Business Context and Reporting Period
DXP Enterprises, Inc. distributes maintenance, repair and operating products, equipment and services to industrial customers through three segments: Service Centers, Innovative Pumping Solutions and Supply Chain Services. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Key Financial Metrics
| Metric | Three Months 2013 | Three Months 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Sales | $307.9 million | $261.9 million | $598.0 million | $514.2 million |
| Gross profit | $91.5 million | $76.6 million | $180.6 million | $148.1 million |
| Gross margin | 29.7% | 29.3% | 30.2% | 28.8% |
| Operating income | $23.3 million | $20.8 million | $46.0 million | $40.8 million |
| Operating margin | 7.5% | 8.0% | 7.7% | 7.9% |
| Net income | $13.7 million | $12.2 million | $27.0 million | $23.8 million |
| Diluted EPS | $0.90 | $0.80 | $1.77 | $1.57 |
Operating cash flow for the six months was $39.0 million, compared with $24.8 million in the prior-year period. Investing activities used $46.2 million, including $41.6 million for acquisitions and $4.5 million for capital expenditures. Financing activities provided $9.1 million. Cash ended at $12.1 million, compared with $10.5 million at December 31, 2012.
At June 30, 2013, total debt was $247.3 million, consisting primarily of $124.5 million under the revolving line of credit and a $119.7 million term loan. Approximately $105.7 million remained available under the credit facility, which expires July 11, 2017. Current assets were $320.0 million and current liabilities were $148.3 million.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 17.6%; six-month sales increased 16.3%. Acquisitions contributed $45.3 million of the quarterly increase and $86.4 million of the six-month increase. Same-store sales increased 0.29% in the quarter but decreased 0.5% for the six-month period.
- Second-quarter gross margin increased 46 basis points, and six-month gross margin increased 140 basis points, primarily from acquired businesses and product mix.
- Second-quarter operating income increased 11.6%, while six-month operating income increased 12.8%. Operating margins declined modestly because acquired businesses had lower operating margins and higher SG&A ratios.
- Interest expense increased 121.7% in the quarter and 108.4% for the six months, primarily because debt was used to fund acquisitions.
- Service Centers sales increased 18.4% in the quarter and 19.2% for the six months, although same-store sales declined in both periods. IPS sales increased 50.5% in the quarter and 26.6% for the six months, while SCS sales declined 13.0% and 6.0%, respectively.
- IPS margins were pressured by product mix, including increased sales of lower-margin packages. SCS weakness reflected lower sales to customers serving oil and gas, military, mining and truck-manufacturing markets.
Guidance, Outlook, Risks and Unusual Items
Management states that operating cash flow and available credit are expected to meet normal working-capital needs for the next twelve months. Additional debt or equity financing may be required for future acquisitions, and such financing could dilute shareholders or may not be available on attractive terms.
At June 30, 2013, DXP reported compliance with its principal credit-facility covenants: leverage ratio of 1.94x versus a maximum of 3.5x, fixed-charge coverage ratio of 3.18x versus a minimum of 1.25x, and asset-coverage ratio of 1.84x versus a minimum of 1.0x. A 100-basis-point change in floating interest rates would affect annual interest expense by approximately $2.4 million.
DXP completed the NatPro acquisition on April 16, 2013 for approximately $40.1 million and the Tucker Tool acquisition on May 17, 2013 for approximately $5.0 million. NatPro included a potential $6.0 million earnout, with a $2.9 million liability recorded at June 30, 2013. The acquisitions contributed $55.3 million of second-quarter sales and $98.7 million of six-month sales from businesses acquired in 2012 and 2013.
Subsequent events disclosed in the filing include acquisitions of Alaska Pump & Supply for approximately $13.0 million and Tool-Tech Industrial Machine & Supply for approximately $7.2 million, both funded with borrowings. The filing text dates these events July 1 and July 31, but contains typographical references to the year “2103.”
Goodwill increased to $177.3 million from $145.8 million at year-end 2012, and net intangible assets increased to $71.3 million from $63.2 million. The company identified ordinary-course legal proceedings but does not expect them to have a material adverse effect. No material changes were reported to previously disclosed risk factors. Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Investor Verification Checklist
- Verify whether acquisition-driven growth can be converted into sustained same-store sales and operating-margin improvement.
- Monitor debt reduction, credit availability, covenant headroom and the sensitivity of interest expense to floating rates.
- Assess integration performance and purchase-accounting assumptions for NatPro, Tucker Tool and subsequent acquisitions, including goodwill, intangible assets and the NatPro earnout.
- Review IPS product mix and SCS customer exposure, particularly to oil and gas, mining, military and truck-manufacturing markets.
- Confirm the financial impact and closing details of the Alaska Pump & Supply and Tool-Tech acquisitions; the filing’s stated dates contain apparent typographical errors.
- Evaluate working-capital requirements, including receivables, inventory, customer advances and the company’s ability to fund additional acquisitions without shareholder dilution.