UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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[ | ☒ | ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2021March 31, 2022 |
or
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[ | ☐ | ] | 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)
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Texas | | 76-0509661 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
5301 Hollister, Houston, Texas 77040
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(Address of principal executive offices, including zip code) |
(713) 996-4700
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(Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Exchange Act:
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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 November 1, 2021: 18,750,597April 30, 2022: 18,642,621 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 September 30, 2020.
In addition, the Company's consolidated financial statements for the periods covered in the quarter and nine-months ended September 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
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 September 30, | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| | 2021 | | 2020 | 2021 | | 2020 | | 2022 | | 2021 | |
| | | | (Restated) | | | (Restated) | | | | | |
Sales | Sales | $ | 289,494 | | | $ | 220,193 | | $ | 820,772 | | | $ | 772,577 | | Sales | $ | 319,411 | | | $ | 245,587 | | |
Cost of sales | Cost of sales | 202,551 | | | 158,892 | | 576,921 | | | 558,081 | | Cost of sales | 224,527 | | | 173,957 | | |
Gross profit | Gross profit | 86,943 | | | 61,301 | | 243,851 | | | 214,496 | | Gross profit | 94,884 | | | 71,630 | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 75,758 | | | 53,746 | | 211,587 | | | 188,484 | | Selling, general and administrative expenses | 73,325 | | | 65,397 | | |
Impairment and other charges | — | | | 48,401 | | — | | | 48,401 | | |
Income from operations | Income from operations | 11,185 | | | (40,846) | | 32,264 | | | (22,389) | | Income from operations | 21,559 | | | 6,233 | | |
Other (income) expense | Other (income) expense | (450) | | | 320 | | (985) | | | (381) | | Other (income) expense | 536 | | | (430) | | |
Interest expense | Interest expense | 5,264 | | | 3,752 | | 15,844 | | | 12,059 | | Interest expense | 5,162 | | | 5,243 | | |
Income (loss) before income taxes | 6,371 | | | (44,918) | | 17,405 | | | (34,067) | | |
Provision for income taxes (benefit) | (565) | | | (10,143) | | 2,380 | | | (7,647) | | |
Net income (loss) | 6,936 | | | (34,775) | | 15,025 | | | (26,420) | | |
Income before income taxes | | Income before income taxes | 15,861 | | | 1,420 | | |
Provision for income taxes | | Provision for income taxes | 3,332 | | | 1,261 | | |
Net income | | Net income | 12,529 | | | 159 | | |
Net loss attributable to noncontrolling interest | Net loss attributable to noncontrolling interest | (189) | | | (109) | | (590) | | | (233) | | Net loss attributable to noncontrolling interest | (113) | | | (212) | | |
Net income (loss) attributable to DXP Enterprises, Inc. | 7,125 | | | (34,666) | | 15,615 | | | (26,187) | | |
Net income attributable to DXP Enterprises, Inc. | | Net income attributable to DXP Enterprises, Inc. | 12,642 | | | 371 | | |
Preferred stock dividend | Preferred stock dividend | 23 | | | 23 | | 68 | | | 68 | | Preferred stock dividend | 23 | | | 23 | | |
Net income (loss) attributable to common shareholders | $ | 7,102 | | | $ | (34,689) | | $ | 15,547 | | | $ | (26,255) | | |
Net income attributable to common shareholders | | Net income attributable to common shareholders | $ | 12,619 | | | $ | 348 | | |
| Net income (loss) | $ | 6,936 | | | $ | (34,775) | | $ | 15,025 | | | $ | (26,420) | | |
Net income | | Net income | $ | 12,529 | | | $ | 159 | | |
Currency translation adjustments | Currency translation adjustments | (2,129) | | | (452) | | 475 | | | (220) | | Currency translation adjustments | 1,669 | | | 1,491 | | |
Comprehensive income (loss) | $ | 4,807 | | | $ | (35,227) | | $ | 15,500 | | | $ | (26,640) | | |
Comprehensive income | | Comprehensive income | $ | 14,198 | | | $ | 1,650 | | |
| | | |
| | | | |
Basic | Basic | $ | 0.38 | | | $ | (1.95) | | $ | 0.82 | | | $ | (1.47) | | Basic | $ | 0.68 | | | $ | 0.02 | | |
Diluted | Diluted | $ | 0.36 | | | $ | (1.95) | | $ | 0.78 | | | $ | (1.47) | | Diluted | $ | 0.65 | | | $ | 0.02 | | |
Weighted average common shares outstanding : | Weighted average common shares outstanding : | | Weighted average common shares outstanding : | | |
Basic | Basic | 18,710 | | | 17,790 | | 19,060 | | | 17,743 | | Basic | 18,534 | | | 19,186 | | |
Diluted | Diluted | 19,550 | | | 17,790 | | 19,900 | | | 17,743 | | Diluted | 19,374 | | | 20,026 | | |
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, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | (Restated) | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
Cash | Cash | $ | 63,043 | | | $ | 119,328 | | Cash | $ | 36,559 | | | $ | 48,989 | |
Restricted cash | Restricted cash | 91 | | | 91 | | Restricted cash | 91 | | | 91 | |
Accounts Receivable, net of allowance of $8,201 and $8,628 | 205,817 | | | 166,941 | | |
Accounts Receivable, net of allowance of $7,176 and $7,759 | | Accounts Receivable, net of allowance of $7,176 and $7,759 | 228,213 | | | 218,137 | |
Inventories | Inventories | 106,376 | | | 97,071 | | Inventories | 111,862 | | | 100,894 | |
Costs and estimated profits in excess of billings | Costs and estimated profits in excess of billings | 17,714 | | | 18,459 | | Costs and estimated profits in excess of billings | 20,504 | | | 17,193 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 6,444 | | | 4,548 | | Prepaid expenses and other current assets | 14,317 | | | 9,522 | |
Federal income taxes receivable | Federal income taxes receivable | 10,906 | | | 2,987 | | Federal income taxes receivable | 1,019 | | | 9,748 | |
Total current assets | Total current assets | 410,391 | | | 409,425 | | Total current assets | 412,565 | | | 404,574 | |
Property and equipment, net | Property and equipment, net | 51,756 | | | 56,899 | | Property and equipment, net | 50,269 | | | 51,880 | |
Goodwill | Goodwill | 308,880 | | | 261,767 | | Goodwill | 301,563 | | | 296,541 | |
Other intangible assets, net | Other intangible assets, net | 83,589 | | | 80,088 | | Other intangible assets, net | 77,005 | | | 79,205 | |
Operating lease ROU assets | Operating lease ROU assets | 53,233 | | | 55,188 | | Operating lease ROU assets | 56,267 | | | 57,221 | |
Other long-term assets | Other long-term assets | 5,108 | | | 4,764 | | Other long-term assets | 4,646 | | | 4,806 | |
Total assets | Total assets | $ | 912,957 | | | $ | 868,131 | | Total assets | $ | 902,315 | | | $ | 894,227 | |
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 | $ | 3,300 | | | $ | 3,300 | | Current maturities of long-term debt | $ | 3,300 | | | $ | 3,300 | |
Trade accounts payable | Trade accounts payable | 91,385 | | | 64,849 | | Trade accounts payable | 81,450 | | | 77,842 | |
Accrued wages and benefits | Accrued wages and benefits | 26,597 | | | 20,621 | | Accrued wages and benefits | 23,515 | | | 23,006 | |
Customer advances | Customer advances | 7,652 | | | 3,688 | | Customer advances | 13,498 | | | 12,924 | |
Billings in excess of costs and estimated profits | Billings in excess of costs and estimated profits | 891 | | | 4,061 | | Billings in excess of costs and estimated profits | 5,328 | | | 3,581 | |
Federal income taxes payable | | Federal income taxes payable | 104 | | | — | |
Short-term operating lease liabilities | Short-term operating lease liabilities | 18,213 | | | 15,891 | | Short-term operating lease liabilities | 18,093 | | | 18,203 | |
Other current liabilities | Other current liabilities | 40,583 | | | 34,729 | | Other current liabilities | 32,692 | | | 42,206 | |
Total current liabilities | Total current liabilities | 188,621 | | | 147,139 | | Total current liabilities | 177,980 | | | 181,062 | |
Long-term debt, net of unamortized debt issuance costs | Long-term debt, net of unamortized debt issuance costs | 315,920 | | | 317,139 | | Long-term debt, net of unamortized debt issuance costs | 315,030 | | | 315,397 | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 35,478 | | | 38,010 | | Long-term operating lease liabilities | 39,045 | | | 39,922 | |
Other long-term liabilities | Other long-term liabilities | 3,097 | | | 2,930 | | Other long-term liabilities | 2,206 | | | 3,603 | |
Deferred income taxes | Deferred income taxes | 8,501 | | | 1,777 | | Deferred income taxes | 7,927 | | | 7,516 | |
Total long-term liabilities | Total long-term liabilities | 362,996 | | | 359,856 | | Total long-term liabilities | 364,208 | | | 366,438 | |
Total liabilities | Total liabilities | 551,617 | | | 506,995 | | Total liabilities | 542,188 | | | 547,500 | |
Commitments and contingencies (Note 10) | 0 | | 0 | |
Commitments and contingencies (Note 11) | | Commitments and contingencies (Note 11) | 0 | | 0 |
Shareholders' equity: | 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; 18,750,597 and 19,208,067 outstanding | 195 | | | 189 | | |
Common stock, $0.01 par value, 100,000,000 shares authorized; 18,633,271 and 18,580,364 outstanding | | Common stock, $0.01 par value, 100,000,000 shares authorized; 18,633,271 and 18,580,364 outstanding | 195 | | | 195 | |
Additional paid-in capital | Additional paid-in capital | 206,007 | | | 192,068 | | Additional paid-in capital | 207,510 | | | 206,772 | |
Retained earnings | Retained earnings | 201,626 | | | 186,078 | | Retained earnings | 215,103 | | | 202,484 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (17,538) | | | (18,013) | | Accumulated other comprehensive loss | (27,613) | | | (29,282) | |
Treasury stock, at cost 1,014,053 shares at September 30, 2021 | (29,174) | | | — | | |
Treasury stock, at cost 1,243,535 shares at March 31, 2022 | | Treasury stock, at cost 1,243,535 shares at March 31, 2022 | (35,024) | | | (33,511) | |
Total DXP Enterprises, Inc. equity | Total DXP Enterprises, Inc. equity | 361,132 | | | 360,338 | | Total DXP Enterprises, Inc. equity | 360,187 | | | 346,674 | |
Noncontrolling interest | Noncontrolling interest | 208 | | | 798 | | Noncontrolling interest | (60) | | | 53 | |
Total equity | Total equity | 361,340 | | | 361,136 | | Total equity | 360,127 | | | 346,727 | |
Total liabilities and equity | Total liabilities and equity | $ | 912,957 | | | $ | 868,131 | | Total liabilities and equity | $ | 902,315 | | | $ | 894,227 | |
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)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | 12,529 | | | 159 | |
Reconciliation of net income to net cash provided (used in) by operating activities: | | | |
Depreciation | 2,517 | | | 2,480 | |
Amortization of intangible assets | 4,235 | | | 4,146 | |
Gain on sale of property and equipment | — | | | (246) | |
Provision for credit losses | (147) | | | (682) | |
Fair value adjustment on contingent consideration | 531 | | | — | |
Amortization of debt issuance costs | 458 | | | 427 | |
Restricted stock compensation expense | 370 | | | 380 | |
Deferred income taxes | 411 | | | 580 | |
Net change in operating assets and liabilities | (18,224) | | | 1,333 | |
Net cash provided by operating activities | $ | 2,680 | | | $ | 8,577 | |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchase of property and equipment | (740) | | | (680) | |
Proceeds from the sale of property and equipment | — | | | 1,297 | |
Acquisition of business, net of cash acquired | (5,316) | | | — | |
Net cash (used in) provided by investing activities | $ | (6,056) | | | $ | 617 | |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Principal debt payments | (825) | | | (825) | |
Preferred Stock dividends paid | (23) | | | (23) | |
Purchase of treasury stock | (8,315) | | | — | |
Payment for employee taxes withheld from stock awards | (159) | | | (517) | |
Net cash used in financing activities | $ | (9,322) | | | $ | (1,365) | |
Effect of foreign currency on cash | 268 | | | 204 | |
Net change in cash and restricted cash | (12,430) | | | 8,033 | |
Cash and restricted cash at beginning of period | 49,080 | | | 119,419 | |
Cash and restricted cash at end of period | $ | 36,650 | | | $ | 127,452 | |
| | | |
Supplemental schedule of non-cash investing and financing activities: | | | |
| $ | 527 | | | $ | — | |
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, |
| 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | (Restated) |
Net income attributable to DXP Enterprises, Inc. | $ | 15,615 | | | $ | (26,187) | |
Less: net loss attributable to non-controlling interest | (590) | | | (233) | |
Net income | 15,025 | | | (26,420) | |
Reconciliation of net income to net cash provided (used in) by operating activities: | | | |
Depreciation | 7,380 | | | 7,998 | |
Amortization of intangible assets | 12,690 | | | 9,296 | |
Gain on sale of property and equipment | (246) | | | — | |
Provision for credit losses | (361) | | | 788 | |
Impairment and other charges | — | | | 48,401 | |
Payment of contingent consideration liability in excess of acquisition-date fair value | (145) | | | (136) | |
Fair value adjustment on contingent consideration | — | | | 13 | |
Amortization of debt issuance costs | 1,256 | | | 1,406 | |
Stock compensation expense | 1,354 | | | 2,870 | |
Deferred income taxes | 6,711 | | | (6,464) | |
Net change in operating assets and liabilities | (20,833) | | | 54,488 | |
Net cash provided by operating activities | $ | 22,831 | | | $ | 92,240 | |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchase of property and equipment | (2,984) | | | (6,530) | |
Proceeds from the sale of property and equipment | 1,297 | | | 123 | |
Acquisition of business, net of cash acquired | (64,610) | | | (14,118) | |
Net cash used in investing activities | $ | (66,297) | | | $ | (20,525) | |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Principal debt payments | (2,475) | | | (26,875) | |
Issuance of Common Stock- shares sold in public market | — | | | 1,142 | |
Payment for contingent consideration liability | (955) | | | (1,864) | |
Dividends paid | (68) | | | (68) | |
Debt issuance costs | — | | | (138) | |
Purchase of treasury stock | (8,769) | | | — | |
Payment for employee taxes withheld from stock awards | (637) | | | (139) | |
Net cash used in financing activities | $ | (12,904) | | | $ | (27,942) | |
Effect of foreign currency on cash | 85 | | | (721) | |
Net change in cash and restricted cash | (56,285) | | | 43,052 | |
Cash and restricted cash at beginning of period | 119,419 | | | 54,326 | |
Cash and restricted cash at end of period | $ | 63,134 | | | $ | 97,378 | |
| | | |
Supplemental schedule of non-cash investing and financing activities: | | | |
| $ | 11,140 | | | $ | — | |
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 June 30, 2020 (Restated) | $ | 1 | | | $ | 15 | | | $ | 175 | | | $ | 163,094 | | | $ | 223,871 | | | $ | — | | | $ | 1,022 | | | $ | (19,722) | | | $ | 368,456 | |
Preferred dividends paid | — | | | — | | | — | | | — | | | (23) | | | — | | | — | | | — | | | (23) | |
Compensation expense for restricted stock | — | | | — | | | — | | | 983 | | | — | | | — | | | — | | | — | | | 983 | |
Tax related items for share based awards | — | | | — | | | — | | | (23) | | | — | | | — | | | — | | | — | | | (23) | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (452) | | | (452) | |
Net income (As restated) | — | | | — | | | — | | | — | | | (34,666) | | | — | | | (109) | | | — | | | (34,775) | |
Balance at September 30, 2020 (Restated) | $ | 1 | | | $ | 15 | | | $ | 175 | | | $ | 164,054 | | | $ | 189,182 | | | $ | — | | | $ | 913 | | | $ | (20,174) | | | $ | 334,166 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2019 (Restated) | $ | 1 | | | $ | 15 | | | $ | 174 | | | $ | 157,886 | | | $ | 215,664 | | | $ | — | | | $ | 1,146 | | | $ | (19,954) | | | $ | 354,932 | |
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 | — | | | — | | | 1 | | | 1,999 | | | — | | | — | | | — | | | — | | | 2,000 | |
Issuance of common stock sold in public markets, net of commissions and fees | — | | | — | | | — | | | 1,142 | | | — | | | — | | | — | | | — | | | 1,142 | |
Currency translation adjustment | — | | | — | | | — | | | 296 | | | (227) | | | — | | | | | (220) | | | (151) | |
Net income (As restated) | — | | | — | | | — | | | — | | | (26,187) | | | — | | | (233) | | | — | | | (26,420) | |
Balance at September 30, 2020 (Restated) | $ | 1 | | | $ | 15 | | | $ | 175 | | | $ | 164,054 | | | $ | 189,182 | | | $ | — | | | $ | 913 | | | $ | (20,174) | | | $ | 334,166 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | $ | 1 | | | $ | 15 | | | $ | 189 | | | $ | 192,068 | | | $ | 186,078 | | | $ | — | | | $ | 798 | | | $ | (30,029) | | | $ | 349,120 | |
Preferred dividends paid | — | | | — | | | — | | | — | | | (23) | | | — | | | — | | | — | | | (23) | |
Restricted stock compensation expense | — | | | — | | | — | | | 380 | | | — | | | — | | | — | | | — | | | 380 | |
Tax related items for share based awards | — | | | — | | | — | | | (517) | | | — | | | — | | | — | | | — | | | (517) | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,491 | | | 1,491 | |
Net income | — | | | — | | | — | | | — | | | 371 | | | — | | | (212) | | | — | | | 159 | |
Balance at March 31, 2021 | $ | 1 | | | $ | 15 | | | $ | 189 | | | $ | 191,931 | | | $ | 186,426 | | | $ | — | | | $ | 586 | | | $ | (28,538) | | | $ | 350,610 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2021 | $ | 1 | | | $ | 15 | | | $ | 194 | | | $ | 203,562 | | | $ | 194,523 | | | $ | (29,174) | | | $ | 397 | | | $ | (15,409) | | | | $ | 354,109 | |
Preferred dividends paid | — | | | — | | | — | | | — | | | (22) | | | — | | | — | | | — | | | | (22) | |
Compensation expense for restricted stock | — | | | — | | | — | | | 458 | | | — | | | — | | | — | | | — | | | | 458 | |
Stock compensation expense | — | | | — | | | — | | | 56 | | | — | | | — | | | — | | | — | | | | 56 | |
Tax related items for share based awards | — | | | — | | | — | | | (51) | | | — | | | — | | | — | | | — | | | | (51) | |
Issuance of shares of common stock | — | | | — | | | 1 | | | 1,982 | | | — | | | — | | | — | | | — | | | | 1,983 | |
Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,129) | | | | (2,129) | |
Net income | — | | | — | | | — | | | — | | | 7,125 | | | — | | | (189) | | | — | | | | 6,936 | |
Balance at September 30, 2021 | $ | 1 | | | $ | 15 | | | $ | 195 | | | $ | 206,007 | | | $ | 201,626 | | | $ | (29,174) | | | $ | 208 | | | $ | (17,538) | | | | $ | 361,340 | |
| | | 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 | | 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 | | |
Balance at December 31, 2021 | | Balance at December 31, 2021 | $ | 1 | | | $ | 15 | | | $ | 195 | | | $ | 206,772 | | | $ | 202,484 | | | $ | (33,511) | | | $ | 53 | | | $ | (29,282) | | | $ | 346,727 | |
Preferred dividends paid | Preferred dividends paid | — | | | — | | | — | | | — | | | (67) | | | — | | | — | | | — | | | (67) | | Preferred dividends paid | — | | | — | | | — | | | — | | | (23) | | | — | | | — | | | — | | | (23) | |
Compensation expense for restricted stock | — | | | — | | | — | | | 1,298 | | | — | | | — | | | — | | | — | | | 1,298 | | |
Stock compensation expense | — | | | — | | | — | | | 56 | | | — | | | — | | | — | | | — | | | 56 | | |
Restricted stock compensation expense | | Restricted stock compensation expense | — | | | — | | | — | | | 370 | | | — | | | — | | | — | | | — | | | 370 | |
Tax related items for share based awards | Tax related items for share based awards | — | | | — | | | — | | | (637) | | | — | | | — | | | — | | | — | | | (637) | | Tax related items for share based awards | — | | | — | | | — | | | (159) | | | — | | | — | | | — | | | — | | | (159) | |
Issuance of shares of common stock | Issuance of shares of common stock | — | | | — | | | 6 | | | 13,222 | | | — | | | — | | | — | | | — | | | 13,228 | | Issuance of shares of common stock | — | | | — | | | — | | | 527 | | | — | | | — | | | — | | | — | | | 527 | |
Currency translation adjustment | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 475 | | | 475 | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,669 | | | 1,669 | |
Purchase of treasury stock | Purchase of treasury stock | — | | | — | | | — | | | — | | | — | | | (29,174) | | | — | | | — | | | (29,174) | | Purchase of treasury stock | — | | | — | | | — | | | — | | | — | | | (1,513) | | | — | | | — | | | (1,513) | |
Net income | Net income | — | | | — | | | — | | | — | | | 15,615 | | | — | | | (590) | | | — | | | 15,025 | | Net income | — | | | — | | | — | | | — | | | 12,642 | | | — | | | (113) | | | — | | | 12,529 | |
Balance at September 30, 2021 | $ | 1 | | | $ | 15 | | | $ | 195 | | | $ | 206,007 | | | $ | 201,626 | | | $ | (29,174) | | | $ | 208 | | | $ | (17,538) | | | | $ | 361,340 | | |
Balance at March 31, 2022 | | Balance at March 31, 2022 | $ | 1 | | | $ | 15 | | | $ | 195 | | | $ | 207,510 | | | $ | 215,103 | | | $ | (35,024) | | | $ | (60) | | | $ | (27,613) | | | | $ | 360,127 | |
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 1112 - 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 unaudited 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/A10-K for the year ended December 31, 2020.2021. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form 10-K/A10-K filed with the Securities and Exchange Commission on October 22, 2021.April 5, 2022. The results of operations for the ninethree months ended September 30, 2021March 31, 2022 are not necessarily indicative of results expected for the full fiscal year. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated statements of operations and comprehensive income for the ninethree months ended September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, condensed consolidated balance sheets as of September 30, 2021March 31, 2022 and December 31, 2020,2021, condensed consolidated statements of cash flows for the ninethree months ended September 30,March 31, 2022 and March 31, 2021, and September 30, 2020, and condensed consolidated statementstatements of equity for the ninethree months ended September 30, 2021March 31, 2022 and September 30, 2020.March 31, 2021. All such adjustments represent normal recurring items.
All inter-company accounts and transactions have been eliminated upon consolidation.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
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 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 evaluatingevaluated the potential impact of this ASU and it does not expect a material impact on the financial statements.Consolidated Financial Statements.
In October 2021, the FASB issued Accounting Standards Update (ASU) 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to address diversity in practice on how an acquirer should recognize and measure revenue contracts acquired in a business combination. ASU 2021-08 will require an acquirer to recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
For the Company, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The ASU should be applied prospectively to business combinations occurring on or after the effective date. Early adoption of ASU 2021-08 is permitted, including in an interim period. The Company expects the new Standard to have an impact for future acquisitions. From time to time the Company does acquire businesses that perform project-based work and therefore include Contract Assets and Liabilities.
All other new accounting pronouncements that have been issued, but not yet effective, are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
NOTE 4 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTSREVISION
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 andDuring the first quarter of 2021.2022, we identified errors in the translation of the goodwill associated with our investment in our Canadian subsidiaries. We determined that we were not appropriately translating Canadian goodwill in consolidation since acquiring these businesses in 2012 and 2013. 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 fromtranslate these balances resulted in an overstatement of US dollar-based goodwill for several years.
We assessed the Company's three-way match process discrepancies,materiality of the recognitionerrors on prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of additional consideration related to a business combination, as well as certain additional errorsFinancial Statements. We concluded that the Company has determinederrors were not material to be immaterial, both individually and in aggregate. Set forth below are the restatement adjustments included in the restatement of the previously issuedour prior period consolidated financial statements forand therefore, amendments of previously filed consolidated financial statements are not required. In accordance with ASC 250, we have corrected the year ended December 31, 2020, anderrors by revising the quarter ended September 30, 2020, each of which is an “error” within the meaning of ASC Topic 250: Accounting Changes and Error Corrections.consolidated financial statements presented herein. Prior periods not presented herein will be revised, as applicable, in future filings.
The following tables presents the impactimpacts of the restatement adjustments described belowrevisions on net income and comprehensive income for the nine months ended September 30, 2020:periods presented herein are provided in the following tables.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| | As previously | | |
| | Reported | Adjustments | Revised |
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME |
Currency translation adjustments | $ | 1,277 | | $ | 214 | | $ | 1,491 | |
Total comprehensive income | $ | 1,436 | | $ | 214 | | $ | 1,650 | |
| | | | | | | | | | | | | | |
| | |
| | As previously | | |
| | Reported | Adjustments | Revised |
BALANCE SHEET (AT DECEMBER 31, 2021): |
Goodwill | $ | 308,506 | | $ | (11,965) | | $ | 296,541 | |
Total Assets | $ | 906,192 | | $ | (11,965) | | $ | 894,227 | |
| | | | |
Cumulative Translation Adjustment | $ | (17,317) | | $ | (11,965) | | $ | (29,282) | |
Equity | | $ | 358,692 | | $ | (11,965) | | $ | 346,727 | |
Total Liabilities & Equity | $ | 906,192 | | $ | (11,965) | | $ | 894,227 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | As Previously | | | | |
| | Reported | | Adjustments | | As Restated |
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS |
Sales | | $ | 772,577 | | | $ | — | | | $ | 772,577 | |
Cost of sales | | 557,595 | | | 486 | | | 558,081 | |
Gross profit | | 214,982 | | | (486) | | | 214,496 | |
Selling, general and administrative costs | | 189,759 | | | (1,275) | | | 188,484 | |
Income before income taxes | | (34,856) | | | 789 | | | (34,067) | |
Provision for income taxes | | (7,809) | | | 162 | | | (7,647) | |
Net income | | $ | (26,814) | | | $ | 627 | | | $ | (26,187) | |
| | | | | | |
Basic earnings per share | | $ | (1.52) | | | 0 | | $ | (1.47) | |
| | | | | | |
Diluted earnings per share | | $ | (1.52) | | | 0 | | $ | (1.47) | |
| | | | | | | | | | | | | | |
| | Accumulated Other Comprehensive Loss |
| | As previously | | |
| | Reported | Adjustments | Revised |
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY |
Balance at December 31, 2020 | $ | (18,013) | | $ | (12,016) | | $ | (30,029) | |
Currency translation adjustment | $ | 1,277 | | $ | 214 | | $ | 1,491 | |
Balance at March 31, 2021 | $ | (16,736) | | $ | (11,802) | | $ | (28,538) | |
| | | |
Balance at December 31, 2021 | $ | (17,317) | | $ | (11,965) | | $ | (29,282) | |
| | | |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | As previously | | |
| | Reported | Adjustments | As Restated |
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME |
Net income | | $ | (26,814) | | $ | 627 | | $ | (26,187) | |
Total comprehensive income | | $ | (27,267) | | $ | 627 | | $ | (26,640) | |
NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
AdjustmentsAuthoritative guidance for financial assets and liabilities measured on a recurring basis applies to Net Salesall financial assets and Related Adjustmentsfinancial 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 Costsell 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 Products Soldan 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 come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
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 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 inputs as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumptions used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured each reporting period and reflected in our results of operations.
Unvouchered Purchase OrdersAs of March 31, 2022, we recorded liabilities in other current and long-term liabilities for contingent consideration associated with the acquisition of PMI, Burlingame and Drydon of $1.4 million, $0.1 million and $2.6 million, respectively. See further discussion at The Company determined it had aged unvouchered purchase orders included in trade accounts payable. After lengthy investigationNote 13 - Business Acquisitions. For the Company's assets and research, DXP determined that theseliabilities 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 were not valid legal obligations to vendorsfor each category therein, and will not be invoicedgains or paid.As a result,losses recognized during the Company wrote off the aged balances that no longer represented legal obligations, resulting in a net reduction in accounts payable.three months ended March 31, 2022:
Landed cost inventory adjustment The Company determined that cost mark-ups for landed costs for certain inventory items related to our private label pumps had not been properly relieved upon the sale of these items. | | | | | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Contingent Liability for Accrued Consideration |
| (in thousands) |
Beginning balance at December 31, 2021 | $ | 905 | |
Acquisitions and settlements | |
| 2,689 | |
Settlements | — | |
Total remeasurement adjustments: | |
Changes in fair value recorded in other (income) expense, net | 531 | |
*Ending Balance at March 31, 2022 | $ | 4,125 | |
| |
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 March 31, 2022. | $ | 531 | |
| |
* Included in other current liabilities | |
Direct shipment cut off adjustment Direct shipment orders placed near period end were not properly reflected in the correct period.The Company adjusted sales and cost of goods sold for items recorded in the incorrect period, as well as accounts receivable and payable.
Other Adjustments to Earnings from Continuing Operations Before Non-Controlling Interest and Income Taxes
Cut-off for credit card payment accruals In January 2020, the Company recorded its monthly payment for its P-Card credit card program, however, the charges were incurred in December 2019. This adjustment reflects the accrual in the correct period, resulting in a shift in other current liabilities between periods.
Sales tax payable accruals The Company increased other current liabilities for its accrual for state sales tax obligations stemming from open audits.
Adjustments to Provision for Income TaxesQuantitative Information about Level 3 Fair Value Measurements
The adjustments reflected forsignificant unobservable inputs used in the provision for income taxes are the tax consequencesfair value measurement of the above listed corrections.Company's contingent consideration liabilities designated as Level 3 are as follows:
| | | | | | | | | | | |
(in thousands, unaudited) | Fair value at March 31, 2022 | Valuation Technique | Significant Unobservable Inputs |
Contingent consideration: (PMI, Burlingame and Drydon acquisitions) | $ | 4,125 | | Discounted cash flow | Annualized EBITDA and probability of achievement |
Balance sheet adjustments relatedSensitivity 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 paidChanges in July 2021; however, the amount of true-up consideration was deemed to have been accrued as of the closing of the acquisitions. Therefore this adjustment resulted in an accrual for the true-up consideration and an increase in goodwill of $13.4 million.Significant Unobservable Inputs
As describedpresented in the table above, the unvouchered purchase order discrepancies resultedsignificant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of PMI, Burlingame and Drydon are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results. The discount rate used in the calculation was 7.6%. Significant increases (decreases) in these unobservable inputs in isolation would result in a reduction of accounts payable in the amount of $12.2 million as of December 31, 2020.significantly (lower) higher fair value measurement.
DuringOther financial instruments not measured at fair value on the consolidation of the 4 acquisitions closed onCompany's unaudited condensed consolidated balance sheets at March 31, 2022 and December 31, 2020,2021, but which require disclosure of their fair values include: cash, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility (Note 9). Due to the short-term nature of these aforementioned securities, the Company improperly reflectedbelieves that the cash on handestimated fair value of such instruments at the targetsMarch 31, 2022 and December 31, 2021 approximates their carrying value 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.In addition, cumulative translation adjustment was also reduced by $1.8 million as a result of a reclassification associated with trade accounts receivable.
The following table presents the impact of the restatement adjustmentsreported on the Company’s previously reportedunaudited condensed consolidated balance sheet as of December 31, 2020 on a condensed basis:
sheets.
| | | | | | | | | | | | | | | | | |
| 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 table below presents the impact to Operating Cash Flows on a Condensed Basis as a result of the restatement for the period ended September 30, 2020:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| As Previously | | | | |
| Reported | | Adjustments | | As Restated |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
Net income | $ | (27,047) | | | $ | 627 | | | $ | (26,420) | |
Reconciliation of net income to net cash provided by operating activities: | | | | |
Changes in operating assets and liabilities | 55,115 | | | (627) | | | 54,488 | |
Net cash provided by operating activities | $ | 92,240 | | | 0 | | $ | 92,240 | |
NOTE 56 – INVENTORIES
The carrying values of inventories are as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Finished goods | Finished goods | $ | 101,167 | | | $ | 105,527 | | Finished goods | $ | 83,655 | | | $ | 80,329 | |
Work in process | Work in process | 21,657 | | | 17,021 | | Work in process | 28,207 | | | 20,565 | |
Obsolescence reserve | (16,448) | | | (25,477) | | |
Inventories | Inventories | $ | 106,376 | | | $ | 97,071 | | Inventories | $ | 111,862 | | | $ | 100,894 | |
NOTE 67 – COSTSCONTRACT ASSETS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTSLIABILITIES
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 unaudited condensed consolidated balance sheets.
Costs and estimated profits on uncompleted contracts and related amounts billed were as follows (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Costs incurred on uncompleted contracts | Costs incurred on uncompleted contracts | $ | 50,861 | | | $ | 36,969 | | Costs incurred on uncompleted contracts | $ | 54,888 | | | $ | 41,329 | |
Estimated profits, thereon | Estimated profits, thereon | 16,693 | | | 6,711 | | Estimated profits, thereon | 21,594 | | | 17,143 | |
Total | Total | 67,554 | | | 43,680 | | Total | 76,482 | | | 58,472 | |
Less: billings to date | Less: billings to date | 50,732 | | | 29,315 | | Less: billings to date | 61,315 | | | 44,859 | |
Net | Net | $ | 16,822 | | | $ | 14,365 | | Net | $ | 15,167 | | | $ | 13,613 | |
Such amounts were included in the accompanying unaudited condensed Consolidated Balance Sheetsconsolidated balance sheets for September 30, 2021March 31, 2022 and December 31, 20202021 under the following captions (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
Costs and estimated profits in excess of billings | Costs and estimated profits in excess of billings | $ | 17,714 | | | $ | 18,459 | | Costs and estimated profits in excess of billings | $ | 20,504 | | | $ | 17,193 | |
Billings in excess of costs and estimated profits | Billings in excess of costs and estimated profits | (891) | | | (4,061) | | Billings in excess of costs and estimated profits | (5,328) | | | (3,581) | |
Translation adjustment | Translation adjustment | (1) | | | (33) | | Translation adjustment | (9) | | | 1 | |
Net | Net | $ | 16,822 | | | $ | 14,365 | | Net | $ | 15,167 | | | $ | 13,613 | |
During the ninethree months ended September 30, 2021, $3.9March 31, 2022, $2 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 78 – INCOME TAXES
Our effective tax rate from continuing operations was a tax benefitexpense of 8.921.0 percent for the three months ended September 30, 2021March 31, 2022 compared to a tax benefitexpense of 22.590.9 percent for the three months ended September 30, 2020.March 31, 2021. Compared to the U.S. statutory rate for the three months ended September 30, 2021,March 31, 2022, 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 rate decreased by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the three months ended September 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, and research and development tax credits and other tax credits and was partially offset by nondeductible expenses and uncertain tax positions recorded due to tax authorities' aggressive auditing of research and development tax credits. .
Our effective tax rate from continuing operations was a tax expense of 13.7 percent for the nine months ended September 30, 2021 compared to a tax benefit of 22.4 percent for the nine months ended September 30, 2020. Compared to the U.S. statutory rate for the nine months ended September 30,March 31, 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 wasrate decreased by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the nine months ended September 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, and research and development tax credits and other tax credits and was partially offset by nondeductible expenses and uncertain tax positions recorded due to tax authorities' aggressive auditing of research and development 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 89 – LONG-TERM DEBT
The components of the Company's long-term debt consisted of the following (in thousands):
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
| | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value | | Carrying Value (1) | | Fair Value |
ABL Revolver | ABL Revolver | $ | — | | | $ | — | | | $ | — | | | $ | — | | ABL Revolver | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Term Loan B | Term Loan B | 327,525 | | | 325,887 | | | 330,000 | | | 325,875 | | Term Loan B | 325,875 | | | 325,060 | | | 326,700 | | | 325,883 | |
Total long-term debt | Total long-term debt | 327,525 | | | 325,887 | | | 330,000 | | | 325,875 | | Total long-term debt | 325,875 | | | 325,060 | | | 326,700 | | | 325,883 | |
Less: current portion | Less: current portion | (3,300) | | | (3,284) | | | (3,300) | | | (3,259) | | Less: current portion | (3,300) | | | (3,292) | | | (3,300) | | | (3,292) | |
Long-term debt less current maturities | Long-term debt less current maturities | $ | 324,225 | | | $ | 322,603 | | | $ | 326,700 | | | $ | 322,616 | | Long-term debt less current maturities | $ | 322,575 | | | $ | 321,768 | | | $ | 323,400 | | | $ | 322,591 | |
(1) Carrying value amounts do not include unamortized debt issuance costs of $8.3$7.5 million and $9.6$8.0 million for September 30, 2021March 31, 2022 and December 31, 2020,2021, respectively.
Credit Agreements
On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $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 30, 2021,March 31, 2022, the Company had no amount outstanding under the ABL Revolver and had $131.0$132.2 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 30,March 31, 2022, and December 31, 2021.
NOTE 910 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | |
Basic: | Basic: | | | (Restated) | | | | (Restated) | Basic: | | | | | |
Weighted average shares outstanding | Weighted average shares outstanding | 18,710 | | | 17,790 | | | 19,060 | | | 17,743 | | Weighted average shares outstanding | 18,534 | | | 19,186 | | | |
Net income attributable to DXP Enterprises, Inc. | Net income attributable to DXP Enterprises, Inc. | $ | 7,125 | | | $ | (34,666) | | | $ | 15,615 | | | $ | (26,187) | | Net income attributable to DXP Enterprises, Inc. | $ | 12,642 | | | $ | 371 | | | |
Convertible preferred stock dividend | Convertible preferred stock dividend | 23 | | | 23 | | | 68 | | | 68 | | Convertible preferred stock dividend | 23 | | | 23 | | | |
Net income attributable to common shareholders | Net income attributable to common shareholders | $ | 7,102 | | | $ | (34,689) | | | $ | 15,547 | | | $ | (26,255) | | Net income attributable to common shareholders | $ | 12,619 | | | $ | 348 | | | |
Per share amount | Per share amount | $ | 0.38 | | | $ | (1.95) | | | $ | 0.82 | | | $ | (1.47) | | Per share amount | $ | 0.68 | | | $ | 0.02 | | | |
| Diluted: | Diluted: | | Diluted: | | |
Weighted average shares outstanding | Weighted average shares outstanding | 18,710 | | | 17,790 | | | 19,060 | | | 17,743 | | Weighted average shares outstanding | 18,534 | | | 19,186 | | | |
Assumed conversion of convertible preferred stock | Assumed conversion of convertible preferred stock | 840 | | | — | | | 840 | | | — | | Assumed conversion of convertible preferred stock | 840 | | | 840 | | | |
Total dilutive shares | Total dilutive shares | 19,550 | | | 17,790 | | | 19,900 | | | 17,743 | | Total dilutive shares | 19,374 | | | 20,026 | | | |
Net income attributable to common shareholders | Net income attributable to common shareholders | $ | 7,102 | | | $ | (34,689) | | | $ | 15,547 | | | $ | (26,255) | | Net income attributable to common shareholders | $ | 12,619 | | | $ | 348 | | | |
Convertible preferred stock dividend | Convertible preferred stock dividend | 23 | | | — | | | 68 | | | — | | Convertible preferred stock dividend | 23 | | | 23 | | | |
Net income attributable to DXP Enterprises, Inc. | Net income attributable to DXP Enterprises, Inc. | $ | 7,125 | | | $ | (34,689) | | | $ | 15,615 | | | $ | (26,255) | | Net income attributable to DXP Enterprises, Inc. | $ | 12,642 | | | $ | 371 | | | |
Per share amount | Per share amount | $ | 0.36 | | | $ | (1.95) | | | $ | 0.78 | | | $ | (1.47) | | Per share amount | $ | 0.65 | | | $ | 0.02 | | | |
NOTE 1011 - 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 or estimate the financial impact of these lawsuits,disputes, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.
NOTE 1112 - 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, manufactures branded private label 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 September 30, |
| 2021 | | 2020 |
| | | | | | | | | (Restated) | | | | | | |
| SC | | IPS | | SCS | | Total | | SC | | IPS | | SCS | | Total |
Product sales1 | $ | 187,302 | | | $ | — | | | $ | 36,213 | | | $ | 223,515 | | | $ | 143,767 | | | $ | — | | | $ | 29,360 | | | $ | 173,127 | |
Inventory services2 | — | | | — | | | 4,302 | | | 4,302 | | | — | | | — | | | 4,057 | | | 4,057 | |
Staffing services3 | 25,237 | | | — | | | — | | | 25,237 | | | 21,133 | | | — | | | — | | | 21,133 | |
Pump production and delivery4 | — | | | 36,440 | | | — | | | 36,440 | | | — | | | 21,876 | | | — | | | 21,876 | |
Total Revenue | $ | 212,539 | | | $ | 36,440 | | | $ | 40,515 | | | $ | 289,494 | | | $ | 164,900 | | | $ | 21,876 | | | $ | 33,417 | | | $ | 220,193 | |
Income from operations | $ | 29,381 | | | $ | 277 | | | $ | 3,181 | | | $ | 32,839 | | | $ | 22,151 | | | $ | (2,913) | | | $ | 2,900 | | | $ | 22,138 | |
| | | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | | (Restated) | | | | |
| | SC | | IPS | | SCS | | Total | | SC | | IPS | | SCS | | Total | | SC | | IPS | | SCS | | Total | | SC | | IPS | | SCS | | Total |
Product sales1 | Product sales1 | $ | 538,134 | | | $ | — | | | $ | 103,058 | | | $ | 641,192 | | | $ | 457,848 | | | $ | — | | | $ | 106,500 | | | $ | 564,348 | | Product sales1 | $ | 195,626 | | | $ | — | | | $ | 42,390 | | | $ | 238,016 | | | $ | 165,342 | | | $ | — | | | $ | 31,777 | | | $ | 197,119 | |
Inventory services2 | Inventory services2 | — | | | — | | | 12,761 | | | 12,761 | | | — | | | — | | | 12,368 | | | 12,368 | | Inventory services2 | — | | | — | | | 5,166 | | | 5,166 | | | — | | | — | | | 4,196 | | | 4,196 | |
Staffing services3 | Staffing services3 | 70,408 | | | — | | | — | | | 70,408 | | | 43,485 | | | — | | | — | | | 43,485 | | Staffing services3 | 23,171 | | | — | | | — | | | 23,171 | | | 21,027 | | | — | | | — | | | 21,027 | |
Pump production and delivery4 | Pump production and delivery4 | — | | | 96,411 | | | — | | | 96,411 | | | — | | | 152,376 | | | — | | | 152,376 | | Pump production and delivery4 | — | | | 53,058 | | | — | | | 53,058 | | | — | | | 23,245 | | | — | | | 23,245 | |
Total Revenue | Total Revenue | $ | 608,542 | | | $ | 96,411 | | | $ | 115,819 | | | $ | 820,772 | | | $ | 501,333 | | | $ | 152,376 | | | $ | 118,868 | | | $ | 772,577 | | Total Revenue | $ | 218,797 | | | $ | 53,058 | | | $ | 47,556 | | | $ | 319,411 | | | $ | 186,369 | | | $ | 23,245 | | | $ | 35,973 | | | $ | 245,587 | |
Income from operations | $ | 77,819 | | | $ | 6,027 | | | $ | 8,991 | | | $ | 92,837 | | | $ | 53,531 | | | $ | 16,080 | | | $ | 10,008 | | | $ | 79,619 | | |
Income from operations5 | | Income from operations5 | $ | 27,351 | | | $ | 7,069 | | | $ | 4,020 | | | $ | 38,440 | | | $ | 22,137 | | | $ | 947 | | | $ | 2,323 | | | $ | 25,407 | |
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 and delivery is recognized over time.
5Income from operations excludes amortization of intangibles and corporate expenses.
The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes (in thousands):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | |
| | | | (Restated) | | | | (Restated) | | | | | | |
Operating income for reportable segments | Operating income for reportable segments | $ | 32,839 | | | $ | 22,138 | | | $ | 92,837 | | | $ | 79,619 | | Operating income for reportable segments | $ | 38,440 | | | $ | 25,407 | | | |
Adjustment for: | Adjustment for: | | Adjustment for: | | |
Amortization of intangible assets | Amortization of intangible assets | 4,238 | | | 3,053 | | | 12,690 | | | 9,296 | | Amortization of intangible assets | 4,235 | | | 4,146 | | | |
Impairment and other charges | — | | | 48,401 | | | — | | | 48,401 | | |
Corporate expenses | Corporate expenses | 17,416 | | | 11,530 | | | 47,883 | | | 44,311 | | Corporate expenses | 12,646 | | | 15,028 | | | |
Income from operations | Income from operations | $ | 11,185 | | | $ | (40,846) | | | 32,264 | | | (22,389) | | Income from operations | $ | 21,559 | | | $ | 6,233 | | | |
Interest expense | Interest expense | 5,264 | | | 3,752 | | | 15,844 | | | 12,059 | | Interest expense | 5,162 | | | 5,243 | | | |
Other (income) expense, net | Other (income) expense, net | (450) | | | 320 | | | (985) | | | (381) | | Other (income) expense, net | 536 | | | (430) | | | |
Income before income taxes | Income before income taxes | $ | 6,371 | | | $ | (44,918) | | | $ | 17,405 | | | $ | (34,067) | | Income before income taxes | $ | 15,861 | | | $ | 1,420 | | | |
NOTE 1213 - BUSINESS ACQUISITIONS
On April 30, 2021,March 1, 2022, the Company completed the acquisition of Carter & Verplanck, LLCDrydon Equipment, Inc. (“CVI”Drydon”), a distributor and manufacturers’ representative of productspumps, valves, controls and services exclusivelyprocess equipment focused on serving the water and wastewater markets.industry in the Midwest. The acquisition of CVIDrydon was funded with cash on hand as well as issuing DXP's common stock. The Company paid approximately $49.7$7.9 million in cash and stock. A majority of CVI'sDrydon's sales are project-based work under the percentage-of-completion accounting model. As a result, CVIDrydon has been included in the IPS segment. For the ninethree months ended September 30, 2021, CVIMarch 31, 2022, Drydon contributed sales of $9.8$1.4 million and net income of $1.1$0.7 million. Goodwill for the transaction totaled approximately $4.1 million.
On JulyMarch 1, 2021,2022, the Company completed the acquisition of Process Machinery,certain assets of Burlingame Engineers, Inc. (“PMI”Burlingame”), a leading distributorprovider of pumps, mechanical seals, tank, filterswater and related processwastewater equipment that focuses on servingin the chemical, power, pulp & paper, mining, metalsindustrial and food processing industries.municipal sectors. The Company paid approximately $9.6$1.1 million in cash, stock and future consideration. For the ninethree months ended September 30, 2021, PMIMarch 31, 2022, Burlingame contributed sales of $2.3$0.4 million and net income of $240$6 thousand.
On September 20, 2021,Pro forma revenue and net income have been excluded as the amounts would have been immaterial to the consolidated results of the Company closed onfor the acquisition of Premier Water LLC (“Premier”).Premier is a leading distributorcurrent and provider of products and services exclusively focused on serving the water and wastewater treatment markets primarily in North and South Carolina.The Company paid approximately $5.8 million in cash and stock.prior year.
In aggregate, the acquisition-date fair value of the consideration transferred for the 32 businesses totaled $65.0$9.0 million, which consisted of the following:
| | | | | | | | |
Purchase Price Consideration (in millions) | | Total Consideration |
| | |
Cash payments | | $ | 53.65.8 | |
Fair value of stock issued | | 11.10.5 | |
Future consideration | | 0.32.7 | |
Total purchase price consideration | | $ | 65.09.0 | |
The fair value of the approximately 422,00021,844 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 represents the pro forma unaudited revenue and earnings as if each of the acquisitions had been included in the consolidated results of the Company for the full nine months period ending September 30, 2021 and 2020, respectively:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
| | (in thousands/unaudited) |
Revenue | | $ | 841,333 | | | $ | 788,937 | |
Net income | | $ | 15,870 | | | $ | (25,241) | |
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
| | | | | | | | |
(In thousands) | | |
Cash | | $ | 34517 | |
Accounts receivable | | 5,0112,709 | |
Other receivables | | 1,29156 | |
Costs in excess of billingsInventory | | 3,00337 | |
Non-compete agreements | | 1,040229 | |
Customer relationships | | 15,219 | |
Goodwill | | 47,2031,770 | |
Property and equipment | | 214124 | |
Other assets | | 2,4602 | |
Assets acquired | | $ | 75,4755,444 | |
Current liabilities assumed | | (10,134) | |
Contingent consideration | | (301)(1,061) | |
Net assets acquired | | $ | 65,0404,383 | |
Total Consideration | | (9,049) | |
Goodwill | | $ | 4,666 | |
Of the $63.5$2 million of acquired intangible assets, $1.0$0.2 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, $15.2$1.8 million was assigned to customer relationships, and will be amortized over a period of 8 years. The goodwill total of $47.2approximately $4.7 million is
attributable primarily to expected synergies and the assembled workforce of each entity.entity and is generally deductible for tax purposes.
The fair value of accounts receivables acquired is $5.0$2.7 million, which approximated book value.
The Company recognized less than $300,000 of acquisition related costs that were expensed in the current period. These costs are included in the consolidated income statementCondensed Consolidated Statements of Operations and Comprehensive Income 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 1314 - SHARE REPURCHASE
On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $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 ninethree months ended September 30, 2021,March 31, 2022, the Company repurchase 1.0 millionrepurchased 58.9 thousand shares of common stock for $29.2$1.5 million at an average price of $28.77$25.66 per share.
Total consideration paid to repurchase the shares was recorded in shareholders’ equity as treasury shares. Such consideration was funded with existing cash balances and an agreement to pay sellers over 4 equal quarterly installments beginning on June 15, 2021. The remaining 3 installments1 installment totaling $20.4$6.8 million werewas included in other current liabilities as of September 30, 2021.March 31, 2022.
| | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions, except per share data) | 2021 | | 2021 |
Total number of shares purchased | — | | | 1.0 | |
Amount paid | $ | — | | | $ | 29.2 | |
Average price paid per share | $ | — | | | $ | 28.77 | |
| | | | | | | | | |
| | Three Months Ended March 31, |
(in thousands, except per share data) | | | 2022 |
Total number of shares purchased | | | 58.9 | |
Amount paid | | | $ | 1,511 | |
Average price paid per share | | | $ | 25.66 | |
NOTE 15 - SUBSEQUENT EVENT
On May 3, 2022, the Company completed the acquisition of Cisco Air Systems, Inc. (“Cisco”). Cisco is a leading distributor of air compressors and related products and services focused on serving the food & beverage, transportation and general industrial markets in the Northern California and Nevada territories. Total consideration for the transaction was approximately $45 million, funded with a mixture of cash on hand of $29 million, DXP stock valued at approximately $5 million and a draw down of approximately $11 million on the ABL.
0
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 months ended September 30, 2021March 31, 2022 should be read in conjunction with our previous Annual Report on Form 10-K/A10-K 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, the Ukrainian/Russia conflict and the impact of lowon commodity prices ofprices; particularly 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 of war or terrorist acts and the governmental or military response thereto, cyber-attacks adversely affecting our operations, other geological, operating and economic considerations and declining prices and market conditions, including 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 capital expenditure levels, which may result from decreased oil and natural gas prices or other factors, economic risks related to the long-term 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", in our Annual Report on Form 10-K/A10-K filed with the Securities and Exchange Commission on October 22, 2021.April 5, 2022. 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"MRO") 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.
Ukrainian - Russia Conflict
In February 2022, Russia invaded Ukraine. DXP has no direct exposure to Russia or Ukraine, however, the Company continues to monitor any broader impact in the global economy, including inflation and cost pressures, supply chains and energy prices. The full impact of the conflict on the Company’s business and financial results remains uncertain and will depend on the severity and duration of the war and its impact on global economic conditions.
Inflation
As the world recovered and reopened during fiscal 2021, and continuing into the current fiscal year, the global commodity and labor markets experienced significant inflationary pressures attributable to economic recovery and supply chain issues tightening caused by the COVID-19 pandemic and the Ukrainian-Russia conflict mentioned above. These inflationary trends increased the cost of many of the products we buy. As a distributor, we often remain neutral to inflation as those costs are generally passed
onto customers. The Company was able to implement these and other strategies designed to mitigate some of the adverse effects of higher costs during the first quarter of fiscal 2022 while also remaining price competitive.
COVID-19 Pandemic Impact
The pandemic continued to have a significant impact on our business for the nine months ended September 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 continued to normalize and re-open. This improved the outlook of the manufacturing and industrial customers that support our traditional branch and onsite business. Although the rate of improvement remains gradual and the overall activity level remains below pre-pandemic levels, DXP is seeing a modest improvement from monthly lows experienced in July of 2020.
The COVID-19 pandemic causedbegan in the first quarter of 2020 and continued throughout the first quarter of fiscal 2022, causing significant disruptions in the U.S. and global markets,markets. While the ongoing recovery continues, it has been accompanied by a resurgence in demand as industries return to regular operations, which continues to disrupt supply chains, transportation efficiency, product and thelabor availability.The full extent ofand long-term impacts on the impacts is still unknownCompany’s business and financial results will depend on a number ofseveral uncertain and unpredictable developments including any continued spread of the virus and its variants, the availability and effectiveness of treatments and usevaccines, imposition of vaccines,protective public safety measures and the overall impact of governmentalgovernment measures to combat the spread of the virus (such as mask mandates or social distancing requirements) andvirus. We are not able to promote economic stability and recovery. The initial recovery from the
COVID-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 aspredict whether our 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 communitieswill continue to change, the Company’s effortsoperate at their current or historical levels, and business plans will evolve accordingly. DXP is focused on serving customers and communitiessuch decreases 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 withtheir operations would have 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 third quarter of 2021, we have remained undrawnnegative impact 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 determinebusiness. We are in the best interests of our employees, customers, suppliers, and shareholders. While we arealso unable to determine or predict the nature, duration, or scope of the overall impacthow long the COVID-19 pandemic will havelast and the impact of the pandemic on future demand for our products and services.
For additional discussion of the potential impact of the COVID-19 pandemic on our business, results of operations, liquidity, or capital resources, we believe that we have remained nimble and are poised to remain opportunistic duringsee Part I, Item 1A: Risk Factors in the recovery.Company’s 2021 Form 10-K.
Matters Affecting Comparability
There were 64 business days in the three months ended September 30, 2021March 31, 2022 and September 30, 2020. There were 19063 business days in the ninethree months ended September 30, 2021 and 191 business days in the nine months ended September 30, 2020.March 31, 2021.
Outlook
Service Centers & Supply Chain Services Segments
The replacement and 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. EconomicLong-term economic conditions remain uncertain with regard to COVID-19 and its impact on various end markets, however, recent order activity has begun to improveimproved as markets strengthened and gained greater visibility to vaccine roll-out strategies in various regions.restrictions and mandates were lifted. In the thirdfirst quarter of 20212022, we had approximately $253.1$266.4 million in sales in our Service Centers and Supply Chain Services segment, an increase of approximately 27.619.8 percent over the thirdfirst quarter of 2020. While the Company continues to expect choppiness as the economy gradually gains confidence with COVID-19 vaccines, we2021. We expect financial results to continually improve with interim periods of potential setback.setback should new variants arise or other economic headwinds prevail.
Innovative Pumping Solutions Segment
To date,In the Company'sfirst quarter of 2022, we had approximately $53.1 million in sales in our Innovative Pumping Solutions segment, has been able to absorban increase of approximately $29.8 million over the pandemicfirst quarter of 2021, of which $9.1 million was associated with small workforce reductions or furloughs, which positionsrecent acquisitions in the Company for accelerated growth once recovery is clear within Innovative Pumping Solutions. The oilwater and gas industry continues to be impacted bywastewater market. Beginning in the COVID-19 pandemic, along with other industry specific factors including environmental concerns and issues.
Inlatter half of 2021, we began to see an improvement in the demand for oil and 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 oil & gas demand recovery has led to higher commodity prices and althoughprices. Although demand levels remainremained below pre-pandemic levels, there is growing confidence of returning to 2019 levels in the coming years. Demand recovery could still possibly slow or pause as a resultIn the first quarter of additional waves of pandemic outbreak or heightened pandemic control measures. Over2022, the longer term, we could also experience a structural shiftUkrainian-Russia conflict caused further disruption in the global economy and its demand for oil and natural gas as a result of changessupply and spurred price increases around the world. These forces contributed to higher spend by oil and gas producers and thus an increase in oil & gas projects within our Innovative Pumping Solutions segment. We expect to benefit from the way people work, travel and interact.increased activity throughout 2022.
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.
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2021 | | % | | 2020 | | % | | 2022 | | % | | 2021 | | % |
| | | | | | (Restated) | | | | | | | | | | |
Sales | Sales | $ | 289,494 | | | 100.0 | % | | $ | 220,193 | | | 100.0 | % | Sales | $ | 319,411 | | | 100.0 | % | | $ | 245,587 | | | 100.0 | % |
Cost of sales | Cost of sales | 202,551 | | | 70.0 | % | | 158,892 | | | 72.2 | % | Cost of sales | 224,527 | | | 70.3 | % | | 173,957 | | | 70.8 | % |
Gross profit | Gross profit | $ | 86,943 | | | 30.0 | % | | $ | 61,301 | | | 27.8 | % | Gross profit | $ | 94,884 | | | 29.7 | % | | $ | 71,630 | | | 29.2 | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | 75,758 | | | 26.2 | % | | 53,746 | | | 24.4 | % | Selling, general and administrative expenses | 73,325 | | | 23.0 | % | | 65,397 | | | 26.6 | % |
Impairment and other charges | Impairment and other charges | — | | | — | % | | 48,401 | | | 30.5 | % | Impairment and other charges | — | | | — | % | | — | | | — | % |
Income from operations | Income from operations | $ | 11,185 | | | 3.9 | % | | $ | (40,846) | | | (18.6) | % | Income from operations | $ | 21,559 | | | 6.7 | % | | $ | 6,233 | | | 2.5 | % |
Other (income) expense, net | Other (income) expense, net | (450) | | | (0.2) | % | | 320 | | | 0.1 | % | Other (income) expense, net | 536 | | | 0.2 | % | | (430) | | | (0.2) | % |
Interest expense | Interest expense | 5,264 | | | 1.8 | % | | 3,752 | | | 1.7 | % | Interest expense | 5,162 | | | 1.6 | % | | 5,243 | | | 2.1 | % |
Income before income taxes | Income before income taxes | $ | 6,371 | | | 2.2 | % | | $ | (44,918) | | | (20.4) | % | Income before income taxes | $ | 15,861 | | | 5.0 | % | | $ | 1,420 | | | 0.6 | % |
Provision for income taxes | Provision for income taxes | (565) | | | (0.2) | % | | (10,143) | | | (4.6) | % | Provision for income taxes | 3,332 | | | 1.0 | % | | 1,261 | | | 0.5 | % |
Net income | Net income | $ | 6,936 | | | 2.4 | % | | $ | (34,775) | | | (15.8) | % | Net income | $ | 12,529 | | | 3.9 | % | | $ | 159 | | | 0.1 | % |
Net loss attributable to noncontrolling interest | Net loss attributable to noncontrolling interest | (189) | | | — | | | (109) | | | — | | Net loss attributable to noncontrolling interest | (113) | | | — | | | (212) | | | — | |
Net income attributable to DXP Enterprises, Inc. | Net income attributable to DXP Enterprises, Inc. | $ | 7,125 | | | 2.5 | % | | $ | (34,666) | | | (15.7) | % | Net income attributable to DXP Enterprises, Inc. | $ | 12,642 | | | 4.0 | % | | $ | 371 | | | 0.2 | % |
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 per share | Basic earnings per share | 0.38 | | | $ | (1.95) | | | Basic earnings per share | 0.68 | | | $ | 0.02 | | |
Diluted earnings per share | Diluted earnings per share | 0.36 | | | $ | (1.95) | | | Diluted earnings per share | 0.65 | | | $ | 0.02 | | |
Three Months Ended September 30, 2021March 31, 2022 compared to Three Months Ended September 30, 2020March 31, 2021
SALES. Sales for the three months ended September 30, 2021March 31, 2022 increased $69.3$73.8 million, or 31.530.1 percent, to approximately $289.5$319.4 million from $220.2$245.6 million for the prior year's corresponding period. Sales from businesses acquired in December 2020 and in 2021for three months ended March 31, 2022, accounted for $37.9$13.1 million of the sales for the three months ended September 30, 2021.March 31, 2022. This overall sales increase is the result of an increase in sales in our SC, IPS and SCS segments of $47.6$32.4 million, $14.6$29.8 million and $7.1$11.6 million, respectively. The fluctuations in sales are further explained in our business segment discussions below.
| | | Three Months Ended September 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | Change | | Change% | | 2022 | | 2021 | | 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 | $ | 212,539 | | | $ | 164,900 | | | $ | 47,639 | | | 28.9 | % | Service Centers | $ | 218,797 | | | $ | 186,369 | | | $ | 32,428 | | | 17.4 | % |
Innovative Pumping Solutions | Innovative Pumping Solutions | 36,440 | | | 21,876 | | | 14,564 | | | 66.6 | % | Innovative Pumping Solutions | 53,058 | | | 23,245 | | | 29,813 | | | 128.3 | % |
Supply Chain Services | Supply Chain Services | 40,515 | | | 33,417 | | | 7,098 | | | 21.2 | % | Supply Chain Services | 47,556 | | | 35,973 | | | 11,583 | | | 32.2 | % |
Total DXP Sales | Total DXP Sales | $ | 289,494 | | | $ | 220,193 | | | $ | 69,301 | | | 31.5 | % | Total DXP Sales | $ | 319,411 | | | $ | 245,587 | | | $ | 73,824 | | | 30.1 | % |
Service Centers segment. Sales for the SC segment increased by approximately $47.6$32.4 million, or 28.917.4 percent for the three months ended September 30, 2021March 31, 2022 compared to the prior year's corresponding period. Excluding $30.9$4.0 million of third quarter 2021 sales from businesses acquired in December 2020, Service Centers segment sales for the third quarterassociated with recent acquisitions, sales increased $16.7$28.4 million or 10.1 percent from the prior year's corresponding period. This sales increase is primarily the result of increased sales of rotating equipment, safety supplies, metal working, and bearings and power transmission products to customers engaged in variety of markets compared due to the negative economic impactsas a result of the COVID-19lifting of pandemic on 2020 sales results.restrictions and a return to normal production and activity.
Innovative Pumping Solutions segment. Sales for the IPS segment increased by $14.6$29.8 million, or 66.6128.3 percent, for the three months ended September 30, 2021March 31, 2022 compared to the prior year's corresponding period. Excluding $6.9$9.1 million of third quarter 2021 IPS segment sales from businesses acquired in 2021,recent acquisitions, IPS segment sales for the third quarter increased $7.6$20.7 million or 34.9 percent, from the prior year's corresponding period. This increase was primarily the result of an increase in the capital spending by oil and gas producers and related businesses stemming from the negative economic impacts of the COVID-19 pandemic on 2020 sales results.businesses.
Supply Chain Services segment. Sales for the SCS segment increased by $7.1$11.6 million, or 21.2%,32.2 percent, for the three months ended September 30, 2021,March 31, 2022, 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 toas pandemic restrictions subsided and the negative economic impacts of the COVID-19 pandemic on 2020 sales results.economy rebounded.
GROSS PROFIT. Gross profit as a percentage of sales for the three months ended September 30, 2021 increased by approximately 219 basis points fromMarch 31, 2022 was 29.7 percent versus 29.2 percent in the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales decreased by approximately 453 basis points.was 29.5 percent. The decreaseincrease in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 726 basis point decrease in the gross profit percentage in our SC segment and a 55 basis point decrease in the gross profit percentage in our SCS segment partially offset by an 928 basis point increase in the gross profit percentage inoverall project activity within our IPS segment..segment.
Service Centers segment. As a percentage of sales, the thirdfirst quarter gross profit percentage for the SC segment increased approximately 183127 basis points. Adjusting for the businesses acquired, gross profit as a percentage of sales decreasedincreased approximately 726133 basis points from the prior year's corresponding period. This was primarily was a result of volume decreasesincreases and product mix. Gross profit for the Service CentersSC segment, excluding businesses acquired, decreased $8.2increased $11.3 million, or 16.520.4 percent, during the third quarter of 2021three months ended March 31, 2022 compared to the prior year’s corresponding period.
Innovative Pumping Solutions segment. As a percentage of sales, the thirdfirst quarter gross profit percentage for the IPS segment increaseddecreased approximately 969493 basis points. Adjusting for the business acquired, gross profit as a percentage of sales increaseddecreased approximately 928645 basis points from the prior year's corresponding period. The increasedecrease in gross profit percentage is primarily due to a mix shift (higher margin international work and domestic water and wastewater projects). Gross profit dollars increased $4.0$4.4 million compared to the prior year corresponding period, excluding business acquired, primarily as a result of an increase in project work as a result of an increase in capital spending by our customers compared to the negative economic impacts of the COVID-19 pandemic in 2020.customers.
Supply Chain Services segment. Gross profit as a percentage of sales for the SCS segment decreasedincreased approximately 5580 basis points compared to the prior year's corresponding period. Gross profit for the thirdfirst quarter of 20212022 increased $1.5$3.0 million or 18.5%36.8% compared to the prior year's corresponding period.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the three months ended September 30, 2021March 31, 2022 increased by approximately $22.0$7.9 million, or 41.0%12.1%, to $75.8$73.3 million from $53.7$65.4 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $7.2$2.2 million. Excluding expenses from businesses acquired, SG&A for the quarter increased by $14.8$5.7 million, or 27.6%8.7%. 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 in 2020.pandemic.
OPERATING INCOME. Operating income for the thirdfirst quarter of 20212022 increased by $52.0$15.3 million to $11.2$21.6 million, from an operating loss of $40.8$6.2 million in the prior year's corresponding period. This increase in operating income is primarily related to an impairment and other charges of $48.4 million in 2020 with no comparablethe aforementioned increased business activity in 2021.across all segments.
INTEREST EXPENSE. Interest expense for the thirdfirst quarter of 20212022 increased $1.5$0.1 million compared with the prior year's corresponding period primarily due to a higher principal balance for the three months ended September 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 September 30, 2021..
INCOME TAXES. Our effective tax rate from continuing operations was a tax benefitexpense of 8.921.0 percent for the three months ended September 30, 2021March 31, 2022 compared to a tax expense of 22.590.9 percent for the three months ended September 30, 2020.March 31, 2021. Compared to the U.S. statutory rate for the three months ended September 30, 2021,March 31, 2022, 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 rate was decreased by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the three months ended September 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, and research and development tax credits and other tax credits. The effective tax rate was decreased by nondeductible expenses and uncertain tax positions recorded due to tax authorities' aggressive auditing of research and development tax credits.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | |
| 2021 | | % | | 2020 | | % | |
| | | | | (Restated) | | | |
Sales | $ | 820,772 | | | 100.0 | % | | $ | 772,577 | | | 100.0 | % | |
Cost of sales | 576,921 | | | 70.3 | % | | 558,081 | | | 72.2 | % | |
Gross profit | $ | 243,851 | | | 29.7 | % | | $ | 214,496 | | | 27.8 | % | |
Selling, general and administrative expenses | 211,587 | | | 25.8 | % | | 188,484 | | | 24.4 | % | |
Impairment and other charges | — | | | — | % | | 48,401 | | | 8.7 | % | |
Income from operations | $ | 32,264 | | | 3.9 | % | | $ | (22,389) | | | (2.9) | % | |
Other (income) expense, net | (985) | | | (0.1) | % | | (381) | | | — | % | |
Interest expense | 15,844 | | | 1.9 | % | | 12,059 | | | 1.6 | % | |
Income before income taxes | $ | 17,405 | | | 2.1 | % | | $ | (34,067) | | | (4.4) | % | |
Provision for income taxes | 2,380 | | | 0.3 | % | | (7,647) | | | (1.0) | % | |
Net income | $ | 15,025 | | | 1.8 | % | | $ | (26,420) | | | (3.4) | % | |
Net loss attributable to noncontrolling interest | (590) | | | — | | | (233) | | | — | % | |
Net income attributable to DXP Enterprises, Inc. | $ | 15,615 | | | 1.9 | % | | $ | (26,187) | | | (3.4) | % | |
Per share amounts attributable to DXP Enterprises, Inc. | | | | | | | | |
Basic earnings per share | $ | 0.82 | | | | | $ | (1.47) | | | | |
Diluted earnings per share | $ | 0.78 | | | | | $ | (1.47) | | | | |
Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020
SALES. Sales for the nine months ended September 30, 2021 increased $48.2 million, or 6.2 percent, to approximately $820.8 million from $772.6 million for the prior year's corresponding period. Sales from businesses acquired since December 2020 accounted for $104.0 million of the sales for the nine months ended September 30, 2021. This sales increase is the result of a an increase in sales in our SC segments of $107.2 million. This was partially offset by a decrease in sales in our IPS and SCS segments of $56.0 million and $3.0 million. The fluctuations in sales are further explained in our business segment discussions below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 | | Change | | Change% |
Sales by Business Segment | (in thousands, except change%) |
Service Centers | 608,542 | | | 501,333 | | | $ | 107,209 | | | 21.4 | % |
Innovative Pumping Solutions | 96,411 | | | 152,376 | | | (55,965) | | | (36.7) | % |
Supply Chain Services | 115,819 | | | 118,868 | | | (3,049) | | | (2.6) | % |
Total DXP Sales | $ | 820,772 | | | $ | 772,577 | | | $ | 48,195 | | | 6.2 | % |
Service Centers segment. Sales for the SC segment increased by $107.2 million, or 21.4 percent for the nine months ended September 30, 2021 compared to the prior year's corresponding period. Excluding $91.8 million of Service Center segment sales for the nine months ended September 30, 2021 from businesses acquired, SC segment sales increased $15.4 million, or 3.1 percent from the prior year's corresponding period. This sales increase is primarily the result of increased sales of metal working, safety services and bearings to customers engaged in the OEM oil and gas markets in connection with increased capital spending by oil and gas producers.
Innovative Pumping Solutions segment. Sales for the IPS segment decreased by $56.0 million, or 36.7 percent for the nine months ended September 30, 2021 compared to the prior year's corresponding period. Excluding $12.1 million of IPS segment sales for the nine months ended September 30, 2021 from businesses acquired, IPS segment sales decreased $68.1 million, or 44.7 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 economic impacts of COVID-19 beginning in the second quarter of 2020. The current level of IPS sales activity could continue during the remainder of 2021, although recoveries in oil production activity and oil prices should increase spending.
Supply Chain Services segment. Sales for the SCS segment decreased by $3.0 million, or 2.6 percent, for the nine months ended September 30, 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 nine months ended September 30, 2021 increased by approximately 195 basis points from the prior year's corresponding period. Excluding the impact of the businesses acquired, gross profit as a percentage of sales decreased by approximately 56 basis points. The increase in the gross profit percentage is primarily the result of an approximate 246 basis point increase in the gross profit percentage in our IPS segment offset by a 134 basis point decrease in the gross profit percentage in our SC segment, excluding businesses acquired. Additionally, a 1 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 nine months ended September 30, 2021 gross profit percentage for the Service Centers increased approximately 189 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 as well as the positive impact of the businesses acquired.
Innovative Pumping Solutions segment. As a percentage of sales, the nine months ended September 30, 2021 gross profit percentage for the IPS segment increased approximately 274 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) as well as the shipment of negative gross profit percentage work completing in 2020. Gross profit dollars decreased $12.5 million, primarily 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 increased approximately 1 basis points, compared to the prior year's corresponding period. Gross profit for the nine months ended September 30, 2021 decreased $0.7 million or 2.5 percent compared to the prior year's corresponding period, primarily the result of the decline in sales due to the items discussed above.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). Selling, general and administrative expense for the nine months ended September 30, 2021 increased by approximately $23.1 million, or 12.3 percent, to $211.6 million from $188.5 million for the prior year's corresponding period. Selling, general and administrative expense from businesses acquired accounted for $18.1 million. Excluding expenses from businesses acquired, SG&A for the nine months ended September 30, 2021 increased by $5.0 million, or 2.7 percent. The increase in SG&A excluding businesses acquired is the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity in 2021 and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets in 2020.
OPERATING INCOME. Operating income for the nine months ended September 30, 2021 increased by $54.7 million or 244.1% to $32.3 million from an operating loss of $22.4 million in the prior year's corresponding period. This increase in operating income is primarily related to an impairment and other charges of $48.4 million in 2020 with no comparable activity in 2021.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2021 increased $3.8 million compared with the prior year's corresponding period primarily due to a higher principal balance for the nine months ended September 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 partially offset by lower LIBOR rates for the nine months ended September 30, 2021.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 13.7 percent for the nine months ended September 30, 2021 compared to a tax benefit of 22.4 percent for the nine months ended September 30, 2020. Compared
to the U.S. statutory rate for the nine months ended September 30,March 31, 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 rate was decreased by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the nine months ended September 30, 2020, the effective tax rate was increased by state taxes, foreign taxes, and research and development tax credits and other tax credits and was partially offset by nondeductible expenses and uncertain tax positions recorded due to tax authorities' aggressive auditing of research and development tax credits.
LIQUIDITY AND CAPITAL RESOURCES
General Overview
As of September 30, 2021,March 31, 2022, we had cash and restricted cash of $63.1$36.7 million and credit facility availability of $131.0$132.2 million. We have a $135.0 million asset-based loan ("ABL") facility, partially offset by letters of credit of $4.0$2.8 million, that is due to mature in August 2022, under which we had no borrowings outstanding as of September 30, 2021March 31, 2022 and a Term Loan B with $327.5$325.9 million in borrowings. The Company intends to amend and extend the ABL prior to the August deadline.
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 operating activities, net cash used in investing activities and net cash used in financing activities for the periods presented (in thousands):
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
Net Cash Provided by (Used in): | Net Cash Provided by (Used in): | | | | Net Cash Provided by (Used in): | | | |
Operating Activities | Operating Activities | $ | 22,831 | | | $ | 92,240 | | Operating Activities | $ | 2,680 | | | $ | 8,577 | |
Investing Activities | Investing Activities | (66,297) | | | (20,525) | | Investing Activities | (6,056) | | | 617 | |
Financing Activities | Financing Activities | (12,904) | | | (27,942) | | Financing Activities | (9,322) | | | (1,365) | |
Effect of Foreign Currency | Effect of Foreign Currency | 85 | | | (721) | | Effect of Foreign Currency | 268 | | | 204 | |
Net Change in Cash | Net Change in Cash | $ | (56,285) | | | $ | 43,052 | | Net Change in Cash | $ | (12,430) | | | $ | 8,033 | |
Operating Activities
The Company generated $22.8$2.7 million of cash infrom operating activities during the ninethree months ended September 30, 2021March 31, 2022 compared to $92.2$8.6 million of cash generated during the prior year's corresponding period. The $69.4$5.9 million decrease in the amount of cash provided between the two periods was primarily driven by the increase in accounts receivables associated with trade accounts receivables from recent acquisitions without comparableproject work activity during the period. Cash is generally used to fund project costs in 2020 and increased business activity in 2021.excess of amounts billed.
Investing Activities
For the ninethree months ended September 30, 2021,March 31, 2022, net cash used in investing activities was $66.3$6.1 million compared to $20.5$0.6 million use of cash generated during the prior year’s corresponding period. This $45.8$6.7 million increase was primarily driven by the purchase of CVI, PMIDrydon and PremierBurlingame in 2021. For the nine months ended September 30, 2021, purchases of property and equipment decreased to approximately $3.0 million compared to $6.5 million in 2020 primarily due to reduced capital spending as a result of company-wide cost cutting measures in response to the COVID-19 pandemic.March 2022. The currentprior year period also benefited from the sale of a corporate asset totaling $1.3 million.million without comparable activity in the current year.
Financing Activities
For the ninethree months ended September 30, 2021,March 31, 2022, net cash used in financing activities was $12.9$9.3 million, compared to net cash used in financing activities of $27.9$1.4 million during the prior year’s corresponding period. The activity in the period was primarily attributed to Term Loan B required principal paymentsshare repurchase installment payment of $2.5$6.8 million related to shares repurchased in 2021 compared to $26.9 millionand share purchases in required2022 of $1.5 million.
principal and optional prepayments in 2020. This was partially offset by share purchases in 2021 of $8.8 million with no comparable activity in 2020.
On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $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 ninethree months ended September 30, 2021March 31, 2022 we purchased 1.0 million59 thousand shares for approximately $29.2$1.5 million. Such consideration was funded with existing cash balances and an agreement to pay sellers over four equal quarterly installments beginning on June 15, 2021. The remaining three installmentsinstallment of $20.4$6.8 million werewas included in other current liabilities as of September 30, 2021.March 31, 2022.
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 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 the Company.
The Company believes cash generated from operations will meet normal working capital needs during the next twelve months. However, the 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, the Company may issue securities that 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 unaudited condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The accompanying unaudited 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/A10-K for the year ended December 31, 2020.2021. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form 10-K/A10-K filed with the Securities and Exchange Commission on October 22, 2021.April 5, 2022. The results of operations for the ninethree months ended September 30, 2021March 31, 2022 are not necessarily indicative of results expected for the full fiscal year.
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/A10-K for the year ended December 31, 2020.2021. Our exposures to market risk have not changed materially since December 31, 2020.2021.
ITEM 4: CONTROLS AND PROCEDURES.
Disclosure ControlsWith the participation of management, our principal executive officer and Procedures
We maintain disclosure controls and procedures that are designedprincipal financial officer carried out an evaluation, pursuant to ensure that information required to be disclosed by us in reports we file or submit underRule 13a-15(b) of the Securities Exchange Act of 1934, is reported, processed, and summarized within the time periods specified in the SEC’s rules and forms. Asas amended (the “Exchange Act”), of September 30, 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 RulesRule 13a-15(e) and 15d-15(e) underof the Securities and Exchange ActAct) as of 1934).the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective, as of September 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 September 30, 2021 and hasprincipal financial officer concluded that our disclosure controls and procedures were not effective as of that dateMarch 31, 2022 because of suchthe material weaknesses.weaknesses in internal control over financial reporting described below.
Remediation Plan and Status for Material Weakness
In response to the identifiedNotwithstanding these material weaknesses, our management, including our principal executive officer and principal financial officer, has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with GAAP for each of the periods presented.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the oversight of the Audit Committeepreparation of our Boardfinancial statements for 2020 and 2021, we identified certain control deficiencies in the design and operation 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 thethat constituted material weaknesses. The material weaknesses identified. Certain remedial actionsare:
Material weakness related to unvouchered purchase order receipts: We did not design and maintain effective controls over the timely clearing of discrepancies arising from our three-way-match process. Specifically, controls were not designed appropriately to ensure that aged items were properly cleared from the sub-ledger and ultimately accounts payable. This material weakness resulted in a restatement of previously reported results related to periods prior to December 31, 2020. Additionally, this material weakness could result in a misstatement of accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Material weakness related to the application of percentage-of-completion (“POC”) accounting: We did not design or maintain effective controls over the completeness, accuracy, occurrence or determination of revenue recognized under the percentage-of-completion input method for our project-based businesses. Specifically, controls were not designed or maintained to ensure accuracy of the costs-to-date and estimates of the cost-to-complete for certain project-based contracts. In addition, clerical errors were noted in the determination of revenue recognized under the POC method. This material weakness resulted in immaterial audit adjustments related to revenue and related contract assets and liabilities during the year ended December 31, 2021. Additionally, this material weakness could result in a misstatement of accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
REMEDIATION PLAN FOR MATERIAL WEAKNESSES
To date we have been completed including ongoing involvementimplemented several process changes to limit the accumulation and aging of outside advisors, reassessmentunmatched items. We continue to enhance policies and systems to timely clear discrepancies and prevent an accumulation of application controls within our accounts payable procure-to-pay platformbalances. Additionally, management is currently in the process of developing and training programs around the issuanceimplementing changes as a part of purchase orders. New controls have been put in placea comprehensive remediation plan to address the weaknesses identified for manual journal entries and purchasematerial weakness related to the application of POC accounting. The CompanyWe believe the remediation activities will further enhance these controls overextend through the remainder of 2021 and test the effectiveness of the new or revised controls in place.fiscal year 2022.
Changes in Internal Control overOver Financial Reporting
Other than those discussedExcept as described above, there were no changes in the Company’s internal control over financial reporting duringidentified in the thirdevaluation for the quarter of 2021ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’sour 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.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors as previously disclosed in “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K/A10-K for the year end December 31, 2020.2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
DXP Enterprises, Inc. issued 20,79318,263 unregistered shares of DXP Enterprises, Inc.’s common stock as part of the consideration for the September 20, 2021March 1, 2022 acquisition of Premier.Drydon. The unregistered shares were issued to the sellers of Premier.Drydon.
DXP Enterprises, Inc. issued 61,1773,581 unregistered shares of DXP Enterprises, Inc.’s common stock as part of the consideration for the JulyMarch 1, 20212022 acquisition of PMI.Burlingame. The unregistered shares were issued to the sole seller of PMI.Burlingame.
We relied on Section 4(a)(2) of the Securities Exchange Act as a basis for exemption from registration. All issuances were as a result of private negotiation, and not pursuant to public solicitation. In addition, we believe the shares were issued to “accredited investors” as defined by Rule 501 of the Securities Act.
Issuer Purchases of Equity Securities
A summary of our purchases of DXP Enterprises, Inc. common stock during the thirdfirst quarter of fiscal year 20212022 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 (2) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (2) | | 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) |
| | Jul 1 - Jul 31 | 808 | | $ | 31.37 | | — | | $ | 55,826 | | | Jan 1 - Jan 31 | 58,927 | | $ | 25.66 | | 58,887 | | $ | 49,982 | |
| | Aug 1 - Aug 31 | — | | — | | — | | 55,826 | | | Feb 1 - Feb 28 | 842 | | 29.27 | | | 49,982 | |
| | Sep 1 - Sep 30 | 960 | | 27.97 | | — | | 55,826 | | | Mar 1 - Mar 31 | 4,646 | | 28.30 | | | 49,982 | |
| | Total | 1,768 | | $ | 29.52 | | — | | $ | 55,826 | | | Total | 64,415 | | | 58,887 | | 49,982 | |
| (1) | (1) | | There were 1,768 shares transferred from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock during three months ended September 30, 2021. | (1) | | There were 5,528 shares transferred from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock during three months ended March 31, 2022. |
(2) | (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's outstanding common stock over the next 24 months. As of September 30, 2021, $55.8 million remained available under the $85.0 million Share Repurchase Program. | (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's outstanding common stock over the next 24 months. As of March 31, 2022, $50 million or 256 thousand shares 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.
ITEM 6. EXHIBITS.
Exhibits designated by the symbol * are filed or furnished with this Quarterly Report on Form 10-Q. All exhibits not so designated are incorporated by reference to a prior filing with the Commission as indicated.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DXP ENTERPRISES, INC.
(Registrant)
By: /s/ Kent Yee
Kent Yee
Senior Vice President and Chief Financial Officer
(Duly Authorized Signatory and Principal Financial Officer)
Dated: December 8, 2021May 13, 2022