DXP Enterprises, Inc. — FY2014 Form 10-K Summary
Business context and reporting period
DXP Enterprises distributes maintenance, repair and operating products and services and provides integrated pumping solutions. Operations are organized into Service Centers, Supply Chain Services and Innovative Pumping Solutions. At December 31, 2014, DXP operated approximately 185 locations across the United States, Canada, Dubai and Mexico and served more than 50,000 customers. The filing covers the fiscal year ended December 31, 2014, with a significant impairment recognized in the fourth quarter.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Sales | $1,499.7 million | $1,241.5 million | +20.8% |
| Gross profit | $432.8 million | $372.3 million | +16.2% |
| Gross margin | 28.9% | 30.0% | Down 110 bps |
| SG&A | $327.9 million | $271.4 million | +20.8% |
| Impairment expense | $117.6 million | None | Nonrecurring fourth-quarter charge |
| Operating income | $(12.6) million | $100.9 million | Declined $113.6 million |
| Net income attributable to common shareholders | $(45.3) million | $60.1 million | Turned to loss |
| Basic EPS | $(3.10) | $4.17 | Declined $7.27 |
| Cash flow from operations | $98.7 million | $82.2 million | +20.1% |
Excluding the impairment, operating income was approximately $104.9 million, up 4.0% from 2013. Gross margin pressure reflected the lower margins of businesses acquired in 2014 and weaker higher-margin safety services and equipment-rental activity.
- Service Centers sales increased 11.6% to $987.6 million; operating income excluding impairment was $107.7 million, compared with $107.1 million in 2013.
- Innovative Pumping Solutions sales increased 66.4% to $348.1 million, largely due to the B27 acquisition; operating income excluding impairment was $51.2 million, compared with $33.8 million in 2013.
- Supply Chain Services sales increased 11.2% to $164.0 million, and operating income increased 10.5% to $13.8 million.
Liquidity, debt and capital resources
- Total debt, including current maturities, was $411.5 million at year-end, compared with $194.6 million at December 31, 2013.
- Approximately $405.9 million of debt carried floating interest rates; management estimated that a 100-basis-point rate increase would increase annual interest expense by approximately $4.1 million.
- The credit facility consisted of a $212.5 million term loan and a $350 million revolving line of credit, expiring January 2, 2019. Borrowings under the facility carried a weighted-average rate of approximately 2.2% at year-end.
- Available borrowing capacity was approximately $51.0 million, down from $154.1 million at year-end 2013, primarily because of acquisition financing.
- Year-end covenant ratios were within stated requirements: leverage ratio 2.90 to 1.00 versus a maximum of 3.25; fixed-charge coverage ratio 2.07 to 1.00 versus a minimum of 1.25; and asset coverage ratio 1.44 to 1.00 versus a minimum of 1.00.
- Capital expenditures were $11.1 million, compared with $7.7 million in 2013. Cash acquisitions totaled $300.8 million, principally for B27 and MT&S.
- Cash at year-end was only $47,000. Management stated that operating cash flow and available credit were expected to meet normal working-capital needs, scheduled debt payments, capital expenditures and preferred-stock dividends during 2015.
- The credit facility generally prohibits cash dividends on common stock. The Series B preferred-stock dividend was $90,000 for 2014.
Material changes versus the prior comparable period
- Sales growth was primarily acquisition-driven. Acquisitions completed in 2014 contributed $176.4 million of sales; same-store sales increased approximately 3.8%.
- DXP acquired B27 on January 2, 2014, for approximately $293.6 million, financed primarily with debt, and acquired MT&S on May 1, 2014, for approximately $14.7 million.
- Fourth-quarter goodwill impairment totaled $117.6 million: $95.1 million for B27 IPS, $12.3 million for NatPro IPS and $10.2 million for B27 Service Centers. The filing attributed the impairment primarily to lower-than-forecast revenue and declining oil prices.
- Interest expense increased 103.7% to $12.8 million because of substantially higher borrowings for acquisitions.
- Oil prices declined significantly in the fourth quarter. Management expected reduced rig counts and continued weakness in higher-margin safety services for upstream oil and gas customers.
- Accounts-receivable days increased to 64.5 from 58.9, while inventory turns improved to 9.5 from 8.3.
- DXP repurchased 200,000 common shares for $11.9 million during 2014. A separate authorization for up to 400,000 shares was announced in December 2014; 191,420 shares had been repurchased under that authorization by March 16, 2015.
Outlook, risks, contingencies and unusual items
Management continued to emphasize internal growth, cross-selling, expanded product offerings, supply-chain solutions and acquisitions. No specific revenue or earnings guidance was provided. Management expected 2015 capital expenditures to remain within the range of 2012–2014 expenditures and indicated that additional financing could be required for future acquisitions.
- Major risks include exposure to oil and gas capital spending, oil-price volatility, economic cyclicality, customer and product-mix changes, competitive pricing pressure and loss of supplier distribution rights.
- Acquisition-related risks include integration challenges, retention of acquired customers and personnel, purchase-price assumptions, goodwill impairment and increased leverage.
- The credit facility contains financial covenants and substantially all assets are pledged as collateral. The filing notes that DXP had previously required covenant waivers or amendments, although it reported compliance at December 31, 2014.
- Contractual obligations totaled approximately $509.8 million, including $411.5 million of debt, $87.7 million of operating leases and $10.6 million of estimated interest payments; revolving-credit interest was excluded from the estimate.
- Goodwill and other intangible assets totaled $383.6 million at year-end, creating continuing impairment sensitivity to cash-flow forecasts, discount rates, oil prices and business performance.
- Legal proceedings arise in the ordinary course of business; management did not expect their resolution to have a material adverse effect. The company reported no material off-balance-sheet arrangements.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the acquired B27 and NatPro operations achieve the cash-flow and profitability assumptions underlying the remaining goodwill and intangible-asset balances.
- The effect of oil-price trends, rig counts and energy-industry capital spending on safety services, IPS demand and gross margins.
- Debt paydown, refinancing needs and compliance with the credit facility’s leverage and fixed-charge coverage covenants.
- Whether the approximately $51.0 million of undrawn credit capacity is adequate for working capital, debt maturities and potential acquisitions.
- Trends in gross margin, safety-services mix, accounts-receivable days and cash conversion.
- The timing and impact of the new revenue-recognition standard, which the company was still evaluating at year-end.