Earnings Call Transcript - DXPE Q1 2020

Operator, Operator

Thank you for being with us, and welcome to the DXP Enterprises, Inc. 2020 First Quarter Earnings Conference Call. I will now hand the conference over to Kent Yee, Chief Financial Officer. Please proceed.

Kent Yee, CFO

Thank you, Cheryl. This is Kent Yee, and welcome to DXP's Q1 2020 conference call to discuss our results for the first quarter ending March 31, 2020. Joining me today is our Chairman and CEO, David Little. Before we get started, I want to remind you that today's call is being webcast and recorded and includes forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings, but DXP assumes no obligation to update that information as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and an accompanying investor presentation are now available on our website at ir.dxpe.com. I will now turn the call over to David Little to provide his thoughts and a summary of our first quarter. David?

David Little, CEO

Good morning, and thank you, Kent. Thanks to everyone for joining us today on our fiscal year 2020 first quarter conference call. Kent will take you through key financial details after my remarks, and after Kent's prepared comments, we will then open for Q&A. In light of the coronavirus and its impact on the health of our employees, customers, and economy, we're going to share with you our thoughts on these items and our responses before we move into the normal format of our earnings call. Before I start, let me first say that our thoughts and prayers go out to all those impacted by the COVID-19 virus. This is a terrible virus and a pandemic unlike anything we have ever seen. In these unprecedented times, I want to thank each of our DXPeople for their support and dedication. DXP appreciates the help of all the medical professionals and first responders in our various communities, and we pray for their safety and well-being as they put themselves at risk daily to serve the people of their countries worldwide and attempt to make it safer for everyone. DXP also appreciates the support of our DXP suppliers as we navigate through our new normal together with ample supply of inventory as we view fiscal year 2020 as a growth year for DXP. Accordingly, we are in good shape with our supplier partners and experienced minor constraints, as expected with safety PPE, as we adjusted inventory in these new environments. As an essential business, we felt responsible to provide excellent service to our customers, who themselves were deemed essential. We provided this level of service by delivering products and services and assisting our customers in keeping the economy functioning the best we could during these difficult times. As COVID-19 spread rapidly in the United States, we quickly rallied our team around three fundamental priorities: Our first priority was the health and safety of our DXPeople and supporting national efforts to stop the spread of the coronavirus. We took immediate steps in the U.S., Canada, and Dubai at our facilities by working in small teams or through rotations. We did this so that if we needed to quarantine one team, we could still continue to serve our customers. Additionally, our facilities implemented social distancing in the workplaces, frequent handwashing, sanitizing, temperature testing, quarantines, and remote work habits where we could. We strongly encouraged our employees to maintain protocols not just at work, but also while at home and outside the workplace. Out of DXP's 2,500-plus DXPeople, I am proud that we have had only two confirmed cases of the coronavirus so far. Our second priority has been to continue to provide excellent service and support to our customers as we support various industries that keep the wheels of the North American economy going. We are thankful that we had the opportunity to support and serve our customers and make a difference. During these unusual times, DXPeople have done some amazing things for our customers to keep them safe and running as an essential business. The letters and emails that we have received showing appreciation for our support have been truly heartwarming. Our third priority has been to manage our balance sheet on expected lower near-term demand to remain strong and poised for an eventual recovery. I am very proud of how our DXP team has managed and balanced these priorities in what is an unprecedented and unique environment. All three priorities are critically important in order to successfully manage through the crisis while protecting our culture and continuing to build DXP for the future. Let me briefly review in a little more detail the actions we are taking to accomplish these priorities. To keep everyone safe in a coronavirus world, we rapidly implemented all the CDC guidelines and preventative measures. We have canceled all large meetings, gatherings, and events and most air travel. We have educated our DXPeople on the basics of social distancing and hygiene protocols and then executed these in our offices and locations. We are leveraging our supply chain to ship and replenish supplies of disinfectants, masks, and hand sanitizers to our customers and employees. With these modified policies, we're being aggressive about having DXPeople stay at home if they have symptoms or have been potentially exposed until it is clear they are not infected with the virus. We're performing our own contact tracing, and when we hear of a scenario that potentially impacts a DXP employee, we act decisively. Finally, all our DXPeople who have the ability and desire to work from home are doing so to reduce the coronavirus risk. Lastly, we are practicing good hygiene techniques at all our locations, including constant cleaning of high-touch, high-traffic areas and overall facilities. Today, all locations remain open, providing excellent service and support to our customers while ensuring the safest environment we can for our DXPeople. In terms of demand, our sales were impacted starting in mid-March as we closed out the first quarter in light of various shelter-in-place and stay-at-home orders across the United States and Canada. I am sure we will get into this in our Q&A portion, but as expected, we have seen additional declines in orders in April. Noting that our year started off strong, we have pivoted to focus on declining demand. Our plan is to be calculating and smart, using marketing intelligence to maximize profits. Part of this intelligence is looking at the market we serve by location and geography to determine their likely demand and adjust accordingly to continue our expected profit profile. So let us look at some of our key end markets. Upstream oil and gas, which is tied to drilling, is contracting. The rig count is down, and this primarily affects demand within our Safety Services division. DXP Safety Services also performs plant turnarounds, which have been delayed but not canceled and should be positive over time. Midstream oil and gas, regarding pipeline activity, continues to execute small projects and has not canceled any large orders with DXP today. Downstream or the refinery business has seen their utilization rates drop from 91% to 70%. Until people start driving and flying again, this market will be a break-fix market, which DXP has a strong service and repair business. DXP anticipates demand will be down 30% in these markets and will start to recover when the price of oil hits $30 to $35 per barrel. The IPS segment will suffer the largest impact as new capital projects are put on hold. The oil and gas industry has a demand problem, which I believe will improve when the country starts going back to work. Ultimately, we will start to see demand we are accustomed to when we have a vaccine. At this point, when demand picks up, we will discover that we have an abundance of supply, and that will take a couple of years to resolve unless everyone in the industry cuts production, which could happen. This means that DXP's IPS segment, which is CapEx dependent, is cutting expenses to maintain profitability on 30% lower demand. The Service Centers and a small part of Supply Chain Services supply aftermarket parts and supplies, service and repair, and OEM components. As such, they are experiencing a 10% reduction in demand related to this industry. On a positive note, gold mining, specialty polymers, bottled water, water and wastewater, certain recreation manufacturers like bicycles, soap, food and beverage, agriculture, and some chemical, medical, petrochemical, and asphalt markets are performing well. Meanwhile, steel, rubber, paint, manufacturing, automotive, aerospace, and most OEM markets are down. On a segment and location basis, we are rightsizing to anticipate sales results with a small, hopefully not, recovery starting in the third quarter and beyond. DXP is not broken. Every day, we work on being more efficient and productive. Customers are utilizing DXP's B2B capabilities more and more to increase their efficiencies. Why? DXP's approach is to tailor each B2B experience to that customer's specific needs rather than take a shotgun approach of trying to have some online portal that is all things to all people. Then we combine that with product expertise. DXP's B2B customers appreciate this approach, and it is a significant differentiator. Vendor-managed inventory programs are growing sales because being fast and convenient helps our customers be more efficient. DXP sales professionals are using a variety of virtual tools to contact customers, demonstrate new products, and troubleshoot. These include Skype, FaceTime, Zoom, Snapchat, and LinkedIn. We use whatever medium the customer prefers and tailor our approach to their needs. DXP is always customer-focused, even in this environment. Especially in the environment we have today, listening to the customer matters. Marketing has developed videos for our customers for many reasons. The one that comes to mind is the video we use for our customers to view our manufacturing plants of our Made in America pumps. Now they cannot travel, so we are sending them a video of our capabilities. Training has always been a social learning experience. Now it still is, but with Zoom and Skype. DXPeople are doing everything possible to stay in touch with our customers, so we do not miss any opportunities. I will discuss some of the results, and then turn the call back over to Kent for more details. DXP's total revenue was $301 million for the first quarter of 2020. Acquisitions contributed $5.2 million in sales during the quarter, and we are excited to have Pumping Systems and Turbo Machinery a part of the DXP family. In terms of our business segments, I was pleased with the contribution from all three segments. Service Centers generated $182.6 million in sales, followed by Innovative Pumping Solutions with $70 million and Supply Chain Services with $48.4 million. Service Center regions that experienced growth year-over-year included Southwest, North Rockies, and Alaska. In terms of the strengths in the IPS backlog, we were up 2.6% compared to Q4 average backlog, and down 17% versus last year. This is consistent with our Q4 commentary around the deceleration of our backlog after a strong fiscal year 2018 and growth in fiscal year 2019. In today's environment, we remain encouraged by the strong backlog dollars; however, we are focused on customers' commitment to these projects and the timing of completion and delivery as well as managing the costs through job completion. DXP's overall gross profit margins for the first quarter were 27.9%, an 85 basis point improvement over 2019 and a 139 basis point improvement over the fourth quarter. Given our commentary around unique items and IPS jobs, this rebound was good to see. However, we will need to monitor these as we move through the depressed demand environment due to COVID-19 and demand-side dynamics as it pertains to oil and gas. SG&A for the first quarter increased $3.7 million versus Q1 of 2019. SG&A as a percentage of sales increased by 200 basis points, from 22.3% in Q1 2019 to 24.3% in 2020. SG&A reflects that we started the year strong and are now pivoting to decrease expenses with decreasing revenues. DXP's overall operating income margin of 3.6% or $10.9 million, including corporate expenses and amortization. This was impacted by normal seasonally high items, including commissions and bonuses associated with 2019, as well as payroll taxes and other first-of-year items. Service Centers' operating income margin was 9.3%. IPS operating income margins were 14.9%, and Supply Chain Services operating income margins were 7.8%. Overall, DXP produced EBITDA of $17.8 million versus $21.1 million in 2019. EBITDA as a percentage of sales was 5.9% versus 6.8% in 2019. To summarize, I am very proud of how our team has performed in these extraordinary times to keep everyone healthy and safe, support our customers, manage our business to lower near-term demand, and take care of each other along the way. As a leading distributor of highly engineered products and services, we believe that DXP remains well positioned to support our customers and navigate this challenging period for the benefit of all stakeholders. We are closely monitoring the trends and adjusting as necessary to perform in the short term, and we will continue to build and manage for the long term. With that, I'll turn this back to Kent.

Kent Yee, CFO

Thank you, David, and thank you to everyone for joining us for our review of our first quarter financial results. As David and I practice social distancing and are in different places, this is a bit unusual, but we're working through it. Let me start by saying that our first quarter results reflect the impact of COVID-19 for about two weeks and do not reflect a full month of shelter-in-place or stay-at-home orders, which are fully reflected in the first month of the second quarter or April. I'm sure we'll discuss our trends during the question-and-answer portion of this call and actions we are taking, but I wanted to provide that context as we review our Q1 results. DXP's first quarter results were in line with our Q4 commentary and reflect improvements in gross margin and other areas that resulted in a strong performance for us during the first quarter. In terms of our capital structure and as an introduction to comments later on, since 2015 and 2016, we have done a lot of work around choosing the appropriate instruments to finance our corporate strategy, as well as creating financial viability and ensuring liquidity and flexibility regardless of the economic environment. We believe the actions we took back in 2017 would provide us with strategic optionality so we could not just manage, but also take advantage of market cycles. In many ways, DXP's capital structure was built for times like this. Our current capital structure was put together for such a scenario. I will discuss this in more detail when reviewing the balance sheet, but let's start with a review of our income statement highlights. Total sales for the first quarter were $301 million compared to $311.2 million for the period in fiscal 2019. Sequentially, this is a 1.9% growth over Q4 and a 3.3% decline compared to the first quarter of 2019. As we discussed in Q4, this primarily reflects a deceleration in activity within Innovative Pumping Solutions, but also now reflects early impacts of COVID-19 within the Service Centers and Supply Chain Services segments. The first quarter performance also includes the acquisitions of Pumping Systems, Inc. and Turbo Machinery Repair, which we closed on January 1 and February 1, 2020, respectively. Combined, they contributed $5.2 million in sales during the quarter. As David mentioned, we are excited to have them as part of DXP, and we look forward to integrating and making them a part of the DXP family. Average daily sales for the first quarter were $4.7 million per day versus $4.9 million per day in Q1 2019. Adjusting for acquisitions, average daily sales were $4.6 million per day. Regions within our Service Center segment, which experienced sales growth on a year-over-year basis, include the Southwest, North Rockies, and Alaska regions. Sales for the Service Centers were essentially flat sequentially and declined $3.6 million from Q1 of last year. As David mentioned, our IPS segment increased backlog from Q4 to Q1 by 2.6%, or $3 million, but is down 17.1% from this time period last year, at $24.4 million. IPS sales for the quarter increased $4.3 million sequentially and declined $4.7 million compared to this time last year. Our main focus regarding IPS is managing the backlog and scaling our facilities for go-forward levels of demand. Everyone is seeing that capital budgets have been significantly reduced, and capital commitments are being reviewed based on individual company circumstances and financial wherewithal. As such, at DXP, we are reviewing orders and customer commitments to these projects, determining expected timing or anticipated delivery and the associated costs to completion. Turning to our gross margins, DXP's total gross margins were 27.9%, an 85 basis point improvement over Q1 of 2019. Additionally, this reflects a 139 basis point improvement over Q4. This improvement is a result of performance within IPS and the removal of the impact of projects that lost gross profit dollars in Q4. In terms of operating income, combined, all three business segments improved 74 basis points in year-over-year business segment operating income margins versus Q1 of 2019 and 258 basis points compared to Q4. Total DXP operating income decreased 113 basis points versus Q1 of 2019 to $10.9 million. This was primarily driven by corporate SG&A and the payout of commissions and bonuses associated with fiscal year 2019, as well as normal seasonal payroll taxes and first-of-year items. Turning to EBITDA, EBITDA was $17.8 million in Q1 versus $21.1 million in Q1 2019 and $13.4 million in Q4. EBITDA margins were 5.9% versus 6.8% in Q1 of 2019. In terms of earnings per share, our net income for Q1 2020 was $5.7 million, and our earnings per diluted share for Q1 2020 was $0.31 versus $0.12 in Q4 and $0.40 in Q1 2019. Turning to the balance sheet and cash flow, our working capital was $243.5 million at the end of the quarter. This amounted to 19.4% of our last 12-month sales. This is above our historical average but reflects a seasonal nature of working on projects, investing in the associated working capital and project-related jobs within IPS as well as the impact of lower sales on a year-over-year basis. As I mentioned earlier, we are focused on reviewing orders and customer commitments to these projects, the expected timing or anticipated delivery, and the associated cost to completion. Cost and estimated profits increased $3.3 million from Q4, but are down from Q1 of last year by $2.4 million. Inventory is up $3.6 million from Q4 as well. This reflects DXP carrying higher levels in anticipation of supporting revenue growth in fiscal year 2020. We anticipate inventory levels to decline as we operate in this new environment, and we focus on collecting and covering costs on existing projects until completion, as I've mentioned several times. In terms of cash, we had $32.8 million in cash on the balance sheet at March 31. This is an increase of $2.1 million compared to March 31, 2019. Cash used in operations was lower by $3.7 million in Q1 of this year versus Q1 of last year, or was a use of $1.6 million versus a use of $5.3 million last year. As a reminder, we typically have negative cash flow from operations in the first quarter and positive cash flow from operations in the second through fourth quarters. In terms of CapEx, CapEx in the first quarter was $3.2 million or 1.1% of first quarter sales. Compared to the first quarter of 2019, CapEx dollars are up $923,000. CapEx during the quarter reflects growth investments we made in fiscal year 2019 and the completion of items tied to projects that we started last year. As we move forward, capital expenditures will decline on a year-over-year basis, as we discussed in Q4, and we have very little maintenance CapEx needs for the business. Return on invested capital, or ROIC, at the end of the first quarter was 21%. In terms of our capital structure, the two main covenants we have include a fixed charge coverage ratio under our ABL and a secured leverage ratio calculation under the Term Loan B agreement. At March 31, our fixed charge coverage ratio was 3.0:1.0, and our secured leverage ratio was 2.2:1.0. Total debt outstanding at March 31 was $243.75 million. As I mentioned at the beginning of this call, our capital structure was built to match our strategy and ensure financial flexibility through different cycles. Additionally, we paired acquisition capital, which are long-term assets, with a long-term financial instrument, a Term Loan B. We have no near-term maturities, with our ABL maturing in August 2022 and our Term Loan B maturing in August of 2023. In March, we proactively took steps to enhance our liquidity and capital availability by expanding our ABL facility from $85 million to $135 million. As of this call, we are undrawn on our ABL and have over $190 million in liquidity, $59 million in cash, and $132 million in ABL availability. That said, given our cash flow profile and the fact that we typically release working capital and produce a significant amount of free cash flow in the first year of a down cycle, we plan to proactively pay down debt as appropriate. After Q1, we made an optional $10 million prepayment on our Term Loan B to further strengthen our balance sheet. We believe this measure, combined with the actions we have taken to reduce our operating expenses and limit capital expenditures, gives us liquidity and financial strength to manage through these unusual and challenging times. We have a senior leadership team with experience managing through multiple cycles, including 2008, 2015, and 2016. We have the capital structure flexibility and knowledge to get us through a lower demand environment. In summary, our priority from a balance sheet perspective is to emphasize and maximize our financial strength and flexibility during these uncertain times without sacrificing long-term growth or market opportunities and position us to be opportunistic when any growth opportunities arise. We have seen down cycles in the past and emerged successfully, and we will do it again as we manage through this cycle. At this point, David and I will now turn the call over for questions.

Operator, Operator

The first question is from Joe Mondillo of Sidoti.

Joseph Mondillo, Analyst

Ken, David, I hope you're doing well. I have two questions about the quarter. Service Center margins were somewhat disappointing, and I'm curious about what contributed to that, especially since it was the second lowest quarter since 2016. On the other hand, margins in the IPS segment were quite strong. You mentioned in the last call that some of the low-margin work might carry over into the first quarter, so I was surprised to see not only a solid quarter compared to 4Q, but also one of your strongest quarters in recent years.

Kent Yee, CFO

Yes. Joe, this is Kent. You got a multitude of questions there a little bit, so I'll try to take them in order. Just in terms of the Service Centers, we did see some contraction in the Service Centers revenue-wise. I think part of that fed into it. Part of it is also that there is elevated SG&A expense in Q1 across the total business at DXP, which is partially impacting the margins, due to bonuses and commissions that occur for fiscal year 2019 rolling over into the first half of the following year, in this case, our fiscal year 2020. I think that's making their margins look lower than they would streamline out as they move through the year. Regarding your comment or question around Innovative Pumping Solutions and the improvement in that segment's operating income margins, what we said in Q4 was that we still had about 6 to 7 potential negative gross margin jobs, but we did not know the timing of the shipment of those jobs on a go-forward basis. None of those jobs did ship in Q1, and as a result, we saw a natural lift and an improvement in the operating income margins for IPS. If 1 or 2 of those had shifted in Q1, more than likely, it would have had some level of impact to the operating income margins in IPS, but they just did not. We’re monitoring that as we go through the quarter, and we’ll speak to it as best we can when we see it.

Joseph Mondillo, Analyst

Okay. To follow up regarding those last comments, do you anticipate those jobs still to ship, number one? And number two, do you have any sense of timing with that?

Kent Yee, CFO

Yes, they're still in our backlog. We're going through that now with that segment, reviewing all the jobs to be sure we understand the timing. I don't want to misspeak at this point because the situation with many customers is influencing their budgets due to COVID. We anticipated that they would ship at some point in fiscal year 2020, and I still presume that. But I do not have specific facts to share regarding timing.

Joseph Mondillo, Analyst

Okay. Understood. David, you mentioned that the IPS backlog was down 17% year-over-year? Was that correct?

David Little, CEO

That's correct. From Q1 of '19 to Q1 of 2020.

Joseph Mondillo, Analyst

You're anticipating that the oil and gas sectors will decline by 30%. Can you elaborate on why the backlog is down by 17%? Could you discuss the order trends from April and your thoughts on reaching that 30% decline? Additionally, during the 2015-2016 period, your sales at IPS decreased by about 27% each year. Can you provide some context for how this current situation compares to that previous downturn?

David Little, CEO

The backlog being down 17% is a function of order intakes and shipments. When you look at both of those, I think we’re forecasting that orders are going to be down 30%, but frankly, our revenues for IPS will not be down 30%. It's going to be more like 18% or 20%. We had a good recovery that started in '17, was really strong in '18, and we grew our IPS business. '19 actually grew on top of that. But we were seeing the fourth quarter of '19 where the oil and gas sector started shutting down as they conserved cash, which had nothing to do with the virus, just general marketplace trends indicating oversupply. They started shutting down projects. We then saw some of our backlog shipped, as Kent pointed out, some good and some less profitable backlog.

Joseph Mondillo, Analyst

Okay. And last question from me, and I'll let someone else have a chance. Your cost management and sort of your cost actions, what are you exactly doing? Did you take any major across-the-board cost cuts? Could you just help us understand a little bit more? I'm not sure if there's anything to quantify, but at least talk through what you're doing to sort of soften or realign the business to the downturn overall not just oil and gas, but just your overall business.

David Little, CEO

I would like to answer that question, Kent, because I think it's worth noting that DXP is not a broke company. We always have the ability to make money. We may not know what it looks like if sales go down 80%, and I don’t anticipate that, but at some level of decline, we're able to adjust to maintain profitability. We didn’t make a big deal out of that because it's part of our DNA to know how to do that. We also need to adjust not just across the board, having people take a 10% pay cut, which is unfair. We need to look at each market's performance; we’re in areas with growth markets, and we won’t be cutting expenses there. But if you're in the Permian Basin where oil and gas is down significantly, we have to make adjustments. We're doing all the normal things from 401(k) adjustments to facility closures. Our system works, and it's worked in 2008, 2015, and 2016 in a smart, sensitive way aligned to performers versus non-performers.

Kent Yee, CFO

Joe, the only other thing I’d add is that every cycle is different. What David is getting at is our approach has always been calculated and intentional. This cycle has seen some traditional cost-saving opportunities to go after and with the stimulus package from the U.S. government providing chances for cash deferrals. One big item DXP is leveraging is the employer portion of social security tax, which we estimate to create a cash flow positive impact greater than $5 million for DXP this year. We are also seeing a trend towards facility and rent abatements which is temporary but provides cash flow implications. We’re managing our business to profitability, but this cycle has that unique governmental assistance as well.

Operator, Operator

Your next question is from Blake Hirschman of Stephens.

Blake Hirschman, Analyst

I hope you're healthy and well. To start out, I guess, just a big picture one. Do you think you guys are being impacted more by COVID-19 or by the drop in oil prices?

David Little, CEO

I think they are the same. If we hadn't had COVID-19, I don't think oil prices would have dropped near as drastically. We were already facing a $2 million or $3 million oversupply problem before COVID-19 caused a huge demand issue. From my perspective, when demand starts to recover, people return to work, start driving, and things get more normal, I believe demand will pick up and the price of oil will stabilize. Our customers have communicated to us that they need the price of oil to be $30 to $35 to make money. At that point, we would feel better seeing that they can pay their bills and would ease financial pressure.

Blake Hirschman, Analyst

Got it. That sounds good. And then if you look at the changes that you guys have made kind of cycle to cycle, is there any way that you could frame up expected decremental margins at different top line declines, like if sales are down 10% or if they're down 20%? Or I guess more than that, how to think about the impact on decrementals?

Kent Yee, CFO

Blake, this is Kent. In the last cycle, we experienced decrementals between 100 to 200 basis points during trough periods. That gives you a sense of potential impacts. We are doing numerous things to maintain margins through these cycles, and while I don’t foresee hitting the bottom for EBITDA margins like the last cycle around 4%, I could suggest there is a potential range we may experience depending on how this cycle pans out.

David Little, CEO

In analyzing performance for April, for example, if we see a 10% decline in Supply Chain Services and Service Center sectors with IPS declining 18% to 20%, we're working to manage that while striving to maintain at least a 5% EBITDA margin. Keep in mind we leverage as we rise, but we face deleverage when we decline.

Blake Hirschman, Analyst

Yes. That makes sense. All right. And then I guess it'd probably be a good time to ask for those, the monthly sales trends throughout the quarter and then into April, if you have them, Kent?

Kent Yee, CFO

Absolutely, I have them. We don’t provide formal guidance but, in terms of daily sales, January was $4.3 million per day, February was $4.6 million, March was $4.7 million, and April was $4.2 million.

Operator, Operator

Your next question comes from Joe Mondillo of Sidoti.

Joseph Mondillo, Analyst

Just a couple of follow-up questions. First off, were there any one-time cost items in the quarter that you would highlight?

Kent Yee, CFO

Nothing of significant note. You mentioned corporate SG&A, and some of those items can be considered one-time, such as costs associated with filing our 10-K and coming off our material weakness. These often involve increased audit and other costs flowing through our corporate SG&A in Q1, reflecting the activities that occurred in 2019. Stock comp expense was unusual, partly due to stock being a part of consideration in our Pumping Systems acquisition. Additionally, legal expenses were elevated due to the acquisitions and other ongoing cases.

Joseph Mondillo, Analyst

All right. And regarding the previous year's average around $12 million a quarter, would you expect this to be down just given some cost cuts? How do you think about that relative to Q1 since Q1 was high?

Kent Yee, CFO

I would anticipate it to be down in Q2 and kind of trending downward as we move throughout the year.

Joseph Mondillo, Analyst

Okay. You mentioned you're cutting something by 10% at the Service Centers. What were you referring to?

David Little, CEO

The 10% refers to the anticipated reduction in revenues respectively tied to Supply Chain and Service Centers and to a larger extent in our CapEx-dependent IPS business sector.

Joseph Mondillo, Analyst

Understood. Also, could you repeat the end markets that you described as performing better than others?

David Little, CEO

Certainly. Gold mining is up; our friends in Alaska are doing well with gold mining. The petrochemical industry producing specialty polymers is performing well, as is bottled water; water and wastewater; municipal services; certain recreational manufacturing like bicycles; and items related to soap; food and beverage; agriculture; medical; and petrochemical areas, as well as asphalt used in government road construction. All these are doing well.

Joseph Mondillo, Analyst

Is there any way for you to define how much that bucket makes up of the total company? I don't know if you have that sort of estimate.

David Little, CEO

I don’t have that right in front of me, but generally, oil and gas makes up about 50% of our DXP business, and the other 50% consists of a variety of other markets, industries, and sectors. This sometimes gets overlooked when we are compared to a group of peers like DNOW and MRC.

Operator, Operator

Your next question is from Blake Hirschman of Stephens.

Blake Hirschman, Analyst

I was wondering how big has safety-related PPE, that kind of stuff been? What percentage of your mix is that? Have you seen any kind of benefit from the surge in demand for that kind of product?

David Little, CEO

Yes, it's only about 1% of our business. So while we have seen upswing, it hasn't been a significant number. What occurred was that our suppliers rationed us to what we normally sell. So it was beneficial but did not move the needle significantly for us.

Blake Hirschman, Analyst

All right. That makes sense. Lastly on capital allocation, I expect that you guys will probably stay defensive in the near term considering uncertainties but at what point would you have the confidence to get more aggressive and look to maybe try to pick up some deals at a lower asking price than a few weeks or months ago?

Kent Yee, CFO

You're absolutely correct. From a defensive perspective, our debt at March 31 was $243 million, and we're going to make an optional $10 million prepayment. After this, we would have roughly $233 million of debt. That's conservative. On the offensive side, we had 7 to 8 discussions surrounding acquisitions before all of this. We see opportunities arising, and we’re prepared to take advantage of them. Our capital structure gives us the flexibility to proceed on both fronts. "When we see clarity on when we know there's a bottom," we will become more aggressive, while bearing in mind that we need to be cautious of timing and valuing incoming opportunities.

Operator, Operator

There are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect.