| NAME | AGE | |||
| David R. Little | 68 | Chairman of the Board, President and Chief Executive Officer | ||
| Kent Yee | 44 | Senior Vice President/Chief Financial Officer | ||
| Gene Padgett | 49 | Senior Vice President/ | ||
| David C. Vinson | 69 | Senior Vice President/Innovative Pumping Solutions | ||
| John J. Jeffery | 52 | Senior Vice President/Supply Chain Services | ||
| Todd Hamlin | 48 | Senior Vice President/Service Centers | ||
| Chris Gregory | 45 | Senior Vice President/Information Technology | ||
David R. Little. Mr. Little has served as Chairman of the Board, President and Chief Executive Officer of DXP since its organization in 1996 and also has held these positions with SEPCO Industries, Inc., predecessor to the Company (“SEPCO”), since he acquired a controlling interest in SEPCO in 1986. Mr. Little has been employed by SEPCO since 1975 in various capacities, including Staff Accountant, Controller, Vice President/Finance and President. Mr. Little gives our Board insight and in-depth knowledge of our industry and our specific operations and strategies. He also provides leadership skills and knowledge of our local community and business environment, which he has gained through his long career with DXP and its predecessor companies.
Kent Yee. Mr. Yee was appointed Senior Vice President/Chief Financial Officer in June 2017. Currently, Mr. Yee is responsible for acquisitions, finance, accounting and human resources of DXP. From March 2011 to June 2017, Mr. Yee served as Senior Vice President Corporate Development and led DXP's mergers and acquisitions, business integration and internal strategic project activities. During March 2011, Mr. Yee joined DXP from Stephens Inc.'s Industrial Distribution and Services team where he served in various positions and most recently as Vice President from August 2005 to February 2011. Prior to Stephens, Mr. Yee was a member of The Home Depot’s Strategic Business Development Group with a primary focus on acquisition activity for HD Supply. Mr. Yee was also an Associate in the Global Syndicated Finance Group at JPMorgan Chase. He has executed over 4344 transactions including more than $1.4$1.5 billion in M&A and $3.4 billion in financing transactions primarily for change of control deals and numerous industrial and distribution acquisition and sale assignments. He holds a Bachelors of Arts in Urban Planning from Morehouse College and an MBA from Harvard University Graduate School of Business.
David C. Vinson. Mr. Vinson was elected Senior Vice President/Innovative Pumping Solutions in January 2006. He served as Senior Vice President/Operations of DXP from October 2000 to December 2005. From 1996 until October 2000, Mr. Vinson served as Vice President/Traffic, Logistics and Inventory. Mr. Vinson has served in various capacities with DXP since his employment in 1981.
John J. Jeffery. Mr. Jeffery serves as Senior Vice President of Supply Chain Services, Marketing and Information Technology. He oversees the strategic direction for the Supply Chain Services business unit while leveraging both Marketing and Information Technology to drive innovative business development initiatives for organizational growth and visibility. He began his career with T.L. Walker, which was later acquired by DXP in 1991. During his tenure with DXP, Mr. Jeffery has served in various significant capacities including branch, area, regional and national sales management as well as sales, marketing and Service Center vice president roles. He holds a Bachelor of Science in Industrial Distribution from Texas A&M University and is also a graduate of the Executive Business Program at Rice University.
Todd Hamlin. Mr. Hamlin was elected Senior Vice President of DXP Service Centers in June of 2010. Mr. Hamlin joined the Company in 1995. From February 2006 until June 2010 he served as Regional Vice President of the Gulf Coast Region. Prior to serving as Regional Vice President of the Gulf Coast Region he served in various capacities, including application engineer, product specialist and sales representative. From April 2005 through February 2006, Mr. Hamlin worked as a sales manager for the UPS Supply Chain Services division of United Parcel Service, Inc. He holds a Bachelor’s of Science in Industrial Distribution from Texas A&M University and a Master in Distribution from Texas A&M University. Mr. Hamlin serves on the Advisory Board for Texas A&M’s Master in Distribution degree program. In 2014, Mr. Hamlin was elected to the Bearing Specialists Association’s Board of Directors.
Chris Gregory. Mr. Gregory was elected Senior Vice President and Chief Information Officer in March of 2018. Mr. Gregory joined the Company in August 2006. From December 2014 until January 2018 he served as Vice President of IT Strategic Solutions. Prior to serving as Vice President of IT Strategic Solutions he served in various roles, including application developer, database manager as well as leading the business intelligence and application development departments. He holds a Bachelor of Business Administration and Computer Information Systems from the University of Houston and an MBA from The University of Texas at Austin, McCombs School of Business.
All officers of DXP hold office until the regular meeting of the board of directors following the Annual Meeting of Shareholders or until their respective successors are duly elected and qualified or their earlier resignation or removal.
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Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), are available free of charge through our Internet website (www.dxpe.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with SEC at http://www.sec.gov. Additionally, we make the following available free of charge through our Internet website ir.dxpe.com:
| DXP Code of Ethics for Senior Financial Officers; |
| DXP Code of Conduct; |
| Compensation Committee Charter; |
| Nominating and Governance Committee Charter; and |
| Audit Committee Charter |
ITEM 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. Investing in DXP involves risk. In deciding whether to invest in DXP, you should carefully consider the risk factors below as well as those matters referenced in the foregoing pages under “Disclosure Regarding Forward-Looking Statements” and other information included and incorporated by reference into this Report and other reports and materials filed by us with the Securities and Exchange Commission. Any of these risk factors could have a significant or material adverse effect on our businesses, results of operations, financial condition or liquidity. They could also cause significant fluctuations and volatility in the trading price of our securities. Readers should not consider any descriptions of these factors to be a complete set of all potential risks that could affect DXP. Further, many of these risks are interrelated and could occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effects of others. Such a combination could materially increase the severity of the impact of these risks on our results of operations, liquidity and financial condition.
Decreased capital expenditures in the energy industry can adversely impact our customers’ demand for our products and services.
A significant portion of our revenue depends upon the level of capital and operating expenditures in the oil and natural gas industry, including capital expenditures in connection with the upstream, midstream, and downstream phases in the energy industry. Therefore, a significant decline in oil or natural gas prices could lead to a decrease in our customers’ capital and other expenditures and could adversely affect our revenues.
Demand for our products could decrease if the manufacturers of those products sell them directly to end users.
Typically, MRO products have been purchased through distributors and not directly from the manufacturers of those products. If customers were to purchase our products directly from manufacturers, or if manufacturers sought to increase their efforts to sell directly to end users, we could experience a significant decrease in sales and earnings.
Changes in our customer and product mix, or adverse changes to the cost of goods we sell, could cause our gross margin percentage to fluctuate or decrease, and we may not be able to maintain historical margins.
Changes in our customer mix have resulted from geographic expansion, daily selling activities within current geographic markets, and targeted selling activities to new customers. Changes in our product mix have resulted from marketing activities to existing customers and needs communicated to us from existing and prospective customers. There can be no assurance that we will be able to maintain our historical gross margins. In addition, we may also be subject to price increases from vendors that we may not be able to pass along to our customers.
Our manufacturers may cancel our oral or written distribution authorizations upon little or no notice, which could adversely impact our revenues and profits from distributing certain manufacturer’s products.
We are authorized to distribute certain manufacturers’ products in specific geographic areas and all of our oral or written distribution authorizations are subject to cancellation by the manufacturer, some upon little or no notice. If certain manufacturers cancel the distribution authorizations they granted to us, our distribution of their products could be disrupted and such occurrence could have a material adverse effect on our results of operations and financial conditions.
A 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 facilities, including the Secured Leverage Ratio and Fixed Charge Coverage Ratio financial covenants.
A deterioration of the oil and gas sector or other circumstances that reduce our earnings may hinder our ability to comply with certain financial covenants under our credit facilities. Specifically, compliance with the Secured Leverage Ratio and Fixed Charge Coverage Ratio covenants depend on our ability to maintain net income and prevent losses. In the future we may not be able to comply with the covenants and, if we are not able to do so, our lenders may not be willing to waive such non-compliance or 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 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.
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.
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.
Pandemic or other public health crisis could result in disruptions in supply chain, decreased customer demand, lower oil price and volatility in the stock market and the global economy, which could negatively impact our operations.
Pandemic or other public health crisis occurring at our or our vendors’ facilities could adversely impact or disrupt our operations, negatively affect the local economies where we operate and these types of events could negatively impact our customers’ spending in the impacted regions or depending upon the severity, globally, which could adversely impact our business, reputation, results of operations or financial conditions. For example, since December 2019, a strain of 2019 Novel Coronavirus (“COVID-19”) has surfaced from China and has spread into several regions globally, resulting in certain supply chain disruptions, volatilities in the stock market, lower oil prices, lockdown in international travels, which could adversely impact the global economy and potential decreased demand from our customers. At this point, the extent to which the COVID-19 virus may impact our operation results is uncertain.
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
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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. 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.
We are subject to various government regulations.regulations, the cost of compliance of such regulations could increase our cost of conducting business and any violations of such regulations couldmaterially adversely affect our financial condition or results of operations.
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 (the “FCPA”), 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. Our employees, contractors or agents may violate laws and regulations despite our attempts to implement policies and procedures to comply with 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.growth and profitability.
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 which increases the likelihood that economic downturns would affect our business.
Tax changes could affect our effective tax rate and profitability.
Future results could be adversely affected by changes in the effective tax rate as a result of changes in our overall profitability and changes in the mix of earnings and losses in countries with differing statutory tax rates, changes in tax legislation, the valuation of deferred tax assets and liabilities, the results of the examination of previously filed tax returns and continuing assessment of the Company's tax exposure.
Risks Associated With Conducting Businessassociated with conducting business in Foreign Countriesforeign 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. We also have operations in Dubai, where the functional currency is dirham. 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,consolidated financial statements, increase or decrease, accordingly. Moreover, our international operations subject us to a variety of foreign laws and regulations, including without limitation, import and export requirements, the FCPA, U.S. and foreign tax laws, data privacy requirements, labor laws and anti-competition regulations. Our employees, contractors or agents may violate laws and
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regulations despite our attempts to implement policies and procedures to comply with such laws and regulations. Any such violations could individually or in the aggregate materially adversely affect our financial condition or results of operations.
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. We may not be successful in efforts to increase sales and product offerings to existing customers. 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 Strategyassociated 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 Relatedrelated to Acquisition Financingacquisition 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 existing credit agreements or equity or debt financings. Our current credit agreements with lenders contain certain restrictions that could adversely
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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.
Our credit facilities require 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 facilities, which could permit acceleration of the Company’s indebtedness under the credit facilities. The Company from time to time has been unable to comply with some of the financial covenants contained in previous credit facilities (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. In the future the Company may not 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 amend such covenants.
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. If such circumstance happens, our business, reputation, results of operations or financial condition could be adversely affected and our existing debt could be in default.
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, 2017,2019, our combined goodwill and intangible assets amounted to $266.1$246.6 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 2015 impairments of B27 goodwill.
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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. Our information systems are vulnerable to natural disasters, power losses, telecommunication failures and other problems despite the protection of our information systems through physical and software safeguards and remote processing capabilities. 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 Associatedassociated with Insuranceinsurance.
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, and/or manufacture, are subject to inherent risks that could result in personal injury, property damage, pollution, death 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 Associatedassociated with Cyber-Securitycyber-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. We may not be able to adequately insure against cyber risks.
The nature of our manufactured products carries the possibility of significant product liability and warranty claims, which could harm our business and future results
Customers use some of our products, in particular manufactured pumps and pump packages, in potentially harmful and high-risk applications that may in some instances can cause personal injury or loss of life and/or damage to property, equipment or the environment. In addition, our products are integral to the production process for some end-users, and a failure of our products could result in a business interruption of their operations. Although we maintain quality controls and procedures, our products may not be completely free from defects and/or malfunction or failure. We maintain various levels and types of insurance coverage that we believe are adequate and commensurate with normal industry practice for a company of our risk profile, relative size, and we further limit our liability by contract wherever possible. However, as described earlier, insurance may not be available or adequate to cover all potential liability. We could be named as a defendant in product liability or other lawsuits asserting potentially large claims if an accident occurs at a location where our equipment is installed or services have been or are being used.
ITEM 1B. Unresolved Staff Comments
None.
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ITEM 2. Properties
We own 8 seven of our facilities including our headquarters facility in Houston, Texas, which has approximately 48,000 square feet of office space. Thewhile the remainder of our facilities are leased. At December 31, 2017,2019, we had approximately 176155 facilities which contained 161141 services centers, 4 distribution centers and 1110 fabrication facilities.
At December 31, 2017,2019, the Service Centers segment operated out of 161 141 service center facilities. Of these facilities, 125112 were located in the U.S. in 3435 states, 3428 were located in 9nine 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 Texas, Montana Nebraska, and Texas.Nebraska. At December 31, 2017,2019, the Innovative Pumping Solutions segment operated out of 1110 fabrication facilities located in 4two states in the U.S. and two provinces in Canada. At December 31, 2017,2019, the Supply Chain Services segment operated supply chain installations in 6789 of our customers’ facilities in 2526 U.S. states.
states and one in Canada.At December 31, 2017,2019, our owned facilities ranged from 5,000 square feet to 48,00045,000 square feet in size. We leased facilities for terms generally ranging from one to fifteen years. The leased facilities ranged from approximately 570 square feet to 105,000 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.
ITEM 3. Legal Proceedings
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.
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PART II
ITEM 5. |
Our common stock trades on The NASDAQ Global Select Market under the stock ticker symbol "DXPE".
| High | Low | |||||||
| 2017 | ||||||||
| Fourth Quarter | $ | 32.44 | $ | 25.01 | ||||
| Third Quarter | $ | 35.62 | $ | 25.35 | ||||
| Second Quarter | $ | 41.67 | $ | 32.80 | ||||
| First Quarter | $ | 39.94 | �� | $ | 29.54 | |||
| 2016 | ||||||||
| Fourth Quarter | $ | 37.88 | $ | 19.75 | ||||
| Third Quarter | $ | 30.69 | $ | 15.07 | ||||
| Second Quarter | $ | 22.94 | $ | 12.78 | ||||
| First Quarter | $ | 21.91 | $ | 13.31 | ||||
On March 21, 2018,February 28, 2020, we had approximately registered 381367 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 credit facilities limit our ability to declare or pay cash dividends or other distributions on our capital stock. 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’s common stock to the NASDAQ Industrial Index and the NASDAQ Composite (US).a customized peer group of three companies that includes: NOW Inc., MRC Global Inc. and Applied Industrial Technologies Inc. The graph assumes that the value of the investment in DXP’s common stock and in each index was $100 at December 31, 20122014 and that all dividends were reinvested.
Investors are cautioned against drawing conclusions from the data contained in the graph below 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, 2017:2019:
| 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 | |||||||||||
| Equity compensation plans approved by shareholders | N/A | N/A | 144,250 | $ | 32.71 | 697,797 | (1) | |||||||||
| Equity compensation plans not approved by shareholders | N/A | N/A | N/A | N/A | N/A | |||||||||||
| Total | N/A | N/A | 144,250 | $ | 32.71 | 697,797 | (1) | |||||||||
(1)Represents shares of common stock authorized for issuance under the 2016 Omnibus Incentive Plan. | ||||||||||||||||
| 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 | |||||||||||||||
| Equity compensation plans approved by shareholders | N/A | N/A | 77,901 | $ | 30.36 | 401,223 | (1) | |||||||||||||
| Equity compensation plans not approved by shareholders | N/A | N/A | N/A | N/A | N/A | |||||||||||||||
| Total | N/A | N/A | 77,901 | $ | 30.36 | 401,223 | (1) | |||||||||||||
(1) Represents shares of common stock authorized for issuance under the 2016 Omnibus Incentive Plan. | ||||||||||||||||||||
Unregistered Shares
DXP issued 30,305 unregistered shares of DXP’s common stock as part of the consideration for the January 1, 2018 acquisition of ASI. The unregistered shares were issued otto the sellers of ASI.
We relied on Section 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.
Repurchases of Common Stock
During 2017, 20162019, 2018 and 20152017 the Company withheld 30,500, 12,5077,760, 12,122 and 20,44030,500 shares, respectively, to satisfy tax withholding obligations in connection with vesting of employee equity awards.
ITEM 6. Selected Financial Data
The selected historical consolidated financial data set forth below for each of the years in the five-year period ended December 31, 20172019 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, | ||||||||||||||||||||
| 2017 | 2016 | 2015(2) | 2014(1) | 2013 | ||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||
| Consolidated Statement of Earnings Data: | ||||||||||||||||||||
| Sales | $ | 1,006,782 | $ | 962,092 | $ | 1,247,043 | $ | 1,499,662 | $ | 1,241,510 | ||||||||||
| Gross Profit | 271,581 | 264,802 | 351,986 | 432,840 | 372,345 | |||||||||||||||
| Impairment expense | - | - | 68,735 | 117,569 | - | |||||||||||||||
| B27 settlement | - | - | 7,348 | - | - | |||||||||||||||
| Operating income (loss) | 33,490 | 19,332 | (27,916 | ) | (12,628 | ) | 100,924 | |||||||||||||
| Income (loss) before income taxes | 16,892 | 9,674 | (38,920 | ) | (25,556 | ) | 94,717 | |||||||||||||
| Net income (loss) | 16,529 | 7,151 | (39,070 | ) | (45,238 | ) | 60,237 | |||||||||||||
| Net (loss) attributable to noncontrolling interest | (359 | ) | (551 | ) | (534 | ) | - | - | ||||||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | 16,888 | 7,702 | (38,536 | ) | (45,328 | ) | 60,237 | |||||||||||||
| Per share amounts | ||||||||||||||||||||
Basic earnings (loss) per common share(3) | 0.97 | 0.51 | $ | (2.68 | ) | $ | (3.10 | ) | $ | 4.17 | ||||||||||
Common shares outstanding(3) | 17,400 | 15,042 | 14,423 | 14,639 | 14,439 | |||||||||||||||
Diluted earnings (loss) per share(3) | 0.93 | 0.49 | $ | (2.68 | ) | $ | (3.10 | ) | $ | 3.94 | ||||||||||
Common and common equivalent shares Outstanding(3) | 18,240 | 15,882 | 14,423 | 14,639 | 15,279 | |||||||||||||||
19
| Years Ended December 31 | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015(1) | ||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||
| Consolidated Statements of Earnings Data: | ||||||||||||||||||
| Sales | $ | 1,267,189 | $ | 1,216,197 | $ | 1,006,782 | $ | 962,092 | $ | 1,247,043 | ||||||||
| Gross Profit | 347,224 | 332,208 | 271,581 | 264,802 | 351,986 | |||||||||||||
| Operating income (loss) | 66,122 | 68,451 | 33,490 | 19,332 | (27,916 | ) | ||||||||||||
| Net income (loss) | 35,775 | 35,521 | 16,529 | 7,151 | (39,070 | ) | ||||||||||||
| Net loss attributable to non-controlling interest | (260 | ) | (111 | ) | (359 | ) | (551 | ) | (534 | ) | ||||||||
| Net income (loss) attributable to DXP | $ | 36,035 | $ | 35,632 | $ | 16,888 | $ | 7,702 | $ | (38,536 | ) | |||||||
| Earnings per share: | ||||||||||||||||||
Basic earnings (loss)(2) | $ | 2.04 | $ | 2.02 | $ | 0.97 | $ | 0.51 | $ | (2.68 | ) | |||||||
Diluted earnings (loss)(2) | $ | 1.96 | $ | 1.94 | $ | 0.93 | $ | 0.49 | $ | (2.68 | ) | |||||||
(1)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.
diluted earnings per share.
| Years Ended December 31 | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash(1) | $ | 54,327 | $ | 40,519 | $ | 25,579 | $ | 1,590 | $ | 1,693 | |||||||||
Net Working Capital (2) | 208,483 | 205,201 | 170,892 | 140,430 | 166,667 | ||||||||||||||
| Total Assets | 788,220 | 699,962 | 639,083 | 602,052 | 674,984 | ||||||||||||||
| Long-term Debt Obligations | 241,875 | 245,309 | 248,716 | 174,323 | 300,726 | ||||||||||||||
| Total Shareholders’ Equity | $ | 344,948 | $ | 308,254 | $ | 268,546 | $ | 252,549 | $ | 198,870 | |||||||||
(2) Net Working Capital equals current assets minus current liabilities excluding cash and short-term debt
| Consolidated Balance Sheet Data: | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Total assets | $ | 639,083 | $ | 602,052 | $ | 683,980 | $ | 841,632 | $ | 636,615 | ||||||||||
| Long-term debt obligations | 248,716 | 174,323 | 300,726 | 372,908 | 168,372 | |||||||||||||||
| Shareholders’ equity | 268,546 | 252,549 | 198,870 | 242,952 | 296,250 | |||||||||||||||
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-LookingForward-looking Statements and Item 1A. Risk Factors.Factors.
General Overview
| Operating Environment Overview* | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Active Drilling Rigs** | ||||||||||||
| U.S | 944 | 1,032 | 875 | |||||||||
| Canada | 135 | 191 | 207 | |||||||||
| International | 1,098 | 988 | 948 | |||||||||
| Worldwide | 2,177 | 2,211 | 2,030 | |||||||||
| Gross Domestic Product (in billions) | $ | 21,429.0 | $ | 20,500.6 | $ | 19,485.4 | ||||||
| West Texas Intermediate ** (per barrel) | $ | 56.98 | $ | 65.23 | $ | 50.80 | ||||||
| Purchasing Managers Index | 47.2 | 54.3 | 59.3 | |||||||||
* The information contained in this table has been obtained from 2013. However, oil prices declined significantly during the second half of 2014. Our employee headcount increased 15.5% primarily as a result of the two acquisitions completed during the year. Salesthird party publicly available sources.
** Averages 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 2017, the growth rate of the general economy improved from 2016 and the rig count increased, but remained significantly below 2014 peaks. The energy market for our products improved. Sales for the year ended December 31, 2017 increased $44.7 million, or 4.6%, to approximately $1.0 billion from $962.1 million for the prior corresponding period. Sales from a business sold in 2016 accounted for $22.7 million of 2016 sales. Excluding the 2016 sales of the sold business, on a same store sales basis, sales for 2017 increased by $67.4 million, or 7.2% from the prior corresponding period. This same store sales increase is the result of sales increases in our Service Centers,SC, IPS and SCS segments of $42.9 million, $16.9 million and $7.5 million respectively. The majority of the 2017 sales increase is the result of increased sales of pumps, bearings, industrial supplies, metal working and safety services to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2018, the growth rate of the general economy improved from 2017 and the rig count increased, but remained significantly below 2014 peaks. The energy market for our products improved. Sales for the year ended December 31, 2018 increased $209.4 million, or 20.8%, to approximately $1.2 billion from $1.0 billion for the prior corresponding period. Sales from a business acquired in 2018 accounted for $47.5 million of 2018 sales. Excluding the 2018 sales of the business acquired, on a same store sales basis, sales for 2018 increased by $161.9 million, or 16.1% from the prior corresponding period. This same store sales increase is the result of sales increases in our IPS, SC and SCS segments of $87.6 million, $61.3 million and $13.0 million respectively. The majority of the 2018 sales increase is the result of increased sales of pumps, bearings, industrial supplies, metal working and safety services to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2019, the growth rate of the general economy improved from 2018 while the rig count decreased, but remained higher than 2016 peaks. Sales for the year ended December 31, 2019 increased $51.0 million, or 4.2%, to approximately $1.3 billion from $1.2 billion for the prior corresponding period. The majority of the 2019 sales increase is the result of increased sales of pumps, bearings, industrial supplies, metal working and safety services 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, customer service and inside sales functions, and using information technology to increase employee productivity.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2017 | % | 2016 | % | 2015 | % | |||||||||||||||||||
(in millions, except percentages and per share amounts) | ||||||||||||||||||||||||
| Sales | $ | 1,006.8 | 100.0 | $ | 962.1 | 100.0 | $ | 1,247.0 | 100.0 | |||||||||||||||
| Cost of sales | 735.2 | 73.0 | 697.3 | 72.5 | 895.1 | 71.8 | ||||||||||||||||||
| Gross profit | 271.6 | 27.0 | 264.8 | 27.5 | 351.9 | 28.2 | ||||||||||||||||||
| Selling, general & administrative expense | 238.1 | 23.7 | 245.5 | 25.5 | 303.8 | 24.4 | ||||||||||||||||||
| Impairment expense | - | - | - | - | 68.7 | 5.5 | ||||||||||||||||||
| B27 settlement | - | - | - | - | 7.3 | 0.6 | ||||||||||||||||||
| Operating income (loss) | 33.5 | 3.3 | 19.3 | 2.0 | (27.9 | ) | (2.2 | ) | ||||||||||||||||
| Interest expense | 17.1 | 1.7 | 15.5 | 1.6 | 10.9 | 0.9 | ||||||||||||||||||
| Other expense (income) | (0.5 | ) | - | (5.9 | ) | (0.6 | ) | 0.1 | - | |||||||||||||||
| Income (loss)before income taxes | 16.9 | 1.6 | 9.7 | 1.0 | (38.9 | ) | (3.1 | ) | ||||||||||||||||
| Provision for income taxes | 0.4 | - | 2.5 | 0.3 | 0.1 | - | ||||||||||||||||||
| Net income (loss) | 16.5 | 1.7 | 7.2 | 0.7 | (39.0 | ) | (3.1 | ) | ||||||||||||||||
| Net (loss) attributable to noncontrolling interest | (0.4 | ) | - | (0.5 | ) | - | (0.5 | ) | - | |||||||||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | $ | 16.9 | 1.7 | $ | 7.7 | 0.8 | $ | (38.5 | ) | (3.1 | ) | |||||||||||||
| Per share | ||||||||||||||||||||||||
| Basic earnings (loss) per share | $ | 0.97 | $ | 0.51 | $ | (2.68 | ) | |||||||||||||||||
| Diluted earnings (loss) per share | $ | 0.93 | $ | 0.49 | $ | (2.68 | ) | |||||||||||||||||
21
Consolidated Results of operations for the Service Centers segment are as follows:Operations
| Years Ended December 31, | |||||||||||||||||
| 2019 | % | 2018 | % | 2017 | % | ||||||||||||
( in millions, except percentages and per share amounts) | |||||||||||||||||
| Sales | $ | 1,267.2 | 100.0 | $ | 1,216.2 | 100.0 | $ | 1,006.8 | 100.0 | ||||||||
| Cost of sales | 920.0 | 72.6 | 884.0 | 72.7 | 735.2 | 73.0 | |||||||||||
| Gross profit | $ | 347.2 | 27.4 | $ | 332.2 | 27.3 | $ | 271.6 | 27.0 | ||||||||
| Selling, general & administrative expense | 281.1 | 22.2 | 263.8 | 21.7 | 238.1 | 23.6 | |||||||||||
| Operating income | $ | 66.1 | 5.2 | $ | 68.4 | 5.6 | $ | 33.5 | 3.3 | ||||||||
| Other income | — | — | (1.2 | ) | (0.1) | (0.5 | ) | — | |||||||||
| Interest expense | 19.5 | 1.5 | 20.9 | 1.7 | 17.1 | 1.7 | |||||||||||
| Income before income taxes | $ | 46.6 | 3.7 | $ | 48.7 | 4.0 | $ | 16.9 | 1.7 | ||||||||
| Provision for income taxes | 10.9 | 0.9 | 13.2 | 1.1 | 0.4 | — | |||||||||||
| Net income | $ | 35.7 | 2.8 | $ | 35.5 | 2.9 | $ | 16.5 | 1.6 | ||||||||
| Net loss attributable to noncontrolling interest | (0.3 | ) | — | (0.1 | ) | — | (0.4 | ) | — | ||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | 36.0 | 2.8 | $ | 35.6 | 2.9 | $ | 16.9 | 1.7 | ||||||||
| Per share | |||||||||||||||||
| Basic earnings per share | $ | 2.04 | $ | 2.02 | $ | 0.97 | |||||||||||
| Diluted earnings per share | $ | 1.96 | $ | 1.94 | $ | 0.93 | |||||||||||
| 2017 | % | 2016 | % | 2015 | % | |||||||||||||||||||
| (in millions, except percentages and per share amounts) | ||||||||||||||||||||||||
| Sales | $ | 641.3 | 100.0 | $ | 621.0 | 100.0 | $ | 826.6 | 100.0 | |||||||||||||||
| Cost of sales | 451.2 | 70.3 | 437.6 | 70.5 | 575.0 | 69.6 | ||||||||||||||||||
| Gross profit | 190.1 | 29.7 | 183.4 | 29.5 | 251.6 | 30.4 | ||||||||||||||||||
| Selling, general & administrative expense | 126.9 | 19.8 | 135.8 | 21.9 | 173.4 | 21.0 | ||||||||||||||||||
| Impairment expense | - | - | - | - | 15.8 | 1.9 | ||||||||||||||||||
| Operating income (loss), excluding amortization | $ | 63.2 | 9.9 | $ | 47.6 | 7.6 | $ | 62.4 | 7.5 | |||||||||||||||
| Operating income, excluding impairment and amortization | $ | 63.2 | 9.9 | $ | 47.6 | 7.6 | $ | 78.2 | 9.5 | |||||||||||||||
| 2017 | % | 2016 | % | 2015 | % | |||||||||||||||||||
| (in millions, except percentages and per share amounts) | ||||||||||||||||||||||||
| Sales | $ | 204.0 | 100.0 | $ | 187.1 | 100.0 | $ | 254.8 | 100.0 | |||||||||||||||
| Cost of sales | 160.2 | 78.5 | 142.5 | 76.2 | 191.6 | 75.2 | ||||||||||||||||||
| Gross profit | 43.8 | 21.5 | 44.6 | 23.8 | 63.2 | 24.8 | ||||||||||||||||||
| Selling, general & administrative expense | 32.4 | 15.9 | 34.7 | 18.5 | 41.6 | 16.3 | ||||||||||||||||||
| Impairment expense | - | - | - | - | 52.9 | 20.8 | ||||||||||||||||||
| Operating income (loss), excluding amortization | $ | 11.4 | 5.6 | $ | 9.9 | 5.3 | $ | (31.3 | ) | (12.3 | ) | |||||||||||||
| Operating income excluding impairment and amortization | $ | 11.4 | 5.6 | $ | 9.9 | 5.3 | $ | 21.6 | 8.5 | |||||||||||||||
| 2017 | % | 2016 | % | 2015 | % | |||||||||||||||||||
| (in millions, except percentages and per share amounts | ||||||||||||||||||||||||
| Sales | $ | 161.5 | 100.0 | $ | 154.0 | 100.0 | $ | 165.6 | 100.0 | |||||||||||||||
| Cost of sales | 123.8 | 76.7 | 117.1 | 76.1 | 128.4 | 77.5 | ||||||||||||||||||
| Gross profit | 37.7 | 23.3 | 36.9 | 23.9 | 37.2 | 22.5 | ||||||||||||||||||
| Selling, general & administrative expense | 22.2 | 13.7 | 21.5 | 13.9 | 23.0 | 13.9 | ||||||||||||||||||
| Operating income (loss), excluding amortization | $ | 15.5 | 9.6 | $ | 15.4 | 10.0 | $ | 14.2 | 8.6 | |||||||||||||||
Year Ended December 31, 20172019 compared to Year Ended December 31, 20162018
SALES. Sales for the year ended December 31, 20172019 increased $44.7$51.0 million, or 4.6%4.2%, to approximately $1.0$1.3 billion from $962.1 million$1.2 billion for the year ended December 31, 2016. Sales from a business sold in 2016 accounted for $22.7 million of 2016 sales. Excluding the 2016 sales of the sold business, on a same store sales basis, sales for 2017 increased by $67.4 million, or 7.2% from 2016.2018. This same store sales increase is the result of an increase in our Service Centers,SCS, SC and IPS and SCS segments of $42.9$26.8 million, $16.9$12.2 million and $7.5$12.0 million, respectively. TheseThe fluctuations in the sales in our segments areis further explained in our business segment discussions below.
| Years Ended December 31 | ||||||||||||||
| 2019 | 2018 | Change | Change% | |||||||||||
| Sales by Business Segment | (in thousands, except change%) | |||||||||||||
| Service Centers | $ | 762,256 | $ | 750,044 | $ | 12,212 | 1.6 | % | ||||||
| Innovative Pumping Solutions | 303,655 | 291,697 | 11,958 | 4.1 | % | |||||||||
| Supply Chain Services | 201,278 | 174,456 | 26,822 | 15.4 | % | |||||||||
| Total DXP Sales | $ | 1,267,189 | $ | 1,216,197 | $ | 50,992 | 4.2 | % | ||||||
Service Centers Segment.Sales for the Service Centers segment increased by $12.2 million, or 1.6% for the year ended December 31, 2019, compared to the year ended December 31, 2018. This sales increase is primarily the result of increased sales of rotating equipment to customers engaged in the late upstream, midstream or downstream oil and gas markets or manufacturing equipment for these markets in connection with increased capital spending by oil and gas producers. If crude oil and natural gas prices and the drilling rig count remain at levels experienced during the year ended December 31, 2019, this level of sales to the oil and gas industry might continue, or improve, during 2020; however, signs of contraction have appeared in the oil and gas markets in early 2020.
Innovative Pumping Solutions Segment. Sales for the IPS segment increased by $12.0 million, or 4.1% for the year ended December 31, 2019, compared to the year ended December 31, 2018. This increase was primarily the result of an increase in the capital spending by oil and gas producers and related businesses stemming from an increase in U.S. crude oil production during the year ended December 31, 2019. This level of IPS sales might continue, or improve, during 2020 if crude oil and natural gas prices and the drilling rig count remain at levels experienced during 2019; however, signs of contraction have appeared in the oil and gas markets in early 2020.
22
Supply Chain Services Segment. Sales for the SCS segment increased by $26.8 million, or 15.4%, for the year ended December 31, 2019, compared to the year ended December 31, 2018. The improved sales are primarily related to increased sales to customers in the medical device, aerospace, oil and gas and food and beverage industries as a result of new locations.
GROSS PROFIT. Gross profit as a percentage of sales for the year ended December 31, 2017 decreased2019 increased by approximately 559 basis points from the year ended December 31, 2016. On a same store sales basis,prior year's corresponding period. The increase in the gross profit as a percentage of sales decreased by approximately 25 basis points. The overall decrease in the profit percentage, on a same store sales basis, is primarily the result of an approximate 23595 basis point decreasepoints increase in the gross profit percentage in our IPS segment and an approximate 61 basis point decrease in gross profit percentage in our Supply Chain Services segment partially offset by an approximate 51 basis point increase in the gross profit percentage in our Service Centers segment. These fluctuations are explained in the segment discussions below.
Innovative Pumping Solutions Segment. As a percentage of sales, 2019 gross profit percentage for the IPS segment increased approximately 95 basis points from the prior year's corresponding period primarily as a result of increased utilization and capacity within IPS' engineered-to-order business and an overall improvement in the pricing environment driven by an increase in capital spending by oil and gas producers. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built to order customer specific products. Operating income for the IPS segment decreased $5.0 million, or 14.9%, primarily as a result of an increase in SG&A expense (SG&A)due to increased payroll, incentive compensation and related taxes and 401(k) expenses mainly due to increased headcount offset by the above mentioned increase in sales.
Supply Chain Services Segment. Gross profit as a percentage of sales decreased approximately 40 basis points for the year ended December 31, 2017 decreased by approximately $7.4 million, or 3.0%,2019, compared to $238.1 million from $245.5 million for the year ended December 31, 2016. SG&A fromprior year's corresponding period. This was primarily as a business that was sold accounted for $6.1 million of the decrease. Excluding the 2016 SG&A from the business that was sold in 2016, on a same store sales basis, SG&A decreased by $1.3 million, or 1.0%. The overall decline in SG&A, on a same store sales basis, is the result of decreased payroll, related taxes and 401(k) expenses due to headcount and salary reductions and other cost reduction measures primarily implemented near the end of the first quarter of 2016. Additionally, amortization expense declined by $0.8 million, on a same store sales basis. As a percentage of sales, the 2017 expense decreased approximately 183 basis points to 23.7% from 25.5% for 2016, on a same store sales basis.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for year ended December 31, 2019 increased by approximately $17.3 million, or 6.6%, to $33.5$281.1 million from $19.3$263.8 million for prior year's corresponding period. The overall increase in SG&A is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses. The remaining increase in SG&A expense for the year ended December 31, 2016.2019 is primarily a result of the increase in sales. As a percentage of sales, the year ended December 31, 2019 expense increased 50 basis points to 22.2% from 21.7% for the prior year's corresponding period.
OPERATING INCOME. Operating income for the year ended December 31, 2019 decreased by $2.3 million, or 3.4%, to $66.1 million from $68.5 million in the prior year's corresponding period. This decrease in operating income is primarily related to the increase in SG&A discussed above.
INTEREST EXPENSE. Interest expense for year ended December 31, 2019 decreased by $1.4 million, or 6.9%, from prior year's corresponding period primarily as a result of third party fees of $0.9 million and $60 thousand of accelerated deferred debt issuance cost in connection with the Repricing Amendment in June 2018.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 23.2% for the year ended December 31, 2019 compared to a tax expense of 27.1% for the year ended December 31, 2018. Compared to the U.S. statutory rate for the year ended December 31, 2019, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and partially offset by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the year ended December 31, 2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and partially offset by research and development tax credits and other tax credits.
23
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
SALES. Sales for the year ended December 31, 2018 increased $209.4 million, or 20.80%, to approximately $1.2 billion from $1.0 billion for the year ended December 31, 2017. Sales from a business acquired on January 1, 2018 accounted for $47.5 million of the increase in sales. Excluding the 2018 sales of the business acquired, sales for the year ended December 31, 2018 increased by $161.9 million, or 16.1% from prior year's corresponding period. This sales increase is the result of an increase in our SC, IPS and SCS segments of $108.8 million, $87.6 million and $13.0 million, respectively. The fluctuations in sales is further explained in our business segment discussions below.
| Years Ended December 31 | ||||||||||||||
| 2018 | 2017 | Change | Change% | |||||||||||
| Sales by Business Segment | (in thousands, except change%) | |||||||||||||
| Service Centers | $ | 750,044 | $ | 641,275 | $ | 108,769 | 17.0 | % | ||||||
| Innovative Pumping Solutions | 291,697 | 204,030 | 87,667 | 43.0 | % | |||||||||
| Supply Chain Services | 174,456 | 161,477 | 12,979 | 8.0 | % | |||||||||
| Total DXP Sales | $ | 1,216,197 | $ | 1,006,782 | $ | 209,415 | 20.8 | % | ||||||
Service Centers Segment.Sales for the Service Centers segment increased by $108.8 million, or 17.0% for the year ended December 31, 2018, compared to the year ended December 31, 2017. Excluding $47.5 million of Service Centers segment sales for year ended December 31, 2018 from a business acquired, Service Centers segment sales for the period increased $61.3 million, or 9.6% from prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment, bearings and metal working products to customers engaged in the late upstream, midstream or downstream oil and gas markets or manufacturing equipment for these markets in connections with increased capital spending by oil and gas producers. If crude oil and natural gas prices and the drilling rig count remain at levels experienced during the year ended December 31, 2018, this level of sales to the oil and gas industry might continue, or improve, during 2019.
Innovative Pumping Solutions Segment. Sales for the IPS segment increased by $87.7 million, or 43.0% for the year ended December 31, 2018, compared to the year ended December 31, 2017. This increase was primarily the result of an increase in capital
spending by oil and gas producers and related businesses stemming from an increase in the drilling rig count and the price of oil during the year ended December 31, 2018. This level of IPS sales might continue, or improve, during 2019 if crude oil and natural gas prices and the drilling rig count remain at levels experienced during 2018.
Supply Chain Services Segment. Sales for the SCS segment increased by $13.0 million, or 8.0%, for the year ended December 31, 2018, compared to the year ended December 31, 2017. The increase in sales is primarily related to increased sales to customers
in the oil and gas and aerospace industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased more from DXP because of the increase in capital spending by oil and gas companies operating in the U.S.
GROSS PROFIT. Gross profit as a percentage of sales for the year ended December 31, 2018 increased by approximately 34 basis points from the prior year's corresponding period. Excluding the impact of business acquired, gross profit as a percentage of sales increased by approximately 77 basis points. The increase in the gross profit percentage excluding the business acquired, is primarily the result of an approximate 314 basis points increase in the gross profit percentage in our IPS segment. These fluctuations are explained in the segment discussions below.
Service Centers Segment. As a percentage of sales, the gross profit percentage for the Service Centers decreased approximately
24 basis points but increased approximately 61 basis points, adjusting for the business acquired, from the prior year's corresponding
period. This was primarily as a result of sales mix and price increases from vendors. Operating income for the Service Centers segment increased $17.5 million, or 27.6%. The increase in operating income is primarily the result of the improved sales.
Innovative Pumping Solutions Segment. As a percentage of sales, 2018 gross profit percentage for the IPS segment increased
approximately 314 basis points from the prior year's corresponding period primarily as a result of increased utilization and capacity
within IPS' engineered-to-order business and an overall improvement in the pricing environment driven by an increase in capital spending by oil and gas producers and a corresponding tightening in market conditions for IPS related work. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built to order customer specific products. Operating income for the IPS segment increased $22.5 million, or 197.1% , primarily as a result of the above mentioned increase in sales.
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Supply Chain Services Segment. Gross profit as a percentage of sales decreased approximately 47 basis points for the year ended
December 31, 2018, compared to the prior year's corresponding period. This was primarily as a result of sales mix and contractual
lag effects of price increases from vendors. Operating income for the year ended December 31, 2018 increase $0.8 million compared
to the prior year's corresponding period mainly due to an increase in gross profit of $2.2 million primarily offset by an increase in SG&A of $1.5 million.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for year ended December 31, 2018 increased by approximately $25.7 million, or 10.8%, to $263.8 million from $238.1 million for prior year's corresponding period. Selling, general and administrative expense from a business that was acquired accounted for $3.0 million of the increase. Excluding the 2018 expenses from the business acquired, SG&A for the year ended December 31, 2018 increased by $22.7 million, or 9.5%. The overall increase in SG&A adjusting for the business acquired is the result of increased payroll, incentive compensation and related taxes and 401(k) expenses primarily due to increased headcount. The remaining increase in SG&A expense for the year ended December 31, 2018 is primarily a result of the increase in sales. As a percentage of sales, the year ended December 31, 2018 expense decreased 134 basis points to 22.3% from 23.6% for the prior year's corresponding period, adjusting for the business acquired, primarily as a result of the percentage increase in sales exceeding the percentage increase in SG&A.
OPERATING INCOME. Operating income for the year ended December 31, 2018 increased by $35.0 million, or 104.4%, to$68.5 million from $33.5 million in the prior year's corresponding period. The operating income from the business soldacquired in 2016 reduced2018 increased the overall increase during 2017 in operating income for the year ended December 31, 2018 in the amount of $2.9$5.0 million. Excluding the
operating income from the business sold, on a same store sales basis,acquired, operating income increased $17.1$30.0 million, or 103.8%89.5% from 2016.the prior year'scorresponding period. This increase in operating income is primarily related to the increase in gross profit and decrease in SG&Asales discussed above.
INTEREST EXPENSE. Interest expense for the year ended December 31, 20172018 increased 9.6%by $3.9 million, or 22.8%, from the year ended December 31, 2016prior year's corresponding period primarily as a result of increased interest rates underand fees associated with the repricing of our credit facilities. Under our senior secured Term Loan B, DXP borrows at a spread over LIBOR. LIBOR increased 95 basis points from January through December 31, 2018. However, DXP repriced the Term Loan B on June 25, 2018 reducing the spread on LIBOR from 5.50% to 4.75%, reducing the impact of increases in LIBOR which DXP should benefit in fiscal 2019.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 27.1% for the year ended December 31,2018 compared to a tax expense of 2.2% for the year ended December 31, 2017 compared2017. Compared to a tax expense of 26.1%the U.S. statutory rate for the year ended December 31, 2016.2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and
partially offset by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the year ended December 31, 2017, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate decreased because of the remeasurement of our net deferred income tax liabilities, lower income tax rates on income earned in foreign jurisdictions, the change in valuation allowance recorded against deferred tax assets, the reduction of tax rates used to establish deferred tax liabilities related to intangibles for customer relationships acquired in Canada in 2012 and 2013, research and development tax credits and domestic production activity deduction. Compared
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 U.S. statutorycustomer whenever practicable.
The rate of inflation, as measured by changes in the producer price index, affects different commodities, the cost of products purchased and ultimately the pricing of our different products and product classes to our customers. Our pricing related to inflation did not have a measurable impact on our sales revenue for the year ended December 31, 2016,year. Historically, price changes from suppliers have been consistent with inflation and have not had a material impact on the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate decreased by the book gain on the saleresults of Vertex, lower income tax rates on income earned in foreign jurisdictions, research and development credits, and foreign tax credits.our operations.
In an effort to provide investors with additional information regarding our results of operations as determined by GAAP, we disclose non-GAAP financial measures. The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, the Service Centers segment increased by $20.3 million, or 3.3% for the year ended December 31, 2017 compared to the year ended December 31, 2016. Excluding $22.7 million of the 2016 Service Centers segment sales from a business soldresults prepared in 2016, Service Centers segment sales for 2017 increased $42.9 million, or 7.2% from the year ended December 31, 2016, on a same store sales basis. This sales increase is primarily the result of increased sales of safety services and rotating equipment to customers engagedaccordance with accounting principles generally accepted in the upstream, midstream or downstream oilUnited States of America (“U.S. GAAP”).
Our primary non-GAAP financial measure is organic sales (Organic Sales) and gas markets or manufacturing equipment for the upstream, midstream or downstream oilearnings before interest, taxes, depreciation and gas markets in connection with increased capital spendingamortization (EBITDA). The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by oilother companies, and gas producers and related businesses during 2017 compared to 2016. As a percentage of sales, the 2017 gross profit percentage for the Service Centers increased approximately 12 basis points but increased approximately 51 basis points on a same store sales basis, from 2016. This increaseother companies may not define these non-GAAP financial measures in the gross profit percentage is primarily the result of improved margins onsame way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, of rotating equipment, bearings and industrial supplies. Operating income for the Service Centers segment increased $18.5 million, or 41.4% on a same store sales basis. The increase in operating income is primarily the result of the reduced SG&A combined with increased gross profit.net income/(loss),
diluted earnings per common share (“EPS”), or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Management uses these non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect our underlying operations. Management believes that presenting our non-GAAP financial measures (i.e., Organic Sales forand EBITDA) is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permits investors to view performance using the IPS segment increasedsame tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating our results. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding U.S. GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained absent these disclosures.
Organic Sales is defined as net sales excluding, when they occur, the impact of acquisitions and divestitures. Organic Sales is a tool that can assist management and investors in comparing our performance on a consistent basis by $16.9 million, or 9.0% forremoving the year ended December 31, 2017 comparedimpact of certain items that management believes do not directly reflect our underlying operations.
EBITDA is defined as the sum of consolidated net income in such period, plus to the year ended December 31, 2016. This increaseextent deducted from consolidated net income: (i) income tax expense, (ii) franchise tax expense, (iii) consolidated interest expense, (iv) amortization and depreciation during such period, (v) all non-cash charges and adjustments, and (vi) non-recurring cash expenses related to the Term Loan; in addition to these adjustments, we exclude, when they occur, the impacts of impairment losses and losses/(gains) on the sale of a business. EBITDA is primarilya tool that can assist management and investors in comparing our performance on a consistent basis by removing the resultimpact of increased capital spending by oil and gas producers and related businesses during 2017 compared to 2016. As a percentage of sales, 2017 gross profit percentage for the IPS segment decreased approximately 235 basis points from 2016 primarily as a result competitive pricing pressures and a reduced level of large, complex, high margin orders in 2017. 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 for the IPS segment increased $1.6 million, or 15.8%, primarily as a resultcertain items that management believes do not directly reflect our underlying operations.
A reconciliation of the $16.9 million increase non-GAAP financial measures, to its most comparable GAAP financial measure is included below.
The following table set forth the reconciliation of net sales to organic net sales (in sales discussed above and a decrease of $2.3 million in SG&A.thousands):
| Fiscal 2018 | Net Sales | Acquisition Sales | Divestiture Sales | Organic Sales | ||||||||||||
| Service Centers | $ | 750,044 | $ | 47,486 | $ | — | $ | 702,558 | ||||||||
| Innovative Pumping Solutions | 291,697 | — | — | 291,697 | ||||||||||||
| Supply Chain Services | 174,456 | — | — | 174,456 | ||||||||||||
| Total Sales | $ | 1,216,197 | $ | 47,486 | $ | — | $ | 1,168,711 | ||||||||
| Fiscal 2017 | ||||||||||||||||
| Service Centers | $ | 641,275 | $ | — | $ | — | $ | 641,275 | ||||||||
| Innovative Pumping Solutions | 204,030 | — | — | 204,030 | ||||||||||||
| Supply Chain Services | 161,477 | — | — | 161,477 | ||||||||||||
| Total Sales | $ | 1,006,782 | $ | — | $ | — | $ | 1,006,782 | ||||||||
| Year-over-year growth rates | ||||||||||||||||
| Service Centers | 17.0 | % | — | — | 9.6 | % | ||||||||||
| Innovative Pumping Solutions | 43.0 | % | — | — | 43.0 | % | ||||||||||
| Supply Chain Services | 8.0 | % | — | — | 8.0 | % | ||||||||||
| Total Sales | 20.8 | % | — | — | 16.1 | % | ||||||||||
Note : Table excludes fiscal year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in sales2019. Fiscal 2019 is primarily related to increased sales to customers in the oil and gas industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased more from DXP because of the increase in capital spending by oil and gas companies operating in the U.S and Canada. Gross profit as a percentage of sales decreased approximately 61 basis points in 2017 compared to 2016 primarily as a result of increased sales of lower margin products to oil and gas related customers. Operating income for 2017 was flat compared to 2016 for the SCS segment because gross profit increased $0.8 million, which was partially offset by an increase of $0.8 million in SG&A.100% organic.
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The following table set forth 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 relatedreconciliation of EBITDA to the decreased gross profit which is partially offset by the decline most comparable GAAP financial measure (in SG&A discussed above.
thousands):
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| GAAP net income attributable to DXP Enterprises, Inc. | $ | 36,035 | $ | 35,632 | $ | 16,888 | ||||||
| Loss attributable to non-controlling interest | (260 | ) | (111 | ) | (359 | ) | ||||||
| Provision for income taxes | 10,894 | 13,185 | 363 | |||||||||
| Depreciation and amortization | 25,174 | 26,164 | 27,786 | |||||||||
| Interest expense | 19,498 | 20,937 | 17,054 | |||||||||
| EBITDA | $ | 91,341 | $ | 95,807 | $ | 61,732 | ||||||
| EBITDA margin as % of sales | 7.2 | % | 7.9 | % | 6.1 | % | ||||||
Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net sales | $ | 1,006.8 | $ | 939.4 | ||||
| Net income attributable to DXP Enterprises, Inc. | $ | 16.9 | $ | 5.5 | ||||
| Per share data | ||||||||
| Basic earnings | $ | 0.97 | $ | 0.36 | ||||
| Diluted earnings | $ | 0.93 | $ | 0.35 | ||||
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 | ||||||||
| Basic earnings (loss) | $ | 0.36 | $ | (2.83 | ) | |||
| Diluted earnings (loss) | $ | 0.35 | $ | (2.83 | ) | |||
Liquidity and Capital Resources
General Overview
As of December 31, 2019, we had cash and cash equivalents of $54.3 million and bank and other borrowings of $237.9 million. We have a $85 million Asset-Based Loan facility that is due to mature in August 2022, under which we had no borrowings outstanding as of December 31, 2019.
Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. As a distributor of MRO products and services, we require significant amounts of working capital to fund inventories and accounts receivable.receivables. Additional cash is required for capital items such asfor information technology, warehouse equipment, metal workingleasehold improvements, pump manufacturing equipment and capital expenditures for our safety products and services category.equipment. We also require cash to pay our lease obligations and to service our debt.
| Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | Change | Change(%) | |||||||||||
| Net cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 41,307 | $ | 35,840 | $ | 5,467 | 15 | % | ||||||
| Investing activities | (22,085 | ) | (17,576 | ) | (4,509 | ) | 26 | % | ||||||
| Financing activities | (6,092 | ) | (2,921 | ) | (3,171 | ) | 109 | % | ||||||
| Effect of foreign currency | 676 | (403 | ) | 1,079 | (268 | )% | ||||||||
| Net change in cash | $ | 13,806 | $ | 14,940 | $ | (1,134 | ) | (8 | )% | |||||
Operating Activities
The Company generated approximately $12.5$41.3 million of cash in operating activities in 2017 asduring the year ended December 31, 2019 compared to generating $48.2of $35.8 million cash during the prior year's corresponding period. The $5.5 million increase in 2016. The decreasethe amount of cash generated between the two periods was primarily driven by a $20.5 millionan increase in accounts receivableprofitability that exceeded investments in 2017 compared to a $12.1 million reduction in 2016. The increase in accounts receivable resulted fromworking capital.
Investing Activities
For the $43.3 million increase in sales for the fourth quarteryear ended December 31, 2017 compared to the fourth quarter ended December 31, 2016. Sales for the fourth quarter of 2016 declined $56.42019, net cash used in investing activities was $22.1 million compared to sales$17.6 million in the corresponding period in 2018. This increase was primarily driven by purchases of property, plant and equipment of approximately $22.1 million compared to $9.3 million in the corresponding period in 2018. This increase was partially offset by the cash component of the purchase of ASI for $10.8 million partially offset by proceeds from the fourth quartersale of 2015.a building for $2.6 million in 2018.
Financing Activities
For the year ended December 31, 2019, net cash used in financing activities was $6.1 million, compared to net cash generated by financing activities of $2.9 million for the corresponding period in 2018. The activity in the period was primarily attributed to the Company making a payment for contingent consideration associated with the acquisition of ASI and higher principal repayments of debt in 2019.
During the year ended December 31, 2019, the amount available to be borrowed under our credit facility increased to $81.6 million compared to $79.3 million at December 31, 2018. This was the result of a reduction in letters of credit outstanding to $3.4 million at December 31, 2019, down from $5.7 million at December 31, 2018.
We believe this is adequate funding to support working capital needs within the business.
At December 31, 2017,2019, our total long-term debt, including the current portion, less principal repayments and less unamortized debt issuance fees, was $242.0$237.9 million, or 47.4%40.8% of total capitalization (total long-term debt including current portion plus shareholders’ equity) of $510.6$582.9 million. Approximately $249.4$244.4 million of this outstanding debt bears interest at various floating rates. Therefore,See Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Free Cash Flow
We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to fund acquisitions, make investments, repay debt obligations, repurchase company shares, and for certain other activities. Our free cash flow, which is calculated as cash provided by operations less net purchase of property and equipment, was$19.2 million, $29.1 million and $9.7 million for years 2019, 2018 and 2017, respectively.
Free cash flow is not a measure of liquidity under generally accepted accounting principles in the United States, and may not be defined and calculated by other companies in the same manner. Free cash flow should not be considered in isolation or as an example, a 200 basis point increase in interest rates would increase our annual interest expensealternative to net cash provided by approximately $5.0 million.operating activities. Free cash flow reconciles to the most directly comparable GAAP financial measure of cash flows from operations as follows:
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net cash provided by operating activities | $ | 41,307 | $ | 35,840 | $ | 12,544 | ||||||
| Less: Purchase of property and equipment | 22,120 | 9,323 | 2,811 | |||||||||
| Add: Proceeds from the disposition of property and equipment | 35 | 2,558 | — | |||||||||
| Free cash flow | $ | 19,222 | $ | 29,075 | $ | 9,733 | ||||||
Senior Secured Term Loan B and ABL Facility
Asset-Based Loan Facility:
On August 29, 2017, DXP entered into a five year, $85$85.0 million Asset Based Loan and Security Agreement (the “ABL Credit Agreement”Revolver”) and a six-year, $250 million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing credit facility.
. The ABL Credit AgreementRevolver provides for asset-based revolving loans in an aggregate principal amount of up to $85.0 million, (the “ABL Loans”). subject to increase in certain circumstances.
As of December 31, 2019, there were no amounts of ABL Loans outstanding under the ABL Revolver.
The Company's consolidated Fixed Charge Coverage Ratio was 2.92 to 1.00 as of December 31, 2019. DXP was in compliance with all such covenants that were in effect on such date under the ABL Revolver as of December 31, 2019.
The ABL Credit Agreement may be increased in increments of $10.0 million up to an aggregate of $50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average daily excess availability under the facility for the most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum are payable on the portion of the facility not in use at any given time. The unused line fee was 0.375% at December 31, 2017.2019.
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The interest rate for the ABL facility was 2.9%3.5% at December 31, 2017.2019.
Term Loan B:
The Term Loan B Agreement provides for a $250 million term loan (the “Term Loan”) that amortizes in equal quarterly installments of 0.25% with the balance payable in August 2023, when the facility matures. Subject to securing additional lender commitments, the Term Loan B Agreement allows for incremental increases in facility size up to an aggregate of $30 million, plus an additional amount such that DXP’s Secured Leverage Ratio (as defined in the Term Loan B Agreement) would not exceed 3.60 to 1.00. Interest accrues on the Term Loan at a rate equal to the base rate plus a margin of 4.5%3.75% for the Base Rate Loans (as defined in the Term Loan B Agreement), or LIBOR plus a margin of 5.5%4.75% for the Eurodollar Rate Loans (as defined in the Term Loan B Agreement). We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total leverage ratio is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00.
The interest rate for the Term Loan was 7.1%6.5% as of December 31, 2017.2019.
Financial Covenants:
DXP’s principal financial covenants under the ABL Credit Agreement and Term Loan B Agreement include:
Fixed Charge Coverage Ratio – The Fixed Charge Coverage Ratio under the ABL Credit Agreement is defined as the ratio for the most recently completed four-fiscal quarter period, of (a) EBITDA minus capital expenditures (excluding those financed or funded with debt (other than the ABL Loans), (ii) the portion thereof funded with the net proceeds from asset dispositions of equipment or real property which DXP is permitted to reinvest pursuant to the Term Loan and the portion thereof funded with the net proceeds of casualty insurance or condemnation awards in respect of any equipment and real estate which DXP is not required to use to prepay the ABL Loans pursuant to the Term Loan B Agreement or with the proceeds of casualty insurance or condemnation awards in respect of any other property) minus cash taxes paid (net of cash tax refunds received during such period), to (b) fixed charges. The Company is restricted from allowing its fixed charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under the ABL facility falls below a threshold set forth in the ABL Credit Agreement.
As of December 31, 2017,2019, the Company's consolidated Fixed Charge Coverage Ratio was 3.672.92 to 1.00.
Secured Leverage Ratio – The Term Loan B Agreement requires that the Company’s Secured Leverage Ratio, defined as the ratio, as of the last day of any fiscal quarter of consolidated secured debt (net of unrestricted cash, not to exceed $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2017,2019, is either equal to or less than as indicated in the table below:
| Fiscal Quarter | Secured Leverage Ratio |
| December 31, 2019 | 4.75:1.00 |
| March 31, 2020 | 4.75:1.00 |
| June 30, 2020 and each Fiscal Quarter thereafter | 4.50:1.00 |
EBITDA as defined under the Term Loan B Agreement for financial covenant purposes means, without duplication,for any period of determination, the sum of, consolidated net income during such period; plusto the extent deducted from consolidated net income in such period: (i) income tax expense, (ii) franchise tax expense, (iii) consolidated interest expense, (iv) amortization and depreciation during such period, (v) all non-cash charges and adjustments, and (vi) non-recurring cash expenses related to the Term Loan, provided, that if the Company acquires or disposes of any property during such period (other than under certain exceptions specified in the Term Loan B Agreement, including the sale of inventory in the ordinary course of business, then EBITDA shall be calculated, after giving pro forma effect to such acquisition or disposition, as if such acquisition or disposition had occurred on the first day of such period.
As of December 31, 2017,2019, the Company’s consolidated Secured Leverage Ratio was 3.592.23 to 1.00.
The ABL Loans and the Term Loan are secured by substantially all of the assets of the Company.
December 31, 2017 | December 31, 2016 | Increase (Decrease) | ||||||||||
| Current portion of long-term debt | $ | 3,381 | $ | 51,354 | $ | (47,973 | ) | |||||
| Long-term debt, less debt issuance costs | 238,643 | 173,331 | 65,312 | |||||||||
| Total long-term debt | $ | 242,024 | $ | 224,685 | $ | 17,339 | ||||||
Amount available(1) | $ | 82,007 | $ | 37,347 | $ | 44,660 | ||||||
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Three Months Ended December 31, | ||||||||||||
| 2017 | 2016 | Increase (Decrease) | ||||||||||
| Days of sales outstanding | 60.7 | 65.0 | (4.3 | ) | ||||||||
| Inventory turns | 8.4 | 7.7 | 0.7 | |||||||||
Three Months Ended December 31, | ||||||||||||
| Increase | ||||||||||||
| 2016 | 2015 | (Decrease) | ||||||||||
| Days of sales outstanding | 65.0 | 56.9 | 8.1 | |||||||||
| Inventory turns | 7.7 | 7.7 | - | |||||||||
| December 31, 2019 | December 31, 2018 | Increase (Decrease) | |||||||||
| Current portion of long-term debt | $ | 2,500 | $ | 3,407 | $ | (907 | ) | ||||
| Long-term debt, less debt issuance costs | 235,419 | 236,979 | (1,560 | ) | |||||||
| Total long-term debt | 237,919 | 240,386 | (2,467 | ) | |||||||
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 our credit facilities 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.
| December 31, 2019 | December 31, 2018 | Increase (Decrease) | |||||||||
| Total borrowing capacity | $ | 85,000 | $ | 85,000 | $ | — | |||||
| Less : ABL | — | — | — | ||||||||
| Less : Outstanding letters of credit | 3,442 | 5,679 | (2,237 | ) | |||||||
| Total amount available | $ | 81,558 | $ | 79,321 | $ | 2,237 | |||||
Contractual Obligations
The impact that our contractual obligations as of December 31, 20172019 are expected to have on our liquidity and cash flow in future periods is as follows (in thousands):
| Payments Due by Period | |||||||||||||||||||
| Less than 1 Year | 1–3 Years | 3-5 Years | More than 5 Years | Total | |||||||||||||||
Long-term debt, including current portion (1) | $ | 2,500 | $ | 5,000 | $ | 236,875 | $ | — | $ | 244,375 | |||||||||
| Operating lease obligations | 21,641 | 32,653 | 13,499 | 10,301 | 78,094 | ||||||||||||||
Estimated interest payments (2) | 15,923 | 31,355 | 7,757 | — | 55,035 | ||||||||||||||
| Total | $ | 40,064 | $ | 69,008 | $ | 258,131 | $ | 10,301 | $ | 377,504 | |||||||||
| Payments Due by Period | ||||||||||||||||||||
Less than 1 Year | 1–3 Years | 3-5 Years | More than 5 Years | Total | ||||||||||||||||
Long-term debt, including current portion (1) | $ | 3,381 | $ | 6,841 | $ | 5,000 | $ | 236,875 | $ | 252,097 | ||||||||||
| Operating lease obligations | 19,419 | 26,494 | 16,072 | 3,441 | 65,426 | |||||||||||||||
Estimated interest payments (2) | 17,607 | 34,611 | 33,870 | 8,382 | 94,470 | |||||||||||||||
| Total | $ | 40,407 | $ | 67,946 | $ | 54,942 | $ | 248,698 | $ | 411,993 | ||||||||||
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, 2017,2019, 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.
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DISCUSSION OF CRITICAL ACCOUNTING POLICIES
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 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, 2017,2019, the allowance was 5.1%approximately 4.6% of the gross accounts receivable compared to an allowance of 5.2%remaining unchanged from 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
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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 net assets including goodwill exceeds its estimated fair value. For 20172019 and 2016,2018, the Company’s annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units of goodwill, determined that a quantitative impairmentanalysis was not necessary.
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.analyses. 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.
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 2017, 20162019, 2018 and 2015.2017.
Revenue Recognition
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Management performs detailed quarterly reviews of all of our open contracts. Based upon these reviews, we record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, we record a provision for the entire anticipated contract loss at that time. Due to the significance of judgment in the estimation process described above, it is likely that materially different profit margins and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. The percentage-of-completion method requires that we estimate future revenues and costs over the life of a contract. Revenues are estimated based upon the original contract price, with consideration being given to exercised contract options, change orders and in some cases projected customer requirements. Contract costs may be incurred over a period of several months, and the estimation of these costs requires significant judgment based upon the acquired knowledge and experience of program managers, engineers, and finance professionals. Estimated costs are based primarily on anticipated purchase contract terms, historical performance trends, business base and other economic projections. The complexity of certain designs as well as technical risks and uncertainty as to the future availability of materials and labor resources could affect the company's ability to accurately estimate future contract costs.
Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones or product specifications. Management continues to monitor and update program cost estimates quarterly for all open contracts. A significant change in an estimate on several of these contracts could have a material effect on our financial position and results of operations.
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.liabilities for the acquisition completed in fiscal 2018. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. DXP did not complete
Many of our acquisitions may include as additional compensation, contingent consideration. Contingent consideration is a financial liability recorded at fair value upon acquisition. The amount of contingent consideration to be paid is based on the occurrence of future events, such as the achievement of certain revenue or earnings milestones of the target after consummation. Accordingly, the estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate used. Changes in fair value of the contingent consideration obligation result from changes to the assumptions used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any acquisitions during 2017 or 2016.of these assumptions could produce a different fair value, which could have a material impact on the results from operations. The impact of changes in key assumptions is described in Note 5 - Fair Value of Financial Assets and Liabilities.
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 allowancesWe are establishedrequired to reduceassess the likelihood that our deferred income tax assets, to the amountswhich may include net operating loss carryforwards, tax credits or temporary differences that are expected to be realized underdeductible in future years, will be recoverable from future taxable income. In making that assessment, we consider the nature of the deferred tax assets and related statutory limits on utilization, recent operating results, future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies. If, based upon available evidence, recovery of the full amount of the deferred tax assets is not likely, we provide a morevaluation allowance on amounts not likely to be realized. Changes in valuation allowances are included in our tax provision in the period of change. Assessments are made at each balance sheet date to determine how much of each deferred tax asset is realizable. These estimates are subject to change in the future, particularly if earnings of
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a particular subsidiary are significantly higher or lower than not criterion.expected, or if management takes operational or tax planning actions that could impact the future taxable earnings of a subsidiary.
Accounting for Uncertainty in Income Taxes
In the normal course of business, we are audited by federal, state and foreign tax authorities, and are periodically challenged regarding the amount of taxes due. These challenges relate primarily to the timing and amount of deductions and the allocation of income among various tax jurisdictions. 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. Our effective tax rate in a given period could be impacted if, upon final resolution with taxing authorities, we prevail on positions for which unrecognized tax benefits have been accrued, or are required to pay amounts in excess of accrued unrecognized tax benefits.
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 2012.2013. 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
Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This update adds language to the SEC Staff Guidance in relation to ASU 2014-09, ASU 2016-02, and ASU 2016-13. This ASU 2017-03 provides the SEC Staff view that a registrant should consider additional quantitative and qualitative disclosures related to the previously mentioned ASUs in connection with the status and impact of their adoption. This guidance, which was effective immediately, did not have a material impact on our Condensed Consolidated Financial Statements.Pronouncements Not Yet Adopted
Financial Instruments – Credit Losses.In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses, which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses.
34
losses ("CECL"). The update is intended to provide financial statement users with more useful information about expected credit losses.
We do not currently hold most of the financial instruments contemplated by the new standard, with the exception of trade receivables and contract assets associated with custom built pump packages. CECL will become the single model to measure impairment on financial assets measured at amortized cost, which include trade receivables and contract assets under ASC 606. Therefore, consistent with other types of financial assets measured at amortized cost, estimates of expected credit losses on trade receivables and contract assets over their contractual life will be required to be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts.
Currently, our reserve methodology for trade receivables is based on matrices in which historical loss percentages are applied to respective aging categories. CECL will require us to use a forward-looking methodology that incorporates lifetime expected credit losses. While our current reserving matrices may still be used under CECL, historical loss data will need to be combined with reasonable and supportable forecasts of future losses to determine estimated credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Wemost visible impact of CECL will therefore be that receivables and contract assets that are currently evaluating the effect, if any, that the guidanceeither current or not yet due, which today do not generally have a reserve, will have onan allowance for expected credit losses.
The CECL model does not prescribe a specific methodology for developing a reasonable and supportable forecast, nor the Company’s Consolidated Financial Statementsduration of the period that losses can be forecast, nor the precision required to support the estimate. As a result, the determination of the reasonable and related disclosures.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Our market risk results primarily from volatility in interest rates. Our exposurerates and fluctuations in the Canadian dollar.
Interest Rate Risk
We are exposed to risk resulting from changes in interest rates as a result of our issuance of variable rate debt. To reduce our interest rate risk we may enter into financial derivative instruments, including, but not limited to, interest rate risk relates primarilyswaps and rate lock agreements to manage and mitigate our debt portfolio. Using floatingexposure. As of December 31, 2019, we had no interest rate debt outstanding athedges in place. Based on a sensitivity analysis as of December 31, 2017, a2019, it was estimated that if short-term interest rates average 100 basis point increasepoints higher (lower) in 2019 than in 2018, interest expense, would fluctuate by $2.4 million before tax. Comparatively, based on a sensitivity analysis as of December 31, 2018, had short-term interest rates would increase our annualaveraged 100 basis points higher (lower) in 2018 than in 2017, it was estimated that interest expense would have fluctuated by approximately $2.5 million. These amounts were estimated by considering the effect of the hypothetical interest rates on variable-rate debt outstanding each year.
Foreign Currency Risk
We are exposed to foreign currency risk from our Canadian operations. To mitigate risks associated with foreign currency fluctuations, contracts may be denominated in or indexed to the U.S. dollar and/or local inflation rates, or investments may be naturally hedged through debt and other liabilities denominated or issued in the foreign currency. To monitor our currency exchange rate risks, we use sensitivity analysis, which measures the effect of devaluation of the Canadian dollar. An average 10% devaluation in the Canadian dollar exchange rate during 2019 would have resulted in an estimated net loss on the translation of local currency earnings of approximately $0.4 million on our Consolidated Statement of Operations.
Also see “Risk“Risk Factors,” included in Item 1A of this Report for additional risk factors associated with our business.
Principal Amount By Expected Maturity (in thousands, except percentages) | ||||||||||||||||||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | There- after | Total | Fair Value | |||||||||||||||||||||||||
| Fixed Rate Long- term Debt | $ | 881 | $ | 905 | $ | 936 | $ | - | $ | - | $ | - | $ | 2,722 | $ | 2,722 | ||||||||||||||||
| Fixed Interest Rate | 2.9 | % | 2.9 | % | 2.9 | % | - | - | - | - | - | |||||||||||||||||||||
| Floating Rate Long-term Debt | $ | 2,500 | $ | 2,500 | $ | 2,500 | $ | 2,500 | $ | 2,500 | $ | 236,875 | $ | 249,375 | $ | 249,375 | ||||||||||||||||
| Average Interest Rate (1) | 7.1 | % | 7.1 | % | 7.1 | % | 7.1 | % | 7.1 | % | 7.1 | % | - | - | ||||||||||||||||||
| Total Maturities | $ | 3,381 | $ | 3,405 | $ | 3,436 | $ | 2,500 | $ | 2,500 | $ | 236,875 | $ | 252,097 | $ | 252,097 | ||||||||||||||||
| (1) Assumes weighted average floating interest rates in effect at December 31, 2017. | ||||||||||||||||||||||||||||||||
ITEM 8. Financial Statements and Supplementary Data
| TABLE OF CONTENTS | |
| Page | |
| Reports of Independent Registered Public Accounting | |
| Consolidated Statements of Operations and Comprehensive Income | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Cash Flows | |
| Consolidated Statements of Equity | |
| Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
DXP Enterprises, Inc.
We have audited the accompanying consolidated balance sheetsheets of DXP Enterprises, Inc. and subsidiaries (the “Company”) as of December 31, 2017,2019 and 2018, the related consolidatedstatements of income (loss)operations and comprehensive income, (loss), equity and cash flows for each of the yearthree years in the period ended December 31, 20172019, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017,2019 and 2018, and the consolidated results of its operations and its cash flows for each of the yearthree years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 4 to the Committeeconsolidated financial statements, the Company changed its method of Sponsoring Organizationsaccounting for leases in 2019 due to the adoption of the Treadway Commission and our report dated March 27, 2018 expressed an adverse opinion on theAccounting Standards Codification Topic No. 842.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, due to material weaknesses.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud. fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditaudits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that ourOur audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Moss Adams LLP
Houston, TXTexas
March 28, 2018
13, 2020We have served as the Company’s auditor since 2017.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Sales | $ | 1,267,189 | $ | 1,216,197 | $ | 1,006,782 | |||||
| Cost of sales | 919,965 | 883,989 | 735,201 | ||||||||
| Gross profit | 347,224 | $ | 332,208 | $ | 271,581 | ||||||
| Selling, general and administrative expense | 281,102 | 263,757 | 238,091 | ||||||||
| Income from operating | 66,122 | $ | 68,451 | $ | 33,490 | ||||||
| Other income, net | (45 | ) | (1,192 | ) | (456 | ) | |||||
| Interest expense | 19,498 | 20,937 | 17,054 | ||||||||
| Income before income taxes | 46,669 | $ | 48,706 | $ | 16,892 | ||||||
| Provision for income taxes | 10,894 | 13,185 | 363 | ||||||||
| Net income | 35,775 | $ | 35,521 | $ | 16,529 | ||||||
| Net loss attributable to noncontrolling interest | (260 | ) | (111 | ) | (359 | ) | |||||
| Net income attributable to DXP Enterprises, Inc. | 36,035 | $ | 35,632 | $ | 16,888 | ||||||
| Preferred stock dividend | 90 | 90 | 90 | ||||||||
| Net income attributable to common shareholders | $ | 35,945 | $ | 35,542 | $ | 16,798 | |||||
| Net income | $ | 35,775 | $ | 35,521 | $ | 16,529 | |||||
| Cumulative translation adjustment, net of income taxes | (687 | ) | 224 | (1,217 | ) | ||||||
| Comprehensive income | $ | 35,088 | $ | 35,745 | $ | 15,312 | |||||
| Earnings per share: | |||||||||||
| Basic | 2.04 | $ | 2.02 | $ | 0.97 | ||||||
| Diluted | 1.96 | $ | 1.94 | $ | 0.93 | ||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 17,592 | 17,553 | 17,400 | ||||||||
| Diluted | 18,432 | 18,393 | 18,240 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| December 31, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 22,047 | $ | 1,590 | ||||
| Restricted Cash | 3,532 | - | ||||||
| Trade accounts receivable, net of allowances for doubtful accounts of $9,015 in 2017 and $8,160 in 2016 | 167,272 | 148,919 | ||||||
| Inventories | 91,413 | 83,699 | ||||||
| Costs and estimated profits in excess of billings on | ||||||||
| uncompleted contracts | 26,915 | 18,421 | ||||||
| Prepaid expenses and other current assets | 5,296 | 2,138 | ||||||
| Federal income taxes recoverable | 1,440 | 2,558 | ||||||
| Total current assets | 317,915 | 257,325 | ||||||
| Property and equipment, net | 53,337 | 60,807 | ||||||
| Goodwill | 187,591 | 187,591 | ||||||
| Other intangible assets, net of accumulated amortization of $84,624 in 2017 and $70,027 in 2016 | 78,525 | 94,831 | ||||||
| Other long-term assets | 1,715 | 1,498 | ||||||
| Total assets | $ | 639,083 | $ | 602,052 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 3,381 | $ | 51,354 | ||||
| Trade accounts payable | 80,303 | 78,698 | ||||||
| Accrued wages and benefits | 18,483 | 16,962 | ||||||
| Customer advances | 2,189 | 2,441 | ||||||
| Billings in excess of costs and estimated profits on uncompleted contracts | 4,249 | 2,813 | ||||||
| Other current liabilities | 16,220 | 14,391 | ||||||
| Total current liabilities | 124,825 | 166,659 | ||||||
| Long-term debt, less current maturities and unamortized debt issuance costs | 238,643 | 173,331 | ||||||
| Deferred income taxes | 7,069 | 9,513 | ||||||
| Total long-term liabilities | 245,712 | 182,844 | ||||||
| Commitments and Contingencies (Note 15) | ||||||||
| Equity: | ||||||||
Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $100 per share ($112 at December 31, 2017 and 2016); 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, 2017 and 2016); 1,000,000 shares authorized; 15,000 shares issued and outstanding | 15 | 15 | ||||||
| Common stock, $0.01 par value, 100,000,000 shares authorized; 17,315,573 in 2017 and 17,197,380 in 2016 shares issued | 174 | 173 | ||||||
| Additional paid-in capital | 153,087 | 152,313 | ||||||
| Retained earnings | 134,193 | 117,395 | ||||||
| Accumulated other comprehensive loss | (19,491 | ) | (18,274 | ) | ||||
| Total DXP Enterprises, Inc. equity | 267,979 | 251,623 | ||||||
| Noncontrolling interest | 567 | 926 | ||||||
| Total equity | 268,546 | 252,549 | ||||||
| Total liabilities and equity | $ | 639,083 | $ | 602,052 | ||||
| December 31, 2019 | December 31, 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash | $ | 54,203 | $ | 40,304 | |||
| Restricted cash | 124 | 215 | |||||
Accounts receivable, net of allowances for doubtful accounts of $8,929 and $10,126 | 187,116 | 191,829 | |||||
| Inventories | 129,364 | 114,830 | |||||
| Costs and estimated profits in excess of billings | 32,455 | 32,514 | |||||
| Prepaid expenses and other current assets | 4,223 | 4,938 | |||||
| Federal income taxes receivable | 996 | 960 | |||||
| Total current assets | $ | 408,481 | $ | 385,590 | |||
| Property and equipment, net | 63,703 | 51,330 | |||||
| Goodwill | 194,052 | 194,052 | |||||
| Other intangible assets, net | 52,582 | 67,207 | |||||
| Operating lease ROU assets | 66,191 | — | |||||
| Other long-term assets | 3,211 | 1,783 | |||||
| Total assets | $ | 788,220 | $ | 699,962 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Current maturities of long-term debt | $ | 2,500 | $ | 3,407 | |||
| Trade accounts payable | 76,438 | 87,407 | |||||
| Accrued wages and benefits | 23,412 | 21,275 | |||||
| Customer advances | 3,408 | 3,223 | |||||
| Billings in excess of costs and estimated profits | 11,871 | 10,696 | |||||
| Short-term operating lease liabilities | 17,603 | — | |||||
| Other current liabilities | 12,939 | 17,269 | |||||
| Total current liabilities | $ | 148,171 | $ | 143,277 | |||
| Long-term debt, net of current maturities and unamortized debt issuance costs | 235,419 | 236,979 | |||||
| Long-term operating lease liabilities | 48,605 | — | |||||
| Other long-term liabilities | 1,205 | 2,819 | |||||
| Deferred income taxes | 9,872 | 8,633 | |||||
| Total long-term liabilities | $ | 295,101 | $ | 248,431 | |||
| Total liabilities | $ | 443,272 | $ | 391,708 | |||
| Commitments and Contingencies (Note 16) | |||||||
| Shareholders' Equity: | |||||||
| Series A preferred stock, $1.00 par value; 1,000,000 shares authorized | 1 | 1 | |||||
| Series B convertible preferred stock, $1.00 par value; 1,000,000 shares authorized | 15 | 15 | |||||
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,604,092 and 17,570,590 outstanding | 174 | 174 | |||||
| Additional paid-in capital | 157,886 | 156,190 | |||||
| Retained earnings | 205,680 | 169,735 | |||||
| Accumulated other comprehensive loss | (19,954 | ) | (19,267 | ) | |||
| Total DXP Enterprises, Inc. equity | $ | 343,802 | $ | 306,848 | |||
| Noncontrolling interest | 1,146 | 1,406 | |||||
| Total equity | $ | 344,948 | $ | 308,254 | |||
| Total liabilities and equity | $ | 788,220 | $ | 699,962 | |||
The accompanying notes are an integral part of these consolidated financial statements.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Sales | $ | 1,006,782 | $ | 962,092 | $ | 1,247,043 | ||||||
| Cost of sales | 735,201 | 697,290 | 895,057 | |||||||||
| Gross profit | 271,581 | 264,802 | 351,986 | |||||||||
| Selling, general and administrative expense | 238,091 | 245,470 | 303,819 | |||||||||
| Impairment expense | - | - | 68,735 | |||||||||
| B27 settlement | - | - | 7,348 | |||||||||
| Operating income (loss) | 33,490 | 19,332 | (27,916 | ) | ||||||||
| Other expense (income), net | (456 | ) | (5,906 | ) | 72 | |||||||
| Interest expense | 17,054 | 15,564 | 10,932 | |||||||||
| Income (loss) before income taxes | 16,892 | 9,674 | (38,920 | ) | ||||||||
| Provision for income taxes | 363 | 2,523 | 150 | |||||||||
| Net income (loss) | 16,529 | 7,151 | (39,070 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (359 | ) | (551 | ) | (534 | ) | ||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | 16,888 | 7,702 | (38,536 | ) | ||||||||
| Preferred stock dividend | 90 | 90 | 90 | |||||||||
| Net income (loss) attributable to common shareholders | $ | 16,798 | $ | 7,612 | $ | (38,626 | ) | |||||
| Net income (loss) | $ | 16,529 | $ | 7,151 | $ | (39,070 | ) | |||||
| Cumulative translation adjustment, net of income taxes | (1,217 | ) | (7,658 | ) | (4,916 | ) | ||||||
| Comprehensive income (loss) | $ | 15,312 | $ | (507 | ) | $ | (43,986 | ) | ||||
| Basic earnings (loss) per share | $ | 0.97 | $ | 0.51 | $ | (2.68 | ) | |||||
| Weighted average common shares outstanding | 17,400 | 15,042 | 14,423 | |||||||||
| Diluted earnings (loss) per share | $ | 0.93 | $ | 0.49 | $ | (2.68 | ) | |||||
| Weighted average common shares and common equivalent shares outstanding | 18,240 | 15,882 | 14,423 | |||||||||
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Paid-In Capital | Retained Earnings | Treasury Stock | Non- Control Interest | Accum. Other Comp. Income | Total Equity | ||||||||||||||||||||||||||||
| BALANCES AT January 1, 2015 | $ | 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 | |||||||||||||||||||||||||||
| Tax related items for share based awards | - | - | - | (815 | ) | - | - | - | - | (815 | ) | |||||||||||||||||||||||||
| 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 | - | - | - | (2,632 | ) | - | 2,632 | - | - | - | ||||||||||||||||||||||||||
| 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 | - | - | - | 3,580 | - | - | - | - | 3,580 | |||||||||||||||||||||||||||
| Tax related items for share based awards | - | - | - | (858 | ) | - | - | - | - | (858 | ) | |||||||||||||||||||||||||
| 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 | ) | |||||||||||||||||||||||||
| 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 | |||||||||||||||||
| Dividends paid | - | - | - | - | (90 | ) | - | - | - | (90 | ) | |||||||||||||||||||||||||
| Compensation expense for restricted stock | - | - | - | 1,708 | - | - | - | - | 1,708 | |||||||||||||||||||||||||||
| Tax related items for share based awards | - | - | - | (933 | ) | - | - | - | - | (933 | ) | |||||||||||||||||||||||||
| Issuance of shares of Common stock | - | - | 1 | (1 | ) | - | - | - | - | - | ||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | - | - | - | (1,217 | ) | (1,217 | ) | |||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | 16,888 | - | (359 | ) | - | 16,529 | ||||||||||||||||||||||||||
| BALANCES AT DECEMBER 31, 2017 | $ | 1 | $ | 15 | $ | 174 | $ | 153,087 | $ | 134,193 | $ | - | $ | 567 | $ | (19,491 | ) | $ | 268,546 |
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | $ | 16,888 | $ | 7,702 | $ | (38,536 | ) | |||||
| Less net loss attributable to noncontrolling interest | (359 | ) | (551 | ) | (534 | ) | ||||||
| Net income (loss) | 16,529 | 7,151 | (39,070 | ) | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation | 10,520 | 11,933 | 12,622 | |||||||||
| Amortization of intangible assets | 17,266 | 18,061 | 20,621 | |||||||||
| Impairment of goodwill | - | - | 68,735 | |||||||||
| Bad debt expense | 3,416 | 180 | 2,014 | |||||||||
| Amortization of debt issuance costs | 1,548 | 1,856 | 1,211 | |||||||||
| Write off of debt issuance costs | 578 | - | - | |||||||||
| Gain on sale of subsidiary | - | (5,635 | ) | - | ||||||||
| Stock compensation expense | 1,708 | 3,580 | 2,973 | |||||||||
| Tax loss related to vesting of restricted stock | - | 619 | - | |||||||||
| Deferred income taxes | (3,827 | ) | 2,687 | (9,024 | ) | |||||||
| Changes in operating assets and liabilities, net of assets and liabilities acquired in business acquisitions: | ||||||||||||
| Trade accounts receivable | (20,539 | ) | 12,080 | 71,261 | ||||||||
| Costs and estimated profits in excess of billings on uncompleted contracts | (8,419 | ) | 3,457 | (2,047 | ) | |||||||
| Inventories | (7,544 | ) | 5,453 | 12,724 | ||||||||
| Prepaid expenses and other assets | (3,287 | ) | 620 | 159 | ||||||||
| Accounts payable and accrued expenses | 3,189 | (8,595 | ) | (42,862 | ) | |||||||
| Billings in excess of costs & estimated profits on uncompleted contracts | 1,406 | (5,203 | ) | (513 | ) | |||||||
| Net cash provided by operating activities | 12,544 | 48,244 | 98,804 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchase of property and equipment | (2,811 | ) | (4,868 | ) | (13,992 | ) | ||||||
| Proceeds from the sale of fixed assets | - | 1,206 | - | |||||||||
| Proceeds from sale of subsidiary | - | 31,476 | - | |||||||||
Acquisitions of businesses, net of cash acquired (1) | - | - | (15,501 | ) | ||||||||
| Net cash provided by (used in) investing activities | (2,811 | ) | 27,814 | (29,493 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from debt | 728,822 | 517,689 | 393,551 | |||||||||
| Principal payments on revolving line of credit and other long-term debt | (702,402 | ) | (643,568 | ) | (453,480 | ) | ||||||
| Debt issuance costs | (11,208 | ) | (801 | ) | (543 | ) | ||||||
| Noncontrolling interest holder contributions (distributions), net of tax benefits | - | (335 | ) | 2,346 | ||||||||
| Preferred dividends paid | (90 | ) | (90 | ) | (90 | ) | ||||||
| Purchase of treasury stock | - | - | (8,908 | ) | ||||||||
| Proceeds from issuance of common shares, net | - | 51,889 | - | |||||||||
| Payment for employee taxes withheld from stock awards | (934 | ) | (238 | ) | (815 | ) | ||||||
| Tax (loss) related to vesting of restricted stock | - | (619 | ) | - | ||||||||
| Net cash provided by (used in) financing activities | 14,188 | (76,073 | ) | (67,939 | ) | |||||||
| EFFECT OF FOREIGN CURRENCY ON CASH | 68 | (88 | ) | 274 | ||||||||
| (DECREASE) INCREASE IN CASH | 23,989 | (103 | ) | 1,646 | ||||||||
| CASH AT BEGINNING OF YEAR | 1,590 | 1,693 | 47 | |||||||||
| CASH AT END OF YEAR | $ | 25,579 | $ | 1,590 | $ | 1,693 | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
| Cash paid for Interest | $ | 15,205 | $ | 13,708 | $ | 9,721 | ||||||
| Cash paid for Income Taxes | $ | 714 | $ | 4,780 | $ | 13,792 | ||||||
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | 36,035 | $ | 35,632 | $ | 16,888 | |||||
| Less: net loss attributable to non-controlling interest | (260 | ) | (111 | ) | (359 | ) | |||||
| Net income | $ | 35,775 | $ | 35,521 | $ | 16,529 | |||||
| Reconciliation of net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 10,100 | 9,578 | 10,520 | ||||||||
| Amortization of intangible assets | 15,074 | 16,586 | 17,266 | ||||||||
| Bad debt expense | 139 | 2,368 | 3,416 | ||||||||
| Payment of contingent consideration liability in excess of acquisition-date fair value | (106 | ) | — | — | |||||||
| Amortization of debt issuance costs | 1,875 | 1,743 | 1,548 | ||||||||
| Fair value adjustment on contingent consideration | 54 | 313 | — | ||||||||
| Write off of debt issuance costs | — | 60 | 578 | ||||||||
| Gain on sale of property and equipment | (9 | ) | (1,330 | ) | — | ||||||
| Stock compensation expense | 1,963 | 2,549 | 1,708 | ||||||||
| Deferred income taxes | 1,110 | 1,004 | (3,827 | ) | |||||||
| Other long-term liabilities | (6,718 | ) | 2,610 | — | |||||||
| Changes in operating assets and liabilities | |||||||||||
| Trade accounts receivable | 5,560 | (22,487 | ) | (20,539 | ) | ||||||
| Costs and estimated profits in excess of billings | 92 | (5,640 | ) | (8,419 | ) | ||||||
| Inventories | (14,447 | ) | (20,838 | ) | (7,544 | ) | |||||
| Prepaid expenses and other assets | 5,110 | 188 | (3,287 | ) | |||||||
| Accounts payable and accrued expenses | (15,407 | ) | 7,093 | 3,189 | |||||||
| Billings in excess of costs & estimated profits | 1,142 | 6,522 | 1,406 | ||||||||
| Net cash provided by operating activities | $ | 41,307 | $ | 35,840 | $ | 12,544 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchase of property and equipment | (22,120 | ) | (9,323 | ) | (2,811 | ) | |||||
| Proceeds from the sale of property and equipment | 35 | 2,558 | — | ||||||||
| Acquisition of business | — | (10,811 | ) | — | |||||||
| Net cash used in investing activities | $ | (22,085 | ) | $ | (17,576 | ) | $ | (2,811 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from debt | — | — | 728,822 | ||||||||
| Principal debt payments | (4,341 | ) | (3,381 | ) | (702,402 | ) | |||||
| Debt issuance costs | — | (60 | ) | (11,208 | ) | ||||||
| Payment for contingent consideration liability | (1,394 | ) | — | — | |||||||
| Non-controlling interest holder contributions (distributions), net of tax benefits | — | 950 | — | ||||||||
| Preferred dividends paid | (90 | ) | (90 | ) | (90 | ) | |||||
| Payment for employee taxes withheld from stock awards | (267 | ) | (340 | ) | (934 | ) | |||||
| Net cash provided by (used in) financing activities | $ | (6,092 | ) | $ | (2,921 | ) | $ | 14,188 | |||
| Effect of foreign currency on cash | 676 | (403 | ) | 68 | |||||||
| Net Change In Cash | $ | 13,806 | $ | 14,940 | $ | 23,989 | |||||
| Cash at Beginning of Year | 40,519 | 25,579 | 1,590 | ||||||||
| Cash at End of Year | $ | 54,325 | $ | 40,519 | $ | 25,579 | |||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||||
| Cash paid for interest | $ | 17,623 | $ | 19,134 | $ | 15,205 | |||||
| Cash paid for income taxes | $ | 13,318 | $ | 8,301 | $ | 714 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
| Series A preferred Stock | Series B preferred Stock | Common Stock | Paid-in Capital | Retained earnings | Treasury stock | Non controlling interest | Accum Other Comp (Loss) | Total equity | |||||||||||||||||||||||||||
| Balances at December 31, 2016 | $ | 1 | $ | 15 | $ | 173 | $ | 152,313 | $ | 117,395 | $ | — | $ | 926 | $ | (18,274 | ) | $ | 252,549 | ||||||||||||||||
| Dividends paid | — | — | — | — | (90 | ) | — | — | — | (90 | ) | ||||||||||||||||||||||||
| Compensation expense for restricted stock | — | — | — | 1,708 | — | — | — | — | 1,708 | ||||||||||||||||||||||||||
| Tax related items for share based awards | — | — | — | (934 | ) | — | — | — | — | (934 | ) | ||||||||||||||||||||||||
| Issuance of shares of common stock | — | — | 1 | — | — | — | — | — | 1 | ||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | — | — | — | (1,217 | ) | (1,217 | ) | ||||||||||||||||||||||||
| Net income | — | — | — | — | 16,888 | — | (359 | ) | — | 16,529 | |||||||||||||||||||||||||
| Balances at December 31, 2017 | $ | 1 | $ | 15 | $ | 174 | $ | 153,087 | $ | 134,193 | $ | — | $ | 567 | $ | (19,491 | ) | $ | 268,546 | ||||||||||||||||
| Dividends paid | — | — | — | — | (90 | ) | — | — | — | (90 | ) | ||||||||||||||||||||||||
| Compensation expense for restricted stock | — | — | — | 2,549 | — | — | — | — | 2,549 | ||||||||||||||||||||||||||
| Tax related items for share based awards | — | — | — | (340 | ) | — | — | — | — | (340 | ) | ||||||||||||||||||||||||
| Non-controlling interest holder contributions, net of tax benefits | — | — | — | — | — | — | 950 | — | |||||||||||||||||||||||||||
| Issuance of shares of common stock | — | — | — | 894 | — | — | — | — | 894 | ||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | — | — | — | 224 | 224 | ||||||||||||||||||||||||||
| Net income | — | — | — | — | 35,632 | — | (111 | ) | — | 35,521 | |||||||||||||||||||||||||
| Balances at December 31, 2018 | $ | 1 | $ | 15 | $ | 174 | $ | 156,190 | $ | 169,735 | $ | — | $ | 1,406 | $ | (19,267 | ) | $ | 308,254 | ||||||||||||||||
| Dividends paid | — | — | — | — | (90 | ) | — | — | — | (90 | ) | ||||||||||||||||||||||||
| Compensation expense for restricted stock | — | — | — | 1,963 | — | — | — | — | 1,963 | ||||||||||||||||||||||||||
Tax related items for share based awards | — | — | — | (267 | ) | — | — | — | — | (267 | ) | ||||||||||||||||||||||||
| Non-controlling interest holder contributions, net of tax benefits | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of shares of common stock | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | — | — | — | (687 | ) | (687 | ) | ||||||||||||||||||||||||
| Net income | — | — | — | — | 36,035 | — | (260 | ) | — | 35,775 | |||||||||||||||||||||||||
| Balances at December 31, 2019 | $ | 1 | $ | 15 | $ | 174 | $ | 157,886 | $ | 205,680 | $ | — | $ | 1,146 | $ | (19,954 | ) | $ | 344,948 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
DXP Enterprises, Inc. together with its subsidiaries (collectively “DXP,” “Company,” “us,” “we,” or “our”) was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to energy and industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). See Note 19 - Segment and Geographical Reporting18 for discussion of the business segments.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
Basis of Presentation
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its 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, 2017,2019, the total assets of the VIE were approximately $5.2$4.6 million including approximately $4.5$4.0 million of fixed assets. DXP is the primary customer of the VIE. Consolidation of the VIE increaseddecreased cost of sales by approximately $0.6 million and $1.3$0.4 million for the twelve monthsyear ended December 31, 20172019 and 2016,decreased cost of sales by approximately $0.7 million for the year ended December 31, 2018, respectively. The Company recognized a related income tax benefit of $0.2 million$83 thousand and $0.3 million$46 thousand related to the VIE for the years ended December 31, 20172019 and 2016, respectively. At December 31, 2017,2018, respectively. As of December 31, 2019, the owners of the 52.5% of the equity not owned by DXP included employees of DXP.
All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation; none affected net income.
Foreign Currency
The financial statements of the Company’s Canadian subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive income (loss). Gains and losses on transactions denominated in foreign currency are reported in the consolidated statements of operations and comprehensive income (loss).
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company’s presentation of cash includes cash equivalents. Cash equivalents are defined as short-term investments with maturity dates of 90 days or less at time of purchase. The Company places its cash and cash equivalents with institutions with high credit quality. However, at certain times, such cash and cash equivalents may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not historically experienced any losses when in excess of these limits.
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.
43
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. 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.
Changes in this allowance for 2017, 20162019, 2018 and 20152017 were as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Balance at beginning of year | $ | 8,160 | $ | 9,364 | $ | 8,713 | ||||||
| Charged to costs and expenses | 3,367 | 180 | 2,014 | |||||||||
| Charged to other accounts | 22 | 3 | (17 | )2 | 1,255 | 2 | ||||||
| Deductions | (2,534 | )1 | (1,367 | )1 | (2,618 | )1 | ||||||
| Balance at end of year | $ | 9,015 | $ | 8,160 | $ | 9,364 | ||||||
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Balance at beginning of year | $ | 10,126 | $ | 9,015 | $ | 8,160 | ||||||
| Charged to costs and expenses | 139 | 2,368 | 3,367 | |||||||||
| Charged to other accounts | 79 | (3) | (86 | ) | (2) | 22 | (3) | |||||
| Deductions | (1,415 | ) | (1) | (1,171 | ) | (1) | (2,534 | ) | (1) | |||
| Balance at end of year | $ | 8,929 | $ | 10,126 | $ | 9,015 | ||||||
(2) Includes allowance for doubtful accounts from acquisitions and divestiture
(3) Primarily due to translation adjustments
Inventories
Inventories consist principally of equipment purchased for resale or finished goods and are priced at net realizable value,, cost being primarily determined using the first-in, first-out (“FIFO”)weighted average cost method. Provisions are provided against inventories for estimated excess and obsolescence based upon the aging of the inventories and market trends and are applied as a reduction in cost of associated inventory.
Property and Equipment
Property and equipment are carried on the basis of cost. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings.
The principal estimated useful lives used in determining depreciation are as follows:
| Buildings | 20-39 years |
| Building improvements | 10-20 years |
| Furniture, fixtures and equipment | 3-20 years |
| Leasehold improvements | Shorter of estimated useful life or related lease term |
Impairment of Goodwill and Other 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.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.
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 assessmentShould the reporting unit's carrying amount exceed the fair value, then an impairment charge for the excess would be recognized. The impairment charge is performed, the first step islimited to identify a potential impairment, and the second step measures the amount of goodwill allocated to the impairment loss, if any. Goodwill is deemed toreporting unit, and goodwill will not be impaired if the carrying amountreduced below zero.
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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 of long-lived assets excluding goodwill, was required in 2017, 20162019, 2018 and 2015.
Revenue Recognition
The Company fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed. This typically occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin. Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue for these contracts using the percentage of completion method.method, an "input method" as defined by the new standard. 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. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. Revenues of approximately $40.6 million, $31.5 million, and $47.5 million were recognized on contracts in process for the years ended December 31, 2017, 2016, and 2015, respectively. The typical time span of these contracts is approximately one to two years.
The Company reserves for potential customer returns based upon the historical level of returns.
Shipping and Handling Costs
The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified as a component of cost of sales.
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 $175,000 of risk on each medical claim for our employees and their 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, 20172019 and 20162018 was approximately $2.7$2.5 million and $3.1$2.3 million, respectively.
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Cost of Sales and Selling, General and Administrative Expense
Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs and depreciation. Selling, general and administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation and amortization.
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.U.S. federal, state and local tax examination by tax authorities for years prior to 2012.2013. 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 mattermatter.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and foreign currency translation adjustments and unrealized gains and losses on certain investments in debt and equity securities.adjustments. The Company’s other comprehensive (loss) income is comprised of changes in the market value of an investment with quoted market prices in an active market for identical instruments and translation adjustments from translating foreign subsidiaries to the reporting currency. Comprehensive income for the year ended December 31, 2016 was reduced by an $8.6 million charge recorded during the fourth quarter of 2016 to correct errors which accumulated during 2013, 2014 and 2015 due to the Company improperly recognizing an $8.6 million deferred tax asset on unrealized foreign currency losses not expected to be realized within one year. We assessed the materiality of this misstatement and concluded the misstatement was not material to the results of operations or financial condition for the years ended December 31, 2016 and 2015.
Out-of-Period Items
Deferred tax liabilities related to intangibles for customer relationships acquired in Canada during 2012 and 2013 were reduced by $2.2 million during the fourth quarter of 2017 to correct the tax rate used to establish the deferred tax liabilities at the dates of acquisition. The Company evaluated the misstatement of each period since these acquisitions were completed and concluded the effects were immaterial.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This update adds language to the SEC Staff Guidance in relation to ASU 2014-09, ASU 2016-02, and ASU 2016-13. This ASU 2017-03 provides the SEC Staff view that a registrant should consider additional quantitative and qualitative disclosures related to the previously mentioned ASUs in connection with the status and impact of their adoption. This guidance, which was effective immediately, did not have a material impact on our Condensed Consolidated Financial Statements.Pronouncements Not Yet Adopted
Financial Instruments – Credit Losses.In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses, which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses.losses ("CECL"). The update is intended to provide financial statement users with more useful information about expected credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect, if any, that the guidance will have on the Company’s Consolidated Financial Statements and related disclosures.
Currently, our reserve methodology for trade receivables is based on matrices in which historical loss percentages are applied to respective aging categories. CECL will require us to use a forward-looking methodology that incorporates lifetime expected credit losses. While our current reserving matrices may still be used under CECL, historical loss data will need to be combined with reasonable and supportable forecasts of future losses to determine estimated credit losses. The most visible impact of CECL will therefore be that receivables and contract assets that are either current or not yet due, which today do not generally have a reserve, will have an allowance for expected credit losses.
The CECL model does not prescribe a specific methodology for developing a reasonable and supportable forecast, nor the duration of the period that losses can be forecast, nor the precision required to support the estimate. As a result, the determination of the reasonable and supportable forecast period is a judgment to be made in estimating the overall expected credit loss. Although the CECL model requires entities to perform this new evaluation for trade receivables and contract assets, we generally do not expect to see a significant change in the impairment losses recognized on our trade receivables or contract assets given their short-term nature. We will adopt the standard on January 1, 2020, with a cumulative-effect adjustment to retained earnings. Based upon our current assessment, the adjustment will be less than $3 million to our allowance for doubtful accounts and the company does not expect the adoption of the standard to have a material impact on the consolidated statement of operations and cash flows.
NOTE 4 - LEASES
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). which was modified by subsequently issued ASUs 2018-01, 2018-10, 2018-11 and 2018-20. The update requires organizations that lease assets (“lessees”("lessees") to recognize the assets and liabilities forof 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 haswas 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, including qualitative and quantitative requirements. This pronouncement iswas effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption iswas permitted. The Company is currently assessing the impact that this standard will have on its Consolidated Financial Statements.
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The Company adopted the standard effective January 1, 2019. We elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and we elected to apply the following practical expedients and accounting policy decisions.
We elected a package of transition expedients that allowed us to forgo reassessing certain conclusions reached under ASC 840 which must be elected together. All expedients in this package were applied together for all leases that commenced before the effective date, January 1, 2019, of ASC 842. As a result, in transitioning to ASC 842, for existing leases as of 1/1/2019, we continued to use judgments made under ASC 840 related to embedded leases, lease classification and accounting for initial direct costs. We generally have four classes of leased assets : Real Estate related properties (such as office space, warehouses, distribution centers and land), Automobiles, Office Equipment and Manufacturing Equipment and do not utilize finance leases.
In addition, we have chosen, as an accounting policy election by class of underlying asset, not to separate nonlease components from the associated lease for all of our leased asset classes, except for Real Estate related leases. As a result, for classes of Automobiles, Office Equipment and Manufacturing Equipment, we account for each separate lease component and the nonlease components associated with that lease as a single lease component.
For short-term leases as defined under ASC 842, we elected the short-term lease exception pursuant to ASC 842 to all classes of our leased assets. We do not recognize a lease liability or a right of use asset on our overall assessment performedconsolidated balance sheets for our leased assets with an original lease term of twelve months or less. Instead, we recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred and disclose in the notes to date, the adoption of theconsolidated financial statements our short-term lease expense.
The new standard is not expected todid have an ongoinga material impact on our consolidated balance sheets related to recording right-of-use (ROU) assets and the Company’s Consolidated Financial Statements.corresponding lease liabilities for our inventory of operating leases. In January 2019, we recorded a ROU Asset and total lease liability obligations of $72.7 million and $72.4 million, respectively. The new standard did not have a material impact on our consolidated statements of operations and had no impact on cash flows.
We lease office space, warehouses, land, automobiles, and office and manufacturing equipment. All of our leases are classified as operating leases.
Our leases have remaining lease terms of 1 month to 11 years, some of which include options to extend the leases for up to 14 years. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not include options to purchase the leased property.
The lease expenses were as follows (in thousands):
| Twelve Months Ended December 31, 2019 | ||||||
| Lease cost | Classification | |||||
| Short-term lease expense | SG&A expenses(*) | $ | 1,087 | |||
| Other operating lease cost | SG&A expenses(*) | 23,911 | ||||
| Total operating lease cost | $ | 24,998 | ||||
(*) Manufacturing equipment and some vehicle rental expenses are included in the cost of sales. | ||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| Twelve Months Ended December 31, 2019 | ||||
| Lease | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 19,020 | ||
| Right-of-use assets obtained in exchange for lease liabilities | ||||
| Operating leases | $ | 12,608 | ||
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Supplemental balance sheet information related to leases was as follows (in thousand):
| Lease | Classification | December 31, 2019 | Impact of ASC 842 Transition | |||||||
| Assets | ||||||||||
| Operating | Operating lease right-of-use assets | $ | 66,191 | $ | 72,679 | |||||
| Liabilities | ||||||||||
| Current operating | Short-term operating lease liabilities | 17,603 | 18,762 | |||||||
| Non-current operating | Long-term operating lease liabilities | 48,605 | 53,654 | |||||||
| Total operating lease liabilities | $ | 66,208 | $ | 72,416 | ||||||
Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments for lease commenced on or after January 1, 2019. We used our incremental borrowing rate as of the transition date of January 1, 2019 for operating leases that commenced prior to transition.
Maturities of lease liabilities were as follows (in thousands):
| Year Ending December 31, | Operating leases (*) | |||
| 2020 | $ | 21,641 | ||
| 2021 | 18,455 | |||
| 2022 | 14,198 | |||
| 2023 | 8,926 | |||
| 2024 | 4,573 | |||
| Thereafter | 10,301 | |||
| Total lease payments | $ | 78,094 | ||
| Less: imputed interest | 11,886 | |||
| Present value of lease liabilities | $ | 66,208 | ||
(*) Operating lease payments exclude $1.1 million of legally binding minimum lease payments for leases signed but not yet commenced.
Contractual obligations related to operating leases as of December 31, 2018, under ASC 840 (in thousands):
| Payments due by period (in thousands) | ||||||||||||||||||||
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
| Operating lease obligations | $ | 22,096 | $ | 33,825 | $ | 18,379 | $ | 11,022 | $ | 85,322 | ||||||||||
| Lease term and discount rate | Twelve Months Ended December 31, 2019 | |
| Weighted average remaining lease term (years) | ||
| Operating lease | 4.74 | |
| Weighted average discount rate | ||
| Operating lease | 7.3% | |
For the twelve months ended December 31, 2019, the Company paid approximately $2.2 million in lease expenses to entities controlled by the Company's Chief Executive Officer, David Little and family.
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NOTE 45 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories:
Level 1 Inputs
Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs
Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 Inputs
Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
As of December 31, 2019, we recorded a $2.7 million liability for contingent consideration associated with the acquisition of ASI in other current and long-term liabilities. See further discussion at Note 15 - Business Acquisitions. For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the twelve months ended December 31, 2019:
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| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||
| Contingent Liability for Accrued Consideration | |||
| (in thousands) | |||
| Beginning balance at December 31, 2018 | $ | 4,319 | |
| Acquisitions and settlements | |||
| Acquisitions (Note 15) | — | ||
| Settlements | (1,500 | ) | |
| Total remeasurement adjustments: | |||
| Changes in fair value recorded in other (income) expense, net | (114 | ) | |
| Ending balance at December 31, 2019 | $ | 2,705 | |
| The amount of total (gains) or losses for the year included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at year-end. | (114 | ) | |
| * Included in other current and long-term liabilities | |||
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in accordance with the fair value hierarchy.measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
| (in thousands, unaudited) | Fair Value at December 31, 2019 | Valuation Technique | Significant Unobservable Inputs | ||
| Contingent consideration: (ASI acquisition) | $ | 2,705 | Discounted cash flow | Annualized EBITDA and probability of achievement | |
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of ASI are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results. The discount rate used in the calculation was 7.5%. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement.
Other financial instruments not measured at fair value on the Company's consolidated balance sheets at December 31, 2019 but which require disclosure of their fair values include: cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility (Note 10). The Company believes that the estimated fair value of such instruments at December 31, 2019 and December 31, 2018 approximates their carrying value as reported on the consolidated balance sheets.
NOTE 56 - INVENTORIES
The carrying values of inventories were as follows (in thousands):
| December 31, 2019 | December 31, 2018 | ||||||
| Finished goods | $ | 122,510 | $ | 110,182 | |||
| Work in process | 19,721 | 17,344 | |||||
| Obsolescence reserve | (12,867 | ) | (12,696 | ) | |||
| Inventories | $ | 129,364 | $ | 114,830 | |||
December 31, 2017 | December 31, 2016 | |||||||
| Finished goods | $ | 79,820 | $ | 74,269 | ||||
| Work in process | 11,593 | 9,430 | ||||||
| Inventories | $ | 91,413 | $ | 83,699 | ||||
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NOTE 67 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
Costs and estimated profits on uncompleted contracts and related amounts billed for 20172019 and 20162018 were as follows (in thousands):
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Costs incurred on uncompleted contracts | $ | 37,899 | $ | 25,214 | ||||
| Estimated earnings, thereon | 2,665 | 6,274 | ||||||
| Total | 40,564 | 31,488 | ||||||
| Less: billings to date | 17,881 | 15,864 | ||||||
| Net | $ | 22,683 | $ | 15,624 | ||||
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Costs incurred on uncompleted contracts | $ | 51,017 | $ | 53,595 | |||
| Estimated profits, thereon | 10,771 | 6,847 | |||||
| Total | $ | 61,788 | $ | 60,442 | |||
| Less: billings to date | 41,223 | 38,662 | |||||
| Net | $ | 20,565 | $ | 21,780 | |||
Such amounts were included in the accompanying Consolidated Balance Sheets for 20172019 and 20162018 under the following captions (in thousands):
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Costs and estimated profits in excess of billings | $ | 32,455 | $ | 32,514 | |||
| Billings in excess of costs and estimated profits | (11,871 | ) | (10,696 | ) | |||
| Translation Adjustment | (19 | ) | (38 | ) | |||
| Net | $ | 20,565 | $ | 21,780 | |||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Costs and estimated profits in excess of billings on uncompleted contracts | $ | 26,915 | $ | 18,421 | ||||
| Billings in excess of costs and estimated profits on uncompleted contracts | (4,249 | ) | (2,813 | ) | ||||
| Translation Adjustment | 17 | 16 | ||||||
| Net | $ | 22,683 | $ | 15,624 | ||||
During the twelve months ended December 31, 2019, $10.5 million of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments.
NOTE 78 - PROPERTY AND EQUIPMENT
The carrying values of property and equipment were as follows (in thousands):
| December 31, 2019 | December 31, 2018 | ||||||
| Land | $ | 1,960 | $ | 1,960 | |||
| Buildings and leasehold improvements | 15,445 | 15,051 | |||||
| Furniture, fixtures and equipment | 119,865 | 100,449 | |||||
| Less – Accumulated depreciation | (73,567 | ) | (66,130 | ) | |||
| Total Property and Equipment | $ | 63,703 | $ | 51,330 | |||
December 31, 2017 | December 31, 2016 | |||||||
| Land | $ | 2,346 | $ | 2,346 | ||||
| Buildings and leasehold improvements | 16,724 | 16,259 | ||||||
| Furniture, fixtures and equipment | 94,475 | 94,784 | ||||||
| Less – Accumulated depreciation | (60,208 | ) | (52,582 | ) | ||||
| Total Property and Equipment | $ | 53,337 | $ | 60,807 | ||||
Depreciation expense was $10.5$10.1 million, $11.9$9.6 million, and $12.6$10.5 million for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively. Capital expenditures by segment are included in Note 19 - Segment and Geographical Reporting18..
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NOTE 89 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 20172019 (in thousands):
Goodwill | Other Intangible Assets | Total | ||||||||||
| Balances as of December 31, 2016 | $ | 187,591 | $ | 94,831 | $ | 282,422 | ||||||
| Translation adjustment | - | 960 | 960 | |||||||||
| Amortization | - | (17,266 | ) | (17,266 | ) | |||||||
| Balances as of December 31, 2017 | $ | 187,591 | $ | 78,525 | $ | 266,116 | ||||||
| Goodwill | Other Intangible Assets | Total | |||||||||
| Balances as of December 31, 2018 | $ | 194,052 | $ | 67,207 | $ | 261,259 | |||||
| Translation adjustment | — | 449 | 449 | ||||||||
| Amortization | — | (15,074 | ) | (15,074 | ) | ||||||
| Balances as of December 31, 2019 | $ | 194,052 | $ | 52,582 | $ | 246,634 | |||||
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 20162018 (in thousands):
Goodwill | Other Intangible Assets | Total | ||||||||||
| Balances as of December 31, 2015 | $ | 197,362 | $ | 112,297 | $ | 309,659 | ||||||
| Sale of subsidiary | (9,620 | ) | - | (9,620 | ) | |||||||
| Purchase accounting adjustment | (151 | ) | - | (151 | ) | |||||||
| Translation adjustment | - | 595 | 595 | |||||||||
| Amortization | - | (18,061 | ) | (18,061 | ) | |||||||
| Balances as of December 31, 2016 | $ | 187,591 | $ | 94,831 | $ | 282,422 | ||||||
| Goodwill | Other Intangible Assets | Total | |||||||||
| Balances as of December 31, 2017 | $ | 187,591 | $ | 78,525 | $ | 266,116 | |||||
| Translation adjustment | — | (917 | ) | (917 | ) | ||||||
| Acquisition of ASI | 6,461 | 6,185 | 12,646 | ||||||||
| Amortization | — | (16,586 | ) | (16,586 | ) | ||||||
| Balances as of December 31, 2018 | $ | 194,052 | $ | 67,207 | $ | 261,259 | |||||
The following table presents the goodwill balance by reportable segment as of December 31, 20172019 and 2016 2018 (in thousands):
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Service Centers | $ | 154,473 | $ | 154,473 | ||||
| Innovative Pumping Solutions | 15,980 | 15,980 | ||||||
| Supply Chain Services | 17,138 | 17,138 | ||||||
| Total | $ | 187,591 | $ | 187,591 | ||||
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Service Centers | $ | 160,934 | $ | 160,934 | |||
| Innovative Pumping Solutions | 15,980 | 15,980 | |||||
| Supply Chain Services | 17,138 | 17,138 | |||||
| Total | $ | 194,052 | $ | 194,052 | |||
The following table presents a summary of amortizableamortization of other intangible assets (in thousands):
| As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Carrying Amount, net | Gross Carrying Amount | Accumulated Amortization | Carrying Amount, net | |||||||||||||||||||
| Customer relationships | $ | 162,200 | $ | (83,806 | ) | $ | 78,394 | $ | 163,022 | $ | (68,446 | ) | $ | 94,576 | ||||||||||
| Non-compete agreements | 949 | (818 | ) | 131 | 1,836 | (1,581 | ) | 255 | ||||||||||||||||
| Total | $ | 163,149 | $ | (84,624 | ) | $ | 78,525 | $ | 164,858 | $ | (70,027 | ) | $ | 94,831 | ||||||||||
| As of December 31, 2019 | As of December 31, 2018 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Carrying Amount, net | Gross Carrying Amount | Accumulated Amortization | Carrying Amount, net | ||||||||||||||||||
| Customer relationships | $ | 156,282 | $ | (103,796 | ) | $ | 52,486 | $ | 168,255 | $ | (101,200 | ) | $ | 67,055 | |||||||||
| Non-compete agreements | 285 | (189 | ) | 96 | 784 | (632 | ) | 152 | |||||||||||||||
| Total | $ | 156,567 | $ | (103,985 | ) | $ | 52,582 | $ | 169,039 | $ | (101,832 | ) | $ | 67,207 | |||||||||
Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according to estimated economic benefits over their estimated useful lives.lives.
Customer relationships are amortized over their estimated useful lives. Amortization expense is recognized according to estimated economic benefits and was $17.3$15.1 million, $18.1$16.6 million, and $20.6$17.3 million for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows (in thousands):
| 2018 | $ | 15,615 | ||
| 2019 | 14,170 | |||
| 2020 | 10,292 | |||
| 2021 | 8,911 | |||
| 2022 | 7,264 | |||
| Thereafter | 22,273 | |||
| Total | $ | 78,525 |
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| 2020 | $ | 11,611 | |
| 2021 | 9,287 | ||
| 2022 | 7,974 | ||
| 2023 | 6,508 | ||
| 2024 | 4,886 | ||
| Thereafter | 12,316 | ||
| Total | $ | 52,582 | |
The weighted average remaining estimated life for customer relationships and non-compete agreements are 8.3 years7.33 and 1.8 years,2.58, respectively.
NOTE 910 – LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| ABL Revolver | $ | - | $ | - | ||||
| Term Loan B | 249,375 | - | ||||||
| Line of credit | - | 147,600 | ||||||
| Term loan | - | 74,500 | ||||||
| Promissory note payable in monthly installments at 2.9% through January 2021, collateralized by equipment | 2,722 | 3,577 | ||||||
| Less unamortized debt issuance costs | (10,073 | ) | (992 | ) | ||||
| Total Debt | 242,024 | 224,685 | ||||||
| Less: Current maturities | (3,381 | ) | (51,354 | ) | ||||
| Total Long-term Debt | $ | 238,643 | $ | 173,331 | ||||
| December 31, 2019 | December 31, 2018 | ||||||||||||||
Carrying Value(1) | Fair Value | Carrying Value(1) | Fair Value | ||||||||||||
| ABL Revolver | $ | — | — | $ | — | — | |||||||||
| Term Loan B | 244,375 | 244,375 | 246,875 | 245,949 | |||||||||||
Promissory note payable(2) | — | — | 1,841 | 1,841 | |||||||||||
| Total Debt | 244,375 | 244,375 | 248,716 | 247,790 | |||||||||||
| Less: Current maturities | (2,500 | ) | (2,500 | ) | (3,407 | ) | (3,398 | ) | |||||||
| Total Long-term Debt | $ | 241,875 | $ | 241,875 | $ | 245,309 | $ | 244,392 | |||||||
(1) Carrying value amount do not include unamortized debt issuance costs of $6.5 million and $8.3 million for year ended December 31, 2019 and December 31, 2018 respectively.
(2) Note payable in monthly installments at 2.9% through January 2021, collateralized by equipment. In August 2019, the Company
made a cash payment of $1.3 million to repay the remaining balance of the outstanding promissory note payable.
August 2017 Credit Agreements
On August 29, 2017, DXPthe Company entered into two credit agreements (the "August 2017 Credit Agreements") that provided for an $85.0 million asset-backed revolving line of credit (the "ABL Revolver") and a five year, $85$250.0 million Asset Basedsenior secured term loan B (the "Term Loan and Security Agreement (the “ABL Credit Agreement”B"). TheUnder the ABL Credit Agreement provides for asset-basedRevolver, the Company may request $10.0 million incremental revolving loansloan commitments in an additional aggregate principal amount of upnot to $85.0exceed $50.0 million, (the “ABL Loans”). subject to pro forma compliance with certain net secured leverage ratio tests.
The applicable rate for the ABL Loans may be increased, in increments of $10.0 million, up to an aggregate of $50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding borrowings at a rate equal toRevolver is LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate baseannum. The applicable rate Canadian primefor the Term Loan B was LIBOR plus 5.50% subject to a LIBOR floor of 1.00%. The maturity date of the ABL Revolver is August 29, 2022 and the maturity date of the Term Loan B is August 29, 2023.
On June 25, 2018, the Company entered into Amendment No. 1 (the "Repricing Amendment") to the Senior Secured Term Loan B Agreement. The Repricing Amendment, among other things, reduced the applicable rate or Canadianfor the term loans to LIBOR plus 4.75% (subject to a LIBOR floor of 1.00%) from LIBOR plus 5.50% for the Eurodollar Rate Loans and reduced the base rate plus a margin rangingof 3.75% for the Base Rate Loans from 0.25%4.50%. The Repricing Amendment also included a "soft call" prepayment penalty of 1.0% for a period of six months commencing with the date of the Repricing Amendment for certain prepayments, refinancing, and amendments.
The Company accounted for the Repricing Amendment as a modification of debt. Approximately, $60,000 of prior deferred debt issuance costs were accelerated and recorded as additional interest expense in the consolidated statements of operations and comprehensive income, attributable to 0.75% per annum,prior syndicate lenders who reduced or eliminated their positions during the amendment process. The Company also incurred $0.9 million of third party fees in each case, based uponconnection with the average daily excess availabilityRepricing Amendment, which was also recorded as additional interest expense in the consolidated statements of operations and comprehensive income.
As of December 31, 2019, the Company had no amount outstanding under the facility forABL Revolver and had $81.6 million of borrowing capacity, including the most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum are payable on the portionimpact of the facility not in use at any given time. The interest rate for the ABL facility was 2.9% at December 31, 2017. The unused line fee was 0.375% at December 31, 2017.letters of credit.
Debt Issuance Cost Amortization
Fees paid to DXP’s lenders to secure a firm commitment on our term loan and revolving line of credit are presented as a direct deduction from the carrying amount of the Borrowersdebt liability. For the term loan, fees paid by DXP are guaranteed byamortized over the Company and its direct and indirect material wholly-owned subsidiaries other than certain excluded subsidiaries.
The interest rates on our borrowings outstanding at December 31, 2019 and 2018, including the amortization of debt issuance costs, were as follows:
| December 31, | |||||
| 2019 | 2018 | ||||
| ABL Revolver | 3.5 | % | 4.0 | % | |
| Term Loan B | 6.5 | % | 7.3 | % | |
| Promissory Note | — | % | 2.9 | % | |
| Weighted average interest rate | 6.5 | % | 7.2 | % | |
The Company was in compliance with all financial covenants under the August 2017 Credit Agreements as of December 31, 2017, the maturities of long-term debt for the next five years and thereafter were as follows (in thousands):2019.
| 2018 | $ | 3,381 | ||
| 2019 | 3,405 | |||
| 2020 | 3,436 | |||
| 2021 | 2,500 | |||
| 2022 | 2,500 | |||
| Thereafter | 236,875 | |||
| Total | $ | 252,097 |
NOTE 1011 - INCOME TAXES
The components of income before income taxes were as follows (in thousands):
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Domestic | $ | 41,184 | $ | 46,270 | $ | 13,183 | |||||
| Foreign | 5,485 | 2,436 | 3,709 | ||||||||
| Total income before taxes | $ | 46,669 | $ | 48,706 | $ | 16,892 | |||||
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Domestic | $ | 13,183 | $ | 11,079 | $ | (42,179 | ) | |||||
| Foreign | 3,709 | (1,405 | ) | 3,259 | ||||||||
| Total income before taxes | $ | 16,892 | $ | 9,674 | $ | (38,920 | ) | |||||
The provision for income taxes consisted of the following (in thousands):
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Current - | |||||||||||
| Federal | $ | 4,940 | $ | 7,295 | $ | 1,400 | |||||
| State | 1,862 | 2,257 | 698 | ||||||||
| Foreign | 2,982 | 2,629 | 2,092 | ||||||||
| Total current | $ | 9,784 | $ | 12,181 | $ | 4,190 | |||||
| Deferred - | |||||||||||
| Federal | 2,618 | 2,389 | 686 | ||||||||
| State | (224 | ) | 123 | (464 | ) | ||||||
| Foreign | (1,284 | ) | (1,508 | ) | (4,049 | ) | |||||
| Total deferred | $ | 1,110 | $ | 1,004 | $ | (3,827 | ) | ||||
| Total current and deferred taxes | $ | 10,894 | $ | 13,185 | $ | 363 | |||||
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current - | ||||||||||||
| Federal | $ | 1,400 | $ | (902 | ) | $ | 5,182 | |||||
| State | 698 | 136 | 1,499 | |||||||||
| Foreign | 2,092 | 602 | 2,493 | |||||||||
| 4,190 | (164 | ) | 9,174 | |||||||||
| Deferred - | ||||||||||||
| Federal | 686 | 4,174 | (7,090 | ) | ||||||||
| State | (464 | ) | 120 | - | ||||||||
| Foreign | (4,049 | ) | (1,607 | ) | (1,934 | ) | ||||||
| (3,827 | ) | 2,687 | (9,024 | ) | ||||||||
| $ | 363 | $ | 2,523 | $ | 150 | |||||||
The difference between income taxes computed at the federal statutory income tax rate (35%) and the provision for income taxes is as follows (in thousands):
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Income taxes computed at federal statutory rate | $ | 5,912 | $ | 3,386 | $ | (13,622 | ) | |||||
| State income taxes, net of federal benefit | 152 | 166 | 974 | |||||||||
| Non-tax deductible impairment expense computed at federal statutory rate | - | - | 15,765 | |||||||||
| Foreign adjustment | 255 | 140 | 689 | |||||||||
| Meals and entertainment | 422 | 361 | 620 | |||||||||
| Gain on sale of Vertex | - | (1,971 | ) | - | ||||||||
| Domestic Production Activity Deduction | (98 | ) | - | (1,143 | ) | |||||||
| Research and development tax credit | (641 | ) | (886 | ) | (1,730 | ) | ||||||
| Foreign tax credit | - | (383 | ) | (921 | ) | |||||||
| Valuation Allowance | (791 | ) | - | - | ||||||||
| Tax Reform Deferred Tax Remeasurement | (1,294 | ) | - | - | ||||||||
| Canadian Acquisition Deferred Tax Liability True Up | (2,180 | ) | - | - | ||||||||
| Foreign rate difference | (297 | ) | 112 | (261 | ) | |||||||
| Other | (1,077 | ) | 1,598 | (221 | ) | |||||||
| $ | 363 | $ | 2,523 | $ | 150 | |||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Goodwill | $ | 2,668 | $ | 4,029 | ||||
| Allowance for doubtful accounts | 1,707 | 2,469 | ||||||
| Inventories | 2,365 | 3,944 | ||||||
| Accruals | (61 | ) | 97 | |||||
| Research and development credit carryforward | 1,115 | 886 | ||||||
| Foreign Tax Credit Carryforward | 64 | 64 | ||||||
| Charitable Contribution Carryforward | 559 | 138 | ||||||
| Net operating loss carryforward | 136 | 760 | ||||||
| Capital loss carryforward | 12,225 | 18,903 | ||||||
| Deferred Compensation | 475 | 1,881 | ||||||
| Other Accruals | 266 | - | ||||||
| Other | 65 | 107 | ||||||
| Total deferred tax assets | 21,584 | 33,278 | ||||||
| Less valuation allowance | (12,220 | ) | (19,633 | ) | ||||
| Total deferred tax asset, net of valuation Deferred tax liabilities : | 9,364 | 13,645 | ||||||
| Intangibles | (8,695 | ) | (10,042 | ) | ||||
| Property and equipment | (6,860 | ) | (12,762 | ) | ||||
| Unremitted foreign earnings | (354 | ) | (354 | ) | ||||
| Cumulative translation adjustment | (67 | ) | - | |||||
| Other | (457 | ) | - | |||||
| Net deferred tax liability | $ | (7,069 | ) | $ | (9,513 | ) | ||
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Income taxes computed at federal statutory rate | $ | 9,801 | $ | 10,228 | $ | 5,912 | |||||
| State income taxes, net of federal benefit | 1,294 | 1,880 | 152 | ||||||||
| Foreign taxes | 311 | 150 | (1,077 | ) | |||||||
| Nondeductible expenses | 1,108 | 954 | 642 | ||||||||
| Domestic production activity deduction | — | — | (98 | ) | |||||||
| Research and development tax credit | (2,324 | ) | (480 | ) | (641 | ) | |||||
| Foreign tax credit | (57 | ) | (346 | ) | — | ||||||
| Valuation allowance | (5 | ) | — | (791 | ) | ||||||
| Tax reform deferred tax remeasurement | — | 81 | (1,294 | ) | |||||||
| Deferred tax liability true up | 1,065 | — | (2,180 | ) | |||||||
| Uncertain tax positions | 665 | 172 | — | ||||||||
| Other | (964 | ) | 546 | (262 | ) | ||||||
| Total current and deferred taxes | $ | 10,894 | $ | 13,185 | $ | 363 | |||||
On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was enacted into law. The majority of the provisions signed into law in 2017 dodid not take effect until January 1, 2018. The Act is a comprehensive tax reform legislation that contains significant changes to corporate taxation. Provisions ontaxation, of which the enacted law include a permanent reduction ofin the corporate income tax rate from 35%35.0% to 21%, imposing a mandatory one-time tax on un-repatriated accumulated earnings21.0% and the imposition of foreign subsidiaries, a partialGlobal Intangible Low - Taxable Income ("GILTI") had the most impact to the Company. The Company analyzed other provisions of The Act such as limitation on the deductibility of business interest expense, a limitation on net operating losses to 80% of taxable income each year, a shift of the U.S. taxation of multinational corporations from alimitation on officer compensation, mandatory repatriation and transition tax, on worldwide income to a partial territorial system (along with rules that create a new U.S. minimum tax on earnings of foreign subsidiaries)Base Erosion & Anti–Abuse Tax ("BEAT"), and other relatedForeign–Derived Intangible Income Deduction ("FDII") and determined these provisions to maintainhave minimal to no impact on the U.S. tax base.Company.
In accordance with SAB 118Staff Accounting Bulletin No. 18 (SAB 118) issued by the Securities and Exchange Commission on December 22, 2017, companies are allowed a one year measurement period to complete the accounting related to The Act. Specifically, SAB 118 permits companies to record a provisional amount which can be remeasured during the measurement period due to obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enacted date. As a result, we remeasured our net deferred income tax liabilities by a provisional $1.3 million benefit and a corresponding provisional decrease in the net deferred tax liability as of December 31, 2017. We are still in the process of analyzing The Act's impact as permitted under SAB 118. The largest impact to the Company being thenet deferred tax liability remeasurement of deferred taxes due to the U.S. statutory tax rate change. The mandatory repatriation and resulting toll charge on accumulated foreign earnings and profits has limited impact on the Company as unremitted earnings from non-US jurisdictions is minimal. The Company is provisional in its approach and assertion that there is no financial statement impactanalysis was completed as of December 31, 2017.2018, impacting the Company's provision for income taxes less than $0.1 million.
As of December 31, 2018, the Company has completed its accounting for the income tax effects of The Act. The Act subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. Pursuant to FASB Staff Q&A, Topic 740, No. 5 Accounting for Global Intangible Low-Taxed Income, the Company has adopted an accounting policy to recognize the tax effects of GILTI in the year tax is incurred. The Company recorded a GILTI inclusion of $2.3 million, which is partially offset with GILTI foreign tax credits, resulting in a net liability of $0.1 million as of December 31, 2018.
For the year ended December 31, 2019, the effective tax rate was impacted by state taxes, foreign taxes, nondeductible expenses, research and development tax credits, and foreign tax credits.
56
Deferred tax liabilities related to intangibles for customer relationships acquired and assets were comprised of the following (in Canada during 2012 and 2013 were reduced by $2.2 million during the fourth quarterthousands):
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Deferred tax assets: | |||||||
| Allowance for doubtful accounts | $ | 1,657 | $ | 1,948 | |||
| Inventories | 3,254 | 2,944 | |||||
| Research and development credit carryforward | 1,361 | 775 | |||||
| Foreign tax credit carryforward | 64 | 64 | |||||
| Net operating loss carryforward | 812 | 610 | |||||
| Capital loss carryforward | 12,363 | 12,564 | |||||
| Deferred compensation | — | 538 | |||||
| Accruals | 4,077 | 576 | |||||
| Investment in partnerships | 500 | — | |||||
| Other | — | 137 | |||||
| Total deferred tax assets | $ | 24,088 | $ | 20,156 | |||
| Less valuation allowance | (12,363 | ) | (12,564 | ) | |||
| Total deferred tax asset, net of valuation deferred tax liabilities : | $ | 11,725 | $ | 7,592 | |||
| Goodwill | (8,459 | ) | (1,053 | ) | |||
| Intangibles | (2,051 | ) | (7,820 | ) | |||
| Property and equipment | (8,319 | ) | (6,807 | ) | |||
| Unremitted foreign earnings | (421 | ) | (421 | ) | |||
| Deferred compensation | (317 | ) | — | ||||
| Method changes | (1,961 | ) | — | ||||
| Other | (69 | ) | (124 | ) | |||
| Net deferred tax liability | $ | (9,872 | ) | $ | (8,633 | ) | |
The Company records a valuation allowance when it is more-likely-than-not that some portion or all of 2017 to correct the tax rate used to establish the deferred tax liabilities atassets will not be realized. The ultimate realization of the dates of acquisition. The Company evaluated the misstatement of each period since these acquisitions were completed and concluded the effects were immaterial.
To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts are classified as a deferredcomponent of income tax asset related to cumulative translation adjustment losses. The Company evaluated the misstatement of each period and concluded the effects were immaterial. Therefore, the Company decided to correct the accumulated $8.6 million errorprovision (benefit) in the fourth quarter of 2016. We assessedconsolidated financial statements consistent with the materiality of this misstatement and concludedCompany’s policy. For the misstatement was not material to the results of operations or financial condition for the yearsyear ended December 31, 2017, 20162019, the Company recorded $0.7 million tax expense for interest and 2015.penalties related to uncertain tax positions.
The Company is subject to taxation in the United States, various states, and foreign jurisdictions. The Company has significant operations in the United States and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally open in the United States for the tax years ending after 2012 and outside the United States for the tax years ending after 2011.
57
NOTE 1112 - SHARE-BASED COMPENSATION
Restricted Stock
We issued equity-based awards from the 2016 Omnibus Plan.
2016 Omnibus Incentive Plan
On June 19, 2019, our shareholders approved an amendment to the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) to increase the number of shares that can be issued under the 2016 Plan from 500,000 shares to a total of 1,000,000 shares, which represents an increase of 500,000 shares (the “Amendment”), which authorized grants of restricted stock awards, restricted stock units (“RSUs”), performance awards, options, investment rights, and cash-based awards. This plan authorizes the issuance of up to 1,000,000 shares of our common stock.
Under the restricted stock plans2016 Omnibus Plan approved by our shareholders, directors, consultants and employees may be awarded shares of DXP’s common stock. The shares of restricted stock awards granted to employees and that are outstanding as of December 31, 20172019 vest in accordance with one of the following vesting schedules: 100% one year after date ofthe grant date; 50% each year for two years after the grant; 33.3% each year for three years after date of grant;the grant date; 20% each year for five years after date of grant;the grant date; or 10% each year for ten years after the date of grant. The shares of restricted stock awards granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock awards is measured based upon the closing prices of DXP’s common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Once restricted stock vests, new shares of the Company’s stock are issued. At December 31, 2017, 401,2232019, 697,797 shares were available for future grant.
Changes in restricted stock awards for the twelve months ended December 31, 2019 were as follows:
Number of Shares | Weighted Average Grant Price | |||||
| Non-vested at December 31, 2018 | 169,293 | $ | 31.05 | |||
| Granted | 46,885 | $ | 35.60 | |||
| Forfeited | (5,720 | ) | $ | 32.35 | ||
| Vested | (66,208 | ) | $ | 27.75 | ||
| Non-vested at December 31, 2019 | 144,250 | $ | 32.71 | |||
Changes in restricted stock awards for the twelve months ended December 31, 2018 were as follows:
Number of Shares | Weighted Average Grant Price | |||||
| Non-vested at December 31, 2017 | 77,901 | $ | 30.36 | |||
| Granted | 131,413 | $ | 31.92 | |||
| Forfeited | (2,400 | ) | $ | 46.68 | ||
| Vested | (37,621 | ) | $ | 31.68 | ||
| Non-vested at December 31, 2018 | 169,293 | $ | 31.05 | |||
Changes in restricted stock awards for the twelve months ended December 31, 2017 were as follows:
Number of Shares | Weighted Average Grant Price | |||||||
| Non-vested at December 31, 2016 | 143,380 | $ | 26.76 | |||||
| Granted | 18,672 | $ | 34.07 | |||||
| Forfeited | (298 | ) | $ | 59.60 | ||||
| Vested | (83,853 | ) | $ | 24.92 | ||||
| Non-vested at December 31, 2017 | 77,901 | $ | 30.36 | |||||
Number of Shares | Weighted Average Grant Price | |||||
| Non-vested at December 31, 2016 | 143,380 | $ | 26.76 | |||
| Granted | 18,672 | $ | 34.07 | |||
| Forfeited | (298 | ) | $ | 59.60 | ||
| Vested | (83,853 | ) | $ | 24.92 | ||
| Non-vested at December 31, 2017 | 77,901 | $ | 30.36 | |||
Number of Shares | Weighted Average Grant Price | |||||||
| Non-vested at December 31, 2015 | 137,507 | $ | 54.58 | |||||
| Granted | 108,553 | $ | 17.07 | |||||
| Forfeited | (39,000 | ) | $ | 65.41 | ||||
| Vested | (63,680 | ) | $ | 46.65 | ||||
| Non-vested at December 31, 2016 | 143,380 | $ | 26.76 | |||||
Number of Shares | Weighted Average Grant Price | |||||||
| Non-vested at December 31, 2014 | 179,942 | $ | 52.71 | |||||
| Granted | 35,821 | $ | 40.95 | |||||
| Forfeited | (20,855 | ) | $ | 41.34 | ||||
| Vested | (57,401 | ) | $ | 44.99 | ||||
| Non-vested at December 31, 2015 | 137,507 | $ | 54.58 | |||||
Compensation expense, associated with restricted stock awards, recognized in the years ended December 31, 2019, December 31, 2018 and December 31, 2017 2016 and 2015 was $1.7 million, $2.0 million, $2.1 million, and $3.0$1.7 million, respectively. Related income tax benefits recognized
58
in earnings in the years ended December 31, 2017, 20162019, December 31, 2018 and 2015December 31, 2017 were approximately $0.7$0.5 million, $0.8$0.5 million and $1.2$0.7 million, respectively. Unrecognized compensation expense under the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan at December 31, 2017,2019, December 31, 20162018 and December 31, 20152017 was $1.6$3.0 million, $2.7$3.6 million and $4.9$1.6 million, respectively. As of December 31, 2017,2019, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 15.222.7 months.
NOTE 1213 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities. For the year ended December 31, 2015, we excluded the potential dilution of convertible preferred stock, which could be converted into 840,000 shares because they would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
| December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Basic: | |||||||||||
| Weighted average shares outstanding | 17,592 | 17,553 | 17,400 | ||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | 36,035 | $ | 35,632 | $ | 16,888 | |||||
| Convertible preferred stock dividend | (90 | ) | (90 | ) | (90 | ) | |||||
| Net income attributable to common shareholders | $ | 35,945 | $ | 35,542 | $ | 16,798 | |||||
| Per share amount | $ | 2.04 | $ | 2.02 | $ | 0.97 | |||||
| Diluted: | |||||||||||
| Weighted average shares outstanding | 17,592 | 17,553 | 17,400 | ||||||||
| Assumed conversion of convertible preferred stock | 840 | 840 | 840 | ||||||||
| Total dilutive shares | 18,432 | 18,393 | 18,240 | ||||||||
| Net income attributable to common shareholders | $ | 35,945 | $ | 35,542 | $ | 16,798 | |||||
| Convertible preferred stock dividend | 90 | 90 | 90 | ||||||||
| Net income attributable to DXP Enterprises, Inc. | $ | 36,035 | $ | 35,632 | $ | 16,888 | |||||
| Per share amount | $ | 1.96 | $ | 1.94 | $ | 0.93 | |||||
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Basic: | ||||||||||||
| Weighted average shares outstanding | 17,400 | 15,042 | 14,423 | |||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | $ | 16,888 | $ | 7,702 | $ | (38,536 | ) | |||||
| Convertible preferred stock dividend | (90 | ) | (90 | ) | (90 | ) | ||||||
| Net income (loss) attributable to common shareholders | $ | 16,798 | $ | 7,612 | $ | (38,626 | ) | |||||
| Per share amount | $ | 0.97 | $ | 0.51 | $ | (2.68 | ) | |||||
| Diluted: | ||||||||||||
| Weighted average shares outstanding | 17,400 | 15,042 | 14,423 | |||||||||
| Assumed conversion of convertible preferred stock | 840 | 840 | - | |||||||||
| Total dilutive shares | 18,240 | 15,882 | 14,423 | |||||||||
| Net income (loss) attributable to common shareholders | $ | 16,798 | $ | 7,612 | $ | (38,626 | ) | |||||
| Convertible preferred stock dividend | 90 | 90 | - | |||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. for diluted earnings per share | $ | 16,888 | $ | 7,702 | $ | (38,626 | ) | |||||
| Per share amount | $ | 0.93 | $ | 0.49 | $ | (2.68 | ) | |||||
Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding during the period and excludes dilutive securities. Diluted earnings per share reflects the potential dilution that could occur if the preferred stock was converted into common stock. Restricted stock is considered a participating security and is included in the computation of basic earnings per share as if vested. Because holders of Preferred Stock do not participate in losses, the loss was not allocated to Preferred Stock for fiscal year 2015. The Preferred Stockvested.The preferred stock is convertible into 840,000 shares of common stock.
NOTE 1314 – CAPITAL STOCK
The Company has Series A and Series B preferred stock of 1,122 shares and 15,000 shares outstanding as of year-endDecember 31, 2019, 2018 and 2017, 2016 and 2015, respectively. The preferred stock did not have any activity during 2017, 20162019, 2018 and 2015. 2017.
Series A Preferred Stock
The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to $100 liquidation preference per share.
Series B Preferred Stock
Each share of the Series B convertible preferred stock is convertible into 56 shares of common stock and a monthly dividend per share of $.50. The holders of the Series B convertible stock are entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock.
59
The activity related to outstanding common stock and common stock held in treasury was as follows:
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Common Stock: | Quantity (in thousands) | |||||||||||
| Balance, beginning of period | 17,197 | 14,390 | 14,375 | |||||||||
| Issuance of shares for compensation net of withholding | 119 | 84 | 15 | |||||||||
| Issuance of common stock related to equity distribution agreements | - | 2,723 | - | |||||||||
| Balance, end of period | 17,316 | 17,197 | 14,390 | |||||||||
| December 31, | ||||||||
| 2019 | 2018 | 2017 | ||||||
| Common Stock: | Quantity (in thousands) | |||||||
| Balance, beginning of period | 17,401 | 17,316 | 17,197 | |||||
| Issuance of shares for compensation net of withholding | 59 | 85 | 119 | |||||
| Issuance of common stock related to equity distribution agreements | — | — | — | |||||
| Balance, end of period | 17,460 | 17,401 | 17,316 | |||||
| December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Treasury Shares: | Quantity (in thousands) | |||||||||||
| Balance, beginning of period | - | 264 | 280 | |||||||||
| Issuance of treasury shares for acquisition | - | - | (149 | ) | ||||||||
| Purchase of treasury shares | - | - | 191 | |||||||||
| Issuance of treasury shares upon vesting of restricted shares net of withholding | - | (264 | ) | (58 | ) | |||||||
| Balance, end of period | - | - | 264 | |||||||||
There were not any treasury shares outstanding for the years ended 2019, 2018 and 2017.
NOTE 1415 - BUSINESS ACQUISITIONS
On AprilJanuary 1, 2015,2018, the Company completed the acquisition of allApplication Specialties, Inc. ("ASI"), a distributor of cutting tools, abrasives, coolants and machine shop supplies. The Company paid approximately $11.7 million in cash and stock. The purchase price also includes approximately $4.6 million in contingent consideration. The purchase was financed with $10.8 millionof cash on hand as well as issuing $0.9 million of the equity interestsCompany's common stock. ASI provides the Company's metal working division with new geographic territory and enhances DXP's end market mix. For the twelve months December 31, 2019, ASI contributed sales of Tool Supply, Inc. (“TSI”$51.1 million and earnings before taxes of approximately $3.8 million.
As part of our purchase agreement, we may pay up to an additional $4.6 million of contingent consideration over three years based on the achievement of certain earnings benchmarks established for calendar years 2018, 2019 and 2020. The purchase price includes the estimated fair value of the contingent consideration recorded at the present value of approximately $2.7 million. The estimated fair value of the contingent consideration was determined using a probability-weighted discounted cash flow model. We determined the fair value of the contingent consideration obligations by calculating the probability-weighted payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement includes earnings forecasts which are a Level 3 measurement as discussed in Note 5 - Fair Value of Financial Assets and Liabilities. The fair value of the contingent consideration is reviewed quarterly over the earn-out period to compare actual earnings before interest, taxes, depreciation and amortization ("EBITDA") achieved to expand DXP’s cutting tools offeringthe estimated EBITDA used in our forecasts.
As of December 31, 2019, approximately $1.5 million of the actual cash due toward the contingent consideration earned is recorded in current liabilities. We may pay up to an additional $1.6 million over the remaining earn-out period based on the achievement of certain EBITDA benchmarks. The estimated fair value of the contingent consideration is recorded at the present value of $2.7 million at December 31, 2019. Changes in the Northwest regionestimated fair value of the United States. DXP paid approximately $5.0 million for TSI,contingent earn-out consideration, up to the total contractual amount, are reflected in our results of operations in the periods in which was borrowed underthey are identified. Changes in the Company’s credit facility in effect at the date of acquisition. Estimated goodwill of $2.9 million and intangible assets of $2.0 were recognized for this acquisition. Allfair value of the estimated goodwill is includedcontingent consideration may materially impact and cause volatility in our future operating results. Changes in our estimates for the Service Centers segment. Nonecontingent consideration are discussed in Note 5 - Fair Value of the estimated goodwill or intangible assets are expectedFinancial Assets and Liabilities to be tax deductible.our consolidated financial statements.
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The value assignedtotal acquisition consideration is equal to the non-compete agreementssum of all cash payments, the fair value of stock issued, and customer relationshipsthe present value of any contingent consideration. The following table summarizes the total acquisition consideration for business acquisitions were determined by discounting the estimated cash flows associated with non-compete agreements and customer relationships as of the date the acquisition was consummated. ASI Purchase at closing (in thousands):
| Purchase Price Consideration | Total Consideration | ||
| Cash payments | $ | 10,811 | |
| Fair value of stock issued | 894 | ||
| Present value of estimated fair value of contingent earn-out consideration | 4,006 | ||
| Total purchase price consideration | $ | 15,711 | |
The estimated cash flows were based on estimated revenues net of operating expenses and net of capital charges for assets that contribute to the projected cash flow from these assets. The projected revenues and operating expenses were estimated based on management estimates. Net capital charges for assets that contribute to projected cash flow were based onfollowing table summarizes the estimated fair valuevalues of those assets.the assets acquired and liabilities assumed during 2018 in connection with the ASI acquisition described above (in thousands):
| Total | |||
| Cash | $ | — | |
| Accounts Receivable,net | 6,142 | ||
| Inventory | 2,729 | ||
| Other Current Assets | 18 | ||
| Property and equipment | 216 | ||
| Goodwill and intangibles | $ | 11,856 | |
| Assets acquired | $ | 20,961 | |
| Current liabilities assumed | $ | (5,175 | ) |
| Non-current liabilities assumed | (75 | ) | |
| Net assets acquired | $ | 15,711 | |
Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net sales | $ | 1,006.8 | $ | 939.4 | ||||
| Net income attributable to DXP Enterprises, Inc. | $ | 16.9 | $ | 5.5 | ||||
| Per share data | ||||||||
| Basic earnings | $ | 0.97 | $ | 0.36 | ||||
| Diluted earnings | $ | 0.93 | $ | 0.35 | ||||
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 | ||||||||
| Basic earnings (loss) | $ | 0.36 | $ | (2.83 | ) | |||
| Diluted earnings (loss) | $ | 0.35 | $ | (2.83 | ) | |||
NOTE 1516 - COMMITMENTS AND CONTINGENCIES
The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of December, 31, 2017,2019, for non-cancelable leases are as follows (in thousands):
| 2018 | $ | 19,419 | ||
| 2019 | 15,002 | |||
| 2020 | 11,492 | |||
| 2021 | 9,435 | |||
| 2022 | 6,637 | |||
| Thereafter | 3,441 |
| 2020 | $ | 21,641 | |
| 2021 | 18,455 | ||
| 2022 | 14,198 | ||
| 2023 | 8,926 | ||
| 2024 | 4,573 | ||
| Thereafter | 10,301 | ||
| Total | $ | 78,094 | |
Rental expense for operating leases was $27.7$25.0 million, $27.6$18.5 million and $32.7$27.7 million for the years ended December, 31,2019, 2018 and 2017, 2016 and 2015, respectively.
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 consolidated financial position, cash flows, or results of operations.
NOTE 1617 - EMPLOYEE BENEFIT PLANS
The Company offers a 401(k) plan which is eligible to substantially all employees in the United States. For the year ended December 31, 2015 as well as the first quarter of 2016,2019, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $0.2$1.7 million, $0.4$1.8 million, and $2.6$0.2 million to the 401(k) plan in the years ended December 31,
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2019, 2018, and 2017, 2016, and 2015, respectively. In 2016 the Company suspended indefinitely the employee match program. The Company contributed $0.4 million in the first quarter of 2016 to the 401(k) plan. No other contributions were made during the remainder of 2016. The Company reinstated the employee match program in October 2017 contributing $0.2 million to the 401(k) plan for 2017.
NOTE 1718 - OTHER COMPREHENSIVE INCOME
Other comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments by, or distributions to, shareholders.
During 2012 and 2013, the Company acquired four entities that operate in Canada. These Canadian entities maintain financial data in Canadian dollars. Upon consolidation, the Company translates the financial data from these foreign subsidiaries into U.S. dollars and records cumulative translation adjustments in other comprehensive income. The Company recorded $(1.2)$(0.7) million, $(7.7)$0.2 million, and ($4.9)$(1.2) million in translation adjustments, net of tax, in other comprehensive income during the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively. Comprehensive income for the year ended December 31, 2016 was reduced by an $8.6 million charge recorded during the fourth quarter of 2016 to correct errors which accumulated during 2013, 2014 and 2015 due to the Company improperly recognizing an $8.6 million deferred tax asset on unrealized foreign currency losses not expected to be realized within one year. We assessed the materiality of this misstatement and concluded the misstatement was not material to the results of operations or financial condition for the years ended December 31, 2016 and 2015.
NOTE 1819 – SEGMENT AND GEOGRAPHICAL REPORTING
The Company’s reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, MRO products and equipment, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, fastener, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's MRO products supply chain, including warehouse and inventory management.
The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations.
The following table sets out financial information relatingrelated to the Company’s segments (in thousands):
| Years Ended December 31, | Service Centers | Innovative Pumping Solutions | Supply Chain Services | Total | |||||||||||
| 2019 | |||||||||||||||
| Product sales (recognized at a point in time) | $ | 703,742 | $ | — | $ | 184,767 | $ | 888,509 | |||||||
| Inventory management services (recognized over contract life) | — | — | 16,511 | 16,511 | |||||||||||
| Staffing services (day-rate basis) | 58,514 | — | — | 58,514 | |||||||||||
| Customized pump production (recognized over time) | — | $ | 303,655 | — | 303,655 | ||||||||||
| Total Revenue | $ | 762,256 | $ | 303,655 | $ | 201,278 | $ | 1,267,189 | |||||||
| Operating income for reportable segments, excluding amortization | 86,778 | 28,895 | 14,445 | 130,118 | |||||||||||
| Identifiable assets at year end | 462,663 | 212,015 | 56,714 | 731,392 | |||||||||||
| Capital expenditures | 2,333 | 9,347 | 922 | 12,602 | |||||||||||
| Proceeds from sale of fixed assets | 35 | — | — | 35 | |||||||||||
| Depreciation | 3,517 | 4,602 | 285 | 8,404 | |||||||||||
| Amortization | 8,230 | 5,855 | 989 | 15,074 | |||||||||||
| Interest expense | $ | 10,786 | $ | 6,747 | $ | 1,965 | $ | 19,498 | |||||||
Years Ended December 31, | Service Centers | Innovative Pumping Solutions | Supply Chain Services | Total | ||||||||||||
| 2017 | ||||||||||||||||
| Sales | $ | 641,275 | $ | 204,030 | $ | 161,477 | $ | 1,006,782 | ||||||||
| Operating income for reportable segments, excluding amortization | 63,250 | 11,423 | 15,451 | 90,124 | ||||||||||||
| Identifiable assets at year end | 385,744 | 172,538 | 59,942 | 618,224 | ||||||||||||
| Capital expenditures | 1,076 | 1,488 | 82 | 2,646 | ||||||||||||
| Depreciation | 5,162 | 4,198 | 103 | 9,463 | ||||||||||||
| Amortization | 8,989 | 7,194 | 1,083 | 17,266 | ||||||||||||
| Interest expense | 9,712 | 5,352 | 1,990 | 17,054 | ||||||||||||
| 2016 | ||||||||||||||||
| Sales | $ | 621,007 | $ | 187,124 | $ | 153,961 | $ | 962,092 | ||||||||
| Operating income for reportable segments, excluding impairment expense | 47,634 | 9,867 | 15,449 | 72,950 | ||||||||||||
| Identifiable assets at year end | 370,261 | 175,198 | 44,796 | 590,255 | ||||||||||||
| Capital expenditures | 447 | 3,827 | 129 | 4,403 | ||||||||||||
| Proceeds from sale of fixed assets | (1,038 | ) | (168 | ) | - | (1,206 | ) | |||||||||
| Depreciation | 6,520 | 3,834 | 126 | 10,480 | ||||||||||||
| Amortization | 9,152 | 7,826 | 1,083 | 18,061 | ||||||||||||
| Interest expense | 9,290 | 4,422 | 1,852 | 15,564 |
| 2015 | ||||||||||||||||
| Sales | $ | 826,588 | $ | 254,829 | $ | 165,626 | $ | 1,247,043 | ||||||||
| Operating income for reportable segments, excluding impairment expense | 78,170 | 21,584 | 14,213 | 113,967 | ||||||||||||
| Identifiable assets at year end | 451,333 | 159,365 | 50,012 | 660,710 | ||||||||||||
| Capital expenditures | 3,185 | 8,383 | 604 | 12,172 | ||||||||||||
| Depreciation | 7,734 | 2,930 | 227 | 10,891 | ||||||||||||
| Amortization | 10,334 | 8,406 | 1,881 | 20,621 | ||||||||||||
| Interest expense | 2,967 | 6,881 | 1,084 | 10,932 | ||||||||||||
| Impairment expense by segment | 15,842 | 52,893 | - | 68,735 |
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Operating income for reportable segments, excluding impairment expense | $ | 90,124 | $ | 72,950 | $ | 113,967 | ||||||
| Adjustments for: | ||||||||||||
| B27 settlement | - | - | 7,348 | |||||||||
| Impairment expense | - | - | 68,735 | |||||||||
| Amortization of intangibles | 17,266 | 18,061 | 20,621 | |||||||||
| Corporate and other expense, net | 39,368 | 35,557 | 45,179 | |||||||||
| Total operating income (loss) | 33,490 | 19,332 | (27,916 | ) | ||||||||
| Interest expense | 17,054 | 15,564 | 10,932 | |||||||||
| Other expenses (income), net | (456 | ) | (5,906 | ) | 72 | |||||||
| Income (loss) before income taxes | $ | 16,892 | $ | 9,674 | $ | (38,920 | ) | |||||
| Years Ended December 31, | Service Centers | Innovative Pumping Solutions | Supply Chain Services | Total | |||||||||||
| 2018 | |||||||||||||||
| Product sales (recognized at a point in time) | $ | 685,309 | $ | — | $ | 160,770 | $ | 846,079 | |||||||
| Inventory management services (recognized over contract life) | — | — | 13,686 | 13,686 | |||||||||||
| Staffing services (day-rate basis) | 64,735 | — | — | 64,735 | |||||||||||
| Customized pump production (recognized over time) | — | 291,697 | — | 291,697 | |||||||||||
| Total Revenue | $ | 750,044 | $ | 291,697 | $ | 174,456 | $ | 1,216,197 | |||||||
| Operating income for reportable segments, excluding amortization | 80,718 | 33,943 | 16,204 | 130,865 | |||||||||||
| Identifiable assets at year end | 402,944 | 188,765 | 53,517 | 645,226 | |||||||||||
| Capital expenditures | 1,655 | 6,800 | 296 | 8,751 | |||||||||||
| Proceeds from sale of fixed assets | 3 | 9 | — | 12 | |||||||||||
| Depreciation | 3,974 | 4,064 | 49 | 8,087 | |||||||||||
| Amortization | 9,272 | 6,237 | 1,077 | 16,586 | |||||||||||
| Interest expense | $ | 11,178 | $ | 7,351 | $ | 2,408 | $ | 20,937 | |||||||
| Years Ended December 31, | Service Centers | Innovative Pumping Solutions | Supply Chain Services | Total | |||||||||||
| 2017 | |||||||||||||||
| Product sales (recognized at a point in time) | $ | 575,328 | $ | — | $ | 147,927 | $ | 723,255 | |||||||
| Inventory management services (recognized over contract life) | — | — | 13,550 | 13,550 | |||||||||||
| Staffing services (day-rate basis) | 65,947 | — | — | 65,947 | |||||||||||
| Customized pump production (recognized over time) | — | 204,030 | — | 204,030 | |||||||||||
| Total Revenue | $ | 641,275 | $ | 204,030 | $ | 161,477 | $ | 1,006,782 | |||||||
| Operating income for reportable segments, excluding amortization | 63,250 | 11,423 | 15,451 | 90,124 | |||||||||||
| Identifiable assets at year end | 385,744 | 172,538 | 59,942 | 618,224 | |||||||||||
| Capital expenditures | 1,076 | 1,488 | 82 | 2,646 | |||||||||||
| Depreciation | 5,162 | 4,198 | 103 | 9,463 | |||||||||||
| Amortization | 8,989 | 7,194 | 1,083 | 17,266 | |||||||||||
| Interest expense | 9,712 | 5,352 | 1,990 | 17,054 | |||||||||||
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Operating income for reportable segments, excluding amortization | $ | 130,118 | $ | 130,865 | $ | 90,124 | |||||
| Adjustments for: | |||||||||||
| Amortization of intangibles | 15,074 | 16,586 | 17,266 | ||||||||
| Corporate and other expense, net | 48,922 | 45,828 | 39,368 | ||||||||
| Total operating income | $ | 66,122 | $ | 68,451 | $ | 33,490 | |||||
| Interest expense | 19,498 | 20,937 | 17,054 | ||||||||
| Other expenses (income), net | (45 | ) | (1,192 | ) | (456 | ) | |||||
| Income before income taxes | $ | 46,669 | $ | 48,706 | $ | 16,892 | |||||
The Company had capital expenditures at Corporate of $9.5 million, $0.6 million, and $0.2 million $0.5for the years ended December 31, 2019, 2018, and 2017, respectively. The Company had identifiable assets at Corporate of $56.8 million, $54.7 million, and $19.4 million as of December 31, 2019, 2018, and 2017, respectively. Corporate depreciation was $1.7 million, $1.5 million, and $1.8 million for the years ended December 31, 2017, 2016,2019, 2018, and 2015, respectively. The Company had identifiable assets at Corporate of $19.4 million, $18.3 million, and $23.3 million as of December 31, 2017, 2016, and 2015, respectively. Corporate depreciation was $1.8 million, $1.4 million, and $1.7 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Geographical Information
63
Revenues are presented in geographic area based on location of the facility shipping products or providing services. Long-lived assets are based on physical locations and are comprised of the net book value of property.
The Company’s revenues and property and equipment by geographical location are as follows (in thousands)millions):
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Revenues | |||||||||||
| United States | $ | 1,165 | $ | 1,110 | $ | 903 | |||||
| Canada | 102 | 106 | 104 | ||||||||
Other(1) | — | — | — | ||||||||
| Total | $ | 1,267 | $ | 1,216 | $ | 1,007 | |||||
(1) Other includes Mexico and Dubai.
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Property and Equipment, net | |||||||
| United States | $ | 56 | $ | 41 | |||
| Canada | 8 | 10 | |||||
Other(1) | — | — | |||||
| Total | $ | 64 | $ | 51 | |||
(1) Other includes Dubai.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenues | ||||||||||||
| United States | $ | 902,636 | $ | 873,926 | $ | 1,119,210 | ||||||
| Canada | 104,146 | 88,166 | 127,833 | |||||||||
| Total | $ | 1,006,782 | $ | 962,092 | $ | 1,247,043 | ||||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Property and Equipment, net | ||||||||
| United States | $ | 42,683 | $ | 48,635 | ||||
| Canada | 10,654 | 12,172 | ||||||
| Total | $ | 53,337 | $ | 60,807 | ||||
NOTE 1920 - QUARTERLY FINANCIAL INFORMATION (unaudited)
Summarized quarterly financial information for the years ended December 31, 2017, 20162019, 2018 and 20152017 is as follows (in millions, except per share data):
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| 2019 | |||||||||||||||
| Sales | $ | 311.2 | $ | 333.3 | $ | 327.2 | $ | 295.5 | |||||||
| Gross profit | 84.2 | 92.0 | 92.7 | 78.3 | |||||||||||
| Net income | 7.3 | 13.4 | 13.2 | 2.1 | |||||||||||
| Net income attributable to DXP Enterprises, Inc. | 7.3 | 13.4 | 13.1 | 2.2 | |||||||||||
| Earnings per share - basic | 0.41 | 0.76 | 0.74 | 0.12 | |||||||||||
| Earnings per share - diluted | $ | 0.40 | $ | 0.73 | $ | 0.71 | $ | 0.12 | |||||||
| 2018 | |||||||||||||||
| Sales | $ | 285.9 | $ | 311.2 | $ | 308.0 | $ | 311.0 | |||||||
| Gross profit | 76.4 | 85.1 | 84.1 | 86.6 | |||||||||||
| Net income | 4.5 | 11.6 | 8.4 | 11.1 | |||||||||||
| Net income attributable to DXP Enterprises, Inc. | 4.6 | 11.6 | 8.4 | 11.1 | |||||||||||
| Earnings per share - basic | 0.26 | 0.66 | 0.48 | 0.63 | |||||||||||
| Earnings per share - diluted | $ | 0.25 | $ | 0.63 | $ | 0.46 | $ | 0.60 | |||||||
| 2017 | |||||||||||||||
| Sales | $ | 238.5 | $ | 250.7 | $ | 251.9 | $ | 265.7 | |||||||
| Gross profit | 64.5 | 68.9 | 67.0 | 71.2 | |||||||||||
| Net income | 3.1 | 4.1 | 3.0 | 6.6 | |||||||||||
| Net income attributable to DXP Enterprises, Inc. | 3.0 | 4.0 | 2.9 | 6.6 | |||||||||||
| Earnings per share - basic | 0.18 | 0.24 | 0.17 | 0.38 | |||||||||||
| Earnings per share - diluted | $ | 0.17 | $ | 0.23 | $ | 0.16 | $ | 0.37 | |||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| 2017 | ||||||||||||||||
| Sales | $ | 238.5 | $ | 250.7 | $ | 251.9 | $ | 265.7 | ||||||||
| Gross profit | 64.5 | 68.9 | 67.0 | 71.2 | ||||||||||||
| Net income (loss) | 3.1 | 4.1 | 3.0 | 6.6 | ||||||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | 3.0 | 4.0 | 2.9 | 6.6 | ||||||||||||
| Earnings (loss) per share - basic | $ | 0.18 | $ | 0.24 | $ | 0.17 | $ | 0.38 | ||||||||
| Earnings (loss) per share - diluted | $ | 0.17 | $ | 0.23 | $ | 0.16 | $ | 0.37 | ||||||||
| 2016 | ||||||||||||||||
| Sales | $ | 253.6 | $ | 256.2 | $ | 230.0 | $ | 222.3 | ||||||||
| Gross profit | 68.8 | 71.6 | 63.8 | 60.6 | ||||||||||||
| Net income (loss) | (5.2 | ) | 5.1 | 0.1 | 7.1 | |||||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | (5.1 | ) | 5.1 | 0.2 | 7.4 | |||||||||||
| Earnings (loss) per share - basic | $ | (0.36 | ) | $ | 0.36 | $ | 0.02 | $ | 0.44 | |||||||
| Earnings (loss) per share - diluted | $ | (0.36 | ) | $ | 0.34 | $ | 0.02 | $ | 0.42 | |||||||
| 2015 | ||||||||||||||||
| Sales | $ | 341.6 | $ | 323.7 | $ | 303.1 | $ | 278.6 | ||||||||
| Gross profit | 98.1 | 91.3 | 85.7 | 76.9 | ||||||||||||
| Impairment expense | - | - | �� | 58.9 | 9.8 | |||||||||||
| Net income (loss) | 9.7 | 7.2 | (52.7 | ) | (3.2 | ) | ||||||||||
| Net income (loss) attributable to DXP Enterprises, Inc. | 9.7 | 7.2 | (52.4 | ) | (3.0 | ) | ||||||||||
| Earnings (loss) per share - basic | $ | 0.67 | $ | 0.50 | $ | (3.64 | ) | $ | (0.20 | ) | ||||||
64
The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each quarter’s computation is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and the dilutive effects of the stock options and restricted stock in each quarter.
NOTE 2021 – RELATED PARTIES DISCLOSURES
The Board uses policies and procedures, to be applied by the Audit Committee of the Board, for review, approval or ratification of any transactions with related persons. Those policies and procedures will apply to any proposed transactions in which DXP is a participant, the amount involved exceeds $120,000 and any director, executive officer or significant shareholder or any immediate family member of such a person has a direct or material indirect interest. Any related party transaction will be reviewed by the Audit Committee of the Board of Directors to determine, among other things, the benefits of any transaction to DXP, the availability of other sources of comparable products or services and whether the terms of the proposed transaction are comparable to those provided to unrelated third parties.
For the year ended December 31, 2017,2019, the Company paid approximately $1.4$ 2.2 million in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little, $1.2 million in lease expenses to an entity in which a retired senior vice president holds a minority interest, and $0.3 million in lease expenses to an entity in which a retired senior vice president holds an interest, and the children of David Little hold a majority interest. The Company employs six people who work for David Little, and Mr. Little reimbursed the Company for the cost. Total cost to Mr. Little for the year ended December 31, 2017 for payroll, related payroll expenses, vehicles, fuel and supplies was $0.4 million. The Company employs two sons and two sons-in-laws of executives. Total wages and other compensation for 2017 was approximately $1.3 million for the four employees.Little.
NOTE 21 –22 - SUBSEQUENT EVENTS
On January 31, 2020, the Company completed the acquisition of Turbo, a pump and industrial equipment repair, maintenance, machining and labor services company. Turbo was funded with cash on hand.
On January 2, 2020, the Company completed the acquisition of PSI, a distributor of cutting tools, abrasives, coolantspumps, systems and machine shop supplies. DXP paid approximately $11.5 million for ASI.related services. The purchasePSI acquisition was financedfunded with $10.6 million of cash on hand as well as issuing $0.9 million of DXPDXP's common stock.
65
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
DXP carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness as of December 31, 2017,2019, of the design and operation of DXP’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15e and 15d-15e. Disclosure controls and procedures are the controls and other procedures of DXP that are designed to ensure that information required to be disclosed by DXP in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (the “Commission”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by DXP in the reports that it files or submits under the Exchange Act, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon thaton their evaluation the Chief Executive Officer and the Chief Financial Officer concluded that DXP’s disclosure controls and procedures were not effective as of the end of the period covered by this Annual Report due to material weaknesses in internal control over financial reportingon Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as further discussed below.
of December 31, 2019 at a reasonable assurance level.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
DXP Enterprises, Inc.’s management is responsible for establishing and maintaining adequate internal control over financial reporting.reporting, as defined in Exchange Act Rule 13a-15(f). DXP Enterprises, Inc.’s internal control system was 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.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
A material weakness is a deficiency, or 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.
REMEDIATION OF PREVIOUSLY DISCLOSED MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, we had material weaknesses in our control environment and monitoring to support the financial reporting process.
We committed to remediating the material weaknesses and, as such, implemented changes to our internal control over financial reporting throughout 2018 and 2019.
During the last two years, the following actions were implemented:
Engaged a third party consulting firm to lead our remediation efforts.
Conducted a review of our organization structure, reporting relationships and adequacy of staffing levels and made specific staffing changes as a result of our review.
Completed training for all appropriate personnel regarding the applicable accounting guidance and requirements.
Training was conducted by both an outside expert and through internal training meetings and provided to accounting personnel, remote location personnel, and management positions.
Strengthened our risk assessment, materiality and scoping, and fraud risk assessment.
Significantly improved our COSO mapping of entity level controls.
Developed or revised process maps for all key business processes.
Identified and documented key controls and control gaps in a comprehensive consolidated risk control matrix
Developed controls to address gaps and enhanced management review controls.
Educated process owners as to the expectations for documentation to evidence key controls.
The procedures described above have been implemented and controls have been successfully tested by our third party consultants and external auditors.
Management is committed to a strong internal control environment. We hadbelieve the full implementation and testing of the design and operating effectiveness of the newly implemented and revised controls, the actions described above successfully remediated the material weaknesses related to information technology general controls (“ITGC”). We did not maintain effective ITGC, which are required to support automated controls and information technology (“IT”) functionality; therefore, automated controls and IT functionality were ineffective.in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Except asfor the changes described above, there arewere no changes in our internal control over financial reporting that occurredidentified in our evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the year ended December 31, 20172019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| /s/ David R. Little | /s/ Kent Yee | ||
| David R. Little | Kent Yee | ||
President and Chief Executive Officer (Principal Executive Officer) | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | ||
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be included in our definitive Proxyproxy statement for the 20182020 Annual Meeting of Shareholders that we will file with the SEC within 120 days of the end of the fiscal year to which this Report relates (the “Proxy Statement”) and is hereby incorporated by reference thereto.
ITEM 11. Executive Compensation
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
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ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 14. Principal Accounting Fees and Services.
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules.
(a) Documents included in this Report:
| 1. | Financial Statements – See Part II, Item 8 of this Report. |
| 2. | Financial Statement Schedules - All other schedules have been omitted since the required information is not applicable or significant or is included in the Consolidated Financial Statements or notes thereto. |
| 3. | Exhibits: |
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission.
Exhibit No. | Description | |
| 3.1 | Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998). | |
| 3.2 | ||
| 4.1 | Form of Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998). | |
| 4.2 | See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of security holders. | |
| 4.3 | See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of security holders. | |
| 4.4 | Form of Senior Debt Indenture of DXP Enterprises, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (Reg. No. 333-166582), filed with the Commission on May 6, 2010). | |
| 4.5 | Form of Subordinated Debt Indenture of DXP Enterprises, Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 (Reg. No. 333-166582), filed with the SEC on May 6, 2010). | |
| *4.6 | ||
| 10.1+ | ||
| 10.2+ | ||
| Amendment Number One to Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R. Little (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-21513:06979954), filed with the Commission on July 26, 2006). | ||
| 10.3+ | |
| Amendment Number Two to Employment Agreement dated effective January 1, 2004 between DXP Enterprises, Inc. and David R. Little (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-21513:09846339) filed with the Commission on May 22, 2009). | |
| 10.4+ | |
| Amendment Two to David Little Equity Incentive Program effective May 1, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-21513:11823072) filed with the Commission on May 3, 2013). | |
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| 10.5+ | DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 (File No. 000-21513:161832364) filed with the Commission on August 15, 2016). | |
| 10.6+ | ||
| 10.7+ | ||
| 10.8+ | Term Loan and Security Agreement | |
| 10.9+ | Loan and Security Agreement Dated as of August 29, 2017 by and among DXP Enterprises, Inc., Pump-PMI, LLC, PMI Operating Company, LTD., PMI Investment, LLC, Integrated Flow Solutions, LLC, DXP Holdings, Inc., Best Holding, LLC, Best Equipment Service & Sales Company, LLC, B27 Holdings Corp., B27, LLC, B27 Resources, Inc. and Pumpworks 610, LLC as US Borrowers, DXP Canada Enterprises, LTD., Industrial Paramedic Services, LTD., HSE Integrated LTD., and National Process Equipment Inc., as Canadian Borrowers and the Other Persons Party hereto from time to time, as Guarantors, and Bank of America, N.A., as agent and Certain Financial Institutions as Lenders, Bank of America, N.A. as Sole Lead Arranger and Sole Bookrunner and BMO Capital Markets Corp., as Documentation Agent (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 000-21513:171191516) filed with the Commission on November 9, 2017). | |
| 10.10+ | ||
| *21.1 | ||
| Subsidiaries of the Company. | ||
| *23.1 | Consent of Moss Adams LLP, Independent Registered Public Accounting Firm. | |
| 31.1 | ||
| Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended. |
| *31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended. | |
| *32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended. | |
| *32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended. | |
| 101 | Interactive Data Files |
Exhibits designated by the symbol * are filed with this Report. All exhibits not so designated are incorporated by reference to a prior filing with the Commission as indicated.
+ Indicates a management contract or compensation plan or arrangement.
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The Company undertakes to furnish to any shareholder so requesting a copy of any of the exhibits to this Report on upon payment to the Company of the reasonable costs incurred by the Company in furnishing any such exhibit.
ITEM 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DXP ENTERPRISES, INC. (Registrant) | ||||
| By: | /s/ | DAVID R. LITTLE | ||
| David R. Little | ||||
| Chairman of the Board, | ||||
| President and Chief Executive Officer | ||||
Dated: March 28, 201813, 2020
Each person whose signature appears below appoints David R. Little, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, with full power and authority to said attorney-in-fact and agent to do and perform each and every act whatsoever that is necessary, appropriate or advisable in connection with any or all of the above-described matters and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
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| NAME | TITLE | DATE | |||
| /s/David R. Little | Chairman of the Board, President | ||||
| David R. Little | Chief Executive Officer and Director | March | |||
| (Principal Executive Officer) | |||||
| /s/Kent Yee | Senior Vice President/Finance and | March | |||
| Kent Yee | Chief Financial Officer and Secretary | ||||
| (Principal Financial Officer) | |||||
| /s/ | Senior Vice President/Finance, | March | |||
| Chief Accounting Officer | |||||
| (Principal Accounting Officer) | |||||
| /s/Cletus Davis | Director | March | |||
| Cletus Davis | |||||
| /s/Timothy P. Halter | Director | March | |||
| Timothy P. Halter | |||||
| /s/David Patton | Director | March | |||
| David Patton | |||||
| /s/Joseph Mannes | Director | March 13, 2020 | |||
| Joseph Mannes | |||||