DXP Enterprises, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014. The financial statements are unaudited and presented in thousands, except per-share data. DXP distributes maintenance, repair and operating products and services through Service Centers, Innovative Pumping Solutions (IPS), and Supply Chain Services (SCS).
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Sales | $387.1 million | $329.7 million | $1,117.2 million | $927.8 million |
| Gross profit | $113.4 million | $97.1 million | $326.2 million | $277.7 million |
| Gross margin | 29.3% | 29.5% | 29.2% | 29.9% |
| Operating income | $31.8 million | $26.9 million | $82.4 million | $72.9 million |
| Operating margin | 8.2% | 8.2% | 7.4% | 7.8% |
| Net income | $17.6 million | $16.4 million | $44.8 million | $43.3 million |
| Diluted EPS | $1.14 | $1.07 | $2.88 | $2.84 |
- Sales growth: Q3 sales increased 17.4%; nine-month sales increased 20.4%. Acquisitions contributed approximately $46.4 million of Q3 growth and $160.4 million of nine-month growth. Same-store sales increased 3.3% in Q3 and 3.1% for nine months.
- Profitability: Q3 operating income rose 18.2%, while nine-month operating income rose 13.0%. On a same-store basis, operating income declined 2.6% in Q3 and 1.5% for nine months.
- Interest and taxes: Q3 interest expense increased 104.2% and nine-month interest expense increased 100.2%, primarily due to acquisition-related borrowings. Effective tax rates were 38.1% for Q3 and 38.2% for nine months, compared with 35.4% and 36.2%, respectively.
- Cash flow: Nine-month cash provided by operating activities was $62.9 million, compared with $67.7 million in the prior-year period. Capital expenditures were $8.1 million.
- Liquidity: Cash was $9.9 million at September 30, 2014, compared with $5.5 million at December 31, 2013. Management stated that operating cash flow and available credit should meet normal working-capital needs for the next twelve months.
- Debt: Total debt was $449.6 million, up from $194.6 million at December 31, 2013. Debt included $221.8 million drawn on the revolving line, $221.9 million under the term loan, and other debt. Approximately $77.4 million remained available under the credit facility.
- Working capital: Trade receivables increased to $269.5 million and inventories to $117.1 million. Days sales outstanding increased to 66.7 days from 57.2 days, while inventory turns improved to 9.3 from 8.4.
Material Changes Versus Prior Comparable Period
- The January 2014 acquisition of B27, LLC, for approximately $293.6 million, and the May 2014 acquisition of MT&S for approximately $14.9 million materially increased sales, goodwill, intangible assets, debt, and amortization.
- Acquired businesses contributed $45.3 million of Q3 sales and approximately $3.4 million of Q3 pretax earnings. For nine months, acquired businesses contributed $125.4 million of sales and approximately $4.3 million of pretax earnings.
- Goodwill increased to $373.7 million from $188.1 million, and net intangible assets increased to $140.0 million from $69.7 million at year-end 2013.
- Gross margins declined due to the lower margins of acquired businesses and reduced higher-margin safety-services work. Management estimated a $9.2 million year-to-date decline in such safety-services sales.
- Same-store IPS sales declined 3.5% in Q3, primarily because of order and vendor-component timing, but increased 2.3% for nine months.
- DXP repurchased 100,000 common shares for $6.8 million under a 200,000-share authorization.
Outlook, Risks, and Unusual Items
- Management cited increased demand from oil and gas customers, including purchases of rotating equipment and pump packages, but stated that some recent demand changes were not known trends.
- The company expects acquisition integration and continued acquisition activity to remain important to its growth strategy. Additional debt or equity financing may be required for potential acquisitions, and such financing could dilute shareholders or may not be available on attractive terms.
- The credit facility expires January 2, 2019 and is secured by substantially all company assets. The September 30 leverage ratio was 2.92-to-1.00 against a 3.50-to-1.00 covenant limit; fixed-charge coverage was 2.11-to-1.00 against a 1.25-to-1.00 minimum.
- Borrowings are primarily floating-rate. A 100-basis-point change in interest rates was estimated to affect annual interest expense by approximately $4.4 million based on September 30, 2014 debt.
- Management expected a 25-basis-point reduction in facility interest-rate margins beginning in November 2014 following the lower leverage ratio; the commitment fee was expected to decline from 0.40% to 0.35%.
- Legal proceedings arise in the ordinary course of business, but management did not expect their resolution to have a material adverse effect. No material changes were reported to previously disclosed risk factors.
- DXP adopted an income-tax presentation standard in the first quarter of 2014 with no material effect. The company was evaluating the future revenue-recognition standard effective for fiscal years beginning after December 15, 2016.
- No subsequent events requiring recognition or disclosure were identified through issuance of the interim financial statements.
Important Facts for Investors to Verify
- Whether acquisition-related revenue and earnings can be sustained and whether B27 and MT&S integration delivers expected synergies.
- Progress in restoring gross margins, particularly the replacement of lost higher-margin safety-services work.
- Receivables collection and working-capital requirements given the increase in days sales outstanding.
- Debt reduction, revolver availability, floating-rate exposure, and continued compliance with credit-facility covenants.
- The carrying value and impairment risk of the substantially increased goodwill and intangible assets.
- Whether oil and gas demand, customer production levels, and IPS order timing represent durable trends or temporary fluctuations.
- The effect of future acquisitions, financing needs, share repurchases, and potential shareholder dilution.