DXP Enterprises, Inc. 2017 Form 10-K Summary
Business context and reporting period
DXP distributes maintenance, repair and operating products and provides supply-chain services and custom pumping solutions to energy and industrial customers. The filing covers the fiscal year ended December 31, 2017; fourth-quarter 2017 data are included in the annual filing. Operations comprised Service Centers, Supply Chain Services and Innovative Pumping Solutions across 176 locations in the United States, Canada, Dubai and Mexico, serving more than 50,000 customers.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Sales | $1,006.8 million | $962.1 million | +4.6% |
| Gross profit | $271.6 million | $264.8 million | +2.6% |
| Gross margin | 27.0% | 27.5% | -55 basis points |
| Operating income | $33.5 million | $19.3 million | +73.2% |
| Operating margin | 3.3% | 2.0% | +130 basis points |
| Net income attributable to DXP | $16.9 million | $7.7 million | +119.4% |
| Diluted EPS | $0.93 | $0.49 | +89.8% |
| Cash flow from operations | $12.5 million | $48.2 million | -$35.7 million |
| Capital expenditures | $2.8 million | $4.9 million | -$2.1 million |
- Fourth-quarter 2017 sales were $265.7 million, gross profit was $71.2 million, net income attributable to DXP was $6.6 million, and diluted EPS was $0.37.
- Segment sales were $641.3 million for Service Centers, $204.0 million for Innovative Pumping Solutions and $161.5 million for Supply Chain Services.
- Segment operating income before amortization was $63.3 million for Service Centers, $11.4 million for IPS and $15.5 million for SCS.
- Year-end cash was $22.0 million, with an additional $3.5 million of restricted cash. Trade receivables were $167.3 million and inventories were $91.4 million.
- Total debt, net of debt issuance costs, was $242.0 million, compared with $224.7 million in 2016. Debt represented 47.4% of total capitalization.
- Available borrowing capacity increased to $82.0 million from $37.3 million following the refinancing completed in August 2017.
- Goodwill and other intangible assets totaled $266.1 million at year-end. No goodwill impairment was recorded in 2017 or 2016.
Material changes versus the prior comparable period
- Sales improved as energy-market conditions and rig counts recovered from 2016 levels. Excluding the business divested in 2016, same-store sales increased 7.2%.
- Service Centers same-store sales increased 7.2%, IPS sales increased 9.0%, and SCS sales increased 4.9%.
- SG&A declined 3.0% to $238.1 million, reflecting prior headcount reductions, compensation controls and other cost reductions. SG&A as a percentage of sales declined to 23.7% from 25.5%.
- IPS gross margin declined approximately 235 basis points because of competitive pricing and fewer large, complex, higher-margin orders. SCS gross margin declined approximately 61 basis points due to a greater mix of lower-margin oil-and-gas sales.
- Operating cash flow declined substantially because accounts receivable increased $20.5 million and inventories increased $7.5 million as sales recovered.
- On August 29, 2017, DXP replaced its prior credit facility with an $85 million ABL facility maturing in 2022 and a $250 million Senior Secured Term Loan B maturing in 2023. The Term Loan carried a 7.1% interest rate at year-end.
- The company sold Vertex in 2016 for approximately $31 million; proceeds were primarily used to reduce debt. No acquisitions were completed in 2017.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2018 capital expenditures to be within the 2017-2016 range and stated that operating cash flow should meet normal working-capital needs for the next twelve months. Additional financing may be required for acquisitions.
- Management described the energy market as improved in 2017 but noted that rig counts remained materially below 2014 peaks. Results remain sensitive to oil and gas prices, customer capital spending and industrial economic conditions.
- The company had a Fixed Charge Coverage Ratio of 3.67:1.00 and a Secured Leverage Ratio of 3.59:1.00 at December 31, 2017. Credit agreements impose leverage, fixed-charge, borrowing, acquisition and dividend restrictions.
- Approximately $249.4 million of debt carried floating interest rates. Management estimated that a 100-basis-point increase in rates would increase annual interest expense by approximately $2.5 million.
- The independent auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses involved management review and monitoring controls, documentation and design of key controls, and information-technology general controls. Management planned to engage third-party consultants and implement remediation measures in 2018; the weaknesses were not considered fully remediated at filing.
- Unusual or nonrecurring matters included a $0.6 million write-off of debt issuance costs related to the refinancing, a provisional $1.3 million tax benefit from the Tax Cuts and Jobs Act, and a $2.2 million reduction of deferred tax liabilities related to Canadian acquisitions. No 2017 goodwill impairment was recorded.
- Major risks include energy-sector cyclicality, margin pressure, supplier and customer concentration risks, covenant compliance and refinancing risk, goodwill impairment, foreign-exchange exposure, cyber-security and information-system interruptions, environmental and product-liability claims, adverse weather, and dependence on key personnel.
- Legal proceedings were described as arising in the ordinary course, with management believing that their ultimate resolution would not materially affect the company. The company reported no material off-balance-sheet arrangements.
- DXP completed the approximately $11.5 million acquisition of Application Specialties, Inc. on January 1, 2018, funded with $10.6 million of cash and $0.9 million of common stock.
Most important facts for investors to verify
- Whether the 2017 recovery in sales and operating margins continues, particularly in Service Centers and IPS, if oil and gas spending changes.
- Progress and independent validation of remediation of the material weaknesses in internal controls and IT general controls.
- Compliance with the Term Loan B secured-leverage covenant as required thresholds become more restrictive after 2017.
- Liquidity after working-capital investment, scheduled debt amortization, floating-rate interest costs and the Application Specialties acquisition.
- Cash conversion, including whether accounts receivable and inventory growth normalizes as sales trends develop.
- Potential sensitivity of goodwill and intangible assets to lower cash-flow forecasts, higher discount rates or renewed energy-market weakness.
- The final accounting and operational contribution of the Application Specialties acquisition and any future acquisition financing or dilution.