UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
☑[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended SeptemberJune 30, 20172018
or
☐[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For1934.For the transition period from tofromto

Commission file number 0-21513
DXP Enterprises, Inc.
(Exact name of registrant as specified in its charter)

Texas 76-0509661
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
   
7272 Pinemont, Houston, Texas 77040
(Address of principal executive offices, including zip code)
 
(713) 996-4700
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 "emergingemerging growth company".company. See definitions of "large accelerated filer," "accelerated filer",filer," "smaller reporting company" and "emergingy"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ [ ]    Accelerated filer ☑ [X]    Non-accelerated filer ☐ (Do not check if a smaller reporting company)  [ ]    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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐[ ] No ☑[X]

Number of shares of registrant's Common Stock outstanding as of November 9, 2017: 17,391,816August 2, 2018: 17,387,176 par value $0.01 per share.

1

PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)(unaudited)
            
 September 30, 2017  December 31, 2016  June 30, 2018  December 31, 2017 
ASSETS            
Current assets:            
Cash $19,473  $1,590  $2,489  $22,047 
Restricted Cash  3,614   - 
Trade accounts receivable, net of allowance for doubtful accounts of $9,634 in 2017 and $8,160 in 2016  165,235   148,919 
Inventories, net  87,720   83,699 
Costs and estimated profits in excess of billings on
uncompleted contracts
  24,191   18,421 
Restricted cash  399   3,532 
Trade accounts receivable, net of allowance for doubtful accounts of $11,037 in 2018 and $9,015 in 2017  185,261   167,272 
Inventories  110,767   91,413 
Costs and estimated profits in excess of billings  37,943   26,915 
Prepaid expenses and other current assets  4,290   2,138   4,750   5,296 
Income taxes recoverable  2,404   2,558 
Federal income taxes receivable  986   1,440 
Total current assets  306,927   257,325   342,595   317,915 
Property and equipment, net  55,703   60,807   53,035   53,337 
Goodwill  187,591   187,591   194,033   187,591 
Other intangible assets, net of accumulated amortization of $80,105 in 2017 and $70,027 in 2016  83,045   94,831 
Other intangible assets, net  75,682   78,525 
Other long-term assets  1,809   1,498   1,587   1,715 
Total assets $635,075  $602,052  $666,932  $639,083 
LIABILITIES AND EQUITY                
Current liabilities:                
Current maturities of long-term debt $3,365  $51,354  $3,394  $3,381 
Trade accounts payable  81,518   78,698   95,013   80,303 
Accrued wages and benefits  14,735   16,962   18,106   18,483 
Customer advances  4,910   2,441   7,882   2,189 
Billings in excess of costs and estimated profits on uncompleted contracts  3,032   2,813 
Billings in excess of costs and estimated profits  3,075   4,249 
Other current liabilities  14,726   14,391   5,645   16,220 
Total current liabilities  122,286   166,659   133,115   124,825 
Long-term debt, less current maturities and unamortized debt issuance costs of $10,531 in 2017 and $992 in 2016  239,042   173,331 
Long-term debt, less current maturities and unamortized debt issuance costs  237,875   238,643 
Other long-term liabilities  2,611   - 
Deferred income taxes  12,102   9,513   7,966   7,069 
Commitments and contingencies (Note 13)        
Total long-term liabilities  248,452   245,712 
Total liabilities  381,567   370,537 
Commitments and contingencies (Note 13)
        
Equity:                
Series A preferred stock, 1/10th vote per share; $1.00 par value; liquidation preference of $112 ($100 per share); 1,000,000 shares authorized; 1,122 shares issued and outstanding  1   1 
Series B convertible preferred stock, 1/10th vote per share; $1.00 par value; $100 stated value; liquidation preference of $1,500 ($100 per share); 1,000,000 shares authorized; 15,000 shares issued and outstanding
  15   15 
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,388,910 at September 30, 2017 and 17,197,380 at December 31, 2016 shares issued  174   172 
Series A preferred stock, $1.00 par value; 1,000,000 shares authorized; 1,122 shares issued and outstanding  1   1 
Series B convertible preferred stock, $1.00 par value; 1,000,000 shares authorized; 15,000 shares issued and outstanding  15   15 
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,567,912 at June 30, 2018 and 17,315,573 at December 31, 2017 shares issued  174   174 
Additional paid-in capital  152,857   152,313   155,343   153,087 
Retained earnings  127,560   117,396   150,322   134,193 
Accumulated other comprehensive loss  (19,309)  (18,274)  (21,001)  (19,491)
Total DXP Enterprises, Inc. equity  261,298   251,623   284,854   267,979 
Noncontrolling interest  347   926   511   567 
Total equity  261,645   252,549   285,365   268,546 
Total liabilities and equity $635,075  $602,052  $666,932  $639,083 

The accompanying notes are an integral part of these condensed consolidated financial statements.statements.
2
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
(in thousands, except per share amounts) (unaudited)

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 2017  2016  2017  2016  2018  2017  2018   2017 
                        
Sales $251,930  $230,025  $741,155  $739,801  $311,227  $250,698  $597,163  $489,225 
Cost of sales  184,967   166,205   540,741   535,560   226,111   181,762   435,602   355,774 
Gross profit  66,963   63,820   200,414   204,241   85,116   68,936   161,561   133,451 
Selling, general and
administrative expenses
  60,453   
58,887
   175,411   
192,461
   65,056   
58,679
   130,352   
114,958
 
Income from operations  6,510   4,933   25,003   11,780   20,060   10,257   31,209   18,493 
Other income, net  (153)  (251)  (324)  (397)
Other (income) expense, net  (1,416)  57   (1,438)  (171)
Interest expense  4,928   4,338   12,573   11,698   6,137   3,992   11,178   7,645 
Income before provision for income taxes  1,735   846   12,754   479 
Provision (benefit) for income taxes  (1,176)  664   2,880   459 
Income before income taxes  15,339   6,208   21,469   11,019 
Provision for income taxes  3,776   2,239   5,412   4,056 
Net income  2,911   182   9,874   20   11,563   3,969   16,057   6,963 
Net loss attributable to noncontrolling interest  (55)  (81)  (360)  (301)
Net income (loss) attributable to noncontrolling interest  1   (166)  (56)  (305)
Net income attributable to DXP Enterprises, Inc.  2,966   263   10,234   321   11,562   4,135   16,113   7,268 
Preferred stock dividend  23   23   68   68   22   22   45   45 
Net income attributable to
common shareholders
 $2,943  $240  $10,166  $253  $11,540  $4,113  $16,068  $7,223 
                                
Net income $2,911  $182  $9,874  $20  $11,563  $3,969  $16,057  $6,963 
Cumulative translation adjustment  830   19   (1,035)  409   (1,134)  455   (1,511)  (1,865)
Comprehensive income $3,741  $201  $8,839  $429  $10,429  $4,424  $14,546  $5,098 
                                
Basic earnings per share attributable to DXP Enterprises, Inc. $0.17  $0.02  $0.58  $0.02 
Basic earnings per share $0.66  $0.24  $0.92  $0.42 
Weighted average common
shares outstanding
  
17,394
   
14,600
   
17,402
   
14,529
   
17,558
   
17,404
   
17,538
   
17,406
 
Diluted earnings per share attributable to DXP Enterprises, Inc. $0.16  $0.02  $0.56  $0.02 
Weighted average common shares
and common equivalent
shares outstanding
  18,234   
15,440
   18,242   
15,369
 
Diluted earnings per share $0.63  $0.23  $0.88  $0.40 
Weighted average common
and common equivalent
shares outstanding - diluted
  18,398   
18,244
   18,378   
18,246
 


The accompanying notes are an integral part of these condensed consolidated financial statements.

3

DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
 Nine Months Ended  Six Months Ended 
 September 30,  June 30, 
 2017  2016  2018  2017 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income attributable to DXP Enterprises, Inc. $10,234  $321  $16,113  $7,268 
Less net loss attributable to non-controlling interest  (360)  (301)  (56)  (305)
Net income  9,874   20   16,057   6,963 
Adjustments to reconcile net income to net cash provided by operating activities:        
Reconciliation of net income to the net cash provided by (used in) operating activities:        
Gain on sale of building  (1,318)  - 
Depreciation  7,655   9,070   4,727   5,155 
Amortization of intangible assets  12,943   13,557   8,477   8,607 
Bad debt expense  1,466   1,476   1,715   1,001 
Amortization of debt issuance costs  1,071   673   932   628 
Write off of debt issuance costs  578   967 
Write-off of debt issuance costs  60   - 
Compensation expense for restricted stock  1,392   1,944   1,003   1,010 
Tax loss related to vesting of restricted stock  -   619 
Stock compensation expense  494     
Deferred income taxes  2,000   (121)  218   1,998 
Changes in operating assets and liabilities, net of
 assets and liabilities acquired in business combinations:
                
Trade accounts receivable  (16,397)  9,965   (14,469)  (11,768)
Costs and estimated profits in excess of billings on
uncompleted contracts
  (5,701)  5,067 
Costs and estimated profits in excess of billings  (11,051)  (780)
Inventories  (3,827)  5,818   (16,718)  (6,914)
Prepaid expenses and other assets  (2,362)  (608)  614   (1,923)
Trade accounts payable and accrued expenses  (354)  (8,560)  815   3,979 
Billings in excess of costs and estimated profits on
uncompleted contracts
  189   (4,171)
Net cash provided by operating activities  8,527   35,716 
Billings in excess of costs and estimated profits  (1,150)  (102)
Other long-term liabilities
  2,611   - 
Net cash provided by (used in) operating activities  (6,983)  7,854 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment  (2,157)  (3,843)  (5,516)  (1,118)
Proceeds from sale of property and equipment  -   1,198 
Equity method investment contribution  -   (3,214)
Proceeds from the sale of fixed assets  2,700   - 
Acquisitions of business, net of cash acquired  (10,792)  - 
Net cash used in investing activities  (2,157)  (5,859)  (13,608)  (1,118)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from debt  728,822   324,229   -   394,966 
Principal payments on revolving line of credit and other long-term
debt
  (701,561)  (356,497)
Costs for registration of common shares  -   5,959 
Debt issuance fees  (11,188)  (616)
Principal debt payments  (1,688)  (399,641)
Debt issuance costs  (60)  (380)
Loss for non-controlling interest owners, net of tax  (219)  (186)  -   (187)
Dividends paid  (68)  (68)  (45)  (45)
Payment for employee taxes withheld from stock awards  (848)  (238)  (136)  (596)
Tax loss related to vesting of restricted stock  -   (619)
Net cash provided by (used in) financing activities  14,938   (28,036)
Net cash used in financing activities  (1,929)  (5,883)
EFFECT OF FOREIGN CURRENCY ON CASH  189   (85)  (171)  36 
NET CHANGE IN CASH  21,497   1,736   (22,691)  889 
CASH AT BEGINNING OF PERIOD  1,590   1,693   25,579   1,590 
CASH AT END OF PERIOD $23,087  $3,429  $2,888  $2,479 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

DXP ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY

DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO)("MRO") products, and servicesservice to energy and industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS"), and Innovative Pumping Solutions ("IPS"). See Note 1415 "Segment 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 generally accepted accounting principles generally accepted in the United States of America ("US GAAP"). The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE"). The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2016.2017. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017.28, 2018. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of results expected for the full fiscal year. In the opinion of management, these condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated balance sheets as of December 31, 20162017 and SeptemberJune 30, 2017 (unaudited),2018, condensed consolidated statements of operations and comprehensive incomeoperations for the three and ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016 (unaudited),2017, and condensed consolidated statements of cash flows for the ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 2016 (unaudited).2017. All such adjustments represent normal recurring items.

DXP is the primary beneficiary of a VIE in which DXP owns 47.5% of the equity. DXP consolidates the financial statements of the VIE with the financial statements of DXP. As of September 30, 2017, the total assets of the VIE were approximately $5.4 million including approximately $4.9 million of property and equipment compared to $5.2 million of total assets and $5.2 million of property and equipment at December 31, 2016. DXP is the primary customer of the VIE. For the three months ended September 30, 2017 and 2016, consolidation of the VIE increased cost of sales by approximately $0.3 million and $0.2 million, respectively and increased SG&A by approximately $0.3 million and $58 thousand, respectively. For the nine months ended September 30, 2017 and 2016, consolidation of the VIE increased cost of sales by approximately $0.7 million and $0.8 million, respectively and increased SG&A by approximately $0.8 million and $0.2 million, respectively.  The Company recognized a related income tax benefit of $33 thousand and $50 thousand, respectively, related to the VIE for the three months ended September 30, 2017 and 2016 and $219 thousand and $130 thousand, respectively, for the nine months ended September 30, 2017 and 2016.  At September 30, 2017, the owners of 52.5% of the equity not owned by DXP included a former executive officer and other employees of DXP.

Equity investments in which we exercise significant influence, but do not control and are not the primary beneficiary, are accounted for using the equity method of accounting. During the first quarter of 2016, DXP invested $4.0 million in a related party equity method investment.  During the third and fourth quarters of 2016, the investment was reduced to zero by $4.0 million of distributions received from the entity. As of September 30, 2017, a $0.2 million receivable related to the return DXP earned on this investment is included in other current assets.

All intercompany accounts and transactions have been eliminated upon consolidation.

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

Standards Effective in 2017 or EarlierRecently Adopted Accounting Pronouncements

Accounting Changes and Error Corrections.Compensation - Stock Compensation.  In JanuaryMay 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-03 ("ASU 2017-03"), Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This update adds language to the SEC Staff Guidance in relation to ASU 2014-09, ASU 2016-02, and ASU 2016-13. This ASU 2017-03 provides the SEC Staff view that a registrant should consider additional quantitative and qualitative disclosures related to the previously mentioned ASUs in connection with the status and impact of their adoption. This guidance, which was effective immediately, did not have a material impact on our Condensed Consolidated Financial Statements.
Compensation – Stock Compensation. In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update aims to simplify aspects of accounting for share-based payment award transactions, including (a) income tax consequences, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods.  The Company adopted the ASU January 1, 2017 and it had the following impact on the Company's Condensed Consolidated Financial Statements:
5

TopicMethod of Adoption
Impact on Consolidated Financial Statements
Recognize all excess tax benefits and tax deficiencies as income tax benefit or expenseProspective
The Company recognized $0.2 million and $0.3 million of excess tax benefit in income taxes in the three and nine months ended September 30, 2017, respectively, decreasing the effective tax rate for each period.
Excess tax benefits and deficiencies on the statement of cash flows are classified as an operating activityProspective
The Company recognized $0.3 million of excess tax benefit in the nine months ended September 30, 2017 as an operating activity.  Prior to the adoption of the ASU 2016-09, the excess tax expense in the nine months ended September 30, 2016 was $0.6 million recognized as a financing activity.
Employee taxes paid when an employer withholds shares for tax-withholding purposes on the statement of cash flows are classified as financing activityRetrospective
The Company reclassified $0.2 million of employee taxes paid from cash flows from operating activities to cash flows from financing  on the Consolidated Statements of Cash Flows in the nine months ended September 30, 2016.
Accounting for forfeitures and tax withholding electionsProspectiveThe Company has not changed its accounting policy for forfeitures.  There is no significant impact on Consolidated Financial Statements.

Income Taxes. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The update requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. The update simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within.  The Company adopted this ASU January 1, 2017 and reclassified $9.5 million of current deferred income tax assets from current assets to non-current deferred income tax liabilities on the Condensed Consolidated Balance Sheet as of December 31, 2016.

Inventory. In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. The amendments in ASU 2015-11 clarify the subsequent measurement of inventory requiring an entity to subsequently measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. This ASU applies only to inventory that is measured using the first-in, first-out (FIFO) or average cost method. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in ASU 2015-11 should be applied prospectively and are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  The Company adopted this ASU January 1, 2017 and it did not have a material impact on the Company's Condensed Consolidated Financial Statements.

Statement of Cash Flows. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Classification of Restricted Cash. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amounts should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 should be applied retrospectively and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted this ASU September 30, 2017 and classified $3.6 million of cash to restricted cash. This cash deposit was required as collateral for letters of credit outstanding under our previously existing credit facility.;

6
Standards Effective in 2018 or Later

Compensation - Stock Compensation.  In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently assessing the impact, if any, thatadopted this ASU willas of January 1, 2018, and it did not have upon adoption.a material impact on the Company's Consolidated Financial Statements.
Intangibles-Goodwill and Other. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this ASU early on December 31, 2017. The Company's annual tests of goodwill for impairment, testing forincluding qualitative assessments of all of its reporting units' goodwill, determined a quantitative impairment test was not necessary.  Therefore the fiscal period beginning January 1, 2020, will follow the provisionsadoption of this ASU.  This ASU isstandard did not expected to have a material impacteffect on the Company's Consolidated Financial Statements.consolidated financial position, results of operations or cash flows.
Business Combinations. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ThisThe Company adopted this ASU isas of January 1, 2018, and it did not expected to have a material impact on the Company's Consolidated Financial Statements.  As discussed in Note 14 "Business Acquisitions", the Company acquired Application Specialties, Inc. in January 2018.  Application Specialties, Inc. met the definition of a business under the new guidance and goodwill was recorded.
Statement of Cash Flows. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ThisThe Company adopted this ASU isas of January 1, 2018, and it did not expected to have a material impact on the Company's Consolidated Financial Statements.

Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.

Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement, as amended by ASU 2015-14, was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
5

The Company has evaluated the provisions of the new standard and assessed its impact on financial statements, information systems, business processes and financial statement disclosures. We engaged a third party consultant to assist us in assessing our contracts with customers, processes and controls required to address the impact that ASU No. 2014-09 would have on our business. The Company elected the modified retrospective method and adopted the new revenue guidance effective January 1, 2018, with no impact to the opening retained earnings.

The analysis of contracts with customers under the new revenue recognition standard was consistent with the Company's current revenue recognition model, whereby revenue is recognized primarily on the date products are shipped to the customer. The ASU also requires expanded qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, significant judgments and accounting policy.

The adoption of the new standard did not have a material impact on the Company's Consolidated Financial Statements. See Note 4 – Revenue Recognition.

Accounting Pronouncements Not Yet Adopted

Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses, which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses.  The update is intended to provide financial statement users with more useful information about expected credit losses.  The amended guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.  We are currently evaluating the effect, if any, that the guidance will have on the Company's Consolidated Financial Statements and related disclosures.

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The update requires organizations that lease assets ("lessees") to recognize the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains dependent on its classification as a finance or operating lease. The criteria for determining whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its Consolidated Financial Statements.

Financial Instruments. In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company is evaluating the impact of this ASU.NOTE 4 – REVENUE RECOGNITION

Revenue Recognition.In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides and issued subsequent amendments to the initial guidance on revenue recognition.in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The core principalprinciple of this new revenue recognition guidance is that an entity shoulda company will recognize revenue to depict the transfer ofwhen promised goods or services are transferred to customers in an amount that reflects the consideration to which the entitycompany expects to be entitled in exchange for those goods or services. ThisThe new guidance requires entities to applydefines a five-step process to achieve this core principle. The new guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance provides for two transition methods, a full retrospective approach and a modified retrospective approach.

On January 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method with no impact to (1) identify the contract(s)opening retained earnings and determined there were no changes required to its reported revenues as a result of the adoption. The Company has enhanced its disclosures of revenue to comply with customers, (2) identifythe new guidance.

Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC Topic 605, "Revenue Recognition." 

Overview
The Company's primary source of revenue is the sale of products, and service to energy and industrial customers. The Company is organized into three business segments: Service Centers, Supply Chain Services and Innovative Pumping Solutions.

The Service Centers segment provides a wide range of maintenance, repair and operating (MRO) products, equipment and integrated services, including logistics capabilities, to industrial customers. Revenue is recognized upon the completion of our performance obligation(s) under the sales agreement.  The majority of the Service Centers segment revenue originates from the satisfaction of a single performance obligation, the delivery of products.  Revenues are recognized when an agreement is in place, the performance obligation(s) inobligations under the contract (3) determinehave been identified, and the transaction price (4) allocate the transaction priceor consideration to be received is fixed and allocated to the performance obligation(s) in the contract, and (5) recognize revenuecontract.  We believe our performance obligation has been satisfied when (or as)title passes to the entity satisfies a performance obligation. This pronouncement, as amended by ASU 2015-14, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. customer or services have been rendered under the contract.  Revenues are recorded net of sales taxes.

The Company has evaluatedfabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the provisionsCompany recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed.  This typically occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin.  Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation.  We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by the new standardstandard. 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 three to eighteen months.

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. Like the Service Centers segment above, revenue for the Supply Chain Services segment is recognized upon the completion of performance obligations. Revenues are recognized when an agreement or contract is in place and the processprice is fixed followed by execution of assessing its impact on financial statements, information systems, business processes and financial statement disclosures.our performance obligations.  We generally consider the satisfaction of our performance obligation has occurred when title for product passes to the customer or services have engaged third party consultants to assist us in assessing our contracts with customers, processes and controls required to address the impact that ASU No. 2014-09 will have on our business.been rendered. Revenues are recorded net of sales taxes.

See Note 15 "Segment Reporting" for disaggregation of revenue by reporting segments. The Company believes that our current plan will enable us to implement our new proceduresthis disaggregation best depicts how the nature, amount, timing and controls;uncertainty of revenue and assess the cumulative effect of applying ASU No. 2014-09 at the date of initial application. Based on our overall assessment performed to date, the standard is not expected to have a material impact on the Company's Consolidated Financial Statements.cash flows are affected by economic factors.

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NOTE 45 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories:

Level 1 Inputs

Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 Inputs

Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.

Level 3 Inputs

Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

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 managements 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 measurement as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumption 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 each reporting period and reflected in our results of operations.  As of June 30, 2018, we recorded a $4 million liability for contingent consideration associated with the acquisition of ASI in other current and long-term liabilities.  See further discussion at Note 14 "Business Acquisitions".

7
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 six months ended June 30, 2018:
  
    
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 
  Contingent Liability for Accrued Consideration 
  (in thousands) 
    
Beginning balance at January 1, 2018 $- 
Acquisitions and settlements    
     Acquisition of ASI (Note 14)  4,214 
     Settlements  - 
Total remeasurement adjustments:    
       (Gains) or losses recorded against goodwill  (208)
     
Ending balance at June 30, 2018* $4,006 
     
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. $- 
     
* Included in other current and long-term liabilities
 
    

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:
 
         
          
(in thousands, unaudited) Fair Value at June 30, 2018              Valuation Technique
Significant Unobservable
Inputs
Contingent consideration:
(ASI acquisition)
 $4,006 Discounted cash flowAnnualized EBITDA and probability of achievement

Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of ASI are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results. The discount rate used in the calculation was 7.6%. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement.

Other financial instruments not measured at fair value on the Company's unaudited condensed consolidated balance sheet at June 30, 2018 but which require disclosure of their fair values include: cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility. The Company believes that the estimated fair value of such instruments at June 30, 2018 and December 31, 2017 approximates their carrying value as reported on the unaudited Condensed Consolidated Balance Sheets.
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NOTE 56 – INVENTORIES NET

The carrying values of inventories are as follows (in thousands):
  
September 30,
2017
  
December 31,
2016
 
Finished goods $75,213  $74,269 
Work in progress  12,507   9,430 
Inventories, net $87,720  $83,699 

  
June 30,
2018
  
December 31,
2017
 
       
Finished goods $98,960  $79,820 
Work in process  11,807   11,593 
Inventories $110,767  $91,413 

NOTE 67 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS

Costs and estimated profits in excess of billings on uncompleted contracts arise in the consolidated balance sheets when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract.

Costs and estimated profits on uncompleted contracts and related amounts billed were as follows (in thousands):

 
September 30,
2017
  
December 31,
2016
  
June 30,
2018
  
December 31,
2017
 
Costs incurred on uncompleted contracts $31,584  $25,214  $53,626  $37,899 
Estimated profits, thereon  3,097   6,274   6,504   2,665 
Total  34,681   31,488   60,130   40,564 
Less: billings to date  13,530   15,864   25,265   17,881 
Net $21,151  $15,624  $34,865  $22,683 

Such amounts were included in the accompanying condensed consolidated balance sheetsCondensed Consolidated Balance Sheets for 20172018 and 20162017 under the following captions (in thousands):
 
September 30,
2017
  
December 31,
2016
  
June 30,
2018
  December 31, 2017 
Costs and estimated profits in excess
of billings on uncompleted contracts
 $24,191  $18,421 
Billings in excess of costs and estimated
profits on uncompleted contracts
  (3,032)  (2,813)
Costs and estimated profits in excess
of billings
 $37,943  $26,915 
Billings in excess of costs and estimated
profits
  (3,075)  (4,249)
Translation adjustment  (8)  16   (3)  17 
Net $21,151  $15,624  $34,865  $22,683 

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NOTE 7 - PROPERTY AND EQUIPMENT, NET

The carrying values of property and equipment are as follows (in thousands):

       
  
September 30,
2017
  
December 31,
2016
 
       
Land $2,345  $2,346 
Buildings and leasehold improvements  16,668   16,259 
Furniture, fixtures and equipment  96,337   94,784 
Less – Accumulated depreciation  (59,647)  (52,582)
Total property and equipment, net $55,703  $60,807 

NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill and other intangible assets during the ninesix months ended SeptemberJune 30, 20172018 (in thousands):
 
Goodwill
  
Other
Intangible Assets
  Total  
Goodwill
  
Other
Intangible Assets
  Total 
Balance as of December 31, 2016 $187,591  $94,831  $282,422 
         
Balance as of December 31, 2017 $187,591  $78,525  $266,116 
Acquired during the period  6,442   6,185   12,627 
Translation adjustment  -   1,157   1,157   -   (551)  (551)
Amortization  -   (12,943)  (12,943)  -   (8,477)  (8,477)
Balance as of September 30, 2017 $187,591  $83,045  $270,636 
Balance as of June 30, 2018 $194,033  $75,682  $269,715 

The following table presents the goodwill balance by reportable segment as of June 30, 2018 and December 31, 2017 (in thousands):
 
September 30,
2017
  
December 31,
2016
  
June 30,
2018
  
December 31,
2017
 
Service Centers $154,473  $154,473  $160,914  $154,473 
Innovative Pumping Solutions  15,980   15,980   15,980   15,980 
Supply Chain Services  17,138   17,138   17,139   17,138 
Total $187,591  $187,591  $194,033  $187,591 

The following table presents a summary of amortizable other intangible assets (in thousands):

 As of September 30, 2017  As of December 31, 2016     June 30, 2018  
 
December 31, 2017
 
 
Gross
Carrying
Amount
  
Accumulated
Amortization
  Carrying Amount, net  
Gross
Carrying
Amount
  
Accumulated
Amortization
  Carrying Amount, net  
Gross
Carrying
Amount
  
Accumulated
Amortization
  Carrying Amount, net  
Gross
Carrying
Amount
  
Accumulated
Amortization
  Carrying Amount, net 
Customer relationships $162,201  $(79,315) $82,886  $163,022  $(68,446) $94,576  $168,255  $(92,767)  75,488   162,200   (83,806)  78,394 
Non-compete agreements  949   (790)  159   1,836   (1,581)  255   784   (590)  194   949   (818)  131 
Total $163,150  $(80,105) $83,045  $164,858  $(70,027) $94,831  $169,039  $(93,357) $75,682  $163,149  $(84,624) $78,525 

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.

NOTE 9 – LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):
  
September 30,
2017
  
December 31,
2016
 
       
ABL Revolver $-  $- 
Term Loan B  250,000   - 
Line of credit  -   147,600 
Term loan  -   74,500 
Promissory note payable in monthly installments at 2.9% through
  January 2021, collateralized by equipment
  2,938   3,577 
Less unamortized debt issuance costs  (10,531)  (992)
   242,407   224,685 
Less: Current portion  (3,365)  (51,354)
Long-term debt less current maturities $239,042  $173,331 


9

Senior Secured Term Loan B:INCOME TAXES
On August 29, 2017, DXP entered into a six year Senior Secured Term Loan B (the "Term Loan") with an original principal amount of $250 million which amortizes in equal quarterly installments of 0.25% with the balance payable in August 2023, when the facility matures.  Subject to securing additional lender commitments, the Term Loan allows for incremental increases in facility size up to an aggregate of $30 million, in minimum increments of $10 million, plus an additional amount such that DXP's secured leverage ratio (as defined under the Term Loan) would not exceed 3.60 to 1.00. We are required to repay the Term Loan in connection 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. In addition, the Term Loan contains a number of customary restrictive covenants.
The interest rate for the Term Loan was 6.7 % as of September 30, 2017.
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 restricted cash, not to exceed $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2017, is either equal to or less than as indicated in the table below:
Fiscal QuarterSecured Leverage Ratio
December 31, 20175.75:1.00
March 31, 20185.75:1.00
June 30, 20185.50:1.00
September 30, 20185.50:1.00
December 31, 20185.25:1.00
March 31, 20195.25:1.00
June 30, 20195.00:1.00
September 30, 20195.00:1.00
December 31, 20194.75:1.00
March 31, 20204.75:1.00
June 30, 2020 and each Fiscal Quarter thereafter4.50:1.00
As of September 30, 2017, the company's consolidated Secured Leverage Ratio was 3.61 to 1.00.

The Term Loan is guaranteed by each of the Company's directTax Cuts and indirect material wholly owned subsidiaries, other than any of the Company's Canadian subsidiariesJobs Act was enacted on December 22, 2017. The Tax Cuts and certain other excluded subsidiaries.
The Term Loan is secured by substantially all of the assets of the Company.
ABL Facility
On August 29, 2017, DXP also entered into a five year, $85 million Asset Based Loan and Security Agreement (the "ABL Credit Agreement").  The ABL Credit Agreement provides for asset-based revolving loans in an aggregate principal amount of up to $85.0 million (the "ABL Loans"). The ABL Loans may be increased, in increments of $10.0 million, up to an aggregate of $50.0 million. The facilityJobs Act contains several tax law changes that 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 obligations of the Borrowers are guaranteed byimpact the Company and its direct and indirect material wholly-owned subsidiaries other than certain excluded subsidiaries.
The ABL Credit Agreement contains a financial covenant restricting the Company 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 ABL Facility falls below a threshold set forth in the ABL Credit Agreement.
current and future periods. The ABL LoanCompany is securedapplying the guidance in Staff Accounting Bulletin ("SAB") 118 issued by substantially all of the assets of the Company.
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Termination of Previously Existing Credit Facility

As set forth above, on August 29, 2017, the Company terminated its previously existing credit agreement and facility and replaced it with the Term Loan and the ABL Credit Agreement. The terminated facility was under the Amended and Restated Credit Agreement, dated as of January 2, 2014, by and among the Company, as borrower, and Wells Fargo Bank, National Association, as issuing lender and administrative agent for other lenders (the "Original Credit Agreement"). This Original Credit Agreement was subsequently amended five times by the First Amendment to Restated Credit Agreement dated as of August 6, 2015, Second Amendment to Restated Credit Agreement dated as of September 30, 2015, Third Amendment to Restated Credit Agreement dated as of May 12, 2016, Fourth Amendment to Restated Credit Agreement dated as of August 15, 2016, and Fifth Amendment to Amended and Restated Credit Agreement dated as of November 28, 2016. A description of the material terms of these terminated agreements can be found in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017.
NOTE 10 – INCOME TAXESwhen accounting for the enactment-date effects of the Tax Cuts and Jobs Act. Specifically, SAB 118 permits companies to record a provisional amount which can be remeasured during the measurement period due to obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enacted date.  At June 30, 2018, the Company has not completed our accounting for all of the tax effects of the Tax Cuts and Jobs Act; however, in certain cases, as described below, the Company has made a reasonable estimate of other effects. The Company will continue to refine our calculations as additional analysis is completed.

Our effectiveThe Company originally remeasured our U.S. net deferred tax liabilities and recorded a provisional $1.3 million benefit and a corresponding provisional decrease in the U.S. net deferred tax liability relating to the reduction in the U.S. federal corporate income tax rate to 21% from continuing operations was a tax benefit35%. We are still in the process of 67.8% foranalyzing Tax Cuts and Jobs Act's impact as permitted under SAB 118. The largest impact to the three months ended September 30, 2017 compared to a tax expenseCompany being the remeasurement of 78.5% for the three months ended September 30, 2016. Compareddeferred taxes due to the U.S. statutory rate for the three months ended September 30, 2017, the effective tax rate was increased by state taxeschange. The mandatory repatriation and nondeductible expenses.resulting toll charge on accumulated foreign earnings and profits has limited impact on the Company as unremitted earnings from non-US jurisdictions is minimal.  The effectiveCompany is provisional in its approach and assertion that there is no financial statement impact related to mandatory repatriation as of June 30, 2018. We will continue to monitor tax rate was decreased by lower income tax rates on income earned in foreign jurisdictions,reform, as we anticipate additional guidance from the change in valuation allowance recorded against deferred tax assets, and research and development tax credits. Compared to the U.S. statutory rate for the three months ended September 30, 2016, the effective tax rate was increased by state taxes and nondeductible expenses.Internal Revenue Service will become more available throughout 2018.

Our effective tax rate from continuing operations was a tax expense of 22.6%25.21% for the ninesix months ended SeptemberJune 30, 20172018 compared to a tax expense of 95.8%36.81% for the ninesix months ended SeptemberJune 30, 2016.2017. Compared to the U.S. statutory rate for the ninesix months ended SeptemberJune 30, 2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and partially offset by research and development tax credits. Compared to the U.S. statutory rate for the six months ended June 30, 2017, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreasedexpenses and partially offset by lower income tax rates on income earned in foreign jurisdictions, the change in valuation allowance recorded against deferred tax assets,domestic production activities deduction, and research and development tax credits. Compared
10

NOTE 10 – LONG-TERM DEBT

The components of the Company's long-term debt consisted of the following (in thousands):

  June 30, 2018  December 31, 2017 
  Carrying Value*  Fair Value  Carrying Value*  Fair Value 
             
ABL Revolver $-  $-  $-  $- 
Term Loan B  248,125   249,519   249,375   251,869 
Promissory note due January 2021  2,284   2,284   2,722   2,722 
Total long-term debt  250,409   251,803   252,097   254,591 
Less: current portion  (3,394)  (3,408)  (3,381)  (3,406)
Long-term debt less current maturities $247,015  $248,395  $248,716  $251,185 

*Carrying value amounts do not include unamortized debt issuance costs of $9.1M and $10.1 for June 30, 2018 and December 31, 2017, respectively.

The fair value measurements used by the Company are considered Level 2 inputs, as defined in the fair value hierarchy. The fair value estimates were based on quoted prices for identical or similar securities.

August 2017 Credit Agreements

On August 29, 2017, the Company entered into two credit agreements (the "August 2017 Credit Agreements") that provided for an $85.0 million asset-backed revolving line of credit (the "ABL Revolver") and a $250.0 million senior secured term loan B (the "Term Loan B"). Under the ABL Revolver, the Company may request $10.0 million incremental revolving loan commitments in an additional aggregate amount not to the U.S. statutoryexceed $50.0 million, subject to pro forma compliance with certain net secured leverage ratio tests.

The applicable rate for the nineABL Revolver is LIBOR plus a margin ranging from 1.25% to 1.75% per annum. The applicable rate for the Term Loan B was LIBOR plus 5.50% subject to a LIBOR floor of 1.00%. The maturity date of the ABL Revolver is August 29, 2022 and the maturity date of the Term Loan B is August 29, 2023.

On June 25, 2018, the Company entered into Amendment No. 1 (the "Repricing Amendment") to the Senior Secured Term Loan B Agreement. The Repricing Amendment, among other things, reduced the applicable rate for the term loans to LIBOR plus 4.75% (subject to a LIBOR floor of 1.00%) from LIBOR plus 5.50%. The Repricing Amendment also includes a "soft call" prepayment penalty of 1.0% for a period of six months ended Septembercommencing with the date of the Repricing Amendment for certain prepayments, refinancing, and amendments.

The Company accounted for the Repricing Amendment as a modification of debt. Approximately, $60,000 of prior deferred debt issuance cost were accelerated and recorded as additional interest expense in the condensed consolidated statements of operations and comprehensive operations, attributable to prior syndicate lenders who reduced or eliminated their positions during the amendment process. The Company also incurred $0.9 million of third party fees in connection with the Repricing Amendment, which was also recorded as additional interest expense in the condensed consolidated statements of operations and comprehensive operations.

As of June 30, 2016,2018, the effective tax rate was increased by state taxesCompany had no amount outstanding under the ABL Revolver and nondeductible expenses.had $80.0 million of borrowing capacity, including the impact of letters of credit.

11

Interest on Borrowings

The interest rates on our borrowings outstanding at June 30, 2018 and December 31, 2017, including the amortization of debt issuance costs, were as follows:

  
June 30,
2018
  
December 31,
2017
 
ABL Revolver  3.8%  2.9%
Term Loan B  6.8%  7.1%
Promissory Note  2.9%  2.9%
Weighted average interest rate  6.8%  7.0%

The Company was in compliance with all financial covenants under the August 2017 Credit Agreement as of June 30, 2018.

NOTE 11 - STOCK-BASED COMPENSATION

Restricted Stock

Under the restricted stockequity incentive plans approved by our shareholders, directors, consultants and employees weremay be awarded shares of DXP's common stock. The shares of restricted stock and restricted stock units granted to employees and that are outstanding as of SeptemberJune 30, 20172018 vest (or have forfeiture restrictions that lapse) in accordance with one of the following vesting schedules: 100% one year after date of grant; 33.3% each year for three years after the date of grant; 20% each year for five years after the grant date;date of grant; or 10% each year for ten years after the grant date.date of grant. The shares of restricted stock granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock awards wasis measured based upon the closing prices of DXP's common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Shares of our common stock are issued and outstanding upon the grant of awards of restricted stock. Once restricted stock vests,units vest, new shares of the Company's stock are issued.  At SeptemberJune 30, 2017, 401,2232018, 279,149 shares were available for future grants.grant.

Changes in restricted stock for the ninesix months ended SeptemberJune 30, 20172018 were as follows:
 
Number of
Shares
  
Weighted Average
Grant Price
  
Number of
Shares
  
Weighted Average
Grant Price
 
Non-vested at December 31, 2016  143,380  $26.76 
Non-vested at December 31, 2017  77,901  $30.36 
Granted  18,672  $34.07   124,474  $31.54 
Forfeited  (298) $59.60   (2,400) $46.68 
Vested  (79,853) $25.14   (12,699) $49.67 
Non-vested at September 30, 2017  81,901  $29.88 
Non-vested at June 30, 2018  187,276  $29.63 

Compensation expense, associated with restricted stock, recognized in the ninesix months ended SeptemberJune 30, 2018 and 2017 and 2016 was $1.4 million and $1.9$1.0 million, respectively. Related income tax benefits recognized in earnings for the ninesix months ended SeptemberJune 30, 20172018 and 20162017 were approximately $0.6 million and $0.6 million, respectively.$0.4 million. Unrecognized compensation expense under the Restricted Stock Plan at SeptemberJune 30, 20172018 and December 31, 20162017 was $1.9$4.4 million and $2.7$1.6 million, respectively. As of SeptemberJune 30, 2017,2018, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 17.428.2 months.


1112

NOTE 12 - 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):
 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2017  2016  2017  2016  2018  2017  2018  2017 
Basic:                        
Weighted average shares outstanding  17,394   14,600   17,402   14,529   17,558   17,404   17,538   17,406 
Net income attributable to DXP Enterprises, Inc. $2,966  $263  $10,234  $321  $11,562  $4,135  $16,113  $7,268 
Convertible preferred stock dividend  23   23   68   
68
   22   22   45   
45
 
Net income attributable to common shareholders $2,943  $240  $10,166  $253  $11,540  $4,113  $16,068  $7,223 
Per share amount $0.17  $0.02  $0.58  $0.02  $0.66  $0.24  $0.92  $0.42 
                                
Diluted:                                
Weighted average shares outstanding  17,394   14,600   17,402   14,529   17,558   17,404   17,538   17,406 
Assumed conversion of convertible
preferred stock
  840   840   840   840   840   840   840   840 
Total dilutive shares  18,234   15,440   18,242   15,369   18,398   18,244   18,378   18,246 
Net income attributable to
common shareholders
 $2,943  $240  $10,166  $253  $11,540  $4,113  $16,068  $7,223 
Convertible preferred stock dividend  23   23   68   68   22   22   45   45 
Net income attributable to DXP Enterprises, Inc. for diluted
earnings per share
 $2,966  $263  $10,234  $321  $11,562  $4,135  $16,113  $7,268 
Per share amount $0.16  $0.02  $0.56  $0.02  $0.63  $0.23  $0.88  $0.40 


NOTE 13 - COMMITMENTS AND CONTINGENCIES

From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.

NOTE 14 – BUSINESS ACQUISITIONS

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 includes approximately $4.0 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 will provide the Company's metal working division with new geographic territory and enhance DXP's end market mix. For the six months ended June 30, 2018, ASI contributed sales of $23.0 million and earnings before taxes of approximately $2.6 million.

As part of our purchase agreement, we may pay up to an additional $4.6 million of contingent consideration over the next three years based on the achievement of certain earnings benchmarks established for calendar years 2018, 2019 and 2020. The purchase price includes the estimated fair value of the contingent consideration recorded at the present value of $4.0 million. The estimated fair value of the contingent consideration was determined using a probability-weighted discounted cash flow model. We determined the fair value of the contingent consideration obligations by calculating the probability-weighted payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement includes earnings forecasts which are a Level 3 measurement as discussed in Note 5. 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 June 30, 2018 approximately $1.4 million of the actual cash due toward the contingent consideration earned is recorded in current liabilities. We may pay up to an additional $3.2 million over the remaining earn-out period based on the achievement of certain EBITDA benchmarks. The estimated fair value of the contingent consideration is recorded at the present value of $4.0 million at June 30, 2018. 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 5 to our condensed consolidated financial statements.
The total acquisition consideration is equal to the sum of all cash payments, the fair value of stock issued, and the present value of any contingent consideration. The following table summarizes the total acquisition consideration for the ASI Purchase:
1213
Purchase Price Consideration Total Consideration 
  (Dollars in thousands) 
Cash payments $10,792 
Fair value of stock issued  894 
Present value of estimated fair value of contingent earn-out consideration  4,006 
Total purchase price consideration $15,692 

NOTE 1415 - SEGMENT REPORTING

The Company's reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, MRO products, equipment and integrated services, 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.

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):

  Three Months Ended June 30, 
  2018  2017 
  SC  IPS  SCS  Total  SC  IPS  SCS  Total 
Sales $193,576  $74,257  $43,394  $311,227  $164,749  $44,470  $41,479  $250,698 
Amortization  2,310   1,538   271   4,119   2,227   1,793   271   4,291 
Income (loss) from operations  19,623   7,418   3,984   31,025   16,190   (38)  3,447   19,599 
Income from operations,
excluding amortization
 $21,933  $8,956  $4,255  $35,144  $18,417  $1,755  $3,718  $23,890 
14
  For the Three Months Ended September 30, 
  2017  2016 
  SC  IPS  SCS  Total  SC  IPS  SCS  Total 
Sales $160,863  $51,027  $40,040  $251,930  $152,018  $39,830  $38,177  $230,025 
Amortization  2,262   1,803   271   4,336   2,292   1,956   271   4,519 
Income (loss) from operations  13,288   35   3,711   17,034   11,053   (326)  3,658   14,385 
Income from operations,
excluding amortization
 $15,550  $1,838  $3,982  $21,370  $13,345  $1,630  $3,929  $18,904 

   
 For the Nine Months Ended September 30,  
Six Months Ended June 30,
 
 2017  2016  2018  2017 
 SC  IPS  SCS  Total  SC  IPS  SCS  Total  SC  IPS  SCS  Total  SC  IPS  SCS  Total 
Sales $474,324  $144,555  $122,276  $741,155  $481,352  $141,614  $116,835  $739,801  $368,937  $141,899  $86,327  $597,163  $313,461  $93,528  $82,236  $489,225 
Amortization  6,738   5,393   812   12,943   6,871   5,874   812   13,557   4,770   3,165   542   8,477   4,477   3,588   542   8,607 
Income from operations  40,570   1,710   10,946   53,226   28,608   1,549   10,799   40,956   32,992   12,173   7,767   52,932   27,281   1,676   7,234   36,191 
Income from operations,
excluding amortization
 $47,308  $7,103  $11,758  $66,169  $35,479  $7,423  $11,611  $54,513  $37,762  $15,338  $8,309  $61,409  $31,758  $5,264  $7,776  $44,798 


The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes (in thousands):
    
Three Months Ended
September 30,
  
 
Nine Months Ended
September 30,
      Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2017  2016  2017  2016  2018  2017  2018  2017 
Operating income for reportable segments, excluding amortization $21,370  $18,904  $66,169  $54,513 
Operating income for reportable segments $35,144  $23,890  $61,409  $44,798 
Adjustment for:                                
Amortization of intangible assets  4,336   4,519   12,943   13,557   4,119   4,291   8,477   8,607 
Corporate expense  10,524   9,452   28,223   29,176 
Corporate expenses  10,965   9,342   21,723   17,698 
Income from operations  6,510   4,933   25,003   11,780   20,060   10,257   31,209   18,493 
Interest expense  4,928   4,338   12,573   11,698   6,137   3,992   11,178   7,645 
Other income, net  (153)  (251)  (324)  (397)
Other (income) expense, net  (1,416)  57   (1,438)  (171)
Income before income taxes $1,735  $846  $12,754  $479  $15,339  $6,208  $21,469  $11,019 

NOTE 1516 - SUBSEQUENT EVENTS

We have evaluated subsequent events through the date the interim Condensed Consolidated Financial Statements were issued. There were no subsequent events that required recognition or disclosure unless elsewhere identified in this report.

1315

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management discussion and analysis (MD&A)("MD&A") of the financial condition and results of operations of
DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") for the three and ninesix months ended SeptemberJune 30, 20172018 should be read in conjunction with our previous annual report on Form 10-K and our quarterly reports on Form 10-Q, and the consolidated financial statements and notes thereto included in our annual and quarterly reports. The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this "Report") contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such 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. 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 our ability to satisfy our debt covenants under our credit facilities, our ability to refinance our debt on acceptable terms, the effectiveness of management's strategies and decisions, our ability to implement our internal growth and acquisition growth strategies, general economic and business conditionconditions specific to our primary customers, changes in government regulations, our ability to effectively integrate businesses we may acquire, our success in remediating our internal control weaknesses, new or modified statutory or regulatory requirements, availability of materials and changinglabor, 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 or 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 fluctuatingreduced oil and gas prices and supply or demand for maintenance, repair and operating products, equipment and service, 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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017.28, 2018. We assume no obligation and do not intend to update these forward-looking statements. Unless the context otherwise requires, references in this Report to the "Company", "DXP", "we" or "our" shall mean DXP Enterprises, Inc., a Texas corporation, together with its subsidiaries.
1416

RESULTS OF OPERATIONS
(in thousands, except percentages and per share data)

 Three Months Ended September 30,  Nine Months September 30,  Three Months Ended June 30,  Six Months Ended June 30, 
 2017  %  2016  %  2017  %  2016  %  2018  %  2017  %  2018  %  2017  % 
Sales $251,930   100.0% $230,025   100.0% $741,155   100.0% $739,801   100.0% $311,227   100.0% $250,698   100.0% $597,163   100.0% $489,225   100.0%
Cost of sales  184,967   73.4%  166,205   72.3%  540,741   73.0%  535,560   72.4%  226,111   72.7%  181,762   72.5%  435,602   72.9%  355,774   72.7%
Gross profit  66,963   26.6%  63,820   27.7%  200,414   27.0%  204,241   27.6%  85,116   27.3%  68,936   27.5%  161,561   27.1%  133,451   27.3%
Selling, general and administrative expense  60,453   24.0%  58,887   25.6%  175,411   23.7%  192,461   26.0%
Selling, general and administrative expenses  65,056   20.9%  58,679   23.4%  130,352   21.8%  114,958   23.5%
Income from operations  6,510   2.6%  4,933   2.1%  25,003   3.4%  11,780   1.6%  20,060   6.4%  10,257   4.1%  31,209   5.2%  18,493   3.8%
Other income, net  (153)  -0.1%  (251)  -0.1%  (324)  0.0%  (397)  -0.1%
Other (income) expense, net  (1,416)  -0.5%  57   0.0%  (1,438)  -0.2%  (171)  0.0%
Interest expense  4,928   2.0%  4,338   1.9%  12,573   1.7%  11,698   1.6%  6,137   2.0%  3,992   1.6%  11,178   1.9%  7,645   1.6%
Income before taxes  1,735   0.7%  846   0.4%  12,754   1.7%  479   0.1%  15,339   4.9%  6,208   2.5%  21,469   3.6%  11,019   2.2%
Provision(benefit) for income taxes  (1,176)  -0.4%  664   0.3%  2,880   0.4%  459   0.1%
Provision for income taxes  3,776   1.2%  2,239   0.9%  5,412   0.9%  4,056   0.8%
Net income  2,911   1.2%  182   0.0%  9,874   1.3%  20   0.0%  11,563   3.7%  3,969   1.5%  16,057   2.7%  6,963   1.4%
Net loss attributable to noncontrolling interest  (55)  0.0%  (81)  0.0%  (360)  0.0%  (301)  0.0%
Net income (loss) attributable to noncontrolling interest  1   0.0%  (166)  0.0%  (56)  0.0%  (305)  -0.1%
Net income attributable to DXP Enterprises, Inc. $2,966   1.2% $263   0.1% $10,234   1.4% $321   0.0% $11,562   3.7% $4,135   1.6% $16,113   2.7% $7,268   1.5%
Per share amounts attributable to DXP Enterprises, Inc.                                                                
Basic earnings per share $0.17      $0.02      $0.58      $0.02      $0.66      $0.24      $0.92      $0.42     
Diluted earnings per share $0.16      $0.02      $0.56      $0.02      $0.63      $0.23      $0.88      $0.40     

DXP is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS"). The Service Centers are engaged in providing maintenance, repair and operating ("MRO") products, equipment and integrated services, including technical expertise and logistics capabilities, to industrial customers with the ability to provide same day delivery. The Service Centers provide a wide range of MRO products and services in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The SCS segment provides a wide range of MRO products and manages all or part of our customer's supply chain including inventory.function, and inventory management. The IPS segment fabricates and assembles integrated pump system packages custom made to customer specifications, remanufactures pumps and manufactures branded private label pumps. Over 90% of DXP's revenues represent sales of products.

Three Months Ended SeptemberJune 30, 20172018 compared to Three Months Ended SeptemberJune 30, 20162017

SALES. Sales for the three months ended SeptemberJune 30, 20172018 increased $21.9$60.5 million, or 9.5%24.1%, to approximately $251.9$311.2 million from $230.0$250.7 million for the prior year's corresponding period. Sales from Vertex, a business soldacquired on OctoberJanuary 1, 20162018 accounted for $7.1$12.4 million of thirdthe increase. Excluding second quarter 2016 sales. Excluding third quarter 20162018 sales of Vertex, on a same store sales basis,the business acquired, sales for the thirdsecond quarter in 20172018 increased by $29.0$48.1 million, or 13.0%19.2% from the prior year's corresponding period. This same store sales increase is the result of sales increasesan increase in our Service Center, Innovative Pumping SolutionsIPS, SC and Supply Chain ServicesSCS segments of $15.9$29.8 million, $11.2 million$16.4 and $1.9 million. Thesemillion, respectively, excluding acquisition sales. The fluctuations in the sales is further explained in our segments are further explained inbusiness segment discussions below.

Innovative Pumping Solutions segment. Sales for the IPS segment increased by $29.8 million, or 67.0% for the second quarter of 2018 compared to the prior year's corresponding period. This increase was primarily the result of an increase in the capital spending by oil and gas producers and related businesses stemming from an increase in the drilling rig count production and the price of oil during the first six months of 2018.  This level of IPS sales might continue, or improve, during the remainder of 2018, if crude oil and natural gas prices and the drilling rig count remain at levels experienced during the first six months of 2018.

Service Centers segment. Sales for the Service Centers segment increased by $28.8 million, or 17.5% for the second quarter of 2018 compared to the prior year's corresponding period. Excluding $12.4 million of second quarter 2018 Service Centers segment sales from a business acquired, Service Centers segment sales for the second quarter in 2018 increased $16.4 million, or 10.0% from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment, bearings and metal working products to customers engaged in the late upstream, midstream or downstream oil and gas markets or manufacturing equipment for these markets in connection with increased capital spending by oil and gas producers. If crude oil and natural gas prices and the drilling rig count remain at levels experienced during the second quarter of 2018, this level of sales to the oil and gas industry might continue, or improve, during the remainder of 2018.

Supply Chain Services segment. Sales for the SCS segment increased by $1.9 million, or 4.6%, for the second quarter of 2018, compared to the prior year's corresponding period. The increase in sales is primarily related to increased sales to customers in the oil and gas and aerospace industries.

17
GROSS PROFIT. Gross profit as a percentage of sales for the three months ended SeptemberJune 30, 20172018 decreased by approximately 11615 basis points from the prior year's corresponding period. On a same store sales basis,Excluding the impact of the business acquired, gross profit as a percentage of sales decreasedincreased by approximately 6931 basis points. The overall decreaseincrease in the gross profit percentage on a same store sales basisexcluding the business acquired, is primarily the result of an approximate 186397 basis point decreaseincrease in the gross profit percentage in our IPS segment partially offset by an approximate 6127 basis point decrease in the gross profit percentage in our Supply Chain Services segment. Gross profit for the IPS segment andincreased as a result of an approximate 16 basis point decreaseincrease in the capital spending by oil and gas producers and related businesses stemming from an increase in the drilling rig count production and the price of oil during the first six months of 2018.

Service Centers segment. As a percentage of sales, the second quarter gross profit percentage for the Service Centers decreased approximately 108 basis points but decreased approximately 18 basis points, adjusting for the business acquired, from the prior year's corresponding period. This was primarily as a result of sales mix and price increases from vendors. Operating income for the Service Centers segment increased $2.2 million, or 12.2%. The increase in our Service Centeroperating income is primarily the result of the improved sales.

Innovative Pumping Solutions segment. These fluctuations are explained As a percentage of sales, the second quarter gross profit percentage for the IPS segment increased approximately 397 basis points from the prior year's corresponding period primarily as a result of an increase in utilization and capacity within IPS' engineered-to-order business and an overall improvement in the pricing environment driven by an increase in capital spending by oil and gas producers. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built to order customer specific products. Operating income for the IPS segment discussions below.increased $7.2 million, or 410%, primarily as a result of the above mentioned increase in sales.

Supply Chain Services segment. Gross profit as a percentage of sales decreased approximately 27 basis points, compared to the prior year's corresponding period.  This was primarily as a result of sales mix and contractual lag effects of price increases from vendors.  Operating income for the second quarter of 2018 increased compared to the prior year's corresponding period mainly due to an increase in gross profit of $0.3 million primarily and a decrease in SG&A of $0.2 million.

SELLING, GENERAL AND ADMINISTRATIVE.ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense (SG&A) for the three months ended SeptemberJune 30, 20172018 increased by approximately $1.6$6.4 million, or 2.7%10.9%, to $60.5$65.1 million from $58.9$58.7 million for the prior year's corresponding period. Selling, general and administrative expense from a business that was soldacquired accounted for $1.9$0.7 million of the thirdsecond quarter 2016 expense.increase. Excluding third quarter expenses from the business that was sold, on a same store sales basis,acquired, SG&A for the quarter increased by $3.5$5.6 million, or 6.2%9.6%. The overall increase in SG&A on a same store sales basis,adjusting for the business acquired, is the result of increased payroll, incentive compensation and related taxes.taxes and 401(K) expenses. The remaining increase in SG&A expense for the second quarter of 2018 is a result of the increase in sales. As a percentage of sales, the thirdsecond quarter 20172018 expense decreased approximately 154188 basis points to 24.0%21.5% from 25.5%23.4% for the prior year's corresponding period, on a same store sales basis,adjusting for the business acquired, primarily as a result of the percentage increase in sales exceeding the percentage increasedecrease in SG&A.

OPERATING INCOME. Operating income for the thirdsecond quarter of 20172018 increased $1.6by $9.8 million, to $6.5$20.1 million, from $4.9$10.3 million in the prior year's corresponding period. The third quarter 2016 operating income from the business soldacquired in 2016 was $1.12018 increased the overall operating income for the three months ended June 30, 2018 in the amount of $1.3 million. Excluding the operating income from the business sold, on a same store sales basis,acquired, operating income increased $2.6$8.5 million, or 68.6%83.2% from the prior year's corresponding period. This increase in operating income is primarily related to the increase in sales discussed above.

INTEREST EXPENSE. Interest expense of $4.9 million for the thirdsecond quarter of 20172018 increased 13.6%53.7% from the prior year's corresponding period.  The increase isperiod primarily theas a result of the $0.6 million write-off of debt issuance costs in connection with the termination of the previously existing credit facility during the third quarter of 2017. Increasedincreased interest rates were partially offset by a lower outstanding balance.under our credit facility.

INCOME TAXES. Our effective tax rate from continuing operations was a tax benefitexpense of 67.8%24.62% for the three months ended SeptemberJune 30, 20172018 compared to a tax expense of 78.5%36.07% for the three months ended SeptemberJune 30, 2016.2017. Compared to the U.S. statutory rate for the three months ended SeptemberJune 30, 2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. The effective tax rate was decreased by research and development tax credits. Compared to the U.S. statutory rate for the three months ended June 30, 2017, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreased by lower income tax rates on income earned in foreign jurisdictions, the change in valuation allowance recorded against deferred tax assets,domestic production activities deduction, and research and development tax credits. Compared

Six Months Ended June 30, 2018 compared to Six Months Ended June 30, 2017

SALES. Sales for the six months ended June 30, 2018 increased $107.9 million, or 22.1%, to approximately $597.2 million from $489.2 million for the prior year's corresponding period. Sales from a business acquired on January 1, 2018 accounted for $23.0 million of the increase in sales. Excluding the first six months of 2018 sales of the business acquired, sales for the first six months of 2018 sales increased by $85.0 million, or 17.4% from the prior year's corresponding period. This sales increase is the result of an increase in our IPS, SC and SCS segments of $48.4 million, $32.5 million and $4.1 million, respectively, excluding acquisition sales. The fluctuations in sales is further explained in our business segment discussions below.

Innovative Pumping Solutions segment. Sales for the IPS segment increased by $48.4 million, or 51.7% for the six month period ended June 30, 2018 compared to the U.S. statutory rate forprior year's corresponding period. This increase was primarily the threeresult of an increase in the capital spending by oil and gas producers and related businesses stemming from an increase in the drilling rig count production and the price of oil during the first six months ended September 30, 2016,of 2018.  This level of IPS sales might continue, or improve, during the effective tax rate was increased by state taxesremainder of 2018 if crude oil and nondeductible expenses.natural gas prices and the drilling rig count remain at levels experienced during the first six months of 2018.

SERVICE CENTERS SEGMENT.Service Centers segment. Sales for the Service Centers segment increased by $8.8$55.5 million, or 5.8%,17.7% for the third quarter of 2017six months ended June 30, 2018 compared to the prior year's corresponding period. Excluding $7.1$23.0 million of third quarter 2016 Service Centers segment sales from a business sold, Service Centers segment sales for the third quarter in 2016six months ended June 30, 2018 from a business acquired, Service Centers segment sales for the period increased $15.9$32.5 million, or 11.0%10.4% from the prior year's corresponding period, on a same store sales basis.period. This sales increase is primarily the result of increased sales of rotating equipment, industrial suppliesbearings and bearingsmetal working products to customers engaged in the late upstream, midstream or downstream oil and gas marketmarkets or manufacturing equipment for the upstreamthese markets in connection with increased capital spending by oil and gas market. Increases and decreases in DXP's sales to oil and gas related customers tend to lag many months behind increases and decreases in crude oil and natural gas prices and the drilling rig count.producers. If crude oil and natural gas prices and the drilling rig count remain at levels experienced during the thirdsecond quarter of 2017,2018, this level of sales to the upstream oil and gas industry could be expected tomight continue, or improve, during the remainder of 2017.
15
As a percentage of sales, the third quarter gross profit percentage for the Service Centers segment decreased approximately 78 basis points but decreased approximately 16 basis points on a same store sales basis, from the prior corresponding period. This decline is primarily the result of a decline in the gross profit percentage for our safety services in Canada. Operating income, on a same store sales basis, for the Service Centers segment increased $3.3 million, or 26.7%. The increase in operating income is primarily the result of the $4.4 million increase in gross profit.
16
INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for the IPS segment increased by $11.2 million, or 28.1 % for the third quarter of 2017 compared to the prior corresponding period. This increase was primarily the result of an increase in capital spending by oil and gas producers and related businesses during 2017 compared to 2016. As a percentage of sales, the third quarter gross profit percentage for the IPS segment decreased approximately 186 basis points from the prior corresponding period primarily as a result of competitive pricing pressures and a reduced level of large, complex, high margin orders in the 2017 period. Additionally, gross profit margins for individual orders for the IPS segment can fluctuate significantly because each order is for a unique package built to customer specifications and subject to varying competition. Operating income for the IPS segment increased $0.2 million, or 12.8%, primarily as a result of the $11.2 million increase in sales discussed above.2018.

SUPPLY CHAIN SERVICES SEGMENT.Supply Chain Services segment. Sales for the SCS segment increased by $1.9$4.1 million, or 4.9%5.0%, for the third quarter of 2017six months ended June 30, 2018, compared to the prior year's corresponding period. The increase in sales is primarily related to increased sales to customers in the oil and gas relatedand aerospace industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased more from DXP because of the increase in capital spending by oil and gas companies operating in the U.S and Canada. Gross profit as a percentage of sales decreased approximately 61 basis points compared to the prior corresponding period primarily as a result of increased sales of lower margin products to oil and gas related customers.  Operating income for the SCS segment increased 1.3% primarily as a result of the 4.9% increase in sales.U.S.

Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2016
18

SALES. Sales for the nine months ended September 30, 2017 increased $1.3 million, or 0.2%, to approximately $741.2 million from $739.8 million for the prior corresponding period. Sales from a business sold in 2016 accounted for $22.7 million of 2016 sales. Excluding the first nine months of 2016 sales of the sold business, on a same store sales basis, sales for the first nine months of 2017 increased by $24.0 million, or 3.4% from the prior corresponding period. This same store sales increase is the result of an increase in our Service Centers, SCS and IPS segments of $15.6 million, $5.4 million and $2.9 million respectively, on a same store sales basis. These fluctuations in the sales in our segments are further explained in segment discussions below.

GROSS PROFIT. Gross profit as a percentage of sales for the ninesix months ended SeptemberJune 30, 20172018 decreased by approximately 5722 basis points from the prior year's corresponding period. On a same store sales basis,Excluding the impact of the business acquired, gross profit as a percentage of sales increased by approximately 1816 basis points. The overall decreaseincrease in the gross profit percentage on a same store sales basis,excluding the business acquired, is primarily the result of an approximate 208 basis point decrease in the gross profit percentage in our IPS segment and an approximate 69 basis point decrease in gross profit percentage in our Supply Chain segment partially offset by a 53180 basis point increase in the gross profit percentage in our Service CentersIPS segment. These fluctuations are explained in the segment discussions below.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense (SG&A) for the nine months ended September 30, 2017 decreased by approximately $17.1 million, or 8.9%, to $175.4 million from $192.5 million for the prior corresponding period. SG&A from a business that was sold accounted for $6.1 million of the decrease. Excluding the first nine months of SG&A from the business that was sold, on a same store sales basis, SG&A decreased by $10.9 million, or 5.9%. The overall decline in SG&A, on a same store sales basis, is the result of decreased payroll, incentive compensation, related taxes and 401(k) expenses due to headcount and salary reductions and other cost reduction measures primarily implemented near the end of the first quarter of 2016. Additionally, amortization expense declined by $0.6 million, on a same store sales basis.Innovative Pumping Solutions segment. As a percentage of sales, the six month period gross profit percentage for the IPS segment increased approximately 180 basis points from the prior year's corresponding period primarily as a result of an increase in utilization and capacity within IPS' engineered-to-order business and an overall improvement in the pricing environment driven by an increase in capital spending by oil and gas producers. Additionally, gross profit margins for individual orders have continued to improve because of the increase in sales of built to order customer specific products. Operating income for the IPS segment increased $10.1 million, or 191%, primarily as a result of the above mentioned increase in sales.

Service Centers segment. As a percentage of sales, the six month period gross profit percentage for the Service Centers decreased approximately 73 basis points but increased approximately 5 basis points, adjusting for the business acquired, from the prior year's corresponding period. This was primarily as a result of sales mix and price increases from vendors. Operating income for the Service Centers segment increased $3.4 million, or 10.8%. The increase in operating income is primarily the result of the improved sales.

Supply Chain Services segment. Gross profit as a percentage of sales decreased approximately 12 basis points, compared to the prior year's corresponding period.  This was primarily as a result of sales mix and contractual lag effects of price increases from vendors.  Operating income for the six months ended June 30, 2018 increased compared to the prior year's corresponding period mainly due to an increase in gross profit of $0.8 million primarily offset by an increase in SG&A of $0.3 million.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the six months ended June 30, 2018 increased by approximately $15.4 million, or 13.4%, to $130.4 million from $115.0 million for the prior year's corresponding period. Selling, general and administrative expense from a business that was acquired accounted for $1.4 million of the increase. Excluding the first ninesix months of 20172018 expenses from the business that was acquired, SG&A for the six months increased by $14.0 million, or 12.1%. The overall increase in SG&A adjusting for the business acquired, is the result of increased payroll, incentive compensation and related taxes and 401(K) expenses. The remaining increase in SG&A expense for the first six months of 2018 is primarily a result of the increase in sales. As a percentage of sales, the six months ended June 30, 2018 expense decreased approximately 231105 basis points to 23.7%22.5% from 26.0%23.5% for the prior year's corresponding period, on a same store sales basis,adjusting for the business acquired, primarily as a result of the percentage increase in sales exceeding the percentage increasedecrease in SG&A.

OPERATING INCOME. Operating income for the ninefirst six months ended September 30, 2017of 2018 increased $13.2by $12.7 million, to $25.0$31.2 million, from $11.8$18.5 million in the prior year's corresponding period. The operating income from the business soldacquired in 2016 reduced2018 increased the overall increase in operating income for the six months ended June 30, 2018 in the amount of $2.9$2.6 million. Excluding the operating income from the business sold, on a same store sales basis,acquired, operating income increased $16.1$10.1 million, or 181.6%54.9% from the prior year's corresponding period. This increase in operating income is primarily related to the decrease in SG&A and increase in gross profitsales discussed above.

INTEREST EXPENSE. Interest expense for the ninefirst six months ended September 30, 2017of 2018 increased 7.5%46.2% from the prior year's corresponding period primarily as a result of increased interest rates under our credit facilities.facility.

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 22.6%25.21% for the ninesix months ended SeptemberJune 30, 20172018 compared to a tax expense of 95.8%36.81% for the ninesix months ended SeptemberJune 30, 2016.2017. Compared to the U.S. statutory rate for the ninesix months ended SeptemberJune 30, 2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. The effective tax rate was decreased by research and development tax credits. Compared to the U.S. statutory rate for the six months ended June 30, 2017, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreased by lower income tax rates on income earned in foreign jurisdictions, the change in valuation allowance recorded against deferred tax assets,domestic production activities deduction, and research and development tax credits. Compared to the U.S. statutory rate for the nine months ended September 30, 2016, the effective tax rate was increased by state taxes and nondeductible expenses.

SERVICE CENTERS SEGMENT. Sales for the Service Centers segment decreased by $7.0 million, or 1.5% for the nine months ended September 30, 2017 compared to the prior corresponding period. Excluding $22.7 million of the first nine months 2016 Service Centers segment sales from a business sold, Service Centers segment sales for the first nine months in 2017 increased $15.6 million, or 3.4% from the prior corresponding period, on a same store sales basis. This sales increase is primarily the result of increased sales of rotating equipment, industrial supplies and bearings to customers engaged in the upstream oil and gas market or manufacturing equipment for the upstream oil and gas market. As a percentage of sales, the nine month period gross profit percentage for the Service Centers increased approximately 3 basis points but increased approximately 53 basis points on a same store sales basis, from the prior corresponding period. This increase in the gross profit percentage is primarily the result of improved margins on sales of bearings and industrial supplies. Operating income for the Service Centers segment increased $14.7 million, or 45.2% on a same store sales basis. The increase in operating income is primarily the result of the reduced SG&A combined with increased gross profit.

INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for the IPS segment increased by $2.9 million, or 2.1% for the nine months ended September 30, 2017 compared to the prior corresponding period. This increase is primarily the result of increased capital spending by oil and gas producers and related businesses during the first nine months of 2017 compared to the first nine months of 2016.  As a percentage of sales, the nine month period gross profit percentage for the IPS segment decreased approximately 208 basis points from the prior corresponding period primarily as a result competitive pricing pressures and a reduced level of large, complex, high margin orders in in the 2017 period. Additionally, gross profit margins for individual orders for the IPS segment can fluctuate significantly because each order is for a unique package built to customer specifications and subject to varying competition. Operating income for the IPS segment decreased $0.3 million, or 4.3%, primarily as a result of the 208 basis point decrease in the gross profit percentage discussed above, partially offset by a decrease in SG&A.

SUPPLY CHAIN SERVICES SEGMENT. Sales for the SCS segment increased by $5.4 million, or 4.7%, for the nine months ended September 30, 2017 compared to the prior corresponding period. The increase in sales is primarily related to increased sales to customers in the oil and gas industries.  We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased more from DXP because of the increase in capital spending by oil and gas companies operating in the U.S and Canada. Gross profit as a percentage of sales decreased approximately 69 basis points compared to the prior corresponding period primarily as a result of increased sales of lower margin products to oil and gas related customers.  Operating income for the SCS segment increased 1.3% primarily as a result of gross profit increasing more than SG&A increased.

1619
LIQUIDITY AND CAPITAL RESOURCES

General Overview

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of debt. As a distributor of MRO products and services, we require significant amounts of working capital to fund inventories and accounts receivable. 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 and to service our debt.

The following table summarizes our net cash flows used in and provided by operating activities, net cash used in investing activities and net cash (used in) provided by financing activities for the periods presented (in thousands):


     
Six Months Ended
June 30,
 
Net Cash Provided by (Used in): 
2018
  
2017
 
Operating Activities $(6,983) $7,854 
Investing Activities  (13,608)  (1,118)
Financing Activities  (1,929)  (5,883)
Effect of Foreign Currency  (171)  36 
Net Change in Cash $(22,691) $889 

Operating Activities

The Company generated $8.5used $7.0 million of cash fromin operating activities during the ninesix months ended SeptemberJune 30, 20172018 compared to $35.7generating $7.9 million of cash during the prior year's corresponding period. The $27.2$14.9 million decreaseincrease in the amount of cash generatedused between the two periods was primarily driven by inventory build-up and increases in costs and estimated profits in excess of billings as a greaterresult of increased project activity at our IPS segment.

Investing Activities

For the six months ended June 30, 2018, net cash used in investing activities was $13.6 million compared to $1.1 million in the corresponding period in 2017. This increase in working capital duringwas primarily driven by the 2017 period,purchase of ASI partially offset by proceeds from the sale of a $9.9building. For the six months ended June 30, 2018, purchases of property, plant and equipment were approximately $5.5 million.

Financing Activities

For the six months ended June 30, 2018, net cash used in financing activities was $1.9 million, improvement in net income and a lower level of net adjustments to reconcile net incomecompared to net cash provided by operating activities.used in financing activities of $5.9 million for the corresponding period in 2017. The activity in the period was primarily attributed to the Company making principal repayments on the Term Loan.

During the ninesix months ended SeptemberJune 30, 2017,2018, the amount available to be borrowed under our credit facility increased from $37.3decreased to $80.0 million at June 30, 2018 compared to $82.0 million at December 31, 2016, to $81.0 million at September 30, 2017.  This increase in availability is primarily awas the result of the Company terminating its previously existing$5.0 million in letters of credit facility and replacing it with the ABL Credit Agreement and Term Loan.outstanding as of June 30, 2018.

We believe this is adequate funding to support working capital needs within the business. 

Funding Commitments

We intend to pursue additional acquisition targets, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be determined with certainty. We continue to expect to fund future acquisitions primarily with cash flows from operations and borrowings, including the undrawn portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us.

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.

20
ABL Facility and Senior Secured Term Loan B and ABL Facility
Asset-Based Loan Facility:
On August 29, 2017, DXP entered into a five year, $85 million Asset Based Loan and Security Agreement (the "ABL Credit Agreement") and a six year, $250 million Senior Secured Term Loan B (the "Term Loan B Agreement"Revolver").
The ABL Credit AgreementRevolver provides for asset-based revolving loans in an aggregate principal amount of up to $85.0 million, subject to increase in certain circumstances (the "ABL Loans"). The interest rate for the ABL Credit Agreement may be increased in incrementsRevolver was 3.8% at June 30, 2018 with a LIBOR component of $10.0 million up to an aggregate2.1%.
The unused line fee was 0.375% at June 30, 2018. As of $50.0 million. The facility will mature on August 29, 2022. Interest accrues onJune 30, 2018 there were no amounts of ABL Loans 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.ABL Revolver.

The Company's consolidated Fixed Charge Coverage Ratio was 3.33 to 1.00 as of June 30, 2018. DXP was in compliance with all such covenants that were in effect on such date under the ABL Revolver as of June 30, 2018.
Senior Secured Term Loan B:
On June 25, 2018, DXP entered into Amendment No.1 (the "Repricing Amendment") to the Term Loan Agreement for the six year Senior Secured Term Loan B Agreement provides for a(the "Term Loan B") with an original principal amount of $250 million term loan (the "Term Loan") thatwhich amortizes in equal quarterly installments of 0.25% with the balance payable in August 2023, when the facility matures. SubjectThe Company entered into the amendment for purposes of reducing the applicable margin that is applied to securing additional lender commitments,determine the effective interest rate from time to time in effect under the Term Loan B Agreement allows for incremental increases in facility size up to an aggregateAgreement. Under the terms of $30 million, plus an additional amount suchthe First Amendment the applicable margin that DXP's secured leverage ratio (as defined inis applied under the Term Loan B Agreement) would not exceed 3.60Agreement with respect to 1.00. Interest accrues onLIBOR based loans was reduced from LIBOR plus 5.5% to LIBOR plus 4.75%, and the applicable margin that is applied under the Term Loan at a rate equalAgreement with respect to the base rate plus a margin of"Base Rate Loans" was reduced from 4.5%, or LIBOR plus a margin of 5.5%. 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 1.00.3.75%.
The interest rate for the Term Loan B was 6.7%6.8% as of SeptemberJune 30, 2017.

DXP's2018. At June 30, 2018, the aggregate principal financial covenants under the ABL Credit Agreement andamount of Term Loan B Agreement include:
Fixed Charge Coverage Ratio – The Fixed Charge Coverage Ratioborrowings outstanding under the ABL Credit Agreement is defined asfacility was $248.1 million.

As of June 30, 2018, 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), 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.
Company's consolidated Secured Leverage Ratio – The Term Loan B Agreement  requireswas 3.22 to 1.00. DXP was in compliance with all such covenants 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 ofwere in effect on such day to EBITDA, beginning with the fiscal quarter ending December 31, 2017, is either equal to or less than as indicated in the table below:

Fiscal QuarterSecured Leverage Ratio
December 31, 20175.75:1.00
March 31, 20185.75:1.00
June 30, 20185.50:1.00
September 30, 20185.50:1.00
December 31, 20185.25:1.00
March 31, 20195.25:1.00
June 30, 20195.00:1.00
September 30, 20195.00:1.00
December 31, 20194.75:1.00
March 31, 20204.75:1.00
June 30, 2020 and each Fiscal Quarter thereafter4.50:1.00

17
EBITDA as defineddate under the Term Loan B Agreement for financial covenant purposes means, without duplication, for any periodfacility as 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 SeptemberJune 30, 2017, the company's consolidated Secured Leverage Ratio was 3.61 to 1.00.

The ABL Loan and the Term Loan are secured by substantially all of the assets of the Company.2018

Borrowings (in thousands):
  September 30, 2017  December 31, 2016  Increase (Decrease) 
Current maturities of long-term debt, less unamortized debt issuance costs $3,365  $51,354  $(47,989)
Long-term debt  239,042   173,331   65,711 
Total long-term debt $242,407  $224,685  $17,722 
Amount available (1)
 $81,010  $37,347  $43,663 
(1) Represents the amount available to be borrowed at the indicated date under the most restrictive covenant of the credit facility in effect at the indicated date. The increase in the amount available to be borrowed is primarily the result of the Company terminating its previously existing credit facility and replacing it with the Term Loan Agreement and the ABL Credit Agreement.
 

  
June 30,
2018
  December 31, 2017  Increase (Decrease) 
Current maturities of long-term debt $3,394  $3,381  $13 
Long-term debt less unamortized debt issuance costs and current maturities  237,875   238,643   (768)
Total long-term debt $241,269  $242,024  $(755)
Amount available (1)
 $79,980  $82,007  $(2,027)
(1) Represents the amount available to be borrowed at the indicated date under the most restrictive covenant of the credit facility in effect at the indicated date.
 

Performance Metrics (in days):

Three Months Ended September 30,  
Six Months Ended
June 30,
   
    Increase    Increase 
 
2017
 2016 (Decrease)2018 2017 (Decrease) 
   
Days of sales outstanding63.2 65.4 (2.2) 57.4 61.5             (4.1)
Inventory turns8.5 6.7  1.8 8.2 8.0             0.2

Accounts receivable days of sales outstanding were 63.257.4 days at SeptemberJune 30, 20172018 compared to 65.461.5 days at SeptemberJune 30, 2016.2017. The 2.24.1 days decrease was primarily due to our customers paying us sooner during the 2017 quarter compared to the 2016 quarter.more timely payment times in connection with an improved economy. Inventory turns were 8.5 times at September 30, 2017 compared to 6.7 times at September 30, 2016.  The increase is primarilyconsistent between the result of low inventory turns in 2016 related to the 2016 organic sales decline, which resulted in 2016 sales decreasing faster than inventory decreased.

Funding Commitments

We believe cash generated from our operations will meet our normal working capital needs during the next twelve months. We expect we will be in compliance with the financial covenants under the existing ABL and Term Loan facilities through and including September 30, 2018.

Sales of Common Stock

During September 2016, the Company sold 238,858 shares of common stock at a weighted average price of $26.38 per share through a Form S-3 Registration Statement. Net proceeds were approximately $6.0 million and were used to pay down debt obligations.

On October 31, 2016, the Company closed on the sale of 2,484,000 shares of stock for total net proceeds of $46.2 million after expenses. These proceeds were used to pay down debt obligations.

The Company has not made any sales of common stock in the nine months ended September 30, 2017.

Acquisitions

All of the Company's acquisitions have been accounted for using the purchase method of accounting. Revenues and expenses of the acquired businesses have been included in the accompanying Condensed Consolidated Financial Statements beginning on their respective dates of acquisition. The allocation of purchase price to the acquired assets and liabilities is based on estimates of fair market value.
two periods.
1821

DISCUSSION OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES

Critical accounting and business policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's subjective or complex judgments. These policies have been discussed with the Audit Committee of the Board of Directors of DXP.

The Company's condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The accompanying Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE"). The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements have been prepared on substantially the same basis as our annual consolidated financial statementsConsolidated Financial Statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2016.2017. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017.28, 2018. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of results expected for the full fiscal year.

DXP is the primary beneficiary of a VIE in which DXP owns 47.5% of the equity. DXP consolidates the financial statements of the VIE with the financial statements of DXP. As of September 30, 2017, the total assets of the VIE were approximately $5.4 million including approximately $4.9 million of property and equipment compared to $5.2 million of total assets and $5.2 million of property and equipment at December 31, 2016. DXP is the primary customer of the VIE. For the three months ended September 30, 2017 and 2016, consolidation of the VIE increased cost of sales by approximately $0.3 million and $0.2 million, respectively and increased SG&A by approximately $0.3 million and $58 thousand, respectively. For the nine months ended September 30, 2017 and 2016, consolidation of the VIE increased cost of sales by approximately $0.7 million and $0.8 million, respectively and increased SG&A by approximately $0.8 million and $0.2 million, respectively.  The Company recognized a related income tax benefit of $33 thousand and $50 thousand, respectively, related to the VIE for the three months ended September 30, 2017 and 2016 and $219 thousand and $130 thousand, respectively, for the nine months ended September 30, 2017 and 2016.  At September 30, 2017, the owners of 52.5% of the equity not owned by DXP included a former executive officer and other employees of DXP.

Equity investments in which we exercise significant influence, but do not control and are not the primary beneficiary, are accounted for using the equity method of accounting. During the first quarter of 2016, DXP invested $4.0 million in a related party equity method investment.  During the third and fourth quarters of 2016, the investment was reduced to zero by $4.0 million of distributions received from the entity.

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RECENT ACCOUNTING PRONOUNCEMENTS

See Note 3 to the Condensed Consolidated Financial Statements for information regarding recent accounting pronouncements.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our market risk results from volatility in interest rates. Our exposure to interest rate risk relates primarily to our debt portfolio. Using floating interest rate debt outstanding at SeptemberJune 30, 20172018 and 2016,2017, a 100 basis point change in interest rates would result in approximately a $2.5 million and a $3.2$2.2 million change in annual interest expense, respectively. The decrease from 2016 is primarily the result of paying down debt during 2016 and 2017.

ITEM 4: CONTROLS AND PROCEDURES.

We have established disclosure controlsThe Company's management is responsible for establishing and procedures that aremaintaining adequate internal control over financial reporting. Our internal control system was designed to ensureprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material information relatingmisstatements 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 us, including our consolidated subsidiaries, is made knowndesign into the process safeguards to our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer)reduce, though not eliminate, this risk.

Management has used the 2013 framework set forth in the report entitled "Internal Control – Integrated Framework" published by others within our organizationthe Committee of Sponsoring Organizations ("COSO") of the Treadway Commission to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation ofevaluate the effectiveness of our disclosure controls and procedures as of September 30, 2017. Based on this evaluation, as a result of the material weakness in ourCompany's internal control over financial reporting. Management had previously concluded that the Company's internal control over financial reporting described below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures werewas not effective due to material weaknesses in internal control over financial reporting as of September 30, 2017.further discussed below.  Management's remediation plans are also discussed below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

We had material weaknesses in our control environment and monitoring to support the financial reporting process.
We
The Company's control environment did not design and maintainsufficiently promote effective internal control over financial reporting; specifically, the accounting for income taxes, includingfollowing factors relating to the timely preparation of the income tax provision and schedules supporting the related tax assets and liabilities. Specifically, management did not design and maintain controls with a level of precision that would allow for an effective review to identify a material misstatement. We did not maintain effective management review controls over the monitoring and review of certain accounts, thus we were not able to properly conclude these account reconciliations and analyses were performed at an appropriate level of detail.  We did not design and maintain effective controls to provide reasonable assurance over the accuracy and completeness relating to:control environment:

·Maintaining adequate documentation to support proper revenue recognition;Management did not maintain effective management review controls over the monitoring and review of certain accounts.

·CapturingManagement did not effectively design, document nor monitor (review, evaluate and assess) the key internal control activities that provide the accounting for all fixed price contracts;information contained in the Company's consolidated financial statements.
·Obtaining proper approvals for contract change orders;
·Documenting approval of management bonuses in a timely manner;
·Improperly recording proceeds from property and equipment disposals to cost of sales;
·Improper recording of valuation accounts in purchase accounting;
·Obtaining proper approvals for freight invoices;
·Accounting for fully amortized intangible assets;
·Improperly recording operating leases on a method other than straight line recognition; and
·Improper access to payroll records.

We had material weaknesses related to information technology general controls ("ITGC").  We did not maintain effective ITGC, which are required to support automated controls and information technology ("IT") functionality; therefore, automated controls and IT functionality were ineffective.

We had material weaknesses related to internal control activities to support the financial reporting process and failure to maintain adequate evidence of control operations.  We did not effectively design, document nor monitor (review, evaluate and assess) the risks associated with the key internal control activities that provide the accounting information contained in our financial statements.
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Remediation Plans

Beginning inDuring the fourthsecond quarter of 2016, as part of2018, we engaged third party consultants to assist us with our routine efforts to design and maintain adequate and effective internal controlcontrols over financial reporting, we initiated and are continuing to implement measures designed to improve our financial closing process and enhance certain internal controls, processes and procedures. As indicated below, a number of these initiatives relate directly to strengthening our control over accounting for income taxes and address specific control deficiencies which contributed to the material weaknesses as discussed above. As a result of these efforts, the Company believes it has made progress as of September 30, 2017 toward remediating the underlying causes of the material weaknesses.procedures, including ITGC. Specifically, the Company has undertakenwill undertake the following steps to remediate the deficiencies underlying these material weaknesses:

·We augmented our tax accounting resources by engaging third party professionals and hiring an experienced tax director to strengthen tax accounting review procedures in the United States and Canada.
·We developed and implemented enhanced policies and procedures relating to tax account reconciliations and analysis.
·We are implementing close procedures at interim periods to allow for more timely and increased oversight by our management of the calculation and reporting of certain tax balances.
·We are reassessing the design of our tax review controls to identify areas where enhanced precision will help detect and prevent material misstatements.
·In connection with the remediation of the material weakness in our control activities, we are enhancingwill enhance our policies relating to the design, documentation, review, monitoring and approval of account reconciliations.management review controls and other key internal control activities that provide the accounting information contained in our consolidated financial statements.
·To enhance our information technology controls, we are implementingwill implement systems and processes in order to create an effective segregation of duties, restrict user access to applications and improve output controls.
·We are implementing procedures to enhance the level of communication and understanding of our accounting and internal control policies and procedures in an effort to remediate the material weakness in our monitoring efforts.

We are committed to maintaining a strong internal control environment, and believe that these remediation efforts represent significant improvements in our control environment. The identified material weaknesses in internal control will not be considered fully remediated until the internal controls over these areas have been in operation for a sufficient period of time for our management to test and conclude that the material weakness has been fully remediated. The Company will continue its efforts to implement and test the new controls in order to make this final determination.
Remediated Material Weakness

As of the filing of this Quarterly Report on Form 10-Q, our management has completed the implementation of our remediation efforts related to the material weakness over the accounting for income taxes which included the following:

·Engaged third party professionals and hired an experienced tax director to strengthen tax accounting review procedures in the United States and Canada.
·Developed and implemented enhanced policies and procedures relating to tax account reconciliations and analysis.
·Implemented close procedures at interim periods to allow for more timely and increased oversight by our management of the calculation and reporting of certain tax balances.
·Reassessed the design of our tax review controls to identify areas where enhanced precision will help detect and prevent material misstatements.

Changes in Internal Control over Financial Reporting

Except as described above, there are no changes in our internal control over financial reporting that occurred during the three months ended SeptemberJune 30, 20172018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.

ITEM 1A. RISK FACTORS.

No material changes have occurred from risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2017.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

3.1Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Registrant'sCompany's Registration Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).

3.2Bylaws, (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statementas amended on Form S-4 (Reg. No. 333-10021), filed with the Commission on August 12, 1996).July 27, 2011.

3.3* 10.1First Amendment No. 1 to Bylaws (incorporated by reference to Exhibit A to the Registrant's Current Report on Form 8-K, filed with the Commission on July 28, 2011 (file no. 000-71513)).
*10.1Term Loan and Security Agreement, Dated as of August 29, 2017 by and among DXP Enterprises, Inc., Borrower and the Other Persons Party hereto from time to time, as Guarantors, and Goldman Sachs Bank USA, as Administrative Agent and Certain Financial Institutions, as Lenders.effective June 25, 2018.

*10.2
Loan and Security Agreement Dated as of August 29, 2017 by and among DXP Enterprises, Inc., Pump-PMI, LLC, PMI Operating Company, LTD., PMI Investment, LLC, Integrated Flow Solutions, LLC, DXP Holdings, Inc., Best Holding, LLC, Best Equipment Service & Sales Company, LLC, B27 Holdings Corp., B27, LLC, B27 Resources, Inc. and Pumpworks 610, LLC as US Borrowers, DXP Canada Enterprises, LTD., Industrial Paramedic Services, LTD., HSE Integrated LTD., and National Process Equipment Inc., as Canadian Borrowers and the Other Persons Party hereto from time to time, as Guarantors, and Bank of America, N.A., as agent and Certain Financial Institutions as Lenders, Bank of America, N.A. as Sole Lead Arranger and Sole Bookrunner and BMO Capital Markets Corp., as Documentation Agent.
* 31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended.

* 31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended.


* 32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


* 32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101Interactive Data Files

Exhibits designated by the symbol * are filed or furnished with this Quarterly Report on Form 10-Q. All exhibits not so designated are incorporated by reference to a prior filing with the Commission as indicated.


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SIGNATURES

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

DXP ENTERPRISES, INC.
(Registrant)
By: /s/ Kent Yee
Kent Yee
Senior Vice President and Chief Financial Officer
(Duly Authorized Signatory and Principal Financial Officer)

Dated: August November 9, 201708, 2018





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