DXP Enterprises, Inc. 10-Q Summary
Business Context and Reporting Period
DXP Enterprises 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). This unaudited filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Sales | $323.7 million | $381.6 million | $665.3 million | $730.1 million |
| Gross profit | $91.3 million | $111.0 million | $189.3 million | $212.8 million |
| Gross margin | 28.2% | 29.1% | 28.5% | 29.1% |
| Operating income | $14.0 million | $27.4 million | $32.1 million | $48.5 million |
| Operating margin | 4.3% | 7.2% | 4.9% | 6.6% |
| Net income | $7.2 million | $14.9 million | $16.8 million | $25.8 million |
| Diluted EPS | $0.47 | $0.96 | $1.11 | $1.66 |
Six-month operating cash flow was $53.8 million, compared with $19.8 million in the prior-year period. Investing cash use was $11.5 million, including $6.5 million of capital expenditures and $5.0 million for the acquisition of Tool Supply, Inc. Financing cash use was $41.0 million, reflecting $238.5 million of debt repayments, $8.9 million of share repurchases and $206.5 million of debt proceeds. Cash increased to $1.5 million from $47 thousand at December 31, 2014.
At June 30, 2015, total debt was $377.4 million, including $180.9 million drawn on the revolving facility and $193.8 million under the term loan. The credit facility had $27.5 million of borrowing availability under the most restrictive covenant, compared with $51.0 million at year-end 2014. Reported covenant ratios were 3.03x leverage versus a 3.25x maximum, 1.82x fixed-charge coverage versus a 1.25x minimum, and 1.26x asset coverage versus a 1.0x minimum.
Total assets were $793.6 million and shareholders’ equity was $247.2 million at June 30, 2015. Accounts receivable were $194.3 million and inventory was $109.7 million. Accounts receivable days improved to 57.1 from 63.0, while inventory turns declined to 8.5 from 9.7.
Material Changes Versus the Prior Comparable Period
- Q2 sales declined 15.2%; six-month sales declined 8.9%. Excluding acquired businesses, same-store sales decreased 16.3% in Q2 and 11.0% for the six-month period.
- Q2 operating income declined 48.9%, and six-month operating income declined 33.9%. SG&A decreased in dollars but increased as a percentage of sales to 23.9% in Q2 and 23.6% year to date.
- IPS sales decreased 26.1% in Q2 and 17.2% year to date. IPS gross margin declined approximately 500 basis points in Q2 and 230 basis points year to date, driven by competitive pricing and unabsorbed manufacturing overhead.
- Service Centers sales decreased 14.0% in Q2 and 8.4% year to date, primarily due to lower demand from upstream oil and gas and related manufacturing customers. SCS sales increased 1.1% in Q2 and 5.8% year to date.
- Interest expense decreased 18.4% in Q2 and 19.7% year to date, primarily due to debt reduction.
- DXP acquired Tool Supply, Inc. on April 1, 2015 for approximately $5.0 million. Businesses acquired in 2014 and 2015 contributed $44.8 million of Q2 sales and a $2.3 million pretax loss; six-month contributions were $88.5 million of sales and a $3.7 million pretax loss.
Outlook, Risks, Contingencies and Unusual Items
The filing provides no formal earnings or revenue guidance. Management expects weakness in Service Centers and IPS could continue through the remainder of 2015 if crude oil and natural gas prices remain at or below second-quarter levels. Risks include reduced oil and gas capital spending, lower drilling activity, competitive pressure on IPS pricing, foreign-currency effects, customer and industry concentration, acquisition integration, interest-rate exposure and limited borrowing availability.
DXP recorded $117.6 million of goodwill impairment in the fourth quarter of 2014, including impairment related to B27 and the elimination of NatPro IPS goodwill. Remaining B27 goodwill was approximately $73 million at June 30, 2015; further declines in oil and gas-related cash flows could result in additional impairment.
On August 6, 2015, subsequent to quarter-end, DXP amended its credit facility. The amendment increased permitted leverage through 2018, reduced the minimum fixed-charge coverage requirement to 1.15x through 2016, added a LIBOR-plus-2.75% pricing tier for leverage of at least 4.00x, and resulted in $0.5 million of new debt issuance costs. Management stated that operating cash flow and available credit should meet normal working-capital needs for the next twelve months, but additional financing may be required for acquisitions.
Interest-rate sensitivity was material: a 100-basis-point change in floating rates would affect annual interest expense by approximately $3.8 million based on June 30, 2015 debt. Ordinary-course litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Investor Verification Checklist
- Verify the sustainability of operating cash flow and the decline in credit availability from $51.0 million to $27.5 million.
- Monitor leverage, fixed-charge coverage and compliance with the amended credit-facility covenants.
- Assess whether oil and gas demand weakness and IPS margin compression persist.
- Review the valuation assumptions supporting approximately $256.2 million of goodwill, particularly the remaining B27 goodwill.
- Evaluate the profitability and integration of Tool Supply and other acquired businesses.
- Confirm the effects of foreign exchange, floating interest rates and future acquisition financing on liquidity and earnings.