SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

OR

COMMISSION FILE NUMBER 0-21513

_______________

DXP ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

713/996-4700

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Number of shares outstanding of each of the issuer's classes of common stock, as of November 10, 2003:

Common Stock: 4,071,685

ITEM 1: FINANCIAL STATEMENTS

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

DXP ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

DXP ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. DXP Enterprises, Inc. ("DXP" or the "Company") believes that the presentations and disclosures herein are adequate to make the information not misleading. The condensed consolidated financial statements reflect all elimination entries and adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's 10-K Annual Report for the year ended December 31, 2002, filed with the Securities and Exchange Commission.

DXP, a Texas corporation, was incorporated on July 26, 1996, to be the successor to SEPCO Industries, Inc. (SEPCO). The Company is organized into two segments: Maintenance, Repair and Operating (MRO) and Electrical Contractor.

The Company accounts for its stock-based compensation plans under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma information below is based on provisions of Statement of Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure, issued in December 2002.

The following table sets forth the computation of basic and diluted earnings per share before cumulative effect of a change in accounting principle for the periods indicated.

The MRO Segment is engaged in providing maintenance, repair and operating products, equipment and integrated services, including engineering expertise and logistics capabilities, to industrial customers. The Company provides a wide range of MRO products in the fluid handling equipment, bearing, power transmission equipment, general mill, safety supply and electrical products categories. The Electrical Contractor segment sells a broad range of electrical products, such as wire conduit, wiring devices, electrical fittings and boxes, signaling devices, heaters, tools, switch gear, lighting, lamps, tape, lugs, wire nuts, batteries, fans and fuses, to electrical contractors.

The high degree of integration of the Company's operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. All business segments operate primarily in the United States.

Financial information relating the Company's segments is as follows:

All of the Company's goodwill pertained to one reporting unit as defined in SFAS 142. The goodwill was tested for impairment during the first quarter of 2002 as required by SFAS 142 upon adoption based upon the expected present value of future cash flows approach. As a result of this valuation process as well as the application of the remaining provisions of SFAS 142, the Company recorded a transitional impairment loss of $2.5 million before income taxes ($1.7 million after income taxes). This write-off was reported as a cumulative effect of a change in accounting principle in the Company's consolidated statement of operations as of January 1, 2002. This adoption of the statement has resulted in the elimination of approximately $79,000 of annual goodwill amortization subsequent to December 31, 2001.

On June 25, 2003 the Company amended the loan agreement with its bank lender ("Credit Facility"). The amendment extended the maturity to April 1, 2006, reduced the maximum amount to $30.0 million, and provided the option of interest at LIBOR plus a margin ranging from 2.25% to 3.25% or prime plus a margin ranging from 0.0% to 0.75%. The margin is determined by the ratio of funded debt to earnings before interest, taxes, depreciation and amortization for a twelve month period as of the end of the preceding calendar quarter. For the quarter ended September 30, 2003 the prime margin and LIBOR margin were 0.25% and 2.75%, respectively, for the revolving portion of the Credit Facility and 0.50% and 3.0%, respectively, for the term portion of the credit facility.

SALES. Revenues for the quarter ended September 30, 2003, increased $1.9 million, or 5.1%, to approximately $40.4 million from $38.4 million in 2002. Sales for the MRO Segment increased $2.1 million, or 5.7%, to $39.7 million for 2003. This increase can be primarily attributed to increased sales of fluid handling products for use in capital projects for offshore energy production. Sales for the Electrical Contractor segment decreased by $0.2 million, or 23.9%, for the current quarter when compared to the same period in 2002. This decrease is the result of a slow down in the commercial construction business for electrical contractors.

GROSS PROFIT. Gross profit as a percentage of sales was 25.5% for the third quarter of 2003, and the third quarter of 2002. Gross profit as a percentage of sales for the MRO segment increased to 25.3% for the three months ended September 30, 2003, from 25.2% in the comparable period of 2002. This increase can be primarily attributed to increased sales of higher margin fluid handling products. Gross profit as a percentage of sales for the Electrical Contractor segment increased to 38.5% for the three months ended September 30, 2003, from 38.0% in the comparable period of 2002. This increase resulted from decreased sales of low margin commodity products.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for the quarter ended September 30, 2003, increased $0.3 million, or 3.3%, compared to the same period in 2002. This increase is primarily attributed to increased costs for general insurance, employee healthcare and costs related to additional sales personnel. As a percentage of revenue, the 2003 expense decreased by approximately 0.4% to 22.3% from 22.7%, for 2002. This decrease is attributed to the percentage increase in revenues being greater than the percentage increase in expenses.

OPERATING INCOME. Operating income for the third quarter of 2003 increased by $0.2 million, or 22.6% when compared to the same period in 2002. Operating income for the MRO segment for the 2003 quarter increased $0.3 million, or 27.8%, when compared to the same period in 2002. This increase in operating income is the result of increased gross profit, partially offset by increased selling, general and administrative expense. Operating income for the Electrical Contractor segment decreased slightly in 2003 compared to the same period in 2002. The decreased operating income for the Electrical Contractor segment is the result of reduced gross profit, partially offset by reduced selling, general and administrative expenses.

INTEREST EXPENSE. Interest expense for the quarter ended September 30, 2003 decreased by $0.1 million to $0.3 million from $0.4 million during the same period in 2002. This decline results from lower interest rates for the third quarter of 2003 when compared to the third quarter of 2002, as well as a lower average debt balance.

SALES. Revenues for the nine months ended September 30, 2003, increased $2.4 million, or 2.1%, to approximately $115.6 million from $113.2 million in 2002. Sales for the MRO Segment increased $2.8 million, or 2.5%, primarily due to increased sales of fluid handling products for use in capital projects for offshore energy production. Sales for the Electrical Contractor segment decreased by $0.4 million, or 17.9%, for the first nine months of 2003 when compared to same period in 2002. This decrease is the result of a slow down in the commercial construction business for electrical contractors.

GROSS PROFIT. Gross profit as a percentage of sales decreased by approximately 0.2% for the first nine months of 2003, when compared to the same period in 2002. Gross profit as a percentage of sales for the MRO segment decreased to 25.2% for the nine months ended September 30, 2003, from 25.4% in the comparable period of 2002. This decrease can be primarily attributed to decreased margins on bearings sold by the MRO segment. Gross profit as a percentage of sales for the Electrical Contractor segment decreased to 36.4% for the nine months ended September 30, 2003, down from 38.8% in the comparable period of 2002. This decrease resulted from lower margin sales associated with a slow down in the commercial construction business.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for the nine months ended September 30, 2003, increased by approximately $0.1 million when compared to the same period in 2002. This increase is primarily attributed to increased incentive compensation related to the increased gross profit. As a percentage of revenue, the 2003 expense decreased by approximately 0.5% to 22.4% from 22.9% for 2002. This decrease is primarily attributable to a similar level of costs being spread over a larger revenue amount.

OPERATING INCOME. Operating income for the first nine months of 2003 increased by $0.3 million, or 8.3%, when compared to operating income for the same period in 2002. This increase is the result of an 8.2% increase in operating income for the MRO Segment and a small improvement in operating income for the Electrical Contractor segment.

INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2003 decreased by $0.3 million to $0.9 million from $1.2 million during the same period in 2002. This decline results from lower interest rates for the first nine months of 2003 when compared to the first nine months of 2002, as well as a lower average debt balance.

As a distributor of MRO and Electrical products, we require significant amounts of working capital to fund inventories and accounts receivable. Additional cash is required for capital items such as information technology and warehouse equipment. We also require cash to pay our lease obligations and to service our debt.

Under the loan agreements with our bank lender, all available cash is generally applied to reduce outstanding borrowings, with operations funded through borrowings under the Credit Facility. Our policy is to maintain low levels of cash and cash equivalents and to use borrowings under our lines of credit for working capital. We had approximately $7.2 million available for borrowings under the revolving portion of the Credit Facility at September 30, 2003. Working capital at September 30, 2003 and December 31, 2002 was approximately $22.4 million and $22.8 million, respectively. During the first nine months of 2003 and 2002, we collected trade receivables in approximately 51 and 51 days, respectively. For the nine months ended September 30, 2003 and 2002, we turned our inventory approximately six times and five times, respectively, on an annualized basis.

The Credit Facility with our bank lender, which was amended on June 25, 2003, provides for borrowings up to an aggregate of the lesser of (i) a percentage of the collateral value based on a formula set forth therein or (ii) $30.0 million, and matures April 1, 2006. The Credit Facility is secured by receivables, inventory, real estate and machinery and equipment. In addition to the $0.8 million of cash on hand at September 30, 2003, we had $7.2 million available for borrowings under the Credit Facility. The Credit Facility contains customary affirmative and negative covenants as well as financial covenants that are measured monthly and require that we maintain certain fixed charge coverage and other financial ratios. Although we expect to be able to comply with the covenants, including the financial covenants, of the Credit Facility, there can be no assurance that in the future we will be able to do so or that our lender would be willing to waive such non-compliance or amend such covena nts.

We generated approximately $2.7 million of cash in operating activities in the first nine months of 2003 as compared to generating approximately $1.8 million of cash during the first nine months of 2002. This increased generation of cash can be partially attributed to improved earnings in 2003 compared to 2002.

Fixed asset purchases of approximately $0.2 million during the first nine months of 2003 related primarily to computer equipment, software and pump testing equipment. Fixed asset purchases of approximately $0.3 million during the first nine months of 2002 related primarily to computer equipment.

Our internal cash flow projections indicate our cash generated from operations and available under our Credit Facility will meet our normal working capital needs during the next twelve months. However, we may require additional debt or equity financing to meet our future debt service obligations beyond September 30, 2004, which may include additional bank debt or the public or private sale of equity or debt securities. In connection with such financing, we may be required to issue securities that substantially dilute the interest of our shareholders.

We would require additional capital to fund any future acquisitions. At this time, we do not plan to grow through acquisitions unless the market price of our common stock rises to levels that will make acquisitions accretive to our earnings or we generate excess cash flow. We may also pursue additional equity or debt financing to fund future acquisitions, although we may not be able to obtain additional financing on attractive terms.

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 and self-insured medical claims. Actual results could differ from those estimates.

Critical accounting policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's subjective or complex judgments. Below is a discussion of what we believe are our critical accounting policies.

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 collecitibility is reasonably assured.

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.

Inventory consists principally of finished goods and is priced at lower of cost or market, cost being determined using both the first-in and 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.

In accordance with SFAS 109, Accounting for Income Taxes, we have recorded a net deferred tax asset of $1.4 million as of September 30, 2003. We believe it is more likely than not that this net deferred tax asset will be realized based primarily on the assumption of future taxable income.

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.

In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is effective for financial statements issued for fiscal years beginning after September 15, 2002. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting for asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. The Company adopted SFAS No. 143 on January 1, 2003. The adoption did not have a material effect on the Company's financial statements.

SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," was issued in May 2003 and requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for interim periods beginning after June 15, 2003. SFAS No. 150 does not have a material impact on our financial position or results of operations.

Our market risk results from volatility in interest rates. This risk is monitored and managed. Our exposure to interest rate risk relates primarily to our Credit Facility. Based on our capital structure at September 30, 2003, a 100 basis point change in interest rates would result in an estimated $0.2 million change in annual interest expense.

Based on their evaluation as of September 30, 2003, the principal executive officer and principal financial officer of the Company have concluded that the Company's disclosures controls and procedures (as defined in Rules 13a-14 (c) 15d-14(c) under the Securities Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. The Company is not currently a party to any litigation that it believes could have a material adverse effect on the results of operations or financial condition of the Company.

None.

None.

None

Our expectations with respect to future results of operations that may be embodied in oral and written forward-looking statements, including any forward-looking statements that may be contained in this Quarterly Report on Form 10-Q, are subject to risks and uncertainties that must be considered when evaluating the likelihood of our realization of such expectations. Our actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below.

The Credit Facility requires that we comply with certain specified covenants, restrictions, financial ratios and other financial and operating tests. Our ability to comply with any of the foregoing restrictions will depend on our future performance, which will be subject to prevailing economic conditions and other factors, including factors beyond our control. A failure to comply with any of these obligations could result in an event of default under the Credit Facility, which could permit acceleration of our indebtedness under the Credit Facility. From time to time in previous years we were unable to comply with some of the financial covenants contained in the Credit Facility (relating to, among other things, the maintenance of prescribed financial ratios) and have, when necessary, obtained waivers or amendments to the covenants from our lender. Although we expect to be able to comply with the covenants, including the financial covenants, of the Credit Facility, there can be no as surance that in the future we will be able to do so or that our lender will be willing to waive such non-compliance or further amend such covenants.

Future results for us will depend in part on our success in implementing our internal growth strategy, which includes expanding our existing geographic areas and adding new customers. Our ability to implement this strategy will depend on our success in selling more to existing customers, acquiring new customers, hiring qualified sales persons, and marketing integrated supply arrangements such as those being pursued by us through our SmartSource program. Although we intend to increase sales and product offerings to existing customers and reduce costs through consolidating certain administrative and sales functions, there can be no assurance that we will be successful in these efforts.

Our business is highly competitive. We compete with a variety of industrial supply distributors, some of which may have greater financial and other resources than us. Although many of our traditional distribution competitors are small enterprises selling to customers in a limited geographic area, we also compete with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by our SmartSource program. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than us. Our competitors include direct mail suppliers, large warehouse stores and, to a lesser extent, certain manufacturers.

Demand for our products is subject to changes in the United States economy in general and economic trends affecting our customers and the industries in which they compete in particular. Many of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, we may experience changes in demand for our products as changes occur in the markets of our customers.

We will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, our Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of our company could have a material adverse effect on our financial condition and results of operations. We do not maintain key-man life insurance on the life of Mr. Little or on the lives of our other executive officers. In addition, our ability to grow successfully will be dependent upon our ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely affect our financial condition and results of operations.

We have distribution rights for certain product lines and depend on these distribution rights for a substantial portion of our business. Many of these distribution rights are pursuant to contracts that are subject to cancellation upon little or no prior notice. Although we believe that we could obtain alternate distribution rights in the event of such a cancellation, the termination or limitation by any key supplier of its relationship with our company could result in a temporary disruption on our business and, in turn, could adversely affect results of operations and financial condition.

Certain of our operations are subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise relating to the protection of the environment. Although we believe that we have adequate procedures to comply with applicable discharge and other environmental laws, the risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals cannot be eliminated completely. In the event of such an accident, we could be held liable for any damages that result and any such liability could have a material adverse effect on our financial condition and results of operations.

On August 8, 2003, DXP filed a Form 8-K in connection with the press release announcing the Company's 2003 second quarter results.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DXP ENTERPRISES, INC.

(Registrant)

By: /s/ MAC McCONNELL

Mac McConnell

Senior Vice-President and Chief Financial Officer

Dated: November 14, 2003

I, David R. Little, the Chief Executive Officer of DXP Enterprises, Inc., certify that:

1. I have reviewed this Form 10-Q 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 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:

1. 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;
2. 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;
3. evaluated the effectiveness of the registrant's disclosure controls 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
4. 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

1. The registrant's other certifying officer 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):

1. 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
2. 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.

November 14, 2003

/s/ David R. Little

David R. Little

Chief Executive Officer

I, Mac McConnell, the Chief Financial Officer of DXP Enterprises, Inc., certify that: