2007 Q1 Form 10-Q
UNITED
STATES 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 MARCH 31,
2007
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 or organization)
|
|
(I.R.S.
Employer Identification Number)
|
|
|
|
7272
Pinemont, Houston TX
|
|
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 [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Act).
Large
accelerated filer [ ] Accelerated Filer [X] Non-accelerated filer [
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
[ ]
No [X]
_______________
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Number
of
shares outstanding of each of the issuer's classes of common stock, as of May
8,
2007: Common Stock: 5,313,889
PART
I:
FINANCIAL INFORMATION
ITEM
1:
FINANCIAL STATEMENTS
DXP
ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(IN
THOUSANDS, EXCEPT SHARE AMOUNTS)
|
March
31, 2007
|
|
December
31, 2006
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$
3,222
|
|
$
2,544
|
Trade
accounts receivable, net of allowances for doubtful
accounts
|
|
|
|
of $1,563 in 2007 and $1,482 in 2006
|
43,182
|
|
40,495
|
Inventories,
net
|
35,923
|
|
37,310
|
Prepaid
expenses and other current assets
|
920
|
|
652
|
Federal
income taxes recoverable
|
1,415
|
|
1,042
|
Deferred
income taxes
|
1,190
|
|
1,087
|
Total
current assets
|
85,852
|
|
83,130
|
Property
and equipment, net
|
10,200
|
|
9,944
|
Goodwill
and other intangibles net of amortization of $662 in 2007 and $538
in
2006
|
23,329
|
|
23,428
|
Other
assets
|
255
|
|
305
|
Total
assets
|
$
119,636
|
|
$
116,807
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Current
portion of long-term debt
|
$
2,710
|
|
$
2,771
|
Trade
accounts payable
|
22,953
|
|
25,706
|
Accrued
wages and benefits
|
7,788
|
|
6,490
|
Customer
advances
|
981
|
|
3,924
|
Other
accrued liabilities
|
4,919
|
|
4,770
|
Total
current liabilities
|
39,351
|
|
43,661
|
Long-term
debt, less current portion
|
35,449
|
|
35,174
|
Deferred
income taxes
|
2,173
|
|
2,242
|
Minority
interest in consolidated subsidiary
|
12
|
|
12
|
Shareholders'
equity:
|
|
|
|
Series
A preferred stock, 1/10th
vote per share; $1.00 par value;
liquidation
preference of $100 per share ($112 at March 31, 2007),
1,000,000
shares authorized; 1,122 shares issued and outstanding
|
1
|
|
1
|
Series
B convertible preferred stock, 1/10th
vote per share; $1.00
par
value; $100 stated value; liquidation preference of $100 per
share
($1,500 at March 31, 2007); 1,000,000 shares authorized;
15,000
shares issued and outstanding
|
15
|
|
15
|
Common
stock, $0.01 par value, 100,000,000 shares authorized;
5,310,889
and 5,124,134 shares issued and outstanding, respectively
|
53
|
|
51
|
Paid-in
capital
|
9,374
|
|
6,147
|
Retained
earnings
|
34,007
|
|
30,303
|
Notes
receivable from David R. Little, CEO
|
(799)
|
|
(799)
|
Total
shareholders' equity
|
42,651
|
|
35,718
|
Total
liabilities and shareholders' equity
|
$
119,636
|
|
$
116,807
|
See
notes to condensed consolidated financial
statements.
|
DXP
ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
Three
Months Ended
|
|
March
31,
|
|
2007
|
|
2006
|
Sales
|
$
83,631
|
|
$
62,512
|
Cost
of sales
|
58,694
|
|
45,159
|
Gross
profit
|
24,937
|
|
17,353
|
Selling,
general and administrative expense
|
18,231
|
|
12,919
|
Operating
income
|
6,706
|
|
4,434
|
Other
income
|
18
|
|
7
|
Interest
expense
|
(590)
|
|
(363)
|
Minority
interest in loss of consolidated subsidiary
|
-
|
|
21
|
Income
before taxes
|
6,134
|
|
4,099
|
Provision
for income taxes
|
2,407
|
|
1,597
|
Net
income
|
3,727
|
|
2,502
|
Preferred
stock dividend
|
(23)
|
|
(23)
|
Net
income attributable to common shareholders
|
$
3,704
|
|
$
2,479
|
|
|
|
|
Basic
income per share
|
$
0.72
|
|
$
0.51
|
Weighted
average common shares outstanding
|
5,128
|
|
4,887
|
Diluted
income per share
|
$
0.65
|
|
$
0.44
|
Weighted
average common and common equivalent
shares outstanding
|
5,758
|
|
5,659
|
|
See
notes to condensed consolidated financial
statements.
|
DXP
ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN
THOUSANDS)
|
THREE
MONTHS ENDED
|
|
MARCH
31
|
|
2007
|
|
2006
|
OPERATING
ACTIVITIES:
|
|
|
|
Net
income
|
$
3,727
|
|
$
2,502
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
by
(used in) operating activities
|
|
|
|
Depreciation
|
304
|
|
248
|
Amortization
of intangibles
|
124
|
|
-
|
Compensation
expense on stock options and restricted stock
|
129
|
|
4
|
Benefit
from deferred income taxes
|
(172)
|
|
(43)
|
Gain
on sale of property and equipment
|
(8)
|
|
-
|
Minority
interest in loss of consolidated subsidiary
|
-
|
|
(21)
|
Tax
benefit related to exercise of stock options
|
(2,916)
|
|
(1,659)
|
Changes
in operating assets and liabilities:
|
|
|
|
Trade
accounts receivable
|
(2,687)
|
|
(2,930)
|
Inventories
|
1,386
|
|
(3,356)
|
Prepaid
expenses and other current assets
|
2,301
|
|
609
|
Accounts
payable and accrued liabilities
|
(4,250)
|
|
104
|
Net
cash used in operating activities
|
(2,062)
|
|
(4,542)
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
Purchase
of property and equipment
|
(560)
|
|
(406)
|
Proceeds
from the sale of property and equipment
|
8
|
|
-
|
Net
cash used in investing activities
|
(552)
|
|
(406)
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
Proceeds
from debt
|
24,904
|
|
16,438
|
Principal
payments on revolving line of credit and other long-term
debt
|
(24,690)
|
|
(12,986)
|
Dividends
paid in cash
|
(23)
|
|
(23)
|
Proceeds
from exercise of stock options
|
185
|
|
461
|
Payments
for payroll taxes related to exercise of stock options
|
-
|
|
(86)
|
Proceeds
from sale of common stock
|
-
|
|
429
|
Tax
benefit related to exercise of stock options
|
2,916
|
|
1,659
|
Net
cash provided by financing activities
|
3,292
|
|
5,892
|
INCREASE
IN CASH
|
678
|
|
944
|
CASH
AT BEGINNING OF PERIOD
|
2,544
|
|
570
|
CASH
AT END OF PERIOD
|
$
3,222
|
|
$
1,514
|
|
|
See
notes to condensed consolidated financial
statements.
|
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 accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. DXP Enterprises, Inc. (together with its subsidiaries, the
"Company" or “DXP”) 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
Annual Report on Form 10-K for the year ended December 31, 2006, filed with
the
Securities and Exchange Commission.
NOTE
2: THE COMPANY
DXP,
a
Texas corporation, was incorporated on July 26, 1996, to be the successor to
SEPCO Industries, Inc. (SEPCO). The Company is organized into two segments:
Maintenance, Repair and Operating (MRO) and Electrical Contractor.
NOTE
3: STOCK-BASED COMPENSATION
Adoption
of SFAS 123(R)
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
Statement of Financial Accounting Standard 123(R) “Share-Based
Payment”
(“SFAS
123(R)”) using
the
modified prospective transition method. In
addition, the Securities and Exchange Commission (the “SEC”) issued Staff
Accounting Bulletin No. 107 “Share-Based
Payment”
(“SAB
107”) in March 2005, which provides supplemental SFAS 123(R) application
guidance based on the views of the SEC. Under
the
modified prospective transition method, compensation cost recognized in each
quarterly period ended after January 1, 2006 includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance
with
the original provisions of SFAS No. 123, and (b) compensation cost for
all share-based payments granted beginning January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS 123(R).
In
accordance with the modified prospective transition method, results for prior
periods have not been restated.
The
adoption of SFAS
123(R) resulted in compensation expense for stock options for the quarterly
periods ended March 31, 2006 and 2007 of $2,200 and zero, respectively, all
of
which was recorded to operating expenses.
Stock
Options as of the Quarterly Period Ended March 31, 2007
No
future
grants will be made under the Company’s stock option plans. No grants of stock
options have been made by the Company since July 1, 2005. As of March 31, 2007,
all outstanding options were non-qualified stock options.
The
following table summarizes stock options outstanding and changes during the
quarterly period ended March 31, 2007:
|
Options
Outstanding and Exercisable
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in
years)
|
|
Aggregate
Intrinsic
Value
|
Options
outstanding at
January 1, 2007
|
311,181
|
|
$
1.41
|
|
|
|
|
Granted
|
-
|
|
-
|
|
|
|
|
Exercised
|
(186,755)
|
|
$0.99
|
|
|
|
|
Options
outstanding and exercisable
at March 31, 2006
|
124,426
|
|
$2.05
|
|
3.81
|
|
$
4,497,709
|
The
total
intrinsic value, or the difference between the exercise price and the market
price on the date of exercise, of all options exercised during the quarterly
period ended March 31, 2007, was approximately $7.9 million. Cash received
from
stock options exercised during the quarterly period ended March 31, 2007 was
$185,000.
Stock
options outstanding and currently exercisable at March 31, 2007 are as follows:
|
|
Options
Outstanding and Exercisable
|
Range
of
exercise
prices
|
|
Number
of Options
Outstanding
|
|
Weighted
Average Remaining Contractual Life
(in
years)
|
|
Weighted
Average
Exercise
Price
|
$1.00
- $2.50
|
|
104,426
|
|
3.07
|
|
$1.37
|
$4.53
- $6.72
|
|
20,000
|
|
7.69
|
|
$5.63
|
|
|
124,426
|
|
3.81
|
|
$2.05
|
Restricted
Stock.
Under
a
restricted stock plan approved by our shareholders in July 2005, (the
“Restricted Stock Plan”) directors, consultants and employees may be awarded
shares of DXP’s common stock. The shares of stock granted to employees as of
March 31, 2007 vest 20% each year for five years after the grant date. The
Restricted Stock Plan provides that on each July 1 during the term of the plan
each non-employee director of DXP will be granted 3,000 shares of restricted
stock which will vest one year after the grant date. The fair value of
restricted stock awards is measured based upon the closing prices of DXP’s
common stock on the grant dates and is recognized as compensation expense over
the vesting period of the awards.
The
following table provides certain information regarding the shares authorized
and
outstanding under the Restricted Stock Plan at March 31, 2007:
Number
of shares authorized for grants
|
300,000
|
Number
of shares outstanding
|
40,698
|
Number
of shares available for future grants
|
256,302
|
Weighted-average
grant price of outstanding shares
|
$
24.87
|
Changes
in restricted stock for the three months ended March 31, 2007 were as
follows:
|
Number
of
Shares
|
|
Weighted
Average
Grant
Price
|
Outstanding
at December 31, 2006
|
43,698
|
|
$
24.45
|
Granted
|
-
|
|
-
|
Vested
|
3,000
|
|
$
18.85
|
Outstanding
at March 31, 2007
|
40,698
|
|
$
24.87
|
At
March
31, 2007, 3,000 shares were vested under the Restricted Stock Plan. Compensation
expense recognized in the three months ended March 31, 2007 and 2006 was
$129,000 and $2,000, respectively. Unrecognized compensation expense under
the
Restricted Stock Plan was $741,000 and $864,000 at March 31, 2007 and December
31, 2006, respectively. As of March 31, 2006, the weighted average period over
which the unrecognized compensation expense is expected to be recognized is
18
months.
NOTE
4: INVENTORY
The
Company uses the last-in, first-out ("LIFO") method of inventory valuation
for
approximately 80 percent of its inventories. Remaining inventories are accounted
for using the first-in, first-out ("FIFO") method. An actual valuation of
inventory under the LIFO method can be made only at the end of each year based
on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Because these are subject to many forces
beyond management's control, interim results are subject to the final year-end
LIFO inventory valuation. The reconciliation of FIFO inventory to LIFO basis
is
as follows:
|
March
31,
2007
|
|
December
31,
2006
|
|
(in
Thousands)
|
Finished
goods
|
$
38,975
|
|
$
39,204
|
Work
in process
|
2,123
|
|
3,030
|
Inventories
at FIFO
|
41,098
|
|
42,234
|
Less
- LIFO allowance
|
(5,175)
|
|
(4,924)
|
Inventories
|
$
35,923
|
|
$
37,310
|
NOTE
5: 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
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
Basic:
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
5,128,284
|
|
|
4,886,765
|
|
Net
income
|
|
$
|
3,727,000
|
|
$
|
2,502,000
|
|
Convertible
preferred stock dividend
|
|
|
(23,000
|
)
|
|
(23,000
|
)
|
Net
income attributable to common shareholders
|
|
$
|
3,704,000
|
|
$
|
2,479,000
|
|
Per
share amount
|
|
$
|
0.72
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
5,128,284
|
|
|
4,886,765
|
|
Net
effect of dilutive stock options - based on the
treasury
stock method
|
|
|
209,722
|
|
|
352,413
|
|
Assumed
conversion of convertible preferred stock
|
|
|
420,000
|
|
|
420,000
|
|
Total
|
|
|
5,758,006
|
|
|
5,659,178
|
|
Net
income attributable to common shareholders
|
|
$
|
3,704,000
|
|
$
|
2,479,000
|
|
Convertible
preferred stock dividend
|
|
|
23,000
|
|
|
23,000
|
|
Net
income for diluted earnings per share
|
|
$
|
3,727,000
|
|
$
|
2,502,000
|
|
Per
share amount
|
|
$
|
0.65
|
|
$
|
0.44
|
|
NOTE
6: SEGMENT REPORTING
The
MRO
Segment is engaged in providing maintenance, repair and operating products,
equipment and integrated services, including engineering expertise and logistics
capabilities, to industrial customers. The Company provides a wide range of
MRO
products in the fluid handling equipment, bearing, power transmission equipment,
general mill, safety supply and electrical products categories. The Electrical
Contractor segment sells a broad range of electrical products, such as wire
conduit, wiring devices, electrical fittings and boxes, signaling devices,
heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries,
fans and fuses, to electrical contractors.
The
high
degree of integration of the Company’s operations necessitates the use of a
substantial number of allocations and apportionments in the determination of
business segment information. Sales are shown net of intersegment eliminations.
All business segments operate primarily in the United States.
Financial
information relating the Company’s segments is as follows:
|
Three
Months ended March 31,
|
|
MRO
|
|
Electrical
Contractor
|
|
Total
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
Sales
|
$
82,866
|
|
$
765
|
|
$
83,631
|
Operating
income
|
6,659
|
|
47
|
|
6,706
|
Income
before taxes
|
6,113
|
|
21
|
|
6,134
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
Sales
|
$
61,876
|
|
$
636
|
|
$
62,512
|
Operating
income
|
4,381
|
|
53
|
|
4,434
|
Income
before taxes
|
4,085
|
|
14
|
|
4,099
|
NOTE
7: INCOME TAXES
In
June,
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements in
accordance with FASB Statement No. 109, “Accounting for Income Taxes”. The
interpretation prescribes a recognition threshold and measurement attribute
criteria for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation
also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states. With few exceptions, the Company is no longer
subject to U. S. federal, state and local tax examination by tax authorities
for
years prior to 2002. The Company’s policy is to recognize interest related to
unrecognized tax benefits as interest expense and penalties as operating
expenses. Accrued interest is insignificant and there are no penalties accrued
at March 31, 2007. The Company believes that it has appropriate support for
the
income tax positions taken and to be taken on its tax returns and that its
accruals for tax liabilities are adequate for all open years based on an
assessment of many factors including past experience and interpretations of
tax
law applied to the facts of each matter.
The
Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of
FIN
48 did not impact the consolidated financial condition, result of operations
or
cash flows.
NOTE
8: ACQUISITIONS
All
of
the Company’s acquisitions have been accounted for using the purchase method of
accounting. Revenues and expenses of the acquired businesses have been included
in the accompanying consolidated financial statements beginning on their
respective dates of acquisition. The allocation of purchase price to the
acquired assets and liabilities is based on estimates of fair market value
and
may be prospectively revised if and when additional information the Company
is
awaiting concerning certain asset and liability valuations is obtained, provided
that such information is received no later than one year after the date of
acquisition.
On
May
31, 2006, DXP purchased the businesses of Production Pump and Machine Tech.
DXP
acquired these businesses to strengthen DXP’s position with upstream oil and gas
and pipeline customers. DXP paid approximately $8.1 million for the acquired
businesses and assumed approximately $1.2 million worth of liabilities. The
purchase price consisted of approximately $4.6 million paid in cash and $3.5
million in the form of promissory notes payable to the former owners of the
acquired businesses. In addition, DXP may pay up to an additional $2.0 million
contingent upon earnings of the acquired businesses over the next five years.
The cash portion was funded by utilizing available capacity under DXP’s
revolving credit facility. The promissory notes, which are subordinated to
DXP’s
revolving credit facility, bear interest at prime minus 2%.
On
October 11, 2006, DXP completed the acquisition of the business of Safety
International, Inc. DXP acquired this business to strengthen DXP’s expertise in
safety products. DXP paid $2.2 million in cash for the business of Safety
International, Inc. The purchase price was funded by utilizing available
capacity under DXP’s revolving credit facility.
On
October 19, 2006, DXP completed the acquisition of the business of Gulf Coast
Torch & Regulator, Inc. DXP acquired this business to strengthen DXP’s
expertise in the distribution of welding supplies. DXP paid approximately $5.5
million, net of $0.5 million of acquired cash, for the business of Gulf Coast
Torch & Regulator, Inc. and assumed approximately $0.2 million worth of
debt. Approximately $3.5 million of the purchase price was paid in cash funded
by utilizing available capacity under DXP’s revolving credit facility. $2.0
million of the purchase price was paid by issuing promissory notes payable
to
the former owners of Gulf Coast Torch & Regulator. The promissory notes,
which are subordinated to DXP’s revolving credit facility, bear interest at
prime minus 1.75%.
On
November 1, 2006, DXP completed the acquisition of the business of Safety
Alliance. DXP acquired this business to strengthen DXP’s expertise in safety
products. DXP paid $2.3 million in cash for the business of Safety Alliance.
The
purchase price was funded by utilizing available capacity under DXP’s revolving
credit facility.
The
allocation of purchase price for all acquisitions completed in 2006 is
preliminary in the December 31, 2006 and the March 31, 2007 consolidated balance
sheets. The initial purchase price allocations may be adjusted within one year
of the purchase date for changes in the estimates of the fair value of assets
acquired and liabilities assumed. The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed during 2006 (in
thousands):
Cash
|
$
1,018
|
Accounts
Receivable
|
4,169
|
Inventory
|
2,847
|
Property
and equipment
|
1,158
|
Goodwill
and intangibles
|
13,512
|
Other
assets
|
348
|
Assets
acquired
|
23,052
|
Current
liabilities assumed
|
(3,661)
|
Non-current
liabilities assumed
|
(788)
|
Net
assets acquired
|
$18,603
|
At
December 31, 2006, $16,964,000 and $6,464,000 (net of $538,000 of amortization)
of our total purchase price for acquisitions were allocated to goodwill and
other intangibles, respectively. Of the amounts allocated to other intangibles
at December 31, 2006, $3,568,000 was allocated to vendor agreements and
$2,896,000 was allocated to customer relationships. At March 31, 2007,
$16,989,000 and $6,340,000 (net of $662,000 of amortization) of our total
purchase price for acquisitions were allocated to goodwill and other
intangibles, respectively. Of the amounts allocated to other intangibles at
March 31, 2007, $3,521,000 was allocated to vendor agreements and $2,819,000
was
allocated to customer relationships. The weighted average useful life for the
vendor agreements and the customer relationships was 20 years and 10.5 years,
respectively.
The
pro
forma unaudited results of operations for the Company on a consolidated basis
for the three months ended March 31, 2006 assuming the consummation of the
purchases as of January 1, 2006 are as follows:
|
Three
Months Ended
March
31, 2006
|
Net
sales
|
$
72,507
|
Net
income
|
$
3,135
|
Per
share data
|
|
Basic
earnings
|
$
0.64
|
Diluted
earnings
|
$
0.55
|
NOTE
9: SUBSEQUENT
EVENTS - ACQUISITION AND INCREASE IN CREDIT FACILITY
On
May 3,
2007, DXP increased its existing bank revolving credit facility to $50 million
from $40 million and extended the maturity date to July 31, 2010. All other
terms of the existing credit facility remain unchanged.
On
May 4,
2007, DXP completed the acquisition of the business of Delta Process Equipment,
Inc. DXP paid $10.0 million in cash for the business of Delta Process Equipment,
Inc. The purchase price was funded by utilizing available capacity under DXP’s
bank revolving credit facility.
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
RESULTS
OF OPERATIONS
|
Three
Months Ended March 31,
|
|
2007
|
|
%
|
|
2006
|
|
%
|
|
(in
thousands, except percentages and per share amounts)
|
|
|
|
|
|
|
|
|
Sales
|
$
83,631
|
|
100.0
|
|
$
62,512
|
|
100.0
|
Cost
of sales
|
58,694
|
|
70.2
|
|
45,159
|
|
72.2
|
Gross
profit
|
24,937
|
|
29.8
|
|
17,353
|
|
27.8
|
Selling,
general and administrative expense
|
18,231
|
|
21.8
|
|
12,919
|
|
20.7
|
Operating
income
|
6,706
|
|
8.0
|
|
4,434
|
|
7.1
|
Interest
expense
|
(590)
|
|
(0.7)
|
|
(363)
|
|
(0.5)
|
Minority
interest in loss of consolidated
subsidiary
|
-
|
|
-
|
|
21
|
|
-
|
Other
income
|
18
|
|
-
|
|
7
|
|
-
|
Income
before income taxes
|
6,134
|
|
7.3
|
|
4,099
|
|
6.6
|
Provision
for income taxes
|
2,407
|
|
2.9
|
|
1,597
|
|
2.6
|
Net
income
|
$
3,727
|
|
4.4
|
|
$
2,502
|
|
4.0
|
Per
share amounts
|
|
|
|
|
|
|
|
Basic
earnings per share
|
$
0.72
|
|
|
|
$
0.51
|
|
|
Diluted
earnings per share
|
$
0.65
|
|
|
|
$
0.44
|
|
|
Three
Months Ended March 31, 2007 compared to Three Months Ended March 31, 2006
SALES.
Revenues for the quarter ended March 31, 2007, increased $21.1 million, or
33.8%, to approximately $83.6 million from $62.5 million for the same period
in
2006. Sales for the MRO Segment increased $21.0 million, or 33.9%, primarily
due
to a broad based increase in sales of pumps, bearings, safety products and
mill
supplies to companies engaged in oilfield service, oil and gas production,
mining, electricity generation and petrochemical processing. The sales increases
appear to be at least partially the result of an improving economy and high
energy prices. Sales by the four businesses acquired in 2006 accounted for
$10.2
million of the 2007 sales increase. Excluding sales of the acquired businesses,
sales for the MRO segment increased 17.5%. Sales for the Electrical Contractor
segment increased by $0.1 million, or 20.3%, for the current quarter when
compared to the same period in 2006. The sales increase resulted from the sale
of more commodity type electrical products.
GROSS
PROFIT. Gross profit as a percentage of sales increased by approximately 2.0%
for the first quarter of 2007, when compared to the same period in 2006. Gross
profit as a percentage of sales for the MRO segment increased to 29.8% for
the
three months ended March 31, 2007, from 27.7% in the comparable period of 2006.
This increase can be primarily attributed to increased margins on pump related
equipment sold by the MRO segment. Gross profit as a percentage of sales for
the
businesses acquired in 2006 is higher than the same for the remainder of our
business and accounts for a portion of the increase in the gross profit
percentage for the MRO segment. Gross profit as a percentage of sales for the
Electrical Contractor segment decreased to 32.5% for the three months ended
March 31, 2007, from 35.1% in the comparable period of 2006. This decrease
resulted from increased sales of lower margin commodity type electrical
products.
SELLING,
GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for
the
quarter ended March 31, 2007, increased by approximately $5.3 million when
compared to the same period in 2006. The increase is primarily attributed to
increased salaries, incentive compensation, employee benefits, payroll related
expenses, information technology expenses and $0.3 million of costs for
Sarbanes-Oxley compliance. Salaries have increased partially as a result of
increased headcount due to acquisitions and hiring more sales related personnel
for the purpose of increasing sales. Incentive compensation has increased as
a
result of increased gross profit. The majority of our employees receive
incentive compensation which is based upon gross profit. Selling, general and
administrative expense associated with the four businesses acquired in 2006
accounted for $2.1 million of the $5.3 million increase. Selling, general and
administrative expenses for the quarter ended March 31, 2007 increased by 41.1%
compared to the same period in 2006, which is less than the 43.7% increase
in
gross profit for the same periods. Gross profit increased more than selling,
general and administrative expenses because many expenses such as salaries
did
not increase at the same rate as gross profit increased.
OPERATING
INCOME. Operating income for the first three months of 2007 increased 51.2%
when
compared to the same period in 2006. Operating income for the MRO segment
increased 52.0% as a result of increased gross profit, partially offset by
increased selling, general and administrative expense. Operating income for
the
Electrical Contractor segment decreased 11.3% as a result of increased selling,
general and administrative expense partially offset by increased gross
profit.
INTEREST
EXPENSE. Interest expense for the quarter ended March 31, 2007 increased by
62.5% from the same period in 2006. This increase results from the combination
of an approximate 80 basis point increase in market interest rates on floating
rate debt and increased debt used to fund acquisitions and internal growth.
LIQUIDITY
AND CAPITAL RESOURCES
General
Overview
As
a
distributor of MRO products and Electrical Contractor 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.
We
used
$2.1 million of cash in operating activities during the first three months
of
2007 as compared to using $4.5 million during the first three months of 2006.
This change between the two periods was primarily attributable to a reduction
in
inventories in the 2007 period compared to an increase in inventories in the
2006 period.
During
the first three months of 2007, the amount available to be borrowed under our
loan agreement with our bank lender (the “Credit Facility”) decreased from $13.6
million at December 31, 2006 to $12.2 million at March 31, 2007. This decrease
in availability primarily resulted from the $0.9 million increase in the amount
borrowed under
the
Credit Facility. The
funds
obtained from the increase in long-term debt were used in operations, including
the increase in accounts receivable.
Credit
Facility
The
Credit Facility 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) $40.0 million, and matures July 31, 2009. The Credit Facility is secured
by
receivables, inventory and intangibles. The Credit Facility contains customary
affirmative and negative covenants as well as financial covenants that are
measured quarterly and require that we maintain a certain cash flow and other
financial ratios.
The
Credit Facility allows us to borrow at LIBOR plus a margin ranging from 0.75%
to
1.25% or prime minus a margin of 1.75% to 1.25%. At March 31, 2007, the LIBOR
based rate was LIBOR plus 75 basis points. At March 31, 2007, the prime based
rate was prime minus 175 basis points. At March 31, 2007, $24 million was
borrowed at an interest rate of 6.125% under the LIBOR option and $3.0 million
was borrowed at an interest rate of 6.5% under the prime option. Commitment
fees
of .125% per annum are payable on the portion of the Credit Facility capacity
not in use for borrowings at any given time. At March 31, 2007, we were in
compliance with all covenants. In addition to the $3.2 million of cash at March
31, 2007, we had $12.2 million available for borrowings under the Credit
Facility.
The
Credit Facility’s principal financial covenants include:
Fixed
Charge Coverage Ratio - The Credit Facility requires that the Fixed Charge
Coverage Ratio be not less than 2.0 to 1.0 as of each fiscal quarter end,
determined on a rolling four quarters basis, with “Fixed Charge Coverage Ratio”
defined as the aggregate of net profit after taxes plus depreciation expense,
amortization expense, and cash capital contributions minus dividends and
distributions divided by the aggregate of the current maturity of long-term
debt
and capitalized lease payments.
Debt
to
Credit Facility Adjusted EBITDA - The Credit Facility requires that the
Company’s ratio of Total Funded Debt to Credit Facility Adjusted EBITDA,
determined on a rolling four quarters basis, not exceed 4.0 to 1.0 as of each
quarter end. Total Funded Debt is defined under the Facility for financial
covenant purposes as the sum of all obligations for borrowed money (excluding
subordinated debt) plus all capital lease obligations. Credit Facility Adjusted
EBITDA is defined under the credit facility for financial covenant purposes
as
net profit before tax, plus interest expense (net of capitalized interest
expense), depreciation expense and amortization expense, inclusive of
acquisitions.
Borrowings
|
|
|
March
31,
2007
|
|
|
December
31,
2006
|
|
|
Increase
(Decrease)
|
|
|
|
(in
Thousands)
|
|
|
|
Current
portion of long-term debt
|
|
$
|
2,710
|
|
$
|
2,771
|
|
$
|
(61
|
)
|
Long-term
debt, less current portion
|
|
|
35,449
|
|
|
35,174
|
|
|
275
|
|
Total
long-term debt
|
|
$
|
38,159
|
|
$
|
37,945
|
|
$
|
214(2)
|
|
Amount
available
|
|
$
|
12,237(1)
|
|
$
|
13,601(1)
|
|
$
|
1,364(3)
|
|
(1)
Represents amount available to be borrowed at the indicated date
under the
credit facility.
|
(2)
The funds obtained from the increase in long-term debt were primarily
used
in operations, primarily to fund the increase in accounts
receivable.
|
(3)
The $1.4 million decrease in the amount available is primarily a
result of
increased borrowings under the line of
credit.
|
Performance
Metrics
|
March
31,
|
|
Increase
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
(in
Days)
|
Days
of sales outstanding
|
48.2
|
|
49.1
|
|
(.9)
|
Inventory
turns
|
6.6
|
|
7.0
|
|
(.4)
|
Accounts
receivable days of sales outstanding were 48.2 days at March 31, 2007 compared
to 49.1 days at March 31, 2006. The decrease resulted primarily from a change
in
customer mix which resulted in faster collection of accounts receivable.
Annualized inventory turns were 6.6 at March 31, 2007 and 7.0 at March 31,
2006.
The decline in inventory turns resulted from decisions made by inventory
management to increase inventory to support increased sales, to purchase
inventory before price increases and to react to longer lead times.
Funding
Commitments
We
believe 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 fund
potential acquisitions. Such additional financings may include additional bank
debt or the public or private sale of debt or equity securities. In connection
with any such financing, we may issue securities that substantially dilute
the
interests of our shareholders. We may not be able to obtain additional financing
on attractive terms, if at all.
DISCUSSION
OF CRITICAL ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions in determining the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates made by us in the accompanying
financial statements relate to reserves for accounts receivable collectibility,
inventory valuations, income taxes and self-insured medical claims. Actual
results could differ from those estimates.
Critical
accounting policies are those that are both most important to the portrayal
of a
company’s financial position and results of operations, and require management’s
subjective or complex judgments. Below is a discussion of what we believe are
our critical accounting policies.
Revenue
Recognition
We
recognize revenues when an agreement is in place, price is fixed, title for
product passes to the customer or services have been provided, and
collectibility is reasonably assured.
Allowance
for Doubtful Accounts
Provisions
to the allowance for doubtful accounts are made monthly and adjustments are
made
periodically (as circumstances warrant) based upon the expected collectibility
of all such accounts. Write-offs could be materially different from the reserve
provided if economic conditions change or actual results deviate from historical
trends.
Inventory
Inventory
consists principally of finished goods and is priced at lower of cost or market,
cost being determined using both the first-in, first-out (FIFO) and the last-in,
first-out (LIFO) method. Reserves are provided against inventory for estimated
obsolescence based upon the aging of the inventory and market trends. Actual
obsolescence could be materially different from the reserve if economic
conditions or market trends change significantly.
Income
Taxes
Deferred
income tax assets and liabilities are computed for differences between the
financial statement and income tax bases of assets and liabilities. Such
deferred income tax asset and liability computations are based on enacted tax
laws and rates applicable to periods in which the differences are expected
to
reverse. Valuation allowances are established to reduce deferred income tax
assets to the amounts expected to be realized.
Self-Insured
Medical Claims
We
accrue
for the estimated outstanding balance of unpaid medical claims for our employees
and their dependents. The accrual is adjusted monthly based on recent claims
experience. The actual claims could deviate from recent claims experience and
be
materially different from the reserve.
Management
periodically re-evaluates these estimates as events and circumstances change.
Together with the effects of the matters discussed above, these factors may
significantly impact the Company’s results of operations from period to
period.
ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our
market risk results from volatility in interest rates. Our exposure to interest
rate risk relates primarily to our debt portfolio. Using floating interest
rate
debt outstanding at March 31, 2007, a 100 basis point change in interest rates
would result in approximately a $322,000 change in annual interest
expense.
ITEM
4: CONTROLS AND PROCEDURES
As
of the
end of the period covered by this Quarterly Report on Form 10-Q, the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934)
was evaluated by our management with the participation of our President and
Chief Executive Officer, David R. Little (principal executive officer), and
our
Senior Vice President and Chief Financial Officer, Mac McConnell (principal
financial officer). Messrs. Little and McConnell have concluded that our
disclosure controls and procedures are effective, as of the end of the period
covered by this Quarterly Report on Form 10-Q, to help ensure that information
we are required to disclose in reports that we file with the SEC is accumulated
and communicated to management and recorded, processed, summarized and reported
within the time periods prescribed by the SEC.
There
were no changes in our internal control over financial reporting that occurred
during our last fiscal quarter (the quarter ended March 31, 2007) that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II: OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
No
material developments have occurred in the asbestos related litigation or the
litigation with BP America Production Company disclosed in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2006.
ITEM
1A. RISK FACTORS
No
material changes have occurred in the risk factors disclosed in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM
2. UNREGISTERED SALES OF EQUITY 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.
None.
ITEM
6. EXHIBITS
3.1
|
Restated
Articles of Incorporation, as amended (incorporated by reference
to
Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 (Reg.
No. 333-61953), filed with Commission on August 20,
1998)
|
3.2
|
Bylaws
(incorporated by reference to Exhibit 3.2 to the Registrant’s Registration
Statement on Form S-4 (Reg. No. 333-10021), filed with the Commission
on
August 12, 1996).
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
of the Securities Exchange Act, as amended. (Filed
herewith).
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
of the Securities Exchange Act, as amended. (Filed
herewith).
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002. (Filed herewith).
|
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:
May 10, 2007