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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 SEPTEMBER 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 November 5, 1999:
Common Stock: 4,055,092
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................... $ 808 $ 1,625
Trade accounts receivable, net of allowance for doubtful
accounts of $1,638 and $1,155, respectively .................. 23,252 24,367
Inventory ...................................................... 24,116 28,926
Prepaid expenses and other ..................................... 1,550 1,453
Deferred income taxes .......................................... 984 870
-------- --------
Total current assets ........................................ $ 50,710 $ 57,241
Property, plant and equipment, net .............................. 13,014 13,160
Goodwill, net ................................................... 10,163 10,447
Other assets .................................................... 1,078 484
-------- --------
Total assets ................................................ $ 74,965 $ 81,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable ......................................... $ 16,861 $ 14,826
Employee compensation .......................................... 1,114 1,449
Other accrued liabilities ...................................... 921 99
Current portion of long-term debt .............................. 3,116 3,782
-------- --------
Total current liabilities ................................... $ 22,012 $ 20,156
Long-term debt, less current portion ............................ 35,714 42,910
Deferred compensation ........................................... 739 739
Deferred income taxes ........................................... 561 563
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, 15,000
outstanding and 2,700 shares are treasury stock .............. 18 18
Common stock, $.01 par value, 100,000,000 shares
authorized; 4,212,043 and 4,211,010 shares issued, of
which 4,055,092, 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 ............................................... 15,332 15,443
Treasury stock .................................................. (1,718) (804)
-------- --------
Total shareholders' equity ................................... 15,827 15,607
-------- --------
Total liabilities and shareholders' equity ................... $ 74,965 $ 81,332
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales ................................................. $ 44,158 $ 52,296 $ 139,004 $ 153,886
Cost of sales ......................................... 32,495 38,247 102,890 113,505
--------- --------- --------- ---------
Gross profit .......................................... 11,663 14,049 36,114 40,381
Selling, general and administrative expenses .......... 10,995 11,940 33,954 33,758
--------- --------- --------- ---------
Operating income ...................................... 668 2,109 2,160 6,623
Other income .......................................... 417 177 991 695
Interest expense ...................................... (924) (1,041) (2,789) (2,735)
--------- --------- --------- ---------
Income before income taxes ............................ 161 1,245 362 4,583
Provision for income taxes ............................ 64 498 406 1,833
--------- --------- --------- ---------
Net income (loss) ..................................... $ 97 $ 747 $ (44) $ 2,750
Preferred stock dividend .............................. 23 25 68 69
--------- --------- --------- ---------
Net income (loss) attributable to common
shareholders ......................................... $ 74 $ 722 $ (112) $ 2,681
========= ========= ========= =========
Basic earnings (loss) per common share ................ $ 0.02 $ .17 $ (.03) $ .64
========= ========= ========= =========
Common shares outstanding ............................. 4,055 4,173 4,085 4,168
========= ========= ========= =========
Diluted earnings (loss) per share ..................... $ 0.02 $ .13 $ (.03) $ .49
========= ========= ========= =========
Common and common equivalents shares outstanding ...... 4,055 5,635 4,085 5,630
========= ========= ========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by operating activities ...................... $ 9,085 $ 4,918
INVESTING ACTIVITIES:
Purchase of Tri-Electric Supply, Ltd. net assets ............... -- (6,208)
Purchase of Lucky Electric Supply, Inc. net assets ............. -- (2,206)
Purchase of M. W. Smith Equipment, Inc. net assets ............. -- (4,206)
Purchase of Pelican State Supply common stock .................. -- (839)
Purchase of property and equipment ............................. (1,909) (2,451)
Proceeds on the sale of assets, at cost ........................ 850 26
--------- ---------
Net cash used in investing activities ....................... (1,059) (15,884)
FINANCING ACTIVITIES:
Proceeds from debt ............................................. 136,249 168,044
Principal payments on revolving line of credit, long-term
and subordinated debt, and notes payable to bank ........... 144,110) (155,458)
Issuance of common stock ....................................... -- 16
Acquisition of common stock .................................... (914) (201)
Dividends paid ................................................. (68) (69)
--------- ---------
Net cash provided by financing activities ................... (8,843) 12,332
--------- ---------
INCREASE (DECREASE) IN CASH ..................................... (817) 1,366
CASH AT BEGINNING OF PERIOD ..................................... 1,625 736
========= =========
CASH AT END OF PERIOD ........................................... $ 808 $ 2,102
========= =========
</TABLE>
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.
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 for the quarter ended September 30, 1999 and
the nine months ended September 30, 1999 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 59 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 the Company's estimates of
expected year-end inventory levels and costs. Because these are subject to many
forces beyond the Company's control, interim results are subject to the final
year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO
basis is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............... $ 25,819 $29,717
Work in process.............. 2,329 3,093
-------- -------
Inventories at FIFO.......... 28,148 32,810
Less -- LIFO allowance........ (4,032) (3,884)
-------- -------
Inventories.................. $ 24,116 $28,926
======== =======
</TABLE>
NOTE 4: ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
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 $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.
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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.
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 $2.04 million in cash, a $500,000 promissory note and the
assumption of a $114,000 note payable. The consideration received from the sale
of the assets approximated the net book value of the assets sold, which
consisted of inventory and personal property. The Company retained and will
collect the accounts receivable balances associated with that division. Since
the completion of the transaction, the Company no longer competes in the valve
and valve automation business.
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 in each of the first three quarters of 1999, which at
September 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. The amendments also extended the maturity date of the Credit
Facility from April 1, 2000 to April 1, 2001. Additionally, the LIBOR pricing,
set to expire on June 30, 1999, was cancelled and the interest rate was
increased to prime plus 1% on the term loan portion of the Credit Facility,
which was $13.4 million at September 30, 1999, and prime plus 1/2% on the
revolving loan portion of the Credit Facility, which was $19.8 million at
September 30, 1999. The Credit Facility is secured by receivables, inventory,
and machinery and equipment. 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 September 30, 1999 were approximately $3.7 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.
NOTE 6: SUBSEQUENT EVENTS
As of September 30, 1999, the Company was not in compliance with certain of
the covenants in the Credit Facility regarding financial ratios for which it
subsequently obtained waivers from its lender.
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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 its valve and valve
automation products division, for approximately $2.65 million, consisting of
$2.04 million in cash, a $500,000 promissory note and the assumption of a
$114,000 note payable. As a result, the Company no longer competes in the valve
and 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 15 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, within particular
markets and product categories the Company may 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 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 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, the ability of the Company to
integrate such acquisitions.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998
Revenues for the three months ended September 30, 1999 decreased 15.6% to
$44.2 million from the three months ended September 30, 1998. Excluding revenues
attributable to the Company's valve and valve automation division, which the
Company sold early in the third quarter of 1999, revenues in the third quarter
of 1999 decreased 12.0% to $44.2 million from $50.2 in the third quarter of
1998. Sales of fluid handling equipment decreased 5.5%, or $1.1 million, from
the comparable period in 1998. Sales of bearings and power transmission
equipment for the quarter ended September 30, 1999 decreased 19.3%, or $2.5
million, from the comparable period in 1998. During the three months ended
September 30, 1999, sales of general mill and safety supplies decreased 13.0%,
or $1.6 million, from the comparable period in 1998. The Company added
electrical product sales pursuant to two acquisitions, one in the first quarter
of 1998 and the other in the second quarter of 1998. Sales of electrical
products decreased 17.5%, or $.8 million, from $4.7 million to $3.9 million for
the quarter ended September 30, 1999, from the comparable period in 1998. The
decrease in revenues resulted primarily from the effects associated with
declining oil prices and a slow recovery by the oil industry along with a
softness related to the mining industry.
Gross margins for the third quarter of 1999 remained relatively consistent
compared to the third quarter of 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.
Although the Company reduced selling, general and administrative expenses to
$11.0 million in the third quarter of 1999 from $11.9 million in the third
quarter of 1998, as a percentage of revenues, these expenses increased by 2.1%,
from 22.8% to 24.9%, due
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primarily to the greater decrease in revenue volume and the Company's expanded
marketing efforts.
Operating income for the three month period ended September 30, 1999
decreased from $2.1 million to $.7 million as compared to the third quarter of
1998, due to the fact that the decrease in revenue volume outpaced the expense
reduction efforts undertaken by the Company.
Interest expense during the third quarter of 1999 decreased by $.1 million
to $.9 million compared to the second quarter of 1998, due to the use of the
proceeds from the sale of the valve and valve automation assets to reduce
outstanding debt under the Credit Facility.
The Company's provision for income taxes for the three months ended
September 30, 1999 decreased by $.4 million compared to the same period of 1998,
as a result of the decrease in profits.
Net income for the three month period ended September 30, 1999, decreased
$.7 million from the three month period ended September 30, 1998, due to the
various factors discussed above.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues for the nine months ended September 30, 1999 decreased 9.7% to
$139.0 million from the nine months ended September 30, 1998. The Company's
acquisitions during the first and second quarters of 1998 accounted for $15.6
million in revenues during the period ended September 30, 1999 and $13.1 million
in revenues for the same period in 1998. The valve and valve automation
business, which was sold in the third quarter of 1999, generated revenues of
$3.7 million for the nine months ended September 30, 1999 and $7.1 million in
the same period in 1998. Excluding revenues generated by the acquired companies
and the valve and valve automation business, revenues for the nine months ended
September 30, 1999 decreased by 10.4% to $119.7 million from $133.6 million for
the nine months ended September 30, 1998. Sales of fluid handling equipment
remained consistent over the first nine months of 1999 as compared to the same
period in 1998. Sales of bearings and power transmission equipment for the nine
months ended September 30, 1999 decreased 24.2%, or $9.9 million, from the
comparable period in 1998. Sales of general mill and safety supplies for the
nine months ended September 30, 1999 decreased 10.7%, or $4.1 million, from the
comparable period in 1998. The decrease in revenues resulted primarily from the
effects associated with declining oil prices and a slow recovery by the oil
industry along with a softness related to the mining industry. The Company did
not have revenues from the sale of electrical products during the entire nine
months of 1998.
Gross margins remained consistent over the first nine months of 1999 as
compared to 1998. The Company currently expects some increase in manufacturers
prices to continue due to increased raw material costs. Although the Company
intends to attempt to pass on these price increases to its customers to maintain
current gross margins, there can be no assurances that the Company will be
successful in this regard.
Selling, general and administrative expense for the first nine months of
1999 increased as a percentage of revenues by 2.5%, from 21.9% to 24.4%, as
compared to the same period of 1998. This was due primarily to the decrease in
revenue volume which outpaced the expense reduction efforts undertaken by the
Company in the first nine months of 1999 as compared to the first nine months of
1998 and the Company's additional investment in marketing and other
administrative departments ($.9 million).
Operating income for the nine month period ended September 30, 1999
decreased from $6.6 million to $2.2 million compared to the same period in 1998,
due to the fact that the decrease in revenue volume outpaced the expense
reduction efforts undertaken by the Company.
Interest expense during the first nine months of 1999 remained consistent as
compared to the first nine months of 1998.
The Company's provision for income taxes for the nine months ended September
30, 1999 decreased by $1.4 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 nine month period ended September 30, 1999, decreased
$2.8 million from the nine month period ended September 30, 1998, due to the
various factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
General
Under 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 $3.7 million available for borrowings under the Credit Facility
at September 30, 1999. Working capital at September 30, 1999 and December 31,
1998 was $28.7 million and $37.1 million, respectively, due in part to the
current business conditions and the sale of the assets of the valve and valve
automation division in the third quarter of 1999. During the first nine months
of 1999 and the year 1998, the Company collected its trade receivables in
approximately 49 days and turned its inventory approximately four times on an
annualized basis.
The Company and its lender amended the Credit Facility three times in the
first nine months of 1999: effective March 30, 1999, May 13, 1999 and August 13,
1999. At September 30, 1999, the Credit Facility provided for borrowings of 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. The amendments to the
Credit Facility extended the maturity date of the Credit Facility from April 1,
2000 to April 1, 2001. In addition, the interest rates on borrowings under the
Credit Facility were amended and increased from a LIBOR rate to prime (8.25% at
September 30, 1999) plus 1% on the term loan portion of the Credit Facility and
prime plus 1/2% on the revolving loan portion of the Credit Facility. At
September 30, 1999, the Company had outstanding indebtedness of $13.4 million
under the term loan portion of the Credit Facility and $19.8 million under the
revolving loan portion of the Credit Facility. The Credit Facility is secured by
receivables, inventory, and machinery and equipment. 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 pledged to secure this line of credit. The available borrowings under the
Credit Facility at September 30, 1999 were approximately $3.7 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 from time to time has not been in compliance with certain
covenants under the Credit Facility regarding financial ratios. At September 30,
1999, the Company again was not in compliance with certain of those covenants.
The lender has provided waivers to the Company regarding the compliance with
these covenants, although there can be no assurance the lender will be willing
to provide waivers in the future if the Company is unable to comply with the
financial ratio covenants.
The Company generated cash through operating activities of $9.1 million in
the first nine months of 1999 as compared to $4.9 million in cash generation
during the first nine months of 1998, due primarily to a decrease in accounts
receivable, inventory and an increase in accounts payable.
The Company had capital expenditures of approximately $1.9 million for the
first nine months of 1999 as compared to $2.5 million during the same period of
1998. Capital expenditures in the first nine months of 1999 were primarily
related to the purchase of furniture and fixtures and a telephone system ($.9
million) for the Company's corporate headquarters as well as the purchase of
computer equipment and software ($.8 million). Capital expenditures for the
first nine months of 1998 were primarily related to the purchase of real
property ($1.7 million) to be used as the corporate headquarters and computer
equipment ($.5 million).
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, should the Company decide
to resume such efforts, 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.
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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.
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 the majority of the
Company's active customers and 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. With respect to phase (4),
the Company has completed 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. Company
policy has been, and remains, that the Company will maintain version/release
currency on business software packages for maintainability and interoperability
considerations. With respect to phase (5), the Company began testing and
verification at the end of the first quarter of 1999 and completed the last of
these efforts during the third quarter. The last of the testing efforts
addressed the Company's desktop computers, and was completed in the third
quarter of 1999. Those desktop computers that the Company determined to be
non-Year 2000 compliant were identified and will be replaced. All costs
associated with the Year 2000 issues will be included as part of the normal
software/hardware upgrades or operating costs, as appropriate. As a result of
the completion of the Company's Year 2000 program, the Company does not
anticipate that the Year 2000 issue will have a material effect on its business.
If any issues arise as a result of customers or vendors not being Year 2000
compliant, the Company may find it necessary to increase inventory levels to
mitigate complications related to vendors.
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.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
<PAGE> 11
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 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.
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.
11
<PAGE> 12
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.
Possible Delisting from the Nasdaq National Market
In June 1999, the Nasdaq-Amex Market Group advised the Company that it did
not meet the Nasdaq National Market requirements for number of shares and value
of public float. While the Company has resolved with Nasdaq the issue regarding
the requirement for number of shares of public float, due to the current trading
price of the Common Stock, the Company does not comply with the value of public
float requirement. The Company agreed to submit an application to move the
listing of its Common Stock from the Nasdaq National Market to the Nasdaq
Small-Cap Market. There can be no assurance, however, that the Company's
transition application will be approved by Nasdaq. If the application is not
approved, Nasdaq will remove the Company's Common Stock from listing on the
Nasdaq National Market. If the Common Stock is removed from listing, the
liquidity of the Common Stock will be materially adversely affected, as there
can be no assurance that any alternative market for the Common Stock will be
available.
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 has
completed the upgrading of its business system software and has tested and
verified its state of readiness for the Year 2000. 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 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.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
11.1 -- Statement re: Computation of Per Share
Earnings.
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K.
None.
13
<PAGE> 14
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:
------------------------------------
Gary A. Allcorn
Senior Vice President/Finance and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Date: November 12, 1999
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
11.1 -- Statement re: Computation of Per Share
Earnings.
27.1 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Average shares outstanding ...................... 4,055,092 4,173,159 4,084,862 4,167,832
Net income (loss) attributable to common
shareholders .................................. $ 74,000 $ 722,000 $ (112,000) $ 2,681,000
Per share amount ................................ $ .0182 $ .1730 $ (.0274) $ .6433
Diluted:
Average shares outstanding ...................... 4,055,092 4,173,159 4,084,862 4,167,832
Net effect of dilutive stock
options -- based on the treasury stock
method using period-end market price, if
higher than average market price .............. -- 1,041,728 -- 1,041,728
Assumed conversion of Class A convertible
Preferred stock ................................. -- 420,000 -- 420,000
Total ...................................... 4,055,092 5,634,877 4,084,862 5,629,560
Net income (loss) ................................ $ 74,000 $ 747,000 $ (112,000) $ 2,750,000
Per share amount* $ .0182 $ .1326 $ (.0274) $ .4885
</TABLE>
- ----------
* Due to a loss for the quarter ended September 30, 1999 and for the nine
months ended September 30, 1999, the conversion of common stock equivalents
would be anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS OF DXP ENTERPRISES, INC. AS OF
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 808
<SECURITIES> 0
<RECEIVABLES> 23,252
<ALLOWANCES> 1,638
<INVENTORY> 24,116
<CURRENT-ASSETS> 50,710
<PP&E> 22,827
<DEPRECIATION> 9,813
<TOTAL-ASSETS> 74,965
<CURRENT-LIABILITIES> 22,012
<BONDS> 0
112
0
<COMMON> 41
<OTHER-SE> 15,786
<TOTAL-LIABILITY-AND-EQUITY> 74,965
<SALES> 139,004
<TOTAL-REVENUES> 139,004
<CGS> 102,890
<TOTAL-COSTS> 102,890
<OTHER-EXPENSES> 33,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,789
<INCOME-PRETAX> 362
<INCOME-TAX> 406
<INCOME-CONTINUING> (44)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
