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DXP Enterprises, Inc. (NASDAQ:DXPE)

Q3 2012 Earnings Call

November 1, 2012, 5:00 p.m. ET

Executives

Mac McConnell – SVP, Finance and CFO

David Little – Chairman, President and CEO

Analysts

Matt Duncan – Stephens, Inc.

Joe Mondello – Sidoti

Holden Lewis – BB&T Capital Markets

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the DXP Enterprise's Incorporated 2012 third quarter conference call. (Operator Instructions). This conference is being recorded today, Thursday, November 1, 2012.

I would now like to turn the conference over to our host, Mr. Mac McConnell. Please go ahead, sir.

Mac McConnell – SVP, Finance and CFO

Thank you. This is Mac McConnell, CFO of DXP. Good evening, and thank you for joining us. Welcome to DXP's third quarter conference call. David Little, our CEO, will also speak to you and answer your questions.

Before I begin, I want to remind you that today's discussion will include forward-looking statements. I want to caution you that such statements are predictions and actual events or results can 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 filing, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP's third quarter 2012 results. David Little will share his thoughts regarding the quarter, then we will be happy to answer questions.

Payables for the third quarter increased 39.5%, $289.9 million from the third quarter of 2011. After excluding third quarter 2012's sales of $66.7 billion for businesses acquired in 2011 and 2012, sales for the third quarter increased 7.4% on a same-store sales basis.

Sales for supply chain services increased 11.2% to $38.6 million compared to $34.7 million for the 2011 third quarter. Excluding third quarter 2012 SCS segment sales of $4.5 million from acquired businesses, SCS segment sales for the third quarter 2012 decreased 1.7% from 2011 on a same-store sales basis. The decline is a result of reduced sales to military and truck-related customers.

Sales of innovative pumping solution products increased 24% to $38.9 million compared to $31.3 million for the 2011 third quarter. Sales of our service center segment increased $70.7 million to $212.5 million compared to $141.8 million of sales for the third quarter of 2011. After excluding 2012 service center segment sales of $62.3 million, for businesses acquired 2011 and 2012, service center segment sales for the third quarter of 2012 increased 5.9% from the third quarter of 2011 on a same-store-sales basis.

When compared to the second quarter of 2012, sales for the third quarter of 2012 increased 10.7% after excluding $27.6 million of sales for businesses acquired in 2012 on a same-store sales basis, sales for the third quarter increased 2/10ths of a percent from the second quarter. The third quarter contained one more business day compared to the second quarter.

Third quarter 2012 sales for supply chain services decreased 9.5% compared to the second quarter of 2012 as a result of reduced sales to military and truck-related customers.

Third quarter 2012 sales of innovative pumping solutions products increased 10.4% compared to the second quarter of 2012. The sequential increase in IPS sales is the result of energy and mining-related projects.

Third quarter 2012 sales of our service center segment increased 15.4% compared to the second quarter of 2012. After excluding $27.6 million of service center sales for businesses acquired in 2012 on a same-store sales basis, service center segment sales for the third quarter increased 4/10ths of 1% from the second quarter of 2012.

Gross profits for the third quarter of 2012 increased 40.4% from the third quarter of 2011 compared to the 39.5% sales increase. Gross profit as the percentage of sales increased to 28.8% in the third quarter of 2012 compared to 28.6% for the third quarter of 2011. This increase is primarily the result of increased gross profit margins for the IPS segment. Gross profit as a percentage of sales for the third quarter of 2012 decreased to 28.8% from 29.3% for the second quarter of 2012 primarily as a result of reduced gross margins for the IPS and SCS segments.

SG&A for the third quarter of 2012 increased $14.0 million or 31% from the third quarter of 2011 compared to the 39.5% sales increase. This increase is a result of approximately $14.3 million of SG&A expenses including the amortization of intangibles and acquisition costs associated with the acquisitions completed in 2011 and 2012 on a same store sales basis. Excluding the SG&A expenses related to acquired businesses, increased compensation related expenses were offset by lower healthcare costs, professional fees, travel expenses, and collection of a $500,000 legal settlement. We spent approximately $1.1 million of professional fees during the quarter, which were incurred in connection with the acquisition of a HSE during the third quarter of 2012. As a percentage of sales, SG&A decreased to 20.3% from 21.7% for the third quarter of 2011. This decrease is primarily the result of economies of scale. SG&A for the third quarter of 2012 increased $3.2 million or 5.8% from the second quarter of 2012. This increase is the result of approximately $5.6 million of SG&A expenses including amortization of intangibles acquisition costs associated with the acquisition of HSE completed in the third quarter, 2012. Excluding the SG&A expenses related to the acquisition of HSE, increased compensation related expenses were offset by lower healthcare costs, professional fees, travel expenses, and the collection of a $500,000 legal settlement. As a percentage of sales, SG&A decreased to 20.3% from 21.3% for the second quarter of 2012 primarily as a result of spreading corporate expenses over a larger sales base.

Interest expense for the third quarter of 2012 increased approximately 200% from the third quarter of 2011 and the second quarter of 2012. From July 1, 2012, DXP entered into a new credit facility in connection with the acquisition of HSE. This increase is the increase in interest as a result of increased borrowings used to fund acquisitions, increased amortization of debt issuance costs for the new facility, and a $654,000 charge to fully amortize debt issuance costs related to the prior credit facility.

The tax rate for the third quarter of 2012 increased from the rate, past rate for 2011 and the rate, tax rate for the first six months of 2012 primarily as a result of the non-deductibility of the acquisition expenses associated with HSE.

As of September 30th, our total long-term debt was $259 million. And our bank leverage ratio was 2.12/1 September 30th, 2012. At September 30th, our borrowings under credit facility were at a weighted average rate of approximately 2.2%. Our availability under the credit facility at September 30th, 2012 was approximately $67.4 million.

Cash on the balance sheet at September 30th, 2012 was $12.2 million. Accounts receivable and inventory balances were $188.7 million and $99 million respectively at September 30th, 2012.

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

David Little

Thanks, Mac and thanks all our participants on our conference call today.

Our first thoughts go to our DXP people, our customers, and their families that were affected by Hurricane Sandy. Our prayers are with them to have a safe and speedy recovery.

Our third quarter results were excellent in both top line and bottom line growth. Our external growth strategy of new acquisitions is working very well. Our focus is to support and help our new family members to exceed by being a part of a bigger ship with more tools and resources to help their customers to be more successful resulting in growth for both us, the customer, and our new acquisition.

Our goal is to acquire a successful company and help them grow creating a win/win situation by better serving their customers with a larger breadth of technical products and services. This strategy is working and will continue to be a big part of our future success together.

I would like to personally congratulate all our DXP people for their accomplishment of reaching our $1 billion sales goal. If you look at our last 12 months, we did $1 billion, $22 million, $465,000 in sales and a 9.5% EBITDA margin. In the third quarter, our EBITDA margins were actually 10.6%. We achieved this goal much earlier than expected since it was actually our 2013 goal.

Okay, take a minute. Congratulate yourself on a job well done, but now we're going to get this planning to our next milestone of $2 billion by the end of 2016. And of course, EBITDA margins of 10% plus. I believe in monetary goals, but I also believe in the pursuit of happiness. In business, money is just a measurement. Happiness is defined as being successful. DXP wants to provide each of its employees and our customers with the opportunity to be successful and grow. We continue to be successful in managing our balance sheet as Q3, 2012 pro forma return on invested capital was 28.8% after tax. This is one of the highest returns in working capital plus fixed assets in our industry.

We are excited to grow our individual service centers to be supercenters. And expand our market presence in North America through acquisitions, which we take their locations and we grow them in to be supercenters. Our vision is set and reachable. And we are getting really, really good at execution.

I will now focus in summarizing activities within our three business segments, service centers, supply chain, and IPS. The service center segment sales increased 15.4% from Q2 to Q3 of 2012. And 49.8% compared to Q3 of 2012 versus Q3 of 2011.

Operating income increased 14.4% from Q2 to Q3. And 56.4% compared to Q3 of 2011.

Our service center leverage comes in the form of top down commitment to sales and operational excellence and acquisition strategy around technical products and services in our five product business.

Overall, the tone of our business remains stable to growing. We're experiencing softness in some in-markets. But our goal is to continue to grow by taking market share from medium and small distributors that cannot provide the breadth of products, services, and technical expertise needed in this highly competitive market channel. We continue to transfer market share gains into strong earnings growth by providing our service center network with excellent programs that provide freedom within the structure to capitalize on the market opportunities. This approach allows us to take advantage of the entrepreneurial culture in the front office and add agility in the back office. Our excellent programs focus on quality processes and educational programs that reinforce our culture of adding value through collaboration with our customers, suppliers, and product business. I would like to formally recognize our operational and sales excellence committees for their dedication and commitment to continuous improvement and success in this marketplace.

Our continued success in key end markets is fueling the expansion of our service center network. Our Q3 investment in (Jersey Supply) broadened our technical product and service portfolio with a greater Houston area thereby strengthening our strong position in this key geographic market. Jersey's reputation of providing quality products along with a high level of personal service will unlock additional opportunities for our greater Houston sales channel.

We continue to create value for our industrial customers seeking to consolidate their vendor base without sacrificing local inventory and expertise. We delivered a record three supercenters during the third quarter. This accomplishment reinforces our commitment to being a one-stop source for the industrial customers looking for an experience result oriented MROP partner. We would like to recognize our employees, customers, and suppliers in the Mason City, Iowa, Atlanta, Georgia, and Goldsboro, North Carolina markets for their dedication in helping us create these three new supercenters. We presently have a network of 33 supercenters and 9 in progress.

A few more facts, we have 155 total service centers. We have nine sales offices. We have 33 supercenters as mentioned. We have nine supercenters in process. And seven distribution centers, eight fabrication centers. We're in 35 states in the United States and 7 provinces in Canada.

Supply chain services, SCS business segment was very busy in Q3 implementing multiple locations. Many of these onsite locations will be completed in Q4. Completion is a good term. That means we start making revenues off of them. These sites consist of several SCS value solutions with multiple plans, onsite storerooms, vending solutions, SCS's chase. It's computerized maintenance management software. These solutions are very exciting to our customers and our teams because SCS is enhancing value beyond what our competition's abilities are. In Q3, the supply chain excellent team is in operation and sales are continuing to strive to deliver solutions by creating value and competitive advantage. This sales excellent program is helping the team evaluate and deliver differentiating solutions to customers. And in return, SCS has seen more qualified customers that allow SCS to generate better top and bottom line growth.

The operational excellence team is still focused on providing customer service levels above the customer's expectations while leaning out SCS's cost, the supply chain, and lower SG&A, and improve the bottom line.

Q3 and Q4 are traditionally slower months for SCS with holidays, weather, and capital discipline affecting daily sales. We are still seeing increased spending in defense, military, and government market segments. Recent trends have seen some slowdown in our transportation and our gas customers in the fourth quarter.

Let's kind of go back through some facts on supply chain services. In 2011, we had 52 onsite and 101 offsite locations. In 2012 to date, we have 62 sites and 101 offsite locations. This 12 new sites and 2 that we had also had 2 closed (fights). When we say implement, we mean to implement these to start generating revenue. In Q1, we had one site in this category. In Q2, we had one site. In Q3, we had one site. And in Q4, we're having – which we hope to be about eight sites. We have some really nice things coming.

Q2 sales were $35.177 million versus Q3 of $38.854 million. [Inaudible] percentages in Q2 were 34.2% versus Q3 of 30%. This margin erosion is due to lower margin jobs associated with highly competitive production kite modular packages. These are black units. And so they're a little more competitive than our offshore modular packages. We also had some slippage of orders from Q2 to Q3, which when that happens in the products phase at our shops a longer period of time, they can't help but accumulate more hours and more costs.

IPS segment is continuing to be faced with manufacture expended delivery times, the major equipment component on major equipment components. As in Q2, we continued to face the issue of end users taking steps to delay delivery of our modular packages. What appears to be the driving force here is one, the year-end users total project is suffering from delivery issues on other aspects of the project. And in some cases, there is evident attempt to slow down our completion of the modular package by the end user. The above issues continue to contribute to inefficiencies in our production schedule and fabrication process, which is a longer explanation as to why gross profit margins are down.

When we look at our downstream on gas mining sector in the Rocky Mountains in the North Dakota regions, we continue to see a shift in projects to production equipment. These are black unit opportunities. The current black package being marketed by DXP Golden has gained acceptance in the market. It will provide additional modular packaging opportunities for this business unit. This type of modular package typically does result in slightly lower margins because of the nature of the product.

[Inaudible] to Mexico, the signs of activity are encouraging as it relates to new projects. Anadarko is duplicating their Lucas platform equipment. BP and Chevron are moving forward on some projects. We feel confident based on the product DXP has to offer and our relationships with BP and Chevron and other players that this will result in opportunities for us. BP has decided to move forward on Mad Dog 10. This is a new platform project. The project is moving slower than expected. So IPS has over 35 million pumps quoted on this project. Our expectation is that this equipment on this project will be purchased in 2013 and 2014. BP has let us upgrade projects. This is an existing production platform equipment expected to be purchased in Q2 of 2013.

Offshore, we're looking at projects in Africa. IPS is currently involved in three offshore Africa project opportunities. Most of the equipment for these projects is slated to be purchased in 2013 and 2014. Based on our relationships with end users, the ENC's existing presence in the production area and product offering DXP has to offer, we are confident that our ability to get the opportunity to provide modular packages for these platforms.

Offshore Alaska, we are currently engaged in an opportunity to provide modular packages for an offshore Alaska platform project. This equipment is slated to be purchased in Q1 and Q2 of 2013.

When we go to midstream, we see quoting activity in this sector increasing. In this sector, delivery is important. And many opportunities can be realized when DXP and our manufacturers can provide acceptable deliveries. Working with our major manufacturers to commit and hold critical deliveries will be a key component for new requirements. We feel our re-manufactured projects and HP-Plus products, which we have stronger control over our own deliveries, will continue to provide opportunities based on our 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 has gained traction. We have been successful in placing a significant amount of HP-Plus units in the Permian Basin, [Inaudible], the Marcellus Shale pipeline applications. Based on our current backlog and sales activity, IPS segment scheduled deliveries for Q4 should be our largest revenue quarter for 2012 due to the manufacturing extended lead times and end user extended lead times requirements system may affect some Q4 deliveries and performance.

Our present 529, PMI, and Golden are working two-ten hour shifts six days a week in the production of our modular packages. We see this continuing in Q4. 529 is increasing its production staff in order to meet production schedules for Q4 for IPS segment business.

Our current open live project quotes is in excess of 80 million, 30 million alone on the BP Mad Dog 2. This is double what our open quotes were at the end of Q2.

[Inaudible] activity is steady. At year end, we were seeing several small packages quoted opportunities for modular package. This is typical for this time of year. We feel comfortable barring no economic, political, or world upset that Q1 of 2013 should be strong.

I'd now like to talk a little bit about our Q3, 2012 acquisitions. In the third quarter of 2012, we completed one acquisition for a total transaction consideration of $85 million or 4.6 times acquisition EBITDA of $18.6 million. Now total transaction through consideration includes working capital adjustments plus any additional expenses, CapEx, reimbursements, et cetera, but excludes legal costs.

Consequently, the Q3, we completed the acquisition of Jersey Industries on October 1st, 2012, which we'll begin financial reporting in Q4. We're excited to have these two acquisitions as part of DXP family. HSE Integrated adds to our safety price and services division and provides a significant presence covering both the western and eastern parts. And firmly establishes DXP across North America.

Western Canada or Alberta is a major oil and gas market. And will allow DXP to leverage its expertise within this market and better serve DXP customers who desire products and services providing with an entire North America footprint as discussed in last quarter.

For Q3, HSE contributed $24.9 million in sales and $3.6 million in operating income. That's a 14.5% margin. All acquisitions in Q3 contributed $66.6 million in sales. All acquisitions including Kenneth Crosby, C.W. Rod, Mid-Continent , Aledco, and of course, Pump &Power, Industrial Paramedic Services, Austin & Denholm, and HSE. Here to date, acquisitions have contributed $137.6 million in sales.

Highlights from our two recent acquisitions include the following. HSE highlights, Canada's largest industrial safety services company. Last 12 months sales and adjusted EBITDA at acquisition of $105.2 million and $18.6 million respectively. 23 locations in Canada and the United States. 20 are in Canada, 3 are in the United States. Positioned to service to oil spans market. Firmly established DXP as a leading safety service provider in North America. Presently, in the number two market position.

Jersey, leading provider of industrial and hydraulic hose and fittings in the greater Houston market. Last 12 month sales and adjusted EBITDA at acquisition of $9 million and $1.3 million respectively. Two locations in Houston in Deer Park and Harvey Wilson Drive provided DXP with significant scale in the industrial hose and fitting sub-product category. We include hose in our [inaudible] NTP group. I think you'll see us breaking that out soon. Focus on serving the only gas, chemical, and petro chemical markets.

Since Q4, 2011, we have now completed nine acquisitions. DXP's acquisitions have focused on additional scale, geographic reach to our product divisions, as well as establishing DXP's business presence across North America.

Overall, we are pleased with these acquisitions we have completed. We remain excited about our pipeline. We continue to see opportunities in the U.S. and in Canada. As of late, while we continue to evaluate and review opportunities, we are more cautious given that overall shift in tone of the market and an increase in volatility in monthly results. In other words, we're slowing down with it.

In conclusion, I'd like to congratulate our DXP people for achieving our milestone of $1 billion in sales and 10% EBITDA by 2013 based on our execution and relentless pursuit of sales and operational excellence, based on our suppliers who make world class products, and provide DXP with self-support, based on our customers that believe that our large breadth of technical products and services, and our expertise makes them more successful.

I'd also like to thank this country for the free enterprise system. It gives everyone the opportunity to be successful. I can only hope that everyone at DXP and our customers feel the same.

I am personally looking forward to our next four years to achieve our next milestone of $2 billion in sales. And EBITDA margins of 10% plus.

We are now open for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from the line of Matt Duncan – Stephens, Inc. Please go ahead.

Matt Duncan – Stephens, Inc.

Good afternoon guys. Congrats on another great quarter.

David Little – Chairman, President and CEO

Thank you.

Matt Duncan – Stephens, Inc.

First question I’ve go, David if you could talk a little bit about the sales trends that you’re seeing in the business. How did it do month to month throughout the quarter, and how did October look. You said you’re seeing a little bit of a slowdown, if you could maybe talk a little bit more about what you’re seeing out there?

David Little – Chairman, President and CEO

Well, really month to month was from a base sales basis was probably a relatively flat one. You know, the gas market continues to contract, oil is still relatively strong. We see our oil and gas customers talking and putting together their next year budgets, which are at least the same as this last year if not larger in some cases. So, we feel that 2013 should be a really good year.

We likewise see some slowdown in the fourth quarter with some of the oil and gas customers. As you know they get their budgets, they spend them as fast as they can so that they produce more oil and get more volume of product on the books. When they get towards the end of the year their budget tend to be gone or are depleted significantly. And so we’re not seeing a lot of extra money coming in in oil and gas play to continue to keep drilling going.

That said, remember also though that DXP is besides [inaudible] service business is on the production side, and there as you heard on the IPS, you heard everybody talk about how their quoting activity is strong, their backlog is strong, they’re working an unbelievable amount of hours. And so, on the production side and in the midstream side of moving the product from all the drilling that we’ve had is pretty strong. So, we feel good about where we are. The rig count is going down and that I think is just people either reducing their gas drilling which has been happening and is continuing to go down. But on the oil field side we’ve seen them speed that up until recently and now it’s sort of declining too, but we just really contribute that to the fact that they’re spending more time on the production end and trying to produce what all the drilling that they’ve done along with sort of the climate this election year climate ran.

But that all trickles down as you know, so now we have regular manufacturing that services the oil and gas industry. We have service companies that are building [inaudible] trucks and all that. So all of that infrastructure has in fact slowed down. You know we did in our organic growth rate it’s there and you can see it, it’s 13-plus for the year and it was 7.4% over this last quarter, so that speaks to the organic piece slowing down.

The question I have is, you know, how do we compare against our peer group. And when I look at our peer group well 7.4% organic growth is pretty good. So, I’m feeling that our strategies of growing supercenters and the things we’re doing are working, hiring new people, hiring new salesmen, training new people, et cetera. So, you know, we like the spot we’re in, we like what’s happening to our business. We could always have more so to speak I guess, but things are pretty at DXP, and when looking we see ourselves continuing to take market share and grow.

Matt Duncan – Stephens, Inc.

Okay, David that’s helpful. So it sounds like from what you’re saying, you know, after adding in Jersey Shore, I guess it’s kind of 2 to 3 million revenue – or Jersey Industry rather [inaudible] in revenues. It sounds like they’re probably going to be down a little bit sequentially in the 4Q just on sort of normal seasonality and maybe some slowing that you’re seeing in oil and gas, would that be fair? May be revenues are down a little bit sequentially?

David Little – Chairman, President and CEO

We certainly have a headwind there. We’ve got the holiday season, we’ve got – you know we don’t see people increasing their budgets for the rest of the year. So, we have some headwinds that we’re looking at. You know, I might comment about Supply Chain Services, because it’s – a lot of its business is in fact is adding new business, but a lot of its business is just day to day business, running these manufacturer [inaudible]. So, we see them having declining sales where they don’t have any way of – they already have 100% of that persons business, so they can’t get more if it’s already got 100% of it. So it if goes down, their sales go down. So, we’re seeing that, so there is slowness out there, there’s not – I don’t think anybody on this call would think that I was crazy if I said business hadn’t slowed down, because it has.

So, that and the holidays and the election and all the things that are going on, you know, we have some headwinds. That said, IPS has a tremendous amount of stuff that it’s supposed to produce. The service centers are still trying to grow supercenters, and so we’re adding product and we are capturing market share. So, I think you should see us outperform our peer group, but whether or not that means sequential sales, I hate to when sequential sales go down because we’ve had twelve, eleven [inaudible] eleven quarters of sequential going up, and so I hate to break [inaudible] I’m not going to say it, but if you want to say it, you can.

Matt Duncan – Stephens, Inc.

Okay, that does sound good. David if I look at the goals that you’ve now laid out for 2016, you bring in revenues at a 10% EBITDA margin, I’m curious about the 10% EBITDA margin. I think that was your goal at a billion in revenues a little bit. So, maybe if you could talk a little bit about why maybe you wouldn’t do better. I guess you said 10%-plus, so maybe you’re thinking you can do better, but just give us a little collar around that goal for 10% EBITDA margin and two billion revenue.

David Little – Chairman, President and CEO

Well the things that make the plus really real, is we’re still getting – we’re implementing P2, which are pricing software. We still have regions that do not have gross margins where they need to be. And we have a lot of things going for us that we think because we have more engineered products, they demand a little higher price than commodity products. And there’s a lot of things going that would say, yes, you’re right, we should hit eleven, we should hit twelve et cetera. The things working against that is that if Supply Chain Services, start growing very rapidly, well then it’s not a 10% business, so in a way it’s a drag. It’s not a drag on [inaudible] invested capital because that’s a very high one, and so we like it – we like it as a way of dealing with really, really, large customers, but it’s not going to be at 10% EBITDA business.

Things happening to IPS like units are less complicated in themselves, so therefore they don’t demand as quite a high margins as we make on stuff that’s got more controls and piping, et cetera. So we have a product mix this year, one. We also have a customer mix issue, and so tell me we’re really trying to serve both – you know if we had four quadrants of accounts, say accounts B,C,D. You know the more we’re in the C & D area, we’re going to get more margins because we do more things for those kind of people. And in the A & B area the margins, those are bigger accounts, we do less for them, they want to turn everything into a commodity, and so our margins get tighter. So, customer mix, product mix, segment mix can all work sort of against us.

That said, I certainly don’t want to leave anybody with the impression that I’m just happy with 10 and 10 is all we ever want to do because that’s not the case. A) We have this pricing software and we’re not spending money on that time and energy just for the fun of it. We think that that will raise our margins. B) We have legacy [inaudible] specific precision branches that had lower margins that need to get them up. So (audio blank) did that answer your question?

Matt Duncan – Stephens, Inc.

Yes it did, thank you David, I appreciate it. I’ll hop back in queue.

David Little – Chairman, President and CEO

Okay.

Operator

As a reminder ladies and gentlemen, if you have a question please press the star followed by the one. If you are using a speaker phone, please remember to lift the handset before making your selection. One moment please for the next question.

Our next question comes from Joe Mondello – Sidoti. Please go ahead.

Joe Mondello – Sidoti

Hey guys. I missed the part where you were talking about the segment margins. I was wondering if you could just give me the margins on all three segments again?

David Little – Chairman, President and CEO

Our organic growth?

Mac McConnell – SVP, Finance and CFO

No, no, no, the gross [inaudible] operating income margin.

Joe Mondello – Sidoti

Yes, operating.

Mac McConnell – SVP, Finance and CFO

Of those three segments.

David Little – Chairman, President and CEO

For service centers in the third quarter it was 12.4%. In IPS it was 18.6%. And Supply Chain Services it’s 7.2%.

Mac McConnell – SVP, Finance and CFO

And you have to look at that mix that – real rough, very rough [inaudible] 70% of the business service centers

Joe Mondello – Sidoti

In terms of the IPS, how is either backlog and the orders, how is the backlog looking compared to the second quarter? How did the orders trend throughout the quarter? And in addition to that, sort of – how was sort of the pricing that you’re seeing within that backlog trending?

Mac McConnell – SVP, Finance and CFO

Okay, so our quota activity is more than doubled where we were in the second quarter looking at the third quarter. Our backlogs are up. Our manpower the working two shifts 10 hours a day, that’s 20 hours of a 24 hour day. And so – and then as far as the margin on that business, what we commented about was the [inaudible] units are at lower GP margins than the modular stuff that goes offshore and even the modular stuff that’s onshore, that’s got more controls and housing and all these kinds of things on it. So, there’s been a shift towards more of the production oriented equipment in that causing our margins and IPS to go down a little bit.

Joe Mondello – Sidoti

Okay, but the actual orders and may be the top line looks pretty good going into the fourth quarter, and going into the beginning of next year?

Mac McConnell – SVP, Finance and CFO

Yes.

Joe Mondello – Sidoti

Okay. And then I also just had a question regarding the – I didn’t get what your total debt was at the end of the quarter, I was wondering if you could give me that. And also did you say there was a onetime fee regarding changing your credit agreement? Just trying to get an idea of sort of what a normalized interest expense should be in a quarterly basis going forward?

Mac McConnell – SVP, Finance and CFO

Total debt September 30th was $259,491,000.

Joe Mondello – Sidoti

Okay. And …

Mac McConnell – SVP, Finance and CFO

There was $654,000 charge or a riding off or fully [inaudible] the debt issuance cost on the prior loan agreement.

Joe Mondello – Sidoti

Okay. So on a normalized basis we’re sort of looking at 1.5, 1.6 million on a quarterly basis until you potentially start reducing that debt level? Is that fair?

Mac McConnell – SVP, Finance and CFO

Let me think about it just a minute. Interest expense was two million three, so if you back that off 100,000 would be a million eight [inaudible]

Joe Mondello – Sidoti

Okay. I was just trying to get a ballpark …

Mac McConnell – SVP, Finance and CFO

It’s a small affect, but 85 million of that debt was incurred on the 12th of July, so there’s a few more days of having [inaudible]

Joe Mondello – Sidoti

And then just lastly, I was wondering David, if you could talk about any new developments or sort of any opportunities or new developments, or just give an update on the HSE acquisition and how that’s trending thus far?

David Little – Chairman, President and CEO

Yes we’re very pleased with multiple things. One, we’re very pleased with their corporate group, their corporate accounting group, we’re leveraging that for IPS and also [inaudible] and so that’s taken a little bit of burden off of us here in Huston. We’re very happy with the sales we’re getting in the group of people that they’ve put together, the revenues, the profitability was all very good, where we would like for it to be.

We’re excited about really positioning ourselves to be a North American Safety Services Company that’s probably close to 250 million, the number one player’s total safety and about 450 million. But then it drops off pretty fast after us to players that are some of the very biggest ones are in the $40-50 million type range.

Joe Mondello – Sidoti

And another we’ve had a full quarter here with it onboard, any sort of synergies or cost improvements, anything related in terms of that, that could potentially be an opportunity?

David Little – Chairman, President and CEO

Well we’re taking [inaudible]they were public companies, so we’re no longer a stand-alone public company. There is some – we put our grid all over who was the vice president of the safety [inaudible] We’ve moved him up there so really their president and their operations guy are gone. So, there’s some savings. We’re looking at – we’re kind of in an expensive neighborhood of being in the Calvary downtown. And so we’re looking at maybe moving out of that particular area [inaudible] salesmen there. There’s a real need for that’s where the major oil companies are, [inaudible] have a little bit of presence there to fall on.

There’s some big [inaudible] around the utilization of equipment, and that’s for all of North America. What makes the safety businesses really not that complicated and yet it’s sort of complicated.

It’s sort of complicated because you really need – they have a lot of flexible manpower that knows the safety business. And so there’s some real art to that in knowing how to do things correctly. And there’s some real art to that.

The part that’s simple is kind of the math. The math is, is that you rent people literally and so the higher utilization rate you have for all your people, the more hours their billing to the customer, the more money you make. And we also rent equipment, so more utilization we have of our equipment all across North America, the more profitable. So if they were 100% utilized in people and equipment, the margins that we would make would be obscene. Since we don’t ever get to that point, we still make – they made 14.5% operating margins, that’s pretty nice business. So it’s all about, you know, being bigger allows you to move equipment around, allows you to move people around, et cetera. So it gives you more flexibility.

Joe Mondello – Sidoti

Okay. And just to clarify, did you say 14.5%?

David Little – Chairman, President and CEO

Yes.

Joe Mondello – Sidoti

Okay, all right. Thanks a lot guys.

Joe Mondello – Sidoti

All right, thanks.

Operator

Our next question comes from Holden Lewis – BB&T Capital Markets. Please go ahead.

Holden Lewis – BB&T Capital Markets

Thank. Good afternoon guys.

David Little – Chairman, President and CEO

Hi Holden.

Holden Lewis – BB&T Capital Markets

I also [inaudible] prior caller talked about the [$654 million] charge for [inaudible] of past debt. I also thought you saying that there was a half a million dollar collection in SG&A that was an offset SG&A, can you give a little collar on that, what was the number for that?

David Little – Chairman, President and CEO

That one was $500,000.

Holden Lewis – BB&T Capital Markets

Okay, what was their net worth?

David Little – Chairman, President and CEO

I can’t tell you. [inaudible] we were suing somebody and we won. We have a non-disclosure agreement, so we can’t.

Holden Lewis – BB&T Capital Markets

So the way we should be looking at this, I guess from an [inaudible] point, is that collection largely offset that (ammonizing) charge, and so the impact across the line is [inaudible] or is there some different treatment from a tax standpoint that negates the net impact of those two things, irrelevant from an early standpoint?

David Little – Chairman, President and CEO

They are both treated the same for tax purposes. So, you’re right, we wrote off 654,000, that’s an interest expense by (ammonizing) the bad issuance cost, than we’d also in NSD&A picked up $500,000 on [inaudible]

Holden Lewis – BB&T Capital Markets

Got you, okay. I wanted to ask you a little bit more about the SCS business? You kind of alluded to a new account here, a new account there and in this fourth quarter, it sounds like you have eight accounts that are going to begin recognizing revenue. That business obviously has seen some natural headwinds, but what kind of revenue impact would we expect from these new things coming on? Is this something which is going to, you know, push the revenues of supply chain back up into the 40s? Is that sustainable going into next year? Just trying to get a sense of what the impact is, and what the profitability of those new implementations are?

David Little – Chairman, President and CEO

I’m going to have to get to that answer Holden, I don’t really know what amount of revenues they have. I think that, when I talked to John [inaudible] about SCS, I think he would tell you that [inaudible] holidays and uncertainties in the market, that he would do about the same on third quarter to fourth quarter. That said, we – other jobs that are really jobs on the profitability side and so I guess we’ve done okay, and that there’s not been a growth business for us as you can tell, and so from that point of view that’s not – we’re not really happy with that. But let me punt this one. [inaudible] this one and get you a number.

Holden Lewis – BB&T Capital Markets

Okay, yes, because I mean you’re opening one [inaudible] That sounds reasonably dramatic. So, you know, I recognize that some of your core businesses or customers are having some issues, but, you know, it looks like those issues result in a few million down, but it sounds like eight new accounts could result in a meaningful step up in revenues, and that’s why I’m trying to get a little bit of collar on. [inaudible] Does that suggest that 2013 is a growth year for it I guess?

David Little – Chairman, President and CEO

Holden, I’m glad you asked the question because I agree with the [inaudible]

Holden Lewis – BB&T Capital Markets

All right. And then thinking through the IPS as well, I guess this is all coming – it’s clear that you’re more cautious that your tone is more conservative on the end market [inaudible] I get that. But again it kind of sounds like you get the [inaudible] gross revenue will see. But it sounds like IPS also, I mean, for all the concerns about [inaudible] and things like that, you know, using you quoting activity and all that, I mean, it sounds like you’re thinking that 2013 – again there’s no reason to think that IPS is not going to build on this Q4 and continue to grow, or is this Q4 positive revenues that you’re expecting, is this kind of backlog clearing, that’s going to clear the top [inaudible] ’13 that might be difficult to grow off of?

David Little – Chairman, President and CEO

I personally feel very good about 2013. I base that off of the fact that I’ve been very concerned about the rate count going down, and so – because that affects us later on down the road. But I’m told that the oil and gas companies are going to increase their budgets from this coming year, and business should be good. But it’s not been a good year for the oil and gas companies, it’s not necessarily been a good year for the service companies. And then I would preface – I would also say that IPS is saying that there’s a lot of attention on the fact that they’ve poked a lot of holes in the ground, and now they’re saying “Okay, we got to figure out how to move this product around”. We’ve got to build these production facilities, we’ve got to build these pipeline infrastructures to bring all this stuff to market more efficiently than having trucks and tanks and all that other stuff moving it around. So, I think from that point of view, IPS feels they’re going to build off of 2012.

Holden Lewis – BB&T Capital Markets

I was sort of under the impression, you know, with your IPS business that oil rigs if they’re relatively stable, gas rate is a disaster, but you guys – gas I think is more – you’re more [inaudible] gas uses more compression than pumping, therefore it doesn’t really – the mix seems to work for you because more oil good, less gas doesn’t matter because you don’t do it much there. Is that incorrect or?

David Little – Chairman, President and CEO

It’s correct, it’s correct when you think about our pumping business or you know the business that we were founded as a pump company okay? So it’s correct in that point. It’s slightly incorrect as is relates to our Safety Services business because they actually sell our gas, they make a lot more money off of selling gas than they do supervising of an oil well. So, I didn’t answer your question very well because I can’t really say “Okay, if the 80/20 rule”. Yes 80% of the time we’re going to be so much better off with oil and 20% of the time we get hurt with gas going down, so that’s a win. You know 80 combination of 20, so it’s a win. But I can’t give you that kind of answer – I probably could, and so I can get back with you on that one too.

Holden Lewis – BB&T Capital Markets

Okay, that’s fine. And then how do you feel about the accretion from the acquisition at this point. I think that there were some discussion about it, some initial numbers. I mean, do you feel that those are coming in [inaudible] what you see right now is lower because you’re concerned about the [inaudible] How do you feel about how does are coming in accretion wise?

Mac McConnell – SVP, Finance and CFO

[inaudible] EBITDA, and they’re highly accretive, and our goal in life as you know has been not to screw them up. So, we don’t do anything that hurts revenues, we don’t change compensation plans, we don’t change salesmen plans, we don’t do anything that hurts revenues. All we do is things that will enhance revenues. So, they’re all performing really nicely, very nicely, they exceed our expectations.

Holden Lewis – BB&T Capital Markets

Okay, great. Thank you.

Operator

Our next question is a follow-up from Matt Duncan. Please go ahead.

Matt Duncan – Stephens Inc.

Hi David. You talked a little bit about the pricing software earlier in the call, can you give us an update on how many of your regions have that now, and sort of what impact it’s been having on gross margin?

David Little – Chairman, President and CEO

I don’t have an update on the individual regions in terms of what kind of improvement they’re seeing. I do know that they’ve – they’re all on the system and capable of using the system. And so they’re in that process of how believability is, so I don’t know the utilization of the rate we track how many times they use the price are higher versus how many times they lower the price, and I haven’t seen a report on that either. So I assume that we probably are going through a month or two here where our results are not helping at all quite frankly. And so that’s why I’m not seeing it. So, if somebody has good news, they normally bring it to me. But they’re all up and running and we should get – we know we’ll get positive results as soon as we can buy-in, and so we’re working on the buy-in part.

Matt Duncan – Stephens Inc.

Okay, that’s helpful. And then, can you give us a little bit of an update on the M&A pipeline. You know, one small build it sounds like at the beginning of this quarter. How does that M&A funnel look, and how is it going with trying to find some branches to buy up in Canada you’ve got the ability to sell more product up there?

David Little – Chairman, President and CEO

I really would like to get back to the acquisitions being 10%, so let’s say we’re at a billion, so the next 12 months you should do $100 million in acquisitions. We definitely have that much [inaudible] you know, we’re actually pushing back to try to slow down some of this, so that we can A) Catch our breath and B) Get passed this sort of uncertain times. And so what are the numbers really telling us. Of course the flip side of that is the seller is looking at it, and going “Oh man things might get worse, so I won’t want to sell [inaudible]” But we’re really pushing back sort of deliberately to – and then certainly our pace, and I don’t know what the number is, I think it was 260 billion or something that we’ve purchased over the last 12 months, that pace is going to slowdown too. So we should get back to a little more discipline around the 10% external growth rate, and they’re pretty keyed up.

Matt Duncan – Stephens Inc.

Dave, do you think we’ll see something else before the end of the year? It sounds like probably the funnel sounds like it’s pretty full there?

David Little – Chairman, President and CEO

We – I’m not saying we won’t or will. We’re never done till we’re done.

Matt Duncan – Stephens Inc.

All right, thanks guys.

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