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 ~~June 30, 2018~~March 31, 2019



[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition period ~~fromto~~from 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,~~5301 Hollister, 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]

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of Each Class	Trading Symbol	Name of Exchange on which Registered
Common Stock par value $0.01	DXPE	NASDAQ Global Select Market

Number of shares of registrant's Common Stock outstanding as of ~~August 2, 2018: 17,387,176~~April 30, 2019: 17,592,190 par value $0.01 per share.

DXP ENTERPRISES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

DESCRIPTION



Item		Page
PART I: FINANCIAL INFORMATION
	ITEM 1. Financial Statements	3
	a) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income	3
	b) Unaudited Condensed Consolidated Balance Sheets	4
	c) Unaudited Condensed Consolidated Statements of Cash Flows	5
	d) Unaudited Condensed Consolidated Statements of Equity	6
	e) Notes to Unaudited Condensed Consolidated Financial Statements	7
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	18
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	22
	ITEM 4. Controls and Procedures	23

PART II: OTHER INFORMATION		24
	ITEM 1. Legal Proceedings	24
	ITEM 1A. Risk Factors	24
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
	ITEM 3. Default upon Senior Securities	24
	ITEM 4. Mine Safety Disclosures	24
	ITEM 5. Other Information	24
	ITEM 6. Exhibits	24
	Signatures	25

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share amounts) (unaudited)



	Three Months Ended March 31,
	2019			2018
Sales	$	311,225		$	285,936
Cost of sales	227,025			209,491
Gross profit	84,200			76,445
Selling, general and administrative expenses	69,384			65,296
Income from operations	14,816			11,149
Other income, net	(33		)	(22		)
Interest expense	5,040			5,041
Income before income taxes	9,809			6,130
Provision for income taxes	2,622			1,636
Net income	7,187			4,494
Net loss attributable to noncontrolling interest	(104		)	(57		)
Net income attributable to DXP Enterprises, Inc.	7,291			4,551
Preferred stock dividend	23			23
Net income attributable to common shareholders	$	7,268		$	4,528

Net income	$	7,187		$	4,494
Cumulative translation adjustment	702			(377		)
Comprehensive income	$	7,889		$	4,117

Earnings per share :
Basic	$	0.41		$	0.25
Diluted	$	0.40		$	0.24
Weighted average common shares outstanding :
Basic	17,566			17,901
Diluted	18,406			18,741

The accompanying notes are an integral part of these unaudited condensed consolidated 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.~~

~~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



	March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash	$	30,606		$	40,304
Restricted cash	122			215
Accounts Receivable, net of allowance for doubtful accounts of $10,080 and $10,126	197,267			191,829
Inventories	121,754			114,830
Costs and estimated profits in excess of billings	38,150			32,514
Prepaid expenses and other current assets	5,597			4,938
Federal income taxes receivable	—			960
Total current assets	393,496			385,590
Property and equipment, net	51,404			51,330
Goodwill	194,052			194,052
Other intangible assets, net	63,609			67,207
Operating lease ROU assets	70,851			—
Other long-term assets	1,795			1,783
Total assets	$	775,207		$	699,962
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,414		$	3,407
Trade accounts payable	92,460			87,407
Accrued wages and benefits	16,882			21,275
Customer advances	3,867			3,223
Billings in excess of costs and estimated profits	8,207			10,696
Federal income taxes payable	67			—
Short-term operating lease liabilities	17,660			—
Other current liabilities	16,075			17,269
Total current liabilities	158,632			143,277
Long-term debt, net of current maturities and unamortized debt issuance costs	236,591			236,979
Long-term operating lease liabilities	52,993			—
Other long-term liabilities	988			2,819
Deferred income taxes	9,422			8,633
Total long-term liabilities	299,994			248,431
Total liabilities	458,626			391,708
Commitments and contingencies (Note 11)
Shareholders' Equity:
Series A preferred stock, $1.00 par value; 1,000,000 shares authorized	$	1		$	1
Series B convertible preferred stock, $1.00 par value; 1,000,000 shares authorized	15			15
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,435,117 and 17,401,297 outstanding	174			174
Additional paid-in capital	156,651			156,190
Retained earnings	177,003			169,735
Accumulated other comprehensive loss	(18,565		)	(19,267		)
Total DXP Enterprises, Inc. equity	315,279			306,848
Noncontrolling interest	1,302			1,406
Total equity	316,581			308,254
Total liabilities and equity	$	775,207		$	699,962

The accompanying notes are an integral part of these unaudited 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



	Three Months Ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to DXP Enterprises, Inc.	$	7,291		$	4,551
Less net loss attributable to non-controlling interest	(104		)	(57		)
Net income	7,187			4,494
Reconciliation of net income to the net cash used in operating activities:
Depreciation	2,392			2,356
Amortization of intangible assets	3,814			4,358
Gain on sale of property and equipment	(8		)	—
Bad debt expense	58			829
Payment of contingent consideration liability in excess of acquisition-date fair value	(106		)	—
Fair value adjustment on contingent consideration	33			—
Amortization of debt issuance costs	468			462
Stock compensation expense	505			736
Deferred income taxes	722			(179		)
Changes in operating assets and liabilities
Trade accounts receivable	(5,035		)	3,953
Costs and estimated profits in excess of billings	(5,628		)	(8,642		)
Inventories	(6,891		)	(9,107		)
Prepaid expenses and other assets	3,389			699
Trade accounts payable and accrued expenses	1,085			(691		)
Billings in excess of costs and estimated profits	(2,514		)	(76		)
Other long-term liabilities	(4,781		)	—
Net cash used in operating activities	$	(5,310	)	$	(808	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(2,312		)	(791		)
Proceeds from the sale of property and equipment	29			—
Acquisition of business, net of cash acquired	—			(9,836		)
Net cash used in investing activities	$	(2,283	)	$	(10,627	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal debt payments	(849		)	(844		)
Debt issuance costs	—			(38		)
Payment for contingent consideration liability up to acquisition-date fair value	(1,394		)	—
Dividends paid	(23		)	(23		)
Payment for employee taxes withheld from stock awards	(44		)	(54		)
Net cash used in financing activities	$	(2,310	)	$	(959	)
Effect of foreign currency on cash	112			(140		)
Net change in cash and restricted cash	(9,791		)	(12,534		)
Cash and restricted cash at beginning of period	40,519			25,579
Cash and restricted cash at end of period	$	30,728		$	13,045

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

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands) (unaudited)



	Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital			Retained earnings			Non controlling interest			Accum other comp loss			Total equity
Balances at December 31, 2017	$	1	$	15	$	174	$	153,087		$	134,182		$	567		$	(19,491	)	$	268,535
Preferred dividends paid	—		—		—		—			(23		)	—			—			(23		)
Compensation expense for restricted stock	—		—		—		736			—			—			—			736
Tax related items for share based awards							(54		)										(54		)
Issuance of shares of common stock	—		—		—		894			—			—			—			894
Cumulative translation adjustment	—		—		—		—			—			—			(377		)	(377		)
Net income	—		—		—		—			4,551			(57		)	—			4,494
Balances at March 31, 2018	$	1	$	15	$	174	$	154,663		$	138,710		$	510		$	(19,868	)	$	274,205



	Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital			Retained earnings			Non controlling interest			Accum other comp loss			Total equity
Balances at December 31, 2018	$	1	$	15	$	174	$	156,190		$	169,735		$	1,406		$	(19,267	)	$	308,254
Preferred dividends paid	—		—		—		—			(23		)	—			—			(23		)
Compensation expense for restricted stock	—		—		—		505			—			—			—			505
Tax related items for share based							(44		)										(44		)
Cumulative translation adjustment	—		—		—		—			—			—			702			702
Net income	—		—		—		—			7,291			(104		)	—			7,187
Balances at March 31, 2019	$	1	$	15	$	174	$	156,651		$	177,003		$	1,302		$	(18,565	)	$	316,581

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

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"~~12 - 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.~~2018. 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.~~8, 2019. The results of operations for ~~the~~ three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 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 June 30, 2018, condensed consolidated~~ statements of operations and comprehensive ~~operations~~income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and March 31, 2018, condensed consolidated balance sheets as of March 31, 2019 and ~~June 30, 2017, and~~December 31, 2018, condensed consolidated statements of cash flows for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and March 31, 2018, and ~~June 30, 2017.~~condensed consolidated statement of equity as of March 31, 2019 and March 31, 2018. 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.~~ Leases.In ~~May 2017,~~February 2016, the Financial Accounting Standards ~~Board~~Board's ("FASB") issued Accounting Standards Update ("ASU") ~~ASU 2017-09,~~ No. 2016-02, ~~Compensation - Stock Compensation~~Leases (Topic ~~718): Scope of Modification Accounting.~~842) 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,as modified by subsequently issued ASUs 2018-01, 2018-10, 2018-11 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.2018-20. The Company adopted ~~this ASU as of~~the standard effective January 1, ~~2018,~~2019. We have elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and ~~it did not~~we have ~~a material impact on~~elected to apply several of the ~~Company's Consolidated Financial Statements.~~practical expedients in conjunction with accounting policy elections. See Note 4 - Leases for further discussion.

Accounting Pronouncements Not Yet Adopted

Intangibles-Goodwill and ~~Other.~~ Other. In ~~January 2017,~~August 2018, the FASB issued ASU ~~2017-04,~~ No. 2018-15, ~~Intangibles-Goodwill and Other (Topic 350)~~Internal-Use Software (Subtopic 350-40): ~~Simplifying the Test~~Customer’s Accounting for ~~Goodwill Impairment.~~Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ~~This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date~~based on a consensus of the ~~amendment~~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 ~~standard~~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, ~~including~~and interim periods within those fiscal years. ~~The Company adopted this ASU early on December 31, 2017. The Company's annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units' goodwill, determined~~Early adoption is permitted, and we will continue to assess the standard and make 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.determination later.

~~Business Combinations.~~Fair Value Measurement. In ~~January 2017,~~August 2018, the FASB issued ASU ~~2017-01,~~ 2018-13: ~~Business Combinations (Topic 805): Clarifying~~Fair Value Measurement: Disclosure Framework-Changes to the ~~Definition~~Disclosure Requirements for Fair Value Measurement which eliminates, adds and modifies certain disclosure

requirements for fair value measurements as part of ~~a Business.~~ ~~This ASU clarifies~~its disclosure framework project. Entities will no longer be required to disclose the ~~definition~~amount of ~~a business with~~and reasons for transfers between Level 1 and Level 2 of the ~~objective of adding~~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 ~~to assist~~is effective for all 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~~2019 and for interim periods within those fiscal ~~years.~~ years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the disclosure requirements. The ~~Company adopted this ASU as of January 1, 2018, and it did~~new standard will not have ~~a material~~an impact on ~~the Company's Consolidated Financial Statements. As discussed in~~ ~~Note 14 "Business Acquisitions", the Company acquired Application Specialties, Inc. in January 2018. Application Specialties, Inc. met the definition~~our results 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~~operations, but 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~~will significantly modify our disclosures around fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. ~~The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.~~

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

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

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

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

~~Accounting Pronouncements Not Yet Adopted~~measurements.

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.~~

NOTE 4 - LEASES

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). which was modified by subsequently issued ASUs 2018-01, 2018-10, 2018-11 and 2018-20. The update requires organizations that lease assets ("lessees") to recognize the assets and liabilities ~~for~~of 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~~was not ~~been~~ significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This pronouncement iswas effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption iswas permitted. ~~The Company is currently assessing the impact that this standard will have on its Consolidated Financial Statements.~~

~~NOTE 4 – REVENUE RECOGNITION~~

In ~~May 2014,~~July 2018, the FASB issued ASU ~~2014-09,~~ ~~Revenue from Contracts with Customers, and issued subsequent amendments~~No. 2018-11, Leases: Targeted Improvements (Topic 842). ASU 2018-11 provided additional relief in the comparative reporting requirements for initial adoption of ASC 842. Prior to ~~the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within~~ ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The core 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 provides for two transition methods, a full retrospective approach and2018-11, a modified retrospective ~~approach.~~

Ontransition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 provided an additional transition method to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date (such as January 1, ~~2018, the Company adopted ASC Topic 606 using the modified retrospective method with no impact~~2019, for calendar year-end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings ~~and determined there were no changes required to its reported revenues as a result~~ in the period 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 allocatedadoption without adjustment to the ~~performance obligation(s) in the contract. We believe our performance obligation has been satisfied when title passes~~financial statements for periods prior to ~~the customer or services have been rendered under the contract. Revenues are recorded net of sales taxes.~~adoption.

The Company ~~fabricates~~adopted the standard effective January 1, 2019. We elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and ~~assembles custom-made pump packages, remanufactures pumps~~we elected to apply the following practical expedients and ~~manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements~~accounting policy decisions.

We elected a package of transition expedients that allowed us to ~~fabricate tangible~~forgo reassessing certain conclusions reached under ASC 840 which must be elected together. All expedients in this package were applied together for all leases that commenced before the effective date, January 1, 2019, of ASC 842. As a result, in transitioning to ASC 842, for existing leases as of 1/1/2019, we continued to use judgments made under ASC 840 related to embedded leases, lease classification and accounting for initial direct costs. We generally have four classes of leased assets : Real Estate related properties (such as office space, warehouses, distribution centers and land), Automobiles, Office Equipment and Manufacturing Equipment and do not utilize finance leases.

In addition, we have chosen, as an accounting policy election by class of underlying asset, not to ~~customer specifications,~~separate nonlease components from the ~~Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially~~associated lease for all of our leased asset classes, except for Real Estate related leases. As a result, for classes of Automobiles, Office Equipment and Manufacturing Equipment, we account for each separate lease component and the ~~benefits~~nonlease components associated with that lease as a single lease component.

For short-term leases as defined under ASC 842, we elected the short-term lease exception pursuant to ASC 842 to all classes of ~~the work performed. This typically occurs when the products have no alternative use for us and we have~~our leased assets. We do not recognize a lease liability or a right ~~to payment~~of use asset on our consolidated balance sheets for our leased assets with an original lease term of twelve months or less. Instead, we recognize the ~~work completed to date plus~~lease payments in profit or loss on a ~~reasonable profit margin. Contracts generally include cancellation provisions that require~~straight-line basis over the ~~customer to reimburse us~~lease term and variable lease payments in the period in which the obligation 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 arethose payments is incurred and ~~include estimated profits calculated on~~disclose in the ~~basis of~~notes to 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.consolidated financial statements our short-term lease expense.

The ~~Supply Chain Services segment provides~~new standard did have 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 placematerial impact on our consolidated balance sheets related to recording right-of-use assets and the ~~price is fixed followed by execution~~corresponding lease liabilities for our inventory of operating leases. In January 2019, we recorded a ROU Asset and total lease liability obligations of approximately $72 million, each. The new standard did not have a material impact on our consolidated statements of operations and had no impact on cash flows.

We lease office space, warehouses, land, automobiles, and office and manufacturing equipment. All of our ~~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~~leases are ~~recorded net of sales taxes.~~classified as operating leases.

~~See~~ ~~Note 15 "Segment Reporting"~~ Our leases have remaining lease terms of 1 month to 12 years, some of which include options to extend the leases for ~~disaggregation~~up to 14 years. The exercise of ~~revenue by reporting segments.~~ lease renewal options is at our sole discretion. Our lease agreements do not include options to purchase the leased property.

The ~~Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.~~lease expenses were as follows (in thousands):



		Three Months Ended March 31,
Lease cost	Classification	2019
Short-term lease expense	SG&A expenses^(*)	$	269
Other operating lease cost	SG&A expenses^(*)	5,832
Total operating lease cost		$	6,101
^(*) Manufacturing equipment and some vehicle rental expenses are included in the cost of sales.

6Supplemental cash flow information related to leases was as follows (in thousands):



	Three Months Ended March 31,
Lease	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	4,513
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	$	2,935

Supplemental balance sheet information related to leases was as follows (in thousand):



Lease	Classification	Impact of ASC 842 Transition		Leases commenced during the quarter		Payments, amortization and terminations				As of March 31, 2019
Assets
Operating	Operating lease right-of-use assets	$	72,679	$	2,935	$	(4,763	)		$	70,851

Liabilities
Current operating	Short-term operating lease liabilities	18,762		678		(1,780		)	^(*)	17,660
Non-current operating	Long-term operating lease liabilities	53,654		2,256		(2,917		)		52,993
Total operating lease liabilities		$	72,416	$	2,934	$	(4,697	)		$	70,653

Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate associated with secured debt based on the information available at the commencement date in determining the present value of lease payments for leases commenced on or after January 1, 2019. We used our incremental borrowing rate as of the transition date of January 1, 2019 for operating leases that commenced prior to transition to ASC 842.

^(*) Amount is net of the reclassification of long-term liability to short-term lease liability as of March 31, 2019.

Maturities of lease liabilities were as follows (in thousands):



Year Ending December 31,	Operating leases ^(*)
2019 (excluding 3 months ended 3/31/2019)	$	16,884
2020	19,360
2021	16,061
2022	12,034
2023	7,119
Thereafter	13,359
Total lease payments	$	84,817
Less: imputed interest	14,164
Present value of lease liabilities	$	70,653

^(*)Operating lease payments exclude $250 thousand of legally binding minimum lease payments for leases signed but not yet commenced.

Contractual obligations related to operating leases as of December 31, 2018, under ASC 840 (in thousands):



	Payments due by period
	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Operating lease obligations	$	22,096	$	33,825	$	18,379	$	11,022	$	85,322



Lease term and discount rate		March 31, 2019
Weighted average remaining lease term (years)
Operating lease		5.06
Weighted average discount rate
Operating lease		7.3%

For the three months ended March 31, 2019, the Company paid approximately $550 thousand in lease expenses to entities controlled by the Company's Chief Executive Officer, David Little.

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 ~~June 30, 2018,~~March 31, 2019, we recorded a $4$2.9 million liability for contingent consideration associated with the acquisition of ~~ASI~~Application Specialties Inc. ("ASI") in other current and long-term liabilities. ~~See further discussion at~~ ~~Note 14 "Business Acquisitions~~".

For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the ~~six~~three months ended ~~June 30, 2018:~~March 31, 2019:



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Contingent Liability for Accrued Consideration
	(in thousands)
Beginning balance at December 31, 2018	$	4,319
Acquisitions and settlements
Acquisitions	—
Settlements	(1,500		)
Total remeasurement adjustments:
Changes in fair value recorded in profit and loss	33
*Ending Balance at March 31, 2019	$	2,852

The amount of total losses for the quarter included in earnings or changes to net assets, attributable to changes in unrealized losses relating to liabilities still held at March 31, 2019.	$	33

* Included in other current and long-term liabilities

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Contingent Liability for Accrued Consideration
(in thousands)

Beginning balance at January 1, 2018 $ -
Acquisitions and settlements
     Acquisition of ASI (Note 14) 4,214
     Settlements -
Total remeasurement adjustments:
       (Gains) or losses recorded against goodwill (208 )

Ending balance at June 30, 2018* $ 4,006

The amount of total (gains) or losses for the year included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at year-end. $ -

* Included in other current and long-term liabilities

Quantitative Information about Level 3 Fair Value Measurements

The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:

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



(in thousands, unaudited)	Fair value at March 31, 2019		Valuation Technique	Significant Unobservable Inputs
Contingent consideration: (ASI acquisition)	$	2,852	Discounted cash flow	Annualized EBITDA and probability of achievement

Sensitivity to Changes in Significant Unobservable Inputs

As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of ASI are annualized ~~EBITDA~~earnings before interest, tax, deprecation and amortization ("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%~~7.3%. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement.

Other financial instruments not measured at fair value on the Company's unaudited condensed consolidated balance sheet at ~~June 30,~~March 31, 2019 and December 31, 2018, but which require disclosure of their fair values include: cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility. The Company believes that the estimated fair value of such instruments at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 approximates their carrying value as reported on the unaudited ~~Condensed Consolidated Balance Sheets.~~condensed consolidated balance sheets.

NOTE 6 – INVENTORIES

The carrying values of inventories are as follows (in thousands):



	March 31, 2019			December 31, 2018
Finished goods	$	105,448		$	110,182
Work in process	28,613			17,344
Obsolescence reserve	(12,307		)	(12,696		)
Inventories	$	121,754		$	114,830

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~~Under our customized pump production contracts 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~~our IPS segment, amounts are ~~recoverable from customers~~billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “cost and estimated profits in excess of billings” on our

Condensed Condsolidated Balance Sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our Condensed Consolidated Balance Sheets.

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



	March 31, 2019		December 31, 2018
Costs incurred on uncompleted contracts	$	69,861	$	53,595
Estimated profits, thereon	8,744		6,847
Total	78,605		60,442
Less: billings to date	48,662		38,662
Net	$	29,943	$	21,780

Such amounts were included in the accompanying Condensed Consolidated Balance Sheets for ~~2018~~March 31, 2019 and ~~2017~~December 31, 2018 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

~~NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS~~



	March 31, 2019			December 31, 2018
Costs and estimated profits in excess of billings	$	38,150		$	32,514
Billings in excess of costs and estimated profits	(8,207		)	(10,696		)
Translation adjustment	—			(38		)
Net	$	29,943		$	21,780

~~The following table presents~~During the ~~changes in the carrying amount of goodwill and other intangible assets during the six~~three months ended ~~June 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

~~The following table presents~~March 31, 2019, $8.3 million of the ~~goodwill balance by reportable segment~~balances that were previously classified as contract liabilities at the beginning of ~~June 30, 2018~~the period shipped. Contract assets 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

~~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

~~Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according~~liability changes were primarily due to ~~estimated economic benefits over their estimated useful lives.~~normal activity and timing differences between our performance and customer payments.

NOTE 98 – 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 June 30, 2018, the Company has not completed our accounting for all of the tax effects of the Tax Cuts and Jobs Act; however, in certain cases, as described below, the Company has made a reasonable estimate of other effects. The Company will continue to refine our calculations as additional analysis is completed.

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 June 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%~~26.7% for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 compared to a tax expense of ~~36.81%~~26.7% for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018. Compared to the U.S. statutory rate for the ~~six~~three months ended June 30, 2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and partially offset by research and development tax credits. Compared to the U.S. statutory rate for the six months ended June 30, 2017,March 31, 2019, 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, and~~taxes research and development tax credits, foreign tax credits, and other tax credits.

Compared to the U.S. statutory rate for the three months ended March 31, 2018, the effective tax rate was increased by state taxes and nondeductible expenses and partially offset by foreign taxes, research and development credits, and other tax credits.

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 109 – 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



	March 31, 2019						December 31, 2018
	Carrying Value ⁽¹⁾			Fair Value			Carrying Value ⁽¹⁾			Fair Value
ABL Revolver	$	—		$	—		$	—		$	—
Term Loan B	246,250			249,944			246,875			245,949
Promissory note payable ⁽²⁾	1,616			1,616			1,841			1,841
Total long-term debt	247,866			251,560			248,716			247,790
Less: current portion	(3,414		)	(3,451		)	(3,407		)	(3,398		)
Long-term debt less current maturities	$	244,452		$	248,109		$	245,309		$	244,392

*⁽¹⁾Carrying value amounts do not include unamortized debt issuance costs of ~~$9.1M~~$7.9 million and ~~$10.1~~$8.3 million for ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

⁽²⁾ Note payable in monthly installments at 2.9% through January 2021, collateralized by equipment.

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

~~August 2017 Credit Agreements~~

On August 29, 2017, the Company entered into two credit agreements (the "August 2017 Credit Agreements") that provided for an $85.0 million asset-backed revolving line of credit (the "ABL Revolver") and a $250.0 million senior secured term loan B (the "Term Loan B"). Under the ABL Revolver, the Company may request $10.0 million incremental revolving loan commitments in an additional aggregate amount not to exceed $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 cost were accelerated and recorded as additional interest expense in the condensed consolidated statements of operations and comprehensive operations, attributable to prior syndicate lenders who reduced or eliminated their positions during the amendment process. The Company also incurred $0.9 million of third party fees in connection with the Repricing Amendment, which was also recorded as additional interest expense in the condensed consolidated statements of operations and comprehensive operations.

~~As of June 30, 2018, the Company had no amount outstanding under the ABL Revolver and had $80.0 million of borrowing capacity, including the impact of letters of credit.~~

~~Interest on Borrowings~~

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

June 30,
2018

December 31,
2017

ABL Revolver 3.8 % 2.9 %
Term Loan B 6.8 % 7.1 %
Promissory Note 2.9 % 2.9 %
Weighted average interest rate 6.8 % 7.0 %

The Company was in compliance with all financial covenants under the ~~August 2017 Credit Agreement~~ABL Revolver and Term Loan B Agreements as of ~~June 30, 2018.~~March 31, 2019.

~~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 June 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; 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 June 30, 2018, 279,149 shares were available for future grant.

~~Changes in restricted stock for the six months ended June 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

Compensation expense, associated with restricted stock, recognized in the six months ended June 30, 2018 and 2017 was $1.0 million, respectively. Related income tax benefits recognized in earnings for the six months ended June 30, 2018 and 2017 were approximately $0.4 million. Unrecognized compensation expense under the Restricted Stock Plan at June 30, 2018 and December 31, 2017 was $4.4 million and $1.6 million, respectively. As of June 30, 2018, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 28.2 months.

NOTE 1210 - 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 March 31,
	2019		2018
Basic:
Weighted average shares outstanding	17,566		17,901
Net income attributable to DXP Enterprises, Inc.	$	7,291	$	4,551
Convertible preferred stock dividend	23		23
Net income attributable to common shareholders	$	7,268	$	4,528
Per share amount	$	0.41	$	0.25

Diluted:
Weighted average shares outstanding	17,566		17,901
Assumed conversion of convertible preferred stock	840		840
Total dilutive shares	18,406		18,741
Net income attributable to common shareholders	$	7,268	$	4,528
Convertible preferred stock dividend	23		23
Net income attributable to DXP Enterprises, Inc.	$	7,291	$	4,551
Per share amount	$	0.40	$	0.24

NOTE 1311 - COMMITMENTS AND CONTINGENCIES

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

~~NOTE 14 – BUSINESS ACQUISITIONS~~

On January 1, 2018, the Company completed the acquisition of Application Specialties, Inc. ("ASI"), a distributor of cutting tools, abrasives, coolants and machine shop supplies. The Company paid approximately $11.7 million in cash and stock. The purchase price also includes approximately $4.0 million in contingent consideration. The purchase was financed with $10.8 million of cash on hand as well as issuing $0.9 million of the Company's common stock. ASI will provide the Company's metal working division with new geographic territory and enhance DXP's end market mix. For the six months ended June 30, 2018, ASI contributed sales of $23.0 million and earnings before taxes of approximately $2.6 million.

As part of our purchase agreement, we may pay up to an additional $4.6 million of contingent consideration over the next three years based on the achievement of certain earnings benchmarks established for calendar years 2018, 2019 and 2020. The purchase price includes the estimated fair value of the contingent consideration recorded at the present value of $4.0 million. The estimated fair value of the contingent consideration was determined using a probability-weighted discounted cash flow model. We determined the fair value of the contingent consideration obligations by calculating the probability-weighted payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement includes earnings forecasts which are a Level 3 measurement as discussed in Note 5. The fair value of the contingent consideration is reviewed quarterly over the earn-out period to compare actual earnings before interest, taxes, depreciation and amortization ("EBITDA") achieved to the estimated EBITDA used in our forecasts.

As of June 30, 2018 approximately $1.4 million of the actual cash due toward the contingent consideration earned is recorded in current liabilities. We may pay up to an additional $3.2 million over the remaining earn-out period based on the achievement of certain EBITDA benchmarks. The estimated fair value of the contingent consideration is recorded at the present value of $4.0 million at June 30, 2018. Changes in the estimated fair value of the contingent earn-out consideration, up to the total contractual amount, are reflected in our results of operations in the periods in which they are identified. Changes in the fair value of the contingent consideration may materially impact and cause volatility in our future operating results. Changes in our estimates for the contingent consideration are discussed in Note 5 to our condensed consolidated financial statements.

The total acquisition consideration is equal to the sum of all cash payments, the fair value of stock issued, and the present value of any contingent consideration. The following table summarizes the total acquisition consideration for the ASI Purchase:

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 1512 - 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



Three Months Ended March 31, 2019
	SC		IPS		SCS		Total
Product sales (recognized at a point in time)	$	171,668	$	—	$	46,385	$	218,053
Inventory management services (recognized over contract life)	—		—		3,938		3,938
Staffing services (day-rate basis)	14,511		—		—		14,511
Customized pump production (recognized over time)	—		74,723		—		74,723
Total Revenue	$	186,179	$	74,723	$	50,323	$	311,225
Income from operations	$	18,980	$	6,799	$	4,086	$	29,865

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



Three Months Ended March 31, 2018
	SC		IPS		SCS		Total
Product sales (recognized at a point in time)	$	160,544	$	—	$	39,702	$	200,246
Inventory management services (recognized over contract life)	—		—		3,230		3,230
Staffing services (day-rate basis)	14,818		—		—		14,818
Customized pump production (recognized over time)	—		67,642		—		67,642
Total Revenue	$	175,362	$	67,642	$	42,932	$	285,936
Income from operations	$	15,830	$	6,382	$	4,054	$	26,266

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



	Three Months Ended March 31,
	2019			2018
Operating income for reportable segments	$	29,865		$	26,266
Adjustment for:
Amortization of intangible assets	3,814			4,358
Corporate expenses	11,235			10,759
Income from operations	$	14,816		$	11,149
Interest expense	5,040			5,041
Other income, net	(33		)	(22		)
Income before income taxes	$	9,809		$	6,130

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

The Company's identifiable assets by segments are as follows (in thousands):



	As of March 31, 2019		As of December 31, 2018
Service Centers	$	460,604	$	402,944
Innovative Pumping Solutions	209,742		188,765
Supply Chain Services	59,725		53,517
Total Identifiable Assets	$	730,071	$	645,226

The Company had identifiable assets at Corporate of $45.1 million and $54.7 million, as of March 31, 2019 and December 31, 2018.

NOTE 1613 - 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.

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 six~~ months ended ~~June 30, 2018~~March 31, 2019 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.~~8, 2019. 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.

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 March 31,
	2019			%		2018			%
Sales	$	311,225		100.0	%	$	285,936		100.0	%
Cost of sales	227,025			72.9	%	209,491			73.3	%
Gross profit	84,200			27.1	%	76,445			26.7	%
Selling, general and administrative expenses	69,384			22.3	%	65,296			22.8	%
Income from operations	14,816			4.8	%	11,149			3.9	%
Other (income) expense, net	(33		)	—	%	(22		)	—	%
Interest expense	5,040			1.6	%	5,041			1.8	%
Income before income taxes	9,809			3.2	%	6,130			2.1	%
Provision for income taxes (benefit)	2,622			0.8	%	1,636			0.6	%
Net income	7,187			2.3	%	4,494			1.5	%
Net loss attributable to noncontrolling interest	(104		)	—		(57		)	—
Net income attributable to DXP Enterprises, Inc.	$	7,291		2.3	%	$	4,551		1.5	%
Per share amounts attributable to DXP Enterprises, Inc.
Basic earnings per share	$	0.41				$	0.25
Diluted earnings per share	$	0.40				$	0.24

Three Months Ended ~~June 30, 2018~~March 31, 2019 compared to Three Months Ended ~~June 30, 2017~~March 31, 2018

SALES. Sales for the three months ended ~~June 30, 2018~~March 31, 2019 increased ~~$60.5~~$25.3 million, or ~~24.1%~~8.8%, to approximately $311.2 million from ~~$250.7~~$285.9 million for the prior year's corresponding period. Sales from a business acquired on January 1, 2018 accounted for $12.4 million of the increase. Excluding second quarter 2018 sales of the business acquired, sales for the second quarter in 2018 increased by $48.1 million, or 19.2% from the prior year's corresponding period. This sales increase is the result of an increase in our ~~IPS,~~ SC, SCS and ~~SCS~~IPS segments of ~~$29.8~~$10.8 million, ~~$16.4~~$7.4 million and ~~$1.9~~$7.1 million, ~~respectively, excluding acquisition sales.~~respectively. 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 million, or 67.0% for the second quarter of 2018 compared to the prior year's corresponding period. This increase was primarily the result of an increase in the capital spending by oil and gas producers and related businesses stemming from an increase in the drilling rig count production and the price of oil during the first six months of 2018. This level of IPS sales might continue, or improve, during the remainder of 2018, if crude oil and natural gas prices and the drilling rig count remain at levels experienced during the first six months of 2018.



	Three Months Ended March 31,
	2019		2018		Change		Change%
Sales by Business Segment	(in thousands, except change%)
Service Centers	$	186,179	$	175,362	$	10,817	6.2	%
Innovative Pumping Solutions	74,723		67,642		7,081		10.4	%
Supply Chain Services	50,323		42,932		7,391		17.2	%
Total DXP Sales	$	311,225	$	285,936	$	25,289	8.8	%

Service Centers segment. Sales for the Service Centers segment increased by ~~$28.8~~$10.8 million, or ~~17.5%~~6.2% for the ~~second quarter of 2018~~three months ended March 31, 2019 compared to the prior year's corresponding period. Excluding $12.4 million of second quarter 2018 Service Centers segment sales from a business acquired, Service Centers segment sales for the second quarter in 2018 increased $16.4 million, or 10.0% from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment, bearings and 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 second quarter of~~ 2018, this level of sales to the oil and gas industry might continue, or improve, during the remainder of ~~2018.~~2019.

Supply Chain Services segment. Sales for the SCS segment increased by ~~$1.9~~$7.4 million, or ~~4.6%~~17.2%, for the ~~second quarter of 2018,~~three months ended March 31, 2019, compared to the prior year's corresponding period. The increase in sales is primarily related to increased sales to customers in the medical device, aerospace, oil and gas and ~~aerospace industries.~~food and beverage industries due to new locations.

17Innovative Pumping Solutions segment. Sales for the IPS segment increased by $7.1 million, or 10.5% for the three months ended March 31, 2019 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 three months of 2019 compared to the prior year corresponding period. This level of IPS sales might continue, or improve, during the remainder of 2019, if crude oil and natural gas prices and the drilling rig count remain at levels experienced during the first three months of 2019.

GROSS PROFIT. Gross profit as a percentage of sales for the three months ended ~~June 30, 2018 decreased~~March 31, 2019 increased by approximately 1532 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 31 basis points.~~ The increase in the gross profit percentage ~~excluding the business acquired,~~ is primarily the result of an approximate ~~397~~104 basis point increase in the gross profit percentage in our IPS segment, 41 basis point increase in the gross profit percentage in our SC segment partially offset by an approximate 2756 basis point decrease in the gross profit percentage in our ~~Supply Chain Services~~SCS 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~~three months of ~~2018.~~

~~Service Centers segment.~~2019. 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~~first quarter gross profit percentage for the IPS segment increased approximately ~~397~~104 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~~$0.4 million or ~~410%~~6.5%, primarily as a result of the above mentioned increase in sales.

~~Supply Chain Services~~Service Centers 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~~first 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.

~~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 six month period~~ gross profit percentage for the Service Centers ~~decreased approximately 73 basis points but~~ increased approximately 541 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~~$3.2 million, or ~~10.8%~~19.9%. 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 1256 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.~~costs associated with new customer implementation. Operating income for the ~~six months ended June 30, 2018 increased~~first quarter of 2019 primarily remained flat compared to the prior year's corresponding period mainly due to an increase in ~~gross profit~~SG&A expense of ~~$0.8~~$1.4 million primarily related to payroll and incentive compensation offset by an increase in ~~SG&A~~gross profit of ~~$0.3 million.~~$1.4 million.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A").Selling, general and administrative expense for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 increased by approximately ~~$15.4~~$4.1 million, or ~~13.4%~~6.3%, to ~~$130.4~~$69.4 million from ~~$115.0~~$65.3 million for the prior year's corresponding period. Selling, general and administrative expense from a business that was acquired accounted for $1.4 million of the increase. Excluding the first six months of 2018 expenses from the business that was acquired, SG&A for the six months increased by $14.0 million, or 12.1%. The overall increase in SG&A ~~adjusting for the business acquired,~~ is the result of increased payroll, incentive compensation and related taxes and ~~401(K) expenses.~~401(k) expenses primarily due to increased headcount. The remaining increase in SG&A expense for the first ~~six months~~quarter of ~~2018~~2019, is ~~primarily~~ a result of the increase in sales. ~~As a percentage of sales, the six months ended June 30, 2018~~The first quarter 2019 expense decreased ~~approximately 105~~54 basis points to ~~22.5%~~22.3% from ~~23.5%~~22.8% 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~~fixed cost leverage nature of SG&A.

OPERATING INCOME. Operating income for the first ~~six months~~quarter of ~~2018~~2019 increased by ~~$12.7~~$3.6 million, to ~~$31.2~~$29.9 million, from ~~$18.5~~$26.3 million in the prior year's corresponding period. The operating income from the business acquired in 2018 increased the overall operating income for the six months ended June 30, 2018 in the amount of $2.6 million. Excluding the operating income from the business acquired, operating income increased $10.1 million, or 54.9% 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 ~~six months~~quarter of ~~2018 increased 46.2% from~~2019 remained consistent with the prior year's corresponding ~~period primarily as a result of increased interest rates under our credit facility.~~period.

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of ~~25.21%~~26.7% for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 compared to a tax ~~expense~~benefit of ~~36.81%~~26.7% for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018. Compared to the U.S. statutory rate for the ~~six~~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 six months ended June 30, 2017,March 31, 2019, the effective tax rate was increased by state taxes, and nondeductible expenses. The effective tax rate was decreased by ~~lower income~~foreign tax, ~~rates on income earned in foreign jurisdictions, domestic production activities deduction, and~~ research and development tax credits, foreign tax credits, and other tax credits.

Compared to the U.S. statutory rate for the three months ended March 31, 2018, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreased by foreign taxes, research and development credits, and other tax credits.

LIQUIDITY AND CAPITAL RESOURCES

General Overview

As ofMarch 31, 2019, we had cash and cash equivalents of $30.7 million and bank and other borrowings of $240.0 million. We have a $85 million Asset-Based loan facility that is due to mature in August 2022, under which we had no borrowing outstanding as of March 31, 2019.

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



	Three Months Ended March 31,
	2019			2018
Net Cash Used in:
Operating Activities	$	(5,310	)	$	(808	)
Investing Activities	(2,283		)	(10,627		)
Financing Activities	(2,310		)	(959		)
Effect of Foreign Currency	112			(140		)
Net Change in Cash	$	(9,791	)	$	(12,534	)

Operating Activities

The Company used ~~$7.0~~$5.3 million of cash in operating activities during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 compared to ~~generating $7.9~~using $0.8 million of cash during the prior year's corresponding period. The ~~$14.9~~$4.5 million increase in the amount of cash used between the two periods was primarily driven by ~~inventory build-up and~~ increases in costs and estimated profits in excess of billings as a result of increased project activity at our IPS segment.

Investing Activities

For the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, net cash used in investing activities was ~~$13.6~~$2.3 million compared to ~~$1.1~~$10.6 million in the corresponding period in ~~2017.~~2018. This ~~increase~~$8.3 million decrease was primarily driven by the purchase of ASI in 2018 and partially offset by ~~proceeds from the sale of a building.~~investing in capital equipment. For the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, purchases of property ~~plant~~ and equipment ~~were~~was approximately ~~$5.5~~$2.3 million.

Financing Activities

For the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, net cash used in financing activities was ~~$1.9~~$2.3 million, compared to net cash used in financing activities of ~~$5.9~~$1.0 million for the corresponding period in ~~2017.~~2018. The activity in the period was primarily attributed to the ~~Company making principal repayments on~~payment of contingent consideration associated with the ~~Term Loan.~~purchase of ASI.

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the amount available to be borrowed under our credit facility ~~decreased~~increased to ~~$80.0~~$79.6 million ~~at June 30, 2018~~ compared to ~~$82.0~~$79.3 million at December 31, ~~2017.~~2018. This was the result of ~~$5.0~~$5.4 million in letters of credit outstanding as of ~~June 30,~~March 31, 2019 compared to $5.7 million in letters of credit outstanding as of December 31, 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.

~~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% at June 30, 2018 with a LIBOR component of 2.1%.

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

The Company's consolidated Fixed Charge Coverage Ratio was 3.33 to 1.00 as of June 30, 2018. DXP was in compliance with all such covenants that were in effect on such date under the ABL Revolver as of June 30, 2018.

~~Senior Secured Term Loan B:~~

On June 25, 2018, DXP entered into Amendment No.1 (the "Repricing Amendment") to the Term Loan Agreement for the six year Senior Secured Term Loan B (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% as of June 30, 2018. At June 30, 2018, the aggregate principal amount of Term Loan B borrowings outstanding under the facility was $248.1 million.~~

As of June 30, 2018, the Company's consolidated Secured Leverage Ratio was 3.22 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 June 30, 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.

~~Performance Metrics (in days):~~

Six Months Ended
June 30,

Increase
2018 2017 (Decrease)

Days of sales outstanding 57.4 61.5 (4.1)
Inventory turns 8.2 8.0 0.2

Accounts receivable days of sales outstanding were 57.4 days at June 30, 2018 compared to 61.5 days at June 30, 2017. The 4.1 days decrease was primarily due to more timely payment times in connection with an improved economy. Inventory turns were consistent between the two periods.

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.~~2018. 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.~~8, 2019. The results of operations for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of results expected for the full fiscal year.

RECENT ACCOUNTING PRONOUNCEMENTS

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

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

~~Our~~For quantitative and qualitative disclosures about market risk, ~~results from volatility in interest rates.~~see Item 7A, 'Quantitative and Qualitative Disclosures About Market Risk,' of our annual report on Form 10-K for the year ended December 31, 2018. Our ~~exposure~~exposures to ~~interest rate~~market risk relates primarily to our debt portfolio. Using floating interest rate debt outstanding at June 30, 2018 and 2017, a 100 basis point change in interest rates would result in approximately a $2.5 million and a $2.2 million change in annual interest expense, respectively.have not changed materially since December 31, 2018.

ITEM 4: CONTROLS AND PROCEDURES.

~~The Company's~~Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is reported, processed, and summarized within the time periods specified in the SEC’s rules and forms. As of March 31, 2019, our management, ~~is responsible~~with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness in internal control over financial reporting previously disclosed in our Annual Report on Form 10-K for ~~establishing~~the year ended December 31, 2018, and ~~maintaining adequate~~as described below, our disclosure controls and procedures were not effective as of March 31, 2019.

Previously Reported Material Weakness

As reported in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, our management concluded that our internal control over financial reporting was not effective as of that date because of a material weakness in our internal controls over financial reporting. We concluded that we had material weaknesses in our control environment and monitoring to support the financial reporting process. We specifically did not maintain effective management review controls over the monitoring and review of certain accounts; and 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.

Remediation Plans

We are committed to remediating the material weaknesses and, as such, implemented changes to our internal control over financial reporting. ~~Our~~We implemented additional procedures to address the underlying causes of the material weaknesses throughout 2018 and beyond, and continue to implement changes and improvements in our internal control ~~system was designed~~over financial reporting to ~~provide reasonable assurance~~remediate the control deficiencies that caused the material weaknesses. We believe with full implementation and testing of the design and operating effectiveness of the newly implemented and revised controls, the actions previously described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018 will successfully remediate the material weaknesses in our internal control over financial reporting. Management continues to report regularly to the Audit Committee regarding the ~~reliability~~status of the implementation activities and progress.

Changes in Internal Control over Financial Reporting

Except as described above, there are no changes in our internal control over financial reporting ~~and~~that occurred during the ~~preparation~~three months ended March 31, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of ~~financial statements for external purposes in accordance with generally accepted accounting principles.~~

Internal Controls

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.

~~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 undertake 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 enhance 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 implement 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 June 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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.~~2018.

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.



101	Interactive 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.

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~~ 08May 8, 2019~~, 2018~~


	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

	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

	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

	June 30, 2018		December 31, 2017

Finished goods	$	98,960	$	79,820
Work in process		11,807		11,593
Inventories	$	110,767	$	91,413

	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

	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

	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

	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

	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

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

	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

	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

	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

	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.

	Six Months Ended June 30,
					Increase
	2018		2017		(Decrease)

Days of sales outstanding	57.4	61.5		(4.1)
Inventory turns	8.2	8.0		0.2

(in thousands, unaudited)

Fair Value at June 30, 2018

Valuation Technique

Significant Unobservable
Inputs

Contingent consideration:
(ASI acquisition)

Discounted cash flow

Annualized EBITDA and probability of achievement