<PAGE> 1
AMENDMENT NO. 1
TO
FORM 10-Q
ON
FORM 10-Q-A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-21513
DXP ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0509661
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
580 Westlake Park Boulevard, Suite 1100 77079
Houston, Texas (Zip Code)
(Address of principal executive offices)
281/531-4214
(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 May 7, 1998:
Common Stock: 8,314,845
<PAGE> 2
DXP Enterprises, Inc. hereby amends Part I of its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 as follows:
Item 1: Financial Statement
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 2,259 $ 736
Trade accounts receivable, net of allowance for doubtful
accounts of $608 and $476, respectively 26,830 25,707
Inventory 28,922 26,018
Prepaid expenses and other current assets 1,107 996
Deferred income taxes 796 722
-------- --------
Total current assets 59,914 54,179
Property, plant and equipment, net 10,384 10,403
Other assets 6,864 3,054
-------- --------
Total assets 77,162 67,636
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable 18,197 14,368
Employee compensation 1,224 1,384
Other accrued liabilities 1,082 704
Current portion of long-term debt 1,198 1,461
-------- ------
Total current liabilities 21,701 17,917
Long-term debt, less current portion 38,245 33,395
Deferred compensation 739 739
Deferred income taxes 514 479
Equity subject to redemption:
Series A preferred stock--1,122 shares 112 112
Common stock, 280,428 shares 1,963 1,963
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 outstanding 18 18
Common stock, $.01 par value, 50,000,000 shares
authorized; 8,375,717 shares issued, of which 8,034,417
shares are outstanding, 280,428 shares are equity subject to
redemption, and 60,872 shares are treasury stock 80 80
Paid-in capital 852 852
Retained earnings 13,516 12,659
Treasury stock (580) (580)
-------- --------
Total shareholders' equity 13,888 13,031
Total liabilities and shareholders' equity $ 77,162 $ 67,636
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 3
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
-------- --------
<S> <C> <C>
Sales $ 49,004 $ 30,129
Cost of sales 36,419 21,756
-------- --------
Gross Profit 12,585 8,373
Selling, general and administrative expenses 10,508 7,043
-------- --------
Operating income 2,077 1,330
Other income 176 429
Interest expense (785) (539)
-------- --------
Income before income taxes 1,468 1,220
Provision for income taxes 590 429
-------- --------
Net income $ 878 $ 791
Preferred stock dividend 21 38
-------- --------
Net Income attributable to common
Shareholders $ 857 $ 753
======== ========
Basic earnings per common share $ .10 $ .09
-------- --------
Common shares outstanding 8,315 7,994
-------- --------
Diluted earnings per share $ .08 $ .07
-------- --------
Common and common equivalent shares
outstanding 11,401 10,984
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 3,415 $ 1,006
INVESTING ACTIVITIES:
Purchase of Tri-Electric Supply net assets (6,208) --
Purchase of property and equipment (250) (227)
-------- --------
Net cash used in investing activities (6,458) (227)
FINANCING ACTIVITIES:
Proceeds from debt 53,634 29,205
Principal payments on revolving line of credit, long-term and
Subordinated debt, and notes payable to bank (49,047) (29,844)
Dividends paid (21) (38)
-------- --------
Net cash provided by financing activities 4,566 (677)
-------- --------
INCREASE(DECREASE) IN CASH 1,523 102
CASH AT BEGINNING OF PERIOD 736 876
-------- --------
CASH AT END OF PERIOD $ 2,259 $ 979
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
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. 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 31,1997, filed with the
Securities and Exchange Commission.
Note 2: The Company
DXP Enterprises, Inc. (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. The Company also offers a line of valve and
valve automation products to its customers.
Note 3: Inventory
The Company uses the last-in, first-out (LIFO) method of inventory valuation for
approximately 56 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>
3/31/98 12/31/97
-------- --------
(in thousands)
<S> <C> <C>
Finished goods $ 29,976 $ 27,280
Work in process 2,697 2,276
-------- --------
Inventories at FIFO 32,673 29,556
Less - LIFO allowance (3,751) (3,538)
-------- --------
Inventories $ 28,922 $ 26,018
======== ========
</TABLE>
5
<PAGE> 6
Note 4: Acquisition
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 $6.2 million in cash, assumption of $1.6 million of
trade payables and other accrued expenses and a deferred payment up to a maximum
of $275,000 based on the earnings before interest and taxes and depreciation of
the acquired company to be paid on March 31, 1999, if earned. The results of
operations of Tri-Electric are included in the consolidated statements of income
from the date of acquisition. Goodwill of $3.9 million was recorded in
connection with the acquisition. The acquisition has been accounted for using
the purchase method of accounting.
The Company is continuing its evaluation of the acquisition of Tri-Electric as
it relates to the purchase price allocation. The allocation of the purchase
price is based on the best estimates of the Company using information currently
available. Certain adjustments relating to this acquisition are subject to
change based upon the final determination of the fair values of the net assets
acquired.
Note 5: Long-Term Debt
The Company has secured lines of credit for up to $40 million with an
institutional lender. The rate of interest ranges from LIBOR plus 2.25 percent
to prime plus .50 percent (8.50 percent at March 31, 1998). The line of credit
is secured by receivables, inventory, and machinery and equipment and matures
January, 1999. An executive officer of the Company, who is also a shareholder
of the Company, has personally guaranteed up to $500,000 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 borrowings available under the existing lines of credit at March 31,
1998 approximated $3.1 million. This facility includes loan covenants, which,
among other things, require the Company to maintain a positive cash flow and
other financial ratios, which are measured monthly. During April 1998, the
Company amended its Credit Facility. (See Note 6)
Note 6: Subsequent Events
Effective April 29th, 1998, the Company amended its lines of credit with its
lender. The restructure provided for a combined line of credit for up to $50
million. Additionally, the loan restructure increased the Company's term loan
from $4.9 million to $9.9 million upon conversion of $5.0 million of the amounts
outstanding under the revolving loan to the term loan. The amended credit
facility provides for a $15.0 million acquisition term loan to be used for
acquisitions provided certain customary provisions related to combined cash
flows and acquisition pricing are met. Additionally, interest rates will range
from LIBOR plus 1.50 to LIBOR plus 3.00 depending upon the relationship of the
Company's debt to cash flow and financial covenants tied to debt service levels
and cash flow.
The Company recently entered into letters of intent to acquire the electrical
product distribution assets and operations of Lucky Electric Supply, Inc. and
the pump distribution assets and operations of M.W. Smith Equipment, Inc. for a
total consideration of approximately $6.0 million, $1.0 million in cash and $5.0
million in notes.
6
<PAGE> 7
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues for the three months ended March 31, 1998 increased 62.7% to $49.0
million from the three months ended March 31, 1997. The Company's acquisitions
during the period accounted for $14.5 million of the $18.9 million increase in
revenues. Sales of bearings and power transmission equipment for the quarter
ended March 31, 1998 increased 19.6%, or $2.4 million over the comparable period
in 1997, accounting for 7.8% of the revenue increase. Sales of valve and valve
automation equipment increased 39.8%, or $.7 million over the comparable period
in 1997, accounting for 2.2% of the revenue increase. During the three months
ended March 31, 1998, sales of pumps and pump products increased 4.5%, or $1.3
million, over the comparable period in 1997, accounting for 5.6% of the revenue
increase.
Gross margins decreased 2.1% for the first quarter of 1998 as compared to the
first quarter of 1997, from 27.8% of sales to 25.7%. The decrease in gross
margin is attributable to lower margins associated with the two businesses
acquired in May, 1997 and a third in February, 1998. The Company currently
expects some increase in manufacturers prices to continue due to increased raw
material costs and strong market conditions. 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 decreased as a percentage of
revenues by 1.9% for the first quarter of 1998 as compared to the first quarter
of 1997.
Operating income for the three month period ended March 31, 1998 was consistent
as a percentage of revenues as compared to the first quarter of 1997.
Interest expense during the first quarter of 1998 increased by $246,000 to
$785,000 compared to the first quarter of 1997. Long-term debt at March 31, 1998
increased by $15.5 million as a result of the financing of two acquisitions
during the second quarter of 1997 and a third during the first quarter of 1998,
resulting in greater interest costs. Average interest rates were consistent
during the three months ended March 31, 1998 as compared to the same period in
1997.
The Company's provision for income taxes for the three months ended March 31,
1998 increased by $161,000 compared to the same period of 1997, as a result of
the increase in profits.
Net income for the three month period ended March 31, 1998, increased $87,000
from the three month period ended March 31, 1997 due to the increase in revenue
volume and the decrease of selling, general and administrative expenses as a
percentage of revenue.
Liquidity and Capital Resources
Under the Company's loan agreements with its bank lender (the "Credit
Facility"), all available cash is generally applied to reduce outstanding
borrowings, with operations funded through borrowings under the credit facility.
The 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
$3.1 million available for borrowings under its working capital line of credit
at March 31, 1998. Working capital at March 31, 1998 and December 31, 1997 was
$38.2 million and $36.5 million, respectively. During the first three months of
1998 and the year 1997, the Company collected its trade receivables in
approximately 49 and 46 days, respectively, and turned its inventory
approximately five times on an annualized basis.
7
<PAGE> 8
Subsequent to the end of the first quarter of 1998, the Company amended the
Credit Facility and currently has a combined line of credit for up to $50
million. Additionally, the loan restructure increased the Company's term loan
from $4.9 million to $9.9 million upon conversion of $5.0 million of the amounts
outstanding under the revolving loan to the term loan. The amended credit
facility provides for a $15.0 million acquisition term loan to be used for
acquisitions provided certain customary provisions related to combined cash
flows and acquisition pricing are met. Additionally, interest rates will range
from LIBOR plus 1.50 to LIBOR plus 3.00 depending upon the relationship of the
Company's debt to cash flow and financial covenants tied to debt service levels
and cash flow. The line of credit is secured by receivables, inventory, and
machinery and equipment and matures January, 2000. The facility contains
customary affirmative and negative covenants as well as financial covenants that
require the Company to maintain a positive cash flow and other financial ratios,
such as tangible net worth less than five to one and current assets to current
liabilities greater than two to one.
Subsequent to the end of the first quarter of 1998, the Company entered
into letters of intent to acquire the electrical product distribution assets and
operations of Lucky Electric Supply, Inc. and the pump distribution assets and
operations of M.W. Smith Equipment, Inc. for a total consideration of
approximately $6.0 million, $1.0 million in cash and $5.0 million in notes.
The Company generated cash from operating activities of $3.4 million in the
first three months of 1998 as compared to $1.0 million during the first three
months of 1997 due primarily to a reduction in the net working capital
components during the first three months of 1998.
The Company had capital expenditures of approximately $250,000 for the first
three months of 1998 as compared to $227,000 during the same period of 1997.
Capital expenditures in the first three months of 1998 were primarily related to
computer hardware ($136,000). Capital expenditures for 1997 were predominantly
for the expansion of a facility in LaPorte, Texas ($80,000), leasehold
improvements and furniture and fixtures at the corporate office and for office
equipment and computer automation.
On February 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Tri-Electric Supply, Ltd ("Tri-Electric").
The purchase price consisted of $6.2 million in cash, assumption of 1.6 million
of trade payables and other accrued expenses and a deferred payment of up to a
maximum of $275,000 based on the earnings before interest and taxes and
depreciation of the acquired Company to be paid on March 31, 1999, if earned.
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.
The Company expects that its software will be year 2000 compatible by the end of
1998. The upgrading of the Company's software to address year 2000 issues is
being handled through new releases of current software. All costs associated
with year 2000 issues will be included as part of normal software upgrades or
operating costs, as appropriate. The Company does not believe that any of the
costs associated with year 2000 issues will be material to its financial
condition or results of operations.
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 the Company's acquisition program and
integrated supply strategy 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.
Item 3: Quantitative and Qualitative Disclosures about Market Price
Not Applicable
8
<PAGE> 9
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.
Date: May 22, 1998 By: /s/ GARY A. ALLCORN
---------------------------------------
Gary A. Allcorn
Senior Vice President/Finance and Chief
Financial Officer
(Duly authorized officer and
principal financial officer)
