UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


[			☒			]			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended ~~September~~June 30, ~~2020~~2021


[			☐			]			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period 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)

5301 Hollister, Houston, Texas 77040

(Address of principal executive offices, including zip code)

(713) 996-4700


(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

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

Large accelerated filer [ ] Accelerated filer [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]

Number of shares of registrant's Common Stock outstanding as of ~~October 30, 2020: 17,790,717~~August 31, 2021: 18,570,840 par value $0.01 per share.

EXPLANATORY NOTE

DXP Enterprises, Inc. (collectively with its subsidiaries, the “Company”) filed Amendment No. 1 on Form 10-K/A (“Form 10-K/A”) to amend its Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 18, 2021 (“2020 Form 10-K”). This Form 10-Q should be read in conjunction with the Form 10-K/A, as filed with the SEC on October 22, 2021. The historical periods presented in this Form 10-Q reflect adjustments to the information presented in the Company’s previously-filed Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

In addition, the Company's consolidated financial statements for the periods covered in the quarter and six-months ended June 30, 2020 have also been restated to correct certain immaterial adjustments. These adjustments primarily reflect proper cut-off for direct ship sales to customers and credit card payments, and adjustments for inventory obsolescence reserves.The impacts of the restatement on our Unaudited Condensed Consolidated Statements of Operations and Balance Sheets are detailed in Note 4 to the Notes to Unaudited Condensed Consolidated Financial Statements.

The Company is also revising its disclosures in Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations” to reflect corresponding changes.

DXP ENTERPRISES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

DESCRIPTION


Item		Page
PART I: FINANCIAL INFORMATION
	ITEM 1. Financial Statements	4
	a) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income	4
	b) Unaudited Condensed Consolidated Balance Sheets	5
	c) Unaudited Condensed Consolidated Statements of Cash Flows	6
	d) Unaudited Condensed Consolidated Statements of Equity	7
	e) Notes to Unaudited Condensed Consolidated Financial Statements	78
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	1817
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	2624
	ITEM 4. Controls and Procedures	2825

PART II: OTHER INFORMATION		2926
	ITEM 1. Legal Proceedings	2926
	ITEM 1A. Risk Factors	2926
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	3026
	ITEM 3. Default upon Senior Securities	3026
	ITEM 4. Mine Safety Disclosures	3026
	ITEM 5. Other Information	3026
	ITEM 6. Exhibits	3127
	Signatures	3228

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 June 30,				Six Months Ended June 30,
		Three Months Ended September 30,				Nine Months Ended September 30,					2021		2020		2021		2020
		2020		2019		2020		2019					(Restated)				(Restated)
Sales	Sales	$	220,193	$	327,178	$	772,577	$	971,721	Sales	$	285,691	$	251,401	$	531,278	$	552,384
Cost of sales	Cost of sales	158,892		234,474		557,595		702,830		Cost of sales	200,413		181,320		374,370		399,189
Gross profit	Gross profit	61,301		92,704		214,982		268,891		Gross profit	85,278		70,081		156,908		153,195
Selling, general and administrative expenses	Selling, general and administrative expenses	53,746		70,987		189,759		209,511		Selling, general and administrative expenses	70,432		62,943		135,829		134,738
Impairment and other charges		48,401		0		48,401		0
Income (loss) from operations		(40,846)		21,717		(23,178)		59,380
Other expense (income)		320		(25)		(381)		127
Income from operations										Income from operations	14,846		7,138		21,079		18,457
Other (income) expense										Other (income) expense	(105)		133		(535)		(701)
Interest expense	Interest expense	3,752		4,986		12,059		14,911		Interest expense	5,337		3,930		10,580		8,307
Income (loss) before income taxes		(44,918)		16,756		(34,856)		44,342
Provision for income taxes (benefit)		(10,143)		3,606		(7,809)		10,655
Net income (loss)		(34,775)		13,150		(27,047)		33,687
Net (loss) attributable to noncontrolling interest		(109)		41		(233)		(172)
Net income (loss) attributable to DXP Enterprises, Inc.		(34,666)		13,109		(26,814)		33,859
Income before income taxes										Income before income taxes	9,614		3,075		11,034		10,851
Provision for income taxes										Provision for income taxes	1,684		710		2,945		2,496
Net income										Net income	7,930		2,365		8,089		8,355
Net loss attributable to noncontrolling interest										Net loss attributable to noncontrolling interest	(189)		(62)		(401)		(124)
Net income attributable to DXP Enterprises, Inc.										Net income attributable to DXP Enterprises, Inc.	8,119		2,427		8,490		8,479
Preferred stock dividend	Preferred stock dividend	23		23		68		68		Preferred stock dividend	22		22		45		45
Net income (loss) attributable to common shareholders		$	(34,689)	$	13,086	$	(26,882)	$	33,791
Net income attributable to common shareholders										Net income attributable to common shareholders	$	8,097	$	2,405	$	8,445	$	8,434

Net income (loss)		$	(34,775)	$	13,150	$	(27,047)	$	33,687
Net income										Net income	$	7,930	$	2,365	$	8,089	$	8,355
Currency translation adjustments	Currency translation adjustments	(452)		(1,281)		(220)		(718)		Currency translation adjustments	1,327		1,395		2,604		232
Comprehensive income (loss)		$	(35,227)	$	11,869	$	(27,267)	$	32,969
Comprehensive income										Comprehensive income	$	9,257	$	3,760	$	10,693	$	8,587

Earnings (loss) per share (Note 11) :
Earnings per share (Note 9) :										Earnings per share (Note 9) :
Basic	Basic	$	(1.95)	$	0.74	$	(1.52)	$	1.92	Basic	$	0.42	$	0.14	$	0.44	$	0.48
Diluted	Diluted	$	(1.95)	$	0.71	$	(1.52)	$	1.84	Diluted	$	0.41	$	0.13	$	0.42	$	0.45
Weighted average common shares outstanding :	Weighted average common shares outstanding :									Weighted average common shares outstanding :
Basic	Basic	17,790		17,602		17,743		17,588		Basic	19,291		17,735		19,239		17,719
Diluted	Diluted	17,790		18,442		17,743		18,428		Diluted	20,131		18,575		20,079		18,559

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)


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS			(Restated)
Current assets:	Current assets:					Current assets:
Cash	Cash	$	97,287	$	54,203	Cash	$	79,169	$	119,328
Restricted cash	Restricted cash	91		124		Restricted cash	91		91
Accounts Receivable, net of allowance of $8,441 and $8,929		152,013		187,116
Accounts Receivable, net of allowance of $7,948 and $8,628						Accounts Receivable, net of allowance of $7,948 and $8,628	193,657		166,941
Inventories	Inventories	118,864		129,364		Inventories	103,447		97,071
Costs and estimated profits in excess of billings	Costs and estimated profits in excess of billings	21,544		32,455		Costs and estimated profits in excess of billings	16,718		18,459
Prepaid expenses and other current assets	Prepaid expenses and other current assets	6,061		4,223		Prepaid expenses and other current assets	6,914		4,548
Federal income taxes receivable	Federal income taxes receivable	6,834		996		Federal income taxes receivable	3,689		2,987
Total current assets	Total current assets	402,694		408,481		Total current assets	403,685		409,425
Property and equipment, net	Property and equipment, net	57,452		63,703		Property and equipment, net	52,456		56,899
Goodwill	Goodwill	166,375		194,052		Goodwill	300,643		261,767
Other intangible assets, net	Other intangible assets, net	47,616		52,582		Other intangible assets, net	83,175		80,088
Operating lease ROU assets	Operating lease ROU assets	58,657		66,191		Operating lease ROU assets	56,173		55,188
Other long-term assets	Other long-term assets	3,924		3,211		Other long-term assets	5,448		4,764
Total assets	Total assets	$	736,718	$	788,220	Total assets	$	901,580	$	868,131
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Current maturities of long-term debt	Current maturities of long-term debt	$	2,500	$	2,500	Current maturities of long-term debt	$	3,300	$	3,300
Trade accounts payable	Trade accounts payable	81,570		76,438		Trade accounts payable	80,208		64,849
Accrued wages and benefits	Accrued wages and benefits	21,121		23,412		Accrued wages and benefits	26,240		20,621
Customer advances	Customer advances	9,185		3,408		Customer advances	7,426		3,688
Billings in excess of costs and estimated profits	Billings in excess of costs and estimated profits	4,168		11,871		Billings in excess of costs and estimated profits	2,300		4,061
Short-term operating lease liabilities	Short-term operating lease liabilities	16,605		17,603		Short-term operating lease liabilities	17,512		15,891
Other current liabilities	Other current liabilities	20,723		12,939		Other current liabilities	50,438		34,729
Total current liabilities	Total current liabilities	155,872		148,171		Total current liabilities	187,424		147,139
Long-term debt, net of unamortized debt issuance costs	Long-term debt, net of unamortized debt issuance costs	209,813		235,419		Long-term debt, net of unamortized debt issuance costs	316,343		317,139
Long-term operating lease liabilities	Long-term operating lease liabilities	41,324		48,605		Long-term operating lease liabilities	37,907		38,010
Other long-term liabilities	Other long-term liabilities	2,007		1,205		Other long-term liabilities	2,930		2,930
Deferred income taxes	Deferred income taxes	4,148		9,872		Deferred income taxes	2,867		1,777
Total long-term liabilities	Total long-term liabilities	257,292		295,101		Total long-term liabilities	360,047		359,856
Total liabilities	Total liabilities	413,164		443,272		Total liabilities	547,471		506,995
Commitments and contingencies (Note 12)
Shareholders' Equity:
Commitments and contingencies (Note 10)						Commitments and contingencies (Note 10)	0		0
Shareholders' equity:						Shareholders' equity:
Series A and B preferred stock, $1.00 par value each; 1,000,000 shares authorized each	Series A and B preferred stock, $1.00 par value each; 1,000,000 shares authorized each	16		16		Series A and B preferred stock, $1.00 par value each; 1,000,000 shares authorized each	16		16
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,790,717 and 17,604,092 outstanding		175		174
Common stock, $0.01 par value, 100,000,000 shares authorized; 18,558,674 and 19,208,067 outstanding						Common stock, $0.01 par value, 100,000,000 shares authorized; 18,558,674 and 19,208,067 outstanding	194		189
Additional paid-in capital	Additional paid-in capital	164,054		157,886		Additional paid-in capital	203,562		192,068
Retained earnings	Retained earnings	178,570		205,680		Retained earnings	194,523		186,078
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(20,174)		(19,954)		Accumulated other comprehensive loss	(15,409)		(18,013)
Total DXP Enterprises, Inc. Equity		322,641		343,802
Treasury stock, at cost 1,014,053 shares at June 30, 2021						Treasury stock, at cost 1,014,053 shares at June 30, 2021	(29,174)		—
Total DXP Enterprises, Inc. equity						Total DXP Enterprises, Inc. equity	353,712		360,338
Noncontrolling interest	Noncontrolling interest	913		1,146		Noncontrolling interest	397		798
Total Equity		323,554		344,948
Total liabilities and Equity		$	736,718	$	788,220
Total equity						Total equity	354,109		361,136
Total liabilities and equity						Total liabilities and equity	$	901,580	$	868,131

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)


		Nine Months Ended September 30,					Six Months Ended June 30,
		2020		2019			2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:					CASH FLOWS FROM OPERATING ACTIVITIES:			(Restated)
Net income (loss) attributable to DXP Enterprises, Inc.		$	(26,814)	$	33,859
Net income attributable to DXP Enterprises, Inc.						Net income attributable to DXP Enterprises, Inc.	$	8,490	$	8,479
Less: net loss attributable to non-controlling interest	Less: net loss attributable to non-controlling interest	(233)		(172)		Less: net loss attributable to non-controlling interest	(401)		(124)
Net income (loss)		(27,047)		33,687
Reconciliation of net income (loss) to net cash provided by operating activities:
Net income						Net income	8,089		8,355
Reconciliation of net income to net cash provided (used in) by operating activities:						Reconciliation of net income to net cash provided (used in) by operating activities:
Depreciation	Depreciation	7,998		7,270		Depreciation	5,132		5,747
Amortization of intangible assets	Amortization of intangible assets	9,296		11,423		Amortization of intangible assets	8,452		6,243
Gain on sale of property and equipment	Gain on sale of property and equipment	0		(9)		Gain on sale of property and equipment	(246)		—
Bad debt expense (recoveries)		788		(75)
Impairment and other charges		48,401		0
Provision for credit losses						Provision for credit losses	(637)		434
Payment of contingent consideration liability in excess of acquisition-date fair value	Payment of contingent consideration liability in excess of acquisition-date fair value	(136)		(106)		Payment of contingent consideration liability in excess of acquisition-date fair value	(145)		(136)
Fair value adjustment on contingent consideration	Fair value adjustment on contingent consideration	13		101		Fair value adjustment on contingent consideration	—		25
Amortization of debt issuance costs	Amortization of debt issuance costs	1,406		1,406		Amortization of debt issuance costs	854		937
Stock compensation expense	Stock compensation expense	2,870		1,502		Stock compensation expense	840		1,887
Deferred income taxes	Deferred income taxes	(6,477)		2,337		Deferred income taxes	1,068		188
Changes in operating assets and liabilities:
Trade accounts receivable		37,212		(17,581)
Costs and estimated profits in excess of billings		10,876		(1,371)
Inventories		4,533		(17,039)
Prepaid expenses and other assets		4,990		1,786
Trade accounts payable and accrued expenses		11,710		(6,301)
Billings in excess of costs and estimated profits		(7,702)		(3,524)
Other long-term liabilities		(6,491)		(6,021)
Net change in operating assets and liabilities						Net change in operating assets and liabilities	(7,201)		38,084
Net cash provided by operating activities	Net cash provided by operating activities	$	92,240	$	7,485	Net cash provided by operating activities	$	16,206	$	61,764

CASH FLOWS FROM INVESTING ACTIVITIES:	CASH FLOWS FROM INVESTING ACTIVITIES:					CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	Purchase of property and equipment	(6,530)		(14,247)		Purchase of property and equipment	(1,526)		(5,133)
Proceeds from the sale of property and equipment	Proceeds from the sale of property and equipment	123		35		Proceeds from the sale of property and equipment	1,297		123
Acquisition of business, net of cash acquired	Acquisition of business, net of cash acquired	(14,118)		0		Acquisition of business, net of cash acquired	(44,435)		(14,153)
Net cash used in investing activities	Net cash used in investing activities	$	(20,525)	$	(14,212)	Net cash used in investing activities	$	(44,664)	$	(19,163)

CASH FLOWS FROM FINANCING ACTIVITIES:	CASH FLOWS FROM FINANCING ACTIVITIES:					CASH FLOWS FROM FINANCING ACTIVITIES:
Principal debt payments	Principal debt payments	(26,875)		(3,716)		Principal debt payments	(1,650)		(16,250)
Issuance of Common Stock sold in public market		1,142		0
Issuance of Common Stock- shares sold in public market						Issuance of Common Stock- shares sold in public market	—		1,142
Payment for contingent consideration liability	Payment for contingent consideration liability	(1,864)		(1,394)		Payment for contingent consideration liability	(955)		(1,864)
Dividends paid	Dividends paid	(68)		(68)		Dividends paid	(45)		(45)
Debt issuance costs		(138)		0
Purchase of treasury stock						Purchase of treasury stock	(8,769)		—
Payment for employee taxes withheld from stock awards	Payment for employee taxes withheld from stock awards	(139)		(266)		Payment for employee taxes withheld from stock awards	(585)		(116)
Net cash used in financing activities	Net cash used in financing activities	$	(27,942)	$	(5,444)	Net cash used in financing activities	$	(12,004)	$	(17,133)
Effect of foreign currency on cash	Effect of foreign currency on cash	(721)		213		Effect of foreign currency on cash	303		(1,025)
Net change in cash and restricted cash	Net change in cash and restricted cash	43,052		(11,958)		Net change in cash and restricted cash	(40,159)		24,443
Cash and restricted cash at beginning of period	Cash and restricted cash at beginning of period	54,326		40,519		Cash and restricted cash at beginning of period	119,419		54,326
Cash and restricted cash at end of period	Cash and restricted cash at end of period	$	97,378	$	28,561	Cash and restricted cash at end of period	$	79,260	$	78,769

Supplemental schedule of non-cash investing and financing activities:						Supplemental schedule of non-cash investing and financing activities:
Shares issued for the acquisition of CVI (Note 12)						Shares issued for the acquisition of CVI (Note 12)	$	8,859	$	—
Share repurchase agreement						Share repurchase agreement	$	20,405	$	—

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		Treasury stock		Non controlling interest		Accum other comp loss		Total equity
Balance at March 31, 2020 (Restated)	$	1	$	15	$	175	$	160,695	$	221,693	$	—	$	1,084	$	(21,117)	$	362,546
Preferred dividends paid	—		—		—		—		(22)		—		—		—		(22)
Compensation expense for restricted stock	—		—		—		956		—		—		—		—		956
Stock compensation expense	—						27		—		—		—		—		27
Tax related items for share based awards	—		—		—		(22)		—		—		—		—		(22)
Issuance of common stock sold in public markets, net of commissions and fees	—		—		—		1,142		—		—		—		—		1,142
Currency translation adjustment	—		—		—		296		(227)		—		—		1,395		1,464
Net income (As restated)	—		—		—		—		2,427		—		(62)		—		2,365
Balance at June 30, 2020 (Restated)	$	1	$	15	$	175	$	163,094	$	223,871	$	—	$	1,022	$	(19,722)	$	368,456


		Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital		Retained earnings		Non controlling interest		Accum other comp loss		Total equity			Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital		Retained earnings		Treasury stock		Non controlling interest		Accum other comp loss		Total equity
Balance at June 30, 2019		$	1	$	15	$	174	$	157,091	$	190,440	$	1,193	$	(18,704)	$	330,210
Balance at December 31, 2019 (Restated)																		Balance at December 31, 2019 (Restated)	$	1	$	15	$	174	$	157,886	$	215,664	$	—	$	1,146	$	(19,954)	$	354,932
Preferred dividends paid	Preferred dividends paid	—		—		—		—		(23)		—		—		$	(23)	Preferred dividends paid	—		—		—		—		(45)		—		—		—		(45)
Compensation expense for restricted stock	Compensation expense for restricted stock	—		—		—		473		—		—		—		$	473	Compensation expense for restricted stock	—		—		—		1,860		—		—		—		—		1,860
Stock compensation expense																		Stock compensation expense	—		—		—		27		—		—		—		—		27
Tax related items for share based awards	Tax related items for share based awards	—		—		—		(138)		—		—		—		$	(138)	Tax related items for share based awards	—		—		—		(116)		—		—		—		—		(116)
Issuance of shares of common stock																		Issuance of shares of common stock	—		—		1		1,999		—		—		—		—		2,000
Issuance of common stock sold in public markets, net of commissions and fees																		Issuance of common stock sold in public markets, net of commissions and fees	—		—		—		1,142		—		—		—		—		1,142
Currency translation adjustment	Currency translation adjustment	—		—		—		—		—		—		(1,281)		$	(1,281)	Currency translation adjustment	—		—		—		296		(227)		—				232		301
Net income		—		—		—		—		13,109		41		—		$	13,150
Balance at September 30, 2019		$	1	$	15	$	174	$	157,426	$	203,526	$	1,234	$	(19,985)	$	342,391
Net income (As restated)																		Net income (As restated)	—		—		—		—		8,479		—		(124)		—		8,355
Balance at June 30, 2020 (Restated)																		Balance at June 30, 2020 (Restated)	$	1	$	15	$	175	$	163,094	$	223,871	$	—	$	1,022	$	(19,722)	$	368,456


	Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital		Retained earnings		Treasury stock		Non controlling interest		Accum other comp loss		Total equity
Balance at March 31, 2021 (Restated)	$	1	$	15	$	189	$	191,931	$	186,426	$	—	$	586	$	(16,736)	$	362,412
Preferred dividends paid	—		—		—		—		(22)		—		—		—		(22)
Compensation expense for restricted stock	—		—		—		460		—		—		—		—		460
Tax related items for share based awards	—		—		—		(69)		—		—		—		—		(69)
Issuance of shares of common stock	—		—		5		11,240		—		—		—		—		11,245
Currency translation adjustment	—		—		—		—		—		—		—		1,327		1,327
Purchase of treasury stock	—		—		—		—		—		(29,174)		—		—		(29,174)
Net income	—		—		—		—		8,119		—		(189)		—		7,930
Balance at June 30, 2021	$	1	$	15	$	194	$	203,562	$	194,523	$	(29,174)	$	397	$	(15,409)	$	354,109


	Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital		Retained earnings		Treasury stock		Non controlling interest		Accum other comp loss		Total equity
Balance at December 31, 2020 (Restated)	$	1	$	15	$	189	$	192,068	$	186,078	$	—	$	798	$	(18,013)	$	361,136
Preferred dividends paid	—		—		—		—		(45)		—		—		—		(45)
Compensation expense for restricted stock	—		—		—		840		—		—		—		—		840
Tax related items for share based awards	—		—		—		(586)		—		—		—		—		(586)
Issuance of shares of common stock	—		—		5		11,240		—		—		—		—		11,245
Currency translation adjustment	—		—		—		—		—		—		—		2,604		2,604
Purchase of treasury stock	—		—		—		—		—		(29,174)		—		—		(29,174)
Net income	—		—		—		—		8,490		—		(401)		—		8,089
Balance at June 30, 2021	$	1	$	15	$	194	$	203,562	$	194,523	$	(29,174)	$	397	$	(15,409)	$	354,109

Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Non controlling interest Accum other comp loss Total equity
Balance at December 31, 2018 $ 1 $ 15 $ 174 $ 156,190 $ 169,735 $ 1,406 $ (19,267) $ 308,254
Preferred dividends paid — — — — (68) — — $ (68)
Compensation expense for restricted stock — — — 1,502 — — — $ 1,502
Tax related items for share based awards — — — (266) — — — $ (266)
Currency translation adjustment — — — — — — (718) $ (718)
Net income — — — — 33,859 (172) — $ 33,687
Balance at September 30, 2019 $ 1 $ 15 $ 174 $ 157,426 $ 203,526 $ 1,234 $ (19,985) $ 342,391

Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Non controlling interest Accum other comp loss Total equity
Balance at June 30, 2020 $ 1 $ 15 $ 175 $ 163,094 $ 213,260 $ 1,022 $ (19,722) $ 357,845
Preferred dividends paid — — — — (23) — — (23)
Compensation expense for restricted stock — — — 983 — — — 983
Tax related items for share based awards — — — (23) — — — (23)
Currency translation adjustment — — — — (1) — (452) (453)
Net loss — — — — (34,666) (109) — (34,775)
Balance at September 30, 2020 $ 1 $ 15 $ 175 $ 164,054 $ 178,570 $ 913 $ (20,174) $ 323,554

Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Non controlling interest Accum other comp loss Total equity
Balance at December 31, 2019 $ 1 $ 15 $ 174 $ 157,886 $ 205,680 $ 1,146 $ (19,954) $ 344,948
Preferred dividends paid — — — — (68) — — $ (68)
Compensation expense for restricted stock — — — 2,843 — — — $ 2,843
Stock compensation expense — — — 27 — — — $ 27
Tax related items for share based awards — — — (139) — — — $ (139)
Issuance of shares of common stock as consideration for acquisitions — — 1 2,000 — — — $ 2,001
Issuance of common stock sold in public markets, net of commissions and fees — — — 1,142 — — — $ 1,142
Currency translation adjustment — — — 295 (228) — (220) $ (153)
Net loss — — — — (26,814) (233) — $ (27,047)
Balance at September 30, 2020 $ 1 $ 15 $ 175 $ 164,054 $ 178,570 $ 913 $ (20,174) $ 323,554

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 a variety of end markets 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 3 business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS"). See Note 1 3 11 - 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~~10-K/A for the year ended December 31, ~~2019.~~2020. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form ~~10-K~~10-K/A filed with the Securities and Exchange Commission on ~~March 13, 2020.~~October 22, 2021. The results of operations for the ~~three and nine~~six months ended ~~September~~June 30, ~~2020~~2021 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 statements of operations and comprehensive income for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~September~~June 30, ~~2019,~~2020, condensed consolidated balance sheets as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, condensed consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~September~~June 30, ~~2019,~~2020, and condensed consolidated statement of equity for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~September~~June 30, ~~2019.~~2020. All such adjustments represent normal recurring items.

All inter-company accounts and transactions have been eliminated upon consolidation.

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

~~Recently Adopted Accounting Pronouncements~~

~~Intangibles-Goodwill and Other~~. ~~In August 2018, the FASB issued ASU No. 2018-15,~~ ~~Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~ based on a consensus of the FASB’s Emerging Issues Task Force (EITF) that requires implementation costs incurred by customers in cloud computing arrangements (CCAs) to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40, “Intangibles-Goodwill and Other-Internal-Use Software”. The ASU does not affect the accounting by cloud service providers, other software vendors or customers’ accounting for software licensing arrangements. The ASU requires 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 non-cancellable 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 Company adopted the standard effective January 1, 2020. The standard did not have an impact on our results of operations.

~~Fair Value Measurement.~~ ~~In August 2018, the FASB issued ASU 2018-13:~~ ~~Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement~~ which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company adopted the standard effective January 1, 2020. The standard did not have an impact on our results of operations.

~~Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,~~ as later modified by ASUs 2018-19, 2019-04, 2019-05, 2019-11 and 2020-02. This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables and contract assets, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The Company adopted this ASU effective January 1, 2020 which resulted in an immaterial impact to beginning retained earnings. While the adoption of this ASU did not have a material impact on the Company's financial statements, it required changes to the Company’s process of estimating expected credit losses on trade receivables and contract assets. The Company carries its accounts receivable at their face amounts less an allowance for expected credit losses. The Company establishes an allowance for expected credit losses to present the net amount of accounts receivable expected to be collected. On a regular basis, the Company evaluates its accounts receivable and contract assets and establishes the allowance for expected credit losses based on a combination of specific customer circumstances (including slow pays and bankruptcies), as well as history of write-offs and collections, current credit conditions and micro and macro-economic forecasts.

Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London ~~Inter-bank~~Inter-Bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on the financial statements.

All other new accounting pronouncements that have been issued, but not yet effective, are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.

NOTE 4 ~~– IMPAIRMENTS AND OTHER CHARGES~~- RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

As previously reported, the Company restated its consolidated balance sheets as of December 31, 2020 and 2019, and consolidated statements of operations and comprehensive income, equity and cash flows for the years ended December 31, 2020, 2019 and 2018. The restatement also affected periods prior to 2018. The impact of the restatement on such prior periods was reflected as an adjustment to retained earnings as of January 1, 2018. In addition, the restatement impacts the first, second and third quarters of 2020 and the first quarter of 2021. The restated amounts for the comparable interim period in 2020 are presented below. The restatement corrects errors resulting from the failure to timely clear aged payables resulting from the Company's three-way match process discrepancies, the recognition of additional consideration related to a business combination, as well as certain additional errors that the Company has determined to be immaterial, both individually and in aggregate. Set forth below are the restatement adjustments included in the restatement of the previously issued financial statements for the year ended December 31, 2020, and the quarter ended June 30, 2020, each of which is an “error” within the meaning of ASC Topic 250: Accounting Changes and Error Corrections.

The ~~Company tests goodwill~~following tables presents the impact of the restatement adjustments described below on net income and comprehensive income for ~~impairment at least annually or more frequently whenever events or circumstances occur indicating that it might be impaired. During~~ the ~~third~~ quarter ~~of 2020,~~and the Company’s market capitalization declined significantly driven by current macroeconomic and geopolitical conditions including the collapse of oil prices caused by both surplus production and supply as well as the decrease in demand caused by the COVID-19 pandemic. In addition, the uncertainty related to oil demand continues to have a significant impact on the investment and operating plans of a certain percentage of our customers. Based on these events, the Company concluded that it was more likely than not that the fair values of certain of its reporting units were less than their carrying values. Therefore, the Company performed an interim goodwill impairment test.

~~For the three~~six months ended ~~September~~June 30, 2020, goodwill was evaluated for impairment at the reporting unit level. The Company had 4 goodwill reporting units: Service Centers, Innovative Pumping Solutions, Canada and Supply Chain Services. The Company determined the fair values of 2 reporting units with goodwill were below their carrying values, resulting in a $36.4 million goodwill impairment, which was included in impairment charges in the consolidated statement of operations.2020:

~~Innovative Pumping Solutions~~


	For the Three Months Ended June 30, 2020						For the Six Months Ended June 30, 2020
	As Previously						As Previously
	Reported		Adjustments		As Restated		Reported		Adjustments		As Restated
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Sales	$	251,401	0		$	251,401	$	552,384	0		$	552,384
Cost of sales	181,705		(385)		181,320		398,703		486		399,189
Gross profit	69,696		385		70,081		153,681		(486)		153,195
Selling, general and administrative costs	62,943		—		62,943		136,013		(1,275)		134,738
Income before income taxes	2,690		385		3,075		10,062		789		10,851
Provision for income taxes	610		100		710		2,334		162		2,496
Net income	$	2,080	$	285	$	2,365	$	7,728	$	627	$	8,355

Basic earnings per share	$	0.12	0		$	0.14	$	0.44	0		$	0.48

Diluted earnings per share	$	0.12	0		$	0.13	$	0.42	0		$	0.45


	For the Three Months Ended June 30, 2020						For the Six Months Ended June 30, 2020
	As previously						As previously
	Reported		Adjustments		As Restated		Reported		Adjustments		As Restated
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income	$	2,080	$	285	$	2,365	$	7,728	$	627	$	8,355
Total comprehensive income	$	3,475	$	285	$	3,760	$	7,960	$	627	$	8,587

Adjustments to Net Sales and Related Adjustments to Cost of Products Sold

Unvouchered Purchase Orders The ~~oil~~Company determined it had aged unvouchered purchase orders included in trade accounts payable.After lengthy investigation and ~~gas industry experienced unprecedented disruption during 2020 as~~research, DXP determined that these balances were not valid legal obligations to vendors and will not be invoiced or paid.As a result, the Company wrote off the aged balances that no longer represented legal obligations, resulting in a net reduction in accounts payable.

Landed cost inventory adjustment The Company determined that cost mark-ups for landed costs for certain inventory items related to our private label pumps had not been properly relieved upon the sale of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and subsequent mitigation efforts. This disruption created a substantial surplus of oil and a decline in oil prices. West Texas Intermediate (WTI) oil spot prices decreased sharply during the first quarter of 2020 from a high of $63 per barrel in early January of 2020 to approximately $21 per barrel by the end of the first quarter of 2020. Although oil prices have recovered modestly, WTI oil spot prices averaged approximately $41 per barrel during the third quarter of 2020, which is approximately 28% less than the average price per barrel during 2019. The U.S. average rig count continued to decline in the third quarter of 2020, dropping 35% compared to the second quarter of 2020. These factors, along with the continued impact of COVID-19, constituted a triggering event and required a goodwill impairment analysis for our manufacturing reporting unit. With the adverse economic impacts discussed above and the uncertainty surrounding the COVID-19 pandemic, the results of the impairment test indicated that the carrying amount of the manufacturing reporting unit exceeded the estimated fair value of the reporting unit, and a full impairment of its remaining goodwill was required. Significant assumptions inherent in the valuation methodologies for goodwill include, but are not limited to, prospective financial information, growth rates, discount rates, inflationary factors, and the cost of capital. Tothese items.

~~evaluate~~Direct shipment cut off adjustment Direct shipment orders placed near period end may not be properly reflected in the ~~sensitivity~~correct period.The Company adjusted sales and cost of goods sold for items recorded in the incorrect period, as well as accounts receivable and payable.

Other Adjustments to Earnings from Continuing Operations Before Non-Controlling Interest and Income Taxes

Cut-off for credit card payment accruals In January 2020, the Company recorded its monthly payment for its P-Card credit card program, however, the charges were incurred in December 2019.This adjustment reflects the accrual in the correct period, resulting in a shift in other current liabilities between periods.

Sales tax payable accruals The Company increased other current liabilities for its accrual for state sales tax obligations stemming from open audits.

Adjustments to Provision for Income Taxes

The adjustments reflected for the provision for income taxes are the tax consequences of the ~~fair value calculations~~above listed corrections.

Balance sheet adjustments related to purchase accounting and consolidation

On December 31, 2020, DXP closed on the acquisition of 4 businesses.The owners of 2 of the targets were eligible for true-up consideration based upon the closing financial results of calendar year 2020. This true-up consideration was paid in July 2021; however, the amount of true-up consideration was deemed to have been accrued as of the closing of the acquisitions. Therefore this adjustment resulted in an accrual for the ~~reporting unit,~~true-up consideration and an increase in goodwill of $13.4 million.

As described above, the ~~Company applied~~unvouchered purchase order discrepancies resulted in a ~~hypothetical 100 bps~~ reduction of accounts payable in the ~~weighted average cost~~amount of ~~capital, and separately, increased the revenue projections by 10 percent, holding other factors steady. Even with more favorable assumptions, the results~~$12.2 million as of ~~these sensitivity analyses led the Company to record a non-cash impairment charge of $16.0 million for goodwill during the three months ended September 30,~~December 31, 2020.

~~Canada~~

During the consolidation of the 4 acquisitions closed on December 31, 2020, the Company improperly reflected the cash on hand at the targets as an increase in cumulative translation adjustment and other comprehensive income for approximately $2 million. This reclassification adjustment properly records the increase in cash and restricted cash upon closing.

AsIn addition, cumulative translation adjustment was also reduced by $1.8 million as a result of ~~the reductions in capital spending for oil and gas producers and processors and the economic repercussions from the COVID-19 pandemic, we determined these events constituted~~ a triggering event that required us to review the recoverability of our long-lived assets and perform an interim goodwill impairment assessment as of July 31, 2020. Our review resulted in the recording of impairments and other charges during the third quarter of 2020. As a result of our goodwill impairment assessments, we determined that the fair value of our Canadian reporting unit was lower than its net book value and, therefore, resulted in a partial goodwill impairment. The enterprise value of the Canadian reporting unit at July 31, 2020 was less than its carrying value by approximately 40 percent. This resulted in a partial goodwill impairment of $20.5 million for Canada. Per the impairment test and respective sensitivity analyses, it was noted that a decrease of approximately 480 basis points in the pre-tax discount rate and an approximately 150 basis points increase in our revenue long-term growth rate projections would cause the Canada business enterprise value to increase to the level of its carrying value and thus avoid a full impairment.

reclassification associated with trade accounts receivable.

~~Other Impairments~~

The ~~negative market indicators described above were triggering events that indicated that certain~~following table presents the impact of the restatement adjustments on the Company’s long-lived intangible and tangible assets and additional inventory items may also have been impaired. Recoverability testing indicated that certain long-lived assets and inventory were indeed impaired. The estimated fair valuepreviously reported balance sheet as of ~~these assets was determined to be below their carrying value. As~~December 31, 2020 on a ~~result, the Company recorded the following additional impairment and other charges as~~

~~detailed in the table below~~ ~~(in thousands)~~.condensed basis:


	~~Three and Nine Months Ended September 30, 2020~~
~~Long-lived asset impairments~~	$	~~4,775~~
~~Goodwill impairments~~	~~36,435~~
~~Inventory and work-in-progress costs~~	~~7,191~~
~~Total impairment and other charges~~	$	~~48,401~~


	As				As
BALANCE SHEET (AT DECEMBER 31, 2020):	Reported		Adjustments		Restated
Cash and restricted cash	$	117,444	$	1,975	$	119,419
Accounts Receivable	163,429		3,512		166,941
Inventory	97,071		—		97,071
Federal income taxes receivable	5,632		(2,645)		2,987
Goodwill	248,339		13,428		261,767
Total Assets	$	851,861	$	16,270	$	868,131

Accounts Payable	75,744		(10,895)		64,849
Other current liabilities	20,834		13,895		34,729
Total Liabilities	$	503,995	$	3,000	$	506,995

Cumulative Translation Adjustment	(21,842)		3,829		(18,013)
Retained Earnings	176,637		9,441		186,078
Equity	347,866		13,270		361,136
Total Liabilities & Equity	$	851,861	$	16,270	$	868,131

The Company determined the fair value of both long-lived assets and goodwill primarily using the discounted cash flow method and in the case of goodwill, a multiples-based market approach for comparable companies. Given the current volatile market environment and inherent complexities it presents, the Company utilized third-party valuation advisors to assist us with these valuations. These analyses included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on the weighted average cost of capital, as derived from peers, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset, all of which were classified as Level 3 inputs under the fair value hierarchy. These impairment assessments incorporate inherent uncertainties, including supply and demand for the Company’s products and services and future market conditions, which are difficult to predict in volatile economic environments. The discount rates utilized to value the reporting units were in a range from 14.8 percent to 16.4 percent. Given the dynamic nature of the COVID-19 pandemic and related market conditions, we cannot reasonably estimate the period that these events will persist or the full extent of the impact they will have on our business. If market conditions continue to deteriorate, including crude oil prices further declining or remaining at low levels for a sustained period, we may record further asset impairments, which may include an impairment of the carrying value of our goodwill associated with other reporting units.

~~NOTE 5 - LEASES~~

The Company frequently utilizes operating leases for buildings, vehicles, machinery and equipment. For more information on lease accounting, see Note 4 - Lease to the consolidated financial statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

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

Nine Months Ended September 30, Nine Months Ended September 30,
Lease 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 13,714 $ 13,941
Right-of-use assets obtained in exchange for lease liabilities
Operating leases 4,986 8,889

The table below presents the impact to Operating Cash Flows on a Condensed Basis as a result of the restatement for the period ended June 30, 2020:

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

Lease Classification September 30, 2020 September 30, 2019
Assets
   Operating Operating lease right-of-use assets $ 58,657 $ 67,296
Liabilities
   Current operating Short-term operating lease liabilities 16,605 17,711
   Non-current operating Long-term operating lease liabilities 41,324 49,602
Total operating lease liabilities $ 57,929 $ 67,313

~~During the nine months ended September 30, 2020, the Company paid $2.8 million in current and future lease obligations to entities invested in by the Company’s Chief Executive Officer.~~


	For the Six Months Ended June 30, 2020
	As Previously
	Reported		Adjustments		As Restated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Net income	$	7,728	$	627	$	8,355
Reconciliation of net income to net cash provided by operating activities:
Changes in operating assets and liabilities	38,711		(627)		38,084
Net cash provided by operating activities	$	61,764	0		$	61,764

NOTE ~~6 - 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 classified 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 September 30, 2020, we recorded a $0.8 million liability for contingent consideration associated with the acquisition of Application Specialties Inc. ("ASI") in other current liabilities.

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 nine months ended September 30, 2020:


~~Fair Value Measurements Using Significant Unobservable Inputs (Level 3)~~
	~~Contingent Liability for Accrued Consideration~~
	~~(in thousands)~~
~~Beginning balance at December 31, 2019~~	$	~~2,705~~
~~Acquisitions and settlements~~
~~Acquisitions~~	0
~~Settlements~~	~~(2,000)~~
~~Total remeasurement adjustments:~~
~~Changes in fair value recorded in other (income) expense, net~~	98
*Ending Balance at September 30, 2020	$	~~803~~

The amount of total (gains) or losses for the quarter included in earnings or changes to net assets, attributable to changes in unrealized losses relating to liabilities still held at September 30, 2020.	$	98

* Included in other current 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 September 30, 2020~~		~~Valuation Technique~~	Significant Unobservable Inputs
Contingent consideration: (ASI acquisition)	$	~~803~~	~~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 Application Specialties, Inc ("ASI") are annualized earnings before interest, tax, depreciation 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 7.9 percent. With less than one year remaining on the earn-out payment schedule, changes to the discount rate would not result in a significant impact on the recorded liability.

Other financial instruments not measured at fair value on the Company's unaudited condensed consolidated balance sheet at September 30, 2020 and December 31, 2019, 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. The Company believes that the estimated fair value of such instruments at September 30, 2020 and December 31, 2019 approximates their carrying value as reported on the unaudited condensed consolidated balance sheets. See ~~Note 10 - Long Term Debt~~ ~~for the fair value of our term loan debt under our syndicated credit agreement facility.~~

~~Nonrecurring Fair Value Measurements~~ - In the third quarter of 2020, we incurred noncash impairment charges for goodwill and certain long-lived and other assets. The valuation of these assets required the use of significant unobservable inputs. To estimate the fair value, we used two generally accepted valuation techniques, an income approach and a market approach. Under the income approach, our discounted cash flow analysis included the following inputs that are not readily available - a discount rate, or weighted cost of capital derived from our industry peers, our estimate of future sales, operating costs and capital expenditures. Under the market approach, our inputs included EBITDA multiples, which were derived from recent peer acquisition transactions, and forward EBITDA, which incorporates the same inputs used under the income approach. The estimated fair value of assets and our reporting units are classified as Level 3. See ~~Note 4~~ ~~- Impairments and Other Charges~~ ~~for additional information about these impairment charges and our assumptions.~~

~~NOTE 7~~5 – INVENTORIES

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


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Finished goods	Finished goods	$	120,492	$	122,510	Finished goods	$	105,763	$	105,527
Work in process	Work in process	13,056		19,721		Work in process	22,076		17,021
Obsolescence reserve	Obsolescence reserve	(14,684)		(12,867)		Obsolescence reserve	(24,392)		(25,477)
Inventories	Inventories	$	118,864	$	129,364	Inventories	$	103,447	$	97,071

NOTE 86 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS

Under our customized pump production and long-term water and wastewater project contracts in our IPS segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “Cost and estimated profits in excess of billings” on our condensed consolidated balance sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our condensed consolidated balance sheets.

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


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Costs incurred on uncompleted contracts	Costs incurred on uncompleted contracts	$	52,500	$	51,017	Costs incurred on uncompleted contracts	$	56,184	$	36,969
Estimated profits, thereon	Estimated profits, thereon	10,107		10,771		Estimated profits, thereon	18,878		6,711
Total	Total	62,607		61,788		Total	75,062		43,680
Less: billings to date	Less: billings to date	45,233		41,223		Less: billings to date	60,641		29,315
Net	Net	$	17,374	$	20,565	Net	$	14,421	$	14,365

Such amounts were included in the accompanying condensed Consolidated Balance Sheets for ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 under the following captions (in thousands):


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Costs and estimated profits in excess of billings	Costs and estimated profits in excess of billings	$	21,544	$	32,455	Costs and estimated profits in excess of billings	$	16,718	$	18,459
Billings in excess of costs and estimated profits	Billings in excess of costs and estimated profits	(4,168)		(11,871)		Billings in excess of costs and estimated profits	(2,300)		(4,061)
Translation adjustment	Translation adjustment	(2)		(19)		Translation adjustment	3		(33)
Net	Net	$	17,374	$	20,565	Net	$	14,421	$	14,365

1311

During the ~~nine~~six months ended ~~September~~June 30, ~~2020, $11.7~~2021, $3.8 million of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments.

NOTE 97 – INCOME TAXES

Our effective tax rate from continuing operations was ~~22.4~~17.4 percent for the ~~nine~~three months ended ~~September~~June 30, ~~2020~~2021 compared to a tax expense of ~~24.0~~23.1 percent for the ~~nine~~three months ended ~~September~~June 30, ~~2019.~~2020. Compared to the U.S. statutory rate for the ~~nine~~three months ended ~~September~~June 30, ~~2019,~~2021, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded due to tax authorities’ aggressive auditing of research and development tax credits. The effective tax was decreased by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the three months ended June 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and was partially offset by research and development tax credits ~~return~~and other tax credits.

Our effective tax rate from continuing operations was a tax expense of 26.7 percent for the six months ended June 30, 2021 compared to ~~provision adjustments~~a tax expense of 23.0 percent for the six months ended June 30, 2020. Compared to the U.S. statutory rate for the six months ended June 30, 2021, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded due to tax authorities’ aggressive auditing of research and development tax credits. The effective tax was decreased by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the six months ended June 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and was partially offset by research and development tax 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 108 – LONG-TERM DEBT

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


		September 30, 2020				December 31, 2019					June 30, 2021				December 31, 2020
		Carrying Value (1)		Fair Value		Carrying Value (1)		Fair Value			Carrying Value (1)		Fair Value		Carrying Value (1)		Fair Value
ABL Revolver	ABL Revolver	$	0	$	0	$	0	$	0	ABL Revolver	$	—	$	—	$	—	$	—
Term Loan B	Term Loan B	217,500		212,606		244,375		244,375		Term Loan B	328,350		328,350		330,000		325,875
Total long-term debt	Total long-term debt	217,500		212,606		244,375		244,375		Total long-term debt	328,350		328,350		330,000		325,875
Less: current portion	Less: current portion	(2,500)		(2,444)		(2,500)		(2,500)		Less: current portion	(3,300)		(3,300)		(3,300)		(3,259)
Long-term debt less current maturities	Long-term debt less current maturities	$	215,000	$	210,162	$	241,875	$	241,875	Long-term debt less current maturities	$	325,050	$	325,050	$	326,700	$	322,616

(1) Carrying value amounts do not include unamortized debt issuance costs of ~~$5.2~~$8.7 million and ~~$6.5~~$9.6 million for ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Credit Agreements

On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a ~~$135~~$135.0 million asset-backed revolving line of credit (the "ABL Revolver") a $50.0 million increase above the $85.0 million original revolver. The Increase Agreement amends and supplements that certain Loan and Security Agreement, dated as of August 29, 2017. As of ~~September~~June 30, ~~2020,~~2021, the Company had 0no amount outstanding under the ABL Revolver and had ~~$114.3~~$131.3 million of borrowing capacity, net of the impact of outstanding letters of credit.

On December 23, 2020, DXP entered into a new seven year, $330 million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan.

The 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.

The Company was in compliance with all financial covenants under the ABL Revolver and Term Loan B Agreements as of ~~September~~June 30, ~~2020.~~2021.

NOTE 119 - EARNINGS PER SHARE DATA

Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Basic:
Weighted average shares outstanding 17,790 17,602 17,743 17,588
Net income (loss) attributable to DXP Enterprises, Inc. $ (34,666) $ 13,109 $ (26,814) $ 33,859
Convertible preferred stock dividend 23 23 68 68
Net income (loss) attributable to common shareholders $ (34,689) $ 13,086 $ (26,882) $ 33,791
Per share amount $ (1.95) $ 0.74 $ (1.52) $ 1.92
Diluted:
Weighted average shares outstanding 17,790 17,602 17,743 17,588
Assumed conversion of convertible preferred stock 0 840 0 840
Total dilutive shares 17,790 18,442 17,743 18,428
Net income (loss) attributable to common shareholders $ (34,689) $ 13,086 $ (26,882) $ 33,791
Convertible preferred stock dividend 0 23 0 68
Net income (loss) attributable to DXP Enterprises, Inc. $ (34,689) $ 13,109 $ (26,882) $ 33,859
Per share amount $ (1.95) $ 0.71 $ (1.52) $ 1.84

For the three and nine months ended September 30, 2020, we excluded from the diluted EPS calculation 840 thousand convertible preferred shares, respectively, since the effect would have been antidilutive.


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Basic:			(Restated)				(Restated)
Weighted average shares outstanding	19,291		17,735		19,239		17,719
Net income attributable to DXP Enterprises, Inc.	$	8,119	$	2,427	$	8,490	$	8,479
Convertible preferred stock dividend	22		22		45		45
Net income attributable to common shareholders	$	8,097	$	2,405	$	8,445	$	8,434
Per share amount	$	0.42	$	0.14	$	0.44	$	0.48

Diluted:
Weighted average shares outstanding	19,291		17,735		19,239		17,719
Assumed conversion of convertible preferred stock	840		840		840		840
Total dilutive shares	20,131		18,575		20,079		18,559
Net income attributable to common shareholders	$	8,097	$	2,405	$	8,445	$	8,434
Convertible preferred stock dividend	22		22		45		45
Net income attributable to DXP Enterprises, Inc.	$	8,119	$	2,427	$	8,490	$	8,479
Per share amount	$	0.41	$	0.13	$	0.42	$	0.45

NOTE 1210 - 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 1311 - 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, repair and operating 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, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, re-manufactures pumps, ~~and~~ manufactures branded private label ~~pumps.~~pumps and provides products and process lines for the water and wastewater treatment industries. 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 inter-segment eliminations.

The following table sets out financial information related to the Company's segments excluding amortization (in thousands):



	Three Months Ended June 30,
	2021								2020
									(Restated)
	SC		IPS		SCS		Total		SC		IPS		SCS		Total
Product sales1	$	185,489	$	—	$	35,068	$	220,557	$	144,286	$	—	$	32,988	$	177,274
Inventory services2	—		—		4,263		4,263		—		—		4,086		4,086
Staffing services3	24,144		—		—		24,144		9,562		—		—		9,562
Pump production and delivery4	—		36,727		—		36,727		—		60,479		—		60,479
Total Revenue	$	209,633	$	36,727	$	39,331	$	285,691	$	153,848	$	60,479	$	37,074	$	251,401
Income from operations	$	26,300	$	4,803	$	3,488	$	34,591	$	14,050	$	8,565	$	3,353	$	25,968



	Six Months Ended June 30,
	2021								2020
									(Restated)
	SC		IPS		SCS		Total		SC		IPS		SCS		Total
Product sales1	$	350,831	$	—	$	66,845	$	417,676	$	314,081	$	—	$	77,140	$	391,221
Inventory services2	—		—		8,459		8,459		—		—		8,311		8,311
Staffing services3	45,171		—		—		45,171		22,352		—		—		22,352
Pump production and delivery4	—		59,972		—		59,972		—		130,500		—		130,500
Total Revenue	$	396,002	$	59,972	$	75,304	$	531,278	$	336,433	$	130,500	$	85,451	$	552,384
Income from operations	$	48,437	$	5,751	$	5,810	$	59,998	$	31,379	$	18,993	$	7,108	$	57,480

Three Months Ended September 30,
2020 2019
SC IPS SCS Total SC IPS SCS Total
Product sales1
$ 143,767 $ 0 $ 29,360 $ 173,127 $ 178,841 $ 0 $ 46,998 $ 225,839
Inventory services2
0 0 4,057 $ 4,057 0 0 4,284 $ 4,284
Staffing services3
21,133 0 0 $ 21,133 14,886 0 0 $ 14,886
Pump production4
0 21,876 0 $ 21,876 0 82,169 0 $ 82,169
Total Revenue $ 164,900 $ 21,876 $ 33,417 $ 220,193 $ 193,727 $ 82,169 $ 51,282 $ 327,178
Income (loss) from operations5
$ 22,151 $ (2,913) $ 2,900 $ 22,138 $ 25,071 $ 10,097 $ 3,110 $ 38,278

Nine Months Ended September 30,
2020 2019
SC IPS SCS Total SC IPS SCS Total
Product sales1
$ 457,848 $ 0 $ 106,500 $ 564,348 $ 534,953 $ 0 $ 141,768 $ 676,721
Inventory services2
0 0 12,368 $ 12,368 0 0 12,149 $ 12,149
Staffing services3
43,485 0 0 $ 43,485 44,931 0 0 $ 44,931
Pump production4
0 152,376 0 $ 152,376 0 237,920 0 $ 237,920
Total Revenue $ 501,333 $ 152,376 $ 118,868 $ 772,577 $ 579,884 $ 237,920 $ 153,917 $ 971,721
Income from operations 5
$ 52,742 $ 16,080 $ 10,008 $ 78,830 $ 67,281 $ 28,924 $ 10,980 $ 107,185

1Product sales that are recognized at a point in time.

2 Inventory management services that are recognized over the contract life.

3Staffing services that are invoiced on a day-rate basis.

4Custom pump production ~~that~~and delivery is recognized over time.

5~~Excludes impairment expense and other charges of $26.2 million for IPS and $22.2 million for Service Centers.~~

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


											Three Months Ended June 30,				Six Months Ended June 30,
		Three Months Ended September 30,				Nine Months Ended September 30,					2021		2020		2021		2020
		2020		2019		2020		2019					(Restated)				(Restated)
Operating income for reportable segments	Operating income for reportable segments	$	22,138	$	38,278	$	78,830	$	107,185	Operating income for reportable segments	$	34,591	$	25,968	$	59,998	$	57,480
Adjustment for:	Adjustment for:									Adjustment for:
Amortization of intangible assets	Amortization of intangible assets	3,053		3,806		9,296		11,423		Amortization of intangible assets	4,306		3,046		8,452		6,243
Impairment and other charges		48,401		0		48,401		0
Corporate expenses	Corporate expenses	11,530		12,755		44,311		36,382		Corporate expenses	15,439		15,784		30,467		32,780
Income (loss) from operations		$	(40,846)	$	21,717	(23,178)		59,380
Income from operations										Income from operations	$	14,846	$	7,138	21,079		18,457
Interest expense	Interest expense	3,752		4,986		12,059		14,911		Interest expense	5,337		3,930		10,580		8,307
Other (income) expense, net	Other (income) expense, net	320		(25)		(381)		127		Other (income) expense, net	(105)		133		(535)		(701)
Income (loss) before income taxes		$	(44,918)	$	16,756	$	(34,856)	$	44,342
Income before income taxes										Income before income taxes	$	9,614	$	3,075	$	11,034	$	10,851

NOTE 1412 - BUSINESS ACQUISITIONS

On ~~February 1, 2020,~~April 30, 2021, the Company completed the acquisition of ~~substantially all of the assets of Turbo Machinery Repair~~Carter & Verplanck, LLC (“Turbo”), a pump and industrial equipment repair, maintenance, machining and labor services company. The Company paid approximately $3.2 million in cash. For the nine months ended September 30, 2020, Turbo contributed sales of $1.9 million.

~~On January 1, 2020, the Company completed the acquisition of Pumping Systems, Inc. (“PSI”~~CVI”), a distributor of ~~pumps, systems~~products and ~~related services.~~services exclusively focused on serving the water and wastewater markets. The ~~PSI~~ acquisition of CVI was funded with ~~a mixture of~~ cash on hand as well as issuing DXP's common stock. The Company paid approximately ~~$13.0~~$49.7 million in cash and stock. For the ~~nine~~six months ended ~~September~~June 30, ~~2020, PSI~~2021, CVI contributed sales of ~~$12.9~~$5.2 million and net income of $1.1 million. A majority of CVI's sales are project-based work under the percentage-of-completion accounting model. As a result, CVI has been included in the IPS segment.


Purchase Price Consideration(in millions)	Total Consideration
	~~(Dollars in millions)~~
Cash payments	$	~~14.2~~40.8
Fair value of stock issued			~~2.0~~8.9
Total purchase price consideration	$	~~16.2~~49.7

The fair value of the approximately 352,000 common shares issued was determined based on the closing market price of the Company’s common shares on the acquisition date, adjusted for holding restrictions following consummation.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:


(In thousands)
Accounts receivable	$	4,397
Costs in excess of billings	2,484
Non-compete agreements	730
Customer relationships	10,676
Goodwill	38,612
Property and equipment	85
Other assets	2,456
Assets acquired	$	59,440
Current liabilities assumed	(9,781)
Net assets acquired	$	49,659

The following represents the pro forma unaudited revenue and earnings as if CVI had been included in the consolidated results of the Company for the six months ended June 20, 2020 and 2021, respectively:


	Six months Ended June 30,
	2020		2021
	(in thousands/unaudited)
Revenue	$	558,630	$	536,576
Net income	$	7,938	$	8,010

Of the $50 million of acquired intangible assets, $0.7 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years, coincident with the terms of the agreements. In addition, $10.7 million was assigned to customer relationships, and will be amortized over a period of 8 years. The $38.6 million of goodwill was assigned to the Innovative Pumping Solutions segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of CVI. None of the goodwill is expected to be deductible for income tax purposes.

The fair value of accounts receivables acquired is $4.4 million, which approximated book value.

The Company recognized less than $200,000 of acquisition related costs that were expensed in the current period. These costs are included in the consolidated income statement in Selling, General and Administrative costs. The Company also recognized

an immaterial amount in costs associated with issuing the shares issued as consideration in the business combination. Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity.

NOTE 1513 - ~~SALES OF COMMON STOCK~~SHARE REPURCHASE

On May ~~11, 2020,~~12, 2021, the Company ~~entered into an Equity Distribution Agreement~~announced that its Board of Directors authorized a share repurchase program (the ~~“Equity Distribution Agreement”~~“program”) ~~with BMO Capital Markets Corp. (the “Distribution Agent”) pursuant~~under which up to ~~which~~$85.0 million or 1.5 million shares of its outstanding common stock may be acquired in the open market over the next 24 months at the discretion of management. During the three and six months ended June 30, 2021, the Company may offer and sell shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering amount of up to $37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company’s common stock pursuant to the Equity Distribution Agreement will be made in “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. During the nine months ended September 30, 2020, the Company issued and sold 46,000repurchased 1.0 million shares of common stock ~~under~~for $29.2 million at an average price of $28.77 per share.

Total consideration paid to repurchase the ~~Equity Distribution Agreement,~~shares was recorded in shareholders’ equity as treasury shares. Such consideration was funded with ~~net proceeds~~existing cash balances and an agreement to pay sellers over 4 equal installments beginning on June 15, 2021. The remaining 3 installments totaling $20.4 million were included in other current liabilities as of June 30, 2021.


	Three Months Ended June 30,		Six Months Ended June 30,
(in millions, except per share data)	2021			2021
Total number of shares purchased	1.0			1.0
Amount paid	$	29.2		$	29.2
Average price paid per share	$	28.77		$	28.77

NOTE 14 - SUBSEQUENT EVENTS

On July 1, 2021, the Company completed the acquisition of Process Machinery, LLC (“Process Machinery”), a distributor of pumps, mechanical seals, tank, filters and related process equipment that focuses on serving the chemical, power, pulp & paper, mining, metals and food processing industries. The acquisition of Process Machinery was funded with cash on hand as well as issuing DXP's common stock. The Company paid approximately ~~$1.1~~$10 million ~~after deducting~~in cash and stock.

In September 2021, the ~~Distribution Agent’s commission~~Company completed the acquisition of Premier Water, a distributor and provider of products and services exclusively focused on serving the water and wastewater treatment markets in North and South Carolina.The acquisition was also funded with a combination of cash on hand and stock. The Company paid approximately ~~$26 thousand.~~$6 million.

1716

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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 should be read in conjunction with our previous Annual Report on Form ~~10-K~~10-K/A and our Quarterly Reports on Form 10-Q, and the consolidated financial statements and notes thereto included in such 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. These forward-looking statements include without limitation those about the Company’s expectations regarding the impact of the COVID-19 pandemic and the impact of low commodity prices of oil and gas; the Company’s business, the Company’s future profitability, cash flow, liquidity, and growth. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "might", "estimates", "will", "should", "could", "would", "suspect", "potential", "current", "achieve", "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. 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, new or modified statutory or regulatory requirements, availability of materials and labor, inability to obtain or delay in obtaining government or third-party approvals and permits, non-performance by third parties of their contractual obligations, unforeseen hazards such as weather conditions, acts orof war or terrorist acts and the governmental or military response thereto, cyber-attacks adversely affecting our operations, other geological, operating and economic considerations and declining prices and market conditions, including reduced oil and gas prices and supply or demand for maintenance, repair and operating products, equipment and service, decreases in oil and natural gas prices, decreases in oil and natural gas industry expenditure levels, which may result from decreased oil and natural gas prices or other factors, economic risks related to the impact of COVID-19, our ability to manage changes and the continued health or availability of management personnel, and our ability to obtain financing on favorable terms or amend our credit facilities, as needed. This Report identifies other factors that could cause such differences. We cannot assure that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", ~~included in this Report and~~ in our Annual Report on Form ~~10-K~~10-K/A filed with the Securities and Exchange Commission on ~~March 13, 2020.~~October 22, 2021. 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.

CURRENT MARKET CONDITIONS AND OUTLOOK

General

DXP Enterprises, Inc. is a business-to-business distributor of maintenance, repair and operating and production ("MROP") products and services to a variety of customers in different end markets primarily across North America. Additionally, we fabricate, remanufacture and assemble custom pump packages along with manufacturing branded private label pumps.

COVID-19 PandemicImpact

The pandemic continued to have a significant impact on our business infor the ~~third quarter of 2020.~~six months ended June 30, 2021. The marketplace broadly, and the Company specifically, continued to operate with certain modifications to balance re-opening with employee and customer safety. However, most of the markets in which we operate ~~began~~continued to normalize ~~in the third quarter of 2020.~~and re-open. This improved the outlook of the manufacturing and ~~construction~~industrial customers that support our traditional branch and ~~Onsite~~onsite business. Although the rate of improvement remains gradual and the overall activity level remains below pre-pandemic levels, DXP is seeing a modest improvement from monthly lows experienced in ~~July.~~July of 2020.

Consistent with broader social trends, we have taken steps to safeguard the health of our employees. This includes closing branch and corporate facilities to outside personnel, enabling through technologyThe COVID-19 pandemic caused significant ~~work from home capabilities for many employees, and where employees remain~~disruptions in the ~~workplace creating space between work areas, providing ample PPE~~U.S. and ~~cleaning supplies,~~global markets, and ~~having formal policies for mitigation in~~ the ~~event~~full extent of ~~cases~~the impacts is still unknown and will depend on a number of ~~illness. Due~~developments, including any continued spread of the virus and its variants, the availability of and use of vaccines, and the impact of governmental measures to ~~these precautions, our operations have continued~~combat the spread of the virus (such as mask mandates or social distancing requirements) and to ~~function effectively, including internal controls over financial reporting.~~

promote economic stability and recovery. The initial recovery from the

1817

WeCOVID-19 pandemic has been accompanied by a resurgence in demand as industries re-open, which is currently straining global supply chains, raw material and labor availability, and transportation efficiency. DXP’s businesses and its major facilities have remained operational during the pandemic as customers relied on DXP’s products and services to keep their businesses up and running.

While the COVID-19 pandemic continues to impact global markets and the needs of customers, employees, suppliers and communities continue to change, the Company’s efforts and business plans will evolve accordingly. DXP is focused on serving customers and communities in addressing the pandemic and providing products to assist in the ongoing recovery, supporting the needs and safety of employees and ensuring the Company continues to operate with a strong financial position. As more vaccine is distributed and mask mandates evolve, the Company continues to monitor and refine its product assortment and actions to support customers’ return to regular operations.The COVID-19 pandemic has impacted and is likely to continue impacting our businesses and operations as well as the operations of our customers and suppliers. From a customer perspective, business re-openings, production and related activity throughout the quarter varied based on geography, industry and regional COVID-19 pandemic conditions. The Company's major operational facilities and infrastructure (i.e. distribution centers, branches, and on-site logistic partners) are remaining operational with limited disruptions, while adhering to strict safety and social-distancing protocols. In addition, the Company has prioritized maintaining all facilities safe for customers and employees to work and interact. Many of our employees, depending on local conditions and regulations, have returned to a work-from-office environment, and we expect that trend to continue in the near term.

As of the end of the second quarter of 2021, we have remained undrawn on our $135 million bank revolver; and it remains available for use in the event a need arises. In response to easing restrictions and the continued vaccination efforts, we continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that ~~it is important~~we have remained nimble and are poised to ~~share where our company stands today, how our response to COVID-19 is progressing, and how our operations and financial condition may change as~~remain opportunistic during the ~~fight against COVID-19 progresses.~~recovery.

~~COVID-19 PandemicImpact~~Matters Affecting Comparability

There were 63 business days in the three months ended June 30, 2021 and June 30, 2020. There were 126 business days in the six months ended June 30, 2021 and 127 business days in the six months ended June 30, 2020.

Outlook

~~During the nine months ended September 30, 2020, the widely publicized~~

Service Centers & Supply Chain Services Segments

The replacement and ~~discussed coronavirus (COVID-19) outbreak rapidly spread across the world, driving a sharp erosion in demand for crude oil and other~~mission-critical nature of our products and services within the Company's Service Centers and Supply Chain Services business segments and industrial and manufacturing environments and processes drives a demand and outlook that are correlated with global, national and regional industrial production, capacity utilization and long-term GDP growth. Economic conditions remain uncertain with regard to COVID-19, and its impact on various end markets, however, recent order activity has begun to improve as ~~whole economies ordered curtailed activity.~~markets strengthened and gained greater visibility to vaccine roll-out strategies in various regions. In ~~response~~the second quarter of 2021, we had approximately $249.0 million in sales in our Service Centers and Supply Chain Services segment, an increase of approximately 30.4 percent over the the second quarter of 2020. While the Company continues to ~~declining demand~~expect choppiness as the economy gradually gains confidence with COVID-19 vaccines, we expect financial results to continually improve with interim periods of potential setback.

Innovative Pumping Solutions Segment

To date, the Company's Innovative Pumping Solutions segment has been able to absorb the pandemic with small workforce reductions or furloughs, which positions the Company for crude oil, members of the Organization of the Petroleum Exporting Countries and other producing countries (OPEC+), including Russia, met in early March to discuss additional production cuts to help stabilize prices.accelerated growth once recovery is clear within Innovative Pumping Solutions. The group failed to reach an agreement, and production was instead increased into the already oversupplied market, decimating oil prices and rapidly filling worldwide oil storage facilities. OPEC+ eventually reached an agreement in April 2020 to reduce production, which had a muted effect on oil prices due to the belief that the cuts were significantly less than the demand destruction caused by COVID-19. As a result, companies across the oil and gas industry ~~responded~~continues to be impacted by the COVID-19 pandemic, along with ~~severe capital spending budget cuts, cost cuts, personnel layoffs, facility closures~~other industry specific factors including environmental concerns and ~~bankruptcy filings. The North American rig count declined from 964 active rigs in October of 2019 to only 382 active rigs as of October 2020.~~issues.

~~We have taken a number~~In the first half of ~~mitigation efforts~~2021, we began to see an improvement in the demand for oil and ~~proactive steps~~natural gas as the roll out of the COVID-19 vaccinations gradually improved around the globe and pandemic restrictions eased. The increasing optimism related to demand recovery has led to higher commodity prices and although demand levels remain below pre-pandemic levels, there is growing confidence of returning to 2019 levels in ~~response. We moved forward with our plans~~the coming years. Also, contributing to the improvement in oil prices has been cooperation within OPEC to implement production cuts over the last year; however, it was recently announced that OPEC intends to increase ~~our ABL revolver facility from $85 million~~production beginning in August 2021, that will continue into late 2022 to $135 million. In addition, we reduced certain discretionary expenditures and suspended the Company’s matching contributions to retirement plans. We may take additional mitigation actions in the future such as raising additional financingmatch increasing demand expectations. Demand recovery could still possibly slow or ~~furloughs. Some of these measures may have an adverse impact on our businesses.~~

Throughout the COVID-19 pandemic crisis, we have continued to operate our business despite the challenges that arise from closing offices and operating our branch locations. Our use of technology and third party conferencing platforms have enabled our office employees to work from home, performing their job functions with little to no loss of productivity. We required our employees to work from homepause as a result of ~~governmental isolation orders~~additional waves of pandemic outbreak or heightened pandemic control measures. Over the longer term, we could also experience a structural shift in the global economy and ~~in many cases, in advance of those orders~~its demand for the health and safety of our employees. For the most part, our warehouses and regional distribution centers have remained open. Under various isolation orders by national, state, provincial and local governments, we have been exempted as an “essential” business as the products we sell are necessary for the maintenance and functioning of many industries including the energy infrastructure. We have taken measures to safeguard the health and welfare of our employees, including social distancing measures while at work, certain screening, providing personal protection equipment such as gloves, face masks and hand sanitizer and sterilizing cleaning services at Company facilities. As various governmental isolation orders are lifted or phased out, we are reviewing our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact.

As a distribution business, we have also closely monitored the ability of our suppliers and transportation providers to continue the functioning of our supply chain. We have not experienced significant delays by transportation providers or significant delays in our supply chains. Our inventory position for most products has allowed us to continue supply to most customers with little interruption. In those instances where there is interruption, we are working with our customers to discuss the impact of the COVID-19 delay. We continue to monitor the situation and have ongoing dialogue with our vendors and customers regarding the status of impacted orders.

Management expects industry activity levels and spending by customers to remain volatile throughout the remainder of 2020 as oil supplies continue to increase and demand destruction from COVID-19 remains. A prolonged contraction of activity related to oil and natural gas ~~and~~as a ~~long lasting economic impact from COVID-19 may have a further adverse impact on our results and the carrying value~~result of long-lived assets, inventory and related business segment goodwill. DXP remains committed to streamlining operations and improving organizational efficiencies while continuing to focus on delivering the products and services that remainchanges in the ~~Company’s backlog. We believe this strategy will further advance the Company’s competitive position, regardless of the market environment.~~

way people work, travel and interact.

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RESULTS OF OPERATIONS

(in thousands, except percentages and per share data)

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 June 30,
		Three Months Ended September 30,									2021		%		2020		%
		2020		%		2019		%							(Restated)
Sales	Sales	$	220,193	100.0	%	$	327,178	100.0	%	Sales	$	285,691	100.0	%	$	251,401	100.0	%
Cost of sales	Cost of sales	158,892		72.2	%	234,474		71.7	%	Cost of sales	200,413		70.2	%	181,320		72.1	%
Gross profit	Gross profit	$	61,301	27.8	%	$	92,704	28.3	%	Gross profit	$	85,278	29.8	%	$	70,081	27.9	%
Selling, general and administrative expenses	Selling, general and administrative expenses	53,746		24.4	%	70,987		21.7	%	Selling, general and administrative expenses	70,432		24.7	%	62,943		25.0	%
Impairment and other charges		48,401		22.0	%	—		—	%
Income (loss) from operations		$	(40,846)	(18.6)	%	$	21,717	6.6	%
Income from operations										Income from operations	$	14,846	5.2	%	$	7,138	2.8	%
Other (income) expense, net	Other (income) expense, net	320		0.1	%	(25)		—	%	Other (income) expense, net	(105)		—	%	133		0.1	%
Interest expense	Interest expense	3,752		1.7	%	4,986		1.5	%	Interest expense	5,337		1.9	%	3,930		1.6	%
Income (loss) before income taxes		$	(44,918)	(20.4)	%	$	16,756	5.1	%
Provision for income taxes (benefit)		(10,143)		(4.6)	%	3,606		1.1	%
Net income (loss)		$	(34,775)	(15.8)	%	$	13,150	4.0	%
Net income (loss) attributable to noncontrolling interest		(109)		—		41		—
Income before income taxes										Income before income taxes	$	9,614	3.4	%	$	3,075	1.2	%
Provision for income taxes										Provision for income taxes	1,684		0.6	%	710		0.3	%
Net income										Net income	$	7,930	2.8	%	$	2,365	0.9	%
Net loss attributable to noncontrolling interest										Net loss attributable to noncontrolling interest	(189)		—		(62)		—
Net income attributable to DXP Enterprises, Inc.	Net income attributable to DXP Enterprises, Inc.	$	(34,666)	(15.7)	%	$	13,109	4.0	%	Net income attributable to DXP Enterprises, Inc.	$	8,119	2.8	%	$	2,427	1.0	%
Per share amounts attributable to DXP Enterprises, Inc.	Per share amounts attributable to DXP Enterprises, Inc.									Per share amounts attributable to DXP Enterprises, Inc.
Basic earnings (loss) per share		(1.95)				$	0.74
Diluted earnings (loss) per share		(1.95)				$	0.71
Basic earnings per share										Basic earnings per share	0.42				$	0.14
Diluted earnings per share										Diluted earnings per share	0.41				$	0.13

Three Months Ended ~~September~~June 30, ~~2020~~2021 compared to Three Months Ended ~~September~~June 30, ~~2019~~2020

SALES. Sales for the three months ended ~~September~~June 30, ~~2020 decreased $107.0~~2021 increased $34.3 million, or ~~32.7%,~~13.6 percent, to approximately ~~$220.2~~$285.7 million from ~~$327.2~~$251.4 million for the prior year's corresponding period. Sales from businesses acquired in December 2020 and April 2021 accounted for ~~$5.1~~$37.7 million of the sales for the three months ended ~~September~~June 30, ~~2020.~~2021. This overall sales ~~decrease~~increase is the result of ~~a decrease~~an increase in sales in our SC ~~IPS~~ and SCS segments of ~~$28.8 million, $60.3~~$55.8 million and ~~$17.9~~$2.3 million, ~~respectively.~~partially offset by a decrease in sales of $23.8 million in our IPS segment. The fluctuations in sales isare further explained in our business segment discussions below.


		Three Months Ended September 30,									Three Months Ended June 30,
		2020		2019		Change		Change%			2021		2020		Change		Change%
Sales by Business Segment	Sales by Business Segment	(in thousands, except change%)								Sales by Business Segment	(in thousands, except change %)
Service Centers	Service Centers	$	164,900	$	193,727	$	(28,827)	(14.9)	%	Service Centers	$	209,633	$	153,848	$	55,785	36.3	%
Innovative Pumping Solutions	Innovative Pumping Solutions	21,876		82,169		(60,293)		(73.4)	%	Innovative Pumping Solutions	36,727		60,479		(23,752)		(39.3)	%
Supply Chain Services	Supply Chain Services	33,417		51,282		(17,865)		(34.8)	%	Supply Chain Services	39,331		37,074		2,257		6.1	%
Total DXP Sales	Total DXP Sales	$	220,193	$	327,178	$	(106,985)	(32.7)	%	Total DXP Sales	$	285,691	$	251,401	$	34,290	13.6	%

Service Centers segment. Sales for the SC segment increased by approximately $55.8 million, or 36.3 percent for the three months ended June 30, 2021 compared to the prior year's corresponding period. Excluding $32.5 million of second quarter 2021 SC segment sales from businesses acquired in December 2020, Service Centers segment sales for the second quarter increased $23.3 million, or 15.1 percent from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment, metal working, and bearings and power transmission products to customers engaged in variety of markets compared due to the negative economic impacts of the COVID-19 pandemic on 2020 sales results.

Innovative Pumping Solutions segment. Sales for the IPS segment decreased by $23.8 million, or 39.3 percent for the three months ended June 30, 2021 compared to the prior year's corresponding period. Excluding $5.2 million of second quarter 2021 IPS segment sales from a business acquired in April 2021, IPS segment sales for the second quarter decreased $28.9 million, or 47.8 percent from the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production previously announced due to the negative economic impacts of the COVID-19 pandemic.

Supply Chain Services segment. Sales for the SCS segment increased by $2.3 million, or 6.1%, for the three months ended June 30, 2021, compared to the prior year's corresponding period. The improved sales is primarily related to increased sales to customers in the food & beverage, general manufacturing and aerospace industries, compared to the negative economic impacts of the COVID-19 pandemic on 2020 sales results.

GROSS PROFIT. Gross profit as a percentage of sales for the three months ended June 30, 2021 increased by approximately 197 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales increased by approximately 175 basis points. The increase in the gross profit percentage, excluding the businesses acquired, is primarily the result of an approximate a 253 basis point increase in the gross profit percentage in our SC segment, 19 basis point increase in the gross profit percentage in our IPS segment, and a 11 basis point decrease in the gross profit percentage in our SCS segment.

Service Centers segment. As a percentage of sales, the second quarter gross profit percentage for the SC increased approximately 247 basis points. Adjusting for the businesses acquired, gross profit as a percentage of sales increased approximately 253 basis points from the prior year's corresponding period. This was primarily as a result of volume increases and product mix. Gross profit for the Service Centers segment, excluding businesses acquired, increased $11.1 million, or 25.4 percent, during the second quarter of 2021 compared to the prior year’s corresponding period. The increase in gross profit is primarily the result of the improvement in sales due to the items discussed above.

Innovative Pumping Solutions segment. As a percentage of sales, the second quarter gross profit percentage for the IPS segment increased approximately 129 basis points. Adjusting for the business acquired, gross profit as a percentage of sales increased approximately 19 basis points from the prior year's corresponding period. The increase in gross profit percentage is primarily due to a mix shift (higher margin international work and domestic water and wastewater projects). Gross profit dollars decreased $8.2 million, excluding business acquired, primarily as a result of a decrease in utilization as a result of significantly reduced capital expenditure budgets by our customers associated with the negative economic impacts of the COVID-19 pandemic.

Supply Chain Services segment. Gross profit as a percentage of sales for the SCS segment decreased approximately 11 basis points compared to the prior year's corresponding period. Gross profit for the second quarter of 2021 increased $0.5 million or 5.6% compared to the prior year's corresponding period, primarily the result of the improvement in sales due to the items discussed above.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the three months ended June 30, 2021 increased by approximately $7.5 million, or 11.9%, to $70.4 million from $62.9 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $6.0 million. Excluding expenses from businesses acquired, SG&A for the quarter increased by $1.5 million, or 2.3%. The increase in SG&A excluding businesses acquired is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity associated with recovery from the negative economic impacts of the COVID-19 pandemic.

OPERATING INCOME. Operating income for the second quarter of 2021 increased by $7.7 million to $14.8 million, from $7.1 million in the prior year's corresponding period. This increase in operating income is primarily related to the above mentioned increase in sales and profitability with SC and IPS.

INTEREST EXPENSE. Interest expense for the second quarter of 2021 increased $1.4 million compared with the prior year's corresponding period primarily due to a higher principal balance for the three months ended June 30, 2021 compared to the prior year's corresponding period as a result of the Company entering into a new term loan in December 2020. This was partially offset by lower LIBOR rates for the three months ended June 30, 2021.

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 17.4 percent for the three months ended June 30, 2021 compared to a tax expense of 23.1 percent for the three months ended June 30, 2020. Compared to the U.S. statutory rate for the three months ended June 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions which required an increase in reserves. The effective tax rate was partially offset by research and development tax credits and other tax credits.


	Six Months Ended June 30,
	2021		%		2020		%
					(Restated)
Sales	$	531,278	100.0	%	$	552,384	100.0	%
Cost of sales	374,370		70.5	%	399,189		72.3	%
Gross profit	$	156,908	29.5	%	$	153,195	27.7	%
Selling, general and administrative expenses	135,829		25.6	%	134,738		24.4	%
Income from operations	$	21,079	4.0	%	$	18,457	3.3	%
Other (income) expense, net	(535)		(0.1)	%	(701)		(0.1)	%
Interest expense	10,580		2.0	%	8,307		1.5	%
Income before income taxes	$	11,034	2.1	%	$	10,851	2.0	%
Provision for income taxes	2,945		0.6	%	2,496		0.5	%
Net income	$	8,089	1.5	%	$	8,355	1.5	%
Net loss attributable to noncontrolling interest	(401)		—		(124)		—	%
Net income attributable to DXP Enterprises, Inc.	$	8,490	1.6	%	$	8,479	1.5	%
Per share amounts attributable to DXP Enterprises, Inc.
Basic earnings per share	$	0.44			$	0.48
Diluted earnings per share	$	0.42			$	0.45

Six Months Ended June 30, 2021 compared to Six Months Ended June 30, 2020

SALES. Sales for the six months ended June 30, 2021 decreased $21.1 million, or 3.8 percent, to approximately $531.3 million from $552.4 million for the prior year's corresponding period. Sales from businesses acquired since December 2020 accounted for $66.1 million of the sales for the six months ended June 30, 2021. This sales decrease is the result of a decrease in sales in our IPS and SCS segments of $70.5 million, and $10.1 million. This was partially offset by an increase of $59.6 million in SC. The fluctuations in sales are further explained in our business segment discussions below.


	Six Months Ended June 30,
	2021		2020		Change		Change%
Sales by Business Segment	(in thousands, except change%)
Service Centers	396,002		336,433		$	59,569	17.7	%
Innovative Pumping Solutions	59,972		130,500		(70,528)		(54.0)	%
Supply Chain Services	75,304		85,451		(10,147)		(11.9)	%
Total DXP Sales	$	531,278	$	552,384	$	(21,106)	(3.8)	%

Service Centers segment. Sales for the ~~Service Centers~~SC segment ~~decreased~~increased by ~~approximately $28.8~~$59.6 million, or ~~14.9%~~17.7 percent for the ~~three~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year's corresponding period. Excluding ~~$5.1~~$60.9 million of ~~third quarter 2020~~ Service ~~Centers segment sales from businesses acquired, Service Centers~~Center segment sales for the ~~third quarter in 2020~~six months ended June 30, 2021 from businesses acquired, SC segment sales decreased ~~$33.9~~$1.4 million, or ~~17.5%~~0.4 percent from the prior year's corresponding period. This sales decrease is primarily the result of decreased sales of metal working, safety ~~supply products~~services and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. We expect that this level of sales to the oil and gas industry will likely continue to decline if U.S. crude oil production remains at levels experienced during the quarter. With a prolonged economic recession related to COVID-19, we will likely experience a further decline in overall segment sales.producers.

Innovative Pumping Solutions segment. Sales for the IPS segment decreased by ~~$60.3~~$70.5 million, or ~~73.4%~~54.0 percent for the ~~three~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year's corresponding period. Excluding $5.2 million of IPS segment sales for the six months ended June 30, 2021 from a business acquired, IPS segment sales decreased $75.7 million, or 58.0 percent from the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to low crude prices and the ~~negative~~ economic impacts of COVID-19. ~~This~~The current level of IPS sales ~~will likely~~activity could continue ~~to decline~~ during the remainder of ~~2020 if the U.S. crude oil production remains at levels experienced during the first nine months of 2020.~~2021.

Supply Chain Services segment. Sales for the SCS segment decreased by ~~$17.9~~$10.1 million, or ~~34.8%,~~11.9 percent, for the ~~three~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to the prior year's corresponding period. The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic.

GROSS PROFIT. Gross profit as a percentage of sales for the ~~three~~six months ended ~~September~~June 30, ~~2020 decreased~~2021 increased by approximately 49180 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales ~~decreased~~increased by approximately 66158 basis points. The ~~decrease~~increase in the gross profit percentage ~~excluding the businesses acquired~~ is primarily the result of an approximate ~~1,076~~270 basis point ~~decrease~~increase in the gross profit percentage in our IPS segment, and a 59182 basis point ~~decrease~~increase in the gross profit percentage in our SC segment, ~~partially offset by~~excluding businesses acquired. Additionally, a ~~246~~20 basis point increase in the gross profit percentage in our SCS segment contributed to the increase.

Service Centers segment. As a percentage of sales, the six months ended June 30, 2021 gross profit percentage for the Service Centers increased approximately 187 basis points from the prior year's corresponding period. This was primarily the result of increased sales of rotating equipment and bearings and power transmission products to customers engaged in non-oil and gas markets.

Innovative Pumping Solutions segment. As a percentage of sales, the ~~third quarter~~six months ended June 30, 2021 gross profit percentage for the IPS segment ~~decreased~~increased approximately ~~1,076~~314 basis points from the prior year's corresponding ~~period~~period. The increase in gross profit percentage is primarily due to a mix shift (higher margin international work and domestic water and wastewater projects) as well as the shipment of negative gross profit percentage work completing in 2020. Gross profit dollars decreased $18.4 million, primarily as a result of ~~a decrease in utilization and capacity within IPS' engineered-to-order business and~~significantly reduced capital expenditure budgets by our customers associated with the negative economic impacts of the COVID-19 pandemic. Operating income for the IPS segment decreased $13.0 million or 128.9%, during the third quarter of 2020 compared to the prior year’s corresponding period. The decrease in operating income is primarily the result of the above-mentioned decrease in sales and the absorption of fixed costs.

~~Service Centers segment.~~ As a percentage of sales, the third quarter gross profit percentage for the Service Centers decreased approximately 44 basis points and decreased approximately 59 basis points, adjusting for the businesses 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 decreased $2.9 million, or 11.6%, during the third quarter of 2020 compared to the prior year’s corresponding period. The decrease in operating income is primarily the result of the decline in sales due to the items discussed above.

Supply Chain Services segment. Gross profit as a percentage of sales ~~for the SCS segment~~ increased approximately ~~246~~20 basis points, compared to the prior year's corresponding period. ~~This was primarily as a result of costs associated with new customer implementation in 2019 with no comparable activity in 2020. Operating income~~Gross profit for the ~~third~~second quarter of ~~2020~~2021 decreased ~~$0.2~~$2.2 million or 11.1 percent compared to the prior year's corresponding period, ~~mainly~~primarily the result of the decline in sales due to the ~~above- mentioned decrease in sales.~~items discussed above.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the ~~three~~six months ended ~~September~~June 30, ~~2020~~2021 decreased by approximately ~~$17.2~~$1.1 million, or ~~24.3%,~~0.8 percent, to ~~$53.7~~$135.8 million from ~~$71.0~~$134.7 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for ~~$1.1~~$10.9 million. Excluding expenses from businesses acquired, SG&A for the ~~quarter~~six months ended June 30, 2021 decreased by ~~$18.3~~$9.8 million, or ~~25.8%.~~7.3 percent. The ~~overall~~ decrease in SG&A excluding businesses acquired is ~~primarily~~ the result of decreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of decreased business activity and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets.

~~IMPAIRMENT AND OTHER CHARGES.~~ Due to circumstances discussed above, in the third quarter ended September 30, 2020, we evaluated our goodwill, certain long-lived assets and other assets for impairment. Based on the results, we recorded the following impairment charges:

~~Service Centers segment.~~ In the third quarter of 2020, we recorded $1.8 million of noncash impairment charges related primarily to certain long-lived assets that were not recoverable, $20.5 million of non-cash impairment charges related to goodwill related to our operations based in Canada.

~~Innovative Pumping Solutions segment.~~ In the third of quarter 2020, we recorded $10.2 million of non-cash impairment charges related to certain inactive assets and inventory and a $16.0 million noncash impairment charge related to goodwill.

~~For additional information on our impairment charges, see~~ ~~Note 4 - Impairments and Other Charges~~ ~~of the Notes to Consolidated Financial Statements in this Quarterly Report.~~

OPERATING INCOME. Operating income for the ~~third quarter of 2020 decreas~~edsix months ended June 30, 2021 increased by ~~$62.6~~$2.6 million or 14.2% to ~~a loss of $40.8~~$21.1 million from ~~$21.7~~$18.5 million in the prior year's corresponding period. This ~~decrease~~increase in operating income is primarily related to the ~~above mentioned decrease in sales and the impact of impairments and other charges.~~items discussed above.

INTEREST EXPENSE. Interest expense for the ~~third quarter of 2020 decreased $1.2~~six months ended June 30, 2021 increased $2.3 million compared with the prior year's corresponding period primarily due to ~~lower LIBOR rates and~~ a ~~reduction in~~higher principal balance ~~including required and optional prepayments.~~

~~INCOME TAXES.~~ ~~Our effective tax rate from continuing operations was a~~ ~~tax benefit of 22.6 percent~~ for th~~e three~~the six months ended ~~September~~June 30, ~~2020~~ compared to a tax expense of 21.5 percent for the three months ended September 30, 2019. Compared to the U.S. statutory rate for the three months ended September 30, 2019, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses. The effective tax rate was decreased by research and development tax credits and other tax credits.

Nine Months Ended September 30,
2020 % 2019 %
Sales $ 772,577 100.0 % $ 971,721 100.0 %
Cost of sales 557,595 72.2 % 702,830 72.3 %
Gross profit $ 214,982 27.8 % $ 268,891 27.7 %
Selling, general and administrative expenses 189,759 24.6 % 209,511 21.6 %
Impairment and other charges 48,401 6.3 % — — %
Income (loss) from operations $ (23,178) (3.0) % $ 59,380 6.1 %
Other (income) expense, net (381) — % 127 — %
Interest expense 12,059 1.6 % 14,911 1.5 %
Income (loss) before income taxes $ (34,856) (4.5) % $ 44,342 4.6 %
Provision for income taxes (benefit) (7,809) (1.0) % 10,655 1.1 %
Net income (loss) $ (27,047) (3.5) % $ 33,687 3.5 %
Net loss attributable to noncontrolling interest (233) — (172) —
Net income (loss) attributable to DXP Enterprises, Inc. $ (26,814) (3.5) % $ 33,859 3.5 %
Per share amounts attributable to DXP Enterprises, Inc.
Basic earnings (loss) per share $ (1.52) $ 1.92
Diluted earnings per share $ (1.52) $ 1.84

~~Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019~~

~~SALES.~~ Sales for the nine months ended September 30, 2020 decreased $199.1 million, or 20.5 percent, to approximately $772.6 million from $971.7 million for the prior year's corresponding period. This sales decrease is the result of a decrease in sales in our SC, IPS and SCS segments of $78.6 million, $85.5 million, and $35.0 million, respectively. The fluctuations in sales are further explained in our business segment discussions below.

Nine Months Ended September 30,
2020 2019 Change Change%
Sales by Business Segment (in thousands, except change%)
Service Centers 501,333 579,884 $ (78,551) (13.5) %
Innovative Pumping Solutions 152,376 237,920 (85,544) (36.0) %
Supply Chain Services 118,868 153,917 (35,049) (22.8) %
Total DXP Sales $ 772,577 $ 971,721 $ (199,144) (20.5) %

~~Service Centers segment.~~ Sales for the Service Centers segment decreased by $78.6 million, or 13.5 percent for the nine months ended September 30, 2020 compared to the prior year's corresponding period. Excluding $14.9 million of Service Center segment sales for the nine months ended September 30, 2020 from businesses acquired, Service Centers segment sales decreased $93.4 million, or 16.1 percent from the prior year's corresponding period. This sales decrease is primarily the result of decreased sales of metal working, safety supply products and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. We expect that this level of sales to the oil and gas industry will likely continue to decline if U.S. crude oil production remains at levels experienced during the first nine months of 2020. With a prolonged economic recession related to COVID-19, we will likely experience a further decline in overall segment sales.

~~Supply Chain Services segment.~~ Sales for the SCS segment decreased by $35.0 million, or 22.8 percent, for the nine months ended September 30, 2020, compared to the prior year's corresponding period. The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic.

~~Innovative Pumping Solutions segment~~. Sales for the IPS segment decreased by $85.5 million, or 36.0 percent for the nine months ended September 30, 2020 compared to the prior year's corresponding period. This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to low crude prices and the economic impacts of COVID-19. This level of IPS sales will likely continue to decline during the remainder of 2020.

~~GROSS PROFIT.~~ Gross profit as a percentage of sales for the nine months ended September 30, 2020 increased by approximately 15 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales increased by approximately 14 basis points. The increase in the gross profit percentage is primarily the result of an approximate 12 basis point increase in the gross profit percentage in our IPS segment and 171 basis point increase in the gross profit percentage in our SCS segment, partially offset by a 44 basis point decrease in the gross profit percentage in our SC segment (excluding businesses acquired during the nine months ended September 30, 2020).

~~Innovative Pumping Solutions segment.~~ As a percentage of sales, the nine months ended September 30, 2020 gross profit percentage for the IPS segment increased approximately 12 basis points from the prior year's corresponding period. Operating income for the IPS segment decreased $12.8 million or 44.4%, primarily as a result of of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S. crude oil production due to low crude prices and the economic impacts of COVID-19.

~~Service Centers segment.~~ As a percentage of sales, the nine months ended September 30, 2020 gross profit percentage for the Service Centers decreased approximately 45 basis points from the prior year's corresponding period. This was primarily the result of decreased sales of metal working, safety services and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic. Operating income for the Service Centers segment decreased $14.5 million, or 21.6%. The decrease in operating income is primarily the result of a decline in sales.

~~Supply Chain Services segment.~~ Gross profit as a percentage of sales increased approximately 171 basis points, compared to the prior year's corresponding period. This was primarily as a result of costs associated with new customer site implementations which are incurred prior to sales in the comparable 2019 period. Operating income for the nine months ended September 30, 2020 decreased $1.0 million2021 compared to the prior year's corresponding period ~~mainly due to the lower above mentioned sales partially offset by a decrease in SG&A expense of $4.7 million primarily related to payroll and incentive compensation.~~

~~SELLING, GENERAL AND ADMINISTRATIVE ("SG&A").~~ ~~Selling, general and administrative expense for the nine months ended September 30, 2020 decreased by approximately $19.8 million, or 9.4 percent, to $189.8 million from $209.5~~

million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $3.7 million. Excluding expenses from businesses acquired, SG&A for the nine months ended September 30, 2020 decreased by $23.5 million, or 11.2 percent. The overall decrease in SG&A is the result of decreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of ~~decreased business activity and cost reduction actions associated with COVID-19 and depressed demand~~the Company entering into a new term loan in ~~oil and gas markets.~~

~~IMPAIRMENT AND OTHER CHARGES.~~ ~~Due to circumstances discussed above, in the third quarter of~~December 2020 ~~we evaluated our goodwill, certain long-lived assets and other assets for impairment. Based on the results, we recorded the following impairment charges:~~

~~Service Centers segment.~~ In the third quarter 2020, we recorded $1.8 million of noncash impairment charges related primarily to certain long-lived assets that were not recoverable and $20.5 million of noncash impairment charges related to goodwill related to our operations based in Canada.

~~Innovative Pumping Solutions segment.~~ In the third of quarter 2020, we recorded $10.2 million of noncash impairment charges related to certain inactive assets and inventory and a $16.0 million noncash impairment charge related to goodwill.

~~For additional information on our impairment charges, see~~ ~~Note~~ 4 ~~- Impairments and Other Charges~~ ~~of the Notes to Consolidated Financial Statements in this Quarterly Report.~~

~~OPERATING INCOME.~~ ~~Operating income for the nine months ended September 30, 2020 decreased~~partially offset by $82.6 million, or 139.0%, to a loss of $23.2 million, from $59.4 million in the prior year's corresponding period. This decrease in operating income is primarily related to the decrease in sales discussed above and the impact of impairment and other charges.

~~INTEREST EXPENSE.~~ ~~Interest expense for the nine months ended September 30, 2020 decreased $2.9 million compared with the prior year's corresponding period due to~~ lower LIBOR rates ~~and a reduction in principal balance.~~for the six months ended June 30, 2021.

INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of ~~22.4%~~26.7 percent for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to a tax expense of ~~24.0%~~23.0 percent for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Compared to the U.S. statutory rate for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and ~~nondeductible.~~uncertain tax positions which required an increase in reserves. The effective tax rate ~~decreased primarily due to~~was partially offset by research and development tax credits ~~return to provision adjustments~~ and other tax ~~credits.~~credits..

LIQUIDITY AND CAPITAL RESOURCES

General Overview

As of ~~September~~June 30, ~~2020,~~2021, we had cash and restricted cash ~~equivalents~~ of ~~$97.4~~$79.3 million and credit facility availability of ~~$114.3~~$131.3 million. We have a ~~$135~~$135.0 million asset-based loan facility, partially offset by letters of credit of $3.7 million, that is due to mature in August 2022, under which we had no borrowings outstanding as of ~~September~~June 30, ~~2020~~2021 and a Term Loan B with ~~$217.5~~$328.4 million in borrowings.

Our primary source of capital is cash flow from operations, supplemented as necessary by bank borrowings or other sources of financing. As a distributor of MRO products and services and fabricator of custom pumps and packages, working capital can fluctuate as a result of changes in inventory levels, accounts receivable and costs in excess of billings for project work. 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 generated by or used in operating activities, net cash provided by or used in investing activities and net cash used in financing activities for the periods presented (in thousands):


		Nine Months Ended September 30,					Six Months Ended June 30,
		2020		2019			2021		2020
Net Cash Provided by (Used in):	Net Cash Provided by (Used in):					Net Cash Provided by (Used in):
Operating Activities	Operating Activities	$	92,240	$	7,485	Operating Activities	$	16,206	$	61,764
Investing Activities	Investing Activities	(20,525)		(14,212)		Investing Activities	(44,664)		(19,163)
Financing Activities	Financing Activities	(27,942)		(5,444)		Financing Activities	(12,004)		(17,133)
Effect of Foreign Currency	Effect of Foreign Currency	(721)		213		Effect of Foreign Currency	303		(1,025)
Net Change in Cash	Net Change in Cash	$	43,052	$	(11,958)	Net Change in Cash	$	(40,159)	$	24,443

Operating Activities

The Company ~~provided $92.2~~generated $16.2 million of cash in operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$7.5~~$61.8 million of cash generated during the prior year's corresponding period. The ~~$84.8~~$45.6 million ~~increase~~decrease in the amount of cash provided between the two periods was primarily driven by the ~~collections of~~increase in accounts receivables associated with trade accounts receivables from recent acquisitions without comparable activity in 2020 and ~~decreased inventory purchases.~~increased business activity in 2021.

Investing Activities

For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, net cash used in investing activities was ~~$20.5~~$44.7 million compared to ~~$14.2~~$19.2 million inuse of cash during the prior year’s corresponding ~~period in September 30, 2019.~~period. This ~~$6.3~~$25.5 million increase was primarily driven by the purchase of ~~PSI and Turbo~~CVI in the ~~first~~second quarter of ~~2020.~~2021. For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, purchases of property and equipment decreased to approximately ~~$6.5~~$1.5 million compared to ~~$14.2~~$5.1 million in ~~2019~~2020 primarily due to ~~leasehold improvements and software upgrades~~reduced capital spending as a result of company-wide cost cutting measures in ~~2019 with no comparable activity in 2020.~~response to the COVID-19 pandemic. The current year also benefited from the sale of a corporate asset totaling $1.3 million.

Financing Activities

For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, net cash used in financing activities was ~~$27.9~~$12.0 million, compared to net cash used in financing activities of ~~$5.4~~$17.1 million ~~for~~during the prior year’s corresponding ~~period in September 30, 2019.~~period. The activity in the period was primarily attributed to Term Loan B required principal payments of $1.7 million in 2021 compared to $16.3 million in required principal and optional prepayments in 2020. This was partially offset by share purchases in 2021 of ~~$26.9~~$8.8 million ~~in 2020 compared to $1.9 million in 2019 and $1.1 million associated~~ with ~~common stock sold in public markets~~no comparable activity in 2020.

On May ~~11, 2020,~~12, 2021, the Company ~~entered into an Equity Distribution Agreement~~announced that its Board of Directors authorized a share repurchase program (the ~~“Equity Distribution Agreement”~~“program”) ~~with BMO Capital Markets Corp. (the “Distribution Agent”) pursuant~~under which up to ~~which the Company may offer and sell~~$85.0 million or 1.5 million shares of ~~the Company’s~~its outstanding common stock ~~par value $0.01 per share, having an aggregate offering price~~may be acquired in the open market over the next 24 months at the discretion of up to $37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company’s common stock pursuant to the Equity Distribution Agreement will be made in “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended.management. During the ~~nine~~six months ended ~~September~~June 30, ~~2020, the Company issued~~2021 we purchased 1.0 million shares for $29.2 million. Such consideration was funded with existing cash balances and ~~sold 46,000 shares~~an agreement to pay sellers over four equal installments beginning on June 15, 2021. The remaining three installments of ~~common stock under the Equity Distribution Agreement, with net proceeds totaling approximately $1.1~~$20.4 million ~~after deducting the Distribution Agent’s commission~~were included in other current liabilities as of ~~approximately $26 thousand.~~

On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $135 million asset-backed revolving line of credit (the "ABL Revolver"), a $50 million increase from the $85.0 million available under the original revolver. During the nine months ended SeptemberJune 30, 2020, the amount available to be borrowed under our credit facility increased to $114.3 million compared to $81.6 million at December 31, 2019, primarily as a result of the above mentioned Increase Agreement offset by outstanding letters of credit. 2021.

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.~~the Company.

~~We believe our~~The Company believes cash generated from operations will meet ~~our~~ normal working capital needs during the next twelve months. However, wethe Company 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, wethe Company may issue securities that ~~substantially~~ dilute the interests of our shareholders.

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~~10-K/A for the year ended December 31, ~~2019.~~2020. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form ~~10-K~~10-K/A filed with the Securities and Exchange Commission on ~~March 13, 2020.~~October 22, 2021. The results of operations for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 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.

For quantitative and qualitative disclosures about market risk, see Item 7A, 'Quantitative and Qualitative Disclosures About Market Risk,' of our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019.~~2020. Our exposures to market risk have not changed materially since December 31, ~~2019.~~2020.

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ITEM 4: CONTROLS AND PROCEDURES.

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 ~~September~~June 30, ~~2020,~~2021, our management, 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 ~~have~~ concluded that our disclosure controls and procedures were ineffective, as of June 30, 2021 due to previously identified material weakness in our internal controls as we did not have adequate internal controls that ensure timely clearing of aged accounts payables arising from three-way match exceptions for items ordered through purchase orders. In connection with the correction associated with aged accounts payable, management identified a material weakness in the design of the Company’s controls around journal entries, specifically requiring review and approval by senior management with the requisite experience, authority and competence to determine the proper conclusion. In addition, management identified a material weakness around business combination accounting, specifically as it relates to the identification of all agreements and their impact on the transaction and future consideration and disclosure. As a result of these material weaknesses, management evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2021 and has concluded that our disclosure controls and procedures were not effective as of ~~September 30, 2020.~~that date because of such material weaknesses.

Remediation Plan and Status for Material Weakness

In response to the identified material weakness, our management, with the oversight of the Audit Committee of our Board of Directors, has dedicated significant resources, including the involvement of outside advisors, and efforts to improve our internal control over financial reporting and has taken immediate action to remediate the material weaknesses identified. Certain remedial actions have been completed including ongoing involvement of outside advisors, reassessment of application controls within our accounts payable procure-to-pay platform and training programs around the issuance of purchase orders. The Company will further enhance these controls over the remainder of 2021.

Changes in Internal Control over Financial Reporting

~~There are~~Other than those discussed above, there were no changes in ~~our~~the Company’s internal control over financial reporting ~~that occurred~~ during the ~~nine months ended September 30, 2020~~second quarter of 2021 that have materially affected, or are reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

Inherent Limitations of 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.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1A. RISK FACTORS.

~~Security breaches and other disruptions or misuse of our network and information systems could affect our ability to conduct our business effectively.~~

Despite our security measures and those of our third-party service providers, our systems may be vulnerable to interruption or damage from computer hacks, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or any combination of the foregoing. Our computer systemsThere have been ~~and will likely continue~~no material changes to be, subject to attack. For example, in August 2020, the Company’s computer network was the target of a cyber-attack that we believe was orchestrated by a foreign actor. The systems housing confidential vendor, customer and employee data were not breached in this attack. The costs incurred to remedy the breach were not material to the results of the Company, and the increased cost of future mitigating measures are not expected to be material to our results. While we have implemented controls and taken other preventative actions to further strengthen our systems against future attacks, these controls and preventative actions may not be effective against future attacks. Any breach of network; information systems, our data security could result in a disruption of our services or improper disclosure of personal data or confidential information, which could harm our reputation, require us to expend resources to remedy such a security breach or defend against further attacks or subject us to liability under laws that protect personal data, resulting in increased operating costs or loss of revenue.

~~The~~COVID-19 pandemic has and could continue to result in disruptions in supply chain, decreased customer demand, lower oil price and volatility in the stock market and the global economy, which could negatively impact our business, financial position, and results of operations.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. During the first few months on 2020, COVID-19 has spread globally, resulting in certain supply chain disruptions, volatility in the stock market, lower oil prices, and a lockdown in international travel, all of which has and could continue to adversely impact the global economy and has and could potentially continue to decrease demand from our customers. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity and increased economic and market uncertainty. Further, a COVID-19 outbreak at one of our vendors’ or customers’ facilities could adversely impact or disrupt our operations. The pandemic has impacted our customers spending and these types of events could negatively impact our customers’ spending in the impacted regions or, depending upon the severity, globally, which could adversely impact our business, reputation, results of operations or financial conditions. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors ~~identified~~as previously disclosed in “Part I. Item 1A. Risk Factors” in our annual report on Form ~~10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways.~~

~~Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not know~~10-K/A for the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any actions taken by governmental authorities and other third parties in response to the pandemic. While we do not know the full extent of the impact on our business, our operations or the global economy as a whole, the effects could have a material adverse effect on our business, financial condition, and results of operations. Moreover, many risk factors set forth in the Form 10-K should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

~~We could be adversely impacted by the unexpected loss of the services of our executive management team and other key employees.~~

Our success depends in large part on the performance of our executive management team and other key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for qualified employees is intense and the process of locating qualified key personnel may be lengthy and

expensive. If any of our executive management team contract COVID-19, we may lose their services for an extended period of time, which would likely have a negative impact on our business and operations. If we experience widespread cases of COVID-19 among our employees, it would place more pressure on the remaining employees to perform all functions across the organization while maintaining their health, may require us to take remediation measures, and could impair our ability to conduct business. We may not be successful in retaining our key employees or finding adequate replacements for lost personnel.

~~We could be adversely impacted by sustained low oil prices, volatility in oil prices and downturns in the energy industry.~~

Sustained low oil prices or the failure of oil prices to rise in the future and the resulting downturns or lack of growth in the energy industry and energy related business could adversely impact our results of operations and financial condition. The unprecedented sharp decline in crude oil prices since February 2020 has negatively impacted the oil and gas industry and is expected to cause further worsening conditions of energy companies, oilfield services companies, and related businesses. A significant portion of our revenue depends upon the level of capital and operating expenditures in the oil and natural gas industry, including capital expenditures in connection with the upstream, midstream, and downstream phases in the energy industry. Therefore, sustained low oil and natural gas prices or a continued decline of such prices could lead to a decrease in our customers’ capital and other expenditures and could adversely affect our revenues. Oil and gas pricing and the resultant economic conditions may not recover meaningfully in the near term.

year end December 31, 2020.

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

~~Repurchases~~Issuer Purchases of ~~Common Stock~~Equity Securities

A summary of our purchases of DXP Enterprises, Inc. common stock during the ~~third~~second quarter of fiscal year ~~2020~~2021 is as

follows:

Total Number of Shares Purchased (1) Average Price Paid per Share Total number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Jul 1 - Jul 31 604 $ 19.14 — $ —
Aug 1 - Aug 31 598 $ 19.15 — $ —
Sep 1 - Sep 30 — $ — — $ —
Total 1,202 $ 19.14 — $ —
(1) We withheld 1,202 shares to satisfy tax withholding obligation in connection with the vesting of employee equity awards.


		Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (2)
	Apr 1 - Apr 30	330	$	30.20	—	$	—
	May 1 - May 31	1,690	32.23		—	85,000
	Jun 1 - Jun 30	1,014,149	28.77		1,014,053	55,826
	Total	1,016,169	$	28.78	1,014,053	$	55,826

(1)	There were $1.0 million shares repurchased as part of our publicly announced share repurchase program and there were 2,116 shares transferred from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock during three months ended June 30, 2021.
(2)	On May 12, 2021, the Company announced the Share Repurchase Program pursuant to which we may repurchase up to $85.0 million or 1.5 million shares of the Company outstanding common stock over the next 24 months. As of June 30, 2021, $55.8 million remained available under the $85.0 million Share Repurchase Program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

None.

3026

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 on Form S-8, filed with the Commission on August 20, 1998. File No. :333-61953).


3.2			Bylaws ~~as amended on July 27, 2011~~of DXP Enterprises, Inc. (incorporated by reference to Exhibit ~~3.1~~3.2 to the ~~Company's~~Company’s Quarterly Report on Form 10-Q, filed with the ~~Commission~~SEC on May 10, ~~2018.~~2018 (File No. 000-21513)., as amended on July 27, 2011.


3.3			Amendment to Section 3.4 of the Bylaws of DXP Enterprises, Inc., effective January 1, 2022. Bylaws, as amended on April 23, 201 (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 000-21513 : 21860170 , filed with the Commission on April 27, 2021).
* 10.1			Form of Indemnification Agreement between DXP Enterprises, Inc. and each of its directors.
* 22.1			Subsidiary Guarantors of Guaranteed Securities
* 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			The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2020,~~March 31, 2021, formatted in Inline eXtensible Business Reporting Language (iXBRL), (i) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) Unaudited Condensed Consolidated Balance Sheets, (iii) Unaudited Condensed Consolidated Statements of Cash Flows, (iv) Unaudited Condensed Consolidated Statements of Equity, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
*104			The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2020~~March 31, 2021 formatted in Inline XBRL.

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

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SIGNATURES

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

DXP ENTERPRISES, INC.

(Registrant)

By: /s/ Kent Yee

Kent Yee

Senior Vice President and Chief Financial Officer

(Duly Authorized Signatory and Principal Financial Officer)

Dated: November ~~9, 2020~~5, 2021

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	Nine Months Ended September 30,		Nine Months Ended September 30,
Lease	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	13,714	$	13,941
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	4,986		8,889


Lease	Classification	September 30, 2020		September 30, 2019
Assets
Operating	Operating lease right-of-use assets	$	58,657	$	67,296

Liabilities
Current operating	Short-term operating lease liabilities	16,605		17,711
Non-current operating	Long-term operating lease liabilities	41,324		49,602
Total operating lease liabilities		$	57,929	$	67,313