DXP Enterprises, Inc. — Form 10-Q Summary
Business Context and Reporting Period
DXP distributes maintenance, repair and operating products, equipment and services to industrial customers. Its segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sales | $329.7 million | $289.9 million | $927.8 million | $804.1 million |
| Gross profit | $97.1 million | $83.5 million | $277.7 million | $231.6 million |
| Gross margin | 29.5% | 28.8% | 29.9% | 28.8% |
| Operating income | $26.9 million | $24.5 million | $72.9 million | $65.3 million |
| Operating margin | 8.2% | 8.5% | 7.8% | 8.1% |
| Net income | $16.4 million | $13.1 million | $43.3 million | $36.9 million |
| Diluted EPS | $1.07 | $0.86 | $2.84 | $2.43 |
For the nine months, operating cash flow was $67.7 million, compared with $21.3 million in the prior-year period. Capital expenditures were $6.4 million and acquisition spending, net of cash acquired, was $61.4 million. Cash declined to $8.3 million at September 30, 2013 from $10.5 million at December 31, 2012.
Total debt was $236.2 million, including $23.8 million of current maturities, versus $238.4 million at year-end 2012. The revolving facility and term loan had $233.4 million outstanding at an approximately 1.8% weighted-average LIBOR-based rate, with approximately $118.5 million available. Shareholders’ equity increased to $257.0 million from $208.5 million, while goodwill and other intangible assets increased to $260.3 million from $209.0 million.
Material Changes Versus Prior Comparable Period
- Third-quarter sales increased 13.7%; nine-month sales increased 15.4%. Acquisitions contributed $28.9 million of the quarterly increase and $115.3 million of the nine-month increase. Same-store sales increased 3.8% in the quarter and 1.0% for the nine months.
- Gross margin improved by 66 basis points in the quarter and 114 basis points for the nine months, primarily due to customer and product mix.
- SG&A increased to $70.2 million in the quarter and $204.9 million for the nine months. SG&A as a percentage of sales increased because acquired businesses had higher expense ratios.
- Operating income increased 9.7% in the quarter and 11.7% for the nine months, below the rate of sales growth because acquired businesses generated lower operating margins.
- Quarterly interest expense decreased 29.4%, primarily because the 2012 period included a $0.7 million write-off of debt issuance costs. Nine-month interest expense increased 27.1% because of higher average debt associated with acquisitions.
- IPS was the strongest growth segment, with sales up 58.9% in the quarter and 37.6% for the nine months. Service Centers sales increased 9.2% and 15.5%, respectively. Supply Chain Services sales declined 6.4% and 6.2%.
- Recent acquisitions included National Process Equipment, Tucker Tool, Alaska Pump & Supply and Tool-Tech. Acquired businesses contributed $62.7 million of sales in the quarter and $161.4 million for the nine months.
Guidance, Outlook, Risks and Unusual Items
Management stated that operating cash flow and available credit are expected to meet normal working-capital needs for the next twelve months. Additional financing may be required for potential acquisitions, which could dilute shareholders or may not be available on attractive terms.
Management attributed quarterly same-store sales growth to improvement in the U.S. economy and IPS growth to increased capital spending by oil, gas and mining customers. Supply Chain Services remained exposed to weakness among automotive and truck manufacturing customers.
- The credit facility matures July 11, 2017 and is secured by substantially all of the Company’s assets. Financial covenants were satisfied at September 30, 2013: leverage ratio 1.81x versus a 3.50x maximum, fixed-charge coverage ratio 3.15x versus a 1.25x minimum, and asset coverage ratio 1.99x versus a 1.00x minimum.
- A 100-basis-point change in floating interest rates would change annual interest expense by approximately $2.4 million.
- NatPro includes a potential $6.0 million earnout; the recorded liability was $2.9 million at September 30, 2013.
- The investment portfolio experienced a $1.3 million decline in market value during the nine months, recognized in other comprehensive income, net of tax.
- Management identified acquisition integration, customer and market conditions, regulatory changes, pricing, financing availability and execution of internal and acquisition growth strategies as material risks.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes were reported to previously disclosed risk factors, and no subsequent events required disclosure.
Investor Verification Checklist
- Verify the sustainability of growth excluding acquisitions, particularly the modest nine-month same-store increase of 1.0%.
- Assess whether acquired businesses can reach the margins of the legacy operations and whether goodwill and intangible-asset valuations remain supportable.
- Monitor leverage, covenant headroom, floating-rate exposure and the Company’s reliance on its secured credit facility to fund acquisitions.
- Review the NatPro earnout, acquisition purchase-price allocations and any subsequent revisions to estimated fair values.
- Evaluate working-capital trends, including receivables, inventory, cash balances and the reported improvement in days sales outstanding.
- Confirm the filing’s acquisition dates and amounts, as the text contains apparent typographical references to 2013 transactions as “2103.”