Q4 2019 Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the DXP Enterprises fourth quarter and fiscal 2019 conference call. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone.

If you require any further assistance please press star zero.

I would now like to handle the conference over to your speaker today, David Little CEO and 10 P. CFO. Please go ahead.

Thank you Kinsey. This is Kent, you and welcome to DXP is Q4 2019 conference call to discuss our results for the fourth quarter in fiscal year, ending December 30, Onest 2019.

Joining me today is our chairman and CEO David Little.

Before we get started I want to remind you that today's call is being webcast and recorded and includes forward looking statements.

Actual results may differ materially from those contemplated by these forward looking statements a detailed discussion of the many factors that we believe may have a material effect on our business on ongoing basis are contained in our SEC filings, but DXP assumes no obligation to update that information as a result of new information our future event.

Yes.

During this call we may present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our earnings press release.

Press release is now available on our website at <unk> IR that VXP E Dot com.

I will now I'll turn the call over to David to provide his thoughts and a summary of fiscal 2019 in the fourth quarter results.

Thanks, again, and thanks, everyone on our 2019 fourth quarter and year end conference call.

Ken will take you through the key financial details after my remarks, and after cans purposes. We we'll then open for QNX.

DXP you started fiscal year 2019, with the intention of making meaningful investments internally to grow sales and become more productive. We took on various initiatives that required short term added expenses and capital investments. Some of these large initiatives included in hand.

Seeing improving consult and consolidating our corporate operations to better support our internal customers.

Moving our flagship fabrication facility in Houston to a new 100000, plus square foot facility to provide more capabilities that faster deliveries for our customers.

And implementing several new software applications to support supply chain services accounts payable and human resource themes, expanding our aftermarket service and repair business new programs around vendor managed inventory and supply same services and created multiple new sizes.

All of our Pumpworks private label brands, including two new products Pwc, a if sales NPW Pcs.

We're pleased with these initiatives to make us fast convenient and technical experts.

Capital expenditures for fiscal 2019 to 22.1 million of which 13 million 0.1.

Was entirely growth related and in support of these initiatives in positioning DXP for the future.

Our growth initiatives were largely supported by our end markets for three quarters of the year and as we finished Q3, we experienced a deceleration in our Q enter backlog subsequent to two Q3 oil and gas activity continued to slow and in some instances halted as we closed out the.

Sure.

Additionally, our industrial end market indicators started to show.

Signs that pointed to a slowness in activity that caught up with our results in Q4.

However, we feel optimistic about 2020, despite the volatility in the market environment, given the strength of our balance sheet recent acquisition activity and the future opportunities we have to drive gross margin improvement into renewed focus on creating efficiencies.

In 2020.

We believe there are projects and 2022 wins.

And execute and that DXP will participate in this activity.

Our end market indicators have slowly started to rebound including the pm.

Metal working business index, but the overall health of the economy.

Was trending in a positive direction and seem to be better until the most recent macrilen.

Event, the Corona bars briefly DXP was developing programs to help keep our employees safe as possible.

Therefore.

On the keeping our customers exposure to a minimum.

Pumpworks supply channel, which.

Pumpworks supply channel will not be affected as everything made in the it is and made in America.

Our fourth quarter results reflect the abrupt halt to the oil and gas spending as our customers approach their physical year end and as overall slowness in the industrial markets. The start to show signs in Q3.

Total DXP sales for Q4 were.

295.5 million or 4.8 million per business day.

However, our profits were also impacted by some one time or unique items in jobs, which shifted Kent will review after.

During his comments they would have.

Skinny would have soften the impact of the slowing in sales.

Dx be delivered 4.2% total organic sales growth for the full year Dxpeople continue to provide 100% effort and doing a day's work in a day and driving stakeholder success and value creation.

Thank you to the 2747 Dxpeople for your hard work and dedication is always my pleasure to share your financial results on your behalf.

We generated 19.2 million of free cash flow in 2019, which is after these significant investments made in the physical year 2019.

DXP has positioned for significant capital deployment going forward as we look to close additional acquisitions. After the two we closed at the beginning of year of in systems, Inc. and turbo machinery repair.

We believe we continue to take market share in many of our businesses driven by our focus to provide fast convenient and technical expertise for our customers and all our stakeholders.

Turning to our results.

Total DXP sales in physical 2019 were 1.3 billion EUR, 4.2% increase.

Over the fiscal year 2018 supply chain services sales were 15.4% year over year to $201.3 million innovative pumping solutions sales increased 4.1% year over year to 303.7 million.

While service center sales increased 1.6% year over year to 762.3 million.

The lodging sales growth reflects the addition of new site new customer side.

They have implemented 14, plus new slides sites since Q3 of last year, including customers in the medical device aerospace and food and beverage markets.

Innovative pumping solutions sales increase continued to be driven by our modular package equipment of CTO and Ito jobs for upstream midstream refinery chemical petrochemical empower customers.

In terms of the IP as backlog it continued to decelerate in October and maintained its levels through the last two months of 2019.

EPS yearly average backlog decreased 1.1% from 2018 2019.

The Q4 monthly average is down 11.4% from 2018 yearly average backlog.

Overall, while Lubbock backlog has decelerated off of the 2018 high points. We remain encouraged by the total backlog dollar amounts in the market commentary from our customers that point out that there are jobs to win into 2020.

And DXP should get its fair share.

Keep in mind, we experience, 43% sales growth from 2017 to do thousand 18, and their volume is slightly down in 2020, we are not envisioning a scenario, where we cannot make money. We have just we made adjustments there.

In the last cycle.

We should be able to profitably perform at the current levels we are experiencing.

The service center year over year sales growth was primarily driven by increases in our metal working rotating equipment product divisions within service centers, we saw particular year over year sales strength in DXP hi.

Ill River Valley, West Seal and Texas Gulf Coast region.

Our Ohio River Valley regions, specifically set a record with as high as sales performance.

Year in the history of DXP congratulations.

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Dx fees overall gross profit margins for the year were 27.4%.

And eight basis point improvement over 2018.

Adjusting for unique items and IP addresses jobs gross margins.

Were 27.6% or 28 basis point improvement over 2018.

That said we were disappointed in the cost on these jobs and have made internal adjustments, including processes and personnel changes as we should have finished 2019 stronger than we did even in light of changing market conditions. We still are driving improvements in gross profit margins.

And look to have incremental improvements through 2020.

Yes, you today as a percent of sales increase 49 basis points going from 21.7% may 18% to 22.2% in 2019.

In terms of my thoughts on SGN, a SGN they will be managed to a targeted percent of sales.

As we become more focused only macro environment, while pushing the envelope for accelerated acquisition costs and pushing.

On cost efficiencies and 22000.

The next phase overall operating income margin was 5.2% or 66.1 million, which includes corporate expenses and amortization.

We feel there's the opportunity in our operations to be more efficient and I just mentioned as I just mentioned.

But we want to make sure. This is targeted towards those businesses that still have areas of improvement within DSP.

Service centers operating income margins were 11.4% Rps operating income margins were 9.5%.

With Q4 results showing weakness is due to lower margin jobs and the impact us a onetime costs.

Adjusting for these jobs and onetime costs Ibps operating income margins would have been 10.4% and finally supply chain services operating income margin was 7.2% with supply chain.

Improving margins in the fourth quarter 126 basis points.

Overall, DXP reduced EBITDA of 91.3 million versus 95.8 million in 2018, EBITDA as a percent of sales of 7.2% versus 7.9% in 2018.

And in terms of capital allocation physical 2019 was focused on investing internally in the businesses as they started.

As of shared with you have started my comments. Additionally, dx be focused on generating cash paying down debt, maintaining a pristine balance sheet that would give us the opportunities headed into 2020 to pursue acquisitions more forcefully.

For the future successful execution of our strategy, we expect continued improvements towards generating free cash flow and greater shareholder value.

In summary, we are pleased with our first three quarters and disappointed in our fourth quarter.

Q4 has a lot of noise and that will not reappear, but sales were down and the outlook seems okay with backlog building slowly and then oil prices go to $43 a barrel driven by the Corona bars.

We look to continue to drive improvement in our gross margins move closer to our historical average of 28 plus percent on a combined basis, we will drive future sales growth through acquisitions and anticipate physical 2020 to be another year of volatility but one.

One where we cannot take anything for granted and need to proactively drive sales growth through acquisitions.

Improving gross margins through internal initiatives and look to drive efficiency, where appropriate in light of ever changing market environments.

We know that DXP has a differentiated compelling value proposition DXP sales operation and corporate functions remain energized and continue to work together to create value for our customers.

XP as a great team focused on producing great results for our customers suppliers and our shareholders alike, all three business segments.

We'll strive to improve in the upcoming year, and we will drive change innovate for growth and lead smarter.

With that I'll now turn it back over to can't to review the financials in more detail.

Thank you David and thank you to everyone joining us for our review fourth quarter and fiscal 2019 financial results.

Q4 financial performance reflects a shift in the operating environment, specifically by our oil and gas customers. All three business segments were impacted but the greatest impact was felt within innovative pumping solutions.

That said the XP finished the year and a strong position poised to execute on our acquisition strategy, having closed two acquisitions since year end drive further improvements in gross and operating margins within innovative pumping solutions, which I will touch on in my comments later and continue to drive free cash flow generation as we move into fiscal year 2000.

20.

As David mentioned in his comments fiscal 2019 was focused on internal investment and positioning DSP to continue to serve our customers employees and suppliers, we executed our plans, while navigating that changing macro and industry environment.

Our initiatives, we're focused on improving our facilities in expanding for growth enhancing our software tools to be more efficient and manage the business smarter and offering products and services to continue to be a one stop source for all our customer needs.

Total sales for the fourth quarter decreased 5% year over year to 295.5 million, reflecting the stall in activity, we experienced from our oil and gas customers.

Total DXP sales for fiscal 2019 grew 4.2%.

First six months of 2019, we were on pace to grow 7.9% and through three quarters, we were still on track to grow 7.3%.

A majority of the drop off occurred in Q4, and the shift our halting in spending from our oil and gas end markets as such for the second half of 2019 Q3 in Q4, we grew 0.6% on a year over year basis.

Average daily sales for the fourth quarter were 4.8 million per day.

It is 5 million per day in Q4 2018.

Average daily sales for fiscal 2019 were 5 million per day versus 4.8 million per day in fiscal 2018.

In terms of our business segments, all three experienced sales growth year over year with supply chain services, showing the greatest improvement increasing 15.4% followed by innovative pumping solutions, which experienced 4.1% growth and service centers with 1.6% growth.

Hi, Jane sales growth reflects the addition of new customer sites, which we have highlighted since Q3 of 2018.

SCS has consistent sequential growth quarter over quarter through 2019, implementing 14, plus new sites, including customers in the medical device aerospace and food and beverage markets.

If sales growth was driven by configure to order engineered to order and our brand in private label pump offerings.

End markets, where we experienced growth include the upstream midstream refinery chemical petrochemical and power customers.

Regions within our service Center segment, which experienced meaningful sales growth in fiscal 2019 include the Ohio River Valley, West and Texas Gulf Coast regions. Additionally, we saw meaningful increases within our seal metalworking and rotating equipment product divisions.

As David mentioned, we want to congratulate our Ohio River Valley region for setting a sales record growing to over 81.7 million in sales.

Graduations to the RV team you had a great year.

Turning to our gross margins Dxps total gross margins were 27.4%.

DXP is total gross margins for 2019 reflect progress. However in Q1 in Q4, we were negatively impacted by projects that lost gross profit dollars.

We were simply too aggressive in building market share and on multiple projects manufacturing made mistakes there've been some adjustments to improve these processes and personnel changes and we should see gradual improvement in fiscal year 2020.

Adjusting for these jobs on a breakeven basis gross margins would've been 27.6%.

In terms of operating income combined all three business segments declined by 49 basis points in year over year business segment operating income margin versus 2018.

Total DSP operating income decreased by 2.3 million or 3.4% versus 2000 $18 million to $60.1 million.

Service centers improved operating income margins 62 basis points to 86.8 million supply chain services decreased 211 basis points year over year to 14.4 million followed by an unpaid innovative excuse me pumping solutions, which had a 212 basis points declined to 28.9 million for fiscal year 2019.

The decline in SCS is associated with the implementation of new SCS sites and revenue not fully scaling as mentioned during our earlier conference calls.

Additionally, supply chain services was impacted by a significant overrun on cost of implementing software for one of our customers that was intended to increase warehouse management productivity.

That said supply chain services improved operating income margins 126 basis points sequentially from Q3, Q4, and they are back on track going into fiscal year 2020.

In terms of IP has not only was IP has impacted by multiple jobs shipping at the same time that we're focused on market share gains versus profitability, but they also impacted by 1.6 million at one time SGN eight items during Q4.

In terms of corporate SGN, a DSP incurred an additional 1.5 million and onetime items that will not repeat in 2020.

Adjusting for these items operating income would have been 69.3 million or 5.5% of sales.

Turning to EBITDA fiscal 2019, EBITDA was 91.3 million.

EBITDA margins for fiscal 2019 were 7.2% compared to 7.9% in fiscal 2018.

Again, if we adjust for the aforementioned items adjusted EBITDA would have been $94.5 million or 7.5% of sales.

We do need to remember note that fiscal year 2018 includes a onetime gain from the sale of our corporate facility. So on a comparative basis EBITDA would've been flat year over year.

In terms of tax our effective tax rate was lower this year, primarily primarily due to the impact of a feature statutory rate change, Alberta, Canada move from 12% to 8%. We also received an increase benefit from R&D and work opportunity tax tax credits. They DXP has previously received in the past and a favorable change.

And then estimate due to tax reform.

In terms of EPS. Our net income for 2019 was 39.1 million. This is up 3.6 million or 10.1% versus 2018.

Our earnings per diluted share for fiscal 2019 was a dollar and 96 cents versus $1.94 cents in fiscal 2018.

Adjusting for all the items, we have discussed previously earnings per diluted share in 2019 would have been $2 in 17 cents.

Or 21 cents per share impact by these onetime or unique items.

Turning to the balance sheet in terms of working capital our working capital increased 21.1 million from the prior year to 225.3 main working capital as a percentage of sales at the ended the fourth quarter was 17.8%.

This is above our historical average, but reflects 170 basis points improvement compared to Q3.

The main drivers of the increase in working capital in 2019 include a 14.5 million increase in inventory and a 5.8 average payables day reduction in accounts payable were 11 million dollar impact we achieved inventory turns a 7.1 times down from 7.7 times a year ago.

From Q3 inventory is down 2.6 million and accounts payable is down $6.7 million.

We recently invested in a new procure to pay platform Cooper and we're seeing the impact of this investment in managing our financial relationship with our vendors, which we've mentioned in Q3, while it helped us get more in line with pain, our vendors overtime will be in a better position just strategically manage accounts payable as we move forward and take advantage of purchasing data and trends.

In the future.

In terms of cash we have 54.3 million in cash on the balance sheet at December 30, Onest. This is an increase of 13.8 million compared to December 30, Onest 2018.

In terms of Capex capex in the fourth quarter, with 7.9 million or 2.7% a fourth quarter sales.

Capex in fiscal 2019 was $22.1 million.

1.7% of total sales compared to fiscal 2018, Capex dollars are up $12.8 million.

As we have been discussing capex during the year reflects investments made within our facilities, including our corporate office, new fabrication facilities in Houston and other service Center locations. We also are continuing to make investments in software to enhance our corporate support operations and provide our people with tools to be more efficient fiscal year 2019 has been a yeah.

Year, where we have focused on growth capex versus maintenance capex of the 22.1 million and capex, 59% or 13.1 million has been growth related.

Turning to free cash flow.

Generated solid operating cash flow during the fourth quarter. During Q4 in fiscal 2019, we had cash flow from operations of 33.8 million and 41.3 million, respectively cash flow from operations increased 15.3% or $5.5 million versus 2018.

For fiscal 2019, we generated 19.2 million and free cash flow.

Adjusting for the growth related Capex adjusted free cash flow would've been $32.9 million or an increase of 31, 13.1% versus 2018, while we're always looking to enhance and improve our cash flow generate clash flow generation, we're comfortable with where we at the end of year, what further improvements to come in the future.

Return on invested capital our our IC was.

Was 24.2% in terms of our capital structure at December 30, Onest, our fixed charge coverage ratio was 2.9 to one and our secured leverage ratio was 2.2 to one.

Total debt outstanding at December 30, Onest was 244.4 million.

In conclusion, we remain focused on improving the way we operate our business segments and we have plans to continue to do more to propel disciplined consistent execution to drive greater productivity margin leverage and free cash flow in our businesses DXP is on the path of achieving its financial goals driving organic and acquisition sales growth EBITDA margin improved.

Okay, and EPS increases, we will now turn the call over for your questions.

At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.

Our first question comes from the line of Blake Hirschman from Stephens. Please go ahead. Your line is open.

Hi, good morning, guys.

More like good morning.

First one on start with Es margins essentially breakeven there you talked about the one state Samalizumab onetime costs can you talk a little bit more about that in kind of help us bridged.

Now, we got all the way down basically flat.

Yes, I'll start with that.

Well.

Blake This is Ken.

First of all it started off with that we just simply had some jobs that had negative gross margin dollars. So.

The first adjustment.

You do that is very uncharacteristic for us as we said it was in an effort to build market share in some some aggressive nature on the sales side of our business. If you well and so that was roughly a 2 million dollar impact.

So if you just and that's just a breakeven that's not to say.

Hey, maybe that those jobs could have performed at now closer to our average gross margins, but it's purely a conservative view. It just assume those jobs broke even in so thats, a 2 million dollar impact.

Then in Q4 as well you had some SG it SGN any items, some more cash as well as non cash that.

Related to the IP segment, and Thats, where you get that additional kind of 1.6 million dollar impact on that should flow through the SGN today.

So that.

That's where we get the additional kind of.

1.6, there as well so total year Youre really looking at at 3.6 and IP US alone that's just flowing through.

And so that.

We didnt have those items, obviously, you can do the math.

We would have been in a positive operating income territory, we would not have been.

You know.

The margins we were at in Q3.

But.

We surely wouldn't have had basically a breakeven quarter.

And so.

Thats kind of how we looked at it but once again that doesn't reflect that had those jobs performed at our average gross margin you could you could potentially add another $2 million on top of that from operating income perspective. So.

Okay and.

Had the majority of B.

More aggressively bid jobs slip flowed through or is this something we should be thinking about carrying over.

And to the next few quarters or year within an IPO.

Yes, no thats a great question Blake.

What I would say is we can see you know another.

Four to six jobs that Andy could ship kind of potentially in 2020 uneven as late as.

2021, just dependent upon the timing of those jobs.

And so we have some more if you will in the funnel not an in terms of volume a number of jobs a majority went out in Q4.

And so but there could be some more well there will be.

More into the future. We just don't know the exact timing right now at this point, but we can see it.

Okay, and then on the gross margins that took a little bit let's step back what was that mainly.

We kind of do due to these DS segment.

Issues that we've talked about or.

Is there more geographical product segment noise, just kind of want to get a better feel for some of that pieces there.

I guess I'm not following their their Blake just.

Maybe clarify the question.

Yes.

What was the best let's step back in gross margins that we saw was that mainly due to Ah yes.

Or were there some other headwinds in there maybe in.

The other says Oh I got your as well now now that the majority of the headwinds I apologize their Blake I follow you that you're talking total DXP gross margins.

Correct, Yes, you know.

Yes, no. This step back was primarily.

IP has driven there was there was a small quarter to quarter decline in the service that centers, but nothing notable a majority of that headwind was IP, yes related.

Okay, and then just lastly can we get that sales per day trends in on any.

Commentary you guys have been around how things it's bounced if they have come back in Austin the ended the year end.

How we should be thinking about the market with this corona Myers situation.

In terms of sales per business day.

You know I'll just read you the numbers as I normally do and I'll start as I normally do Q4 and bring you through estimate for February.

On October was 4.6 November 4.7 December 4.9 million per day January 4.4 million per day and in February 4.6.

So definitely.

I'll pull off from 5 million per day, we were averaging 2019.

But we're picking up as we.

China, if you will bottomed out a little bit here.

In March is typically a big month for us Blake So we're anticipating.

Big month in March as we normally have when we finish a quarter out.

Alright, Thanks, a lot I'll hop back in Q.

Our next question comes from the line of Joe Mondello with Sidoti and company. Please go ahead.

Hi, guys good morning.

I apologize back.

The beginning of the calls I apologize recovered.

Something already but a couple of things first off IPO.

So in terms of the revenue much lighter than we were looking for I'm, just going back to the third quarter call back in November.

It seemed like.

Relative to the backlog you stated that backlog was I think you said slightly down.

But this is long lead time type business and so I was thinking that we'd be a 2020 type fact than you. Even stated that you thought fourth quarter should be trending pretty good.

Revenue off or what 10% or so.

Such.

Lighter than I was looking for so could you help understand how the fourth quarter.

Progressed.

Relative to I guess your expectations.

Yes.

Jos David then.

You know the fourth quarter is.

I wish we had more color on that.

And just seem like.

That.

That everybody.

Stock buying it just looks really really quiet enormous.

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Rise by.

By by the end activity in and our and our capital the App in you're talking specifically about Rps. So there you know there they're working off backlog in in the holidays or.

Have a tendency to.

We will produce quite as much during the holidays.

As we normally would but.

There was plenty of work so really there's also though of component of just.

Weekly business, you know, where we get an order and we ship it in a week.

That also happens in the capital projects side so.

With that kind of slowed the.

Pretty drastically.

And and so it and then and then I don't really have an answer forward except for the fact that are that are rolling gas customers.

They the word on the street was that they were.

They were not.

I'm not going to spend any money for the rest of the year build up their cash flow and try to get their stock up.

Okay. So it sounds like a bookings at least in the first half of the.

The quarter orders than trends, so well how did but how did the how have the orders trended over the last.

Five months or so could you help us.

Understand the trend there in terms of new orders and where your backlog is put on.

Yes.

You said you missed the early part of the call. So that what Joe that was in David's comments, but essentially on it.

On a year over year basis.

The backlog is it from a dollar point of view is just down 1.1%, meaning where we stood at December eight teen versus where we stood at December 19 is down 1.1% that said if you look at the Q4 monthly average backlog.

Were down 11.4% versus the total fiscal year 2018 average backlog so.

From our perspective.

Absolutely dollars.

Point to that Hey, there's still activity and that that that that follows up in firms up with what we're hearing from our our team in the field interacting with the customers and so dollars do appear to be down, but not materially and theres projects that.

No have been won.

In our backlog of that are showing in our backlog in February.

And likely in March and so.

So you know we feel good with where we're at but from a from an absolute percentage point it is down 11.4%, but once again thats coming off our yep.

That.

From an absolute from from an absolute.

Let dollar perspective, you've got to remember 2018 was up.

40, plus percent off of 17 and so.

Net net what I'm getting at is where we're still comfortable with where we are at in our Q3 commentary was really that there was this deceleration occurring in the backlog and that's still continue but we were seeing in the in the IP EPS backlog.

I'll pick up here as we go into the beginning the year.

And so we'll have greater clarity.

Once we get to Q1, our Q1 earnings call.

Okay.

Could you just clarify I thought you said.

Was down 1% at the end of 2019 and I thought you just said towards the end of your remarks, there down 11.4% could you just clarifying.

Yes, I'm, just giving you too.

Two different data points or how we dissect our backlog without.

Giving you the absolute numbers, but if you look at that point, where we ended 2019.

Versus where we were at the end of 2018 backlog dollars are only down 1.1%.

Okay, and then I thought you if you look at and then and then if you look at the average monthly.

Q4 backlog.

And compare that to the entirety of fiscal 2018.

Average monthly backlog.

Thats only not only but it's only down seem we had such a strong year in 2018, but thats down 11.4 personal.

Okay. Okay I got it so it's a follow up on that and relative to your comment that you made regarding margins and.

Some of the lower margin margin projects that you're trying to take share.

It sounds like in this could be a total coincidence.

But it sounds like maybe you're taking your you're trying to go after some share.

With some pricing strategies in a more competitive.

Weaker demand time period, so while your backlog is down 1% at the end between 92 the margin.

Is the margin lower and is that just the coincident relative to the comments that you made regarding some of that.

That low margin or.

Negative margin type projects.

So I'll answer this the best I can.

Sale, but we actually.

Gained.

Two brand new customers never done business with used to buy from sold certain insulated log they bought from us and.

And we won that business and I really don't mind.

The fact that the salesman and get real aggressive and we're trying to gain market share et cetera.

That's a common.

Thing.

What's not right there was not common and not acceptable to me.

Is that that we actually would take.

Orders below our cost.

So there might be a reason to maintain account and sell it calls for my B, we need work in the shop to maintain so we might take a on order it cost.

But it's not acceptable to to sell jobs, where we're just going to give the customer equipment and money at same time and so.

That was happening and where the where the check point on that is not the salespeople salespeople did the job they will have got an order.

It was the manufacturing side, where we didnt have good checks and balances.

We had checks and balances, but the person there.

One of the order.

And so.

We took it and we lost money.

And in terms of the I guess internal process.

But you guys manage was there a fix to this or in terms of the strategy in that process.

Yes.

You know we leave we were looked at the process there were some personnel changes.

And so we fully expect while.

Joe I don't know when you jumped on the call, but the previous question. You know there are some jobs, we still got to work through.

But we've put in some changes in personnel changes in so we expect that there will be improvements as we go throughout the year.

Okay and then.

Ken I was hoping that you could clarify exactly what the 1.6 million of onetime items were.

So.

1.6 is a lot of stuff some of it with some of some R&D costs that got categorize incorrectly that you could argue had to do with some of these jobs and so that was roughly $769000.

We did and from a corporate perspective by out one of the.

Machines, there so that was another 251000.

But also that was just reflecting some bad financial decisions being made there.

And then there was.

Impact related to it involves Torrey reserve that we needed to take in the magnitude of 442000 and then another 181000 once again, it's specific to another job that had been on the books for awhile. So.

You at all that up in Q4, and you get another 1.6 million that we that impacted the rest DNA.

Okay. So I guess just last question for me and I'll hop back in Q.

So to look at the margin I know this is sort of address.

Could you you know maybe.

Point, a little more.

Dependably of what you're thinking margins, maybe in the near term or.

I mean, the drop so drastic in the fourth quarter.

You are doing.

During the fourth 15% earlier in the year you went to zero in the fourth quarter could you just help us.

Maybe directionally if anything just more definitively point to where you're thinking in the near term IPO terms of margins, Yes, yes, no I mean, hey, you know I think the place if I'm in your once again, we don't provide guidance Joe So here's what I'll say is you know those one time items, that's 1.6 that that.

That we should not.

See impact if you will I P. S going forward so that that that's one place obviously just to start just in terms, if you're thinking about IP as margins going forward.

You know I do think it's fair you know we had a disproportion amount of these jobs.

I'll call it 10 plus jobs.

In Q4 that.

Had negative gross profit dollars and so.

You can you can quantify to breakeven at another 2 million dollar impact.

But you know that from my perspective would be conservative.

But then the question is what margin should you bake in on those dollars if they keep the volume at that same level would those jobs performed at and so would they have performed closer to our store average.

Level that may be appropriate in that get any b b anywhere between another I'll call. It one to 2 million dollar impact and so on from the gross margin line and so.

You know that's probably the best that's our due in a world where we don't provide specific guidance, but I think that gives you a good feel that hey, part of the drop in IP EPS performance in Q4 is purely volume related take any of the noise out, but then on top of it you have this noise.

And so.

No that's probably what I would say.

Anecdotally.

Okay. Thanks, I have a couple of questions more but I'll hop back into your thanks a lot.

Okay.

Our next question comes from the line of Carlson with Keybanc capital markets. Please go ahead.

Hi, good morning.

Hey, good morning.

So just quickly on the acquisitions.

Can you just kind of describe what they kind of the rationale what if theyre expanding product lines or geographic expansion or what else are those acquisitions might bring to the portfolio.

Yeah no absolutely.

Your car I appreciate you mentioning that.

At the beginning the year, we closed pumping systems, Inc.

They were based in Atlanta, Georgia.

And they provided us.

A good amount of new geography for US we were not in the South Atlantic We did not have a rotating equipment location. We did have some existing bearing in PT locations, but we did not have.

Our core product category rotating equipment.

Rough sales on on a 12 month basis, there about 18 to 19 million in sales.

And so we're excited to have them as a part of our portfolio.

He also bring.

With us.

Good end market mix, so, they're primarily chemical pulp and paper water wastewater food and beverage and some other general industrial market. So were excited to have pumping systems team with us here at DXP and then kind of in February we closed the turbo machinery repair.

Transaction, it's a single location.

Roughly around 4 million in sales.

And it's on the repair side.

Once again.

End market exposure is leaning chemical water wastewater municipal power and some other industrial markets. So.

New geography, new end market coverage.

And in our core product.

Great.

I guess I'm, just looking at future deals.

Kind of leverage ratio or are you comfortable getting to.

What's sort of the upper limit on net debt to EBITDA that you would want to push too.

Yes, no and I'll answer that two to two ways Carl first and foremost we actually have cash on the balance sheet at year end, we add.

In excess of $50 million worth a cash on the balance sheet and as of today.

I had about $47 million worth a cash on the balance sheet, so as long as I'm doing.

Needs.

Once these into the acquisitions as I call them.

We're going to be where we can work through that cash and so.

Leverage actually should rise.

All things being equal.

That said you know your question about where are we comfortable historically you know weve.

You know when we've gotten.

Closer to the four times EBITDA, we've probably taken what we call a pause and really kind of de Levered. The business that said, we do have some covenants that you can kind of look up on our term loan b.

That kind of governess as well and so.

You know, we think about it more just in terms of having access to capital as well and how we're able to structure that transactions.

Great. Thanks.

Our next question comes from the line of Joe Mondello with Sidoti and company. Please go ahead.

Hi, guys just a couple follow up questions.

Service Center.

What would you say you know really weighed on the business, mostly because the rig count everything that's going on oil and gas and then number two in terms the margins.

I continue to have a tough time.

Predicting where these margins are the jump all over the place Doug seem to be seasonal.

Could you could you address.

The sequential ticked down and also I guess the year over year drop.

What drove that.

Outside of volume if anything and.

And how you're thinking about back going forward.

Yes, This service centers and I'm sure David will chime in here, but the service centers. Once again, you got to remember they still have the oil and gas exposure, but there are more on the MRO side. So if we see a curtail in activity, Joe and our oil and gas end markets. The service center end market mix for the most part approximates what dsps.

It'll end market mixes and so today roughly that's about 50% of what they do they have a mix of amro and they do have some OEM customers and those OEM tend to be more oil and gas bat and so I think some of that volatility here in Q4.

You know that's what's your kind of seen impact those guys just a touch.

Once again all segments were impacted by this holds that we saw on oil and gas spending even supply chain services was even though they're up 15.4% year over year.

But it kind of impact at all segments that had.

Which we've always had.

Asked exposure.

David I don't know if you have some thoughts there.

Yeah.

Are we talking operating margins are we talking about gross margin operating margins and within service centers.

I think I.

I think service centers did quite well actually yes, no. They for the year our goal our goal for the year was to get gross profit margins up.

And in our service.

Business did a really nice job of that.

And I P S.

You know blew up a bunch of jobs and so the overall GP.

Came down for them.

I will say this for you Joe just kind of help you a little bit.

The the mix of.

Jobs that.

We're not did not perform well in IP address was much higher.

In 19, then it's going to be in 20, there's still a few.

Lingering jobs, but the mix is going to be.

Oh.

Less so the 9.5% operating income margin that Rps made overall for the year.

Had more of the jobs that were not.

I did not do will.

Then and then it's going to happen in 2020, so I mean, we kind of got onto this way before.

We ended the year I mean, we started seeing this comments. So it was so we've been on it so.

So you should see Rps is gross or even operating gross margin operating income margin either one.

Go up in 2020.

Okay and everybody else.

Go ahead.

I was going to take just a follow up regarding my question on service Center margins.

I think in I would sort of referencing just a fourth quarter alone I understand the year actually was really good definitely.

And part of the reason why the year was good as far as I understand was especially in earlier in the year in second quarter third quarter, you're rotating equipment was really strong and then I think your business in Canada.

Improved pretty nicely could you talk about the fundamentals of those two things rotating equipment and the Canada business as we're entering into 20, just begun sense of.

Whether those margins are sustainable and Tony.

So so Canada is still faced with a.

Pretty strong oil and gas headwind of course, the eastern Canada is more water related.

So, it's it's doing fun and doing real well.

On the oil and gas side is is.

Got business got activity is going to is going to have a.

You know what I think we're forecasting sort of flat so it.

He is doing well and then where we picked up margin in Canada was on the safety service side.

And we had we hired a new guy in.

And he's doing a great job in and we are.

So we kind of changed our structure up there so.

The everybody's.

Playing well together and really doing a nice job so I.

I expect that to continue.

So and that will have any reason to think that it's not.

So I would say flat sales in.

And continuing to be profitable.

Pretty much the same level as last year, maybe maybe a slight improvements steel on the safety service side.

And then just rotating equipment and the fundamental Oh yeah.

Well rotating equipment, where we're having.

All the issues that we're really talking about just for a little clarity there.

It's not our fabrication business is not that we don't know how to estimate how to fabricate things and et cetera. So were really is a little morally pump side.

So.

Yeah.

But but again.

You know the markets only going to pay us so much for these pumps and we have to manufacture it.

At a cost is less than what the market will pay and so.

We have a little little work to do there.

Correct.

Tivity.

In midstream is is getting softer, but it's it's we've got a really strong backlog headed into this year and so the activity is.

Okay.

I'd really start worrying more about 2021 that I would 2000 22020 looks to be shaping up to be.

Better.

In the 19 and.

And a good part of that is just that we don't have as many of these jobs that.

So we kind of got a little over aggressive on so.

I think thats.

Kind of what I have to say.

Thanks, Rob.

Question, where is your after.

Executing on these two acquisitions this year, where your leverage today.

And what.

Comfort level do you have to go.

With leverage.

And in the context of your M&A strategy I guess, that's my question.

Yes, Joe this is Ken our leverage ratio as defined in our.

Credit agreement is 2.2 to one.

And that does it.

Reflect only using.

30 million of the $50 million worth a cash on our balance sheet just in terms of calculating.

The ratio so we're really a little bit less than half you add an additional 20 million we had at year end.

Total $53 million worth the cash from the balance sheet today, we have $47 million, where the cash on the balance sheet. So we were able to execute those two transactions.

And really frankly, almost hold flat in terms of the level of cash and we have off the balance sheet.

Your question just regarding kind of Comfortability.

At this point.

If you will I don't know if it's probably say at this point in the cycle you got a lot of macro black Swan event, but.

We feel comfortable.

We built this capital structure, when we read in our debt to give us the flexibility for times like this and so were undrawn on our Emile.

Which we have at 85 million in where their process of of creating some additional capacity there.

We have an accordion feature where we can flex it up an additional 50 million based upon.

Net growth of DXP, and so we'll probably do that but it'll still be undrawn. So along when a way of what I'm getting that as we have we have ample capacity to go forward.

And opportunistically pursue acquisitions, meaning.

Good I'm at the right multiple.

Good I'm structure properly and also be sure the businesses are performing.

And so if we do that on minutes and in some of these smaller transactions, it's going to be a net win for XP and that went for the shareholders and it's not going to impact leverage as much.

Obviously, it's the tends to be the larger transactions.

That tend to cause us and we havent been necessary looking at those here more recently that in the past is when we've kind of.

Pete the leverage and so a lot of what we're looking at today a lot of what's in the pipeline.

It's closer to what we saw here more recently and pumping systems and turbo machinery.

Pumping systems was roughly.

19 manner in revenue and then Turbomachinery was four main in revenues so.

Okay and use cash the finance those acquisitions.

Yes, we did.

Okay, Alright, thanks have a good day.

Thanks.

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