This Annual Report on Form 10-K (this “Report”) contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements include without limitation those about the Company’s expectations regarding the impact of the COVID-19 pandemic, the Company’s business, and the Company’s future profitability, cash flow, liquidity, and growth. Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”"believes", “expects”"expects", “may”"may", “might”"might", “estimates”"estimates", “will”"will", “should”"should", “could”"could", “plans”"would", "suspect", "potential", "current", "achieve", "plans" or “anticipates”,"anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and actual results may vary materially from those discussed in the forward-looking statements or historical performance as a result of various factors. These factors include the effectiveness of management’smanagement's strategies and decisions, our ability to implement our internal growth and acquisition growth strategies, general economic and business conditions specific to our primary customers, changes in government regulations, our ability to effectively integrate businesses we may acquire, our success in remediating our internal control weaknesses, new or modified statutory or regulatory requirements, availability of materials and labor, inability to obtain or delay in obtaining government or third-party approvals and permits, non-performance by third parties of their contractual obligations, unforeseen hazards such as weather conditions, acts orof war or terrorist acts and the governmental or military response thereto, cyber-attacks adversely affecting our operations, other geological, operating and economic considerations and declining prices and market conditions, including reducedvolatility in oil and gas prices and supply or demand for maintenance, repair and operating products, equipment and service, decreases in oil and natural gas prices, decreases in oil and natural gas industry expenditure levels, economic risks related to the impact of COVID-19, our ability to manage changes and the continued health or availability of management personnel, and our ability to obtain financing on favorable terms or amend our credit facilities as needed. This Report identifies other factors that could cause such differences. We cannot assure that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. This Report identifies other factors that could cause such differences. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", and elsewhere in this Report. We assume no obligation and do not intend to update these forward-looking statements. Unless the context otherwise requires, references in this Report to the "Company", "DXP", “we” or “our” shall mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries.
3
PART I
ITEM 1. Business
Company Overview
Founded in 1908, DXP Enterprises, Inc. (together with our subsidiaries, hereinafter referred to as "DXP" or the "Company" or by the terms such as we, our, or us) was incorporated in Texas in 1996 to be the successor to SEPCO Industries, Inc., founded in 1908. Since our predecessor company was founded, we have primarily been engaged in the business of distributing maintenance, repair and operating (MRO)("MRO") products, equipment and service to customers in a variety of end markets including the general industrial, energy, food & beverage, chemical, transportation, water and industrial customers.wastewater. The Company is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions.Solutions ("IPS"). Sales, operating income, and other financial information for 2015, 20162022, 2021 and 2017,2020, and identifiable assets at the close of such years for our business segments are presented in Note 18 of22 – Segment Reporting to the Notes to Consolidated Financial Statements “financial statements” in Item 8 of this Report.8. Financial Statements and Supplementary Data.
Our total sales have increased from $125 million in 1996 to $1.0$1.5 billion in 20172022 through a combination of internal growth and business acquisitions. At December 31, 20172022, we operated from 176180 locations in thirty-fourwhich included 37 states in the U.S., nine provinces in Canada Dubai and one statelocation in Mexico,Dubai serving more than 50,000 customers engaged in a variety of industrial end markets. We have grown sales and profitability by adding additional products, services, locations and becoming customer driven experts in maintenance, repair and operating solutions.
The following table shows, as of the end of the last 10 fiscal years, our consolidated sales; the number of service centers, supply chain service sites, IPS facilities and the corresponding sales and average sales per business segment location:
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($ in millions) | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
Sales | $ | 1,242 | | $ | 1,500 | | $ | 1,247 | | $ | 962 | | $ | 1,007 | | $ | 1,216 | | $ | 1,265 | | $ | 1,005 | | $ | 1,114 | | $ | 1,481 | |
SC locations | 178 | 185 | 179 | 167 | 165 | 155 | 145 | 158 | 152 | 160 |
SC Sales | $ | 885 | | $ | 988 | | $ | 827 | | $ | 621 | | $ | 641 | | $ | 750 | | $ | 762 | | $ | 663 | | $ | 816 | | $ | 1,009 | |
Avg. Sales / SC location | 5.0 | 5.3 | 4.6 | 3.7 | 3.9 | 4.8 | 5.3 | 4.2 | 5.4 | 6.3 |
SCS Customer Sites | 62 | 74 | 69 | 67 | 67 | 83 | 89 | 79 | 82 | 95 |
SCS Sales | $ | 148 | | $ | 164 | | $ | 166 | | $ | 154 | | $ | 161 | | $ | 174 | | $ | 201 | | $ | 155 | | $ | 158 | | $ | 240 | |
Avg. SCS Sales / Site | 2.4 | 2.2 | 2.4 | 2.3 | 2.4 | 2.1 | 2.3 | 2.0 | 1.9 | 2.5 |
IPS Facilities | 10 | 12 | 12 | 11 | 11 | 11 | 10 | 10 | 18 | 20 |
IPS Sales | $ | 209 | | $ | 348 | | $ | 255 | | $ | 187 | | $ | 204 | | $ | 292 | | $ | 304 | | $ | 188 | | $ | 140 | | $ | 231 | |
Avg. IPS Sales / Facility | 20.9 | 29.0 | 21.3 | 17.0 | 18.5 | 26.5 | 30.4 | 18.8 | 7.8 | 11.6 |
Total Locations | 250 | 271 | 260 | 245 | 243 | 249 | 244 | 247 | 252 | 275 |
Our principal executive office is located at 7272 Pinemont5301 Hollister St., Houston, Texas 77040 and our telephone number is (713) 996-4700. Our website address on the Internet is www.dxpe.com and emails may be sent to info@dxpe.com. The reference to our website address does not constitute incorporation by reference of the information contained on the website and such information should not be considered part of this Report.report.
Industry Overview
The industrial distribution market is highly fragmented. Based on 20162021 sales as reported by Industrial Distribution magazine, we were the 1917th largest distributor of MRO products in the United States. Most industrial customers currently purchase their industrial supplies through numerous local distribution and supply companies. These distributors generally provide the customer with repair and maintenance services, technical support and application expertise with respect to one product category. Products typically are purchased by the distributor for resale directly from the manufacturer and warehoused at distribution facilities of the distributor until sold to the customer. The customer also typically will purchase an amount of product inventory for its near term anticipated needs and store those products at its industrial site until the products are used.
We believe that the distribution system for industrial products, as described in the preceding paragraph, creates inefficiencies at both the customer and the distributor levels through excess inventory requirements and duplicative cost structures. To compete more effectively, our customers and other users of MRO products are seeking ways to enhance efficiencies and lower MRO product and procurement costs. In response to this customer desire, three primary trends have emerged in the industrial supply industry:
| · | Industry Consolidation. Industrial customers have reduced the number of supplier relationships they maintain to lower total purchasing costs, improve inventory management, assure consistently high levels of customer service and enhance purchasing power. This focus on fewer suppliers has led to consolidation within the fragmented industrial distribution industry.
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•Industry Consolidation. Industrial customers have reduced the number of supplier relationships they maintain to lower total purchasing costs, improve inventory management, assure consistently high levels of customer service and enhance purchasing power. This focus on fewer suppliers has led to consolidation within the fragmented industrial distribution industry.
| · | Customized Integrated Service. As industrial customers focus on their core manufacturing or other production competencies, they increasingly demand customized integration services, consisting of value-added traditional distribution, supply chain services, modular equipment and repair and maintenance services.
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•Customized Integrated Service. As industrial customers focus on their core manufacturing or other production competencies, they increasingly demand customized integration services, consisting of value-added traditional distribution, supply chain services, modular equipment and repair and maintenance services.
| · | Single Source, First-Tier Distribution. As industrial customers continue to address cost containment, there is a trend toward reducing the number of suppliers and eliminating multiple tiers of distribution. Therefore, to lower overall costs to the customer, some MRO product distributors are expanding their product coverage to eliminate second-tier distributors and become a “one stop source”.
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•Single Source, First-Tier Distribution. As industrial customers continue to address cost containment, there is a trend toward reducing the number of suppliers and eliminating multiple tiers of distribution. Therefore, to lower overall costs to the customer, some MRO product distributors are expanding their product coverage to eliminate second-tier distributors and become a “one stop source”.We believe we have increased our competitive advantage through our traditional fabrication of integrated system pump packages and integrated supply programs, which are designed to address our customers’ specific product and procurement needs. We offer our customers various options for the integration of their supply needs, ranging from serving as a single source of supply for all our specific lines of products and product categories to offering a fully integrated supply package in which we assume procurement and management functions, which can include ownership of inventory, at the customer's location. Our approach to integrated supply allows us to design a program that best fits the needs of the customer. Customers purchasing large quantities of product are able to outsource all or most of those needs to us. For customers with smaller supply needs, we are able to combine our traditional distribution capabilities with our broad product categories and advanced ordering systems to allow the customer to engage in one-stop sourcing without the commitment required under an integrated supply contract.
Business Segments
The Company is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives and provide a framework for timely and rational allocation of resources within our businesses. In addition to the three business segments, our consolidated financial results include "Corporate and other expenses" which includes costs related to our centralized support functions, consisting, of accounting and finance, information technology, marketing, human resources, legal, inventory management & procurement and other support services and removes inter-company transactions. The following table sets forth DXP’sthe Company’s sales recognition by business segments as of December 31, 2017.2022. See Results of Operations under Item 7, “Management7. Management Discussion and Analysis of Financial Condition and Results of Operations”Operations for further information on our segments’ financial results. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | | |
Segment | | 2022 Sales | | % of Sales | | End Markets | | Locations | | Employees |
SC | | $1,009.4 | | 68.2% | | General Industrial, Oil & Gas, Food & Beverage, Water & Wastewater, Chemical & Petrochemical, Transportation, Aerospace | | 156 service centers, 4 distribution centers | | 1,651 |
IPS | | $231.1 | | 15.6% | | Oil & Gas, Mining, Petrochemical, Water & Wastewater and Utilities | | 16 fabrication facilities, 4 wastewater locations | | 337 |
SCS | | $240.4 | | 16.2% | | Food & Beverage, Transportation, Oil & Gas, General Industrial & Chemical | | 95 customer facilities' | | 409 |
Segment | 2017 Sales (in thousands) | % of Sales | End-Markets | Locations | Employees |
SC | $ 641,275 | 63.7 % | Oil & Gas, Food & Beverage, General Industrial, Chemical & Petrochemical, Transportation | 161 service centers 4 distribution centers | 1,463 |
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SCS | $ 161,477 | 16.0 % | Oil & Gas Food & Beverage, Mining & Transportation | 67 customer facilities | 271 |
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IPS | $ 204,030 | 20.3 % | Oil & Gas Mining Utilities | 11 fabrication facilities | 555 |
Service Centers
The Service Centers are engaged in providing MRO products, equipment and integrated services, including technical expertise and logistics capabilities, to energy and industriala variety of customers serving varied end markets with the ability to provide same day delivery. We offer our customers a single source of supply on an efficient and competitive basis by being a first-tier distributor that can purchase products directly from manufacturers. As a first-tier distributor, we are able to reduce our customers' costs and improve efficiencies in the supply chain. We offer a wide range of industrial MRO products, equipment and integrated services through a continuum of customized and efficient MRO solutions. We also provide services such as field safety supervision, in-house and field repair and predictive maintenance.
A majority of our Service Center segment sales are derived from customer purchase orders for products. Sales are directly solicited from customers by our sales force. DXPThe Company's Service Centers are stocked and staffed with knowledgeable sales associates and backed by a centralized customer service team of experienced industry professionals. At December 31, 2017,2022, our Service Centers’ products and services were distributed from 161156 service centers and 4 distribution centers.
DXP The Company's Service Centers provide a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. We currently serve as a first-tier distributor of more than 1,000,000 items of which more than 60,000 are stock keeping units (SKUs) for use primarily by customers engaged in the oil and gas, food and beverage, petrochemical, transportation and other general industrial industries. Other industries served by our Service Centers include mining, construction, chemical, municipal, agriculture and pulp and paper.
At December 31, 2017,2022, the Service Centers segment had approximately 1,4631,651 employees, all of whom were full-time.
Innovative Pumping Solutions
The Company's Innovative Pumping Solutions (IPS) segment provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to meet the capital equipment needs of our global customer base. Additionally, our IPS segment provides project solutions and capital equipment to the water and wastewater treatment markets including potable water, bio-solid and residual management and wastewater treatment. Our IPS segment provides a single source for engineering, systems design and fabrication for unique customer specifications.
Our sales of integrated pump packages, remanufactured pumps or branded private label pumps are generally derived from customer purchase orders containing the customers’ unique specifications. Sales are directly solicited from customers by our dedicated sales force.
The Company's engineering staff can design a complete custom pump package to meet our customers’ project specifications. Drafting programs such as Solidworks and AutoCAD® allow our engineering team to verify the design and layout of packages with our customers prior to the start of fabrication. Finite Elemental Analysis programs such as Cosmos Professional are used to design the package to meet all normal and future loads and forces. This process helps maximize the pump packages’ life and minimizes any impact to the environment.
With over 100 years of fabrication experience, the Company has acquired the technical expertise to ensure that our pumps and pump packages are built to meet the highest standards. The Company utilizes manufacturer authorized equipment and manufacturer certified personnel. Pump packages require MRO products and original equipment manufacturers’ (OEM) equipment such as pumps, motors, valves, and consumable products such as welding supplies. The Company leverages its MRO product inventories and breadth of authorized products to lower the total cost and maintain the quality of our pump packages.
The Company's fabrication facilities provide convenient technical support and pump repair services. Examples of our innovative pump packages include, but are not limited to:
•Diesel and electric driven fire and water packages
•Pipeline booster packages
•Potable water packages
•Pigging pump packages
•Lease Automatic Custody Transfer (LACT) charge units
•Chemical injection pump packages wash down units
•Seawater lift pump packages
•Seawater/produced water injection packages
•Variety of packages to meet customer required industry specifications such as API, ANSI and NFPA
At December 31, 2022, the Innovative Pumping Solutions segment operated out of 20 facilities, 18 of which are located in the United States and two in Canada.
All of the IPS segment’s long-lived assets are located in the U.S. Approximately 4.7% of the IPS segment’s 2022 revenues were recognized in Canada and 95.3% were in the U.S.
At December 31, 2022, the IPS segment had approximately 337 employees, all of whom were full-time.
Total backlog, representing firm orders for the IPS segment products that have been received and entered into our production systems, was $108.5 million and $96.9 million at December 31, 2022 and 2021, respectively.
Supply Chain Services
DXP’sThe Company's Supply Chain Services (SCS) segment manages all or part of its customers’ supply chains, including procurement and inventory management. The SCS segment enters into long-term contracts with its customers that can be cancelledcanceled on little or no notice under certain circumstances. The SCS segment provides fully outsourced MRO solutions for sourcing MRO products including, but not limited to, the following: inventory optimization and management; store room management; transaction consolidation and control; vendor oversight and procurement cost optimization; productivity improvement services; and customized reporting. Our mission is to help our customers become more competitive by reducing their indirect material costs and order cycle time by increasing productivity and by creating enterprise-wide inventory and procurement visibility and control.
DXPThe Company has developed assessment tools and master plan templates aimed at taking cost out of supply chain processes, streamlining operations and boosting productivity. This multi-faceted approach allows us to manage the entire MRO products channel for maximum efficiency and optimal control, which ultimately provides our customers with a low-cost solution.
DXPThe Company takes a consultative approach to determine the strengths and opportunities for improvement within a customer’s MRO products supply chain. This assessment determines if and how we can best streamline operations, drive value within the procurement process, and increase control in storeroom management.
Decades of supply chain inventory management experience and comprehensive research, as well as a thorough understanding of our customers’ businesses and industries have allowed us to design standardized programs that are flexible enough to be fully adaptable to address our customers’ unique MRO products supply chain challenges. These standardized programs include:
| · | SmartAgreement, a planned, pro-active MRO products procurement solution for MRO categories leveraging DXP’s local Service Centers. |
•SmartAgreement, a planned, pro-active MRO products procurement solution leveraging DXP’s local Service Centers. | · | SmartBuy, DXP’s on-site or centralized MRO procurement solution. |
•SmartBuy, DXP’s on-site or centralized MRO procurement solution. | · | SmartSourceSM, DXP’s on-site procurement and storeroom management by DXP personnel.
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•SmartSource SM, DXP’s on-site procurement and storeroom management by DXP personnel. | · | SmartStore, DXP’s customized e-Catalog solution. |
•SmartStore, DXP’s customized e-Catalog solution. | · | SmartVend, DXP’s industrial dispensing solution, which allows for inventory-level optimization, user accountability and item usage reduction by an initial 20-40%. |
•SmartVend, DXP’s industrial dispensing solution, which allows for inventory-level optimization, user accountability and item usage reduction by an initial 20-40%. | · | SmartServ, DXP’s integrated service pump solution. It provides a more efficient way to manage the entire life cycle of pumping systems and rotating equipment. |
•SmartServ, DXP’s integrated service pump solution. It provides a more efficient way to manage the entire life cycle of pumping systems and rotating equipment.
The Company's SmartSolutions programs listed above help customers to cut product costs, improve supply chain efficiencies and obtain expert technical support. DXPThe Company represents manufacturers of up to 90% of all the maintenance, repair and operating products of our customers. Unlike many other distributors who buy products from second-tier sources, DXPthe Company takes customers to the source of the products they need.
At December 31, 2017,2022, the Supply Chain ServicesSCS segment operated supply chain installations in 6795 of our customers’ facilities.
Virtually allAll of the SCS segment’s long-lived assets are in the U.S. Approximately 1.4%and the majority of the SCS segment’s 20172022 revenues were recognized in Canada and 98.6% were in the U.S.
At December 31, 2017,2022, the Supply Chain ServicesSCS segment had approximately 271409 employees, all of whom were full-time.
Innovative Pumping Solutions
DXP’s Innovative Pumping Solutions® (IPS) segment provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to meet the capital equipment needs of our global customer base. Our IPS segment provides a single source for engineering, systems design and fabrication for unique customer specifications.
Our sales of integrated pump packages, remanufactured pumps or branded private label pumps are generally derived from customer purchase orders containing the customers’ unique specifications. Sales are directly solicited from customers by our dedicated sales force.
DXP’s engineering staff can design a complete custom pump package to meet our customers’ project specifications. Drafting programs such as Solidworks® and AutoCAD® allow our engineering team to verify the design and layout of packages with our customers prior to the start of fabrication. Finite Elemental Analysis programs such as Cosmos Professional® are used to design the package to meet all normal and future loads and forces. This process helps maximize the pump packages’ life and minimizes any impact to the environment.
With over 100 years of fabrication experience, DXP has acquired the technical expertise to ensure that our pumps and pump packages are built to meet the highest standards. DXP utilizes manufacturer authorized equipment and manufacturer certified personnel. Pump packages require MRO products and original equipment manufacturers’ (OEM) equipment such as pumps, motors, valves, and consumable products, such as welding supplies. DXP leverages its MRO product inventories and breadth of authorized products to lower the total cost and maintain the quality of our pump packages.
DXP’s fabrication facilities provide convenient technical support and pump repair services. The facilities contain state of the art equipment to provide the technical expertise our customers require including, but not limited to, the following:
| · | Hydrostatic pressure testing |
| · | Mechanical string testing |
Examples of our innovative pump packages include, but are not limited to:
| · | Diesel and electric driven firewater packages |
| · | Pipeline booster packages |
| · | Lease Automatic Custody Transfer (LACT) charge units |
| · | Chemical injection pump packages wash down units |
| · | Seawater lift pump packages |
| · | Condensate pump packages |
| · | Seawater/produced water injection packages |
| · | Variety of packages to meet customer required industry specifications such as API, ANSI and NFPA |
At December 31, 2017, the Innovative Pumping Solutions segment operated out of 11 facilities, 9 of which are located in the United States and two in Canada.
Approximately 6.4% of the IPS segment’s long-lived assets are located in Canada and the remainder were located in the U.S. Approximately 8.2% of the IPS segment’s 2017 revenues were recognized in Canada and 91.8% were in the U.S.
At December 31, 2017, the IPS segment had approximately 555 employees, all of whom were full-time.
Total backlog, representing firm orders for the IPS segment products that have been received and entered into our production systems, was $104.1 million and $68.8 million at December 31, 2017 and 2016, respectively.
Products
Most industrial customers currently purchase their MRO products through local or national distribution companies that are focused on single or unique product categories. As a first-tier distributor, our network of service and distribution centers stock more than 60,000 SKUs and provide customers with access to more than 1,000,000 items. Given our breadth of product and our industrial distribution customers’ focus around specific product categories, we have become customer driven experts in five key product categories. As such, our three business segments are supported by the following five key product categories: rotating equipment; bearings & power transmission; industrial supplies; metal working; and safety products & services. Each business segment tailors its inventory and leverages product experts to meet the needs of its local customers.
Key product categories that we offer include:
| · | Rotating Equipment. Our rotating equipment products include a full line of centrifugal pumps for transfer and process service applications, such as petrochemicals, refining and crude oil production; rotary gear pumps for low- to- medium pressure service applications, such as pumping lubricating oils and other viscous liquids; plunger and piston pumps for high-pressure service applications such as disposal of produced water and crude oil pipeline service; and air-operated diaphragm pumps. We also provide a large variety of pump accessories.
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•Rotating Equipment. Our rotating equipment products include a full line of centrifugal pumps for transfer and process service applications, such as petrochemicals, refining and crude oil production; rotary gear pumps for low- to- medium pressure service applications, such as pumping lubricating oils and other viscous liquids; plunger and piston pumps for high-pressure service applications such as disposal of produced water and crude oil pipeline service; and air-operated diaphragm pumps. We also provide a large variety of pump accessories.
| · | Bearings & Power Transmission. Our bearing products include several types of mounted and un-mounted bearings for a variety of applications. The power transmission products we distribute include speed reducers, flexible-coupling drives, chain drives, sprockets, gears, conveyors, clutches, brakes and hoses.
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•Bearings & Power Transmission. Our bearing products include several types of mounted and unmounted bearings for a variety of applications. The power transmission products we distribute include speed reducers, flexible-coupling drives, chain drives, sprockets, gears, conveyors, clutches, brakes and hoses.
| · | Industrial Supplies. We offer a broad range of industrial supplies, such as abrasives, tapes and adhesive products, coatings and lubricants, fasteners, hand tools, janitorial products, pneumatic tools, welding supplies and welding equipment.
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•Industrial Supplies. We offer a broad range of industrial supplies, such as abrasives, tapes and adhesive products, coatings and lubricants, fasteners, hand tools, janitorial products, pneumatic tools, welding supplies and welding equipment.
| · | Metal Working. Our metal working products include a broad range of cutting tools, abrasives, coolants, gauges, industrial tools and machine shop supplies.
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•Metal Working. Our metal working products include a broad range of cutting tools, abrasives, coolants, gauges, industrial tools and machine shop supplies.
| · | Safety Products & Services. We sell a broad range of safety products including eye and face protection, first aid, hand protection, hazardous material handling, instrumentation and respiratory protection products. Additionally, we provide safety services including hydrogen sulfide (H2S) gas protection and safety, specialized and standby fire protection, safety supervision, training, monitoring, equipment rental and consulting. Our safety services include safety supervision, medic services, safety audits, instrument repair and calibration, training, monitoring, equipment rental and consulting.
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•Safety Products & Services. We sell a broad range of safety products including eye and face protection, first aid, hand protection, hazardous material handling, instrumentation and respiratory protection products. Additionally, we provide safety services including hydrogen sulfide (H2S) gas protection and safety, specialized and standby fire protection, safety supervision, training, monitoring, equipment rental and consulting. Our safety services include safety supervision, medic services, safety audits, instrument repair and calibration, training, monitoring, equipment rental and consulting.We acquire our products through numerous OEMs. We are authorized to distribute certain manufacturers' products only in specific geographic areas. All of our oral or written distribution authorizations are subject to cancellation by the manufacturer, some upon little or no notice. For the last three fiscal years, no manufacturer provided products that accounted for 10% or more of our revenues.
Over 90% of our business relates to sales of products. Service revenues are less than 10% of sales.
The Company has operations in the United States of America, Canada Dubai, and Mexico.Dubai. Information regarding financial data by geographic areas is set forth in Note 1822 - Segment Reporting of the Notes to Consolidated Financial Statements.
Recent Acquisitions
A key component of our growth strategy includes effecting acquisitions ofacquiring businesses with complementary or desirable product lines, locations or customers. Since 2004, we have completed 3448 acquisitions across our three business segments. Below is a summary of recent acquisitions since
The following briefly describes the beginning of 2013.Company’s acquisition activity for the years ended December 31, 2022 and December 31, 2021.
On April 16, 2013, DXP acquired all of the stock of National Process Equipment Inc. (“NatPro”) through its wholly owned subsidiary, DXP Canada Enterprises Ltd. DXP acquired this business to expand DXP’s geographic presence in Canada and strengthen DXP’s pump, integrated system packaging and related equipment offering. The $40.1 million purchase price was financed with $36.6 million of borrowings under our then-existing credit facility and 52,542 shares of DXP common stock. Additionally, the purchase agreement included an earn-out provision, which stated that former owners of NatPro may earn CDN $6.0 million based on achievement of an earnings target during the first year of DXP’s ownership. The fair value of the earn-out recorded at the acquisition date was $2.8 million. As of December 31, 2013 the $2.8 million accrued liability associated with this earn-out provision was reversed and included in 2013 operating income. See Note 8 of the financial statements regarding the 2014 impairment of NatPro assets.
On May 17, 2013, DXP acquired substantially all of the assets of Tucker Tool Company, Inc. (“Tucker Tool”). DXP acquired this business to expand DXP's geographic presence in the northern U.S. and strengthen DXP's industrial cutting tools offering. DXP paid approximately $5.0 million for Tucker Tool which was borrowed under our then-existing credit facility.
On JulySeptember 1, 2013, DXP acquired all of the stock of Alaska Pump & Supply, Inc. (APS). DXP acquired this business to expand DXP's geographic presence in Alaska. DXP paid approximately $13.0 million for APS which was borrowed under our then-existing credit facility.
On July 31, 2013, DXP acquired substantially all of the assets of Tool-Tech Industrial Machine & Supply, Inc. (“Tool-Tech”). DXP acquired this business to enhance our metal working product offering in the southwest region of the United States. DXP paid approximately $7.2 million for Tool-Tech which was borrowed under our then-existing credit facility.
On January 2, 2014, the Company acquired all of the equity securities and units of B27, LLC (“B27”). DXP acquired this business to expand DXP’s pump packaging offering. The total transaction value was approximately $304.9 million, including working capital payments and excluding approximately $1.0 million in transaction costs. The purchase price was financed with borrowings under our then-existing credit facility and approximately $4.0 million (36,000 shares) of DXP common stock. See Note 8 of the Notes to Consolidated Financial Statements regarding the 2014 and 2015 impairments of B27 goodwill. After the acquisition of B27, there was a working capital dispute between the Company and the sellers. During the third quarter of 2015, an accounting expert issued his report on the working capital dispute between DXP and the sellers of B27. The report required DXP to pay the sellers of B27 an additional $11.3 million. Because the time period to allow adjustments of purchase accounting had expired, $7.3 million of the payment was expensed. The remaining $4.0 million of the required payment represented tax refunds, which the Company collected as of the end of 2016.
On May 1, 2014,2022, the Company completed the acquisition of allSullivan Environmental Technologies, Inc. ("Sullivan"). Sullivan is a leading distributor for the municipal and industrial water and wastewater treatment industries in Ohio, Kentucky, and Indiana. Sullivan is included within our IPS business segment. Total consideration for the transaction was approximately $6.5 million, funded with a mixture of cash on hand of $4.6 million, the equity interestsCompany's common stock valued at approximately $0.9 million and contingent consideration of Machinery Tooling and Supply, LLC (MT&S) to expand DXP’s cutting tools offering in the North Central region of the United States. DXP paid approximately $14.7 million for MT&S, which was borrowed under our then-existing credit facility.$1.0 million.
On April 1, 2015,May 2, 2022, the Company completed the acquisition of allCisco Air Systems, Inc. ("Cisco"). Cisco is a leading distributor of air compressors and related products and services focused on serving the equity interests of Tool Supply, Inc. (“TSI”) to expand DXP’s cutting tools offeringfood and beverage, transportation and general industrial markets in the Northwest regionNorthern California and Nevada territories. Cisco is included within our SC business segment. Total consideration for the transaction was approximately $52.3 million, funded with a mixture of cash on hand of $32 million, the United States. DXP paidCompany's common stock valued at approximately $5.0$4.4 million for TSI, which was borrowed under our then-existing credit Facility.and a draw down of approximately $11 million on the ABL and contingent consideration of $4.5 million.
On SeptemberMarch 1, 2015,2022, the Company completed the acquisition of allDrydon Equipment, Inc. ("Drydon"), a distributor and manufacturers’ representative of pumps, valves, controls and process equipment focused on serving the equity interestswater and wastewater industry in the Midwest. The acquisition of Cortech Engineering, LLC (“Cortech”) to expand DXP’s rotating equipment offering to the Western seaboard. DXPDrydon was funded with cash on hand and an issuance of DXP's common stock. The Company paid approximately $14.9$7.9 million, for Cortech. The purchase was financedfunded with borrowings under our then-existing credit facility as well as $4.4a mixture of cash on hand of $4.9 million, (148.8the Company's common stock valued at approximately $441 thousand shares)and contingent consideration of DXP common stock.$2.6 million. A majority of Drydon's sales are project-based work. As a result, Drydon has been included in the IPS business segment.
On JanuaryMarch 1, 2018,2022, the Company completed the acquisition of Application Specialties,certain assets of Burlingame Engineers, Inc. ("Burlingame"), a provider of water and wastewater equipment in the industrial and municipal sectors. Burlingame is included within our SC business segment. The Company paid approximately $1.1 million in cash, the Company's common stock and contingent consideration.
On September 20, 2021, the Company completed the acquisition of Premier Water LLC (“ASI”Premier”).Premier is a leading distributor and provider of products and services exclusively focused on serving the water and wastewater treatment markets primarily in North and South Carolina.Premier is included within our IPS business segment.The Company paid approximately $5.8 million in cash and stock.
On July 1, 2021, the Company completed the acquisition of Process Machinery, Inc. (“PMI”), a leading distributor of pumps, mechanical seals, tank, filters and related process equipment that focuses on serving the chemical, power, pulp & paper, mining, metals and food processing industries. PMI is included within our SC business segment.The Company paid approximately $9.6 million in cash, stock, and contingent consideration.
On April 30, 2021, the Company completed the acquisition of Carter & Verplanck, LLC (“CVI”), a distributor of cutting tools, abrasives, coolantsproducts and machine shop supplies. DXP paid approximately $11.5 million for ASI.services exclusively focused on serving the water and wastewater markets. The purchaseacquisition of CVI was financedfunded with $10.6 million of cash on hand as well as issuing $0.9 million of DXP’sDXP's common stock.
Disposition
On October 3, 2016, the The Company sold Vertex Corporate Holdings, Inc. forpaid approximately $31$49.7 million in cash. The sale iscash and stock. A majority of CVI's sales are project-based work under the percentage-of-completion accounting model. As a non-core business divestiture for DXP, andresult, CVI has been included in the proceeds were primarily used to pay down debt obligations.IPS segment.
Competition
Our business is highly competitive. In the Service Centers segment we compete with a variety of industrial supply distributors, some of which may have greater financial and other resources than we do. Some of our competitors are small enterprises selling to customers in a limited geographic area. We also compete with catalog distributors, large warehouse stores and, to a lesser extent, manufacturers. While many of our competitors offer traditional distribution of some of the product groupings that we offer, we are not aware of any major competitor that offers on a non-catalog basis a variety of products and services as broad as our offerings. Further, while certain catalog distributors provide product offerings as broad as ours, these competitors do not offer the product application, technical expertise and after-the-sale services that we provide. In the Supply Chain Services segment we compete with larger distributors that provide integrated supply programs and outsourcing services, some of which might be able to supply their products in a more efficient and cost-effective manner than we can provide. In the Innovative Pumping Solutions segment we compete against a variety of manufacturers, distributors and fabricators, many of which may have greater financial and other resources than we do. We generally compete on expertise, responsiveness and price in all of our segments.
Insurance
We maintain liability and other insurance that we believe to be customary and generally consistent with industry practice. We retain a portion of the risk for medical claims, general liability, worker’s compensation and property losses. The various deductibles of our insurance policies generally do not exceed $250,000 per occurrence. There are also certain risks for which we do not maintain insurance. There can be no assurance that such insurance will be adequate for the risks involved, that coverage limits will not be exceeded or that such insurance will apply to all liabilities. The occurrence of an adverse claim in excess of the coverage limits that we maintain could have a material adverse effect on our financial condition and results of operations. The premiums for insurance have decreased over the past three years in connection with the decline in revenues, payroll and vehicles since 2014. This trend would be expected to reverse with an increase in revenues. Additionally, we are partially self-insured for our group health plan, worker’s compensation, auto liability and general liability insurance. The cost of claims for the group health plan has increased over the past three years. This trend is expected to continue.
Government Regulation and Environmental Matters
We are subject to various laws and regulations relating to our business and operations and various health and safety regulations including those established by the Occupational Safety and Health Administration and Canadian Occupational Health and Safety.
Certain of our operations are subject to federal, state and local laws and regulations as well as provincial regulations controlling the discharge of materials into or otherwise relating to the protection of the environment.
Although we believe that we have adequate procedures to comply with applicable discharge and other environmental laws, such laws and regulations could result in costs to remediate releases of regulated substances into the environment or costs to remediate sites to which we sent regulated substances for disposal. In some cases, these laws can impose strict liability for the entire cost of clean-up on any responsible party without regard to negligence or fault and impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them. New laws have been enacted and regulations are being adopted by various regulatory agencies on a continuing basis and the costs of compliance with these new laws can only be broadly appraised until their implementation becomes more defined.
The risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals cannot be eliminated completely. In the event of such a discharge, we could be held liable for any damages that result and any such liability could have a material adverse effect on us.
We are not currently aware of any environmental situation or conditionviolations of government regulations that we believe isare likely to have a material adverse effect on our results of operations or financial condition.
EmployeesHuman Capital
AtThe Company employed 2,675 people as of December 31, 2017, DXP had2022 with approximately 2,511employees,2,433 people located in the United States and 242 people located in Canada and other countries where the Company's business operates. The Company is continually investing in its workforce to further talent development, increase employee safety, drive a strong workplace culture, improve compensation and benefits and diversity and inclusion to support our employees’ well-being, and foster their growth and development.
Talent Development. The Company's leaders are expected to make great strategic choices, deliver great results, be great talent managers and provide strong leadership. The Company's leaders who have expertise in the Company's business model are the critical factor in translating the potential of the Company's business model into full performance. Because this expertise develops over time and through specific experiences, the Company focuses on developing and promoting its own talent to ensure the Company's sustained business success over the long term.
Employee Safety. The safety and well-being of the Company's colleagues around the world has been, and always will be, its top priority. Guided by the Company's Safety Service offering, business and the philosophy that every accident is preventable, the Company strives every day to foster a proactive safety culture. The Company's safety strategy is based on the following core principles: (i) a goal of zero accidents, (ii) shared ownership for safety (business and individual); (iii) proactive approach focused on accident prevention; and (iv) continuous improvement philosophy.
Consistent with these commitments, employee health and safety has been a top priority during the COVID-19 pandemic. Among its many actions and initiatives, the Company redesigned processes to ensure proper social distancing practices, adjusted shift schedules and assignments to help colleagues who have child and elder care needs and implemented aggressive workplace sanitation practices and a coordinated response to ensure access to personal protective equipment to minimize infection risk.
Workplace Culture. The Company operates under a balanced centralized and decentralized entrepreneurial culture that is crucial to the Company's performance and is one of the three unique elements of the Company's business model. The Company believes its colleagues around the world thrive in this culture, as it allows them to experience significant autonomy, a sense of shared ownership with their colleagues, and a work atmosphere deeply rooted in the Company's core values.
Compensation and Benefits. The Company is committed to providing market-competitive compensation and benefits to attract and retain great talent across its business segments. Specific compensation and benefits vary and are based on regional practices. In the U.S., the Company focuses on providing a comprehensive, competitive benefits package that supports the health and wellness, educational endeavors, community involvement and financial stability of its colleagues.
Our key human capital measures include employee safety, turnover, absenteeism and production. We frequently benchmark our compensation practices and benefits programs against those of comparable companies and industries and in the geographic areas where our facilities are located. We believe that our compensation and employee benefits are competitive and allow us to attract and retain skilled and unskilled labor throughout our organization. Our notable health, welfare and retirement benefits include:
| | | | | | | | |
| ● | Company subsidized health insurance |
| | | | | | | | |
| ● | 401(k) Plan with Company matching contributions |
Diversity and Inclusion. The Company believes it is at its best when it brings together unique perspectives, experiences and ideas. The Company is committed to equal employment opportunity, fair treatment and creating diverse and inclusive workplaces where all the Company's colleagues can perform to their full potential. We strive to maintain an inclusive environment free from discrimination of whomany kind, including sexual or other discriminatory harassment. Our employees have multiple avenues available through which inappropriate behavior can be reported, including a confidential hotline. All reports of inappropriate behavior are promptly investigated with appropriate action taken aimed at stopping such behavior.
Labor Relations. None of the Company's U.S. employees are represented by a labor union, while outside the U.S., employees in certain countries are represented by an employee representative organization, such as a union, works council or employee association.
The Company considers its employee relations to be excellent. Headcount by segment and country are as follows:
| | | | | | | | | | | | | | |
Business Segment | Employees | | Country | Employees |
Service Centers | 1,651 | | United States | 2,433 |
Innovative Pumping Solutions | 337 | | Canada | 232 |
Supply Chain Services | 409 | | Other | 10 |
Corporate | 278 | | | |
Total Employees | 2,675 | | Total Employees | 2,675 |
We believe our employees are key to achieving our business objectives. Throughout the COVID-19 pandemic crisis, we continued to operate our business despite the challenges that arose from closing offices and operating our branch locations. Our use of technology and third party conferencing platforms enabled our office employees to work from home, performing their job functions with little to no loss of productivity. We required our employees to work from home as a result of governmental stay-at-home orders and, in many cases, in advance of those orders for the health and safety of our employees. For the most part, our warehouses and regional distribution centers remained open. Under various shelter-in place orders by national, state, provincial and local governments, we were full-time.exempted as an “essential” business as the products we sell are necessary for the maintenance and functioning of the energy infrastructure and other industries. We took measures to safeguard the health and welfare of our employees. As various governmental isolation orders were lifted or phased out, we modified our operational plans to continue operating our business while addressing the health and safety of our employees.
Executive Officers
The following is a list of DXP’sthe Company's executive officers, their age, positions, and a description of each officer’s business experience as of March 28, 2018.April 17, 2023. All of our executive officers hold office at the pleasure of DXP’sthe Company's Board of Directors.
| NAME | | POSITION | AGE | | | | |
NAME | AGE | TITLE |
David R. Little | 71 | Chairman of the Board, President and Chief Executive Officer | 66 |
| Kent Yee | 47 | Senior Vice President/Chief Financial Officer | 42Officer/Secretary |
Nick Little | Mac McConnell41 | | Senior Vice President/Finance, Chief AccountingOperating Officer and Secretary* | 64 |
Chris Gregory | 48 | Senior Vice President/Chief Information Technology Officer |
Paz Maestas | 43 | Senior Vice President/Chief Marketing & Technology Officer |
David C. Vinson | 72 | Senior Vice President/Innovative Pumping Solutions | 67 |
| John J. Jeffery | 55 | Senior Vice President/Supply Chain Services | 50 |
| Todd Hamlin | 51 | Senior Vice President/Service Centers | 46 |
| Chris Gregory | | Senior Vice President/Information Technology | 43 |
* As previously disclosed, on March 16, 2018, Mac McConnell notified the Company of his intention to retire from his role with the Company effective March 31, 2018. The Company is in the process of conducting a search for a new Chief Accounting Officer.
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 OfficerOfficer/Secretary in June 2017. Currently, Mr. Yee is responsible for acquisitions, finance, accounting, business integrations 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 4348 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.
Mac McConnell.Nick Little.Mr. McConnell transitioned fromLittle was appointed Senior Vice President/Finance and Chief Financial Officer to Senior Vice President/Finance and Chief AccountingOperating Officer in June 2017. From September 2000 to June 2017,January 2021. Mr. McConnell servedLittle began his career with DXP nearly twenty years ago as Senioran application engineer. During his tenure at DXP, Mr. Little has held various roles of increasing responsibility including outside sales, Director of Operations and more recently as the Regional Vice President/President of Sales and Operations. As Chief Operating Officer, Mr. Little is responsible for the execution of the strategic direction of the Company and oversees sales, operations and inventory management & procurement of DXP. He holds a Bachelor of Business Administration in Finance and Chief Financial Officer. From February 1998 until September 2000,from Baylor University.
Chris Gregory. Mr. McConnell served asGregory was appointed Senior Vice President and Chief FinancialInformation Officer and a directorin March of Transportation Components, Inc., a NYSE-listed distributor of truck parts.2018. Mr. Gregory joined the Company in August 2006. From December 1992 to February 1998,2014 until January 2018 he served as Chief Financial OfficerVice President of Sterling Electronics Corporation, a NYSE-listed electronics parts distributor, which was acquired by Marshall Industries, Inc. in 1998. From 1990IT Strategic Solutions. Prior to 1992, Mr. McConnell wasserving as Vice President-FinancePresident of Interpak Holdings, Inc., a publicly-traded company involved in packaging and warehousing thermoplastic resins. From 1976 to 1990,IT Strategic Solutions he served in various capacities,roles, including application developer, database manager as well as leading the business intelligence and application development departments. He holds a partner,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.
Paz Maestas.Mr. Maestas was appointed Senior Vice President/Chief Marketing and Technology Officer in January 2021. Mr. Maestas has been with Ernst & Young LLP.DXP since 2002 and leads the Company's e-Commerce and Omni-Channel initiatives. In his 20 years with DXP, he has served in various roles and most recently as Vice President of Marketing and Operations. He holds a Bachelor of Science from the University of Texas at Austin.
David C. Vinson. Mr. Vinson was electedappointed 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 aswas appointed Senior Vice President of Supply Chain Services Marketing and Information Technology.in May 2010. He oversees the strategic direction for the Supply Chain Services business unit while leveraging both Marketing and Information Technology to drivedriving 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, information technology 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 electedappointed 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 2022 Annual Meeting of Shareholders or until their respective successors are duly elected and qualified or their earlier resignation or removal.
Available Information
Our internet address is www.dxpe.com and the investor relations section of our website is located at ir.dxpe.com.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 Ethics for Senior Financial Officers; | - | Compensation Committee Charter; |
•DXP Conflict Minerals Policy; | - | Nominating and Governance Committee Charter; and |
•DXP Anti-Corruption Policy;•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 DXPthe Company involves risk. In deciding whether to invest in DXP,the Company, 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.the Company. 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
We face a variety of risks that are substantial and inherent in our businesses. The following is a summary of some of the more important factors that could affect our businesses:
Business and Operations
•Demand for our products could decrease if manufacturers decide to sell them direct.
•Changes in our customer or product mix, could cause our gross margins to fluctuate.
•Material changes in the costs of our products from manufacturers without the ability to pass price increases onto our customers could cause our gross margins to decline.
•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 subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver products on a timely basis.
•Our business has substantial competition that could adversely affect our results.
•The loss of or the failure to attract and retain key personnel could adversely impact our results of operations.
•The loss of any key supplier could adversely affect the Company’s sales and profitability.
•Our future results will be impacted by our ability to implement our internal growth strategy.
•Our future results will be impacted by the effective execution of our acquisition strategy.
•Goodwill and intangible assets recorded as a result of our acquisitions could become impaired.
•Interruptions in the proper functioning of our information systems could disrupt operations and cause increases in costs and/or decreases in revenues.
•Cybersecurity breaches and other disruptions or misuse of our network and information systems could affect our ability to conduct our business effectively.
•Our backlog is subject to unexpected adjustments and potential cancellations
•Our actual results could differ from the assumptions and estimates used to prepare our financial statements
•If we do not successfully remediate our internal controls weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted.
Market and Economy
•The COVID-19 pandemic has and could continue to 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 business, financial position, and results of operations.
•A general slowdown in the economy could negatively impact the Company’s sales growth and profitability.
•We could be adversely impacted by low oil prices, volatility in oil prices and downturns in the energy industry, can adversely impactincluding decreased capital expenditures, impacting our customers’ demand for our products and services.
•Adverse weather events or natural disasters could negatively disrupt our operations.
A significant portion
Credit and Access to Debt Capital
•We may not be able to refinance on favorable terms, extend, or repay our debt, which could adversely affect our results of operations or may result in default of our revenue depends upon the leveldebt.
•Our failure to comply with financial covenants of capitalour credit facilities may adversely affect our results of operations and operating expendituresour financial conditions.
•We may not be able to access acquisition financing, including debt capital.
•A deterioration in the oil and natural gas industry,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 capital expendituresthe Secured Leverage Ratio and Fixed Charge Coverage Ratio financial covenants.
Legal and Regulatory
•Risks associated with substantial or material claim or lawsuits that are not covered by insurance.
•The nature of our manufactured products carries the possibility of significant product liability and warranty claims, which could harm our business and future results.
•We are subject to potential shareholder litigation associated with potential volatile trading of our common stock.
•We are subject to personal injury and product liability claims involving allegedly defective products.
•We are subject to risks associated with conducting business in connection withforeign countries.
•We are subject to environmental, health and safety laws and regulations.
•We are subject to various government regulations, the upstream, midstream,cost of compliance of such regulations could increase our cost of conducting business and downstream phases in the energy industry. Therefore, a significant decline in oil or natural gas pricesany violations of such regulations could lead to a decrease in our customers’ capital and other expenditures and couldmaterially adversely affect our revenues.financial condition or results of operations.
The following are more detailed discussions of our Risk Factors summarized above:
Risk Related to the Company's Business and Operations
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.
A deterioration in the oil and gas sectorOur manufacturers may cancel our oral or other circumstances may negativelywritten distribution authorizations upon little or no notice, which could adversely impact our businessrevenues 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 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.conditions.
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.
Adverse weather events or natural disastersOur business has substantial competition that could negatively disruptadversely affect our operations.results.
Certain areasOur 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 whicha limited geographic area, we operate are susceptible to adverse weather conditions or natural disasters,also compete with larger distributors that provide integrated supply programs such as hurricanes, tornadoes, floodsthose 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 earthquakes. These events can disrupt our operations, result in damagecost-efficient manner than us. Our competitors include catalog suppliers, large warehouse stores and, to our properties and negativelya lesser extent, certain manufacturers. Competitive pressures could adversely affect the local economies in which we operate. Additionally, we may experience communication disruptions with our customers, vendorsCompany's sales and employees.profitability.
We cannot predict whether or to what extent damage caused by these events will affect our operations or the economies in regions where we operate. These adverse events could result in disruption of our purchasing or distribution capabilities, interruption of our business that exceeds our insurance coverage, our inability to collect from customers and increased operating costs. Our business or results of operations may be adversely affected by these and other negative effects of these events.
The loss of or the failure to attract and retain key personnel could adversely impact our results of operations.
The loss of the services of any of the executive officers of the Company could have a material adverse effect on our financial condition and results of operations. In addition, our ability to grow successfully will be dependent upon our ability to attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially adversely affect our financial condition and results of operations.
The loss of any key supplier could adversely affect DXP’sthe Company’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.
If we do not successfully remediate our internal controls weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted.
As discussed in Item 9A, “Managements Report on Internal Controls Over Financial Reporting,” we had material weaknesses in our internal controls during 2017. If we fail to successfully remediate those weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted
We are subject to various government regulations.
We are subject to laws and regulations in every jurisdiction where we operate. Compliance with laws and regulations increases our cost of doing business. We are subject to a variety of laws and regulations, including without limitation import and export requirements, the Foreign Corrupt Practices Act, tax laws (including U.S. taxes on our foreign subsidiaries), data privacy requirements, labor laws and anti-competition regulations. We are also subject to audits and inquiries in the ordinary course of business. Changes to the legal and regulatory environments could increase the cost of doing business, and such costs may increase in the future as a result of changes in these laws and regulations or in their interpretation. 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.
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.
Risks Associated With Conducting Business in Foreign Countries
We conduct a meaningful amount of business outside of the United States of America. We could be adversely affected by economic, legal, political and regulatory developments in countries that we conduct business in. We have meaningful operations in Canada in which the functional currency is denominated in Canadian dollars. As the value of currencies in foreign countries in which we have operations increases or decreases related to the U.S. dollar, the sales, expenses, profits, losses assets and liabilities of our foreign operations, as reported in our Consolidated Financial Statements, increase or decrease, accordingly.
The trading price of our common stock may be volatile.
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this and other periodic reports, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could adversely affect our business.
Our future results will be impacted by our ability to implement our internal growth strategy.
Our future results will depend in part on our success in implementing our internal growth strategy, which includes expanding our existing geographic areas, selling additional products to existing customers and adding new customers. Our ability to implement this strategy will depend on our success in selling more products and services to existing customers, acquiring new customers, hiring qualified sales persons, and marketing integrated forms of supply management such as those being pursued by us through our SmartSourceSM program. 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 executing our 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.
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, 2022, our combined goodwill and intangible assets amounted to $413.3 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.
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 the Company'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, The Company'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.
Cybersecurity breaches and other disruptions or misuse of our network and information systems could affect our ability to conduct our business effectively.
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 penetrateour 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.
Despite our security measures and those of our third-party service providers, our systems may be vulnerable to interruption or damage from computer hacks, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing. Our computer systems have been, and will likely continue to be, subject to attack. For example, in August 2020, the Company’s computer network was the target of a cyber-attack that we believe was orchestrated by a foreign actor.The systems housing confidential vendor, customer and employee data were not breached in this attack. The costs incurred to remedy the breach were not material to the results of the Company, and the increased cost of future mitigating measures are not expected to be material to our results.While we have implemented controls and taken other preventative actions to further strengthen our systems against future attacks, these controls and preventative actions may not be effective against future attacks. Any breach of network; information systems, our data security could result in a disruption of our services or improper disclosure of personal data or confidential information, which could harm our reputation, require us to expend resources to remedy such a security breach or defend against further attacks or subject us to liability under laws that protect personal data, resulting in increased operating costs or loss of revenue.
Our backlog is subject to unexpected adjustments and potential cancellations
Our backlog generally consists of projects for which we have an executed contract or commitment with a client and reflects our expected revenue from the contract or commitment, which is often subject to revision over time. We cannot guarantee that the revenue projected in our backlog will be realized or profitable or will not be subject to delay or suspension. Project cancellations, scope adjustments or deferrals, may occur with respect to contracts reflected in our backlog and could reduce the dollar amount of our backlog and the revenue and profits that we actually earn; or, may cause the rate at which we perform on our backlog to decrease. Our contracts typically provide for the payment of fees earned through the date of termination and the reimbursement of costs incurred including demobilization costs. In addition, projects may remain in our backlog for an extended period of time. During periods of economic slowdown, or decreases and/or instability in oil prices, the risk of projects being suspended, delayed or canceled generally increases. Finally, poor project or contract performance could also impact our backlog. Such developments could have a material adverse effect on our business and our profits.
Our actual results could differ from the assumptions and estimates used to prepare our financial statements
In preparing our financial statements, we make estimates and assumptions that affect the reported values of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Areas requiring significant estimates by our management include:
•recognition of revenue, costs, profits or losses;
•recognition of recoveries under contract change orders or claims;
•estimated amounts for project losses, warranty costs, contract close-out or other costs;
•income tax provisions and related valuation allowances; and
•accruals for other estimated liabilities, including litigation and insurance reserves and receivables.
Estimates are based on management's reasonable assumptions and experience, but are only estimates. Our actual business and financial results could differ from our estimates of such results due to changes in facts and circumstances, which could have a material negative impact on our financial condition and reported results of operations. Further, we recognize contract revenue as work on a contract progresses. The cumulative amount of revenue recorded on a contract at any point in time is the costs incurred to date versus the estimated total costs. Accordingly, contract revenue and total cost estimates are reviewed and revised as the work progresses. Adjustments are reflected in contract revenue in the period when such estimates are revised. Such adjustments could be material and could result in reduced profitability.
If we do not successfully remediate our internal controls weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted.
As discussed in Item 9A, “Management's Report on Internal Control Over Financial Reporting,” we concluded we have material weaknesses in our internal controls during 2022. If we fail to successfully remediate these weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted.
Risks Related to Acquisition Financingthe Market and Economy
The COVID-19 pandemic has and could continue to 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 business, financial position, and results of operations.
The COVID-19 pandemic created extensive disruptions to the global economy and to the lives of individuals throughout the world. COVID-19 spread globally during the first few months of 2020, resulting in certain supply chain disruptions, volatility in the stock market, lower oil prices, and a lockdown in international travel, all of which continued to adversely impact the global economy and may potentially impact future demand from our customers. While the scope, duration, and long-term effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it disrupted global economic activity and increased economic and market uncertainty. Further, a COVID-19 variant outbreak at one of our vendors’ or customers’ facilities could adversely impact or disrupt our operations. The pandemic impacted our customers spending and we have experienced these types of events negatively impacting our customers’ spending in certain regions or, depending upon the severity, globally, which can adversely impact our business, reputation, results of operations or financial conditions.If these effects resurface or continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not know the lingering extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any actions taken by governmental authorities and other third parties in response to a resurgence of the virus. While we do not know the long-term impact on our business, our operations or the global economy as a whole, the effects could have a prolonged material adverse effect on our business, financial condition, and results of operations.
Our success depends in large part on the performance of our executive management team and other key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for qualified employees is intense and the process of locating qualified key personnel may be lengthy and expensive. If any of our executive management team contract COVID-19, we may lose their services for an extended period of time, which would likely have a negative impact on our business and operations. If we experience widespread cases of COVID-19 or its variants among our employees, it would place more pressure on the remaining employees to perform all functions across the organization while maintaining their health, may require us to take remediation measures, and could impair our ability to conduct business. We may not be successful in retaining our key employees or finding adequate replacements for lost personnel.
A general slowdown in the economy could negatively impact the Company's sales growth and profitability.
Economic and industry trends affect the Company'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 manufacturing, food & beverage and oil and gas industry, are subject to volatility while others, such as the petrochemical industry, are cyclical and are 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.
We could be adversely impacted by low oil prices, volatility in oil prices and downturns in the energy industry, including decreased capital expenditures, impacting 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.
Low oil prices and the resulting downturns or lack of growth in the energy industry and energy related business could adversely impact our results of operations and financial condition. 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, sustained low oil and natural gas prices or a decline of such prices could lead to a decrease in our customers’ capital and other expenditures and could adversely affect our revenues.
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.
Risks Related to Credit or Access to Debt Capital
We may not be able to refinance on favorable terms or may not refinance, extend or repay our debt, which could adversely affect our results of operations or may result in default of our debt.
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.
Our failure to comply with financial covenants of our credit facilities may adversely affect our results of operations and our financial conditions.
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 access acquisition financing, including debt capital.
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 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.
AbilityA 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 Complycomply with Financial Covenants of Credit Facilities
Ourfinancial covenants under our credit facilities, requireincluding the CompanySecured 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 specifiedfinancial covenants restrictions, financial ratiosunder our credit facilities. Specifically, compliance with the Secured Leverage Ratio and other financial and operating tests. The Company’sFixed Charge Coverage Ratio covenants depend on our ability to comply with any of the foregoing restrictions will depend on its future performance, which will be subject to prevailing economic conditionsmaintain net income 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.prevent losses. In the future the Companywe may not be able to comply with the covenants or,and, if iswe are not able to do so, that itsour lenders willmay not be willing to waive such non-compliance or amend such covenants.
Ability If we are unable to Refinance
We may not be able to refinance existing debtcomply with our financial covenants or the termsobtain a waiver or amendment of any refinancing may not be as favorable as the terms ofthose covenants or obtain alternative financing, 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.
Goodwillbusiness 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, our combined goodwill and intangible assets amounted to $266.1 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 whichfinancial condition 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.
Our business has substantial competition that could adversely affect our results.
Our business is highly competitive. We compete with a variety of industrial supply distributors, some of which may have greater financial and other resources than us. Although many of our traditional distribution competitors are small enterprises selling to customers in a limited geographic area, we also compete with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by our SCS segment. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than us. Our competitors include catalog suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. Competitive pressures could adversely affect DXP’s sales and profitability.
Interruptions in the proper functioning of our information systems could disrupt operations and cause increases in costs and/or decreases in revenues.
The proper functioning of DXP’s information systems is critical to the successful operation of our business. 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 AssociatedRelated to Legal and Regulatory Matters
Risks associated with Insurancesubstantial or material claim or lawsuits that are not covered by insurance.
In the ordinary course of business we at times may become the subject of various claims, lawsuits or administrative proceedings seeking damages or other remedies concerning our commercial operations, the products we distribute, employees and other matters, including potential claims by individuals alleging exposure to hazardous materials as a result of the products we distribute or our operations. Some of these claims may relate to the activities of businesses that we have acquired, even though these activities may have occurred prior to acquisition. The products we distribute, 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 AssociatedThe 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 Cyber-Securitynormal 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.
ThroughWe are subject to potential shareholder litigation associated with the potential volatile trading price of our sales channelscommon stock.
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 electronic communicationsother 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.
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.
We are subject to risks associated with customers generally,conducting business in foreign countries.
We conduct a meaningful amount of business outside of the United States of America. We could be adversely affected by economic, legal, political and regulatory developments in countries that we collect and maintain confidential information that customers provide to usconduct business in. We have meaningful operations in order to purchase products or services.Canada in which the functional currency is denominated in Canadian dollars. We also acquirehave 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 retain information about suppliersliabilities of our foreign operations, as reported in our 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 regulations despite our attempts to implement policies and procedures to comply with such laws and regulations. Any such violations could individually or in the normalaggregate 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.
We are subject to various government 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. Computer hackersChanges to the legal and regulatory environments could increase the cost of doing business, and such costs may attempt to penetrate our information systemsincrease in the future as a result of changes in these laws and regulations or our vendors' information systems and, if successful, misappropriate confidential customer, supplier, employee or other business information. In addition, one of ourin their interpretation. Our employees, contractors or other third partyagents may attemptviolate laws and regulations despite our attempts to circumvent security measuresimplement policies and procedures to comply with such laws and regulations. Any such violations could individually or 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 onthe aggregate materially adversely affect our financial condition andor results of operations. We may not be able to adequately insure against cyber risks.
ITEM 1B. | Unresolved Staff Comments |
ITEM 1B. Unresolved Staff Comments
None.
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, 2017,2022, we had approximately 176180 facilities which contained 161156 services centers, 4 distribution centers, 16 fabrication facilities and 11 fabrication4 wastewater locations. Additionally, we operated out of 95 of our customers' facilities.
At December 31, 2017,2022, the Service Centers segment operated out of 161 156 service center facilities. Of these facilities, 125131 were located in the U.S. in 3437 states, 3424 were located in 9nine Canadian provinces one was located in Sonora, Mexico and one was located in Dubai. All of theThe four distribution centers were located in the U.S., specifically in Texas, Montana Nebraska, and Texas.Nebraska. At December 31, 2017,2022, the Innovative Pumping Solutions segment operated out of 1116 fabrication facilities located in 4two states in the U.S. and, two provinces in Canada.Canada and 4 wastewater locations in the U.S.. At December 31, 2017,2022, the Supply Chain Services segment operated supply chain installations in 6795 of our customers’ facilities in 2531 U.S. states.
states and one Canadian province.
| | | | | | | | | | | | | | | | | |
| State/City/Province | Locations | | State/City/Province | Locations |
| Alaska | 1 | | New York | 3 |
| Alabama | 6 | | Ohio | 5 |
| Arkansas | 1 | | Oklahoma | 3 |
| Arizona | 2 | | Oregon | 1 |
| California | 8 | | Pennsylvania | 3 |
| Colorado | 6 | | South Dakota | 1 |
| Florida | 2 | | Tennessee | 1 |
| Georgia | 4 | | Texas | 47 |
| Iowa | 4 | | Utah | 1 |
| Illinois | 2 | | Washington | 4 |
| Indiana | 2 | | Wisconsin | 2 |
| Kansas | 2 | | West Virginia | 1 |
| Kentucky | 1 | | Wyoming | 2 |
| Louisiana | 14 | | Alberta | 10 |
| Massachusetts | 1 | | British Columbia | 1 |
| Maryland | 1 | | Manitoba | 2 |
| Michigan | 1 | | New Brunswick | 1 |
| Minnesota | 1 | | Newfoundland | 1 |
| Montana | 2 | | Nova Scotia | 2 |
| Nebraska | 9 | | Ontario | 5 |
| New Mexico | 2 | | Quebec | 1 |
| North Carolina | 3 | | Saskatchewan | 3 |
| North Dakota | 3 | | Dubai | 1 |
| New Jersey | 1 | | Total Locations | 180 |
At December 31, 2017,2022, our owned facilities ranged from 5,000 square feet to 48,00045,000 square feet in size. We leasedlease facilities for terms generally ranging from one to fifteen years. The leased facilities rangedrange 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. See Note 4 - Leases for additional discussion on our leases.
The following table provides information regarding shares covered by the Company’s equity compensation plans as of December 31, 2017:2022:
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.
On August 19, 2016, the Company filed with the Securities and Exchange Commission a Form S-3 Registration Statement, commonly referred to as a “shelf registration,” which was effective August 26, 2016, whereby the Company registered shares of common stock and which shall have an aggregate offering price of up to $100 million.
In September 2016, pursuant to this registration statement, the Company issued 238,858 shares of common stock at a weighted average price of $26.38 per share under the related Equity Distribution Agreement. The distribution agents received $0.1 million aggregate commissions on such sales. Net proceeds were approximately $6.0 million. These proceeds were used to pay down debt obligations.
On October 31, 2016, the Company closed on the sale of 2,484,000 shares of stock for total net proceeds of $46.2 million after expenses. These proceeds were used to pay down debt obligations.
Repurchases of Common Stock
During 2017, 2016 and 2015The following table presents information with respect to the Company withheld 30,500, 12,507 and 20,440 shares, respectively, to satisfy tax withholding obligations in connection with vestingCompany’s repurchases of employee equity awards.
On December 17, 2014, DXP publicly announced an authorization from the Board of Directors that allowed DXP from time to time to purchase up to 400,000 shares of DXP'sits common stock over 24 months. Purchases could be made in open market or in privately negotiated transactions. DXP purchased 191,420 shares for $8.9 million under this authorization through December 31, 2015. No shares were purchased during 2016. The authorization expired on December 16, 2016.
The selected historical consolidated financial data set forth below for each of the
years in the five-year periodquarter ended December 31,
2017 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.2022 (in thousands except average price paid per share): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
| October 1 – October 31 | $ | — | | | $ | — | | | $ | — | | | $ | 46,626 | |
| November 1 – November 30 | 880 | | | 28.71 | | | 880 | | | 21,353 | |
| December 1 – December 31 | 187 | | | 27.25 | | | 187 | | | 84,860 | |
| Total | $ | 1,067 | | | $ | 28.46 | | | $ | 1,067 | | | $ | 84,860 | |
| | | | | | | | |
(1) | Represents shares repurchased by the Company during the period as part of our publicly announced share repurchase program. No shares were repurchased during the period from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock. |
(2) | | On May 12, 2021, the Company announced the Share Repurchase Program pursuant to which the Company may repurchase up to $85.0 million worth, or 1.5 million shares of the Company's outstanding common stock over the next 24 months. The Company completed the $85.0 million Share Repurchase Program in December 2022.
On December 15, 2022, the Company announced a new Share Repurchase Program pursuant to which the Company may repurchase up to $85.0 million worth, or 2.8 million shares of the Company's outstanding common stock over the next 24 months. |
| | | | | 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 | |
(1)The impairment expense in 2014, further discussed in Note 8 of the Notes to Consolidated Financial Statements, reduced operating income by $117.6 million, increased the net loss by $102.0 million, and increased basic and diluted loss per share by $6.97.
(2) The impairment expense in 2015, further discussed in Note 8 of the Notes to Consolidated Financial Statements, reduced operating income by $68.7 million, increased the net loss by $58.4 million, and increased basic and diluted loss per share by $4.05.ITEM 6. Reserved
(3) See Note 12 of the Notes to Consolidated Financial Statements for the calculation of basic and diluted earnings per share.
Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | 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 |
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General Overview
The Company is a leading North American distributor of technical products and services. Our comprehensive knowledge, specialized services and leading brands serve MRO, OEM and capital equipment end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, expertise, timely response and an overall ease of doing business.
The Company's products are marketed in the United States, Canada and Dubai and Mexico to over 50,000 customers that are engaged in a variety of industries, many of which may be countercyclicalcounter cyclical to each other. Demand for our products generally is subject to changes in the United States and Canada, and global and micro-economicmacro-economic trends affecting our customers and the industries in which they compete in particular.compete. Certain of these industries, such as the oil and gas industry, are subject to volatility driven by a variety of factors, while others, such as the petrochemical industry and the construction industry, are cyclical and materially affected by changes in the United States and global economy. As a result, we may experience changes in demand within particular markets, segments and product categories as changes occur in our customers' respective markets.
CURRENT MARKET CONDITIONS AND OUTLOOK
Economic Indices
The Company monitors several economic indices that have been key indicators for industrial and oil & gas economic activity in the United States. These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM). Additionally, we track the Metalworking Business Index ("MBI"). A reading above 50 generally indicates expansion.
Below are readings for the fourth quarter versus the full year average:
| | | | | | | | | | | | | | |
| Index Reading * |
Period | MCU | PMI | IP | MBI |
October | 79.9 | 50.2 | 104.7 | 49 |
November | 79.7 | 49 | 104.5 | 47.1 |
December | 78.8 | 48.4 | 103.4 | 46.8 |
| | | | |
Fiscal 2022 Q4 average | 79.5 | 49.2 | 104.2 | 47.6 |
Fiscal 2022 average | 79.7 | 53.5 | 103.9 | 53.9 |
Fiscal 2021 average | 75.4 | 60.6 | 100.5 | 59.7 |
Fiscal 2020 average | 71.9 | 52.5 | 101.8 | 47.6 |
* The information contained in this table has been obtained from third party publicly available sources.
The Company also monitors various oil & gas indicators including active drilling rigs, gross U.S. domestic production and the West Texas Intermediate ("WTI") price of oil. Below are readings for the last three years:
| | | | | | | | | | | | | | | | | |
Operating Environment Overview* | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
Active Drilling Rigs** | | | | | |
U.S. | 721 | | | 475 | | | 436 | |
Canada | 176 | | | 131 | | | 90 | |
International | 851 | | | 755 | | | 825 | |
Worldwide | 1,747 | | | 1,361 | | | 1,351 | |
| | | | | |
Gross Domestic Product (in billions) | $ | 25,461.3 | | | $ | 22,993.5 | | | $ | 20,932.8 | |
West Texas Intermediate ** (per barrel) | $ | 94.90 | | | $ | 68.14 | | | $ | 39.16 | |
Purchasing Managers Index | 48.4 | | 58.8 | | 60.5 |
* The information contained in this table has been obtained from third party publicly available sources.
** Averages for the years indicated.
During 2013,2022, the growth rate of the general economy slowed from 2012improved, as the macro economy and salesbusiness cycle began to normalize relative to the pandemic related years of metal working2020 and bearing and power transmission products to manufacturers of oil field equipment declined. Our employee headcount increased by 13.8% primarily as a result of multiple acquisitions.2021. Sales for the year ended December 31, 20132022 increased $144.4$366.9 million, or 13.2%32.9%, to $1.2approximately $1.5 billion from $1.1 billion for the prior corresponding period. Customer demand was generally healthy throughout fiscal 2022, resulting in 2012. Salesindustry expected volume growth, complemented by businesses acquired in 2013 accounted for $63.7 million of 2013 sales. Salesmeaningful pricing actions taken by businesses acquired in 2012 accounted for $75.9 million of 2013 sales,the Company's vendors which ultimately, get passed on a same store sales basis. Excluding 2013 sales of $139.6 million by businesses acquired in 2012 and 2013, on a same store sales basis, sales increased $4.8 million, or 0.4%, from 2012.
During 2014,to customers. As such, the growth ratemajority of the general economy increased slightly 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. Sales for the year ended December 31, 2014 increased $258.2 million, or 20.8%, to approximately $1,499.7 million from $1,241.5 million in 2013. Sales by businesses acquired in 2014 accounted for $176.4 million of 2014 sales. Sales by businesses acquired in 2013 accounted for $35.1 million of the 2014 increase, on a same store sales basis. Excluding 2014 sales of $211.5 million by businesses acquired in 2014 and 2013, on a same store sales basis, sales increased by $46.7 million, or 3.8%, from 2013. This2022 sales increase is primarily the result of increased sales byincreases in price with volume as well as the Service Centers segment of $22.1 million, IPS segment of $8.1 million,contribution from acquisitions and SCS segment of $16.5 million, on a same store sales basis. The majority of these 2014 sales increases came from a broad based increase in sales of pumps, bearings, industrial supplies, metal working and safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2015, the growth rate of the general economy was flat with 2014. However, the growth rate of the industrial economy slowed. Oil prices significantly declined during the year, falling approximately 35%. Our employee headcount decreased 12.7%, despite two acquisitions, primarily as a result of headcount reductions stemming from reduced capital spending by oil and gas producers. Sales for the year ended December 31, 2015 decreased $252.6 million, or 16.9%, to approximately $1,247.0 million from $1,499.7 million in 2014. Sales by businesses acquired in 2014 and 2015 reduced the decline by $14.5 million and $9.1 million, respectively. Excluding 2015 sales of $23.6 million by businesses acquired in 2014 and 2015, on a same store sales basis, sales decreased by $276.2 million, or 18.4%, from 2014. This sales decrease is primarily the result of decreased sales by the Service Centers segment of $184.6 million and IPS segment of $93.3 million, which were partially offset by increased sales by the Supply Chain Services segment of $1.7 million, on a same store sales basis. The majority of these 2015 sales decreases resulted from declines inrelated sales of rotating equipment bearings, metal working products, industrial supplies and safety products and services to customers engaged in oil and gas production, mining and manufacturing. The sales declines were primarily the resultair compressors.
During 2016, the growth rate of the general economy remained flat with 2015 and the rig count declined significantly during the first half of 2016, increased during the second half, but remained significantly below 2014 peaks. The energy market for our products remained depressed. We reduced our employee headcount 24.1% due to the continued reduction of spending by the oil and gas producers. Sales for the year ended December 31, 2016 decreased $285.0 million, or 22.9%, to approximately $962.1 million from $1,247.0 million in 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by a business sold in 2016 accounted for a decline of $7.1 million on a same store basis. Excluding 2016 sales of $15.1 million by businesses acquired in 2015; and 2015 sales of $7.1 million of the business divestiture in 2016, on a same store sales basis, sales decreased by $292.9 million, or 23.6%, from 2015. This sales decrease is the result of decreased sales by the Service Centers segment of $213.5 million, the IPS segment of $67.7 million and the Supply Chain Services segment of $11.7 million, on a same store sales basis. The majority of the 2016 sales decline is the result of a decrease in sales of pumps, bearings, industrial supplies, metal working and safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2017,2021, the growth rate of the general economy improved from 2016 and2020 as well as the rig count increased, but remained significantly below 2014 peaks. The energy market for our products improved.count. Sales for the year ended December 31, 20172021 increased $44.7$108.7 million, or 4.6%10.8%, to approximately $1.0$1.1 billion from $962.1 million$1.0 billion 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, IPS and SCS segments of $42.9 million, $16.9 million and $7.5 million respectively. The majority of the 20172021 sales increase iswas primarily due to acquisitions and the result of increasedrelated 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.rotating equipment air compressors.
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.
Consolidated Results of Operations
| | Years Ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Years Ended December 31, |
| | 2017 | | | % | | | 2016 | | | % | | | 2015 | | | % | | | 2022 | | % | | 2021 | | % | | 2020 | | % |
| | (in millions, except percentages and per share amounts) | | | | | | | | | | | | | |
| | | | | ( in millions, except percentages and per share amounts) |
Sales | | $ | 1,006.8 | | | | 100.0 | | | $ | 962.1 | | | | 100.0 | | | $ | 1,247.0 | | | | 100.0 | | Sales | $ | 1,480.8 | | | 100.0 | | $ | 1,113.9 | | | 100.0 | | $ | 1,005.3 | | | 100.0 |
Cost of sales | | | 735.2 | | | | 73.0 | | | | 697.3 | | | | 72.5 | | | | 895.1 | | | | 71.8 | | Cost of sales | 1,058.8 | | | 71.5 | | 785.4 | | | 70.5 | | 728.1 | | | 72.4 |
Gross profit | | | 271.6 | | | | 27.0 | | | | 264.8 | | | | 27.5 | | | | 351.9 | | | | 28.2 | | Gross profit | 422.0 | | | 28.5 | | 328.5 | | | 29.5 | | 277.2 | | | 27.6 |
Selling, general & administrative expense | | | 238.1 | | | | 23.7 | | | | 245.5 | | | | 25.5 | | | | 303.8 | | | | 24.4 | | Selling, general & administrative expense | 324.3 | | | 21.9 | | 288.6 | | | 25.9 | | 245.0 | | | 24.4 |
Impairment expense | | | - | | | | - | | | | - | | | | - | | | | 68.7 | | | | 5.5 | | |
B27 settlement | | | - | | | | - | | | | - | | | | - | | | | 7.3 | | | | 0.6 | | |
Impairment and other charges | | Impairment and other charges | — | | | — | | — | | | — | | 59.9 | | | 6.0 |
Operating income (loss) | | | 33.5 | | | | 3.3 | | | | 19.3 | | | | 2.0 | | | | (27.9 | ) | | | (2.2 | ) | Operating income (loss) | 97.7 | | | 6.6 | | 39.9 | | | 3.6 | | (27.7) | | | (2.8) |
Other( income) expense, net | | Other( income) expense, net | 2.7 | | | 0.2 | | (0.4) | | | — | | 0.1 | | | — |
Interest expense | | | 17.1 | | | | 1.7 | | | | 15.5 | | | | 1.6 | | | | 10.9 | | | | 0.9 | | Interest expense | 29.1 | | | 2.0 | | 21.1 | | | 1.9 | | 20.6 | | | 2.0 |
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 | | | | - | | |
Income (loss) before income taxes | | Income (loss) before income taxes | 65.9 | | | 4.5 | | 19.2 | | | 1.7 | | (48.4) | | | (4.8) |
Provision for income taxes (benefit) | | Provision for income taxes (benefit) | 17.8 | | | 1.2 | | 3.4 | | | 0.3 | | (18.7) | | | (1.9) |
Net income (loss) | | | 16.5 | | | | 1.7 | | | | 7.2 | | | | 0.7 | | | | (39.0 | ) | | | (3.1 | ) | Net income (loss) | 48.1 | | | 3.2 | | 15.8 | | | 1.4 | | (29.7) | | | (3.0) |
Net (loss) attributable to noncontrolling interest | | | (0.4 | ) | | | - | | | | (0.5 | ) | | | - | | | | (0.5 | ) | | | - | | |
Net loss attributable to noncontrolling interest | | Net loss attributable to noncontrolling interest | (0.1) | | | — | | (0.7) | | | (0.1) | | (0.3) | | | — |
Net income (loss) attributable to DXP Enterprises, Inc. | | $ | 16.9 | | | | 1.7 | | | $ | 7.7 | | | | 0.8 | | | $ | (38.5 | ) | | | (3.1 | ) | Net income (loss) attributable to DXP Enterprises, Inc. | $ | 48.2 | | | 3.3 | | $ | 16.5 | | | 1.5 | | $ | (29.4) | | | (2.9) |
Per share | | | | | | | | | | | | | | | | | | | | | | | | | Per share | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | 0.97 | | | | | | | $ | 0.51 | | | | | | | $ | (2.68 | ) | | | | | |
Diluted earnings (loss) per share | | $ | 0.93 | | | | | | | $ | 0.49 | | | | | | | $ | (2.68 | ) | | | | | |
Basic earnings per share | | Basic earnings per share | $ | 2.58 | | | $ | 0.87 | | | | | $ | (1.65) | | | |
Diluted earnings per share | | Diluted earnings per share | $ | 2.47 | | | $ | 0.83 | | | | | $ | (1.65) | | | |
DXP is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). The Service Centers are engaged in providing maintenance, repair and operating (“MRO”) products and equipment, including technical expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery. The Service Centers provide a wide range of MRO products and expertise in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The SCS segment manages all or part of our customers’ MRO products supply chain, including warehouse and inventory management. The IPS segment fabricates and assembles integrated pump system packages custom made to customer specifications, remanufactures pumps and manufactures branded private label pumps.
Results of operations for the Service Centers segment are as follows:
| | 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 | |
Results of operations for the IPS segment are as follows:
| | 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 | |
Results of operations for the SCS segment are as follows:
| | 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, 20172022 compared to Year Ended December 31, 20162021
SALES. Sales for the year ended December 31, 20172022 increased $44.7$366.9 million, or 4.6%32.9%, to approximately $1.0$1.5 billion from $962.1 million$1.1 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 2016.2021. This same store sales increase is the result of an increase in sales in our Service Centers,SC, IPS and SCS segments of $42.9$192.9 million, $16.9$91.5 million and $7.5$82.5 million, respectively. TheseSales from businesses recently acquired accounted for $41.5 million of the sales for the twelve months ended December 31, 2022. Excluding the 2022 sales of from businesses acquired, sales for the year increased by $325.4 million, or 29.2% from the prior year's corresponding period. The fluctuations in the sales in our segments are further explained in our business segment discussions below.
GROSS PROFIT. Gross profit as a percentage
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2022 | | 2021 | | Change | | Change% |
| | | | | | | |
Sales by Business Segment | (in thousands, except change %) |
Service Centers | $ | 1,009,356 | | | $ | 816,496 | | | $ | 192,860 | | | 23.6 | % |
Innovative Pumping Solutions | 231,102 | | | 139,591 | | | 91,511 | | | 65.6 | % |
Supply Chain Services | 240,374 | | | 157,834 | | | 82,540 | | | 52.3 | % |
Total Sales | $ | 1,480,832 | | | $ | 1,113,921 | | | $ | 366,911 | | | 32.9 | % |
Service Centers segment. These fluctuations are explained in the segment discussions below.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense (SG&A) for the year ended December 31, 2017 decreased by approximately $7.4 million, or 3.0%, to $238.1 million from $245.5 million for the year ended December 31, 2016. SG&A from 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.
OPERATING INCOME. Operating income for the year ended December 31, 2017 increased $14.2 million, to $33.5 million, from $19.3 million in the year ended December 31, 2016. The operating income from the business sold in 2016 reduced the overall increase during 2017 in operating income in the amount of $2.9 million. Excluding the operating income from the business sold, on a same store sales basis, operating income increased $17.1 million, or 103.8% from 2016. This increase in operating income is primarily related to the increase in gross profit and decrease in SG&A discussed above.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2017 increased 9.6% from the year ended December 31, 2016 primarily as a result of increased interest rates under our credit facilities.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 2.2% for the year ended December 31, 2017 compared to a tax expense of 26.1% for the year ended December 31, 2016. 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 to the U.S. statutory rate for the year ended December 31, 2016, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate decreased by the book gain on the sale of Vertex, lower income tax rates on income earned in foreign jurisdictions, research and development credits, and foreign tax credits.
SERVICE CENTERS SEGMENT. Segment.Sales for the Service Centers segment increased by $20.3$192.9 million, or 3.3%23.6% for the year ended December 31, 20172022, compared to the year ended December 31, 2016.2021. Excluding $22.7$35.0 million of the 20162022 Service Centers segment sales from a business sold in 2016,businesses acquired, Service Centers segment sales for 2017 increased $42.9$157.9 million, or 7.2%19.3% from the year ended December 31, 2016, on a same store sales basis.prior year's corresponding period. This sales increase is primarily the result of increased sales of safety servicesrotating equipment and rotating equipmentbearings product lines to customers engaged in operating and maintenance services in the upstream, midstream or downstream oilgeneral industrial, diversified chemical, and gas markets or manufacturing equipment for the upstream, midstream or downstream oil and gas markets in connection with increased capital spending by oil 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 increase in the gross profit percentage is primarily the result of improved margins on 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.producers.
INNOVATIVE PUMPING SOLUTIONS SEGMENT. Innovative Pumping Solutions Segment. Sales for the IPS segment increased by $16.9$91.5 million, or 9.0%65.6% for the year ended December 31, 20172022, compared to the year ended December 31, 2016.2021. Excluding $6.6 million of 2022 IPS segment sales from businesses acquired, IPS segment sales increased $85.0 million, or 60.9% from the prior year's corresponding period. This increase iswas primarily the result of increasedan increase in the 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 result of the $16.9 million increase in sales discussed above and a decrease of $2.3 million in SG&A.businesses.
SUPPLY CHAIN SERVICES SEGMENT. Supply Chain Services Segment. Sales for the SCS segment increased by $7.5$82.5 million, or 4.9%52.3%, for the year ended December 31, 20172022, compared to the year ended December 31, 2016.2021. The increaseimprovement in sales is primarily related to increasedthe addition of a new customer in the diversified chemicals market, as well as sales to customersincreases in the medical technology, food and beverage and 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.markets.
GROSS PROFIT. 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.
Year Ended December 31, 2016 compared to Year Ended December 31, 2015
SALES. Sales for the year ended December 31, 20162022 decreased $285.0 million, or 22.9%, toby approximately $962.1 million99 basis points from $1,247.0 million in 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by a business sold in 2016 accounted for a decline of $7.1 million of sales on a same store basis.the prior year's corresponding period. Excluding 2016 sales of $15.1 million by businesses acquired in 2015 and 2015 sales of $7.1 millionthe impact of the business sold in 2016, on a same store sales basis, sales decreased by $292.9 million, or 23.6%, from 2015. This sales decline is the result of decreased sales by all three segments including $213.5 million in Service Centers, $67.7 million in IPS and $11.7 million in SCS, on a same store sales basis. These decreases are explained in the segment discussions below.
GROSS PROFIT. Gross profit as a percentage of sales decreased approximately 70 basis points to 27.5% for 2016 compared to 28.2% for 2015. On a same store sales basis,businesses acquired, gross profit as a percentage of sales decreased by approximately 60137 basis points. This declineThe decrease in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 100133 basis point declinedecrease in the 2016gross profit percentage in our IPS segment, a 54 basis point decrease in the gross profit percentage in our SC segment and a 366 basis point decrease in the gross profit percentage in our SCS segment.
Service Centers Segment. The gross profit percentage for our IPS segment and an approximate 80 basis point decline in ourthe Service Centers segment, which was partially offset by an increase ofdecreased approximately 14521 basis points and approximately 54 basis points, excluding the impact for the SCS segment. Gross profit as a percentage of sales for each segment are explained below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative (or “SG&A”) expense for 2016 decreased by approximately $58.3 million, or 19.21%, when compared to 2015. Selling, general and administrative expense by businesses acquired, in 2015 was $5.2 million on a same store basis. The 2015 SG&A expense for the 2016 business divestiture was $2.1 million on a same store sales basis. Excluding 2016 expenses of $5.2 million by businesses acquired in 2015 and 2015 expenses of $2.1 million for the 2016 business divestiture, on a same store sales basis, selling, general and administrative expenses decreased by $61.4 million, or 20.4%. The decline in SG&A, on a same store sales basis, is partially the result of a $39.0 million decrease in payroll, variable compensation, payroll taxes and 401(k) expense due to headcount reductions. Amortization expense for 2016 decreased by $2.6 million compared to 2015.
OPERATING INCOME. Operating income for 2016 decreased approximately $28.8 million, or 59.9%, from $48.2 million to $19.3 million, compared to 2015, excluding the 2015 impairment expense and B27 settlement,. Businesses acquired in 2015 increased the decline by $0.6 million, on a same store sales basis, and the business divested reduced the decline by $1.2 million. Excluding operating income from businesses acquired and divested, the B27 settlement and impairment expense, operating income decreased $27.1 million or 57.6%. This decrease in operating income, on a same store sales basis, is primarily related to the decreased gross profit which is partially offset by the decline in SG&A discussed above.
INTEREST EXPENSE. Interest expense for 2016 increased by $4.6 million, or 42.4%, from 2015 primarily due to an increase in our interest rates.
INCOME TAXES. Our 2016 provision for income taxes, which is at an effective rate of 26.1%, differed from the U.S. statutory rate of 35% primarily due to the effect of the book gain, but tax loss, recognized on the sale of Vertex during 2016. Our effective tax rate for 2016 of 62.4%, after excluding the effect of the sale of Vertex, increased from 27.7% for the prior year's corresponding period, before the effect of the mostly non-deductible impairment of goodwill and B27 settlement,period. This was primarily as a result of reduced research and development and foreign tax credits, reduced domestic production activity deductions and prior year provision to return adjustments. During 2009, DXP wrote off $38.2 million of goodwill and intangibles in connection with an impairment which substantially reduced the book basis of Vertex, but not the tax basis.
SERVICE CENTERS SEGMENT. Salesproduct mix. Gross profit for the Service Centers decreased $205.6SC segment, excluding businesses acquired, increased $42.9 million, or 24.9%, in 201617.2 percent, during the twelve months ended December 31, 2022 compared to 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by the 2016 business divestiture accounted for a decline of $7.1 million on a same store basis. Excluding 2016 sales of $15.1 million by businesses acquired in 2015 and $7.1 million of 2015 sales for the 2016 divested business, on a same stores sales basis, Service Centers’ sales decreased $213.5 million, or 26.1%, on a same stores sales basis, from the prior year’s corresponding period. The majority of the 2016 sales decrease isThis was primarily the result of decreasedincreased sales of rotating equipment and bearings metal workingand power transmission products industrial supplies and safety products and services to customers engaged in the upstream oilnon-oil and gas market or manufacturing equipmentmarkets.
Innovative Pumping Solutions Segment. The 2022 gross profit percentage for the upstream oil and gas market. If crude oil and natural gas prices were to return to, or go below the prices experienced during the first nine months of 2016, this level of sales to the upstream oil and gas industry would be expected to continue, or decline, during 2017. Gross profit as a percentage of sales, on a same store sales basis, declinedIPS segment decreased approximately 8066 basis points in 2016 compared to 2015 as a result of declines infrom the gross profit percentages for sales of pumps, safety services and metal working products due to competitive pressures. Excluding year-to-date Service Centers segment operating income from acquired businesses of $0.4 million and $1.2 million of 2015 incomeprior year's corresponding period. Adjusting for the business divestiture, Service Centers segment operating income for 2016 decreased by $29.7 million, or 38.6%, primarily as a result of the decline in sales discussed above and the percentage decrease in sales exceeding the percentage decrease in SG&A.
SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services decreased by $11.7 million, or 7.0%, in 2016 compared to 2015. None of the 2015 acquisitions or the 2016 divestiture contributed sales to this segment. The decrease is primarily related to decreased sales to customers engaged in the oilfield services and oilfield manufacturing industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased less from DXP because of the decline in the number of drilling rigs operating in the U.S and Canada. Gross profit as a percentage of sales increased approximately 145 basis points in 2016 compared to the prior corresponding period as a result of decreased sales of lower margin products to oil and gas and trucking related customers. Operating income for the SCS segment increased $1.2 million, or 8.7%, primarily as a result of the 145 basis point increase inbusinesses acquired, gross profit as a percentage of sales combined withdecreased approximately 133 basis points from the prior year's corresponding period. The decrease in gross profit percentage as a 7.0% reductionpercentage of sales is primarily due to a mix shift (lower margin oil and gas work versus domestic water and wastewater projects). Gross profit for the IPS segment, excluding businesses acquired, increased $22.5 million, primarily as a result of an increase in SG&A.
INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for Innovative Pumping Solutions decreased by $67.7 million, or 26.6%, in 2016 compared to 2015. The sales decrease primarily resulted from a significant decline inthe capital spending by our oil and gas producers and related businesses stemming from the decline in the price of oil. If crude oil and natural gas prices were to return to, or go below prices experienced during the first nine months of 2016, this level of sales to the upstream and mid-stream oil and gas industry would be expected to continue, or decline, during 2017. businesses.
Supply Chain Services Segment. Gross profit as a percentage of sales declined approximately100 basis points in 2016 compared to 2015 primarily as a result of competitive pressures resulting in lower margin jobs and $3.7 million of unabsorbed manufacturing overhead related to the start-up of manufacturing our ANSI pumps. Additionally, gross profit margins for individual orders for the IPS segment can fluctuate significantly because each order is for a unique package built to customer specifications and subject to varying competition. Operating income decreased $11.7 million, or 54.3%, primarily as a result of the 26.6% decline in sales and approximate 100 basis point decline in the gross profit percentage discussed above.
Pro Forma Results
The pro forma unaudited results of operations for the Company on a consolidated basisdollars for the twelve months ended December 31, 2017 and 2016, assuming2022 increased $10.9 million or, 28.9 percent, compared to the divestitureprior year's corresponding period due to the addition of a business completed in 2016 (previously discussed in Item 1, Business) was consummated asnew customer during the current year. As a percentage of January 1, 2016 are as follows (in millions, except per share amounts):
| | 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 | |
The pro forma unaudited results of operations for the Company on a consolidated basissales, or gross margins, for the twelve months ended December 31, 20162022 decreased approximately 366 basis points, compared to the prior year's corresponding period, due to the addition of the same customer and 2015, assuming the acquisitionprofitability of this contract.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A for the year ended December 31, 2022 increased by approximately $35.6 million, or 12.3%, to $324.3 million from $288.6 million for the prior year's corresponding period. SG&A expense from businesses completedacquired accounted for $8.9 million. Excluding expenses from businesses acquired, SG&A for the twelve months ended December 31, 2022 increased by $26.8 million, or 9.3% from the prior year's corresponding period. The increase in 2015SG&A excluding businesses acquired is primarily the result of increased payroll, incentive compensation and divestiturerelated taxes and 401(k) expenses as a result of increased business activity associated with recovery from the negative economic impacts of the COVID-19 pandemic.
OPERATING INCOME. Operating income for the year ended December 31, 2022 increased by $57.9 million to $97.8 million from $39.9 million in the prior year's corresponding period. This increase in operating income is primarily related to the aforementioned increased business activity across all segments.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2022 increased $8.0 million compared to the prior year's corresponding period, primarily due to the Company borrowing an additional $105.0 million on its Term Loan B during the fourth quarter of 2022 as well as incurring higher than average interest rates during the year due to changes in the macro-economic environment and the associated increasing interest rate policy by the U.S. Federal Reserve Bank. Both of the Company's facilities are subject to a variable interest rate for the twelve months ended December 31, 2022.
INCOME TAXES. Our effective tax rate from continuing operations was 27.0 percent for the twelve months ended December 31, 2022, compared to 17.9 percent for the twelve months ended December 31, 2021. Compared to the U.S. statutory rate for the twelve months ended December 31, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, return to provision adjustments, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the twelve months ended December 31, 2021, the effective tax rate was decreased by research and development tax credits and other tax credits and foreign tax credits, and was partially offset by state taxes, nondeductible expenses, and uncertain tax positions for research and development tax credits.
Year Ended December 31, 2021 compared to Year Ended December 31, 2020
For the full year 2021 to 2020 comparative discussion, see Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 incorporated by reference in this Annual Report on Form 10-K. Non-GAAP Financial Measures and Reconciliations
In an effort to provide investors with additional information regarding our results of operations as determined by accounting principles generally accepted in the United States of America ("U.S. 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, results prepared in accordance with U.S. GAAP.
Our primary non-GAAP financial measures are organic sales (Organic Sales), sales per business day ("Sales per Business Day"), free cash flow ("Free Cash Flow"), earnings before interest, taxes, depreciation and amortization ("EBITDA") and adjusted EBITDA ("Adjusted EBITDA"). The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. 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, Sales per Business Day, Free Cash Flow, EBITDA and Adjusted EBITDA) are 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 same 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 the impact of acquisitions and divestitures for the respective periods. Organic Sales is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Sales per Business Day is defined as total net sales divided by business days for the period. Sales per Business Day assists management and investors in evaluating the Company's historical performance.
Free Cash Flow is defined as cash provided by operations less net purchases of property and equipment. 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 shares of the Company's common stock, and for certain other activities.
EBITDA is defined as the sum of consolidated net income in such period, plus to the extent deducted from consolidated net income: (i) income tax expense, (ii) franchise tax expense, (iii) 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 completedbusiness. EBITDA is a tool that can assist management and investors in 2016 (previously discussed comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
From time to time, the Company incurs non-cash, unique or one-time items. As such, the Company will add these items back to determine an Adjusted EBITDA.
We use EBITDA and Adjusted EBITDA internally to evaluate and manage the Company's operations because we believe it provides useful supplemental information regarding the Company's ongoing economic performance. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results.
A reconciliation of the non-GAAP financial measures, to its most comparable U.S. GAAP financial measure is included below.
The following table sets forth the reconciliation of net sales to organic net sales (in Item 1, Business) were consummated asmillions):
Reconciliation of January 1, 2015Net Sales to Organic Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fiscal 2022 | | Net Sales | | Acquisition Sales | | Divestiture Sales | | Organic Sales |
Service Centers | | $ | 1,009 | | | $ | 35 | | | $ | — | | | $ | 974 | |
Innovative Pumping Solutions | | 231 | | | 7 | | | — | | | 224 | |
Supply Chain Services | | 240 | | | — | | | — | | | 240 | |
Total Sales | | $ | 1,480 | | | $ | 42 | | | $ | — | | | $ | 1,438 | |
| | | | | | | | |
Fiscal 2021 | | | | | | | | |
Service Centers | | $ | 816 | | | $ | 129 | | | $ | — | | | $ | 687 | |
Innovative Pumping Solutions | | 140 | | | 18 | | | — | | | 122 | |
Supply Chain Services | | 158 | | | — | | | — | | | 158 | |
Total Sales | | $ | 1,114 | | | $ | 147 | | | $ | — | | | $ | 967 | |
| | | | | | | | |
Year-over-year growth rates | | | | | | | | |
Service Centers | | 23.7 | % | | $ | (94) | | | — | | | 41.8 | % |
Innovative Pumping Solutions | | 65.0 | % | | (11) | | | — | | | 83.6 | % |
Supply Chain Services | | 51.9 | % | | — | | | — | | | 51.9 | % |
Total Sales | | 32.9 | % | | $ | (105) | | | — | | | 48.7 | % |
The Sales per Business Day are as follows (in millions, except per share amounts.thousands):
| | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Business days | | 253 | | 251 | | 253 |
| Sales per Business Day | | $ | 5,853 | | | $ | 4,500 | | | $ | 3,974 | |
We use EBITDA and Adjusted EBITDA internally to evaluate and manage the Company's operations because we believe it provides useful supplemental information regarding the Company's ongoing economic performance. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results.
For further discussion regarding free cash flow as a management metric see the "Liquidity and Capital Resources - Free Cash Flow" below.
The following table sets forth the reconciliation of EBITDA and Adjusted EBITDA to the most comparable U. S. GAAP financial measure (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
U.S. GAAP net income (loss) attributable to DXP Enterprises, Inc. | | $ | 48,155 | | | $ | 16,496 | | | $ | (29,269) | |
Loss attributable to non-controlling interest | | (53) | | | (745) | | | (348) | |
Provision for income taxes | | 17,799 | | | 3,431 | | | (18,696) | |
Depreciation and amortization | | 28,500 | | | 27,143 | | | 22,683 | |
Interest and other financing expenses | | 29,135 | | | 21,089 | | | 20,571 | |
EBITDA | | $ | 123,536 | | | $ | 67,414 | | | $ | (5,059) | |
EBITDA margin as % of sales | | 8.3 | % | | 6.1 | % | | (0.5) | % |
NCI loss before tax(1) | | 227 | | | 993 | | | 632 | |
Loss associated with sale of interest in VIE(2) | | 1,193 | | | — | | | — | |
Impairment and other charges | | — | | | — | | | 59,883 | |
Stock compensation expense | | 1,850 | | | 1,823 | | | 3,532 | |
Adjusted EBITDA | | $ | 126,806 | | | $ | 70,230 | | | $ | 58,988 | |
Adjusted EBITDA margin as % of sales | | 8.6 | % | | 6.3 | % | | 5.9 | % |
(1) NCI represents non-controlling interest | | | | | | |
(2)The loss associated with the sale of our interest in our VIE is included in other income and expense on our consolidated statement of operations for the year ended December 31, 2022. |
|
Liquidity and Capital Resources
General Overview
As ofDecember 31, 2022, we had cash and restricted cash of $46.1 million and credit facility availability of $132.4 million. We have a $135.0 million asset backed revolving line of credit (the "ABL Revolver"), partially offset by letters of credit of $2.6 million, that were due to mature in August 2022. The Company also has a Term Loan B with $428.1 million in borrowings as of December 31, 2022. On July 19, 2022, the Company amended and extended the ABL Revolver. The ABL Revolver matures on July 19, 2027, under which we had no borrowings outstanding as of December 31, 2022 .
Our primary source of capital is cash flow from operations, supplemented as necessary by Company shares, 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, fund project work-in-process and to service our debt.
The following table summarizes our net cash flows used in and provided by operating activities, net cash used in investing activities and net cash (used in) provided by financing activities for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | Change | | Change(%) |
| | | | | | | |
Net cash provided by (used in): | | | | | | | |
Operating activities | $ | 5,894 | | | $ | 37,089 | | | $ | (31,195) | | | (84) | % |
Investing activities | (53,422) | | | (69,023) | | | 15,601 | | | (23) | % |
Financing activities | 44,312 | | | (38,493) | | | 82,805 | | | (215) | % |
Effect of foreign currency | 253 | | | 88 | | | 165 | | | 188 | % |
Net change in cash | $ | (2,963) | | | $ | (70,339) | | | $ | 67,376 | | | (96) | % |
Operating Activities
The Company generated approximately $12.5$5.9 million of cash in operating activities in 2017 asduring the year ended December 31, 2022 compared to generating $48.2$37.1 million of cash during the prior year's corresponding period. The $31.2 million decrease in 2016. The decreasethe amount of cash generated between the two periods was primarily driven by a $20.5 millionthe increase in accounts receivable, in 2017 comparedinventory, deferred income taxes and project work activity as a result of increased business activity. Cash is generally used to a $12.1 million reduction in 2016. The increase in accounts receivable resulted fromfund project costs ahead of actual billings and collection.
Investing Activities
For the $43.3 million increase in sales for the fourth quarteryear ended December 31, 20172022, net cash used in investing activities was $53.4 million compared to $69.0 million in the fourth quartercorresponding period in 2021. This decrease of $15.6 million was primarily driven by a reduction in the total purchase price paid for acquisitions during 2022 of $48.5 million compared to $64.7 million for acquisitions in 2021.
Financing Activities
For the year ended December 31, 2016. Sales for the fourth quarter of 2016 declined $56.42022, net cash generated in financing activities was $44.3 million, compared to salesnet cash used in financing activities of $38.5 million for the fourth quartercorresponding period in 2021. For the year ended December 31, 2022, the Company repurchased approximately $47.9 million worth of 2015.
We purchased approximately $2.8 million of capital assets during 2017outstanding shares compared to $4.9$33.5 million worth of outstanding shares for the year ended December 31, 2021. The net inflow of cash from financing activities in 2022 benefited from borrowing an additional $105.0 million on our Term Loan B. Debt issuance costs associated with the amendment of our Term Loan B and ABL Revolver was $8.4 million for 2016. Capital expenditures during 2017 were primarily relatedthe year ended December 31, 2021.
During the twelve months ended December 31, 2022 we repurchased 1.3 million shares of the Company's common stock for approximately $35.2 million compared to building improvements, manufacturing equipment, and patterns. Capital expenditures1.2 million shares of the Company's stock for 2018approximately $33.5 million for the twelve months ended December 31, 2021.
On December 15, 2022, the Company announced a new share repurchase program pursuant to which we may repurchase up to $85.0 million worth, or 2.8 million shares of the Company's outstanding common stock in the open market or through privately negotiated transactions over the next 24 months.
On November 22, 2022, the Company entered into an amendment on its existing $330 million Senior Secured Term Loan (the "Term Loan Amendment"), borrowing an additional $105.0 million on the $330 million Senior Secured Term Loan (the “Term Loan Agreement”) which matures on December 23, 2027. $105.0 million that was added to the $330 million Senior Secured Term Loan (the “Term Loan Agreement”) which matures on December 23, 2027. There was $428.1 million outstanding as of December 31, 2022.
On June 15, 2021, the Company entered into a negotiated share repurchase agreement to repurchase certain shares of its common stock from certain of its shareholders agreeing to pay sellers over four equal quarterly installments, which are expected to bepresented within the rangepurchase of capital expenditures during 2017 and 2016.treasury stock in the cash flow statement. During the twelve months ended December 31, 2022, there were two installment payments totaling $13.6 million. There are no further installment payments outstanding as of December 31, 2022.
On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $85.0 million worth or 1.5 million shares of its outstanding common stock may be acquired in the open
market or through privately negotiated transactions over the next 24 months at the discretion of management. The Company completed the $85.0 million program in December 2022.
We believe the Company has adequate funding to support its working capital needs within the business.
At December 31, 2017,2022, our total long-term debt, including the current portion, less principal repayments, and less unamortized debt issuance fees, was $242.0$428.1 million, or 47.4%54.0% of total capitalization (total long-term debt including current portion plus shareholders’ equity) of $510.6$793.5 million. Approximately $249.4$428.1 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 shares of the Company's common stock, 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 $1.0 million, $32.8 million and $103.1 million for years 2022, 2021 and 2020, respectively.
Free Cash Flow is not a measure of liquidity under U.S. GAAP, 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 U.S. GAAP financial measure of cash flows from operations.
The following table sets forth the reconciliation of net cash provided by operating activities to Free Cash Flow:
Our normal trade terms for our customers require payment within 30 days of invoice date. In response to competition | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Net cash provided by operating activities | | $ | 5,894 | | | $ | 37,089 | | | $ | 109,650 | |
Less: Purchase of property and equipment | | 4,916 | | | 5,999 | | | 6,672 | |
Add: Proceeds from the disposition of property and equipment | | — | | | 1,669 | | | 123 | |
Free Cash Flow | | $ | 978 | | | $ | 32,759 | | | $ | 103,101 | |
ABL Revolver and customer demands we will offer extended terms to selected customers with good credit history. Customers that are financially strong tend to request extended terms more often than customers that are not financially strong. Many of our customers, including companies listed in the Fortune 500, do not pay us within stated terms for a variety of reasons, including a general business philosophy to pay vendors as late as possible.
During 2017, the amount available to be borrowed under our credit facilities increased from $37.3 million at December 31, 2016, to $82.0 million at December 31, 2017. This increase in availability is primarily a result of the Company terminating its previously existing credit facility and replacing it with the ABL Credit Agreement and Term Loan, as discussed further below.
Senior Secured Term Loan B and ABL Facility
ABL Revolver:
On August 29, 2017, DXPJuly 19, 2022, the Company entered into a five year, $85 million Asset Basedan Amended and Restated Loan and Security Agreement (the “ABL Credit Agreement”) andthat provided for a six-year, $250$135.0 million Senior Secured Term Loan Basset-backed revolving line of credit (the “Term Loan B Agreement”"ABL Revolver"), which replaced DXP’s previously existing credit facility.
. The ABL Credit Agreement provides for asset-based revolving loans in an aggregate principal amountamends and restates the Loan and Security Agreement dated as of up to $85.0August 29, 2017. The ABL Revolver matures on July 19, 2027. Total borrowing capacity under the ABL Revolver was $132.4 million, (the “ABL Loans”). net of the impact of outstanding letters of credit $2.6 million.
As of December 31, 2022, there were no amounts outstanding under the ABL Revolver.
The ABL Credit Agreement may be increased in increments of $10.0 million up to an aggregate of $50.0 million. The facilityABL Revolver will mature on August 29, 2022.July 19, 2027. Interest accruesshall accrue on outstanding borrowings at a rate equal to LIBORSOFR 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 facilityABL Revolver for the most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum arewill be payable on the portion of the facilityABL Revolver not in use at any given time. The unused line fee was 0.375% at December 31, 2017.
2022. The interest rate for the ABL facilityRevolver was 2.9%7.8% at December 31, 2017.2022.
Senior Secured Term Loan B:
On November 22, 2022, the Company entered into an amendment on its existing $330 million Senior Secured Term Loan (the "Term Loan Amendment"), borrowing an additional $105.0 million that was added to the existing $330 million Senior Secured Term Loan (the “Term Loan Agreement”). There was $428.1 million outstanding under the Term Loan Agreement, as amended as of December 31, 2022.
The Term Loan BAmendment amends and supplements the Term Loan Agreement, dated as of December 23, 2020 and provides for, a $250among other things, $105 million term loan (the “Term Loan”) thatin new incremental commitments. The Term Loan Agreement and Term Loan Amendment amortizes in equal quarterly installments of 0.25% with the balance payable in August 2023,December 2027, 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$85.0 million, plus an additional amount such that DXP’sthe Company's Secured Leverage Ratio (as defined in the Term Loan B Agreement) would not exceed 3.603.75 to 1.00. Interest accrues on the Term Loan at a rate equal to the base rateSOFR plus a margin of 4.5%5.25% for the Base RateSOFR Loans (as defined in the Term Loan B Agreement), or LIBOR plus a margin of 5.5% for the Eurodollar Rate Loans (as defined in the Term Loan B Agreement)Amendment). 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%10.0% as of December 31, 2017.2022.
DXP’sFinancial Covenants:
The Company'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 DXPthe Company 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 DXPthe Company 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 facilityRevolver falls below a threshold set forth in the ABL Credit Agreement.
As of December 31, 2017,2022, the Company'sCompany was in compliance with this covenant with a consolidated Fixed Charge Coverage Ratio was 3.67of 3.59 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, 2017,2022, is either equal to or less than as indicated in the table below:
| | | | | | | | |
| Fiscal Quarter | Secured Leverage Ratio |
| December 31, 20172022 | 5.75:5.00:1.00 |
| March 31, 20182023 | 5.75:5.00:1.00 |
| June 30, 2018 | 5.50:1.00 |
September 30, 2018 | 5.50:1.00 |
December 31, 2018 | 5.25:1.00 |
March 31, 2019 | 5.25:1.00 |
June 30, 2019 | 5.00:1.00 |
September 30, 2019 | 5.00:1.00 |
December 31, 2019 | 4.75:1.00 |
March 31, 2020 | 4.75:1.00 |
June 30, 20202023 and each Fiscal Quarter thereafter | 4.50:4.75:1.00 |
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, 2017,2022, the Company’s consolidated Secured Leverage Ratio was 3.592.83 to 1.00.
The ABL Loans and the Term Loan are secured by substantially all of the assets of the Company.
Borrowings (in thousands):
| | 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 | |
(1) Represents the amount available to be borrowed at the indicated date under the most restrictive covenant of the credit facility in effect at the indicated date. The increase in the amount available to be borrowed is primarily the result of the Company terminating its previously existing credit facility and replacing it with the Term Loan B Agreement and the ABL Credit Agreement.
Performance Metrics (in days):
| | 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 | |
Accounts receivable days of sales outstanding were 60.7 days at December 31, 2017 compared to 65.0 days at December 31, 2016. The 4.3 days decrease was primarily due to more timely payment times in connection with an improved economy. Inventory turns increased primarily due to stronger sales for the three months ended December 31, 2017 compared to sales for the three months ended December 31, 2016.
| | 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 | | | | - | |
Accounts receivable days of sales outstanding were 65.0 days at December 31, 2016 compared to 56.9 days at December 31, 2015. The 8.1 days increase was primarily due to slower payment times by oil and gas customers. Inventory turns remained flat at December 31, 2016 compared to December 31, 2015.
Funding Commitments
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | Increase (Decrease) |
Current portion of long-term debt | $ | 4,369 | | | $ | 3,300 | | | $ | 1,069 | |
Long-term debt | 423,764 | | | 323,400 | | | 100,364 | |
Total debt | $ | 428,133 | | | $ | 326,700 | | | $ | 101,433 | |
| | | | | |
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.
RepurchasesBorrowing Capacity (in thousands):
The following table summarizes the amount of Common Stock
On December 17, 2014, DXP publicly announced an authorization from the Board of Directors that allowed DXP from time to time to purchase up to 400,000 shares of DXP's common stock over 24 months. Purchases could be made in open market or in privately negotiated transactions. DXP purchased 191,420 shares for $8.9 millionborrowing capacity under this authorization through December 31, 2015. No shares were purchased during 2016. The authorization expired on December 16, 2016.
our ABL Revolver as follows: | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | Increase (Decrease) |
Total borrowing capacity | $ | 135,000 | | | $ | 135,000 | | | $ | — | |
Less : ABL | — | | | — | | | — | |
Less : Outstanding letters of credit | 2,620 | | | 3,267 | | | (647) | |
Total amount available | $ | 132,380 | | | $ | 131,733 | | | $ | 647 | |
Contractual Obligations
The impact that our contractual obligations as of December 31, 20172022 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) | $ | 4,369 | | | $ | 8,737 | | | $ | 415,026 | | | $ | — | | | $ | 428,132 | |
Operating lease obligations | 21,400 | | | 27,400 | | | 12,550 | | | 4,740 | | | 66,090 | |
Estimated interest payments (2) | 18,690 | | | 36,812 | | | 36,053 | | | — | | | 91,555 | |
Total | $ | 44,459 | | | $ | 72,949 | | | $ | 463,629 | | | $ | 4,740 | | | $ | 585,777 | |
| | 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 | |
(1) | (1) Amounts represent the expected cash payments of our long-term debt and do not include any fair value adjustment. |
(2) | Assumes interest rates in effect at December 31, 2017. Assumes debt is paid on maturity date and not replaced. |
Off-Balance Sheet Arrangements
As part of our ongoing business, welong-term debt and do not participateinclude any fair value adjustment.
(2) Assumes interest rates 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 ofeffect at December 31, 2017, we were2022. Assumes debt is paid on maturity date and not involved in any unconsolidated SPE transactions.replaced.
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, DXPthe Company enters into contractual arrangements under which DXPthe Company may agree to indemnify customers from any losses incurred relating to the services we perform. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnities have been immaterial.
DISCUSSION OF CRITICAL ACCOUNTING POLICIESESTIMATES
Critical accounting policiesThe Consolidated Financial Statements of the Company are thoseprepared in accordance with US GAAP, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are both most important tonot readily apparent from other sources. Management has discussed the portrayaldevelopment, selection and disclosure of a company’s financial position and results of operations, and require management’s subjective or complex judgments. These policies have been discussedthese estimates with the Audit Committee of the Company's Board of DirectorsDirectors. Management believes that the accounting estimates employed and the resulting amounts are reasonable; however, actual results may differ from these estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of DXP.which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.
The Company’s financial statements are prepared
A summary of significant accounting policies is included in accordance with accounting principles generally accepted inNote 2 - Summary of Significant Accounting and Business Policies to the United States of America (“USGAAP”). The accompanying Consolidated Financial Statements includein Item 8. Financial Statements and Supplementary Data, which is incorporated herein by reference. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the accountstime the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Company, its wholly owned subsidiaries and its variable interest entity (“VIE”).Consolidated Financial Statements.
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, the total assets of the VIE were approximately $5.2 million including approximately $4.5 million of fixed assets. DXP is the primary customer of the VIE. Consolidation of the VIE increased cost of sales by approximately $0.6 million and $1.3 million for the twelve months ended December 31, 2017 and 2016, respectively. The Company recognized a related income tax benefit of $0.2 million and $0.3 million related to the VIE for the years ended December 31, 2017 and 2016, respectively. At December 31, 2017, the owners of the 52.5% of the equity not owned by DXP included employees of DXP.
Receivables and Credit Risk
Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms.
The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the United States, and Canada. The Company believes no significant concentration of credit risk exists. The Company evaluates the creditworthiness of its customers' financial positions and monitors accounts on a regular basis, but generally does not require collateral. Provisions to the allowance for doubtful accounts (or allowance for credit losses) are made monthly and adjustments are made periodically (as circumstances warrant) based upon management’s best estimate of the collectability of such accounts.accounts under the current expected credit losses model. The Company writes-off uncollectible trade accounts receivable when the accounts are determined to be uncollectible. No customer represents more than 10% of consolidated sales.
Uncertainties require the Company to make frequent judgments and estimates regarding a customer’s ability to pay amounts due in order to assess and quantify an appropriate allowance for doubtful accounts. The primary factors used to quantify the allowance are customer delinquency, bankruptcy, and the Company’s estimate of its ability to collect outstanding receivables based on the number of days a receivable has been outstanding.
The majority of the Company’sCompany has customers that operate in the energy industry. The cyclical nature of the industry may affect customers’ operating performance and cash flows, which could impact the Company’s ability to collect on these obligations.
The Company continues to monitor the economic climate in which its customers operate and the aging of its accounts receivable. The allowance for doubtful accounts is based on the aging of accounts under the aging schedule method, and an individual assessment of each invoice. Under this method, a historical credit loss rate is determined by age bucket or how long a receivable has been outstanding. The historical loss rates for each respective age bucket are then adjusted for current conditions using reasonable and supportable data points. The overall allowance is adjusted accordingly based upon historical experience and economic factors that impact our business and customers. At December 31, 2017,2022, the allowance was 5.1%approximately 2.3% of the gross accounts receivable, compared to an allowance of 5.2% a year earlier.receivable. 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, and Long-Lived 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. As of December 31, 2017 DXP Core Service Centers (“Core SC”), DXP Core IPS, and DXP Core Supply Chain Services (“Core SCS”) had goodwill.
The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a two-step quantitative test for that reporting unit. When a quantitative assessment is performed, the first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s net assets including goodwill exceeds its estimated fair value. For 2017 and 2016, the Company’s annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units of goodwill, determined that a quantitative impairment 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.
During the third quarter of 2015,2020, the priceCompany’s market capitalization and overall sales declined significantly driven by then current macroeconomic and geopolitical conditions including the collapse of DXP’s common stockoil prices caused by both surplus production and supply as well as the decrease in demand caused by the COVID-19 pandemic. In addition, the uncertainty related to oil demand had a significant impact on the investment and operating plans of many of our customers. Based on these events, the Company concluded that it was more likely than not that the fair values of certain of its reporting units were less than their carrying values. Therefore, the Company performed an interim goodwill impairment test.
For the twelve months ended December 31, 2020, goodwill was evaluated for impairment at the reporting unit level. The Company had four goodwill reporting units: Service Centers, Innovative Pumping Solutions, Canada and Supply Chain Services. The Company determined the fair values of two reporting units with goodwill were below their carrying values, resulting in a $36.4 million goodwill impairment, which was included in impairments and other charges in the consolidated statement of operations. As the world and the priceeconomy began to reopen during 2021, the lifting of crudemandates and the dissemination of vaccines eased the impacts of the pandemic. In light of these improvements, we performed an assessment of our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value and therefore no impairment of goodwill was recorded for 2022 and 2021.
Innovative Pumping Solutions
The oil declined over 40% and over 20%, respectively. Thegas industry experienced unprecedented disruption during 2020 as a result of a combination of factors, including the substantial decline in global demand for oil prices reduced spendingcaused by the COVID-19 pandemic and subsequent mitigation efforts. These factors, along with the continued impact of COVID-19, constituted a triggering event and required a goodwill impairment analysis for our customersmanufacturing reporting unit. With the adverse economic impacts discussed above and reduced ourthe uncertainty surrounding the COVID-19 pandemic, the results of the impairment test indicated that the carrying amount of the manufacturing reporting unit exceeded the estimated fair value of the reporting unit, and a full impairment of its remaining goodwill was required. Significant assumptions inherent in the valuation methodologies for goodwill impairment calculations included, but were not limited to, prospective financial information, growth rates, discount rates, inflationary factors, and the cost of capital. To evaluate the sensitivity of the fair value calculations for the reporting unit, the Company applied a hypothetical 100 bps reduction in the weighted average cost of capital, and separately, increased the revenue expectations. This sustained declineprojections by 10 percent, holding other factors steady. Even with more favorable assumptions, the results of these sensitivity analyses led the Company to record a non-cash impairment charge of $16.0 million for goodwill during the twelve months ended December 31, 2020. As described above, no impairment of goodwill was recorded for 2022 and 2021.
Canada
In 2020, as a result of the reductions in crude oil prices, reduced capital spending by customersfor oil and reduced revenue expectations weregas producers and processors and the economic repercussions from the COVID-19 pandemic, we determined to bethose events constituted a triggering event that required us to review the recoverability of our long-lived assets and perform an interim goodwill impairment assessment as of July 31, 2020. Our review resulted in the recording of impairments and other charges during the third quarter of 2015. This triggering event required us to perform testing for possible2020. As a result of our goodwill impairment in two of our reporting units, and our step one testing indicated there was an impairment in the B27 IPS and B27 SC reporting units. No triggering event was identified in our other reporting units during the third quarter. Accounting Standards Codification 350 Intangibles – Goodwill and Other (“ASC 350”) step two of the goodwill impairment testing for the reporting units was performed preliminarily during the third quarter of 2015. Our preliminary analysis concluded that $48.0 million of our B27 IPS reporting unit’s goodwill and $9.8 of our B27 SC reporting unit’s goodwill was impaired. The remaining goodwill for the B27 IPS and B27 SC reporting units at September 30, 2015 was $4.9 million and $10.3 million, respectively. The third quarter of 2015 ASC 350 step two testing was completed in the fourth quarter of 2015 without any adjustment to the amount recorded in the third quarter of 2015.
As of October 1, 2015, DXP performed a qualitative assessment (“Step 0”) to determine whether DXP was required to proceed to ASC 350 step one of the impairment analysis for any of its reporting units. It is the position of DXP that the factors taken into the Step 0 analysis failed to meet the more likely than not criteriaassessments, we determined that the fair value of anyour Canadian reporting unit was lower than its net book value and, therefore, resulted in a partial goodwill impairment. The enterprise value of ourthe Canadian reporting units had fallen belowunit at July 31, 2020 was less than its carrying value asby approximately 40 percent. This resulted in a partial goodwill impairment of October 1, 2015.
Duringapproximately $20.5 million for Canada. Per the fourth quarterimpairment test and respective sensitivity analyses, it was noted that a decrease of 2015,approximately 480 basis points in the pricepre-tax discount rate and an approximately 150 basis points increase in our revenue long-term growth rate projections would cause the Canada business enterprise value to increase to the level of DXP’s common stockits carrying value and thus avoid a full impairment. The easing of restrictions and the pricedistribution of crude oil declined over 16%vaccines contributed to significant improvements in 2021. As a result, no impairment of goodwill was recorded for 2022 and over 18%, respectively. Actual earnings before interest, taxes, depreciation2021.
Other Impairments and amortization (“EBITDA”)methodology
The negative market indicators described above were triggering events that indicated that certain of the Company’s long-lived intangible and tangible assets and additional inventory items may also have been impaired. Recoverability testing indicated that certain long-lived assets and inventory were indeed impaired or otherwise not recoverable. The estimated fair value of these assets was determined to be below their carrying value. As a result, the Company recorded the following additional impairment and other charges for the fourth quarter of 2015 for the Core SCS and Core SC reporting units exceeded the EBITDA amountstwelve months ended December 31, 2020 as detailed in the October 1, 2015 Step 0 analysis. Therefore, evidence of a fourth quarter triggering event for these two reporting units does not exist. Additionally,table below (in thousands).
| | | | | | | | | | | |
| | | Twelve months ended December 31, 2020 |
| Long-lived asset impairments | | $ | 4,775 | |
| Goodwill impairments | | 36,435 | |
| Inventory and work-in-progress costs | | 18,673 | |
| Total impairment and other charges | | $ | 59,883 | |
The Company determined the fair value of eachboth long-lived assets and goodwill, discussed above, primarily using the discounted cash flow method and in the case of goodwill, a multiples-based market approach for comparable companies. Given the current volatile market environment and inherent complexities it presents, the Company utilized third-party valuation advisors to assist us with these valuations. These analyses included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on the weighted average cost of capital, as derived from peers, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset, all of which were classified as Level 3 inputs under the fair value hierarchy. These impairment assessments incorporate inherent uncertainties, including supply and demand for the Company’s products and services and future market conditions, which are difficult to predict in volatile economic environments. The discount rates utilized to value the reporting units is substantiallywere in excessa range from 14.8 percent to 16.4 percent. Given the dynamic nature of each reporting units carrying value asthe COVID-19 pandemic and related market conditions, we cannot reasonably estimate the period that these events will persist or the full extent of October 1, 2015. Actual EBITDAthe impact they will have on our business. If market conditions continue to deteriorate, including crude oil prices further declining or remaining at low levels for the fourth quartera sustained period, we may record further asset impairments, which may include an impairment of 2015 for the Core IPS reporting unit was below the EBITDA amount in the October 1, 2015 Step 0 analysis. Therefore, DXP updated the 2016 through 2020 forecasts for the Core IPS reporting unit. The forecasted EBITDA for 2016 through 2020 in the updated forecast declined less than $1 million from the October 1, 2015 forecast. The effect of this decline was more than offset by a $12 million reduction in the carrying value of our goodwill associated with other reporting units.
For inventory and work-in-progress we evaluated the Core IPS reporting unit at December 31, 2015recoverability based upon their net realizable value, factoring in the costs to complete work-in-progress and the salability of inventory items primarily tied to oil and gas. The net realizable value was derived from the October 1, 2015 value. Therefore, evidence of a triggering eventquotes for this reporting unit does not exist. Additionally, the fair value of this reporting unit is substantially in excess of its carrying value as of October 1, 2015.similar items and recent transactions.
Actual EBITDA for the fourth quarter of 2015 for the B27 IPS and B27 SC reporting units were below the EBITDA amounts in the October 1, 2015 Step 0 analysis. Therefore, DXP updated the 2016 through 2020 forecasts for the B27 IPS and B27 SC reporting units. The forecasted EBITDA for 2016 through 2020 in the updated forecasts declined significantly from the October 1, 2015 forecast. The declines in the forecasted EBITDA for these two reporting units were determined to be a triggering event during the fourth quarter of 2015. This triggering event required us to perform testing for possible goodwill impairment in these two reporting units, and our ASC 350 step one testing indicated there may be an impairment in our B27 IPS and B27 SC reporting units. ASC 350 step two testing for reporting units was performed during the fourth quarter of 2015. Our analysis concluded that $4.9 million of our B27 IPS reporting unit’s goodwill was impaired, and $5.0 million of our B27 SC reporting unit’s goodwill was impaired. The remaining goodwill for the B27 IPS and B27 SC reporting units at December 31, 2015 was zero and $5.3 million, respectively.
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, 2016 and 2015.
Revenue Recognition
For binding, long-term agreementsIn our Innovative Pumping Solutions segment, a substantial portion of our sales to customers are pursuant to contracts to assemble, fabricate and or deliver tangible assets to customer specifications that can range from three to eighteen months or more. We account for these contracts under the Company recognizes revenues using the percentagepercentage-of-completion method of completion method.accounting, which is an input method as defined by ASC 606, Revenue Recognition. Under this method, revenueswe recognize sales and profit based upon the cost-to-cost method, in which sales and profit are recognized as costs are incurred and include estimated profits calculated onrecorded based upon the basisratio of the relationship between costs incurred andto estimated total estimatedcosts to complete the asset. The percentage-of-completion method of accounting requires the Company to estimate the project costs at completion. ChangesWe are required to make assumptions relating to items such as cost of materials, labor productivity and cost, and overhead.
Management performs detailed quarterly reviews of all of our open contracts. Based upon these reviews, we record the effects of adjustments in estimated profitability may periodically result in revisions to revenue and expenses and are recognized in the period such revisions become probable.profit estimates each period. If at any time expectedmanagement determines that in the case of a particular contract total costs will exceed the value of thetotal contract the loss is recognized immediately. Revenues of approximately $40.6 million, $31.5 million, and $47.5 million were recognized on contracts in processrevenue, we record a provision for the years ended December 31, 2017, 2016, and 2015, respectively.entire anticipated contract loss at that time. The typical time span of these contracts is approximately one to two years.
For other sales, the Company recognizes revenues when an agreement is in place, the price is fixed, title for product passes to the customer or services have been provided and collectability is reasonably assured.percentage-of-completion method requires that we estimate project costs at completion. Revenues are recorded net of sales taxes.
The Company reserves for potential customer returnsestimated based upon the historical leveloriginal contract price and change orders. Contract costs may be incurred over a period of returns. Reserves for customer returns were $0.3several months, and $0.2 million at December 31, 2017 and 2016, respectively.
Self-insured Insurance and Medical Claims
We generally retain up to $100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue for the estimated loss on the self-insured portionestimation of these claims. The accrual is adjusted quarterlycosts requires judgment based upon reported claims information.the acquired knowledge and experience of program managers, engineers, and finance professionals. Estimated costs are based primarily on purchase contract terms and assumptions relating to terms such as estimated cost of materials, labor productivity and cost, and overhead. The actualuncertainty as to the future availability of materials and labor resources could affect the Company's ability to accurately estimate future contract costs.
Management continues to monitor and update project cost estimates quarterly for all open contracts. A significant change in an estimate on several projects could deviate from the recorded estimate.have a material effect on our financial position and results of operations.
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, 2017 and 2016 was approximately $2.7 million and $3.1 million, respectively.
Purchase Accounting
DXPThe Company 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 acquisitions completed in fiscal year 2022. 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
Some of our acquisitions may include additional compensation such as 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 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. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final resolution of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the outcome of these matters is different than the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate as well as related interest and penalties. 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 2012.2015. 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
Standards Effective in 2017 or Earlier
See Note 3 - Recent Accounting Changes and Error Corrections. In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2017-03 ("ASU 2017-03"), 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 languagePronouncements 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. Compensation – Stock Compensation. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update aims to simplify aspects of accounting for share-based payment award transactions, including (a) income tax consequences, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted the ASU January 1, 2017 and it had the following impact on the Company’s Condensed Consolidated Financial Statements:
Topic
| Method of Adoption
| Impact on Consolidated Financial Statements
|
| | |
Recognize all excess tax benefits and tax deficiencies as income tax benefit or expense | Prospective | The Company recognized $0.1 million of excess tax benefit in income taxes for the year ended December 31, 2017, decreasing the effective tax rate for the year. |
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Excess tax benefits and deficiencies on the statement of cash flows are classified as an operating activity | Prospective | The Company recognized $0.1 million of excess tax benefit for the year ended December 31, 2017 as an operating activity. Prior to the adoption of the ASU 2016-09, the excess tax expense for the year ended December 31, 2016 of $0.6 million was recognized as a financing activity. The excess tax expense for the year ended December 31, 2015 was zero. |
| | |
Employee taxes paid when an employer withholds shares for tax-withholding purposes on the statement of cash flows are classified as a financing activity | Retrospective | The Company reclassified $0.2 million and $0.8 million of employee taxes paid from cash flows from operating activities to cash flows from financing activities on the Consolidated Statements of Cash Flows for the year ended December 31, 2016 and December 31, 2015. |
| | |
Accounting for forfeitures and tax withholding elections | Prospective | The Company has not changed its accounting policy for forfeitures. There is no significant impact on Consolidated Financial Statements. |
Income Taxes. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The update requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. The update simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within. The Company adopted this ASU January 1, 2017 and reclassified $9.5 million of current deferred income tax assets from current assets to non-current deferred income tax liabilities on the Condensed Consolidated Balance Sheet as of December 31, 2016.
Inventory. In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. The amendments in ASU 2015-11 clarify the subsequent measurement of inventory requiring an entity to subsequently measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. This ASU applies only to inventory that is measured using the first-in, first-out (FIFO) or average cost method. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in ASU 2015-11 should be applied prospectively and are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this ASU January 1, 2017 and it did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Statement of Cash Flows. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Classification of Restricted Cash. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amounts should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 should be applied retrospectively and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted this ASU September 30, 2017 and classified $3.5 million of cash to restricted cash on the Condensed Consolidated Balance Sheet as of December 31, 2017. This cash deposit was required as collateral for letters of credit outstanding under our previously existing credit facility.
Standards Effective in 2018 or Later
Compensation - Stock Compensation. In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently assessing the impact, if any, that this ASU will have upon adoption.
Intangibles-Goodwill and Other. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company early adopted this ASU December 31, 2017. The Company’s annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units goodwill, determined a quantitative impairment test was not necessary.
Business Combinations. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Statement of Cash Flows. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
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. 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.for information regarding recent accounting pronouncements.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The update requires organizations that lease assets (“lessees”) to recognize the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains dependent on its classification as a finance or operating lease. The criteria for determining whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its Consolidated Financial Statements.
Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company is evaluating the impact of this ASU.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement, as amended by ASU 2015-14, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business processes and financial statement disclosures. We have engaged third party consultants to assist us in assessing our contracts with customers, processes and controls required to address the impact that ASU No. 2014-09 will have on our business. The Company believes that our current plan will enable us to implement our new procedures and controls; and assess the cumulative effect of applying ASU No. 2014-09 at the date of initial application. Based on our overall assessment performed to date, the standard is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Inflation
We do not believe the effects of inflation have any material adverse effect on our results of operations or financial condition. We attempt to minimize inflationary trends by passing manufacturer price increases on to the customer whenever practicable.
ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk |
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, 2022, we had no interest rate hedges in place. Based on a sensitivity analysis as of December 31, 2022, it was estimated that if short-term interest rates average 100 basis points higher (lower) in 2022 than in 2021, interest expense, would fluctuate by $4.3 million before tax. Comparatively, based on a sensitivity analysis as of December 31, 2021, had short-term interest rates averaged 100 basis points higher (lower) in 2021 than in 2020, it was estimated that interest expense would have fluctuated by approximately $3.3 million. These amounts were estimated by considering the effect of the hypothetical interest rates on variable-rate debt outstanding at December 31, 2017, a 100 basis point increaseeach 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 interestor 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 2022 would increasehave resulted in an estimated net loss on the translation of local currency earnings of approximately $0.4 million on our annual interest expense by approximately $2.5 million. Consolidated Statement of Operations.
Also see “Risk“Risk Factors,” included in Item 1A of this Report for additional risk factors associated with our business.
The table below provides information about the Company’s market sensitive financial instruments and constitutes a forward-looking statement.
Principal Amount By Expected Maturity (in thousands, except percentages) | |
| | 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
ITEM 8. | Financial Statements and Supplementary Data | | | | |
TABLE OF CONTENTS |
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ReportsReport of Independent Registered Public Accounting FirmsFirm (PricewaterhouseCoopers LLP, Houston, Texas PCAOB ID: 238 | 42 |
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Consolidated Balance SheetsReport of Independent Registered Public Accounting Firm (McConnell & Jones LLP, Houston, Texas PCAOB ID: 869 | |
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Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Houston, Texas, PCAOB ID: 659) | |
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Consolidated Statements of Income (Loss)Operations and Comprehensive Income (Loss) | 48 |
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Consolidated Statements of EquityBalance Sheets | 49 |
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Consolidated Statements of Cash Flows | 50 |
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Consolidated Statements of Equity | |
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Notes to Consolidated Financial Statements | 51 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors and Shareholders of
DXP Enterprises, Inc.
OpinionOpinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and its subsidiaries (the “Company”) as of December 31, 2017,2022, and the related consolidated statements of income (loss)operations and comprehensive income (loss), of equity and of cash flows for the year then ended, December 31, 2017, andincluding the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017, and the consolidated results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 27, 2018 expressed an adverse opinion on the Company’s internal control over financial reporting due to material weaknesses.(COSO).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 our audit provides a reasonable basis for our opinion.
Houston, TX
March 28, 2018
We have served as the Company’s auditor since 2017.