Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DXPE > SEC Filings for DXPE > Form 10-K on 11-Mar-2013All Recent SEC Filings

Show all filings for DXP ENTERPRISES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for DXP ENTERPRISES INC


11-Mar-2013

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes contained within Item 8 of this Report. Management's Discussion and Analysis uses forward-looking statements as described previously in our Disclosure Regarding Forward-Looking Statements.

General Overview

Our products and services are marketed in the United States, Canada, and Mexico to over 50,000 customers that are engaged in a variety of industries, many of which may be countercyclical to each other. Demand for our products generally is subject to changes in the United States and Canada, and global and micro-economic trends affecting our customers and the industries in which they compete in particular. Certain of these industries, such as the oil and gas industry, are subject to volatility driven by a variety of factors, while others, such as the petrochemical industry and the construction industry, are cyclical and materially affected by changes in the United States and global economy. As a result, we may experience changes in demand within particular markets, segments and product categories as changes occur in our customers' respective markets.

During 2008, the general economy weakened. However, the oil and gas exploration and production business continued to be positive during the first half of 2008, before declining during the second half of 2008. During 2008 our headcount increased by 18% primarily as a result of three acquisitions. Sales by the three businesses acquired in 2008 accounted for $33.4 million of 2008 sales. Sales by three businesses acquired in 2007 accounted for $200.4 million of 2008 sales. Excluding sales of businesses acquired in 2007 and 2008, on a same store sales basis, 2008 sales increased 13.2%. This increase resulted from a broad-based increase in sales by our Service Centers, Innovative Pumping Solutions locations and Supply Chain locations.

During 2009, the general economy and the oil and gas exploration and production business declined significantly. During 2009, our headcount decreased by approximately 10% as a result of actions taken to reduce operating costs. Sales for 2009 declined by 21% from 2008. Sales by businesses acquired during 2008 accounted for $36.1 million of 2009 sales. Excluding these sales by acquired businesses, sales declined by 26% from 2008. The 2009 sales decline is primarily due to a broad-based decline in the sales of pumps, bearings, safety products and industrial supplies in connection with a broad-based decline in the U.S. economy. This economic decline led to the impairment of our goodwill and other intangibles. During the fourth quarter of 2009 the Company recognized an impairment charge of $53.0 million for goodwill and other intangibles and an impairment charge of $13.8 million to reduce the valuation of inventory acquired in the 2007 acquisition of Precision Industries, Inc. The impairment charges did not result in any cash expenditures, did not adversely affect compliance with covenants under our credit facility, and did not affect our cash position or cash flows from operating activities.

During 2010, the general economy and the oil and gas exploration and production business improved. Our employee headcount increased by approximately 7% as a result of two acquisitions. Excluding the employees at the two acquired businesses headcount declined by approximately 1%, primarily as a result of consolidating back office functions. Sales by Quadna, acquired April 1, 2010 and D&F, acquired December 1, 2010, accounted for $43.6 million of 2010 sales. Excluding Quadna and D&F sales, sales for 2010 increased 5.0%.

During 2011, the general economy and the oil and gas exploration and production business continued to improve. Our employee headcount increased by 18% primarily as a result of two acquisitions and hiring additional personnel to support increased sales. Sales for the year ended December 31, 2011 increased $150.8 million, or 23.0%, to approximately $807.0 million from $656.2 million in 2010. Sales by KC, acquired October 10, 2011, accounted for $11.9 million of 2011 sales. Sales by businesses acquired in 2010, on a same store sales basis, accounted for $35.6 million of 2011 sales. Excluding 2011 sales by businesses acquired in 2010 and 2011, on a same store sales basis, sales increased 15.8% from 2010. The majority of the 2011 sales increase came from a broad-based increase in sales of pumps, bearings, safety products and industrial supplies to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.


During 2012, the general economy and the oil and gas exploration and production business remained positive. Our employee headcount increased by 35% primarily as a result of multiple acquisitions and hiring additional personnel to support increased sales. Sales for the year ended December 31, 2012 increased $290.1 million, or 35.9%, to $1,097.1 million from $807.0 million in 2011. Sales by businesses acquired in 2012 accounted for $86.3 million of 2012 sales. Sales by businesses acquired in 2011 accounted for $107.7 million of 2012 sales, on a same store sales basis. Excluding 2012 sales of $194.0 million by businesses acquired in 2011 and 2012, on a same store sales basis, sales increased 11.9% from 2011. The majority of this 11.9% sales increase came from a broad-based increase in sales of pumps, bearings, safety products and industrial supplies to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.

Our sales growth strategy in recent years has focused on internal growth and acquisitions. Key elements of our sales strategy include leveraging existing customer relationships by cross-selling new products, expanding product offerings to new and existing customers, and increasing business-to-business solutions using system agreements and supply chain solutions for our integrated supply customers. We will continue to review opportunities to grow through the acquisition of distributors and other businesses that would expand our geographic reach and/or add additional products and services. Our results will depend on our success in executing our internal growth strategy and, to the extent we complete any acquisitions, our ability to integrate such acquisitions effectively.

Our strategies to increase productivity include consolidated purchasing programs, centralizing product distribution centers, and customer service and inside sales functions, converting selected locations from full warehouse and customer service operations to service centers, and using information technology to increase employee productivity.

Results of Operations

                                           Years Ended December 31,

                             2012      %        2011        %        2010       %
                            (in millions, except percentages and per share amounts)

   Sales                          $    100.0     $ 807.0    100.0     $ 656.2 100.0
                            1,097.1
   Cost of sales              778.0     70.9       575.2     71.3       467.8  71.3
   Gross profit               319.1     29.1       231.8     28.7       188.4  28.7
   Selling, general &         228.6     20.8       176.3     21.9       151.3  23.1
   administrative expense
   Operating income            90.5      8.3        55.5      6.8        37.1   5.6
   Interest expense             5.6      0.5         3.5      0.4         5.2   0.8
   Other expense (income)     (0.1)        -           -        -       (0.2)     -
   Income before income        85.0      7.8        52.0      6.4        32.1   4.8
   taxes
   Provision for income        34.0      3.1        20.6      2.5        12.7   1.9
   taxes
   Net income                $ 51.0      4.7      $ 31.4      3.9      $ 19.4   2.9
   Per share
    Basic earnings per       $ 3.54               $ 2.19               $ 1.40
   share
    Diluted earnings per     $ 3.35               $ 2.08               $ 1.32
   share

DXP is organized into three business segments: Service Centers, Supply Chain Services (SCS) and Innovative Pumping Solutions (IPS). The Service Centers are engaged in providing maintenance, repair and operating (MRO) products, equipment and integrated services, including technical expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery. The Service Centers provide a wide range of MRO products and services in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The SCS segment manages all or part of our customer's supply chain, including inventory. The IPS segment fabricates and assembles custom-made integrated pump system packages.


Year Ended December 31, 2012 compared to Year Ended December 31, 2011

SALES. Sales for the year ended December 31, 2012 increased $290.1 million, or 35.9%, to approximately $1,097.1 million from $807.0 million in 2011. Sales by businesses acquired in 2012 accounted for $86.3 million of 2012 sales. Sales by businesses acquired in 2011 accounted for $107.7 million of the 2012 increase, on a same store sales basis. Excluding 2012 sales of $194.0 million by businesses acquired in 2011 and 2012, on a same store sales basis, sales increased by $96.1 million, or 11.9% from 2011. The majority of this 11.9% sales increase came from a broad-based increase in sales of pumps, bearings, safety products and industrial supplies to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.

GROSS PROFIT. Gross profit as a percentage of sales increased to 29.1% for 2012 compared to 28.7% for the prior corresponding period primarily as a result of increased gross profit percentages experienced by our Innovative Pumping Solutions and Supply Chain Services segments. Supply Chain Services' gross profit percentage increased primarily as a result of a change in customer mix. The increase in gross profit percentage in the IPS segment was primarily related to stronger demand for IPS products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense for 2012 increased by approximately $52.3 million, or 29.7%, when compared to 2011. Selling, general and administrative expense by businesses acquired in 2012 was $24.3 million. Selling, general and administrative expense for acquisitions that occurred in 2011 accounted for $19.3 million of the 2012 increase, on a same store sales basis. Excluding 2012 expenses of $43.6 million by businesses acquired in 2011 and 2012, on a same store sales basis, the increase primarily related to increased salaries, commissions, health claims and insurance premiums. As a percentage of sales, the 2012 expense decreased to 20.8% from 21.9%, primarily as a result of economies of scale.

OPERATING INCOME. Operating income for 2012 increased $35.0 million from $55.5 million to $90.5 million, or 63.1%, compared to the prior corresponding period. The increase is primarily related to the combination of the 35.9% increase in sales, the increase in gross profit as a percentage of sales, and selling, general and administrative expense increasing only 29.7% compared to the 35.9% increase in sales.

INTEREST EXPENSE. Interest expense for 2012 increased by $2.1 million, or 58%, from 2011. Approximately $0.7 million of this increase resulted from fully amortizing the debt issuance costs of the old credit facility which was replaced on July 11, 2012. The remainder of the increase in interest expense was primarily the result of increased borrowings used to acquire businesses.

INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 35% primarily due to state income taxes and non-deductible expenses. Our effective tax rate for 2012 of 40% increased from 39.5% from the prior corresponding period, primarily as a result of non-deductible fees associated with acquisitions.

SERVICE CENTERS SEGMENT. Sales for the Service Centers increased $218.8 million, or 39.1% from the prior corresponding period. Sales by businesses acquired in 2012 accounted for $86.3 million of 2012 sales. Sales by businesses acquired in 2011 accounted for $95.6 million of the 2012 increase, on a same store sales basis. Excluding 2012 sales of $181.9 million by businesses acquired 2011 and 2012, on a same stores sales basis, Service Centers' sales increased $36.9 million, or 6.6%, on a same stores sales basis, from the prior corresponding period. This sales increase is primarily due to continued improvement in the manufacturing and oil and gas portions of the U.S. economy. Operating income for the Service Centers segment increased $24.4 million, or 37.9%. Excluding 2011 and 2012 acquisitions, operating income increased $8.3 million, or 12.8%, on a same stores sales basis, from the prior corresponding period. This increase was primarily attributable to the increased sales mentioned above.

SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services increased by $11.8 million, or 8.2%, in 2012 compared to the prior corresponding period. None of the 2012 acquisitions contributed sales to this segment. Sales by businesses acquired in 2011 accounted for $12.1 million of 2012 sales, on a same store sales basis. The segment experienced a $0.4 million decrease in sales on a same store sales basis. The decrease is primarily due to reduced sales to customers in the trucking and military related industries. Operating income for the SCS segment increased by $4.0 million, or 47.8%, compared to the prior corresponding period. Excluding 2011 and 2012 acquisitions, operating income increased $3.1 million, or 36.8%, on a same stores sales basis from the prior corresponding period. This increase was due to an increase in gross profit percentage and a decrease in sales, general and administrative costs related to a reduction in administrative headcount.

INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for Innovative Pumping Solutions increased by $59.5 million, or 58.2%, in 2012 compared to the prior corresponding period. The sales increase resulted from increased capital spending by our oil and gas and mining customers. Operating income for the IPS segment increased $15.2 million, or 89.7%, primarily as a result of the 58.2% increase in sales combined with an increased gross profit percentage.


Year Ended December 31, 2011 compared to Year Ended December 31, 2010

SALES. Sales for the year ended December 31, 2011 increased $150.8 million, or 23.0%, to approximately $807.0 million from $656.2 million in 2010. Sales by KC, acquired October 10, 2011, accounted for $11.9 million of 2011 sales. Sales by businesses acquired in 2010, on a same store sales basis, accounted for $35.6 million of 2011 sales. Excluding 2011 sales by businesses acquired in 2010 and 2011, on a same store sales basis, sales increased 15.8% from 2010.

GROSS PROFIT. Gross profit as a percentage of sales was 28.7% for 2011 and 2010.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for 2011 increased by approximately $25.0 million when compared to 2010. A portion of the increase relates to $9.6 million of selling, general and administrative expense for businesses acquired in 2010 and 2011, on a same store sales basis. Excluding the expenses of businesses acquired in 2010 and 2011, on a same store sales basis, the increase primarily resulted from increased salaries, incentive compensation, employee benefits and travel expenses compared to 2010. As a percentage of revenue, the 2011 expense decreased to 21.9% from 23.1% for 2010.

OPERATING INCOME. Operating income for 2011 increased 49.6% compared to 2010. This increase is the result of gross profit increasing 23.1% while selling, general and administrative expense increased only 16.6%.

INTEREST EXPENSE. Interest expense for 2011 decreased by 32.5% from 2010. This decrease primarily resulted from lower average interest rates combined with a reduction in the average amount of debt outstanding compared to 2010. On July 25, 2011 we amended our credit facility. This amendment significantly decreased the interest rates and commitment fees applicable at various leverage ratios from levels in effect before July 25, 2011.

INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 35% due to state income taxes and non-deductible expenses. Our effective tax rate for 2011 of 39.6% was consistent with the 39.7% rate for 2010.

SERVICE CENTERS SEGMENT. Sales for Service Centers increased $107.5 million, or 23.7%. Excluding $9.1 million of first quarter 2011 Quadna Service Centers segment sales, first eleven months of 2011 sales by D&F of $23.2 million and $5.9 million of fourth quarter 2011 KC Service Centers segment sales, Service Center segment sales for 2011 increased 15.3% from 2010, on a same store sales basis. This sales increase is primarily due to improvement in the oil and gas and manufacturing portions of the U.S. economy. Operating income for the Service Centers segment increased 27.6%, primarily as a result of the 23.7% increase in sales combined with an increase in gross profit as a percentage of sales.

SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services increased by $18.0 million, or 14.2%, for 2011 when compared to 2010. Excluding KC SCS segment sales of $5.9 million, SCS segment sales for 2011 increased 9.5% from 2010, on a same store sales basis. Operating income for the SCS segment increased 18.7% primarily as a result of the 14.2% increase in sales for this segment.

INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for Innovative Pumping Solutions increased by $25.3 million, or 32.8% for 2011 when compared to 2010. Excluding first quarter 2011 Quadna IPS sales of $3.3 million, IPS sales for 2011 increased 28.5% from 2010, on a same store sales basis. The sales increase resulted from the increase in capital spending by our oil and gas and mining related customers. Operating income for the IPS segment increased 63.7% as a result of the 32.8% increase in sales combined with relatively consistent selling, general and administrative expenses.


Pro Forma Results

The pro forma unaudited results of operations for the Company on a consolidated
basis for the years ended December 31, 2012 and 2011, assuming the acquisitions
of businesses completed in 2012 were consummated as of January 1, 2011 follows:

                                            Years Ended
                                            December 31,
                                       2012             2011
                                            (unaudited)
                                           (in millions,
                                     except for per share data)
                  Net sales            $ 1,177.1        $ 1,062.5
                  Net income            $   54.0        $    41.4
                  Per share data
                  Basic Earnings          $ 3.75           $ 2.88
                  Diluted Earnings        $ 3.55           $ 2.72

The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2010 and 2011, assuming the acquisitions of businesses completed in 2011 were consummated as of January 1, 2010 follows:

                                            Years Ended
                                            December 31,
                                       2012             2011
                                            (unaudited)
                                           (in millions,
                                     except for per share data)
                  Net sales              $ 903.2          $ 778.3
                  Net income             $  35.5          $  22.9
                  Per share data
                  Basic Earnings          $ 2.48           $ 1.65
                  Diluted Earnings        $ 2.35           $ 1.56

Liquidity and Capital Resources

General Overview

As a distributor of MRO products and services, we require significant amounts of working capital to fund inventories and accounts receivable. Additional cash is required for capital items such as information technology, warehouse equipment and capital expenditures for our safety products and services category. We also require cash to pay our lease obligations and to service our debt.

We generated approximately $51.2 million of cash in operating activities in 2012 as compared to generating $25.8 million in 2011. This change between the two years was primarily attributable to the $19.5 million increase in net income.

During 2012 we paid $106.0 million in cash, net of $12.4 million of cash acquired, for seven businesses acquired during 2012 and $38.9 million for an acquisition that occurred in late 2011 compared to paying $18.4 million in cash related to the purchase of two businesses during 2011.


We purchased approximately $14.1 million of capital assets during 2012 compared to $4.1 million for 2011. Capital expenditures during 2012 were related primarily to transportation equipment, computer equipment, computer software, production equipment, inventory handling equipment, safety rental equipment and building improvements. Capital expenditures for 2013 are expected to be lower than the 2012 amount.

At December 31, 2012, our total long-term debt, including the current portion, was $238.4 million compared to total capitalization (total long-term debt plus shareholders' equity) of $446.9 million. Approximately $234.5 million of this outstanding debt bears interest at various floating rates. Therefore, as an example, a 200 basis point increase in interest rates would increase our annual interest expense by approximately $4.7 million.

Our normal trade terms for our customers require payment within 30 days of invoice date. In response to competition and customer demands we will offer extended terms to selected customers with good credit history. Customers that are financially strong tend to request extended terms more often than customers that are not financially strong. Many of our customers, including companies listed in the Fortune 500, do not pay us within stated terms for a variety of reasons, including a general business philosophy to pay vendors as late as possible.

During 2012, the amount available to be borrowed under our credit facility increased from $78.2 million at December 31, 2011, to $109.5 million at December 31, 2012. The increase in availability is primarily the result of the terms of the new credit facility. We believe that the liquidity of our balance sheet and credit facility at December 31, 2012, provides us with the ability to meet our working capital needs, scheduled principal payments, capital expenditures and Series B convertible preferred stock dividend payments during 2013.

Credit Facility

On July 11, 2012 DXP entered into a credit facility with Wells Fargo Bank National Association, as Issuing Lender, Swingline Lender and Administrative Agent for the lenders. On December 31, 2012 the Company amended the agreement which increased the Credit Facility by $75 million (the "Facility"). The Facility consists of a $130 million term loan and a revolving credit facility that provides a $262.5 million line of credit to the Company as of December 31, 2012.

The line of credit portion of the Facility provides the option of interest at LIBOR plus an applicable margin ranging from 1.25% to 2.25% or prime plus an applicable margin from 0.25% to 1.25% where the applicable margin is determined by the Company's leverage ratio as defined by the Facility at the date of borrowing. Rates for the $130 million term loan component are 25 basis points higher than the line of credit borrowings. Commitment fees of 0.20% to 0.40% per annum are payable on the portion of the Facility capacity not in use at any given time on the line of credit. Commitment fees are included as interest in the consolidated statements of income.

Primarily because the leverage ratio was higher after the acquisition of HSE that occurred on July 11, 2012, interest rates in effect on July 11, 2012 were approximately 70 basis points higher than they were immediately prior to the acquisition. Approximately $0.7 million of debt issuance costs associated with the prior credit facility were expensed in the third quarter of 2012.

On December 31, 2012, the LIBOR based rate on the line of credit portion of the Facility was LIBOR plus 1.75%, the prime based rate of the Facility was prime plus 0.75%, the LIBOR based rate on the term loan portion of the Facility was LIBOR plus 2.00% and the commitment fee was 0.30%. At December 31, 2012, $226.5 million was borrowed under the Facility at a weighted average interest rate of approximately 2.11% under the LIBOR options and $8.0 million was borrowed at 3.75% under the prime option. At December 31, 2012, the Company had $109.5 million available for borrowing under the Facility.

The Facility expires on July 11, 2017. The Facility contains financial covenants defining various financial measures and levels of these measures with which the Company must comply. Covenant compliance is assessed as of each quarter end.


The Facility's principal financial covenants include:

Consolidated Leverage Ratio - The Facility requires that the Company's Consolidated Leverage Ratio, determined at the end of each fiscal quarter, not exceed 3.5 to 1.0 as of the last day of each quarter from the closing date through March 31, 2015 and not to exceed 3.25 to 1.00 from June 30, 2015 and thereafter. The Consolidated Leverage Ratio is defined as the outstanding indebtedness divided by Consolidated EBITDA for the period of four consecutive fiscal quarters ending on or immediately prior to such date. Indebtedness is defined under the Facility for financial covenant purposes as: (a) all obligations of DXP for borrowed money including but not limited to obligations evidenced by bonds, debentures, notes or other similar instruments; (b) obligations to pay deferred purchase price of property or services; (c) capital lease obligations; (d) obligations under conditional sale or other title retention agreements relating to property purchased; (e) issued and outstanding letters of credit; and (f) contingent obligations for funded indebtedness. At December 31, 2012, the Company's Leverage Ratio was 1.87 to 1.00.

Consolidated Fixed Charge Coverage Ratio -The Facility requires that the Consolidated Fixed Charge Coverage Ratio on the last day of each quarter be not less than 1.25 to 1.0 with "Consolidated Fixed Charge Coverage Ratio" defined as the ratio of (a) Consolidated EBITDA for the period of 4 consecutive fiscal quarters ending on such date minus capital expenditures during such period (excluding acquisitions) minus income tax expense paid minus the aggregate amount of restricted payments defined in the agreement to (b) the interest expense paid in cash, scheduled principal payments in respect of long-term debt and the current portion of capital lease obligations for such 12-month period, determined in each case on a consolidated basis for DXP and its subsidiaries. At December 31, 2012, the Company's Consolidated Fixed Charge Coverage Ratio was 3.10 to 1.00.

Asset Coverage Ratio -The credit facility requires that the Asset Coverage Ratio at any time be not less than 1.0 to 1.0 with "Asset Coverage Ratio" defined as the ratio of (a) the sum of 85% of net accounts receivable plus 65% of net inventory to (b) the aggregate outstanding amount of the revolving credit . . .

  Add DXPE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DXPE - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.