DXP Enterprises, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013; unaudited financial statements. DXP distributes maintenance, repair and operating products, equipment and services through Service Centers, Innovative Pumping Solutions and Supply Chain Services.
Financial Performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $290.1 million | $252.3 million | 15.0% increase |
| Gross profit | $89.1 million | $71.5 million | 24.7% increase |
| Gross margin | 30.7% | 28.3% | 240 basis-point increase |
| Operating income | $22.7 million | $19.9 million | 14.1% increase |
| Operating margin | 7.8% | 7.9% | Essentially flat |
| Net income | $13.2 million | $11.6 million | 13.6% increase |
| Net income attributable to common shareholders | $13.2 million | $11.6 million | 13.7% increase |
| Diluted EPS | $0.87 | $0.77 | 13.0% increase |
| Interest expense | $1.6 million | $0.8 million | 96.3% increase |
Sales growth primarily reflected businesses acquired since March 31, 2012. Acquired businesses contributed approximately $41.1 million of first-quarter sales according to MD&A; the acquisition note separately reports $43.4 million of sales from businesses acquired during 2012. Excluding acquired businesses, same-store sales decreased 1.3%, primarily because the quarter had two fewer business days.
Gross-margin expansion was attributed to product mix and acquired businesses with higher margins. Selling, general and administrative expense increased to $66.4 million from $51.6 million, or 22.9% of sales versus 20.4%, due largely to acquired operations, higher health insurance costs, salaries and commissions.
Segment Results
| Segment | Q1 2013 Sales | Q1 2013 Operating Income | Year-over-year sales change | Year-over-year operating income change |
|---|---|---|---|---|
| Service Centers | $210.1 million | $25.0 million | 20.0% increase | 35.0% increase |
| Innovative Pumping Solutions | $41.5 million | $7.1 million | 5.3% increase | 13.7% decrease |
| Supply Chain Services | $38.5 million | $3.2 million | 1.9% increase | 13.0% increase |
IPS profitability declined because of lower gross margin from product mix and higher selling and administrative costs associated with increased capacity. SCS benefited from new customers and improved gross margin.
Cash Flow, Balance Sheet and Liquidity
- Operating cash flow was $16.9 million, down from $26.6 million in Q1 2012, primarily because of working-capital changes.
- Capital expenditures were $2.4 million, compared with $0.9 million in the prior-year quarter. No acquisitions were completed during the quarter.
- Cash declined to $7.2 million from $10.5 million at December 31, 2012.
- Accounts receivable increased to $189.3 million from $174.8 million; days sales outstanding increased to 61.0 from 55.1 days.
- Inventory declined to $99.7 million from $101.4 million; inventory turns improved to 8.2 from 7.7.
- Total debt was $220.3 million at March 31, 2013, down $18.1 million from year-end. Debt consisted of $91.9 million drawn on the revolving line, a $124.8 million term loan and $3.5 million of subordinated notes.
- The credit facility provided approximately $133.4 million of remaining borrowing availability, up from $109.5 million at December 31, 2012, and expires July 11, 2017.
- Reported covenant ratios were within requirements: leverage ratio of 1.76x versus a maximum of 3.50x, fixed-charge coverage of 2.87x versus a minimum of 1.25x, and asset coverage of 2.44x versus a minimum of 1.00x.
Material Changes and Unusual Items
- Interest expense nearly doubled because of higher average debt following 2012 acquisitions, particularly HSE Integrated.
- Goodwill increased by $1.6 million to $147.3 million, while other intangible assets declined to $58.1 million after $2.6 million of amortization and purchase-accounting adjustments.
- A valuation adjustment reduced estimated HSE customer lists by approximately $2.8 million and increased goodwill, net of related deferred tax liabilities. Jerzy acquisition intangibles increased by approximately $0.3 million.
- Comprehensive income was $12.2 million, including a $1.2 million decline in the fair value of an investment and a $0.3 million foreign-currency translation loss.
- Businesses acquired during 2012 contributed approximately $1.9 million of pretax earnings during Q1 2013. Pro forma results assuming the 2012 acquisitions occurred at the beginning of 2012 show Q1 2012 sales of $292.9 million and net income of $14.0 million, compared with reported Q1 2013 sales of $290.1 million and net income of $13.2 million.
Outlook, Risks and Contingencies
Management did not provide specific earnings or revenue guidance in the filing. Management stated that operating cash flow and available credit are expected to satisfy normal working-capital needs for the next twelve months, but additional debt or equity financing may be required for future acquisitions. Such financing may be unavailable or could dilute shareholders.
Key risks include integration of acquired businesses, dependence on industrial customers and economic conditions, changing regulations and market prices, interest-rate exposure, working-capital requirements, and estimates related to receivables, inventory, purchase accounting, percentage-of-completion contracts and self-insured claims. A 100-basis-point change in floating interest rates would change annual interest expense by approximately $2.2 million.
DXP reported no material change to previously disclosed risk factors. Ordinary-course legal proceedings were not expected to have a material adverse effect. Self-insured claims accruals were approximately $1.9 million at March 31, 2013. No goodwill or long-lived-asset impairment was required.
On April 16, 2013, after quarter-end, DXP acquired National Process Equipment for approximately $37.8 million in cash and $3.5 million in DXP common stock, funded primarily with borrowings under the credit facility. DXP also issued 52,542 unregistered shares in connection with the acquisition.
Important Facts for Investors to Verify
- Whether same-store demand improves after the two-business-day shortfall in Q1 and whether acquisition-related growth remains sustainable.
- Progress integrating the 2012 acquisitions and the post-quarter-end National Process Equipment acquisition.
- Ability to reduce leverage while funding working capital and potential acquisitions.
- Accounts-receivable collection trends, particularly the increase in days sales outstanding.
- IPS margin recovery and the effect of increased capacity costs.
- Compliance with credit-facility covenants and exposure to floating interest rates.
- Future purchase-accounting adjustments, amortization, goodwill recoverability and percentage-of-completion estimates.