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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 JUNE 30, 2003
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
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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)
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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 [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of each of the issuer's classes of common
stock, as of August 10, 2003:
Common Stock: 4,071,685
ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 926 $ 1,171
Trade accounts receivable, net of allowances for doubtful accounts
of $1,338 and $1,235, respectively 19,346 17,560
Inventories, net 20,408 20,392
Prepaid expenses and other current assets 684 429
Deferred income taxes 934 899
---------- ----------
Total current assets 42,298 40,451
Property, plant and equipment, net 7,699 8,034
Deferred income taxes 481 508
Other assets 135 255
---------- ----------
Total assets $ 50,613 $ 49,248
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,501 $ 1,625
Trade accounts payable and accrued liabilities 15,001 14,057
Accrued wages and benefits 1,006 1,192
Other accrued expenses 1,121 801
---------- ----------
Total current liabilities 18,629 17,675
Long-term debt, less current portion 23,029 23,486
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; 1,168 shares issued and outstanding 1 1
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
treasury stock 18 18
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 2,842 2,842
Retained earnings 9,293 8,425
Treasury stock (1,894) (1,894)
Notes receivable from shareholders (1,346) (1,346)
---------- ----------
Total shareholders' equity 8,955 8,087
---------- ----------
Total liabilities and shareholders' equity $ 50,613 $ 49,248
========== ==========
</Table>
See notes to condensed consolidated financial statements.
2
DXP ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales $ 37,766 $ 37,159 $ 75,227 $ 74,762
Cost of sales 28,226 27,558 56,201 55,534
---------- ---------- ---------- ----------
Gross profit 9,540 9,601 19,026 19,228
Selling, general and administrative expense 8,508 8,545 16,922 17,147
---------- ---------- ---------- ----------
Operating income 1,032 1,056 2,104 2,081
Other income 15 18 37 49
Interest expense (327) (437) (670) (856)
---------- ---------- ---------- ----------
Income before income taxes 720 637 1,471 1,274
Provision for income taxes 275 238 558 509
---------- ---------- ---------- ----------
Net income before cumulative effect of a change in
accounting principle 445 399 913 765
Cumulative effect of a change in accounting principle -- -- -- (1,729)
---------- ---------- ---------- ----------
Net income (loss) 445 399 913 (964)
Preferred stock dividend 22 22 45 45
---------- ---------- ---------- ----------
Net income (loss) attributable to common shareholders $ 423 $ 377 $ 868 $ (1,009)
========== ========== ========== ==========
Per share and share amounts before cumulative effect
of a change in accounting principle
Basic earnings per common share $ 0.10 $ 0.09 $ 0.21 $ 0.18
========== ========== ========== ==========
Common shares outstanding 4,072 4,072 4,072 4,072
========== ========== ========== ==========
Diluted earnings per share $ 0.10 $ 0.09 $ 0.20 $ 0.17
========== ========== ========== ==========
Common and common equivalent shares outstanding 4,643 4,572 4,591 4,560
========== ========== ========== ==========
Cumulative effect of a change in accounting principle
per share - basic and diluted -- -- -- $ (0.42)
========== ========== ========== ==========
Basic income (loss) per share $ 0.10 $ 0.09 $ 0.21 $ (0.25)
========== ========== ========== ==========
Common shares outstanding 4,072 4,072 4,072 4,072
========== ========== ========== ==========
Diluted income (loss) per share $ 0.10 $ 0.09 $ 0.20 $ (0.25)
========== ========== ========== ==========
Common and common equivalent shares outstanding 4,643 4,572 4,591 4,072
========== ========== ========== ==========
</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>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 913 $ (964)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Cumulative effect of a change in accounting principle -- 1,729
Depreciation and amortization 520 579
Deferred income taxes (8) 1
(Gain) loss on disposal of property and equipment (2) 4
Changes in operating assets and liabilities:
Trade accounts receivable (1,786) (645)
Inventories (16) (1,292)
Prepaid expenses and other current assets (135) (214)
Accounts payable and accrued expenses 1,077 1,206
------------ ------------
Net cash provided by operating activities 563 404
INVESTING ACTIVITIES:
Purchase of property and equipment (185) (234)
Proceeds from sale of equipment 2 --
------------ ------------
Net cash used in investing activities (183) (234)
FINANCING ACTIVITIES:
Proceeds from debt 72,896 103,097
Principal payments on revolving line of credit
long-term debt, and notes payable to bank (73,476) (103,664)
Purchase of preferred stock -- (35)
Dividends paid in cash (45) (45)
------------ ------------
Net cash used in financing activities (625) (647)
------------ ------------
DECREASE IN CASH (245) (477)
CASH AT BEGINNING OF PERIOD 1,171 2,260
------------ ------------
CASH AT END OF PERIOD $ 926 $ 1,783
============ ============
</Table>
Noncash activities:
Changes in inventories and principle payments on debt exclude the $1.9 million
noncash reduction of inventory cost and debt associated with a litigation
settlement recorded in 2002.
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 accounting principles generally
accepted in the United States of America have been omitted. DXP Enterprises,
Inc. ("DXP" or 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, 2002, filed with
the Securities and Exchange Commission.
NOTE 2: THE COMPANY
DXP, 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: STOCK OPTIONS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. The pro forma information below is based on provisions of Statement
of Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based
Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, issued in December 2002.
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2003 2002
---------- ----------
(in thousands)
PRO FORMA IMPACT OF FAIR VALUE METHOD (FAS 148)
Reported net income (loss) attributable to common shareholders 868 (1,009)
Less: fair value impact of employee stock compensation (24) (82)
---------- ----------
Pro forma net income (loss) attributable to common shareholders 844 (1,091)
========== ==========
EARNINGS (LOSS) PER COMMON SHARE
Basic- as reported $ 0.21 $ (0.25)
Diluted- as reported $ 0.20 $ (0.25)
Basic- pro forma $ 0.21 $ (0.27)
Diluted- pro forma $ 0.19 $ (0.27)
WEIGHTED AVERAGE BLACK-SCHOLES FAIR VALUE ASSUMPTIONS
Risk free interest rate 3.9% 3.9%
Expected life 5-10 yrs. 5-10 yrs.
Expected volatility 82% 82%
Expected dividend yield 0.0% 0.0%
</Table>
5
NOTE 4: INVENTORY
The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 80 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>
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(IN THOUSANDS)
Finished goods .................... $ 22,440 $ 23,268
Work in process ................... 1,415 720
---------- ----------
Inventories at FIFO ............... 23,855 23,988
Less - LIFO allowance ............. (3,447) (3,596)
---------- ----------
Inventories ....................... $ 20,408 $ 20,392
========== ==========
</Table>
NOTE 5: EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per share before cumulative effect of a change in accounting principle
for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- --------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Basic:
Average shares outstanding 4,071,685 4,071,685 4,071,685 4,071,685
=========== =========== =========== ===========
Income before cumulative effect of a change
in accounting principle $ 445,000 $ 399,000 $ 913,000 $ 765,000
Convertible preferred stock dividend (22,000) (22,000) (45,000) (45,000)
----------- ----------- ----------- -----------
Income attributable to common shareholders
before cumulative effect of a change in
accounting principle $ 423,000 $ 377,000 $ 868,000 $ 720,000
=========== =========== =========== ===========
Per share amount $ 0.10 $ 0.09 $ 0.21 $ 0.18
=========== =========== =========== ===========
Diluted:
Average shares outstanding 4,071,685 4,071,685 4,071,685 4,071,685
Net effect of dilutive stock options--based
on the treasury stock method 151,755 80,516 99,802 68,095
Assumed conversion of convertible preferred stock 420,000 420,000 420,000 420,000
----------- ----------- ----------- -----------
Total 4,643,440 4,572,201 4,591,487 4,559,780
=========== =========== =========== ===========
Income attributable to common shareholders
before cumulative effect of a change in
accounting principle $ 423,000 $ 377,000 $ 868,000 $ 720,000
Convertible preferred stock dividend 22,000 22,000 45,000 45,000
----------- ----------- ----------- -----------
Income for diluted earnings per share, before
cumulative effect of a change in
accounting principle $ 445,000 $ 399,000 $ 913,000 $ 765,000
=========== =========== =========== ===========
Per share amount $ 0.10 $ 0.09 $ 0.20 $ 0.17
=========== =========== =========== ===========
</Table>
6
NOTE 6: 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, bearing,
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 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. All business segments operate primarily in the United
States.
Financial information relating the Company's segments is as follows:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ------------------------
ELECTRICAL ELECTRICAL
MRO CONTRACTOR TOTAL MRO CONTRACTOR TOTAL
------- ---------- ------- ------- ---------- -------
2003
Sales $37,146 $ 620 $37,766 $74,047 $ 1,180 $75,227
Operating income 1,032 -- 1,032 2,107 (3) 2,104
2002
Sales $36,433 $ 726 $37,159 $73,384 $ 1,378 $74,762
Operating income 1,095 (39) 1,056 2,129 (48) 2,081
</Table>
NOTE 7: CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued. SFAS No. 142 changed the treatment of goodwill by no longer amortizing
goodwill, and instead requires, at least annually, an assessment for impairment
by applying a fair-value based test. However, other identifiable intangible
assets with determinable lives are to be separately recognized and amortized.
The statement was effective for fiscal years beginning after December 15, 2001.
All of the Company's goodwill pertained to one reporting unit as
defined in SFAS 142. The goodwill was tested for impairment during the first
quarter of 2002 as required by SFAS 142 upon adoption based upon the expected
present value of future cash flows approach. As a result of this valuation
process as well as the application of the remaining provisions of SFAS 142, the
Company recorded a transitional impairment loss of $2.5 million before income
taxes ($1.7 million after income taxes). This write-off was reported as a
cumulative effect of a change in accounting principle in the Company's
consolidated statement of operations as of January 1, 2002. This adoption of the
statement has resulted in the elimination of approximately $79,000 of annual
goodwill amortization subsequent to December 31, 2001.
NOTE 8: AMENDMENT TO CREDIT FACILITY
On June 25, 2003 the Company amended the loan agreement with its bank
lender ("the Credit Facility"). The amendment extended the maturity to April 1,
2006, reduced the maximum amount to $30.0 million, and provided the option of
interest at LIBOR plus a margin ranging from 2.25% to 3.25% or prime plus a
margin ranging from 0.0% to 0.75%. The margin is determined by the ratio of
funded debt to earnings before interest, taxes, depreciation and amortization
for a twelve month period as of the end of the preceding calendar quarter. At
June 30, 2003 the prime margin and LIBOR margin were 0.25% and 2.75%,
respectively, for the revolving portion of the Credit Facility and 0.50% and
3.0%, respectively, for the term portion of the credit facility.
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 compared to Three Months Ended June 30, 2002
SALES. Revenues for the quarter ended June 30, 2003, increased $0.6
million, or 1.6%, to approximately $37.8 million from $37.2 million in 2002.
Sales for the MRO Segment increased $0.7 million, or 2.0%, to $37.1 million for
2003. This increase can be primarily attributed to increased sales of pump
products. Sales for the Electrical Contractor segment decreased by $0.1 million,
or 14.6%, for the current quarter when compared to the same period in 2002. This
decrease is the result of a slow down in the commercial construction business
for electrical contractors.
GROSS PROFIT. Gross profit as a percentage of sales decreased by
approximately 0.5% for the second quarter of 2003, when compared to the same
period in 2002. Gross profit as a percentage of sales for the MRO segment
decreased to 25.1% for the three months ended June 30, 2003, from 25.6% in the
comparable period of 2002. This decrease can be primarily attributed to
decreased margins on pump and mill supply products sold by the MRO segment.
Gross profit as a percentage of sales for the Electrical Contractor segment
decreased to 33.7% for the three months ended June 30, 2003, from 36.1% in the
comparable period of 2002. This decrease resulted from lower margins sales
associated with a slow down in the commercial construction business for
electrical contractors.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for the quarter ended June 30, 2003, was approximately
equal to the same period in 2002. As a percentage of revenue, the 2003 expense
decreased by approximately 0.5% to 22.5% from 23.0%, for 2002. This decreased is
attributed to a constant level of expenses being spread over an increased
revenue amount.
OPERATING INCOME. Operating income for the second quarter of 2003
decreased slightly when compared to the same period in 2002. Operating income
for the MRO segment for the 2003 quarter declined by $0.1 million, or 5.7%, when
compared to the same period in 2002. This decrease in operating income is the
result of decreased gross profit and increased selling, general and
administrative expense. Operating income for the Electrical Contractor segment
improved to a breakeven in 2003 from a small loss in 2002. The improved
operating income for the Electrical Contractor segment is the result of reduced
selling, general and administrative expenses partially offset by reduced gross
profit.
INTEREST EXPENSE. Interest expense for the quarter ended June 30, 2003
decreased by $0.1 million or to $0.3 million from $0.4 million during the same
period in 2002. This decline results from lower interest rates for the second
quarter of 2003 when compared to the second quarter of 2002 as well as a lower
average debt balance. .
Six Months Ended June 30, 2003 compared to Six Months Ended June 30, 2002
SALES. Revenues for the six months ended June 30, 2003, increased $0.5
million, or 0.6%, to approximately $75.2 million from $74.8 million in 2002.
Sales for the MRO Segment increased $0.7 million, or 0.9%, primarily due to
increased sales of pump products. Sales for the Electrical Contractor segment
decreased by $0.2 million, or 14.4%, for the first half of 2003 when compared to
same period in 2002. This decrease is the result of a slow down in the
commercial construction business for electrical contractors.
GROSS PROFIT. Gross profit as a percentage of sales decreased by
approximately 0.4% for the first six months of 2003, when compared to the same
period in 2002. Gross profit as a percentage of sales for the MRO segment
decreased to 25.1% for the six months ended June 30, 2003, from 25.5% in the
comparable period of 2002. This decrease can be primarily attributed to
decreased margins on bearings sold by the MRO segment. Gross profit as a
percentage of sales for the Electrical Contractor segment decreased to 35.3% for
the six months ended June 30, 2003, down from 39.3% in the comparable period of
2002. This decrease resulted from lower margin sales associated with a slow down
in the commercial construction business.
8
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expense for the six months ended June 30, 2003, decreased by
approximately $0.2 million when compared to the same period in 2002. This
decrease is primarily attributed to reduced administrative expenses. As a
percentage of revenue, the 2003 expense decreased by approximately 0.4% to 22.5%
from 22.9% for 2002. This decrease is primarily attributable to a reduced level
of costs being spread over a larger revenue amount.
OPERATING INCOME. Operating income for the first six months of 2003 was
approximately equal to operating income for the same period in 2002. This
similar result is the net of a small decrease in operating income for the MRO
Segment and a small improvement in operating income for the Electrical
Contractor segment.
INTEREST EXPENSE. Interest expense for the six months ended June 30,
2003 decreased by $0.2 million to $0.7 million from $0.9 million during the same
period in 2002. This decline results from lower interest rates for the six
months of 2003 when compared to the first six months of 2002 as well as a lower
average debt balance.
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 lines of
credit for working capital. We had approximately $3.0 million available for
borrowings under the revolving portion of the Credit Facility at June 30, 2003.
Working capital at June 30, 2003 and December 31, 2002 was approximately $23.7
million and $22.8 million, respectively. During the first six months of 2003 and
2002, we collected trade receivables in approximately 50 and 58 days,
respectively. For the six months ended June 30, 2003 and 2002, we turned our
inventory approximately six times and five times, respectively, on an annualized
basis.
The Credit Facility with our bank lender, which was amended on June 25,
2003, 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)
$30.0 million, and matures April 1, 2006. The Credit Facility is secured by
receivables, inventory, real estate and machinery and equipment. In addition to
the $0.9 million of cash on hand at June 30, 2003, we had $3.0 million available
for borrowings under the Credit Facility. The Credit Facility contains customary
affirmative and negative covenants as well as financial covenants that are
measured monthly and require that we maintain certain fixed charge coverage and
other financial ratios. 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 amend such covenants.
We generated approximately $0.6 million of cash in operating activities
in the first six months of 2003 as compared using approximately $0.4 million of
cash during the first six months of 2002. This increased generation of cash can
be attributed to improved earnings in 2003 compared to 2002.
Fixed asset purchases of approximately $0.2 million during the first
six months of 2003 and the first six months of 2002 related primarily to
computer equipment, software and pump testing equipment in 2003 and computer
equipment in 2002.
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 beyond June
30, 2004, which 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.
9
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.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made by us in the
accompanying financial statements relate to reserves for accounts receivable
collectibility, inventory valuations and self-insured medical claims. Actual
results could differ from those estimates.
Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's subjective or complex judgments. Below is a discussion of
what we believe are our critical accounting policies.
Revenue Recognition
We recognize revenues when an agreement is in place, price is fixed,
title for product passes to the customer or services have been provided, and
collectibility is reasonably assured.
Allowance for Doubtful Accounts
Provisions to the allowance for doubtful accounts are made monthly and
adjustments are made periodically (as circumstances warrant) based upon the
expected collectibility of all such accounts.
Inventory
Inventory consists principally of finished goods and is priced at lower
of cost or market, cost being determined using both the first-in and first out
(FIFO) and the last-in, first-out (LIFO) method. Reserves are provided against
inventory for estimated obsolescence based upon the aging of the inventory and
market trends.
Income Taxes
In accordance with SFAS 109, Accounting for Income Taxes, we have
recorded a net deferred tax asset of $1.4 million as of June 30, 2003. We
believe it is more likely than not that this net deferred tax asset will be
realized based primarily on the assumption of future taxable income.
Management periodically re-evaluates these estimates as events and
circumstances change. Together with the effects of the matters discussed above,
these factors may significantly impact the Company's results of operations from
period-to-period.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations,"which is effective for financial statements issued for
fiscal years beginning after June 15,2002. 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 for 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. The
Company adopted SFAS No. 143 on January 1, 2003. The adoption did not have a
material effect on the Company's financial statements.
10
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 Credit Facility. Based on our capital structure at June 30, 2003, a 100
basis point change in interest rates would result in an estimated $0.2 million
change in annual interest expense.
ITEM 4: CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days of the filing
date of this report, the principal executive officer and principal financial
officer of the Company have concluded that the Company's disclosures controls
and procedures (as defined in Rules 13a-14 (c)15d-14(c) under the Securities
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that the Company files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these internal controls
subsequent to the date of their most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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. 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.
On June 3, 2003, at the Company's annual meeting of shareholders, the
individuals listed below were elected directors by the holders of Common Stock,
Series A Preferred Stock and Series B Preferred Stock, voting together as a
class. Set forth opposite each director's name is the tabulation of votes cast.
<Table>
<Caption>
NOMINEE VOTES FOR VOTES AGAINST VOTES WITHHELD
- --------------------------------------------------------------------------------------------------
David R Little ....................... 3,679,145 1,591 0
Cletus Davis ......................... 3,678,492 2,244 0
Kenneth H. Miller .................... 3,678,492 2,244 0
Timothy Halter ....................... 3,679,666 1,070 0
</Table>
11
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 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 our existing
geographic areas and adding new customers. Our ability to implement this
strategy will depend on our success in selling more to existing customers,
acquiring new customers, hiring qualified sales persons, 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 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.
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.
12
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.
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).
31.1 Certification of David R. Little pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith).
31.2 Certification of Mac McConnell pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith).
32.1 Certifications of David R. Little and Mac McConnell pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith).
(b) Reports on Form 8-K.
On May 2, 2003, DXP filed a Form 8-K in connection with the press
release announcing the Company's 2003 first quarter results.
13
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: August 12, 2003
14
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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).
31.1 Certification of David R. Little pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith).
31.2 Certification of Mac McConnell pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith).
32.1 Certifications of David R. Little and Mac McConnell pursuant to
Section 1350, Chapter 63 of Title 18, United States Code, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Filed herewith).
</Table>