On February 1, 2020, the Company completed the acquisition of Turbo Machinery Repair (“Turbo”), a pump and industrial equipment repair, maintenance, machining and labor services company. The Company paid approximately $3.2 million in cash. For the threesix months ended March 31,June 30, 2020, Turbo contributed sales of $0.5$1.2 million.
On January 1, 2020, the Company completed the acquisition of substantially all of the assets of Pumping Systems, Inc. (“PSI”), a distributor of pumps, systems and related services. The PSI acquisition was funded with a mixture of cash on hand as well as issuing DXP's common stock. The Company paid approximately $13.0 million in cash and stock. For the threesix months ended March 31,June 30, 2020, PSI contributed sales of $4.7$8.5 million.
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 and six months ended March 31,June 30, 2020 should be read in conjunction with our previous Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, and the consolidated financial statements and notes thereto included in such reports. The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements include without limitation those about the Company’s expectations regarding the impact of the COVID-19 pandemic and the impact of low commodity prices of oil and gas; the Company’s business, the Company’s future profitability, cash flow, liquidity, and growth. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "might", "estimates", "will", "should", "could", "would", "suspect", "potential", "current", "achieve", "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and actual results may vary materially from those discussed in the forward-looking statements or historical performance as a result of various factors. These factors include the effectiveness of management's strategies and decisions, our ability to implement our internal growth and acquisition growth strategies, general economic and business conditions specific to our primary customers, changes in government regulations, our ability to effectively integrate businesses we may acquire, new or modified statutory or regulatory requirements, availability of materials and labor, inability to obtain or delay in obtaining government or third-party approvals and permits, non-performance by third parties of their contractual obligations, unforeseen hazards such as weather conditions, acts or war or terrorist acts and the governmental or military response thereto, cyber-attacks adversely affecting our operations, other geological, operating and economic considerations and declining prices and market conditions, including reduced oil and gas prices and supply or demand for maintenance, repair and operating products, equipment and service, decreases in oil and natural gas prices, decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors, economic risks related to the impact of COVID-19, our ability to manage changes and the continued health or availability of management personnel, and our ability to obtain financing on favorable terms or amend our credit facilities as needed. This Report identifies other factors that could cause such differences. We cannot assure that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", included in this Report and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2020. 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
During the first quarter ofsix months ended June 30, 2020, the widely publicized and discussed coronavirus (COVID-19) outbreak rapidly spread across the world, driving a sharp erosion in demand destruction for crude oil and other products and services, as whole economies ordered curtailed activity. In response to declining demand for crude oil, members of the Organization of the Petroleum Exporting Countries and other producing countries (OPEC+), including Russia, met in early March to discuss additional production cuts to help stabilize prices. The group failed to reach an agreement, and production was instead increased into the already oversupplied market, decimating oil prices and rapidly filling worldwide oil storage facilities. OPEC+ eventually reached an agreement in April 2020 to reduce production, which had a muted effect on oil prices due to the belief that the cuts were significantly less than the demand destructionsdestruction caused by COVID-19. As a result, companies across the industry responded with severe capital spending budget cuts, cost cuts, personnel layoffs, facility closures and bankruptcy filings. The North American rig count has declined from over 1,2001,079 active rigs in MarchJuly of 2019 to only 435296 as of May 1,July 2020.
We have taken a number of mitigation efforts and proactive steps in response. We moved forward with our plans to increase our ABL revolver facility from $85 Million to $135 Million. In addition, we reduced certain discretionary expenditures;expenditures and suspended the Company’s matching contributions to retirement plans. We may take additional mitigation actions in the future such as raising additional financing or furloughs. Some of these measures may have an adverse impact on our businesses.
Throughout the COVID-19 pandemic crisis, we have continued to operate our business despite the challenges that arise from closing offices and operating our branch locations. Our use of technology and third party conferencing platforms have enabled our office employees to work from home, performing their job functions with little to no loss of productivity. We required our employees to work from home as a result of governmental isolation orders and, in many cases, in advance of those orders for the health and safety of our employees. For the most part, our warehouses and regional distribution centers have remained open. Under various isolation orders by national, state, provincial and local governments, we have been exempted as an “essential” business as the products we sell are necessary for the maintenance and functioning of the energy infrastructure and other industries. We have taken measures to safeguard the health and welfare of our employees, including social distancing measures while at work, certain screening, providing personal protection equipment such as gloves, face masks and hand sanitizer and sterilizing cleaning services at Company facilities. As various governmental isolation orders are lifted or phased out, we are reviewing our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact.
As a distribution business, we have also closely monitored the ability of our suppliers and transportation providers to continue the functioning of our supply chain. We have not experienced significant delays by transportation providers or significant delays in our supply chains. Our inventory position for most products has allowed us to continue supply to most customers with little interruption. In those instances where there is interruption, we are working with our customers to discuss the impact of the COVID-19 delay. We continue to monitor the situation and have ongoing dialogue with our vendors and customers regarding the status of impacted orders.
Management expects industry activity levels and spending by customers to decrease throughout the remainder of 2020 as oil supplies continue to increase and demand destruction from COVID-19 remains. A prolonged contraction of activity related to oil and gas and a long lasting economic impact from COVID-19 may have a further adverseadversely impact on our results and the carrying value of long-lived assets, inventory and related business segment goodwill. DXP remains committed to streamlining operations and improving organizational efficiencies while continuing to focus on delivering the products and services that remain in the Company’s backlog. We believe this strategy will further advance the Company’s competitive position, regardless of the market environment.
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. Over 90% of DXP's revenues represent sales of products.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | |
| 2020 | | % | | 2019 | | % |
Sales | $ | 251,401 | | | 100.0 | % | | $ | 333,318 | | | 100.0 | % |
Cost of sales | 181,705 | | | 72.3 | % | | 241,331 | | | 72.4 | % |
Gross profit | $ | 69,696 | | | 27.7 | % | | $ | 91,987 | | | 27.6 | % |
Selling, general and administrative expenses | 62,943 | | | 25.0 | % | | 69,140 | | | 20.7 | % |
Income from operations | $ | 6,753 | | | 2.7 | % | | $ | 22,847 | | | 6.9 | % |
Other (income) expense, net | 133 | | | 0.1 | % | | 185 | | | 0.1 | % |
Interest expense | 3,930 | | | 1.6 | % | | 4,885 | | | 1.5 | % |
Income before income taxes | $ | 2,690 | | | 1.1 | % | | $ | 17,777 | | | 5.3 | % |
Provision for income taxes (benefit) | 610 | | | 0.2 | % | | 4,427 | | | 1.3 | % |
Net income | $ | 2,080 | | | 0.8 | % | | $ | 13,350 | | | 4.0 | % |
Net (loss) income attributable to noncontrolling interest | (62) | | | — | | | (109) | | | — | |
Net income attributable to DXP Enterprises, Inc. | $ | 2,142 | | | 0.9 | % | | $ | 13,459 | | | 4.0 | % |
Per share amounts attributable to DXP Enterprises, Inc. | | | | | | | |
Basic earnings per share | 0.12 | | | | | $ | 0.76 | | | |
Diluted earnings per share | 0.12 | | | | | $ | 0.73 | | | |
|
| | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | % | | 2019 | | % |
Sales | $ | 300,983 |
| | 100.0 | % | | $ | 311,225 |
| | 100.0 | % |
Cost of sales | 216,998 |
| | 72.1 | % | | 227,025 |
| | 72.9 | % |
Gross profit | $ | 83,985 |
| | 27.9 | % | | $ | 84,200 |
| | 27.1 | % |
Selling, general and administrative expenses | 73,070 |
| | 24.3 | % | | 69,384 |
| | 22.3 | % |
Income from operations | $ | 10,915 |
| | 3.6 | % | | $ | 14,816 |
| | 4.8 | % |
Other (income) expense, net | (834 | ) | | (0.3 | )% | | (33 | ) | | — | % |
Interest expense | 4,377 |
| | 1.5 | % | | 5,040 |
| | 1.6 | % |
Income before income taxes | $ | 7,372 |
| | 2.4 | % | | $ | 9,809 |
| | 3.2 | % |
Provision for income taxes (benefit) | 1,724 |
| | 0.6 | % | | 2,622 |
| | 0.8 | % |
Net income | $ | 5,648 |
| | 1.9 | % | | $ | 7,187 |
| | 2.4 | % |
Net (loss) income attributable to noncontrolling interest | (62 | ) | | — |
| | (104 | ) | | — |
|
Net income attributable to DXP Enterprises, Inc. | $ | 5,710 |
| | 1.9 | % | | $ | 7,291 |
| | 2.4 | % |
Per share amounts attributable to DXP Enterprises, Inc. | | | | | | | |
Basic earnings per share | 0.32 |
| | | | $ | 0.41 |
| | |
Diluted earnings per share | 0.31 |
| | | | $ | 0.40 |
| | |
Three Months Ended March 31,June 30, 2020 compared to Three Months Ended March 31,June 30, 2019
SALES. Sales for the three months ended March 31,June 30, 2020 decreased $10.2$81.9 million, or 3.3%24.6%, to approximately $301.0$251.4 million from $311.2$333.3 million for the prior year's corresponding period. Sales from businesses acquired during the first quarter of 2020year accounted for $5.2 million.$4.5 million of the sales for the three months ended June 30, 2020. This overall sales decrease is the result of a decrease in sales in our SC, IPS SC and SCS segments of $4.7$46.1 million,$3.6 $20.5 million and $1.9$15.2 million, respectively. The fluctuations in sales is further explained in our business segment discussions below.
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| Three Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | Change | | Change% |
Sales by Business Segment | (in thousands, except change%) | | | | | | |
Service Centers | $ | 153,848 | | | $ | 199,978 | | | $ | (46,130) | | | (23.1) | % |
Innovative Pumping Solutions | 60,479 | | | 81,028 | | | (20,549) | | | (25.4) | % |
Supply Chain Services | 37,074 | | | 52,312 | | | (15,238) | | | (29.1) | % |
Total DXP Sales | $ | 251,401 | | | $ | 333,318 | | | $ | (81,917) | | | (24.6) | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | Change | | Change% |
Sales by Business Segment | (in thousands, except change%) |
Service Centers | $ | 182,585 |
| | $ | 186,179 |
| | $ | (3,594 | ) | | (1.9 | )% |
Innovative Pumping Solutions | 70,021 |
| | 74,723 |
| | (4,702 | ) | | (6.3 | )% |
Supply Chain Services | 48,377 |
| | 50,323 |
| | (1,946 | ) | | (3.9 | )% |
Total DXP Sales | $ | 300,983 |
| | $ | 311,225 |
| | $ | (10,242 | ) | | (3.3 | )% |
Service Centers segment. Sales for the Service Centers segment decreased by approximately $3.6$46.1 million, or 1.9%23.1% for the three months ended March 31,June 30, 2020 compared to the prior year's corresponding period. Excluding $5.2$4.5 million of firstsecond quarter 2020 Service Centers segment sales from businesses acquired, Service Centers segment sales for the firstsecond quarter in 2020 decreased $8.8$50.6 million, or 4.7%25.3% from the prior year's corresponding period. This sales decrease is primarily the result of decreased sales of metal working, safety supply products and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. If the U.S. crude oil production remain at levels experienced during the latter part of the quarter,We expect that this level of sales to the oil and gas industry will likely continue to decline.decline if U.S. crude oil production remains at levels experienced during the quarter. With a prolonged economic shutdown related to COVID-19, we will likely experience a further decline in overall segment sales.
Innovative Pumping Solutions segment. Sales for the IPS segment decreased by $4.7$20.5 million, or 6.3%25.4% for the three months ended March 31,June 30, 2020 compared to the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to low crude prices and the negative economic impacts of COVID-19. This level of IPS sales will likely continue to decline during the remainder of 2020 if the U.S. crude oil production remains at levels experienced during the first six months of 2020.
Supply Chain Services segment. Sales for the SCS segment decreased by $15.2 million, or 29.1%, for the three months ended June 30, 2020, compared to the prior year's corresponding period. The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic.
GROSS PROFIT. Gross profit as a percentage of sales for the three months ended June 30, 2020 increased by approximately 13 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales increased by approximately 15 basis points. The increase in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 292 basis point increase in the gross profit percentage in our SCS segment, partially offset by a 53 basis point decrease in the gross profit percentage in our SC segment and a 5 basis point decrease in the gross profit percentage in our IPS segment.
Innovative Pumping Solutions segment. As a percentage of sales, the second quarter gross profit percentage for the IPS segment increased approximately 5 basis points from the prior year's corresponding period primarily as a result of an increase in utilization and capacity within IPS' engineered-to-order business and an overall improvement in the pricing environment. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built-to-order customer specific products. Operating income for the IPS segment decreased $3.5 million or 28.8%, during the second quarter of 2020 compared to the prior year’s corresponding period. The decrease in operating income is primarily the result of the above-mentioned decrease in sales.
Service Centers segment. As a percentage of sales, the second quarter gross profit percentage for the Service Centers decreased approximately 59 basis points and decreased approximately 53 basis points, adjusting for the businesses acquired, from the prior year's corresponding period. This was primarily as a result of sales mix and price increases from vendors. Operating income for the Service Centers segment decreased $9.6 million, or 41.2%, during the second quarter of 2020 compared to the prior year’s corresponding period. . The decrease in operating income is primarily the result of the decline in sales due to the items discussed above.
Supply Chain Services segment. Gross profit as a percentage of sales for the SCS segment increased approximately 292 basis points, compared to the prior year's corresponding period. This was primarily as a result of costs associated with new customer implementation in 2019 with no comparable activity in 2020. Operating income for the second quarter of 2020 decreased $0.4 million compared to the prior year's corresponding period mainly due to the above- mentioned decrease in sales.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the three months ended June 30, 2020 decreased by approximately $6.2 million, or 9.0%, to $62.9 million from $69.1 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $1.2 million. Excluding expenses from businesses acquired, SG&A for the quarter decreased by $7.4 million, or 10.7%. The overall decrease in SG&A is primarily the result of decreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of decreased business activity and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets. Adjusting for the businesses acquired, the second quarter 2020 expense decreased 428 basis points to 25.0% from 20.7% for the prior year's corresponding period primarily as a result of the fixed cost leverage nature of SG&A.
OPERATING INCOME. Operating income for the second quarter of 2020 decreased by $16.1 million to $6.8 million, from $22.8 million in the prior year's corresponding period. This decrease in operating income is primarily related to the above mentioned decrease in sales discussed above.
INTEREST EXPENSE. Interest expense for the second quarter of 2020 decreased $1.0 million compared with the prior year's corresponding period due to lower LIBOR rates and a reduction in principal balance.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 22.9% for the three months ended June 30, 2020 compared to a tax expense of 24.9% for the three months ended June 30, 2019. Compared to the U.S. statutory rate for the three months ended June 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. 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 June 30, 2019, the effective tax rate was increased by state taxes, foreign taxes and nondeductible expenses. The effective tax rate was decreased by research and development tax credits and other tax credits.
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| Six Months Ended June 30, | | | | | | | |
| 2020 | | % | | 2019 | | % | |
Sales | $ | 552,384 | | | 100.0 | % | | $ | 644,543 | | | 100.0 | % | |
Cost of sales | 398,703 | | | 72.2 | % | | 468,356 | | | 72.7 | % | |
Gross profit | $ | 153,681 | | | 27.8 | % | | $ | 176,187 | | | 27.3 | % | |
Selling, general and administrative expenses | 136,013 | | | 24.6 | % | | 138,524 | | | 21.5 | % | |
Income from operations | $ | 17,668 | | | 3.2 | % | | $ | 37,663 | | | 5.8 | % | |
Other (income) expense, net | (701) | | | (0.1) | % | | 152 | | | — | % | |
Interest expense | 8,307 | | | 1.5 | % | | 9,925 | | | 1.5 | % | |
Income before income taxes | $ | 10,062 | | | 1.8 | % | | $ | 27,586 | | | 4.3 | % | |
Provision for income taxes (benefit) | 2,334 | | | 0.4 | % | | 7,049 | | | 1.1 | % | |
Net income | $ | 7,728 | | | 1.4 | % | | $ | 20,537 | | | 3.2 | % | |
Net loss attributable to noncontrolling interest | (124) | | | — | | | (213) | | | — | | |
Net income attributable to DXP Enterprises, Inc. | $ | 7,852 | | | 1.4 | % | | $ | 20,750 | | | 3.2 | % | |
Per share amounts attributable to DXP Enterprises, Inc. | | | | | | | | |
Basic earnings per share | $ | 0.44 | | | | | $ | 1.18 | | | | |
Diluted earnings per share | $ | 0.42 | | | | | $ | 1.13 | | | | |
Six Months Ended June 30, 2020 compared to Six Months Ended June 30, 2019
SALES. Sales for the six months ended June 30, 2020 decreased $92.2 million, or 14.3%, to approximately $552.4 million from $644.5 million for the prior year's corresponding period. This sales decrease is the result of a decrease in sales in our SC, IPS and SCS segments of $49.7 million, $25.3 million, and $17.2 million, respectively. The fluctuations in sales are further explained in our business segment discussions below.
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| Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | Change | | Change% |
Sales by Business Segment | (in thousands, except change%) | | | | | | |
Service Centers | 336,433 | | | 386,157 | | | $ | (49,724) | | | (12.9) | % |
Innovative Pumping Solutions | 130,500 | | | 155,751 | | | (25,251) | | | (16.2) | % |
Supply Chain Services | 85,451 | | | 102,635 | | | (17,184) | | | (16.7) | % |
Total DXP Sales | $ | 552,384 | | | $ | 644,543 | | | $ | (92,159) | | | (14.3) | % |
Service Centers segment. Sales for the Service Centers segment decreased by $49.7 million, or 12.9% for the six months ended June 30, 2020 compared to the prior year's corresponding period. Excluding $9.7 million of Service Center segment sales for the six months ended June 30, 2020 from businesses acquired, Service Centers segment sales decreased $59.5 million, or 15.4% from the prior year's corresponding period. This sales decrease is primarily the result of decreased sales of metal working, safety supply products and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. We expect that this level of sales to the oil and gas industry will likely continue to decline if U.S. crude oil production remains at levels experienced during the first six months of 2020. With a prolonged economic shutdown related to COVID-19, we will likely experience a further decline in overall segment sales.
Supply Chain Services segment. Sales for the SCS segment decreased by $17.2 million, or 16.7%, for the six months ended June 30, 2020, compared to the prior year's corresponding period. The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic.
Innovative Pumping Solutions segment. Sales for the IPS segment decreased by $25.3 million, or 16.2% for the six months ended June 30, 2020 compared to the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to low crude prices and the economic impacts of COVID-19. This level of IPS sales will likely continue to decline during the remainder of 2020 if the U.S. crude oil production remains at levels experienced during the first threesix months of 2020.
Supply Chain Services segment. Sales for the SCS segment decreased by $1.9 million, or 3.9%, for the three months ended March 31, 2020, compared to the prior year's corresponding period. The decline in sales are primarily related to decreased sales to customers in the medical device, aerospace, oil and gas and food and beverage industries due to the economic impacts of the COVID-19 pandemic.
GROSS PROFIT. Gross profit as a percentage of sales for the threesix months ended March 31,June 30, 2020 increased by approximately 8549 basis points from the prior year's corresponding period. Excluding the impact of the businessbusinesses acquired, gross profit as a percentage of sales increased by approximately 9053 basis points. The increase in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 435208 basis point increase in the gross profit percentage in our IPS segment and 15143 basis point increase in the gross profit percentage in our SCS segment, partially offset by a 2735 basis point decrease in the gross profit percentage in our SC segment.segment excluding businesses acquired during the six months ended June 30, 2020.
Innovative Pumping Solutions segment. As a percentage of sales, the first quartersix months ended June 30, 2020 gross profit percentage for the IPS segment increased approximately 435208 basis points from the prior year's corresponding period primarily as a result of an increase in utilization and capacity within IPS' engineered-to-order business and an overall improvement in the pricing environment .driven by an increase in capital spending by oil and gas producers. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built to order customer specific products. Operating income for the IPS segment increased $3.6$0.2 million or 53.4%0.9%, primarily as a result of the abovebelow mentioned increasedecrease in gross profit.SG&A.
Service Centers segment. As a percentage of sales, the first quartersix months ended June 30, 2020 gross profit percentage for the Service Centers decreased approximately 3844 basis points and decreased approximately 27 basis points, adjusting for the businesses acquired, from the prior year's corresponding period. This was primarily as a result of sales mix and price increases from vendors. Operating income for the Service Centers segment decreased $2.1$11.6 million, or 10.8%27.5%. The decrease in operating income is primarily the result of thea decline in sales due to the items discussed above.sales.
Supply Chain Services segment. Gross profit as a percentage of sales increased approximately 15143 basis points, compared to the prior year's corresponding period. This was primarily as a result of costs associated with new customer implementationsite implementations which are incurred prior to sales in the comparable 2019 with no comparable activity in 2020.period. Operating income for the first quartersix month period of 2020 decreased $0.3$0.8 million compared to the prior year's corresponding period mainly due to the above mentioneda decrease in sales.SG&A expense of $1.8 million primarily related to payroll and incentive compensation.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the threesix months ended March 31,June 30, 2020 increaseddecreased by approximately $3.7$2.5 million, or 5.3%1.8%, to $73.1$136.0 million from $69.4$138.5 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $1.5 million of the first quarter increase.$2.6 million. Excluding expenses from businesses acquired, SG&A for the quarter increasedsix months ended June 30, 2020 decreased by $2.2$5.1 million, or 3.2%3.7%. The overall increasedecrease in SG&A is the result of increaseddecreased payroll, incentive compensation and related taxes and 401(k) expenses. Adjustingexpenses as a result of decreased business activity and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets. The overall decrease adjusting for the businesses acquired, the first quarter 2020 expense increased 192309 basis points to 24.2%24.6% from 22.3%21.5% for the prior year's corresponding period primarily as a result of the fixed cost leverage nature of SG&A.
OPERATING INCOME. Operating income for the first quarter ofsix months ended June 30, 2020 decreased by $3.9$20.0 million, or 53.1%, to $10.9$17.7 million, from $14.8$37.7 million in the prior year's corresponding period. This decrease in operating income is primarily related to the above mentioned increasedecrease in selling, general and administrative expensesales discussed above.
INTEREST EXPENSE. Interest expense for the first quarter ofsix months ended June 30, 2020 decreased $0.7$1.6 million compared with the prior year's corresponding period due to lower LIBOR rates.rates and a reduction in principal balance.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 23.3%23.2% for the threesix months ended March 31,June 30, 2020 compared to a tax expense of 26.7%25.6% for the threesix months ended March 31,June 30, 2019. Compared to the U.S. statutory rate for the threesix months ended March 31,June 30, 2020, the effective tax rate was increased by state taxes, foreign taxes and nondeductible. The effective tax rate decreased primarily due to research and development tax credits and other tax credits.
Compared to the U.S. statutory rate for the six months ended June 30, 2019, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. 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, 2019, the effective tax rate was increased by state taxes, foreign taxes and nondeductible expenses. The effective tax rate was decreased by research and development tax credits and other tax credits.
LIQUIDITY AND CAPITAL RESOURCES
General Overview
As ofMarch 31,June 30, 2020, we had cash and cash equivalents of $32.9$78.8 million and bank and other borrowings of $237.8$222.6 million. We have a $135 million Asset-Based loan facility that is due to mature in August 2022, under which we had no borrowingborrowings outstanding as of March 31,June 30, 2020.
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 used in operating activities, net cash used in investing activities and net cash used in financing activities for the periods presented (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Net Cash Provided by (Used in): | | | |
Operating Activities | $ | 61,764 | | | $ | (3,460) | |
Investing Activities | (19,163) | | | (8,550) | |
Financing Activities | (17,133) | | | (3,267) | |
Effect of Foreign Currency | (1,025) | | | 311 | |
Net Change in Cash | $ | 24,443 | | | $ | (14,966) | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
Net Cash Provided by (Used in): | | | |
Operating Activities | $ | (1,612 | ) | | $ | (5,310 | ) |
Investing Activities | (17,388 | ) | | (2,283 | ) |
Financing Activities | (742 | ) | | (2,310 | ) |
Effect of Foreign Currency | (1,730 | ) | | 112 |
|
Net Change in Cash | $ | (21,472 | ) | | $ | (9,791 | ) |
Operating Activities
The Company used $1.6provided $61.8 million of cash in operating activities during the threesix months ended March 31,June 30, 2020 compared to using $5.3$3.5 million of cash during the prior year's corresponding period. The $3.7$65.2 million decreaseincrease in the amount of cash usedprovided between the two periods was primarily driven by the timingcollections of paymentsreceivables associated with trade accounts payablereceivables and decreased inventory purchases.
Investing Activities
For the threesix months ended March 31,June 30, 2020, net cash used in investing activities was $17.4$19.2 million compared to $2.3$8.6 million in the corresponding period in June 30, 2019. This $15.2$10.6 million increase was primarily driven by the purchase of PSI and Turbo in the first quarter of 2020. For the threesix months ended March 31,June 30, 2020, purchases of property and equipment wasdecreased to approximately $3.2 million.$5.1 million compared to $8.6 million in 2019 primarily due to leasehold improvements in 2019 with no comparable activity in 2020.
Financing Activities
For the threesix months ended March 31,June 30, 2020, net cash used in financing activities was $0.7$17.1 million, compared to net cash used in financing activities of $2.3$3.3 million for the corresponding period in June 30, 2019. The activity in the period was primarily attributed to the paymentTerm Loan B payments of contingent consideration$15.6 million in 2020 compared to $1.3 million in 2019 of $1.4and $1.1 million associated with common stock sold in public markets in 2020.
On May 11, 2020, the purchaseCompany entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with BMO Capital Markets Corp. (the “Distribution Agent”) pursuant to which the Company may offer and sell shares of ASI.the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company’s common stock pursuant to the Equity Distribution Agreement will be made in “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. During the three months ended June 30, 2020, the Company issued and sold 46,000 shares of common stock under the Equity Distribution Agreement, with net proceeds totaling approximately $1.1 million, after deducting the Distribution Agent’s commission of approximately $26 thousand.
On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $135 million asset-backed revolving line of credit (the "ABL Revolver"), a $50 million increase from the $85.0 million available under the original revolver. During the threesix months ended March 31,June 30, 2020, the amount available to be borrowed under our credit facility increased to $131.6$131.0 million compared to $81.6 million at December 31, 2019, primarily as a result of the above mentioned Increase Agreement offset by outstanding letters of credit.
We believe this is adequate funding to support working capital needs within the business.
Funding Commitments
We intend to pursue additional acquisition targets, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be determined with certainty. We continue to expect to fund future acquisitions primarily with cash flows from operations and borrowings, including the undrawn portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us.
We believe our cash generated from operations will meet our normal working capital needs during the next twelve months. However, we may require additional debt outside of our credit facilities or equity financing to fund potential acquisitions. Such additional financings may include additional bank debt or the public or private sale of debt or equity securities. In connection with any such financing, we may issue securities that substantially dilute the interests of our shareholders.
DISCUSSION OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
Critical accounting and business policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's subjective or complex judgments. These policies have been discussed with the Audit Committee of the Board of Directors of DXP.
The Company's condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The accompanying Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE"). The accompanying unaudited Condensed Consolidated Financial Statements have been prepared on substantially the same basis as our annual Consolidated Financial Statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2019. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2020. The results of operations for the threesix months ended March 31,June 30, 2020 are not necessarily indicative of results expected for the full fiscal year.
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, 2019. Our exposures to market risk have not changed materially since December 31, 2019.
ITEM 4: CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is reported, processed, and summarized within the time periods specified in the SEC’s rules and forms. As of March 31,June 30, 2020, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of March 31,June 30, 2020.
Changes in Internal Control over Financial Reporting
There are no changes in our internal control over financial reporting that occurred during threethe six months ended March 31,June 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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.
TheCOVID-19 pandemic could result in disruptions in supply chain, decreased customer demand, lower oil price and volatility in the stock market and the global economy, which could negatively impact our business, financial position, and results of operations.
The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. During the first few months on 2020, COVID-19 has spread into several regions globally, resulting in certain supply chain disruptions, volatilitiesvolatility in the stock market, lower oil prices, and a lockdown in international travel, all of which could adversely impact the global economy and potentially decrease demand from our customers. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity and increased economic and market uncertainty. Further, a COVID-19 outbreak at one of our vendors’ or customers’ facilities could adversely impact or disrupt our operations. These types of events could negatively impact our customers’ spending in the impacted regions or, depending upon the severity, globally, which could adversely impact our business, reputation, results of operations or financial conditions. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any actions taken by governmental authorities and other third parties in response to the pandemic. While we do not know the full extent of the impact on our business, our operations or the global economy as a whole, the effects could have a material adverse effect on our business, financial condition, and results of operations. Moreover, many risk factors set forth in the Form 10-K should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
We could be adversely impacted by the unexpected loss of the services of our executive management team and other key employees.
Our success depends in large part on the performance of our executive management team and other key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for qualified employees is intense and the process of locating qualified key personnel may be lengthy and expensive. If any of our executive management team contract COVID-19, we may lose their services for an extended period of time, which would likely have a negative impact on our business and operations. If we experience widespread cases of COVID-19 among theour employees, it would place more pressure on the remaining employees to perform all functions across the organization while maintaining their health, may require us to take remediation measures, and could impair our ability to conduct business. We may not be successful in retaining our key employees or finding adequate replacements for lost personnel.
We could be adversely impacted by sustained low oil prices, volatility in oil prices and downturns in the energy industry.
Sustained low oil prices or the failure of oil prices to rise in the future and the resulting downturns or lack of growth in the energy industry and energy‑energy related business could adversely impact our results of operations and financial condition. The unprecedented sharp decline in crude oil prices since February 2020 has negatively impacted the oil and gas industry and is expected to cause further worsening conditions of energy companies, oilfield services companies, and related businesses. A significant portion of our revenue depends upon the level of capital and operating expenditures in the oil and natural gas industry, including capital expenditures in connection with the upstream, midstream, and downstream phases in the energy industry. Therefore, sustained low oil and natural gas prices or a continued decline of such prices could lead to a decrease in our customers’ capital and other expenditures and could adversely affect our revenues. Oil and gas pricing and the resultant economic conditions may not recover meaningfully in the near term.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the fiscal quarter ended March 31, 2020, we issued an aggregateRepurchases of 49,468 sharesCommon Stock
A summary of
the Company’sour purchases of DXP Enterprises, Inc. common stock
to certain employeesduring the second quarter of
PSI in a private placement pursuant to Section 4(a)(2) of the Securities Act of 1933,fiscal year 2020 is as
amended, for a total consideration of $2,000,000, as described above in Note 13 - Business Acquisitions.
follows:
| | | | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | |
| Apr 1 - Apr 30 | 855 | | $ | 13.22 | | — | | $ | — | |
| May 1 - May 31 | 541 | | $ | 13.34 | | — | | $ | — | |
| Jun 1 - Jun 30 | — | | $ | — | | — | | $ | — | |
| Total | 1,396 | | $ | 13.27 | | — | | $ | — | |
| | | | | |
(1) | | We withheld 1,396 shares to satisfy tax withholding obligation in connection with the vesting of employee equity awards. | | | | |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
|
| | | | |
*101 | Interactive Data Files |
*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.
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 8,August 10, 2020