DXP Enterprises, Inc.
Q2 2015 Earnings Call Transcript

Published: 10 Aug 2015

[Operator:]

Good day and welcome to this DXP Enterprises Incorporated second quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

[Mac McConnell:]

Thank you. This is Mac McConnell, CFO of DXP. Good morning and thank you for joining us. Welcome to DXP's second 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 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 filings, but DXP assumes no obligation to update that information. I will begin with a summary of DXP's second quarter 2015 results. David Little will share his thoughts regarding the quarter. Then we will be happy to answer questions. Sales for the second quarter of 2015 decreased 15.2% to $323.7 million from $381.6 million for the second quarter of 2014. After excluding second quarter 2015 sales of $4.4 million for businesses acquired, sales for the second quarter decreased $62.3 million or 16.3% on a same-store sales basis. This decrease was primarily the result of the declines in sales to customers engaged in the upstream oil and gas industry or manufacturing equipment for the upstream oil and gas industry. The strength of the U.S. dollar contributed to the sales decline. Sales for our Canadian operations were $32.6 million for the second quarter of 2015. The change in the exchange rate reduced sales by approximately $4.1 million. Sales for our service center segment in the second quarter of 2015 decreased $34.7 million or 14% to $214.1 million compared to $248.8 million of sales for the second quarter of 2014. After excluding 2015 service center segment sales of $4.4 million from acquired businesses, service center segment sales for the second quarter of 2015 decreased $39.1 million or 15.7% from the second quarter of 2014 on a same-store sales basis. This sales decrease is primarily the result of decreased sales of bearings, metal working products and safety services to customers engaged in the upstream oil and gas market or manufacturing equipment for the upstream oil and gas equipment market. The strength of the U.S. dollar also contributed to the sales decline. Service center sales for our Canadian operations were $23.1 million. The change in the exchange rate reduced sales by $2.9 million, compared to the 2014 exchange rate. Sales of innovative pumping solution products decreased $23.7 million or 26.1% to $66.9 million compared to $90.6 million for the 2014 second quarter. This decrease was primarily the result of a decline in capital spending by oil and gas producers and related businesses. Sales for supply chain services increased $0.5 million or 1.1% to $42.7 million compared to $42.2 million for the 2014 second quarter. This increase in sales is primarily related to increased sales to new and existing customers in the food and beverage, transportation and gas turbine industries which were partially offset by decreases in sales to customers in the oilfield services and oilfield equipment manufacturing industries. When compared to the first quarter of 2015, sales for the second quarter of 2015 decreased $17.9 million or 5.2%. Excluding $1.2 million of second quarter sales for Tool Supply acquired on April 1, 2015, sales for the second quarter declined $19.1 million or 5.6% from the first quarter on a same-store sales basis. This decrease was primarily the result of declines in sales to customers engaged in the upstream oil and gas industry and related industries. The sales decline has occurred in connection with the significant decline in the number of drilling rigs operating in the U.S. and Canada and the decline in capital spending by oil and gas producers in related businesses. Second quarter 2015 sales by our service center segment decreased $11.7 million or 5.2% compared to the first quarter of 2015. Excluding tool supply sales, service center segment sales declined 5.7% from the first quarter of 2015. Second quarter 2015 sales for supply chain services increased $1.1 million or 2.7% compared to the first quarter of 2015. Second quarter 2015 sales of innovative pumping solutions products decreased $7.4 million or 9.9% compared to the first quarter of 2015. The decline in IPS sales in the second quarter is primarily the result of over $8 million of revenue which had been expected to be recognized during the second quarter, but customer and vendor related delays caused recognition of these revenues to be delayed until the second half of 2015. Gross profit, as a percentage of sales for the second quarter of 2015 decreased by approximately 90 basis points from the second quarter of 2014. On a same-store sales basis, gross profit as a percentage of sales also decreased by the same 90 basis points. This decrease is primarily the result of the approximate 500 basis point decline in the gross profit percentage for the IPS segment. The 500 basis point decline from the second quarter of 2014 and the gross profit percentage for the IPS segment is primarily the result of product mix, competitive pressures resulting in lower margin orders, cost overdues and unabsorbed manufacturing and fabrication overhead. The second quarter profit percentage for the service centers and supply chain segments increased from the second quarter of 2014. Gross profit as a percentage of sales for the second quarter 2015 decreased approximately 50 basis points from the first quarter of 2015. The decrease is the result of the approximate 300 basis point decline in the gross profit percentage for the IPS segment. The decline is primarily the result of product mix, competitive pressures resulting in lower margin order and cost overdues and unabsorbed manufacturing and fabrication overhead. The second quarter 2015 gross profit percentage would have been improved by over $800 million of budgeted revenues, which were related until the second half of 2015 due to customer and vendor delays. These delayed orders are expected to have a much higher gross profit percentage than the average we experienced during the second quarter for IPS. SG&A for the second quarter of 2015 decreased $6.3 million or 7.6% from the second quarter of 2014. After excluding second quarter expenses from acquired businesses of $900,000, SG&A decreased $7.2 million or 8.7% on a same-store sales basis. The decline in SG&A is a result of the $2.6 million decline in incentive compensation and other cost control measures, including headcount reductions. As a percentage of sales, the second quarter of 2015 expense increased approximately 200 basis points to 23.9% from 21.9% for the prior corresponding period on a same-store sales basis, essentially because of economies of scale. Sales declined by 16.3% and SG&A declined by only 8.7%. SG&A for the second quarter of 2015 decreased $2.6 million or 3.3% from the first quarter of 2015. After excluding second quarter expenses from acquired businesses of $300,000 for Tool Supply, SG&A decreased by $3 million or 3.7%. This decline in SG&A is the result of cost control measures, including headcount reductions. As a percentage of sales, SG&A increased approximately 50 basis points from the first quarter of 2015 due to economies of scale working in reverse when sales decline. Corporate SG&A for the second quarter of 2015 decreased $350,000 or 3% from the second quarter of 2014 and increased $150,000 or 1.3% from the first quarter of 2015. The year-over-year decrease was primarily the result of decreased incentive compensation. The sequential increase was primarily the result of increased legal fees. Interest expense for the second quarter of 2015 decreased 18.4% from the second quarter of 2014 and 3.4% from the first quarter of 2015. These decreases are primarily due to paying down debt during 2014 and 2015. Total long-term debt decreased approximately $25.3 million during the second quarter of 2015 and approximately $32 million during the first half of 2015. This debt pay down as after spending $8.9 million to purchase DXP stock in the first quarter and $5 million to acquire Tool Supply on April 1. Our bank leverage ratio was 3.03

[David Little:]

Thanks, Mac and thanks to everyone on our conference call today. DXP achieved solid results this quarter in the midst of a cyclical downturn tied to oil and gas. As we all know, oil prices continue to decline and the North American rig count has hit the bottom. With an estimated 20% of DXP's business tied to upstream drilling, development and completion market, we are pleased with our performance relative to how the key energy market indicators have performed. Total DXP revenues of $323.7 million declined 5% sequentially and 15% year-over-year, outperforming the 15% sequential drop in the North American rig count and the 53% decline year-over-year. Organically sales declined 16% with the Tool Supply acquisition positively contributing $4.4 million in sales. Gross profit margins at our initial review were disappointing. However, once we dug in and understood what caused the majority of the decline, we were certain that a lot of the reasons were not reoccurring. Gross profit margins declined 49 basis points sequentially and 89 basis points year-over-year. This was driven by innovative pumping solutions. There are combination of factors that contributed to the decline including product mix, small pump packages versus large pump packages and onshore versus offshore projects, project delays or push outs and competitive pressures as a result of the industry slowdown. We appreciate all the hard work from our DXP people as we work as a team and remain resilient through these tough market conditions. Because DXP serves the cyclical oil and gas market, we focus intently on operational execution, cost control and investing and building DXP for the future. As such, we are focused on what we can control in this challenging environment. From a cost management perspective, we continue to take cost saving measures by reducing our headcount and cutting cost where practical without impacting customer service, the customer's experience and expectations. DXP's headcount decreased by approximately 136 people in the second quarter. Since our employment of 2014, we have reduced our headcount by approximately 216 through to the second quarter. SG&A dollars decreased $2.6 million sequentially and $6.3 million year-over-year. That said, we have also made investments and have cost that are positioning and building DXP for the future. We believe environments like we are currently in, are when great businesses are built. While we are focused on managing costs, we are not losing sight of the exciting DXP future. From an investment and cost perspective, in Q2 DXP incurred $2.3 million in pretax cost associated with severance pay, multichannel initiatives and new API machinery and equipment. While we do not talk about these costs and investment routinely, we are reminded in markets like we are in, that our earnings picture as well as our future success are impacted by these decisions. These initiatives will position us to be stronger for when the market recovers. Turning back to the second quarter performance, as with as our first quarter results, DXP's performance reflects the dynamics tied to oil and gas end market exposure. Reduced capital spending, low oil prices and a strong U.S. dollar continue to impact DXP. During the second quarter, we experienced sequential organic growth within our supply chain services segment, a 6% decline with our service centers and a 10% decline within innovative pumping solutions. The main drivers behind our sales declines continue to be upstream drilling, development and completion and upstream production. This has been offset by continuing strength in food and beverage, chemical, agriculture and general MRO industrial markets. Earnings per diluted share for the second quarter of 2015 were $0.47 per share compared to $0.53 per share in Q1 and $0.96 per share in second quarter of 2014. Subsequent to the quarter end, we amended our existing credit facility, increasing our total leverage covenant from 3.25

[Operator:]

[Operator Instructions]. We will take our first question from Matt Duncan with Stephens.

[Matt Duncan:]

Good morning, guys.

[David Little:]

Good morning, Matt.

[Matt Duncan:]

So David, just on sales trends that you are seeing the seeing in the service center business, do you feel like that the sales numbers, month-to-month have bottomed there? Or are you still seeing them tick down sequentially at service centers?

[David Little:]

No. We feel like that the decline maybe less, but it's still declining.

[Matt Duncan:]

Still declining a little bit and that's probably, I assume that's just the lag affecting your business versus rig count?

[David Little:]

Yes. And I think we are hopeful that people will start gearing up for next year in the fourth quarter but nobody thinks for sure that that will happen, but that's what we are hopeful for.

[Matt Duncan:]

And are you seeing much in the way of price pressure in that business? Or was price really just flat?

[David Little:]

Actually our service center margins were up, back in -- actually sometimes it would be mixed, but I want to answer your question but I am saying that I think they are flat.

[Matt Duncan:]

Okay. Moving on to IPS. So you had $8 million stuff that pushed out to 2Q in the back half of the year. Is there any way to look at that? And how much, I guess, look to see, how much of that might be subject to further delays? Or do you feel pretty confident that those orders are going to go ahead and come in, in the back half? And as we e look ahead for that business, I would assume given what's going on in the energy markets, it's probably going to continue to see sequential declines until we start to oil prices turn back around. But just what are your thoughts on how we should think about that segment going forward? And how confident are you that those delayed projects are going to come back?

[David Little:]

I don't think we are seeing any cancellation of projects. So I think that just means that what people are trying to do is push out her investment to the extent that they can. Well, they won't just do this forever. So it's just something we are going to have to deal with.

[Matt Duncan:]

Okay. So all things taken into account, then it sounds like there is probably a downtick at service centers, probably a little bit of a downtick in IPS as well. So we should probably expect to see sales down a little bit in the 3Q versus the 2Q? Is that fair?

[David Little:]

That's fair.

[Matt Duncan:]

What about earnings, though? Because it sounds like you have been cutting expense. What are you guys doing on the SG&A cost side to trim back expanse? When you look at the changes you have already made, is there any way to quantify annual savings from those actions? And are you still, at this point, taking cost out of the business to try and protect earnings? If revenues are going to be down sequentially, given the cost-cutting actions, it sounds like maybe the mix ought to be a little better, so maybe gross margins will be up a tiny bit, 3Q versus 2Q? Taking all of that into account, are earnings pretty flat, you think sequentially? Or how should we think about that?

[David Little:]

Well, first, the way I look at it is, I thought if it was a perfect world for DXP, given that we can't do anything about sales besides be as aggressive as we can possibly be, that the GP was too low and expenses were too high. So we when we dug into that, there was some reasons why GP was lower that are just part of doing business and that is that we do pricing pressures and there is product mix issues, but then there were some things where we weren't able to recognize revenues or matters and we were incurring the cost but really not the revenue. The fact that this job gets pushed back and we have people that are expecting to work on the job, so our factory overhead applied goes up. So there was some unusual things that we felt wouldn't carry forward. And then on the expense side, we dug in and most of that had to with things that we were spending money on that were investments in the future, whether that's investing in the equipment or investing in IT projects, investing in e-commerce, there were just some things that we will have to do if we were going to position the company for the turnaround and to be as good as everybody else in the market, then there's some things that we need to be doing. So we were certainly doing those things. And then we are also have -- we are always investing in something that we are not going to talk about because we don't want our competition to know, but until we launch some things. But we have some really significant events that we feel really good about that we think will position DXP to win bigger going forward. So that plus just some unusual lawsuits and legal expenses and then severance pay and Canada and some things that are just one time events, the percent 23% SG&A expense is just to high. So I would say that we should, even though we have declining sales and it's hard to cut as fast as sales decline, that percentage should not go up and has a chance to come down. That was a long answer for that question, anyway.

[Matt Duncan:]

Yes. And there was a lot of detail and I appreciate that, but when you take all of that stuff together, can you at least hold earnings flat? Is that the way we should think about it?

[David Little:]

Yes.

[Matt Duncan:]

Okay. And the last thing for me and I will hop back in queue. Your inventory went down quite as much as I thought it might be in the 2Q versus the 1Q. What are you guys looking at in terms of your inventory balance over the rest of year? There is sort of an edict out to try and the bring inventory level down and get a little more cash of the business. Obviously, you had very good free cash flow in the quarter. But it seems like there is an opportunity to bring even more out over the of course the rest of year bringing that inventory level down. How are you guys looking at that?

[David Little:]

We don't have an edict out to reduce inventory, but we have a very sophisticated system that looks at usage and forecast usage and brings it down. But we were really focused on serving our customers and being there for them and so providing decent inventory levels is a way that we do have realized that we already have a turnover rate of probably an industry high of seven, eight, nine times, something like that. So I think it will come down if our sales continue go down, but it's not something we are just trying to chop.

[Matt Duncan:]

Okay. So at the time the cash if going to come out of AR then? So Mac, do you have a view on what free cash flow should be for this year?

[Mac McConnell:]

I think free cash flow should continue to be about the same run rate that we had in the first half.

[Matt Duncan:]

Okay. So what you are talking, maybe $90 million to $100 million for the full year?

[Mac McConnell:]

Yes, could be. It could be $80 million to $100 million, because it does depend on inventory and receivables.

[Matt Duncan:]

Okay. Bye. That helps, guys. Thanks.

[Operator:]

And we will take our next question from Ryan Merkel with William Blair. Please go ahead.

[Ryan Merkel:]

Thanks. Good morning, everyone.

[David Little:]

Good morning, Ryan.

[Mac McConnell:]

Good morning.

[Ryan Merkel:]

So I think you said that you thought sales would be down sequentially in the third quarter, following on to Matt's question. So maybe just can you help us, what was July? How did July end up for you? What was the decline in sales there?

[David Little:]

Sales per day, average sales in April were $5,056,000, in May $5,057,000, June $5,290,000. So sales actually picked up in June, but we sell a lot of big projects and it's not unusual that our sales go up in the last month of a quarter.

[Ryan Merkel:]

And do you have the July number there?

[David Little:]

We know July is down because a lot of our revenues are now on percentage of completion. What we have are estimates and not the final umbers.

[Ryan Merkel:]

Okay.

[David Little:]

We know July was down from the average day sales in the second quarter.

[Ryan Merkel:]

Got you. And we had the big oil decline in July. Did you notice that in impacting business at all? Is that maybe what explains some of the further deceleration?

[David Little:]

I don't think people flinched on that yet.

[Ryan Merkel:]

Okay. And then a couple of quarters ago, you laid out the business in terms of end markets pretty nicely. And I was just wondering if we could revisit that? So you have the oil and gas production and midstream, which was roughly 40% of sales. Initially, I think you thought that could be flattish, but here we are six months into the year, what are you expecting that piece of your business to look like for 2015 at this point?

[David Little:]

So oil and gas development, completion drilling is 20% of our business and that's the biggest piece that's really down. And then we go to upstream production which we thought would be flat and we found out that in that number is that we saw Halliburton, Schlumberger and Baker and those OEM people that support the oil field production side, their business is down and then also our safety services business has a component on production and stuff. So the oil field production piece is, for our service centers, has been down and that's continuing. The midstream has been flat and has continued to stay flat and then the downstream is the chemical -- chemical and downstream, I guess people actually call chemical something else, but the refineries are the downstream side, that business is up.

[Ryan Merkel:]

Okay. And then what about the industrial piece?

[David Little:]

So we look at mining and it's still down. We look at food and beverage, it's up. We look at chemical, it's way up. We look at general manufacturing and that's kind of flat. I think we have some currency headwinds there. I don't have all those categories in front of me, but I am just trying to remember the ones off the top of my head. You remember the others that -- most of the others are flat to up.

[Ryan Merkel:]

Okay. So, yes, I think that kind of other industrial, food and beverage, chemical, you thought that 40% could be up 5%. It's looking more like, for the year and it's looking more like that might be flattish at this point. Is that fair?

[David Little:]

That's fair.

[Ryan Merkel:]

What about the metalworking category? What were sales there year-over-year in the second quarter?

[Mac McConnell:]

Year-over-year, the second quarter was down 44%.

[Ryan Merkel:]

And what's driving that? Is that back to well hookups and the OEMs related to energy?

[Mac McConnell:]

Yes. Well, oil field equipment, primarily well head equipment.

[Ryan Merkel:]

Yes.

[Mac McConnell:]

Really as the number of wells being completed has gone down, their business has gone down and there is some hope that the ultimate customer was ordering in advance and so they were planning to grow drill substantially more wells than they are drilling. So they have ordered equipment. And even if the rig count stays the same, maybe the business will get better.

[Ryan Merkel:]

Right.

[Mac McConnell:]

Actually, it has been declining starting last year and in June actually it didn't go down and so we thought was a positive and then in July it went down some.

[Ryan Merkel:]

Okay.

[Mac McConnell:]

So it doesn't mean it doesn't hasn't stabilized, but I was hoping to see it go up.

[Ryan Merkel:]

Okay. And then last question for me. What do you see in Canada? What were sales down year-over-year in the second quarter? And at this point, how long do you think it could stay fairly sluggish in the oil sands, given where the price of crude is today?

[Mac McConnell:]

Canada sales were down 30% plus from Q2 to Q2 comparison. Interesting things in Canada, their rig count has sort of started going back up.

[David Little:]

They are seasonally low.

[Mac McConnell:]

Yes.

[Ryan Merkel:]

And that decline is mostly the safety services? What else is really declining there?

[David Little:]

The pump business somewhat has had headwinds too. The same oil and gas type issues that we have had in the United States.

[Ryan Merkel:]

Okay. All right. Thank you very much.

[David Little:]

But there, the safety also has an industrial aspect that's been doing fairly well. But the sales are still down.

[Ryan Merkel:]

I appreciate it. Thanks.

[Operator:]

Our next question comes from Joe Mondillo with Sidoti and Company.

[Joe Mondillo:]

Hi guys. Good morning.

[Mac McConnell:]

Hi Joe.

[David Little:]

Good morning, Joe.

[Joe Mondillo:]

So you stated that the midstream oil and gas is fairly flattish. If you add back the $8 million to IPS, which I understand that there is really no upstream in IPS. So if you add back the $8 million to IPS, you are still getting to roughly about a $75 million revenue number and that would be down year-over-year by 17%, 18%. So is volume sort of flattish in all that rest of 17% delta on a pricing standpoint?

[David Little:]

Well, first I have to correct something in that theme. Mac, I don't know whoever said that IPS doesn't participate in the upstream.

[Mac McConnell:]

It operates -- a lot of IPS sales go to what we call the upstream production, not the upstream development, but the production side, into all the gathering systems.

[Joe Mondillo:]

Okay. So when you upstream production, you do have exposure at IPS upstream production?

[Mac McConnell:]

Yes, substantial. All of it, the LACT units go into, what we call upstream not midstream, upstream production.

[Joe Mondillo:]

Okay.

[David Little:]

It does have a big proportion of the midstream too, but it does both, okay.

[Joe Mondillo:]

Great. So in regard to the margin, it seems like you have stressed a couple times and one of the biggest things was cost absorption and I believe at one point in time you sort of stated that you think it's sort of one-time in nature, but you also stated that the back half of the year looks like it's going to can be or at least in third quarter, it's going to be worse than the second quarter. So wouldn't that translate into lower margins, just due to the cost absorption part of it alone?

[David Little:]

Well, we can adjust our absorption if we know about it. When we don't know about it and the customer or our vendors surprises us and then deliver product that we are expecting to get to work on or the customer delays a project, then that's when we are going to have under-absorption because our people are expecting to work and et cetera.

[Joe Mondillo:]

Okay. So you have taken measures to adjust to the demand for the third quarter then, which you think will translate?

[David Little:]

Right.

[Joe Mondillo:]

Okay.

[David Little:]

We think IPS's sales will go down slightly, but we think there is a chance that their profits will go up.

[Joe Mondillo:]

Okay. And is that temporary work that you are just not bringing back for the third quarter? How does that flexibility on the cost side of things work?

[Mac McConnell:]

Some of it is product mix. There are several things. The jobs that were delayed were higher-margin than that 24.75% that IPS had during the second quarter. And so that's a piece of it. And there were several jobs in the second quarter that were, by our standards, we considered low margin jobs to begin with, from the time they were bid during 2014. We took them for competitive reasons. And we just had a whole series of events. We had some cost overheads. We can't have cost overheads can occur in time, because everything IPS is building is a custom-made package. But we believe it was unusual.

[David Little:]

Joe, a point, I mean it is a whole bunch of stuff, but our point is that we don't think we should be forecasting margins based on Q2 results.

[Joe Mondillo:]

Okay. I understand. When did the jobs, the $8 million of work that got delayed, when did that actually happen? Or when did it get delayed within the quarter?

[David Little:]

Good question. It actually primarily consists of five, well, six or seven different orders and some of those were delayed and that we are building very sophisticated packages, very custom-made and so we quote on building this package and then you go through the process of actually doing better designs and submitting drawings and all kinds of issues come out which often result in change orders and it takes a while to get those changes worked through because as we are actually making modifications to how this piece of equipment is going to be built and some of them were in this $8 million were delays due to basically designing. So we thought we were going to be building this package during the second quarter and instead we were doing designing. And we didn't get because there were a lot of changes that had to be approved. There were some where vendors didn't us the equipment, so we could not continue to build the package. And then there was one that's really just because the customer no longer is in a hurry for it, so they are slowing it down.

[Joe Mondillo:]

Okay. So largely, the delays were not, except for that one that you just mentioned, were not related to the customer saying to you, that we don't need it immediately. We really needed sort of towards the back half of the year now. It's more so related to sort of production issues or design issues or stuff like that?

[David Little:]

That's correct.

[Joe Mondillo:]

Okay. So in that case then, you would probably be pretty confident that that $8 million gets delivered in the back of the year then?

[David Little:]

Yes. And delivery is not exactly, it may not be the right word, it's the fact that we will be constructing, fabricating, building this equipment.

[Joe Mondillo:]

Right. Okay. How about placing? You mentioned that as part of the issue in the second quarter was a product mix issue which is probably related to, even you mentioned because of competitive pressures, you having to maybe book lower pricing? How is that translated through the second quarter and into July? Is it still very competitive? Is pricing sort of still on a downward trajectory?

[David Little:]

I think as long as oil prices are down and the oil companies are trying to stay in business with the parameters that the revenues are only going to be some number per barrel, there is going to be pricing pressures. And they are looking to us to give them very competitive ways of doing business so that they can make money. And we do that a lot of different ways. We do that by bringing value-added solutions that are maybe more efficient, maybe the equipments cheaper, there is various ways of doing that without necessarily hurting our margins, but sometimes we are also just bidding against somebody else and we are trying to maintain our relationship with that account and so we take the order at margins that we would not normally take them at.

[Joe Mondillo:]

Okay. So I would imagine placing could be bit more pressured in the back half compared to the first half?

[David Little:]

I think as long as oil prices are down, yes.

[Joe Mondillo:]

Okay. And then I guess, one of the biggest sort of question marks for me at least, is the midstream part of the business that's even bigger than the upstream part of the business. You are saying it's sort of flattish now. How does your outlook for the back half look like? Are you worried that that part of the sector is going to start to see either project delays or a slowdown to where we maybe start to see declines, if oil prices stay in sort of the low-40s there?

[David Little:]

So we have, in the last few months, received very nice significant orders. We have also seen less activity at times too. I think the general trend is that there is still a lot of good business out there. And then there are other people that just don't have projects on the horizon. So I think that realistically what we are being told is that things are getting a little softer in the midstream market, but yet there is still a lot of infrastructure that the midstream guys still need to build. Basically as long as we still have oil being trucked or put on rail and on rail, it's killing people, then there is reasons to have pipelines.

[Joe Mondillo:]

Okay. And then that regarding orders and backlog at IPS. Is the backlog sort of down what we are seeing in revenue? Or is it down even more than that 26% on the revenue side that you saw?

[David Little:]

So we are not capable of getting to so many moving parts to IPS, service center, sales, et cetera, that we are really not able to get backlog in an exact science wise, so I just wanted to on record as saying that. My impression is that our backlog is down a little less than our revenues.

[Joe Mondillo:]

Okay. And then I was just wondering, I think you cited some of it in the prepared commentary, but I didn't get it exactly. Mac, can you walk me through any of the one-time items on a cost basis in the quarter, whether it was severance or anything else? What is the total look like?

[Mac McConnell:]

The $2.3 million that David mentioned in his comments?

[Joe Mondillo:]

Yes. Okay. I think I had that written down. Right. Okay. So it's about $2.3 million of severance and other type one-time items that will won't recur?

[David Little:]

No. That isn't what I have said, mostly for months over here. What I have said was, we were spending $2.3 million on things that yes, some of which is one-time occurring, but a lot of it is investing in our future and so we have roughly things that we would just identify as just total one-time cost as probably $600,000 of that number and rest of it is investigating in internal projects that we think ring will help us grow organically going forward.

[Joe Mondillo:]

Okay. I think that does it for me. Thanks a lot.

[Operator:]

[Operator Instructions]. And it appears there are no further questions. Ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.