DXP Enterprises, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
DXP distributes maintenance, repair and operating products, equipment and services to industrial customers in the United States. Its segments are Service Centers, Innovative Pumping Solutions and Supply Chain Services. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $252.3 million | $183.1 million | +37.8% |
| Gross profit | $71.5 million | $52.4 million | +36.3% |
| Gross margin | 28.3% | 28.6% | Down 0.3 percentage points |
| Operating income | $19.9 million | $11.5 million | +72.5% |
| Operating margin | 7.9% | 6.3% | Up 1.6 percentage points |
| Net income | $11.6 million | $6.3 million | +83.6% |
| Diluted EPS | $0.77 | $0.42 | +83.3% |
| Cash flow from operations | $26.6 million | $7.7 million | Increase of $18.9 million |
SG&A increased 26.1% to $51.6 million, but declined to 20.4% of sales from 22.3%. Interest expense decreased 18.9% to $0.8 million, primarily because of lower borrowing rates. The effective income tax rate was approximately 39.0% in Q1 2012 versus approximately 39.8% in Q1 2011.
At March 31, 2012, cash was $3.5 million, accounts receivable were $147.9 million, inventories were $95.3 million and total assets were $422.7 million. Total debt was $133.4 million, compared with $114.9 million at December 31, 2011. Shareholders’ equity was $168.7 million.
DXP generated $26.6 million from operations, used $43.3 million in investing activities, including $42.4 million for acquisitions, and generated $18.6 million from financing activities. Cash increased from $1.5 million at December 31, 2011 to $3.5 million at March 31, 2012.
Material changes versus the prior comparable period
- Sales growth included $31.9 million from businesses acquired in 2011 and 2012. Excluding those acquisitions, same-store sales increased 20.4%, which management attributed primarily to improved oil and gas and manufacturing activity.
- Service Centers sales increased 28.9%, or 9.5% excluding acquired businesses. Supply Chain Services sales increased 24.3%, or 5.9% on a same-store basis.
- Innovative Pumping Solutions sales increased 136.3%, driven by higher capital spending by oil and gas and mining customers; segment operating income increased 188.6%.
- Gross margin declined modestly because of the lower-margin KC acquisition and lower fastener margins, while operating margin improved because SG&A grew more slowly than gross profit.
- Q1 2012 acquisitions included Mid-Continent Safety for approximately $3.8 million and Pump & Power Equipment for approximately $1.9 million. The company also funded the delayed clearance of $36.7 million of checks related to the 2011 CW Rod acquisition.
- Goodwill increased to $103.6 million from $101.8 million at year-end 2011, and other intangible assets increased to $43.6 million from $43.2 million.
Guidance, outlook, risks, contingencies and unusual items
The filing does not provide specific financial guidance. Management stated that operating cash flow and available borrowing capacity are expected to meet normal working-capital needs for the next twelve months, but additional financing may be required for acquisitions. Management cited oil and gas and manufacturing conditions as drivers of recent growth.
- The $200 million revolving credit facility expires July 25, 2016. Borrowings were $129.5 million at March 31, 2012, with approximately $69.5 million available. The weighted-average borrowing rate under LIBOR options was approximately 1.50%.
- DXP reported compliance with its principal covenants: a fixed-charge coverage ratio of 12.8 to 1.0 versus a minimum of 1.5 to 1.0, and a leverage ratio of 1.58 to 1.0 versus a maximum of 4.0 to 1.0.
- A 100-basis-point change in interest rates would change annual interest expense by approximately $1.3 million based on floating-rate debt outstanding at March 31, 2012.
- Subsequent to quarter-end, DXP agreed to acquire HSE Integrated Ltd. for approximately US$85 million of enterprise value, subject to shareholder and court approvals. On May 1, 2012, it acquired Industrial Paramedic Services for $24.1 million, financed with borrowings, promissory notes and common stock. These transactions were not reflected in the March 31 financial statements.
- The company carries significant goodwill, intangible assets, receivables and inventory. Estimates involving collectability, inventory obsolescence, purchase accounting, taxes, self-insurance and impairment could materially affect results.
- There was a $0.2 million after-tax loss on long-term investments in comprehensive income, and the fair value of a quoted investment declined by $0.4 million during the quarter.
- No material developments occurred in the litigation with BP America Production Company. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether acquisition-driven growth and the reported 20.4% same-store sales increase are sustainable if oil, gas and manufacturing activity weakens.
- Integration performance, margins and cash generation from KC, CW Rod, Mid-Continent, Pump & Power and the subsequent Canadian acquisitions.
- Debt utilization, remaining borrowing capacity and compliance with the revolving facility’s covenants after the subsequent acquisitions.
- The effect of lower-margin acquired businesses and fastener pricing on future gross margins.
- Exposure to floating interest rates, with approximately $1.3 million of annual interest sensitivity for each 100-basis-point rate change.
- Goodwill and intangible-asset impairment risk, including the assumptions used in future impairment assessments.
- The filing text does not provide a clear full-year earnings or revenue forecast; investors should not infer formal guidance from management’s general outlook statements.