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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 JUNE 30, 1999
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7272 PINEMONT 77040
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 August 11, 1999:
Common Stock: 4,212,043
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ 1,143 $ 1,625
Trade accounts receivable, net of allowance for doubtful
accounts of $1,491 and $1,155, respectively............ 23,675 24,367
Inventory................................................. 30,135 28,926
Prepaid expenses and other................................ 2,577 1,453
Deferred income taxes..................................... 1,053 870
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Total current assets................................. $58,583 $57,241
Property, plant and equipment, net.......................... 13,808 13,160
Goodwill, net............................................... 10,257 10,447
Other assets................................................ 471 484
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Total assets......................................... $83,119 $81,332
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable.................................... $21,199 $14,826
Employee compensation..................................... 1,191 1,449
Other accrued liabilities................................. 787 99
Current portion of long-term debt......................... 3,917 3,782
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Total current liabilities............................ $27,094 $20,156
Long-term debt, less current portion........................ 38,835 42,910
Deferred compensation....................................... 739 739
Deferred income taxes....................................... 587 563
Equity subject to redemption:
Series A preferred stock -- 1,122 shares.................. 112 112
Common stock, -0- and 140,214 shares...................... -- 1,245
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 and 15,000
outstanding............................................ 18 18
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,211,072 and 4,211,010 shares issued, of
which 4,054,121 and 4,155,773 shares are outstanding,
and 156,951 and 55,237 shares are treasury stock....... 41 40
Paid-in capital........................................... 2,152 908
Retained earnings......................................... 15,257 15,443
Treasury stock............................................ (1,718) (804)
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Total shareholders' equity........................... 15,752 15,607
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Total liabilities and shareholders' equity........... $83,119 $81,332
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See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- ------- --------
Sales................................................ $46,436 $52,586 $94,846 $101,590
Cost of sales........................................ 34,747 38,839 70,395 75,258
------- ------- ------- --------
Gross profit......................................... 11,689 13,747 24,451 26,332
Selling, general and administrative expenses......... 11,134 11,310 22,959 21,818
------- ------- ------- --------
Operating income..................................... 555 2,437 1,492 4,514
Other income......................................... 66 342 574 518
Interest expense..................................... (936) (909) (1,865) (1,694)
------- ------- ------- --------
Income(loss) before income taxes..................... (315) 1,870 201 3,338
Provision for income taxes........................... 84 745 342 1,335
------- ------- ------- --------
Net income (loss).................................... $ (399) $ 1,125 $ (141) $ 2,003
Preferred stock dividend............................. 23 23 45 44
------- ------- ------- --------
Net income (loss) attributable to common
Shareholders....................................... $ (422) $ 1,102 $ (186) $ 1,959
======= ======= ======= ========
Basic earnings (loss) per common share............... $ (.10) $ .26 $ (.05) $ .47
======= ======= ======= ========
Common shares outstanding............................ 4,068 4,164 4,095 4,160
======= ======= ======= ========
Diluted earnings (loss) per share.................... $ (.10) $ .20 $ (.05) $ .35
======= ======= ======= ========
Common and common equivalents shares outstanding..... 4,068 5,675 4,095 5,671
======= ======= ======= ========
See notes to condensed consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 1998
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OPERATING ACTIVITIES:
Net cash provided by operating activities................. $ 5,800 $ 3,240
INVESTING ACTIVITIES:
Purchase of Tri-Electric Supply, Ltd. net assets.......... -- (6,109)
Purchase of Lucky Electric Supply, Inc. net assets........ -- (2,430)
Purchase of Mark W. Smith Equipment, Inc. net assets...... -- (3,938)
Purchase of property and equipment........................ (1,650) (2,357)
Proceeds on the sale of assets, at cost................... 267 --
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Net cash used in investing activities................ (1,383) (14,834)
FINANCING ACTIVITIES:
Proceeds from debt........................................ 92,894 94,456
Principal payments on revolving line of credit, long-term
and Subordinated debt, and notes payable to bank....... (96,834) (81,662)
Acquisition of common stock............................... (914) --
Dividends paid............................................ (45) (44)
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Net cash provided by financing activities............ (4,899) 12,750
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INCREASE (DECREASE) IN CASH................................. (482) 1,156
CASH AT BEGINNING OF PERIOD................................. 1,625 736
======= =======
CASH AT END OF PERIOD....................................... $ 1,143 $ 1,892
======= =======
See notes to condensed consolidated financial statements.
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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 and Article
10 of Regulation S-X. 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 Company has adopted SFAS 128 and has applied the provisions of the
statement to current and prior periods. While the Company has outstanding stock
options and Series A Preferred Stock convertible into Common Stock, these are
not included in the computation of diluted earnings (loss) per share because to
do so would be anti-dilutive.
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 Annual Report on Form 10-K for the year ended December 31, 1998, filed
with the Securities and Exchange Commission.
NOTE 2: THE COMPANY
The Company was incorporated on July 26, 1996 in the State of Texas. The
Company is a leading supplier of maintenance, repair and operating ("MRO")
products, equipment and services to industrial customers. The Company provides
MRO products in the following categories: fluid handling equipment, bearings and
power transmission equipment, general mill and safety supplies and electrical
supplies.
NOTE 3: INVENTORY
The Company uses the last-in, first-out ("LIFO") method of inventory
valuation for approximately 64 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:
JUNE 30, DECEMBER 31,
1999 1998
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(IN THOUSANDS)
Finished goods...................................... $29,062 $29,717
Work in process..................................... 5,091 3,093
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Inventories at FIFO................................. 34,153 32,810
Less -- LIFO allowance.............................. (4,018) (3,884)
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Inventories......................................... $30,135 $28,926
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NOTE 4: ACQUISITIONS
On February 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of Tri-Electric Supply, Ltd ("Tri-Electric"). The
purchase price consisted of $6.1 million in cash, assumption of
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DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1.6 million of trade payables and other accrued expenses. The results of
operations of Tri-Electric are included in the consolidated statements of income
from the date of acquisition. The acquisition has been accounted for using the
purchase method of accounting. Goodwill of $3.9 million was recorded in
connection with the acquisition.
On May 31, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of Lucky Electric & Supply, Inc. ("Lucky
Electric"). The purchase price consisted of approximately $2.4 million in cash,
a $735,000 promissory note and the assumption of $149,000 of trade payables and
other accrued expenses. The results of operations of Lucky Electric are included
in the consolidated statements of income of the Company from the date of
acquisition. The acquisition has been accounted for using the purchase method of
accounting. Goodwill of $.6 million was recorded in connection with the
acquisition.
On May 31, 1998, a wholly-owned subsidiary of the Company acquired
substantially all the assets of M.W. Smith Equipment, Inc. ("Smith Equipment").
The purchase price consisted of approximately $3.9 million in cash and the
assumption of $618,000 of trade payables and other accrued expenses. The results
of operations of Smith Equipment are included in the consolidated statements of
income of the Company from the date of acquisition. The acquisition has been
accounted for using the purchase method of accounting. Goodwill of $2.7 million
was recorded in connection with the acquisition.
NOTE 5: LONG-TERM DEBT
The Company has secured lines of credit for up to $44 million with an
institutional lender (the "Credit Facility"). The Credit Facility was amended by
the Company and its lender effective March 30, 1999, which at June 30, 1999
provided for borrowings up to an aggregate of the lessor of (i) a percentage of
the collateral value based on a formula set forth therein or (ii) $44.0 million.
Additionally, the LIBOR pricing, set to expire as of June 30, 1999, was
cancelled and therefore all of the borrowings under the Credit Facility will
bear interest at prime. The Credit Facility is secured by receivables,
inventory, and machinery and equipment and matures April 2000. An executive
officer of the Company, who is also a shareholder of the Company, has personally
guaranteed up to $.5 million of the obligations of the Company under the line of
credit. Additionally, certain shares held in trust for this executive officer's
children are also pledged to secure this line of credit. The available
borrowings under the Credit Facility at June 30, 1999 were approximately $5.7
million. The Credit Facility includes loan covenants that are measured monthly,
which, among other things, require the Company to maintain a certain cash flow
and other financial ratios.
NOTE 6: SUBSEQUENT EVENTS
As of June 30, 1999, the Company was not in compliance with certain of its
financial ratios for which it subsequently obtained waivers from its lender. In
conjunction with obtaining those waivers, the Company and its lender amended the
Credit Facility, effective August 13, 1999, to extend its maturity date from
April 1, 2000 to April 1, 2001. The amendment raised the interest rate from
prime to prime plus one percent on the term portion of the Credit Facility,
which was $14.4 million at June 30, 1999, and prime plus one-half on the
revolver portion of the Credit Facility, which was $21.7 million at June 30,
1999. The amendment requires the Company to provide a balance sheet, income
statement and statement of cash flows by month for the fourth quarter of 1999.
Furthermore, the funds available under the Credit Facility will be reduced by
$1.25 million. The effect, had the Credit Facility been amended at June 30,
1999, would have reduced availability from $5.7 million to $4.5 million. All
other terms and conditions remain as stated above.
On July 16, 1999, the Company completed the sale of certain assets of Wesco
Equipment, a division that specializes in valve and valve automation products,
for approximately $2.65 million. The proceeds of the sale approximated the net
book value of the assets sold. The assets sold included inventory and personal
property. The Company will retain and collect the customer accounts receivable
balances. Since the completion of the transaction, the Company no longer
competes in the valve automation business.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading provider of MRO 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 and power transmission equipment, general
mill and safety supplies and electrical product categories. On July 16, 1999,
the Company completed the sale of certain assets of Wesco Equipment, a division
that specializes in valve and valve automation products, for approximately $2.65
million. As a result, the Company no longer competes in the valve automation
business. The Company offers its customers a single source of integrated
services and supply on an efficient and competitive basis by being a first-tier
distributor which purchases its products directly from the manufacturer. The
Company also provides integrated services such as system design, fabrication,
installation, repair and maintenance for its customers. The Company offers a
wide range of industrial MRO products, equipment and services through a complete
continuum of customized and efficient MRO solutions, ranging from traditional
distribution to fully integrated supply contracts. The integrated solution is
tailored to satisfy the customer's unique needs.
The Company's products and services are marketed in 16 states to over
25,000 customers that are engaged in a variety of industries, many of which may
be counter cyclical to each other. Demand for the Company's products generally
is subject to changes in the United States economy and economic trends affecting
the Company's customers and the industries in which they compete in particular.
Certain 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, the Company may
within particular markets and product categories experience changes in demand as
changes occur in the markets of its customers.
The Company's strategy in the past focused on addressing current trends in
the industrial distribution market through a combination of acquisitions and
internal growth. Due to current conditions in the Company's industry, the
Company has curtailed its acquisitions efforts. Key elements of the Company's
internal growth strategy include leveraging existing customer relationships,
expanding product offerings from existing locations, reducing costs through
consolidated purchasing programs and combined product distribution centers,
designing and implementing innovative solutions to address the procurement and
supply needs of the Company's customers and using the Company's traditional
distribution and integrated supply capabilities to increase sales in each area.
When conditions in the Company's industry improve, the Company intends to seek
acquisitions that will provide the Company access to additional product lines
and customers to enhance its position as a single source industrial distributor
with first-tier distribution capabilities. Future results for the Company will
be dependent on the success of the Company in implementing its internal growth
strategy and, to the extent the Company completes any acquisitions, on the
ability of the Company to integrate such acquisitions.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998
Revenues for the three months ended June 30, 1999 decreased 11.7% to $46.4
million from the three months ended June 30, 1998. Revenues for the Company's
two acquisitions during the second quarter of 1998, are excluded for comparative
purposes because the Company did not own the entities during the entire
comparative period. The revenues from these two entities that were excluded for
comparative purposes were $2.6 million for the second quarter of 1999 and $1.2
million for the second quarter of 1998. Sales of fluid handling equipment
decreased 6.5%, or $1.2 million, from the comparable period in 1998. Sales of
bearings and power transmission equipment for the quarter ended June 30, 1999
decreased 24.3%, or $3.3 million, from the comparable period in 1998. Sales of
valve and valve automation equipment decreased 32.5%, or $.9 million, from the
comparable period in 1998. During the three months ended June 30, 1999, sales of
general mill and safety supplies decreased 7.8%, or $1.0 million, from the
comparable period in 1998. The Company entered into electrical product sales
with the acquisition of Tri-Electric during the first quarter of
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1998. Sales of electrical products decreased 32.0%, or $1.2 million, from $3.8
million to $2.6 million for the quarter ended June 30, 1999, from the comparable
period in 1998. The decrease in revenues resulted primarily from the effects
associated with declining oil prices and a softness related to the mining
industry.
Gross margins decreased by 1% for the second quarter of 1999 as compared to
the second quarter of 1998, from 26.1% to 25.1%. The margin decrease is
primarily attributable to the reduction of volume in the bearing and power
transmission and pump product lines which normally produce higher margins than
other products. The Company currently expects some increase in manufacturers'
prices to continue due to increased raw material costs. Although the Company
intends to attempt to pass on these price increases to its customers to maintain
current gross margins, there can be no assurances that the Company will be
successful in this regard.
Selling, general and administrative expense for the second quarter of 1999
increased as a percentage of revenues by 2.5%, from 21.5% to 24.0%, as compared
to the second quarter of 1998. This was due in large part to lower revenues in
the second quarter 1999 as compared to the second quarter in 1998. Also
contributing to the increase were higher selling expenses of $.6 million in the
second quarter of 1999 over those generated in the second quarter of 1998 by
Smith Equipment and Lucky Electric, which were acquired in the second quarter of
1998.
Operating income for the three month period ended June 30, 1999 decreased
from $2.4 million to $.6 million as compared to the second quarter of 1998, due
to the decrease in revenue volume and the increase of selling, general and
administrative expenses as a percentage of revenue.
Interest expense during the second quarter of 1999 remained consistent at
$.9 million compared to the second quarter of 1998. Average interest rates were
slightly lower during the three months ended June 30, 1999 as compared to the
same period in 1998.
The Company's provision for income taxes for the three months ended June
30, 1999 decreased by $.7 million compared to the same period of 1998, as a
result of the decrease in profits. The current tax provision for the quarter
resulted from deductions allowed for book purposes and not allowed for tax
purposes and state income taxes.
Net income for the three month period ended June 30, 1999, decreased $1.5
million from the three month period ended June 30, 1998 due to the decrease in
revenue volume and the increase of selling, general and administrative expenses
as a percentage of revenue.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues for the six months ended June 30, 1999 decreased 6.6% to $94.8
million from the six months ended June 30, 1998. The Company's acquisitions
during the first and second quarters of 1998 accounted for $10.5 million in
revenues during the period ended June 30, 1999 and $6.1 million in revenues for
the same period in 1998. Revenues generated by the acquired companies, one in
the first quarter of 1998 and two in the second quarter of 1998, will be
excluded for comparative purposes because the Company did not own these entities
during the entire comparative period. Sales of fluid handling equipment remained
consistent at $36.7 million with the comparable period in 1998. Sales of
bearings and power transmission equipment for the six months ended June 30, 1999
decreased 26.5%, or $7.4 million, from the comparable period in 1998. Sales of
valve and valve automation equipment decreased 25.8%, or $1.3 million, from the
comparable period in 1998. Sales of general mill and safety supplies for the six
months ended June 30, 1999 decreased 9.7%, or $2.5 million, from the comparable
period in 1998. The decrease in revenues resulted primarily from the effects
associated with declining oil prices and a softness related to the mining
industry. A comparison of electrical supplies is not presented because the
product category did not exist during the entire comparative prior period.
Gross margins remained consistent in the first half of 1999 as compared to
1998. The Company currently expects some increase in manufacturers prices to
continue due to increased raw material costs. Although the Company intends to
attempt to pass on these price increases to its customers to maintain current
gross margins, there can be no assurances that the Company will be successful in
this regard.
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Selling, general and administrative expense for the first half of 1999
increased as a percentage of revenues by 2.7%, from 21.5% to 24.2%, as compared
to the first half of 1998. This was due in part to lower revenues in the first
half of 1999 as compared to the first half of 1998. Also contributing to the
increase were the higher selling expenses of $1.8 million in the first half of
1999 over those generated in the first half of 1998 by Tri-Electric, acquired in
the first quarter of 1998, as well as Smith Equipment and Lucky Electric, which
were acquired in the second quarter of 1998.
Operating income for the six month period ended June 30, 1999 decreased
from $4.5 million to $1.5 million, due to the decrease in revenue volume and the
increase of selling, general and administrative expenses as a percentage of
revenue.
Interest expense during the first half of 1998 increased by $.2 million to
$1.9 million as compared to the first half of 1998. The increase was primarily
due to greater interest expense resulting from additional borrowings incurred to
finance an acquisition late in the first quarter of 1998 and two acquisitions
during the second quarter of 1998 and the purchase of real property used as the
Company's corporate headquarters. Average interest rates were slightly lower
during the six months ended June 30, 1999 as compared to the same period in
1998.
The Company's provision for income taxes for the six months ended June 30,
1999 decreased by $1.0 million compared to the same period of 1998, as a result
of the decrease in profits. The current tax provision resulted from deductions
allowed for book purposes but not allowed for tax purposes and state income
taxes.
Net income for the six month period ended June 30, 1999, decreased $2.1
million from the six month period ended June 30, 1998 due to the decrease in
revenue volume and the increase in selling, general and administrative expenses
as a percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
General
Under the Company's loan agreements with its bank lender, all available
cash is generally applied to reduce outstanding borrowings, with operations
funded through borrowings under the Credit Facility. The Company's policy is to
maintain low levels of cash and cash equivalents and to use borrowings under its
line of credit for working capital. The Company had $5.7 million available for
borrowings under the Credit Facility at June 30, 1999. Working capital at June
30, 1999 and December 31, 1998 was $31.5 million and $37.1 million,
respectively, due in large part to the efforts of the Company to use capital to
reduce long term debt by $4.1 million and to purchase capital assets of $1.7
million. During the first six months of 1999 and the year 1998, the Company
collected its trade receivables in approximately 48 and 49 days, respectively,
and turned its inventory approximately four times on an annualized basis.
In the first and again in the second quarter of 1999, the Company and its
lender amended the Credit Facility effective March 30, 1999 and May 13, 1999,
which at June 30, 1999 provided for borrowings up to an aggregate of the lessor
of (i) a percentage of the collateral value based on a formula set forth therein
or (ii) $44.0 million. Additionally, the LIBOR pricing, set to expire as of June
30, 1999, was cancelled and therefore all of the borrowings under the Credit
Facility will bear interest at prime (7.75 percent at June 30, 1999). The line
of credit is secured by receivables, inventory, and machinery and equipment.
As of June 30, 1999, the Company was not in compliance with certain of its
financial ratios for which it subsequently obtained waivers from its lender. In
conjunction with obtaining those waivers, the Company and its lender further
amended the Credit Facility, effective August 13, 1999 to extend the maturity
date to April 1, 2001. The amendment raised the interest rate from prime to
prime plus one percent on the term portion of the Credit Facility, which was
$14.4 million at June 30, 1999, and prime plus one-half on the revolver portion
of the Credit Facility, which was $21.7 million at June 30, 1999. The amendment
requires the Company to provide a balance sheet, income statement and statement
of cash flows by month for the fourth quarter of 1999. Furthermore, the funds
available under the Credit Facility will be reduced by $1.25 million. The
effect, had the amendment occurred at June 30, 1999, would have reduced
availability from $5.7 million
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to $4.5 million. 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 generated cash through operating activities of $5.8 million in
the first six months of 1999 as compared to $3.2 million in cash generation
during the first six months of 1998, due primarily to a decrease in accounts
receivable and an increase in accounts payable.
The Company had capital expenditures of approximately $1.7 million for the
first six months of 1999 as compared to $2.4 million during the same period of
1998. Capital expenditures in the first six months of 1999 were primarily
related to the purchase of furniture and fixtures and a phone system ($.9
million) for the Company's corporate headquarters as well as the purchase of
computer equipment ($.4 million). Capital expenditures for the first six months
of 1998 were primarily related to the purchase of real property ($1.7 million)
to be used as the corporate headquarters for the Company's management and
administrative group.
During the first six months of 1998, in three separate transactions, the
Company completed the acquisition of substantially all of the assets of three
unaffiliated businesses for an aggregate consideration consisting of
approximately $12.6 million in cash, $2.3 million of assumed trade payables and
other accrued expenses and $.7 million in a promissory note. An aggregate of
$7.2 million of goodwill was recorded in connection with these acquisitions.
On July 17, 1998, the Company entered into a stock purchase agreement with
a common stock holder. The Company agreed to purchase 43,000 shares for a total
of $401,000 over two installments. On September 1, 1998, the Company purchased
one-half of the shares in exchange for $200,500. On June 1, 1999, the remainder
of the shares were purchased in exchange for $200,500 which completed the stock
purchase agreement.
The Company believes that cash generated from operations and available
under its Credit Facility will meet its future ongoing operational and liquidity
needs and capital requirements. Funding of any acquisitions will require capital
in the form of the issuance of additional equity or debt financing. There can be
no assurance that such financing will be available to the Company or as to the
terms thereof.
Year 2000 Readiness Disclosure
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. The Year 2000 issue is the
risk that systems, products and equipment utilizing date-sensitive software or
computer chips with two-digit date fields will fail to properly recognize the
Year 2000. Such failures by the Company's software or hardware or that of
government entities, customers, major vendors and other third parties with whom
the Company has material relationships could result in interruptions of the
Company's business which could have a material adverse effect on the Company.
In response to the Year 2000 issue, the Company has implemented a
company-wide Year 2000 program designed to identify, assess and address
significant Year 2000 issues in the Company's key business operations, including
products and services, business applications, information technology systems and
facilities and to identify the Company's customers, major vendors and other
third parties with whom the Company has material relationships that may have
Year 2000 issues.
The Company's Year 2000 program is an integrated, multi-phase process
covering information technology systems and hardware as well as equipment and
products with embedded computer chips technology. The primary phases of the
program are (1) inventorying existing equipment and systems; (2) analyzing
equipment and systems to identify those which are not Year 2000 ready and to
prioritize critical items; (3) communicating with customers, major vendors and
other third parties with whom the Company has material relationships regarding
their Year 2000 readiness; (4) remediating, repairing or replacing equipment and
systems that are not Year 2000 ready; and (5) testing to verify that Year 2000
readiness has been achieved for the Company's equipment and systems.
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Phases (1) and (2) of the Company's Year 2000 program have been completed.
In support of phase (3) of the Company's Year 2000 program, the Company
developed and implemented a vendor/client Year 2000 questionnaire on the Company
web-site, as well as the development of a paper based version of the
questionnaire. Phase (3) is complete with the mailing to over 26,000
customers/vendors. To date, all responses received have indicated that vendors
and customers will be Year 2000 compliant. The Company will continue
communicating with customers, major vendors and other third parties with whom
the Company has material relationships to determine if they will be ready for
the Year 2000 by the end of 1999. Although the most likely worst case scenario
faced by the Company would require the Company to carry additional inventory
levels to mitigate vendor complications, to the extent the Company's customers,
vendors and other third parties are not compliant by the Year 2000 and
unexpected complications result therefrom, it could have a material adverse
effect upon the Company's results of operations and financial condition. With
respect to phase (4), the Company is addressing Year 2000 software issues
through the implementation of Year 2000 compliant upgrades to, or new releases
of, current software. The Company installed the latest upgrade to its main
business system software on the 8th of May 1999, at which time the main business
system supporting the Company became Year 2000 compliant. Cost incurred to date
relative to the conversions and upgrades have been minimal and are expected to
continue to be minimal in future periods, as the Company policy has been, and
continues to be to maintain the most current version of its business software
packages for maintainability and interoperability considerations. The Company
will continue to analyze systems and services that utilize date imbedded codes
that may experience operational problems when the Year 2000 is reached. The
Company began phase (5) at the end of the first quarter of 1999 and has
completed testing and verification efforts on all major systems with only the
desktop PCs at 12 final locations remaining to be tested. The last of the
testing effort for the remaining PCs will be completed before the end of the
third quarter of 1999. All costs associated with the Year 2000 issues will be
included as part of the normal software upgrades or operating costs, as
appropriate.
The foregoing statements of this subsection are intended to be and are
hereby designated "Year 2000 Readiness Disclosure" statements within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
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.
Under the terms of the Credit Facility, the Company is restricted from
paying dividends on its common stock and must comply with certain covenants with
respect to working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 8, 1999, 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.
NOMINEE VOTES FOR VOTES AGAINST VOTES WITHHELD
------- --------- ------------- --------------
David R. Little.................... 3,942,034 -0- -0-
Jerry J. Jones..................... 3,942,034 -0- -0-
Cletus Davis....................... 3,942,034 -0- -0-
Thomas V. Orr...................... 3,942,034 -0- -0-
Kenneth H. Miller.................. 3,942,034 -0- -0-
At the annual meeting of shareholders, the holders of the Company's Common
Stock, Series A Preferred Stock and Series B Preferred Stock, voting together as
a single class, approved the adoption of the DXP Enterprises, Inc. 1999 Employee
Stock Option Plan (the "Employee Plan") and the DXP Enterprises, Inc. 1999
Non-Employee Director Stock Option Plan (the "Director Plan"). Holders of
3,417,382 shares of capital stock of the Company voted in favor of the Employee
plan, 55,022 voted against the Employee Plan and 12 abstained. Holders of
3,341,949 shares of capital stock of the Company voted in favor of the Director
plan, 122,902 voted against the Director Plan and 116,355 abstained.
ITEM 5. OTHER INFORMATION.
None.
CAUTIONARY STATEMENTS
The Company's 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 the Company's realization of such expectations. The
Company's 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
The Credit Facility requires the Company to comply with certain specified
covenants, restrictions, financial ratios and other financial and operating
tests. The Company's ability to comply with any of the foregoing restrictions
will depend on its future performance, which will be subject to prevailing
economic conditions and other factors, including factors beyond the Company's
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
the Company's indebtedness under the Credit Facility. The Company from time to
time has 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 has, when necessary, obtained waivers or
amendments to the covenants from its lender. 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 its lender will be willing to waive such compliance or
further amend such covenants.
Risks Associated With Acquisition Strategy
Future results for the Company will depend in part on the success of the
Company in implementing its acquisition strategy. This strategy includes taking
advantage of a consolidation trend in the industry and effecting acquisitions of
distributors with complementary or desirable new product lines, strategic
distribution locations and attractive customer bases and manufacturer
relationships. The ability of the Company to
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implement this strategy will be dependent on its ability to identify, consummate
and successfully assimilate acquisitions on economically favorable terms. Due to
current business conditions, the Company has curtailed its acquisitions efforts.
In addition, acquisitions involve a number of special risks, including possible
adverse effects on the Company's operating results, diversion of management's
attention, failure to retain key acquired personnel, risks associated with
unanticipated events or liabilities, expenses associated with obsolete inventory
of an acquired company and amortization of acquired intangible assets, some or
all of which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company or other industrial supply distributors acquired in the future will
achieve anticipated revenues and earnings. In addition, the Credit Facility
contains certain restrictions that could adversely affect its ability to
implement its acquisition strategy. Such restrictions include a provision
prohibiting the Company from merging or consolidating with, or acquiring all or
a substantial part of the properties or capital stock of, any other entity
without the prior written consent of the lender. There can be no assurance that
the Company will be able to obtain the lender's consent to any of its proposed
acquisitions.
Risks Related to Acquisition Financing
The Company currently intends to finance acquisitions by using shares of
Common Stock for a portion or all of the consideration to be paid. In the event
that the Common Stock does not maintain a sufficient market value, or potential
acquisition candidates are otherwise unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to use more of its cash resources, if available, to maintain its acquisition
program. If the Company does not have sufficient cash resources, its growth
could be limited unless it is able to obtain additional capital through debt or
equity financings. Under the Credit Facility, all available cash generally is
applied to reduce outstanding borrowings. As of June 30, 1999, the Company had
approximately $5.7 million available under the Credit Facility, and there can be
no assurance that the Company will be able to obtain additional financing on a
timely basis or on terms the Company deems acceptable. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
Risks Related to Internal Growth Strategy
Future results for the Company also will depend in part on the Company's
success in implementing its internal growth strategy, which includes expanding
existing product lines and adding new product lines. The ability of the Company
to implement this strategy will depend on its success in acquiring and
integrating new product lines and marketing integrated forms of supply
arrangements such as those being pursued by the Company through its SmartSource
program. The Company acquired two businesses in the second quarter of 1997, a
third in the first quarter of 1998 and two additional businesses in the second
quarter of 1998 and plans to acquire other distributors with complementary or
desirable product lines and customer bases. Although the Company intends to
increase sales and product offerings to the customers of these and other
acquired companies, reduce costs through consolidating certain administrative
and sales functions and integrate the acquired companies' management information
systems with the Company's system, there can be no assurance that the Company
will be successful in these efforts.
Substantial Competition
The Company's business is highly competitive. The Company competes with a
variety of industrial supply distributors, some of which may have greater
financial and other resources than the Company. Although many of the Company's
traditional distribution competitors are small enterprises selling to customers
in a limited geographic area, the Company also competes with larger distributors
that provide integrated supply programs such as those offered through
outsourcing services similar to those that are offered by the Company's
SmartSource program. Some of these large distributors may be able to supply
their products in a more timely and cost-efficient manner than the Company. The
Company's competitors include direct mail suppliers, large warehouse stores and,
to a lesser extent, certain manufacturers.
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Risks of Economic Trends
Demand for the Company's products is subject to changes in the United
States economy in general and economic trends affecting the Company's 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, the Company may experience changes in
demand for its products as changes occur in the markets of its customers.
Dependence on Key Personnel
The Company will continue to be dependent to a significant extent upon the
efforts and ability of David R. Little, its Chairman of the Board, President and
Chief Executive Officer. The loss of the services of Mr. Little or any other
executive officer of the Company could have a material adverse effect on the
Company's financial condition and results of operations. The Company does not
maintain key-man life insurance on the life of Mr. Little or on the lives of its
other executive officers. In addition, the Company's ability to grow
successfully will be dependent upon its ability to attract and retain qualified
management and technical and operational personnel. The failure to attract and
retain such persons could materially adversely affect the Company's financial
condition and results of operations.
Dependence on Supplier Relationships
The Company has distribution rights for certain product lines and depends
on these distribution rights for a substantial portion of its business. Many of
these distribution rights are pursuant to contracts that are subject to
cancellation upon little or no prior notice. Although the Company believes that
it could obtain alternate distribution rights in the event of such a
cancellation, the termination or limitation by any key supplier of its
relationship with the Company could result in a temporary disruption on the
Company's business and, in turn, could adversely affect results of operations
and financial condition.
Year 2000 Issues
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the Year 2000. The Company relies on its
computer systems and software for financial reporting, customer account
information and inventory management and replenishment. The Company is in the
process of assessing its state of readiness for the Year 2000 and expects its
software to be Year 2000 compliant by the end of the third quarter of 1999 upon
completion of the upgrading of its software and verification testing efforts.
Additionally, the Company has developed and implemented a web-based
questionnaire along with a standard questionnaire in order to communicate with
customers, major vendors and other third parties with whom it has material
relationships to determine if they will be ready for the Year 2000. To the
extent unexpected problems associated with the Year 2000 arise during the
implementation phase of the Company's Year 2000 program or due to the fact that
the Company's customers, vendors and other third parties are not compliant by
the Year 2000, it could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Readiness Disclosure."
Risks Associated With Hazardous Materials
Certain of the Company's 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 the Company believes
that it has 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, the
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Company could be held liable for any damages that result and any such liability
could have a material adverse effect on the Company's financial condition and
results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 -- DXP Enterprises, Inc. 1999 Employee Stock Option Plan.
10.2 -- DXP Enterprises, Inc. 1999 Non-Employee Director Stock
Option Plan.
10.3 -- August 1999 Amendment to Loan and Security Agreement
dated August 13, 1999, by and among DXP Acquisition,
Inc., d/b/a Strategic Acquisition, Inc. and Fleet Capital
Corporation.
10.4 -- August 1999 Amendment to Second Amended and Restated Loan
and Security Agreement and Modification to Other
Agreements dated August 13, 1999, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation.
10.5 -- August 1999 Amendment to Loan and Security Agreement
dated August 13, 1999, by and among Pelican State Supply
Company, Inc. and Fleet Capital Corporation.
11.1 -- Statement re: Computation of Per Share Earnings.
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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 hereunto duly authorized.
DXP Enterprises, Inc.
By: /s/ GARY A. ALLCORN
------------------------------------
Gary A. Allcorn
Senior Vice President/Finance and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Date: August 13, 1999
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 -- DXP Enterprises, Inc. 1999 Employee Stock Option Plan.
10.2 -- DXP Enterprises, Inc. 1999 Non-Employee Director Stock
Option Plan.
10.3 -- August 1999 Amendment to Loan and Security Agreement
dated August 13, 1999, by and among DXP Acquisition,
Inc., d/b/a Strategic Acquisition, Inc. and Fleet Capital
Corporation.
10.4 -- August 1999 Amendment to Second Amended and Restated Loan
and Security Agreement and Modification to Other
Agreements dated August 13, 1999, by and among SEPCO
Industries, Inc., Bayou Pumps, Inc., American MRO, Inc.
and Fleet Capital Corporation.
10.5 -- August 1999 Amendment to Loan and Security Agreement
dated August 13, 1999, by and among Pelican State Supply
Company, Inc. and Fleet Capital Corporation.
11.1 -- Statement re: Computation of Per Share Earnings.
27.1 -- Financial Data Schedule.