DXP Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products and services to industrial customers and provides custom pump packages, pump remanufacturing and private-label pumps. Reportable segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. The filing covers the three and six months ended June 30, 2016; financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Sales | $256.2 million | $509.8 million |
| Gross profit / margin | $71.6 million / 27.9% | $140.4 million / 27.5% |
| Operating income / margin | $8.8 million / 3.5% | $6.8 million / 1.3% |
| Net income attributable to DXP | $5.2 million | $58 thousand |
| Diluted earnings per share | $0.34 | $0.00 |
| Cash flow from operations | Not separately provided | $11.2 million |
At June 30, 2016, cash was $1.1 million, accounts receivable were $159.1 million and inventories were $98.4 million. Total assets were $667.3 million and total equity was $199.2 million.
Total debt, net of debt issuance costs, was $347.1 million, consisting principally of $193.7 million drawn on the revolving credit facility and a $150.0 million term loan. Borrowing availability was $10.1 million, compared with $19.8 million at December 31, 2015.
For the twelve months ended June 30, 2016, the reported credit-facility leverage ratio was 5.94x, the fixed-charge coverage ratio was 0.75x and the asset-coverage ratio was 1.00x. Floating-rate debt exposure was approximately $3.5 million of annual interest expense for each 100-basis-point rate change.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 20.8% year over year; first-half sales declined 23.4%. On a same-store basis, sales decreased 22.8% in the quarter and 25.2% year to date.
- Service Centers drove the largest sales decline, reflecting weaker demand from upstream oil and gas and related manufacturing customers. IPS sales also declined due to reduced oil-and-gas capital spending. SCS sales declined more modestly.
- Gross margin decreased 25 basis points in the quarter and approximately 90 basis points year to date. First-half IPS margins declined approximately 200 basis points, while SCS margins improved approximately 160 basis points.
- SG&A decreased 18.8% in the quarter and 15.1% year to date, reflecting headcount reductions, compensation savings and other cost controls. SG&A nevertheless increased as a percentage of sales because revenue declined faster than expenses.
- Operating income decreased 36.8% in the quarter and 78.7% year to date. Interest expense increased 52.4% in the quarter and 39.5% year to date, partly due to debt issuance cost write-offs and higher rates.
- Operating cash flow fell from $53.8 million to $11.2 million year to date, primarily because of lower earnings and a substantially smaller reduction in accounts receivable.
- Days sales outstanding increased to 60.1 days from 57.1 days, while inventory turns declined to 7.5x from 8.5x.
Guidance, Outlook, Risks and Unusual Items
- Management expected declining oil-and-gas-related demand to continue through the remainder of 2016 if crude oil and natural gas prices remained at or below second-quarter levels. No quantitative revenue or earnings guidance was provided.
- On August 15, 2016, after quarter-end, DXP amended its credit facility. The revolving commitment was reduced to $205 million, with a further reduction to $190 million scheduled for March 31, 2017; pricing increased to LIBOR plus 5.00% or base rate plus 4.00%.
- The amended facility shortened maturity to March 31, 2018, required additional mandatory prepayments of $30 million by December 31, 2016 and $25 million by March 31, 2017, and added minimum EBITDA and capital-expenditure requirements.
- The leverage and fixed-charge covenants were waived through June 30, 2017, but management stated that covenant requirements become more restrictive thereafter and that refinancing or an amendment will be needed within the next two years. Alternative financing could dilute shareholders, and financing may not be available on attractive terms.
- Management believed operating cash flow would meet normal working-capital needs for the next twelve months and expected compliance with applicable covenants through June 30, 2017. However, the company stated that liquidity may be insufficient for working capital, scheduled principal payments, capital expenditures and preferred-stock dividends without additional financing.
- The company consolidated a variable-interest entity in which it owned 47.5% of the equity; the VIE had approximately $4.7 million of assets and was solely dependent on DXP as its customer.
- Legal proceedings were described as ordinary-course matters that management did not expect to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Most Important Facts to Verify
- Whether DXP can satisfy the amended facility’s mandatory principal prepayments, minimum EBITDA and asset-coverage requirements.
- Availability and terms of refinancing before the March 31, 2018 maturity and before covenants tighten after June 30, 2017.
- Whether oil-and-gas demand, customer payment times and inventory turns stabilize or deteriorate further.
- The sustainability of cost reductions and whether lower revenue continues to pressure operating margins and cash generation.
- The impact of higher borrowing spreads and required debt reductions on interest expense and liquidity.
- The company’s ability to maintain compliance with the amended facility given the reported 5.94x leverage ratio and 0.75x fixed-charge coverage ratio.