DXP Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products, equipment and services to industrial customers through Service Centers, Supply Chain Services and Innovative Pumping Solutions. This unaudited quarterly report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Sales | $207.9 million | $172.2 million | $588.6 million | $486.5 million |
| Gross profit | $59.5 million | $48.9 million | $169.2 million | $138.7 million |
| Gross margin | 28.6% | 28.4% | 28.7% | 28.5% |
| Operating income | $14.4 million | $10.2 million | $39.6 million | $26.0 million |
| Operating margin | 6.9% | 5.9% | 6.7% | 5.3% |
| Net income | $8.3 million | $5.3 million | $22.2 million | $13.5 million |
| Diluted EPS | $0.55 | $0.36 | $1.47 | $0.93 |
| Cash flow from operations | Not separately provided | Not separately provided | $18.4 million | $18.7 million |
- At September 30, 2011, cash was $1.7 million, total assets were $341.0 million and shareholders’ equity was $146.2 million.
- Total debt was $101.6 million, down from $114.6 million at December 31, 2010. Credit-facility availability was $51.6 million.
- Accounts receivable were $121.2 million and inventories were $79.1 million at September 30, 2011.
- Capital expenditures were $3.5 million during the first nine months, compared with $0.9 million in the prior-year period.
- The company’s fixed-charge coverage ratio was 9.44 and leverage ratio was 1.67 to 1.00 at September 30, 2011, compared with facility limits of 1.50 and 4.00, respectively.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 20.7%; nine-month sales increased 21.0%. Excluding acquired businesses, management reported underlying growth of 17.2% for the quarter and 14.5% for the nine-month period.
- Gross margin improved modestly, primarily due to product mix.
- SG&A increased 16.3% in the quarter and 14.9% year to date, but declined as a percentage of sales to 21.7% from 22.5% in the quarter and to 22.0% from 23.2% year to date.
- Operating margin expanded by 100 basis points in the quarter and 140 basis points year to date.
- Interest expense declined 47% in the quarter and 30.3% year to date, reflecting lower average interest rates and reduced average debt.
- Service Centers sales increased 20.4% in the quarter and 22.1% year to date; Innovative Pumping Solutions sales increased 38.8% and 30.3%, respectively; Supply Chain Services sales increased 8.6% and 11.7%.
- Operating cash flow remained approximately flat year to date because higher net income was offset by increased receivables and inventories. Days sales outstanding increased to 58.6 from 57.4, while inventory turns improved to 7.1 from 6.6.
Guidance, Outlook, Risks and Unusual Items
- No specific quantitative earnings or revenue guidance was provided. Management stated that operating cash flow and available credit were expected to meet normal working-capital needs for the next twelve months, while additional financing could be required for acquisitions.
- The July 2011 credit-facility amendment reduced interest rates, increased the maximum leverage ratio to 4.00 to 1.00, permitted up to $5.0 million of equity repurchases, and expanded acquisition flexibility. The $150 million revolving facility expires July 25, 2016.
- Floating-rate debt creates interest-rate exposure; management estimated that a 100-basis-point rate change would affect annual interest expense by approximately $974,000.
- Management identified risks related to economic conditions, customer demand, acquisition integration, financing availability, interest rates, accounts-receivable collectability, inventory obsolescence, self-insured claims and goodwill or long-lived-asset impairment.
- On October 10, 2011, after the quarter ended, DXP acquired substantially all assets of Kenneth Crosby, a five-location industrial-tools distributor. KC reported approximately $49 million of sales for the twelve months ended July 31, 2011; purchase price and financing terms were not provided in the filing text.
- DXP repurchased 50,000 common shares in non-open-market transactions during the quarter for an average price of $23.47 per share.
- The company reported no material developments in the BP America Production Company litigation and believed the claim was without merit, with a remote likelihood of material adverse impact.
- Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting.
Investor Verification Items
- Verify the final purchase accounting, financing requirements and post-acquisition contribution of the Kenneth Crosby transaction.
- Monitor working-capital intensity, particularly the increase in receivables, customer collection days and inventory balances.
- Review compliance with the credit facility’s leverage, fixed-charge coverage and borrowing-base requirements as acquisition activity continues.
- Assess sensitivity to floating interest rates and the effect of any refinancing or additional acquisition debt.
- Evaluate whether segment growth and margin expansion are sustainable after adjusting for Quadna and D&F acquisition effects.
- Review assumptions supporting goodwill, intangible-asset and other long-lived-asset valuations, as well as reserves for doubtful accounts, inventory obsolescence and self-insured claims.