DXP ENTERPRISES INC annual report, FY2012

DXP Enterprises, Inc. — Fiscal 2012 Form 10-K Summary

Business Context and Reporting Period

DXP Enterprises distributes maintenance, repair and operating products, equipment and services to industrial customers in the United States, Canada and Mexico. Its three segments are Service Centers, Supply Chain Services and Innovative Pumping Solutions. The filing covers the fiscal year ended December 31, 2012, including fourth-quarter results. DXP served more than 50,000 customers and reported approximately 2,817 full-time employees at year-end.

Growth in 2012 reflected both internal expansion and multiple acquisitions, particularly in industrial safety, pumps, rotating equipment and Canadian operations. The company completed seven acquisitions during 2012, including HSE Integrated, Industrial Paramedic Services, ADI and Jerzy Supply.

Financial Results and Key Metrics

Metric	2012	2011	Change
Sales	$1,097.1 million	$807.0 million	+35.9%
Gross profit	$319.1 million	$231.8 million	+37.6%
Gross margin	29.1%	28.7%	+40 bps
Operating income	$90.5 million	$55.5 million	+63.1%
Operating margin	8.3%	6.8%	+150 bps
Net income	$51.0 million	$31.4 million	+62.2%
Diluted EPS	$3.35	$2.08	+61.1%
Operating cash flow	$51.2 million	$25.8 million	+98.4%

SG&A increased 29.7% to $228.6 million, but declined to 20.8% of sales from 21.9%, reflecting operating leverage.
Interest expense increased to $5.6 million from $3.5 million, primarily because of acquisition-related borrowing and a $0.7 million write-off of debt issuance costs when the prior credit facility was replaced.
The effective tax rate was approximately 40.0%, compared with 39.5% in 2011.
Fourth-quarter 2012 sales were $293.0 million, gross profit was $87.5 million and net income was $14.1 million; diluted EPS was $0.92.
Segment sales were $779.0 million for Service Centers, $161.8 million for Innovative Pumping Solutions and $156.2 million for Supply Chain Services.
Segment operating income was $88.9 million, $32.1 million and $12.5 million, respectively, before amortization and corporate expense allocations.

Cash Flow, Debt and Liquidity

Cash and cash equivalents were $10.5 million at December 31, 2012, compared with $1.5 million at December 31, 2011.
Cash used in investing activities was $159.1 million, including $144.9 million for acquisitions and $14.1 million for capital expenditures.
Total long-term debt, including current maturities, increased to $238.4 million from $114.9 million, principally to fund acquisitions.
The July 2012 credit facility, amended on December 31, 2012, included a $130.0 million term loan and a $262.5 million revolving facility. Borrowings totaled approximately $234.5 million, with $109.5 million available at year-end.
The facility matures in July 2017 and is secured by substantially all company assets. The December 31, 2012 leverage ratio was 1.87x versus a maximum covenant of 3.5x; fixed-charge coverage was 3.10x versus a minimum of 1.25x; and asset coverage was 2.04x versus a minimum of 1.0x.
Approximately $234.5 million of debt carried floating interest rates. Management estimated that a 100-basis-point rate increase would raise annual interest expense by approximately $2.3 million.
Management stated that operating cash flow and available credit should satisfy normal working-capital needs, scheduled debt payments, capital expenditures and preferred-stock dividends during 2013.

Material Changes Versus the Prior Comparable Period

Sales increased $290.1 million, including $194.0 million attributable to businesses acquired in 2011 and 2012. Same-store sales increased 11.9%.
Service Centers sales increased 39.1%; Innovative Pumping Solutions sales increased 58.2%; Supply Chain Services sales increased 8.2%.
Service Centers and Innovative Pumping Solutions benefited from stronger demand from oil and gas, mining, manufacturing and petrochemical customers. Supply Chain Services experienced a same-store sales decline of $0.4 million, primarily from reduced activity in trucking and military-related industries.
Gross margin improved because of stronger margins in Innovative Pumping Solutions and Supply Chain Services. SG&A leverage also improved as sales grew faster than expenses.
Property and equipment increased to $58.7 million from $16.9 million, while goodwill and other intangible assets increased to approximately $209.0 million from $145.0 million, largely because of acquisitions.
Accounts receivable days increased modestly to 57.2 from 56.8, while inventory turns improved to 8.0 from 6.6.

Outlook, Commentary, Risks and Unusual Items

Management expected 2013 capital expenditures to be lower than the $14.1 million incurred in 2012 and intended to continue pursuing acquisition opportunities.
Management attributed the 2012 performance to positive general economic and oil-and-gas conditions, internal growth, cross-selling and acquisitions. The filing does not provide formal revenue or earnings guidance.
Acquisition-related activity created significant integration, financing, goodwill and intangible-asset risks. Goodwill and intangible assets totaled approximately $209.0 million at year-end; no impairment was recorded in 2012, 2011 or 2010.
Debt increased substantially and included significant floating-rate exposure. The company disclosed that it had previously been unable to comply with certain credit-facility covenants and had obtained waivers or amendments when necessary, although it reported compliance at December 31, 2012.
Major business risks include sensitivity to oil and gas capital spending, economic cyclicality, competition, supplier distribution-authority cancellations, customer and product-mix changes, transportation disruptions, foreign-currency exposure, adverse weather, cybersecurity, product liability and environmental obligations.
Insurance is partly self-funded, and claims could exceed coverage or reserves. The company reported ordinary-course legal proceedings but did not expect them to have a material adverse effect.
The company repurchased 76,300 shares during 2012 and paid no common-stock cash dividend. Its credit facility generally prohibited common-stock dividends; the Series B preferred-stock dividend was $90,000 for the year.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2012.

Most Important Facts for Investors to Verify

Whether acquisition-driven growth can be integrated successfully and whether the reported 11.9% same-store sales growth is sustainable.
The company’s ability to reduce leverage while continuing acquisitions and meeting debt maturities, particularly the $124.5 million scheduled for 2017.
Compliance with all credit-facility covenants and continued availability under the revolving facility.
Exposure to floating interest rates, oil and gas and mining capital spending, and Canadian operating and currency risks.
The recoverability of approximately $209.0 million of goodwill and intangible assets and the potential for future impairment or amortization expense.
Whether working-capital performance, including receivables collection and inventory turns, remains consistent as the company expands.
The filing’s segment and facility counts, which are presented inconsistently in different sections and should be reconciled against the detailed segment disclosures.