================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21513
---------------
DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7272 PINEMONT
HOUSTON, TEXAS 77040
(Address of principal executive offices) (Zip Code)
713/996-4700
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
---------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the issuer's classes of common
stock, as of November 10, 2001:
Common Stock: 4,071,685
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ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash ........................................................ $ 233 $ 2,744
Trade accounts receivable, net of allowance for
doubtful accounts of $2,015 and $1,888,
respectively ............................................. 20,662 24,377
Inventory ................................................... 23,536 23,504
Prepaid expenses and other .................................. 1,025 578
Deferred income taxes ....................................... 693 1,308
------------- ------------
Total current assets ................................ 46,149 52,511
Property, plant and equipment, net ............................ 9,095 9,314
Goodwill, net ................................................. 2,488 2,547
Receivables from officers and employees ....................... 1,304 811
Deferred income taxes ......................................... 1,540 1,388
Other assets .................................................. 362 568
------------- ------------
Total assets ........................................ 60,938 67,139
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable and accrued liabilities .............. 18,819 18,498
Accrued wages and benefits .................................. 1,206 999
Other accrued liabilities ................................... 657 661
Current portion of long-term debt ........................... 8,473 9,675
------------- ------------
Total current liabilities ........................... 29,155 29,833
Long-term debt, less current portion .......................... 22,313 28,476
Equity subject to redemption:
Series A preferred stock -- 1,122 shares .................... 112 112
Shareholders' Equity:
Series A preferred stock, 1/10th vote per share; $1.00
par value; liquidation preference of $100 per share;
1,000,000 shares authorized;
2,992 shares issued and outstanding: ..................... 2 2
Series B convertible preferred stock, 1/10th vote
per share; $1.00 par value; $100 stated value;
liquidation preference of $100 per share; 1,000,000
shares authorized; 17,700 shares
issued, 15,000 shares outstanding and 2,700 shares in .... 18 18
treasury stock
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,257,760 shares issued and
4,071,685 shares are outstanding and
186,075 shares in treasury stock ......................... 41 41
Paid-in capital ............................................. 2,765 2,765
Retained earnings ........................................... 8,426 7,786
Treasury stock .............................................. (1,894) (1,894)
------------- ------------
Total shareholders' equity .......................... 9,358 8,718
------------- ------------
Total liabilities and shareholders' equity .......... $ 60,938 $ 67,139
============= ============
</Table>
See notes to condensed consolidated financial statements.
2
DXP ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Sales .............................................. $ 43,240 $ 45,959 $ 135,826 $ 136,030
Cost of sales ...................................... 32,296 34,372 101,712 102,168
---------- ---------- ---------- ----------
Gross profit ....................................... 10,944 11,587 34,114 33,862
Selling, general and administrative expenses ....... 9,914 10,386 30,808 31,287
---------- ---------- ---------- ----------
Operating income ................................... 1,030 1,201 3,306 2,575
Other income ....................................... 12 92 53 2,188
Interest expense ................................... (572) (890) (2,025) (2,738)
---------- ---------- ---------- ----------
Income before income taxes ......................... 470 403 1,334 2,025
Provision for income taxes ......................... 198 196 628 943
---------- ---------- ---------- ----------
Net income ......................................... $ 272 $ 207 $ 706 $ 1,082
Preferred stock dividend ........................... 23 23 68 68
---------- ---------- ---------- ----------
Net Income attributable to common shareholders ..... $ 249 $ 184 $ 638 $ 1,014
========== ========== ========== ==========
Basic earnings per common share .................... $ .06 $ .05 $ .16 $ .25
---------- ---------- ---------- ----------
Common shares outstanding .......................... 4,072 4,077 4,072 4,077
---------- ---------- ---------- ----------
Diluted earnings per share ......................... $ .06 $ .05 $ .16 $ .23
---------- ---------- ---------- ----------
Common and common equivalent shares outstanding .... 4,586 4,077 4,505 4,622
---------- ---------- ---------- ----------
</Table>
See notes to condensed consolidated financial statements.
3
DXP ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
---------- ----------
OPERATING ACTIVITIES:
Net income ............................................. $ 706 $ 1,082
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities
Depreciation and amortization ...................... 1,054 1,444
Provision (benefit) for deferred income taxes ...... 463 (78)
(Gain) on sale of property and
equipment ....................................... -- (1,955)
Changes in operating assets and liabilities:
Trade accounts receivable ....................... 3,713 (1,658)
Inventories ..................................... (1,241) (970)
Prepaid expenses and other ...................... (734) (279)
Accounts payable and accrued liabilities ........ 483 4,581
---------- ----------
Net cash provided by operating activities ....... 4,444 2,167
INVESTING ACTIVITIES:
Purchase of property and equipment ..................... (672) (915)
Net proceeds on the sale of real estate ................ -- 3,231
Net proceeds on the sale of certain
electrical contractor segment assets ................. 1,149 --
---------- ----------
Net cash provided by investing activities ........... 477 2,316
FINANCING ACTIVITIES:
Proceeds from debt ..................................... 132,974 132,804
Principal payments on revolving line of credit,
long-term and subordinated debt, and notes
payable to bank ...................................... (140,338) (139,815)
Dividends paid ......................................... (68) (68)
---------- ----------
Net cash used in financing activities ............... (7,432) (7,079)
---------- ----------
DECREASE IN CASH ....................................... (2,511) (2,596)
CASH AT BEGINNING OF PERIOD ............................ 2,744 2,991
---------- ----------
CASH AT END OF PERIOD .................................. $ 233 $ 395
---------- ----------
</Table>
See notes to condensed consolidated financial statements.
4
DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. DXP Enterprises, Inc. (the "Company") believes
that the presentations and disclosures herein are adequate to make the
information not misleading. The condensed consolidated financial statements
reflect all elimination entries and adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's 10-K Annual Report for the year ended December 31, 2000, filed with
the Securities and Exchange Commission.
NOTE 2: THE COMPANY
DXP Enterprises, Inc. and subsidiaries (DXP or the Company), a Texas
corporation, was incorporated on July 26, 1996, to be the successor to SEPCO
Industries, Inc. (SEPCO). The Company is organized into two segments:
Maintenance, Repair and Operating (MRO) and Electrical Contractor.
NOTE 3: RECENT OPERATIONS AND LIQUIDITY
The Company sustained a net loss of approximately $7.4 million during
fiscal year 2000 primarily from non-recurring operating charges of $10.8
million. This operating loss coupled with a default on a subordinated note
payable caused the Company to be in violation of covenants under the Credit
Facility with its bank lender; consequently, the Company reclassified the
subordinated note and a portion of its debt under the Credit Facility to a
current liability in 2000, as well as at September 30, 2001 (see Note 7 below
for further discussion).
For the first nine months of 2001, the Company generated $1,334,000 in
income before taxes. Gross profit and operating income increased from the
comparable period in 2000, resulting from improved sales and margins in its MRO
segment (see "Management's Discussion and Analysis of Financial Condition and
Result of Operations" for further information) and reduced selling, general and
administrative expenses. The Company was in compliance with its bank loan
agreement covenants for the third quarter of 2001. In addition to $0.2 million
of cash on hand, the Company has approximately $4.1 million available for
additional borrowings under its Credit Facility at September 30, 2001.
NOTE 4: NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities (SFAS No. 133)". This statement
requires the fair value of derivatives be recorded as assets or liabilities.
Gains or losses resulting from changes in the fair values of derivatives are
accounted for currently in earnings or comprehensive income depending on the
purpose of the derivatives and whether they qualify for hedge accounting
treatment. SFAS No. 133, as amended, is effective for us beginning January 1,
2001. We adopted the statement effective January 1, 2001; there was no impact on
our financial results as we were not a party to any derivative instruments.
In 2000, the Emerging Issues Task Force of the FASB reached a consensus
on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" and Issue
00-14, "Accounting for Certain Sales Incentives", (collectively, "the Issues").
We adopted the Issues in the fourth quarter of 2000 and have restated our
quarterly and annual financial statements to conform to the requirements of the
Issues. There was no effect on net income as a result of the adoption of the
Issues. The net effect of the adoption of the Issues was an increase in net
sales of $1.3 million and $3.8 million, an increase in cost of sales of $1.3
million and $3.8 million, a decrease in selling, general and administrative
expenses of $0.3 million and $0.7 million, and a decrease in other income of
$0.3 million and $0.7 million, for the quarter and nine months ended September
30, 2000, respectively.
5
In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" was issued. SFAS No. 141 eliminates the use of the
pooling-of-interests method of accounting for business combinations and
establishes the purchase method as the only acceptable method. The statement was
effective beginning June 30, 2001. Management has reviewed the requirements of
the statement and does not believe it will have a material impact on the
financial position or results of operations of the Company.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing
goodwill, and instead requiring, at least annually, an assessment for impairment
by applying a fair-value based test. However, other identifiable intangible
assets are to be separately recognized and amortized. The statement is effective
for fiscal years beginning after December 15, 2001. The adoption of the
statement will result in the elimination of approximately $79,000 of goodwill
amortization, annually, subsequent to December 31, 2001. Additionally, adoption
could result in an impairment of up to the $2.5 million of goodwill recorded on
our balance sheet at September 30, 2001. The charge for the impairment would be
reflected as a cumulative effect of a change in accounting principle on January
1, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The purpose of this statement
is to develop consistent accounting of asset retirement obligations and related
costs in the financial statements and provide more information about future cash
outflows, leverage and liquidity regarding retirement obligations and the gross
investment in long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
will implement SFAS No. 143 on January 1, 2003. The impact of such adoption is
not anticipated to have a material effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). This Statement also amends Accounting Research Board
No. 51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for subsidiaries for which control is likely to be temporary. The
Company will adopt SFAS No. 144 beginning January 1, 2002. The impact of such
adoption is not anticipated to have a material effect on the Company's financial
statements.
NOTE 5: INVENTORY
The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 60 percent of its inventories. Remaining inventories
are accounted for using the first-in, first-out ("FIFO") method. An actual
valuation of inventory under the LIFO method can be made only at the end of each
year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO
basis is as follows:
<Table>
<Caption>
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(IN THOUSANDS)
Finished Goods ............. $ 25,630 $ 25,770
Work in Process ............ 1,335 985
-------- --------
Inventories at FIFO ........ 26,965 26,755
Less - LIFO allowance ...... (3,429) (3,251)
-------- --------
Inventories ................ $ 23,536 $ 23,504
======== ========
</Table>
6
NOTE 6: DIVESTITURES
During the first nine months of 2000, the Company sold two warehouse
facilities for approximately $3.5 million in cash. Gains of approximately $2.0
million were recorded as other income as a result of the sales.
NOTE 7: LONG-TERM DEBT
Under the Company's loan agreements with its bank lender (the "Credit
Facility"), all available cash is generally applied to reduce outstanding
borrowings, with operations funded through borrowings under the Credit Facility.
The Credit Facility consists of three secured lines of credit with various
subsidiaries of the Company and a term loan.
Under the terms of the asset purchase agreement associated with the
acquisition of a MRO business in 1997, the Company can require the seller to
adjust the purchase price for certain inventory remaining unsold as of July 1,
2000. The Company notified the seller that the adjustment of the purchase price
exceeds the outstanding $2.0 million balance of the associated subordinated note
payable. As of July 1, 2000, the Company suspended principal and interest
payments on the note. The seller has notified the Company's bank lender that the
Company is in default on the subordinated note. The Company's bank lender
notified the Company that the default on the subordinated note caused the
Company to be in default on one of its secured lines of credit with an
outstanding balance of $4.2 million at September 30, 2001. However, the bank
lender agreed to forebear taking any action on defaults under the secured line
of credit. The bank lender can terminate this forbearance at anytime. The $4.2
million outstanding balance of the secured line of credit and the $2.0 million
balance of the subordinated note have been included in current maturities of
long-term debt at September 30, 2001.
In management's opinion, should payment of the $4.2 million outstanding
balance of the secured line of credit be demanded, the Company would be able to
refinance the obligation or liquidate it through the proceeds from asset sales
or property refinancing. During January, 2001, the Company filed suit against
the seller to collect the purchase price adjustment. In February, 2001, the
seller filed a counterclaim against the Company to collect the balance of the
subordinated note and accrued interest. The Company expects to attend a court
mandated mediation meeting during the fourth quarter of 2001. The Company
intends to aggressively pursue the Company's claims against the seller under the
provisions of the asset purchase agreement. The subordinated note provides for
an interest rate of prime plus 4% if the note is in default. The Company did not
accrue interest or penalty interest on the subordinated note for the nine months
ended September 30, 2001. Management believes the subordinated note will either
be paid off using funds obtained from the seller in settlement of the Company's
claims or the subordinated note will be offset against its claims. However,
there can be no assurance that the Company will be successful in collecting the
funds due under its claims or in offsetting the subordinated note against its
claims.
During August of 2001, the Company and its bank amended the Credit
Facility effective August 14, 2001, which now provides for borrowings up to an
aggregate of the lesser of (i) a percentage of the collateral value based on a
formula set forth therein or (ii) $35.0 million, and matures April 1, 2004,
except for the $4.2 million outstanding balance of the $5.8 million secured line
of credit which is in default and callable at anytime. Interest accrues at prime
plus 1/2% on approximately $19 million of the Credit Facility, prime plus 1 1/2%
on the $5.8 line of credit which is in default, and prime plus 1 1/2 % on the
term portion ($9.0 million at September 30, 2001) of the Credit Facility. The
prime rate at September 30, 2001, was 6.0%. The Credit Facility is secured by
receivables, inventory, real estate and machinery and equipment. The Credit
Facility contains customary affirmative and negative covenants as well as
financial covenants that are measured monthly and require the Company to
maintain a certain cash flow and other financial ratios. The Company from time
to time has not been in compliance with certain covenants under the Credit
Facility including the minimum earnings requirement and the fixed charge
coverage ratio. At September 30, 2001, the Company was in compliance with these
covenants. In addition to the $0.2 million of cash on hand at September 30, 2001
the Company had $4.1 million available for borrowings under the amended credit
facility at September 30, 2001. Although the Company expects to be able to
comply with the covenants, including the financial covenants, of the Credit
Facility, there can be no assurance that in the future the Company will be able
to do so or that the lender will be willing to waive such non-compliance or
further amend such covenants.
7
NOTE 8: EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Basic:
Average shares outstanding ........................ 4,071,685 4,076,618 4,071,685 4,076,618
Net income attributable to common shareholders .... $ 249,000 $ 184,000 $ 638,000 $1,014,000
Per share amount .................................. $ .06 $ .05 $ .16 $ .25
Diluted:
Average shares outstanding ........................ 4,071,685 4,076,618 4,071,685 4,076,618
Net effect of dilutive stock options--
Based on the treasury stock method .............. 94,800 -- 12,979 125,198
Assumed conversion of Class B convertible
Preferred stock ................................. 420,000 -- 420,000 420,000
---------- ---------- ---------- ----------
Total ............................................. 4,586,485 4,076,618 4,621,816 4,504,664
Net income for diluted earnings per share ......... $ 272,000 $ 184,000 $ 706,000 $1,082,000
Per share amount .................................. $ .06 $ .05 $ .16 $ .23
</Table>
For the three months ended September 30, 2000, the Class B convertible preferred
stock is anti-dilutive and is excluded from the computation of diluted earnings
per share.
NOTE 9: SEGMENT REPORTING
The MRO Segment is engaged in providing maintenance, repair and
operating products, equipment and integrated services, including engineering
expertise and logistics capabilities, to industrial customers. The Company
provides a wide range of MRO products in the fluid handling equipment, bearings,
power transmission equipment, general mill, safety supply and electrical
products categories. The Electrical Contractor segment sells a broad range of
electrical products, such as wire conduit, wiring devices, electrical fittings
and boxes, signaling devices, heaters, tools, switch gear, lighting, lamps,
tape, lugs, wire nuts, batteries, fans and fuses, to electrical contractors. The
Company began offering electrical products to electrical contractors following
its acquisition of the assets of two electrical supply businesses in 1998.
During August 2001, the Company sold the majority of the assets of one
of the two businesses which comprised the Electrical Contractor segment.
Historically, the business which was sold accounted for approximately two thirds
of the sales of the segment. No gain or loss was recognized on the sale.
All business segments operate primarily in the United States.
The high degree of integration of the Company's operations necessitates
the use of a substantial number of allocations and apportionments in the
determination of business segment information. Sales are shown net of
intersegment eliminations.
Financial information relating the Company's segments is as follows:
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -------------------------------------
ELECTRICAL ELECTRICAL
MRO CONTRACTOR TOTAL MRO CONTRACTOR TOTAL
-------- ---------- -------- -------- ---------- --------
2001
Sales $ 41,431 $ 1,809 $ 43,240 $128,353 $ 7,473 $135,826
Operating income (loss) 1,119 (89) 1,030 3,711 (405) 3,306
Identifiable Assets 58,382 2,556 60,938
2000
Sales $ 42,766 $ 3,193 $ 45,959 $126,938 $ 9,092 $136,030
Operating income (loss) 1,280 (79) 1,201 2,855 (280) 2,575
Identifiable Assets 63,316 9,208 72,524
</Table>
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 compared to Three Months Ended September
30, 2000
SALES. Sales for the quarter ended September 30, 2001, decreased $2.7
million, or 5.9%, to approximately $43.2 million from $46.0 million in 2000.
Sales for the MRO Segment decreased $1.3 million, or 3.1%, primarily due to a
slowing of the overall economy. Sales for the Electrical Contractor segment
decreased by $1.4 million, or 43.3%, for the current quarter when compared to
same period in 2000. This decrease in sales is the result of the sale, during
August 2001, of the majority of the assets of a business which comprised
approximately two thirds of the sales of the Electrical Contractor segment
combined with a slow down in the construction business for electrical
contractors.
GROSS PROFIT. Gross profit as a percentage of sales increased to 25.3%
for the third quarter of 2001, from 25.2% for the same period in 2000. Gross
profit as a percentage of sales for the MRO segment was 25.4% for the third
quarter of 2001 and 2000. Gross profit as a percentage of sales for the
Electrical Contractor segment decreased to 22.1% in the three months ended
September 30, 2001, down from 23.3% in the comparable period of 2000. This
decline resulted from lower margin sales associated with a slow down in the
construction business for electrical contractors.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for the quarter ended September 30, 2001, decreased by
approximately $0.5 million when compared to the same period in 2000. This 4.5%
decrease is consistent with the 5.9% decrease in sales between the two periods.
As a percentage of sales, the 2001 expense increased to 22.9% from 22.6% for
2000. This increase is primarily attributable to sales decreasing by a greater
percentage than expenses decreased.
OPERATING INCOME. Operating income for the third quarter of 2001
decreased $0.2 million when compared to the same period in 2000. This decrease
is the result of a $0.2 million decrease in operating income for the MRO
Segment. The reduced operating income for the MRO segment is the result of
decreased sales and gross profit resulting from the slow down in the overall
economy.
INTEREST EXPENSE. Interest expense for the quarter ended September 30,
2001 decreased by $0.3 million to $0.6 million from $0.9 million during the same
period in 2000. This decline results from lower interest rates as well as a
lower average debt balance for the third quarter of 2001 when compared to the
third quarter of 2000.
INCOME TAXES. The 42% effective tax rate for the quarter ended
September 30, 2001, decreased from 49% for the same period in 2000 because of
less state income taxes. State income taxes decreased because profitability
declined in operations in certain states which were profitable in 2000 and
improved in operations in certain states which incurred losses in 2000 for which
a state tax benefit was not realized in 2000.
Nine Months Ended September 30, 2001 compared to Nine Months Ended September 30,
2000
SALES. Sales for the nine months ended September 30, 2001, decreased
$0.2 million, or 0.2%, to approximately $135.8 million from $136.0 million in
2000. Sales for the MRO Segment increased $1.4 million, or 1.1% primarily due to
an improvement in the oil and gas industry. Sales for the Electrical Contractor
segment decreased by $1.6 million, or 18%, for the current nine months when
compared to same period in 2000. This decrease is the result of the sale, during
August 2001, of the majority of the assets of a business which comprised
approximately two thirds of the sales of the Electrical Contractor segment
combined with a slow down in the construction business for electrical
contractors..
GROSS PROFIT. Gross profit as a percentage of sales increased to 25.1%
for the first nine months of 2001, up from 24.9% for the same period in 2000.
Gross profit as a percentage of sales for the MRO segment
9
increased to 25.4% for the nine months ended September 30, 2001, up from 24.9%
in the comparable period of 2000. This increase can be primarily attributed to
increased margins in fluid handling equipment sold by the MRO segment. Gross
profit as a percentage of sales for the Electrical Contractor segment decreased
to 21.0% for the nine months ended September 30, 2001, down from 24.4% for the
comparable period of 2000. This decline resulted from lower margin sales
associated with a slowdown in the construction business for electrical
contractors.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for the nine months ended September 30, 2001, declined
$0.5 million, or 1.5% to approximately $30.8 million from $31.3 million in 2000.
As a percentage of revenue, the 2001 expense declined to 22.7% from 23.0% for
2000. This decrease is primarily attributable to reduced compensation related
expenses resulting from reduced headcount.
OPERATING INCOME. Operating income for the first nine months of 2001
increased $0.7 million when compared to the same period in 2000. All of the
increase came from the MRO segment. The improved operating income for the MRO
segment is the result of increased sales and gross profit combined with reduced
selling, general and administrative expenses. The operating loss for the
Electrical Contractor segment increased to $0.4 million for the nine months
ended September 30, 2001, up from $0.3 million for the same period of 2000. The
larger operating loss for the Electrical Contractor segment results from the
lower sales and margins resulting from a slow down in the construction business
for electrical contractors.
INTEREST EXPENSE. Interest expense for the nine months ended September
30, 2001 decreased by $0.7 million to $2.0 million from $2.7 million during the
same period in 2000. This decline results from lower interest rates as well as a
lower average debt balance for the first nine months of 2001 when compared to
the first nine months of 2000.
OTHER INCOME. Other income was approximately $2.1 million lower in 2001
than in 2000 due primarily to $2.0 million of gains on the sale of two warehouse
facilities during 2000.
INCOME TAXES. The effective tax rates for the nine month periods ended
September 30, 2001, and 2000, were approximately 47% for both periods.
NET INCOME. Excluding the gains on the sale of two warehouse facilities
in 2000, net income increased by approximately $0.8 million in 2001 from a loss
of approximately $0.2 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As a distributor of MRO and Electrical products, we require significant
amounts of working capital to fund inventories and accounts receivable.
Additional cash is required for capital items such as information technology and
warehouse equipment. We also require cash to pay our lease obligations and to
service our debt.
Under the loan agreements with our bank lender, all available cash is
generally applied to reduce outstanding borrowings, with operations funded
through borrowings under the Credit Facility. Our policy is to maintain low
levels of cash and cash equivalents and to use borrowings under our line of
credit for working capital. We had approximately $4.1 million available for
borrowings under the revolving portion of the Credit Facility at September 30,
2001. Working capital at September 30, 2001 and December 31, 2000 was
approximately $17.0 million and $22.7 million, respectively. During the first
nine months of 2001 and 2000, we collected trade receivables in approximately 46
and 50 days, respectively. For the nine months ended September 30, 2001 and
2000, we turned our inventory approximately six and five times, respectively, on
an annualized basis.
Under the terms of the asset purchase agreement associated with the
acquisition of a MRO business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
notified the seller that the adjustment of the purchase price exceeds the
outstanding $2.0 million balance of the associated subordinated note payable. As
of July 1, 2000, we suspended principal and interest payments on the note. The
seller has notified our bank lender that we were in default on the subordinated
note. Our bank lender notified us that the default on the subordinated note
caused us to be in default on one of our secured lines of credit with an
outstanding balance of $4.2 million at September 30, 2001. However, our bank
lender agreed to forebear taking any action on defaults under the secured line
of credit. The bank lender can terminate the forbearance at anytime. The
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$4.2 million outstanding balance of the secured line of credit and the $2.0
million balance of the subordinated note have been included in current
maturities of long-term debt at September 30, 2001.
In our opinion, should payment of the $4.2 million outstanding balance
of the secured line of credit be demanded, we would be able to refinance the
obligation or liquidate it through the proceeds from asset sales or property
refinancing. During January, 2001, we filed suit against the seller to collect
the purchase price adjustment. In February, 2001, the seller filed a
counterclaim against us to collect the balance of the subordinated note and
accrued interest. The Company expects to attend a court mandated mediation
meeting during the fourth quarter of 2001. We intend to aggressively pursue our
claims against the seller under the provisions of the asset purchase agreement.
The subordinated note provides for an interest rate of prime plus 4% if the note
is in default. We did not accrue interest or penalty interest on the
subordinated note for the nine months ended September 30, 2001. We believe the
subordinated note will either be paid off using funds obtained from the seller
in settlement of our claims or the subordinated note will be offset against our
claims. However, there can be no assurance that we will be successful in
collecting the funds due under our claims or in offsetting the subordinated note
against our claims.
During August of 2001, we amended the Credit Facility with our bank
lender effective August 14, 2001, which now provides for borrowings up to an
aggregate of the lesser of (i) a percentage of the collateral value based on a
formula set forth therein or (ii) $35.0 million, and matures April 1, 2004,
except for the $4.2 million balance of the $5.8 million secured line of credit
which is in default and callable at anytime. Interest accrues at prime plus 1/2%
on approximately $19 million of the Credit Facility, and prime plus 1 1/2 % on
the $5.8 million line of credit which is in default, and prime plus 1 1/2 % on
the term portion ($9.0 million at September 30, 2001) of the Credit Facility.
The prime rate at September 30, 2001, was 6.00%. The Credit Facility is secured
by receivables, inventory, real estate and machinery and equipment. The Credit
Facility contains customary affirmative and negative covenants as well as
financial covenants that are measured monthly and require that we maintain
certain cash flow and other financial ratios. We have, from time to time, not
been in compliance with certain covenants under the Credit Facility including
the minimum earnings requirement and the fixed charge coverage ratio. At
September 30, 2001, we are in compliance with these covenants. In addition to
the $0.2 million of cash on hand at September 30, 2001, we had $4.1 million
available for borrowings under the amended credit facility at September 30,
2001. Although we expect to be able to comply with the covenants, including the
financial covenants, of the Credit Facility, there can be no assurance that in
the future we will be able to do so or that our lender will be willing to waive
such non-compliance or further amend such covenants.
We generated cash through operating activities of approximately $4.4
million in the first nine months of 2001 as compared to $2.2 million during the
first nine months of 2000. This increase is primarily attributable to improved
operating income and to a decrease in accounts receivable in 2001 compared to an
increase in accounts receivable in 2000. In the third quarter of 2001, sales
decreased approximately $3.3 million from the fourth quarter of 2000; for the
comparable period in 2000, sales increased approximately $4.0 million from the
fourth quarter of 1999.
We generated cash through investing activities of approximately $0.5
million in the first nine months of 2001 as compared to generating $2.3 million
in cash during the first nine months of 2000. This change results from the sales
of two warehouse facilities in 2000 for approximately $3.5 million in cash.
Capital expenditures of $0.7 million during the first nine months of 2001
related primarily to computer software. Capital expenditures of $0.9 million
during the first nine months of 2000 were related primarily to computer
equipment and developing an e-commerce website, which we subsequently wrote-off
during the fourth quarter of 2000.
Our internal cash flow projections indicate our cash generated from
operations and available under our Credit Facility will meet our normal working
capital needs during the next twelve months. However, we may require additional
debt or equity financing to meet our future debt service obligations. Such
financing may include additional bank debt or the public or private sale of
equity or debt securities. In connection with such financing, we may be required
to issue securities that substantially dilute the interest of our shareholders.
As described above, all of our Credit Facility matures on or before April 1,
2004. We will need to extend the maturity of, or replace, our Credit Facility
before April 1, 2004. However, we may not be able to renew and extend or replace
the Credit Facility. Any extended or replacement facility may have higher
interest costs, less borrowing capacity, more restrictive conditions and could
involve equity dilution. Our ability to obtain a satisfactory credit facility
may depend, in part, upon the level of our asset base for collateral purposes,
our future financial performance and our ability to obtain additional equity.
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We would require additional capital to fund any future acquisitions. At
this time, we do not plan to grow through acquisitions unless the market price
of our common stock rises to levels that will make acquisitions accretive to our
earnings or we generate excess cash flow. We may also pursue additional equity
or debt financing to fund future acquisitions, although we may not be able to
obtain additional financing on attractive terms.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 4 of the Notes to Condensed Consolidated Financial
Statements for a discussion of recently issued accounting standards.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk results from volatility in interest rates. This risk is
monitored and managed.
Our exposure to interest rate risk relates primarily to our debt
portfolio. To limit interest rate risk on borrowings, we target a portfolio
within certain parameters for fixed and floating rate loans taking into
consideration the interest rate environment and our forecasted cash flow. This
policy limits exposure to rising interest rates and allows us to benefit during
periods of falling interest rates. Our interest rate exposure is generally
limited to our Credit Facility. See "Liquidity and Capital Resources."
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to legal proceedings arising
in the ordinary course of business. Other than the previously disclosed legal
proceedings with the seller of an MRO business to the Company in 1997, the
Company is not currently a party to any litigation that it believes could have a
material adverse effect on the results of operations or financial condition of
the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
CAUTIONARY STATEMENTS
Our expectations with respect to future results of operations that may
be embodied in oral and written forward-looking statements, including any
forward-looking statements that may be contained in this Quarterly Report on
Form 10-Q, are subject to risks and uncertainties that must be considered when
evaluating the likelihood of our realization of such expectations. Our actual
results could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below.
Ability to Comply with Financial Covenants of Credit Facility
Our loan agreements with our bank lender (the "Credit Facility")
requires that we comply with certain specified covenants, restrictions,
financial ratios and other financial and operating tests. Our ability to comply
with any of the foregoing restrictions will depend on our future performance,
which will be subject to prevailing
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economic conditions and other factors, including factors beyond our control. A
failure to comply with any of these obligations could result in an event of
default under the Credit Facility, which could permit acceleration of our
indebtedness under the Credit Facility. From time to time we have been unable to
comply with some of the financial covenants contained in the Credit Facility
(relating to, among other things, the maintenance of prescribed financial
ratios) and have, when necessary, obtained waivers or amendments to the
covenants from our lender. Although we expect to be able to comply with the
covenants, including the financial covenants, of the Credit Facility, there can
be no assurance that in the future we will be able to do so or that our lender
will be willing to waive such non-compliance or further amend such covenants.
Risks Related to Internal Growth Strategy
Future results for us will depend in part on our success in
implementing our internal growth strategy, which includes expanding existing
product lines and adding new product lines. Our ability to implement this
strategy will depend on our success in acquiring and integrating new product
lines and marketing integrated supply arrangements such as those being pursued
by us through our SmartSource program. Although we intend to increase sales and
product offerings to existing customers, improve our business to business
e-commerce capability through outsourcing our website and reduce costs through
consolidating certain administrative and sales functions, there can be no
assurance that we will be successful in these efforts.
Substantial Competition
Our business is highly competitive. We compete with a variety of
industrial supply distributors, some of which may have greater financial and
other resources than us. Although many of our traditional distribution
competitors are small enterprises selling to customers in a limited geographic
area, we also compete with larger distributors that provide integrated supply
programs such as those offered through outsourcing services similar to those
that are offered by our SmartSource program. Some of these large distributors
may be able to supply their products in a more timely and cost-efficient manner
than us. Our competitors include direct mail suppliers, large warehouse stores
and, to a lesser extent, certain manufacturers.
Risk Associated with Default on Subordinated Note Payable
Under the terms of the asset purchase agreement associated with the
acquisition of a business in 1997, we can require the seller to adjust the
purchase price for certain inventory remaining unsold as of July 1, 2000. We
notified the seller that the adjustment of the purchase price exceeds the
outstanding $2.0 million balance of the associated subordinated note payable. As
of July 1, 2000, we suspended principal and interest payments on the note. The
seller has notified our bank lender that we were in default on the subordinated
note. Our bank lender notified us that the default on the subordinated note
caused us to be in default on one of our secured lines of credit with an
outstanding balance of $4.2 million at September 30, 2001. However, our bank
lender agreed to forebear taking any action on defaults under the secured line
of credit. The bank lender can terminate the forbearance at any time. The $4.2
million outstanding balance of the secured line of credit and the $2.0 million
balance of the subordinated note have been included in current maturities of
long-term debt at September 30, 2001.
In our opinion, should the $4.2 million balance of the secured line of
credit be demanded, we would be able to refinance the obligation or liquidate it
through the proceeds from asset sales or property refinancing. In January, 2001,
we filed suit against the seller to collect the purchase price adjustment. In
February, 2001, the seller filed a counterclaim against us to collect the
balance of the subordinated note and accrued interest. We intend to aggressively
pursue our claims against the seller under the provisions of the asset purchase
agreement. The subordinated note provides for an interest rate of prime plus 4%
if the note is in default. The Company did not accrue interest or penalty
interest on the subordinated note for the nine months ended September 30, 2001.
We believe the subordinated note will either be paid off using funds obtained
from the seller in settlement of our claims or the subordinated note will be
offset against our claims. However, there can be no assurance that we will be
successful in collecting the funds due under our claims or in offsetting the
subordinated note against our claims.
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Risks of Economic Trends
Demand for our products is subject to changes in the United States
economy in general and economic trends affecting our customers and the
industries in which they compete in particular. Many of these industries, such
as the oil and gas industry, are subject to volatility while others, such as the
petrochemical industry, are cyclical and materially affected by changes in the
economy. As a result, we may experience changes in demand for our products as
changes occur in the markets of our customers.
Dependence on Key Personnel
We will continue to be dependent to a significant extent upon the
efforts and ability of David R. Little, our Chairman of the Board, President and
Chief Executive Officer. The loss of the services of Mr. Little or any other
executive officer of our company could have a material adverse effect on our
financial condition and results of operations. We do not maintain key-man life
insurance on the life of Mr. Little or on the lives of our other executive
officers. In addition, our ability to grow successfully will be dependent upon
our ability to attract and retain qualified management and technical and
operational personnel. The failure to attract and retain such persons could
materially adversely affect our financial condition and results of operations.
Dependence on Supplier Relationships
We have distribution rights for certain product lines and depend on
these distribution rights for a substantial portion of our business. Many of
these distribution rights are pursuant to contracts that are subject to
cancellation upon little or no prior notice. Although we believe that we could
obtain alternate distribution rights in the event of such a cancellation, the
termination or limitation by any key supplier of its relationship with our
company could result in a temporary disruption on our business and, in turn,
could adversely affect results of operations and financial condition. See
"Business--Suppliers".
Risks Associated With Hazardous Materials
Certain of our operations are subject to federal, state and local laws
and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although we believe that we have
adequate procedures to comply with applicable discharge and other environmental
laws, the risks of accidental contamination or injury from the discharge of
controlled or hazardous materials and chemicals cannot be eliminated completely.
In the event of such an accident, we could be held liable for any damages that
result and any such liability could have a material adverse effect on our
financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Restated Articles of Incorporation, as amended (incorporated
by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with
Commission on August 20, 1998)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-10021), filed with the Commission on August 12, 1996).
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DXP ENTERPRISES, INC.
(Registrant)
By: /s/ MAC McCONNELL
------------------------------------
Mac McConnell
Senior Vice-President/Finance and
Chief Financial Officer
Dated: November 14, 2001
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