DXP Enterprises, Inc. — Q1 2015 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 branded private-label pumps. Reportable segments are Service Centers, Innovative Pumping Solutions (IPS) and Supply Chain Services (SCS). The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $341.6 million | $348.5 million | Down 2.0% |
| Gross profit | $98.0 million | $101.7 million | Down 3.6% |
| Gross margin | 28.7% | 29.2% | Down 50 basis points |
| Operating income | $18.1 million | $21.2 million | Down 14.5% |
| Operating margin | 5.3% | 6.1% | Down 80 basis points |
| Net income | $9.7 million | $11.0 million | Down 12.0% |
| Diluted EPS | $0.63 | $0.70 | Down 10.0% |
| Cash flow from operations | $22.0 million | $20.7 million | Up $1.3 million |
Net margin was 2.8%, compared with 3.1% in the prior-year quarter. Interest expense declined 21.0% to $2.7 million, primarily from debt repayment. The effective tax rate was 38.4%, compared with 38.7%.
At March 31, 2015, cash was $2.4 million, accounts receivable were $212.0 million, inventory was $112.7 million and total assets were $810.4 million. Total debt was $402.4 million, including $196.5 million drawn on the revolving facility and a $203.1 million term loan. Borrowing availability was $41.3 million, down from $51.0 million at December 31, 2014.
Debt covenant measures remained within requirements: leverage ratio of 2.95 to 1.00 versus a maximum of 3.25, fixed-charge coverage ratio of 1.78 to 1.00 versus a minimum of 1.25, and asset coverage ratio of 1.29 to 1.00 versus a minimum of 1.00. The credit facility expires January 2, 2019. A 100-basis-point change in floating interest rates would affect annual interest expense by approximately $4.0 million based on March 31, 2015 debt.
Material changes versus the prior comparable period
- Sales declined $6.9 million. On a same-store basis, excluding $11.3 million of MT&S sales, sales declined $18.3 million, or 5.2%.
- Service Centers same-store sales declined 7.3%, primarily due to lower bearing, metalworking and safety-service demand from upstream oil and gas customers. IPS sales declined 7.0%, reflecting lower oil and gas capital spending. SCS sales increased 11.1%, supported by automotive, petrochemical, mining and gas turbine customers.
- Canadian sales were $36.4 million; currency translation reduced reported sales by approximately $4.5 million. The stronger U.S. dollar contributed to the sales decline.
- Gross margin pressure reflected MT&S's 20.6% gross margin versus 29.0% for the remainder of DXP and lower-margin safety-related sales. Safety-related gross margin fell to 30.0% from 35.6%, primarily because of reduced higher-margin safety-services work in upstream oil and gas markets.
- SG&A declined 0.8% to $80.0 million. Excluding MT&S, same-store SG&A declined 3.0%, but health-care claims increased $1.8 million and raised same-store SG&A as a percentage of sales.
- Operating cash flow increased to $22.0 million, helped by collections and working-capital changes. Capital expenditures were $3.6 million, and the company repurchased 191,420 shares for $8.9 million.
- Businesses acquired during 2014 contributed $43.7 million of Q1 2015 sales but produced an approximately $1.4 million pretax loss. DXP recorded a $117.6 million goodwill impairment charge in the fourth quarter of 2014, including $105.3 million related to B27; no new goodwill impairment was recorded in Q1 2015.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings or revenue guidance. Management stated that if crude oil and natural gas prices remain at or below Q1 2015 levels, declines in upstream oil and gas-related sales and IPS activity could continue through the remainder of 2015. The company expects operating cash flow and available credit to fund normal working-capital needs for the next twelve months, but may require additional debt or equity financing for acquisitions.
- Key risks include continued weakness in upstream oil and gas markets, customer capital-spending reductions, foreign-exchange movements, interest-rate volatility and limited borrowing availability.
- Acquisition integration and valuation remain important risks, including the previously disclosed B27 working-capital dispute and substantial goodwill and intangible balances.
- DXP reported various ordinary-course legal proceedings but believes their resolution will not materially affect financial position, cash flows or results of operations.
- On April 1, 2015, DXP acquired substantially all equity interests of Tool Supply for approximately $5.2 million, financed under the existing credit facility.
- DXP early adopted ASU 2015-03, presenting debt issuance costs as a deduction from debt. The company was evaluating the future impact of the new revenue-recognition standard, ASC 606.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether upstream oil and gas demand and drilling activity stabilized or continued to weaken after March 31, 2015.
- Progress in restoring gross margins, particularly in safety services and the MT&S business.
- Compliance with the 3.25 leverage covenant and the trend in borrowing availability.
- Cash generation after share repurchases, capital expenditures, debt service and the Tool Supply acquisition.
- Performance and integration of B27 and MT&S, including any further goodwill or intangible-asset impairment risk.
- Foreign-exchange effects on Canadian operations and sensitivity to floating interest rates.
- Terms and financial impact of any additional acquisitions or financing required to support the company’s growth strategy.