UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the
fiscal year ended December 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
or
For the transition period
from
to
Commission file number 0-21513
DXP Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction of incorporation or organization)
76-0509661
(I.R.S. Employer Identification Number)
7272 Pinemont, Houston, Texas 77040
(Address of principal executive offices)
(713) 996-4700
Registrant’s telephone number, including area code.
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $0.01 Par Value
(Title of Class)
NASDAQ
(Name of exchange on which registered)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. (See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller eporting
Smaller reporting company [ ]
Accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of the registrant's Common Stock held by non-affiliates of registrant as of June 30, 2007: $178,365,312.
Number of shares of registrant's Common Stock outstanding as of March 14, 2008: 6,322,072.
Documents incorporated by reference: Portions of the definitive proxy statement for the annual meeting of shareholders to be held in 2008 are
incorporated by reference into Part III hereof.
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Item
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TABLE OF CONTENTS
DESCRIPTION
PART 1
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART III
Exhibits, Financial Statement Schedules
Signatures
PART IV
Page
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48
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that constitute “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes”, “expects”,
“may”, “estimates”, “will”, “should”, “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy. Any such forward-looking statements are not guarantees of future performance and involve significant risks and
uncertainties, and actual results may vary materially from those discussed in the forward-looking statements as a result of various factors. These
factors include the effectiveness of management’s strategies and decisions, our ability to affect our internal growth strategy, general economic
and business conditions, developments in technology, our ability to effectively integrate businesses we may acquire, new or modified statutory
or regulatory requirements and changing prices and market conditions. This report identifies other factors that could cause such differences. We
cannot assure you that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. We
assume no obligation and do not intend to update these forward-looking statements.
2
PART I
This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and
uncertainties. DXP Enterprises, Inc.'s actual results could differ materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", and elsewhere in this Annual
Report on Form 10-K. Unless the context otherwise requires, references in this Annual Report on Form 10-K to the "Company" or "DXP" shall
mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries.
ITEM 1. Business
DXP was incorporated in Texas in 1996 to be the successor to a company founded in 1908. Since our predecessor company was founded, we
have primarily been engaged in the business of distributing maintenance, repair and operating (“MRO”) products, equipment and service to
industrial customers. We are organized into two segments: MRO and Electrical Contractor. Sales and operating income for 2005, 2006 and
2007, and identifiable assets at the close of such years for our business segments are presented in Note 12 of the Notes to the Consolidated
Financial Statements.
The industrial distribution market is highly fragmented. Based on 2006 sales as reported by industry sources, we were the 27th largest distributor
of MRO products in the United States. Most industrial customers currently purchase their industrial supplies through numerous local distribution
and supply companies. These distributors generally provide the customer with repair and maintenance services, technical support and application
expertise with respect to one product category. Products typically are purchased by the distributor for resale directly from the manufacturer and
warehoused at distribution facilities of the distributor until sold to the customer. The customer also typically will purchase an amount of product
inventory for its near term anticipated needs and store those products at its industrial site until the products are used.
We believe that the distribution system for industrial products in the United States, described in the preceding paragraph, creates inefficiencies at
both the customer and the distributor levels through excess inventory requirements and duplicative cost structures. To compete more effectively,
our customers and other users of MRO products are seeking ways to enhance efficiencies and lower MRO product and procurement costs. In
response to this customer desire, three primary trends have emerged in the industrial supply industry:
• Industry Consolidation. Industrial customers have reduced the number of supplier relationships they maintain to lower total
purchasing costs, improve inventory management, assure consistently high levels of customer service and enhance purchasing
power. This focus on fewer suppliers has led to consolidation within the fragmented industrial distribution industry.
• Customized Integrated Service. As industrial customers focus on their core manufacturing or other production competencies, they
increasingly are demanding customized integration services, ranging from value-added traditional distribution to integrated supply
and system design, fabrication, installation and repair and maintenance services.
• Single Source, First-Tier Distribution. As industrial customers continue to address cost containment, there is a trend toward
reducing the number of suppliers and eliminating multiple tiers of distribution. Therefore, to lower overall costs to the MRO
customer, some MRO distributors are expanding their product coverage to eliminate second-tier distributors and the difficulties
associated with alliances.
Recent Acquisitions
Our growth strategy includes effecting acquisitions of businesses with complementary or desirable product lines, locations or customers. We
completed two acquisitions in 2005, four acquisitions in 2006 and three acquisitions in 2007.
On August 20, 2005, we paid approximately $2.4 million to purchase the assets of a pump remanufacturer. We made this acquisition to enhance
our ability to meet customer needs for shorter lead times on selected pumps. We assumed $1.0 million of liabilities and gave a $0.5 million
credit to the seller to use to purchase maintenance, repair and operating supplies from us.
On December 1, 2005, we purchased 100% of R. A. Mueller, Inc. to expand geographically into Ohio, Indiana, Kentucky and West
Virginia. DXP paid $7.3 million ($3.65 million cash and $3.65 million in promissory notes payable to the former owners) and assumed
approximately $1.6 million of debt and $1.9 million of accounts payable and other liabilities.
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 over the next five years.
3
On October 11, 2006, we 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.
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 $2.0 million of
the purchase price was paid by issuing promissory notes payable to the former owners of Gulf Coast Torch & Regulator.
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.
On May 4, 2007, DXP completed the acquisition of Delta Process Equipment, Inc. DXP paid $10 million in cash for this business.
On September 10, 2007, DXP acquired Precision Industries, Inc. for $106 million in cash.
On October 19, 2007, DXP completed the acquisition of the business of Indian Fire & Safety. DXP acquired this business to strengthen DXP’s
expertise in safety products and services in New Mexico and Texas. DXP paid $6.0 million in cash, $3.0 million in the form of a promissory note
and $3.0 million in future payments contingent to earnings for the business of Indian Fire & Safety.
MRO Segment
The MRO segment provides MRO products, equipment and integrated services, including technical design expertise and logistics capabilities, to
industrial customers. We provide a wide range of MRO products in the fluid handling equipment, bearing, power transmission equipment,
general mill, safety supply and electrical products categories. We offer our customers a single source of integrated services and supply on an
efficient and competitive basis by being a first-tier distributor that can purchase products directly from the manufacturer. We also provide
integrated services such as system design, fabrication, installation, repair and maintenance for our customers. We offer a wide range of industrial
MRO products, equipment and services through a complete continuum of customized and efficient MRO solutions, ranging from traditional
distribution to fully integrated supply contracts. The integrated solution is tailored to satisfy our customers’ unique needs.
SmartSource SM , one of our proprietary integrated supply programs, allows a more effective and efficient way to manage the customer’s supply
chain needs for MRO products. SmartSource SM effectively lowers costs by outsourcing the customer’s purchasing, accounting and on-site
supply/warehouse management to DXP, which reduces the duplication of effort by the customer and supplier. The program allows the customer
to transfer all or part of their supply chain needs to DXP, so the customer can focus on their core business. DXP has a broad range of first-tier
products to support a successful integrated supply offering. The program provides a productive, measurable solution to reduce cost and
streamline procurement and sourcing operations.
We currently serve as a first-tier distributor of more than 1,000,000 items of which more than 45,000 are stock keeping units ("SKUs") for use
primarily by customers engaged in the general manufacturing, oil and gas, petrochemical, service and repair and wood products industries. Other
industries served by our MRO segment include mining, construction, chemical, municipal, food and beverage, agriculture and pulp and paper.
Our MRO products include a wide range of products in the fluid handling equipment, bearing, power transmission equipment, general mill,
safety products and electrical products. Our products are distributed from 100 service centers, 75 supply chain locations and three distribution
centers.
Our fluid handling equipment line includes a full line of centrifugal pumps for transfer and process service applications, such as petrochemicals,
refining and crude oil production; rotary gear pumps for low- to medium-pressure service applications, such as pumping lubricating oils and
other viscous liquids; plunger and piston pumps for high-pressure service applications such as salt water injection and crude oil pipeline service;
and air-operated diaphragm pumps. We also provide various pump accessories. Our bearing products include several types of mounted and
unmounted bearings for a variety of applications. The hose products we distribute include a large selection of industrial fittings and stainless
steel hoses, hydraulic hoses, Teflon hoses and expansion joints, as well as hoses for chemical, petroleum, air and water applications. We
distribute seal products for downhole, wellhead, valve and completion equipment to oilfield service companies. The power transmission products
we distribute include speed reducers, flexible-coupling drives, chain drives, sprockets, gears, conveyors, clutches, brakes and hoses. We offer a
broad range of general mill supplies, such as abrasives, tapes and adhesive products, coatings and lubricants, cutting tools, fasteners, hand tools,
janitorial products, pneumatic tools, welding supplies and welding equipment. We offer a broad range of fluid power and hydraulics
solutions. Our safety products include eye and face protection products, first aid products, hand protection products, hazardous material
handling products, instrumentation and respiratory protection products. We distribute 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.
4
In addition to distributing MRO products, we provide innovative pumping solutions. DXP provides fabrication and technical design to meet the
capital equipment needs of our customers. DXP provides these solutions by utilizing manufacturer authorized equipment and certified
personnel. Pump packages require MRO and original equipment manufacturer, or OEM, equipment and parts such as pumps, motors and valves,
and consumable products such as welding supplies. DXP leverages its MRO inventories and breadth of authorized products to lower the total
cost and maintain the quality of our innovative pumping solutions.
Our operations managers support the sales efforts through direct customer contact and manage the efforts of the outside and direct sales
representatives. We have structured compensation to provide incentives to our sales representatives, through the use of commissions, to increase
sales. Our outside sales representatives focus on building long-term relationships with customers and, through their product and industry
expertise, providing customers with product application, engineering and after-the-sale services. The direct sales representatives support the
outside sales representatives and are responsible for entering product orders and providing technical support with respect to our products.
Because we offer a broad range of products, our outside and direct sales representatives are able to use their existing customer relationships with
respect to one product line to cross-sell our other product lines. In addition, geographic locations in which certain products are sold also are
being utilized to sell products not historically sold at such locations. As we expand our product lines and geographical presence through hiring
experienced sales representatives, we assess the opportunities and appropriate timing of introducing existing products to new customers and new
products to existing customers. Prior to implementing such cross-selling efforts, we provide the appropriate sales training and product expertise
to our sales force.
Unlike many of our competitors, we market our products primarily as a first-tier distributor, generally procuring products directly from the
manufacturers, rather than from other distributors. As a first-tier distributor, we are able to reduce our customers' costs and improve efficiencies
in the supply chain.
We believe we have increased our competitive advantage through our traditional and integrated supply programs, which are designed to address
the customer's specific product and procurement needs. We offer our customers various options for the integration of their supply needs, ranging
from serving as a single source of supply for all or specific lines of products and product categories to offering a fully integrated supply package
in which we assume the procurement and management functions, including ownership of inventory, at the customer's location. Our approach to
integrated supply allows us to design a program that best fits the needs of the customer. For those customers purchasing a number of products in
large quantities, the customer is able to outsource all or most of those needs to us. For customers with smaller supply needs, we are able to
combine our traditional distribution capabilities with our broad product categories and advanced ordering systems to allow the customer to
engage in one-stop shopping without the commitment required under an integrated supply contract.
We acquire our products through numerous original equipment manufacturers, or OEMs. We are authorized to distribute the manufacturers'
products in specific geographic areas. All of our distribution authorizations are subject to cancellation by the manufacturer upon one-year notice
or less. In 2007, one manufacturer provided pump products that accounted for approximately 10% of our revenues. No other manufacturer
provided products that accounted for 10% or more or our revenues. We believe that alternative sources of supply could be obtained in a timely
manner if any distribution authorization were canceled. Accordingly, we do not believe that the loss of any one distribution authorization would
have a material adverse effect on our business, financial condition or results of operations. Representative manufacturers of our products include
BACOU/DALLOZ, Baldor Electric, Emerson, Falk, G&L, Gates, Gould's, INA/Fag Bearing, LaCross Rainfair Safety Products, Martin
Sprocket, National Oilwell, Norton Abrasives, NTN, Rexnord, SKF, ULTRA, 3M, Timken, Tyco, Union Butterfield, Viking and Wilden.
At December 31, 2007, the MRO Segment had 1,594 full-time employees.
5
Electrical Contractor Segment
The Electrical Contractor segment was formed in 1998 with the acquisition of substantially all of the assets of an electrical supply business. 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
segment has one owned warehouse/sales facility in Memphis, Tennessee.
We acquire our electrical products through numerous OEMs. We are authorized to distribute the manufacturers' products in specific geographic
areas. All of our distribution authorizations are subject to cancellation by the manufacturer upon one-year notice or less. No one manufacturer
provides products that account for 10% or more of our revenues. We believe that alternative sources of supply could be obtained in a timely
manner if any distribution authorization were canceled. Accordingly, we do not believe that the loss of any one distribution authorization would
have a material adverse effect on our business, financial condition or results of operations. Significant vendors include Cutler-Hammer, Cooper,
Killark, 3M, General Electric and Allied. To meet prompt delivery demands of its customers, this segment maintains large inventories.
At December 31, 2007, the Electrical Contractor segment had 9 full-time employees.
Competition
Our business is highly competitive. In the MRO segment we compete with a variety of industrial supply distributors, many of which may have
greater financial and other resources than we do. Many of our competitors are small enterprises selling to customers in a limited geographic area.
We also compete with larger distributors that provide integrated supply programs and outsourcing services similar to those offered through our
SmartSource program, some of which might be able to supply their products in a more efficient and cost-effective manner than we can provide.
We also compete with catalog distributors, large warehouse stores and, to a lesser extent, manufacturers. While many of our competitors offer
traditional distribution of some of the product groupings that we offer, we are not aware of any major competitor that offers on a non-catalog
basis a product grouping as broad as our offering. Further, while certain catalog distributors provide product offerings as broad as ours, these
competitors do not offer the product application, technical design and after-the-sale services that we provide. In the Electrical Contractor
segment we compete against a variety of suppliers of electrical products, many of which may have greater financial and other resources than we
do.
Insurance
We maintain liability and other insurance that we believe to be customary and generally consistent with industry practice. We retain a portion of
the risk for medical claims, general liability, worker’s compensation and property losses. The various deductibles per our insurance policies
generally do not exceed $200,000 per occurrence. There are also certain risks for which we do not maintain insurance. There can be no
assurance that such insurance will be adequate for the risks involved, that coverage limits will not be exceeded or that such insurance will apply
to all liabilities. The occurrence of an adverse claim in excess of the coverage limits that we maintain could have a material adverse effect on our
financial condition and results of operations. The premiums for insurance have increased significantly over the past three years. This trend
could continue. Additionally, we are partially self-insured for our group health plan, worker’s compensation, auto liability and general liability
insurance. The cost of claims for the group health plan has increased over the past three years. This trend is expected to continue.
Government Regulation and Environmental Matters
We are subject to various laws and regulations relating to our business and operations, and various health and safety regulations as established by
the Occupational Safety and Health Administration.
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 a discharge, we could be held liable for any damages that result, and any such liability
could have a material adverse effect on us. We are not currently aware of any situation or condition that we believe is likely to have a material
adverse effect on our results of operations or financial condition.
Employees
At December 31, 2007, we had 1,603 full-time employees. We believe that our relationship with our employees is good.
Available Information
6
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available through our Internet website
( www.dxpe.com ) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission.
ITEM 1A. Risk Factors
The following is a discussion of significant risk factors relevant to DXP’s business that could adversely affect its business, financial condition or
results of operations.
Our future results will be impacted by our ability to implement our internal growth strategy.
Our future results will depend in part on our success in implementing our internal growth strategy, which includes expanding our existing
geographic areas, selling additional products to existing customers and adding new customers. Our ability to implement this strategy will depend
on our success in selling more products and services to existing customers, acquiring new customers, hiring qualified sales persons, and
marketing integrated forms of supply management such as those being pursued by us through our SmartSource program. Although we intend to
increase sales and product offerings to existing customers, there can be no assurance that we will be successful in these efforts.
Risks Associated With Acquisition Strategy
Our future results will depend in part on our success implementing our acquisition strategy. This strategy includes taking advantage of a
consolidation trend in the industry and effecting acquisitions of businesses with complementary or desirable new product lines, strategic
distribution locations, attractive customer bases or manufacturer relationships. Our ability to implement this strategy will be dependent on our
ability to identify, consummate and successfully assimilate acquisitions on economically favorable terms. Although DXP is actively seeking
acquisitions that would meet its strategic objectives, there can be no assurance that we will be successful in these efforts. In addition,
acquisitions involve a number of special risks, including possible adverse effects on our operating results, diversion of management’s attention,
failure to retain key acquired personnel, risks associated with unanticipated events or liabilities, expenses associated with obsolete inventory of
an acquired company and amortization of acquired intangible assets, some or all of which could have a material adverse effect on our business,
financial condition and results of operations. There can be no assurance that DXP or other businesses acquired in the future will achieve
anticipated revenues and earnings. In addition, our loan agreements with our bank lenders (the “Facility”), contain certain restrictions that could
adversely affect our ability to implement our acquisition strategy. Such restrictions include a provision prohibiting us from merging or
consolidating with, or acquiring all or a substantial part of the properties or capital stock of, any other entity without the prior written consent of
the lenders. There can be no assurance that we will be able to obtain the lender’s consent to any of our proposed acquisitions.
Risks Related to Acquisition Financing
We may need to finance acquisitions by using shares of Common Stock for a portion or all of the consideration to be paid. In the event that the
Common Stock does not maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept Common Stock
as part of the consideration for the sale of their businesses, we may be required to use more of our cash resources, if available, to maintain our
acquisition program. If we do not have sufficient cash resources, our growth could be limited unless we are able to obtain additional capital
through debt or equity financings.
Our business has substantial competition and competition could adversely affect our results.
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 catalog suppliers, large warehouse stores and, to a lesser extent, certain
manufacturers. Competitive pressures could adversely affect DXP’s sales and profitability.
7
The loss of or the failure to attract and retain key personnel could adversely impact our results of operations.
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. 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.
The loss of any key supplier could adversely affect DXP’s sales and profitability.
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 of our business and, in turn, could adversely affect results of operations and financial
condition.
A slowdown in the economy could negatively impact DXP’s sales growth.
Economic and industry trends affect DXP’s business. Demand for our products is subject to 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, demand for our products could
be adversely impacted by changes in the markets of our customers.
Interruptions in the proper functioning of our information systems could disrupt operations and cause increases in costs and/or decreases in
revenues.
The proper functioning of DXP’s information systems is critical to the successful operation of our business. Although DXP’s information
systems are protected through physical and software safeguards and remote processing capabilities exist, information systems are still vulnerable
to natural disasters, power losses, telecommunication failures and other problems. If critical information systems fail or are otherwise
unavailable, DXP’s ability to procure products to sell, process and ship customer orders, identify business opportunities, maintain proper levels
of inventories, collect accounts receivable and pay accounts payable and expenses could be adversely affected.
ITEM 1B. Unresolved Staff Comments
Not applicable.
ITEM 2. Properties
We own our headquarters facility in Houston, Texas, which has 48,000 square feet of office space. The MRO segment owns or leases
102 facilities located in Arkansas, California, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland,
Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington and Wyoming. In addition, we operate supply chain
installations in 75 of our customers’ facilities in Arkansas, California, Georgia, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan,
Mississippi, Missouri, Nebraska, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and
Wisconsin, as well as Ontario, Canada. The Electrical Contractor segment owns one service center facility in Tennessee. Our owned facilities
range from 5,000 square feet to 65,000 square feet in size. We lease facilities for terms generally ranging from one to seven years. The leased
facilities range from 2,000 square feet to 84,600 square feet in size. The leases provide for periodic specified rental payments and certain leases
are renewable at our option. We believe that our facilities are suitable and adequate for the needs of our existing business. We believe that if the
leases for any of our facilities were not renewed, other suitable facilities could be leased with no material adverse effect on our business,
financial condition or results of operations. Two of the facilities owned by us are pledged to secure our indebtedness.
ITEM 3. Legal Proceedings
On July 22, 2004, DXP and Ameron International Corporation, DXP’s vendor of fiberglass reinforced pipe, were sued in the Twenty-Fourth
Judicial District Court, Parish of Jefferson, State of Louisiana by BP America Production Company regarding the failure of Bondstrand PSX JFC
pipe, a recently introduced type of fiberglass reinforced pipe which had been installed on four energy production platforms. BP American
Production Company alleges negligence, breach of contract, breach of warranty and that damages exceed $20 million. DXP believes the failures
were caused by the failure of the pipe itself and not by work performed by DXP. We intend to vigorously defend these claims. Our insurance
carrier has agreed, under a reservation of rights to deny coverage, to provide a defense against these claims. The maximum amount of our
insurance coverage, if any, is $6 million. Under certain circumstances our insurance may not cover this claim. DXP currently believes that
losses related to this claim are not reasonably possible.
8
In 2003, we were notified that we had been sued in various state courts in Nueces County, Texas. The twelve suits allege personal injury
resulting from products containing asbestos allegedly sold by us. The suits do not specify what products or the dates we allegedly sold the
products. The plaintiffs’ attorney has agreed to a global settlement of all suits for a nominal amount to be paid by our insurance
carriers. Settlement has been consummated as to 116 of the 133 plaintiffs, and the remaining settlements are in process. The cases are all
dismissed or dormant pending the remaining settlements.
From time to time the Company is a party to various legal proceedings arising in the ordinary course of its business. The Company believes that
the outcome of any of these various proceedings will not have a material adverse effect on its business, financial condition or results of
operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
On December 31, 2007, at the Company’s annual meeting of shareholders, the individuals listed below were elected directors by the holders of
Common Stock, Series A Preferred Stock and Series B Preferred Stock, voting together as a class.
David Little
Cletus Davis
Timothy P. Halter
Kenneth H. Miller
Charles R. Strader
Shares/Votes Voted For
5,773,359
5,539,823
5,802,224
5,802,771
5,496,768
Shares/Votes Withheld
99,971
333,507
71,106
70,559
376,562
PART II
ITEM 5.
Issuer Purchases of Equity Securities
Market for the Registrant's Common Equity, Related Stockholder Matters and
Our common stock trades on The NASDAQ Global Market under the symbol "DXPE".
The following table sets forth on a per share basis the high and low sales prices for our common stock as reported by NASDAQ for the periods
indicated.
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 44.73
$ 53.88
$ 49.90
$ 53.25
$ 28.21
$ 38.36
$ 30.40
$ 35.53
$ 37.44
$ 59.24
$ 38.49
$ 36.61
$ 16.61
$ 28.00
$ 20.60
$ 20.72
On March 13, 2008 we had approximately 489 holders of record for outstanding shares of our common stock. This number does not include
shareholders for whom shares are held in “nominee” or “street name”.
We anticipate that future earnings will be retained to finance the continuing development of our business. In addition, our bank credit facility
prohibits us from declaring or paying any dividends or other distributions on our capital stock except for the monthly $0.50 per share dividend
on our Series B convertible preferred stock, which amounts to $90,000 in the aggregate per year. Accordingly, we do not anticipate paying cash
dividends on our common stock in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors
and will depend upon, among other things, future earnings, the success of our business activities, regulatory and capital requirements, our
lenders, our general financial condition and general business conditions.
9
Stock Performance
The following performance graph compares the performance of DXP Common Stock to the NASDAQ Industrial Index and the NASDAQ
Composite (US). The graph assumes that the value of the investment in DXP Common Stock and in each index was $100 at December 31, 2002
and that all dividends were reinvested.
Issuer Purchase of Equity Securities
On October 24, 2007, DXP exchanged a note receivable from Mr. David Little with a value of $825,000, including accrued interest, for 20,049
shares of common stock owned by Mr. Little. The shares were valued at the $41.14 per share closing price on October 24, 2007.
ITEM 6. Selected Financial Data
The selected historical consolidated financial data set forth below for each of the years in the five-year period ended December 31, 2007 has
been derived from our audited consolidated financial statements. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Earnings Data:
Sales
Gross Profit
Operating income
Income before income taxes
Net income
Per share amounts
Basic earnings per common share
Common shares outstanding
Diluted earnings per share
Common
outstanding
common
and
equivalent
2003
Years Ended December 31,
2006
2005
(in thousands, except per share amounts)
2004
$ 150,683 $ 160,585
39,431
5,209
4,384
2,780
38,549
4,309
3,197
2,069
$ 185,364 $ 279,820
78,622
20,678
19,404
11,922
49,714
9,404
8,615
5,467
4,072
$ 0.49 $ 0.67
4,027
$ 0.42 $ 0.50
5,509
4,920
4,349
$ 1.24 $ 2.34
5,063
$ 0.94 $ 2.08
5,732
5,789
shares
2007
$ 444,547
125,692
31,892
28,897
17,347
$ 2.95
5,849
$ 2.71
6,391
10
Consolidated Balance Sheet Data
Total assets
Long-term debt obligations
Shareholders’ equity
As of December 31,
2005
2004
2003
$ 48,375 $ 48,283 $ 72,920
25,109
19,589
14,925
12,876
16,675
10,076
2006
2007
$ 116,807 $ 286,166
101,989
101,511
35,174
35,718
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes contained
elsewhere in this Annual Report on Form 10-K.
General Overview
Our products and services are marketed in at least 36 states in the U.S. and one province in Canada to over 40,000 customers that are engaged in
a variety of industries, many of which may be countercyclical to each other. Demand for our products generally is subject to changes in the
United States and global economy and economic trends affecting our customers and the industries in which they compete in particular. Certain
of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry and the construction
industry, are cyclical and materially affected by changes in the United States and global economy. As a result, we may experience changes in
demand within particular markets, segments and product categories as changes occur in our customers' respective markets. During 2003, our
performance was impacted negatively by the economic downturn, particularly the downturn in domestic manufacturing. All of our increase in
sales and gross profit for 2003 compared to 2002 was due to increased sales of products for offshore energy production. Our employee
headcount decreased by over ten percent during 2003 as we worked to bring our cost structure in line with our sales. During 2004 the economy
improved. Our employee headcount decreased by approximately 1% during 2004. The majority of the 2004 sales increase came from increased
sales of products for offshore energy production and general manufacturing. During 2005 the general economy and the oil and gas exploration
and production business continued to improve. Our employee headcount increased by 17.9% as a result of two acquisitions and hiring additional
personnel to support increased sales. The majority of the 2005 sales increase came from a broad based increase in sales of pumps, bearings,
safety products and mill supplies to customers engaged in oilfield service, oil and gas production, mining, electricity generation and
petrochemical processing. Sales by the two businesses acquired in 2005 accounted for $7.3 million of the $24.8 million 2005 sales
increase. During 2006 the general economy and the oil and gas exploration and production business continued to be positive. Our employee
headcount increased by 45% a result of four acquisitions and hiring additional personnel to support increased sales. The majority of the 2006
sales increase came from a broad based increase in sales of pumps, bearings, safety products and mill supplies to customers engaged in oilfield
service, oil and gas production, mining, electricity generation and petrochemical processing. Sales by the four businesses acquired in 2006
accounted for $11.8 million of the $94.5 million 2006 sales increase. During 2007 the general economy and the oil and gas exploration and
production business continued to be positive. During 2007 the headcount increased by 112% primarily as a result of three acquisitions. Sales by
the three businesses acquired in 2007 accounted for $92.3 million of the $164.7 million sales increase. The 2007 sales increase, excluding sales
of businesses acquired in 2007, resulted from a broad based increase in sales by our service centers, innovative pumping solution locations and
supply chain locations.
Our sales growth strategy in recent years has focused on internal growth and acquisitions. Key elements of our sales strategy include leveraging
existing customer relationships by cross-selling new products, expanding product offerings to new and existing customers, and increasing
business-to-business solutions using system agreements and supply chain solutions for our integrated supply customers. We will continue to
review opportunities to grow through the acquisition of distributors and other businesses that would expand our geographic breadth and/or add
additional products and services. Our results will depend on our success in executing our internal growth strategy and, to the extent we complete
any acquisitions, our ability to integrate such acquisitions effectively.
Our strategies to increase productivity include consolidated purchasing programs, centralizing product distribution centers, centralizing certain
customer service and inside sales functions, converting selected locations from full warehouse and customer service operations to service
centers, and using information technology to increase employee productivity.
11
Results of Operations
Years Ended December 31,
2005
%
2006
%
2007
%
(in millions, except percentages and per share amounts)
Sales
Cost of sales
Gross profit
Selling, general administrative expense
Operating income
Interest expense
Other income and minority interest
Income before income taxes
Provision for income taxes
Net income
Per share
Basic earnings per share
Diluted earnings per share
$185.4
135.7
49.7
40.3
9.4
1.0
(0.2)
8.6
3.1
$ 5.5
$ 1.24
$ 0.94
100.0
73.2
26.8
21.7
5.1
0.5
(0.1)
4.7
1.7
3.0%
$ 279.8
201.2
78.6
57.9
20.7
2.0
(0.7)
19.4
7.5
$ 11.9
$ 2.34
$ 2.08
100.0
71.7
28.3
21.1
7.2
0.7
-
6.5
2.6
3.9%
100.0
71.9
28.1
20.7
7.4
0.7
(0.2)
6.9
2.7
4.2%
$ 444.5
318.8
125.7
93.8
31.9
3.3
(0.3)
28.9
11.6
$ 17.3
$ 2.95
$ 2.71
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
SALES. Revenues for 2007 increased $164.7 million, or 58.9%, to approximately $444.5 million from $279.8 million in 2006. Sales for the
MRO segment increased $164.2 million, or 59.3% primarily due to a broad based increase in sales of pumps, safety products and mill supplies to
companies engaged in oilfield service, oil and gas production, food processing, agriculture, mining, electricity generation and petrochemical
processing. Sales by the three acquisitions completed in 2007 accounted for $92.3 million of the 2007 sales increase. Excluding sales of the
acquired businesses, sales for the MRO segment increased 26.0%. Sales for the Electrical Contractor segment increased $0.5 million, or 18.2%,
to $3.3 million from $2.8 million for 2006. The sales increase for the Electrical Contractor segment resulted from the sale of more commodity
type electrical products.
GROSS PROFIT. Gross profit for 2007 increased 59.9% compared to 2006. Gross profit, as a percentage of sales, increased by approximately
0.2% for 2007, when compared to 2006. Gross profit as a percentage of sales for the MRO segment increased to 28.2% in 2007 from 28.0% in
2006. This increase can be primarily attributed to the implementation of various strategies to increase margins including pricing software and
revised commission plans. Gross profit as a percentage of sales for the Electrical Contractor segment decreased to 37.1% for 2007, from 39.9%
in 2006. This decrease resulted from the sale of more lower margin commodity type electrical products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for 2007 increased by approximately $35.9
million, or 61.9%, when compared to 2006. The increase is primarily attributed to selling, general and administrative expenses of acquired
businesses and increased gross profit. The majority of our employees receive incentive compensation which is based upon gross profit. As a
percentage of revenue, the 2007 expense increased by approximately 0.4% to 21.1% from 20.7% for 2006. This increase resulted from the $2.2
million increase in the amortization of intangibles associated with acquisitions.
OPERATING INCOME. Operating income for 2007 increased by approximately $11.2 million, or 54.2%, when compared to 2006. This
increase was the net of a 55.7% increase in operating income for the MRO segment and a 10.7% decrease in operating income for the Electrical
Contractor segment. Operating income for the MRO segment increased as a result of increased gross profit, partially offset by increased selling,
general, and administrative expense. Operating income for the Electrical Contractor segment decreased as a result of increased gross profit,
which was more than offset by increased selling, general and administrative costs.
INTEREST EXPENSE. Interest expense for 2007 increased by 72.1% from 2006. This increase resulted from the combination of increased
debt to fund acquisitions and internal growth and an approximate 14 basis point increase in prime and LIBOR market interest rates for 2007
compared to 2006.
OTHER INCOME. Other income for 2007 decreased to $0.3 million from $0.7 million for 2006 as a result of gains recorded on sales of
equipment and real estate during 2006.
12
INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 35% due to state income taxes and non-deductible
expenses. Our effective tax rate for 2007 increased to 40.0% from 38.6% for 2006 primarily because the statutory rate for DXP increased to
35% from 34% as a result of increased taxable income and as a result of increased state income taxes. State income taxes increased as a result of
increased operations in higher tax states.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
SALES. Revenues for 2006 increased $94.5 million, or 51.0%, to approximately $279.8 million from $185.4 million in 2005. Sales for the
MRO segment increased $94.1 million, or 51.4% 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 improved economy and high energy prices. Sales by the four acquisitions completed in
2006 accounted for $11.8 million of the 2006 sales increase. Excluding sales of the acquired businesses, sales for the MRO segment increased
45.0%. Sales for the Electrical Contractor segment increased $0.4 million, or 16.9%, to $2.8 million from $2.4 million for 2005. The sales
increase for the Electrical Contractor segment resulted from the sale of more commodity type electrical products.
GROSS PROFIT. Gross profit for 2006 increased 58.1% compared to 2005. Gross profit, as a percentage of sales, increased by approximately
1.3% for 2006, when compared to 2005. Gross profit as a percentage of sales for the MRO segment increased to 28.0% in 2006 from 26.6% in
2005. This increase can be primarily attributed to increased margins on pump related equipment sold by businesses acquired in 2005 and 2006
which are included in the MRO segment. Gross profit as a percentage of sales for the Electrical Contractor segment decreased to 39.9% for
2006, from 42.6% in 2005. This decrease resulted from the sale of more lower margin commodity type electrical products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for 2006 increased by approximately $17.6
million, or 43.7%, when compared to 2005. The increase is primarily attributed to increased salaries, incentive compensation, employee
benefits, payroll related expenses and $0.5 million of costs for Sarbanes-Oxley compliance. Selling, general and administrative expense
associated with the four acquisitions completed in 2006 accounted for $2.6 million of the increase. Salaries have increased partially as a result of
increased headcount due to acquisitions and hiring more personnel for the purpose of supporting increasing sales. Incentive compensation has
increased as a result of increased gross profit and income before tax. The majority of our employees receive incentive compensation which is
based upon gross profit. As a percentage of revenue, the 2006 expense decreased by approximately 1.0% to 20.7% from 21.7% for 2005. This
decrease resulted from sales increasing by 51.0% while selling, general and administrative costs increased by only 43.7%.
OPERATING INCOME. Operating income for 2006 increased by approximately $11.3 million, or 119.9%, when compared to 2005. This
increase was the result of a 122.3% increase in operating income for the MRO segment and a 49.2% increase in operating income for the
Electrical Contractor segment. Operating income for the MRO segment increased as a result of increased gross profit, partially offset by
increased selling, general, and administrative expense. Operating income for the Electrical Contractor segment increased as a result of increased
gross profit, combined with decreased selling, general and administrative costs.
INTEREST EXPENSE. Interest expense for 2006 increased by 94% from 2005. This increase resulted from the combination of increased debt
to fund acquisitions and internal growth and an approximate 177 basis point increase in prime and LIBOR market interest rates for 2006
compared to 2005. The effect of the increase in market interest rates was partially offset by the lower margins on our facility put in place in
August, 2005.
OTHER INCOME. Other income for 2006 increased to $0.7 million from $0.1 million for 2005 as a result of gains recorded on sales of
equipment and real estate during 2006.
INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 34% due to state income taxes and non-deductible
expenses. Our effective tax rate for 2006 increased to 38.6% from 36.5% for 2005 primarily as a result of increased state income taxes. State
income taxes increased as a result of increased operations in higher tax states and the effect of the use of state net operating loss carryforwards in
2005.
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.
13
We generated approximately $13.5 million of cash in operating activities in 2007 as compared to breaking even in 2006. This change between
the two years was primarily attributable to the $5.4 million increase in net income in 2007 compared to 2006, a smaller increase in inventory in
2007 compared to 2006 and an increased amount of amortization in 2007 compared to 2006.
We paid $125.9 million of cash to purchase businesses in 2007 compared to $12.1 million in 2006.
We purchased approximately $1.9 million of capital assets during 2007 compared to $2.4 million for 2006. Capital expenditures during 2007
and 2006 were related primarily to computer equipment, computer software, inventory handling equipment, and building improvements. Capital
expenditures for 2008 are expected to exceed the 2007 amount.
At December 31, 2007, our total long-term debt was $106.2 million compared to total capitalization (total long-term debt plus shareholders’
equity) of $207.7 million. Approximately $101.1 million of this outstanding debt bears interest at various floating rates. Therefore, as an
example, a 200 basis point increase in interest rates would increase our annual interest expense by approximately $2.0 million.
Our normal trade terms for our customers require payment within 30 days of invoice date. In response to competition and customer demands we
will offer extended terms to selected customers with good credit history. Customers that are financially strong tend to request extended terms
more often than customers that are not financially strong. Many of our customers, including companies listed in the Fortune 500, do not pay us
within stated terms for a variety of reasons, including a general business philosophy to pay vendors as late as possible. We generally collect the
amounts due from these large, slow-paying customers.
During 2007, the amount available to be borrowed under our credit facility increased from $13.6 million at December 31, 2006 to $17.1 million
at December 31, 2007. The increase in availability is the result of our new credit facility which allows us to borrow a higher percentage of our
assets compared to our previous credit facility. Our total long-term debt increased $68.2 million during 2007. The increased borrowings were
used primarily to fund acquisitions. Management believes that the liquidity of our balance sheet at December 31, 2007, provides us with the
ability to meet our working capital needs, scheduled principal payments, capital expenditures and Series B preferred stock dividend payments
during 2008.
Credit Facility
On September 10, 2007, DXP entered into a credit agreement (the “Credit Facility”) with Wells Fargo Bank, National Association as lead
arranger and administrative agent. The Credit Facility consists of a revolving credit facility that provides a $130 million line of credit to
DXP. This new line of credit replaced DXP’s prior credit facility. The new Credit Facility expires on September 10, 2012.
DXP’s borrowings and letters of credit outstanding under the Credit Facility as of any day must be less than the sum of 85% of net accounts
receivable; 50% of the net book value of furniture, fixtures and equipment; and 60% of inventory. DXP’s borrowings and letter of credit
capacity under the Credit Facility at any given time is $130 million less borrowings and letters of credit outstanding, subject to the asset
coverage ratio described above.
The Credit Facility is secured by receivables, inventory, fixed assets and intangibles. The Credit Facility contains customary affirmative and
negative covenants as well as financial covenants that are measured quarterly and require that we comply with certain financial covenants
described below.
The Credit Facility allows us to borrow at LIBOR plus a margin ranging from 0.75% to 1.25% or prime plus a margin of 0.00% to 0.25%. At
December 31, 2007, the LIBOR based rate was LIBOR plus 125 basis points. At December 31, 2007, the prime based rate was prime plus .25
percent. At December 31, 2007, $94.2 million was outstanding under the Credit Facility. At December 31, 2007, $90.0 million was borrowed at
an interest rate of 6.5% under the LIBOR option and $4.2 million was borrowed at an interest rate of 7.5% under the prime option. Commitment
fees of 0.125% to 0.25% per annum are payable on the portion of the Credit Facility capacity not in use for borrowings at any given time. At
December 31, 2007 the commitment fee was 0.25%. At December 31, 2007, we were in compliance with all covenants. At December 31, 2007,
we had $17.1 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 1.5 to 1.0 as of each fiscal
quarter end, determined on a rolling four quarters basis, with “Fixed Charge Coverage Ratio” defined as the ratio of (a) EBITDA minus capital
expenditures (excluding acquisitions) to (b) Fixed Charges. EBITDA is defined as consolidated net income plus depreciation, amortization,
other non-cash expense items, interest expense, income tax expense with pro forma EBITDA adjustments for divestitures and
acquisitions. Fixed Charges are defined as the aggregate of interest expense, scheduled principal payments on long term debt, current portion of
capital lease obligations and cash income taxes.
14
Leverage Ratio - The Credit Facility requires that the DXP’s ratio of Indebtedness to EBITDA, determined on a rolling four quarters basis, not to
exceed 3.5 to 1.0 as of each quarter end until and including September 30, 2009 and 3.0 to 1.0 as of each quarter end after September 30,
2009. Indebtedness includes the sum of all obligations for borrowed money, all capital lease obligations, all guarantees of indebtedness of others
and all outstanding letters of credit.
Borrowings
Current portion of long-term debt
Long-term debt, less current portion
Total long-term debt
Amount available (1)
December 31,
2006
2007
(in Thousands)
$ 2,771
35,174
$ 37,945
$ 13,601
$ 4,200
101,989
$ 106,189
$ 17,116
Increase
(Decrease)
$ 1,429
66,815
$ 68,244 (2)
$ 3,515 (3)
(1) Represents amount available to be borrowed under our credit facility at the indicated date.
(2) The funds obtained from the increase in long-term debt were primarily used to complete three acquisitions.
(3) The $3.5 million increase in the amount available is primarily a result of our new credit facility which allows us
to borrow a higher percentage of our assets compared to our previous credit facility.
Performance Metrics
December 31,
2006
2007
Increase
(Decrease)
Days of sales outstanding (in days)
Inventory turns
Results for businesses acquired in 2006 and 2007 were annualized to compute these performance metrics.
50.2
5.9
48.2
5.8
(2.0)
(0.1)
Accounts receivable days of sales outstanding were 48.2 at December 31, 2007 compared to 50.2 days at December 31, 2006. The decrease
resulted primarily from a change in customer mix which resulted in faster collection of accounts receivable. Annualized inventory turns were
5.8 times at December 31, 2007 compared to 5.9 times at December 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.
Contractual Obligations
The impact that our contractual obligations as of December 31, 2007 are expected to have on our liquidity and cash flow in future periods is as
follows:
15
including current
Long-term debt,
portion (1)
Operating lease obligations
Estimated interest payments (2)
Total
Payments Due by Period
Total
$106,189
Less than 1
Year
$ 4,200
1–3 Years
$5,609
3-5 Years
$ 94,745
More than
5 Years
$ 1,635
27,612
1,446
$135,247
7,313
596
$ 12,109
11,196
570
$17,375
5,790
229
$100,764
3,313
51
$ 4,999
(1) Amounts represent the expected cash payments of our long-term debt and do not include any fair value
adjustment.
(2) Assumes interest rates in effect at December 31, 2007. Assumes debt is paid on maturity date and not
replaced. Does not include interest on the revolving line of credit as borrowings under this facility
fluctuate. The amounts of interest incurred for borrowings under the revolving lines of credit were
$755,000, $1,301,000 and $2,595,000 for 2005, 2006 and 2007, respectively. Management anticipates an
increased level of interest payments on the Facility in 2008 as a result of increased debt levels.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities ("SPE's"), which would have been established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2007, we were
not involved in any unconsolidated SPE transactions.
Indemnification
In the ordinary course of business, DXP enters into contractual arrangements under which DXP may agree to indemnify customers from any
losses incurred relating to the services we perform. Such indemnification obligations may not be subject to maximum loss clauses. Historically,
payments made related to these indemnities have been immaterial.
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,
self-insured liability claims and self-insured medical claims. Actual results could differ from those estimates. 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.
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. These policies have been discussed with the Audit Committee of the Board of
Directors of DXP. Below is a discussion of what we believe are our critical accounting policies. Also, see Note 1 of the Notes to the
Consolidated Financial Statements.
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.
16
Self-insured Insurance Claims
We accrue for the estimated loss on self-insured liability claims. The accrual is adjusted quarterly based upon reported claims information. The
actual cost could deviate from the recorded estimate.
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.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets attributable to our reporting units are tested for impairment by comparing the fair value of each reporting
unit with its carrying value. Significant estimates used in the determination of fair value include estimates of future cash flows, future growth
rates, costs of capital and estimates of market multiples. As required under current accounting standards, we test for impairment annually at year
end unless factors otherwise indicate that impairment may have occurred. We did not have any impairments under the provisions of SFAS No.
142 as of December 31, 2007.
Purchase Accounting
The Company estimates the fair value of assets, including property, machinery and equipment and its related useful lives and salvage values, and
liabilities when allocating the purchase price of an acquisition.
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.
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 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 2006 and 2007 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.
No future grants will be made under the Company’s stock option plans. The Company now uses restricted stock for share-based compensation
programs. Compensation expense recognized for restricted stock and stock options in the years ended December 31, 2006 and 2007 was
$220,000 and $591,000, respectively. Unrecognized compensation expense under the Restricted Stock Plan was $864,000 and $3,264,000,
respectively, at December 31, 2006 and 2007. As of December 31, 2007, the weighted average period over which the unrecognized
compensation expense is expected to be recognized is 43.1 months.
Recent Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for discussion of recent accounting pronouncements.
17
Inflation
We do not believe the effects of inflation have any material adverse effect on our results of operations or financial condition. We attempt to
minimize inflationary trends by passing manufacturer price increases on to the customer whenever practicable.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Our market risk results primarily from volatility in interest rates. Our exposure to interest rate risk relates primarily to our debt portfolio. Using
floating interest rate debt outstanding at December 31, 2007, a 100 basis point increase in interest rates would increase our annual interest
expense by $1.0 million.
The table below provides information about the Company’s market sensitive financial instruments and constitutes a forward-looking statement.
Principal Amount By Expected Maturity
(in thousands, except percentages)
2008
2009
2010
2011
2012
There-
after
Total
Fair
Value
$ 1,915
$ 1,165
$ 130
$ 106
$ 113
$ 1,635
$ 5,064
$ 5,064
5.71%
5.7%
5.83%
6.24%
6.25%
6.25%
$ 2,285
$2,301
$2,013
$ 333
$94,193
-
$101,125
$101,125
5.70%
5.72%
5.68%
5.25%
6.55%
$ 4,200
$3,466
$ 2,143
$ 439
$94,306
$ 1,635
$106,189
$106,189
Fixed Rate Long-
term Debt
Average Interest
Rate
Floating Rate
Long-term Debt
Average Interest
Rate (1)
Total Maturities
(1) Assumes floating interest rates in effect at December 31, 2007
ITEM 8. Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm
TABLE OF CONTENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
18
19
22
23
24
25
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
To the Board of Directors and Shareholders of
DXP Enterprises, Inc., and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of DXP Enterprises, Inc. and Subsidiaries as of December 31, 2006 and 2007,
and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December
31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of DXP Enterprises, Inc., and Subsidiaries at December 31, 2006 and 2007, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of
DXP Enterprises, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated March 17, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123R
“Share-Based Payment”, during the year ended December 31, 2006.
Hein & Associates LLP
Houston, Texas
March 17, 2008
19
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2007 based on criteria established
by Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO
Framework”). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial
reporting. The Company’s independent registered public accountants that audited the Company’s financial statements as of December 31, 2007
have issued an attestation report on the Company’s internal control over financial reporting, which appears on page 21.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and
operating effectiveness of its internal controls. In management’s opinion, the Company has maintained effective internal control over financial
reporting as of December 31, 2007, based on criteria established in the COSO Framework.
The Company has excluded Precision Industries, Inc. and the businesses of Delta Process Equipment and Indian Fire and Safety from its
assessment of internal control over financial reporting as of December 31, 2007. Precision Industries, Inc. and the businesses of Delta Process
Equipment and Indian Fire & Safety were acquired by the Company in purchase business combinations during 2007. The total assets and
revenues of Precision Industries, Inc. and the businesses of Delta Process Equipment and Indian Fire and Safety represent approximately 26%
and 21%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2007.
/s/ David R. Little
David R. Little Mac McConnell
Chairman of the Board and Senior Vice President/Finance and
Chief Executive Officer Chief Financial Officer
/s/ Mac McConnell
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
DXP Enterprises, Inc., and Subsidiaries
Houston, Texas
We have audited DXP Enterprises, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Company management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
We also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of DXP Enterprises, Inc., as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 17, 2008 expressed an unqualified
opinion.
As described in Management’s Annual Report on Internal Control over Financial Reporting, the Company has excluded Precision Industries,
Inc., Delta Process Equipment, Inc. and Indian Fire & Safety from its assessment of internal control over financial reporting as of December 31,
2007. Precision Industries, Inc., Delta Process Equipment, Inc. and Indian Fire & Safety were acquired by the Company in purchase business
combinations during 2007. We have also excluded Precision Industries, Inc., Delta Process Equipment, Inc. and Indian Fire & Safety from our
audit of internal control over financial reporting. The total assets and revenues of Precision Industries, Inc., Delta Process Equipment, Inc. and
Indian Fire & Safety represent approximately 26% and 21%, respectively, of the related consolidated financial statement amounts as of and for
the year ended December 31, 2007.
Hein & Associates LLP
Houston, Texas
March 17, 2008
21
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
ASSETS
Current assets:
Cash
Trade accounts receivable, net of allowances for doubtful accounts
of $1,482 in 2006 and $2,131 in 2007
Inventories, net
Prepaid expenses and other current assets
Federal income taxes recoverable
Deferred income taxes
Total current assets
Property and equipment, net
Goodwill
Other intangibles, net of accumulated amortization of $538 in 2006 and
$3,242 in 2007
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
Trade accounts payable
Accrued wages and benefits
Customer advances
Federal income taxes payable
Other accrued liabilities
Total current liabilities
Long-term debt, less current portion
Deferred income taxes
Minority interest in consolidated subsidiary
Commitments and contingencies (Note 9)
Shareholders’ equity:
Series A preferred stock, 1/10 th vote per share; $1.00 par value; liquidation preference
of $100 per share
($112 at December 31, 2007); 1,000,000 shares authorized; 1,122 shares issued and
outstanding
Series B convertible preferred stock, 1/10 th vote per share; $1.00 par value; $100
stated value; liquidation
preference of $100 per share ($1,500 at December 31, 2007); 1,000,000 shares
authorized;
15,000 shares issued and outstanding
Common stock, $0.01 par value, 100,000,000 shares authorized;
5,124,134 and 6,322,072 shares issued and outstanding, respectively.
Paid-in capital
Retained earnings
Note receivable from David R. Little, CEO
Treasury stock; 20,049 common shares, at cost
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2006
2007
$ 2,544
$ 3,978
40,495
37,310
652
1,042
1,087
83,130
9,944
16,964
79,969
84,196
1,650
-
1,791
171,584
17,119
60,849
6,464
305
$ 116,807
35,852
762
$ 286,166
$ 2,771
25,706
6,490
3,924
-
4,770
43,661
35,174
2,242
12
$ 4,200
55,020
10,001
3,684
1,708
5,654
80,267
101,989
2,387
12
1
15
1
15
51
6,147
30,303
(799)
-
35,718
$ 116,807
63
54,697
47,560
-
(825)
101,511
$ 286,166
The accompanying notes are an integral part of these consolidated financial statements.
22
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Operating income
Other income
Interest expense
Minority interest in loss of consolidated subsidiary
Income before provision for income taxes
Provision for income taxes
Net income
Preferred stock dividend
Net income attributable to common shareholders
Per share and share amounts
Basic earnings per common share
Common shares outstanding
Diluted earnings per share
Common and common equivalent shares
outstanding
Years Ended December 31,
2006
2005
2007
$ 185,364
135,650
49,714
40,310
9,404
56
(1,000)
155
8,615
3,148
5,467
(90)
$ 5,377
$ 279,820 $ 444,547
318,855
125,692
93,800
31,892
349
(3,344)
-
28,897
11,550
17,347
(90)
$ 11,832 $ 17,257
201,198
78,622
57,944
20,678
651
(1,943)
18
19,404
7,482
11,922
(90)
$ 1.24
4,349
$ 0.94
$ 2.34 $ 2.95
5,849
$ 2.08 $ 2.71
5,063
5,789
5,732
6,391
The accompanying notes are an integral part of these consolidated financial statements.
23
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2005, 2006 and 2007
(In Thousands, Except Share Amounts)
Series A
Preferred
Stock
Series B
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Notes
Receivable
From
Share-
holders
Total
$ 1
$ 18
$ 41
$ 2,489
$ 13,094
$(1,797)
$ (970)
$ 12,876
-
-
-
-
-
-
-
-
(3)
-
-
-
-
-
-
-
7
-
-
-
-
(90)
(267)
-
-
-
-
-
270
(95)
40
-
-
90
40
(90)
-
(5)
(328)
-
-
5,467
1,622
-
-
-
1,301
5,467
1
15
48
1,894
18,471
-
(840)
19,589
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3
-
-
-
-
(90)
220
424
-
-
3,609
-
-
11,922
-
-
-
-
-
-
41
-
-
-
-
-
41
(90)
220
424
3,612
11,922
1
15
51
6,147
30,303
-
(799)
35,718
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2
10
-
-
-
591
3,396
44,563
-
-
(825)
(90)
-
-
-
17,347
-
-
-
-
-
$ 1
The accompanying notes are an integral part of these consolidated financial statements.
$ 63
$ 15
$47,560
$54,697
$(825)
24
799
-
-
-
-
-
-
(26)
(90)
591
3,398
44,573
17,347
$101,511
BALANCES
AT DECEMBER 31, 2004
Collections on notes
receivable
Dividends paid
Cancellation of Series
B Preferred Stock in
Treasury
Purchase of 6,500 shares
of common stock
Exercise of stock
options for 1,122,175
shares of common
stock
Net income
BALANCES AT
DECEMBER 31, 2005
Collections on notes
receivable
Dividends paid
Compensation expense
for restricted stock and
stock options
Issuance of 23,613 shares
of common stock
Exercise of stock options
for 305,119 shares of
common stock
Net income
BALANCES AT
DECEMBER 31, 2006
Exchange of note
receivable for 20,049
shares of common stock
Dividends paid
Compensation expense
for restricted stock and
stock options
Exercise of stock options
for 199,955 shares of
common stock
Sale of 1,000,000 shares
from public offering
Net income
BALANCES AT
DECEMBER 31, 2007
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31
2005
2006
2007
-
990
-
306
$ 17,347
$ 11,922
$ 5,467
2,258
2,704
(559)
(188)
-
(155)
1,216
538
(103)
591
(3,197)
(8)
-
220
(3,318)
(564)
(18)
(7,650)
(2,574)
(3,089)
5,470
(1,423)
(7,046)
(11,650)
(2,553)
11,341
(15)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net
cash provided by (used in) operating activities –
net of acquisitions
Depreciation
Amortization
Deferred income taxes
Compensation expense from stock options and
restricted stock
Tax benefit related to exercise of stock options
Gain on sale of property and equipment
Minority interest in loss of consolidated subsidiary
Changes in operating assets and liabilities, net of assets
and liabilities acquired in business combinations:
Trade accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued expenses
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Purchase of businesses, net of cash acquired
Proceeds from the sale of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt
Principal payments on revolving line of credit,
long-term debt and notes payable
Dividends paid in cash
Proceeds from exercise of stock options
Proceeds from sale of common stock
Payments for employee taxes related to exercise of
stock options
Tax benefit related to exercise of stock options
Collections on notes receivable from shareholders
Net cash provided by financing activities
INCREASE (DECREASE) IN CASH
CASH AT BEGINNING OF YEAR
CASH AT END OF YEAR
SUPPLEMENTAL DISCLOSURES:
Cash paid for --
Interest
$ 3,158
Income taxes
$ 5,879
Cash income tax refunds
$ 20
Noncash activities: Changes in operating assets and liabilities exclude the $4.5 million after tax benefit of tax deductions related to stock option
exercises in 2005 and the $0.8 million exchange of a note receivable for 20,049 shares of common stock.
(3,906)
-
40
5,394
(1,733)
2,303
$ 570
-
3,172
41
14,246
1,974
570
$ 2,544
-
3,197
-
115,721
1,434
2,544
$ 3,978
$ 984
$ 875
$ 36
$ 1,844
$ 3,329
$ 470
(136,755)
(90)
874
-
(1,902)
(125,869)
8
(127,763)
(123,940)
(90)
202
44,573
(9,253)
(6,882)
3,263
7,212
13,476
(77,600)
(90)
584
424
(2,363)
(12,075)
2,181
(12,257)
(572)
(6,069)
937
(5,704)
145,231
191,779
87,715
The accompanying notes are an integral part of these consolidated financial statements.
25
DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
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 engaged in the business of distributing maintenance, repair and operating products,
equipment and service to industrial customers. The Company is organized into two segments: Maintenance, Repair and Operating (MRO) and
Electrical Contracting. See Note 12 for discussion of the business segments.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Receivables and Credit Risk
Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within
30 days of the invoice date. However, these payment terms are extended in select cases and many customers do not pay within stated trade
terms.
The Company has trade receivables from a diversified customer base in the rocky mountain, midwestern, southeastern and southwestern regions
of the United States. The Company believes no significant concentration of credit risk exists. The Company evaluates the creditworthiness of its
customers' financial positions and monitors accounts on a regular basis, but generally does not require collateral. Provisions to the allowance for
doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon management’s best estimate
of the collectibility of all such accounts. No customer represents more than 10% of consolidated sales.
Inventories
Inventories consist principally of finished goods and are priced at lower of cost or market, cost being determined using the first-in, first-out
(FIFO) and the last-in, first-out (LIFO) method, depending on location. Reserves are provided against inventories for estimated obsolescence
based upon the aging of the inventories and market trends.
Property and Equipment
Assets are carried on the basis of cost. Provisions for depreciation are computed at rates considered to be sufficient to amortize the costs of assets
over their expected useful lives. Depreciation of property and equipment is computed using the straight-line method. Maintenance and repairs of
depreciable assets are charged against earnings as incurred. Additions and improvements are capitalized. When properties are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to
earnings.
The principal estimated useful lives used in determining depreciation are as follows:
Buildings 20 – 39 years
Building improvements 10 – 20 years
Furniture, fixtures and equipment 3 – 10 years
Leasehold improvements over the shorter of the estimated useful life or the term of the related lease
Federal Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined based on
differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted marginal tax rates and laws that
will be in effect when the differences reverse.
26
Cash and Cash Equivalents
The Company’s presentation of cash includes cash equivalents. Cash equivalents are defined as short-term investments with maturity dates of
ninety days or less at time of purchase.
Fair Value of Financial Instruments
A summary of the carrying and the fair value of financial instruments at December 31, 2006 and 2007 is as follows (in thousands):
2006
Carrying
Value
Fair
Value
Cash
Note receivable from David R. Little, CEO
Long-term debt, including current portion
$ 2,544 $ 2,544
633
37,945
799
37,945
2007
Carrying
Value
Fair
Value
$ 3,978 $ 3,978
-
106,189
-
106,189
The carrying value of the long-term debt approximates fair value based upon the current rates and terms available to the Company for
instruments with similar remaining maturities. The carrying amounts of accounts receivable and accounts payable approximate their fair values
due to the short-term maturities of these instruments.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards 123(R) “
Share-Based Payment” (“SFAS 123(R)”) using the modified prospective transition method. In addition, the Securities and Exchange
Commission (“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 period ended after January 1, 2006 include: (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 stock compensation expense for the years ended December 31, 2006 and 2007 of $8,600 and zero,
respectively, all of which was recorded to operating expenses. No future grants will be made under the Company’s stock option plans. The
Company now uses restricted stock for share-based compensation programs.
The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of
assumptions, of which the most significant are, expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option
term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was calculated based upon actual
historical stock price movements over periods equal to the expected option term. The expected option term was calculated using the “simplified”
method permitted by SAB 107.
Prior to the adoption of SFAS 123(R), the Company presented any tax benefits from deductions resulting from the exercise of stock options
within operating cash flows in the condensed consolidated statements of cash flow. SFAS 123(R) requires tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options (“excess tax benefits”) to be classified and reported as both an
operating cash outflow and a financing cash inflow upon adoption of SFAS 123(R). The Company has presented its income tax benefit from
stock based compensation as a financing activity in the Consolidated Statements of Cash Flows, in the amount of $3.2 million in each of 2006
and 2007.
Prior to 2006 the Company elected to follow APB No. 25, and related Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS No. 148 required the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB No. 25, no compensation expense is recognized if the exercise price of the
Company’s employee stock options equals the market price of the underlying stock on the date of grant. No compensation expense was
recognized under APB No. 25 during the year ended December 31, 2005.
27
Pro forma information regarding net income and earnings per share is required by SFAS No. 148 and was determined as if the Company had
accounted for its stock options under the fair value method as provided therein. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options issued in 2005: risk-free
interest rate of 4.14%; expected lives of five to ten years, assumed volatility of 75%; and no expected dividends.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Set forth
below is a summary of the Company's net income and earnings per share as reported and pro forma as if the fair value-based method of
accounting defined in SFAS No. 148 had been applied for the year ended December 31, 2005. The pro forma compensation expense may not be
representative of future amounts because options vest over several years and generally expire upon termination of employment.
For the year ended
December 31, 2005
(in thousands, except
per share amounts)
net
income
Pro forma impact of fair value method (FAS 148)
Reported
shareholders
Less: fair value impact of employee stock compensation
Pro
to common
shareholders
income attributable
forma net
attributable
common
to
Earnings per common share
Basic – as reported
Diluted – as reported
Basic – pro forma
Diluted – pro forma
$5,377
(115)
$5,262
$ 1.24
$ 0.94
$ 1.21
$ 0.92
Revenue Recognition
Revenues recognized include product sales and billings for freight and handling charges. The Company recognizes product sales and billings for
freight and handling charges 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. Shipping and handling costs are included in cost of sales. Revenues are recorded net of sales
taxes.
The Company reserves for potential customer returns based upon the historical level of returns.
Shipping and Handling Costs
The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified
as a component of cost of sales.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company 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 the
Company in the accompanying financial statements relate to the reserves for accounts receivable collectibility, inventory valuations, income
taxes and self-insured medical claims. Actual results could differ from those estimates and such differences could be material.
The Company purchases insurance for catastrophic exposures and those risks required to be insured by law. The Company retains a portion of
the risk for medical claims, general liability, worker’s compensation and property losses. The various deductibles per our insurance policies
generally do not exceed $200,000 per occurrence. There are also certain risks for which the Company does not maintain insurance. The
Company accrues for the estimated outstanding balance of unpaid medical claims for our employees and their dependents based upon recent
claims experience.
28
Goodwill and Other Intangible Assets
Goodwill and other intangible assets attributable to our reporting units are tested for impairment by comparing the fair value of each reporting
unit with its carrying value. Significant estimates used in the determination of fair value include estimates of future cash flows, future growth
rates; costs of capital and estimates of market multiples. As required under current accounting standards, we test for impairment annually at year
end unless factors otherwise indicate that impairment may have occurred. We did not have any impairments under the provisions of SFAS No.
142 as of December 31, 2006 or 2007.
At December 31, 2006, $17.0 million and $6.5 million (net of $0.5 million of amortization) of our total purchase price for acquisitions were
allocated to goodwill and other intangibles, respectively. At December 31, 2007, $60.8 million and $35.9 million (net of $3.2 million of
amortization) of total purchase price for acquisitions were allocated to goodwill and other intangibles, respectively. The $43.9 million increase
in goodwill and the $29.4 million increase in other intangibles from December 31, 2006 to December 31, 2007 results from recording the
estimated intangibles for the acquisitions of Delta Process Equipment, Precision Industries, Inc., and Indian Fire and Safety and changes in the
estimates of intangibles for businesses acquired during 2006. Other intangible assets are generally amortized on a straight line basis over the
useful lives of the assets. All goodwill and other intangible assets pertain to the MRO segment.
The changes in the carrying amount of goodwill and other intangibles for 2006 and 2007 are as follows (in thousands):
Net balance as of January 1, 2006
Acquired during the year
Adjustments to prior year estimates
Amortization
Balance as of December 31, 2006
Acquired during the year
Adjustments to prior year estimates
Amortization
Balance as of December 31, 2007
Total
$ 7,436
16,530
-
(538)
$ 23,428
75,286
691
(2,704)
$ 96,701
Goodwill
$ 7,436
16,530
(7,002)
-
$ 16,964
48,067
(4,182)
-
$ 60,849
Other
Intangibles
$ -
-
7,002
(538)
$ 6,464
27,219
4,873
(2,704)
$ 35,852
A summary of amortizable other intangible assets follows (in thousands):
Vendor agreements
Customer relationships
Non-compete agreements
Total
As of December 31, 2006
Gross
Carrying
Amount
$ 3,773
3,229
-
$ 7,002
Accumulated
Amortization
$ ( 205)
( 333)
-
$ (538)
As of December 31, 2007
Gross
Carrying
Amount
$ 3,773
33,804
1,517
$ 39,094
Accumulated
Amortization
$ (393)
(2,632)
(217)
$ (3,242)
29
The estimated future annual amortization of intangible assets for each of the next five years follows (in thousands):
2008
2009
2010
2011
2012
$4,885
$4,875
$4,685
$4,410
$4,398
The weighted average useful lives of acquired intangibles related to vendor agreements, customer relationships, and non-compete agreements are
20 years, 8.0 years and 3.1 years, respectively. The weighted useful life of amortizable intangible assets in total is 8.0 years.
Of the $96.7 million net balance of goodwill and other intangibles at December 31, 2007, $90.2 million is expected to be deductible for tax
purposes.
Purchase Accounting
DXP estimates the fair value of assets, including property, machinery and equipment and its related useful lives and salvage values, and
liabilities when allocating the purchase price of an acquisition.
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.
Impairment of Long-Lived Assets
The Company determines the realization of goodwill and other intangibles in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets” and its other long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”. Under SFAS No. 142, the Company determines fair value using capitalization of earnings estimates and market valuation multiples for
each reporting unit. Under SFAS No. 144, the Company compares the carrying value of long-lived assets to its projection of future undiscounted
cash flows attributable to such assets, as well as evaluates other factors such as business trends and general economic conditions. In the event
that the carrying value exceeds the future undiscounted cash flows, the Company records an impairment charge against income equal to the
excess of the carrying value over the asset’s fair value.
Comprehensive Income
DXP’s comprehensive income is equal to DXP’s net income. Comprehensive income includes net income, foreign currency translation
adjustments and unrecognized gains (losses) on postretirement and other employment-related plans.
2. NEW ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 requires that a position taken or
expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty
percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest
amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. 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
December 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.
30
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.
In September 2006, FASB Statement 157, “Fair Value Measurements” (“SFAS 157”) was issued. SFAS 157 establishes a framework for
measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. SFAS 157, which does not require any
new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. The
effective date for the Company is January 1, 2008. The Company is evaluating the impact of adopting SFAS 157 on its Consolidated Financial
Statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business combination. The statement is effective for fiscal years beginning after
December 15, 2008, and will be applied to acquisitions after adoption by the Company.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of
Accounting Research Bulletin No. 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. The statement is effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the impact that adoption of SAFS No. 160 may have on its results of operations or financial position.
3. 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. Any contingent purchase price will increase goodwill when paid.
On August 20, 2005, the Company paid approximately $2.4 million to purchase the assets of a pump remanufacturer. The Company made this
acquisition to enhance its ability to meet customer needs for shorter lead times on selected pumps. The Company assumed $1.0 million of
liabilities and gave a $0.5 million credit to the seller to use to purchase maintenance, repair and operating supplies from the Company. The $2.4
million cash portion was financed using funds available under the Company’s credit facility.
On December 1, 2005, the Company purchased 100% of R. A. Mueller, Inc. to expand geographically into Ohio, Indiana, Kentucky and West
Virginia. The Company paid $7.3 million ($3.65 million cash and $3.65 million in promissory notes payable to the former owners) and assumed
approximately $1.6 million of debt and $1.9 million of accounts payable and other liabilities. The cash portion was financed using funds
available under the Company’s credit facility.
The initial purchase price allocation for the 2005 acquisitions was adjusted in 2006 to allocate $7.0 million of purchase price to intangibles other
than goodwill and record an additional note payable of $1.0 million.
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 over the next five years. The cash portion was funded by utilizing available capacity under DXP’s credit facility. The
promissory notes, which are subordinated to DXP’s 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 credit facility.
31
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 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 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 credit facility.
The allocation of purchase price for all acquisitions completed in 2006 was preliminary in the December 31, 2006 consolidated balance
sheet. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed during 2006 as reflected in the
December 31, 2006 consolidated financial statements (in thousands):
Cash
Accounts Receivable
Inventory
Property and equipment
Goodwill and intangibles
Other assets
Assets acquired
Current liabilities assumed
Non-current liabilities assumed
Net assets acquired
$ 1,018
4,169
2,847
1,158
13,512
348
23,052
(3,661)
(788)
$18,603
The initial purchase price allocation for the 2006 acquisitions was adjusted in 2007 to allocate $4.9 million of purchase price to intangibles other
than goodwill and record $0.7 million of additional purchase price.
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. DXP acquired this business to diversify DXP’s customer base in the municipal, wastewater and
downstream industrial pump markets. The purchase price was funded by utilizing available capacity under DXP’s credit facility.
On September 10, 2007, DXP completed the acquisition of Precision Industries, Inc. DXP acquired this business to expand DXP’s geographic
presence and strengthen DXP’s integrated supply offering. The Company paid $106 million in cash for Precision Industries, Inc. The purchase
price was funded using approximately $24 million of cash on hand and approximately $82 million borrowed from a new $130 million credit
facility.
On October 19, 2007, DXP completed the acquisition of the business of Indian Fire & Safety. DXP acquired this business to strengthen DXP’s
expertise in safety products and services in New Mexico and Texas. DXP paid $6.0 million in cash, $3.0 million in the form of a promissory
note and $3.0 million in future payments contingent upon earnings for the business of Indian Fire & Safety. The cash portion was funded by
utilizing available capacity under DXP’s credit facility.
The allocation of purchase price for all acquisitions completed in 2007 is preliminary in the December 31, 2007 and the 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 2007 as reflected in the December 31, 2007 consolidated financial statements (in thousands):
32
Cash
Accounts Receivable
Inventory
Property and equipment
Goodwill and intangibles
Other assets
Assets acquired
Current liabilities assumed
Non-current liabilities assumed
Net assets acquired
2007
$ 643
29,348
34,204
7,532
83,440
2,628
157,795
(28,052)
(317)
$129,426
The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2007 and 2006,
assuming the purchases completed in 2006 and 2007 were consummated as of January 1 of each year follows:
Years Ended December 31,
2006
2007
(Unaudited)
In Thousands, except for per share data
$633,088
$ 14,846
$ 2.91
$ 2.59
$648,745
$ 18,294
$ 3.12
$ 2.87
Net sales
Net income
Per share data
Basic earnings
Diluted earnings
The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2005 and 2006,
assuming the purchases actually completed in 2005 and 2006 were consummated as of January 1 of each year follows:
Years Ended December 31,
2005
2006
(Unaudited)
In Thousands, except for per share data
$229,162
$ 6,544
$ 1.48
$ 1.13
$304,835
$ 12,970
$ 2.55
$ 2.26
Net sales
Net income
Per share data
Basic earnings
Diluted earnings
4. INVENTORIES:
The Company uses the LIFO method of inventory valuation for approximately 79 percent and 46 percent of its inventories at December 31, 2006
and 2007, respectively. Remaining inventories, consisting primarily of used equipment, work in process, products used to fabricate, repair and
remanufacture customer specific pump packages and inventories of businesses acquired during 2007 are accounted for using the FIFO method.
The reconciliation of FIFO inventory to LIFO basis is as follows:
33
Finished goods
Work in process
Inventories at FIFO
Less – LIFO allowance
Inventories
December 31,
2006
2007
(in Thousands)
$39,204
3,030
42,234
(4,924)
$37,310
$86,203
4,002
90,205
(6,009)
$84,196
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
Land
Buildings and leasehold improvements
Furniture, fixtures and equipment
Less – Accumulated depreciation
amortization
and
December 31,
2006
2007
(in Thousands)
$1,809
6,808
8,010
16,627
(6,683)
$1,809
7,120
17,131
26,060
(8,941)
$9,944
$17,119
6. LONG-TERM DEBT: Long-term debt consisted of the following:
Line of credit
Unsecured notes payable to individuals, 3.46% to 4.32% at December 31, 2007, midterm federal rate
adjusted annually,
payable in monthly or quarterly installments through November 2010
Unsecured notes payable to individuals, subordinate to credit facility, 6.0%, payable in monthly
installments through
December 2009
Unsecured notes payable to individuals, subordinate to credit facility at variable rates (5.25% to 6.5%
at December 31, 2007)
payable in monthly installments through June 2011
Unsecured note payable to an individual, subordinate to credit facility at variable rates (5.50% at
December 31, 2007)
payable in monthly installments through November 2010
Mortgage loans payable to financial institutions, 6.25% collateralized by real estate, payable in
monthly installments
through January 2013
Other notes
Less: Current portion
December 31,
2006
2007
(in Thousands)
$26,179
347
$94,193
213
3,057
5,063
-
2,221
1,078
37,945
(2,771)
$35,174
2,108
3,969
2,750
2,138
818
106,189
(4,200)
$101,989
On September 10, 2007, DXP entered into a credit agreement (the “Credit Facility”) with Wells Fargo Bank, National Association as lead
arranger and administrative agent. The Credit Facility consists of a credit facility that provides a $130 million line of credit to DXP. This new
line of credit replaced DXP’s prior credit facility. The new Credit Facility expires on September 10, 2012.
DXP’s borrowings and letters of credit outstanding under the Credit Facility as of any day must be less than the sum of 85% of net accounts
receivable; 50% of the net book value of furniture, fixtures and equipment; and 60% of inventory. DXP’s borrowings and letter of credit
capacity under the Credit Facility at any given time is $130 million less borrowings and letters of credit outstanding, subject to the asset
coverage ratio described above.
34
The Credit Facility is secured by receivables, inventory, fixed assets and intangibles. The Credit Facility contains customary affirmative and
negative covenants as well as financial covenants that are measured quarterly and require that DXP comply with certain financial covenants
described below.
The Credit Facility allows us to borrow at LIBOR plus a margin ranging from 0.75% to 1.25% or prime plus a margin of 0.00% to 0.25%. At
December 31, 2007, the LIBOR based rate was LIBOR plus 125 basis points. At December 31, 2007, the prime based rate was prime plus .25
percent. At December 31, 2007, $94.2 million was outstanding under the Credit Facility. At December 31, 2007, $90.0 million was borrowed at
an interest rate of 6.5% under the LIBOR option and $4.2 million was borrowed at an interest rate of 7.5% under the prime option. Commitment
fees of 0.125% to 0.25% per annum are payable on the portion of the Credit Facility capacity not in use for borrowings at any given time. At
December 31, 2007 the commitment fee was 0.25%. At December 31, 2007, we were in compliance with all covenants. At December 31, 2007,
we had $17.1 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 1.5 to 1.0 as of each fiscal
quarter end, determined on a rolling four quarters basis, with “Fixed Charge Coverage Ratio” defined as the ratio of (a) EBITDA minus capital
expenditures (excluding acquisitions) to (b) Fixed Charges. EBITDA is defined as consolidated net income plus depreciation, amortization,
other non-cash expense items, interest expense, income tax expense with pro forma EBITDA adjustments for divestitures and
acquisitions. Fixed Charges are defined as the aggregate of interest expense, scheduled principal payments on long term debt, current portion of
capital lease obligations and cash income taxes.
Leverage Ratio - The Credit Facility requires that the DXP’s ratio of Indebtedness to EBITDA, determined on a rolling four quarters basis, not
exceed 3.5 to 1.0 as of each quarter end until and including December 31, 2009 and 3.0 to 1.0 as of each quarter end after September 30,
2009. Indebtedness includes the sum of all obligations for borrowed money, all capital lease obligations, all guarantees of indebtedness of others
and all outstanding letters of credit.
The Credit Facility prohibits the payment of dividends on the Company’s common stock.
The maturities of long-term debt for the next five years and thereafter are as follows (in thousands):
2008
2009
2010
2011
2012
Thereafter
4,200
3,466
2,143
439
94,306
1,635
$106,189
7. INCOME TAXES:
The provision for income taxes consists of the following:
Current -
Federal
State
Deferred
2005
Years Ended December 31,
2006
(in Thousands)
2007
$ 2,749
93
2,842
306
$ 3,148
$ 6,545
1,040
7,585
(103)
$ 7,482
$ 10,939
1,170
12,109
(559)
$ 11,550
35
The difference between income taxes computed at the federal statutory income tax rate (34% for 2005 and 2006 and 35% for 2007) and the
provision for income taxes is as follows:
Income taxes computed at federal
statutory rate
State income taxes, net of federal
benefit
Other
Years Ended December 31,
2007
2005
2006
(in Thousands)
$ 2,929
$ 6,597 $ 10 ,114
61
686
760
158
$ 3,148
199
676
$ 7,482 $ 11,550
The net current and noncurrent components of deferred income tax balances are as follows:
Net current assets
Net non-current liabilities
Net assets (liabilities)
December 31,
2006
2007
(in Thousands)
$ 1,087
(2,242)
$ (1,155)
$ 1,791
(2,387)
$ (596)
Deferred tax liabilities and assets were comprised of the following:
Deferred tax assets:
Goodwill
Allowance for doubtful accounts
Inventories
State net operating loss carryforwards
Accruals
Other
Total deferred tax assets
Less valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities
Goodwill
Intangibles
Property and equipment
Other
Net deferred tax asset (liability)
December 31,
2006
2007
(in Thousands)
$ 561
519
244
41
247
312
1,924
(41)
1,883
(215)
(2,262)
(461)
(100)
$ (1,155)
$ 473
746
451
33
310
425
2,438
(33)
2,405
(381)
(2,089)
(431)
(100)
$ (596)
The Company has certain state tax net operating loss carryforwards aggregating approximately $0.7 million before tax, which expire in years
2008 through 2020. A valuation allowance has been recorded to offset the deferred tax asset related to these state tax net operating loss
carryforwards. The valuation allowance represents a provision for the uncertainty as to the realization of these carryforwards. The valuation
allowance decreased by $34,000, $3,000 and $8,000 in the years ended December 31, 2005, 2006 and 2007, respectively.
8. SHAREHOLDERS' EQUITY:
Series A and B Preferred Stock
The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally,
voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation
of the Company, in which case the holders of the Series A preferred stock are entitled to a $100 liquidation preference per share. Each share of
the Series B convertible preferred stock is convertible into 28 shares of common stock and a monthly dividend per share of $.50. The holders of
the Series B convertible stock are also entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the
Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with
the holders of the common stock.
36
Restricted Stock
Under a restricted stock plan approved by DXP’s shareholders in July 2005 (the “Restricted Stock Plan”), directors, consultants and employees
may be awarded shares of DXP’s common stock. The shares of restricted stock granted to employees as of December 31, 2007 vest 20% each
year for five years after the date of grant, 33.3% each year for three years after the grant date or 10% each year for ten years after the grant
date. The shares of restricted stock granted to non-employee directors of DXP vest 100% one year after the grant date. Prior to July 24, 2006,
the Restricted Stock Plan provided that on each July 1 during the term of the plan each non-employee director of DXP would be granted 3,000
shares of restricted stock which will vest one year after the grant date. On July 24, 2006, the Restricted Stock Plan was amended to grant to each
non-employee director of DXP the number of whole shares calculated by dividing $75,000 by the closing price of the common stock on such
July 1. 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, granted and available for future grant under the Restricted
Stock Plan at December 31, 2007:
Number of shares authorized for grants
Number of shares granted
Number of shares available for future grants
Weighted-average grant price of granted shares
300,000
124,258
175,742
$ 32.72
Changes in non-vested restricted stock for 2006 and 2007 were as follows:
Outstanding at December 31, 2005
Granted
Outstanding at December 31, 2006
Granted
Vested
Outstanding at December 31, 2007
Number
Of Shares
Weighted
Average
Grant
Price
-
$ 24.66
$ 24.66
$ 37.09
$ 27.31
$ 33.63
-
43,698
43,698
80,560
(18,032)
106,226
Compensation expense recognized for restricted stock in the years ended December 31, 2006 and 2007 was $213,000 and $591,000,
respectively. Related income tax benefits recognized in earnings were approximately $85,000 and $236,000 in 2006 and 2007,
respectively. Unrecognized compensation expense under the Restricted Stock Plan was $864,000 and $3,264,000, respectively, at December 31,
2006 and 2007. As of December 31, 2007, the weighted average period over which the unrecognized compensation expense is expected to be
recognized is 43.1 months.
Stock Options
The DXP Enterprises, Inc. 1999 Employee Stock Option Plan, the DXP Enterprises, Inc. Long-Term Incentive Plan and the DXP Enterprises,
Inc. Director Stock Option Plan authorized the grant of options to purchase 900,000, 330,000 and 200,000 shares of the Company’s common
stock, respectively. In accordance with these stock option plans that were approved by the Company’s shareholders, options were granted to key
personnel for the purchase of shares of the Company’s common stock at prices not less than the fair market value of the shares on the dates of
grant. Most options may be exercised not earlier than twelve months nor later than ten years from the date of grant. No future grants will be
made under these stock option plans. Activity during 2005, 2006 and 2007 with respect to the stock options follows:
37
Outstanding at December 31, 2004
Granted at market price
Exercised
Cancelled or expired
Outstanding at December 31, 2005
Exercised
Cancelled or expired
Outstanding at December 31, 2006
Exercised
Outstanding and exercisable at December
31, 2007
Shares
1,723,367
30,000
(1,122,175)
(9,762)
621,430
(305,119)
(5,130)
311,181
(199,955)
111,226
Options Price
Per Share
$ 0.65 - $ 12.00
$ 6.72 - $ 6.72
$ 0.65 - $ 12.00
$ 12.00 - $ 12.00
$ 0.92 - $ 12.00
$ 1.00 - $ 12.00
$ 12.00 - $ 12.00
$ 0.92 - $ 6.72
$ 0.92 - $ 2.50
$ 1.00 - $ 6.72
Weighted
Average
Exercise
Price
Weighted
Average
Fair
Value
Aggregate
Intrinsic
Value
$5.43
$1.90
$6.72
$2.19
$12.00
$2.10
$l.28
$12.00
$1.41
$1.00
$2.15
$10,464,000
$ 4,953,000
The total intrinsic value, or the difference between the exercise price and the market price on the date of exercise, of all options exercised 2006
and 2007, was approximately $8.6 million and $8.5 million, respectively. Cash received from stock options exercised during 2006 and 2007 was
$584,000 and $202,000, respectively.
Stock options outstanding and currently exercisable at December 31, 2007 are as follows:
Options Outstanding and Exercisable
Range of
Exercise Prices
$1.00 to $2.50
$4.53 to $6.72
Number
Outstanding
91,226
20,000
111,226
Weighted Average
Remaining
Contractual Life
(in years)
2.3
6.9
3.2
Weighted
Average
Exercise Price
$ 1.39
5.62
2.15
The options outstanding at December 31, 2007, expire between January 2009 and May 2015. The weighted average remaining contractual life
was 4.9 years, 4.9 years and 3.2 years at December 31, 2005, 2006 and 2007, respectively.
Certain Equity Related Transactions
In 2005, DXP purchased 6,500 shares of common stock from James Webster, an employee, for approximately $94,510. The shares purchased
were valued at the average closing market price for the twenty days immediately preceding the date of purchase. The purchase price was applied
to reduce a note receivable from Mr. Webster. This note receivable was reduced to zero in 2005.
During 2005, 2006 and 2007, employees and directors of DXP exercised non-qualified stock options. DXP received a tax deduction for the
amount of the difference between the exercise price and the fair market value of the shares recognized as income by the individuals exercising
the options. The after tax benefit of the tax deduction is accounted for as an increase in paid-in capital. DXP issued the shares out of treasury
stock for the option exercises until treasury shares were reduced to zero in 2005. During 2005, DXP withheld shares from a cashless option
exercise to cover $4.1 million of employee taxes paid by DXP which were related to the cashless option exercise.
During June 2007, DXP sold 1,000,000 shares of common stock in a public offering for proceeds of $44.6 million, net of placement agent
commissions and expenses.
On October 24, 2007, DXP exchanged a note receivable from Mr. David Little, Chief Executive Officer, with a value of $825,000, including
accrued interest, for 20,049 shares of common stock owned by Mr. Little. The shares were valued at the $41.14 per share closing price on
October 24, 2007.
38
Earnings Per Share
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share
is computed including the impacts of all potentially dilutive securities. The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2005, 2006 and 2007.
Basic:
Basic weighted average shares outstanding
Net income
Convertible preferred stock dividend
Net income attributable to common shareholders
Per share amount
Diluted:
Basic weighted average shares outstanding
Net effect of dilutive stock options and restricted stock
-
based on the treasury stock method
Assumed conversion of convertible preferred stock
Total common and common equivalent shares
outstanding
Net income attributable to common shareholders
Convertible preferred stock dividend
Net income for diluted earnings per share
Per share amount
2005
2007
2006
(in Thousands, except per share amounts)
4,349
$5,467
(90)
$5,377
$ 1.24
4,349
1,020
420
5,789
$5,377
90
$5,467
$ 0.94
5,063
$11,922
(90)
$11,832
$ 2.34
5,063
249
420
5,732
$11,832
90
$11,922
$ 2.08
5,849
$17,347
(90)
$17,257
$ 2.95
5,849
122
420
6,391
$17,257
90
$17,347
$ 2.71
9. COMMITMENTS AND CONTINGENCIES:
The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of
December 31, 2007, for non-cancelable leases are as follows (in thousands):
2008
2009
2010
2011
2012
Thereafter
$ 7,313
6,268
4,928
3,651
2,139
3,313
$ 27,612
Rental expense for operating leases was $1,905,000, $2,790,000 and $5,637,000 for the years ended December 31, 2005, 2006 and 2007
respectively.
In 2004, DXP and DXP’s vendor of fiberglass reinforced pipe were sued in Louisiana by a major energy company regarding the failure of
Bondstrand PSX JFC pipe, a recently introduced type of fiberglass reinforced pipe which had been installed on four energy production
platforms. Plaintiff alleges negligence, breach of contract, warranty and that damages exceed $20 million. DXP believes the failures were
caused by the failure of the pipe itself and not by work performed by DXP. DXP intends to vigorously defend these claims. DXP’s insurance
carrier has agreed, under a reservation of rights to deny coverage, to provide a defense against these claims.
39
In 2003, DXP was notified that it had been sued in various state courts in Nueces County, Texas. The suits allege personal injury resulting from
products containing asbestos allegedly sold by the Company. The suits do not specify products or the dates the Company allegedly sold the
products. The plaintiffs’ attorney has agreed to a global settlement of all suits for a nominal amount to be paid by the Company’s insurance
carriers. Settlement has been consummated as to 116 of the 133 plaintiffs, and the remaining settlements are in process. The cases are all
dismissed or dormant pending the remaining settlements.
While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the
aggregate, a material adverse effect on DXP’s consolidated financial position or results of operations.
10. EMPLOYEE BENEFIT PLANS:
The Company offers a 401(k) plan which is eligible to substantially all employees. The Company has elected to match employee contributions
at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $325,000, $569,000 and $847,000 to the 401(k) plan in the
years ended December 31, 2005, 2006 and 2007, respectively.
11. RELATED-PARTY TRANSACTIONS:
Prior to 2002, the Board of Directors of the Company had approved the Company making advances and loans to the CEO. During 2001, the
advances and loans to the CEO were consolidated into three notes receivable, each bearing interest at 3.97 percent per annum and due December
30, 2010. Accrued interest is due annually. On March 31, 2004, DXP exchanged two of the notes receivable from the CEO, with a value of
$338,591 including accrued interest, for 80,619 shares of DXP’s common stock held by three trusts for the benefit of Mr. Little’s children. The
shares were valued at $4.20 per share, the closing market price of the common stock on March 31, 2004. The balance of the remaining note was
$799,000 at December 31, 2006. The note was secured by 677,267 shares of the Company’s common stock. The note receivable was reflected
as a reduction of shareholders’ equity. The note has not been modified or amended since 2001. On October 24, 2007, DXP exchanged the note
receivable from Mr. David Little with a value of $825,000, including accrued interest, for 20,049 shares of common stock owned by Mr.
Little. The shares were valued at the $41.14 per share closing price on October 24, 2007.
12. SEGMENT DATA:
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 Company began
offering electrical products to electrical contractors following its acquisition of the assets of an electrical supply business in 1998. All business
segments operate 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.
40
Financial information relating to the Company’s segments is as follows:
2005
Sales
Operating income
Income before tax
Identifiable assets
Capital expenditures
Depreciation and amortization
Interest expense
2006
Sales
Operating income
Income before tax
Identifiable assets
Capital expenditures
Depreciation and amortization
Interest expense
2007
Sales
Operating income
Income before tax
Identifiable assets
Capital expenditures
Depreciation and amortization
Interest expense
MRO
$ 182,979
9,097
8,452
71,321
572
973
856
$ 277,031
20,220
19,102
115,570
2,363
1,745
1,787
$ 441,250
31,483
28,597
284,689
1,891
4,958
3,236
Electrical
Contractor
(in Thousands)
$ 2,385
307
163
1,599
-
17
144
$ 2,789
458
302
1,237
-
9
156
$ 3,297
409
300
1,477
11
4
108
Total
$ 185,364
9,404
8,615
72,920
572
990
1,000
$ 279,820
20,678
19,404
116,807
2,363
1,754
1,943
$ 444,547
31,892
28,897
286,166
1,902
4,962
3,344
13. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Summarized quarterly financial information for the years ended December 31, 2005, 2006 and 2007 is as follows:
2005
Sales
Gross profit
Net income
Earnings per share - diluted
2006
Sales
Gross profit
Net income
Earnings per share - diluted
2007
Sales
Gross profit
Net income
Earnings per share - diluted
First Quarter Second Quarter
Third Quarter
Fourth Quarter
(in millions, except per share amounts)
$ 41.8
11.0
0.8
0.15
$ 62.5
17.4
2.5
0.44
$ 83.6
24.9
3.7
0.65
$ 45.5
12.2
1.5
0.26
$ 69.8
19.1
2.9
0.51
$ 85.3
24.5
3.4
0.56
$ 43.4
11.5
1.1
0.18
$ 68.2
19.7
3.0
0.52
$ 106.8
29.9
4.5
0.65
$ 54.7
15.0
2.1
0.36
$ 79.4
22.4
3.5
0.61
$ 168.8
46.4
5.7
0.84
The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each quarter’s computation
is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and the
dilutive effects of the stock options and restricted stock in each quarter.
41
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
DXP carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of DXP’s disclosure controls and procedures pursuant to Exchange Act
Rule 13a – 15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that DXP’s disclosure
controls and procedures were effective as of the end of the period covered by this report.
Internal Control Over Financial Reporting
(A) Management’s Annual Report on Internal Control Over Financial Reporting
Management’s report on the Company’s internal control over financial reporting is included on page 20 of this Report under the
heading Management’s Annual Report on Internal Control Over Financial Reporting.
(B) Attestation Report of the Registered Public Accounting Firm
The report from Hein & Associates LLP on its audit of the effectiveness of DXP’s internal control over financial reporting as of
December 31, 2007, is included on page 21 of this Report under the heading Report of Independent Registered Public Accounting Firm.
(C) Changes in Internal Control over Financial Reporting
There have been no changes in DXP’s internal control over financial reporting during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, DXP’s internal control over financial reporting.
In reliance on guidance set forth in Question 3 of a “Frequently Asked Questions” interpretative release issued by the staff of the SEC’s Office
of the Chief Accountant and the Division of Corporation Finance in June 2004, as revised on January 21, 2005, our management determined that
it would exclude Precision Industries, Inc. and its consolidated subsidiaries (“Precision”) and the businesses of Delta Process Equipment and
Indian Fire and Safety from the scope of its assessment of internal control over financial reporting for Precision as of December 31, 2007. The
reason for this exclusion is that we acquired all of the stock of Precision and the businesses of Delta Process Equipment and Indian Fire and
Safety during 2007 and it was not possible for management to conduct an assessment of internal controls over financial reporting in the period
between the dates the acquisitions were completed and the date of management’s assessment. The Company has excluded Precision Industries,
Inc. and the businesses of Delta Process Equipment and Indian Fire and Safety from its assessment of internal control over financial reporting as
of December 31, 2007. The total assets and revenues of Precision Industries, Inc. and the businesses of Delta Process Equipment and Indian Fire
and Safety represent approximately 26% and 21%, respectively, of the related consolidated financial statement amounts as of and for the year
ended December 31, 2007.
ITEM 9B. Other Information
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference from the information in
our definitive proxy statement for the 2008 Annual Meeting of Shareholders that we will file with the SEC within 120 days of the end of the
fiscal year to which this report relates (the “Proxy Statement”).
42
ITEM 11. Executive Compensation
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 14. Principal Auditor Fees and Services.
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
43
PART IV
ITEM 15. Exhibits, Financial Statement Schedules.
(a) Documents included in this report:
1.
Financial Statements (included under Item 8):
DXP Enterprises, Inc. and Subsidiaries:
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II – Valuation and Qualifying Accounts.
Page
19
22
23
24
25
26
All other schedules have been omitted since the required information is not significant or is included in the Consolidated Financial
Statements or notes thereto or is not applicable.
3. Exhibits:
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC.
Exhibit
No. Description
3.1
3.2
4.1
4.2
4.3
Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form
S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).
Bylaws (incorporated by reference 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).
Form of Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
(Reg. No. 333-61953), filed with the Commission on August 20, 1998).
See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of security holders.
See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of security holders.
+10.1 DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999).
+10.2 DXP Enterprises, Inc. 1999 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999).
+10.3 DXP Enterprises, Inc. Long Term Incentive Plan, as amended (incorporated by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).
+10.4 Amendment No. One to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.8 to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
44
+10.5 Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R. Little (incorporated by
reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
+10.6 Employment Agreement dated effective as of June 1, 2004, between DXP Enterprises, Inc. and Mac McConnell (incorporated by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004.).
+10.7 Amendment No. One to DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.10 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
+10.8 Summary Description of Director Compensation (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2004).
+10.9 Summary Description of Executive Officer Cash Bonus Plan (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2004).
+10.10 Amendment No. Two to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.13
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.11 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and PMI Operating Company, Ltd., dated August 22, 2005,
DXP Enterprises, Inc., (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the
Commission on August 22, 2005).
10.12 Stock Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and R. A. Mueller, Inc., dated December 1, 2005, whereby
DXP Enterprises, Inc. acquired all of the outstanding shares of R. A. Mueller, Inc. (incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on December 5, 2005).
+10.13 DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on
Form S-8 (Reg. No. 333-134606), filed with the Commission on May 31, 2006).
10.14 Asset Purchase Agreements between PMI Operating Company, Ltd., as Purchaser, Production Pump Systems of Levelland, L.P.,
Machine Tech Services, L.P., Production Pump Systems, L.P., and the Partners dated May 1, 2006 (incorporated by reference to Exhibit
99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 2, 2006).
+10.15 Amendment No. One to Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R.
Little (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 25,
2006).
+10.16 Amendment No. One to DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K, filed with the Commission on July 25, 2006).
10.17 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and Safety International, Inc., dated October 11, 2006
(incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 11,
2006).
10.18 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and Gulf Coast Torch & Regulator, dated October 19, 2006
(incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 19,
2006).
10.19 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and Safety Alliance, dated November 1, 2006 (incorporated by
reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on November 1, 2006).
45
10.20 Asset Purchase Agreement dated as of May 2, 2007 whereby DXP Enterprises acquired the assets of Delta Process Equipment
Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on May
7, 2007).
10.21 Stock Purchase Agreement dated as of August 19, 2007 whereby DXP Enterprises acquired all outstanding stock of Precision
Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on
August 21, 2007).
10.22 Credit Agreement by and among DXP Enterprises as Borrower, and Wells Fargo Bank, National Association, as Lead Arranger and
Administrative Agent for the Lenders, as Bank, dated as of September 10, 2007 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on September 12, 2007).
10.23 Asset Purchase Agreement dated as of October 19, 2007 whereby DXP Enterprises acquired the assets of Indian Fire & Safety
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 22,
2007).
*21.1 Subsidiaries of the Company.
*23.1 Consent from Hein & Associates LLP, Independent Registered Public Accounting Firm.
*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.
*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.
*32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*32.2 Certification of Chief Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. All exhibits not so designated are incorporated by
reference to a prior filing with the SEC as indicated.
+ Indicates a management contract or compensation plan or arrangement.
The Company undertakes to furnish to any shareholder so requesting a copy of any of the exhibits to this Annual Report on Form 10-K upon
payment to the Company of the reasonable costs incurred by the Company in furnishing any such exhibit.
46
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S
REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
DXP Enterprises, Inc. and Subsidiaries
Houston, Texas
We have audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial statements and internal control over financial reporting of DXP Enterprises, Inc. and Subsidiaries included in this Form 10-K and have
issued our report thereon dated March 17, 2008. Our audits were made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The financial statement schedule listed in Item 15 herein (Schedule II-Valuation and Qualifying Accounts) is the
responsibility of the Company’s management and is presented for the purpose of complying with the Securities and Exchange Commission’s
rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in
the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects with the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ HEIN & ASSOCIATES LLP
HEIN & ASSOCIATES LLP
Houston, Texas
March 17, 2008
Description
Year ended December 31, 2007
Deducted from assets accounts
Allowance for doubtful accounts
Valuation allowance for deferred
tax assets
Year ended December 31, 2006
Deducted from assets accounts
Allowance for doubtful accounts
Valuation allowance for deferred
tax assets
Year ended December 31, 2005
Deducted from assets accounts
Allowance for doubtful accounts
Valuation allowance for deferred
tax assets
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
DXP ENTERPRISES, INC.
Years Ended December 31, 2007, 2006 and 2005
(in thousands)
Balance at
Beginning
of Year
Charged to
Cost and
Expenses
Charged to
Other
Accounts
Balance
At End
of Year
Deductions
$ 1,482
$ 552
$ 253 (3)
$ 156 (1)
$ 2,131
$ 41
$ -
$ -
$ 8 (2)
33
$ 1,835
$ 384
$ -
$ 737 (1)
$ 1,482
$ 44
$ -
$ -
$ 3 (2)
$ 41
$ 1,776
$ 273
$ 48 (3)
$ 262 (1)
$ 1,835
$ 78
$ -
$ -
$ 34 (2)
$ 44
(1) Uncollectible accounts written off, net of recoveries
(2) Reduction results from expiration or use of state net operating loss carryforwards.
(3) Reserve for receivables of acquired businesses.
47
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
DXP ENTERPRISES, INC. (Registrant)
By: /s/ DAVID R. LITTLE
David R. Little
Chairman of the Board, President and Chief Executive Officer
Dated: March 17, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Name Title Date
/s/ DAVID R. LITTLE
David R. Little
Chairman of the Board, President,
March 17, 2008
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ MAC McCONNELL Senior Vice-President/Finance
Mac McConnell
(Principal Financial and Accounting Officer)
and Chief Financial Officer
March 17, 2008
/s/ CHARLES R. STRADER Executive Vice President and
Chief Financial Officer of
Charles R. Strader
Precision Industries
March 17, 2008
/s/ CLETUS DAVIS
Cletus Davis
Director
/s/ TIMOTHY P. HALTER Director
Timothy P. Halter
/s/ KENNETH H. MILLER Director
Kenneth H. Miller
March 17, 2008
March 17, 2008
March 17, 2008
48
Exhibit
No. Description
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form
S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).
Bylaws (incorporated by reference 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).
Form of Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-8
(Reg. No. 333-61953), filed with the Commission on August 20, 1998).
See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of security holders.
See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of security holders.
+10.1 DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999).
+10.2 DXP Enterprises, Inc. 1999 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999).
+10.3 DXP Enterprises, Inc. Long Term Incentive Plan, as amended (incorporated by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).
+10.4 Amendment No. One to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.8 to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
+10.5 Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R. Little (incorporated by
reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
+10.6 Employment Agreement dated effective as of June 1, 2004, between DXP Enterprises, Inc. and Mac McConnell (incorporated by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004.).
+10.7 Amendment No. One to DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.10 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
+10.8 Summary Description of Director Compensation (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2004).
+10.9 Summary Description of Executive Officer Cash Bonus Plan (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2004).
+10.10 Amendment No. Two to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.13
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
10.11 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and PMI Operating Company, Ltd., dated August 22, 2005,
DXP Enterprises, Inc., (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the
Commission on August 22, 2005).
49
10.12 Stock Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and R. A. Mueller, Inc., dated December 1, 2005, whereby
DXP Enterprises, Inc. acquired all of the outstanding shares of R. A. Mueller, Inc. (incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on December 5, 2005).
+10.13 DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on
Form S-8 (Reg. No. 333-134606), filed with the Commission on May 31, 2006).
10.14 Asset Purchase Agreements between PMI Operating Company, Ltd., as Purchaser, Production Pump Systems of Levelland, L.P.,
Machine Tech Services, L.P., Production Pump Systems, L.P., and the Partners dated May 1, 2006 (incorporated by reference to Exhibit
99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 2, 2006).
+10.15 Amendment No. One to Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R.
Little (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on July 25,
2006).
+10.16 Amendment No. One to DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K, filed with the Commission on July 25, 2006).
10.17 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and Safety International, Inc., dated October 11, 2006
(incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 11,
2006).
10.18 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and Gulf Coast Torch & Regulator, dated October 19, 2006
(incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 19,
2006).
10.19 Asset Purchase Agreement between DXP Enterprises, Inc., as Purchaser, and Safety Alliance, dated November 1, 2006 (incorporated by
reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on November 1, 2006).
10.20 Asset Purchase Agreement dated as of May 2, 2007 whereby DXP Enterprises acquired the assets of Delta Process Equipment
Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on May
7, 2007).
10.21 Stock Purchase Agreement dated as of August 19, 2007 whereby DXP Enterprises acquired all outstanding stock of Precision
Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on
August 21, 2007).
10.22 Credit Agreement by and among DXP Enterprises as Borrower, and Wells Fargo Bank, National Association, as Lead Arranger and
Administrative Agent for the Lenders, as Bank, dated as of September 10, 2007 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed with the Commission on September 12, 2007).
10.23 Asset Purchase Agreement dated as of October 19, 2007 whereby DXP Enterprises acquired the assets of Indian Fire & Safety
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on October 22,
2007).
*21.1 Subsidiaries of the Company.
*23.1 Consent from Hein & Associates LLP, Independent Registered Public Accounting Firm.
*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.
*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.
50
*32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
*32.2 Certification of Chief Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. All exhibits not so designated are incorporated by
reference to a prior filing with the SEC as indicated.
+ Indicates a management contract or compensation plan or arrangement.
51
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
SEPCO Industries, Inc., a Texas Corporation
Pelican States Supply Company, Inc., a Nevada Corporation
DXP Acquisition, Inc., a Nevada corporation (doing business as Strategic Supply, Inc.)
American MRO, Inc., a Nevada Corporation
Global Pump Service and Supply, LLC, a Texas limited liability company (doing business as Certified Equipment Services or CES)
PMI Operating Company, Ltd., a Texas limited partnership
PMI Investment, LLC, a Delaware limited liability corporation
Pump - PMI LLC, a Texas limited liability corporation
R. A. Mueller, Inc. an Ohio corporation
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation of our report dated March 17, 2008 included in this Annual Report on Form 10-K, into the Company’s
previously filed registration statements on Form S-8 (File Nos. 333-134606, 333-123698, 333-61953, 333-92875 and 333-92877) and Form S-3
(File No. 333-134603).
/s/HEIN & ASSOCIATES LLP
Hein & Associates LLP
Houston, Texas
March 17, 2008
Exhibit 31.1
I, David R. Little, certify that:
CERTIFICATIONS
1. I have reviewed this report on Form 10-K of DXP Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a – 15(f) and 15d – 15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 17, 2008
/s/ David R. Little
David R. Little
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Mac McConnell, certify that:
CERTIFICATIONS
1. I have reviewed this report on Form 10-K of DXP Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a – 15(f) and 15d – 15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 17, 2008
/s/ Mac McConnell
Mac McConnell
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of DXP Enterprises, Inc. (the “Company”), hereby certifies that the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or 15
(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 17, 2008
/s/David R. Little
David R. Little
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a
separate disclosure document.
Exhibit 32.2
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of DXP Enterprises, Inc. (the “Company”), hereby certifies that the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or 15
(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: March 17, 2008
/s/Mac McConnell
Mac McConnell
Senior Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a
separate disclosure document.