DXP Enterprises, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
DXP distributes maintenance, repair and operating products and services and provides custom pump packages, pump remanufacturing and private-label pumps. The filing covers the fiscal year ended December 31, 2015, with comparative 2014 and 2013 results. Operations included 191 locations across the United States, Canada, Dubai and Mexico, serving more than 50,000 industrial customers.
- Service Centers: $826.6 million of 2015 sales, or 66.3% of total sales.
- Innovative Pumping Solutions: $254.8 million, or 20.4%.
- Supply Chain Services: $165.6 million, or 13.3%.
- Oil and gas exposure was significant; management attributed the 2015 downturn primarily to lower oil prices and reduced capital spending by oil and gas customers.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Sales | $1,247.0 million | $1,499.7 million | Down 16.9% |
| Gross profit | $352.0 million | $432.8 million | Down 18.7% |
| Gross margin | 28.2% | 28.9% | Down 65 basis points |
| SG&A | $303.8 million | $327.9 million | Down 7.3% |
| Operating income (loss) | $(27.9) million | $(12.6) million | Loss increased |
| Net income (loss attributable to DXP) | $(38.5) million | $(45.2) million | Loss narrowed |
| Basic and diluted EPS | $(2.68) | $(3.10) | Improved |
| Cash flow from operations | $98.0 million | $100.5 million | Down $2.5 million |
Reported operating results included $68.7 million of impairment expense and a $7.3 million B27 working-capital settlement charge. Excluding impairment and the settlement, operating income was $48.2 million, down from $104.9 million in 2014. The company reported $309.7 million of goodwill and other intangible assets at year-end, including $197.4 million of goodwill.
- Service Centers sales declined 16.3% to $826.6 million; operating income excluding impairment was $78.2 million, compared with $107.7 million in 2014.
- IPS sales declined 26.8% to $254.8 million; operating income excluding impairment was $21.6 million, compared with $51.2 million.
- SCS sales increased 1.0% to $165.6 million; operating income increased 3.0% to $14.2 million.
- IPS gross margin fell approximately 315 basis points, reflecting competitive pricing, lower-margin jobs and $3.0 million of unabsorbed manufacturing overhead related to ANSI pump production.
Liquidity, debt and cash flow
- Cash at December 31, 2015 was $1.7 million, compared with $0.05 million at December 31, 2014.
- Total debt, including current maturities and before deducting debt issuance costs, was $351.6 million; reported debt net of issuance costs was $349.5 million.
- Debt declined from $408.8 million at year-end 2014, primarily through debt repayment.
- Approximately $347.1 million of debt carried floating interest rates at an average rate of approximately 2.67%.
- Availability under the $350 million revolving credit facility fell to $19.8 million from $51.0 million.
- Scheduled debt maturities were $50.8 million in 2016, $63.4 million in 2017, $63.4 million in 2018 and $173.1 million in 2019.
- 2015 capital expenditures were $14.0 million, and cash acquisitions totaled $15.5 million, supplemented by $4.4 million of common stock issued for acquisitions.
- Operating lease and estimated interest commitments totaled approximately $435.9 million over the disclosed periods.
The company’s December 31, 2015 credit metrics were a 4.02-to-1.00 leverage ratio, a 1.23-to-1.00 fixed-charge coverage ratio and a 1.15-to-1.00 asset-coverage ratio. Management stated that it might not comply with certain financial covenants in the following quarter and would need to amend the credit facility, obtain a waiver or secure alternative financing.
Material changes, outlook and unusual items
- Sales fell 18.4% on a same-store basis, excluding the contribution of 2014 and 2015 acquisitions. The decline was concentrated in Service Centers and IPS and was driven primarily by lower oil and gas capital spending.
- DXP recorded $67.6 million of B27 goodwill impairment and $1.1 million related to termination of an ITT Goulds distribution agreement. The 2015 impairment charge followed $117.6 million of impairment expense in 2014.
- The B27 working-capital dispute resulted in an $11.3 million payment, of which $7.3 million was expensed and $4.0 million represented tax refunds; $3.6 million of the federal refund had been received.
- IPS backlog declined to $85.5 million at December 31, 2015 from $140.6 million at December 31, 2014.
- Management expected oil and gas-related sales pressure to continue into 2016 if crude oil and natural gas prices remained at or below 2015 levels.
- Management expected 2016 capital expenditures to be within the 2014–2015 range and believed operating cash flow would meet normal working-capital needs, subject to obtaining covenant relief or alternative financing.
- 2015 net loss benefited by $3.1 million, or $0.21 per share, from out-of-period items, including a correction of a prior-year accrual and tax benefits related to earlier years.
- No common-stock dividends were expected because the credit facility restricted distributions. The company paid $90,000 of annual dividends on Series B convertible preferred stock.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective.
Principal risks and contingencies
- Dependence on oil and gas activity and customer capital spending creates substantial cyclical and commodity-price exposure.
- High floating-rate debt creates interest-rate risk; management estimated that a 100-basis-point increase would increase annual interest expense by approximately $3.5 million.
- Failure to meet credit-facility covenants could lead to default, acceleration of debt or reduced liquidity. Refinancing may be required.
- Goodwill and intangible assets remain material and sensitive to future cash-flow estimates, discount rates, oil prices and customer demand. The B27 Service Centers reporting unit had carrying value approximately equal to fair value after the 2015 impairment.
- Supplier distribution authorizations may be cancelled with little or no notice, although no supplier accounted for 10% or more of revenue.
- Other risks include competition, acquisitions and integration, foreign currency exposure, environmental and product-liability claims, self-insurance, cybersecurity and information-system disruptions.
- The company disclosed ordinary-course legal proceedings but stated that their resolution was not expected to have a material adverse effect.
Investor verification checklist
- Verify current compliance with, and any subsequent amendments or waivers to, the credit-facility financial covenants.
- Assess the company’s ability to refinance or repay the 2016 and 2019 debt maturities while maintaining adequate working capital.
- Track oil and gas capital-spending trends, Service Centers demand, IPS bookings and the decline in backlog.
- Reconcile reported results with performance excluding the $68.7 million impairment charge, $7.3 million B27 settlement and $3.1 million out-of-period benefit.
- Evaluate potential additional goodwill impairment, particularly for the B27 Service Centers reporting unit.
- Review acquisition integration, customer concentration, supplier-authority continuity and the company’s exposure to floating interest rates.