DXP Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products and services to industrial customers and provides custom pump packages, pump remanufacturing and private-label pumps. Reportable segments are Service Centers, Innovative Pumping Solutions (IPS) and Supply Chain Services (SCS). This unaudited filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $253.6 million | $341.6 million | Down 25.8% |
| Gross profit | $68.8 million | $98.0 million | Down 29.8% |
| Gross margin | 27.1% | 28.7% | Down 155 bps |
| SG&A | $70.8 million | $80.0 million | Down 11.4% |
| Operating income (loss) | $(2.0) million | $18.1 million | Declined $20.1 million |
| Net income (loss) | $(5.2) million | $9.7 million | Declined $14.9 million |
| Net loss attributable to DXP | $(5.1) million | $9.7 million | Declined $14.8 million |
| Basic EPS | $(0.35) | $0.67 | Declined $1.02 |
| Operating cash flow | $(7.7) million | $22.0 million | Declined $29.7 million |
Operating margin was negative 0.8%, compared with 5.3% in the prior-year quarter. Net margin was negative 2.1%, compared with positive 2.8%. Interest expense increased to $3.4 million from $2.7 million, including a $0.4 million write-off of debt issuance costs after the revolving commitment was reduced.
At March 31, 2016, cash was $0.6 million, accounts receivable were $160.7 million and inventory was $105.9 million. Total assets were $682.7 million and shareholders’ equity was $194.0 million. Total debt was $363.5 million, all classified as current because of covenant noncompliance before the May 12, 2016 amendment. Facility availability was $22.3 million.
Investing cash outflows were $5.7 million, including $1.7 million of capital expenditures and a $4.0 million contribution to a related-party equity-method investment. Financing activities provided $12.4 million, principally from net debt borrowings. Accounts receivable days increased to 61.1 from 58.2, while inventory turns declined to 7.0 from 8.8.
Material Changes Versus the Prior Comparable Period
- Sales declined $88.0 million, primarily because of reduced demand from oil and gas-related customers and the effect of a stronger U.S. dollar. Excluding 2015 acquisitions, same-store sales declined 27.5%.
- Service Centers sales declined 25.8% and segment operating income declined 58.3%, reflecting weaker rotating equipment, bearing, metalworking and safety-services demand.
- IPS sales declined 36.1% and segment operating income declined 96.5%. IPS gross margin fell approximately 620 basis points because of competitive pricing and $1.7 million of unabsorbed manufacturing overhead related to ANSI pump production.
- SCS sales declined 7.0%, but segment operating income increased 6% as gross margin improved approximately 200 basis points.
- SG&A declined $9.1 million, including approximately $6.3 million of lower payroll, incentive compensation, related taxes and 401(k) costs. Cost reductions did not offset the sales and gross-margin decline.
- Businesses acquired in 2015 contributed $5.8 million of sales but approximately $0.4 million of pretax loss in Q1 2016.
Guidance, Outlook, Risks and Unusual Items
No quantitative earnings or sales guidance was provided. Management stated that weakness could continue through the remainder of 2016 if crude oil and natural gas prices remain at or below first-quarter levels. The company expects lower oil and gas capital spending to continue affecting Service Centers and IPS demand.
DXP failed two financial covenants at March 31, 2016 before the subsequent amendment. The May 12, 2016 amendment reduced the revolving commitment from $350 million to $250 million, increased applicable interest-rate margins, added a cash-sweep mechanism, provided covenant holidays through March 31, 2016, and temporarily reduced the minimum asset-coverage ratio to 0.90. DXP stated that it expects not to comply with financial covenants in the upcoming quarter and will need another amendment or alternative financing.
The March 31, 2016 leverage ratio was 5.56x versus a future maximum of 4.25x, and the fixed-charge coverage ratio was 0.88x versus a future minimum of 1.15x. Management warned that without amended or alternative financing, liquidity may be insufficient for working capital, scheduled principal payments, capital expenditures and preferred-stock dividends during 2016. Potential financing could include additional debt or equity and may substantially dilute shareholders.
Other notable items include a $68.7 million goodwill impairment recorded during 2015, continued amortization of acquired intangibles, consolidation of a variable-interest entity in which DXP owns 47.5%, and a $4.0 million related-party investment contribution. Management indicated that ordinary-course legal proceedings are not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether DXP secures a further credit-facility amendment or alternative financing before the next covenant testing date.
- Actual oil and gas market conditions, customer capital spending and their effect on Service Centers and IPS sales and margins.
- Cash generation, borrowing availability and compliance with the 4.25x leverage, 1.15x fixed-charge coverage and 1.00x asset-coverage requirements as applicable.
- Whether the $1.7 million of IPS unabsorbed manufacturing overhead and competitive pricing pressures persist.
- Terms, valuation and related-party aspects of the $4.0 million equity-method investment.
- Potential shareholder dilution if equity financing is required, and the treatment of the $112 million liquidation preference of Series A preferred stock and $1.5 million stated value of Series B preferred stock.
- The sustainability of working-capital performance, particularly the increase in receivable days and decline in inventory turns.