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 JuneSeptember 30, 2018
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition period fromtofrom to

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][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][X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [X][X]    Non-accelerated filer [ ]    Smaller reporting company [ ]Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X][X]

Number of shares of registrant's Common Stock outstanding as of August 2,October 31, 2018: 17,387,17617,570,252 par value $0.01 per share.
1


DXP ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
DESCRIPTION
ItemPage
PART I: FINANCIAL INFORMATION
3
ITEM 1. FINANCIAL STATEMENTS
3
a) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Operations
3
b) Unaudited Condensed Consolidated Balance Sheets
4
c) Unaudited Condensed Consolidated Statements of Cash Flows
5
d) Notes to Unaudited Condensed Consolidated Financial Statements
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
25
ITEM 4. CONTROLS AND PROCEDURES
25
PART II: OTHER INFORMATION
27
ITEM 1. LEGAL PROCEEDINGS
27
ITEM 1A. RISK FACTORS
27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
27
ITEM 4. MINE SAFETY DISCLOSURES
27
ITEM 5. OTHER INFORMATION
27
ITEM 6. EXHIBITS
27
SIGNATURES
28



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)
       
  June 30, 2018  December 31, 2017 
 ASSETS      
Current assets:      
Cash $2,489  $22,047 
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  4,750   5,296 
Federal income taxes receivable  986   1,440 
Total current assets  342,595   317,915 
Property and equipment, net  53,035   53,337 
Goodwill  194,033   187,591 
Other intangible assets, net  75,682   78,525 
Other long-term assets  1,587   1,715 
Total assets $666,932  $639,083 
LIABILITIES AND EQUITY        
Current liabilities:        
Current maturities of long-term debt $3,394  $3,381 
Trade accounts payable  95,013   80,303 
Accrued wages and benefits  18,106   18,483 
Customer advances  7,882   2,189 
Billings in excess of costs and estimated profits  3,075   4,249 
Other current liabilities  5,645   16,220 
Total current liabilities  133,115   124,825 
Long-term debt, less current maturities and unamortized debt issuance costs  237,875   238,643 
Other long-term liabilities  2,611   - 
Deferred income taxes  7,966   7,069 
Total long-term liabilities  248,452   245,712 
Total liabilities  381,567   370,537 
Commitments and contingencies (Note 13)
        
Equity:        
Series A preferred stock, $1.00 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  155,343   153,087 
Retained earnings  150,322   134,193 
Accumulated other comprehensive loss  (21,001)  (19,491)
Total DXP Enterprises, Inc. equity  284,854   267,979 
Noncontrolling interest  511   567 
 Total equity  285,365   268,546 
 Total liabilities and equity $666,932  $639,083 

The accompanying notes are an integral part of these condensed consolidated financial 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
June 30,
  
Six Months Ended
June 30,
  2018  2017  2018   2017 
             
Sales $311,227  $250,698  $597,163  $489,225 
Cost of sales  226,111   181,762   435,602   355,774 
Gross profit  85,116   68,936   161,561   133,451 
Selling, general and
 administrative expenses
  65,056   
58,679
   130,352   
114,958
 
Income from operations  20,060   10,257   31,209   18,493 
Other (income) expense, net  (1,416)  57   (1,438)  (171)
Interest expense  6,137   3,992   11,178   7,645 
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  11,563   3,969   16,057   6,963 
Net income (loss) attributable to noncontrolling interest  1   (166)  (56)  (305)
Net income attributable to DXP Enterprises, Inc.  11,562   4,135   16,113   7,268 
Preferred stock dividend  22   22   45   45 
Net income attributable to
 common shareholders
 $11,540  $4,113  $16,068  $7,223 
                 
Net income $11,563  $3,969  $16,057  $6,963 
Cumulative translation adjustment  (1,134)  455   (1,511)  (1,865)
Comprehensive income $10,429  $4,424  $14,546  $5,098 
                 
Basic earnings per share $0.66  $0.24  $0.92  $0.42 
Weighted average common
 shares outstanding
  
17,558
   
17,404
   
17,538
   
17,406
 
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
 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2018 2017 2018 2017
Sales$308,028
 $251,930
 $905,191
 $741,155
Cost of sales223,958
 184,967
 659,560
 540,741
Gross profit84,070
 66,963
 245,631
 200,414
Selling, general and administrative expenses67,257
 60,453
 197,609
 175,411
Income from operations16,813
 6,510
 48,022
 25,003
Other expense (income), net120
 (153) (1,318) (324)
Interest expense4,781
 4,928
 15,959
 12,573
Income before income taxes11,912
 1,735
 33,381
 12,754
Provision for income taxes (benefit)3,550
 (1,176) 8,962
 2,880
Net income8,362
 2,911
 24,419
 9,874
Net loss attributable to noncontrolling interest(35) (55) (91) (360)
Net income attributable to DXP Enterprises, Inc.8,397
 2,966
 24,510
 10,234
Preferred stock dividend23
 23
 68
 68
Net income attributable to common shareholders$8,374
 $2,943
 $24,442
 $10,166
Net income$8,362
 $2,911
 $24,419
 $9,874
Cumulative translation adjustment3,390
 830
 1,880
 (1,035)
Comprehensive income$11,752
 $3,741
 $26,299
 $8,839
Earnings per share :       
     Basic$0.48
 $0.17
 $1.39
 $0.58
     Diluted$0.46
 $0.16
 $1.33
 $0.56
Weighted average common shares outstanding :       
     Basic17,564
 17,394
 17,547
 17,402
     Diluted18,404
 18,234
 18,387
 18,242


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

3
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)(unaudited)
 September 30, 2018 December 31, 2017
ASSETS   
Current assets:   
Cash$15,994
 $22,047
Restricted cash396
 3,532
Accounts Receivable, net of allowance for doubtful accounts of $11,830 and $9,015
183,454
 167,272
Inventories116,545
 91,413
Costs and estimated profits in excess of billings38,432
 26,915
Prepaid expenses and other current assets5,640
 5,296
Federal income taxes receivable1,323
 1,440
Total current assets361,784
 317,915
Property and equipment, net52,617
 53,337
Goodwill194,052
 187,591
Other intangible assets, net71,783
 78,525
Other long-term assets1,596
 1,715
Total assets$681,832
 $639,083
LIABILITIES AND EQUITY   
Current liabilities:   
Current maturities of long-term debt$3,394
 $3,381
Trade accounts payable91,117
 80,303
Accrued wages and benefits16,733
 18,483
Customer advances2,876
 2,189
Billings in excess of costs and estimated profits5,554
 4,249
Other current liabilities16,703
 16,220
Total current liabilities136,377
 124,825
Long-term debt, net of unamortized debt issuance costs237,434
 238,643
Other long-term liabilities2,611
 —
Deferred income taxes8,048
 7,069
Total long-term liabilities248,093
 245,712
Total liabilities384,470
 370,537
Commitments and contingencies ( Note 13)

 

Equity:   
Series A preferred stock, $1.00 par value; 1,000,000 shares authorized1
 1
Series B convertible preferred stock, $1.00 par value; 1,000,000 shares authorized15
 15
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,570,252 and 17,315,573 outstanding
174
 174
Additional paid-in capital155,671
 153,087
Retained earnings158,635
 134,193
Accumulated other comprehensive loss(17,611) (19,491)
Total DXP Enterprises, Inc. equity296,885
 267,979
Noncontrolling interest477
 567
Total equity297,362
 268,546
Total liabilities and equity$681,832
 $639,083
The accompanying notes are an integral part of these condensed consolidated financial statements.


DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)

  Six Months Ended 
  June 30, 
  2018  2017 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income attributable to DXP Enterprises, Inc. $16,113  $7,268 
Less net loss attributable to non-controlling interest  (56)  (305)
Net income  16,057   6,963 
Reconciliation of net income to the net cash provided by (used in) operating activities:        
   Gain on sale of building  (1,318)  - 
   Depreciation  4,727   5,155 
   Amortization of intangible assets  8,477   8,607 
   Bad debt expense  1,715   1,001 
   Amortization of debt issuance costs  932   628 
   Write-off of debt issuance costs  60   - 
   Compensation expense for restricted stock  1,003   1,010 
     Stock compensation expense  494     
   Deferred income taxes  218   1,998 
 Changes in operating assets and liabilities, net of
 assets and liabilities acquired in business combinations:
        
   Trade accounts receivable  (14,469)  (11,768)
   Costs and estimated profits in excess of billings  (11,051)  (780)
   Inventories  (16,718)  (6,914)
   Prepaid expenses and other assets  614   (1,923)
   Trade accounts payable and accrued expenses  815   3,979 
   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  (5,516)  (1,118)
Proceeds from the sale of fixed assets  2,700   - 
Acquisitions of business, net of cash acquired  (10,792)  - 
 Net cash used in investing activities  (13,608)  (1,118)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from debt  -   394,966 
Principal debt payments  (1,688)  (399,641)
Debt issuance costs  (60)  (380)
Loss for non-controlling interest owners, net of tax  -   (187)
Dividends paid  (45)  (45)
Payment for employee taxes withheld from stock awards  (136)  (596)
 Net cash used in financing activities  (1,929)  (5,883)
EFFECT OF FOREIGN CURRENCY ON CASH  (171)  36 
NET CHANGE IN CASH  (22,691)  889 
CASH AT BEGINNING OF PERIOD  25,579   1,590 
CASH AT END OF PERIOD $2,888  $2,479 
 Nine Months Ended
September 30,
 2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income attributable to DXP Enterprises, Inc.$24,510
 $10,234
Less net loss attributable to non-controlling interest(91) (360)
Net income24,419
 9,874
Reconciliation of net income to the net cash provided by operating activities:   
Gain on sale of building(1,318) —
Depreciation7,135
 7,655
Amortization of intangible assets12,575
 12,943
Bad debt expense2,633
 1,466
Amortization of debt issuance costs1,337
 1,071
Write-off of debt issuance costs60
 578
Stock compensation expense2,023
 1,392
Deferred income taxes240
 2,000
Changes in operating assets and liabilities   
Trade accounts receivable(13,225) (16,397)
Costs and estimated profits in excess of billings(11,541) (5,701)
Inventories(22,468) (3,827)
Prepaid expenses and other assets(250) (2,362)
Trade accounts payable and accrued expenses4,291
 (354)
Billings in excess of costs and estimated profits1,320
 189
Other long-term liabilities2,611
 —
Net cash provided by operating activities9,842
 8,527
    
CASH FLOWS FROM INVESTING ACTIVITIES:   
Purchase of property and equipment(7,705) (2,157)
Proceeds from the sale of fixed assets2,546
 —
Acquisition of business, net of cash acquired(10,812) —
Net cash used in investing activities(15,971) (2,157)
    
CASH FLOWS FROM FINANCING ACTIVITIES:   
Proceeds from debt—
 728,822
Principal debt payments(2,534) (701,561)
Debt issuance costs(60) (11,188)
Loss for non-controlling interest owners, net of tax—
 (219)
Dividends paid(68) (68)
Payment for employee taxes withheld from stock awards(332) (848)
Net cash (used in) provided by financing activities(2,994) 14,938
Effect of foreign currency on cash(66) 189
Net change in cash(9,189) 21,497
Cash at beginning of period25,579
 1,590
Cash at end of period$16,390
 $23,087

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") products, and service to energy and industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS"). SeeNote 15 "Segment Reporting"- 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 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, 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 28, 2018. The results of operations for the three and sixnine months ended JuneSeptember 30, 2018 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, 2017 and JuneSeptember 30, 2018, condensed consolidated statements of operations and comprehensive operations for the three and sixnine months ended JuneSeptember 30, 2018 and JuneSeptember 30, 2017, and condensed consolidated statements of cash flows for the sixnine months ended JuneSeptember 30, 2018 and JuneSeptember 30, 2017. All such adjustments represent normal recurring items.

All intercompany accounts and transactions have been eliminated upon consolidation.

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Compensation - Stock Compensation. In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 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 adopted this ASU as of January 1, 2018, and it did not have 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. TheThe Company's annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units' goodwill, determined a quantitative impairment test was not necessary.  Therefore the adoption of this standard did not have a material effect on the Company's 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. The Company


adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Consolidated Financial Statements.  As discussed in Note 14 "Business- 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. The Company adopted this ASU as of January 1, 2018, and it did not 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. 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 ofOur accounting for contracts with customers under the new revenue recognition standard was consistent with the Company's currentprevious 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.Recognition.

Accounting Pronouncements Not Yet Adopted

Intangibles-Goodwill and Other. In August 2018, the FASB issued ASU No. 2018-15, Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract based on a consensus of the FASB’s Emerging Issues Task Force (EITF) that requires implementation costs incurred by customers in cloud computing arrangements (CCAs) to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40, “Intangibles-Goodwill and Other-Internal-Use Software”. The ASU does not affect the accounting by cloud service providers, other software vendors or customers’ accounting for software licensing arrangements. The ASU will require companies to recognize deferred implementation costs to expense over the ‘term of the hosting arrangement’. Under the ASU, the term of the hosting arrangement comprises the noncancellable period of the CCA plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which exercise of the option is controlled by the vendor. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, and we will continue to assess the standard and make a determination later.

Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13: Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate


or modify the disclosure requirements. The new standard will not have an impact on our results of operations, but it will significantly modify our disclosures around fair value measurements.

Leases- Targeted Improvements. In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements (Topic 842). ASU 2018-11 provides additional relief in the comparative reporting requirements for initial adoption of ASC 842 as described below. Under ASU 2018-11, adopters will take a prospective approach, rather than a retrospective approach as initially prescribed, when transitioning to ASU 2016-02. Instead of recording the cumulative impact of all comparative reporting periods presented within retained earnings, adopters will now assess the facts and circumstances of all leasing contracts as of January 1, 2019 (for public companies with calendar year-end reporting dates) and January 1, 2020 (for non-public companies with calendar year-end reporting dates). We intend to apply this adoption approach for our transition January 1, 2019.

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.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 assessingundergoing the implementation process for the new standard. We intend to apply most of the practical expedients and we have elected to apply the current period transition approach as introduced by ASU 2018-11. We expect the new standard to have a significant effect on our consolidated balance sheet by adding ROU assets and the corresponding lease liabilities for our inventory of operating leases. We do not expect the new standard to have a material impact that this standard will have on its Consolidated Financial Statements.our results of operations.

NOTE 4 – REVENUE RECOGNITION

In May 2014, the FASB issued ASU 2014-09, 2014-9, Revenue from Contracts with Customers, and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08,2016-8, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The core principle of this new revenue recognition guidance is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance defines 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 providesprovided 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 the 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 the 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 obligations under the contract have been identified, and the price or consideration to be received is fixed and allocated to the


performance obligation(s) in the contract.  We believe our performance obligation has been satisfied when title passes to the customer or services have been rendered under the contract.  Revenues are recorded net of sales taxes.

The Company fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed.  This typically occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin.  Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation.  We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by the new standard. Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. The typical time span of these contracts is approximately 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 price is fixed followed by execution of 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 been rendered. Revenues are recorded net of sales taxes.

SeeNote 15 "Segment Reporting" - Segment Reportingfor disaggregation of revenue by reporting segments. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

6
NOTE 5 - 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 JuneSeptember 30, 2018, we recorded a $4$4.1 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"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 sixnine months ended JuneSeptember 30, 2018:
 
   
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 Contingent Liability for Accrued Consideration 
 (in thousands) Contingent Liability for Accrued Consideration
   (in thousands)
Beginning balance at January 1, 2018 $- $—
Acquisitions and settlements     
Acquisition of ASI (Note 14)  4,214 4,214
Settlements  - —
Total remeasurement adjustments:     
(Gains) or losses recorded against goodwill  (208)(208)
    
Ending balance at June 30, 2018* $4,006 
Changes in fair value recorded in profit and loss78
Ending Balance at September 30, 2018$4,084
     
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
(in thousands, unaudited)Fair value at September 30, 2018Valuation Technique
Significant Unobservable
Inputs
Contingent consideration:
(ASI acquisition)
$4,084
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 JuneSeptember 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 JuneSeptember 30, 2018 and December 31, 2017 approximates their carrying value as reported on the unaudited Condensed Consolidated Balance Sheets.

8


NOTE 6 – INVENTORIES

The carrying values of inventories are as follows (in thousands):
 September 30, 2018 December 31, 2017
Finished goods$101,227
 $79,820
Work in process15,318
 11,593
Inventories$116,545
 $91,413

  
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 7 – 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):

  
June 30,
2018
  
December 31,
2017
 
Costs incurred on uncompleted contracts $53,626  $37,899 
Estimated profits, thereon  6,504   2,665 
Total  60,130   40,564 
Less: billings to date  25,265   17,881 
Net $34,865  $22,683 
 September 30, 2018 December 31, 2017
Costs incurred on uncompleted contracts$57,655
 $37,899
Estimated profits, thereon7,448
 2,665
Total65,103
 40,564
Less: billings to date32,219
 17,881
Net$32,884
 $22,683

Such amounts were included in the accompanying Condensed Consolidated Balance Sheets for 2018 and 2017 under the following captions (in thousands):

  
June 30,
2018
  December 31, 2017 
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  (3)  17 
Net $34,865  $22,683 

9
 September 30, 2018 December 31, 2017
Costs and estimated profits in excess of billings$38,432
 $26,915
Billings in excess of costs and estimated profits(5,554) (4,249)
Translation adjustment6
 17
Net$32,884
 $22,683

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 sixnine months ended JuneSeptember 30, 2018 (in thousands):

  
Goodwill
  
Other
Intangible Assets
  Total 
          
Balance as of December 31, 2017 $187,591  $78,525  $266,116 
Acquired during the period  6,442   6,185   12,627 
Translation adjustment  -   (551)  (551)
Amortization  -   (8,477)  (8,477)
Balance as of June 30, 2018 $194,033  $75,682  $269,715 
 Goodwill 
Other
Intangible Assets
 Total
Balance as of December 31, 2017$187,591
 $78,525
 $266,116
Acquired during the period6,461
 6,185
 12,646
Translation adjustment—
 (352) (352)
Amortization—
 (12,575) (12,575)
Balance as of September 30, 2018$194,052
 $71,783
 $265,835



The following table presents the goodwill balance by reportable segment as of JuneSeptember 30, 2018 and December 31, 2017 (in thousands):
  
June 30,
2018
  
December 31,
2017
 
Service Centers $160,914  $154,473 
Innovative Pumping Solutions  15,980   15,980 
Supply Chain Services  17,139   17,138 
Total $194,033  $187,591 
 September 30, 2018 December 31, 2017
Service Centers$160,934
 $154,473
Innovative Pumping Solutions15,980
 15,980
Supply Chain Services17,138
 17,138
Total$194,052
 $187,591

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

  June 30, 2018  
 
December 31, 2017
 
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  Carrying Amount, net  
Gross
Carrying
Amount
  
Accumulated
Amortization
  Carrying Amount, net 
Customer relationships $168,255  $(92,767)  75,488   162,200   (83,806)  78,394 
Non-compete agreements  784   (590)  194   949   (818)  131 
Total $169,039  $(93,357) $75,682  $163,149  $(84,624) $78,525 
 September 30, 2018 December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 Carrying Amount, net 
Gross
Carrying
Amount
 
Accumulated
Amortization
 Carrying Amount, net
Customer relationships$168,255
 $(96,639) 71,616
 162,200
 (83,806) 78,394
Non-compete agreements784
 (617) 167
 949
 (818) 131
Total$169,039
 $(97,256) $71,783
 $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 – INCOME TAXES

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Cuts and Jobs Act contains several tax law changes that will impact the Company in the current and future periods. The Company is applying the guidance in Staff Accounting Bulletin ("SAB") 118 issued by the Securities and Exchange Commission when 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 JuneSeptember 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 ourfinalize its calculations as additional analysis is completed.completed during the fourth quarter.

The 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 35%. We are still in the process of analyzing Tax Cuts and Jobs Act's impact as permitted under SAB 118. The largest impact to the Company being the remeasurement of deferred taxes due to the U.S. statutory tax rate change. The mandatory repatriation and resulting toll charge on accumulated foreign earnings and profits has limited impact on the Company as unremitted earnings from non-US jurisdictions is minimal.  The Company is provisional in its approach and assertion that there is no financial statement impact related to mandatory repatriation as of JuneSeptember 30, 2018. We will continue to monitor tax reform, as we anticipate additional guidance from the Internal Revenue Service will become more available throughout 2018.

Our effective tax rate from continuing operations was a tax expense of 25.21%26.9% for the sixnine months ended JuneSeptember 30, 2018 compared to a tax expense of 36.81%22.6% for the sixnine months ended JuneSeptember 30, 2017. Compared to the U.S. statutory rate for the sixnine months ended JuneSeptember 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 and other tax credits. Compared to the U.S. statutory rate for the sixnine months ended JuneSeptember 30, 2017, the effective tax rate was increased by state taxes and nondeductible expenses and partially offset by lower income tax rates on income earned in foreign jurisdictions, domestic production activities deduction, valuation allowance release, and research and development credits.

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To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts would be classified as a component of income tax provision (benefit) in the financial statements consistent with the Company’s policy.




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  $251,185 
 September 30, 2018 December 31, 2017
 Carrying Value* Fair Value Carrying Value* Fair Value
ABL Revolver$—
 $—
 $—
 $—
Term Loan B247,500
 249,356
 249,375
 251,869
Promissory note due January 20212,063
 2,063
 2,722
 2,722
Total long-term debt249,563
 251,419
 252,097
 254,591
Less: current portion(3,394) (3,419) (3,381) (3,406)
Long-term debt less current maturities$246,169
 $248,000
 $248,716
 $251,185

*Carrying value amounts do not include unamortized debt issuance costs of $9.1M$8.7M and $10.1$10.1 for JuneSeptember 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$250.0 million senior secured term loan B (the "Term Loan B"). Under the ABL Revolver, the Company may request $10.0$10.0 million incremental revolving loan commitments in an additional aggregate amount not to exceed $50.0$50.0 million, subject to pro forma compliance with certain net secured leverage ratio tests.

The applicable rate for the ABL 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 commencing with the date of the Repricing Amendment for certain prepayments, refinancing, and amendments.

The Company accounted for the Repricing Amendment as a modification of debt. Approximately, $60,000 of prior deferred debt issuance costcosts 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$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 JuneSeptember 30, 2018, the Company had no amount outstanding under the ABL Revolver and had $80.0$79.9 million of borrowing capacity, including the impact of letters of credit.

11


Interest on Borrowings

The interest rates on our borrowings outstanding at JuneSeptember 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%
 September 30, 2018 December 31, 2017
ABL Revolver4.0% 2.9%
Term Loan B7.0% 7.1%
Promissory Note2.9% 2.9%
Weighted average interest rate7.0% 7.0%

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

NOTE 11 - STOCK-BASED COMPENSATION

Restricted Stock

Under the equity incentive plans approved by our shareholders, directors, consultants and employees may 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 JuneSeptember 30, 2018 vest (or have forfeiture restrictions that lapse) in accordance with one of the following vesting schedules: 100% one year after date of grant; 50% each year for two years after date of grant; 33.3% each year for three years after date of grant; 20% each year for five years after date of grant; or 10% each year for ten years after 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 is measured based upon the closing prices of DXP's common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Shares of our common stock are issued and outstanding upon the grant of awards of restricted stock. Once restricted stock units vest, new shares of the Company's stock are issued.  At JuneSeptember 30, 2018, 279,149272,510 shares were available for future grant.

Changes in restricted stock for the sixnine months ended JuneSeptember 30, 2018 were as follows:

  
Number of
Shares
  
Weighted Average
Grant Price
 
Non-vested at December 31, 2017  77,901  $30.36 
Granted  124,474  $31.54 
Forfeited  (2,400) $46.68 
Vested  (12,699) $49.67 
Non-vested at June 30, 2018  187,276  $29.63 
 
Number of
Shares
 
Weighted Average
Grant Price
Non-vested at December 31, 201777,901
 $30.36
Granted131,113
 $31.90
Forfeited(2,400) $46.68
Vested(37,621) $31.68
Non-vested at September 30, 2018168,993
 $31.03

Compensation expense, associated with restricted stock, recognized in the sixnine months ended JuneSeptember 30, 2018 and 2017 was $1.0$1.5 million and $1.4 million, respectively. Related income tax benefits recognized in earnings for the sixnine months ended JuneSeptember 30, 2018 and 2017 were approximately $0.4 million and $0.6 million. Unrecognized compensation expense under the Restricted Stock Plan at JuneSeptember 30, 2018 and December 31, 2017 was $4.4$4.1 million and $1.6 million, respectively. As of JuneSeptember 30, 2018, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 28.223.5 months.

12

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
June 30,
  
Six Months Ended
June 30,
 
  2018  2017  2018  2017 
Basic:            
Weighted average shares outstanding  17,558   17,404   17,538   17,406 
Net income attributable to DXP Enterprises, Inc. $11,562  $4,135  $16,113  $7,268 
Convertible preferred stock dividend  22   22   45   
45
 
Net income attributable to common shareholders $11,540  $4,113  $16,068  $7,223 
Per share amount $0.66  $0.24  $0.92  $0.42 
                 
Diluted:                
Weighted average shares outstanding  17,558   17,404   17,538   17,406 
Assumed conversion of convertible
 preferred stock
  840   840   840   840 
Total dilutive shares  18,398   18,244   18,378   18,246 
Net income attributable to
 common shareholders
 $11,540  $4,113  $16,068  $7,223 
Convertible preferred stock dividend  22   22   45   45 
Net income attributable to DXP Enterprises, Inc. for diluted
 earnings per share
 $11,562  $4,135  $16,113  $7,268 
Per share amount $0.63  $0.23  $0.88  $0.40 



 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2018 2017 2018 2017
Basic:       
Weighted average shares outstanding17,564
 17,394
 17,547
 17,402
Net income attributable to DXP Enterprises, Inc.$8,397
 $2,966
 $24,510
 $10,234
Convertible preferred stock dividend23
 23
 68
 68
Net income attributable to common shareholders$8,374
 $2,943
 $24,442
 $10,166
Per share amount$0.48
 $0.17
 $1.39
 $0.58
        
Diluted:       
Weighted average shares outstanding17,564
 17,394
 17,547
 17,402
Assumed conversion of convertible preferred stock840
 840
 840
 840
Total dilutive shares18,404
 18,234
 18,387
 18,242
Net income attributable to common shareholders$8,374
 $2,943
 $24,442
 $10,166
Convertible preferred stock dividend23
 23
 68
 68
Net income attributable to DXP Enterprises, Inc.$8,397
 $2,966
 $24,510
 $10,234
Per share amount$0.46
 $0.16
 $1.33
 $0.56

Series A Preferred Stock

The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote
of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to a $100 liquidation preference per share. At September 30, 2018, 1,122 shares of Series A Preferred Stock were issued and outstanding.

Series B Preferred Stock

Each share of the Series B convertible preferred stock is convertible into 56 shares of common stock and a monthly dividend per share of $.50. The holders of the Series B convertible stock are also entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock. At September 30, 2018, 15,000 shares of Series B Preferred Stock were issued and outstanding.

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$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$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 sixnine months ended JuneSeptember 30, 2018, ASI contributed sales of $23.0$35.0 million and earnings before taxes of approximately $2.6 $4.1million.

As part of our purchase agreement, we may pay up to an additional $4.6$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 $4.0approximately $4.1 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 JuneSeptember 30, 2018, approximately $1.4$1.5 million of the actual cash due toward the contingent consideration earned is recorded in current liabilities. We may pay up to an additional $3.2$3.1 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$4.1 million at JuneSeptember 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:
Purchase at closing:
13
Purchase Price ConsiderationTotal Consideration
 (in thousands)
Cash payments$10,792
Fair value of stock issued894
Present value of estimated fair value of contingent earn-out consideration4,006
Total purchase price consideration$15,692
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 15 - 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 excluding amortization (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
 Three Months Ended
September 30,
 2018 2017
 SC IPS SCS Total SC IPS SCS Total
Sales$187,763
 $76,662
 $43,603
 $308,028
 $160,863
 $51,027
 $40,040
 $251,930
Income from operations$20,590
 $8,773
 $3,886
 $33,249
 $15,550
 $1,838
 $3,982
 $21,370

  
Six Months Ended June 30,
 
  2018  2017 
  SC  IPS  SCS  Total  SC  IPS  SCS  Total 
Sales $368,937  $141,899  $86,327  $597,163  $313,461  $93,528  $82,236  $489,225 
Amortization  4,770   3,165   542   8,477   4,477   3,588   542   8,607 
Income from operations  32,992   12,173   7,767   52,932   27,281   1,676   7,234   36,191 
Income from operations,
excluding amortization
 $37,762  $15,338  $8,309  $61,409  $31,758  $5,264  $7,776  $44,798 
 Nine Months Ended
September 30,
 2018 2017
 SC IPS SCS Total SC IPS SCS Total
Sales$556,700
 $218,561
 $129,930
 $905,191
 $474,324
 $144,555
 $122,276
 $741,155
Income from operations$58,353
 $24,109
 $12,196
 $94,658
 $47,308
 $7,103
 $11,758
 $66,169



The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes (in thousands):

      Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2018  2017  2018  2017 
Operating income for reportable segments $35,144  $23,890  $61,409  $44,798 
Adjustment for:                
 Amortization of intangible assets  4,119   4,291   8,477   8,607 
 Corporate expenses  10,965   9,342   21,723   17,698 
Income from operations  20,060   10,257   31,209   18,493 
Interest expense  6,137   3,992   11,178   7,645 
Other (income) expense, net  (1,416)  57   (1,438)  (171)
Income before income taxes $15,339  $6,208  $21,469  $11,019 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2018 2017 2018 2017
Operating income for reportable segments$33,249
 $21,370
 $94,658
 $66,169
Adjustment for:       
Amortization of intangible assets4,098
 4,336
 12,575
 12,943
Corporate expenses12,338
 10,524
 34,061
 28,223
Income from operations16,813
 6,510
 48,022
 25,003
Interest expense4,781
 4,928
 15,959
 12,573
Other (income) expense, net120
 (153) (1,318) (324)
Income before income taxes$11,912
 $1,735
 $33,381
 $12,754

NOTE 16 - 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.

15


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

The following management discussion and analysis ("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 sixnine months ended JuneSeptember 30, 2018 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 the effectiveness of management's strategies and decisions, our ability to implement our internal growth and acquisition growth strategies, general economic and business conditions specific to our primary customers, changes in government regulations, our ability to effectively integrate businesses we may acquire, our success in remediating our internal control weaknesses, new or modified statutory or regulatory requirements, availability of materials and labor, inability to obtain or delay in obtaining government or third-party approvals and permits, non-performance by third parties of their contractual obligations, unforeseen hazards such as weather conditions, acts 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 reduced 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 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.
16


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

  Three Months Ended June 30,  Six Months Ended June 30, 
  2018  %  2017  %  2018  %  2017  % 
Sales $311,227   100.0% $250,698   100.0% $597,163   100.0% $489,225   100.0%
Cost of sales  226,111   72.7%  181,762   72.5%  435,602   72.9%  355,774   72.7%
Gross profit  85,116   27.3%  68,936   27.5%  161,561   27.1%  133,451   27.3%
Selling, general and administrative expenses  65,056   20.9%  58,679   23.4%  130,352   21.8%  114,958   23.5%
Income from operations  20,060   6.4%  10,257   4.1%  31,209   5.2%  18,493   3.8%
Other (income) expense, net  (1,416)  -0.5%  57   0.0%  (1,438)  -0.2%  (171)  0.0%
Interest expense  6,137   2.0%  3,992   1.6%  11,178   1.9%  7,645   1.6%
Income before taxes  15,339   4.9%  6,208   2.5%  21,469   3.6%  11,019   2.2%
Provision for income taxes  3,776   1.2%  2,239   0.9%  5,412   0.9%  4,056   0.8%
Net income  11,563   3.7%  3,969   1.5%  16,057   2.7%  6,963   1.4%
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. $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 $0.66      $0.24      $0.92      $0.42     
Diluted earnings per share $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 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 September 30,
 2018 % 2017 %
Sales$308,028
 100.0% $251,930
 100.0 %
Cost of sales223,958
 72.7% 184,967
 73.4 %
Gross profit84,070
 27.3% 66,963
 26.6 %
Selling, general and administrative expenses67,257
 21.8% 60,453
 24.0 %
Income from operations16,813
 5.5% 6,510
 2.6 %
Other (income) expense, net120
 —% (153) (0.1)%
Interest expense4,781
 1.6% 4,928
 2.0 %
Income before income taxes11,912
 3.9% 1,735
 0.7 %
Provision for income taxes (benefit)3,550
 1.2% (1,176) (0.5)%
Net income8,362
 2.7% 2,911
 1.2 %
Net loss attributable to noncontrolling interest(35) —
 (55) —
Net income attributable to DXP Enterprises, Inc.8,397
 2.7% 2,966
 1.2 %
Per share amounts attributable to DXP Enterprises, Inc.       
Basic earnings per share$0.48
   $0.17
  
Diluted earnings per share$0.46
   $0.16
  

Three Months Ended JuneSeptember 30, 2018 compared to Three Months Ended JuneSeptember 30, 2017

SALES. Sales for the three months ended JuneSeptember 30, 2018 increased $60.5$56.1 million, or 24.1%22.3%, to approximately $311.2$308.0 million from $250.7$251.9 million for the prior year's corresponding period. Sales from a business acquired on January 1, 2018 accounted for $12.4$12.1 million of the increase. Excluding secondthird quarter 2018 sales of the business acquired, sales for the secondthird quarter in 2018 increased by $48.1$44.0 million, or 19.2%17.5% from the prior year's corresponding period. This sales increase is the result of an increase in our IPS, SC and SCS segments of $29.8$25.6 million, $16.4$14.8 million and $1.9$3.6 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 $29.8$25.6 million, or 67.0%50.2% for the second quarter ofthree months ended September 30, 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 sixnine 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 sixnine months of 2018.

Service Centers segment. Sales for the Service Centers segment increased by $28.8$26.9 million, or 17.5%16.7% for the second quarter ofthree months ended September 30, 2018 compared to the prior year's corresponding period. Excluding $12.4$12.1 million of secondthird quarter 2018 Service Centers segment sales from a business acquired, Service Centers segment sales for the secondthird quarter in 2018 increased $16.4$14.8 million, or 9.2% from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment, bearings and power transmissions 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 third 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 $3.6 million, or 8.9%, for the three months ended September 30, 2018, compared to the prior year's corresponding period. The increase in sales is primarily related to increased sales to customers in the food and beverage, oil and gas and aerospace industries.

GROSS PROFIT. Gross profit as a percentage of sales for the three months ended September 30, 2018 increased by approximately 71 basis points from the prior year's corresponding period. Excluding the impact of the business acquired, gross profit as a percentage of sales increased by approximately 106 basis points. The increase in the gross profit percentage excluding the business acquired, is primarily the result of an approximate 402 basis point increase in the gross profit percentage in our IPS segment partially offset by an approximate 109 basis point decrease in the gross profit percentage in our Supply Chain Services segment. Gross profit for the IPS segment increased as a 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 nine months of 2018.

Innovative Pumping Solutions segment. As a percentage of sales, the third quarter gross profit percentage for the IPS segment increased approximately 402 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 $6.9 million or 377.2%, primarily as a result of the above mentioned increase in sales.

Service Centers segment. As a percentage of sales, the third quarter gross profit percentage for the Service Centers increased approximately 32 basis points and increased approximately 107 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 $5.0 million, or 32.4%. 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 109 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 third quarter of 2018 decreased $0.1 million compared to the prior year's corresponding period mainly due to an increase in SG&A expense of $0.5 million primarily partially offset by an increase in gross profit of $0.4 million.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the three months ended September 30, 2018 increased by approximately $6.8 million, or 11.3%, to $67.3 million from $60.5 million for the prior year's corresponding period. Selling, general and administrative expense from a business that was acquired accounted for $0.7 million of the third quarter increase. Excluding expenses from the business that was acquired, SG&A for the quarter increased by $6.1 million, or 10.1%. 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 primarily due to increased headcount. The remaining increase in SG&A expense for the third quarter of 2018, is a result of the increase in sales. Adjusting for the business acquired, the third quarter 2018 expense decreased 152 basis points to 22.5% from 24.0% for the prior year's corresponding period primarily as a result of the fixed cost leverage nature of SG&A.

OPERATING INCOME. Operating income for the third quarter of 2018 increased by $10.3 million, to $16.8 million, from $6.5 million in the prior year's corresponding period. The operating income from the business acquired in 2018 increased the overall operating income for the three months ended September 30, 2018 by $1.5 million. Excluding the operating income from the business acquired, operating income increased $8.8 million, or 134.5% 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 for the third quarter of 2018 decreased 3.0% from the prior year's corresponding period primarily as a result of decreased interest cost compared to rates under a prior credit facility.

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 29.8% for the three months ended September 30, 2018 compared to a tax benefit of 67.8% for the three months ended September 30, 2017. Compared to the U.S. statutory rate for the three months ended September 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 and other tax credits. Compared to the U.S. statutory rate for the three months ended September 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, domestic production activities deduction, valuation allowance release and research and development credits.


 Nine Months Ended September 30,
 2018 % 2017 %
Sales905,191
 100.0 % 741,155
 100.0 %
Cost of sales659,560
 72.9 % 540,741
 73.0 %
Gross profit245,631
 27.1 % 200,414
 27.0 %
Selling, general and administrative expenses197,609
 21.8 % 175,411
 23.7 %
Income from operations48,022
 5.3 % 25,003
 3.4 %
Other (income) expense, net(1,318) (0.2)% (324) —
Interest expense15,959
 1.9 % 12,573
 1.7 %
Income before taxes33,381
 3.7 % 12,754
 1.7 %
Provision for income taxes8,962
 0.9 % 2,880
 0.4 %
Net income24,419
 2.8 % 9,874
 1.3 %
Net income (loss) attributable to noncontrolling interest(91) —
 (360) — %
Net income  attributable to DXP Enterprises, Inc.24,510
 2.8 % 10,234
 1.3 %
Per share amounts attributable to DXP Enterprises, Inc.       
Basic earnings per share$1.39
   $0.58
  
Diluted earnings per share$1.33
   $0.56
  


Nine Months Ended September 30, 2018 compared to Nine Months Ended September 30, 2017

SALES. Sales for the nine months ended September 30, 2018 increased $164.0 million, or 22.1%, to approximately $905.2 million from $741.2 million for the prior year's corresponding period. Sales from a business acquired on January 1, 2018 accounted for $35.0 million of the increase in sales. Excluding the first nine months of 2018 sales of the business acquired, sales for the first nine months of 2018 sales increased by $129.0 million, or 17.4% from the prior year's corresponding period. This sales increase is the result of an increase in our SC, IPS and SCS segments of $47.4 million, $74.0 million and $7.7 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 $74.0 million, or 51.2% for the nine months ended September 30, 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 nine 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 nine months of 2018.

Service Centers segment. Sales for the Service Centers segment increased by $82.4 million, or 17.4% for the nine months ended September 30, 2018 compared to the prior year's corresponding period. Excluding $35.0 million of Service Centers segment sales for the nine months ended September 30, 2018 from a business acquired, Service Centers segment sales for the period increased $47.4 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 secondthird 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$7.7 million, or 4.6%6.3%, for the second quarter ofnine months ended September 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 and aerospace industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased more from DXP because of the increase in capital spending by oil and gas companies operating in the U.S.

17

GROSS PROFIT.Gross profit as a percentage of sales for the threenine months ended JuneSeptember 30, 2018 decreasedincreased by approximately 1510 basis points from the prior year's corresponding period. Excluding the impact of the business acquired, gross profit as a percentage of sales increased by approximately 3147 basis points. The increase in the gross profit percentage excluding the business acquired, is primarily the result of an approximate 397258 basis pointpoints increase in the gross profit percentage in our IPS segment partially offset by an approximate 27 basis point decreasesegment. These fluctuations are explained in the gross profit percentage in our Supply Chain Services segment. Gross profit for the IPS segment increased as a 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.

Service Centers segment.discussions below. 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 operating income is primarily the result of the improved sales.

Innovative Pumping Solutions segment.  As a percentage of sales, the second quarternine month period gross profit percentage for the IPS segment increased approximately 397258 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 $7.2$17.0 million, or 410%239.5%, 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 ("SG&A"). Selling, general and administrative expense for the three months ended June 30, 2018 increased by approximately $6.4 million, or 10.9%, to $65.1 million from $58.7 million for the prior year's corresponding period. Selling, general and administrative expense from a business that was acquired accounted for $0.7 million of the second quarter increase. Excluding expenses from the business that was acquired, SG&A for the quarter increased by $5.6 million, or 9.6%. 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 second quarter of 2018 is a result of the increase in sales. As a percentage of sales, the second quarter 2018 expense decreased 188 basis points to 21.5% from 23.4% for the prior year's corresponding period, adjusting for the business acquired, primarily as a result of the percentage increase in sales exceeding the percentage decrease in SG&A.

OPERATING INCOME. Operating income for the second quarter of 2018 increased by $9.8 million, to $20.1 million, from $10.3 million in the prior year's corresponding period. The operating income from the business acquired in 2018 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 acquired, operating income increased $8.5 million, or 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 for the second quarter of 2018 increased 53.7% from the prior year's corresponding period primarily as a result of increased interest rates under our credit facility.

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 24.62% for the three months ended June 30, 2018 compared to a tax expense of 36.07% for the three months ended June 30, 2017. Compared to the U.S. statutory rate for the three months ended June 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, domestic production activities deduction, and research and development credits.

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 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 $55.5 million, or 17.7% for the six months ended June 30, 2018 compared to the prior year's corresponding period. Excluding $23.0 million of Service Centers segment sales for the six months ended June 30, 2018 from a business acquired, Service Centers segment sales for the period increased $32.5 million, or 10.4% 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 $4.1 million, or 5.0%, for the six 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 and aerospace industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased more from DXP because of the increase in capital spending by oil and gas companies operating in the U.S.

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GROSS PROFIT. Gross profit as a percentage of sales for the six months ended June 30, 2018 decreased by approximately 22 basis points from the prior year's corresponding period. Excluding the impact of the business acquired, gross profit as a percentage of sales increased by approximately 16 basis points. The increase in the gross profit percentage excluding the business acquired, is primarily the result of an approximate 180 basis point increase in the gross profit percentage in our IPS segment. These fluctuations are explained in the segment discussions below.

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 sixnine month period gross profit percentage for the Service Centers decreased approximately 7337 basis points but increased approximately 539 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$11.0 million, or 10.8%23.3%. 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 1244 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 sixnine months ended JuneSeptember 30, 2018 increased 0.4 million compared to the prior year's corresponding period mainly due to an increase in gross profit of $0.8$1.2 million primarily offset by an increase in SG&A of $0.3$0.8 million.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the sixnine months ended JuneSeptember 30, 2018 increased by approximately $15.4$22.2 million, or 13.4%12.7%, to $130.4$197.6 million from $115.0$175.4 million for the prior year's corresponding period. Selling, general and administrative expense from a business that was acquired accounted for $1.4$2.2 million of the increase. Excluding the first sixnine months of 2018 expenses from the business that was acquired, SG&A for the sixnine months increased by $14.0$20.0 million, or 12.1%11.4%. 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.401(k) expenses primarily due to increased headcount. The remaining increase in SG&A expense for the first sixnine months of 2018 is primarily a result of the increase in sales. As a percentage of sales, the sixnine months ended JuneSeptember 30, 2018 expense decreased approximately 105121 basis points to 22.5% from 23.5%23.7% for the prior year's corresponding period, adjusting for the business acquired, primarily as a result of the percentage increase in sales exceeding the percentage decrease in SG&A.

OPERATING INCOME. Operating income for the first sixnine months ofended September 30, 2018 increased by $12.7$23.0 million, to $31.2$48.0 million, from $18.5$25.0 million in the prior year's corresponding period. The operating income from the business acquired in 2018 increased the overall operating income for the sixnine months ended JuneSeptember 30, 2018 in the amount of $2.6 million.$4.1 million. Excluding the operating income from the business acquired, operating income increased $10.1$18.9 million, or 54.9%75.6% 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 for the first sixnine months of 2018 increased 46.2%26.9% from the prior year's corresponding period primarily as a result of increased interest rates under our new credit facility.facilities put in place on August 29, 2017. Under our senior secured Term Loan B, DXP borrow at a spread over LIBOR. LIBOR increased 67 basis points from January through September 30, 2018.

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 25.21%26.9% for the sixnine months ended JuneSeptember 30, 2018 compared to a tax expense of 36.81%22.6% for the sixnine months ended JuneSeptember 30, 2017. Compared to the U.S. statutory rate for the sixnine months ended JuneSeptember 30, 2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. The effective tax rate was decreasedexpenses and partially offset by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the sixnine months ended JuneSeptember 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, domestic production activities deduction, valuation allowance release, and research and development credits.

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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 
 Nine Months Ended September 30,
Net Cash Provided by (Used in):2018 2017
Operating Activities$9,842
 $8,527
Investing Activities(15,971) (2,157)
Financing Activities(2,994) 14,938
Effect of Foreign Currency(66) 189
Net Change in Cash$(9,189) $21,497

Operating Activities

The Company used $7.0generated $9.8 million of cash in operating activities during the sixnine months ended JuneSeptember 30, 2018 compared to generating $7.9$8.5 million of cash during the prior year's corresponding period. The $14.9$1.3 million increase in the amount of cash usedgenerated between the two periods was primarily driven by inventory build-up and increasesan increase in costs and estimated profitsprofitability that exceeds investments in excess of billings as a result of increased project activity at our IPS segment.working capital .

Investing Activities

For the sixnine months ended JuneSeptember 30, 2018, net cash used in investing activities was $13.6$16.0 million compared to $1.1$2.2 million in the corresponding period in 2017. This increase was primarily driven by the purchase of ASI and investments in capital equipment. This was partially offset by proceeds from the sale of a building. For the sixnine months ended JuneSeptember 30, 2018, purchases of property, plant and equipment werewas approximately $5.5$7.7 million.

Financing Activities

For the sixnine months ended JuneSeptember 30, 2018, net cash used in financing activities was $1.9$3.0 million, compared to net cash used ingenerated by financing activities of $5.9$14.9 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 sixnine months ended JuneSeptember 30, 2018, the amount available to be borrowed under our credit facility decreased to $80.0$79.9 million at June September 30, 2018 compared to $82.0 million at December 31, 2017.  This was the result of $5.0$5.1 million in letters of credit outstanding as of JuneSeptember 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.

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ABL Facility and Senior Secured Term Loan B

Asset-Based Loan Facility:

On August 29, 2017, DXP entered into a five year, $85 million Asset Based Loan and Security Agreement (the "ABL Revolver").  The ABL Revolver 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 Revolver was 3.8%4.0% at JuneSeptember 30, 2018 with a LIBOR component of 2.1%1.8%.

The unused line fee was 0.375%0.25% at JuneSeptember 30, 2018. As of JuneSeptember 30, 2018 there were no amounts of ABL Loans outstanding under the ABL Revolver.

The Company's consolidated Fixed Charge Coverage Ratio was 3.333.34 to 1.00 as of JuneSeptember 30, 2018. DXP was in compliance with all such covenants that were in effect on such date under the ABL Revolver as of JuneSeptember 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 (the "Term Loan B") 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. The Company entered into the amendment for purposes of reducing the applicable margin that is applied to determine the effective interest rate from time to time in effect under the Term Loan Agreement. Under the terms of the First Amendment the applicable margin that is applied under the Term Loan Agreement with respect to LIBOR 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 Agreement with respect to "Base Rate Loans" was reduced from 4.5% to 3.75%.

The interest rate for the Term Loan B was 6.8%7.0% as of JuneSeptember 30, 2018. At JuneSeptember 30, 2018, the aggregate principal amount of Term Loan B borrowings outstanding under the facility was $248.1$247.5 million.

As of JuneSeptember 30, 2018, the Company's consolidated Secured Leverage Ratio was 3.222.69 to 1.00. DXP was in compliance with all such covenants that were in effect on such date under the Term Loan B facility as of JuneSeptember 30, 2018
2018.

Borrowings (in thousands):

  
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.
 
 September 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 maturities237,434
 238,643
 (1,209)
Total long-term debt$240,828
 $242,024
 $(1,196)
Amount available (1)
$79,930
 $82,007
 $(2,077)
(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):

 
Six Months Ended
June 30,
   
     Increase 
 2018 2017 (Decrease) 
   
Days of sales outstanding57.4 61.5             (4.1)
Inventory turns8.2 8.0             0.2
 Nine Months Ended
September 30,		 
 2018 2017
Increase
(Decrease)
Days of sales outstanding58.363.2(4.9)
Inventory turns7.68.5(0.9)

Accounts receivable days of sales outstanding were 57.458.3 days at JuneSeptember 30, 2018 compared to 61.563.2 days at JuneSeptember 30, 2017. The 4.14.9 days decrease was primarily due to more timely payment timesterms in connection with an improved economy. Inventory turns were consistent between the two periods.
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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 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, 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 28, 2018. The results of operations for the sixthree and nine months ended JuneSeptember 30, 2018 are not necessarily indicative of results expected for the full fiscal year.

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 JuneSeptember 30, 2018 and 2017, a 100 basis point change in interest ratesLIBOR would result in approximately a $2.5 million and a $2.2 million change in annual interest expense, respectively.

ITEM 4: CONTROLS AND PROCEDURES.

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management has used the 2013 framework set forth in the report entitled "Internal Control – Integrated Framework" published by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission to evaluate the effectiveness of the Company's internal control over financial reporting. Management had previously concluded that the Company's internal control over financial reporting was not effective due to material weaknesses in internal control over financial reporting as 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.

The Company's control environment did not sufficiently promote effective internal control over financial reporting; specifically, the following factors relating to the control environment:

·Management did not maintain effective management review controls over the monitoring and review of certain accounts.

·Management did not effectively design, document nor monitor (review, evaluate and assess) the key internal control activities that provide the accounting information contained in the Company's consolidated financial statements.

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.

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Remediation Plans

During the second quarter of 2018, we engaged third party consultants to assist us with our efforts to design and maintain adequate and effective internal controls over financial reporting, to implement measures designed to improve our financial closing process and enhance certain internal controls, processes and procedures, including ITGC. Specifically, the Company will undertakeis undertaking the following steps to remediate the deficiencies underlying these material weaknesses:

·In connection with the remediation of the material weakness in our control activities, we will enhanceIn connection with the remediation of the material weakness in our control activities, we are enhancing our policies relating to the design, documentation, review, monitoring and approval of 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 will implementTo enhance our information technology controls, we are implementing systems and processes in order to create an effective segregation of duties, restrict user access to applications and improve output controls.

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.

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 JuneSeptember 30, 2018 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, 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.

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

3.2
Bylaws, as amended on July 27, 2011.2011 (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2018.

* 10.1
First Amendment to Loan Agreement, effective June 25, 2018.

* 31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended.

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


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


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

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 08November 6, 2018, 2018

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