Business Context and Reporting Period
DXP Enterprises, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. DXP distributes maintenance, repair and operating products, equipment and services to industrial customers through Service Centers, Innovative Pumping Solutions and Supply Chain Services segments.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Sales | $289.9 million | $207.9 million | $804.1 million | $588.6 million |
| Gross profit | $83.5 million | $59.5 million | $231.6 million | $169.2 million |
| Gross margin | 28.8% | 28.6% | 28.8% | 28.7% |
| Operating income | $24.5 million | $14.4 million | $65.3 million | $39.6 million |
| Operating margin | 8.5% | 6.9% | 8.1% | 6.7% |
| Net income | $13.1 million | $8.3 million | $36.9 million | $22.2 million |
| Diluted EPS | $0.86 | $0.55 | $2.43 | $1.47 |
- Q3 sales increased 39.5%; nine-month sales increased 36.6%.
- Q3 operating income increased 69.8%; nine-month operating income increased 64.8%.
- Q3 interest expense increased 200.9% to $2.3 million; nine-month interest expense increased 38.3% to $3.9 million.
- Cash provided by operating activities was $21.3 million for the first nine months, compared with $18.4 million in the prior-year period.
- Investing cash use was $150.9 million, including $137.8 million for acquisitions and $13.1 million for property and equipment.
- Financing activities provided $140.0 million, primarily reflecting debt proceeds of $343.0 million less debt repayments of $202.5 million.
- Cash was $12.2 million at September 30, 2012, compared with $1.5 million at December 31, 2011.
- Total long-term debt was $259.0 million, compared with $114.9 million at December 31, 2011. Facility availability was $67.4 million, down from $78.2 million.
- Accounts receivable were $188.7 million and inventories were $99.0 million at September 30, 2012.
Material Changes Versus Prior Comparable Period
- Acquired businesses contributed $66.7 million of Q3 sales and $137.6 million of nine-month sales. Excluding acquisitions, same-store sales increased 7.4% in Q3 and 13.2% for the first nine months.
- Management attributed organic growth primarily to improvement in the U.S. oil and gas and manufacturing economies.
- SG&A increased 31.0% in Q3 and 28.4% for the first nine months, but declined as a percentage of sales to 20.3% and 20.7%, respectively, from 21.7% and 22.0%.
- DXP completed multiple acquisitions, including Industrial Paramedic Services and HSE Integrated Ltd. HSE was acquired on July 11, 2012 for an approximately $85 million transaction value.
- Goodwill increased to $141.9 million from $101.8 million at year-end 2011, while net other intangible assets increased to $76.2 million from $43.2 million.
- Days sales outstanding increased to 62.3 days from 55.9 days, primarily due to acquired businesses. Inventory turns improved to 8.3 from 7.4.
Debt, Liquidity, Outlook and Risks
- On July 11, 2012, DXP entered a new $325 million facility consisting of a $100 million term loan and a $225 million revolving credit facility, maturing July 11, 2017.
- At September 30, 2012, borrowings included $240.4 million under LIBOR-based options at approximately 2.09% and $12.8 million under the prime option at 3.75%. The company reported $67.4 million of remaining availability.
- The reported leverage ratio was 2.12 to 1.00 against a maximum of 3.5 to 1.00 through March 31, 2015. Reported fixed-charge coverage was 3.65 to 1.00 and asset coverage was 1.43 to 1.00.
- Management stated that operating cash flow and available credit should meet normal working-capital needs for the next twelve months. Additional financing may be required for future acquisitions and could dilute shareholders or be unavailable on attractive terms.
- No quantitative earnings or revenue guidance was provided. Management’s outlook emphasized continued internal growth and acquisition integration, but results remain subject to economic conditions, market prices, technology, regulation and acquisition execution.
- A 100-basis-point change in interest rates would affect annual interest expense by approximately $2.5 million based on floating-rate debt outstanding at September 30, 2012.
- Acquisition purchase-price allocations remained preliminary for certain 2012 acquisitions, including estimates of goodwill and intangible assets.
- No material changes were reported to previously disclosed risk factors. No material litigation developments occurred in the BP America Production Company matter.
- The company reported no subsequent events requiring recognition or disclosure through November 7, 2012. Disclosure controls were assessed as effective.
Important Facts to Verify
- Confirm the sustainability of acquisition-driven growth and the reported organic sales increases.
- Review integration performance and final purchase-price allocations for HSE and other 2012 acquisitions.
- Monitor leverage, debt availability, covenant compliance and refinancing or acquisition-funding requirements.
- Assess the effect of higher interest rates and floating-rate debt on future earnings and cash flow.
- Evaluate working-capital trends, particularly the increase in receivable days and the company’s ability to convert earnings into cash.
- Review goodwill and intangible-asset balances for potential impairment risk.
- Read the Annual Report risk factors and the BP litigation disclosures for developments not detailed in this quarterly filing.