DXP Enterprises, Inc. — Fiscal 2011 Form 10-K Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products, equipment and services to industrial customers. Its three segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. The filing covers the fiscal year ended December 31, 2011; quarterly data indicates fourth-quarter 2011 sales of $218.3 million and net income of $9.2 million.
- Operated 123 locations in 34 U.S. states and Sonora, Mexico, serving more than 50,000 customers.
- Had approximately 2,093 full-time employees at December 31, 2011.
- Completed acquisitions of Kenneth Crosby in October 2011 and C.W. Rod Tool Company in December 2011.
Financial Results and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $807.0 million | $656.2 million | 23.0% increase |
| Gross profit | $231.8 million | $188.4 million | 23.1% increase |
| Gross margin | 28.7% | 28.7% | Flat |
| Operating income | $55.5 million | $37.1 million | 49.6% increase |
| Operating margin | 6.9% | 5.7% | Improved |
| Net income | $31.4 million | $19.4 million | 62.2% increase |
| Basic EPS | $2.19 | $1.40 | Increase |
| Diluted EPS | $2.08 | $1.32 | Increase |
| Cash flow from operations | $25.8 million | $23.9 million | Increase |
- SG&A increased 16.6% to $176.4 million, but declined to 21.9% of sales from 23.1%.
- Interest expense declined to $3.5 million from $5.2 million, primarily due to lower average interest rates and debt balances.
- The effective tax rate was 39.6%, compared with 39.7% in 2010.
- Year-end cash was $1.5 million; accounts receivable were $137.0 million and inventories were $93.9 million.
- Days sales outstanding increased to 58.6 days from 57.5 days, while inventory turns improved to 7.1 from 6.2.
Debt, Liquidity and Capital Allocation
- Total debt, including the current portion, was $114.9 million at year-end versus $114.6 million in 2010. Shareholders’ equity was $156.7 million.
- The amended revolving credit facility was increased to $200 million and expires July 25, 2016. Availability was $78.2 million at December 31, 2011.
- Borrowings under the facility totaled approximately $110.8 million, principally at floating rates. Management estimates that a 100-basis-point rate increase would raise annual interest expense by approximately $1.1 million.
- The fixed-charge coverage ratio was 14.2 versus a minimum covenant of 1.50; the leverage ratio was 1.49 versus a maximum of 4.00.
- Operating cash flow was offset by $24.1 million of investing outflows, including $18.4 million for acquisitions and $4.1 million of capital expenditures.
- The company repurchased 65,171 common shares during 2011 for $1.4 million. The credit facility generally prohibits common-stock cash dividends; the Series B preferred dividend was $90,000 for the year.
Material Changes Versus the Prior Comparable Period
- Sales growth was broad-based, with same-store sales excluding recent acquisitions increasing 15.8%.
- Service Centers sales increased 23.7%, Innovative Pumping Solutions sales increased 32.8%, and Supply Chain Services sales increased 14.2%.
- Segment operating income increased in all three segments; IPS operating income increased 63.7%.
- Revenue growth and operating leverage drove the improvement in operating margin and net income.
- Goodwill and other intangible assets increased to $145.0 million, including $101.8 million of goodwill, primarily from acquisitions. No impairment was recorded in 2011.
- Accounts receivable increased substantially, contributing to working-capital requirements and limiting operating cash conversion relative to reported earnings.
Outlook, Commentary, Risks and Unusual Items
- Management expected operating cash flow and available credit capacity to fund normal working-capital needs, scheduled debt payments, capital expenditures and preferred dividends during 2012.
- Capital expenditures for 2012 were expected to be in the range of the 2009–2011 amounts. Management also anticipated higher interest payments due to expected acquisition-related borrowings.
- Management intended to pursue internal growth through cross-selling, expanded product offerings and integrated supply-chain solutions, while continuing to evaluate acquisitions.
- Key risks include cyclical and volatile demand from oil and gas, petrochemical, mining, manufacturing and construction customers; competitive pricing pressure; acquisition integration and financing risk; supplier authorization cancellations; key-person dependence; information-system disruptions; and potential covenant noncompliance.
- The company has previously needed waivers or amendments for certain credit-facility covenants, although management expected continued compliance at year-end 2011.
- A Louisiana lawsuit alleges damages exceeding $20 million relating to fiberglass-reinforced pipe failures. DXP believes the claim is without merit and considers a material adverse outcome remote; insurance coverage is subject to a reservation of rights and may be limited to $6 million.
- Insurance and medical claims are partly self-insured; the related accrual increased to approximately $2.4 million from $1.8 million.
- The filing contains no 2012 revenue or earnings guidance. It states that future results depend on economic conditions, execution of internal growth initiatives and successful acquisitions.
Most Important Facts for Investors to Verify
- Reconcile the reported $807.0 million of sales growth with organic growth, acquisition contributions and segment trends.
- Assess whether the 6.9% operating margin is sustainable after acquisition-related costs, amortization and rising compensation expenses.
- Monitor floating-rate debt, the $78.2 million of remaining credit availability and compliance with leverage and fixed-charge covenants.
- Evaluate cash conversion, particularly the increase in receivable days and the funding required for inventory and acquisitions.
- Review the valuation and impairment sensitivity of the $145.0 million of goodwill and other intangible assets.
- Confirm the final cash and debt effects of the CW Rod acquisition, including $36.7 million of outstanding checks and approximately $2.2 million of expected working-capital adjustment payments.
- Track the Louisiana litigation, insurance coverage and other self-insured claims.