DXP Enterprises, Inc. — Q3 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 private-label pumps. Reportable segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. This unaudited filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Sales | $303.1 million | $387.1 million | $968.4 million | $1,117.2 million |
| Gross profit | $85.7 million | $113.4 million | $275.1 million | $326.2 million |
| Gross margin | 28.3% | 29.3% | 28.4% | 29.2% |
| SG&A | $75.1 million | $82.6 million | $232.3 million | $246.8 million |
| Operating income (loss) | $(55.6) million | $30.8 million | $(23.5) million | $79.3 million |
| Net income (loss attributable to DXP) | $(52.4) million | $17.0 million | $(35.6) million | $42.8 million |
| Diluted EPS | $(3.64) | $1.10 | $(2.48) | $2.76 |
| Operating cash flow | Not separately provided | Not separately provided | $74.8 million | $62.9 million |
Reported operating margins were negative 18.3% for the quarter and negative 2.4% year to date, primarily because of goodwill and intangible impairment charges and the B27 settlement. Excluding the $58.9 million impairment and $7.3 million B27 settlement expense, Q3 operating income was approximately $10.6 million, compared with $30.8 million in Q3 2014. The corresponding nine-month adjusted operating income was approximately $42.7 million, compared with $79.3 million in 2014.
Liquidity, cash flow and debt
- Cash was $8.1 million at September 30, 2015, compared with $47 thousand at December 31, 2014.
- Operating activities generated $74.8 million during the first nine months, supported by reductions in accounts receivable and inventory.
- Investing cash use was $27.2 million, including $15.5 million for acquisitions and $11.7 million for property and equipment.
- Financing cash use was $40.0 million, reflecting $343.2 million of debt principal payments, $310.3 million of debt proceeds, $8.9 million of treasury-stock purchases and $68 thousand of dividends.
- Total debt was $376.2 million at September 30, 2015, down $32.6 million from December 31, 2014. The credit facility included a $184.4 million term loan and $189.5 million drawn on the revolving line, with $31.4 million available under the facility.
- The facility expires January 2, 2019. The weighted-average LIBOR-based borrowing rate was approximately 2.45%; the reported leverage ratio was 3.48 to 1.00 against a 4.25 to 1.00 limit, fixed-charge coverage was 1.63 to 1.00 against a 1.15 minimum, and asset coverage was 1.16 to 1.00 against a 1.00 minimum.
- Management stated that operating cash flow and available facility capacity should meet normal working-capital requirements for the next twelve months, although additional financing may be required for acquisitions.
Material changes versus the prior comparable period
- Q3 sales declined 21.7% and nine-month sales declined 13.3%. On a same-store basis, Q3 sales fell 22.3% and nine-month sales fell 14.9%, primarily due to weaker oil-and-gas-related demand and the stronger U.S. dollar.
- Q3 Service Centers sales decreased 21.9%, IPS sales decreased 30.7% and Supply Chain Services sales decreased 2.5%. For the first nine months, Service Centers declined 13.0%, IPS declined 21.8% and SCS increased 2.9%.
- Gross margin declined 100 basis points in Q3 and approximately 80 basis points for the first nine months. IPS experienced a particularly significant margin decline due to competitive pricing and unabsorbed manufacturing overhead.
- SG&A declined in dollars, partly due to lower variable compensation and headcount reductions, but increased as a percentage of sales because revenue declined faster than expenses.
- Interest expense declined 20.2% in Q3 and 19.9% year to date, primarily because of debt repayment.
- Accounts receivable declined to $187.5 million from $239.2 million at year-end, and inventory declined to $108.1 million from $115.7 million. Inventory turns decreased to 8.0 from 9.3 in the comparable quarter.
Guidance, outlook, risks and unusual items
- Management provided no formal revenue or earnings guidance. It expected weakness in upstream oil-and-gas demand to continue through the remainder of 2015 if crude oil and natural-gas prices remained at or below third-quarter levels.
- DXP recorded $57.8 million of preliminary B27 goodwill impairment and $1.1 million for the write-off of an ITT Goulds distribution agreement. The impairment was triggered by sustained lower oil prices, reduced customer capital spending and lower revenue expectations.
- Additional fourth-quarter 2015 impairment could be material because B27 step-two testing was not complete at the filing date. Remaining B27 goodwill was $4.9 million for IPS and $10.3 million for Service Centers.
- DXP recorded a $7.3 million B27 settlement expense. The total required payment was $11.3 million; the remaining $4.0 million represented expected tax refunds receivable in 2016.
- DXP acquired Tool Supply for approximately $5.0 million in April 2015 and Cortech Engineering for approximately $14.9 million in September 2015. Acquired businesses contributed $44.3 million of Q3 sales but a pre-tax loss of approximately $10.1 million before impairment, and $132.8 million of nine-month sales with a pre-tax loss of approximately $13.7 million.
- Principal risks include oil-and-gas cyclicality, customer capital-spending reductions, acquisition integration and valuation risk, leverage and covenant compliance, interest-rate exposure, foreign-currency movements and potential dilution from future financing. A 100-basis-point interest-rate change was estimated to affect annual interest expense by approximately $3.8 million.
- Management reported no material changes to previously disclosed risk factors, no material adverse legal proceedings, effective disclosure controls and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Completion of B27 impairment testing and any additional fourth-quarter impairment charge.
- Oil-and-gas exposure, order trends, backlog and margin recovery in the IPS and Service Centers segments.
- Compliance with credit-facility leverage, fixed-charge and asset-coverage covenants and the $31.4 million of remaining borrowing availability.
- Sustainability of operating cash flow, working-capital improvements and the ability to fund required debt repayments.
- Integration, profitability and final purchase-price allocations for TSI and Cortech.
- Collection and timing of the approximately $4.0 million of expected B27-related tax refunds.