14A further deterioration in the oil and gas sector or other circumstances may negatively impact our business and results of operations and thus hinder our ability to comply with financial covenants under our credit facility, including the Consolidated EBITDA financial covenant.
TableA further deterioration of Contentsthe oil and gas sector or other circumstances that reduce our earnings may hinder our ability to comply with certain financial covenants under our credit facility. Specifically, compliance with the Consolidated EBITDA covenant depends on our ability to maintain net income and prevent losses. There can be no assurance that in the future we will be able to comply with the covenants or, if we are not able to do so, that our lenders will be willing to waive such non-compliance or further amend such covenants. If we are unable to comply with our financial covenants or obtain a waiver or amendment of those covenants or obtain alternative financing, our business and financial condition would be adversely affected.
We likely will need to amend our credit facility or obtain alternative financing during the next 12 months.
Because our credit facility, as amended by the Fifth Amendment, matures on March 31, 2018, we will need to amend our credit facility or obtain alternative financing including additional debt and/or equity during the next 12 months. Such alternative 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. Our ability to amend the credit facility or to obtain alternative financing on attractive terms, if at all, may be affected by our recent difficulty meeting the financial covenants in the credit facility and will depend in part on prevailing economic conditions and other factors, including factors beyond our control.
We rely upon third-party transportation providers for our merchandise shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver products on a timely basis.
We rely upon independent third-party transportation providers for our merchandise shipments, including shipments to and from all of our service centers. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, labor availability, labor strikes and inclement weather, which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. In addition, we may not be able to obtain favorable terms as we have with our current third-party transportation providers.
Adverse weather events or natural disasters could negatively disrupt our operations.
Certain areas in which we operate are susceptible to adverse weather conditions or natural disasters, such as hurricanes, tornadoes, floods and earthquakes. These events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. Additionally, we may experience communication disruptions with our customers, vendors and employees.
We cannot predict whether or to what extent damage caused by these events will affect our operations or the economies in regions where we operate. These adverse events could result in disruption of our purchasing or distribution capabilities, interruption of our business that exceeds our insurance coverage, our inability to collect from customers and increased operating costs. Our business or results of operations may be adversely affected by these and other negative effects of these events.
The loss of or the failure to attract and retain key personnel could adversely impact our results of operations.
The loss of the services of any of the executive officers of the 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 and/or sources of similar products in the event of such a cancellation, the termination or limitation by any key supplier of its relationship with the Company could result in a temporary disruption of our business and, in turn, could adversely affect our results of operations and financial condition.
If we do not successfully remediate our internal controls weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted.
As discussed in Item 9A, “Managements Report on Internal Controls Over Financial Reporting,” we had material weaknesses in our internal controls during 2016. If we fail to successfully remediate those weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted
We are subject to various government regulations.
We are subject to laws and regulations in every jurisdiction where we operate. Compliance with laws and regulations increases our cost of doing business. We are subject to a variety of laws and regulations, including without limitation import and export requirements, the Foreign Corrupt Practices Act, tax laws (including U.S. taxes on our foreign subsidiaries), data privacy requirements, labor laws and anti-competition regulations. We are also subject to audits and inquiries in the ordinary course of business. Changes to the legal and regulatory environments could increase the cost of doing business, and such costs may increase in the future as a result of changes in these laws and regulations or in their interpretation. Although we have implemented policies and procedures designed to comply with laws and regulations, there can be no assurance that employees, contractors or agents will not violate such laws and regulations. Any such violations could individually or in the aggregate materially adversely affect our financial condition or results of operations.
We are subject to environmental, health and safety laws and regulations.
We are subject to federal, state, local, foreign and provincial environmental, health and safety laws and regulations. Fines and penalties may be imposed for non-compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits. The failure by us to comply with applicable environmental, health and safety requirements could result in fines, penalties, enforcement actions, third party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective measures.
A general 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. We traditionally do not enter into long-term contracts with our customers.customers which increases the likelihood that economic downturns would affect our business.
Risks Associated With Conducting Business in Foreign Countries
We conduct a meaningful amount of business outside of the United States of America. We could be adversely affected by economic, legal, political and regulatory developments in countries that we conduct business in. We have meaningful operations in Canada in which the functional currency is denominated in Canadian dollars. As the value of currencies in foreign countries in which we have operations increases or decreases related to the U.S. dollar, the sales, expenses, profits, losses assets and liabilities of our foreign operations, as reported in our consolidated financial statements, increase or decrease, accordingly.
The trading price of our common stock may be volatile.
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this and other periodic reports, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could adversely affect our business.
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 SmartSourceSM 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. Additionally, we sell products and services in very competitive markets. We could experience a material adverse effect to the extent that our competitors are successful in reducing our customers’ purchases of products and services from us. Competition could also cause us to lower our prices, which could reduce our margins and profitability. Consolidation in our industry could heighten the impacts of competition on our business and results of operations discussed above. The fact that we do not traditionally enter into long-term contracts with our suppliers or customers may provide opportunities for our competitors.
We are subject to personal injury and product liability claims involving allegedly defective products.
A variety of products we distribute are used in potentially hazardous applications that can result in personal injury and product liability claims. A catastrophic occurrence at a location where the products we distribute are used may result in us being named as a defendant in lawsuits asserting potentially large claims and applicable law may render us liable for damages without regard to negligence or fault.
Risks Associated With Acquisition Strategy
Our future results will depend in part on our ability to successfully implement our acquisition strategy. We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and stock price. This strategy includes taking advantage of a consolidation trend in the industry and effecting acquisitions of businesses with complementary or desirable product lines, strategic distribution locations, attractive customer bases or manufacturer relationships. Promising acquisitions are difficult to identify and complete for a number of reasons, including high valuations, competition among prospective buyers, the need for regulatory (including antitrust) approvals and the availability of affordable funding in the capital markets. In addition, competition for acquisitions in our business areas is significant and may result in higher purchase prices. Changes in accounting or regulatory requirements or instability in the credit markets could also adversely impact our ability to consummate acquisitions. 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 personnel of the acquired business, difficulties in integrating operations, technologies, services and personnel of acquired companies, potential loss of customers of acquired companies, preserving business relationships of the acquired companies, risks associated with unanticipated events or liabilities, and expenses associated with obsolete inventory of an acquired business, some or all of which could have a material adverse effect on our business, financial condition and results of operations. Our ability to grow at or above our historic rates depends in part upon our ability to identify and successfully acquire and integrate companies and businesses at appropriate prices and realize anticipated cost savings.
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. These cash resources may include borrowings under our credit agreement or equity or debt financings. Our current credit agreement with our bank lenders contains certain restrictions that could adversely affect our ability to implement and finance potential acquisitions. Such restrictions include provisions which limit our ability to merge or consolidate with, or acquire all or a substantial part of the properties or capital stock of, other entities without the prior written consent of the lenders. There can be no assurance that we will be able to obtain the lenders’ consent to any of our proposed acquisitions. 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.
Ability to Comply with Financial Covenants of Credit Facility
Our credit facility requires the Company to comply with certain specified covenants, restrictions, financial ratios and other financial and operating tests. The Company’s ability to comply with any of the foregoing restrictions will depend on its future performance, which will be subject to prevailing economic conditions and other factors, including factors beyond the Company’s control. A failure to comply with any of these obligations could result in an event of default under the credit facility, which could permit acceleration of the Company’s indebtedness under the credit facility. The Company from time to time has been unable to comply with some of the financial covenants contained in the credit facility (relating to, among other things, the maintenance of prescribed financial ratios) and has, when necessary, obtained waivers or amendments to the covenants from its lenders. There can be no assurance that in the future the Company will be able to comply with the covenants or, if is not able to do so, that its lenders will be willing to waive such non-compliance or further amend such covenants. The Company currently believes that it may not be able to comply with some of the financial covenants in its credit facility in the next quarter unless it is able to amend its credit facility or obtain alternative financing. If it is unable to comply with those financial covenants or obtain a waiver or amendment of those covenants or obtain alternative financing, the Company’s business and financial condition would be adversely affected.
Ability to Refinance
We may not be able to refinance existing debt or the terms of any refinancing may not be as favorable as the terms of our existing debt. If principal payments due upon default or at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital, our cash flow may not be sufficient to repay all maturing debt in years when significant payments come due.
Goodwill and intangible assets recorded as a result of our acquisitions could become impaired.
Goodwill represents the difference between the purchase price of acquired companies and the related fair values of net assets acquired. We test goodwill for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. Goodwill and intangibles represent a significant amount of our total assets. As of December 31, 2015,2016, our combined goodwill and intangible assets amounted to $309.7$282.4 million, net of accumulated amortization. To the extent we do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other intangible assets recorded, the investment could be considered impaired and subject to write-off which would directly impact earnings. We expect to record additional goodwill and other intangible assets as a result of future business acquisitions. Future amortization of such other intangible assets or impairments, if any, of goodwill or intangible assets would adversely affect our results of operations in any given period. See Note 8 of the Notes to Consolidated Financial Statements regarding the 2014 and 2015 impairments of B27 and NatPro goodwill and intangible assets.
Our business has substantial competition that 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 SCS segment. 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.
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, our 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.
Risks Associated with Insurance
In the ordinary course of business we at times may become the subject of various claims, lawsuits or administrative proceedings seeking damages or other remedies concerning our commercial operations, the products we distribute, employees and other matters, including potential claims by individuals alleging exposure to hazardous materials as a result of the products we distribute or our operations. Some of these claims may relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to acquisition. The products we distribute are subject to inherent risks that could result in personal injury, property damage, pollution, death or loss of production. Any defects in the products we distribute could result in personal injury, death, property damage, pollution or loss of production.
We maintain insurance to cover potential losses, and we are subject to various deductibles and caps under our insurance. It is possible, however, that judgments could be rendered against us in cases in which we would be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for such matters. Even a partially uninsured claim, if successful and of significant size, could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we may not be able to continue to obtain insurance on commercially reasonable terms in the future, and we may incur losses from interruption of our business that exceed our insurance coverage. In cases where we maintain insurance coverage, our insurers may raise various objections and exceptions to coverage which could make uncertain the timing and amount of any possible insurance recovery.
Risks Associated with Cyber-Security
Through our sales channels and electronic communications with customers generally, we collect and maintain confidential information that customers provide to us in order to purchase products or services. We also acquire and retain information about suppliers and employees in the normal course of business. Computer hackers may attempt to penetrate our information systems or our vendors' information systems and, if successful, misappropriate confidential customer, supplier, employee or other business information. In addition, one of our employees, contractors or other third party may attempt to circumvent security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of information could expose us to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our financial condition and results of operations.
ITEM 1B. | Unresolved Staff Comments |
None.
We own our headquarters facility in Houston, Texas, which has approximately 48,000 square feet of office space. At December 31, 2015,2016, we had approximately 191178 facilities which contained 171162 services centers, 85 distribution centers and 1211 fabrication facilities.
At December 31, 2015,2016, the Service Centers segment owned or leased 171162 service center facilities. Of these facilities, 137126 were located in the U.S. in 3534 states, 3234 were located in 9 Canadian provinces, one was located in Sonora, Mexico and one was located in Dubai. All of the distribution centers were located in the U.S., specifically in California, Georgia, Illinois, Massachusetts, Montana, Nebraska, and Texas. At December 31, 2015,2016, the Innovative Pumping Solutions segment operated out of 1211 fabrication facilities located in 54 states in the U.S. and two provincesprovinces in Canada. At December 31, 2015,2016, the Supply Chain Services segment operated supply chain installations in 6967 of our customers’ facilities in 2825 U.S. states.
At December 31, 2015,2016, our owned facilities ranged from 5,000 square feet to 48,000 square feet in size. We leased facilities for terms generally ranging from one to fifteen years. The leased facilities ranged from approximately 500570 square feet to 170,000105,000 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.
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. 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 business, consolidated financial position, cash flows, or results of operations.
ITEM 4. | Mine Safety Disclosures |
Not applicable.
PART II
ITEM 5. | Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Our common stock trades on The NASDAQ Global Select Market under the stock 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:
| | High | | | Low | | | High | | | Low | |
2015 | | | | | | | | | | | | |
Fourth Quarter | | $ | 33.44 | | | $ | 22.66 | | | $ | 33.44 | | | $ | 22.66 | |
Third Quarter | | $ | 45.26 | | | $ | 26.32 | | | $ | 45.26 | | | $ | 26.32 | |
Second Quarter | | $ | 48.85 | | | $ | 39.94 | | | $ | 48.85 | | | $ | 39.94 | |
First Quarter | | $ | 50.20 | | | $ | 39.19 | | | $ | 50.20 | | | $ | 39.19 | |
| | | | | | | | | | | | | | | | |
2014 | | | | | | | | | |
2016 | | | | | | | | | |
Fourth Quarter | | $ | 73.30 | | | $ | 44.74 | | | $ | 37.88 | | | $ | 19.75 | |
Third Quarter | | $ | 82.81 | | | $ | 69.12 | | | $ | 30.69 | | | $ | 15.07 | |
Second Quarter | | $ | 113.21 | | | $ | 64.58 | | | $ | 22.94 | | | $ | 12.78 | |
First Quarter | | $ | 112.00 | | | $ | 91.07 | | | $ | 21.91 | | | $ | 13.31 | |
On FebruaryMarch 29, 2016,2017, we had approximately registered 410392 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 cash 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, lenders, and general financial and business conditions.
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, 20102011 and that all dividends were reinvested.
Investors are cautioned against drawing conclusions from the data contained in the graph above as past results are not necessarily indicative of future performance.
Equity Compensation Table
The following table provides information regarding shares covered by the Company’s equity compensation plans as of December 31, 2015:2016:
Plan category | | Number of Securities to be issued upon exercise of outstanding options | | | Weighted average exercise price of outstanding options | | | Non-vested restricted shares outstanding | | | Weighted average grant price | | | Number of securities remaining available for future issuance under equity compensation plans | | | Number of Securities to be issued upon exercise of outstanding options | | | Weighted average exercise price of outstanding options | | | Non-vested restricted shares outstanding | | | Weighted average grant price | | | Number of securities remaining available for future issuance under equity compensation plans | |
Equity compensation plans approved by shareholders | | | N/A | | | | N/A | | | | 126,657 | | | $ | 55.54 | | | | 81,527(1) | | | | N/A | | | | N/A | | | | 143,380 | | | $ | 26.76 | | | | 419,597 | (1) |
Equity compensation plans not approved by shareholders | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Total | | | N/A | | | | N/A | | | | 126,657 | | | $ | 55.54 | | | | 81,527(1) | | | | N/A | | | | N/A | | | | 143,380 | | | $ | 26.76 | | | | 419,597 | (1) |
(1) Represents shares of common stock authorized for issuance under the 2005 Restricted Stock Plan. | | |
(1) Represents shares of common stock authorized for issuance under the 2016 Omnibus Incentive Plan. | | (1) Represents shares of common stock authorized for issuance under the 2016 Omnibus Incentive Plan. | |
Unregistered Shares
DXP issued 52,542 unregistered shares of DXP Common Stock as part of the consideration for the April 16, 2013 acquisition of NatPro. The unregistered shares were issued to certain sellers of NatPro.
DXP issued 36,000 unregistered shares of DXP Common Stock as part of the consideration for the January 2, 2014 acquisition of B27. The unregistered shares were issued to certain sellers of B27.
DXP issued 148,769 unregistered shares of DXP Common Stock as part of the consideration for the September 1, 2015 acquisition of Cortech. The unregistered shares were issued to the sellers of Cortech.
We relied on Section 4(2)4(a)(2) of the Securities Exchange Act as a basis for exemption from registration. All issuances were as a result of private negotiation, and not pursuant to public solicitation. In addition, we believe the shares were issued to “accredited investors” as defined by Rule 501 of the Securities Act.
Recent Sales of Common Stock
On May 29, 2013,August 19, 2016, the Company filed with the Securities and Exchange Commission a Form S-3 Registration Statement, commonly referred to as a “shelf registration”,registration,” which was effective August 26, 2016, whereby the Company registered an indeterminate number of shares of common stock asand which shall have an aggregate initial offering price notof up to exceed $150.0$100 million. In December 2013,September 2016, pursuant to this registration statement, the Company issued 235,976238,858 shares of common stock at a weighted average price of $105.94$26.38 per share.share under the related Equity Distribution Agreement. The distribution agents received $0.1 million aggregate commissions on such sales. Net proceeds were approximately $24.4$6.0 million. TheThese proceeds were used to pay down debt obligations.
On October 31, 2016, the Company has not had any subsequent salesclosed on the sale of common stock.2,484,000 shares of stock for total net proceeds of $46.2 million after expenses. These proceeds were used to pay down debt obligations.
Repurchases of Common Stock
On December 17, 2014, DXP publicly announced an authorization from the Board of Directors that allows DXP from time to time to purchase up to 400,000 shares of DXP's common stock over 24 months. Purchases could be made in open market or in privately negotiated transactions. DXP has purchased 191,420 shares for $8.9 million under this authorization as ofthrough December 31, 2015. No shares were purchased during the fourth quarter of 2015.2016. The authorization expired on December 16, 2016.
The selected historical consolidated financial data set forth below for each of the years in the five-year period ended December 31, 20152016 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 Report.
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2015(2) | | | 2014(1) | | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015(2) | | | 2014(1) | | | 2013 | | | 2012 | |
| | (in thousands, except per share amounts) | | | (in thousands, except per share amounts) | |
Consolidated Statement of Earnings Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 1,247,043 | | | $ | 1,499,662 | | | $ | 1,241,510 | | | $ | 1,097,110 | | | $ | 807,005 | | | $ | 962,092 | | | $ | 1,247,043 | | | $ | 1,499,662 | | | $ | 1,241,510 | | | $ | 1,097,110 | |
Gross Profit | | | 351,986 | | | | 432,840 | | | | 372,345 | | | | 319,091 | | | | 231,836 | | | | 264,802 | | | | 351,986 | | | | 432,840 | | | | 372,345 | | | | 319,091 | |
Impairment expense | | | 68,735 | | | | 117,569 | | | | - | | | | - | | | | - | | | | - | | | | 68,735 | | | | 117,569 | | | | - | | | | - | |
B27 settlement | | | 7,348 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 7,348 | | | | - | | | | - | | | | - | |
Operating income (loss) | | | (27,916 | ) | | | (12,628 | ) | | | 100,924 | | | | 90,522 | | | | 55,485 | | | | 19,332 | | | | (27,916 | ) | | | (12,628 | ) | | | 100,924 | | | | 90,522 | |
Income (loss) before income taxes | | | (38,920 | ) | | | (25,556 | ) | | | 94,717 | | | | 85,009 | | | | 51,995 | | | | 9,674 | | | | (38,920 | ) | | | (25,556 | ) | | | 94,717 | | | | 85,009 | |
Net income (loss) | | | (39,070 | ) | | | (45,238 | ) | | | 60,237 | | | | 50,985 | | | | 31,437 | | | | 7,151 | | | | (39,070 | ) | | | (45,238 | ) | | | 60,237 | | | | 50,985 | |
Net income (loss) attributable to noncontrolling interest | | | (534 | ) | | | - | | | | - | | | | - | | | | - | | |
Net (loss) attributable to noncontrolling interest | | | | (551 | ) | | | (534 | ) | | | - | | | | - | | | | - | |
Net income (loss) attributable to DXP Enterprises, Inc. | | | (38,536 | ) | | | (45,328 | ) | | | 60,237 | | | | 50,985 | | | | 31,437 | | | | 7,702 | | | | (38,536 | ) | | | (45,328 | ) | | | 60,237 | | | | 50,985 | |
Per share amounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share3 | | $ | (2.68 | ) | | $ | (3.10 | ) | | $ | 4.17 | | | $ | 3.54 | | | $ | 2.19 | | |
Common shares outstanding3 | | | 14,423 | | | | 14,639 | | | | 14,439 | | | | 14,374 | | | | 14,301 | | |
Diluted earnings (loss) per share3 | | $ | (2.68 | ) | | $ | (3.10 | ) | | $ | 3.94 | | | $ | 3.35 | | | $ | 2.08 | | |
Common and common equivalent shares Outstanding3 | | | 14,423 | | | | 14,639 | | | | 15,279 | | | | 15,214 | | | | 15,141 | | |
Basic earnings (loss) per common share(3) | | | | 0.51 | | | $ | (2.68 | ) | | $ | (3.10 | ) | | $ | 4.17 | | | $ | 3.54 | |
Common shares outstanding(3) | | | | 15,042 | | | | 14,423 | | | | 14,639 | | | | 14,439 | | | | 14,374 | |
Diluted earnings (loss) per share(3) | | | | 0.49 | | | $ | (2.68 | ) | | $ | (3.10 | ) | | $ | 3.94 | | | $ | 3.35 | |
Common and common equivalent shares Outstanding(3) | | | | 15,882 | | | | 14,423 | | | | 14,639 | | | | 15,279 | | | | 15,214 | |
(1)The impairment expense in 2014, further discussed in Note 8 of the Notes to Consolidated Financial Statements, reduced operating income by $117.6 million, increased the net loss by $102.0 million, and increased basic and diluted loss per share by $6.97.
(2) The impairment expense in 2015, further discussed in Note 8 of the Notes to Consolidated Financial Statements, reduced operating income by $68.7 million, increased the net loss by $58.4 million, and increased basic and diluted loss per share by $4.05.
(3) See Note 12 of the Notes to Consolidated Financial Statements for the calculation of basic and diluted earnings per share.
Consolidated Balance Sheet Data: | | As of December 31, | | | As of December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | (in thousands) | | | (in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 683,980 | | | $ | 841,632 | | | $ | 636,615 | | | $ | 569,732 | | | $ | 405,338 | | | $ | 611,525 | | | $ | 683,980 | | | $ | 841,632 | | | $ | 636,615 | | | $ | 569,732 | |
Long-term debt obligations | | | 300,726 | | | | 372,908 | | | | 168,372 | | | | 216,339 | | | | 114,205 | | | | 174,323 | | | | 300,726 | | | | 372,908 | | | | 168,372 | | | | 216,339 | |
Shareholders’ equity | | | 198,870 | | | | 242,952 | | | | 296,250 | | | | 208,493 | | | | 156,675 | | | | 252,549 | | | | 198,870 | | | | 242,952 | | | | 296,250 | | | | 208,493 | |
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 within Item 8, Financial Statements and Supplementary Data and the other financial information found elsewhere in this Report. Management’s Discussion and Analysis uses forward-looking statements that involve certain risks and uncertainties as described previously in our Disclosure Regarding Forward-Looking Statements and Item 1A. Risk Factors.
General Overview
Our products are marketed in the United States, Canada, Dubai and Mexico to over 50,000 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 Canada, and global and micro-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 driven by a variety of factors, 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 2011, the general economy and the oil and gas exploration and production business continued to improve. Our employee headcount increased by 18% primarily as a result of two acquisitions and hiring additional personnel to support increased sales. Sales for the year ended December 31, 2011 increased $150.8 million, or 23.0%, to approximately $807.0 million from $656.2 million in 2010. Sales by KC, acquired October 10, 2011, accounted for $11.9 million of 2011 sales. Sales by businesses acquired in 2010, on a same store sales basis, accounted for $35.6 million of 2011 sales. Excluding 2011 sales by businesses acquired in 2010 and 2011, on a same store sales basis, sales increased 15.8% from 2010. The majority of the 2011 sales increase came from a broad-based increase in sales of pumps, bearings, safety products and industrial supplies to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2012, the general economy and the oil and gas exploration and production business remained positive. Our employee headcount increased by 35% primarily as a result of multiple acquisitions and hiring additional personnel to support increased sales. Sales for the year ended December 31, 2012 increased $290.1 million, or 35.9%, to $1,097.1 million from $807.0 million in 2011. Sales by businesses acquired in 2012 accounted for $86.3 million of 2012 sales. Sales by businesses acquired in 2011 accounted for $107.7 million of 2012 sales, on a same store sales basis. Excluding 2012 sales of $194.0 million by businesses acquired in 2011 and 2012, on a same store sales basis, sales increased 11.9% from 2011. The majority of this 11.9% sales increase came from a broad-based increase in sales of pumps, bearings, safety products and industrial supplies to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2013, the growth rate of the general economy slowed from 2012 and sales of metal working and bearing and power transmission products to manufacturers of oil field equipment declined. Our employee headcount increased by 13.8% primarily as a result of multiple acquisitions. Sales for the year ended December 31, 2013 increased $144.4 million, or 13.2%, to $1.2 billion from $1.1 billion in 2012. Sales by businesses acquired in 2013 accounted for $63.7 million of 2013 sales. Sales by businesses acquired in 2012 accounted for $75.9 million of 2013 sales, on a same store sales basis. Excluding 2013 sales of $139.6 million by businesses acquired in 2012 and 2013, on a same store sales basis, sales increased $4.8 million, or 0.4%, from 2012.
During 2014, the growth rate of the general economy increased slightly from 2013. However, oil prices declined significantly during the fourth quartersecond half of 2014. Our employee headcount increased 15.5% primarily as a result of the two acquisitions completed during the year. Sales for the year ended December 31, 2014 increased $258.2 million, or 20.8%, to approximately $1,499.7 million from $1,241.5 million in 2013. Sales by businesses acquired in 2014 accounted for $176.4 million of 2014 sales. Sales by businesses acquired in 2013 accounted for $35.1 million of the 2014 increase, on a same store sales basis. Excluding 2014 sales of $211.5 million by businesses acquired in 2014 and 2013, on a same store sales basis, sales increased by $46.7 million, or 3.8%, from 2013. This sales increase is primarily the result of increased sales by the Service Centers segment of $22.1 million, IPS segment of $8.1 million, and SCS segment of $16.5 million, on a same store sales basis. The majority of these 2014 sales increases came from a broad based increase in sales of pumps, bearings, industrial supplies, metal working and safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2015, the growth rate of the general economy was flat with 2014. However, the growth rate of the industrial economy slowed. Oil prices significantly declined during the year, falling approximately 35%. Our employee headcount decreased 12.7%, despite two acquisitions, primarily as a result of headcount reductions stemming from reduced capital spending by oil and gas producers. Sales for the year ended December 31, 2015 decreased $252.6 million, or 16.9%, to approximately $1,247.0 million from $1,499.7 million in 2014. Sales by businesses acquired in 2014 and 2015 reduced the decline by $14.5 million and $9.1 million, respectively. Excluding 2015 sales of $23.6 million by businesses acquired in 2014 and 2015, on a same store sales basis, sales decreased by $276.2 million, or 18.4%, from 2014. This sales decrease is primarily the result of decreased sales by the Service Centers segment of $184.6 million and IPS segment of $93.3 million, which were partially offset by increased sales by the Supply Chain Services segment of $1.7 million, on a same store sales basis. The majority of these 2015 sales decreases resulted from declines in sales of rotating equipment, bearings, metal working products, industrial supplies and safety products and services to customers engaged in oil and gas production, mining and manufacturing. The sales declines were primarily the result of reduced capital spending by oil and gas producers.
During 2016, the growth rate of the general economy remained flat with 2015 and the rig count declined significantly during the first half of 2016, increased during the second half, but remained significantly below 2014 peaks. The energy market for our products remained depressed. We reduced our employee headcount 24.1% due to the continued reduction of spending by the oil and gas producers. Sales for the year ended December 31, 2016 decreased $285.0 million, or 22.9%, to approximately $962.1 million from $1,247.0 million in 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by a business sold in 2016 accounted for a decline of $7.1 million on a same store basis. Excluding 2016 sales of $15.1 million by businesses acquired in 2015; and 2015 sales of $7.1 million of the business divestiture in 2016, on a same store sales basis, sales decreased by $292.9 million, or 23.6%, from 2015. This sales decrease is the result of decreased sales by the Service Centers segment of $213.5 million, the IPS segment of $67.7 million and the Supply Chain Segment of $11.7 million, on a same store sales basis. The majority of the 2016 sales decline is the result of a decrease in sales of pumps, bearings, industrial supplies, metal working and safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
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 reach 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, and 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.
Results of Operations
| | Years Ended December 31, | | | Years Ended December 31, | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | | % | | | 2014 | | | % | | | 2013 | | | % | | | 2016 | | | % | | | 2015 | | | % | | | 2014 | | | % | |
| | (in millions, except percentages and per share amounts) | | | (in millions, except percentages and per share amounts) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 1,247.0 | | | | 100.00 | | | $ | 1,499.7 | | | | 100.0 | | | $ | 1,241.5 | | | | 100.0 | | | $ | 962.1 | | | | 100.00 | | | $ | 1,247.0 | | | | 100.00 | | | $ | 1,499.7 | | | | 100.0 | |
Cost of sales | | | 895.1 | | | | 71.8 | | | | 1,066.8 | | | | 71.1 | | | | 869.2 | | | | 70.0 | | | | 697.3 | | | | 72.5 | | | | 895.1 | | | | 71.8 | | | | 1,066.8 | | | | 71.1 | |
Gross profit | | | 351.9 | | | | 28.2 | | | | 432.9 | | | | 28.9 | | | | 372.3 | | | | 30.0 | | | | 264.8 | | | | 27.5 | | | | 351.9 | | | | 28.2 | | | | 432.9 | | | | 28.9 | |
Selling, general & administrative expense | | | 303.8 | | | | 24.4 | | | | 327.9 | | | | 21.9 | | | | 271.4 | | | | 21.9 | | | | 245.5 | | | | 25.5 | | | | 303.8 | | | | 24.4 | | | | 327.9 | | | | 21.9 | |
Impairment expense | | | 68.7 | | | | 5.5 | | | | 117.6 | | | | 7.8 | | | | - | | | | - | | | | - | | | | - | | | | 68.7 | | | | 5.5 | | | | 117.6 | | | | 7.8 | |
B27 settlement | | | 7.3 | | | | 0.6 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 7.3 | | | | 0.6 | | | | - | | | | - | |
Operating income (loss) | | | (27.9 | ) | | | (2.2 | ) | | | (12.6 | ) | | | (0.8 | ) | | | 100.9 | | | | 8.1 | | | | 19.3 | | | | 2.0 | | | | (27.9 | ) | | | (2.2 | ) | | | (12.6 | ) | | | (0.8 | ) |
Interest expense | | | 10.9 | | | | 0.9 | | | | 12.8 | | | | 0.9 | | | | 6.3 | | | | 0.5 | | | | 15.5 | | | | 1.6 | | | | 10.9 | | | | 0.9 | | | | 12.8 | | | | 0.9 | |
Other expense (income) | | | 0.1 | | | | - | | | | 0.1 | | | | - | | | | (0.1 | ) | | | - | | | | (5.9 | ) | | | (0.6 | ) | | | 0.1 | | | | - | | | | 0.1 | | | | - | |
Income before income taxes | | | (38.9 | ) | | | (3.1 | ) | | | (25.5 | ) | | | (1.7 | ) | | | 94.7 | | | | 7.6 | | | | 9.7 | | | | 1.0 | | | | (38.9 | ) | | | (3.1 | ) | | | (25.5 | ) | | | (1.7 | ) |
Provision for income taxes | | | 0.1 | | | | - | | | | 19.7 | | | | 1.3 | | | | 34.5 | | | | 2.8 | | | | 2.5 | | | | 0.3 | | | | 0.1 | | | | - | | | | 19.7 | | | | 1.3 | |
Net income (loss) | | | (39.0 | ) | | | (3.1 | ) | | | (45.2 | ) | | | (3.0 | ) | | | 60.2 | | | | 4.8 | | | | 7.2 | | | | 0.7 | | | | (39.0 | ) | | | (3.1 | ) | | | (45.2 | ) | | | (3.0 | ) |
Net income (loss) attributable to noncontrolling interest | | | (0.5 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.5 | ) | | | (0.1 | ) | | | (0.5 | ) | | | - | | | | - | | | | - | |
Net income (loss) attributable to DXP Enterprises, Inc. | | $ | (38.5 | ) | | | (3.1 | ) | | $ | (45.2 | ) | | | (3.0 | ) | | $ | 60.2 | | | | 4.8 | | | $ | 7.7 | | | | 0.8 | | | $ | (38.5 | ) | | | (3.1 | ) | | $ | (45.2 | ) | | | (3.0 | ) |
Per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | (2.68 | ) | | | | | | $ | (3.10 | ) | | | | | | $ | 4.17 | | | | | | | $ | 0.51 | | | | | | | $ | (2.68 | ) | | | | | | $ | (3.10 | ) | | | | |
Diluted earnings (loss) per share | | $ | (2.68 | ) | | | | | | $ | (3.10 | ) | | | | | | $ | 3.94 | | | | | | | $ | 0.49 | | | | | | | $ | (2.68 | ) | | | | | | $ | (3.10 | ) | | | | |
DXP is organized into three business segments: Service Centers, Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). The Service Centers are engaged in providing maintenance, repair and operating (“MRO”) products and equipment, including technical expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery. The Service Centers provide a wide range of MRO products and expertise in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The SCS segment manages all or part of our customer’s MRO products supply chain, including warehouse and inventory management. The IPS segment fabricates and assembles integrated pump system packages custom made to customer specifications, remanufactures pumps and manufactures branded private label pumps.
Results of operations for the Service Centers segment are as follows:
| | Years Ended December 31, | |
| | 2016 | | | % | | | 2015 | | | % | | | 2014 | | | % | |
| | (in millions, except percentages and per share amounts) | |
| | | | | | | | | | | | | | | | | | |
Sales | | $ | 621.0 | | | | 100.0 | | | $ | 826.6 | | | | 100.0 | | | $ | 987.6 | | | | 100.0 | |
Cost of sales | | | 437.6 | | | | 70.5 | | | | 575.0 | | | | 69.6 | | | | 687.2 | | | | 69.6 | |
Gross profit | | | 183.4 | | | | 29.5 | | | | 251.6 | | | | 30.4 | | | | 300.4 | | | | 30.4 | |
Selling, general & administrative expense | | | 135.8 | | | | 21.9 | | | | 173.4 | | | | 21.0 | | | | 192.7 | | | | 19.5 | |
Impairment expense | | | - | | | | - | | | | 15.8 | | | | 1.9 | | | | 10.2 | | | | 1.0 | |
Operating income (loss), excluding amortization | | $ | 47.6 | | | | 7.6 | | | $ | 62.4 | | | | 7.5 | | | $ | 97.5 | | | | 9.9 | |
Operating income, excluding impairment and amortization | | $ | 47.6 | | | | 7.6 | | | $ | 78.2 | | | | 9.5 | | | $ | 107.7 | | | | 10.9 | |
Results of operations for the IPS segment are as follows:
| | Years Ended December 31, | |
| | 2016 | | | % | | | 2015 | | | % | | | 2014 | | | % | |
| | (in millions, except percentages and per share amounts) | |
| | | | | | | | | | | | | | | | | | |
Sales | | $ | 187.1 | | | | 100.0 | | | $ | 254.8 | | | | 100.0 | | | $ | 348.1 | | | | 100.0 | |
Cost of sales | | | 142.5 | | | | 76.2 | | | | 191.6 | | | | 75.2 | | | | 250.8 | | | | 72.0 | |
Gross profit | | | 44.6 | | | | 23.8 | | | | 63.2 | | | | 24.8 | | | | 97.3 | | | | 28.0 | |
Selling, general & administrative expense | | | 34.7 | | | | 18.5 | | | | 41.6 | | | | 16.3 | | | | 46.1 | | | | 13.2 | |
Impairment expense | | | - | | | | - | | | | 52.9 | | | | 20.8 | | | | 107.4 | | | | 30.9 | |
Operating income (loss), excluding amortization | | $ | 9.9 | | | | 5.3 | | | $ | (31.3 | ) | | | (12.3 | ) | | $ | (56.2 | ) | | | (16.1 | ) |
Operating income excluding impairment and amortization | | $ | 9.9 | | | | 5.3 | | | $ | 21.6 | | | | 8.5 | | | $ | 51.2 | | | | 14.7 | |
Results of operations for the Service Centers segment are as follows:
| | Years Ended December 31, | |
| | 2015 | | | % | | | 2014 | | | % | | | 2013 | | | % | |
| | (in millions, except percentages and per share amounts) | |
| | | | | | | | | | | | | | | | | | |
Sales | | $ | 826.6 | | | | 100.0 | | | $ | 987.6 | | | | 100.0 | | | $ | 884.8 | | | | 100.0 | |
Cost of sales | | | 575.0 | | | | 69.6 | | | | 687.2 | | | | 69.6 | | | | 605.4 | | | | 68.4 | |
Gross profit | | | 251.6 | | | | 30.4 | | | | 300.4 | | | | 30.4 | | | | 279.4 | | | | 31.6 | |
Selling, general & administrative expense | | | 173.4 | | | | 21.0 | | | | 192.7 | | | | 19.5 | | | | 172.3 | | | | 19.5 | |
Impairment expense | | | 15.8 | | | | 1.9 | | | | 10.2 | | | | 1.0 | | | | - | | | | 0.0 | |
Operating income (loss) | | $ | 62.4 | | | | 7.5 | | | $ | 97.5 | | | | 9.9 | | | | 107.1 | | | | 12.1 | |
Operating income excluding impairment | | $ | 78.2 | | | | 9.5 | | | $ | 107.7 | | | | 10.9 | | | $ | 107.1 | | | | 12.1 | |
Results of operations for the IPS segment are as follows:
| | Years Ended December 31, | |
| | 2015 | | | % | | | 2014 | | | % | | | 2013 | | | % | |
| | (in millions, except percentages and per share amounts) | |
| | | | | | | | | | | | | | | | | | |
Sales | | $ | 254.8 | | | | 100.0 | | | $ | 348.1 | | | | 100.0 | | | $ | 209.2 | | | | 100.0 | |
Cost of sales | | | 191.6 | | | | 75.2 | | | | 250.8 | | | | 72.0 | | | | 149.0 | | | | 71.2 | |
Gross profit | | | 63.2 | | | | 24.8 | | | | 97.3 | | | | 28.0 | | | | 60.2 | | | | 28.8 | |
Selling, general & administrative expense | | | 41.6 | | | | 16.3 | | | | 46.1 | | | | 13.2 | | | | 26.4 | | | | 12.6 | |
Impairment expense | | | 52.9 | | | | 20.8 | | | | 107.4 | | | | 30.9 | | | | - | | | | 0.0 | |
Operating income (loss) | | $ | (31.3 | ) | | | (12.3 | ) | | $ | (56.2 | ) | | | (16.1 | ) | | $ | 33.8 | | | | 16.2 | |
Operating income excluding impairment | | $ | 21.6 | | | | 8.5 | | | $ | 51.2 | | | | 14.7 | | | $ | 33.8 | | | | 16.2 | |
Results of operations for the SCS segment are as follows:
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2015 | | | % | | | 2014 | | | % | | | 2013 | | | % | | | 2016 | | | % | | | 2015 | | | % | | | 2014 | | | % | |
| | (in millions, except percentages and per share amounts) | | | (in millions, except percentages and per share amounts) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 165.6 | | | | 100.0 | | | $ | 164.0 | | | | 100.0 | | | $ | 147.5 | | | | 100.0 | | | $ | 154.0 | | | | 100.0 | | | $ | 165.6 | | | | 100.0 | | | $ | 164.0 | | | | 100.0 | |
Cost of sales | | | 128.4 | | | | 77.5 | | | | 128.9 | | | | 78.6 | | | | 114.8 | | | | 77.8 | | | | 117.1 | | | | 76.1 | | | | 128.4 | | | | 77.5 | | | | 128.9 | | | | 78.6 | |
Gross profit | | | 37.2 | | | | 22.5 | | | | 35.1 | | | | 21.4 | | | | 32.7 | | | | 22.2 | | | | 36.9 | | | | 23.9 | | | | 37.2 | | | | 22.5 | | | | 35.1 | | | | 21.4 | |
Selling, general & administrative expense | | | 23.0 | | | | 13.9 | | | | 21.3 | | | | 13.0 | | | | 20.2 | | | | 13.7 | | | | 21.5 | | | | 13.9 | | | | 23.0 | | | | 13.9 | | | | 21.3 | | | | 13.0 | |
Operating income (loss) | | $ | 14.2 | | | | 8.6 | | | $ | 13.8 | | | | 8.4 | | | | 12.5 | | | | 8.5 | | |
Operating income (loss), excluding amortization | | | $ | 15.4 | | | | 10.0 | | | $ | 14.2 | | | | 8.6 | | | $ | 13.8 | | | | 8.4 | |
Year Ended December 31, 2016 compared to Year Ended December 31, 2015
SALES. Sales for the year ended December 31, 2016 decreased $285.0 million, or 22.9%, to approximately $962.1 million from $1,247.0 million in 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by a business sold in 2016 accounted for a decline of $7.1 million of sales on a same store basis. Excluding 2016 sales of $15.1 million by businesses acquired in 2015; and 2015 sales of $7.1 million of the business sold in 2016, on a same store sales basis, sales decreased by $292.9 million, or 23.6%, from 2015. This sales decline is the result of decreased sales by all three segments including $213.5 milion in Service Centers, $67.7 million in IPS and $11.7 million in SCS, on a same store sales basis. These decreases are explained in the segment discussions below.
GROSS PROFIT. Gross profit as a percentage of sales decreased approximately 70 basis points to 27.5% for 2016 compared to 28.2% for 2015. On a same store sales basis, gross profit as a percentage of sales decreased by approximately 60 basis points. This decline is primarily the result of an approximate 100 basis point decline in the 2016 gross profit percentage for our IPS segment and an approximate 80 basis point decline in our Service Centers segment, which was partially offset by an increase of approximately 145 basis points for the SCS segment. Gross profit as a percentage of sales for each segment are explained below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative (or “SG&A”) expense for 2016 decreased by approximately $58.3 million, or 19.21%, when compared to 2015. Selling, general and administrative expense by businesses acquired in 2015 was $5.2 million on a same store basis. The 2015 SG&A expense for the 2016 business divestiture was $2.1 million on a same store sales basis. Excluding 2016 expenses of $5.2 million by businesses acquired in 2015 and 2015 expenses of $2.1 million for the 2016 business divestiture, on a same store sales basis, selling, general and administrative expenses decreased by $61.4 million, or 20.4%. The decline in SG&A, on a same store sales basis, is partially the result of a $39.0 million decrease in payroll, variable compensation, payroll taxes and 401(k) expense due to headcount reductions. Amortization expense for 2016 decreased by $2.6 million compared to 2015.
OPERATING INCOME. Operating income for 2016 decreased approximately $28.8 million, or 59.9%, from $48.2 million to $19.3 million, compared to 2015, excluding the 2015 impairment expense and B27 settlement,. Businesses acquired in 2015 increased the decline by $0.6 million, on a same store sales basis, and the business divested reduced the decline by $1.2 million. Excluding operating income from businesses acquired and divested, the B27 settlement and impairment expense, operating income decreased $27.1 million or 57.6%. This decrease in operating income, on a same store sales basis, is primarily related to the decreased gross profit which is partially offset by the decline in SG&A discussed above.
INTEREST EXPENSE. Interest expense for 2016 increased by $4.6 million, or 42.4%, from 2015 primarily due to an increase in our interest rates.
INCOME TAXES. Our 2016 provision for income taxes, which is at an effective rate of 26.1%, differed from the U.S. statutory rate of 35% primarily due to the effect of the book gain, but tax loss, recognized on the sale of Vertex during 2016. Our effective tax rate for 2016 of 62.4%, after excluding the effect of the sale of Vertex, increased from 27.7% for the prior corresponding period, before the effect of the mostly non-deductible impairment of goodwill and B27 settlement, primarily as a result of reduced research and development and foreign tax credits, reduced domestic production activity deductions and prior year provision to return adjustments. During 2009, DXP wrote off $38.2 million of goodwill and intangibles in connection with an impairment which substantially reduced the book basis of Vertex, but not the tax basis.
SERVICE CENTERS SEGMENT. Sales for the Service Centers decreased $205.6 million, or 24.9%, in 2016 compared to 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by the 2016 business divestiture accounted for a decline of $7.1 million on a same store basis. Excluding 2016 sales of $15.1 million by businesses acquired in 2015 and $7.1 million of 2015 sales for the 2016 divested business, on a same stores sales basis, Service Centers’ sales decreased $213.5 million, or 26.1%, on a same stores sales basis, from the prior corresponding period. The majority of the 2016 sales decrease is the result of decreased sales of rotating equipment, bearings, metal working products, industrial supplies and safety products and services to customers engaged in the upstream oil and gas market or manufacturing equipment for the upstream oil and gas market. If crude oil and natural gas prices were to return to, or go below the prices experienced during the first nine months of 2016, this level of sales to the upstream oil and gas industry would be expected to continue, or decline, during 2017. Excluding year-to-date Service Centers segment operating income from acquired businesses of $0.4 million and $1.2 million of 2015 income for the business divestiture, Service Centers segment operating income for 2016 decreased by $29.7 million, or 38.6%, primarily as a result of the decline in sales discussed above and the percentage decrease in sales exceeding the percentage decrease in SG&A.
SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services decreased by $11.7 million, or 7.0%, in 2016 compared to 2015. None of the 2015 acquisitions or the 2016 divestiture contributed sales to this segment. The decrease is primarily related to decreased sales to customers engaged in the oilfield services and oilfield manufacturing industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased less from DXP because of the decline in the number of drilling rigs operating in the U.S and Canada. Gross profit as a percentage of sales increased approximately 145 basis points in 2016 compared to the prior corresponding period as a result of decreased sales of lower margin products to oil and gas and trucking related customers. Operating income for the SCS segment increased $1.2 million, or 8.7%, primarily as a result of the 145 basis point increase in gross profit as a percentage of sales combined with a 7.0% reduction in SG&A.
INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for Innovative Pumping Solutions decreased by $67.7 million, or 26.6%, in 2016 compared to 2015. The sales decrease primarily resulted from a significant decline in capital spending by our oil and gas producers and related businesses stemming from the decline in the price of oil. If crude oil and natural gas prices were to return to, or go below prices experienced during the first nine months of 2016, this level of sales to the upstream and mid-stream oil and gas industry would be expected to continue, or decline, during 2017. Gross profit as a percentage of sales declined approximately100 basis points in 2016 compared to 2015 primarily as a result of competitive pressures resulting in lower margin jobs and $3.7 million of unabsorbed manufacturing overhead related to the start-up of manufacturing our ANSI pumps. Additionally, gross profit margins for individual orders for the IPS segment can fluctuate significantly because each order is for a unique package built to customer specifications and subject to varying competition. Operating income decreased $11.7 million, or 54.3%, primarily as a result of the 26.6% decline in sales and approximate 100 basis point decline in the gross profit percentage discussed above.
Year Ended December 31, 2015 compared to Year Ended December 31, 2014
SALES. Sales for the year ended December 31, 2015 decreased $252.6 million, or 16.9%, to approximately $1,247.0 million from $1,499.7 million in 2014. Sales by businesses acquired in 2015 accounted for $9.1 million of 2015 sales. Sales by a business acquired in 2014 reduced the sales decline by $14.5 million, on a same store sales basis. Excluding 2015 sales of $23.6 million by businesses acquired in 2015 and 2014, on a same store sales basis, sales decreased by $276.2 million, or 18.4%, from 2014. This sales decrease is primarily the result of decreased sales by the Service Centers segment of $184.6 million and IPS segment of $93.3 million, which were partially offset by increased sales by the SCS segment of $1.7 million, on a same store sales basis. These increases are explained in the segment discussions below. The strength of the U.S. dollar also contributed to the sales decline. Sales for our Canadian operations were $127.8 million for 2015. The change in the exchange rate reduced sales by approximately $20.0 million compared to the amount which would be calculated using the 2014 average exchange rate.
GROSS PROFIT. Gross profit as a percentage of sales decreased approximately 65 basis points to 28.2% for 2015 compared to 28.9% for 2014. On a same store sales basis, gross profit as a percentage of sales also decreased by approximately 65 basis points. This decline is primarily the result of an approximate 315 basis point decline in the 2015 gross profit percentage for our IPS segment, which was partially offset by an increase of approximately 105 basis points for the SCS segment. Gross profit as a percentage of sales for the Service Centers segment remained flat. Gross profit as a percentage of sales for each segment are explained below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative (or “SG&A”) expense for 2015 decreased by approximately $24.1 million, or 7.3%, when compared to 2014. Selling, general and administrative expense by businesses acquired in 2015 was $3.5 million. Selling, general and administrative expense for a business acquired in 2014 reduced the decline by $2.4 million, on a same store sales basis. Excluding 2015 expenses of $5.9 million by businesses acquired in 2015 and 2014, on a same store sales basis, selling, general and administrative expenses decreased by $30.0 million, or 9.2%. The decline in SG&A, on a same store sales basis, is partially the result of a $15.5 million decrease in variable compensation. Amortization expense for 2015 decreased by $1.9 million compared to 2014. Salary expense fell approximately $4.4 million due to headcount reductions. In addition, the strength of the U.S. dollar contributed to the decline. Expenses for our Canadian operations were $37.6 million. The change in exchange rate reduced SG&A by approximately $5.9 million compared to the amount which would be calculated using the average exchange rate for the year ended 2014. As a percentage of sales, 2015 SG&A increased by approximately 250 basis points from the prior corresponding period, on a same store sales basis, primarily as a result of the percentage decrease in sales exceeding the percentage decrease in SG&A.
IMPAIRMENT EXPENSE. As a result of the sustained decline in crude oil prices, reduced capital spending by oil and gas customers and reduced revenue expectations, DXP performed interim impairment tests at the end of the third quarter of 2015 and at the end of the fourth quarter of 2015. The Company recognized a total impairment expense of $67.6 million of the goodwill associated with the acquisition of B27. Additionally, DXP recorded $1.1 million of impairment expense in 2015 to write off an acquired intangible asset related to an ITT Goulds distribution agreement, which was terminated by ITT Goulds during 2015. See Notes 4 and 8 of the Notes to Consolidated Financial Statements.
B27 SETTLEMENT. During 2015, an accounting expert issued his report on the working capital dispute between DXP and the sellers of B27. The report required DXP to pay the sellers of B27 an additional $11.3 million. Because the time period to allow adjustments of purchase accounting had expired, $7.3 million of the payment was expensed. The remaining $4.0 million of the required payment representsrepresented tax refunds, and the $3.6 million federal portion of the refunds has been received.refunds.
OPERATING INCOME. Excluding impairment expense and the B27 settlement, operating income for 2015 decreased approximately $56.8 million, or 54.1%, from $104.9 million to $48.2 million, compared to 2014. Businesses acquired in 2015 and 2014 reduced the decline by $1.0 million, on a same store sales basis. Excluding operating income from businesses acquired, the B27 settlement, and impairment expense, operating income decreased $57.7 million or 55.0%. This decrease in operating income, on a same store sales basis, is primarily related to the decreased gross profit percentage and the percentage decline in sales exceeding the percentage decline in SG&A discussed above.
INTEREST EXPENSE. Interest expense for 2015 decreased by $1.9 million, or 14.6%, from 2014 primarily due to paying down debt during 2015.
INCOME TAXES. Our provision for income taxes, which was at an effective rate of -0.4%, differed from the U. S. statutory rate of 35% primarily due to the mostly non-deductible impairment of goodwill, the mostly non-deductible B27 settlement, the Domestic Production Activity Deduction, research and development credits and foreign tax credits. Our effective tax rate for 2015 of 27.7%, before the effect of the mostly non-deductible impairment of goodwill and B27 settlement, decreased from 38.3% from the prior corresponding period, primarily as a result of increased research and development and foreign tax credits.
SERVICE CENTERS SEGMENT. Sales for the Service Centers decreased $161.0 million, or 16.3%, in 2015 compared to 2014. Sales by businesses acquired in 2015 accounted for $9.1 million of 2015 sales. Sales by businesses acquired in 2014 reduced the sales decline by $14.5 million, on a same store sales basis. Excluding 2015 sales of $23.6 million by businesses acquired in 2015 and 2014, on a same stores sales basis, Service Centers’ sales decreased $184.6 million, or 18.7%, on a same stores sales basis, from the prior corresponding period. The majority of the 2015 sales decrease is the result of decreased sales of rotating equipment, bearings, metal working products, industrial supplies and safety products and services to customers engaged in the upstream oil and gas market or manufacturing equipment for the upstream oil and gas market. If crude oil and natural gas prices remain at, or below, prices experienced during the during 2015, this decline in sales to the upstream oil and gas industry would be expected to continue during 2016. The strength of the U.S. dollar also contributed to the sales decline. Service Center sales for our Canadian operations were $104.6 million. The change in the exchange rate reduced sales by $16.4 million compared to the amount which would be calculated using the average exchange rate for 2014. Excluding year-to-date Service Centers segment operating income from acquired businesses of $1.9 million and 2015 impairment expense of $15.8 million, Service Centers segment operating income for 2015 decreased by $31.5 million, or 29.2%, primarily as a result of the decline in sales discussed above and the percentage decrease in sales exceeding the percentage decrease in SG&A.
SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services increased by $1.7 million, or 1.0%, in 2015 compared to 2014. None of the 2015 or 2014 acquisitions contributed sales to this segment. The increase is primarily related to increased sales to new and existing customers in the transportation, mining, chemical and alternative energy industries. These were partially offset by decreased sales to customers engaged in the oilfield services and oilfield manufacturing industries. We suspect the customers whichthat purchased more products from DXP did so because the customers increased production during the period. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased less from DXP because of the decline in the number of drilling rigs operating in the U.S and Canada. Gross profit as a percentage of sales increased approximately 105 basis points in 2015 compared to the prior corresponding period as a result of decreased sales of lower margin products to oil and gas and trucking related customers. Operating income for the SCS segment increased $0.4 million, or 3.0%, primarily as a result of the 105 basis point increase in gross profit as a percentage of sales.
INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for Innovative Pumping Solutions decreased by $93.3 million, or 26.8%, in 2015 compared to 2014. The sales decrease primarily resulted from a significant decline in capital spending by our oil and gas producers and related businesses stemming from the decline in the price of oil. This decline in IPS sales could continue in 2016 if crude oil and natural gas prices remain at or below prices experienced during 2015. Gross profit as a percentage of sales declined approximately 315 basis point in 2015 compared to 2014 primarily as a result of competitive pressures resulting in lower margin jobs and $3.0 million of unabsorbed manufacturing overhead related to the start-up of manufacturing our ANSI pumps. Additionally, gross profit margins for individual orders for the IPS segment can fluctuate significantly because each order is for a unique package built to customer specifications and subject to varying competition. Excluding impairment expense of $52.9 million, operating income decreased $29.6 million, or 57.8%, primarily as a result of the 26.8% decline in sales and approximate 315 basis point decline in the gross profit percentage discussed above.
Year Ended December 31, 2014 compared to Year Ended December 31, 2013Pro Forma Results
SALES. SalesThe pro forma unaudited results of operations for the yearCompany on a consolidated basis for the twelve months ended December 31, 2014 increased $258.2 million, or 20.8%, to approximately $1,499.7 million from $1,241.5 million2016 and 2015, assuming the acquisition of businesses completed in 2013. Sales by businesses acquired2015 and the divestiture of a business completed in 2014 accounted for $176.4 million2016 (previously discussed in Item 1, Business) were consummated as of 2014 sales. Sales by businesses acquired January 1, 2015 are as follows (in 2013 accounted for $35.1 million of the 2014 increase, on a same store sales basis. Excluding 2014 sales of $211.5 million by businesses acquired in 2014 and 2013, on a same store sales basis, sales increased by $46.7 million, or 3.8%, from 2013. This sales increase is primarily the result of increased sales by the Service Centers segment of $22.1 million, IPS segment of $8.1 million, and SCS segment of $16.5 million, on a same store sales basis. These increases are explained in the segment discussions below.millions, except per share amounts):
GROSS PROFIT. Gross profit as a percentage of sales decreased approximately 110 basis points to 28.9% for 2014 compared to 30.0% for 2013. This decrease is primarily the result of businesses acquired in 2014 having a lower gross profit percentage of 24.8% than the 29.5% gross profit percentage for the remainder of DXP. On a same store sales basis, gross profit as a percentage of sales decreased by approximately 50 basis points in 2014, to 29.5%, compared to 30.0% for the prior corresponding period. This decline is primarily the result of an approximate 350 basis point decline in 2014 in the gross profit percentage for $209.9 million of 2014 sales of safety related products and services. The decline in the gross profit percentage to 33.9%, from 37.4% for 2013, for safety related products and services is primarily the result of a decline in sales of higher margin safety services work and equipment rentals primarily related to work over rigs in the U.S. and drilling and well completions in Canada. The decline in sales of safety services and equipment rentals to the upstream oil and gas industry was offset with increased sales of lower margin safety products to industrial customers, which contributed to the decline in the gross profit percentage. We believe our customers purchased fewer services because of eliminating costs in the U.S. and limitations on the ability to transport oil within Canada. We expect the decline in higher margin safety service sales to upstream oil and gas customers to continue due to the decline in the rig count resulting from the significant decline in oil prices during the fourth quarter of 2014.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense for 2014 increased by approximately $56.5 million, or 20.8%, when compared to 2013. Selling, general and administrative expense by businesses acquired in 2014 was $32.5 million. Selling, general and administrative expense for acquisitions that occurred in 2013 accounted for $9.9 million of the 2013 increase, on a same store sales basis. Excluding 2014 expenses of $42.4 million by businesses acquired in 2014 and 2013, on a same store sales basis, selling, general and administrative expenses increased by $14.1 million, or 5.2%. This increase is partially related to a $3.1 million, or 25.7%, increase in health care claims for 2014, and the 2013 $2.8 million reduction in selling, general and administrative expenses from eliminating DXP’s earn-out liability for the purchase of NatPro. This earn-out is further discussed in Note 13 to the financial statements. The remaining $8.2 million (3.0% of 2013 selling, general and administrative expenses) of the increase is consistent with the 3.8% increase in sales on a same stores basis. As a percentage of sales, the 2014 expense increased approximately 30 basis points on a same store sales basis due to the items described above.
IMPAIRMENT EXPENSE. DXP recognized an impairment expense of $117.6 million during the fourth quarter of 2014. Impairment expense of $107.4 million is included in operating income for the IPS segment. The remaining $10.2 million in impairment expense is included in operating income for the Service Centers segment. See Notes 4 and 8 of the Notes to Consolidated Financial Statements.
OPERATING INCOME. Excluding impairment expense, operating income for 2014 increased approximately $4.0 million, or 4.0%, from $100.9 million to $104.9 million, compared to 2013. Businesses acquired in 2014 and 2013 (primarily B27) accounted for a $10.0 million increase in operating income, on a same store sales basis. Excluding operating income from businesses acquired and impairment expense, operating income decreased $6.0 million or 6.0%. This decrease in operating income, on a same store sales basis, is primarily related to the decline in gross profit as a percentage of sales and the increase in SG&A previously discussed.
INTEREST EXPENSE. Interest expense for 2014 increased by $6.5 million, or 103.7%, from 2013. The increase in interest expense was primarily the result of increased borrowings to fund our January 2, 2014 acquisition of B27, LLC and our May 1, 2014 acquisition of Machinery Tooling and Supply, LLC, further discussed in Note 13 of the Notes to Consolidated Financial Statements.
INCOME TAXES. Our provision for income taxes, which was at an effective rate of -77.0%, differed from the U. S. statutory rate of 35% primarily due to a mostly non-deductible impairment of goodwill, state income taxes and non-deductible expenses. Our effective tax rate for 2014 of 38.3%, before the effect of a mostly non-deductible impairment of goodwill, increased from 36.4% from the prior corresponding period, primarily as a result of increased state income tax expense.
SERVICE CENTERS SEGMENT. Sales for the Service Centers increased $102.7 million, or 11.6%, in 2014 compared to 2013. Sales by businesses acquired in 2014 accounted for $55.3 million of 2014 sales. Sales by businesses acquired in 2013 accounted for $25.3 million of the 2013 increase, on a same store sales basis. Excluding 2014 sales of $80.6 million by businesses acquired in 2014 and 2013, on a same stores sales basis, Service Centers’ sales increased $22.1 million, or 2.5%, on a same stores sales basis, from the prior corresponding period. The majority of the 2014 sales increase came from a broad increase in sales of pumps, bearings, industrial supplies, metal working and safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing. We believe our customers increased purchases of our products and services primarily because of increased oil production in the U.S during recent years and a modest improvement in the general economy. Excluding year-to-date Service Centers segment operating income from acquired businesses of $7.6 million and 2014 impairment expense of $10.2 million, Service Centers segment operating income for 2014 decreased by $7.0 million partially as a result of an approximate 70 basis point decline in gross profit percentage to 30.9%, from 31.6% for 2013. The decline in gross profit as a percentage of sales, on a same store sales basis, is primarily the result of an approximate 360 basis point decline in 2014 in the gross profit percentage for $199.0 million of 2014 sales of safety related products and services. The decline in the gross profit percentage to 34.7% for 2014, from 38.3% for 2013, for safety related products and services is primarily the result of a decline in sales of higher margin safety services work and equipment rentals primarily related to work over rigs in the U.S. and drilling and well completions in Canada. The decline in sales of safety services and equipment rentals to the upstream oil and gas industry was offset with increased sales of lower margin safety products to industrial customers, which contributed to the decline in the gross profit percentage. We believe our customers purchased fewer safety services because of eliminating costs in the U.S. and limitations on the ability to transport oil to markets in Canada. We expect the decline in higher margin safety service sales to oil and gas customers to continue due to the decline in the rig count resulting from the significant decline in oil prices during the fourth quarter of 2014. Excluding impairment expense, the decline in operating income for Service Centers, on a same store sales basis, was partially the result of the 2013 reduction in selling, general and administrative expenses to eliminate DXP’s earn-out liability related to the acquisition of NatPro, further discussed in Note 13 of the financial statements.
SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services increased by $16.5 million, or 11.2%, in 2014 compared to 2013. None of the 2014 or 2013 acquisitions contributed sales to this segment. The increase in sales is related to increases in sales to customers in the oil and gas, automotive, and general manufacturing industries as well as sales to new customers in both the mining and automotive industries. Operating income for the SCS segment increased $1.3 million, or 10.5%, from the prior corresponding period primarily as a result of the 11.2% increase in sales.
INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for Innovative Pumping Solutions increased by $139.0 million, or 66.4%, in 2014 compared to 2013. Sales by B27, acquired in 2014, accounted for $121.2 million of 2014 sales. Sales by NatPro, acquired in 2013, accounted for $9.7 million of the 2013 increase, on a same store sales basis. Excluding 2014 sales of $130.9 million by businesses acquired in 2014 and 2013, on a same stores sales basis, IPS’ sales increased $8.1 million, or 3.9%, on a same stores sales basis, from the prior corresponding period. The sales increase primarily resulted from increased capital spending by our oil and gas customers. Gross profit as a percentage of sales declined to 27.9% for 2014 from 28.8% for 2013. Excluding the business acquired in 2014 and 2013, on a same store sales basis, gross profit as a percentage of sales for 2014 increased approximately 110 basis points to 29.9%, from 28.8% for the prior corresponding period. The increase in the gross profit as a percentage of sales is primarily the result of an approximate 1,100 basis point improvement in the gross profit as a percentage of sales for NatPro. This improvement was the result of organizational changes made in connection with integrating NatPro with DXP. Excluding impairment expense of $107.4 million, operating income for the IPS segment increased $17.4 million, or 51.5%. Excluding 2014 and 2013 acquisitions and 2014 impairment expense, operating income increased $3.5 million, or 10.5%, on a same stores sales basis, from the prior corresponding period. The increase in operating income is primarily the result of the increase in gross profit.
Pro Forma Results
| | Years Ended December 31, | |
| | 2016 | | | 2015 | |
Net sales | | $ | 939.4 | | | $ | 1,228.9 | |
Net income (loss) attributable to DXP Enterprises, Inc. | | $ | 5.5 | | | $ | (40.7 | ) |
Per share data attributable to DXP Enterprises, Inc. | | | | | | | | |
Basic earnings (loss) | | $ | 0.36 | | | $ | (2.83 | ) |
Diluted earnings (loss) | | $ | 0.35 | | | $ | (2.83 | ) |
The pro forma unaudited results of operations for the Company on a consolidated basis for the twelve months ended December 31, 2015 and 2014, assuming the acquisition of businesses completed in 2015 and 2014 (previously discussed in Item 1, Business) were consummated as of January 1, 2014 are as follows (in millions, except per share amounts):
| | Years Ended December 31, | |
| | 2015 | | | 2014 | |
Net sales | | $ | 1,263 | | | $ | 1,541 | |
Net income (loss) attributable to DXP Enterprises, Inc. | | $ | (37 | ) | | $ | (44 | ) |
Per share data attributable to DXP Enterprises, Inc. | | | | | | | | |
Basic earnings (loss) | | $ | (2.60 | ) | | $ | (2.99 | ) |
Diluted earnings (loss) | | $ | (2.60 | ) | | $ | (2.99 | ) |
The pro forma unaudited results of operations for the Company on a consolidated basis for the twelve months ended December 31, 2014 and 2013, assuming the acquisition of businesses completed in 2014 and 2013 (previously discussed in Item 1, Business) were consummated as of January 1, 2013 are as follows (in millions, except per share amounts):
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2014 | | | 2013 | | | 2015 | | | 2014 | |
Net sales | | $ | 1,513 | | | $ | 1,496 | | | $ | 1,263 | | | $ | 1,541 | |
Net income (loss) | | $ | (45 | ) | | $ | 71 | | | $ | (37 | ) | | $ | (44 | ) |
Per share data | | | | | | | | | | | | | | | | |
Basic earnings (loss) | | $ | (3.08 | ) | | $ | 4.90 | | | $ | (2.60 | ) | | $ | (2.99 | ) |
Diluted earnings (loss) | | $ | (3.08 | ) | | $ | 4.64 | | | $ | (2.60 | ) | | $ | (2.99 | ) |
Liquidity and Capital Resources
General Overview
As a distributor of MRO products and services, we require significant amounts of working capital to fund inventories and accounts receivable. Additional cash is required for capital items such as information technology, warehouse equipment, metal working equipment and capital expenditures for our safety products and services category. We also require cash to pay our lease obligations and to service our debt.
We generated approximately $98.0$48.0 million of cash in operating activities in 20152016 as compared to generating $98.7$98.0 million in 2014. This small change2015. The decrease between the two yearsperiods was primarily attributabledriven by reduced earnings before impairment charges and a $59.2 million smaller reduction in accounts receivable in 2016 compared to 2015. The smaller reduction in accounts receivable resulted from a smaller decline in sales for the fourth quarter ended December 31, 2016 compared to the 2015 reduction in working capital offsetting the effectfourth quarter of the 2015 decline in net income excluding goodwill impairments.
During 2015 we paid $15.5year ended December 31, 2015. Sales for the fourth quarter of 2016 declined $56.4 million in cash and $4.4 million in common stock for two businesses compared to paying $300.8 million in cash, net of $3.3 million of cash acquired, and $4.0 in common stock,sales for the purchasefourth quarter of two businesses during2015. Sales for the fourth quarter of 2015 declined $104.0 million compared to sales for the fourth quarter of 2014.
We purchased approximately $14.0$4.9 million of capital assets during 20152016 compared to $11.1$14.0 million for 2014.2015. Capital expenditures during 20152016 were primarily related primarilyto B27 building improvements, manufacturing equipment, and patterns. Capital expenditures for 20162017 are expected to be within the range of capital expenditures during 2014 through 2015.2015 and 2016.
At December 31, 2015,2016, our total long-term debt, including the current portion and less unamortized debt issuance fees, was $349.5$224.7 million, or 63.7%47.1% of total capitalization (total long-term debt including current portion plus shareholders’ equity) of $548.4$477.2 million. Approximately $347.1$221.1 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 $6.9$4.4 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.
During 2015,2016, the amount available to be borrowed under our credit facility decreasedincreased from $51.0 million at December 31, 2014, to $19.8 million at December 31, 2015.2015, to $37.3 million at December 31, 2016. This decreaseincrease in availability is a result of a $65.1$124.8 million decrease in 2015 earnings before interest, taxes, amortization and depreciation when compared to 2014. We believe that we may not be able to comply withreduction of long-term debt during the financial covenants in our credit facility in the upcoming quarter and will need to amend our credit facility or obtain alternative financing. If such an amendment or alternate financing is obtained, then we believe that the liquidity of our balance sheet and credit facility attwelve months ended December 31, 2015 provides us with2016. The company reduced the ability to meet our working capital needs, scheduled principal payments, capital expendituresdebt primarily through a divestiture of a non-core subsidiary and Series B convertible preferred stock dividend payments during 2016.sales of common stock.
Credit Facility
On July 11, 2012, DXP entered into a credit facility with Wells Fargo Bank National Association, as Issuing Lender, Swingline Lender and Administrative Agent for the lenders (as amended, the “Original Facility”). On January 2, 2014, the Company entered into an Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, as Issuing Lender and Administrative Agent for other lenders ((as amended by that certain First Amendment to the Amended and Restated Credit Agreement, dated as thereafterof August 6, 2015 (the “First Amendment”), that certain Second Amendment to the Amended and Restated Credit Agreement, dated as of September 30, 2015 (the “Second Amendment”), that certain Third Amendment to the Amended and Restated Credit Agreement, dated as of May 12, 2016 (the “Third Amendment”), that certain Fourth Amendment to the Amended and Restated Credit Agreement, dated as of August 15, 2016 (the “Fourth Amendment”), and that certain Fifth Amendment to the Amended and Restated Credit Agreement, dated as of November 28, 2016 (the “Fifth Amendment” and as so amended, or restated the “Facility”), amending and restating the Original Facility. On August 6, 2015 and September 30, 2015,Pursuant to the Facility, as of December 31, 2016, the lenders named therein provided to DXP amended the Facility.
The Facility provides a $74.5 million term loan and a $350$205 million revolving line of credit to the Company. At December 31, 2015, the term loan component of the Facility was $175.0 million.credit. The Facility expires on January 2, 2019.March 31, 2018. Loans made from the Facility may be used for working capital and general corporate purposes of DXP and its subsidiaries. As of December 31, 2016, the aggregate principal amount of revolving loans outstanding under the facility was $147.6 million.
The Facility provides the option of interest at LIBOR (or CDOR for Canadian dollar loans) plus an applicable margin ranging from 1.25%Amortization payments are required with respect to 2.75% or prime plus an applicable margin from 0.25% to 1.75% where the applicable margin is determined by the Company’s leverage ratio as defined by the Facility as ofon the last business day of the fiscal quarter most recently ended prior to the date of borrowing. Commitment fees of 0.20% to 0.50% per annum are payable on the portion of the Facility capacity not in use at any given time on the line of credit. Commitment fees are included as interest in the consolidated statements of income.
On December 31, 2015, the LIBOR based rate of the Facility was LIBOR plus 2.25% the prime based rate of the Facility was prime plus 1.25%, and the commitment fee was 0.40%. At December 31, 2015, $347.1 million was borrowed under the Facility at a weighted average interest rate of approximately 2.67% under the LIBOR options. At December 31, 2015, the Company had $19.8 million available for borrowing under the Facility.
At December 31, 2015, the Facility’s principal financial covenants included:
Consolidated Leverage Ratio – The Facility requires that the Company’s Consolidated Leverage Ratio, determined at the end of each fiscal quarter, not exceed 4.25 to 1.00 as ofpayable at $15.625 million per quarter for the last day of eachfiscal quarter through September 30, 2016, not to exceed 4.00 to 1.00 on December 31, 2016, not to exceed 3.75 to 1.00 fromperiods ending March 31, 2017 through June 30, 2017, not to exceed 3.50 to 1.00 from September 30, 2017 through Decemberand thereafter. On October 31, 2017, and not to exceed 3.25 to 1.002016, DXP prepaid $12 million of the $15.625 million amortization payment due on March 31, 2018 and thereafter.2017. The Consolidated Leverage Ratio is defined as the outstanding indebtedness dividedFourth Amendment required additional term loan principal reductions of $17 million by Consolidated EBITDA for the period of four consecutive fiscal quarters ending on or immediately prior to such date. Indebtedness is defined under the Facility for financial covenant purposes as: (a) all obligations of DXP for borrowed money including but not limited to obligations evidenced by bonds, debentures, notes or other similar instruments; (b) obligations to pay deferred purchase price of property or services; (c) capital lease obligations; (d) obligations under conditional sale or other title retention agreements relating to property purchased; and (e) contingent obligations for funded indebtedness. At December 31, 2015, the Company’s Leverage Ratio was 4.02 to 1.00.
Consolidated Fixed Charge Coverage Ratio – The Facility requires that the Consolidated Fixed Charge Coverage Ratio on the last day of each quarter be not less than 1.15 to 1.00 through December 31, 2016 and not less than 1.25 to 1.00 on$14 million by March 31, 20172017. During October, 2015 DXP paid the mandatory $17 million and thereafter, with “Consolidated Fixed Charge Coverage Ratio” defined as the ratio of (a) Consolidated EBITDA for the period of 4 consecutive fiscal quarters ending on such date minus capital expenditures during such period (excluding acquisitions) minus income tax expense paid minus the aggregate amount of restricted payments defined in the agreement to (b) the interest expense paid in cash, scheduled$14 million principal payments in respect of long-term debt and the current portion of capital lease obligations for such 12-month period, determined in each case on a consolidated basis for DXP and its subsidiaries.reductions. At December 31, 2015, the Company's Consolidated Fixed Charge Coverage Ratio was 1.23 to 1.00.
Asset Coverage Ratio –The Facility requires that the Asset Coverage Ratio at any time be not less than 1.0 to 1.0 with “Asset Coverage Ratio” defined as the ratio of (a) the sum of 85% of net accounts receivable plus 65% of net inventory to (b)2016, the aggregate outstandingprincipal amount of term loans outstanding under the revolvingFacility was $74.5 million. Substantially all of the Company’s assets are pledged as collateral to secure the credit on such date. At December 31, 2015, the Company's Asset Coverage Ratio was 1.15 to 1.00.facilities.
Consolidated EBITDA as defined under the Facility for financial covenant purposes means, without duplication, for any period the consolidated net income of DXP plus, to the extent deducted in calculating consolidated net income, depreciation, amortization (except to the extent that such non-cash charges are reserved for cash charges to be taken in the future), non-cash compensation including stock option or restricted stock expense, interest expense and income tax expense for taxes based on income, certain one-time costs associated with our acquisitions, integration costs, facility consolidation and closing costs, severance costs and expenses, write-down of cash expenses incurred in connection with the existing credit agreement and extraordinary losses less interest income and extraordinary gains. Consolidated EBITDA shall be adjusted to give pro forma effect to disposals or business acquisitions assuming that such transaction(s) had occurred on the first day of the period excluding all income statement items attributable to the assets or equity interests that isare subject to such disposition made during the period and including all income statement items attributable to property or equity interests of such acquisitions permitted under the Facility.
Under the terms of the Fourth and Fifth Amendments:
| · | The revolving line of credit was reduced from $250 million to $205 million, as of August 15, 2016, and shall be reduced to $190 million, as of March 31, 2017. |
| · | A permitted overadvance facility (the “Permitted Overadvance Facility”) has been added with amounts to be determined but which shall permit drawings in excess of the ratio of (i) the sum of 85% of net accounts receivable and 65% of net inventory to (ii) the aggregate amount of revolving credit outstandings (the “Asset Coverage Ratio”). |
| · | Certain modifications were made to the pricing grid set forth in the Facility to increase the rate at which the Facility bears interest to a rate equal to LIBOR (or CDOR for Canadian dollar loans) plus 5.00% and Base Rate (or Canadian Base Rate for Canadian dollar loans) plus 4.00%; provided, that drawings under the Permitted Overadvance Facility shall bear interest at a rate equal to LIBOR (or CDOR for Canadian dollar loans) plus 6.00% and Base Rate (or Canadian Base Rate for Canadian dollar loans) plus 5.00%. |
| · | The maturity date of the Facility was modified from January 2, 2019 to March 31, 2018. |
| · | Additional mandatory prepayments were added in an amount equal to $30 million (including $17 million to be applied to the term loan) by December 31, 2016 and $25 million (including $14 million to be applied to the term loan) by March 31, 2017. As of October 31, 2016, both of these mandatory prepayments have been paid. |
| · | The negative covenants were modified to reduce certain debt baskets, including for purchase money, capital lease and unsecured debt and to limit the ability of the Company to conduct asset sales in excess of $3.5 million without the consent of the Required Lenders. |
| · | A financial covenant holiday has been provided through March 31, 2018 for the Consolidated Leverage Ratio and the Consolidated Fixed Charge Coverage Ratio. |
| · | The minimum Asset Coverage Ratio was adjusted to 0.95 to 1.00 beginning June 30, 2016. |
| · | A Minimum Consolidated EBITDA and capital expenditure covenant were added to the Facility. |
On December 31, 2016, the LIBOR based rate in effect under the Facility was LIBOR plus 5.0% and the prime based rate of the Facility was prime plus 4.0%. At December 31, 2016, $222.1 million was borrowed under the Facility at a weighted average interest rate of approximately 5.89%. At December 31, 2016, the Company had $37.3 million available for borrowing under the Facility.
Commitment fees of 0.50% per annum are payable on the portion of the Facility capacity not in use at any given time on the line of credit. Commitment fees are included as interest in the condensed consolidated statements of operations.
The Facility’s principal financial covenants included:
Consolidated Leverage Ratio – The Facility requires that the Company’s Consolidated Leverage Ratio, determined at the end of each fiscal quarter, not to exceed 3.50 to 1.00 from July 1, 2017 through December 31, 2017, and not to exceed 3.25 to 1.00 on January 1, 2018 and thereafter. The Consolidated Leverage Ratio is defined as the outstanding indebtedness divided by Consolidated EBITDA for the period of four consecutive fiscal quarters ending on or immediately prior to such date. Indebtedness is defined under the Facility for financial covenant purposes as: (a) all obligations of DXP for borrowed money including but not limited to obligations evidenced by bonds, debentures, notes or other similar instruments; (b) obligations to pay deferred purchase price of property or services; (c) capital lease obligations; (d) obligations under conditional sale or other title retention agreements relating to property purchased; and (e) contingent obligations for funded indebtedness. At December 31, 2016, the Company’s Leverage Ratio was 3.78 to 1.00, but the Facility does not require compliance with a Consolidated Leverage Ratio from June 30, 2016 through March 31, 2018.
Consolidated Fixed Charge Coverage Ratio – The Facility requires that the Consolidated Fixed Charge Coverage Ratio on the last day of each quarter be not less than 1.25 to 1.00 from July 1, 2017 and thereafter, with “Consolidated Fixed Charge Coverage Ratio” defined as the ratio of (a) Consolidated EBITDA for the period of 4 consecutive fiscal quarters ending on such date minus capital expenditures during such period (excluding acquisitions) minus income tax expense paid minus the aggregate amount of restricted payments defined in the agreement to (b) the interest expense paid in cash, scheduled principal payments in respect of long-term debt and the current portion of capital lease obligations for such 12-month period, determined in each case on a consolidated basis for DXP and its subsidiaries. At December 31, 2016, the Company's Consolidated Fixed Charge Coverage Ratio was 0.77 to 1.00, but the Facility does not require compliance with a Consolidated Fixed Charge Coverage Ratio from June 30, 2016 through March 31, 2018.
Asset Coverage Ratio – The Facility requires that the Asset Coverage Ratio at any time be not less than 0.95 to 1.00 from June 30, 2016 and thereafter, with “Asset Coverage Ratio” defined as the ratio of (a) the sum of 85% of net accounts receivable plus 65% of net inventory to (b) the aggregate outstanding amount of the revolving credit on such date and excluding the Permitted Overadvance Facility. At December 31, 2016, the Company's Asset Coverage Ratio was 1.18 to 1.00.
Minimum Consolidated EBITDA– The Facility requires that the Company’s Consolidated EBITDA for any twelve month period as of the last day of any calendar month ending during the periods specified below not be less than the corresponding amount set forth below:
Period | | Minimum Consolidated EBITDA | |
December 31, 2016 | | $ | 39,891,000 | |
January 31, 2017 | | $ | 40,576,000 | |
February 28, 2017 | | $ | 42,257,000 | |
March 31, 2017 | | $ | 43,276,000 | |
April 30, 2017 | | $ | 41,266,000 | |
May 31, 2017 | | $ | 39,283,000 | |
June 30, 2017 | | $ | 36,210,000 | |
July 31, 2017 | | $ | 42,968,000 | |
August 31, 2017 | | $ | 42,411,000 | |
September 30, 2017 | | $ | 39,306,000 | |
October 31, 2017 and thereafter | | $ | 39,000,000 | |
At December 31, 2016, the Company’s Consolidated EBITDA was $59,698,000.
The following table sets forth the computation of the Leverage Ratio as of December 31, 20152016 (in thousands, except for ratios):
For the Twelve Months ended December 31, 2015 | | Leverage Ratio | | |
For the Twelve Months ended December 31, 2016 | | | Leverage Ratio | |
| | | | | | |
Loss before taxes | | $ | (38,920 | ) | |
Loss attributable to noncontrolling interest | | | 813 | | |
Income before taxes | | | $ | 9,674 | |
Before tax loss attributable to noncontrolling interest | | | | 886 | |
Interest expense | | | 10,932 | | | | 15,564 | |
Depreciation and amortization | | | 33,243 | | | | 29,994 | |
Impairment expense | | | 68,735 | | |
Stock compensation expense | | | 2,973 | | | | 3,580 | |
Pro forma acquisition EBITDA | | | 2,244 | | |
B27 settlment | | | 7,348 | | |
(A) Defined EBITDA | | $ | 87,368 | | | $ | 59,698 | |
| | | | | | | | |
As of December 31, 2015 | | | | | |
As of December 31, 2016 | | | | | |
Total long-term debt, including current maturities | | $ | 349,509 | | | $ | 224,685 | |
Unamortized debt issuance costs | | | 2,046 | | | | 992 | |
(B) Defined indebtedness | | $ | 351,555 | | | $ | 225,677 | |
| | | | | | | | |
Leverage Ratio (B)/(A) | | | 4.02 | | | | 3.78 | |
The following table sets forth the computation of the Fixed Charge Coverage Ratio as of December 31, 2016 (in thousands, except for ratios):
For the Twelve Months ended December 31, 2016 | | | |
| | | |
Defined EBITDA | | $ | 59,698 | |
Cash paid for income taxes | | | 4,780 | |
Capital expenditures | | | 4,868 | |
(A) Defined EBITDA minus capital expenditures & cash income taxes | | $ | 50,050 | |
Cash interest payments | | $ | 13,708 | |
Dividends | | | 90 | |
Scheduled principal payments | | | 50,831 | |
(B) Fixed Charges | | $ | 64,629 | |
Fixed Charge Coverage Ratio (A)/(B) | | | 0.77 | |
The following table sets forth the computation of the Fixed ChargeAsset Coverage Ratio as of December 31, 20152016 (in thousands, except for ratios):
For the Twelve Months ended December 31, 2015 | �� | | |
| | | |
Defined EBITDA | | $ | 87,368 | |
Cash paid for income taxes | | | 13,792 | |
Capital expenditures | | | 13,992 | |
(A) Defined EBITDA minus capital expenditures & cash income taxes | | $ | 59,584 | |
Cash interest payments | | $ | 9,721 | |
Dividends | | | 90 | |
Scheduled principal payments | | | 38,666 | |
(B) Fixed Charges | | $ | 48,477 | |
Fixed Charge Coverage Ratio (A)/(B) | | | 1.23 | |
The following table sets forth the computation of the Asset Coverage Ratio as of December 31, 2015 (in thousands, except for ratios):
Credit facility outstanding balance | | $ | 172,148 | | | $ | 147,600 | |
Outstanding letters of credit | | | 6,305 | | | | 5,564 | |
Defined indebtedness | | $ | 178,453 | | | $ | 153,164 | |
| | | | | | | | |
Accounts receivable (net), valued at 85% of gross | | $ | 138,486 | | | $ | 126,581 | |
Inventory, valued at 65% of gross | | | 67,482 | | | | 54,405 | |
| | $ | 205,968 | | | $ | 180,986 | |
Asset Coverage Ratio | | | 1.15 | | | | 1.18 | |
Borrowings (in thousands):
| | December 31, 2015 | | | December 31, 2014 | | | Increase (Decrease) | |
| | | | | | |
Current portion of long-term debt | | $ | 50,829 | | | $ | 38,608 | | | $ | 12,221 | |
Long-term debt, less debt issuance costs | | | 298,680 | | | | 370,194 | | | | (71,514 | ) |
Total long-term debt | | $ | 349,509 | | | $ | 408,802 | | | $ | (59,293 | ) |
Amount available | | $ | 19,754 | | | $ | 50,955 | (1) | | $ | (31,201 | ) |
(1) Represents amount available to be borrowed at the indicated date under the Facility. The decrease in availability is a result of a $56.7 million decrease in 2015 Defined EBITDA when compared to 2014.
| | December 31, 2016 | | | December 31, 2015 | | | Increase (Decrease) | |
| | | | | | |
Current portion of long-term debt | | $ | 51,354 | | | $ | 50,829 | | | $ | 525 | |
Long-term debt, less debt issuance costs | | | 173,331 | | | | 298,680 | | | | (125,349 | ) |
Total long-term debt | | $ | 224,685 | | | $ | 349,509 | | | $ | (124,824 | ) |
Amount available(1) | | $ | 37,347 | | | $ | 19,754 | | | $ | 17,593 | |
34(1) | Represents amount available to be borrowed at the indicated date under the Facility. The increase is a result of paying down debt in 2016. |
Performance Metrics (in days):
| | Three Months Ended December 31, | | | | | | Three Months Ended December 31, | | | | |
| | 2015 | | | 2014 | | | Increase (Decrease) | | | 2016 | | | 2015 | | | | |
| | | | | | |
Days of sales outstanding | | | 56.9 | | | | 59.6 | | | | (2.7 | ) | | | 65.0 | | | | 56.9 | | | | 8.1 | |
Inventory turns | | | 7.7 | | | | 9.5 | | | | (1.8 | ) | | | 7.7 | | | | 7.7 | | | | - | |
Accounts receivable days of sales outstanding were 65.0 days at December 31, 2016 compared to 56.9 days at December 31, 2015. The 8.1 days increase was primarily due to slower payment times by oil and gas customers. Inventory turns remained flat at December 31, 2016 compared to December 31, 2015.
| | Three Months Ended December 31, | | | | |
| | 2015 | | | 2014 | | | | |
| | | |
Days of sales outstanding | | | 56.9 | | | | 59.6 | | | | (2.7 | ) |
Inventory turns | | | 7.7 | | | | 9.5 | | | | (1.8 | ) |
Accounts receivable days of sales outstanding were 56.9 days at December 31, 2015 compared to 59.6 days at December 31, 2014. The 2.7 days decrease was primarily due to a 31.8% decrease in December 2015 sales compared to December 2014 sales. Inventory turns were 7.7 times at December 31, 2015 compared to 9.5 times at December 31, 2014. The 1.8 turns decrease is primarily related to our 2015 organic sales decline, which resulted in sales decreasing faster than inventory decreased.
| | Three Months Ended December 31, | | | | |
| | 2014 | | | 2013 | | | Increase (Decrease) | |
| | | |
Days of sales outstanding | | | 59.6 | | | | 58.9 | | | | 0.7 | |
Inventory turns | | | 9.5 | | | | 8.3 | | | | 1.2 | |
Accounts receivable days34
Funding Commitments
We believe our cash generated from operations will meet our normal working capital needs during the next twelve months. However, we may require additional debt outside of the Facility 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. Refer to the Contractual Obligations table below. Additionally, we believe that we may need to amend the financial covenants in our Facility or obtain alternative financing next quarter to avoid breaching the Facility.
Share Repurchases
On December 17, 2014, DXP publicly announced an authorization from the Board of Directors that allows DXP from time to time to purchase up to 400,000 shares of DXP's common stock over 24 months. Purchases could be made in open market or in privately negotiated transactions. As of December 31, 2015, DXP hashad purchased 191,420 shares of DXP’s common stock at an average price of $46.53 under this authorization. No purchases were made during the twelve months ended December 31, 2016. The authorization expired on December 16, 2016.
On May 7, 2014, the Board of Directors authorized DXP from time to time to purchase up to 200,000 shares of DXP's common stock over 24 months. DXP publicly announced the authorization on May 14, 2014. Purchases could be made in open market or in privately negotiated transactions. During 2014, DXP purchased 200,000 shares of DXP’s common stock at an average price of $59.27 under this authorization.
During 2013, DXP purchased 5,400 shares of DXP’s common stock at an average price of $56.25.
Contractual Obligations
The impact that our contractual obligations as of December 31, 20152016 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):
| | Payments Due by Period | | | Payments Due by Period | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 1 Year | | | 1–3 Years | | | 3-5 Years | | | More than 5 Years | | | Total | | | Less than 1 Year | | | 1–3 Years | | | 3-5 Years | | | More than 5 Years | | | Total | |
Long-term debt, including current portion (1) | | $ | 50,829 | | | $ | 126,737 | | | $ | 173,989 | | | $ | - | | | $ | 351,555 | | | $ | 51,354 | | | $ | 173,384 | | | $ | 940 | | | $ | - | | | $ | 225,678 | |
Operating lease obligations | | | 23,951 | | | | 31,891 | | | | 11,555 | | | | 9,861 | | | | 77,258 | | | | 19,412 | | | | 22,671 | | | | 8,939 | | | | 3,141 | | | | 54,163 | |
Estimated interest payments (2) | | | 3,791 | | | | 3,221 | | | | 54 | | | | - | | | | 7,066 | | | | 2,815 | | | | 771 | | | | 14 | | | | - | | | | 3,600 | |
Total | | $ | 78,571 | | | $ | 161,849 | | | $ | 185,598 | | | $ | 9,861 | | | $ | 435,879 | | | $ | 73,581 | | | $ | 196,826 | | | $ | 9,893 | | | $ | 3,141 | | | $ | 283,441 | |
(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, 2015.2016. Assumes debt is paid on maturity date and not replaced. Does not include interest on the revolving line of credit as borrowings under the Facility fluctuate. The amounts of interest incurred for borrowings under the revolving lines of credit were approximately $8.9 million, $4.5 million $3.0 million and $1.9$3.0 million for the years ended 2016, 2015 2014 and 2013,2014, respectively.
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, 2015,2016, we were not involved in any unconsolidated SPE transactions.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments, that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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
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.
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“USGAAP”). The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity (“VIE”).
Variable Interest Entity (VIE)
DXP is the primary beneficiary of a VIE in which DXP owns 47.5% of the equity. DXP consolidates the financial statements of the VIE with the financial statements of DXP. As of December 31, 2015,2016, the total assets of the VIE were approximately $4.0$5.2 million including $0.3 million of cash and approximately $3.6$5.2 million of fixed assets. DXP is the soleprimary customer of the VIE. Consolidation of the VIE increased cost of sales by approximately $1.3 million and $1.4 million for the twelve months ended December 31, 2015.2016 and 2015, respectively. The Company recognized a related income tax benefit of $0.3 million and $0.3 million related to the VIE for the yearyears ended December 31, 2015.2016 and 2015, respectively. At December 31, 2015,2016, the owners of the 52.5% of the equity not owned by DXP included an executive officer and other employees of DXP.
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 customers may not pay within stated trade terms.
The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the United States, and Canada. 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 collectability of such accounts. The Company writes-off uncollectible trade accounts receivable when the accounts are determined to be uncollectible. No customer represents more than 10% of consolidated sales.
Uncertainties require the Company to make frequent judgments and estimates regarding a customer’s ability to pay amounts due in order to assess and quantify an appropriate allowance for doubtful accounts. The primary factors used to quantify the allowance are customer delinquency, bankruptcy, and the Company’s estimate of its ability to collect outstanding receivables based on the number of days a receivable has been outstanding.
The majority of the Company’s customers operate in the energy industry. The cyclical nature of the industry may affect customers’ operating performance and cash flows, which could impact the Company’s ability to collect on these obligations.
The Company continues to monitor the economic climate in which its customers operate and the aging of its accounts receivable. The allowance for doubtful accounts is based on the aging of accounts and an individual assessment of each invoice. At December 31, 2015,2016, the allowance was 5.4%5.2% of the gross accounts receivable, compared to an allowance of 4.7%5.4% a year earlier. While credit losses have historically been within expectations and the provisions established, should actual write-offs differ from estimates, revisions to the allowance would be required.
Impairment of Goodwill and Other Indefinite Intangible Assets
The Company tests goodwill and other indefinite lived intangible assets for impairment on an annual basis in the fourth quarter and when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company assigns the carrying value of these intangible assets to its "reporting units" and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the component is a business and discrete information is prepared and reviewed regularly by segment management. As of December 31, 20152016 DXP Core Service Centers (“Core SC”), DXP Core IPS, and DXP Core Supply Chain Services (“Core SCS”) and B27 Service Centers (“B27 SC”) reporting units had goodwill.
The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a two-step quantitative test for that reporting unit. When a quantitative assessment is performed, the first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value.
The Company determines fair value using widely accepted valuation techniques, including discounted cash flows and market multiples analyses, and through use of independent fixed asset valuation firms, as appropriate. These types of analyses contain uncertainties as they require management to make assumptions and to apply judgments regarding industry economic factors and the profitability of future business strategies. The Company’s policy is to conduct impairment testing based on current business strategies, taking into consideration current industry and economic conditions, as well as the Company’s future expectations. Key assumptions used in the discounted cash flow valuation model include, among others, discount rates, growth rates, cash flow projections and terminal value rates. Discount rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined using a weighted average cost of capital (“WACC”). The WACC considers market an industry data, as well as Company-specific risk factors for each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in a similar business. Management uses industry considerations and Company-specific historical and projected results to develop cash flow projections for each reporting unit. Additionally, as part of the market multiples approach, the Company utilizes market data from publicly traded entities whose businesses operate in industries comparable to the Company’s reporting units, adjusted for certain factors that increase comparability.
The Company cannot predict the occurrence of events or circumstances that could adversely affect the fair value of goodwill. Such events may include, but are not limited to, deterioration of the economic environment, increase in the Company’s weighted average cost of capital, material negative changes in relationships with significant customers, reductions in valuations of other public companies in the Company’s industry, or strategic decisions made in response to economic and competitive conditions. If actual results are not consistent with the Company’s current estimates and assumptions, impairment of goodwill could be required.
During the third quarter of 2015, the price of DXP’s common stock and the price of crude oil declined over 40% and over 20%, respectively. The decline in oil prices reduced spending by our customers and reduced our revenue expectations. This sustained decline in crude oil prices, reduced capital spending by customers and reduced revenue expectations were determined to be a triggering event during the third quarter of 2015. This triggering event required us to perform testing for possible goodwill impairment in two of our reporting units, and our step one testing indicated there was an impairment in the B27 IPS and B27 SC reporting units. No triggering event was identified in our other reporting units during the third quarter. Accounting Standards Codification 350 Intangibles – Goodwill and Other (“ASC 350”) step two of the goodwill impairment testing for the reporting units was performed preliminarily during the third quarter of 2015. Our preliminary analysis concluded that $48.0 million of our B27 IPS reporting unit’s goodwill and $9.8 of our B27 SC reporting unit’s goodwill was impaired. The remaining goodwill for the B27 IPS and B27 SC reporting units at September 30, 2015 was $4.9 million and $10.3 million, respectively. The third quarter of 2015 ASC 350 step two testing was completed in the fourth quarter of 2015 without any adjustment to the amount recorded in the third quarter of 2015.
As of October 1, 2015, DXP performed a qualitative assessment (“Step 0”) to determine whether DXP was required to proceed to ASC 350 step one of the impairment analysis for any of its reporting units. It is the position of DXP that the factors taken into the Step 0 analysis failed to meet the more likely than not criteria that the fair value of any of our reporting units had fallen below its carrying value as of October 1, 2015.
During the fourth quarter of 2015, the price of DXP’s common stock and the price of crude oil declined over 16% and over 18%, respectively. Actual earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the fourth quarter of 2015 for the Core SCS and Core SC reporting units exceeded the EBITDA amounts in the October 1, 2015 Step 0 analysis. Therefore, evidence of a fourth quarter triggering event for these two reporting units does not exist. Additionally, the fair value of each of these reporting units is substantially in excess of each reporting units carrying value as of October 1, 2015. Actual EBITDA for the fourth quarter of 2015 for the Core IPS reporting unit was below the EBITDA amount in the October 1, 2015 Step 0 analysis. Therefore, DXP updated the 2016 through 2020 forecasts for the Core IPS reporting unit. The forecasted EBITDA for 2016 through 2020 in the updated forecast declined less than $1 million from the October 1, 2015 forecast. The effect of this decline was more than offset by a $12 million reduction in the carrying value of the Core IPS reporting unit at December 31, 2015 from the October 1, 2015 value. Therefore, evidence of a triggering event for this reporting unit does not exist. Additionally, the fair value of this reporting unit is substantially in excess of its carrying value as of October 1, 2015.
Actual EBITDA for the fourth quarter of 2015 for the B27 IPS and B27 SC reporting units were below the EBITDA amounts in the October 1, 2015 Step 0 analysis. Therefore, DXP updated the 2016 through 2020 forecasts for the B27 IPS and B27 SC reporting units. The forecasted EBITDA for 2016 through 2020 in the updated forecasts declined significantly from the October 1, 2015 forecast. The declines in the forecasted EBITDA for these two reporting units were determined to be a triggering event during the fourth quarter of 2015. This triggering event required us to perform testing for possible goodwill impairment in these two reporting units, and our ASC 350 step one testing indicated there may be an impairment in our B27 IPS and B27 SC reporting units. ASC 350 step two testing for reporting units was performed during the fourth quarter of 2015. Our analysis concluded that $4.9 million of our B27 IPS reporting unit’s goodwill was impaired, and $5.0 million of our B27 SC reporting unit’s goodwill was impaired. The remaining goodwill for the B27 IPS and B27 SC reporting units at December 31, 2015 was zero and $5.3 million, respectively.
Because the carrying value of the B27 SC reporting unit equals the fair value of the reporting unit, a future decline in the estimated cash flows of the reporting unit could result in an impairment loss. A future decline in the estimated cash flows could result from a significant decline in capital spending by oil and gas producers and related businesses.
As of October 1, 2014, the Core SCS, Core IPS and Core SCS, Canada Service Centers and NatPro Service Centers reporting units had goodwill. The fair value of each of these reporting units as of October 1, 2014 was substantially in excess of each reporting unit’s carrying value. The aggregate goodwill associated with these reporting units was $180.3 million, and the aggregate excess fair value of these reporting units over the carrying value at the measurement date was over 200%. The two reporting units with the lowest excess fair value are 90% and 17%, respectively, and the reporting unit with 17% excess fair value represented less than 5% of goodwill at December 31, 2014. The remaining reporting units, B2 SC, B27 IPS and NatPro IPS, recorded impairment losses during the fourth quarter of 2014. The NatPro IPS goodwill was reduced to zero with the impairment, and the remaining goodwill for the B27 SC and B27 IPS reporting units was $73 million at December 31, 2014.
DXP acquired B27 on January 1, 2014. At the time of acquisition, B27 management forecasted 2014 revenues to increase significantly over 2013 revenues based on their expectation of receiving several large orders from oil companies in South America. During the first half of 2014, the oil companies delayed the issuance of the expected purchase orders. However, oil prices increased during the period, which supported the probability the projects would be funded. During the third quarter of 2014 oil prices declined and it appeared the projects related to the expected orders were being deferred indefinitely. The indefinite delay in the pending large oil and gas production related projects in South America combined with the effect of the third quarter decline in oil prices on the domestic market reduced the expected fair value of the B27 reporting units. Considering the actual results of the B27 reporting units for the nine months ended September 30, 2014 and the decline in oil prices, DXP did not believe it was reasonable to expect B27 to be able to achieve the future operating results forecasted at the time of acquisition.
During 2014 DXP was working to improve the profitability of the NatPro IPS reporting unit. The decline in oil prices during the third quarter of 2014 significantly lowered the forecasts for oil and gas activity in Canada because Canada has high costs for oil production. This decline in forecasted oil and gas activity delayed the expected achievement of profitability for the NatPro IPS reporting unit. Considering the actual results of the NatPro IPS reporting unit for the nine months ended September 30, 2014 and the decline in oil prices, DXP did not believe it was reasonable to expect the NatPro IPS reporting unit to achieve the improved operating results in the time frame forecasted at the date of acquisition.
Impairment of Long-Lived Assets, Excluding Goodwill
The Company tests long-lived assets or asset groups for recoverability on an annual basis and when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. No impairment was recorded for property and equipment and intangible assets with indefinite or determinable lives during 2016, 2015 2014 and 2013.2014.
Revenue Recognition
For binding, long-term agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues using the percentage of completion method. Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. Changes in estimated profitability may periodically result in revisions to revenue and expenses and are recognized in the period such revisions become probable. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. Revenues of approximately $31.5 million, $47.5 million, $65.9 million, and $12.7$65.9 million were recognized on contracts in process for the years ended December 31, 2016, 2015, 2014, and 2013,2014, respectively. The typical time span of these contracts is approximately one to two years.
For other sales, the Company recognizes revenues when an agreement is in place, the price is fixed, title for product passes to the customer or services have been provided and collectability is reasonably assured. Revenues are recorded net of sales taxes.
The Company reserves for potential customer returns based upon the historical level of returns. Reserves for customer accountsreturns were $0.2 and $0.2 million at December 31, 20152016 and 2014,2015, respectively.
Self-insured Insurance and Medical Claims
We generally retain up to $100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The actual cost could deviate from the recorded estimate.
We generally retain up to $250,000$175,000 of risk on each medical claim for our employees and their dependents.dependents with the exception of less than 0.05% of employees where a higher risk is retained. 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.
The accrual for these claims at December 31, 20152016 and 20142015 was approximately $3.4$3.1 million and $2.9$3.4 million, respectively.
Purchase Accounting
DXP estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values, intangibles and liabilities when allocating the purchase price of an acquisition. The fair value estimates are developed using the best information available. Third party valuation specialists assist in valuing the Company’s significant acquisitions. Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including the income approach and the market approach. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies. We typically engage an independent valuation firm to assist in estimating the fair value of goodwill and other intangible assets. We do not expect that there will be material change in the future estimates or assumptions we use to complete the purchase price allocation and estimate the fair values of acquired assets and liabilities for those acquisitions completed in fiscal 2013, fiscal 2014 and fiscal 2015. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Income Taxes
The Company utilizes the asset and liability method of accounting for 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 under a more likely than not criterion.
Accounting for Uncertainty in Income Taxes
A position taken or expected to be taken in a tax return is 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 2009. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company's goodwill impairment testing for the fiscal period beginning January 1, 2018, will follow the provisions of this ASU
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of this ASU.
In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements. This ASU represents changes to clarify, correct errors or make minor improvements to the Accounting Standards Codification. The amendments make the Accounting Standards Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Most of the amendments in this Update do not require transition guidance and are effective upon issuance of this Update. Six amendments in this Update clarify guidance or correct references in the Accounting Standards Codification that could potentially result in changes in current practice because of either misapplication or misunderstanding of current guidance. Early adoption is permitted for the amendments that require transition guidance. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements
In October 2016, the FASB issued ASU 2016-17, Consolidation - Interests Held Through Related Parties That Are Under Common Control. This ASU amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update aims to simplify aspects of accounting for share-based payment award transactions, including (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company has elected not to early adopt this ASU. The Company expects the new guidance to impact its tax expense and dilutive shares outstanding calculation, with a potentially dilutive impact on future earnings per share and increased period-to-period variability of net earnings. The impact cannot be quantified due to the timing and exercise activity that will occur in future periods.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): The update requires organizations that lease assets (“lessees”) to recognize the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains dependent on its classification as a finance or operating lease. The criteria for determining whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing, and uncertainty of cash flows arising from leases, 3 including qualitative and quantitative requirements. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company is evaluating the impact of this ASU.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The update requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. The update simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In AprilJuly 2015, the FASB issued ASU No. 2015-03, Interest – Imputation2015-11, Inventory ("ASU 2015-11"). The amendments in ASU 2015-11 clarify the subsequent measurement of Interest (Subtopic 835-30): Simplifyinginventory requiring an entity to subsequently measure inventory at the Presentationlower of Debt Issuance Costs, which requires entitiescost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU applies only to recognize debt issuance costs related to a recognized debt liability as a direct deduction frominventory that is measured using the carrying amount of that debt liability. This pronouncementfirst-in, first-out (FIFO) or average cost method. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in ASU 2015-11 should be applied prospectively and are effective for financial statements issued for fiscal years, and interim periods within those years beginning after December 15, 2016, however,and interim periods within those fiscal years, with early adoption permitted. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which asserts that management should evaluate whether there are relevant conditions or events that are known and reasonably knowable that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued when applicable. If conditions or events at the date the financial statements are issued raise substantial doubt about an entity’s ability to continue as a going concern, disclosures are required which will enable users of the financial statements to understand the conditions or events as well as management’s evaluation and plan. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter; early application is permitted. DXPThe Company adopted this guidance for the firstfourth quarter of 2015 and adjusted the balance sheet for all periods presented.2016.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In April 2015, the FASB approved a proposal to defer the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. We are evaluatingThe Company has evaluated the impact thatprovisions of the adoption of thisnew standard will have on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Inventory ("ASU 2015-11"). The amendments in ASU 2015-11 clarify the subsequent measurement of inventory requiring an entity to subsequently measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary courseprocess of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU applies only to inventory that is measured using the first-in, first-out (FIFO) or average cost method. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in ASU 2015-11 should be applied prospectively and are effective forassessing its impact on financial statements, issued for fiscal years beginning after December 15, 2016,information systems, business processes and interim periods within those fiscal years, with early adoption permitted. The Companyfinancial statement disclosures. Based on initial reviews, the standard is currently assessingnot expected to have a material impact on the impact that this standard will have on its consolidated financial statements.Company’s Consolidated Financial Statements.
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, 2015,2016, a 100 basis point increase in interest rates would increase our annual interest expense by approximately $3.5$2.2 million. Also see “Risk Factors,” included in Item 1A of this Report for additional risk factors associated with our business.
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) | Principal Amount By Expected Maturity (in thousands, except percentages) | | Principal Amount By Expected Maturity (in thousands, except percentages) | |
| | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | There- after | | | Total | | | Fair Value | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | There- after | | | Total | | | Fair Value | |
Fixed Rate Long- term Debt | | $ | 829 | | | $ | 856 | | | $ | 881 | | | $ | 908 | | | $ | 934 | | | $ | - | | | $ | 4,408 | | | $ | 4,408 | | | $ | 854 | | | $ | 879 | | | $ | 905 | | | $ | 940 | | | $ | - | | | $ | - | | | $ | 3,578 | | | $ | 3,578 | |
Fixed Interest Rate | | | 2.9 | % | | | 2.9 | % | | | 2.9 | % | | | 2.9 | % | | | 2.9 | % | | | - | | | | - | | | | - | | | | 2.9 | % | | | 2.9 | % | | | 2.9 | % | | | 2.9 | % | | | - | | | | - | | | | - | | | | - | |
Floating Rate Long-term Debt | | $ | 50,000 | | | $ | 62,500 | | | $ | 62,500 | | | $ | 172,147 | | | | - | | | | - | | | $ | 347,147 | | | $ | 347,147 | | | $ | 50,500 | | | $ | 171,600 | | | $ | - | | | $ | - | | | | - | | | | - | | | $ | 222,100 | | | $ | 222,100 | |
Average Interest Rate (1) | | | 2.67 | % | | | 2.67 | % | | | 2.67 | % | | $ | 2.67 | % | | | - | | | | - | | | | - | | | | - | | | | 5.89 | % | | | 5.89 | % | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Maturities | | $ | 50,829 | | | $ | 63,356 | | | $ | 63,381 | | | $ | 173,055 | | | $ | 934 | | | $ | - | | | $ | 351,555 | | | $ | 351,555 | | | $ | 51,354 | | | $ | 172,479 | | | $ | 905 | | | $ | 940 | | | $ | - | | | $ | - | | | $ | 225,678 | | | $ | 225,678 | |
(1) Assumes weighted average floating interest rates in effect at December 31, 2015. | | |
(1) Assumes weighted average floating interest rates in effect at December 31, 2016. | | (1) Assumes weighted average floating interest rates in effect at December 31, 2016. | |
ITEM 8. | Financial Statements and Supplementary Data |
TABLE OF CONTENTS |
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Reports of Independent Registered Public Accounting Firms | 43 |
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Consolidated Balance Sheets | 4647 |
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Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) | 4748 |
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Consolidated Statements of Shareholders’ Equity | 4849 |
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Consolidated Statements of Cash Flows | 4950 |
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Notes to Consolidated Financial Statements | 5051 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
DXP Enterprises, Inc.
We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2016, and the related consolidated statements of income (loss) and comprehensive income (loss), shareholders' equity and cash flows for the year ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DXP Enterprises, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated March 31, 2017 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
/s/ Hein & Associates LLP
Houston, Texas
March 31, 2017
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
DXP Enterprises, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheetssheet of DXP Enterprises, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2015, and 2014, and the related consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2015.2015 and 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits 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 financial position of DXP Enterprises, Inc. and subsidiaries as of December 31, 2015, and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 and 2014 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 (not included herein) to the consolidated financial statements, the Company adopted new accounting guidance in 2015 and 2014, related to the presentation for debt issuance costs.
/s/ GRANT THORNTON LLP
Houston, Texas
February 29, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
DXP Enterprises, Inc.
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’sDXP Enterprises, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2015,2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2016 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Houston, Texas
February 29, 2016
Report Of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
DXP Enterprises, Inc. and Subsidiaries
We have audited the internal control over financial reporting of DXP Enterprises, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).2013. The Company’s 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’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’sCompany's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audit also included 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’scompany'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’scompany's internal control over financial reporting includes those policies and procedures that (1)(a) 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)(b) 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)(c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany'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 the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment:
Ineffective control environment and monitoring to support the financial reporting process.
The Company's control environment did not sufficiently promote effective internal control over financial reporting; specifically, the following factors relating to the control environment:
The Company did not effectively design and implement appropriate oversight controls over the period-end process of determining the accounting for income taxes, and the review controls were not sufficient to ensure that errors would be detected.
The Company did not maintain effective management review controls over the monitoring and review of certain accounts, thus we were not able properly conclude these account reconciliations and analyses were performed at an appropriate level of detail.
The Company did not design and maintain effective controls to provide reasonable assurance over the accuracy and completeness relating to:
| · | Recognizing revenue in the proper period; |
| · | Maintaining adequate documentation to support proper revenue recognition; |
| · | Capturing and accounting for all fixed price contracts; |
| · | Obtaining proper approvals for contract change orders; |
| · | Documenting approval of management bonuses in a timely manner; |
| · | Improperly recording fixed assets disposals to cost of sales; |
| · | Improper recording of valuation accounts in purchase accounting; |
| · | Obtaining proper approvals for freight invoices; |
| · | Accounting for fully amortized intangible assets; |
| · | Improperly recording operating leases on a method other than straight line recognition; and |
| · | Improper access to payroll records. |
Ineffective Information Technology General Controls (“ITGC”).
The Company did not maintain effective ITGC, which are required to support automated controls and information technology (“IT”) functionality; therefore, automated controls and IT functionality were deemed ineffective for the same period under audit.
Ineffective internal control activities to support the financial reporting process and failure to maintain adequate evidence of control operations.
The Company did not effectively design, document nor monitor (review, evaluate and assess) the risks associated with the key internal control activities that provide the accounting information contained in the Company’s financial statements.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated March 31, 2017 on those financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2015,2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standardsCommittee of Sponsoring Organizations of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2015, and our report dated February 29, 2016 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
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 sheet of DXP Enterprises, Inc. and Subsidiaries as of December 31, 2013, and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the year ended December 31,Treadway Commission in 2013. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the 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 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 financial position of DXP Enterprises, Inc. and Subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements of DXP Enterprises, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report dated March 11, 2014,31, 2017 expressed an unqualified opinion on the effectiveness of DXP Enterprises, Inc.’s internal control over financial reporting.opinion.
/s/ Hein & Associates LLP
Houston, Texas
March 11, 2014
31, 2017
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| | December 31, 2015 | | | December 31, 2014 | | | December 31, 2016 | | | December 31, 2015 | |
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash | | $ | 1,693 | | | $ | 47 | | | $ | 1,590 | | | $ | 1,693 | |
Trade accounts receivable, net of allowances for doubtful accounts of $9,364 in 2015 and $8,713 in 2014 | | | 162,925 | | | | 239,236 | | |
Trade accounts receivable, net of allowances for doubtful accounts of $8,160 in 2016 and $9,364 in 2015 | | | | 148,919 | | | | 162,925 | |
Inventories | | | 103,819 | | | | 115,658 | | | | 83,699 | | | | 103,819 | |
Costs and estimated profits in excess of billings on uncompleted contracts | | | 22,045 | | | | 20,083 | | |
Costs and estimated profits in excess of billings on | | | | | | | | | |
uncompleted contracts | | | | 18,421 | | | | 22,045 | |
Prepaid expenses and other current assets | | | 2,644 | | | | 3,004 | | | | 2,138 | | | | 2,644 | |
Federal income taxes recoverable | | | 1,839 | | | | - | | | | 2,558 | | | | 1,839 | |
Deferred income taxes | | | 8,996 | | | | 8,250 | | | | 9,473 | | | | 8,996 | |
Total current assets | | | 303,961 | | | | 386,278 | | | | 266,798 | | | | 303,961 | |
Property and equipment, net | | | 68,503 | | | | 69,979 | | | | 60,807 | | | | 68,503 | |
Goodwill | | | 197,362 | | | | 253,312 | | | | 187,591 | | | | 197,362 | |
Other intangible assets, net of accumulated amortization of $87,594 in 2015 and $66,412 in 2014 | | | 112,297 | | | | 130,333 | | |
Other intangible assets, net of accumulated amortization of $70,027 in 2016 and $85,098 in 2015 | | | | 94,831 | | | | 112,297 | |
Other long-term assets | | | 1,857 | | | | 1,730 | | | | 1,498 | | | | 1,857 | |
Total assets | | $ | 683,980 | | | $ | 841,632 | | | $ | 611,525 | | | $ | 683,980 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 50,829 | | | $ | 38,608 | | | $ | 51,354 | | | $ | 50,829 | |
Trade accounts payable | | | 77,108 | | | | 100,774 | | | | 78,698 | | | | 77,108 | |
Accrued wages and benefits | | | 20,864 | | | | 26,967 | | | | 16,962 | | | | 20,864 | |
Federal income taxes payable | | | - | | | | 8,130 | | |
Customer advances | | | 1,076 | | | | 4,262 | | | | 2,441 | | | | 1,076 | |
Billings in excess of costs and profits on uncompleted contracts | | | 8,021 | | | | 8,840 | | |
Billings in excess of costs and estimated profits on uncompleted contracts | | | | 2,813 | | | | 8,021 | |
Other current liabilities | | | 22,220 | | | | 19,621 | | | | 14,391 | | | | 22,220 | |
Total current liabilities | | | 180,118 | | | | 207,202 | | | | 166,659 | | | | 180,118 | |
Long-term debt, less current maturities | | | 300,726 | | | | 372,908 | | | | 174,323 | | | | 300,726 | |
Less unamortized debt issuance costs | | | (2,046 | ) | | | (2,714 | ) | | | (992 | ) | | | (2,046 | ) |
Long-term debt less unamortized debt issuance costs | | | 298,680 | | | | 370,194 | | | | 173,331 | | | | 298,680 | |
Non-current deferred income taxes | | | 6,312 | | | | 21,284 | | | | 18,986 | | | | 6,312 | |
Commitments and Contingencies (Notes 13) | | | | | | | | | |
Commitments and Contingencies (Notes 14) | | | | | | | | | |
Shareholders’ equity: | | | | | | | | | | | | | | | | |
Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share ($112 at December 31, 2015 and 2014); 1,000,000 shares authorized; 1,122 shares issued and outstanding | | | 1 | | | | 1 | | |
Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share ($1,500 at December 31, 2015 and 2014); 1,000,000 shares authorized; 15,000 shares issued and outstanding | | | 15 | | | | 15 | | |
Common stock, $0.01 par value, 100,000,000 shares authorized; 14,655,356 in 2015 and 14,655,356 in 2014 shares issued | | | 146 | | | | 146 | | |
Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share ($112 at December 31, 2016 and 2015); 1,000,000 shares authorized; 1,122 shares issued and outstanding | | | | 1 | | | | 1 | |
Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $100 per share ($1,500 at December 31, 2016 and 2015); 1,000,000 shares authorized; 15,000 shares issued and outstanding | | | | 15 | | | | 15 | |
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,197,380 in 2016 and 14,655,356 in 2015 shares issued | | | | 172 | | | | 146 | |
Additional paid-in capital | | | 110,306 | | | | 115,605 | | | | 152,313 | | | | 110,306 | |
Retained earnings | | | 109,783 | | | | 148,409 | | | | 117,396 | | | | 109,783 | |
Accumulated other comprehensive (loss) income | | | (10,616 | ) | | | (5,700 | ) | |
Treasury stock, at cost (264,297 shares at December 31, 2015 and 280,195 shares at December 31, 2014) | | | (12,577 | ) | | | (15,524 | ) | |
Accumulated other comprehensive loss | | | | (18,274 | ) | | | (10,616 | ) |
Treasury stock, at cost (zero shares at December 31, 2016 and 264,297 shares at December 31, 2015) | | | | - | | | | (12,577 | ) |
Total DXP Enterprises, Inc. shareholders’ equity | | | 197,058 | | | | 242,952 | | | | 251,623 | | | | 197,058 | |
Noncontrolling interest | | | 1,812 | | | | - | | | | 926 | | | | 1,812 | |
Total shareholders’ equity | | $ | 198,870 | | | $ | 242,952 | | | $ | 252,549 | | | $ | 198,870 | |
Total liabilities and shareholders’ equity | | $ | 683,980 | | | $ | 841,632 | | | $ | 611,525 | | | $ | 683,980 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
| | Years Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | |
| | | | | | | | | |
Sales | | $ | 1,247,043 | | | $ | 1,499,662 | | | $ | 1,241,510 | |
Cost of sales | | | 895,057 | | | | 1,066,822 | | | | 869,165 | |
Gross profit | | | 351,986 | | | | 432,840 | | | | 372,345 | |
Selling, general and administrative expense | | | 303,819 | | | | 327,899 | | | | 271,421 | |
Impairment expense | | | 68,735 | | | | 117,569 | | | | - | |
B27 settlement | | | 7,348 | | | | - | | | | - | |
Operating income (loss) | | | (27,916 | ) | | | (12,628 | ) | | | 100,924 | |
Other expense (income), net | | | 72 | | | | 131 | | | | (75 | ) |
Interest expense | | | 10,932 | | | | 12,797 | | | | 6,282 | |
Income (loss) before income taxes | | | (38,920 | ) | | | (25,556 | ) | | | 94,717 | |
Provision for income taxes | | | 150 | | | | 19,682 | | | | 34,480 | |
Net income (loss) | | | (39,070 | ) | | | (45,238 | ) | | | 60,237 | |
Net income (loss) attributable to noncontrolling interest | | | (534 | ) | | | - | | | | - | |
Net income (loss) attributable to DXP Enterprises, Inc. | | | (38,536 | ) | | | (45,238 | ) | | | 60,237 | |
Preferred stock dividend | | | 90 | | | | 90 | | | | 90 | |
Net income (loss) attributable to common shareholders | | $ | (38,626 | ) | | $ | (45,328 | ) | | $ | 60,147 | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (39,070 | ) | | $ | (45,238 | ) | | $ | 60,237 | |
(Loss) gain on long-term investment, net of income taxes | | | - | | | | (55 | ) | | | (387 | ) |
Cumulative translation adjustment, net of income taxes | | | (4,916 | ) | | | (3,277 | ) | | | (3,040 | ) |
Comprehensive income (loss) | | $ | (43,986 | ) | | $ | (48,570 | ) | | $ | 56,810 | |
| | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | (2.68 | ) | | $ | (3.10 | ) | | $ | 4.17 | |
Weighted average common shares outstanding | | | 14,423 | | | | 14,639 | | | | 14,439 | |
Diluted earnings (loss) per share | | $ | (2.68 | ) | | $ | (3.10 | ) | | $ | 3.94 | |
Weighted average common shares and common equivalent shares outstanding | | | 14,423 | | | | 14,639 | | | | 15,279 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2015, 2014 and 2013
(in thousands, except share amounts)
| | Series A Preferred Stock | | | Series B Preferred Stock | | | Common Stock | | | Paid-In Capital | | | Retained Earnings | | | Treasury Stock | | | NCI | | | AOCI | | | Total | |
BALANCES AT DECEMBER 31, 2012 | | $ | 1 | | | $ | 15 | | | $ | 141 | | | $ | 78,554 | | | $ | 133,590 | | | $ | (4,867 | ) | | $ | - | | | $ | 1,059 | | | $ | 208,493 | |
Dividends paid | | | - | | | | - | | | | - | | | | - | | | | (90 | ) | | | - | | | | - | | | | - | | | | (90 | ) |
Issuance of common stock | | | | | | | | | | | 2 | | | | 24,356 | | | | | | | | | | | | | | | | | | | | 24,358 | |
Compensation expense for restricted stock | | | - | | | | - | | | | - | | | | 2,832 | | | | - | | | | - | | | | - | | | | - | | | | 2,832 | |
Net loss on long-term investment for comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (387 | ) | | | (387 | ) |
Issuance of 52,542 shares in connection with an acquisition | | | - | | | | - | | | | 1 | | | | 3,517 | | | | - | | | | - | | | | - | | | | - | | | | 3,518 | |
Vesting of restricted stock for 67,021 shares of common stock | | | - | | | | - | | | | - | | | | 633 | | | | - | | | | - | | | | - | | | | - | | | | 633 | |
Acquisition of 5,400 shares of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (304 | ) | | | - | | | | - | | | | (304 | ) |
Cumulative translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,040 | ) | | | (3,040 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | 60,237 | | | | - | | | | - | | | | - | | | | 60,237 | |
BALANCES AT DECEMBER 31, 2013 | | $ | 1 | | | $ | 15 | | | $ | 144 | | | $ | 109,892 | | | $ | 193,737 | | | $ | (5,171 | ) | | $ | - | | | $ | (2,368 | ) | | $ | 296,250 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends paid | | | - | | | | - | | | | - | | | | - | | | | (90 | ) | | | - | | | | - | | | | - | | | | (90 | ) |
Compensation expense for restricted stock | | | - | | | | - | | | | - | | | | 3,560 | | | | - | | | | - | | | | - | | | | - | | | | 3,560 | |
Net loss on sale of long-term investment for comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (55 | ) | | | (55 | ) |
Issuance of 36,000 shares in connection with an acquisition | | | - | | | | - | | | | 2 | | | | 4,031 | | | | - | | | | - | | | | - | | | | - | | | | 4,033 | |
Vesting of restricted stock for 69,675 shares of common stock | | | - | | | | - | | | | - | | | | (376 | ) | | | - | | | | - | | | | - | | | | - | | | | (376 | ) |
Acquisition of 200,000 shares of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11,855 | ) | | | - | | | | - | | | | (11,855 | ) |
Issuance of 66,676 treasury shares for vesting of restricted stock | | | - | | | | - | | | | - | | | | (1,502 | ) | | | - | | | | 1,502 | | | | - | | | | | | | | - | |
Cumulative translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,277 | ) | | | (3,277 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (45,238 | ) | | | - | | | | - | | | | - | | | | (45,238 | ) |
BALANCES AT DECEMBER 31, 2014 | | $ | 1 | | | $ | 15 | | | $ | 146 | | | $ | 115,605 | | | $ | 148,409 | | | $ | (15,524 | ) | | $ | - | | | $ | (5,700 | ) | | $ | 242,952 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends paid | | | - | | | | - | | | | - | | | | - | | | | (90 | ) | | | - | | | | - | | | | - | | | | (90 | ) |
Compensation expense for restricted stock | | | - | | | | - | | | | - | | | | 2,973 | | | | - | | | | - | | | | - | | | | - | | | | 2,973 | |
Issuance of 148,769 treasury shares in connection with an acquisition | | | - | | | | - | | | | - | | | | (4,825 | ) | | | - | | | | 9,223 | | | | - | | | | - | | | | 4,398 | |
Acquisition of 191,420 shares of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,908 | ) | | | - | | | | - | | | | (8,908 | ) |
Issuance of 57,401 treasury shares upon vesting of restricted stock | | | - | | | | - | | | | - | | | | (3,447 | ) | | | - | | | | 2,632 | | | | - | | | | - | | | | (815 | ) |
Noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,346 | | | | | | | | 2,346 | |
Cumulative translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4,916 | ) | | | (4,916 | ) |
Net income (loss) | | | - | | | | - | | | | - | | | | - | | | | (38,536 | ) | | | - | | | | (534 | ) | | | - | | | | (39,070 | ) |
BALANCES AT DECEMBER 31, 2015 | | $ | 1 | | | $ | 15 | | | $ | 146 | | | $ | 110,306 | | | $ | 109,783 | | | $ | (12,577 | ) | | $ | 1,812 | | | $ | (10,616 | ) | | $ | 198,870 | |
| | Years Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | |
| | | | | | | | | |
Sales | | $ | 962,092 | | | $ | 1,247,043 | | | $ | 1,499,662 | |
Cost of sales | | | 697,290 | | | | 895,057 | | | | 1,066,822 | |
Gross profit | | | 264,802 | | | | 351,986 | | | | 432,840 | |
Selling, general and administrative expense | | | 245,470 | | | | 303,819 | | | | 327,899 | |
Impairment expense | | | - | | | | 68,735 | | | | 117,569 | |
B27 settlement | | | - | | | | 7,348 | | | | - | |
Operating income (loss) | | | 19,332 | | | | (27,916 | ) | | | (12,628 | ) |
Other expense (income), net | | | (5,906 | ) | | | 72 | | | | 131 | |
Interest expense | | | 15,564 | | | | 10,932 | | | | 12,797 | |
Income (loss) before income taxes | | | 9,674 | | | | (38,920 | ) | | | (25,556 | ) |
Provision for income taxes | | | 2,523 | | | | 150 | | | | 19,682 | |
Net income (loss) | | | 7,151 | | | | (39,070 | ) | | | (45,238 | ) |
Net loss attributable to noncontrolling interest | | | (551 | ) | | | (534 | ) | | | - | |
Net income (loss) attributable to DXP Enterprises, Inc. | | | 7,702 | | | | (38,536 | ) | | | (45,238 | ) |
Preferred stock dividend | | | 90 | | | | 90 | | | | 90 | |
Net income (loss) attributable to common shareholders | | $ | 7,612 | | | $ | (38,626 | ) | | $ | (45,328 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | 7,151 | | | $ | (39,070 | ) | | $ | (45,238 | ) |
Loss on long-term investment, net of income taxes | | | - | | | | - | | | | (55 | ) |
Cumulative translation adjustment, net of income taxes | | | (7,658 | ) | | | (4,916 | ) | | | (3,277 | ) |
Comprehensive loss | | $ | (507 | ) | | $ | (43,986 | ) | | $ | (48,570 | ) |
| | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | 0.51 | | | $ | (2.68 | ) | | $ | (3.10 | ) |
Weighted average common shares outstanding | | | 15,042 | | | | 14,423 | | | | 14,639 | |
Diluted earnings (loss) per share | | $ | 0.49 | | | $ | (2.68 | ) | | $ | (3.10 | ) |
Weighted average common shares and common equivalent shares outstanding | | | 15,882 | | | | 14,423 | | | | 14,639 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2016, 2015 and 2014
(in thousands, except share amounts)
| | Series A Preferred Stock | | | Series B Preferred Stock | | | Common Stock | | | Paid-In Capital | | | Retained Earnings | | | Treasury Stock | | | | | | | | | Total | |
BALANCES AT JANUARY 1, 2014 | | $ | 1 | | | $ | 15 | | | $ | 144 | | | $ | 109,892 | | | $ | 193,737 | | | $ | (5,171 | ) | | $ | - | | | $ | (2,368 | ) | | $ | 296,250 | |
Dividends paid | | | - | | | | - | | | | - | | | | - | | | | (90 | ) | | | - | | | | - | | | | - | | | | (90 | ) |
Compensation expense for restricted stock | | | - | | | | - | | | | - | | | | 3,560 | | | | - | | | | - | | | | - | | | | - | | | | 3,560 | |
Net loss on sale of long-term investment for comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (55 | ) | | | (55 | ) |
Issuance of 36,000 shares in connection with an acquisition | | | - | | | | - | | | | 2 | | | | 4,031 | | | | - | | | | - | | | | - | | | | - | | | | 4,033 | |
Vesting of restricted stock for 69,675 shares of common stock | | | - | | | | - | | | | - | | | | (376 | ) | | | - | | | | - | | | | - | | | | - | | | | (376 | ) |
Acquisition of 200,000 shares of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11,855 | ) | | | - | | | | - | | | | (11,855 | ) |
Issuance of 66,676 treasury shares for vesting of restricted stock | | | - | | | | - | | | | - | | | | (1,502 | ) | | | - | | | | 1,502 | | | | - | | | | - | | | | - | |
Cumulative translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,277 | ) | | | (3,277 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (45,238 | ) | | | - | | | | - | | | | - | | | | (45,238 | ) |
BALANCES AT DECEMBER 31, 2014 | | $ | 1 | | | $ | 15 | | | $ | 146 | | | $ | 115,605 | | | $ | 148,409 | | | $ | (15,524 | ) | | $ | - | | | $ | (5,700 | ) | | $ | 242,952 | |
Dividends paid | | | - | | | | - | | | | - | | | | - | | | | (90 | ) | | | - | | | | - | | | | - | | | | (90 | ) |
Compensation expense for restricted stock | | | - | | | | - | | | | - | | | | 2,973 | | | | - | | | | - | | | | - | | | | - | | | | 2,973 | |
Issuance of 148,769 treasury shares in connection with an acquisition | | | - | | | | - | | | | - | | | | (4,825 | ) | | | - | | | | 9,223 | | | | - | | | | - | | | | 4,398 | |
Acquisition of 191,420 shares of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,908 | ) | | | - | | | | - | | | | (8,908 | ) |
Issuance of 57,401 treasury shares upon vesting of restricted stock | | | - | | | | - | | | | - | | | | (3,447 | ) | | | - | | | | 2,632 | | | | - | | | | - | | | | (815 | ) |
Noncontrolling interest holder contributions, net of tax benefits | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,346 | | | | - | | | | 2,346 | |
Cumulative translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4,916 | ) | | | (4,916 | ) |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (38,536 | ) | | | - | | | | (534 | ) | | | - | | | | (39,070 | ) |
BALANCES AT DECEMBER 31, 2015 | | $ | 1 | | | $ | 15 | | | $ | 146 | | | $ | 110,306 | | | $ | 109,783 | | | $ | (12,577 | ) | | $ | 1,812 | | | $ | (10,616 | ) | | $ | 198,870 | |
Dividends paid | | | - | | | | - | | | | - | | | | - | | | | (90 | ) | | | - | | | | - | | | | - | | | | (90 | ) |
Compensation expense for restricted stock | | | - | | | | - | | | | - | | | | 1,172 | | | | - | | | | - | | | | - | | | | - | | | | 1,172 | |
Issuance of 2,722,858 shares of Common stock | | | - | | | | - | | | | 27 | | | | 51,862 | | | | - | | | | - | | | | - | | | | - | | | | 51,889 | |
Issuance of 264,297 treasury shares | | | - | | | | - | | | | - | | | | (12,577 | ) | | | - | | | | 12,577 | | | | - | | | | - | | | | - | |
Noncontrolling interest holder contributions, net of tax benefits | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (335 | ) | | | - | | | | (335 | ) |
Stock compensation expense | | | - | | | | - | | | | - | | | | 1,550 | | | | - | | | | - | | | | - | | | | - | | | | 1,550 | |
Cumulative translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7,658 | ) | | | (7,658 | ) |
Net income (loss) | | | - | | | | - | | | | - | | | | - | | | | 7,702 | | | | - | | | | (551 | ) | | | - | | | | 7,151 | |
BALANCES AT DECEMBER 31, 2016 | | $ | 1 | | | $ | 15 | | | $ | 173 | | | $ | 152,313 | | | $ | 117,395 | | | $ | - | | | $ | 926 | | | $ | (18,274 | ) | | $ | 252,549 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2015 | | | 2014 | | | 2013 | | | 2016 | | | 2015 | | | 2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Net income (loss) attributable to DXP Enterprises, Inc. | | $ | (38,536 | ) | | $ | (45,238 | ) | | $ | 60,237 | | | $ | 7,702 | | | $ | (38,536 | ) | | $ | (45,238 | ) |
Less net income (loss) attributable to noncontrolling interest | | | (534 | ) | | | - | | | | - | | |
Less net loss attributable to noncontrolling interest | | | | (551 | ) | | | (534 | ) | | | - | |
Net income (loss) | | | (39,070 | ) | | | (45,238 | ) | | | 60,237 | | | | 7,151 | | | | (39,070 | ) | | | (45,238 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 12,622 | | | | 12,598 | | | | 9,830 | | | | 11,933 | | | | 12,622 | | | | 12,598 | |
Amortization of intangible assets | | | 20,621 | | | | 22,480 | | | | 11,830 | | | | 18,061 | | | | 20,621 | | | | 22,480 | |
Impairment of goodwill | | | 68,735 | | | | 117,569 | | | | - | | | | - | | | | 68,735 | | | | 117,569 | |
Bad debt expense | | | 2,014 | | | | 2,365 | | | | 2,018 | | | | 180 | | | | 2,014 | | | | 2,365 | |
Amortization of debt issuance costs | | | 1,211 | | | | 1,157 | | | | 793 | | | | 1,856 | | | | 1,211 | | | | 1,157 | |
Gain on reversal of earn-out | | | - | | | | - | | | | (2,805 | ) | |
Compensation expense for restricted stock | | | 2,973 | | | | 3,560 | | | | 2,832 | | |
Tax benefit related to vesting of restricted stock | | | - | | | | (960 | ) | | | (958 | ) | |
Gain on sale of subsidiary | | | | (5,635 | ) | | | - | | | | - | |
Stock compensation expense | | | | 3,580 | | | | 2,973 | | | | 3,560 | |
Tax (benefit) loss related to vesting of restricted stock | | | | 619 | | | | - | | | | (960 | ) |
Deferred income taxes | | | (9,024 | ) | | | (12,122 | ) | | | 2,834 | | | | 2,687 | | | | (9,024 | ) | | | (12,122 | ) |
Changes in operating assets and liabilities, net of assets and liabilities acquired in business acquisitions: | | | | | | | | | | | | | | | | | | | | | | | | |
Trade accounts receivable | | | 71,261 | | | | (14,002 | ) | | | (6,683 | ) | | | 12,080 | | | | 71,261 | | | | (14,002 | ) |
Cost in excess of billings on uncompleted contracts | | | (2,047 | ) | | | (405 | ) | | | 2,857 | | | | 3,457 | | | | (2,047 | ) | | | (405 | ) |
Inventories | | | 12,724 | | | | (1,913 | ) | | | 3,860 | | | | 5,453 | | | | 12,724 | | | | (1,913 | ) |
Prepaid expenses and other assets | | | 159 | | | | 1,948 | | | | 1,422 | | | | 620 | | | | 159 | | | | 1,948 | |
Accounts payable and accrued expenses | | | (43,677 | ) | | | 11,099 | | | | (6,380 | ) | | | (8,833 | ) | | | (43,677 | ) | | | 11,099 | |
Billings in excess of costs on uncompleted contracts | | | (513 | ) | | | 2,359 | | | | 511 | | |
Billings in excess of costs & estimated profits on uncompleted contracts | | | | (5,203 | ) | | | (513 | ) | | | 2,359 | |
Net cash provided by operating activities | | | 97,989 | | | | 100,495 | | | | 82,198 | | | | 48,006 | | | | 97,989 | | | | 100,495 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (13,992 | ) | | | (11,104 | ) | | | (7,745 | ) | | | (4,868 | ) | | | (13,992 | ) | | | (11,104 | ) |
Proceeds from the sale of fixed assets | | | | 1,206 | | | | - | | | | - | |
Proceeds from sale of subsidiary | | | | 31,476 | | | | - | | | | - | |
Sale of investments | | | - | | | | 1,688 | | | | (68 | ) | | | - | | | | - | | | | 1,688 | |
Acquisitions of businesses, net of cash acquired | | | (15,501 | ) | | | (300,844 | ) | | | (61,195 | ) | | | - | | | | (15,501 | ) | | | (300,844 | ) |
Net cash used in investing activities | | | (29,493 | ) | | | (310,260 | ) | | | (69,008 | ) | |
Net cash provided by (used in) investing activities | | | | 27,814 | | | | (29,493 | ) | | | (310,260 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from debt | | | 393,551 | | | | 744,050 | | | | 458,446 | | | | 517,689 | | | | 393,551 | | | | 744,050 | |
Principal payments on revolving line of credit and other long-term debt | | | (453,480 | ) | | | (527,030 | ) | | | (501,990 | ) | | | (643,568 | ) | | | (453,480 | ) | | | (527,030 | ) |
Debt issuance fees | | | (543 | ) | | | (1,823 | ) | | | - | | | | (801 | ) | | | (543 | ) | | | (1,823 | ) |
Contributions from noncontrolling interest holders, net of losses | | | 2,346 | | | | - | | | | - | | |
Noncontrolling interest holder contributions, net of tax benefits | | | | (335 | ) | | | 2,346 | | | | - | |
Preferred dividends paid | | | (90 | ) | | | (90 | ) | | | (90 | ) | | | (90 | ) | | | (90 | ) | | | (90 | ) |
Purchase of treasury stock | | | (8,908 | ) | | | (11,855 | ) | | | (304 | ) | | | - | | | | (8,908 | ) | | | (11,855 | ) |
Proceeds from issuance of common shares, net | | | - | | | | - | | | | 24,358 | | | | 51,889 | | | | - | | | | - | |
Tax benefit related to vesting of restricted stock | | | - | | | | 960 | | | | 958 | | |
Tax (loss) benefit related to vesting of restricted stock | | | | (619 | ) | | | - | | | | 960 | |
Net cash provided by (used in) financing activities | | | (67,124 | ) | | | 204,212 | | | | (18,622 | ) | | | (75,835 | ) | | | (67,124 | ) | | | 204,212 | |
EFFECT OF FOREIGN CURRENCY ON CASH | | | 274 | | | | 131 | | | | 446 | | | | (88 | ) | | | 274 | | | | 131 | |
(DECREASE) INCREASE IN CASH | | | 1,646 | | | | (5,422 | ) | | | (4,986 | ) | | | (103 | ) | | | 1,646 | | | | (5,422 | ) |
CASH AT BEGINNING OF YEAR | | | 47 | | | | 5,469 | | | | 10,455 | | | | 1,693 | | | | 47 | | | | 5,469 | |
CASH AT END OF YEAR | | $ | 1,693 | | | $ | 47 | | | $ | 5,469 | | | $ | 1,590 | | | $ | 1,693 | | | $ | 47 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for Interest | | $ | 9,721 | | | $ | 11,641 | | | $ | 5,489 | | | $ | 13,708 | | | $ | 9,721 | | | $ | 11,641 | |
Cash paid for Income Taxes | | $ | 13,792 | | | $ | 28,784 | | | $ | 35,697 | | | $ | 4,780 | | | $ | 13,792 | | | $ | 28,784 | |
Purchases of businesses in 2013 exclude $3.6 million in common stock in connection with an acquisition. Purchases of businesses in 2014 exclude $4.0 million in common stock issued in connection with an acquisition. Purchases of businesses in 2015 exclude $4.4 million in common stock issued in connection with an acquisition.
The accompanying notes are an integral part of these consolidated financial statements.