DXP Enterprises, Inc. 2011 Q2 Form 10-Q Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products, equipment and services to industrial customers in the United States. Operations are organized into Service Centers, Supply Chain Services and Innovative Pumping Solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Sales | $197.7 million | $167.3 million | $380.8 million | $314.3 million |
| Gross profit | $57.3 million | $47.9 million | $109.7 million | $89.9 million |
| Gross margin | 29.0% | 28.6% | 28.8% | 28.6% |
| Operating income | $13.6 million | $9.1 million | $25.2 million | $15.9 million |
| Operating margin | 6.9% | 5.5% | 6.6% | 5.1% |
| Net income | $7.6 million | $4.6 million | $14.0 million | $8.2 million |
| Diluted EPS | $0.50 | $0.31 | $0.92 | $0.57 |
| Cash flow from operations | Not separately provided | Not separately provided | $16.3 million | $20.5 million |
Q2 sales increased 18.2%, operating income increased 49.3%, and net income increased 66.0% year over year. Six-month sales increased 21.2%, operating income increased 58.6%, and net income increased 70.7%. Selling, general and administrative expense increased in absolute terms but declined as a percentage of sales to 22.1% in Q2 from 23.1% and to 22.2% for six months from 23.5%.
At June 30, 2011, cash was $1.1 million, total current assets were $200.7 million, total current liabilities were $105.5 million, and shareholders’ equity was $138.7 million. Trade receivables were $114.7 million and inventories were $77.7 million.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected improving industrial and economic conditions, increased customer capital spending, and contributions from the Quadna and D&F acquisitions. Excluding acquired businesses, sales increased 14.2% in Q2 and 13.1% for the first six months.
- Service Centers sales increased 19.1% in Q2 and 23.0% for the first six months; Supply Chain Services increased 15.6% and 13.3%, respectively; Innovative Pumping Solutions increased 16.4% and 24.1%, respectively.
- Gross margin improved primarily because of product mix. Operating leverage also contributed to higher operating margins.
- Interest expense declined 36.0% in Q2 and 21.3% for the first six months, primarily because average debt outstanding decreased.
- Operating cash flow declined to $16.3 million from $20.5 million, principally because inventory increased by $1.8 million in 2011 versus a $9.3 million inventory reduction in 2010, and receivables consumed $14.9 million of cash.
- Total long-term debt declined to $101.2 million from $114.6 million at December 31, 2010. Availability under the credit facility increased to $71.6 million from $50.0 million.
Debt, Liquidity and Capital Resources
At June 30, 2011, DXP had $95.5 million borrowed under LIBOR-based arrangements at an approximate weighted-average rate of 2.8% and $1.2 million borrowed under the prime option at 4.75%. The debt is secured by accounts receivable, inventory, general intangibles and non-real-estate property and equipment.
The company reported compliance with its credit-facility covenants, including a fixed charge coverage ratio of 2.84, leverage ratio of 1.76, and senior leverage ratio of 1.71. Management stated that operating cash flow and available credit should meet normal working-capital needs for the next twelve months, although additional financing may be needed for potential acquisitions.
On July 25, 2011, after the reporting date, DXP amended its credit facility. The amendment reduced interest rates, removed the senior leverage ratio, increased the maximum leverage ratio to 4.00-to-1.00, permitted up to $5.0 million of equity repurchases, expanded acquisition flexibility, refinanced the term loan through the $150 million revolving facility, and extended maturity to July 25, 2016.
Guidance, Outlook, Risks and Unusual Items
- No formal numerical revenue or earnings guidance is provided in the filing.
- Management attributed current growth to improving industrial conditions, customer capital spending and newly acquired businesses, but cautioned that interim results are not necessarily indicative of full-year results.
- Principal risks include economic and market conditions, execution of internal growth strategies, integration of acquisitions, changing technology, regulatory changes, product pricing, customer collections and interest-rate volatility.
- A 100-basis-point change in interest rates on floating-rate debt outstanding at June 30, 2011 would change annual interest expense by approximately $968,000.
- Goodwill and intangible assets totaled approximately $115.0 million at June 30, 2011. Impairment testing depends on projected cash flows, discount rates and other estimates.
- Accounts-receivable days increased to 56.8 from 54.6, attributed primarily to customer mix and slower collections. Inventory turns improved to 7.0 from 6.7.
- No material developments occurred in the previously disclosed litigation with BP America Production Company.
- Disclosure controls were deemed effective, and the filing reports no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability of reported sales growth after excluding Quadna and D&F acquisition contributions.
- Monitor receivables, inventory levels and operating cash conversion as sales expand.
- Review the July 2011 credit-facility amendment, borrowing-base availability, interest-rate margins and revised covenants.
- Assess sensitivity to floating interest rates and the company’s ability to fund acquisitions without materially increasing leverage or diluting shareholders.
- Evaluate goodwill and intangible-asset impairment assumptions, acquisition integration results and potential changes in industrial demand.
- Review the BP litigation and other contingencies in subsequent filings for material developments.