(713) 996-4700 | | | | (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | Title of Each Class | Trading Symbol | Name of Exchange on which Registered | | Common Stock par value $0.01 | DXPE | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]☐ No [ X]☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes [ ]☐ No [ X]☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ]☒ No [X ]☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [☐] Emerging growth company [☐]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes [☒] No [ ]☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [☐] No [X]☒
Aggregate market value of the registrant's Common Stock held by non-affiliates of registrant as of June 30, 20202023 was $321.0$495.3 million based on the closing sale price as reported on the NASDAQ Stock Market System.
Number of shares of registrant's Common Stock outstanding as of March 5, 2021: 19,293,280.4, 2024: 16,180,317. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for our 20212024 annual meeting of shareholders are incorporated by reference into Part III hereof. The 20212024 proxy statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
EXPLANATORY NOTEDXP ENTERPRISES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2023
DXP Enterprises, Inc. (collectively with its subsidiaries, the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Form 10-K/A” or this “report”) to amend its Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2021 (the “Original Report”). The Company is filing this Form 10-K/A to correct the untimely clearing of unvouchered purchase order discrepancies arising from our three-way matching process and the recognition of true-up consideration in business combination accounting. The Company is restating its consolidated balance sheets as of December 31, 2020 and 2019 and consolidated statements of operations and comprehensive income, cash flows, and equity for the years ended December 31, 2020, 2019 and 2018. The restatement affected periods prior to 2018. The impact of the restatement on such prior periods was reflected as an adjustment to opening retained earnings as of January 1, 2018. The restatement is reported in this Annual Report on Form 10-K/A and will be reported in an amendment to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.
In addition, the Company's consolidated financial statements for the periods covered in the Original Report have also been restated to correct certain immaterial adjustments. These adjustments primarily reflect proper cut-off for direct ship sales to customers and credit card payments, adjustments for inventory obsolescence reserves.
The impacts of the restatement on our Statements of Income and Balance Sheets are detailed in Note 4 to the Notes to the Consolidated Financial Statements. This amendment is also being made to revise unaudited quarterly financial information for the quarters ended in 2020 and 2019. The impact of the restatement on the quarterly financial information is detailed in Note 23 to the Notes to the Consolidated Financial Statements.
The Company is also revising its disclosures in Part II, Item 9A, “Controls and Procedures” to discuss the material weakness in internal controls that resulted in filing this Form 10-K/A and for other items.
For the convenience of the reader, this Form 10-K/A sets forth the Original Report, in its entirety, and the following items have been amended to solely reflect the corrections and adjustments described above:
In addition, in accordance with applicable SEC rules, this Form 10-K/A includes new certifications required by Rule 13a-14 under the Securities Exchange Act of 1934, as amended, from the Company’s Chief Executive Officer and Chief Financial Officer dated as of the date of filing of this Form 10-K/A.
Except as described above, no other information included in the Original Report is being amended or updated by this Amendment No. 1 on Form 10-K/A and this Amendment No. 1 on Form 10-K/A does not purport to reflect any information or events subsequent to the Original Report. This Amendment No. 1 on Form 10-K/A continues to describe the conditions as of the date of the Original Report and, except as expressly contained herein, we have not updated, modified or supplemented the disclosures contained in the Original Report. Accordingly, this Amendment No. 1 on Form 10-K/A should be read in conjunction with the Original Report and with our filings with the SEC subsequent to the Original Report.
TABLE OF CONTENTS DESCRIPTION | | Item | Item | | Page | Item | | Page | | | | PART I | | | PART I | | | 1. | 1. | | | 1. | | | | 1A. | 1A. | | | 1A. | | | | 1B. | 1B. | Unresolved Staff Comments | | 1B. | Unresolved Staff Comments | | | 1C. | | 1C. | | | | 2. | 2. | | | 2. | | | | 3. | 3. | | | 3. | | | | 4. | 4. | | | 4. | | | | | | PART II | | | | | | | | | | | | 5. | | | 5. | | | 5. | 5. | | | | | | 6. | 6. | | | 6. | | | | 7. | 7. | | | 7. | | | | 7A. | 7A. | Quantitative and Qualitative Disclosures about Market Risk | | 7A. | Quantitative and Qualitative Disclosures about Market Risk | | | 8. | 8. | | | 8. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9. | | 9. | | | | 9A. | | 9A. | Controls and Procedures | | | 9B. | | 9B. | Other Information | | | | | | | | | | | | | | | | | | | | | | | | | 9. | | | | 9A. | Controls and Procedures | | | 9B. | Other Information | | | | PART III | | | 10. | | | 10. | | | 10. | 10. | | | | | | 11. | 11. | | | 11. | | | | 12. | 12. | | | 12. | | | | 13. | 13. | | | 13. | | | | 14. | 14. | | | 14. | | | | | | PART IV | | | | | | | | | | | | 15. | | | 15. | | | 15. | 15. | | | | | | 16. | 16. | | | 16. | | | | | | | | | | | | | | | | | SIGNATURES | |
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K/A10-K (this “Report”"Report") contains statements that constitute “forward-looking statements”"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", "expects", "may", "might", "estimates", "will", "should", "could", "would", "suspect", "potential", "current", "achieve", "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy.strategy but the absence of these words does not mean that a statement is not forward-looking. 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, but not limited to, the effectiveness of management'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, 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 of 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"Item 1A. Risk Factors", and elsewhere in this Report. Should one or more of these risk factors or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. 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”"we" or “our”"our" shall mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries.
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. Since our predecessor company was founded, we have primarily been engaged in the business of distributing maintenance, repair and operating ("MRO") products, equipment and service to 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"), Innovative Pumping Solutions ("IPS") and Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS"). Sales, operating income, and other financial information for 2020, 20192023, 2022 and 2018,2021, and identifiable assets at the close of such years for our business segments are presented in Note 2220 – Segment and Geographical Reporting to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Our total sales have increased from $125 million in 1996 to $1.0$1.7 billion in 20202023 through a combination of internal growth and business acquisitions. At December 31, 2020,2023, we operated from 168183 locations which included 3537 states in the United States ("U.S."), nine9 provinces in Canada and one location in Dubai serving customers engaged in a variety of end markets. We have grown sales and profitability by adding additional products, services, and locations and becoming customer driven experts in maintenance, repair and operating solutions.
The following table shows, as of the end of the last 10 fiscal years, our consolidated sales; total number of locations; the number of SC locations, IPS facilities, SCS customer sites, and the corresponding sales and average sales per business segment location:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in millions) | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | Sales | $ | 1,500 | | $ | 1,247 | | $ | 962 | | $ | 1,007 | | $ | 1,216 | | $ | 1,265 | | $ | 1,005 | | $ | 1,114 | | $ | 1,481 | | $ | 1,679 | | | Locations | 271 | 260 | 245 | 243 | 249 | 244 | 247 | 252 | 275 | 264 | | | | | | | | | | | | | SC sales | $ | 988 | | $ | 827 | | $ | 621 | | $ | 641 | | $ | 750 | | $ | 762 | | $ | 663 | | $ | 816 | | $ | 1,009 | | $ | 1,145 | | | SC locations | 185 | 179 | 167 | 165 | 155 | 145 | 158 | 152 | 160 | 161 | | | | | | | | | | | | | Avg. SC sales/location | $ | 5.3 | | $ | 4.6 | | $ | 3.7 | | $ | 3.9 | | $ | 4.8 | | $ | 5.3 | | $ | 4.2 | | $ | 5.4 | | $ | 6.3 | | $ | 7.1 | | | | | | | | | | | | | | IPS sales | $ | 348 | | $ | 255 | | $ | 187 | | $ | 204 | | $ | 292 | | $ | 304 | | $ | 188 | | $ | 140 | | $ | 231 | | $ | 273 | | | IPS facilities | 12 | 12 | 11 | 11 | 11 | 10 | 10 | 18 | 20 | 22 | | | | | | | | | | | | | Avg. IPS sales/facility | $ | 29.0 | | $ | 21.3 | | $ | 17.0 | | $ | 18.5 | | $ | 26.5 | | $ | 30.4 | | $ | 18.8 | | $ | 7.8 | | $ | 11.6 | | $ | 12.4 | | | | | | | | | | | | | | SCS sales | $ | 164 | | $ | 166 | | $ | 154 | | $ | 161 | | $ | 174 | | $ | 201 | | $ | 155 | | $ | 158 | | $ | 240 | | $ | 260 | | | SCS customer sites | 74 | 69 | 67 | 67 | 83 | 89 | 79 | 82 | 95 | 81 | | | | | | | | | | | | | Avg. SCS sales/site | $ | 2.2 | | $ | 2.4 | | $ | 2.3 | | $ | 2.4 | | $ | 2.1 | | $ | 2.3 | | $ | 2.0 | | $ | 1.9 | | $ | 2.5 | | $ | 3.2 | | | | | | | | | | | | | | | | | | | | | | | |
Our principal executive office is located at 5301 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.
Industry Overview
The industrial distribution market is highly fragmented. Based on 20192022 sales as reported by Industrial Distribution magazine, we were the 1617th largest distributor of MRO products in the United States.U.S. 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.
•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”.
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”("SC"), Innovative Pumping Solutions ("IPS") and Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”("SCS"). Our segments provide managementprovides the Chief Operating Decision Maker ("CODM") with a comprehensive financial view of our key businesses. Our CODM is our Chief Executive Officer. 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 by business segments as of December 31, 2020.2023. See Results of Operations under Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations for further information on our segments’ financial results. | | (in millions) | | | | Segment | | | Segment | | | Segment | Segment | | 2020 Sales | | % of Sales | | End-Markets | | Locations | | Employees | | 2023 Sales (in millions) | | % of Sales | | End Markets | | Locations | | Employees | | SC | SC | | $662.6 | | 65.9% | | Oil & Gas, Food & Beverage, General Industrial, Chemical & Petrochemical, Transportation, Aerospace | | 154 service centers, 4 distribution centers | | 1,605 | SC | | $1,145 | | 68% | | General Industrial, Oil & Gas, Food & Beverage, Water & Wastewater, Chemical, Transportation, Aerospace & Other | | 157 service centers, 4 distribution centers | | 1,723 | | | IPS | IPS | | $188.0 | | 18.7% | | Oil & Gas, Mining, Petrochemical, & Utilities | | 10 fabrication facilities | | 327 | IPS | | $273 | | 16% | | Oil & Gas, Mining, Chemical, Water & Wastewater and Utilities | | 16 fabrication facilities, 6 wastewater locations | | 383 | | | SCS | SCS | | $154.7 | | 15.4% | | Food & Beverage, Transportation, Oil & Gas, General Industrial & Chemical | | 79 customers facilities' | | 347 | SCS | | $260 | | 16% | | Food & Beverage, Transportation, Oil & Gas, General Industrial & Chemical | | 81 customer sites | | 419 |
Service Centers
The Service Centers (SC) are engaged in providing MRO products, equipment and 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 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, 2020,2023, our Service Centers’ products and services were distributed from 154157 service centers and 4 distribution centers. DXPThe 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, chemical and petrochemical, transportation and other general industrial industries. Other industries served by our Service Centers include mining, construction, chemical, municipal water and wastewater, agriculture and pulp and paper.
At December 31, 2020,2023, the Service Centers segment had approximately 1,6051,723 employees, all of whom were full-time.
Innovative Pumping Solutions
DXP’sThe Company's Innovative Pumping Solutions®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 design, engineering, project management and 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’sThe Company's engineering staff can design a complete custom pump package to meet our customers’ project specifications. Drafting programs such as Solidworks®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®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, DXPthe Company has acquired the technical expertise to ensure that our pumps and pump packages are built to meet the highest standards. DXPThe 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. DXPThe Company 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:
•Structural welding
•Pipe welding
•Custom skid assembly
•Custom coatings
•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
•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, 2020,2023, the Innovative Pumping Solutions segment operated out of 1022 facilities, eight20 of which are located in the United StatesU.S. and two in Canada.
All of the IPS segment’s long-lived assets are located in the U.S. Approximately 6.6%4.8% of the IPS segment’s 20202023 revenues were recognized in Canada and 93.4%95.2% were in the U.S.
At December 31, 2020,2023, the IPS segment had approximately 327383 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 $46.6$138.4 million and $101.1$108.5 million at December 31, 20202023 and 2019,2022, 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 canceled 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 leveraging DXP’s local Service Centers. •SmartBuy, DXP’s on-site or centralized MRO procurement solution. •SmartSourceSM, DXP’s on-site procurement and storeroom management by DXP personnel. •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%. •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.
DXP’sThe 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, 2020,2023, the Supply Chain ServicesSCS segment operated supply chain installations in 7981 of our customers’ facilities.sites.
All of the SCS segment’s long-lived assets are in the U.S. and theMexico. The majority of the SCS segment’s 20202023 revenues were recognized in the U.S.
At December 31, 2020,2023, the Supply Chain ServicesSCS segment had approximately 347419 employees, all of whom were full-time.
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 threeOur business segments areis supported by the following five key product categories: rotating equipment; bearings & power transmission; industrial supplies; metal working; and safety products & services. Each business segmentThe Company tailors its inventory and leverages product experts to meet the needs of its local customers.
KeyOur 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.
•Bearings & Power Transmission. Our bearing products include several types of mounted and un-mountedunmounted 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.
•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)(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,U.S., Canada, Mexico, and Dubai. Information regarding financial data by geographic areas is set forth in Note 2219 - Segment and Geographical ReportingRevenue 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 41 acquisitions across our three business segments.51 acquisitions.
OnThe following briefly describes the Company’s acquisition activity for the years ended December 31, 2020, the Company completed the acquisition of Total Equipment Company, Inc. (“TEC”), a distributor of industrial2023 and commercial pumps and air compressors focused on serving multiple end markets including steel, chemicals, water / wastewater, oil & gas and general industrial markets. The Company paid approximately $64.7 million in cash and stock, subject to normal transaction adjustments customary for a transaction of this size and nature.December 31, 2022.
On December 31, 2020, the Company completed the acquisition of APO Pumps & Compressors, LLC (“APO”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water / wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $53.0 million in cash and stock, subject to normal transaction adjustments customary for a transaction of this size and nature.
On December 31, 2020, the Company completed the acquisition of Pumping Solutions, Inc., A California Corporation (“Pumping Solutions”), a distributor of industrial and commercial pumps and process equipment focused on serving multiple end markets including the water / wastewater, chemical, food & beverage, and general industrial markets. The Company paid approximately $21.0 million in cash and stock, subject to normal transaction adjustments customary for a transaction of this size and nature.
On December 31, 2020, the Company completed the acquisition of Corporate Equipment Company, LLC (“CEC”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water /
wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $3.3 million in cash and stock, subject to normal transaction adjustments customary for a transaction of this size and nature.
On FebruaryNovember 1, 2020,2023, the Company completed the acquisition of substantially all of the assets of Turbo Machinery Repair, IncAlliance Pump & Mechanical Service, Inc. (“Turbo”Alliance”),. Alliance is a pumpleading municipal and industrial equipmentpump sales, service, and repair maintenance, machiningbusiness. Alliance is included within our SC business segment. Total consideration for the transaction was approximately $1.7 million, funded with a mixture of cash on hand of $1.5 million and labor services company. The Company paidcontingent consideration of $0.2 million. Goodwill for the transaction totaled approximately $3.2 million in cash, subject to normal transaction adjustments customary for a transaction of this size and nature.$1.3 million.
On JanuaryMay 1, 2020,2023, the Company completed the acquisition of Pumping Systems,Florida Valve & Equipment, LLC and Environmental MD, Inc. (“PSI”(collectively, “Florida Valve EMD”), a distributorleading provider of pumps, systemsvalve and related services. The Company paidproducts and services for the municipal water markets in the state of Florida. Florida Valve EMD is included within our IPS business segment. Total consideration for the transaction was approximately $13.0$3.3 million, infunded with a mixture of cash on hand of $3.0 million and stock, subject to normalcontingent consideration of $0.3 million. Goodwill for the transaction adjustments customary for a transaction of this size and nature.totaled approximately $2.4 million.
On JanuaryMay 1, 2018,2023, the Company completed the acquisition of Application Specialties,Riordan Materials Corporation (“Riordan”), a leading provider of products for water treatment, wastewater treatment, odor control, solids handling, pumping and bio solid processes in the states of Maryland, New Jersey, Pennsylvania, Delaware and Virginia. Riordan is included within our IPS business segment. Total consideration for the transaction was approximately $8.4 million, funded with a mixture of cash on hand of $6.2 million and contingent consideration of $2.2 million. Goodwill for the transaction totaled approximately $6.1 million.
On September 1, 2022, the Company completed the acquisition of Sullivan Environmental Technologies, Inc. (“ASI”("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 Company's common stock valued at approximately $0.9 million and contingent consideration of $1.0 million. Goodwill for the transaction totaled approximately $2.5 million.
On May 2, 2022, the Company completed the acquisition of Cisco Air Systems, Inc. ("Cisco"). Cisco is a leading distributor of air compressors and related products and services focused on serving the food and beverage, transportation and general industrial markets in the Northern 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 Company's common stock valued at approximately $4.4 million, approximately $11 million on the ABL and contingent consideration of $4.5 million. Goodwill for the transaction totaled approximately $30.5 million.
On March 1, 2022, the Company completed the acquisition of Drydon Equipment, Inc. ("Drydon"), a distributor and manufacturers’ representative of cutting tools, abrasives, coolantspumps, valves, controls and machine shop supplies. DXPprocess equipment focused on serving the water and wastewater industry in the Midwest. Drydon is included within our IPS business segment. The Company paid approximately $11.7$7.9 million, infunded with a mixture of cash on hand of $4.9 million, the Company's common stock valued at approximately $0.4 million and stock plus an additional earn-out provision over three yearscontingent consideration of $2.6 million. Goodwill for up to $4.6the transaction totaled approximately $5.3 million.
On March 1, 2022, the Company completed the acquisition of 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 including cash, the Company's common stock and contingent consideration. Goodwill for the transaction totaled approximately $0.5 million.
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 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 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. 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. Additionally, we are partially self-insured for our group health plan, worker’s compensation, auto liability and general liability insurance.
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.
Human Capital
DXPThe Company employed 2,5502,837 people as of December 31, 2020 with approximately 2,309 people located in the United States, 234 people located in Canada and the remainder in other countries where the Company's business operates.2023. 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 DXP'sthe 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, DXPthe Company strives every day to foster a proactive safety culture. DXP'sThe 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. DXPThe 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. DXPThe 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 DXPthe Company's colleagues can perform to their full potential. We strive to maintain an inclusive environment free from discrimination of any 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.
We believe our employees are key to achieving our business objectives. The Company considers its employee relations to be excellent. Headcount by segment isand country are as follows: | | | | | | | | | | | | | Business Segment | Employees | | | Service Centers | 1,605 | | | Innovative Pumping Solutions | 327 | | | Supply Chain Services | 347 | | | Corporate | 271 | | | Total Employees | 2,550 | |
We believe our employees are key to achieving our business objectives. Throughout the COVID-19 pandemic crisis, we have continued to operate our business despite the challenges that arise from closing offices and operating our branch locations. Our use of technology and third party conferencing platforms have 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 have remained open. Under various shelter-in place orders by national, state, provincial and local governments, we have been 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 have taken measures to safeguard the health and welfare of our employees. As various governmental isolation orders are lifted or phased out, we are reviewing our operational plans to continue operating our business while addressing the health and safety of our employees. | | | | | | | | | | | | | | | | Business Segment | Employees | | Country | Employees | | Service Centers | 1,723 | | United States | 2,613 | | Innovative Pumping Solutions | 383 | | Canada | 213 | | Supply Chain Services | 419 | | Other(1) | 11 | | Corporate | 312 | | Total Employees | 2,837 | | Total Employees | 2,837 | | (1) Includes employees located in Mexico and Dubai. |
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 18, 2021.11, 2024. All of our executive officers hold office at the pleasure of DXP’sthe Company's Board of Directors. | | | | | | | | | | NAME | AGE | TITLE | | David R. Little | 6972 | Chairman of the Board, President and Chief Executive Officer | | Kent Yee | 4548 | Senior Vice President/Chief Financial OfficerOfficer/Secretary | Gene PadgettNick Little | 5042 | Senior Vice President/Chief AccountingOperating Officer | | Chris Gregory | 49 | Senior Vice President/Chief Information Technology Officer | | Paz Maestas | 44 | Senior Vice President/Chief Marketing & Technology Officer | | David C. Vinson | 7073 | Senior Vice President/Innovative Pumping Solutions | | John J. Jeffery | 5356 | Senior Vice President/Supply Chain Services | Todd Hamlin(1) | 4952 | Senior Vice President/Service Centers | | David Molero Santos | Chris Gregory42 | 46 | Senior Vice President/Information TechnologyChief Accounting Officer |
(1) On January 26, 2024 Mr. Hamlin departed the Company.
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 asincluding 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 4852 transactions including more than $1.5$1.6 billion in M&A and $3.4$3.9 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.
Gene PadgettNick Little. Mr. PadgettLittle was appointed Senior Vice President/Chief AccountingOperating Officer in May 2018. Prior to joining the Company,January 2021. Mr. Padgett spent tenLittle began his career with DXP nearly twenty years with Spectra Energy in several positions withago as an application engineer. During his tenure at DXP, Mr. Little has held various roles of increasing responsibility including General Manager of U.S. and Canadian Tax,outside sales, Director of U.S. Operations Accounting and General Manager Corporate Accounting.more recently as the Regional Vice 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 from Baylor University.
Chris Gregory. Mr. Gregory was appointed 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 Spectra Energy,serving as Vice President of IT Strategic Solutions he spent seven years with Duke Energyserved in various roles, covering Corporate Accounting, Accounting Researchincluding application developer, database manager as well as leading the business intelligence and Policyapplication development departments. He holds a Bachelor of Business Administration and workingComputer 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 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 divisional controller. Mr. Padgett started his careerBachelor of Science from the University of Texas at PricewaterhouseCoopers.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 GregoryDavid Molero Santos. .Mr. Gregory was elected Senior Vice PresidentMolero is a certified public accountant and has over 18 years of experience in accounting within a public company environment and most recently as a Chief InformationAccounting 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.another publicly traded company. Prior to serving as Vice PresidentDXP, Mr. Molero was the Chief Accounting Officer for AgileThought, Inc., a provider of IT Strategic Solutions he serveddigital transformation services including organizational transformations, training and certifications, and product management services. He spent over 16 years at PricewaterhouseCoopers serving in various audit and capital markets advisory roles, including application developer, database manager as well as leading the business intelligencefocused primarily on SEC reporting clients. Mr. Molero is a Certified Public Accountant in Texas and application development departments. He holds a Bachelor ofBachelor’s degree in Business Administration and Computer Information SystemsManagement from Loyola University in Cordoba (Spain) and a Master’s degree in Audit from the University of Houston and an MBA from The University of Texas at Austin, McCombs School of Business.Alcala in Madrid (Spain).
All officers of DXP hold office until the regular meeting of the board of directors following the 2024 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 Internetinternet website (www.dxpe.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission.Commission (“SEC”). 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 Internetinternet website ir.dxpe.com:
•DXP Code of Ethics for Senior Financial Officers; •DXP Code of Conduct; •DXP Conflict Minerals Policy; •DXP Anti-Corruption Policy; •Compensation Committee Charter; •Nominating and Governance Committee Charter; and •Audit Committee Charter
Corporate Sustainability Report
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.
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 may experience unexpected supply shortages, which could adversely affect our product and service offerings and our business. •Price reductions by our manufacturers of products that we sell could cause the value of our inventory to decline. •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 DXP’sthe 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, as well as impact senior management, which could negatively impact our business, financial position, and results of operations.
•A general slowdown in the economy could negatively impact DXP’sthe Company’s sales growth and profitability. •We could be adversely impacted by sustained 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. •Adverse weather events or natural disasters could negatively disrupt our operations.
Credit and Access to debt capitalDebt 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. •Our failure to comply with financial covenants of our credit facilities may adversely affect our results of operations and our financial conditions. •We may not be able to access acquisition financing, including debt capital. •A deterioration in the oil and gas sector or other circumstances may negatively impact our business and results of operations and thus hinder our ability to comply with financial covenants under our credit facilities, including the Secured Leverage Ratio and Fixed Charge Coverage Ratio financial covenants.
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 and environmental claims involving allegedly defective products. •We are subject to risks associated with conducting business in foreign countries. •We are subject to environmental, health and safety laws and regulations.regulations that may lead to liabilities and negatively impact our business. •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 could materially adversely affect our financial condition or results of operations.
The following are more detailed discussions of our Risk Factors summarized above:
Risk Related to DXP'sthe 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.
Our manufacturers may cancel our oral or written distribution authorizations upon little or no notice, which could adversely impact our revenues and profits from distributing certain manufacturer’s products.
We are authorized to distribute certain manufacturers’ products in specific geographic areas and all of our oral or written distribution authorizations are subject to cancellation by the manufacturer, some upon little or no notice. If certain manufacturers cancel the distribution authorizations they granted to us, our distribution of their products could be disrupted and such occurrence could have a material adverse effect on our results of operations and financial conditions.
We may experience unexpected supply shortages, which could adversely affect our product and service offerings and our business.
We distribute products from certain manufacturers and suppliers. Nevertheless, in the future we may have difficulty obtaining the products we need from suppliers and manufacturers as a result of unexpected demand, production difficulties that might extend lead times or a supplier’s decision to sell its products through other distributors. Our inability to obtain products from suppliers and manufacturers in sufficient quantities to meet customer demand, or at all, could adversely affect our product and service offerings and our business.
Price reductions by our manufacturers of products that we sell could cause the value of our inventory to decline. Also, these price reductions could cause our customers to demand lower sales prices for these products, possibly decreasing our margins and profitability on sales.
The value of our inventory could decline as a result of manufacturer price reductions with respect to products that we sell. Such a decline could have an adverse effect on our revenues.Also, decreases in the market prices of products that we sell could cause customers to demand lower sales prices from us. These price reductions could reduce our margins and profitability on sales with respect to the lower-priced products to the extent that we purchased our inventory of these products at the higher prices prior to the manufacturers price reductions. Reductions in our margins and profitability on sales could have a material adverse effect on our business.
We rely upon third-party transportation providers for our merchandise shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver products on a timely basis.
We rely upon independent third-party transportation providers for our merchandise shipments, including shipments to and from all of our service centers. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, labor availability, labor strikes and inclement weather, which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. In addition, we may not be able to obtain favorable terms as we have with our current third-party transportation providers.
Our business has substantial competition that could adversely affect our results.
Our business is highly competitive. We compete with a variety of industrial supply distributors, some of which may have greater financial and other resources than us. Although many of our traditional distribution competitors are small enterprises selling to customers in a limited geographic area, we also compete with larger distributors that provide integrated supply programs such as those offered through outsourcing services similar to those that are offered by our SCS segment. Some of these large distributors may be able to supply their products in a more timely and cost-efficient manner than us. Our competitors include catalog suppliers, large warehouse stores and, to a lesser extent, certain manufacturers. Competitive pressures could adversely affect DXP’sthe Company's sales and profitability.
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.
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.
Risks associated 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 ofAt December 31, 2020,2023, our combined goodwill and intangible assets amounted to $341.9$407.9 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 DXP’sthe 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, DXP’sThe 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 penetrate our information systems or our vendors' information systems and, if successful, misappropriate confidential customer, supplier, employee or other business information. In addition, one of our employees, contractors or other third party may attempt to circumvent security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of information could expose us to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our financial condition and results of operations. We may not be able to adequately insure against cyber risks.
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.cyber incidents. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our reputation and image and private data exposure. 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. However, in the future, if we suffer a more significant cyber incident, we may be required to shut off our computer systems, reboot them and reestablish our information from back up sources. In other future incidents, we may be required under various laws to notify any third parties whose data has been compromised. 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;network, information systems, or 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 a public company, DXP Enterprises, Inc. is subject to an annual integrated audit (an audit of its financial statements and system of controls). The integrated audit expresses itself in two opinions covering the procedures and records used to produce the financial statements, i.e. the financial statement audit, and, also an opinion as to whether the company has the likelihood, possibility, or existence of a misstatement in its financial statements based upon the interplay between financial, operational and technology processes and systems, i.e. the Sarbanes-Oxley or “SOX” audit (see Item 8 and Item 9A for these opinions).
Specifically, section 404 of the Sarbanes-Oxley Act requires us to annually evaluate our internal control systems over financial reporting, which is an assessment of financial and operational processes as well as a review of the technology processes and systems. This is not a static process as we may change our processes each year or acquire new companies that have different controls than our existing controls. Upon completion of this process each year, we may identify control deficiencies of varying degrees of severity under applicable U.S. Securities and Exchange Commission (“SEC”) and Public Company Accounting Oversight Board (“PCAOB”) rules and regulations that are neither new, and or remain unremediated from previous annual assessments due to ongoing curing efforts. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a significant deficiency or combination of significant deficiencies in internal control over financial reporting that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
The Company has engaged third party consultants in addition to having hired a total of seven (7) CPAs in various positions and functions since December 31, 2022. Specifically, the Company has hired a new Chief Accounting Officer, a Director of Technical Accounting, three assistant controllers, a Director of Tax, and established and expanded technical accounting and SEC financial reporting groups. As discussed in Item 9A, “Management's Report on Internal ControlsControl Over Financial Reporting,” we concluded we have material weaknesses in our internal controls during 2020. 2023. However, the Company has continued to evolve and grow as business while addressing and remediating various deficiencies as a growth oriented company.
If we fail to successfully remediate these weaknesses, our financial statements may not be accurate and we may face restricted access to the capital markets and our stock price may be adversely affected. If we do not develop and maintain effective controls and procedures or if we are otherwise unable to deliver timely and reliable financial information, we could suffer a loss of confidence in the reliability of our financial statements and the trading price of our stock could be negatively impacted.
Risks Related to the 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 is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. During the first few months on 2020, COVID-19 has spread globally, resulting in certain supply chain disruptions, volatility in the stock market, lower oil prices, and a lockdown in international travel, all of which has and could continue to adversely impact the global economy and has and could potentially continue to decrease demand from our customers. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity and increased economic and market uncertainty. Further, a COVID-19 outbreak at one of our vendors’ or customers’ facilities could adversely impact or disrupt our operations. The pandemic has impacted our customers spending and these types of events could negatively impact our customers’ spending in the impacted regions or, depending upon the severity, globally, which could adversely impact our business, reputation, results of operations or financial conditions.If these effects 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 full 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 the pandemic. While we do not know the full extent of the impact on our business, our operations or the global economy as a whole, the effects could have a 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 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 DXP’sthe Company's sales growth and profitability.
Economic and industry trends affect DXP’sthe Company's business. Demand for our products is subject to economic trends affecting our customers and the industries in which they compete in particular. General economic factors beyond our control that affect our business and our customers include (among others) interest rates, recession, inflation, deflation, customer credit availability, consumer credit availability, consumer debt levels, performance of housing markets, energy costs, tax rates and policy, unemployment rates, and other economic matters that influence our customers' spending. Many of theseour customers' 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 sustained 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.
Sustained low oil prices or the failure of oil prices to rise in the future 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. The unprecedented sharp decline in crude oil prices since February 2020 has negatively impacted the oil and gas industry and is expected to cause further worsening conditions of energy companies, oilfield services companies, and related businesses. 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 continued decline of such prices could lead to a decrease in our customers’ capital and other expenditures and could adversely affect our revenues. Oil and gas pricing and the resultant economic conditions may not recover meaningfully in the near term.
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.
A deterioration in the oil and gas sector or other circumstances may negatively impact our business and results of operations and thus hinder our ability to comply with financial covenants under our credit facilities, including the Secured Leverage Ratio and Fixed Charge Coverage Ratio financial covenants.
A deterioration of the oil and gas sector or other circumstances that reduce our earnings may hinder our ability to comply with certain financial covenants under our credit facilities. Specifically, compliance with the Secured Leverage Ratio and Fixed Charge Coverage Ratio covenants depend on our ability to maintain net income and prevent losses. In the future we may not be able to comply with the covenants and, if we are not able to do so, our lenders may not be willing to waive such non-compliance or amend such covenants. If we are unable to comply with our financial covenants or obtain a waiver or amendment of those covenants or obtain alternative financing, our business and financial condition would be adversely affected.
Changes in our credit profile may affect our relationship with our suppliers, which could have a material adverse effect on our liquidity.
Changes in our credit profile may affect the way our suppliers view our ability to make payments and may induce them to shorten the payment terms of their invoices if they perceive our indebtedness to be high. Given the large dollar amounts and volume of our purchases from suppliers, a change in payment terms may have a material adverse effect on our liquidity and our ability to make payments to our suppliers and, consequently, may have a material adverse effect on us.
Risks Related to Legal and Regulatory Matters
Risks associated with substantial 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.
The nature of our manufactured products carries the possibility of significant product liability and warranty claims, which could harm our business and future results.
Customers use some of our products, in particular manufactured pumps and pump packages, in potentially harmful and high-risk applications that may in some instances can cause personal injury or loss of life and/or damage to property, equipment or the environment. In addition, our products are integral to the production process for some end-users, and a failure of our products could result in a business interruption of their operations. Although we maintain quality controls and procedures, our products may not be completely free from defects and/or malfunction or failure. We maintain various levels and types of insurance coverage that we believe are adequate and commensurate with normal industry practice for a company of our risk profile, relative size, and we further limit our liability by contract wherever possible. However, as described earlier, insurance may not be available or adequate to cover all potential liability. We could be named as a defendant in product liability or other lawsuits asserting potentially large claims if an accident occurs at a location where our equipment is installed or services have been or are being used.
We are subject to potential shareholder litigation associated with the potential volatile trading price of our common 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 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.
We are subject to personal injury, and product liability and environmental 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 and environmental 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 even though we did not manufacture the products and applicable law may render us liable for damages without regard to negligence or fault. In particular, certain environmental laws provide for joint and several and strict liability for remediation of spills and releases of hazardous substances. Certain of these risks are reduced by the fact that we are a distributor of products that third-party manufacturers produce, and, thus, in certain circumstances, we may have third-party warranty or other claims against the manufacturer of products alleged to have been defective. However, there is no assurance that these claims could fully protect us or that the manufacturer would be able financially to provide protection. There is no assurance that our insurance coverage will cover or be adequate to cover the underlying claims.
We are subject to risks associated with conducting business in foreign countries.
We conduct a meaningful amount of business outside of the United States of America.U.S. We could be adversely affected by economic, legal, political and regulatory developments in countries that we conduct business in. We have meaningful operations in Canada in which the functional currency is denominated in Canadian dollars. We also have operations in Dubai, where the functional currency is dirham. As the value of currencies in foreign countries in which we have operations increases or decreases related to the U.S. dollar, the sales, expenses, profits, losses assets and liabilities of our foreign operations, as reported in our consolidated financial statements, 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 aggregate materially adversely affect our financial condition or results of operations.
We are subject to environmental, health and safety laws and regulations.regulations that may lead to significant liabilities and negatively impact our business.
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 significant liabilities including 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.measures, which could negatively impact our business.
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 could materially adversely affect our financial condition or results of operations.
We are subject to laws and regulations in every jurisdiction where we operate.operate including the U.S. and certain foreign countries. Compliance with laws and regulations increases our cost of doing business. We are subject to a variety of U.S. and foreign laws and regulations, including without limitation import and export requirements, the Foreign Corrupt Practices Act (the “FCPA”), U.S. and foreign 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 could negatively affect our earnings, 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.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 1C. Cybersecurity
Risk Management and Strategy
We have processes in place to identify, assess and manage material risks from cybersecurity threats. These processes are part of our overall enterprise risk management process and have been embedded in our internal controls and information systems.
Our cybersecurity and information security framework includes risk assessment and mitigation through a threat intelligence-driven approach, application controls, and enhanced security with ransomware defense. The framework leverages the National Institute of Standards and Technology Cyber Security Framework ("NIST CSF") for measuring overall readiness to respond to cyber threats, and Sarbanes-Oxley for assessment of internal controls.
We contract with external firms to assess our cyber security controls relative to our peers using the NIST CSF. We also have a third-party risk management program that assesses risks from vendors and suppliers. In addition, we maintain a Business Continuity and Disaster Recovery Plan as well as a cybersecurity insurance policy.
We have established cybersecurity and information security awareness training programs. Formal training on topics relating to our cybersecurity, data privacy and information security policies and procedures is mandatory at least annually for all employees, contractors and third parties with access to our network. Training is administered and tracked through online learning modules. Training topics include how to escalate suspicious activities including phishing, viruses, spams, insider threats, suspect human behaviors or safety issues. Based on role and location, some employees receive additional in-depth training to provide more comprehensive knowledge on potential risks related to their individual job responsibilities. Training is supplemented through regular company-wide communications with frequent updates to educate on the latest adversary trends and social engineering techniques.
Additionally, we engage in cyber crisis response simulations to assess our ability to adapt to information and operational technology threats. Improper or illegitimate use of our information system resources or violation of our information security policies and procedures is subject to disciplinary action. Our security posture is supported by a comprehensive defense-in-depth strategy that relies on layers of technology including Multi-Factor Authentication to ensure that access to information and communication is vetted and secure.
We also utilizes internal and external audits and assessments, vulnerability testing, governance processes over outsourced service providers, active risk management and benchmarking against peers in the industry to validate our security posture. We also engage external firms to measure our NIST CSF maturity level.
Governance
Our board of directors established a standing Cybersecurity Committee, which is tasked with oversight of the Cybersecurity Program, including: (i) strategy and governance; (ii) operations; and (iii) risk management and regulatory compliance.
The Cybersecurity Committee responsibilities include:
•reviewing our enterprise cybersecurity strategy and framework, including our assessment of cybersecurity threats and risk, data security programs, and our management and mitigation of cybersecurity and information technology risks and potential breach incidents; •reviewing any significant cybersecurity incident that has occurred, reports to or from regulators with respect thereto, and steps that have been taken to mitigate against reoccurrence; •evaluating the effectiveness of our cyber risk management and data security programs measured against our cybersecurity threat landscape; •assessing the effectiveness of our data breach incident response plan; •reviewing and assessing our information technology disaster recovery capabilities; and •reviewing our assessment of cybersecurity threats and risk associated with our supply chain and actions we are taking to address such threats and risks.
The Cybersecurity Committee receives reports and updates at committee meetings from our Chief Information Officer (“CIO”) and other executives and cybersecurity specialists. Following each committee meeting, the chair of the Cybersecurity Committee briefs the full board of directors on matters covered at the prior Cybersecurity Committee meeting. The board also receives periodic briefings on emerging trends in order to enhance its literacy on cybersecurity issues. At least annually, the Cybersecurity Committee receives updates about the results of the Cybersecurity Program reviews.
The Cybersecurity Committee participates with management periodically in “tabletop” exercises to evaluate our data breach incident response plan.
Management’s Role and Expertise in Assessing and Managing Cybersecurity
Our Cybersecurity and Information Technology organization is led by our CIO, who is responsible for cybersecurity risk management. Our CIO has more than 27 years of experience in the IT industry. Since 2006, he has held multiple roles at the Company and most recently as Vice President of IT Strategic Solutions.
Our cybersecurity incident response framework is governed by a corporate Cybersecurity Incident Response Plan (the “IRP”), which sets out our approach for categorizing, responding to, and mitigating cybersecurity incidents. The IRP provides definitions of key terms, stakeholder roles and responsibilities, and a response governance and escalation process.
We have an incident response team comprised of our CIO, executive leaders, management, and internal and external legal counsel, whose primary responsibilities include: •evaluating and validating the impact of an incident; •approving certain incident response countermeasures and remediation actions; •escalating incidents and response countermeasures for approval; and •acting in an advisory capacity in support of cybersecurity incident remediation, as appropriate.
We maintain a Business Continuity and Disaster Recovery Plan that addresses our preparation for, management, recovery from, and ultimate resumption of business after a crisis, including emergency response, continued recovery, and business resumption activities such as information systems recovery, when a cybersecurity incident may potentially have a significant impact on our business strategy, results of operations, or financial condition.
As of the date of this report, we are not aware of any cybersecurity threats that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition. However, as discussed under "Item 1A. Risk Factors," specifically the risks titled "Cybersecurity breaches and other disruptions or misuse of our network and information systems could affect our ability to conduct our business effectively.", the sophistication of cyber threats continues to increase, and the preventative actions we take to reduce the risk of cyber incidents and protect our systems and information may be insufficient. Accordingly, no matter how well our controls are designed or implemented, we will not be able to anticipate all security breaches, and we may not be able to implement effective preventive measures against such security breaches in a timely manner.
ITEM 2. Properties
At December 31, 2023, we had 183 facilities which contained 157 services centers, 4 distribution centers, 16 fabrication facilities and 6 wastewater locations. Additionally, we operated out of 81 of our customers' facilities. We own seven of our facilities while the remainder of our facilities are leased. At December 31, 2020, we had approximately 168 facilities which contained 154 services centers, 4 distribution centers and 10 fabrication facilities.
At December 31, 2020,2023, the Service Centers segment operated out of 154157 service center facilities. Of these facilities, 125132 were located in the U.S. in 3537 states, 2824 were located in nine9 Canadian provinces and one was located in Dubai. All of theThe four distribution centers were located in the U.S., specifically in Texas, Montana and Nebraska. At December 31, 2020,2023, the Innovative Pumping Solutions segment operated out of 1016 fabrication facilities located in twoseven states in the U.S. and, two provinces in Canada.Canada and 6 wastewater locations in the U.S.. At December 31, 2020,2023, the Supply Chain Services segment operated supply chain installations in 7981 of our customers’ facilities in 2629 U.S. states and onetwo Canadian province.provinces.
| | | | | | | | | | | | | | | | State/City/Province | Locations | | State/City/Province | Locations | | Alaska | 1 | | North Dakota | 3 | | Alabama | 6 | | Ohio | 5 | | Arkansas | 1 | | Oklahoma | 3 | | Arizona | 2 | | Oregon | 1 | | California | 10 | | Pennsylvania | 4 | | Colorado | 5 | | South Dakota | 1 | | Florida | 3 | | Tennessee | 1 | | Georgia | 4 | | Texas | 46 | | 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 | | Missouri | 1 | | Nova Scotia | 2 | | Montana | 2 | | Ontario | 5 | | Nebraska | 9 | | Quebec | 1 | | New Mexico | 2 | | Saskatchewan | 3 | | New Jersey | 1 | | Dubai | 1 | | New York | 3 | | Total Locations | 183 | | North Carolina | 3 | | | |
At December 31, 2020,2023, our owned facilities ranged from 5,000 square feet to 45,000 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.
ITEM 3. Legal Proceedings
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXPthe Company is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP’sthe Company's business, consolidated financial position, cash flows, or results of operations.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on The NASDAQ Global Select Market under the stock ticker symbol "DXPE".
On March 5, 2021,4, 2024, we had approximately 381358 holders of record for outstanding shares of our common stock. This number does not include shareholders for whom shares are held in “nominee” or “street name”. We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, the success of our business activities, regulatory and capital requirements, lenders, and general financial and business conditions.
Stock Performance
The following performance graph compares the performance of DXP’sthe Company's common stock to the NASDAQ Industrial Index, S&P 400 Index and a customized peer group of five companies that includes: NOW Inc, MRC Global Inc, AppliedDow Jones U.S. Industrial Technologies Inc, MSC Industrial Direct Co. Inc and Lawson Products Inc.Suppliers Index. The graph assumes that the value of the investment in DXP’sthe Company's common stock and in each index was $100 at December 31, 2015 and that all dividends were reinvested.2018.
Investors are cautioned against drawing conclusions from the data contained in the graph below as past results are not necessarily indicative of future performance.
Equity Compensation Table
The following table provides information regarding shares covered by the Company’s equity compensation plans as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Plan category | | Number of Securities to be issued upon exercise of outstanding options | | Weighted average exercise price of outstanding options | | Non-vested restricted shares outstanding | | Weighted average grant price | | Number of securities remaining available for future issuance under equity compensation plans | | | | Equity compensation plans approved by shareholders | | N/A | | N/A | | 166,976 | | | $ | 32.53 | | | 612,692 | | | (1) | | Equity compensation plans not approved by shareholders | | N/A | | N/A | | N/A | | N/A | | N/A | | | | Total | | N/A | | N/A | | 166,976 | | | $ | 32.53 | | | 612,692 | | | (1) | (1)Represents shares of common stock authorized for issuance under the 2016 Omnibus Incentive Plan. |
Recent Sales of Unregistered Securities
DXP issued 852,391, 345,423, 192,988 and 40,638The Company did not issue any unregistered shares of DXP’scommon stock during the year ended December 31, 2023.
The Company issued 36,549 unregistered shares of common stock as part of the consideration for the December 31, 2020 acquisitionsSeptember 1, 2022 acquisition of TEC, APO, Pumping Solutions and CEC.Sullivan. The unregistered shares were issued to the sellers of TEC, APO, Pumping Solutions and CEC.Sullivan.
The Company issued 49,468208,855 unregistered shares of DXP’s common stock as part of the consideration for the January 1, 2020May 2, 2022 acquisition of PSI.Cisco. The unregistered shares were issued to the sellers of PSI.Cisco.
The Company issued 30,30518,263 unregistered shares of DXP’s common stock as part of the consideration for the JanuaryMarch 1, 20182022 acquisition of ASI.Drydon. The unregistered shares were issued to the sellers of ASI.Drydon.
The Company issued 3,581 unregistered shares of common stock as part of the consideration for the March 1, 2022 acquisition of Burlingame. The unregistered shares were issued to the sole seller of Burlingame.
We relied on Section 4(a)(2) of the Securities Exchange Act as a basis for exemption from registration. All issuances were as a result of private negotiation, and not pursuant to public solicitation. In addition, we believe the shares were issued to “accredited investors” as defined by Rule 501 of the Securities Act.
Repurchases of Common Stock
The following table presents information with respect to the Company’s repurchases of its common stock during the quarter ended December 31, 2020:2023 (in thousands except average price paid per share):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Number of Shares Purchased (1) | | (1)
|
Average Price Paid per Share | |
Total numberNumber 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 (in thousands) | | | | | | | | October 1 –- October 31 2020 | | — | $ | — | | | — | $ | — | | | November 1 – November 30, 2020 | — | | $ | — | | | | | | | | | $ | 26,412 | | | November 1 – November 30 | | | — | | | — | | | — | | | | | | | | | 26,412 | | | December 1 – December 31 | | | — | | | — | | | — | | | | | | | | | 26,412 | | | Total | | | $ | — | | | December 1 – December 31, 2020 | — | | $ | — | | | — | $ | — | | | Total | — | | $ | — | | | — | | | | | $ | —26,412 | | | | | | | | | (1) | Represents shares employees elected to have withheld to satisfy their tax liabilities related to restricted stock vested. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. There were not any repurchases of shares by the Company during the period.
| | | | | | | |
ITEM 6. Selected Financial Data
The selected historical consolidated financial data set forth below for each of the years in the five-year period ended December 31, 2020 has been derived from our audited Consolidated Financial Statements. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto included elsewhere in this Report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | 2020 | 2019 | 2018 | | 2017 | | 2016 | | | (Restated) | (Restated) | (Restated) | | (2) | | (2) | | | | (in thousands, except per share amounts) | | Consolidated Statements of Earnings Data: | | | | | | | | | | Sales | $ | 1,005,266 | | $ | 1,264,851 | | $ | 1,218,709 | | | $ | 1,006,782 | | | $ | 962,092 | | | | Gross Profit | 277,196 | | 349,789 | | 335,843 | | | 271,581 | | | 264,802 | | | | Impairment and other charges | 59,883 | | — | | — | | | — | | | — | | | | Operating income (loss) | (27,668) | | 67,412 | | 72,086 | | | 33,490 | | | 19,332 | | | | Net income (loss) | (29,617) | | 36,765 | | 38,234 | | | 16,529 | | | 7,151 | | | | Net loss attributable to non-controlling interest | (348) | | (260) | | (111) | | | (359) | | | (551) | | | | Net income (loss) attributable to DXP | $ | (29,269) | | $ | 37,025 | | $ | 38,345 | | | $ | 16,888 | | | $ | 7,702 | | | | Earnings per share: | | | | | | | | | Basic earnings (loss)(1) | $ | (1.65) | | $ | 2.10 | | $ | 2.18 | | | $ | 0.97 | | | $ | 0.51 | | | Diluted earnings (loss)(1) | $ | (1.65) | | $ | 2.01 | | $ | 2.08 | | | $ | 0.93 | | | $ | 0.49 | | |
diluted earnings per share.
(2)Prior period adjustments impacting years ended December 31, 2017 and prior were not restated. The cumulative effect of these adjustments were recorded in opening retained earnings as of January 1, 2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31 | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | (Restated) | | (Restated) | | (Restated) | | (3) | | (3) | | (in thousands) | | Consolidated Balance Sheet Data: | | Cash(1) | $ | 119,419 | | | $ | 54,327 | | | $ | 40,519 | | | $ | 25,579 | | | $ | 1,590 | | Net Working Capital (2) | 146,167 | | | 218,197 | | | 214,195 | | | 180,705 | | | 140,430 | | | Total Assets | 868,131 | | | 789,088 | | | 703,741 | | | 640,785 | | | 602,052 | | | Total Debt less current maturities | 326,700 | | | 241,875 | | | 245,309 | | | 248,716 | | | 174,323 | | | Total Shareholders’ Equity | $ | 361,136 | | | $ | 354,932 | | | $ | 317,248 | | | $ | 274,827 | | | $ | 252,549 | |
(1) Cash includes cash and cash equivalents plus restricted cash
(2) Net Working Capital equals current assets minus current liabilities excluding cash and short-term debt
(3) Prior period adjustments impacting years ended December 31, 2017 and prior were not restated. The cumulative effect of these adjustments were recorded in opening retained earnings as of January 1, 2018.Reserved
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes contained within Item 8 - Financial Statements and Supplementary Data and the other financial information found elsewhere in this Report. Management’s Discussion and Analysis uses forward-looking statements that involve certain risks and uncertainties as described previously in our Disclosure Regarding Forward-looking Statements and Item 1A. Risk Factors.
General Overview
DXP Enterprises, Inc.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.
DXP'sThe Company's products are marketed in the United States,U.S., Canada, Mexico, and Dubai to customers that are engaged in a variety of industries, many of which may be counter cyclical to each other. Demand for our products generally is subject to changes in the United StatesU.S. and Canada, and global and macro-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 StatesU.S. 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.
Key Business Metrics
We regularly monitor several financial and operating metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Our key non-U.S. GAAP business metrics may be calculated in a different manner than similarly titled metrics used by other companies. See “Non-U.S. GAAP Financial Measures and Reconciliations” for additional information on non-U.S. GAAP financial measures and a reconciliation to the most comparable U.S. GAAP measures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | | | | | | | 2023 | | 2022 | | 2021 | | Sales by Business Segment | | | | | | | | (in thousands, except percentages and days) | | | | | | | | | | | | | | | Service Centers | | | | | | | | $ | 1,145,082 | | | $ | 1,009,356 | | | $ | 816,496 | | | Innovative Pumping Solutions | | | | | | | | 273,150 | | | 231,102 | | | 139,591 | | | Supply Chain Services | | | | | | | | 260,368 | | | 240,374 | | | 157,834 | | | Total DXP Sales | | | | | | | | $ | 1,678,600 | | | $ | 1,480,832 | | | $ | 1,113,921 | | | Acquisition Sales | | | | | | | | $ | 33,078 | | | $ | 41,527 | | | $ | 147,472 | | | Organic Sales | | | | | | | | 1,645,522 | | | 1,439,305 | | | 966,449 | | | | | | | | | | | | | | | | Business Days | | | | | | | | 252 | | | 253 | | | 251 | | | Sales per Business Day | | | | | | | | $ | 6,661 | | | $ | 5,853 | | | $ | 4,438 | | | Organic Sales per Business Day | | | | | | | | 6,530 | | | 5,689 | | | 3,850 | | | | | | | | | | | | | | | | Gross Profit | | | | | | | | $ | 505,291 | | | $ | 422,038 | | | $ | 328,506 | | | Gross Profit Margin | | | | | | | | 30.1 | % | | 28.5 | % | | 29.5 | % | | EBITDA | | | | | | | | $ | 170,182 | | | $ | 123,535 | | | $ | 67,415 | | | EBITDA Margin | | | | | | | | 10.1 | % | | 8.3 | % | | 6.1 | % | | Adjusted EBITDA | | | | | | | | $ | 174,305 | | | $ | 126,805 | | | $ | 70,231 | | | Adjusted EBITDA Margin | | | | | | | | 10.4 | % | | 8.6 | % | | 6.3 | % | | Free Cash Flow | | | | | | | | $ | 93,959 | | | $ | 980 | | | $ | 32,759 | |
Organic Sales and Acquisition Sales
We define and calculate organic sales to include locations and acquisitions under our ownership for at least twelve months. "Acquisition Sales" are sales from acquisitions that have been under our ownership for less than twelve months and are excluded in our calculation of Organic Sales.
Business Days
"Business Days" are days of the week, excluding Saturdays, Sundays, and holidays, that our locations are open during the year. Depending on the location and the season, our branches may be open on Saturdays and Sundays; however, for consistency, those days have been excluded from the calculation of Business Days.
Sales per Business Day
We define and calculate Sales per Business Day as sales divided by the number of Business Days in the relevant reporting period.
Organic Sales per Business Days
We define and calculate Organic Sales per Business Day as Organic Sales divided by the number of Business Days in the relevant reporting period.
EBITDA and Adjusted EBITDA
We define and calculate EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization, and non-controlling interest. We define and calculate Adjusted EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization minus stock-based compensation expense, non-controlling interest before taxes and all other non-cash charges, adjustments, and non-recurring items. We identify the impact of all other non-cash charges, adjustments and non-recurring items because we believe these items do not directly reflect our underlying operations.
EBITDA Margin and Adjusted EBITDA Margin
We define and calculate EBITDA Margin as EBITDA divided by sales. We define and calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by sales.
Free Cash Flow
We define and calculate free cash flow as net cash provided by operating activities less net purchases of property and equipment.
CURRENT MARKET CONDITIONS AND OUTLOOK
GeneralEconomic Indices
In December 2019, the novel SARS-CoV-2 virus and associated COVID 19 disease (“COVID-19”) were reported in China, and in March 2020 the World Health Organization declared a pandemic. The pandemic had a significant impact on our business during 2020. The marketplace broadly, and the Company specifically, throughout the year operated with certain modifications to balance re-opening with employee and customer safety. However, most of the markets in which we operate began to normalize during the second half of 2020. This improved the outlook of the manufacturing and construction customers that support our traditional branch and onsite business. Although the rate of improvement remains gradual and the overall activity level remains below pre-pandemic levels, DXP saw a modest improvement from monthly lows experienced in July.
Consistent with broader social trends, we took steps to safeguard the health of our employees. This included closing branch and corporate facilities to outside personnel, enabled through technology, significant work from home capabilities for many employees, and where employees remained in the workplace, created space between work areas, provided ample personal protective equipment and cleaning supplies, and instituting formal policies for mitigation in the event of cases of illness. Due to these precautions, our operations continued to function effectively, including internal controls over financial reporting.
As restrictions ease and the roll out of various vaccines continue, we will actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that it is important to share where the Company stands today, how our response to the COVID-19 pandemic has progressed, and how our operations and financial condition may change as the fight against COVID-19 progresses.
COVID-19 Pandemic Impact
During the twelve months ended December 31, 2020, the widely publicized and discussed coronavirus (COVID-19) outbreak rapidly spread across the world, driving a sharp erosion in demand for crude oil and other products and services, as whole economies ordered curtailed activity. In response to declining demand for crude oil, members of the Organization of the Petroleum Exporting Countries and other producing countries (OPEC+), including Russia, met in early March to discuss additional production cuts to help stabilize prices. The group failed to reach an agreement, and production was instead increased into the already oversupplied market, decimating oil prices and rapidly filling worldwide oil storage facilities. OPEC+ eventually reached an agreement in April 2020 to reduce production, which had a muted effect on oil prices due to the belief that the cuts were significantly less than the demand destruction caused by COVID-19. As a result, companies across the oil and gas industry responded with severe capital spending budget cuts, cost cuts, personnel layoffs, facility closures and bankruptcy filings.
We made a number of mitigation decisions and took proactive steps in response to the issues presented by the COVID-19 pandemic and ongoing uncertainties related to the oil and gas industry. We moved forward with our plans to increase our ABL revolver facility from $85 million to $135 million. In addition, we reduced certain discretionary expenditures and suspended the Company’s matching contributions to retirement plans. Some of these measures may have an adverse impact on our businesses, but we believe we took the necessary steps to stabilize the business in unprecedented times.
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 isolation 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 isolation orders by national, state, provincial and local governments, we were exempted as an “essential” business as the products we sell are necessary for the maintenance and functioning of many industries including energy infrastructure. We took measures to safeguard the health and welfare of our employees, including social distancing measures while at work, certain screening, providing personal protection equipment such as gloves, face masks and hand sanitizer and sterilizing cleaning services at Company facilities. As various governmental restrictions continue to be lifted or phased out, we will review our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact.
As a distribution business, we continue to closely monitor the ability of our suppliers and transportation providers to continue the functioning of our supply chain. We have not experienced significant delays by transportation providers or significant delays in our supply chains. Our inventory position for most products has allowed us to continue supply to most customers with little interruption. In those instances where there was interruption, we worked with our customers to discuss the impact of the delay. We will continue to monitor the situation and have ongoing dialogue with our vendors and customers regarding the status of impacted orders.
Management expects industry activity levels and spending by customers to remain volatile in the near term, but we do expect some increased activity as the nation and the world become vaccinated and the oil and gas demand destruction from COVID-19 begins to subside. DXP remains committed to streamlining operations and improving organizational efficiencies while continuing to focus on delivering the products and services that remain in the Company’s backlog. We believe this strategy has further advanced the Company’s competitive position, regardless of the market environment.
DXP monitors several economic indices that have been key indicators for industrial and oil & gas economic activity in the United States.U.S. 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")(MBI). A reading above 50 generally indicates expansion. The Company also monitors various oil & gas indicators including active drilling rigs.
Below are readings for the fourth quarter versus the full year average:
| | Index Reading * | | Index Reading | | | Period | | | Period | | | Period | Period | MCU | PMI | IP | MBI | MCU | PMI | IP | MBI | | Active Drilling Rigs(1) | | October | October | 73.0 | 59.3 | 103.6 | 53.9 | October | 78.6 | 46.7 | 102.4 | 45.4 | | 1,777 | | November | November | 73.4 | 57.5 | 104.1 | 51.0 | November | 78.8 | 46.6 | 102.7 | 43.4 | | 1,794 | | December | December | 74.5 | 60.5 | 105.7 | 53.5 | December | 78.7 | 47.1 | 102.7 | 44.3 | | 1,739 | | Fiscal 2023 Q4 average | | Fiscal 2023 Q4 average | 78.7 | 46.8 | 102.6 | 44.4 | | 1,770 | | | Fiscal 2020 Q4 average | 73.7 | 59.1 | 104.5 | 52.8 | | Fiscal 2020 average | 71.9 | 52.5 | 101.8 | 47.6 | | Fiscal 2019 average | 77.8 | 51.3 | 109.4 | 50.6 | | Fiscal 2018 average | 78.7 | 58.6 | 108.6 | 57.1 | | Fiscal 2023 average | | | Fiscal 2023 average | | | Fiscal 2023 average | | 79.3 | 47.1 | 102.8 | 46.5 | | 1,814 | | Fiscal 2022 average | | Fiscal 2022 average | 79.7 | 53.5 | 103.9 | 53.9 | | 1,747 | | Fiscal 2021 average | | Fiscal 2021 average | 75.4 | 60.6 | 100.5 | 59.7 | | 1,361 |
* The information contained in this table has been obtained from third party publicly available sources.
DXP 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, | | 2020 | | 2019 | | 2018 | | Active Drilling Rigs** | | | | | | | U.S | 436 | | | 944 | | | 1,032 | | | Canada | 90 | | | 135 | | | 191 | | | International | 825 | | | 1,098 | | | 988 | | | Worldwide | 1,352 | | | 2,177 | | | 2,211 | | | | | | | | | Gross Domestic Product (in billions) | $ | 20,932.8 | | | $ | 21,429.0 | | | $ | 20,500.6 | | | West Texas Intermediate ** (per barrel) | $ | 39.16 | | | $ | 56.98 | | | $ | 65.23 | | | Purchasing Managers Index | 60.5 | | 47.8 | | 54.3 |
* The information contained in this table has been obtained from third party publicly available sources.
** Averages for the years indicated.(1). From Baker Hughes’ Worldwide Rig Counts - Current Data
During 2019,2023, the growth rate of the general economy improved, from 2018 whileas the rig count decreased, but remained higher than 2016 peaks.macro economy and business cycle began to normalize relative to the pandemic related years of 2020 and 2021. Sales for the year ended December 31, 20192023 increased $46.1$197.8 million, or 3.8%13.4%, to approximately $1.3$1.7 billion from $1.2$1.5 billion for the prior corresponding period. The majorityCustomer demand was generally healthy throughout fiscal 2023, resulting in industry expected volume growth, complemented by additional pricing actions taken by the Company's vendors after strong pricing action in 2022, which ultimately, gets passed on to customers. As such, some of the 20192023 sales increase is the result of increased sales of pumps, bearings, industrial supplies, metal working and safety services to customers engagedincreases in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2020, the growth rate of the general economy declined from 2019price with increases in volume as well as the rig count. Sales forcontribution from acquisitions and the year ended December 31, 2020 decreased $259.6 million, or 20.5%,related sales of rotating equipment and air compressors.
As our operations have generally stabilized from the COVID-19 pandemic, we have seen growth from our supportive served end-markets and our focus on organic and inorganic sales growth. Our sales volume is expected to approximately $1.0 billion from $1.3 billion fordeliver sustainable and healthy growth, while our diversification efforts have unlocked gains in margins, cash flow and overall organizational efficiency. With our strong backlog and improved market environment, we expect to continue to see growth in 2024.
Assuming a positive general macroeconomic environment and continued supportive environments in our end markets, we expect fiscal 2024 to be comparable to 2023 levels with the prior corresponding period. The majorityexception of increased acquisition activity. We expect our interest expense in 2024 will be relatively higher than the 2020 sales decrease is the result of a decreaseamounts incurred in 2023 due to our refinancing in the fourth quarter of 2023 including the raising of an incremental $125 million.
We expect to generate sufficient cash from operations and have sufficient capacity under our ABL credit facility to fund any working capital, spendingcapital expenditures, share repurchases, and debt payments in 2024. The amount of cash generated or consumed by oilworking capital is dependent on our level of revenues, customer cash advances, backlog, customer-driven delays and gas producersother factors. We will seek to improve our working capital utilization, with a particular focus on improving the management of accounts receivable, inventory and related businesses stemming from a decreasecost in U.S. crude oil production dueexcess of billings. In 2024, our cash flows for investing activities will be focused on strategic initiatives, information technology software and infrastructure, general upgrades and cost reduction opportunities and we currently estimate capital expenditures to low crude pricesbe between $10 million and the negative economic impacts$20 million, before consideration of COVID-19.any acquisition activity.
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, | | 2020 | | % | | 2019 | | % | | 2018 | | % | | (Restated) | | | | (Restated) | | | | (Restated) | | | | ( in millions, except percentages and per share amounts) | | Sales | $ | 1,005.3 | | | 100.0 | | $ | 1,264.9 | | | 100.0 | | $ | 1,218.7 | | | 100.0 | | Cost of sales | 728.1 | | | 72.4 | | 915.1 | | | 72.3 | | 882.9 | | | 72.4 | | Gross profit | $ | 277.2 | | | 27.6 | | $ | 349.8 | | | 27.7 | | $ | 335.8 | | | 27.6 | | Selling, general & administrative expense | 245.0 | | | 24.4 | | 282.4 | | | 22.3 | | 263.8 | | | 21.6 | | Impairment and other charges | $ | 59.9 | | | 6.0 | | $ | — | | | — | | $ | — | | | — | | Operating income (loss) | $ | (27.7) | | | (2.8) | | $ | 67.4 | | | 5.3 | | $ | 72.0 | | | 5.9 | | Other( income) expense, net | 0.1 | | | — | | — | | | — | | (1.2) | | | (0.1) | | Interest expense | 20.6 | | | 2.0 | | 19.5 | | | 1.5 | | 20.9 | | | 1.7 | | Income (loss) before income taxes | $ | (48.4) | | | (4.8) | | $ | 47.9 | | | 3.8 | | $ | 52.3 | | | 4.3 | | Provision for income taxes (benefit) | (18.7) | | | (1.9) | | 11.2 | | | 0.9 | | 14.1 | | | 1.2 | | Net income (loss) | $ | (29.7) | | | (3.0) | | $ | 36.7 | | | 2.9 | | $ | 38.2 | | | 3.1 | | Net loss attributable to noncontrolling interest | (0.3) | | | — | | (0.3) | | | — | | (0.1) | | | — | | Net income (loss) attributable to DXP Enterprises, Inc. | $ | (29.4) | | | (2.9) | | $ | 37.0 | | | 2.9 | | $ | 38.3 | | | 3.1 | | Per share | | | | | | | | | | | | | Basic earnings per share | $ | (1.65) | | | | | $ | 2.10 | | | | | $ | 2.18 | | | | | Diluted earnings per share | $ | (1.65) | | | | | $ | 2.01 | | | | | $ | 2.08 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | 2023 | | % | | 2022 | | % | | 2021 | | % | | | | | | | | | | | | | | (in millions, except percentages and per share amounts) | | Sales | $ | 1,678.6 | | | 100.0 | | $ | 1,480.8 | | | 100.0 | | $ | 1,113.9 | | | 100.0 | | Cost of sales | 1,173.3 | | | 69.9 | | 1,058.8 | | | 71.5 | | 785.4 | | | 70.5 | | Gross profit | 505.3 | | | 30.1 | | 422.0 | | | 28.5 | | 328.5 | | | 29.5 | | Selling, general and administrative expenses | 366.6 | | | 21.8 | | 324.3 | | | 21.9 | | 288.6 | | | 25.9 | | | | | | | | | | | | | | Income from operations | 138.7 | | | 8.3 | | 97.7 | | | 6.6 | | 39.9 | | | 3.6 | | Other (income) expense, net | (1.4) | | | (0.1) | | 2.7 | | | 0.2 | | (0.4) | | | — | | Interest expense | 53.1 | | | 3.2 | | 29.1 | | | 2.0 | | 21.1 | | | 1.9 | | Income before income taxes | 87.0 | | | 5.2 | | 65.9 | | | 4.5 | | 19.2 | | | 1.7 | | Provision for income tax expense | 18.1 | | | 1.1 | | 17.8 | | | 1.2 | | 3.4 | | | 0.3 | | Net income | 68.9 | | | 4.1 | | 48.1 | | | 3.2 | | 15.8 | | | 1.4 | | Net loss attributable to noncontrolling interest | — | | | — | | (0.1) | | | — | | (0.7) | | | (0.1) | | Net income attributable to DXP Enterprises, Inc. | $ | 68.9 | | | 4.1 | | $ | 48.2 | | | 3.3 | | $ | 16.5 | | | 1.5 | | | | | | | | | | | | | | Earning per share: | | | | | | | | | | | | | Basic | $ | 4.07 | | | | | $ | 2.58 | | | | | $ | 0.87 | | | | | Diluted | $ | 3.89 | | | | | $ | 2.47 | | | | | $ | 0.83 | | | |
Year Ended December 31, 20202023 compared to Year Ended December 31, 20192022
SALES. Sales for the year ended December 31, 2020 decreased $259.62023 increased $197.8 million, or 20.5%13.4%, to approximately $1.0$1.7 billion from $1.3$1.5 billion for the year ended December 31, 2019. Sales from businesses acquired accounted for $19.6 million of the sales for the twelve months ended December 31, 2020. Excluding the 2020 sales of the business acquired, sales for the year decreased by $279.2 million, or 22.1% from the prior year's corresponding period.2022. This sales decreaseincrease is the result of a decreasean increase in sales in our SC, IPS and SCS segments of $97.3$135.7 million, $115.7$42.0 million and $46.6$20.0 million, respectively. The fluctuations in sales isare further explained in our business segment discussions below. | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31 | | 2020 | | 2019 | | Change | | Change% | | | | (Restated) | | | | | | Sales by Business Segment | (in thousands, except change%) | | Service Centers | $ | 662,617 | | | $ | 759,918 | | | $ | (97,301) | | | (12.8) | % | | Innovative Pumping Solutions | 187,991 | | | 303,655 | | | (115,664) | | | (38.1) | % | | Supply Chain Services | 154,658 | | | 201,278 | | | (46,620) | | | (23.2) | % | | Total DXP Sales | $ | 1,005,266 | | | $ | 1,264,851 | | | $ | (259,585) | | | (20.5) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31 | | 2023 | | 2022 | | Change | | Change % | | | | | | | | | | Sales by Business Segment | (in thousands, except percentages) | | Service Centers | $ | 1,145,082 | | | $ | 1,009,356 | | | $ | 135,726 | | | 13.4 | % | | Innovative Pumping Solutions | 273,150 | | | 231,102 | | | 42,048 | | | 18.2 | % | | Supply Chain Services | 260,368 | | | 240,374 | | | 19,994 | | | 8.3 | % | | Total Sales | $ | 1,678,600 | | | $ | 1,480,832 | | | $ | 197,768 | | | 13.4 | % |
Service Centers Segment. Sales for the Service Centers segment decreasedincreased by $97.3$135.7 million, or 12.8%13.4% for the year ended December 31, 2020,2023, compared to the year ended December 31, 2019. Excluding $19.62022. Sales from acquisitions for the SC segment was $19.3 million of 2020 Service Centers segment sales from businesses acquired, Service Centers segment sales decreased $116.9 million, or 15.4% fromduring the prior year's corresponding period.twelve months ended December 31, 2023. This sales decreaseincrease is primarily the result of decreasedincreased sales of metal working, safety supply productsrotating equipment and bearings product lines to customers engaged in operating and maintenance services in the OEMgeneral industrial, diversified chemical, and oil and gas markets in connection with decreasedincreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. We expect that this level of sales to the oil and gas industry will likely continue to decline if U.S. crude oil production remains at levels experienced during the year.producers.
Innovative Pumping Solutions Segment. Sales for the IPS segment decreasedincreased by $115.7$42.0 million, or 38.1%18.2% for the year ended December 31, 2020,2023, compared to the year ended December 31, 2019. This decrease2022. Sales from acquisitions for the IPS segment was primarily$13.8 million during the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to low crude prices and the negative economic impacts of COVID-19. With a prolonged economic recession related to COVID-19, we will likely experience a further decline in overall segment sales.twelve months ended December 31, 2023.
Supply Chain Services Segment. Sales for the SCS segment decreasedincreased by $46.6$20.0 million, or 23.2%8.3%, for the year ended December 31, 2020,2023, compared to the year ended December 31, 2019.2022. The decline inimproved sales isare primarily related to decreased sales to customersthe addition of a new customer in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic.diversified chemicals market.
GROSS PROFIT. Gross profit as a percentage of sales for the yeartwelve months ended December 31, 2020 decreased2023 increased by approximately 8 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales decreased by approximately 12 basis points. The decrease in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 78 basis point decrease in the gross profit percentage in our IPS segment and a 96 basis point increase in the gross profit percentage in our SCS segment partially offset by a 45 basis point decrease in the gross profit percentage in our SC segment.
Service Centers Segment. The gross profit percentage for the Service Centers decreased approximately 45 basis points and approximately 46 basis points, adjusting for the businesses acquired, from the prior year's corresponding period. This was primarily the result of decreased sales of metal working, safety services and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic.
Innovative Pumping Solutions Segment. The 2020 gross profit percentage for the IPS segment decreased approximately 78160 basis points from the prior year's corresponding period. The decreaseincrease in the gross profit percentage is primarily the result of aan approximate 147 basis points and 349 basis points increase in the gross profit percentage in our SC and IPS segments, respectively, partially offset by an approximate 21 basis points decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to low crude prices and the economic impacts of COVID-19.
Supply Chain Services Segment. Gross profit as a percentage of sales increased approximately 96 basis points for the year ended December 31, 2020, compared to the prior year's corresponding period. This was primarily as a result of costs associated with new customer implementation in 2019 with no comparable activity in 2020.our SCS segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A for the year ended December 31, 2020 decreased2023 increased by approximately $37.4$42.3 million, or 13.2%13.0%, to $245.0$366.6 million from $282.4$324.3 million for the prior year's corresponding period. SG&A expense from businesses acquired accounted for $4.9 million. Excluding expenses from businesses acquired, SG&A for the twelve months ended December 31, 2020 decreased by $42.3 million, or 15.0 percent. The overall decreaseincrease in SG&A is primarily the result of decreasedincreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of decreasedincreased business activity and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets.activity.
IMPAIRMENT AND OTHER CHARGES.INCOME FROM OPERATIONS. Due to circumstances discussed above, during twelve months ended December 31, 2020, we evaluated our goodwill, certain long-lived assets and other assets for impairment and recoverability. Based on the results, we recorded the following impairment and other charges:
Service Centers segment.In 2020, we recorded $1.8 million of noncash impairment charges related primarily to certain long-lived assets that were not recoverable and $20.5 million of non-cash impairment charges related to goodwill associated with ourIncome from operations in Canada.
Innovative Pumping Solutions segment.In 2020, we recorded $21.7 million of non-cash impairment charges related to certain inactive assets and inventory and a $16.0 million non-cash impairment charge related to goodwill.
OPERATING INCOME. Operating income for the year ended December 31, 2020 decreased2023 increased by $95.1$41.0 million or 141.0%, to a loss of $27.7$138.7 million from income of $67.4$97.8 million in the prior year's corresponding period. This decreaseincrease in operating income is primarily related to the decrease in sales discussed above and the impact of impairment and other charges.aforementioned increased business activity across all segments.
INTEREST EXPENSE. Interest expense for the year ended December 31, 20202023 increased by $1.1$24.0 million or 5.5%, fromcompared to the prior year's corresponding period, primarily due to refinancing costs incurred in connection withincurring higher than average interest rates during the modificationyear due and
extinguishment of debt, partially offset by lower LIBOR rates and a reduction in the principal balance through voluntary pay-downs until the Company's refinancing in December.facilities are subject to a variable interest rate for the twelve months ended December 31, 2023.
PROVISION FOR INCOME TAXES.TAX EXPENSE. Our effective tax rate from continuing operations was a tax benefitexpense of 38.7%20.8 percent for the yeartwelve months ended December 31, 20202023, compared to a tax expense of 23.3%27.0 percent for the yeartwelve months ended December 31, 2019. The Company reported a loss before income taxes for the year ended December 31, 2020. As a result, items that ordinarily increase or decrease the tax rate will have the opposite effect.2022. Compared to the U.S. statutory rate for the yeartwelve months ended December 31, 2020,2023, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and other tax credits. This was partially offset by nondeductible expenses and reserve for uncertain tax positions. Compared to the U.S. statutory rate for the year ended December 31, 2019, the effective tax rate was increased by state taxes, foreign taxes, and non-deductible expenses and partially offset by research and development tax credits and other tax credits.
Year Ended December 31, 20192022 compared to Year Ended December 31, 20182021
For the full year 20192022 to 20182021 comparative discussion, see Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations in DXP’s the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Inflation
We do not believe the effects of inflation have any material adverse effect2022 incorporated by reference in this Annual Report 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.Form 10-K.
Non-GAAPNon-U. S. GAAP Financial Measures and Reconciliations
In an effort to provide investors with additional information regarding our results of operations as determined by GAAP, we disclose non-GAAP financial measures. The non-GAAP financial measures we provide in this report should be viewed in addition to,We define and not as an alternative for, results prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Our primary non-GAAP financial measures arecalculate organic sales (Organic Sales),to include locations and acquisitions under our ownership for at least twelve months. "Acquisition Sales" are sales per business day ("from acquisitions that have been under our ownership for less than twelve months and are excluded in our calculation of Organic Sales.
The following table sets forth the reconciliation of Acquisition 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 inOrganic Sales to the same way. These measures are not substitutes for theirmost comparable U.S. GAAP financial measures, such as net sales, net income/(loss), diluted earnings per common share (“EPS”), or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures. measure
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 (thousands)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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | | | | | | 2023 | | 2022 | | 2021 | | Service Centers | | | | | | | $ | 1,145,082 | | | $ | 1,009,356 | | | $ | 816,496 | | | Innovative Pumping Solutions | | | | | | | 273,150 | | | 231,102 | | | 139,591 | | | Supply Chain Services | | | | | | | 260,368 | | | 240,374 | | | 157,834 | | | Total DXP Sales | | | | | | | 1,678,600 | | | 1,480,832 | | | 1,113,921 | | | Acquisition Sales | | | | | | | 33,078 | | | 41,527 | | | 147,472 | | | Organic Sales | | | | | | | $ | 1,645,522 | | | $ | 1,439,305 | | | $ | 966,449 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin
We define and calculate EBITDA as net sales excluding, when they occur,Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization, and non-controlling interest. We define and calculate Adjusted EBITDA as Net income attributable to DXP Enterprises, Inc., plus interest, taxes, depreciation, amortization minus stock-based compensation expense, non-controlling interest before taxes and all other non-cash charges, adjustments, and non-recurring items. We identify the impact of acquisitionsall other non-cash charges, adjustments and divestitures. Organic Sales is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certainnon-recurring items that management believesbecause we believe these items do not directly reflect our underlying operations.
Sales per Business Day is definedWe define and calculate EBITDA Margin as total net salesEBITDA divided by business days for the period. Sales per Business Day assists managementsales. We define and investors in evaluating the Company's historical performance.calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by sales.
Free Cash Flow is defined cash provided by operations less net purchase 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 company shares, 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) consolidated interest expense, (iv) amortization and depreciation during such period, (v) all non-cash charges and adjustments, and (vi) non-recurring cash expenses related to the Term Loan; in addition to these adjustments, we exclude, when they occur, the impacts of impairment losses and losses/(gains) on the sale of a business. EBITDA is 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.
From time to time, due to accounting guidance and rules, 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 GAAP financial measure is included below.
The following table sets forth the reconciliation of net sales to organic net sales (in millions):
Reconciliation of Net Sales to Organic Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal 2020 | | Net Sales | | Acquisition Sales | | Divestiture Sales | | Organic Sales | | Service Centers | | $ | 662 | | | $ | 20 | | | $ | — | | | $ | 642 | | | Innovative Pumping Solutions | | 188 | | | — | | | — | | | 188 | | | Supply Chain Services | | 155 | | | — | | | — | | | 155 | | | Total Sales | | $ | 1,005 | | | $ | 20 | | | $ | — | | | $ | 985 | | | | | | | | | | | Fiscal 2019 (Restated) | | | | | | | | | | Service Centers | | $ | 760 | | | $ | — | | | $ | — | | | $ | 760 | | | Innovative Pumping Solutions | | 304 | | | — | | | — | | | 304 | | | Supply Chain Services | | 201 | | | — | | | — | | | 201 | | | Total Sales | | $ | 1,265 | | | $ | — | | | $ | — | | | $ | 1,265 | | | | | | | | | | | | Year-over-year growth rates | | | | | | | | | | Service Centers | | (12.9) | % | | — | | | — | | | (15.5) | % | | Innovative Pumping Solutions | | (38.2) | % | | — | | | — | | | (38.2) | % | | Supply Chain Services | | (22.9) | % | | — | | | — | | | (22.9) | % | | Total Sales | | (20.6) | % | | — | | | — | | | (22.1) | % |
The sales per business day were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | | 2020 | | 2019 | | 2018 | | Business days | | 253 | | 252 | | 252 | | Sales per Business Day | | $ | 3,974 | | | $ | 5,019 | | | $ | 4,836 | |
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, EBITDA Margin, Adjusted EBITDA, and Adjusted EBITDA Margin to the most comparable U.S. GAAP financial measure (in thousands): | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2020 | | 2019 | | 2018 | | | (Restated) | | (Restated) | | (Restated) | | GAAP net income (loss) attributable to DXP Enterprises, Inc. | | $ | (29,269) | | | $ | 37,025 | | | $ | 38,345 | | | Loss attributable to non-controlling interest | | (348) | | | (260) | | | (111) | | | Provision for income taxes | | (18,696) | | | 11,194 | | | 14,107 | | | Depreciation and amortization | | 22,683 | | | 25,174 | | | 26,164 | | | Interest and other financing expenses | | 20,571 | | | 19,498 | | | 20,937 | | | EBITDA | | $ | (5,059) | | | $ | 92,631 | | | $ | 99,442 | | | EBITDA margin as % of sales | | (0.5) | % | | 7.3 | % | | 8.2 | % | | NCI loss before tax* | | 632 | | | 342 | | | 157 | | | Impairment and other charges | | 59,883 | | | — | | | — | | | Stock compensation expense | | 3,532 | | | 1,963 | | | 2,549 | | | Adjusted EBITDA | | $ | 58,988 | | | $ | 94,936 | | | $ | 102,148 | | | Adjusted EBITDA margin as % of sales | | 5.9 | % | | 7.5 | % | | 8.4 | % | | *NCI represents non-controlling interest | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | | | | | | 2023 | | 2022 | | 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to DXP Enterprises, Inc. | | | | | | | $ | 68,812 | | | $ | 48,155 | | | $ | 16,496 | | | Less: Net loss attributable to non-controlling interest (NCI) | | | | | | | — | | | (53) | | | (745) | | | Plus: Interest expense | | | | | | | 53,146 | | | 29,135 | | | 21,089 | | | Plus: Provision for income tax expense | | | | | | | 18,119 | | | 17,799 | | | 3,431 | | | Plus: Depreciation and amortization | | | | | | | 30,105 | | | 28,500 | | | 27,143 | | | EBITDA | | | | | | | $ | 170,182 | | | $ | 123,536 | | | $ | 67,414 | | | | | | | | | | | | | | | Plus: NCI income before tax | | | | | | | — | | | 227 | | | 993 | | Plus: other non-recurring items(1) | | | | | | | 1,051 | | | 1,193 | | | — | | | Plus: stock compensation expense | | | | | | | 3,072 | | | 1,850 | | | 1,823 | | | Adjusted EBITDA | | | | | | | $ | 174,305 | | | $ | 126,806 | | | $ | 70,230 | | | | | | | | | | | | | | | Operating Income Margin | | | | | | | 8.3 | % | | 6.6 | % | | 3.6 | % | | EBITDA Margin | | | | | | | 10.1 | % | | 8.3 | % | | 6.1 | % | | Adjusted EBITDA Margin | | | | | | | 10.4 | % | | 8.6 | % | | 6.3 | % | | | | | | | | | | | | | | (1) Other non-recurring items primarily include the loss associated with closing an international location for the year ended December 31, 2023 and the loss associated with the sale of a variable interest entity (VIE) for the year ended December 31, 2022. |
Free Cash Flow We define and calculate free cash flow as net cash provided by operating activities less net purchases of property and equipment.
The following table sets forth the reconciliation of Free Cash Flow to the most comparable U.S. GAAP financial measure (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | | | | | | | 2023 | | 2022 | | 2021 | | Net cash provided by operating activities | | | | | | | | $ | 106,222 | | | $ | 5,894 | | | $ | 37,089 | | | Less: purchases of property and equipment, net | | | | | | | | (12,263) | | | (4,916) | | | (4,330) | | | | | | | | | | | | | | | | Free Cash Flow | | | | | | | | $ | 93,959 | | | $ | 978 | | | $ | 32,759 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liquidity and Capital Resources
General Overview
As ofDecember 31, 2020,2023, we had available cash and cash equivalents of $119.4$173.1 million and bank and other borrowingscredit facility availability of $320.4$132.1 million. We have a $135$135.0 million asset-based Loan facility that is due to mature in August 2022, under which we had no borrowings outstanding asasset backed revolving line of December 31, 2020 and a Term Loan B with $330 million in borrowings.
credit (the "ABL Revolver"), partially offset by letters of credit of $2.9 million. Our primary source of capital is cash flow from operations, supplemented as necessary by companyCompany 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 receivables. Additional cash is required for capital items for information technology, warehouse equipment, leasehold improvements, pump manufacturing equipment and safety services 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 (used in) operating activities, net cash used in investing activities, and net cash (used in) provided by financing activities for the periods presented (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | 2020 | | 2019 | | Change | | Change(%) | | (Restated) | | (Restated) | | | | | | Net cash provided by (used in): | | | | | | | | | Operating activities | $ | 109,650 | | | $ | 41,306 | | | $ | 68,344 | | | 165 | % | | Investing activities | (121,796) | | | (22,085) | | | (99,711) | | | 451 | % | | Financing activities | 77,406 | | | (6,092) | | | 83,498 | | | (1,371) | % | | Effect of foreign currency | (168) | | | 679 | | | (847) | | | (125) | % | | Net change in cash | $ | 65,092 | | | $ | 13,808 | | | $ | 51,284 | | | 371 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | 2023 | | 2022 | | Change | | Change % | | | | | | | | | | Net cash provided by (used in): | | | | | | | | | Operating activities | $ | 106,222 | | | $ | 5,894 | | | $ | 100,328 | | | 1,702 | % | | Investing activities | (22,647) | | | (53,422) | | | 30,775 | | | (58) | % | | Financing activities | 43,579 | | | 44,312 | | | (733) | | | (2) | % | | Effect of foreign currency | (60) | | | 253 | | | (313) | | | (124) | % | | Net change in cash and restricted cash | $ | 127,094 | | | $ | (2,963) | | | $ | 130,057 | | | (4,389) | % |
Operating Activities
The Company generated $109.7$106.2 million of cash in operating activities during the year ended December 31, 20202023 compared to generating $41.3$5.9 million of cash during the prior year's corresponding period. The $68.3$100.3 million increase in the amount of cash generated between the two periods was primarily driven by the collections of receivables associated with trade accounts receivables andreceivable partially offset by decreased inventory purchases.purchases and accrued expenses as compared to the prior period.
Investing Activities
For the year ended December 31, 2020,2023, net cash used in investing activities was $121.8$22.6 million compared to $22.1$53.4 million used in the corresponding period in 2019.2022. This increasedecrease of $30.8 million was primarily driven by a reduction in the total purchase price paid for acquisitions during the year2023 of $115.2 million. For the twelve months ended December 31, 2020, purchases of property and equipment decreased to approximately $6.7$10.4 million compared to $22.1$48.5 million for acquisitions in 2019 primarily due to leasehold improvements and software upgrades in 2019 with no comparable activity in 2020. The maintenance capital expenditures for 2021 are expected to be within the range of $4 million to $10 million.2022.
Financing Activities
For the year ended December 31, 2020,2023, net cash generated in financing activities was $77.4$43.6 million, compared to net cash usedgenerated in financing activities of $6.1$44.3 million for the corresponding period in 2019. The activity in2022. For the period was primarily attributed toyear ended December 31, 2023, the Company repurchased approximately $56.2 million worth of outstanding shares compared to $47.9 million worth of outstanding shares for the year ended December 31, 2022. The net inflow of cash from financing activities in 2023 benefited from refinancing our Term Loan raising $330 million partially offset by the extinguishment of our previous term loan and higher principal repayments of debt in 2019.
On December 23, 2020, DXP entered into a new seven year, $330 millionexisting Senior Secured Term Loan (the “TermB. Debt issuance costs associated with the amendment of our new Term Loan Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan.B was $12.1 million for the year ended December 31, 2023.
On May 11, 2020, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with BMO Capital Markets Corp. (the “Distribution Agent”) pursuant to which the Company may offer and sell shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $37.5 million from time to time through the Distribution Agent. Sales of the Company’s common stock pursuant to the Equity Distribution Agreement are made in “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. During the twelve months ended December 31, 2020, the Company issued and sold 46 thousand2023 we repurchased 1.7 million shares of the Company's common stock underfor approximately $54.7 million compared to 1.3 million shares of the Equity Distribution Agreement, with net proceeds totalingCompany's stock for approximately $1.1$35.2 million less Agent’s commission.for the twelve months ended December 31, 2022.
On March 17, 2020,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. The Company successfully completed the May 2021 repurchase program, whereby, the Company completed the repurchase of 1.5 million shares, under the 2-year program.
On June 15, 2021, the Company entered into an Increase Agreement (the "Increase Agreement")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 provides for a $135 million asset-backed revolving lineare presented within the purchase of credit (the "ABL Revolver"), a $50 million increase fromtreasury stock in the $85.0 million available under the original revolver.cash flow statement. During the twelve months ended December 31, 2020, the amount available to be borrowed under our credit facility increased to $131.9 million compared to $81.6 million at2022, there were two installment payments totaling $13.6 million. There were no further installment payments outstanding as of December 31, 2019, primarily as a result of the above mentioned Increase Agreement offset by outstanding letters of credit.2022 and December 31, 2023
We believe this isthe Company has adequate funding to support its working capital needs within the business.
At December 31, 2020,2023, our total long-termoutstanding debt including the current portion, less principal repayments, was $330.0$548.6 million, or 47.7%59.0% of total capitalization (total long-term debt including current portion plus shareholders’ equity) of $691.1$929.5 million. Approximately $330.0All $548.6 million of this outstanding debt bears interest at various floating rates. See Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Free Cash Flow
We believe Free Cash Flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to fund acquisitions, make investments, repay debt obligations, repurchase company shares 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 $103.1$94.0 million, $19.2$1.0 million and $29.1$32.8 million for years 2020, 20192023, 2022 and 2018,2021, respectively.
Free Cash Flow is not a measure of liquidity under generally accepted accounting principles in the United States,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 alternative to net cash provided by operating activities. Free Cash Flow reconciles to the most directly comparable U.S. GAAP financial measure of cash flows from operations as follows:
The following table sets forth the reconciliation of net cash provided by operating activities to Free Cash Flow to the most comparable GAAP financial measure ((in thousandsthousands)): | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2020 | | 2019 | | 2018 | | Net cash provided by operating activities | | $ | 109,650 | | | $ | 41,306 | | | $ | 35,840 | | | Less: Purchase of property and equipment | | 6,672 | | | 22,120 | | | 9,323 | | | Add: Proceeds from the disposition of property and equipment | | 123 | | | 35 | | | 2,558 | | | Free Cash Flow | | $ | 103,101 | | | $ | 19,221 | | | $ | 29,075 | |
ABL Facility and Senior Secured Term Loan B
Asset-Based Loan Facility:
On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $135 million asset-backed revolving line of credit (the "ABL Revolver") a $50 million increase from the $85.0 million available under the original revolver. During the twelve months ended December 31, 2020, the amount available to be borrowed under our credit facility increased to $131.9 million compared to $81.6 million at December 31, 2019 primarily as a result of the above mentioned Increase Agreement offset by outstanding letters of credit.
As of December 31, 2020, there were no amounts of ABL Loans outstanding under the ABL Revolver.
The Company's consolidated Fixed Charge Coverage Ratio was 3.40 to 1.00 as of December 31, 2020. DXP was in compliance with all such covenants that were in effect on such date under the ABL Revolver as of December 31, 2020.
The ABL Credit Agreement may be increased in increments of $10.0 million up to an aggregate of $50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average daily excess availability under the facility for the most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum are payable on the portion of the facility not in use at any given time. The unused line fee was 0.375% at December 31, 2020.
The interest rate for the ABL facility was 1.9% at December 31, 2020.
Term Loan B:
On December 23, 2020, DXP entered into a new seven year, $330 million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan.
The Term Loan B Agreement provides for a $330 million term loan (the “Term Loan”) that amortizes in equal quarterly installments of 0.25% with the balance payable in 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 $52.5 million, plus an additional amount such that DXP’s Secured Leverage Ratio (as defined in the Term Loan B Agreement) would not exceed 3.75 to 1.00. Interest accrues on the Term Loan at a rate equal to the base rate plus a margin of 3.75% for the Base Rate Loans (as defined in the Term Loan B Agreement), or LIBOR plus a margin of 4.75% for the Eurodollar Rate Loans (as defined in the Term Loan B Agreement). We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total leverage ratio is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00.
The interest rate for the Term Loan was 5.8% as of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | 2023 | | 2022 | | 2021 | | Net cash provided by operating activities | | $ | 106,222 | | | $ | 5,894 | | | $ | 37,089 | | | Less: Purchase of property and equipment, net | | 12,263 | | | 4,916 | | | 4,330 | | | | | | | | | | Free Cash Flow | | $ | 93,959 | | | $ | 978 | | | $ | 32,759 | |
Financial Covenants:
DXP’s principal financial covenants under the ABL Credit AgreementRevolver and Senior Secured Term Loan B Agreement include:
Fixed Charge Coverage Ratio – The Fixed Charge Coverage Ratio under the ABL Credit Agreement is defined as the ratio for the most recently completed four-fiscal quarter period, of (a) EBITDA minus capital expenditures (excluding those financed or funded with debt (other than the ABL Loans), (ii) the portion thereof funded with the net proceeds from asset dispositions of equipment or real property which DXP is permitted to reinvest pursuant to the Term Loan and the portion thereof funded with the net proceeds of casualty insurance or condemnation awards in respect of any equipment and real estate which DXP is not required to use to prepay the ABL Loans pursuant to the Term Loan B Agreement or with the proceeds of casualty insurance or condemnation awards in respect of any other property) minus cash taxes paid (net of cash tax refunds received during such period), to (b) fixed charges. The Company is restricted from allowing its fixed charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under the ABL facility falls below a threshold set forth in the ABL Credit Agreement. As of December 31, 2020, the Company's consolidated Fixed Charge Coverage Ratio was 3.40 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, 2020, is either equal to or less than as indicated in the table below:
| | | | | | | | | | Fiscal Quarter | Secured Leverage Ratio | | December 31, 2020 | 5.75:1.00 | | March 31, 2021 | 5.75:1.00 | | June 30, 2021 | 5.75:1.00 | | September 30, 2021 | 5.50:1.00 | | December 31, 2021 | 5.50:1.00 | | March 31, 2022 | 5.25:1.00 | | June 30, 2022 | 5.25:1.00 | | September 30, 2022 | 5.25:1.00 | | December 31, 2022 | 5.00:1.00 | | March 31, 2023 | 5.00:1.00 | | June 30, 2023 and each Fiscal Quarter thereafter | 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; plus to 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, 2020, the Company’s consolidated Secured Leverage Ratio was 3.25 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, 2020 | | December 31, 2019 | | Increase
(Decrease) | | Current portion of long-term debt | $ | 3,300 | | | $ | 2,500 | | | $ | 800 | | | Long-term debt | 326,700 | | | 241,875 | | | 84,825 | | | Total long-term debt | 330,000 | | | 244,375 | | | 85,625 | | | | | | | |
| | | | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | | | Current portion of long-term debt | $ | 5,500 | | | $ | 4,369 | | | | | Long-term debt | 543,125 | | | 423,764 | | | | | Total debt | $ | 548,625 | | | $ | 428,133 | | | | | | | | | |
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.
Borrowing Capacity (in thousands):
The following table summarizes the amount of borrowing capacity under our ABL Revolver as follows: | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | Increase
(Decrease) | | Total borrowing capacity | $ | 135,000 | | | $ | 85,000 | | | $ | 50,000 | | | Less : ABL | — | | | — | | | — | | | Less : Outstanding letters of credit | 3,131 | | | 3,442 | | | (311) | | | Total amount available | $ | 131,869 | | | $ | 81,558 | | | $ | 50,311 | |
Contractual Obligations
The impact that our contractual obligations as of December 31, 2020 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) | $ | 3,300 | | | $ | 6,600 | | | $ | 6,600 | | | $ | 313,500 | | | $ | 330,000 | | | Operating lease obligations | 19,183 | | | 26,561 | | | 10,008 | | | 7,271 | | | 63,023 | | Estimated interest payments (2) | 18,880 | | | 56,999 | | | 55,829 | | | — | | | 131,708 | | | Total | $ | 41,363 | | | $ | 90,160 | | | $ | 72,437 | | | $ | 320,771 | | | $ | 524,731 | |
(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, 2020. Assumes debt is paid on maturity date and not replaced.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPE's"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2020, we were not involved in any unconsolidated SPE transactions.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments, that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
| | | | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | | | Total borrowing capacity | $ | 135,000 | | | $ | 135,000 | | | | | Less: Amount drawn | — | | | — | | | | | Less: Outstanding letters of credit | 2,945 | | | 2,620 | | | | | Total amount available | $ | 132,055 | | | $ | 132,380 | | | |
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
The Consolidated Financial Statements of DXPEthe Company are prepared in accordance with United States generally accepted accounting principles (“US GAAP”),U.S. 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 not readily apparent from other sources. Management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the Company's Board of Directors of DXP.Directors. 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 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.
A summary of significant accounting policies is included in Note 2 - Summary of Significant Accounting and Business Policiesto the Consolidated Financial Statements in 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 time 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 Consolidated Financial Statements.
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,U.S., 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 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.
Many of the Company’sThe Company 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. Additionally, theUnder 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, 2020,2023, the allowance was approximately 4.9%1.8% of the gross accounts receivable remaining unchanged from 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, Other Indefinite Intangible Assets, and Long-Lived Assets
The Company tests goodwill and other indefinite lived intangible assets for impairment annually on an annual basis in the fourth quarterOctober 1st and when events or changes in circumstances indicate that the carrying amount may not be recoverable .recoverable. The Company assigns the carrying value of these intangible assets to its "reporting units" and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the component is a business and discrete information is prepared and reviewed regularly by segment management.
The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a quantitative test for that reporting unit. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s net assets including goodwill exceeds its estimated fair value.
The Company determines fair value using widely accepted valuation techniques, including discounted cash flows and market multiples 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 2020, the Company’s market capitalization and overall sales declined significantly driven by current macroeconomic and geopolitical conditions including the collapse of oil 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 continued to have 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.
Innovative Pumping Solutions
The oil and gas industry experienced unprecedented disruption during 2020 as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and subsequent mitigation efforts. This disruption created a substantial surplus of oil and a decline in oil prices. West Texas Intermediate (WTI) oil spot prices decreased sharply during the first quarter of 2020 from a high of $63 per barrel in early January of 2020 to approximately $21 per barrel by the end of the first quarter of 2020. Although oil prices recovered modestly, WTI oil spot prices averaged approximately $41 per barrel during the third quarter of 2020, which was approximately 28% less than the average price per barrel during 2019. The U.S. average rig count continued to decline in the third quarter of 2020, dropping 35% compared to the second quarter of 2020. These factors, along with the continued impact of COVID-19, constituted a triggering event and required a goodwill impairment analysis for our manufacturing reporting unit. With the adverse economic impacts discussed above and the 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 include, but are 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 projections 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.
Canada
As a result of the reductions in capital spending for oil and gas producers and processors and the economic repercussions from the COVID-19 pandemic, we determined these 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 2020. As a result of our goodwill impairment assessments, we determined that the fair value of our Canadian reporting unit was lower than its net book value and, therefore, resulted in a partial goodwill impairment. The enterprise value of the Canadian reporting unit at July 31, 2020 was less than its carrying value by approximately 40 percent. This resulted in a partial goodwill impairment of approximately $20.5 million for Canada. Per the impairment test and respective sensitivity analyses, it was noted that a decrease of approximately 480 basis points in the pre-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 its carrying value and thus avoid a full impairment.
Other Impairments and 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 as detailed in the 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 both 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 were in a range from 14.8 percent to 16.4 percent. Given the dynamic nature of the COVID-19 pandemic and related market conditions, we cannot reasonably estimate the period that these events will persist or the full extent of the 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 a sustained period, we may record further asset impairments, which may include an impairment of the carrying value of our goodwill associated with other reporting units.
For inventory and work-in-progress we evaluated the recoverability 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 quotes for similar items and recent transactions.
Revenue Recognition
In our Innovative Pumping Solutions segment, we make a substantial portion of our sales to customers are pursuant to long-term 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 long-term contracts under the percentage-of-completion method of accounting, which is an input method as defined by ASC 606, Revenue Recognition.Recognition. Under this method, we recognize sales and profit based upon the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to estimated total costs to complete the asset. The percentage-of-completion method of accounting involvesrequires the use of various estimating techniquesCompany to estimate the project costs at completion and, in some cases, includes estimates of recoveries asserted against the customer for changes in specifications (change orders). Due to the size, length of time and nature of many of our contracts, the estimation of total contract costs and revenues through completion is complicated and subject to many variables relative to the outcome of future events over a period of several months.completion. We are required to make numerous assumptions and estimates relating to items such as expected engineering requirements, complexity of design and related development costs, product performance, availability and cost of materials, labor productivity and cost, overhead, manufacturing efficiencies and the achievement of contract milestones, including product deliveries, technical requirements, or schedule.overhead.
Management performs detailed quarterly reviews of all of our open contracts. Based upon these reviews, we record the effects of adjustments in profit estimates each period. If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, we record a provision for the entire anticipated contract loss at that time. Due to the significance of judgment in the estimation process described above, it is likely that materially different profit margins and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. The percentage-of-completion method requires that we estimate future revenues andproject costs over the life of a contract.at completion. Revenues are estimated based upon the original contract price with consideration being given to exercised contract options,and change orders and in some cases projected customer requirements.orders. Contract costs may be incurred over a period of several months, and the estimation of these costs requires significant judgment based upon the acquired knowledge and experience of program managers, engineers, and finance professionals. Estimated costs are based primarily on anticipated purchase contract terms historical performance trends, business base and other economic projections.assumptions relating to terms such as estimated cost of materials, labor productivity and cost, and overhead. The complexity of certain designs as well as technical risks and uncertainty as to the future availability of materials and labor resources could affect the company'sCompany's ability to accurately estimate future contract costs.
Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones or product specifications. Management continues to monitor and update programproject cost estimates quarterly for all open contracts. A significant change in an estimate on several of these contractsprojects could have a material effect on our financial position and results of operations.
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 for the acquisitions completed in fiscal 2020.year 2023. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Some of our acquisitions may include as 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 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 7-5 - 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. We are required to assess the likelihood that our deferred tax assets, which may include net operating loss carryforwards, tax credits or temporary differences that are expected to be deductible 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 valuation 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 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 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
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Our market risk results primarily from volatility in interest rates 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 swaps and rate lock agreements to manage and mitigate our exposure. As of December 31, 2020,2023, we had no interest rate hedges in place. Based
on a sensitivity analysis as of December 31, 2020,2023, it was estimated that if short-term interest rates average 100 basis points higher (lower) in 20202023 than in 2019,2022, interest expense, would fluctuate by $3.3$5.5 million before tax. Comparatively, based on a sensitivity analysis as of December 31, 2019,2022, had short-term interest rates averaged 100 basis points higher (lower) in 20192022 than in 2018,2021, it was estimated that interest expense would have fluctuated by approximately $2.4$4.3 million. These amounts were estimated by considering the effect of the hypothetical interest rates on variable-rate debt outstanding each year.
Foreign Currency Risk We are exposed to foreign currency risk from our Canadian operations. To mitigate risks associated with foreign currency fluctuations, contracts may be denominated in or indexed to the U.S. dollar and/or local inflation rates, or investments may be naturally hedged through debt and other liabilities denominated or issued in the foreign currency. To monitor our currency exchange rate risks, we use sensitivity analysis, which measures the effect of devaluation of the Canadian dollar. An average 10% devaluation in the Canadian dollar exchange rate during 2020 would have resulted in an estimated net loss on the translation of local currency earnings of approximately $0.4 million on our Consolidated Statement of Operations.
Also see “Risk Factors,” included in Item 1A of this Report for additional risk factors associated with our business.
ITEM 8. Financial Statements and Supplementary Data
| | | | | | | TABLE OF CONTENTS | | | Page | | | ReportsReport of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP, Houston, Texas PCAOB ID: 238 | | | | Report of Independent Registered Public Accounting Firm (McConnell & Jones LLP, Houston, Texas PCAOB ID: 869 | | | | | Consolidated Statements of Operations and Comprehensive Income | | | | | Consolidated Balance Sheets | | | | | Consolidated Statements of Cash Flows | | | | | Consolidated Statements of Equity | | | | | Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors and Shareholders of DXP Enterprises, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of DXP Enterprises, Inc. and its subsidiaries (the “Company”) as of December 31, 20202023 and 2019,2022, and the related consolidated statements of operations and comprehensive income, of equity and of cash flows for each of the three years in the periodthen ended, December 31, 2020, andincluding the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20202023 and 2019,2022, and the consolidated results of its operations and its cash flows for each of the three years in the periodthen ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company hasdid not maintainedmaintain, in all material respects, effective internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Restatement of Previously Issued Financial Statements and Management’s Report on Internal Control Over Financial Reporting
As discussed in Note 4, the Company has restated its consolidated financial statements to correct errors.
Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020. However, management has subsequently determined that theCOSO because material weaknesses identified below, in internal control over financial reporting existed as of that date. Accordingly, management’s report has been restateddate related to the Company not designing and our opinion onmaintaining (i) an effective control environment due to a lack of a sufficient complement of resources with an appropriate level of Company knowledge and experience to establish effective processes and controls, and (ii) effective controls over the completeness, occurrence, cut-off, accuracy and presentation and disclosure of revenue.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, as presented herein,such that there is different froma reasonable possibility that expresseda material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our previous report.audit of the 2023 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A.management's report referred to above. Our responsibility is to express an opinionopinions on the Company’s consolidated financial statements and an opinion on the Company’sCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures tothat respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognized Over Time - Estimated Costs to Complete Open Contracts
As described in Note 2 to the consolidated financial statements, revenue recognized under the percentage-of-completion method was $311 million for the year ended December 31, 2023. As disclosed by management, the Company has contracts to fabricate tangible assets to customer specifications that can range from three to eighteen months or more. The Company accounts for these contracts under the percentage-of-completion method of accounting. Under this method, the Company recognizes sales and profit based upon the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to estimated total costs to complete the asset. The percentage-of-completion method of accounting requires management to estimate the project costs at completion. Revenues are estimated based upon the original contract price and change orders. Contract costs may be incurred over a period of several months, and the estimation of these costs requires judgment based upon 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 items such as cost of materials, labor productivity and cost, and overhead.
The principal considerations for our determination that performing procedures relating tothe estimated costs to complete open contracts used in revenue recognition is a critical audit matter are (i) the significant judgment by management when developing the estimated costs to complete the open contracts, and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s significant assumption related to the estimated cost of materials. As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified related to this matter.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included evaluating and determining the nature and extent of audit procedures performed and evidence obtained that are responsive to the material weakness identified. These procedures also included, among others, evaluating and testing management’s process for developing the estimated costs to complete the open contracts for a sample of open contracts, and evaluating management’s ability to reasonably estimate costs to complete open contracts. Evaluating management's ability to reasonably estimate costs to complete open contracts involved (i) obtaining and inspecting executed purchase orders and agreements, (ii) evaluating the reasonableness of the significant assumption related to estimated cost of materials by considering customer specifications and associated vendor quotes, and (iii) performing a comparison of the originally estimated and actual costs incurred on similar completed contracts.
/s/ PricewaterhouseCoopers LLP Houston, Texas March 11, 2024
We have served as the Company’s auditor since 2022.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of DXP Enterprises, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statements of operations and comprehensive income, equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, because of the effects of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment in Item 9A:
a.The Company did not design and maintain effective internal controls to ensure that aged items recorded in the uninvoicedun-invoiced inventory accounts payable are monitored, addressed and cleared in a timely manner. b.The Company did not design and maintain effective management review controls to ensure that large manual journal entries are evaluated by persons possessing the necessary authority and competence to determine the proper application of generally accepted accounting conclusion. c.principles (ASC 606, The Company did not design and maintain effective internal controlsRevenue from Contracts with Customers) related to ensure that the termspercentage-of-completion method, an input method as defined by ASC 606, of purchase agreements, including any side agreements, are properly evaluated at the time of the acquisition to identify, measure, and recognize acquisition consideration, and to evaluate whether the related disclosures are complete and accurate.recognizing revenue from contracts with customers.
We considered theThese material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s2021 consolidated financial statements, as of and for the year ended December 31, 2020, andthis report does not affect our opinionreport on suchthose consolidated financial statements was not affected.statements.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill and Other Intangibles Impairment AssessmentRevenue Recognition – Revenue Recognized Over Time
As discussed in Note 52 and Note 6 to the consolidated financial statements, the Company’s evaluation of goodwill and other intangible assets for impairment involves the determination of reporting units and comparison of the fair value of each reporting unit toCompany recognizes revenue from contracts with customers in its carrying value. The Company identified four reporting units, DXP Core-Service Centers, DXP Core-InnovativeInnovative Pumping Solutions DXP Canada, and DXP Core Supply Chain Services. The identificationsegment under the percentage-of-completion method, an input method as defined by ASC 606. For these transactions, revenue is recognized over time based on cost incurred to date as a percentage of reporting units involves consideration of components of the operating segments and whether or not there is discrete financial information available that is regularly reviewed by management. Additionally, the Company considers whether or not it is reasonable to aggregate any of the identified components that have similar economic characteristics. The Company estimates the fair value of its reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. The estimation of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future revenue growth rates, operating margins, and discount rates. The reporting units’ revenue growth rates and operating margins are sensitive to changes in customer demand. The determination of the fair value using the market approach requires management to make significant judgments related to performance-metric market multiples applied to the reporting unit’s prior and expected operating performance.
The Company performed their annual impairment test as of September 30, 2020. The Company concluded that the carrying values of DXP Core-Innovative Pumping Solutions and DXP Canada reporting units exceeded their fair values and, therefore, an impairment was recognized in the amount of $16 million and $20.5 million, respectively, during the year ended December
31, 2020. As of December 31, 2020, after recording the impairments, goodwill for the DXP Core-Innovative Pumping Solutions and DXP Canada reporting units was $0 and $32.3 million, respectively.total estimated cost.
We identified the Company’s determination of reporting units and evaluation of goodwill and other intangibles impairment for the reporting unitsrevenue recognized over time as a critical audit matter duebased on the manual and subjective nature of the Company determining estimated costs to complete, as well as insufficient internal policies, procedures, and software. Evaluating revenue recognized over time under the significant judgments made by management to identifypercentage-of-completion method required extensive audit effort and aggregate reporting units and estimate the fair value of each reporting unit. Aa high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, was required when performing audit procedures to evaluate management’s estimates and assumptions related to the identification of reporting units; revenue growth rates and operating margins; the selection of reporting unit performance-metric market multiples and discount rates; and the reconciliation of the reporting units estimated fair value to the Company’s market capitalization.judgment.
The primary procedures we performed to address this critical audit matter included:
a.b.Testing the effectivenesscalculation of controlsrevenue recognized over management’s determinationtime through an examination of reporting units and goodwillbillings, cash collections, costs incurred, and other intangibles impairment evaluation, including those over the determination of the fair value of the reporting units, including controls related to management’s revenue forecasts, selection of the discount rates, selection of performance-metric market multiples, and market capitalization reconciliation.components;
a.d.Evaluating management’s identification of reporting units, including consideration of components of its operating segments, the availability of discrete financial informationexpected costs to be incurred on projects for each that is regularly reviewedreasonableness by management, and the suitability of aggregation of components.
i.Evaluating management’s forecasts by comparing the forecasts to historical results, including management’s forecasting accuracy and internal communications to management and the Board of Directors.performing a retrospective analysis.
i.Involving our valuation specialists to assist with our evaluation of the valuation model including discount rates, performance-metric multiples, and other significant assumptions.
Valuation of Acquired Intangible Assets - Total Equipment Company and APO Pumps and Compressors, LLC
As discussed in Note 18 to the consolidated financial statements, on December 31, 2020 the Company completed its acquisitions of Total Equipment Company (“TEC”) and APO Pumps and Compressors, LLC (“APO”) for total consideration of $103 million (the “Transactions”). The Transactions are accounted for as business combinations and the Company preliminarily allocated $26.7 million of the purchase price to the fair value of the acquired customer relationship intangible assets.
We identified the valuation of acquired intangible assets for TEC and APO as a critical audit matter. Auditing management's preliminary allocation of purchase price for its acquisitions of TEC and APO involved especially subjective and complex judgements due to the significant estimation required in determining the fair value of customer relationship intangible assets. The significant estimation was primarily due to the complexity of the valuation models used to measure that fair value as well as the sensitivity of the respective fair values to the underlying significant assumptions. The significant assumptions used to estimate the fair value of the customer relationship intangible assets and subsequent amortization expense included discount rates, customer attrition rates and economic lives. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
The primary procedures we performed to address this critical audit matter included:
a.Obtaining an understanding of the Company’s acquisition process and evaluating the design and operating effectiveness of controls as it related to the Company’s valuation process and methodology for acquired intangible assets. This included testing controls over the Company’s estimation process supporting the recognition and measurement of intangible assets, as well as controls over management’s judgments and evaluation of underlying assumptions regarding their valuation.
a.Evaluating the Company's valuation model, the method and significant assumptions used and tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.
a.Involving our valuation specialists to assist with our evaluation of the valuation model and certain significant assumptions.
Income Taxes - Uncertain Tax Positions
As discussed in Note 13 to the consolidated financial statements, during the year ended December 31, 2020, the Company recognized federal and state tax benefits for Federal Research & Development Credits (“R&D Credits”) related to tax years 2016 to 2020 of $16.9 million which is partially offset by $5.1 million recorded as a reduction due to the uncertainty related to the realizability of the tax credits. Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior year audit settlements. To account for uncertainty in income taxes, the Company evaluates the likelihood of a tax position based on the technical merits of the position, performs a subsequent measurement related to the maximum benefit and degree of likelihood, and determines the benefits to be recognized in the financial statements, if any.
We determined the estimates relating to determination of uncertain tax provisions as a critical audit matter. Given the complexity and the subjective nature of the use of R&D Credits, evaluating management’s estimates relating to their determination of uncertain tax positions requires extensive audit effort and a high degree of auditor judgment, including involvement of our income tax specialists.
The primary procedures we performed to address this critical audit matter included:
a.Evaluating the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions related to R&D Credits.
a.Reading and evaluating management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists which detail the basis of the uncertain tax position.
a.Testing the reasonableness of management’s judgments regarding the future resolution of the uncertain tax position, including an evaluation of the technical merits of the uncertain tax position.
a.Evaluating the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments.
/s/ Moss AdamsMcConnell & Jones LLP
We served as the Company’s auditor in 2021.
Houston, Texas March 19, 2021, except for the effects of the restatement discussed in Note 4 to the consolidated financial statements and the matters discussed in Management’s Report on Internal Control over Financial Reporting, as to which the date is October 21, 2021
We have served as the Company’s auditor since 2017.
DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2020 | | 2019 | | 2018 | | (Restated) | | (Restated) | | (Restated) | | Sales | $ | 1,005,266 | | | $ | 1,264,851 | | | $ | 1,218,709 | | | Cost of sales | 728,070 | | | 915,062 | | | 882,866 | | | Gross profit | $ | 277,196 | | | $ | 349,789 | | | $ | 335,843 | | | Selling, general and administrative expense | 244,981 | | | 282,377 | | | 263,757 | | | Impairment and other charges | 59,883 | | | — | | | — | | | Income (loss) from operating | $ | (27,668) | | | $ | 67,412 | | | $ | 72,086 | | | Other expense (income), net | 74 | | | (45) | | | (1,192) | | | Interest expense | 20,571 | | | 19,498 | | | 20,937 | | | Income (loss) before income taxes | $ | (48,313) | | | $ | 47,959 | | | $ | 52,341 | | | Provision for income taxes (benefit) | (18,696) | | | 11,194 | | | 14,107 | | | Net income (loss) | $ | (29,617) | | | $ | 36,765 | | | $ | 38,234 | | | Net loss attributable to noncontrolling interest | (348) | | | (260) | | | (111) | | | Net income (loss) attributable to DXP Enterprises, Inc. | $ | (29,269) | | | $ | 37,025 | | | $ | 38,345 | | | Preferred stock dividend | 90 | | | 90 | | | 90 | | | Net income (loss) attributable to common shareholders | $ | (29,359) | | | $ | 36,935 | | | $ | 38,255 | | | | | | | | | Net income (loss) | $ | (29,617) | | | $ | 36,765 | | | $ | 38,234 | | | Cumulative translation adjustment, net of income taxes | 1,941 | | | (687) | | | 224 | | | Comprehensive income (loss) | $ | (27,676) | | | $ | 36,078 | | | $ | 38,458 | | | | | | | | | | | | | | | Basic | $ | (1.65) | | | $ | 2.10 | | | $ | 2.18 | | | Diluted | $ | (1.65) | | | $ | 2.01 | | | $ | 2.08 | | | Weighted average common shares outstanding: | | | | | | | Basic | 17,748 | | | 17,592 | | | 17,553 | | | Diluted | 17,748 | | | 18,432 | | | 18,393 | |
| | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | 2023 | | 2022 | | 2021 | | | | | | | | Sales | $ | 1,678,600 | | | $ | 1,480,832 | | | $ | 1,113,921 | | | Cost of sales | 1,173,309 | | | 1,058,794 | | | 785,415 | | | Gross profit | 505,291 | | | 422,038 | | | 328,506 | | | Selling, general and administrative expenses | 366,569 | | | 324,286 | | | 288,649 | | | | | | | | | Income from operations | 138,722 | | | 97,752 | | | 39,857 | | | Other (income) expense, net | (1,355) | | | 2,716 | | | (414) | | | Interest expense | 53,146 | | | 29,135 | | | 21,089 | | | Income before income taxes | 86,931 | | | 65,901 | | | 19,182 | | | Provision for income tax expense | 18,119 | | | 17,799 | | | 3,431 | | | Net income | 68,812 | | | 48,102 | | | 15,751 | | | Net loss attributable to noncontrolling interest | — | | | (53) | | | (745) | | | Net income attributable to DXP Enterprises, Inc. | 68,812 | | | 48,155 | | | 16,496 | | | Preferred stock dividend | 90 | | | 90 | | | 90 | | | Net income attributable to common shareholders | $ | 68,722 | | | $ | 48,065 | | | $ | 16,406 | | | | | | | | | Net income | $ | 68,812 | | | $ | 48,102 | | | $ | 15,751 | | | Foreign currency translation adjustments | 435 | | | (2,393) | | | 747 | | | Comprehensive income | $ | 69,247 | | | $ | 45,709 | | | $ | 16,498 | | | | | | | | | | | | | | | Basic | $ | 4.07 | | | $ | 2.58 | | | $ | 0.87 | | | Diluted | $ | 3.89 | | | $ | 2.47 | | | $ | 0.83 | | | | | | | | | Weighted average common shares outstanding: | | | | | | | Basic | 16,870 | | | 18,631 | | | 18,949 | | | Diluted | 17,710 | | | 19,471 | | | 19,789 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) | | | | December 31, 2020 | | December 31, 2019 | | December 31, 2023 | | December 31, 2022 | | | (Restated) | | (Restated) | | ASSETS | ASSETS | | | | | ASSETS | | | ASSETS | | | | | | Current assets: | Current assets: | | | | Current assets: | | | | | Cash | Cash | $ | 119,328 | | | $ | 54,203 | | | Restricted cash | Restricted cash | 91 | | | 124 | | | Accounts receivable, net of allowances for doubtful accounts of $8,628 and $8,929 | 166,941 | | | 188,774 | | | Accounts receivable, net of allowance of $5,584 and $7,610, respectively | | | Inventories | Inventories | 97,071 | | | 129,570 | | | Costs and estimated profits in excess of billings | Costs and estimated profits in excess of billings | 18,459 | | | 32,455 | | | Prepaid expenses and other current assets | Prepaid expenses and other current assets | 4,548 | | | 4,223 | | | Federal income taxes receivable | 2,987 | | | — | | | | Total current assets | | | Total current assets | | | Total current assets | Total current assets | $ | 409,425 | | | $ | 409,349 | | | Property and equipment, net | Property and equipment, net | 56,899 | | | 63,703 | | | Goodwill | Goodwill | 261,767 | | | 194,052 | | | Identified Intangibles, net | 80,088 | | | 52,582 | | | Operating lease ROU assets | 55,188 | | | 66,191 | | | Other intangible assets, net | | | Operating lease right of use assets, net | | | Other long-term assets | Other long-term assets | 4,764 | | | 3,211 | | | Total assets | Total assets | $ | 868,131 | | | $ | 789,088 | | | | LIABILITIES AND EQUITY | | | LIABILITIES AND EQUITY | | | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | | | | | Current liabilities: | Current liabilities: | | | Current liabilities: | | | | | Current maturities of long-term debt | $ | 3,300 | | | $ | 2,500 | | | Current maturities of debt | | | Trade accounts payable | Trade accounts payable | 64,849 | | | 63,676 | | | Accrued wages and benefits | Accrued wages and benefits | 20,621 | | | 23,412 | | | Federal income taxes payable | — | | | 2,101 | | | | Customer advances | | | Customer advances | | | Customer advances | Customer advances | 3,688 | | | 3,408 | | | Billings in excess of costs and estimated profits | Billings in excess of costs and estimated profits | 4,061 | | | 11,871 | | | Short-term operating lease liabilities | Short-term operating lease liabilities | 15,891 | | | 17,603 | | | Other current liabilities | Other current liabilities | 34,729 | | | 14,754 | | | Total current liabilities | Total current liabilities | $ | 147,139 | | | $ | 139,325 | | | Long-term debt, net of current maturities and unamortized debt issuance costs | 317,139 | | | 235,419 | | | Long-term debt, net of unamortized debt issuance costs and discounts | | | Long-term operating lease liabilities | Long-term operating lease liabilities | 38,010 | | | 48,605 | | | Other long-term liabilities | Other long-term liabilities | 2,930 | | | 1,205 | | | Deferred income taxes | 1,777 | | | 9,602 | | | | Total long-term liabilities | | | Total long-term liabilities | | | Total long-term liabilities | Total long-term liabilities | $ | 359,856 | | | $ | 294,831 | | | Total liabilities | Total liabilities | $ | 506,995 | | | $ | 434,156 | | Commitments and Contingencies (Note 19) | 0 | | 0 | Commitments and Contingencies (Note 17) | | Commitments and Contingencies (Note 17) | | | | | Shareholders' Equity: | Shareholders' Equity: | | | Shareholders' Equity: | | | | | Series A preferred stock, $1.00 par value; 1,000,000 shares authorized | Series A preferred stock, $1.00 par value; 1,000,000 shares authorized | 1 | | | 1 | | | Series B convertible preferred stock, $1.00 par value; 1,000,000 shares authorized | Series B convertible preferred stock, $1.00 par value; 1,000,000 shares authorized | 15 | | | 15 | | | Common stock, $0.01 par value, 100,000,000 shares authorized; 19,208,067 and 17,604,092 outstanding | 189 | | | 174 | | | Common stock, $0.01 par value, 100,000,000 shares authorized; 16,177,237 and 17,690,069 outstanding, respectively | | | Additional paid-in capital | Additional paid-in capital | 192,068 | | | 157,886 | | | Retained earnings | Retained earnings | 186,078 | | | 215,664 | | | Accumulated other comprehensive loss | Accumulated other comprehensive loss | (18,013) | | | (19,954) | | | Treasury stock, at cost 4,141,989 and 2,435,352 shares, respectively | | | Total DXP Enterprises, Inc. equity | Total DXP Enterprises, Inc. equity | $ | 360,338 | | | $ | 353,786 | | | Noncontrolling interest | 798 | | | 1,146 | | | Total equity | $ | 361,136 | | | $ | 354,932 | | | | Total liabilities and equity | Total liabilities and equity | $ | 868,131 | | | $ | 789,088 | | | | Total liabilities and equity | | | | Total liabilities and equity | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | | 2023 | | 2022 | | 2021 | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 68,812 | | | $ | 48,102 | | | $ | 15,751 | | | Reconciliation of net income to net cash provided by operating activities: | | | | | | | | Depreciation | | 8,423 | | | 9,585 | | | 9,946 | | | | | | | | | | Amortization of intangible assets and fixed assets | | 21,682 | | | 18,915 | | | 17,197 | | | Amortization of deferred financing costs | | 2,991 | | | 1,842 | | | 1,558 | | | | | | | | | | (Recovery of) provision for credit losses | | (885) | | | 659 | | | 67 | | | Payment of contingent consideration liability in excess of acquisition-date fair value | | (160) | | | (781) | | | (45) | | | Fair value adjustment on contingent consideration | | 1,738 | | | 2,311 | | | 504 | | | Loss on debt extinguishment | | 1,201 | | | — | | | — | | | Gain on sale of property and equipment | | — | | | — | | | (282) | | | Restricted stock compensation expense | | 3,072 | | | 1,850 | | | 1,823 | | | Deferred income taxes | | (9,059) | | | (7,541) | | | 6,140 | | | Loss on sale of interest in VIE | | — | | | 1,193 | | | — | | | Changes in operating assets and liabilities, and other: | | | | | | | | Accounts receivable, net | | 13,293 | | | (93,940) | | | (43,736) | | | Cost and estimated profits in excess of billings | | (18,720) | | | (6,429) | | | 3,991 | | | Inventories | | (2,026) | | | 2,072 | | | (5,290) | | | Prepaid expenses and other assets | | 9,666 | | | (11,865) | | | 649 | | | Accounts payable and accrued expenses | | 10,604 | | | 35,965 | | | 27,004 | | | Billings in excess of costs and estimated profits | | (916) | | | 6,858 | | | (772) | | | Other long-term liabilities | | (3,494) | | | (2,902) | | | 2,584 | | | Net cash provided by operating activities | | $ | 106,222 | | | $ | 5,894 | | | $ | 37,089 | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | Purchase of property and equipment | | (12,263) | | | (4,916) | | | (5,999) | | | Proceeds from the sale of property and equipment | | — | | | — | | | 1,669 | | | Acquisition of businesses, net of cash acquired | | (10,384) | | | (48,506) | | | (64,693) | | | Net cash used in investing activities | | $ | (22,647) | | | $ | (53,422) | | | $ | (69,023) | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | Borrowings on asset-backed credit facility | | 7,870 | | | 827,152 | | | — | | | Repayments on asset-backed credit facility | | (7,870) | | | (827,152) | | | — | | | Proceeds from debt | | 550,000 | | | 105,000 | | | — | | | Principal debt payments | | (429,508) | | | (3,567) | | | (3,300) | | | Debt issuance costs | | (12,061) | | | (8,398) | | | — | | | | | | | | | | Shares repurchased held in treasury | | (56,215) | | | (47,872) | | | (33,511) | | | Payment for acquisition contingent consideration liability | | (5,673) | | | (469) | | | (955) | | | Preferred dividends paid | | (90) | | | (90) | | | (90) | | | Payment for employee taxes withheld from stock awards | | (527) | | | (292) | | | (637) | | | Principal repayments on finance lease obligations | | (2,347) | | | — | | | — | | | Net cash provided by (used in) financing activities | | $ | 43,579 | | | $ | 44,312 | | | $ | (38,493) | | | Effect of foreign currency on cash | | (60) | | | 253 | | | 88 | | | Net change in cash and restricted cash | | 127,094 | | | (2,963) | | | (70,339) | | | Cash and restricted cash at beginning of year | | 46,117 | | | 49,080 | | | 119,419 | | | Cash and restricted cash at end of year | | $ | 173,211 | | | $ | 46,117 | | | $ | 49,080 | | Supplemental cash flow information (Note 15) | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series A preferred Stock | | Series B convertible preferred Stock | | Common Stock | | Paid-in Capital | | Retained earnings | | Treasury stock | | Non controlling interest | | Accum Other Comp Loss | | Total equity | | Balance at December 31, 2020 | $ | 1 | | | $ | 15 | | | $ | 189 | | | $ | 192,068 | | | $ | 186,078 | | | $ | — | | | $ | 798 | | | $ | (30,029) | | | $ | 349,120 | | | Preferred dividends paid | — | | | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | | | Compensation expense for restricted stock | — | | | — | | | — | | | 1,767 | | | — | | | — | | | — | | | — | | | 1,767 | | | Stock compensation expense | | | — | | | — | | | 56 | | | — | | | — | | | — | | | — | | | 56 | | | Tax related items for share based awards | — | | | — | | | — | | | (637) | | | — | | | — | | | — | | | — | | | (637) | | | Issuance of shares of common stock | — | | | — | | | 6 | | | 13,518 | | | — | | | — | | | — | | | — | | | 13,524 | | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 747 | | | 747 | | | Repurchases of shares | — | | | — | | | — | | | — | | | — | | | (33,511) | | | — | | | — | | | (33,511) | | | Net income (loss) | — | | | — | | | — | | | — | | | 16,496 | | | — | | | (745) | | | — | | | 15,751 | | | Balance at December 31, 2021 | $ | 1 | | | $ | 15 | | | $ | 195 | | | $ | 206,772 | | | $ | 202,484 | | | $ | (33,511) | | | $ | 53 | | | $ | (29,282) | | | $ | 346,727 | | | Preferred dividends paid | — | | | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | | | Compensation expense for restricted stock | — | | | — | | | — | | | 1,850 | | | — | | | — | | | — | | | — | | | 1,850 | | | Tax related items for share based awards | — | | | — | | | — | | | (292) | | | — | | | — | | | — | | | — | | | (292) | | | Issuance of shares of common stock | — | | | — | | | 150 | | | 5,607 | | | — | | | — | | | — | | | — | | | 5,757 | | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,393) | | | (2,393) | | | Repurchases of shares | — | | | — | | | — | | | — | | | — | | | (34,269) | | | — | | | — | | | (34,269) | | | | | | | | | | | | | | | | | | | | | Net income (loss) | — | | | — | | | — | | | — | | | 48,155 | | | — | | | (53) | | | — | | | 48,102 | | | Balance at December 31, 2022 | $ | 1 | | | $ | 15 | | | $ | 345 | | | $ | 213,937 | | | $ | 250,549 | | | $ | (67,780) | | | $ | — | | | $ | (31,675) | | | $ | 365,392 | | | Preferred dividends paid | — | | | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | | | Compensation expense for restricted stock | — | | | — | | | — | | | 3,072 | | | — | | | — | | | — | | | — | | | 3,072 | | | | | | | | | | | | | | | | | | | | | Tax related items for share based awards | — | | | — | | | — | | | (527) | | | — | | | — | | | — | | | — | | | (527) | | | | | | | | | | | | | | | | | | | | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 435 | | | 435 | | | Repurchases of shares | — | | | — | | | — | | | — | | | — | | | (56,215) | | | — | | | — | | | (56,215) | | | | | | | | | | | | | | | | | | | | | Net income | — | | | — | | | — | | | — | | | 68,812 | | | — | | | — | | | — | | | 68,812 | | | Balance at December 31, 2023 | $ | 1 | | | $ | 15 | | | $ | 345 | | | $ | 216,482 | | | $ | 319,271 | | | $ | (123,995) | | | $ | — | | | $ | (31,240) | | | $ | 380,879 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2020 | | 2019 | | 2018 | | (Restated) | | (Restated) | | (Restated) | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net income (loss) attributable to DXP Enterprises, Inc. | $ | (29,269) | | | $ | 37,025 | | | $ | 38,345 | | | Less: net loss attributable to non-controlling interest | (348) | | | (260) | | | (111) | | | Net income (loss) | $ | (29,617) | | | $ | 36,765 | | | $ | 38,234 | | | Reconciliation of net income (loss) to net cash provided by operating activities: | | | | | | | Depreciation | 10,396 | | | 10,100 | | | 9,578 | | | Impairment and other charges | 59,883 | | | — | | | — | | | Amortization of intangible assets | 12,287 | | | 15,074 | | | 16,586 | | | Bad debt expense | 1,194 | | | 139 | | | 2,368 | | | Payment of contingent consideration liability in excess of acquisition-date fair value | (136) | | | (106) | | | — | | | Amortization of debt issuance costs | 1,875 | | | 1,875 | | | 1,743 | | | Fair value adjustment on contingent consideration | (395) | | | 54 | | | 313 | | | Loss on extinguishment and modification of debt | 2,288 | | | — | | | 60 | | | Gain on sale of property and equipment | — | | | (9) | | | (1,330) | | | Stock compensation expense | 3,532 | | | 1,963 | | | 2,549 | | | Deferred income taxes | (14,732) | | | 840 | | | 1,004 | | | Changes in operating assets and liabilities | | | | | | | Trade accounts receivable | 44,884 | | | 7,898 | | | (24,999) | | | Costs and estimated profits in excess of billings | 14,009 | | | 92 | | | (5,640) | | | Inventories | 22,414 | | | (13,910) | | | (21,363) | | | Prepaid expenses and other assets | 13,782 | | | 5,110 | | | 187 | | | Accounts payable and accrued expenses | (15,345) | | | (19,003) | | | 7,418 | | | Billings in excess of costs & estimated profits | (7,816) | | | 1,142 | | | 6,522 | | | Other long-term liabilities | (8,853) | | | (6,718) | | | 2,610 | | | Net cash provided by operating activities | $ | 109,650 | | | $ | 41,306 | | | $ | 35,840 | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | Purchase of property and equipment | (6,672) | | | (22,120) | | | (9,323) | | | Proceeds from the sale of property and equipment | 123 | | | 35 | | | 2,558 | | | Acquisition of businesses, net of cash acquired | (115,247) | | | — | | | (10,811) | | | Net cash used in investing activities | $ | (121,796) | | | $ | (22,085) | | | $ | (17,576) | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | Proceeds from debt | 330,000 | | | — | | | — | | | Principal debt payments | (244,375) | | | (4,341) | | | (3,381) | | | Debt issuance costs | (7,268) | | | — | | | (60) | | | Issuance of Common Stock- shares sold in public market | 1,142 | | | — | | | — | | | Payment for contingent consideration liability | (1,864) | | | (1,394) | | | — | | | Non-controlling interest holder contributions (distributions), net of tax benefits | — | | | — | | | 950 | | | Preferred dividends paid | (90) | | | (90) | | | (90) | | | Payment for employee taxes withheld from stock awards | (139) | | | (267) | | | (340) | | | Net cash provided by (used in) financing activities | $ | 77,406 | | | $ | (6,092) | | | $ | (2,921) | | | Effect of foreign currency on cash | (168) | | | 679 | | | (403) | | | Net Change In Cash | $ | 65,092 | | | $ | 13,808 | | | $ | 14,940 | | | Cash, cash equivalents and restricted cash at Beginning of Year | 54,327 | | | 40,519 | | | 25,579 | | | Cash, cash equivalents and restricted cash at End of Year | $ | 119,419 | | | $ | 54,327 | | | $ | 40,519 | | | SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | Cash paid for interest | $ | 13,321 | | | $ | 17,623 | | | $ | 19,134 | | | Cash paid for income taxes | $ | 6,277 | | | $ | 13,318 | | | $ | 8,301 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series A preferred Stock | | Series B preferred Stock | | Common Stock | | Paid-in Capital | | Retained earnings | | Treasury stock | | Non controlling interest | | Accum Other Comp (Loss) | | Total equity | | Balance, December 31, 2017 (Restated) | $ | 1 | | | $ | 15 | | | $ | 174 | | | $ | 153,087 | | | $ | 140,474 | | | $ | — | | | $ | 567 | | | $ | (19,491) | | | $ | 274,827 | | | Dividends paid | — | | | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | | | Compensation expense for restricted stock | — | | | — | | | — | | | 2,549 | | | — | | | — | | | — | | | — | | | 2,549 | | | Tax related items for share based awards | — | | | — | | | — | | | (340) | | | — | | | — | | | — | | | — | | | (340) | | | Issuance of shares of common stock | — | | | — | | | — | | | 894 | | | — | | | — | | | — | | | — | | | 894 | | | Non-controlling interest holder contributions, net of tax benefits | — | | | — | | | — | | | — | | | — | | | — | | | 950 | | | — | | | 950 | | | Cumulative translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 224 | | | 224 | | | Net income (As restated) | — | | | — | | | — | | | — | | | 38,345 | | | — | | | (111) | | | — | | | 38,234 | | | Balances at December 31, 2018 (Restated) | $ | 1 | | | $ | 15 | | | $ | 174 | | | $ | 156,190 | | | $ | 178,729 | | | $ | — | | | $ | 1,406 | | | $ | (19,267) | | | $ | 317,248 | | | Dividends paid | — | | | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | | | Compensation expense for restricted stock | — | | | — | | | — | | | 1,963 | | | — | | | — | | | — | | | — | | | 1,963 | | | Tax related items for share based awards | — | | | — | | | — | | | (267) | | | — | | | — | | | — | | | — | | | (267) | | | Cumulative translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (687) | | | (687) | | | Net income (As restated) | — | | | — | | | — | | | — | | | 37,025 | | | — | | | (260) | | | — | | | 36,765 | | | Balances at December 31, 2019 (Restated) | $ | 1 | | | $ | 15 | | | $ | 174 | | | $ | 157,886 | | | $ | 215,664 | | | $ | — | | | $ | 1,146 | | | $ | (19,954) | | | $ | 354,932 | | | Dividends paid | — | | | — | | | — | | | — | | | (90) | | | — | | | — | | | — | | | (90) | | | Compensation expense for restricted stock | — | | | — | | | — | | | 3,532 | | | — | | | — | | | — | | | — | | | 3,532 | | | Tax related items for share based awards | — | | | — | | | — | | | (139) | | | — | | | — | | | — | | | — | | | (139) | | | Issuance of shares of common stock-Acquisition | — | | | — | | | 15 | | | 29,351 | | | — | | | — | | | — | | | — | | | 29,366 | | | Issuance of shares of common stock-Shares sold in public market | — | | | — | | | — | | | 1,142 | | | — | | | — | | | — | | | — | | | 1,142 | | | Cumulative translation adjustment (As restated) | — | | | — | | | — | | | 296 | | | (227) | | | — | | | — | | | 1,941 | | | 2,010 | | | Net loss (As restated) | — | | | — | | | — | | | — | | | (29,269) | | | — | | | (348) | | | — | | | (29,617) | | | Balances at December 31, 2020 (Restated) | $ | 1 | | | $ | 15 | | | $ | 189 | | | $ | 192,068 | | | $ | 186,078 | | | $ | — | | | $ | 798 | | | $ | (18,013) | | | $ | 361,136 | |
The accompanying notes are an integral part of these consolidated financial statements.
DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
DXP Enterprises, Inc. together with its subsidiaries (collectively “DXP,” “Company,” “us,” “we,” or “our”) was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc.The Company and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to energy and industrial customers.customers serving a variety of end markets. Additionally, DXPthe Company provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into 3three business segments: Service Centers (“SC”), Innovative Pumping Solutions (“IPS”), and Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). See Note 2220 - Segment and Geographical Reporting for discussion of the business segments.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
Basis of Presentation
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”("U.S. GAAP") and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries and its variable interest entity (“VIE”).subsidiaries.
DXP isThe Company was the primary beneficiary of a VIE in which DXP ownsit owned 47.5% of the VIE's equity. DXP consolidatesThe Company consolidated the VIE within its financial statementsstatements. In November 2022, the Company sold its interest in the VIE and ceased the consolidation of the VIE within the Company's financial statements. The losses associated with the financialVIE that occurred prior to the deconsolidation are included in the consolidated statements of DXP. As of December 31, 2020, the total assets of the VIEoperations and comprehensive income. These losses were approximately $4.8$0.2 million including approximately $3.4and $0.9 million of fixed assets. DXP is the primary customer of the VIE. Consolidation of the VIE increased cost of sales by approximately $0.8 million for the year ended December 31, 2020 and decreased cost of sales by approximately $0.4 million for the year ended December 31, 2019, respectively. The Company recognized a related income tax benefit of $116 thousand and $83 thousand related to the VIE for the years ended December 31, 20202022 and December 31, 2019,2021, respectively. As of December 31, 2020, the owners of the 52.5% of the equity not owned by DXP included employees of DXP.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications were made to the prior year amounts have been reclassifiedyear’s consolidated financial statements to conform to the current year presentation; none affected net income.presentation. Such reclassifications did not have a material effect on our consolidated statements of operations and comprehensive income, balance sheets, cash flows or equity.
Business Combinations We allocate the total purchase price of a business combination to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, with the excess purchase price recorded as goodwill. For material acquisitions, we engage third-party valuation specialists to assist us in determining the fair value of the assets acquired and liabilities assumed, including goodwill, based on recognized business valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate in the reporting period in which the adjustment amounts are determined based on facts and circumstances that existed as of the acquisition date, as applicable. Generally, we use an income valuation method to estimate the fair value of the assets acquired or liabilities assumed in a business combination. However, a market or cost valuation method may be utilized.
We expense acquisition-related costs as incurred in connection with each business combination.
Foreign Currency
The financial statements of the Company’s Canadian subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive income (loss). Gains and losses on transactions denominated in foreign currency are reported in the consolidated statements of operations and comprehensive income (loss).
Use of Estimates
The preparation of financial statements in conformity with USU.S. GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company’s presentation of cash includes cash equivalents. Cash equivalents are defined as short-term investments with maturity dates of 90 days or less at time of purchase. The Company places its cash and cash equivalents with institutions with high credit quality. However, at certain times, such cash and cash equivalents may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not historically experienced any losses when in excess of these limits.
Receivables and Credit Risk
Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms.
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 StatesU.S. and Canada. The Company believes no significant concentration of credit risk exists. The Company evaluates the creditworthiness of its customers' financial positions and monitors accounts on a regular basis. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon management’s best estimate of the collectability of such accounts 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.
Changes in this allowance for 2020, 20192023 and 2018 were2022 are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | | 2020 | | 2019 | | 2018 | | | Balance at beginning of year | $ | 8,929 | | | $ | 10,126 | | | $ | 9,015 | | | | Charged to costs and expenses | 1,194 | | | 139 | | | 2,368 | | | | Charged to other accounts | 21 | | (1) | 79 | | (1) | (86) | | (2) | | Deductions | (1,516) | | (3) | (1,415) | | (3) | (1,171) | | (3) | | Balance at end of year | $ | 8,628 | | | $ | 8,929 | | | $ | 10,126 | | |
(1) Primarily due to translation adjustments
(2) Includes allowance for doubtful accounts from acquisitions and divestiture
(3) Uncollectible accounts written off, net of recoveries
| | | | | | | | | | | | | | | | | | 2023 | | 2022 | | | | Beginning balance, January 1 | $ | 7,610 | | | $ | 7,759 | | | | | (Recoveries) Charges to expense | (885) | | | 659 | | | | | Foreign currency translation | 13 | | | (38) | | | | | Write-offs | (1,154) | | | (770) | | | | | Ending balance, December 31 | $ | 5,584 | | | $ | 7,610 | | | |
Inventories
Inventories consist principallyare made up of equipment purchased for resale, or finished goods and are pricedmaterials utilized in the fabrication of industrial and wastewater equipment stated at lower of cost and net realizable value, cost being primarily determined using the weighted average cost method. The Company regularly reviews inventory to evaluate continued demand and records provisions for the difference between cost and net realizable value arising from excess and obsolete items on hand. Provisions are provided against inventories for estimated excess and obsolescencehand based upon the aging of the inventories, and market trends, and continued demand.
The carrying values of inventories are applied as a reduction follows (in cost of the associated inventory.thousands): | | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | Finished goods | $ | 94,031 | | | $ | 82,906 | | | Work in process | 9,774 | | | 18,486 | | | | | | | Inventories | $ | 103,805 | | | $ | 101,392 | |
Property and Equipment
Property and equipment are carriedrecorded on the basis of cost.a historical cost basis. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings.
The principal estimated useful lives used in determining depreciation are as follows: | | | | | | | Buildings | 20-39 years | | Building improvements | 10-20 years | | Furniture, fixtures and equipment | 3-20 years | | Leasehold improvements | Shorter of estimated useful life or related lease term |
Impairment of Goodwill and Other Intangible Assets
The Company tests goodwill and other indefinite lived intangible assets for impairment on an annual basis in the fourth quarteron October 1st and when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company assigns the carrying value of these intangible assets to its "reporting units"reporting units and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the component is a business and discrete information is prepared and reviewed regularly by segment management.
The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a quantitative test for that reporting unit. Should the reporting unit's carrying amount exceed the fair value, then an impairment charge for the excess would be recognized. The impairment charge is limited to the amount of goodwill allocated to the reporting unit and goodwill will not be reduced below zero. ForThe Company performed qualitative tests and determined no impairment of goodwill was required for the twelve monthsyears ended December 31, 2020, goodwill was evaluated for impairment at the reporting unit level resulting in a $36.4 million goodwill impairment which was included in impairment charges in the consolidated statement of operations (see Note 5- Impairments2023, 2022 and other charges).2021.
Impairment of Long-Lived Assets, Excluding Goodwill
The Company tests long-lived assets or asset groups for recoverability 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. ForNo impairment of long-lived assets was required for the twelve monthsyears ended December 31, 2020, long-lived assets was evaluated for impairment at the reporting unit level resulting in a $4.8 million long-lived assets impairment which was included in impairment charges in the consolidated statement of operations (see Note 5 - Impairments2023, 2022 and other charges).2021.
Revenue Recognition
The Company fabricatesprimarily provides purchased products distributed through its branch of local Service Centers and assembles custom-made pump packages, remanufactures pumpsprovides services through its local branch network and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues overrevenue at a point in time when control of the product or service performed transfers to the customer, typically upon shipment or completion from a DXP facility or directly from a supplier. Revenue is ablemeasured at the amount of consideration expected to direct the use of and obtain substantially all of the benefits of the work performed. This typically occurs whenbe received in exchange for the products have no alternative useand services provided, net of allowances for usproduct returns, and we have a rightany taxes collected from customers that will be remitted to payment for the work completed to date plus a reasonable profit margin. Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by the new standard. Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. The typical time span of these contracts is approximately one to two years.
governmental authorities. The Service Centers segment primarily provides a wide range of maintenance, repair and operating (MRO) products, equipment and integrated services, including logistics capabilities, to industrial customers. The Supply Chain Services segment also provides a wide range of MRO products andas well as manages all or part of a customer'svarious customers' supply chain, including warehouse and inventory management services. Revenue is recognized upon the completion of our performance obligation(s) under the sales agreement. The majority of the Service Centers and Supply Chain Services segment revenues originate from the satisfaction of a single performance obligation, theobligation--the delivery of products. Revenues are recognized when an agreement is in place, the performance obligations under the contract have been identified,satisfied, and the price or consideration to be received is fixed and allocated to the performance obligation(s) in the contract. We believe our performance obligation has been satisfied when title passes to the customer or services have been rendered under the contract. Revenues are recorded net of sales taxes.
The Company reserves for potential customer returns based upon historical levels.
The Company also assembles, kits, and fabricates custom-made pump packages, remanufactures pumps, and manufactures branded private label pumps substantially within our Innovative Pumping Solutions segment. For binding agreements to assemble, fabricate and direct tangible assets to customer specifications, the historical levelCompany recognizes revenues over time when the customer is able to direct the use of returns.and obtain substantially all of the benefits of the work performed. This occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin. Contracts include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by ASC 606, "Revenue from Contracts with Customers". Under this method, we recognize sales and profit based upon the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to estimated total costs to complete the asset. The percentage-of-completion method of accounting requires the Company to estimate the project costs at completion. Revenues are estimated based upon the original contract price and change orders. Contract costs may be incurred over a period of several months, and the estimation of these costs requires judgment based upon the acquired knowledge and experience of program managers, engineers, and finance professionals. Estimated costs are based primarily on purchase contract terms and estimated cost of materials, labor productivity and cost, and overhead. Percentage of completion revenues were $311.0 million and $213.3 million for the years ended December 31, 2023 and December 31, 2022.
Shipping and Handling Costs
The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified as a component of cost of sales.
Self-insured Insurance and Medical Claims
We generally retain up to $100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The actual cost could deviate from the recorded estimate.
We generally retain up to $175,000 of risk on each medical claim for our employees and their dependents with the exception of less than 0.05% of employees where a higher risk is retained. We accrue for the estimated outstanding balance of unpaid medical claims for our employees and their dependents. The accrual is adjusted monthly based on recent claims experience. The actual claims could deviate from recent claims experience and be materially different from the reserve.
The accrual for these claims at December 31, 2020 and 2019 was approximately $2.6 million and $2.5 million, respectively.
Cost of Sales and Selling, General and Administrative Expense
Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs, and depreciation. Selling, general and administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation, and amortization.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established to reduce deferred income tax assets to the amounts expected to be realized under a more likely than not criterion.
Accounting for Uncertainty in Income Taxes
A position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examination by tax authorities for years prior to 2014. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses.2015. 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.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and foreign currency translation adjustments. The Company’s other comprehensive (loss) income is comprised of changes in the market value of an investment with quoted market prices in an active market for identical instruments and translation adjustments from translating foreign subsidiaries to the reporting currency.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to address diversity in practice on how an acquirer should recognize and measure revenue contracts acquired in a business combination. ASU 2021-08 will require an acquirer to recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
For the Company, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The ASU should be applied prospectively to business combinations occurring on or after the effective date. From time to time the Company does acquire businesses that perform project-based work and therefore include Contract Assets and Liabilities. The adoption of this new guidance had no impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In March 2020,November 2023, the FASBFinancial Accounting Standards Board ("FASB") issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitationnew guidance that modifies the disclosure and presentation requirements of reportable segments. The new guidance requires the Effectsdisclosure of Reference Rate Reform on Financial Reporting. Thissignificant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit and loss. In addition, the new guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. The update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuancefor annual periods beginning after December 15, 2023, and generally can be applied throughinterim periods within fiscal years beginning after December 31, 2022. The Company is currently15, 2024, with early adoption permitted. We are evaluating the potential impact of adopting this ASUnew guidance on theour consolidated financial statements.statement disclosures.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 4 – RESTATEMENT
The Company has restated its consolidated balance sheet at December 31, 2020 and 2019, and consolidated statements of earnings, cash flows, and comprehensive income and retained earnings for the years ended December 31, 2020, 2019 and 2018. The restatement also affected periods prior to 2018. The impact of the restatement on such prior periods was reflected as an adjustment to retained earnings as of January 1, 2018. In addition, the restatement impacts the first, second and third quarters of 2020. The restated amounts for these quarters and the comparable interim periods in 2019 and 2018 are presented in “Note 23. Selected Quarterly Financial Data (Unaudited),” below. The restatement corrects errors resulting from the failure to timely clear aged payables resulting from the Company's three-way match process discrepancies and the recognition of true-up consideration in business combination accounting, as well as, certain additional errors that the Company has determined to be immaterial, both individually and in aggregate. Set forth below are the restatement adjustments included in the restatement of the previously issued financial statements for the years ended December 31, 2020, 2019 and 2018, each of which is an “error” within the meaning of ASC Topic 250: Accounting Changes and Error Corrections
The following table presents the impact of the restatement adjustments described below on net income and comprehensive income for the years ended December 31, 2020, 2019 and 2018 and retained earnings as of January 1, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retained Earnings | | | | Year Ended December 31, | | as of | | | | 2020 | | 2019 | | 2018 | | Jan.1, 2018 | | As reported | Net Income (As reported) | | $ | (29,074) | | | $ | 35,775 | | | $ | 35,521 | | | $ | 134,193 | | | Unvouchered Purchase Orders | | (1,874) | | | 3,737 | | | 2,411 | | | 7,818 | | | Landed cost inventory adjustment | | (1,366) | | | 623 | | | 525 | | | 218 | | | Obsolete inventory reserve adjustments | | 1,160 | | | (1,160) | | | — | | | — | | | Direct shipment cut off adjustment | | 7 | | | (635) | | | 699 | | | 390 | | | Cut-off for credit card payment accruals | | 581 | | | (581) | | | — | | | — | | | Sales tax payable accruals | | 694 | | | (694) | | | — | | | — | | | Provision for income taxes | | 255 | | | (300) | | | (922) | | | (2,145) | | | Net | Net Income (Restated) | | $ | (29,617) | | | $ | 36,765 | | | $ | 38,234 | | | $ | 140,474 | | | Cumulative translation adjustment, net of taxes | | 1,941 | | | (687) | | | 224 | | | | | Comprehensive income (loss) as restated | | $ | (27,676) | | | $ | 36,078 | | | $ | 38,458 | | | |
Adjustments to Net Sales and Related Adjustments to Cost of Products Sold
Unvouchered Purchase Orders The Company determined it had aged unvouchered purchase orders included in trade accounts payable. After lengthy investigation and research, DXP determined that these balances were not valid legal obligations to vendors and will not be invoiced or paid. As a result, the Company wrote off the aged balances that no longer represented legal obligations, resulting in a net reduction in accounts payable.
Landed cost inventory adjustment The Company determined that cost mark-ups for landed costs for certain inventory items related to our private label pumps had not been properly relieved upon the sale of these items.
Slow moving and obsolete inventory reserve The Company determined it had not appropriately adjusted its inventory reserve on an item-by-item basis for items that moved from obsolete to slow moving or vice versa.
Direct shipment cut off adjustment Direct shipment orders placed near period end may not be properly reflected in the correct period. The Company adjusted sales and cost of goods sold for items recorded in the incorrect period, as well as accounts receivable and payable.
Other Adjustments to Earnings from Continuing Operations Before Non-Controlling Interest and Income Taxes
Cut-off for credit card payment accruals In January 2020, the Company recorded its monthly payment for its P-Card credit card program, however, the charges were incurred in December 2019.This adjustment reflects the accrual in the correct period, resulting in a shift in other current liabilities between periods.
Sales tax payable accruals The Company increased other current liabilities for its accrual for state sales tax obligations stemming from open audits.
Adjustments to Provision for Income Taxes
The adjustments reflected for the provision for income taxes are the tax consequences of the above listed corrections.
Balance sheet adjustments related to purchase accounting and consolidation
On December 31, 2020, DXP closed on the acquisition of 4 businesses.The owners of 2 of the targets were eligible for true-up consideration based upon the closing financial results of calendar year 2020.This true-up consideration was paid in July 2021; however, the amount of true-up consideration was deemed to have been accrued as of the closing of the acquisitions. Therefore, this adjustment resulted in an accrual for the true-up consideration and an increase in goodwill of $13.4 million.
As described above, the unvouchered purchase order discrepancies resulted in a reduction of accounts payable in the amount of $10.2 million as of December 31, 2018, a further reduction of $13.9 million as of December 31, 2019 and a net decrease of $12.2 million as of December 31, 2020.
During the consolidation of the 4 acquisitions closed on December 31, 2020, the Company improperly reflected the cash on hand at the targets as an increase in cumulative translation adjustment and other comprehensive income for approximately $2 million.This reclassification adjustment properly records the increase in cash and cash equivalents upon closing. In addition, cumulative translation adjustment was also reduced by $1.8 million as the a result of a reclassification associated with trade accounts receivable.
The following table presents the impact of the restatement adjustments on the Company’s previously reported 2020, 2019 and 2018 results on a condensed basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, | | 2020 | | 2019 | | 2018 | | As Reported | As Restated | | As Reported | As Restated | | As Reported | As Restated | | STATEMENT(S) OF INCOME | | | | | | | | | Sales | $ | 1,005,266 | | $ | 1,005,266 | | | $ | 1,267,189 | | $ | 1,264,851 | | | $ | 1,216,197 | | $ | 1,218,709 | | | Cost of sales | 725,997 | | 728,070 | | | 919,965 | | 915,062 | | | 883,989 | | 882,866 | | | Gross profit | 279,269 | | 277,196 | | | 347,224 | | 349,789 | | | 332,208 | | 335,843 | | | Selling, general and administrative costs | 246,256 | | 244,981 | | | 281,102 | | 282,377 | | | 263,757 | | 263,757 | | | Income (loss) before income taxes | (47,515) | | (48,313) | | | 46,669 | | 47,959 | | | 48,706 | | 52,341 | | | Provision (benefit) for income taxes | (18,441) | | (18,696) | | | 10,894 | | 11,194 | | | 13,185 | | 14,107 | | | Net (loss) income attributable to common shareholders | $ | (28,816) | | $ | (29,359) | | | $ | 35,945 | | $ | 36,935 | | | $ | 35,542 | | $ | 38,255 | | | | | | | | | | | | Basic earnings (loss) per share | $ | (1.62) | | $ | (1.65) | | | $ | 2.04 | | $ | 2.10 | | | $ | 2.02 | | $ | 2.18 | | | | | | | | | | | | Diluted earnings (loss) per share | $ | (1.62) | | $ | (1.65) | | | $ | 1.96 | | $ | 2.01 | | | $ | 1.94 | | $ | 2.08 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | 2020 | | 2019 | | 2018 | | As Reported | As Restated | | As Reported | As Restated | | As Reported | As Restated | | BALANCE SHEET: | | | | | | | | Cash and cash equivalents | $ | 117,444 | | $ | 119,419 | | | $ | 54,327 | | $ | 54,327 | | | $ | 40,519 | | $ | 40,519 | | | Accounts Receivable | 163,429 | | 166,941 | | | 187,116 | | 188,774 | | | 191,829 | | 195,825 | | | Inventory | 97,071 | | 97,071 | | | 129,364 | | 129,570 | | | 114,830 | | 115,573 | | | Federal income taxes receivable | 5,632 | | 2,987 | | | 996 | | — | | | 960 | | — | | | Goodwill | 248,339 | | 261,767 | | | 194,052 | | 194,052 | | | 194,052 | | 194,052 | | | Total Assets | 851,861 | | 868,131 | | | 788,220 | | 789,088 | | | 699,962 | | 703,741 | | | | | | | | | | | | Accounts Payable | 75,744 | | 64,849 | | | 76,438 | | 63,676 | | | 87,407 | | 80,085 | | | Other current liabilities | 20,834 | | 34,729 | | | 12,939 | | 14,754 | | | 17,269 | | 17,774 | | | Federal income taxes payable | — | | — | | | — | | 2,101 | | | — | | 1,602 | | | Deferred Taxes | 1,777 | | 1,777 | | | 9,872 | | 9,602 | | | 8,633 | | 8,633 | | | Total Liabilities | $ | 503,995 | | $ | 506,995 | | | $ | 443,272 | | $ | 434,156 | | | $ | 391,708 | | $ | 386,493 | | | | | | | | | | | | Accumulated Other Comprehensive Income | (21,842) | | (18,013) | | | (19,954) | | (19,954) | | | (19,267) | | (19,267) | | | Retained Earnings | 176,637 | | 186,078 | | | 205,680 | | 215,664 | | | 169,735 | | 178,729 | | | Equity | 347,866 | | 361,136 | | | 344,948 | | 354,932 | | | 308,254 | | 317,248 | | | Total Liabilities & Equity | $ | 851,861 | | $ | 868,131 | | | $ | 788,220 | | $ | 789,088 | | | $ | 699,962 | | $ | 703,741 | |
| | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | 2020 | 2019 | 2018 | | As Reported | As Restated | As Reported | As Restated | As Reported | As Restated | | | | | | | | | CONSOLIDATED STATEMENTS OF CASH FLOWS: | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | Net income (loss) | $ | (29,074) | | $ | (29,617) | | $ | 35,775 | | $ | 36,765 | | $ | 35,521 | | $ | 38,234 | | | Reconciliation of net income (loss) to net cash provided by operating activities: | | | | | | | | Deferred income taxes | (14,771) | | (14,732) | | 1,110 | | 840 | | $ | 1,004 | | $ | 1,004 | | | Changes in operating assets and liabilities | | | | | | | | Trade accounts receivable | 42,909 | | 44,884 | | 5,560 | | 7,898 | | (22,487) | | (24,999) | | | Inventories | 22,208 | | 22,414 | | (14,447) | | (13,910) | | (20,838) | | (21,363) | | | Prepaid expenses and other assets | 13,053 | | 13,782 | | 5,110 | | 5,110 | | 188 | | 187 | | | Accounts payable and accrued expenses | (14,897) | | (15,345) | | (15,408) | | (19,003) | | 7,093 | | 7,418 | | | Other long-term liabilities | (8,870) | | (8,853) | | (6,718) | | (6,718) | | 2,610 | | 2,610 | | | Net cash provided by operating activities | $ | 107,675 | | $ | 109,650 | | $ | 41,306 | | $ | 41,306 | | $ | 35,840 | | 35,840 | |
NOTE 5 – IMPAIRMENTS AND OTHER CHARGES
The Company tests goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating that it might be impaired. During the third quarter of 2020, the Company’s market capitalization and sales declined significantly driven by current macroeconomic and geopolitical conditions including the collapse of oil 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 continued to have 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 4 goodwill reporting units: Service Centers, Innovative Pumping Solutions, Canada and Supply Chain Services. The Company determined the fair values of 2 reporting units with goodwill were below their carrying values, resulting in a $36.4 million goodwill impairment, which was included in impairment charges in the consolidated statement of operations.
Innovative Pumping Solutions
The oil and gas industry experienced unprecedented disruption during 2020 as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and subsequent mitigation efforts. This disruption created a substantial surplus of oil and a decline in oil prices. West Texas Intermediate (WTI) oil spot prices decreased sharply during the first quarter of 2020 from a high of $63 per barrel in early January of 2020 to approximately $21 per barrel by the end of the first quarter of 2020. Although oil prices have recovered modestly, WTI oil spot prices averaged approximately $41 per barrel during the third quarter of 2020, which is approximately 28% less than the average price per barrel during 2019. The U.S. average rig count continued to decline in the third quarter of 2020, dropping 35% compared to the second quarter of 2020. These factors, along with the continued impact of COVID-19, constituted a triggering event in the third quarter and required an interim goodwill impairment analysis for our manufacturing reporting unit.With the adverse economic impacts discussed above and the 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 include, but are 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 projections 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.
Canada
As a result of the reductions in capital spending for oil and gas producers and processors and the economic repercussions from the COVID-19 pandemic, we determined these 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 2020. As a result of our goodwill impairment assessments, we determined that the fair value of our Canadian reporting unit was lower than its net book value and, therefore, resulted in a partial goodwill impairment.The enterprise value of the Canadian reporting unit at July 31, 2020 was less than its carrying value by approximately 40 percent. This resulted in a partial goodwill impairment of $20.5 million for Canada. Per the impairment test and respective sensitivity analyses, it was noted that a decrease of approximately 480 basis points in the pre-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 its carrying value and thus avoid a full impairment.
Other Impairments and 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. 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 as
detailed in the 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 | |
TheCompany determined the fair value of both long-lived assets and goodwill 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 were in a range from 14.8 percent to 16.4 percent. Given the dynamic nature of the COVID-19 pandemic and related market conditions, we cannot reasonably estimate the period that these events will persist or the full extent of the 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 a sustained period, we may record further asset impairments, which may include an impairment of the carrying value of our goodwill associated with other reporting units.
For inventory and work-in-progress we evaluated the recoverability 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 quotes for similar items and recent transactions.
NOTE 6 - LEASES
We lease office space, warehouses, land, automobiles, and office, and manufacturing equipment. AllSome of our leases are classified as operating leases. Our leases have remaining lease terms of 1 month to 10 years, some of which include one or more renewal options to extend the leases for up to 14 years. The exercise of lease renewal options isterm, which can be exercised at our sole discretion. Our lease agreements do notmay include options to purchase the leased property.
The Company adopted the provisions of ASC 842, "Leases" effective January 1, 2019. We elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Additionally, we elected to apply the following practical expedients and accounting policy decisions. In January 2019, we recorded a ROU Asset and total lease liability obligations of $72.7 million and $72.4 million, respectively. The new standard diddo not have aany material impact on our consolidated statements of operations and had no impact on cash flows.lessor or sub-leasing arrangements.
The following table presents components of lease expenses were as followscost (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 31, 2019 | | Lease cost | | Classification | | | | | | Short-term lease expense | | SG&A expenses(*) | | $ | 374 | | | $ | 1,087 | | | Other operating lease cost | | SG&A expenses(*) | | 22,983 | | | 23,911 | | | Total operating lease cost | | | | $ | 23,357 | | | $ | 24,998 | | (*) Manufacturing equipment and some vehicle rental expenses are included in the cost of sales.
|
| | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | 2023 | | 2022 | | 2021 | | Operating lease costs | $ | 21,575 | | | $ | 24,371 | | | $ | 23,921 | | | Finance lease costs: | | | | | | | Amortization of assets | 3,451 | | | — | | | — | | | Interest on lease liabilities | 595 | | | — | | | — | | | Total finance lease costs | 4,046 | | | $ | — | | | $ | — | | | Total operating and finance lease costs | $ | 25,621 | | | $ | 24,371 | | | $ | 23,921 | | | | | | | | | | | | | | | | | | | |
The following table presents supplemental cash flow information related to leases (in thousands): | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | 2023 | | 2022 | | 2021 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | Operating cash flows - operating leases | $ | 21,823 | | | $ | 20,584 | | | $ | 20,142 | | | Operating cash flows - finance leases | 595 | | | — | | | — | | | Financing cash flows - finance leases | $ | 2,347 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | |
Supplemental cash flow informationThe following table presents the consolidated balance sheet location of assets and liabilities related to operating and finance leases was as follows (in(in thousands): | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 31, 2019 | | Lease | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | Operating cash flows from operating leases | | $ | 18,250 | | | $ | 19,020 | | | Right-of-use assets obtained in exchange for lease liabilities | | | | | | Operating leases | | $ | 5,639 | | | $ | 12,608 | |
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | Balance Sheet Location | | 2023 | | 2022 | | | | | | | | | Operating | | Operating lease right-of-use assets | | $ | 48,729 | | | $ | 57,402 | | | Finance | | Property and equipment, net | | 11,720 | | | — | | | Total lease assets | | | | $ | 60,449 | | | $ | 57,402 | | | | | | | | | | | | | | | | | Current operating | | Short-term operating lease liabilities | | 15,438 | | | 18,083 | | | Non-current operating | | Long-term operating lease liabilities | | 34,336 | | | 40,189 | | Current finance | | Other current liabilities | | 3,329 | | | — | | | Non-current finance | | Other long-term liabilities | | 8,575 | | | — | | | Total lease liabilities | | | | $ | 61,678 | | | $ | 58,272 | |
Supplemental balance sheet information related to leases was as follows (in thousand): | | | | | | | | | | | | | | | | | | | | | | Lease | | Classification | | December 31, 2020 | | December 31, 2019 | | Assets | | | | | | | | Operating | | Operating lease right-of-use assets | | $ | 55,188 | | | $ | 66,191 | | | | | | | | | | Liabilities | | | | | | | | Current operating | | Short-term operating lease liabilities | | 15,891 | | | 17,603 | | | Non-current operating | | Long-term operating lease liabilities | | 38,010 | | | 48,605 | | | Total operating lease liabilities | | | | $ | 53,901 | | | $ | 66,208 | |
Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments for lease commenced on or after January 1, 2019. We used our incremental borrowing rate as of the transition date of January 1, 2019 for operating leases that commenced prior to transition.payments.
MaturitiesAs of December 31, 2023 maturities of lease liabilities wereare as follows (in thousands):
| | | | | | | | | | Year Ending December 31, | | Operating leases (*) | | 2021 | | $ | 19,183 | | | 2022 | | 15,990 | | | 2023 | | 10,571 | | | 2024 | | 6,084 | | | 2025 | | 3,924 | | | Thereafter | | 7,271 | | | Total lease payments | | $ | 63,023 | | | Less: imputed interest | | 9,122 | | | Present value of lease liabilities | | $ | 53,901 | |
| | | | | | | | | | | | | Finance | | Operating | | 2024 | $ | 4,059 | | | $ | 18,177 | | | 2025 | 3,998 | | | 13,691 | | | 2026 | 3,437 | | | 10,218 | | | 2027 | 1,826 | | | 6,870 | | | 2028 | 108 | | | 3,690 | | | Thereafter | — | | | 4,168 | | | Total future lease payments | 13,428 | | | 56,814 | | | Less: imputed interest | 1,524 | | | 7,040 | | | Total lease liability balance | $ | 11,904 | | | $ | 49,774 | |
(*) OperatingThe following table presents weighted average remaining lease payments exclude $2.8 millionterms and $1.1 million of legally binding minimum lease payments for leases signed but not yet commenced, as of December 31, 2020 and December 31, 2019, respectively.discount rates:
| | | | | | | | | | | | | | | | Lease term and discount rate | | Twelve Months Ended December 31, 2020 | | Twelve Months Ended December 31, 2019 | | Weighted average remaining lease term (years) | | | | | | Operating lease | | 4.29 | | 4.74 | | Weighted average discount rate | | | | | | Operating lease | | 7.2% | | 7.3% |
| | | | | | | | | | | | | December 31, | | 2023 | | 2022 | | Weighted-average remaining lease term - operating leases | 4.1 years | | 4.1 years | | Weighted-average remaining lease term - finance leases | 3.5 years | | — | | Weighted average discount rate - operating leases | 6.8% | | 6.5% | | Weighted-average discount rate - finance leases | 7.5% | | —% |
For the twelve months ended December 31, 2020,2023, the Company paidincurred approximately $3.1$1.8 million in lease expenses to entities controlled by the Company's Chief Executive Officer David Little and family.
NOTE 75 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories:
Level 1 Inputs
Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs
Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 Inputs
Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include managementsmanagement's assumptions about the likelihood of payment based on the established benchmarks and discount rates based on an internal rate of return analysis. The fair value measurement includes inputs that are Level 3 inputs as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumptions used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured during each reporting period and reflected in our results of operations.
As of December 31, 2020,2023, we recorded a $1.1 million liabilityliabilities in other current and long-term liabilities for contingent consideration associated with the acquisitionacquisitions of ASI in other current liabilities.Drydon, Cisco, Sullivan, Florida Valve, Riordan, and Alliance of $1.9 million, $2.4 million, $1.0 million, $0.3 million, $2.9 million and $0.2 million, respectively. See further discussion at Note 1816 - Business Acquisitions.
For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein and gains or losses recognized during the twelve months ended December 31, 2020:2023 (in thousands):
| | | | | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | Contingent Liability for Accrued Consideration | | (in thousands) | Beginning balance*Balance at December 31, 20192022 | $ | 2,70510,166 | | Acquisitions and settlementssettlements: | | | —2,682 | | | Settlements | (2,000)(5,833) | | | Total remeasurement adjustments: | | | Changes in fair value recorded in other (income) expense, net | 3951,738 | | Ending balance*Balance at December 31, 20202023 | $ | 1,1008,753 | | | | | The amount of total (gains) or losses for the year included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at year-end. | 395 | | | * IncludedAmounts included in other current liabilities | were $5.4 million and $5.5 million for the periods ending December 31, 2023 and December 31, 2022, respectively. Amounts included in long-term liabilities were $3.4 million and $4.7 million for the periods ending December 31, 2023 and December 31, 2022, respectively. |
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows: | | | | | | | | | | | | Contingent consideration (in thousands, unaudited)unaudited) | Fair Value at December 31, 20202023 | Valuation Technique | Significant Unobservable Inputs | Contingent consideration: (ASI acquisition)Drydon, Cisco, Sullivan, Florida Valve, Riordan and Alliance acquisitions | $ | 1,1008,753 | | Discounted cash flow and weighted probability of possible payments | Annualized EBITDA and probability of achievement |
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of ASIacquisitions are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results. The discount rate used in the calculation was 7.9%11.0%. Significant
increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement. The maximum amount of contingent consideration payable under these arrangements is $10.3 million.
Other financial instruments not measured at fair value on the Company's consolidated balance sheets at December 31, 20202023 but which require disclosure of their fair values include: cash, andrestricted cash, equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility (Note 12).facility. The Company believes that the estimated fair value of such instruments at December 31, 20202023 and December 31, 20192022 approximates their carrying value as reported on the consolidated balance sheets.sheets due to the relative short maturity of these instruments.
NOTE 8 - INVENTORIES
The carrying values of inventories (as restated) were as follows (in thousands): | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | (Restated) | | (Restated) | | Finished goods | $ | 105,527 | | | $ | 122,716 | | | Work in process | 17,021 | | | 19,721 | | | Obsolescence reserve | (25,477) | | | (12,867) | | | Inventories | $ | 97,071 | | | $ | 129,570 | |
NOTE 96 – COSTSCONTRACT ASSETS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTSLIABILITIES
Under our customized pump production contracts, in our IPS segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “Cost and estimated profits in excess of billings” on our Consolidated Balance Sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our Consolidated Balance Sheets.
Costs and estimated profits on uncompleted contracts and related amounts billed for 2020 and 2019 were as follows (in thousands): | | | | | | | | | | | | | | December 31, | | | 2020 | | 2019 | | Costs incurred on uncompleted contracts | $ | 36,969 | | | $ | 51,017 | | | Estimated profits, thereon | 6,711 | | | 10,771 | | | Total | $ | 43,680 | | | $ | 61,788 | | | Less: billings to date | 29,315 | | | 41,223 | | | Net | $ | 14,365 | | | $ | 20,565 | |
| | | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | Costs incurred on uncompleted contracts | $ | 92,363 | | | $ | 70,329 | | | Estimated profits, thereon | 37,379 | | | 23,274 | | | Total costs and estimated profits on uncompleted contracts | 129,742 | | | 93,603 | | | Less: billings to date | 96,928 | | | 80,421 | | | Total | $ | 32,814 | | | $ | 13,182 | |
Such amounts were included in the accompanying Consolidated Balance Sheets for 20202023 and 20192022 under the following captions (in thousands): | | | | December 31, | | December 31, | | | | 2020 | | 2019 | | 2023 | | 2022 | | Costs and estimated profits in excess of billings | Costs and estimated profits in excess of billings | $ | 18,459 | | | $ | 32,455 | | | Billings in excess of costs and estimated profits | Billings in excess of costs and estimated profits | (4,061) | | | (11,871) | | | Translation Adjustment | Translation Adjustment | (33) | | | (19) | | | Net | $ | 14,365 | | | $ | 20,565 | | | Net contract assets | |
During the twelve months ended December 31, 2020, $11.92023, $10.4 million of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments.recognized into revenues.
NOTE 107 - PROPERTY AND EQUIPMENT, NET
The carrying values of property and equipment, werenet are as follows (in thousands): | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | Land | $ | 2,558 | | | $ | 1,960 | | | Buildings and leasehold improvements | 22,952 | | | 15,445 | | | Furniture, fixtures and equipment | 110,159 | | | 119,865 | | | Less – Accumulated depreciation | (78,770) | | | (73,567) | | | Total Property and Equipment | $ | 56,899 | | | $ | 63,703 | |
| | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | Land | $ | 2,023 | | | $ | 2,023 | | | Buildings and leasehold improvements | 29,840 | | | 27,642 | | | Furniture, fixtures and equipment | 113,945 | | | 109,052 | | | Finance lease right-of-use assets | 15,171 | | | — | | | Less – Accumulated depreciation | (99,361) | | | (92,753) | | | Total Property and Equipment, net | $ | 61,618 | | | $ | 45,964 | |
Depreciation expense was $10.4$8.4 million, $10.1$9.6 million, and $9.6$9.9 million for the years ended December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively. Capital expenditures by segment are included in Note 2220 - Segment and Geographical Reporting.
NOTE 118 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 20202023 (in thousands): | | | | | | | | | | | | | | | | | | | | Goodwill | | Other
Intangible
Assets | | Total | | Balances as of December 31, 2019 | $ | 194,052 | | | $ | 52,582 | | | $ | 246,634 | | | Translation adjustment | — | | | (4) | | | (4) | | Acquisitions (restated) | 104,150 | | | 39,797 | | | 143,947 | | | Impairment | (36,435) | | | — | | | (36,435) | | | Amortization | — | | | (12,287) | | | (12,287) | | | Balances as of December 31, 2020 | $ | 261,767 | | | $ | 80,088 | | | $ | 341,855 | |
| | | | | | | | | | | | | | | | | | | | Goodwill | | Other Intangible Assets, Net | | Total | | Balances as of December 31, 2022 | $ | 333,759 | | | $ | 79,584 | | | $ | 413,343 | | | Translation adjustment | 464 | | | 15 | | | 479 | | | Acquisitions | 9,768 | | | 2,527 | | | 12,295 | | | Amortization | — | | | (18,231) | | | (18,231) | | | Balances as of December 31, 2023 | $ | 343,991 | | | $ | 63,895 | | | $ | 407,886 | |
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 20192022 (in thousands): | | | | Goodwill | | Other
Intangible
Assets | | Total | | Goodwill | | Other Intangible Assets, Net | | Total | | Balances as of December 31, 2018 | $ | 194,052 | | | $ | 67,207 | | | $ | 261,259 | | | Balances as of December 31, 2021 | | | Translation adjustment | Translation adjustment | — | | | 449 | | | 449 | | | Acquisitions | | | | Amortization | Amortization | — | | | (15,074) | | | (15,074) | | | Balances as of December 31, 2019 | $ | 194,052 | | | $ | 52,582 | | | $ | 246,634 | | | Amortization | | | Amortization | | | Balances as of December 31, 2022 | |
The following table presents the goodwill balance by reportable segment as of December 31, 20202023 and 20192022 (in thousands): | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | Service Centers | $ | 244,628 | | | $ | 160,934 | | | Innovative Pumping Solutions | — | | | 15,980 | | | Supply Chain Services | 17,139 | | | 17,138 | | | Total | $ | 261,767 | | | $ | 194,052 | |
The following table presents a summary of other intangible assets ( in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | As of December 31, 2019 | | | Gross
Carrying
Amount | | Accumulated
Amortization | | Carrying
Amount,
net | | Gross
Carrying
Amount | | Accumulated
Amortization | | Carrying
Amount,
net | | Customer relationships | $ | 193,747 | | | $ | (116,028) | | | $ | 77,719 | | | $ | 156,282 | | | $ | (103,796) | | | $ | 52,486 | | | Non-compete agreements | 2,617 | | | (248) | | | 2,369 | | | 285 | | | (189) | | | 96 | | | Total | $ | 196,364 | | | $ | (116,276) | | | $ | 80,088 | | | $ | 156,567 | | | $ | (103,985) | | | $ | 52,582 | |
| | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | Service Centers | $ | 270,865 | | | $ | 269,106 | | | Innovative Pumping Solutions | 55,987 | | | 47,514 | | | Supply Chain Services | 17,139 | | | 17,139 | | | Total | $ | 343,991 | | | $ | 333,759 | |
Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according to estimated economic benefits over their estimated useful lives.
Customer relationships are amortized over their estimated useful lives. Table of Contents
Amortization expense is recognized according to estimated economic benefits and was $12.3$18.2 million, $15.1$18.9 million, and $16.6$17.2 million for the years ended December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows (in thousands):
| | | | | | | 2021 | $ | 15,564 | | | 2022 | 14,223 | | | 2023 | 12,504 | | | 2024 | 10,426 | | | 2025 | 9,023 | | | Thereafter | 18,348 | | | Total | $ | 80,088 | |
| | | | | | | Amount | | 2024 | $ | 16,120 | | | 2025 | 14,356 | | | 2026 | 11,721 | | | 2027 | 10,141 | | | 2028 | 8,535 | | | Thereafter | 3,022 | | | Total | $ | 63,895 | |
The weighted average remaining estimated life for customer relationships and non-compete agreements are 7.3 years5.28 and 4.92.96 years, respectively.
NOTE 129 – LONG-TERM DEBT
Long-term debt consisted of the following (in thousands): | | | | | | | | | | | | | | | | | December 31, | | | | | 2023 | | 2022 | | | | | | | | | | ABL Revolver | $ | — | | | | | $ | — | | | | Senior Secured Term Loan B due December 23, 2027(1) | — | | | | | 428,133 | | | | Senior Secured Term Loan B due October 13, 2030(2) | 548,625 | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total debt | 548,625 | | | | | 428,133 | | | | | Less: current maturities | (5,500) | | | | | (4,369) | | | | | Total long-term debt | 543,125 | | | | | 423,764 | | | | | Unamortized discount and debt issuance costs | 22,428 | | | | | 14,559 | | | | | Long-term debt, net of unamortized discount and debt issuance costs | $ | 520,697 | | | | | $ | 409,205 | | | | (1) As of December 31, 2022 the fair value of the Term Loan B due December 23, 2027 was $411.0 million (2) As of December 31, 2023 the fair value of the Term Loan B due October 13, 2030 was $554.1 million | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | Carrying Value(1) | | Fair Value | | Carrying Value(1) | | Fair Value | | ABL Revolver | $ | — | | | — | | | $ | — | | | — | | | Term Loan B | 330,000 | | | 325,875 | | | 244,375 | | | 244,375 | | | Total Debt | 330,000 | | | 325,875 | | | 244,375 | | | 244,375 | | | Less: Current maturities | (3,300) | | | (3,259) | | | (2,500) | | | (2,500) | | | Total Long-term Debt | $ | 326,700 | | | $ | 322,616 | | | $ | 241,875 | | | $ | 241,875 | |
(1)
Carrying value amount do not include unamortized debt issuance
On October 13, 2023, the Company entered into an amendment on its existing Senior Secured Term Loan B (the "Term Loan Amendment"), which provides for, among other things, an additional $125 million in new incremental commitments. The Term Loan Amendment refinanced the existing Senior Term Loan B and replaced it with a new Senior Secured Term Loan B with total borrowings of $550.0 million. The new Senior Secured Term Loan B amortizes in equal quarterly installments of 0.25%, with the remaining balance being payable on October 13, 2030, when the facility matures. Deferred financing costs associated with the Additional Term Loan Amendment were $11.7 million which were amortized to interest expense using the interest method during 2023. In connection with the Additional Term Loan Amendment the Company expensed third-party fees of $9.6$0.8 million and $6.5recognized a $1.2 million for year endedloss on debt extinguishment, which were included in interest expense during 2023. Quarterly interest payments accrue on outstanding borrowings under the new Senior Secured Term Loan B at a rate equal to Term SOFR (with a floor of 1.00%) plus 4.75%, or base rate plus 3.75%. The new Senior Secured Term Loan B is guaranteed by each of the Company’s direct and indirect material wholly owned subsidiaries, other than any of the Company’s Canadian subsidiaries and certain other excluded subsidiaries.
As of December 31, 20202023 there was $548.6 million outstanding under the Senior Secured Term Loan B.
The interest rate for the Senior Secured Term Loan B was 10.44% and 9.95% as of December 31, 2023 and December 31, 20192022, respectively.
Asset-Based Loan Facility:ABL Revolver:
On March 17, 2020,July 19, 2022, the Company entered into an IncreaseAmended and Restated Loan and Security Agreement (the "Increase Agreement"“ABL Credit Agreement”) that provided for a $135$135.0 million asset-backed revolving line of credit (the "ABL Revolver") a $50 million increase from. Subject to the $85.0 million available under the original revolver. During the twelve months ended December 31, 2020, the amount available to be borrowed under our credit facility increased to $131.9 million compared to $81.6 million at December 31, 2019 primarily as a result of the above mentioned Increase Agreement offset by outstanding letters of credit.
As of December 31, 2020, there were no amounts of ABL Loans outstanding underconditions set forth in the ABL Revolver.
The Company's consolidated Fixed Charge Coverage Ratio was 3.40 to 1.00 as of December 31, 2020. DXP was in compliance with all such covenants that were in effect on such date underCredit Agreement, the ABL Revolver as of December 31, 2020.
The ABL Credit Agreement may be increased in increments of $10.0 million up to an aggregate of $50.0 million. The facility will matureABL Revolver matures on August 29, 2022.July 19, 2027. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDORSOFR 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 rangingpayable on the unused portion of the facility range from 0.25% to 0.375% per annum are payable onannum. At December 31, 2023 the portion of the facility not in use at any given time. The unused line fee was 0.375% and there were no amounts outstanding under the ABL Revolver.
As of December 31, 2023, the borrowing availability under our credit facility was $132.1 million compared to $132.4 million at December 31, 2020.2022, primarily as a result of outstanding letters of credit. The interest rate for the ABL facilityRevolver was 1.9% at December 31, 2020.
Term Loan B:
On December 23, 2020, DXP entered into a new seven year, $330 million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan.
The Term Loan B Agreement provides for a new $330 million term loan (the “Term Loan”) that amortizes in equal quarterly installments of 0.25% with the balance payable in 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 $52.5 million, plus an additional amount such that DXP’s Secured Leverage Ratio (as defined in the Term Loan B Agreement) would not exceed 3.75 to 1.00. Interest accrues on the Term Loan at a rate equal to the base rate plus a margin of 3.75% for the Base Rate Loans (as defined in the Term Loan B Agreement), or LIBOR plus a margin of 4.75% for the Eurodollar Rate Loans (as defined in the Term Loan B Agreement). We are required to repay the Term Loan with certain asset sales8.75% and insurance proceeds, certain debt proceeds and 50% of excess cash flow, if our total leverage ratio is no more than 3.00 to 1.00 and greater than 2.50 to 1:00, reducing to 25%, if our total leverage ratio is no more than 2.50 to 1.00.
The interest rate for the Term Loan was 5.75%7.75% as of December 31, 2020.2023 and December 31, 2022, respectively.
Financial Covenants:
DXP’sThe 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 DXP is not required to use to prepay the ABL Loans pursuant to the Term Loan B Agreement or with the proceeds of casualty insurance or condemnation awards in respect of any other property) minus cash taxes paid (net of cash tax refunds received during such period), to (b) fixed charges. The Company is restricted from allowing its fixed charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under the ABL facilityRevolver falls below a threshold set forth in the ABL Credit Agreement. As of December 31, 2020,2023, the Company's consolidated Fixed Charge Coverage Ratio was 3.402.69 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 $150 million)$200 million ) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2020,2023, is either equal to or less than as indicated in the table below:
| | | | | | | | | | | Fiscal Quarter | | Secured Leverage Ratio | | | December 31, 20202023 | | 5.75:1:001.00 | | | March 31, 20212024 | | 5.75:1:001.00 | | | June 30, 20212024 | | 5.75:1:005.50:1.00 | | | September 30, 20212024 | | 5.50:1:001.00 | | | December 31, 20212024 | | 5.50:1:001.00 | | | March 31, 20222025 | | 5.25:1:001.00 | | | June 30, 20222025 | | 5.25:1:001.00 | | | September 30, 20222025 | | 5.25:1:001.00 | | | December 31, 20222025 | | 5.00:1:001.00 | | | March 31, 20232026 | | 5.00:1:001.00 | | | June 30, 20232026 and each Fiscal Quarter thereafter | | 4.75:1:00 | | 1.00 | | |
As of December 31, 2023, the Company’s Secured Leverage Ratio was 2.10 to 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; plus to 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, 2020, the Company’s consolidated Secured Leverage Ratio was 3.25 to 1.00. In connection with the extinguishment of the previously existing term loan agreement we recorded a $2.3 million write-off of debt issuance costs, which was included in interest expense during 2020.
Interest on Borrowings
The interest rates on our borrowings outstanding at December 31, 2020 and 2019, including the amortization of debt issuance costs, were as follows:
| | | | | | | | | | | | | December 31, | | | 2020 | | 2019 | | ABL Revolver | 1.9 | % | | 3.5 | % | | Term Loan B | 5.75 | % | | 6.5 | % | | Weighted average interest rate | 5.75 | % | | 6.5 | % |
The Company was in compliance with all financial covenants as of December 31, 2020.
Extinguishment and modification of Previously Existing Credit Agreement
As set forth above, on December 23, 2020, the Company terminated its previously existing credit agreement and replaced it with a new Term Loan and Security Agreement. The terminated agreement was under the previous Term Loan and Security Agreement dated as of August 29, 2017, by and among the Company, as borrower, and Goldman Sachs Bank USA, as issuing lender and administrative agent for other lenders (the “Original Credit Agreement”). This Original Credit Agreement was subsequently amended on June 25, 2018 (the “Original Term Loan Agreement”).
The refinancing of the term loan involved multiple lenders who were considered members of a loan syndicate. In determining whether the refinancing was to be accounted for as a debt extinguishment or modification, we considered whether the lenders remained the same or changed and whether the change in debt terms was substantial. The debt terms would be considered substantially different if the present value of the cash inflows and outflows of the new term loans, including all principal increases and lender fees on the refinancing date, was at least 10% different from the present value of the remaining cash inflows and outflows of the original term loans, or the 10% Test. We performed a separate 10% Test for each individual lender participating in the loan syndication. For existing lenders who participated in the new term loans as part of the new loan
syndicate, the refinancing was accounted for as a modification as the change in debt terms was determined to not be substantial using the 10% Test.
Deferred financing costs of $3.0 million and an original issue discount of $4.1 million were associated with modified and new debt and will be amortized to interest expense using the interest method over the life of the term loans. In connection with the original lenders considered an extinguishment of the previously existing Term Loan and Security Agreement we recorded a $5.4 million write-off of debt issuance costs and third-party fees, which was included in interest expense during 2020.2023.
As of December 31, 2020,2023, the maturities of long-term debt for the next five years and thereafter were as follows (in thousands):
| | | | | | | | | | Year | $ Amount | | 2021 | $ | 3,300 | | | 2022 | 3,300 | | | 2023 | 3,300 | | | 2024 | 3,300 | | | 2025 | 3,300 | | | Thereafter | 313,500 | | | Total | $ | 330,000 | |
| | | | | | | | | | | Amount | | 2024 | | $ | 5,500 | | | 2025 | | 5,500 | | | 2026 | | 5,500 | | | 2027 | | 5,500 | | | 2028 | | 5,500 | | | Thereafter | | 521,125 | | | Total | | $ | 548,625 | |
NOTE 1310 - INCOME TAXES
The components of income (loss) before income taxes wereare as follows (as restated) (in thousands): | | | | Years Ended December 31, | | Years Ended December 31, | | | | 2020 | | 2019 | | 2018 | | 2023 | | 2022 | | 2021 | | | (Restated) | | (Restated) | | (Restated) | | Domestic | Domestic | $ | (33,239) | | | $ | 42,257 | | | $ | 49,905 | | | Domestic | | | Domestic | | | Foreign | Foreign | (15,074) | | | 5,702 | | | 2,436 | | | Total income before taxes | Total income before taxes | $ | (48,313) | | | $ | 47,959 | | | $ | 52,341 | |
The provision for income taxes consisted of the following (as restated) (in thousands): | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2020 | | 2019 | | 2018 | | (Restated) | | (Restated) | | (Restated) | | Current - | | | | | | | Federal | $ | (6,348) | | | $ | 5,396 | | | $ | 8,058 | | | State | (240) | | | 1,976 | | | 2,416 | | | Foreign | 2,624 | | | 2,982 | | | 2,629 | | | Total current | $ | (3,964) | | | $ | 10,354 | | | $ | 13,103 | | | Deferred - | | | | | | | Federal | (10,567) | | | 2,372 | | | 2,389 | | | State | (3,126) | | | (249) | | | 123 | | | Foreign | (1,039) | | | (1,283) | | | (1,508) | | | Total deferred | $ | (14,732) | | | $ | 840 | | | $ | 1,004 | | | Total current and deferred taxes | $ | (18,696) | | | $ | 11,194 | | | $ | 14,107 | |
| | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2023 | | 2022 | | 2021 | | | | | | | | Current - | | | | | | | Federal | $ | 22,514 | | | $ | 18,591 | | | $ | (5,243) | | | State | 2,620 | | | 4,501 | | | (522) | | | Foreign | 2,044 | | | 2,248 | | | 3,056 | | | Total current | 27,178 | | | 25,340 | | | (2,709) | | | Deferred - | | | | | | | Federal | (7,679) | | | (5,875) | | | 5,016 | | | State | (1,133) | | | (1,083) | | | 1,810 | | | Foreign | (247) | | | (583) | | | (686) | | | Total deferred | (9,059) | | | (7,541) | | | 6,140 | | | Total current and deferred taxes | $ | 18,119 | | | $ | 17,799 | | | $ | 3,431 | |
The difference between income taxes computed at the statutory income tax rate and the provision for income taxes is as follows (as restated) (in thousands): | | | | Years Ended December 31, | | Years Ended December 31, | | | | 2020 | | 2019 | | 2018 | | 2023 | | 2022 | | 2021 | | | (Restated) | | (Restated) | | (Restated) | | Income taxes computed at federal statutory rate | | | Income taxes computed at federal statutory rate | | | Income taxes computed at federal statutory rate | Income taxes computed at federal statutory rate | $ | (10,146) | | | $ | 10,029 | | | $ | 10,992 | | | State income taxes, net of federal benefit | State income taxes, net of federal benefit | (2,625) | | | 1,331 | | | 2,010 | | | Foreign taxes | Foreign taxes | (493) | | | 311 | | | 150 | | | Nondeductible expenses | Nondeductible expenses | 5,617 | | | 1,108 | | | 506 | | | Enacted rate changes | Enacted rate changes | 670 | | | — | | | — | | | Research and development tax credit | Research and development tax credit | (16,879) | | | (2,324) | | | (480) | | | Foreign tax credit | — | | | (57) | | | (346) | | | | Valuation allowance | | | Valuation allowance | | | Valuation allowance | Valuation allowance | 16 | | | (5) | | | — | | | Tax reform deferred tax remeasurement | Tax reform deferred tax remeasurement | — | | | — | | | 81 | | | Deferred tax liability true up | (551) | | | 1,065 | | | — | | | | Uncertain tax positions | | | Uncertain tax positions | | | Uncertain tax positions | Uncertain tax positions | 5,057 | | | 665 | | | 172 | | | Other | Other | 638 | | | (929) | | | 1,022 | | | Total income tax expense (benefit) | $ | (18,696) | | | $ | 11,194 | | | $ | 14,107 | | | Total income tax expense | |
Deferred tax liabilities and assets were comprised of the following ((in thousandsthousands)):
| | | | | | | | | | | | | | December 31, | | | 2020 | | 2019 | | Deferred tax assets: | | | (Restated) | | Allowance for doubtful accounts | $ | 1,784 | | | $ | 1,657 | | | Inventory | 7,072 | | | 3,526 | | | Research and development credit carryforward | 8,408 | | | 1,360 | | | Foreign tax credit carryforward | 64 | | | 64 | | | Net operating loss carryforward | 802 | | | 812 | | | Capital loss carryforward | 12,813 | | | 12,363 | | | Deferred compensation | 540 | | | — | | | Accruals | 5,690 | | | 4,077 | | | Investment in partnerships | 319 | | | 500 | | | Other | 312 | | | — | | | Total deferred tax assets | $ | 37,804 | | | $ | 24,359 | | | Less valuation allowance | (12,813) | | | (12,363) | | | Total deferred tax asset, net of valuation deferred tax liabilities : | $ | 24,991 | | | $ | 11,996 | | | Goodwill | (8,570) | | | (8,459) | | | Intangibles | (8,512) | | | (2,051) | | | Property and equipment | (7,569) | | | (8,319) | | | ROU asset and liability | (323) | | | — | | | Unremitted foreign earnings | (421) | | | (421) | | | Deferred compensation | — | | | (317) | | | Method changes | (754) | | | (1,961) | | | Other | (619) | | | (70) | | | Net deferred tax liability | $ | (1,777) | | | $ | (9,602) | |
| | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | Deferred tax assets: | | | | | Allowance for doubtful accounts | $ | 879 | | | $ | 1,570 | | | Inventory | 3,371 | | | 4,585 | | | | | | | Texas research and development tax credit carryforward | 2,239 | | | 2,329 | | | Louisiana research and development tax credit carryforward | 10 | | | 10 | | | Foreign tax credit carryforward | 64 | | | 64 | | | | | | | Net operating loss carryforward | 1,328 | | | 1,201 | | | Capital loss carryforward | 4 | | | 4 | | | | | | | Accruals | 8,190 | | | 6,190 | | | | | | | ROU asset | 220 | | | 219 | | | Research expenses | 23,822 | | | 16,945 | | | | | | | Total deferred tax assets | 40,127 | | | 33,117 | | | Less valuation allowance | (278) | | | (4) | | | Total deferred tax asset, net of valuation allowance | 39,849 | | | 33,113 | | | Deferred tax liabilities: | | | | | Goodwill | (18,476) | | | (18,439) | | | Intangibles | (8,363) | | | (9,553) | | | Property and equipment | (7,885) | | | (8,542) | | | Deferred compensation | (215) | | | — | | | Unremitted foreign earnings | (421) | | | (421) | | | Method changes | (342) | | | (225) | | | Other | (643) | | | (825) | | | Total deferred tax liability | $ | (36,345) | | | $ | (38,005) | | | Net deferred tax asset (liability) | $ | 3,504 | | 3504000 | $ | (4,892) | |
The Company records a valuation allowance when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. If the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. AtAs of December 31, 2020,2023, the valuation allowance primarily relates to federalstate operating loss and foreign capital loss carryforwards.
The following summarizes changes in the balance of valuation allowances on deferred tax assets (in(in thousands):
| | | | | Years Ended December 31, | | | | 2020 | | 2019 | | 2018 | 2023 | | 2022 | | 2021 | | Balance at January 1 | Balance at January 1 | $ | (12,363) | | | $ | (12,564) | | | $ | (12,220) | | | Changes due to federal and foreign capital loss carryforwards | (450) | | | 201 | | | (344) | | | Changes due to state operating loss and foreign capital loss carryforwards | | | Balance at December 31 | Balance at December 31 | $ | (12,813) | | | $ | (12,363) | | | $ | (12,564) | |
Expected tax benefit on carryforwards available for use on future income tax returns, prior to valuation allowance, at December 31, 2020, were2023, are as follows (in(in thousands):
| | | | Domestic | | Foreign | | Expiration | | Domestic | | Foreign | | Expiration | | Net operating loss - foreign | Net operating loss - foreign | $ | — | | | $ | 414 | | | 2034 - 2040 | Net operating loss - foreign | $ | — | | | $ | | $ | 491 | | | 2034-2042 | | 2034-2042 | | Net operating loss - federal | Net operating loss - federal | 388 | | | — | | | 2036 - 2040 | Net operating loss - federal | 562 | | | — | | — | | | 2036-2042 | | 2036-2042 | | Net operating loss - state | | Net operating loss - state | 338 | | | — | | | Indefinite | | Capital loss carryforward - foreign | Capital loss carryforward - foreign | — | | | 4 | | | Indefinite | Capital loss carryforward - foreign | — | | | 4 | | 4 | | | Indefinite | | Indefinite | | Capital loss carryforward - federal | 12,809 | | | — | | | 2021 | | | Foreign tax credits | Foreign tax credits | 64 | | | — | | | 2023, 2025 | | Federal research and development tax credits | 4,467 | | | — | | | 2026 - 2030 | | Foreign tax credits | | | Foreign tax credits | | 64 | | | — | | | 2023,2025 | | | Texas research and development tax credits | | | Texas research and development tax credits | | | Texas research and development tax credits | Texas research and development tax credits | 3,702 | | | — | | | 2037 - 2040 | 2,239 | | | — | | — | | | 2037-2042 | | 2037-2042 | | Louisiana research and development tax credits | Louisiana research and development tax credits | 239 | | | — | | | 2024 - 2025 | Louisiana research and development tax credits | $ | 10 | | | $ | | $ | — | | | 2024-2026 | | 2024-2026 |
Changes in the balance of unrecognized tax benefits excluding interest and penalties on uncertain tax positions wereare as follows (in(in thousands):
| | | | | | | | | | | | | | | | | | | | Assets (Liabilities) | | | 2020 | | 2019 | | 2018 | | Balance at January 1 | $ | — | | | $ | — | | | $ | — | | | Increases related to prior year tax positions | (5,057) | | | — | | | — | | | Decreases related to prior year tax positions | — | | | — | | | — | | | Increases related to current year tax positions | — | | | — | | | — | | | Settlements | — | | | — | | | — | | | Lapse of statute of limitations | — | | | — | | | — | | | Balance at December 31 | $ | (5,057) | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | Assets (Liabilities) | | | 2023 | | 2022 | | 2021 | | Balance at January 1, | $ | (5,918) | | | $ | (6,316) | | | $ | (5,057) | | | Increases related to prior year tax positions | — | | | — | | | (687) | | | Decreases related to prior year tax positions | 1,475 | | | 614 | | | — | | | Increases related to current year tax positions | (1,312) | | | (216) | | | (572) | | | | | | | | | | | | | | | Balance at December 31, | $ | (5,755) | | | $ | (5,918) | | | $ | (6,316) | |
As of December 31, 2020,2023, the Company had recorded a total tax benefit of $16.9$28.1 million related to federal and state research and development tax credits. This benefit is partially offset by $5.1$5.6 million uncertain tax position due to the uncertainty related to the realizability of the federal research and development tax credits. The Company is also recording a $0.1 million uncertain tax position related to non-deductible auto expense compensation.
To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts are classified as a component of income tax provision (benefit) in the consolidated financial statements consistent with the Company's policy. For the year ended December 31, 2020,2023, the Company did not record anyrecorded $0.2 million tax expense for interest and penalties related to uncertain tax positions.
The Company is subject to taxation in the United States,U.S., various states, and foreign jurisdictions. The Company has significant operations in the United StatesU.S. and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally openclosed in the United StatesU.S. for the tax years prior to 2015 and outside the U.S. for the tax years ended after 2012 and outsideprior to 2018. There is a 4 year statute of limitations for Canadian returns based on the United States for thedate tax years ended after 2012.assessment is received, not filing date. Tax assessments are typically received within weeks of filing date.
NOTE 1411 - SHARE-BASED COMPENSATION
Restricted Stock
We issued equity-based awards from the 2016 Omnibus Plan.
2016 Omnibus Incentive Plan
On June 19, 2019,16, 2023, our shareholders approved an amendment to the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) to increase the number of shares that can be issued under the 2016 Plan from 500,0001,000,000 shares to a total of 1,000,0001,250,000 shares, which represents an increase of 500,000250,000 shares (the “Amendment”), which authorized grants of restricted stock awards, restricted stock units, (“RSUs”), performance awards, options, investment rights, and cash-based awards. This plan authorizes the issuance of up to 1,000,000 shares of our common stock.
Under the 2016 Omnibus Plan approved by our shareholders, directors, consultants and employees may be awarded shares of DXP’sthe Company's common stock. The shares of restricted stock awards granted to employees that are outstanding as of December 31, 20202023 vest in accordance with one of the following vesting schedules: 100% one year after the grant date; 50% each year for two years after the grant; 33.3% each year for three years after the grant date; 20% each year for five years after the grant date; or 10% each year for ten years after the date of grant. The shares of restricted stock awards granted to non-employee directors of DXPthe Company vest one year after the grant date. The fair value of restricted stock awards is measured based upon the closing prices of DXP’sthe Company's common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Once restricted stock vests, new shares of the Company’s common stock are issued. At December 31, 2020, 612,6922023, 489,178 shares were available for future grant.
Changes in restricted stock awards for the twelve months ended December 31, 2020 were2023 are as follows: | | | | | | | | | | | | | | Number of
Shares | | Weighted Average
Grant Price | | Non-vested at December 31, 2019 | 144,250 | | | $ | 32.71 | | | Granted | 100,299 | | | $ | 30.91 | | | Forfeited | (16,794) | | | $ | 28.61 | | | Vested | (60,779) | | | $ | 31.33 | | | Non-vested at December 31, 2020 | 166,976 | | | $ | 32.53 | |
| | | | | | | | | | | | | | Number of
Shares | | Weighted Average
Grant Price | | Non-vested at December 31, 2022 | 157,767 | | | $ | 28.64 | | | Granted | 215,554 | | | $ | 27.36 | | | Forfeited | — | | | $ | — | | | Vested | (68,884) | | | $ | 29.23 | | | Non-vested at December 31, 2023 | 304,437 | | | $ | 27.60 | |
Changes in restricted stock awards for the twelve months ended December 31, 2019 were2022 are as follows: | | | | | | | | | | | | | | Number of
Shares | | Weighted Average
Grant Price | | Non-vested at December 31, 2018 | 169,293 | | | $ | 31.05 | | | Granted | 46,885 | | | $ | 35.60 | | | Forfeited | (5,720) | | | $ | 32.35 | | | Vested | (66,208) | | | $ | 27.75 | | | Non-vested at December 31, 2019 | 144,250 | | | $ | 32.71 | |
| | | | | | | | | | | | | | Number of
Shares | | Weighted Average
Grant Price | | Non-vested at December 31, 2021 | 112,044 | | | $ | 31.72 | | | Granted | 113,077 | | | $ | 27.48 | | | Forfeited | (8,785) | | | $ | 31.96 | | | Vested | (58,569) | | | $ | 31.79 | | | Non-vested at December 31, 2022 | 157,767 | | | $ | 28.64 | |
Changes in restricted stock awards for the twelve months ended December 31, 2018 were2021 are as follows: | | | | | | | | | | | | | | Number of
Shares | | Weighted Average
Grant Price | | Non-vested at December 31, 2017 | 77,901 | | | $ | 30.36 | | | Granted | 131,413 | | | $ | 31.92 | | | Forfeited | (2,400) | | | $ | 46.68 | | | Vested | (37,621) | | | $ | 31.68 | | | Non-vested at December 31, 2018 | 169,293 | | | $ | 31.05 | |
| | | | | | | | | | | | | | Number of
Shares | | Weighted Average
Grant Price | | Non-vested at December 31, 2020 | 166,976 | | | $ | 32.53 | | | Granted | 53,668 | | | $ | 30.95 | | | Forfeited | — | | | $ | — | | | Vested | (108,600) | | | $ | 32.59 | | | Non-vested at December 31, 2021 | 112,044 | | | $ | 31.72 | |
Compensation expense, associated with restricted stock awards, recognized in the years ended December 31, 2020,2023, December 31, 20192022 and December 31, 20182021 was $3.5$3.1 million, $2.0$1.9 million, and $2.1$1.8 million, respectively. Related income tax benefits recognized in earnings in the years ended December 31, 2020,2023, December 31, 20192022 and December 31, 20182021 were approximately $0.9$0.8 million, $0.5 million and $0.5 million, respectively.
The aggregate grant-date fair value of vested shares for the years ended December 31, 2023, December 31, 2022 and December 31, 2021 was $2.0 million, $1.9 million and $3.5 million, respectively.
Unrecognized compensation expense under the DXP Enterprises, Inc. 2016 Omnibus Plan at December 31, 2020,2023, December 31, 20192022 and December 31, 20182021 was $2.2$5.9 million, $3.0$3.1 million and $3.6$2.1 million, respectively. As of December 31, 2020,2023, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 1.52.8 years.
NOTE 1512 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | December 31, | | | 2020 | | 2019 | | 2018 | | (Restated) | | (Restated) | | (Restated) | | Basic: | | | | | | | Weighted average shares outstanding | 17,748 | | | 17,592 | | | 17,553 | | | | | | | | | | Net income (loss) attributable to DXP Enterprises, Inc. | $ | (29,269) | | | $ | 37,025 | | | $ | 38,345 | | | Convertible preferred stock dividend | (90) | | | (90) | | | (90) | | | Net income (loss) attributable to common shareholders | $ | (29,359) | | | $ | 36,935 | | | $ | 38,255 | | | Per share amount | $ | (1.65) | | | $ | 2.10 | | | $ | 2.18 | | | | | | | | | | Diluted: | | | | | | | Weighted average shares outstanding | 17,748 | | | 17,592 | | | 17,553 | | | Assumed conversion of convertible preferred stock | — | | | 840 | | | 840 | | | Total dilutive shares | 17,748 | | | 18,432 | | | 18,393 | | | Net income (loss) attributable to common shareholders | $ | (29,359) | | | $ | 36,935 | | | $ | 38,255 | | | Convertible preferred stock dividend | — | | | 90 | | | 90 | | | Net income (loss) attributable to DXP Enterprises, Inc. | $ | (29,359) | | | $ | 37,025 | | | $ | 38,345 | | | Per share amount | $ | (1.65) | | | $ | 2.01 | | | $ | 2.08 | |
| | | | | | | | | | | | | | | | | | | | December 31, | | | 2023 | | 2022 | | 2021 | | Basic earnings per share: | | | | | | | Weighted average shares outstanding | 16,870 | | | 18,631 | | | 18,949 | | | | | | | | | | Net income attributable to DXP Enterprises, Inc. | $ | 68,812 | | | $ | 48,155 | | | $ | 16,496 | | | Series B convertible preferred stock dividend | (90) | | | (90) | | | (90) | | | Net income attributable to common shareholders | 68,722 | | | 48,065 | | | 16,406 | | | Per share amount | $ | 4.07 | | | $ | 2.58 | | | $ | 0.87 | | | | | | | | | | Diluted earnings per share: | | | | | | | Weighted average shares outstanding | 16,870 | | | 18,631 | | | 18,949 | | | Assumed conversion of convertible preferred stock | 840 | | | 840 | | | 840 | | | Total dilutive shares | 17,710 | | | 19,471 | | | 19,789 | | | | | | | | | Net income attributable to common shareholders | $ | 68,722 | | | $ | 48,065 | | | $ | 16,406 | | | Series B convertible preferred stock dividend | 90 | | | 90 | | | 90 | | | Net income attributable to DXP Enterprises, Inc. | 68,812 | | | 48,155 | | | 16,496 | | | Per share amount | $ | 3.89 | | | $ | 2.47 | | | $ | 0.83 | |
Basic earnings per share have been computed by dividing net earningsincome (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period and excludes dilutive securities. Diluted earnings per share reflects the potential dilution that could occur if the preferred stock was converted into common stock. Restricted stock is considered a participating security and is included in the computation of basic earnings per share as if vested.Thevested. The preferred stock is convertible into 840,000 shares of common stock. For the twelve months ended December 31, 2020, we excluded from the diluted EPS calculation 840,000 convertible preferred shares, respectively, since the effect would have been antidilutive.
NOTE 1613 – CAPITAL STOCK
The Company has Series A and Series B preferred stock of 1,1221,222 shares and 15,000 shares outstanding as of December 31, 2020, 20192023, 2022 and 2018,2021, respectively. The preferred stock did not have any activity during 2020, 20192023, 2022 and 2018.2021.
Series A Preferred Stock
The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to $100 liquidation preference per share.
Series B Convertible Preferred Stock
Each share of the Series B convertible preferred stock is convertible into 56 shares of common stock and a monthly dividend per share of $.50. The holders of the Series B convertible stock are entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock.
The activity related to outstanding common stock and common stock held in treasury was as follows:follows (in thousands):
| | | | | | | | | | | | | | | | | | | | December 31, | | | 2020 | | 2019 | | 2018 | | Common Stock: | Quantity (in thousands) | | Balance, beginning of period | 17,460 | | | 17,401 | | | 17,316 | | | Issuance of shares for compensation net of withholding | 54 | | | 59 | | | 85 | | | Issuance of common stock related to equity distribution agreements | 46 | | | — | | | — | | | Issuance of common stock related to purchase of businesses | 1,481 | | | — | | | — | | | Balance, end of period | 19,041 | | | 17,460 | | | 17,401 | |
There were not any treasury shares outstanding for the years ended 2020, 2019 and 2018. | | | | | | | | | | | | | | | | | | | | | | 2023 | | 2022 | | 2021 | | | | Balance, beginning of period | 17,531 | | | 18,468 | | | 19,041 | | | Issuance of shares for compensation net of withholding | 47 | | | 47 | | | 85 | | | Issuance of common stock related to equity distribution agreements | — | | | — | | | — | | | Issuance of common stock related to purchase of businesses | — | | | 267 | | | 527 | | | Purchase of shares held in treasury | (1,707) | | | (1,251) | | | (1,185) | | | Balance, end of period | 15,871 | | | 17,531 | | | 18,468 | |
NOTE 1714 - SALES OF COMMON STOCKSHARE REPURCHASE
On May 11, 2020,December 15, 2022, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with BMO Capital Markets Corp. (the “Distribution Agent”)announced a new Share Repurchase Program pursuant to which the Companywe may offer and sellrepurchase up to $85.0 million worth, or 2.8 million shares of the Company’sCompany's outstanding common stock par value $0.01over the next 24 months.
The following table represents total number of shares purchased, the amount paid, and the average price paid per share having an aggregate offering amountunder share repurchase programs authorized by our Board of up to $37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company’s common stock pursuant to the Equity Distribution Agreement will be made in “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. During the twelve months ended December 31, 2020, the Company issued and sold 46,000 shares of common stock under the Equity Distribution Agreement, with net proceeds totaling approximately $1.1 million, after deducting the Distribution Agent’s commission of approximately $26 thousand.Directors:
| | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | 2023 | | 2022 | | 2021 | | (in millions, except per share data) | | | Total number of shares purchased | 1.7 | | | 1.3 | | | 1.2 | | | Amount paid | $ | 54.7 | | | 35.2 | | | 33.5 | | | Average price paid per share | $ | 32.06 | | | 28.17 | | | 28.28 | |
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | | | | | | | | | | | | | | | Twelve Months Ended December 31, | | | 2023 | | 2022 | | 2021 | | Supplemental disclosures of cash flow information | | | Cash paid for interest | $ | 48,954 | | | $ | 25,321 | | | $ | 19,531 | | | Cash paid for income taxes | 21,839 | | | 26,179 | | | 6,120 | | | Cash paid for finance lease liability | 2,347 | | | — | | | — | | | | | | | | | | | | | | | Non-cash investing and financing activities | | | | | | | Shares issued for acquisition | — | | | 5,757 | | | 13,524 | | | Assets obtained in exchange for finance lease obligations | $ | 15,171 | | | $ | — | | | $ | — | |
NOTE 1816 - BUSINESS ACQUISITIONS
The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into new and attractive markets. The Company has completed a number of acquisitions and the purchases of the acquired businesses have resulted in the recognition of goodwill and other intangible assets in the Company’s Consolidated Financial Statements.
The Company makes an initial allocation of the purchase price at the date of acquisition based upon its estimate of the fair value of the acquired assets and assumed liabilities. The Company obtains the information used for the purchase price allocation during due diligence and through other sources. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized. Final determination of the fair values may result in further adjustments.
The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company. The Company from time-to-time engages third-party valuation specialists who review the Company’s critical assumptions and calculations of the fair value of acquired intangible assets in connection with significant acquisitions. Only facts and circumstances that existed as of the acquisition date are considered for subsequent adjustment. The Company is continuing to evaluate certain pre-acquisition contingencies associated with certain of its 2023 acquisitions. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
Each acquisition has been accounted for as a business combination under ASC 805, “Business Combinations.”
2023 Acquisitions
On December 31, 2020,November 1, 2023, the Company completed the acquisition of Total Equipment Company,Alliance Pump & Mechanical Service, Inc. (“TEC”Alliance”),. Alliance is a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including steel, chemicals, water / wastewater, oil & gas and general industrial markets. At closing, the Company paid approximately $64.7 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including but not limited to working capital adjustments.
On December 31, 2020, the Company completed the acquisition of APO Pumps & Compressors (“APO”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water / wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $53.0 million in cash and stock, following normal transaction adjustments, for example working capital true-ups, customary for a transaction of this size and nature. Approximately, $38.3 million was paid at closing, and $13.4 million has been accrued as of December 31, 2020 as true-up consideration.
On December 31, 2020, the Company completed the acquisition of Pumping Solutions, Inc. (“Pumping Solutions”), a distributor of industrial and commercial pumps and process equipment focused on serving multiple end markets including the water / wastewater, chemical, food & beverage, and general industrial markets. The Company paid approximately $21.0 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, for example working capital true-ups.
On December 31, 2020, the Company completed the acquisition of Corporate Equipment Company (“CEC”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water / wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $3.3 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups.
On February 1, 2020, the Company completed the acquisition of substantially all of the assets of Turbo Machinery Repair (“Turbo”), a pumpleading municipal and industrial equipmentpump sales, service, and repair maintenance, machining and labor services company. The Company paidbusiness. Alliance is included within our SC business segment. Total consideration for the transaction was approximately $3.2$1.7 million, in cash, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups, .
On January 1, 2020, the Company completed the acquisition of Pumping Systems, Inc. (“PSI”), a distributor of pumps, systems and related services. The PSI acquisition was funded with a mixture of cash on hand as well as issuing DXP's common stock. The PSIof $1.5 million and contingent consideration of $0.2 million. Goodwill for the transaction totaled approximately $1.3 million.
On May 1, 2023, the Company completed the acquisition of Florida Valve & Equipment, LLC and Environmental MD, Inc. (collectively, “Florida Valve EMD”), a leading provider of valve and related products and services for the municipal water markets in the state of Florida. Florida Valve EMD is included within our IPS business segment. Total consideration for the transaction was approximately $3.3 million, funded with a mixture of cash on hand as well as issuing DXP'sof $3.0 million and contingent consideration of $0.3 million. Goodwill for the transaction totaled approximately $2.4 million.
On May 1, 2023, the Company completed the acquisition of Riordan Materials Corporation (“Riordan”), a leading provider of products for water treatment, wastewater treatment, odor control, solids handling, pumping and bio solid processes in the states of Maryland, New Jersey, Pennsylvania, Delaware and Virginia. Riordan is included within our IPS business segment. Total consideration for the transaction was approximately $8.4 million, funded with a mixture of cash on hand of $6.2 million and contingent consideration of $2.2 million. Goodwill for the transaction totaled approximately $6.1 million
2022 Acquisitions
On September 1, 2022, the Company completed the acquisition of Sullivan 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 Company's common stock.stock valued at approximately $0.9 million and contingent consideration of $1.0 million. Goodwill for the transaction totaled approximately $2.5 million.
On May 2, 2022, the Company completed the acquisition of Cisco Air Systems, Inc. ("Cisco"). Cisco is a leading distributor of air compressors and related products and services focused on serving the food and beverage, transportation and general industrial markets in the Northern 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 Company's common stock valued at approximately $4.4 million, approximately $11 million on the ABL and contingent consideration of $4.5 million. Goodwill for the transaction totaled approximately $30.5 million.
On March 1, 2022, the Company completed the acquisition of Drydon Equipment, Inc. ("Drydon"), a distributor and manufacturers’ representative of pumps, valves, controls and process equipment focused on serving the water and wastewater industry in the Midwest. Drydon is included within our IPS business segment. The Company paid approximately $13.0$7.9 million, funded with a mixture of cash on hand of $4.9 million, the Company's common stock valued at approximately $0.4 million and contingent consideration of $2.6 million. Goodwill for the transaction totaled approximately $5.3 million.
On March 1, 2022, the Company completed the acquisition of 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 including cash, the Company's common stock and stock, subjectcontingent consideration. Goodwill for the transaction totaled approximately $0.5 million.
Pro forma results of operations information have not been presented, as the effect of the recent acquisitions is not material. The operating results of Riordan, Florida Valve EMD and Alliance are included within the Company's consolidated statements of operations were not material for the twelve months ended December 31, 2023. Pursuant to normal transaction adjustments, customaryU.S. GAAP, costs incurred to complete the acquisitions as well as costs incurred to integrate into the Company’s operations are expensed as incurred. Transaction-related costs incurred, which are included within selling, general, and administrative expenses in the consolidated statements of operations, were $0.6 million for a transactionthe twelve months ended December 31, 2023.
Purchase Price Allocation and nature, including working capital true-ups.Consideration
The following table summarizestables summarize the total consideration for 2020 transferred to acquire these companies and in aggregateestimated fair values of the amount of identified assets acquired and liabilities assumed at the acquisition dates. The Company is indate for the process of finalizing third-party valuations of certain intangible assets; thus, the provisional measurements of intangible assets, goodwill and deferred income tax liabilities are subject to change. In addition, the company continues to finalize inventory, ROU Assets and Liabilities2023 acquisitions, as well as other assets acquired.the fair value of the consideration transferred:
As described above, the acquisitions of Pumping Systems Inc and Turbo Machinery Repair closed in January and February 2020, respectively. Since their acquisition, they have contributed approximately $19.6 million in revenue and $0.8 million in net income for the year ended December 31, 2020.
None of these acquisitions were individually material. Two of these acquisitions, PSI and Turbo, contributed revenue and net income (loss) which comprised approximately 1.9% and (2.8)%, respectively, of the Company’s consolidated results for the year ended December 31, 2020.
| | | | | | | | | | Purchase Price Consideration (in thousands) | Total ConsiderationAmount Recognized as of Acquisition Date | | Cash payments | $ | 115,247 | | | Fair value of stock issued (1,480,909 shares) | 29,367 | | | Future consideration | 13,428 | | | Total consideration | $ | 158,042 | | | | | | Cash | $ | 1353 | | | Accounts Receivablereceivable | 20,2042,335 | | | | | Inventory | 8,567355 | | | Other Current Assetscurrent assets | 190178 | | | Non-compete agreements | 628 | | | Customer relationships | 1,899 | | | Property and equipment | 1,81141 | | | Non-compete agreementsOperating lease ROU asset | 2,332256 | | | Customer relationships | 37,465 | | | Goodwill | 104,150 | | | Other assets | 6967 | | | Assets acquired | $6,052 | | | Short-term operating lease liability | 175,416 (106) | | | Current liabilities assumed | (10,674)(1,442) | | | Long-term operating lease liability | (150) | | | Deferred tax liability | (6,700)(679) | | | Long-term liabilities assumed | (24) | | | Net assets acquired | 3,651 | | | Total Consideration | 13,419 | | | Goodwill | $ | 158,0429,768 | |
The following represents the pro forma unaudited revenue and earnings as if each of the six 2020 acquisitions had been included in the consolidated results of the Company for the full years ending December 31, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2020 | | 2019 | | | (in thousands/unaudited) | | Revenue | $ | 1,129,610 | | | $ | 1,421,467 | | | Net income (loss) | $ | (15,296) | | | $ | 42,209 | |
Individual pro forma results for each acquisition are not disclosed, as individually these acquisitions would not have a material impact on the Company's financial statements.
The fair value of the 1,480,909 common shares issued was determined based on the closing market price of the Company’s common shares on the acquisition date, adjusted for holding restrictions following consummation.
Of the $39.8$2.5 million of acquired intangible assets, $2.3$0.6 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years, coincidentconsistent with the termterms of these arrangements.the agreements. In addition, $37.5$1.9 million was provisionally assigned to customer relationships and will be amortized over a period of 8 years. As noted earlier, the fair value of the acquired identifiable intangible assets is provisional pending completion of the final valuations for these assets.
The $104.1 million of goodwill was assigned to the Service Centers segment. The goodwill recognizedtotal of $9.8 million is attributable primarily to expected synergies and the assembled workforce of each entity.
In aggregate, the acquirees. Noneacquisition-date fair value of the goodwill isconsideration transferred for the three businesses acquired in 2023 totaled $13.4 million, which consisted of the following:
| | | | | | | Purchase Price Consideration (in millions) | Total Consideration | | Cash payments | $ | 10.7 | | | Contingent consideration | 2.7 | | | Total consideration | $ | 13.4 | |
Goodwill recognized in connection with these acquisitions was attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Goodwill related to asset acquisitions is currently deductible for income tax purposes. AsGoodwill related to stock acquisitions is capitalized to the stock basis of December 31, 2020, the Company recognized additional goodwill of $463 thousand resulting from the acquisition for income tax purposes and is deductible upon disposition of PSI and no additional goodwill for the acquisition Turbo which both closed in the First Quarter of 2020.stock.
The fair value of accounts receivables acquired is $20.2 million, with the gross contractual amounts of $21.1 million. The Company expects $0.9 million to be uncollectible.
The Company recognized $172 thousand of acquisition related costs that were expensed in the current period. These costs are included in the consolidated income statement in Selling, General and Administrative costs. The Company also incurred and recognized an immaterial amount in costs associated with issuing the shares as additional consideration in the acquisitions. Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity.
Previous acquisition
On January 1, 2018, the Company completed the acquisition of Application Specialties, Inc. ("ASI"), a distributor of cutting tools, abrasives, coolants and machine shop supplies. The Company paid approximately $11.7 million in cash and stock. The purchase price also included approximately $4.6 million in contingent consideration. The purchase was financed with $10.8 million of cash on hand as well as issuing $0.9 million of the Company's common stock. ASI provides the Company's metal working division with new geographic territory and enhances DXP's end market mix.Contingent Consideration
As partThe acquisitions of our purchase agreement, we were obligated to pay up to an additional $4.6 million ofFlorida Valve, Riordan and Alliance included a contingent consideration over three yearsarrangement that requires additional consideration to be paid based on the achievement of certain earnings benchmarks established for calendar years 2018, 2019annual EBITDA targets over a one to three year period. The range of undiscounted amounts the Company may be required to pay under the contingent consideration agreement is between zero and 2020.$4.6 million. The purchase price included the estimatedcombined fair value of the contingent consideration recorded atrecognized on each acquisition date of $2.7 million was estimated by using a weighted probability of possible payments. That measure is based on significant Level 3 inputs not observable in the present valuemarket. The significant assumption includes a discount rate of approximately $4.0 million. The estimated11.0%. Changes in the fair value measurement each period reflect the passage of time as well as the contingent consideration was determined using a probability-weighted discounted cash flow model. We determinedimpact of adjustments, if any, to the likelihood of achieving the specified targets. The changes in the fair value of the contingent consideration obligations by calculating the probability-weighted payments based onare measured during each reporting period and reflected in our assessmentresults of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows.operations. The fair value measurement includes earnings forecasts which are a Level 3 measurement as discussed in Note 75 - Fair Value of Financial Assets and Liabilities. The fair value of the contingent consideration is reviewed quarterly over the earn-out period to compare actual earnings before interest, taxes, depreciation and amortization ("EBITDA") achieved to the estimated EBITDA used in our forecasts.As of December 31, 2020, $1.1 million of the actual cash due toward the contingent consideration earned is recorded in current liabilities. The estimated fair value of the contingent consideration is recorded at the present value of $1.1 million at December 31, 2020. Changes in the estimated fair value of the contingent earn-out consideration, up to the total contractual amount, are reflected in our results of operations in the periods in which they are identified. Changes in the fair value of the contingent consideration may materially impact and cause volatility in our future operating results. Changes in our estimates for the contingent consideration are discussed in Note 7 - Fair Value of Financial Assets and Liabilities to our consolidated financial statements.
NOTE 1917 - COMMITMENTS AND CONTINGENCIES
The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of December, 2020, for non-cancelable leases are as follows (in thousands):
| | | | | | | 2021 | $ | 19,183 | | | 2022 | 15,990 | | | 2023 | 10,571 | | | 2024 | 6,084 | | | 2025 | 3,924 | | | Thereafter | 7,271 | | | Total | $ | 63,023 | |
Rental expense for operating leases was $23.4 million, $25.0 million and $18.5 million for the years ended December, 2020, 2019 and 2018, respectively.
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXPthe Company is unable to predict the outcome or estimate the financial impact of these lawsuits,disputes, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP’sits consolidated financial position, cash flows, or results of operations.
NOTE 2018 - EMPLOYEE BENEFIT PLANS
The Company offers a 401(k) plan which is eligible to substantially all employees in the United States.U.S. For the year ended December 31, 2020,2023, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $0.7$5.5 million, $1.7$2.8 million, and $1.8$1.7 million to the 401(k) plan in the years ended December 31, 2020, 2019,2023, 2022, and 2018, respectively. In March 2020 the Company suspended indefinitely the employee match program. The Company contributed $0.7 million in the first quarter of 2020 to the 401(k) plan. No other contributions were made during the remainder of 2020.
NOTE 21 - OTHER COMPREHENSIVE INCOME
Other comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments by, or distributions to, shareholders.
During 2012 and 2013, the Company acquired 4 entities that operate in Canada. These Canadian entities maintain financial data in Canadian dollars. Upon consolidation, the Company translates the financial data from these foreign subsidiaries into U.S. dollars and records cumulative translation adjustments in other comprehensive income. The Company recorded $1.9 million, $(0.7) million, and $0.2 million in translation adjustments, net of tax, in other comprehensive income during the years ended December 31, 2020, 2019 and 2018,2021, respectively.
NOTE 22 – SEGMENT AND GEOGRAPHICAL REPORTING19 - REVENUE
The Company’sCompany disaggregates revenue based upon our geography and our reportable business segments are:- Service Centers, Innovative Pumping Solutions and Supply Chain Services. Each of our geographic and reportable business segments are impacted and influenced by varying factors, including the macroeconomic environment, maintenance and capital spending and commodity prices and exploration and production activity. As such, we believe this information is important in depicting the nature, timing and uncertainty of our contracts with customers. The following Geographical Information and Note 20 - Segment Reporting present our revenue disaggregated by source.
Geographical Information Revenues are presented in geographic area based on location of the facility shipping products or providing services. The Company’s revenues by geographical location are as follows (in millions): | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2023 | | 2022 | | 2021 | | Revenues | | | | | | | United States | $ | 1,602 | | | $ | 1,402 | | | $ | 1,031 | | | Canada | 75 | | | 79 | | | 83 | | | Other | 2 | | | — | | | — | | | Total | $ | 1,679 | | | $ | 1,481 | | | $ | 1,114 | |
NOTE 20 – SEGMENT REPORTING
The Company has three operating and reportable segments - Service Centers, Innovative Pumping Solutions and Supply Chain Services: the Service Centers segment is engaged in providing maintenance, MRO products and equipment, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, fastener, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management.
These business or operating segments were determined primarily on the distribution channels of the products and services offered as and the nature of the customer markets and the primary driver of the customers spend. Business segments are defined components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Executive Officer. The Company's CODM directs the allocation of resources to operating or business segments based on revenue, operating income, and capital expenditures of each respective segment. The allocation of resources across the operating segments is dependent upon, among other factors, the operating segments' historical or future expected operating margins; the operating segments' historical or future expected returns on capital; outlook within a specific market; opportunities to grow profitability; new products, services or new customer accounts; confidence in management; and competitive landscape and intensity.
The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations.
The following table sets out financial information related to the Company’s segments (in thousands): | | Years Ended December 31, | Years Ended December 31, | Service Centers | | Innovative Pumping Solutions | | Supply Chain Services | | Total | Years Ended December 31, | | Service Centers | | Innovative Pumping Solutions | | Supply Chain Services | | Total | | 2020 (Restated) | | | | | | | | | Product sales (recognized at a point in time) | $ | 595,314 | | | $ | — | | | $ | 138,653 | | | $ | 733,967 | | | Inventory management services (recognized over contract life) | — | | | — | | | 16,005 | | | 16,005 | | | Staffing services (day-rate basis) | 67,303 | | | — | | | — | | | 67,303 | | | Customized pump production (recognized over time) | — | | | $ | 187,991 | | | — | | | 187,991 | | | 2023 | | 2023 | | | | Total Revenue | Total Revenue | $ | 662,617 | | | $ | 187,991 | | | $ | 154,658 | | | $ | 1,005,266 | | | Operating income for reportable segments, excluding adjustments | Operating income for reportable segments, excluding adjustments | 71,834 | | | 16,882 | | | 12,804 | | | 101,520 | | | Identifiable assets at year end | Identifiable assets at year end | 564,921 | | | 130,505 | | | 56,721 | | | 752,147 | | | Capital expenditures | Capital expenditures | 1,254 | | | 4,457 | | | — | | | 5,711 | | | Proceeds from sale of fixed assets | — | | | — | | | — | | | — | | | | Depreciation | | | Depreciation | | | Depreciation | Depreciation | 3,299 | | | 4,441 | | | 387 | | | 8,127 | | | Amortization | Amortization | 6,989 | | | 5,298 | | | — | | | 12,287 | | | Interest expense | $ | 11,506 | | | $ | 7,360 | | | $ | 1,705 | | | $ | 20,571 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | Service Centers | | Innovative Pumping Solutions | | Supply Chain Services | | Total | | | 2022 | | | | | | | | | | | Total Revenue | | $ | 1,009,356 | | | $ | 231,102 | | | $ | 240,374 | | | $ | 1,480,832 | | | | Operating income for reportable segments, excluding adjustments | | 127,174 | | | 30,037 | | | 19,530 | | | 176,741 | | | | Identifiable assets at year end | | 746,548 | | | 144,352 | | | 90,480 | | | 981,380 | | | | Capital expenditures | | 1,419 | | | 2,506 | | | 43 | | | 3,968 | | | | | | | | | | | | | | Depreciation | | 3,038 | | | 4,549 | | | 144 | | | 7,731 | | | | Amortization | | 12,294 | | | 6,621 | | | — | | | 18,915 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | Service Centers | | Innovative Pumping Solutions | | Supply Chain Services | | Total | | 2019 (Restated) | | | | | | | | | Product sales (recognized at a point in time) | $ | 701,404 | | | $ | — | | | $ | 184,767 | | | $ | 886,171 | | | Inventory management services (recognized over contract life) | — | | | — | | | 16,511 | | | 16,511 | | | Staffing services (day-rate basis) | 58,514 | | | — | | | — | | | 58,514 | | | Customized pump production (recognized over time) | — | | | 303,655 | | | — | | | 303,655 | | | Total Revenue | $ | 759,918 | | | $ | 303,655 | | | $ | 201,278 | | | $ | 1,264,851 | | | Operating income for reportable segments, excluding adjustments | 85,442 | | | 30,699 | | | 15,267 | | | 131,408 | | | Identifiable assets at year end | 463,531 | | | 212,015 | | | 56,714 | | | 732,260 | | | Capital expenditures | 2,333 | | | 9,347 | | | 922 | | | 12,602 | | | Proceeds from sale of fixed assets | 35 | | | — | | | — | | | 35 | | | Depreciation | 3,517 | | | 4,602 | | | 285 | | | 8,404 | | | Amortization | 8,230 | | | 5,855 | | | 989 | | | 15,074 | | | Interest expense | $ | 10,786 | | | $ | 6,747 | | | $ | 1,965 | | | $ | 19,498 | |
| | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | Service Centers | | Innovative Pumping Solutions | | Supply Chain Services | | Total | | 2018 (Restated) | | | | | | | | | Product sales (recognized at a point in time) | $ | 687,821 | | | $ | — | | | $ | 160,770 | | | $ | 848,591 | | | Inventory management services (recognized over contract life) | — | | | — | | | 13,686 | | | 13,686 | | | Staffing services (day-rate basis) | 64,735 | | | — | | | — | | | 64,735 | | | Customized pump production (recognized over time) | — | | | 291,697 | | | — | | | 291,697 | | | Total Revenue | $ | 752,556 | | | $ | 291,697 | | | $ | 174,456 | | | $ | 1,218,709 | | | Operating income for reportable segments, excluding adjustments | 82,650 | | | 34,977 | | | 16,874 | | | 134,501 | | | Identifiable assets at year end | 404,026 | | | 188,765 | | | 53,517 | | | 646,308 | | | Capital expenditures | 1,655 | | | 6,800 | | | 296 | | | 8,751 | | | Depreciation | 3,974 | | | 4,064 | | | 49 | | | 8,087 | | | Amortization | 9,272 | | | 6,237 | | | 1,077 | | | 16,586 | | | Interest expense | 11,178 | | | 7,351 | | | 2,408 | | | 20,937 | |
| | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | 2020 | | 2019 | | 2018 | | (Restated) | | (Restated) | | (Restated) | | Operating income for reportable segments, excluding adjustments | $ | 101,520 | | | $ | 131,408 | | | $ | 134,501 | | | Adjustments for: | | | | | | | Amortization of intangibles | 12,287 | | | 15,074 | | | 16,586 | | | Impairment and other charges | 59,883 | | | — | | | — | | | Corporate and other expense, net | 57,018 | | | 48,922 | | | 45,829 | | | Total operating income | $ | (27,668) | | | $ | 67,412 | | | $ | 72,086 | | | Interest expense | 20,571 | | | 19,498 | | | 20,937 | | | Other expenses (income), net | 74 | | | (45) | | | (1,192) | | | Income before income taxes | $ | (48,313) | | | $ | 47,959 | | | $ | 52,341 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | Service Centers | | Innovative Pumping Solutions | | Supply Chain Services | | Total | | 2021 | | | | | | | | | | Total Revenue | | $ | 816,496 | | | $ | 139,591 | | | $ | 157,834 | | | $ | 1,113,921 | | | Operating income for reportable segments, excluding adjustments | | 98,931 | | | 12,070 | | | 11,963 | | | 122,964 | | | Identifiable assets at year end | | 642,184 | | | 134,374 | | | 44,684 | | | 821,242 | | | Capital expenditures | | 999 | | | 2,574 | | | 25 | | | 3,598 | | | Depreciation | | 3,475 | | | 4,270 | | | 389 | | | 8,134 | | | Amortization | | 11,107 | | | 6,090 | | | — | | | 17,197 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | 2023 | | 2022 | | 2021 | | | | | | | | Operating income for reportable segments, excluding adjustments | $ | 229,661 | | | $ | 176,741 | | | $ | 122,964 | | | Adjustments for: | | | | | | | Amortization of intangibles | 18,231 | | | 18,915 | | | 17,197 | | | | | | | | | Corporate and other expense, net | 72,708 | | | 60,074 | | | 65,910 | | | Total operating income | $ | 138,722 | | | $ | 97,752 | | | $ | 39,857 | | | Interest expense | 53,146 | | | 29,135 | | | 21,089 | | | Other expenses (income), net | (1,355) | | | 2,716 | | | (414) | | | Income before income taxes | $ | 86,931 | | | $ | 65,901 | | | $ | 19,182 | |
The Company had capital expenditures at Corporatecorporate of $1.0$1.6 million, $9.5$0.7 million, and $0.6$2.4 million for the years ended December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively. The Company had identifiable assets at Corporatecorporate of $114.1$190.8 million, $56.8
million, and $54.7$85.0 million as of December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively. Corporate depreciation was $2.3$2.0 million, $1.7$1.9 million, and $1.5$1.8 million for the years ended December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively.
Geographical Information
Revenues are presented in geographic area based on location of the facility shipping products or providing services. Long-lived assets are based on physical locations and are comprised of the net book value of property.
The Company’s revenues and property and equipment by geographical location are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2020 | | 2019 | | 2018 | | Revenues | | | | | | | United States | $ | 931 | | | $ | 1,163 | | | $ | 1,113 | | | Canada | 74 | | | 102 | | | 106 | | Other(1) | — | | | — | | | — | | | Total | $ | 1,005 | | | $ | 1,265 | | | $ | 1,219 | |
(1) Other includes Mexico and Dubai. | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | Property and Equipment, net | | | | | United States | $ | 52 | | | $ | 56 | | | Canada | 5 | | | 8 | | Other(1) | — | | | — | | | Total | $ | 57 | | | $ | 64 | |
(1) Other includes Dubai.
NOTE 23 - QUARTERLY FINANCIAL INFORMATION (unaudited)
Summarized quarterly financial information for the years ended December 31, 2020, 2019 and 2018 is as follows (in millions, except per share data):
As reported :
| | | | | | | | | | | | | | | | | | | | | | | | | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | 2020 | | | | | | | | | Sales | $ | 301.0 | | | $ | 251.4 | | | $ | 220.2 | | | $ | 232.7 | | | Gross profit | 84.0 | | | 70.0 | | | 61.3 | | | 64.3 | | | Net income | 5.7 | | | 2.1 | | | (34.7) | | | (2.0) | | | Net income attributable to DXP Enterprises, Inc. | 5.7 | | | 2.1 | | | (34.7) | | | (1.9) | | | Earnings per share - basic | 0.31 | | | 0.12 | | | (1.95) | | | (0.11) | | | Earnings per share - diluted | $ | 0.31 | | | $ | 0.12 | | | $ | (1.95) | | | $ | (0.11) | | | 2019 | | | | | | | | | Sales | $ | 311.2 | | | $ | 333.3 | | | $ | 327.2 | | | $ | 295.5 | | | Gross profit | 84.2 | | | 92.0 | | | 92.7 | | | 78.3 | | | Net income | 7.3 | | | 13.4 | | | 13.2 | | | 2.1 | | | Net income attributable to DXP Enterprises, Inc. | 7.3 | | | 13.4 | | | 13.1 | | | 2.2 | | | Earnings per share - basic | 0.41 | | | 0.76 | | | 0.74 | | | 0.12 | | | Earnings per share - diluted | $ | 0.40 | | | $ | 0.73 | | | $ | 0.71 | | | $ | 0.12 | | | 2018 | | | | | | | | | Sales | $ | 285.9 | | | $ | 311.2 | | | $ | 308.0 | | | $ | 311.0 | | | Gross profit | 76.4 | | | 85.1 | | | 84.1 | | | 86.6 | | | Net income | 4.5 | | | 11.6 | | | 8.4 | | | 11.1 | | | Net income attributable to DXP Enterprises, Inc. | 4.6 | | | 11.6 | | | 8.4 | | | 11.1 | | | Earnings per share - basic | 0.26 | | | 0.66 | | | 0.48 | | | 0.63 | | | Earnings per share - diluted | $ | 0.25 | | | $ | 0.63 | | | $ | 0.46 | | | $ | 0.60 | |
As restated :
| | | | | | | | | | | | | | | | | | | | | | | | | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | 2020 | | | | | | | | | Sales | $ | 301.0 | | | $ | 251.4 | | | $ | 220.2 | | | $ | 232.7 | | | Gross profit | 83.1 | | | 70.1 | | | 61.4 | | | 62.6 | | | Net income | 6.0 | | | 2.4 | | | (34.8) | | | (3.2) | | | Net income attributable to DXP Enterprises, Inc. | 6.0 | | | 2.4 | | | (34.7) | | | (3.0) | | | Earnings per share - basic | 0.34 | | | 0.14 | | | (1.95) | | | (0.18) | | | Earnings per share - diluted | $ | 0.32 | | | $ | 0.13 | | | $ | (1.95) | | | $ | (0.18) | | | 2019 | | | | | | | | | Sales | $ | 311.2 | | | $ | 333.3 | | | $ | 327.2 | | | $ | 293.2 | | | Gross profit | 86.0 | | | 92.8 | | | 93.5 | | | 77.5 | | | Net income | 7.6 | | | 14.0 | | | 13.8 | | | 1.3 | | | Net income attributable to DXP Enterprises, Inc. | 7.7 | | | 14.0 | | | 13.7 | | | 1.6 | | | Earnings per share - basic | 0.44 | | | 0.80 | | | 0.78 | | | 0.09 | | | Earnings per share - diluted | $ | 0.42 | | | $ | 0.76 | | | $ | 0.74 | | | $ | 0.08 | | | 2018 | | | | | | | | | Sales | $ | 285.9 | | | $ | 311.2 | | | $ | 308.0 | | | $ | 313.6 | | | Gross profit | 77.4 | | | 85.6 | | | 84.7 | | | 88.2 | | | Net income | 5.2 | | | 11.9 | | | 8.8 | | | 12.3 | | | Net income attributable to DXP Enterprises, Inc. | 5.2 | | | 11.9 | | | 8.8 | | | 12.4 | | | Earnings per share - basic | 0.30 | | | 0.68 | | | 0.50 | | | 0.70 | | | Earnings per share - diluted | $ | 0.29 | | | $ | 0.65 | | | $ | 0.48 | | | $ | 0.67 | |
The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each quarter’s computation is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and the dilutive effects of the stock options and restricted stock in each quarter.
NOTE 2421 – RELATED PARTIES DISCLOSURES
The Board uses policies and procedures, to be applied by the Audit Committee of the Board, for review, approval or ratification of any transactions with related persons. Those policies and procedures will apply to any proposed transactions in which DXPthe Company is a participant, the amount involved exceeds $120,000 and any director, executive officer or significant shareholder or any immediate family member of such a person has a direct or material indirect interest. Any related party transaction will be reviewed by the Audit Committee of the Board of Directors to determine, among other things, the benefits of any transaction to DXP,the Company, the availability of other sources of comparable products or services and whether the terms of the proposed transaction are comparable to those provided to unrelated third parties.
For the year ended December 31, 2020,2023, the Company paidincurred approximately $ 3.1$1.8 million in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little.Officer.
NOTE 22 - SUBSEQUENT EVENTS
On January 1, 2024 the Company completed the acquisition of Hennesy Mechanical Sales LLC (“Hennesy”). Hennesy is a leading manufacturer's representative in the municipal water and wastewater treatment market and provides industrial pump sales, service and repair in Arizona, New Mexico and West Texas. The preliminary purchase price allocation is not complete as of the date of this financial issuance and will be an ongoing process for up to one year subsequent to the closing date of the transaction.
On February 1, 2024 the Company completed the acquisition of Kappe Associates, Inc. (“Kappe”). Kappe is headquartered in Frederick, Maryland and operates out of three locations servicing Maryland, the District of Columbia, Delaware, Virginia, Pennsylvania, Southern New Jersey, and West Virginia. Kappe is a leading distributor and manufacturers’ representative of pumps, controls and process equipment focused on serving the water and wastewater industry. The preliminary purchase price allocation is not complete as of the date of this financial issuance and will be an ongoing process for up to one year subsequent to the closing date of the transaction.
On March 1, 2024 the Company completed the acquisition of Pro-Seal, Inc. (“Pro-Seal”). Pro-Seal is a leading distributor of pumping systems, fluid sealing and related seal support systems, industrial pumping equipment and services as well as lubricants in Michigan and Alaska. The preliminary purchase price allocation is not complete as of the date of this financial issuance and will be an ongoing process for up to one year subsequent to the closing date of the transaction.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and ProceduresEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
DXP carried out
Based on an evaluation under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness as of December 31, 2020, of the design and operation of DXP’sCompany’s disclosure controls and procedures pursuant to Exchange Act(as defined in Rules 13a-15e13a-15(e) and 15d-15e. Disclosure controls and procedures are the controls and other procedures of DXP that are designed to ensure that information required to be disclosed by DXP in the reports that it files or submits15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange(“Exchange Act”)), which have been designed to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, of the U.S. Securities and Exchange Commission (the “Commission”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by DXP in the reports that it files or submits under the Exchange Act, is accumulated and communicated to the issuer’sCompany's management, including its principal executivethe Chief Executive Officer and principal financial officers, or persons performing similar functions,the Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation as ofdisclosure, the end of the period covered by this Annual Report on Form 10-K, ourCompany’s Chief Executive Officer and Chief Financial Officer hadhave concluded that our disclosure controls and procedures were effective as of December 31, 2020 at a reasonable assurance level.
However, in connection with the restatement of our financial statements and the preparation of this Form 10-K/A, due to the material weakness in our internal control over financial reporting subsequently identified and described below, our management re-evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020 and has concluded that our disclosuresuch controls and procedures were not effective as of that date becauseDecember 31, 2023, as a result of suchthe material weakness.weaknesses in our internal control over financial reporting discussed below.
TheNotwithstanding our material weaknesses, resultedwe have concluded that the financial statements and other financial information included in this Form 10-K fairly present in all material misstatements in the consolidated balance sheet as of December 31, 2020, and consolidated statementsrespects our financial condition, results of operations, and comprehensive income, cash flows and equity for the years ended December 31, 2020, 2019 and 2018 as well as unaudited consolidated financial statements forperiods presented in conformity with accounting principles generally accepted in the quarter ended March 31, 2021 included in our previously filed Quarterly Report on Form 10-Q for the quarter ended March 31, 2021U.S.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
DXP Enterprises, Inc.’sThe Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act RuleRules 13a-15(f) and 15d-15(f). DXP Enterprises, Inc.’s internalInternal control system wasover financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of itshas inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control -– Integrated Framework (2013). Based on ourthis evaluation, under the COSO framework, our management had concluded that the Company’s internal control over financial reporting were effective as of December 31, 2020.Subsequent to that assessment, management identified a material weakness in our internal controls as we did not have adequate internal controls that ensure timely clearing of aged accounts payables arising from three-way match exceptions for items ordered through purchase orders. In connection with the correction associated with aged accounts payable, management also identified a material weakness in the design of the Company's controls around journal entries, specifically requiring review and approval by senior management with the requisite experience, authority and competence to determine the proper conclusion. In addition, management identified a material weakness around business combination accounting, specifically as it relates to the identification of all agreements and their impact on the transaction and future consideration and disclosure. Consequently, our management has reassessed the effectiveness of our internal control over financial reporting as of December 31, 2020 and has concluded that our internal control over financial reporting was not effective as of December 31, 2020 due2023 as a result of the material weaknesses described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The Company did not design and maintain an effective control environment commensurate with its financial reporting requirements. Specifically, the Company lacked a sufficient complement of resources with an appropriate level of Company knowledge and experience to establish effective processes and controls. This material weakness contributed to the following additional material weakness:
the material weaknessesThe Company did not design and this report has been revised from our report included in the previously filed 2020 Form 10-K (which had reported internalmaintain effective controls over financial reporting as effective).the completeness, occurrence, cut-off, accuracy and presentation and disclosure of revenue. Specifically, for revenue recognized under the percentage-of-completion input method, controls were not designed and maintained to ensure accuracy of the costs-to-date, estimates of the cost-to-complete and the determination of revenue recognized for certain project-based contracts. Additionally, within the Company’s product sales and service revenue streams, controls were not designed and maintained to ensure the accuracy of the price and quantity, including the approval of credit memos, the existence of a customer contract, and appropriate cut-off during the revenue recognition process. This material weakness resulted in immaterial audit adjustments related to revenue and related contract assets and liabilities during the years ended December 31, 2021 and 2022, and immaterial out-of-period adjustments related to revenue during the years ended December 31, 2022 and 2023.
The above material weaknesses could result in a misstatement of the Company’s accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2020 has also been reassessed by Moss Adams LLP, an independent registered public accounting firm,2023 as stated in their audit report which is included herein.appears in Item 8 of this Form 10-K.
Remediation Plan and Status for Material WeaknessREMEDIATION PLAN
In responserelation to the identified material weaknesses,weakness in our management,control environment, the Company has hired a total of seven CPAs in various positions and functions since December 31, 2022. The Company has hired a Chief Accounting Officer, a Director of Technical Accounting, three assistant controllers, a Director of Tax, and established and expanded its technical accounting and SEC financial reporting groups. In addition to that, the Company has continued to strengthen its tax, accounts payable and accounts receivable groups. These are key individuals with the oversightappropriate level of accounting knowledge, experience, and training to appropriately analyze, record, and disclose accounting matters timely and accurately as well as establish effective processes and controls. These individuals are responsible for the Audit Committeeimplementation of our Board of Directors,processes and controls required to remediate the remaining material weakness. At this point, management believes it has dedicated significantadded the necessary talent and resources includingwith the involvement of outside advisors,proper accounting knowledge to support the Company’s growth and efforts to improve ourcontinue to strengthen its internal control over financial reporting, and has taken immediate actionthe remediation of this material weakness is only dependent on additional time to remediate the remaining material weaknesses identified. Certain remedial actions have been completed including ongoing involvement of outside advisors, reassessment of application controls within our accounts payable procure-to-pay platform and training programs around the issuance of purchase orders. The Company will further enhance these controls over the remainder of 2021.weakness.
ChangesIn relation to the material weakness related to revenue, the controls necessary to address the portion of the material weakness related to revenue recognized under the percentage of completion input method have been designed and implemented during the year ended December 31, 2023. These controls are designed to ensure accuracy of the cost-to-date, estimates of the cost-to-complete and the determination of revenue recognized for certain project-based contracts. Although these controls have been designed and implemented, we will continue to evaluate whether further enhancement or modification to these controls in Internal Control Over Financial Reportingfuture periods are needed. This material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time for management to conclude, through testing, that such controls are operating effectively.
Management is committed to the remediation of the material weaknesses described above, as well as the continued improvement of our internal control over financial reporting. Our planned remediation efforts related to the above identified material weaknesses include a continuous effort to further enhance our revenue recognition controls and procedures. Management expects these material weaknesses will be remediated during the year ended December 31, 2024.
REMEDIATION OF PREVIOUSLY IDENTIFIED MATERIAL WEAKNESSES
As of December 31, 2023, management has concluded that the previously reported material weaknesses related to the following matters have been remediated: (i) timely clearing of discrepancies arising from the three-way-match process of matching purchase orders, invoices, and item receipts, and (ii) segregation of duties and user access.
In relation to the previously existing material weakness identified related to the timely clearing of discrepancies arising from the three-way-match process of matching purchase orders, invoices, and item receipts, as of December 31, 2023, management has remediated this material weakness by effectively designing, implementing, and operating the necessary controls to ensure a timely clearing of discrepancies arising from the three-way match process of matching purchase orders, invoices, and item receipts.
In relation to the previously existing material weakness identified related to the lack of segregation of duties and controls related to user access, as of December 31, 2023, management has remediated this material weakness by effectively designing, implementing, and operating the necessary controls to ensure appropriate segregation of duties and adequately review user access to transactions within business processes relevant to significant accounts and disclosures within the general ledger system across the Company.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in the Company’sour internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the most recently completed fiscal quarterthree months ended December 31, 2023, that hashave materially affected, or isare reasonably likely to materially affect, the Company’sour internal control over financial reporting, other than as discussed above.
| | | | | | | | | | | | /s/ David R. Little | | /s/ Kent Yee | | David R. Little | | Kent Yee | | President and Chief Executive Officer
(Principal Executive Officer) | Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
reporting.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be included in our definitive proxy statement for the 20212024 Annual Meeting of Shareholders that we will file with the SEC within 120 days of the end of the fiscal year to which this Report relates (the “Proxy Statement”) and is hereby incorporated by reference thereto.
ITEM 11. Executive Compensation
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 14. Principal Accounting Fees and Services.
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules.
(a) Documents included in this Report: | | | | | | | 1. | Financial Statements – See Part II, Item 8 of this Report. | | | | | 2. | Financial Statement Schedules - All other schedules have been omitted since the required information is not applicable or significant or is included in the Consolidated Financial Statements or notes thereto. | | | | | 3. | Exhibits: |
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission.
| | | | | | Exhibit
No. | Description | | | | | 3.1 | | | | | | 3.2 | | | | | 3.3 | | | | | | 4.1 | | | | | | 4.2 | | | | | | 4.3 | | | | | | 4.4 | | | | | | 4.5 | | | | | *4.6 | | | | | | 10.1+ | | | | | | 10.2+ | |
| | | | | | | 10.3+ | | | | | | 10.4+ | | | | | | 10.5+ | | | | | | 10.6+ | | | | | 10.7+ | | | | |
| | | | | | 10.8+10.8 | First Amendment to Loan and Security Agreement Dated as of June 25, 2018August 29, 2017 by and among DXP Enterprises, Inc., Pump-PMI, LLC, PMI Operating Company, LTD., PMI Investment, LLC, Integrated Flow Solutions, LLC, DXP Holdings, Inc., Best Holding, LLC, Best Equipment Service & Sales Company, LLC, B27 Holdings Corp., B27, LLC, B27 Resources, Inc. and Pumpworks 610, LLC as US Borrowers, DXP Canada Enterprises, LTD., Industrial Paramedic Services, LTD., HSE Integrated LTD., and National Process Equipment Inc., as Canadian Borrowers and the Other Persons Party hereto from time to time, as Guarantors, and Bank of America, N.A., as agent and Certain Financial Institutions as Lenders, Bank of America, N.A. as Sole Lead Arranger and Sole Bookrunner and BMO Capital Markets Corp., as Documentation Agent (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 000-21513:171191516) filed with the Commission on November 9, 2017. | | | | 10.9 | Amended and Restated Loan and Security Agreement, dated as of July 19, 2022, by and among the Company and the other persons party thereto, as borrowers, the other persons party thereto from time to time, as guarantors, Bank of America, N.A., as agent, certain financial institutions, as lenders, Bank of America, N.A., as sole lead arranger and sole bookrunner, and Bank of Montreal, Chicago Branch, as documentation agent. (incorporated by reference to Exhibit 10.1 to Registrant's Quarterlythe Company’s Current Report on Form 10Q for the quarterly period ended June 30, 20188-K (File No. 000-21513)000-21513; 221103189) filed with the Commission on August 8, 2018.July 25, 2022). | | | 10.9+10.10 | Increase Agreement, dated as of March 17, 2020, by and among the Company, certain of the Company’s US subsidiaries, as borrowers, certain of the Company’s Canadian subsidiaries, as borrowers, the incremental lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-21513; 20728581), filed with the Commission on March 19, 2020). | | | | 10.10+10.11 |
| | | 10.11+10.12 | Term Loan and Security Agreement, dated as of December 23, 2020, by and among the Company, as borrower, and the other persons party thereto from time to time, as guarantors, Goldman Sachs Bank USA, as administrative agent, and certain financial institutions, as lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-21513; 201423473) filed with the Commission on December 30, 2020).
| | | | 10.13 | | | |
| | | | | | | 10.14 | First Amendment to Amended and Restated Loan and Security Agreement, dated as of November 22, 2022, among the Company, certain of the Company’s US subsidiaries, a borrowers, certain of the Company’s Canadian Subsidiaries, as borrowers, the lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-21513; 221432621) filed with the Commission on November 29, 2022). | | | | 10.15 | | | | | 10.16 | Second Amendment to Amended and Restated Loan and Security Agreement, dated as of October 13, 2023, among the Company, certain of the Company’s US subsidiaries, a borrowers, certain of the Company’s US subsidiaries, as guarantors, certain of the Company’s Canadian Subsidiaries, as borrowers, the lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-21513; 231329097) filed with the Commission on October 17, 2023). | | | | *21.1 | | | | | | *22.1 | | | | | *23.1 | | | | | *23.2 | | | | | *31.1 | | | | | *31.2 | | | | | | *32.1 | | | | | | *32.2 | | | | | *97 | | | | | | *101 | | | | | *104 | |
Exhibits designated by the symbol * are filed with this Report. All exhibits not so designated are incorporated by reference to a prior filing with the Commission as indicated.
+ Indicates a management contract or compensation plan or arrangement.
The Company undertakes to furnish to any shareholder so requesting a copy of any of the exhibits to this Report on upon payment to the Company of the reasonable costs incurred by the Company in furnishing any such exhibit.
ITEM 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | | | | | | | | | DXP ENTERPRISES, INC. (Registrant) | | | | | | | | | | By: | /s/ | DAVID R. LITTLE | | | | | | David R. Little | | | | | | Chairman of the Board, | | | | | | President and Chief Executive Officer | |
Dated: October 21, 2021
Each person whose signature appears below appoints David R. Little, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K/A, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, with full power and authority to said attorney-in-fact and agent to do and perform each and every act whatsoever that is necessary, appropriate or advisable in connection with any or all of the above-described matters and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue thereof.March 11, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: | | | | | | | | | | | | | | | | | | | | NAME | | TITLE | | DATE | | | | | | | | | | /s/David R. Little | | Chairman of the Board, President | | | | | David R. Little | | Chief Executive Officer and Director | | October 21, 2021March 11, 2024 | | | | | (Principal Executive Officer) | | | | | | | | | | | | /s/Kent Yee | | Senior Vice President/Finance andPresident Corporate Development | | October 21, 2021March 11, 2024 | | | Kent Yee | | Chief Financial Officer, Secretary and SecretaryDirector | | | | | | (Principal Financial Officer) | | | | | | | | | | /s/David Molero Santos | | Vice President and Chief Accounting Officer | | March 11, 2024 | | David Molero Santos | | (Principal FinancialAccounting Officer) | | | | | | | | | | /s/Gene Padgett | | Senior Vice President/Finance, | | October 21, 2021 | | Gene Padgett | | Chief Accounting Officer | | | | | | (Principal Accounting Officer) | | | | | | | | | | | /s/Timothy P. Halter | | Director | | October 21, 2021March 11, 2024 | | | Timothy P. Halter | | | | | | | | | | | | | | /s/David Patton | | Director | | October 21, 2021March 11, 2024 | | | David Patton | | | | | | | | | | | | | /s/Joseph Mannes | | Director | | October 21, 2021March 11, 2024 | | | Joseph Mannes | | | | | | | | | | | | /s/Karen Hoffman Morris | | Director | | March 11, 2024 | | Karen Hoffman Morris | | | | |
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