-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbPQtzNimdAv7ellJrG6IKBIvP/x0v/xgze55fpzsuI9whVgZrg0pRABB8QInRZz Rd/FW2nKusbqqe9x+fRKZA== 0000950129-01-504068.txt : 20020410 0000950129-01-504068.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950129-01-504068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DXP ENTERPRISES INC CENTRAL INDEX KEY: 0001020710 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 760509661 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21513 FILM NUMBER: 1787955 BUSINESS ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 713-531-42 MAIL ADDRESS: STREET 1: 580 WESTLAKE PARK BLVD STREET 2: SUITE 1100 CITY: HOUSTON STATE: TX ZIP: 77079 FORMER COMPANY: FORMER CONFORMED NAME: INDEX INC DATE OF NAME CHANGE: 19960808 10-Q 1 h92205e10-q.txt DXP ENTERPRISES INC - SEPTEMBER 30, 2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-21513 --------------- DXP ENTERPRISES, INC. (Exact name of registrant as specified in its charter) TEXAS 76-0509661 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 7272 PINEMONT HOUSTON, TEXAS 77040 (Address of principal executive offices) (Zip Code) 713/996-4700 (Registrant's telephone number, including area code) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] --------------- APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares outstanding of each of the issuer's classes of common stock, as of November 10, 2001: Common Stock: 4,071,685 ================================================================================ ITEM 1: FINANCIAL STATEMENTS DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash ........................................................ $ 233 $ 2,744 Trade accounts receivable, net of allowance for doubtful accounts of $2,015 and $1,888, respectively ............................................. 20,662 24,377 Inventory ................................................... 23,536 23,504 Prepaid expenses and other .................................. 1,025 578 Deferred income taxes ....................................... 693 1,308 ------------- ------------ Total current assets ................................ 46,149 52,511 Property, plant and equipment, net ............................ 9,095 9,314 Goodwill, net ................................................. 2,488 2,547 Receivables from officers and employees ....................... 1,304 811 Deferred income taxes ......................................... 1,540 1,388 Other assets .................................................. 362 568 ------------- ------------ Total assets ........................................ 60,938 67,139 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade accounts payable and accrued liabilities .............. 18,819 18,498 Accrued wages and benefits .................................. 1,206 999 Other accrued liabilities ................................... 657 661 Current portion of long-term debt ........................... 8,473 9,675 ------------- ------------ Total current liabilities ........................... 29,155 29,833 Long-term debt, less current portion .......................... 22,313 28,476 Equity subject to redemption: Series A preferred stock -- 1,122 shares .................... 112 112 Shareholders' Equity: Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share; 1,000,000 shares authorized; 2,992 shares issued and outstanding: ..................... 2 2 Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share; 1,000,000 shares authorized; 17,700 shares issued, 15,000 shares outstanding and 2,700 shares in .... 18 18 treasury stock Common stock, $.01 par value, 100,000,000 shares authorized; 4,257,760 shares issued and 4,071,685 shares are outstanding and 186,075 shares in treasury stock ......................... 41 41 Paid-in capital ............................................. 2,765 2,765 Retained earnings ........................................... 8,426 7,786 Treasury stock .............................................. (1,894) (1,894) ------------- ------------ Total shareholders' equity .......................... 9,358 8,718 ------------- ------------ Total liabilities and shareholders' equity .......... $ 60,938 $ 67,139 ============= ============
See notes to condensed consolidated financial statements. 2 DXP ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Sales .............................................. $ 43,240 $ 45,959 $ 135,826 $ 136,030 Cost of sales ...................................... 32,296 34,372 101,712 102,168 ---------- ---------- ---------- ---------- Gross profit ....................................... 10,944 11,587 34,114 33,862 Selling, general and administrative expenses ....... 9,914 10,386 30,808 31,287 ---------- ---------- ---------- ---------- Operating income ................................... 1,030 1,201 3,306 2,575 Other income ....................................... 12 92 53 2,188 Interest expense ................................... (572) (890) (2,025) (2,738) ---------- ---------- ---------- ---------- Income before income taxes ......................... 470 403 1,334 2,025 Provision for income taxes ......................... 198 196 628 943 ---------- ---------- ---------- ---------- Net income ......................................... $ 272 $ 207 $ 706 $ 1,082 Preferred stock dividend ........................... 23 23 68 68 ---------- ---------- ---------- ---------- Net Income attributable to common shareholders ..... $ 249 $ 184 $ 638 $ 1,014 ========== ========== ========== ========== Basic earnings per common share .................... $ .06 $ .05 $ .16 $ .25 ---------- ---------- ---------- ---------- Common shares outstanding .......................... 4,072 4,077 4,072 4,077 ---------- ---------- ---------- ---------- Diluted earnings per share ......................... $ .06 $ .05 $ .16 $ .23 ---------- ---------- ---------- ---------- Common and common equivalent shares outstanding .... 4,586 4,077 4,505 4,622 ---------- ---------- ---------- ----------
See notes to condensed consolidated financial statements. 3 DXP ENTERPRISES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ---------- ---------- OPERATING ACTIVITIES: Net income ............................................. $ 706 $ 1,082 Adjustments to reconcile net income to net cash Provided by (used in) operating activities Depreciation and amortization ...................... 1,054 1,444 Provision (benefit) for deferred income taxes ...... 463 (78) (Gain) on sale of property and equipment ....................................... -- (1,955) Changes in operating assets and liabilities: Trade accounts receivable ....................... 3,713 (1,658) Inventories ..................................... (1,241) (970) Prepaid expenses and other ...................... (734) (279) Accounts payable and accrued liabilities ........ 483 4,581 ---------- ---------- Net cash provided by operating activities ....... 4,444 2,167 INVESTING ACTIVITIES: Purchase of property and equipment ..................... (672) (915) Net proceeds on the sale of real estate ................ -- 3,231 Net proceeds on the sale of certain electrical contractor segment assets ................. 1,149 -- ---------- ---------- Net cash provided by investing activities ........... 477 2,316 FINANCING ACTIVITIES: Proceeds from debt ..................................... 132,974 132,804 Principal payments on revolving line of credit, long-term and subordinated debt, and notes payable to bank ...................................... (140,338) (139,815) Dividends paid ......................................... (68) (68) ---------- ---------- Net cash used in financing activities ............... (7,432) (7,079) ---------- ---------- DECREASE IN CASH ....................................... (2,511) (2,596) CASH AT BEGINNING OF PERIOD ............................ 2,744 2,991 ---------- ---------- CASH AT END OF PERIOD .................................. $ 233 $ 395 ---------- ----------
See notes to condensed consolidated financial statements. 4 DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. DXP Enterprises, Inc. (the "Company") believes that the presentations and disclosures herein are adequate to make the information not misleading. The condensed consolidated financial statements reflect all elimination entries and adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's 10-K Annual Report for the year ended December 31, 2000, filed with the Securities and Exchange Commission. NOTE 2: THE COMPANY DXP Enterprises, Inc. and subsidiaries (DXP or the Company), a Texas corporation, was incorporated on July 26, 1996, to be the successor to SEPCO Industries, Inc. (SEPCO). The Company is organized into two segments: Maintenance, Repair and Operating (MRO) and Electrical Contractor. NOTE 3: RECENT OPERATIONS AND LIQUIDITY The Company sustained a net loss of approximately $7.4 million during fiscal year 2000 primarily from non-recurring operating charges of $10.8 million. This operating loss coupled with a default on a subordinated note payable caused the Company to be in violation of covenants under the Credit Facility with its bank lender; consequently, the Company reclassified the subordinated note and a portion of its debt under the Credit Facility to a current liability in 2000, as well as at September 30, 2001 (see Note 7 below for further discussion). For the first nine months of 2001, the Company generated $1,334,000 in income before taxes. Gross profit and operating income increased from the comparable period in 2000, resulting from improved sales and margins in its MRO segment (see "Management's Discussion and Analysis of Financial Condition and Result of Operations" for further information) and reduced selling, general and administrative expenses. The Company was in compliance with its bank loan agreement covenants for the third quarter of 2001. In addition to $0.2 million of cash on hand, the Company has approximately $4.1 million available for additional borrowings under its Credit Facility at September 30, 2001. NOTE 4: NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities (SFAS No. 133)". This statement requires the fair value of derivatives be recorded as assets or liabilities. Gains or losses resulting from changes in the fair values of derivatives are accounted for currently in earnings or comprehensive income depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. SFAS No. 133, as amended, is effective for us beginning January 1, 2001. We adopted the statement effective January 1, 2001; there was no impact on our financial results as we were not a party to any derivative instruments. In 2000, the Emerging Issues Task Force of the FASB reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" and Issue 00-14, "Accounting for Certain Sales Incentives", (collectively, "the Issues"). We adopted the Issues in the fourth quarter of 2000 and have restated our quarterly and annual financial statements to conform to the requirements of the Issues. There was no effect on net income as a result of the adoption of the Issues. The net effect of the adoption of the Issues was an increase in net sales of $1.3 million and $3.8 million, an increase in cost of sales of $1.3 million and $3.8 million, a decrease in selling, general and administrative expenses of $0.3 million and $0.7 million, and a decrease in other income of $0.3 million and $0.7 million, for the quarter and nine months ended September 30, 2000, respectively. 5 In June 2001, Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" was issued. SFAS No. 141 eliminates the use of the pooling-of-interests method of accounting for business combinations and establishes the purchase method as the only acceptable method. The statement was effective beginning June 30, 2001. Management has reviewed the requirements of the statement and does not believe it will have a material impact on the financial position or results of operations of the Company. In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued. SFAS No. 142 changes the treatment of goodwill by no longer amortizing goodwill, and instead requiring, at least annually, an assessment for impairment by applying a fair-value based test. However, other identifiable intangible assets are to be separately recognized and amortized. The statement is effective for fiscal years beginning after December 15, 2001. The adoption of the statement will result in the elimination of approximately $79,000 of goodwill amortization, annually, subsequent to December 31, 2001. Additionally, adoption could result in an impairment of up to the $2.5 million of goodwill recorded on our balance sheet at September 30, 2001. The charge for the impairment would be reflected as a cumulative effect of a change in accounting principle on January 1, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting of asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will implement SFAS No. 143 on January 1, 2003. The impact of such adoption is not anticipated to have a material effect on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends Accounting Research Board No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for subsidiaries for which control is likely to be temporary. The Company will adopt SFAS No. 144 beginning January 1, 2002. The impact of such adoption is not anticipated to have a material effect on the Company's financial statements. NOTE 5: INVENTORY The Company uses the last-in, first-out ("LIFO") method of inventory valuation for approximately 60 percent of its inventories. Remaining inventories are accounted for using the first-in, first-out ("FIFO") method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO basis is as follows:
SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- (IN THOUSANDS) Finished Goods ............. $ 25,630 $ 25,770 Work in Process ............ 1,335 985 -------- -------- Inventories at FIFO ........ 26,965 26,755 Less - LIFO allowance ...... (3,429) (3,251) -------- -------- Inventories ................ $ 23,536 $ 23,504 ======== ========
6 NOTE 6: DIVESTITURES During the first nine months of 2000, the Company sold two warehouse facilities for approximately $3.5 million in cash. Gains of approximately $2.0 million were recorded as other income as a result of the sales. NOTE 7: LONG-TERM DEBT Under the Company's loan agreements with its bank lender (the "Credit Facility"), all available cash is generally applied to reduce outstanding borrowings, with operations funded through borrowings under the Credit Facility. The Credit Facility consists of three secured lines of credit with various subsidiaries of the Company and a term loan. Under the terms of the asset purchase agreement associated with the acquisition of a MRO business in 1997, the Company can require the seller to adjust the purchase price for certain inventory remaining unsold as of July 1, 2000. The Company notified the seller that the adjustment of the purchase price exceeds the outstanding $2.0 million balance of the associated subordinated note payable. As of July 1, 2000, the Company suspended principal and interest payments on the note. The seller has notified the Company's bank lender that the Company is in default on the subordinated note. The Company's bank lender notified the Company that the default on the subordinated note caused the Company to be in default on one of its secured lines of credit with an outstanding balance of $4.2 million at September 30, 2001. However, the bank lender agreed to forebear taking any action on defaults under the secured line of credit. The bank lender can terminate this forbearance at anytime. The $4.2 million outstanding balance of the secured line of credit and the $2.0 million balance of the subordinated note have been included in current maturities of long-term debt at September 30, 2001. In management's opinion, should payment of the $4.2 million outstanding balance of the secured line of credit be demanded, the Company would be able to refinance the obligation or liquidate it through the proceeds from asset sales or property refinancing. During January, 2001, the Company filed suit against the seller to collect the purchase price adjustment. In February, 2001, the seller filed a counterclaim against the Company to collect the balance of the subordinated note and accrued interest. The Company expects to attend a court mandated mediation meeting during the fourth quarter of 2001. The Company intends to aggressively pursue the Company's claims against the seller under the provisions of the asset purchase agreement. The subordinated note provides for an interest rate of prime plus 4% if the note is in default. The Company did not accrue interest or penalty interest on the subordinated note for the nine months ended September 30, 2001. Management believes the subordinated note will either be paid off using funds obtained from the seller in settlement of the Company's claims or the subordinated note will be offset against its claims. However, there can be no assurance that the Company will be successful in collecting the funds due under its claims or in offsetting the subordinated note against its claims. During August of 2001, the Company and its bank amended the Credit Facility effective August 14, 2001, which now provides for borrowings up to an aggregate of the lesser of (i) a percentage of the collateral value based on a formula set forth therein or (ii) $35.0 million, and matures April 1, 2004, except for the $4.2 million outstanding balance of the $5.8 million secured line of credit which is in default and callable at anytime. Interest accrues at prime plus 1/2% on approximately $19 million of the Credit Facility, prime plus 1 1/2% on the $5.8 line of credit which is in default, and prime plus 1 1/2 % on the term portion ($9.0 million at September 30, 2001) of the Credit Facility. The prime rate at September 30, 2001, was 6.0%. The Credit Facility is secured by receivables, inventory, real estate and machinery and equipment. The Credit Facility contains customary affirmative and negative covenants as well as financial covenants that are measured monthly and require the Company to maintain a certain cash flow and other financial ratios. The Company from time to time has not been in compliance with certain covenants under the Credit Facility including the minimum earnings requirement and the fixed charge coverage ratio. At September 30, 2001, the Company was in compliance with these covenants. In addition to the $0.2 million of cash on hand at September 30, 2001 the Company had $4.1 million available for borrowings under the amended credit facility at September 30, 2001. Although the Company expects to be able to comply with the covenants, including the financial covenants, of the Credit Facility, there can be no assurance that in the future the Company will be able to do so or that the lender will be willing to waive such non-compliance or further amend such covenants. 7 NOTE 8: EARNINGS PER SHARE DATA The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Basic: Average shares outstanding ........................ 4,071,685 4,076,618 4,071,685 4,076,618 Net income attributable to common shareholders .... $ 249,000 $ 184,000 $ 638,000 $1,014,000 Per share amount .................................. $ .06 $ .05 $ .16 $ .25 Diluted: Average shares outstanding ........................ 4,071,685 4,076,618 4,071,685 4,076,618 Net effect of dilutive stock options-- Based on the treasury stock method .............. 94,800 -- 12,979 125,198 Assumed conversion of Class B convertible Preferred stock ................................. 420,000 -- 420,000 420,000 ---------- ---------- ---------- ---------- Total ............................................. 4,586,485 4,076,618 4,621,816 4,504,664 Net income for diluted earnings per share ......... $ 272,000 $ 184,000 $ 706,000 $1,082,000 Per share amount .................................. $ .06 $ .05 $ .16 $ .23
For the three months ended September 30, 2000, the Class B convertible preferred stock is anti-dilutive and is excluded from the computation of diluted earnings per share. NOTE 9: SEGMENT REPORTING The MRO Segment is engaged in providing maintenance, repair and operating products, equipment and integrated services, including engineering expertise and logistics capabilities, to industrial customers. The Company provides a wide range of MRO products in the fluid handling equipment, bearings, power transmission equipment, general mill, safety supply and electrical products categories. The Electrical Contractor segment sells a broad range of electrical products, such as wire conduit, wiring devices, electrical fittings and boxes, signaling devices, heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries, fans and fuses, to electrical contractors. The Company began offering electrical products to electrical contractors following its acquisition of the assets of two electrical supply businesses in 1998. During August 2001, the Company sold the majority of the assets of one of the two businesses which comprised the Electrical Contractor segment. Historically, the business which was sold accounted for approximately two thirds of the sales of the segment. No gain or loss was recognized on the sale. All business segments operate primarily in the United States. The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. Financial information relating the Company's segments is as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- ------------------------------------- ELECTRICAL ELECTRICAL MRO CONTRACTOR TOTAL MRO CONTRACTOR TOTAL -------- ---------- -------- -------- ---------- -------- 2001 Sales $ 41,431 $ 1,809 $ 43,240 $128,353 $ 7,473 $135,826 Operating income (loss) 1,119 (89) 1,030 3,711 (405) 3,306 Identifiable Assets 58,382 2,556 60,938 2000 Sales $ 42,766 $ 3,193 $ 45,959 $126,938 $ 9,092 $136,030 Operating income (loss) 1,280 (79) 1,201 2,855 (280) 2,575 Identifiable Assets 63,316 9,208 72,524
8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three Months Ended September 30, 2001 compared to Three Months Ended September 30, 2000 SALES. Sales for the quarter ended September 30, 2001, decreased $2.7 million, or 5.9%, to approximately $43.2 million from $46.0 million in 2000. Sales for the MRO Segment decreased $1.3 million, or 3.1%, primarily due to a slowing of the overall economy. Sales for the Electrical Contractor segment decreased by $1.4 million, or 43.3%, for the current quarter when compared to same period in 2000. This decrease in sales is the result of the sale, during August 2001, of the majority of the assets of a business which comprised approximately two thirds of the sales of the Electrical Contractor segment combined with a slow down in the construction business for electrical contractors. GROSS PROFIT. Gross profit as a percentage of sales increased to 25.3% for the third quarter of 2001, from 25.2% for the same period in 2000. Gross profit as a percentage of sales for the MRO segment was 25.4% for the third quarter of 2001 and 2000. Gross profit as a percentage of sales for the Electrical Contractor segment decreased to 22.1% in the three months ended September 30, 2001, down from 23.3% in the comparable period of 2000. This decline resulted from lower margin sales associated with a slow down in the construction business for electrical contractors. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for the quarter ended September 30, 2001, decreased by approximately $0.5 million when compared to the same period in 2000. This 4.5% decrease is consistent with the 5.9% decrease in sales between the two periods. As a percentage of sales, the 2001 expense increased to 22.9% from 22.6% for 2000. This increase is primarily attributable to sales decreasing by a greater percentage than expenses decreased. OPERATING INCOME. Operating income for the third quarter of 2001 decreased $0.2 million when compared to the same period in 2000. This decrease is the result of a $0.2 million decrease in operating income for the MRO Segment. The reduced operating income for the MRO segment is the result of decreased sales and gross profit resulting from the slow down in the overall economy. INTEREST EXPENSE. Interest expense for the quarter ended September 30, 2001 decreased by $0.3 million to $0.6 million from $0.9 million during the same period in 2000. This decline results from lower interest rates as well as a lower average debt balance for the third quarter of 2001 when compared to the third quarter of 2000. INCOME TAXES. The 42% effective tax rate for the quarter ended September 30, 2001, decreased from 49% for the same period in 2000 because of less state income taxes. State income taxes decreased because profitability declined in operations in certain states which were profitable in 2000 and improved in operations in certain states which incurred losses in 2000 for which a state tax benefit was not realized in 2000. Nine Months Ended September 30, 2001 compared to Nine Months Ended September 30, 2000 SALES. Sales for the nine months ended September 30, 2001, decreased $0.2 million, or 0.2%, to approximately $135.8 million from $136.0 million in 2000. Sales for the MRO Segment increased $1.4 million, or 1.1% primarily due to an improvement in the oil and gas industry. Sales for the Electrical Contractor segment decreased by $1.6 million, or 18%, for the current nine months when compared to same period in 2000. This decrease is the result of the sale, during August 2001, of the majority of the assets of a business which comprised approximately two thirds of the sales of the Electrical Contractor segment combined with a slow down in the construction business for electrical contractors.. GROSS PROFIT. Gross profit as a percentage of sales increased to 25.1% for the first nine months of 2001, up from 24.9% for the same period in 2000. Gross profit as a percentage of sales for the MRO segment 9 increased to 25.4% for the nine months ended September 30, 2001, up from 24.9% in the comparable period of 2000. This increase can be primarily attributed to increased margins in fluid handling equipment sold by the MRO segment. Gross profit as a percentage of sales for the Electrical Contractor segment decreased to 21.0% for the nine months ended September 30, 2001, down from 24.4% for the comparable period of 2000. This decline resulted from lower margin sales associated with a slowdown in the construction business for electrical contractors. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for the nine months ended September 30, 2001, declined $0.5 million, or 1.5% to approximately $30.8 million from $31.3 million in 2000. As a percentage of revenue, the 2001 expense declined to 22.7% from 23.0% for 2000. This decrease is primarily attributable to reduced compensation related expenses resulting from reduced headcount. OPERATING INCOME. Operating income for the first nine months of 2001 increased $0.7 million when compared to the same period in 2000. All of the increase came from the MRO segment. The improved operating income for the MRO segment is the result of increased sales and gross profit combined with reduced selling, general and administrative expenses. The operating loss for the Electrical Contractor segment increased to $0.4 million for the nine months ended September 30, 2001, up from $0.3 million for the same period of 2000. The larger operating loss for the Electrical Contractor segment results from the lower sales and margins resulting from a slow down in the construction business for electrical contractors. INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2001 decreased by $0.7 million to $2.0 million from $2.7 million during the same period in 2000. This decline results from lower interest rates as well as a lower average debt balance for the first nine months of 2001 when compared to the first nine months of 2000. OTHER INCOME. Other income was approximately $2.1 million lower in 2001 than in 2000 due primarily to $2.0 million of gains on the sale of two warehouse facilities during 2000. INCOME TAXES. The effective tax rates for the nine month periods ended September 30, 2001, and 2000, were approximately 47% for both periods. NET INCOME. Excluding the gains on the sale of two warehouse facilities in 2000, net income increased by approximately $0.8 million in 2001 from a loss of approximately $0.2 million in 2000. LIQUIDITY AND CAPITAL RESOURCES GENERAL As a distributor of MRO and Electrical products, we require significant amounts of working capital to fund inventories and accounts receivable. Additional cash is required for capital items such as information technology and warehouse equipment. We also require cash to pay our lease obligations and to service our debt. Under the loan agreements with our bank lender, all available cash is generally applied to reduce outstanding borrowings, with operations funded through borrowings under the Credit Facility. Our policy is to maintain low levels of cash and cash equivalents and to use borrowings under our line of credit for working capital. We had approximately $4.1 million available for borrowings under the revolving portion of the Credit Facility at September 30, 2001. Working capital at September 30, 2001 and December 31, 2000 was approximately $17.0 million and $22.7 million, respectively. During the first nine months of 2001 and 2000, we collected trade receivables in approximately 46 and 50 days, respectively. For the nine months ended September 30, 2001 and 2000, we turned our inventory approximately six and five times, respectively, on an annualized basis. Under the terms of the asset purchase agreement associated with the acquisition of a MRO business in 1997, we can require the seller to adjust the purchase price for certain inventory remaining unsold as of July 1, 2000. We notified the seller that the adjustment of the purchase price exceeds the outstanding $2.0 million balance of the associated subordinated note payable. As of July 1, 2000, we suspended principal and interest payments on the note. The seller has notified our bank lender that we were in default on the subordinated note. Our bank lender notified us that the default on the subordinated note caused us to be in default on one of our secured lines of credit with an outstanding balance of $4.2 million at September 30, 2001. However, our bank lender agreed to forebear taking any action on defaults under the secured line of credit. The bank lender can terminate the forbearance at anytime. The 10 $4.2 million outstanding balance of the secured line of credit and the $2.0 million balance of the subordinated note have been included in current maturities of long-term debt at September 30, 2001. In our opinion, should payment of the $4.2 million outstanding balance of the secured line of credit be demanded, we would be able to refinance the obligation or liquidate it through the proceeds from asset sales or property refinancing. During January, 2001, we filed suit against the seller to collect the purchase price adjustment. In February, 2001, the seller filed a counterclaim against us to collect the balance of the subordinated note and accrued interest. The Company expects to attend a court mandated mediation meeting during the fourth quarter of 2001. We intend to aggressively pursue our claims against the seller under the provisions of the asset purchase agreement. The subordinated note provides for an interest rate of prime plus 4% if the note is in default. We did not accrue interest or penalty interest on the subordinated note for the nine months ended September 30, 2001. We believe the subordinated note will either be paid off using funds obtained from the seller in settlement of our claims or the subordinated note will be offset against our claims. However, there can be no assurance that we will be successful in collecting the funds due under our claims or in offsetting the subordinated note against our claims. During August of 2001, we amended the Credit Facility with our bank lender effective August 14, 2001, which now provides for borrowings up to an aggregate of the lesser of (i) a percentage of the collateral value based on a formula set forth therein or (ii) $35.0 million, and matures April 1, 2004, except for the $4.2 million balance of the $5.8 million secured line of credit which is in default and callable at anytime. Interest accrues at prime plus 1/2% on approximately $19 million of the Credit Facility, and prime plus 1 1/2 % on the $5.8 million line of credit which is in default, and prime plus 1 1/2 % on the term portion ($9.0 million at September 30, 2001) of the Credit Facility. The prime rate at September 30, 2001, was 6.00%. The Credit Facility is secured by receivables, inventory, real estate and machinery and equipment. The Credit Facility contains customary affirmative and negative covenants as well as financial covenants that are measured monthly and require that we maintain certain cash flow and other financial ratios. We have, from time to time, not been in compliance with certain covenants under the Credit Facility including the minimum earnings requirement and the fixed charge coverage ratio. At September 30, 2001, we are in compliance with these covenants. In addition to the $0.2 million of cash on hand at September 30, 2001, we had $4.1 million available for borrowings under the amended credit facility at September 30, 2001. Although we expect to be able to comply with the covenants, including the financial covenants, of the Credit Facility, there can be no assurance that in the future we will be able to do so or that our lender will be willing to waive such non-compliance or further amend such covenants. We generated cash through operating activities of approximately $4.4 million in the first nine months of 2001 as compared to $2.2 million during the first nine months of 2000. This increase is primarily attributable to improved operating income and to a decrease in accounts receivable in 2001 compared to an increase in accounts receivable in 2000. In the third quarter of 2001, sales decreased approximately $3.3 million from the fourth quarter of 2000; for the comparable period in 2000, sales increased approximately $4.0 million from the fourth quarter of 1999. We generated cash through investing activities of approximately $0.5 million in the first nine months of 2001 as compared to generating $2.3 million in cash during the first nine months of 2000. This change results from the sales of two warehouse facilities in 2000 for approximately $3.5 million in cash. Capital expenditures of $0.7 million during the first nine months of 2001 related primarily to computer software. Capital expenditures of $0.9 million during the first nine months of 2000 were related primarily to computer equipment and developing an e-commerce website, which we subsequently wrote-off during the fourth quarter of 2000. Our internal cash flow projections indicate our cash generated from operations and available under our Credit Facility will meet our normal working capital needs during the next twelve months. However, we may require additional debt or equity financing to meet our future debt service obligations. Such financing may include additional bank debt or the public or private sale of equity or debt securities. In connection with such financing, we may be required to issue securities that substantially dilute the interest of our shareholders. As described above, all of our Credit Facility matures on or before April 1, 2004. We will need to extend the maturity of, or replace, our Credit Facility before April 1, 2004. However, we may not be able to renew and extend or replace the Credit Facility. Any extended or replacement facility may have higher interest costs, less borrowing capacity, more restrictive conditions and could involve equity dilution. Our ability to obtain a satisfactory credit facility may depend, in part, upon the level of our asset base for collateral purposes, our future financial performance and our ability to obtain additional equity. 11 We would require additional capital to fund any future acquisitions. At this time, we do not plan to grow through acquisitions unless the market price of our common stock rises to levels that will make acquisitions accretive to our earnings or we generate excess cash flow. We may also pursue additional equity or debt financing to fund future acquisitions, although we may not be able to obtain additional financing on attractive terms. RECENTLY ISSUED ACCOUNTING STANDARDS Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our market risk results from volatility in interest rates. This risk is monitored and managed. Our exposure to interest rate risk relates primarily to our debt portfolio. To limit interest rate risk on borrowings, we target a portfolio within certain parameters for fixed and floating rate loans taking into consideration the interest rate environment and our forecasted cash flow. This policy limits exposure to rising interest rates and allows us to benefit during periods of falling interest rates. Our interest rate exposure is generally limited to our Credit Facility. See "Liquidity and Capital Resources." PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. Other than the previously disclosed legal proceedings with the seller of an MRO business to the Company in 1997, the Company is not currently a party to any litigation that it believes could have a material adverse effect on the results of operations or financial condition of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. CAUTIONARY STATEMENTS Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be contained in this Quarterly Report on Form 10-Q, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. Ability to Comply with Financial Covenants of Credit Facility Our loan agreements with our bank lender (the "Credit Facility") requires that we comply with certain specified covenants, restrictions, financial ratios and other financial and operating tests. Our ability to comply with any of the foregoing restrictions will depend on our future performance, which will be subject to prevailing 12 economic conditions and other factors, including factors beyond our control. A failure to comply with any of these obligations could result in an event of default under the Credit Facility, which could permit acceleration of our indebtedness under the Credit Facility. From time to time we have been unable to comply with some of the financial covenants contained in the Credit Facility (relating to, among other things, the maintenance of prescribed financial ratios) and have, when necessary, obtained waivers or amendments to the covenants from our lender. Although we expect to be able to comply with the covenants, including the financial covenants, of the Credit Facility, there can be no assurance that in the future we will be able to do so or that our lender will be willing to waive such non-compliance or further amend such covenants. Risks Related to Internal Growth Strategy Future results for us will depend in part on our success in implementing our internal growth strategy, which includes expanding existing product lines and adding new product lines. Our ability to implement this strategy will depend on our success in acquiring and integrating new product lines and marketing integrated supply arrangements such as those being pursued by us through our SmartSource program. Although we intend to increase sales and product offerings to existing customers, improve our business to business e-commerce capability through outsourcing our website and reduce costs through consolidating certain administrative and sales functions, there can be no assurance that we will be successful in these efforts. Substantial Competition Our business is highly competitive. We compete with a variety of industrial supply distributors, some of which may have greater financial and other resources than us. Although many of our traditional distribution competitors are small enterprises selling to customers in a limited geographic area, we also compete with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by our SmartSource program. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than us. Our competitors include direct mail suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. Risk Associated with Default on Subordinated Note Payable Under the terms of the asset purchase agreement associated with the acquisition of a business in 1997, we can require the seller to adjust the purchase price for certain inventory remaining unsold as of July 1, 2000. We notified the seller that the adjustment of the purchase price exceeds the outstanding $2.0 million balance of the associated subordinated note payable. As of July 1, 2000, we suspended principal and interest payments on the note. The seller has notified our bank lender that we were in default on the subordinated note. Our bank lender notified us that the default on the subordinated note caused us to be in default on one of our secured lines of credit with an outstanding balance of $4.2 million at September 30, 2001. However, our bank lender agreed to forebear taking any action on defaults under the secured line of credit. The bank lender can terminate the forbearance at any time. The $4.2 million outstanding balance of the secured line of credit and the $2.0 million balance of the subordinated note have been included in current maturities of long-term debt at September 30, 2001. In our opinion, should the $4.2 million balance of the secured line of credit be demanded, we would be able to refinance the obligation or liquidate it through the proceeds from asset sales or property refinancing. In January, 2001, we filed suit against the seller to collect the purchase price adjustment. In February, 2001, the seller filed a counterclaim against us to collect the balance of the subordinated note and accrued interest. We intend to aggressively pursue our claims against the seller under the provisions of the asset purchase agreement. The subordinated note provides for an interest rate of prime plus 4% if the note is in default. The Company did not accrue interest or penalty interest on the subordinated note for the nine months ended September 30, 2001. We believe the subordinated note will either be paid off using funds obtained from the seller in settlement of our claims or the subordinated note will be offset against our claims. However, there can be no assurance that we will be successful in collecting the funds due under our claims or in offsetting the subordinated note against our claims. 13 Risks of Economic Trends Demand for our products is subject to changes in the United States economy in general and economic trends affecting our customers and the industries in which they compete in particular. Many of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, we may experience changes in demand for our products as changes occur in the markets of our customers. Dependence on Key Personnel We will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, our Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of our company could have a material adverse effect on our financial condition and results of operations. We do not maintain key-man life insurance on the life of Mr. Little or on the lives of our other executive officers. In addition, our ability to grow successfully will be dependent upon our ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely affect our financial condition and results of operations. Dependence on Supplier Relationships We have distribution rights for certain product lines and depend on these distribution rights for a substantial portion of our business. Many of these distribution rights are pursuant to contracts that are subject to cancellation upon little or no prior notice. Although we believe that we could obtain alternate distribution rights in the event of such a cancellation, the termination or limitation by any key supplier of its relationship with our company could result in a temporary disruption on our business and, in turn, could adversely affect results of operations and financial condition. See "Business--Suppliers". Risks Associated With Hazardous Materials Certain of our operations are subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise relating to the protection of the environment. Although we believe that we have adequate procedures to comply with applicable discharge and other environmental laws, the risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals cannot be eliminated completely. In the event of such an accident, we could be held liable for any damages that result and any such liability could have a material adverse effect on our financial condition and results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 3.1 Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (Reg. No. 333-61953), filed with Commission on August 20, 1998) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996). (b) Reports on Form 8-K. None. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DXP ENTERPRISES, INC. (Registrant) By: /s/ MAC McCONNELL ------------------------------------ Mac McConnell Senior Vice-President/Finance and Chief Financial Officer Dated: November 14, 2001 15 -----END PRIVACY-ENHANCED MESSAGE-----