 29.2 | % | |||||||||||||||
| Selling, general and administrative expenses | 73,325 | 23.0 | % | 65,397 | 26.6 | % | |||||||||||||||||
| Impairment and other charges | — | — | % | — | — | % | |||||||||||||||||
| Income from operations | $ | 21,559 | 6.7 | % | $ | 6,233 | 2.5 | % | |||||||||||||||
| Other (income) expense, net | 536 | 0.2 | % | (430) | (0.2) | % | |||||||||||||||||
| Interest expense | 5,162 | 1.6 | % | 5,243 | 2.1 | % | |||||||||||||||||
| Income before income taxes | $ | 15,861 | 5.0 | % | $ | 1,420 | 0.6 | % | |||||||||||||||
| Provision for income taxes | 3,332 | 1.0 | % | 1,261 | 0.5 | % | |||||||||||||||||
| Net income | $ | 12,529 | 3.9 | % | $ | 159 | 0.1 | % | |||||||||||||||
| Net loss attributable to noncontrolling interest | (113) | — | (212) | — | |||||||||||||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | 12,642 | 4.0 | % | $ | 371 | 0.2 | % | |||||||||||||||
| Per share amounts attributable to DXP Enterprises, Inc. | |||||||||||||||||||||||
| Basic earnings per share | 0.68 | $ | 0.02 | ||||||||||||||||||||
| Diluted earnings per share | 0.65 | $ | 0.02 | ||||||||||||||||||||
Three Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021
SALES. Sales for the three months ended March 31, 2022 increased $73.8 million, or 30.1 percent, to approximately $319.4 million from $245.6 million for the prior year's corresponding period. Sales from businesses acquired for three months ended March 31, 2022, accounted for $13.1 million of the sales for the three months ended March 31, 2022. This overall sales increase is the result of an increase in sales in our SC, IPS and SCS segments of $32.4 million, $29.8 million and $11.6 million, respectively. The fluctuations in sales are further explained in our business segment discussions below.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | Change% | ||||||||||||||||||||
| Sales by Business Segment | (in thousands, except 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 | % | |||||||||||||||
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Service Centers segment. Sales for the SC segment increased by approximately $32.4 million, or 17.4 percent for the three months ended March 31, 2022 compared to the prior year's corresponding period. Excluding $4.0 million of Service Centers segment sales associated with recent acquisitions, sales increased $28.4 million from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment, safety supplies, metal working, and bearings and power transmission products to customers engaged in variety of markets as a result of the lifting of pandemic restrictions and a return to normal production and activity.
Innovative Pumping Solutions segment. Sales for the IPS segment increased by $29.8 million, or 128.3 percent, for the three months ended March 31, 2022 compared to the prior year's corresponding period. Excluding $9.1 million of IPS segment sales from recent acquisitions, IPS segment sales increased $20.7 million from the prior year's corresponding period. This increase was primarily the result of an increase in the capital spending by oil and gas producers and related businesses.
Supply Chain Services segment. Sales for the SCS segment increased by $11.6 million, or 32.2 percent, for the three months ended March 31, 2022, compared to the prior year's corresponding period. The improved sales is primarily related to increased sales to customers in the food & beverage, general manufacturing and aerospace industries as pandemic restrictions subsided and the economy rebounded.
GROSS PROFIT. Gross profit as a percentage of sales for the three months ended March 31, 2022 was 29.7 percent versus 29.2 percent in the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales was 29.5 percent. The increase in the gross profit percentage excluding the businesses acquired is primarily the result of an increase in overall project activity within our IPS segment.
Service Centers segment. As a percentage of sales, the first quarter gross profit percentage for the SC segment increased approximately 127 basis points. Adjusting for the businesses acquired, gross profit as a percentage of sales increased approximately 133 basis points from the prior year's corresponding period. This was primarily was a result of volume increases and product mix. Gross profit for the SC segment, excluding businesses acquired, increased $11.3 million, or 20.4 percent, during the three months ended March 31, 2022 compared to the prior year’s corresponding period.
Innovative Pumping Solutions segment. As a percentage of sales, the first quarter gross profit percentage for the IPS segment decreased approximately 493 basis points. Adjusting for the business acquired, gross profit as a percentage of sales decreased approximately 645 basis points from the prior year's corresponding period. The decrease in gross profit percentage is primarily due to a mix shift (higher margin international work and domestic water and wastewater projects). Gross profit dollars increased $4.4 million compared to the prior year corresponding period, excluding business acquired, primarily as a result of an increase in project work as a result of an increase in capital spending by our customers.
Supply Chain Services segment. Gross profit as a percentage of sales for the SCS segment increased approximately 80 basis points compared to the prior year's corresponding period. Gross profit for the first quarter of 2022 increased $3.0 million or 36.8% compared to the prior year's corresponding period.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the three months ended March 31, 2022 increased by approximately $7.9 million, or 12.1%, to $73.3 million from $65.4 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $2.2 million. Excluding expenses from businesses acquired, SG&A for the quarter increased by $5.7 million, or 8.7%. The increase in SG&A excluding businesses acquired is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity associated with recovery from the negative economic impacts of the COVID-19 pandemic.
OPERATING INCOME. Operating income for the first quarter of 2022 increased by $15.3 million to $21.6 million, from $6.2 million in the prior year's corresponding period. This increase in operating income is primarily related to the aforementioned increased business activity across all segments.
INTEREST EXPENSE. Interest expense for the first quarter of 2022 increased $0.1 million compared with the prior year's corresponding period .
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INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 21.0 percent for the three months ended March 31, 2022 compared to a tax expense of 90.9 percent for the three months ended March 31, 2021. Compared to the U.S. statutory rate for the three months ended March 31, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded due to tax authorities’ auditing of research and development tax credits. The effective tax rate was decreased by research and development tax credits and other tax credits. 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’ auditing of research and development tax credits. The effective tax rate was decreased by research and development tax credits and other tax credits.
LIQUIDITY AND CAPITAL RESOURCES
General Overview
As of March 31, 2022, we had cash and restricted cash of $36.7 million and credit facility availability of $132.2 million. We have a $135.0 million asset-based loan ("ABL") facility, partially offset by letters of credit of $2.8 million, that is due to mature in August 2022, under which we had no borrowings outstanding as of March 31, 2022 and a Term Loan B with $325.9 million in borrowings. The Company intends to amend and extend the ABL prior to the August deadline.
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 operating activities, net cash used in investing activities and net cash used in financing activities for the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Cash Provided by (Used in): | |||||||||||
| Operating Activities | $ | 2,680 | $ | 8,577 | |||||||
| Investing Activities | (6,056) | 617 | |||||||||
| Financing Activities | (9,322) | (1,365) | |||||||||
| Effect of Foreign Currency | 268 | 204 | |||||||||
| Net Change in Cash | $ | (12,430) | $ | 8,033 | |||||||
Operating Activities
The Company generated $2.7 million of cash from operating activities during the three months ended March 31, 2022 compared to $8.6 million of cash generated during the prior year's corresponding period. The $5.9 million decrease in the amount of cash provided between the two periods was primarily driven by the increase in project work activity during the period. Cash is generally used to fund project costs in excess of amounts billed.
Investing Activities
For the three months ended March 31, 2022, net cash used in investing activities was $6.1 million compared to $0.6 million cash generated during the prior year’s corresponding period. This $6.7 million increase was primarily driven by the purchase of Drydon and Burlingame in March 2022. The prior year period also benefited from the sale of a corporate asset totaling $1.3 million without comparable activity in the current year.
Financing Activities
For the three months ended March 31, 2022, net cash used in financing activities was $9.3 million, compared to net cash used in financing activities of $1.4 million during the prior year’s corresponding period. The activity in the period was primarily attributed to share repurchase installment payment of $6.8 million related to shares repurchased in 2021 and share purchases in 2022 of $1.5 million.
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On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $85.0 million or 1.5 million shares of its outstanding common stock may be acquired in the open market over the next 24 months at the discretion of management. During the three months ended March 31, 2022 we purchased 59 thousand shares for approximately $1.5 million. Such consideration was funded with existing cash balances and an agreement to pay sellers over four equal quarterly installments beginning on June 15, 2021. The remaining installment of $6.8 million was included in other current liabilities as of March 31, 2022.
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 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 the Company.
The Company believes cash generated from operations will meet normal working capital needs during the next twelve months. However, the Company 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, the Company may issue securities that 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 unaudited condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The accompanying unaudited 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, 2021. 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 April 5, 2022. The results of operations for the three months ended March 31, 2022 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.
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, 2021. Our exposures to market risk have not changed materially since December 31, 2021.
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ITEM 4: CONTROLS AND PROCEDURES.
With the participation of management, our principal executive officer and principal financial officer carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of March 31, 2022 because of the material weaknesses in internal control over financial reporting described below.
Notwithstanding these material weaknesses, our management, including our principal executive officer and principal financial officer, has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our financial statements for 2020 and 2021, we identified certain control deficiencies in the design and operation of our internal control over financial reporting that constituted material weaknesses. The material weaknesses are:
Material weakness related to unvouchered purchase order receipts: We did not design and maintain effective controls over the timely clearing of discrepancies arising from our three-way-match process. Specifically, controls were not designed appropriately to ensure that aged items were properly cleared from the sub-ledger and ultimately accounts payable. This material weakness resulted in a restatement of previously reported results related to periods prior to December 31, 2020. Additionally, this material weakness could result in a misstatement of accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Material weakness related to the application of percentage-of-completion (“POC”) accounting: We did not design or maintain effective controls over the completeness, accuracy, occurrence or determination of revenue recognized under the percentage-of-completion input method for our project-based businesses. Specifically, controls were not designed or maintained to ensure accuracy of the costs-to-date and estimates of the cost-to-complete for certain project-based contracts. In addition, clerical errors were noted in the determination of revenue recognized under the POC method. This material weakness resulted in immaterial audit adjustments related to revenue and related contract assets and liabilities during the year ended December 31, 2021. Additionally, this material weakness could result in a misstatement of accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
REMEDIATION PLAN FOR MATERIAL WEAKNESSES
To date we have implemented several process changes to limit the accumulation and aging of unmatched items. We continue to enhance policies and systems to timely clear discrepancies and prevent an accumulation of balances. Additionally, management is currently in the process of developing and implementing changes as a part of a comprehensive remediation plan to address the material weakness related to the application of POC accounting. We believe the remediation activities will extend through the remainder of fiscal year 2022.
Changes in Internal Control Over Financial Reporting
Except as described above, there were no changes in internal control over financial reporting identified in the evaluation for the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
DXP Enterprises, Inc. issued 18,263 unregistered shares of DXP Enterprises, Inc.’s common stock as part of the consideration for the March 1, 2022 acquisition of Drydon. The unregistered shares were issued to the sellers of Drydon.
DXP Enterprises, Inc. issued 3,581 unregistered shares of DXP Enterprises, Inc.’s common stock as part of the consideration for the March 1, 2022 acquisition of Burlingame. The unregistered shares were issued to the sole seller of Burlingame.
We relied on Section 4(a)(2) of the Securities Exchange Act as a basis for exemption from registration. All issuances were as a result of private negotiation, and not pursuant to public solicitation. In addition, we believe the shares were issued to “accredited investors” as defined by Rule 501 of the Securities Act.
Issuer Purchases of Equity Securities
A summary of our purchases of DXP Enterprises, Inc. common stock during the first quarter of fiscal year 2022 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 (2) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (2) | ||||||||||||||
| Jan 1 - Jan 31 | 58,927 | $ | 25.66 | 58,887 | $ | 49,982 | |||||||||||
Feb 1 - Feb 28 | 842 | 29.27 | 49,982 | ||||||||||||||
Mar 1 - Mar 31 | 4,646 | 28.30 | 49,982 | ||||||||||||||
| Total | 64,415 | 58,887 | 49,982 | ||||||||||||||
| (1) | There were 5,528 shares transferred from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock during three months ended March 31, 2022. | ||||||||||||||||
| (2) | On May 12, 2021, the Company announced the Share Repurchase Program pursuant to which we may repurchase up to $85.0 million or 1.5 million shares of the Company's outstanding common stock over the next 24 months. As of March 31, 2022, $50 million or 256 thousand shares remained available under the $85.0 million Share Repurchase Program. | ||||||||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. MINE SAFETY DISCLOSURES.
None.
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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 13, 2022
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TABLE OF CONTENTS
Part I: Financial InformationItem 1: Financial StatementsNote 1 - The CompanyNote 2 - Summary Of Significant Accounting and Business PoliciesNote 3 - Recent Accounting PronouncementsNote 4 - RevisionNote 5 - Fair Value Of Financial Assets and LiabilitiesNote 6 InventoriesNote 7 Contract Assets and LiabilitiesNote 8 Income TaxesNote 9 Long-term DebtNote 10 - Earnings Per Share DataNote 11 - Commitments and ContingenciesNote 12 - Segment ReportingNote 13 - Business AcquisitionsNote 14 - Share RepurchaseNote 15 - Subsequent EventItem 2: Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3: Quantitative and Qualitative Disclosures About Market RiskItem 4: Controls and ProceduresPart Ii: Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits