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DXP Enterprises, Inc. (NASDAQ:DXPE)

Q4 2012 Results Earnings Call

February 27, 2013 5:00 PM ET

Executives

Mac McConnell - Senior VP, Finance and CFO

David Little - Chief Executive Officer

Analysts

Matt Duncan - Stephens

Joe Mondillo - Sidoti & Company

Holden Lewis - BB&T Capital Market

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the DXP Enterprises Incorporated 2012 Fourth Quarter and Year End Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for question. (Operator Instructions)

This conference is being recorded today, Wednesday, February 27, 2013. I would now like to turn the conference over to, Mr. Mac McConnell, Senior VP of Finance and CFO. Please go ahead.

Mac McConnell

Thank you. Good evening and thank you for joining us. Welcome to DXP’s fourth quarter conference call. David Little, our CEO, will also speak to you and answer your questions.

Before we begin, I want to remind you that today’s discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results could differ materially.

A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP’s fourth quarter 2012 results. David Little will share his thoughts regarding the quarter’s results, then we will be happy to answer questions. On October 1, 2012, DXP acquired substantially all the assets of Jerzy Supply in Houston, Texas for approximately $5 million in cash. DXP recognized approximately $2.3 million of sales for Jerzy during the fourth quarter of 2012.

Sales for the fourth quarter increased 34.2% to $293 million from $218.4 million for the fourth quarter of 2011. After excluding fourth quarter 2012 sales of $56.5 million for businesses acquired in 2011 and 2012, sales for the fourth quarter increased 8.3% on a same store sales basis.

Sales for Supply Chain Services decreased 1.1% to $38.1 million, compared to $38.6 million for the 2011 fourth quarter. Excluding 2012, Supply Chain Services segment sales for businesses acquired in 2011 and 2012 of $600,000. The SCS segment sales for 2012 decreased 2.7% from 2011 on a same store sales basis.

Sales of Innovative Pumping Solutions products increased 49% to $48.4 million, compared to $32.5 million for the 2011 fourth quarter.

Sales by our Service Center segment increased 40.1% to $206.5 million, compared to $147.4 million of sales for the fourth quarter of 2011. After excluding 2012 Service Center segment sales for businesses acquired in 2011 and 2012 up $55.8 million, Service Center segment sales for the fourth quarter of 2012 increased 2.2% from the fourth quarter of 2011 on a same store sales basis.

When compared to the third quarter of 2012, sales for the fourth quarter of 2012 increased 1.1%. After excluding fourth quarter sales of $5 million for businesses acquired in 2012, sales for the fourth quarter declined seven-tenths of 1% on a same store sales basis. This decline is less than the 1.6% or one fewer business days in the fourth quarter compared to the third quarter.

Fourth quarter 2012 sales for Supply Chain Services decreased 1.1% compared to the third quarter of 2012. Fourth quarter 2012 sales of Innovative Pumping Solutions increased 25.8% compared to the third quarter of 2012.

Fourth quarter 2012 sales by our Service Centers segment decreased 3% compared to the third quarter of 2012. After excluding Service Centers segment sales of $5 million for businesses acquired in 2012, Service Centers segment sales for the fourth quarter declined 5.2% from the third quarter on a same store sales basis. The Q4 sales decline from Q3 for Service Centers occurred across most of our Service Center operations.

Sales for all of 2012 increased 35.9% to approximately $1.1 billion from $807 million in 2011. Sales for businesses acquired in 2011 and 2012 accounted for $194 million of 2012 sales on a same store sales basis. Excluding 2012 sales by businesses acquired in 2011 and 2012, sales for 2012 increased 11.9% from 2011.

Sales for Supply Chain Services increased 8.2% to $156.2 million, compared to 2011 sales of $144.5 million. Excluding SCS sales of $12.1 million for businesses acquired in 2011, SCS segment sales for 2012 decreased three-tenths of 1% from 2011 on a same store sales basis.

Sales of our Innovative Pumping Solutions products increased 58.2% to $161.8 million, compared to 2011 sales of $102.3 million. Sales for Service Centers increased 39.1% to $779 million, compared to $560.2 million of sales for 2011.

After excluding Service Centers segment sales of $181.9 million for businesses acquired in 2011 and 2012, Service Centers segment sales for 2012 increased 6.6% from 2011 on a same store sales basis.

Gross profit for the fourth quarter of 2012 increased 39.6%, compared to 34.2% increase in sales from the fourth quarter of 2011. Gross profit as a percentage of sales increased to 29.9% in the fourth quarter of 2012, compared to 28.7% for the fourth quarter of 2011. This increase is a result of increased gross profit percentages for all three of our segments.

Compared to the third quarter of 2012, gross profit as a percentage of sales for the fourth quarter of 2012 increased to 29.9% from 28.8% for the third quarter of 2012, primarily as a result of improved margins in the Supply Chain Services and Service Centers segments.

Gross profit for all of 2012 increased 37.6% from 2011 compared to the 35.9% increase in sales. Gross profit as a percentage of sales increased to 29.1% for all of 2012 from 28.7% for 2011, primarily as a result of increase gross profit percentages experienced by the IPS and SCS segment.

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.

SG&A for the fourth quarter of 2012 increased $15.4 million or 33% from the fourth quarter of 2011, compared to the 34.2% sales increase. This increase is the result of the $15.5 million of SG&A expense for businesses acquired in 2011 and 2012 on a same store sales basis. As a percentage of sales, SG&A decreased to 21.2% from 21.4% for the fourth quarter of 2011.

SG&A for the fourth quarter of 2012 increased $3.2 million, or 5.5% from the third quarter of 2012. This increase is partially the result of the $1.5 million of SG&A expenses associated with the acquisitions of HSE and Jerzy in the second half of 2012 on a same store sales basis.

As a percent of sales, SG&A increased to 21.3% from 20.4% for the third quarter of 2012. This increase is primarily the result of some -- approximately $1 million of restructuring charges incurred during the fourth quarter by HSE.

For all of 2012 SG&A increased $52.2 million or 29.6%, compared to the 35.9% sales increase. This increase is partially the result of $43.6 million of SG&A for businesses acquired in 2011 and 2012 on a same store sales basis. As a percent of sales, SG&A decreased to 20.8% from 29.9% for 2011, primarily as a result of economies of scale are being bigger.

Interest expense for the fourth quarter of 2012 increased 136% from the fourth quarter of 2011. Interest expense for all of 2012 increased by 58%. These increases are primarily the result of increased borrowings used to acquire businesses.

Despite the $5 million of debt incurred with the acquisition of Jerzy. Total long-term debt decreased approximately $20.6 million during the fourth quarter of 2012. During all of 2012, total long-term debt only increased approximately $123.5 million despite the $144.9 million of cash paid for acquisitions during 2012.

During the fourth quarter of 2012, the amount available to be borrowed under our credit facility increased approximately $42.2 million to approximately $109.5 million. This increase was primarily the result of the $20.6 million reduction in debt outstanding combined with the effect of amending our credit facility.

On December 31, 2012, we amended our credit facility which increased the facility by $75 million. The new amended credit facility consists of $130 million term loan and a revolving credit facility that provides a $262.5 million line of credit as of December 31, 2012. Our bank leverage ratio, which is a pro forma calculation was 1.87:1 at December 31, 2012. At December 31, 2012, total debt was $238.4 million.

Capital expenditures were approximately $1 million for the quarter. Cash on the balance sheet at December 31, 2012, was $10.5 million. Accounts receivable and inventory balances were $174.8 million and $101.4 million, respectively, at December 31, 2012.

Now, I would like to turn the call over to David Little.

David Little

Thanks, Mac, and thanks to our participants today. DXP’s fourth quarter and year end results for 2012 were simply outstanding. We continue to produce sequential quarter-over-quarter growth in topline and bottom line results. Our sales for the year grew 36% reaching $1.1 billion, producing a net income increase of $62%. Our last two quarters exceeded 10% EBITDA margins and our after-tax recurrent on invested capital on a pro forma basis was over 30%.

DXP’s fourth quarter results were achieved despite a general softness in daily activity in both the United States and Canada. Yet sales were at a record high of $293 million, up 34.2% from same period in 2011.

Fourth quarter diluted earnings per share were $0.92 versus $0.86 in the third quarter and $0.61 last year, quarter improvement of 50.8%. Fourth quarter year-over-year organic growth was 8.3%.

I cannot thank our operations people enough for the strong back office support that drives customer loyalty and efficiencies by doing a day’s work in a day and exceeding our customer’s expectations. Being customer driven with a positive, can do attitude describes DXP people.

Our operational excellence and back office support is so critical to our success. When our stated goal is to double the size of the company every four to five years, the planning and effort to keep pace an ahead of this is challenging.

I would like to thank our IT department for improvements they made this past year. The accounting department did a great job in growing their department to handle our new entities and increase volume of business.

Thanks to our Customer First Center. They provide excellent customer service. Our customer service representatives are expert across a large breadth of technical products and this group continues to grow as they provide solutions for both our external and internal customers.

Thanks to all our DXP people from the ballistic distribution centers, fabrication centers, SuperCenters, Service Centers, IMP Group, collections and payables for their efforts and continuous improvement.

Thanks to our Human Resource Department for their tireless effort in finding great new DXP employees.

Thanks to the Operations Department for their system support and their integration and training for our newly acquired companies. A special thanks to our sales and marketing people.

Our entrepreneurial spirit is alive and well throughout our outside and inside customer service representatives. Their relationships and understanding of each customer’s business allows them to be creative entrepreneurial problem-solvers.

We have the right balance of entrepreneurial spirit, grow sales and back office controls to support the increase in sales growth. We will continue to be customer driven by being experts that bring value-added solutions to each of our customers.

Our goal is to capture more of the customer’s maintenance repair and operating MRO spend and to improve customer efficiencies and their operating cost. As we accomplish this, the entire breadth of DXP’s technical products and services become stronger than any one individual division. Our multiple segments, support divisions make us unique and gives us a competitive advantage that is winning market share against the competition.

We continue to demonstrate our ability to acquire companies that fit our strategies to grow our breadth of technical product and services and all five divisions including rotating equipment, bearing and power transmission, safety products and services, metal working, and industrial supplies increased sales in 2012.

Great growth strategies, passion for outstanding customer service and technical expertise, and our great DXP people executing on all these strategies above is what makes DXP successful. Customer driven experts at MROP solutions accomplish by fantastic DXP people who want to help our customers improve their operations.

I would like to welcome our latest fourth quarter acquisition, Jerzy Supply to our DXP family. This is a great addition of people with hose expertise. This was a great year for our acquisition program as DXP added more than a 10% targeted growth via acquisition sales.

We strengthened our rotating equipment division with three great companies. Our products and services division with three substantial company and as mentioned above, our bearing and power transmission division added one hose company. All these companies added experts, products and services to grow these divisions.

Overall we were pleased with our acquisitions we have completed since Q4 of 2011 and we remain excited about our pipeline of future candidates. We continue to see opportunities in the U.S. and Canada, and during the first half of 2013, we anticipate closing one to two acquisitions and approximately two or three acquisitions during the second half of the year.

I will now focus on our -- on summarizing activities within our three business segments, Service Centers, Supply Chain Services and IPS.

The Service Centers segment sales increased 39.1% from 2011 to 2012 and operating income increased 37.9%. Our Service Centers leverage comes in the form of top-down commitment to our sales and operational excellence, five technical product divisions, an acquisition -- and an acquisition strategy around technical products and services.

2012 was a noteworthy year for our Service Centers segment, improving economic conditions and the successful execution of our core strategy cumulated into a record year. Increasing sales and profits driven by our manufacturing and related portions of U.S. economy enabled us to make strategic investments in our network of Service Centers.

Notably, 2012 investments included three rotating equipment acquisitions, three safety acquisitions and one hose and rubber acquisition, the creation of five new SuperCenters and further refinement of our excellent programs.

Our Service Centers segment’s management team has also made significant investments in people. Our human resource investments came in the form of recruiting, career development and our suite of excellent programs, which are designed to reinforce our commitment to quality business processes.

Collectively, our investments allow us to take full advantage of the levers that we have been able to create in our industry-leading breadth of technical products and services. We are extremely grateful to our employees, customers and suppliers for their contribution in making 2012 a monumental year.

Over the course of 2012, our Service Centers management team successfully converted five in-process Service Centers to SuperCenters. We move into 2013 with a network of 33 SuperCenters and a momentum to convert an additional eight by the close of fiscal year.

Improving on our ability to convert Service Centers prospects to SuperCenters has led us to an increased number of in-process SuperCenters currently in the pipeline. We will actively seek out new SuperCenter candidates over the course of the year and continue to report our progress on these initiatives.

Moving into Q1 of 2013, we remain optimistic about the economic recovery and strength of our business model. Our Service Centers network is powered by five product division platforms that are designed to provide substantial business results for our industrial customers. Our progressive approach to conventional industry has created distance between us and our competitors who prefer to do more transactional environment.

The cornerstone of our branch-based model is a SuperCenters strategy. This customer-driven strategy continues to create value for industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise. Broadening our portfolio of technical products and services, recruiting top talent and acquiring great companies will continue to be our recipe for SuperCenter expansion.

In summary, we look forward to competing and winning in 2013. Our focus will remain on building a North American Service Center platform that will provide substantial benefits to our industrial customers, looking to improve their overall production and financial performance.

Supply Chain Services. Supply Chain Services business segment was busy in Q4, finishing the implementation of an on-site location started in Q3. Q4 is traditionally a slower month for SCS with holidays, weather and capital this month at year’s end. We are still seeing decreased spending in defense, military, natural gas exploration and transportation industry.

Q4 saw two customers announced closing and consolidation of manufacturing, which is expected to reduce their production by 40%. SCS started a new implementation in Q1 and the completion of the site at the end of Q4, which will keep us at our current rate of 62 locations. 2012 ended overall contributing to a good -- I’ll say that again. 2012 ended overall contributing to an operating income of 8%.

This achievement was due to our continued strive of operational excellence resulting in a leaner, more efficient supply chain, delivering bottom line results to DXP and exceptional customer service. The SCS 2013 strategy is to continue develop operational excellence along with sales excellence. Sales excellence has a strong focus on delivering profitable topline growth in 2013.

Another SCS strategy is to establish DXP’s Supply Chain Services as the expert in automating the supply chain channel, thus delivering additional savings to our customers and increased bottom line to DXP. This strategy has been developed -- developing over time through our uncovering our customers’ need for this strategy. And the strategy will accomplish -- was accomplished through expansion of our case software, B2B website solutions, and enhancing our vendor deliverable within our on-site presence, and lastly expanding the speed and accuracy of data mining.

IPS -- Innovative Pumping Solutions, Q4 results and Q1 outlook. The IPS segment financial result for Q4 saw -- versus Q3 sequentially saw sales increased 25.82%. Operating income increased 34.2%. On a yearly basis, we saw IPS increase sales 58.19% and operating income 89.71%.

Due to the increased activity with the HP-Plus line, we are adding personnel to support project management, and fabrication assembly testing and documentation staff. In order to remain compliant for safety and Q&A and QC with the major old companies, we have had to increase staffing in these two areas.

Manufacturing lead times on non-API pumps and motors appears to be back to normal levels. Plunger pumps lead times are currently 24-weeks. API, high-energy pump lead times continue to be in the 42 to 52 weeks. Motors have stabilized in the 8 to 10-week range on larger sizes. Engines for API applications are in the 36 to 52-week range. Lead times for products related to our day-to-day business have attained normal levels.

In Q4, we took a proactive approach in managing our delivery expectations with our customers based on our commitment to core deliveries, working with the customers well ahead of near term, near the year-end projected deliveries. We were successful in minimizing shipments that slipped into Q1 for 2013.

Downstream oil and gas and mining sector -- land based, current order placement profile is in the $100k or less range, smaller orders. We anticipate the large project dollar orders to be placed starting late Q1 and forward.

The Eagle Ford, the Permian, the Marcellus, the Bakken, and Niobrara shale plays will continue to provide substantial opportunities for our modular equipment packages in 2013. To date, these specific shale plays account for the bulk of equipment shipped into the shale play markets.

In the Rocky Mountains and North Dakota regions, we continue to have success with opportunities associated with LACT units. The current LACT unit is packaged being marketed by DXP/our golden operation, has gained acceptance in the market and continues to provide additional modular packaging opportunities for this business unit.

In the Middle East, we are actively involved in opportunities for our modular packaging in this geographic region. We are optimistic in order placement in Q2. Gulf of Mexico, the signs of activity are slowly evolving as it relates to projects. Projects that were put in play in 2012 are still on the board at present time.

They are planned to happen. The uncertainty is when will they actually be released for equipment purchases. We feel confident based on products DXP has to offer and our relationships with the major players in this sector. This will result in substantial opportunities, and we anticipate in placing orders in Q1 and Q3 of this year.

Offshore at Africa, most of the equipment for these projects is slated to be purchased in 2013 and 2014 based on our relationship with end users, E&C’s and our existing presence in productions arena within geographic -- within DXP’s product offering. We remain confident in our ability to getting the opportunity to provide modular package on these projects.

Offshore Alaska, we are currently engaged in an opportunity to provide modular packages for an offshore Alaska platform project. This equipment is slated for purchase in Q1 or Q3 of 2013.

Midstream, pipeline industry, we see quoting activity in this sector related to oil and gas pipeline opportunity increasing. In this sector, equipment delivery is important, and many opportunities can be realized when DXP and our manufacturer have the ability to provide acceptable deliveries.

Working with our major manufacturers to commit and hold critical deliveries will be a key component of new equipment. Sales and requirements, we feel our remanufactured products offered in HP-Plus product line will continue to provide opportunity based on DXP’s ability to provide quality products and favorable deliveries as we control the entire process of providing the pump product and packaging.

Our HP-Plus product line continues to gain traction in this sector. We have been successful in placing a significant amount of HP-Plus units in the Permian basin, the Eagle Ford, the Marcellus, Shale pipeline, and the Marcellus Shale pipeline applications. We have expanded this product offering to provide product applications designed for the use of modular lack units.

Q1 outlook, our 529 PMI, golden fab facilities continue working two 10-hour shifts six days a week in production for modular packages. We see this continuing. 529 has increased its production, project management and project engineering staffs in order to meet the production schedule for 2013 for IPS segment business.

Production pump, Snyder has settled into their expanded fab facility and Q1 capacity has been booked. This business unit has expanded their electronic -- electrical controls programming, troubleshooting and insulation staff. This has provided the opportunity for increased revenue growth in this area.

We are seeing new opportunities for fab service in our fab centers. It is evident that the commitments DXP has made in documentation compliance and controls, safety, QC and QA processes. This is in compliance with regular players in the oil and gas sectors are providing additional revenue opportunities with our fabricators requesting our services.

Current IPS segment backlog is $60 million plus. Current open live project quotes to $80 million plus. We feel comfortable bearing no economic, political, or world upset events, Q1 ‘13 will provide a solid foundation for growth in 2013.

In conclusion, 2012 was a fantastic year. We became $1 billion company. Our platform and the markets we serve will let us be a multibillion dollar company in the future. It’s all about the execution.

We achieved 10% plus EBITDA margins, after-tax return on invested capital of an industry high of 30 plus percent. According to Bill Gunderson, over the last decade DXP’s stock was the fifth best annual average return for all public companies in the U.S. We beat Apple, who was eighth.

DXP employees account grew from 2,100, to 2,817 active employees. We increased Service Centers from 123 to 128 in the U.S. and from 0 to 25 in Canada. We have eight sales offices, 33 SuperCenters, nine SuperCenters in progress, seven distribution centers, eight fabrication centers. We’re in 35 states and seven provinces in Canada.

SCS also has 62 home site locations to 101 offsite locations. We are growing, but if you looked at a map, you will see all of the places we still have to grow to. In other words, we had a lot of runway in a very fragmented market. Our course is set, and our goals are achievable. I believe in our family of DXP people.

I believe in our forefathers who wrote in the declaration of independence, we hold these truths to be self-evident that all men are created equal, that they are endowed by their creator with certain unalienable rights. That among these are life, liberty, and the pursuit of happiness, and I believe that happiness is achieved by the pursuit of success, not a gift from the government. I believe that people at DXP are successful because they are free to match their skills with their passion. DXP people are passionate the about what they know, about customer service, and about being part of a winning team.

I want to thank you our customers who give us innovative products that help us bring value to our joint customers. A special thanks to our suppliers that understand how we both win when our relationship grows with the customer, because of our breadth of technical products and services that helps the customer be more profitable.

I want to thank again our DX people. This is a people business, and your expertise and passion for customer service makes me proud to be part of your DXP family. I believe the economy will have slow growth in 2013 because of our government. I also believe we will grow faster than the economy because of the opportunities DXP people and our sales strategy.

Our slogan for the year is “battle for market share”. Thanks, and we will now open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Matt Duncan with Stephens. Please go ahead.

Matt Duncan - Stephens

Good afternoon, guys. Congrats on a great quarter

David Little

Thank you, Matt.

Matt Duncan - Stephens

The first question I’ve got, David, just to make sure I understand some of the guidance, or sort of comments you were giving us about the first quarter correctly. You had a really big quarter in Innovative Pumping Solutions this quarter. And if I annualize that number, you’re up almost to $200 million in terms of annual revenues. Is that an annual revenue number you think you can do in 2013 in that segment, or was there something special about this quarter?

David Little

Well, special because it was the biggest loan we ever had. But, I think, we’ll duplicate that at least in the first quarter of next year and we see a lot of activity. I think to explain it best for our audience today is that we’ve had a lot of drilling and then drilling started declining.

And part of that is frankly that we’re building the infrastructure production facilities and pipelines and things necessary to carry that oil to wherever it needs to be, whether that’s export chemical plant, refinery, et cetera and that infrastructure building is driving our capital equipment sales, and it is very strong and we see that continuing in 2013.

Matt Duncan - Stephens

Okay. So it’s going to continue with that 4Q level into the 1Q, and they want to see where it goes from there but you feel good about it kind of wanted to think about it then?

David Little

Yeah.

Matt Duncan - Stephens

Okay. Looking at the sales trends in the quarter, obviously your growth slowed a little bit in the Service Center business. Clearly there’s got to be some kind of economic and fiscal cliff impact on that. Can you maybe go through sort of the month-to-month sales trends you saw in the quarter, what’s you’re seeing so far here in the first quarter and is there anyway in your mind David to quantify the impact fiscal cliff might have had on your business?

David Little

Well, I don’t know how to quantify it. In effect, I mean all of 2012 we had, kind of a seesaw environment. So I don’t -- there has to be affecting business. I would say that our -- we had a very good January. I would say that February is tracking like January, but January had a lot more days. So February’s never going to be a blowout month.

And then I would say our normal year, March, is always one of our bigger months of the year. And to give you an answer to that, it’s because oil field companies get their budgets and the faster they spend their budgets on equipment that’s going produce more, than the people get rewarded for producing more oil during the year than less.

So consequently they spend the money at the end of the year than they only have a few months to produce oil, whereas if they spent it at the beginning of the year, they will do better. Of course, they can’t. They don’t have the ability to spend it all at one time. So they’ll get the impression that it’s always -- we’re not going to have anything to do for the rest of the year if it works that way. But I would say that March is typically a very, very good month for us and we started out with a good January.

Matt Duncan - Stephens

Okay. That helps. Looking at your gross margin, it was obviously pretty strong this quarter relative to both last year and the quarter before it. Is that a, roughly 30% gross margin. Is that something you can carry forward? And is there any way to sort of call out, how much you think the new pricing software is helping your gross margin right now?

David Little

Our pricing software is installed in all of the regions and it’s healthy. But it’s only helping like a 0.5% or something. It’s not -- we’re not getting the full benefit of that. And we we’ll see continued improvement throughout the year.

I think that we had some really nice fabrication jobs. So we have an increase in IPS-type business. That said, we had some of our -- some of the Service Center businesses whether it was cutting tools or safety services or some of those things, did not perform quite as well as we would like.

And so you were never hitting on all cylinders. And so I -- I really feel like we’re going to be able to maintain our margin range from the high 28-point-something percent to still having a goal and we’ll have months where we will hit 30%. So to answer your question is, it’s always a mixed question, but I feel good about the direction of our gross profit margins.

Matt Duncan - Stephens

Okay. So we should probably model that a little bit lower for 2013 than what it was in that one quarter, because we might be seeing sort of the best of all worlds in that quarter, because you’re saying it’s sustained. I’m thinking of the high.

David Little

Yeah. I think we modeled higher for the year. But we did have a nice December.

Matt Duncan - Stephens

Okay.

David Little

Nice fourth quarter. Excuse me.

Matt Duncan - Stephens

Last thing from me and I’ll hop back in queue. Just on the M&A front, it sounds like you’re expecting to close one or two deals in the first half, two to three in the second half. As we think about sort of the size impact that that may have sort of total revenue basis, when you put them all together, is it going to be enough to sort of hit that at least 10% revenue growth via acquisitions target that you’ve set?

David Little

Yeah. You can put it in the book that we’re going to do one -- we’re going to do $110 million.

Matt Duncan - Stephens

Okay. Got it. All right. Thanks, David.

David Little

You bet.

Operator

(Operator Instructions) Our next question is from the line of Joe Mondillo with Sidoti & Company. Please go ahead.

Joe Mondillo - Sidoti & Company

Hi, David, Mac.

David Little

Hi, Joe.

Mac McConnell

Hi, Joe.

Joe Mondillo - Sidoti & Company

First question. Just regarding, I just wanted to focus a little bit on the IPS business. First off, you mentioned that the backlog at the end of the quarter was $60 million. What was it at the end of the third quarter?

Mac McConnell

I don’t know.

Joe Mondillo - Sidoti & Company

Okay.

Mac McConnell

I’ll find out for you. I mean, I can find that out. It was less.

Joe Mondillo - Sidoti & Company

I thought -- okay, it was less. Okay, okay. I thought I had a number in mind and I guess that’s incorrect. So I guess one of the big things that I’m trying to understand, you gave a lot of information regarding what’s driving that business. But if you could point out maybe one or two drivers that’s really driving, I mean, you’re seeing a significant growth compared to a lot of other companies.

Just wondering what -- if you could point to one or two drivers that’s really driving that, whether it’s the offshore in the Gulf platforms coming online there or whether it’s the midstream business that you were talking about or new products. If you could point to one or two drivers there, that would be helpful. And then also if you could talk about the competitive landscape give us a feel there, how that’s looking? That’d be great. Thanks.

David Little

Well, Joe, the answer to your question is all the things you just listed. So you asked a great question. We’ve really added LACT units. And we’re having really nice success with our HP Plus product. So we have, in fact, added new products.

We’ve also pointed out and I think the projection is we’ve done some offshore stuff. But that to us looks like it’s going to be increasing. Of course, we’re past the point where we did no offshore stuff. And so now we’re doing some offshore stuff. And it’s going to grow and we see some emerging market stuff growing.

And then you had one other point. It was products and then it was offshore, and then markets. When we look at -- we look at markets and you pointed out midstream, it’s not just midstream. I mean, yeah, they’re trying to build more pipelines and stuff. But it’s also production facilities.

And so you’ll have a small gathering facility that -- where they punched 20 holes in the ground and now they’re ready to reduce that. They gather it up in a production facility out in the oil field. It’s not -- it’s not like Cushing where they gather billions of barrels. It’s more just a small little gathering system where we sell equipment there.

And so it’s that part of the equation that people are catching up on. And then from that production facility, they hope to tie in to a pipeline. And so they’ve got to build the infrastructure for that pipeline and that’s mid market. And then -- and so all of that is kind of in our sweet spot and we’re doing really well.

Joe Mondillo - Sidoti & Company

Okay. So sort of a combination between products, I guess offshore drilling, and midstream production facilities.

David Little

Yeah. Yeah, sir. Absolutely.

Joe Mondillo - Sidoti & Company

Okay. Okay. And in terms of new products, where are we in terms of introducing new products? Have they -- and sort of -- are these, sort of, revolutionary products to the industry. And sort of how does that match up, I also asked before if you could talk about just the competitive landscape. How does that match up with your competition?

David Little

Right. What happened to us was that we were -- we’ve always been selling big recip pumps. And we had competitors, manufacturers out there like Reda, Woods Group and Centrilift that had this down-hole pump. And this down-hole pump was designed to produce oil out of the ground. It was -- it’s designed to do something different than a lift situation like a Lufkin.

But they took that down-hole pump and it’s just a long, centrifugal pump and they put in horizontal on the -- above the ground and start using it for disposal in water flood situation. And so what happened there is, those people never sold through distribution. So, we decided that we needed to play in that field, so we could have a high energy pump. We could have a reset pump. And then we could have this cheaper -- well, I shouldn’t say cheap, I’d just say less expensive centrifugal, long pump.

And we decided to do that ourselves because nobody would play with us. And we felt -- so we went to -- we hired some people that knew how to make the pump. We went to China to have the parts made. We ship them here. We assemble them. We test it. And we have grown that business pretty substantially. And it’s a real nice piece of business.

Joe Mondillo - Sidoti & Company

Okay. Great. That’s helpful. And then also, you mentioned that there was about $1 million of restructuring HSE. Could you talk about that acquisition and what you’re doing there and what that million was spent on and how every thing’s going with that?

David Little

Well, the two bigger pieces were around -- in the fourth quarter, around $400,000 of severance pay. We spent several hundred thousand dollars to move people into the Eagle Ford and safety area. HSE had U.S. safety operations and I moved a bunch of people into the Eagle Ford. That cost several hundred thousand. We’re just doing things to help the business grow.

Mac McConnell

The Canadian environment’s kind of interesting. You can fire anybody any time but when you do there’s a pretty big severance package that goes with it. It’s all defined based on how many years you worked there. And so we felt pretty strongly that when we purchased HSE that there were some synergies between the United States and Canada.

But there was also kind of an overkill because HSE was a public company, trying to grow itself and had an infrastructure that looked heavy to us. So we went into that understanding the need to sort of right size the business. And it’s just kind of expensive to do that.

Joe Mondillo - Sidoti & Company

Do you expect any further restructuring?

David Little

No. We do not.

Joe Mondillo - Sidoti & Company

Okay.

David Little

Sorry. Wait a minute.

Mac McConnell

There’s a -- say $700,000 of severance in the first quarter.

Joe Mondillo - Sidoti & Company

Okay. Okay. I was thinking about current. Okay. Mac’s right. I was thinking about that we’ve done…

Mac McConnell

We did it in January.

David Little

By the way, all of our Canadian buddies, we’re not firing any more people.

Joe Mondillo - Sidoti & Company

All right. Good to know.

Mac McConnell

All behind us.

Joe Mondillo - Sidoti & Company

Could you -- Mac, could you also just give me the amortization and the corporate expenses that were associated in the quarter?

Mac McConnell

Sure. Quarter. I was listing to the year. Okay. The Q4 amortization was $2.620 million, what I calculated. And the corporate expense was $6.3 million.

Joe Mondillo - Sidoti & Company

$6.3 million. So that $6.3 million seems a little lighter compared to past quarters. Why would that be and is that sustainable or...

Mac McConnell

We have -- probably need to get better at this. If you look, you’ll see the SG&A outside of corporate was up. And so some of it is a swing, we historically have accrued for things in corporate that we didn’t charge for locations for till the time it was paid.

Joe Mondillo - Sidoti & Company

Okay.

Mac McConnell

So bonuses, commission, some things that end up swinging. And I admit we probably need to get better about making that. The year’s right.

Joe Mondillo - Sidoti & Company

Okay.

Mac McConnell

Swing between quarters.

Joe Mondillo - Sidoti & Company

Okay. All right. Thank you.

David Little

Thank you.

Operator

Our next question is from the line of Holden Lewis with BB&T Capital Market. Please go ahead.

Holden Lewis - BB&T Capital Market

Great. Thank you. Good afternoon -- good evening. Wanted to ask -- now that you have a little bit more experience with the pricing software, you perhaps picking up few months here of data points and such. I think you commented that may be that was kind of a 50 basis points benefit in the fourth quarter. But that was about it and there is still learning curve issues and things.

Do you have a sense of how impactful -- I mean, when you feel like it’s operating and you wanted to operate, how impactful do you think that will ultimately be on gross margin versus if it wasn’t there. And how long do you think it’s going to take you to get there? Any feeling based on your experiences so far?

David Little

Well, we were told by the software company that our goal was to increase margins 2% to 3%. Now, they’re trying to sell us something. So, I think that was a grain of salt. But nonetheless, it’s the function. Yeah, we have the ability to track how often do they use the suggested price or how often do they even raise the suggested price, I give credit for that too, versus how many time do they go ahead and cut the price.

And so what you’re trying to do is you’re trying to get to some 80% compliance where 80% of the times they’re using the suggested price they believe in. And they don’t foal like they have to cut the price. We’re probably in the 30% range. And it’s just because we haven’t been on it that long. They still don’t trust it. And we still give them the ability to cut the price if they feel like they need to.

Holden Lewis - BB&T Capital Market

Okay. Fair enough. And so you don’t have to -- it’s entirely up to the branch still as to whether or not they comply or not. I mean, you’re assuming that they’re going to see that it’s in their best interests. But I mean, it sounds like you’re not that confident based on what you’re seeing the 200 to 300 basis points.

If you have 50 basis points and you’re almost halfway to your compliance goal. I mean, it suggested about 100 basis points. Why is the difference between, what the creators of the software tell you can do and what it seems like you’re on track to do? Is that because you’re not requiring them to live via the software or there’s still an option? So there’s still too much bleeding out?

David Little

That’s right. And so what we do is there’s a report. There’s an exception report. So every time, the manager’s post to daily go through and look at the exceptions of when they decided to not use the price. Now, by the way, I mean, let’s say that there’s $100 item and they sold it for $99 instead. Well, worse than that, $99.90. Well, they still get dinged for not complying but it’s awful close to the right number.

So -- but on the other hand, the manager says, hey, what’s -- why did you cut the price here. I mean, that -- it was only $0.10. And so there’s follow-up, there’s accountability, there’s tracking of the individual. So we got that Sandy over here, who cuts the price all the time and Mac, that never cuts the price. So why is that going on? There’s a lot of tractability and a lot of accountability but we do allow them to cut the price.

We’re just not -- we’re not a 100% there yet. I mean, at some point of time, we’d love to be Grainger or MSC where they sit there and say this is the price. And this kind of customer gets a 5% discount. And this one gets nothing, et cetera but we’re not there yet.

Holden Lewis - BB&T Capital Market

Okay. And on the SCS business, a lot of moving pieces there. I’m just sort of wondering what it all adds up to. It seems like we’re seeing little bit better sort of general industrial activity. On the other hand, you have some markets in there such as military and transportation that aren’t doing terribly well.

It sounds like you’ve added at least one contract, lost at least one contract. Can you give us a sense directionally of how you see that revenue playing out based on all these moving pieces. I mean, do you have a big pipeline of new contracts to implement or it’s just directionally -- how are you feeling that SCS is going to go over the next 12 months?

David Little

It’s not -- it’s not looking that great. It’s -- they’ve done a really, really nice job of becoming a better company and putting some dollars on the bottom line. But there’s -- it’s been a struggle to grow and land new business. So that’s been our example, we’ve worked on a $19 million deal at the end of the day.

Grainger won it and we were told we were the -- we were second. We were, in fact, they wanted to buy some stuff from us. But they weren’t going to go with us. It’s been a struggle. I don’t really have any confidence that I tell them all the time they’re my organic growth engine and they need to grow 20%. But if they did -- if they did 10 and part of that would come from just a better economy, which I kind of expect to have in the second half, then they will have a good year.

Holden Lewis - BB&T Capital Market

Okay. So the idea is kind of mid high-single digit type growth, but sustaining kind of an 8% type margin just because that’s kind of how the model works now?

Mac McConnell

Yeah. And, Holden, that’s a really good point. We could get more deals if we were willing to give it away. And we’re just -- you know me, I’m all about margin, I’m all about 10% EBITDA. And they’re already under that. So, I’ve got a really good manager that’s managing that, that’s sitting there, saying, hey, we’re not going to just take thee deals for the fun of it.

We’re going to either be able to make some money or not. And it just seem like there’s other people that are willing to just do it for nothing. And we’re just not willing to do that. What that’s done to us is that relegated us down into the more medium-size accounts. And we’re having some success there where we can really, really bring more value than just a cheaper price.

Holden Lewis - BB&T Capital Market

Okay. What sense, just tell me, you talked about sort of the 10% EBITDA. You’re there in 2012. Can you give a sense of what kind of the next bogey and the next objective and when you plan on hitting that since you’ve kind of achieved now that original bogey?

Mac McConnell

Well, 2016 we’re going to be at $2 billion. And I think we’ll still be in the low teens with EBITDA margins. I don’t really -- based on our -- on the type of customers we deal with --- if you take A, B, C, D accounts, we don’t have a lot of C and D accounts. And so we have the larger accounts with more pressure on margins. I just think you’re going to see us in the low-teens and part of that will be -- I’ve been amazed.

I thought it, but when it happened, I was still sort of surprised I guess but scale is important. And scale’s important with purchasing power and scale’s important with SG&A expense. And both of those things add up to increased margins. And maybe I will surprise myself.

But that’s still amounts to like 50 to 70 basis points. It is legally sort of carrying it forward, that would still amount to 50 to 70 basis points of margin improvement a year through that period to get there, right. No, not to go from 10 to 11. I mean, but -- 11’s not low key, right.

David Little

Exactly. Well, I’m at 10. I mean, the last two quarters we’ve been 10, 10.5 on average. So, it’s just going to be incremental. It’s going to be pretty small, incremental improvement. Do you think -- I think there’s improvement. I’m not going to say there’s not improvement because there is, but…

Holden Lewis - BB&T Capital Market

Okay. Thanks, guys.

David Little

Yeah. 2016 to hit $2 billion requires a 20% growth rate. And the 20% growth rate and the leverage we get across the organization. It will drive better margins.

Operator

Ladies and gentlemen, that does conclude the question-and-answer session, as well as our call for today. Thank you for your participation. You may now disconnect.

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