UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the
fiscal year ended December 31, 2010
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period
from
to
Commission file number 0-21513
DXP Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction
of incorporation or organization)
7272 Pinemont, Houston, Texas
(Address of principal executive offices)
77040
(Zip Code)
76-0509661
(I.R.S. Employer Identification Number)
(713) 996-4700
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
NASDAQ
(Name of exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
[ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. (See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] (Do not check if a smaller reporting
company) Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Aggregate market value of the registrant's Common Stock held by non-affiliates of registrant as of June 30, 2010: $144,552,821
Number of shares of registrant's Common Stock outstanding as of March 15, 2011: 14,087,998.
Documents incorporated by reference: Portions of the definitive proxy statement for the annual meeting of shareholders to be held in 2011 are
incorporated by reference into Part III hereof.
TABLE OF CONTENTS
DESCRIPTION
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
(Reserved)
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
Exhibits, Financial Statement Schedules
Signatures
PART IV
Page
4
10
13
13
13
14
16
16
27
28
54
54
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56
56
56
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56
56
57
62
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that constitute “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes”, “expects”,
“may”, “estimates”, “will”, “should”, “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 involve significant risks and
uncertainties, and actual results may vary materially from those discussed in the forward-looking statements as a result of various factors. These
factors include the effectiveness of management’s strategies and decisions, our ability to affect our internal growth strategy, general economic
and business conditions, developments in technology, our ability to effectively integrate businesses we may acquire, new or modified statutory
or regulatory requirements and changing prices and market conditions. This report identifies other factors that could cause such differences. We
cannot assure you that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. We
assume no obligation and do not intend to update these forward-looking statements.
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This Annual Report on Form 10-K (this “Report”) contains, in addition to historical information, “forward-looking statements” that involve
risks and uncertainties. DXP Enterprises, Inc.'s actual results could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors", and elsewhere in this
Annual Report on Form 10-K. 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.
PART I
ITEM 1. Business
Company Overview
DXP was incorporated in Texas in 1996 to be the successor to a company founded in 1908. Since our predecessor company was founded, we
have primarily been engaged in the business of distributing maintenance, repair and operating (“MRO”) products, equipment and service to
industrial customers. We are organized into three segments: Service Centers, Innovative Pumping Solutions and Supply Chain Services. This is
a change from prior years when we were organized into only two segments. We believe this reorganization better reflects how we manage our
current business. Prior year’s financial information has been restated throughout to match the new segmentation. Sales and operating income
for 2008, 2009 and 2010, and identifiable assets at the close of such years for our business segments are presented in Note 14 of the Notes to the
Consolidated Financial Statements.
Our total sales have increased from $125 million in 1996 to $656 million in 2010 through a combination of internal growth and acquisitions. At
December 31, 2010 we operated from 176 locations in 42 states in the U.S. and Sonora, Mexico serving more than 40,000 customers engaged in
a variety of industrial end markets. We have grown sales and profitability through a combination of additional locations, products, services and
becoming customer driven experts in maintenance, repair and operating solutions.
Our principal executive office is located at 7272 Pinemont Houston, Texas 77040, and our telephone number is (713) 996-4700. Our website
address on the Internet is www.dxpe.com and emails may be sent to info@dxpe.com. The reference to our website address does not constitute
incorporation by reference of the information contained on the website and should not be considered part of this report.
Industry Overview
The industrial distribution market is highly fragmented. Based on 2009 sales as reported by Industrial Distribution magazine, we were the 21st
largest distributor of MRO products in the United States. Most industrial customers currently purchase their industrial supplies through
numerous local distribution and supply companies. These distributors generally provide the customer with repair and maintenance services,
technical support and application expertise with respect to one product category. Products typically are purchased by the distributor for resale
directly from the manufacturer and warehoused at distribution facilities of the distributor until sold to the customer. The customer also typically
will purchase an amount of product inventory for its near term anticipated needs and store those products at its industrial site until the products
are used.
We believe that the distribution system for industrial products in the United States, described in the preceding paragraph, creates inefficiencies at
both the customer and the distributor levels through excess inventory requirements and duplicative cost structures. To compete more effectively,
our customers and other users of MRO products are seeking ways to enhance efficiencies and lower MRO product and procurement costs. In
response to this customer desire, three primary trends have emerged in the industrial supply industry:
• Industry Consolidation. Industrial customers have reduced the number of supplier relationships they maintain to lower total
purchasing costs, improve inventory management, assure consistently high levels of customer service and enhance purchasing
power. This focus on fewer suppliers has led to consolidation within the fragmented industrial distribution industry.
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Customized Integrated Service. As industrial customers focus on their core manufacturing or other production competencies, they
increasingly are demanding customized integration services, consisting of value-added traditional distribution, supply chain
services, modular equipment and repair and maintenance services.
• Single Source, First-Tier Distribution. As industrial customers continue to address cost containment, there is a trend toward
reducing the number of suppliers and eliminating multiple tiers of distribution. Therefore, to lower overall costs to the customer,
some MRO distributors are expanding their product coverage to eliminate second-tier distributors and become a “one stop source”.
We believe we have increased our competitive advantage through our traditional and integrated supply programs, which are designed to address
the customer's specific product and procurement needs. We offer our customers various options for the integration of their supply needs, ranging
from serving as a single source of supply for all or specific lines of products and product categories to offering a fully integrated supply package
in which we assume the procurement and management functions, including ownership of inventory, at the customer's location. Our approach to
integrated supply allows us to design a program that best fits the needs of the customer. Customers purchasing large quantities of product are
able to outsource all or most of those needs to us. For customers with smaller supply needs, we are able to combine our traditional distribution
capabilities with our broad product categories and advanced ordering systems to allow the customer to engage in one-stop sourcing without the
commitment required under an integrated supply contract.
Business Segments
DXP is organized under three business segments: Service Centers, Innovative Pumping Solutions (“IPS”) and Supply Chain Services
(“SCS”). Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of
strategies and objectives and they provide a framework for timely and rational allocation of resources within our businesses.
Service Centers Segment
The Service Centers provide MRO products, equipment and services, including technical design expertise and logistics capabilities, to industrial
customers with the ability to provide same day delivery. We offer our customers a single source of supply on an efficient and competitive basis
by being a first-tier distributor that can purchase products directly from the manufacturer. As a first-tier distributor, we are able to reduce our
customers' costs and improve efficiencies in the supply chain. We also provide services such as field safety supervision, in-house and field
repair and predictive maintenance. We offer a wide range of industrial MRO products, equipment and services through a complete continuum of
customized and efficient MRO solutions.
DXP Service Centers are stocked and staffed with knowledgeable sales associates and backed by a centralized customer service team of
experienced industry professionals. Our Service Centers’ products and services are distributed from 112 service centers and 6 distribution
centers.
DXP Service Centers provide a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power,
industrial supply and safety product categories. We currently serve as a first-tier distributor of more than 1,000,000 items of which more than
60,000 are stock keeping units ("SKUs") for use primarily by customers engaged in the oil and gas, food and beverage, petrochemical,
transportation and other general industrial industries. Other industries served by our Service Centers include mining, construction, chemical,
municipal, food and beverage, agriculture and pulp and paper.
Virtually all of the segment’s long-lived assets are located in the U.S. and approximately 99% of sales are recognized in the U.S.
At December 31, 2010, the Service Centers segment had 1,127 full-time employees.
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Supply Chain Services Segment
DXP’s Supply Chain Services segment manages the supply-chain of its customers from across a variety of industries. Our mission is to help our
customers become more competitive by reducing their indirect material costs and order cycle time by increasing productivity and by creating
enterprise-wide inventory and procurement visibility and control.
DXP has developed assessment tools and master plan templates aimed at taking cost out of supply chain processes, streamlining operations and
boosting productivity. This multi-faceted approach allows us to manage the entire channel for maximum efficiency and optimal control, which
ultimately provides our customers with a low-cost solution.
DXP takes a consultative approach to determine the strengths and opportunities for improvement within a customer’s indirect supply chain. This
assessment determines if and how we can best streamline operations, drive value within the procurement process, and increase control in
storeroom management.
Decades of supply chain inventory management experience and comprehensive research, as well as a thorough understanding of our customer’s
business and industry have allowed us to design standardized programs that are flexible enough to be fully adaptable to address our customers’
unique supply chain challenges. These standardized programs include:
• SmartAgreement is a planned, pro-active procurement solution for MRO categories serviced by local DXP Service Centers.
• SmartBuy is DXP’s on-site or centralized MRO procurement solution.
• SmartSource SM is DXP’s on-site procurement and storeroom management by DXP personnel.
• SmartStore is DXP’s customized e-Catalog solution.
• SmartVend is DXP’s industrial dispensing solution. It allows for inventory-level optimization, user accountability and item usage
reduction by 20-40%.
• SmartServ is DXP’s integrated service pump solution. It provides a more efficient way to manage the entire life cycle of pumping
systems and rotating equipment.
DXP’s SmartSolutions programs help customers to cut product costs, improve supply chain efficiencies and obtain expert technical
support. DXP represents manufacturers of up to 90% of all the maintenance, repair and operating products of our customers. Unlike many other
distributors who buy products from second-tier sources, DXP takes customers to the source of the products they need.
The Supply Chain Services segment operates supply chain installations in 52 of our customers’ facilities.
All of the segment’s long-lived assets are located in the U. S. and approximately 99% of 2010 sales were recognized in the U.S.
At December 31, 2010, the Supply Chain Services segment had approximately 281 full-time employees.
Innovative Pumping Solutions Segment
DXP’s Innovative Pumping Solutions® segment provides fabrication and technical design to meet the capital equipment needs of our global
customer base.
DXP’s engineering staff can design a complete custom pump package to meet the customers’ project specifications. Drafting programs such as
Solidworks and Auto CAD allow our engineering team to verify the design and layout of packages with our customers prior to the start of
fabrication. FEA programs such as Cosmos Professional are used to design the package to meet all normal and future loads and forces. This
process helps maximize the pump packages’ life and minimizes any impact to the environment.
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With over 100 years of fabrication experience, DXP has acquired the technical expertise to ensure that our pumps and pump packages are built
to meet the highest standards. DXP utilizes manufacturer authorized equipment and certified personnel. Pump packages require MRO and OEM
equipment such as pumps, motors, valves , and consumable products , such as welding supplies. DXP leverages its MRO inventories and breadth
of authorized products to lower the total cost and maintain the quality of the pump package.
DXP’s fabrication facilities provide convenient technical support and pump services. They have been designed with state of the art equipment to
provide the technical services our customers require:
• Certified structural welding
• Certified pipe welding
• Custom skid assembly
• Custom coatings
• Hydrostatic pressure testing
• Mechanical string testing
• ABS/DNV certification
Examples of our innovative pump packages include:
• Diesel and electric driven firewater
• Pipeline booster
• Potable water packages
• Pigging pump packages
• LACT charge units
• Chemical injection pump packages wash down units
• Seawater lift pumps
• Jockey pumps
• Condensate pump packages
• Cooling water skids
• Seawater/produced water injection packages
• Variety of packages to meet API, ANSI and NFPA 20 specifications
The Innovative Pumping Solutions segment operates out of 6 facilities located in Texas, Louisiana and Nebraska.
All of the segment’s long-lived assets are located in the U. S. and virtually all sales are recognized in the U.S.
At December 31, 2010, the Innovative Pumping Solutions segment had 185 full-time employees.
Products
Most industrial customers currently purchase their MRO supplies through local or national distribution companies that are focused on single or
unique product categories. As a first-tier distributor, our network of service and distribution centers stock more than 60,000 stock keeping units
and provide customers with access to more than 1,000,000 items. Given our breadth of product and the industrial distribution customers focus
around key products categories such as bearings & power transmission, fluid handling and power, safety and industrial supplies, we have
become customer driven experts in four key product categories. As such, our three business segments are supported by these key product
categories including, rotating equipment, bearings & power transmission, industrial supplies and safety products & services. Each business
segment tailors its inventory and leverages product experts to meet the needs of its local customers.
Key product categories that we offer include:
• Rotating Equipment . Our rotating equipment line includes a full line of centrifugal pumps for transfer and process service
applications, such as petrochemicals, refining and crude oil production; rotary gear
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• pumps for low- to medium-pressure service applications, such as pumping lubricating oils and other viscous liquids; plunger and
piston pumps for high-pressure service applications such as salt water injection and crude oil pipeline service; and air-operated
diaphragm pumps. We also provide various pump accessories.
• Bearings & Power Transmission . Our bearing products include several types of mounted and unmounted bearings for a variety
of applications. The power transmission products we distribute include speed reducers, flexible-coupling drives, chain drives,
sprockets, gears, conveyors, clutches, brakes and hoses.
• Industrial Supplies . We offer a broad range of industrial supplies, such as abrasives, tapes and adhesive products, coatings and
lubricants, cutting tools, fasteners, hand tools, janitorial products, pneumatic tools, welding supplies and welding equipment.
• Safety Products & Services . Our safety products include eye and face protection products, first aid products, hand protection
products, hazardous material handling products, instrumentation and respiratory protection products. Additionally, we provide
safety services including safety supervision, training, monitoring, equipment rental and consulting.
We acquire our products through numerous original equipment manufacturers, or OEMs. We are authorized to distribute certain manufacturers'
products in only specific geographic areas. All of our distribution authorizations are subject to cancellation by the manufacturer upon one-year
notice or less. For the last three fiscal years, no manufacturer provided products that accounted for 10% or more of our revenues. We believe
that alternative sources of supply could be obtained in a timely manner if any distribution authorization were canceled. Accordingly, we do not
believe that the loss of any one distribution authorization would have a material adverse effect on our business, financial condition or results of
operations.
Recent Acquisitions
A key component of our growth strategy includes effecting acquisitions of businesses with complementary or desirable product lines, locations
or customers. Since 2004, we have completed 15 acquisitions across our three business segments. Below is a summary of recent acquisitions
since May 2006.
On May 31, 2006, DXP purchased the businesses of Production Pump and Machine Tech. DXP acquired these businesses to strengthen DXP’s
position with upstream oil and gas and pipeline customers. DXP paid approximately $8.9 million for the acquired businesses and assumed
approximately $1.2 million worth of liabilities. The purchase price consisted of approximately $5.4 million paid in cash and $3.5 million in the
form of promissory notes payable to the former owners of the acquired businesses. In addition, DXP paid an additional $1.2 million in cash
based upon earnings after the acquisition date.
On October 11, 2006, we completed the acquisition of the business of Safety International. DXP acquired this business to strengthen DXP’s
expertise in safety products and services. DXP paid $2.2 million in cash for the business of Safety International.
On October 19, 2006, DXP completed the acquisition of the business of Gulf Coast Torch & Regulator. DXP acquired this business to
strengthen DXP’s expertise in the distribution of welding supplies. DXP paid approximately $5.5 million, net of $0.5 million of acquired cash,
for the business of Gulf Coast Torch & Regulator, and assumed approximately $0.2 million worth of debt. Approximately $2.0 million of the
purchase price was paid by issuing promissory notes payable to the former owners of Gulf Coast Torch & Regulator.
On November 1, 2006, DXP completed the acquisition of the business of Safety Alliance. DXP acquired this business to strengthen DXP’s
expertise in safety products. DXP paid $2.3 million in cash for the business of Safety Alliance.
On May 4, 2007, DXP completed the acquisition of the business of Delta Process Equipment. DXP paid $10 million in cash for this
business. DXP acquired this business to diversify DXP’s customer base in the municipal, wastewater and downstream industrial pump
markets. The purchase price was funded by utilizing available capacity under DXP’s credit facility.
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On September 10, 2007, DXP completed the acquisition of Precision Industries, Inc. DXP acquired this business to expand DXP’s geographic
presence and strengthen DXP’s integrated supply offering. The Company paid $106 million in cash for Precision Industries, Inc. The purchase
price was funded using approximately $24 million of cash on hand and approximately $82 million borrowed from a new credit facility.
On October 19, 2007, DXP completed the acquisition of the business of Indian Fire & Safety. DXP acquired this business to strengthen DXP’s
expertise in safety products and services in New Mexico and Texas. DXP paid $6.0 million in cash, $3.0 million in the form of a promissory note
and up to $3.0 million in future payments contingent upon future earnings.
On January 31, 2008, DXP completed the acquisition of the business of Rocky Mtn. Supply. DXP acquired this business to expand DXP’s
presence in the Colorado area. DXP paid $3.9 million in cash and $0.7 million in seller notes.
On August 28, 2008, DXP completed the acquisition of PFI, LLC (“PFI”). DXP acquired this business to strengthen DXP’s expertise in the
distribution of fasteners. DXP paid $66.4 million in cash for this business.
On December 1, 2008, DXP completed the acquisition of the business of Falcon Pump. DXP acquired this business to strengthen DXP’s pump
offering in the Rocky Mountain area. DXP paid $3.1 million in cash, $0.8 million in seller notes and $0.2 million in cash based upon earnings
after the acquisition date.
On April 1, 2010, DXP acquired substantially all the assets of Quadna, Inc. (“Quadna”). The purchase price of approximately $25.0 million (net
of $3.0 million of acquired cash) consisted of $11 million paid in cash, $10 million in the form of convertible promissory notes bearing interest
at a rate of 10% and approximately $4.0 million in the form of 343,337 shares of DXP common stock. On April 9, 2010, $4.5 million principal
amount of the convertible promissory notes, along with accrued interest, were converted into 376,417 shares of DXP’s common stock. On
August 18, 2010, $3.7 million of the convertible promissory notes were paid off using funds obtained from DXP’s credit facility and $1.8
million of the convertible promissory notes were converted to 117,374 shares of DXP common stock. The $11 million cash portion of the
purchase price was funded by borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in
the Western U.S.
On November 30, 2010, DXP acquired substantially all of the assets of D&F Distributors, Inc. (“D&F”). The purchase price of $13.4 million
consisted of approximately $7.4 million paid in cash, approximately $2.9 million in the form of promissory notes bearing interest at a rate of 5%,
and approximately $3.1 million in the form of 155,393 shares of DXP common stock. The cash portion of the purchase price was funded by
borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in Indiana, Kentucky, Tennessee
and Ohio.
Competition
Our business is highly competitive. In the Service Centers segment we compete with a variety of industrial supply distributors, many of which
may have greater financial and other resources than we do. Many of our competitors are small enterprises selling to customers in a limited
geographic area. We also compete with catalog distributors, large warehouse stores and, to a lesser extent, manufacturers. While many of our
competitors offer traditional distribution of some of the product groupings that we offer, we are not aware of any major competitor that offers on
a non-catalog basis a range of products and services as broad as our offering. Further, while certain catalog distributors provide product offerings
as broad as ours, these competitors do not offer the product application, technical design and after-the-sale services that we provide. In the
Supply Chain Services segment we compete with larger distributors that provide integrated supply programs and outsourcing services, some of
which might be able to supply their products in a more efficient and cost-effective manner than we can provide. In the Innovative Pumping
Solutions segment we compete against a variety of manufacturers, distributors and fabricators, many of which may have greater financial and
other resources than we do. We generally compete on service and price in all of our segments.
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Insurance
We maintain liability and other insurance that we believe to be customary and generally consistent with industry practice. We retain a portion of
the risk for medical claims, general liability, worker’s compensation and property losses. The various deductibles of our insurance policies
generally do not exceed $200,000 per occurrence. There are also certain risks for which we do not maintain insurance. There can be no
assurance that such insurance will be adequate for the risks involved, that coverage limits will not be exceeded or that such insurance will apply
to all liabilities. The occurrence of an adverse claim in excess of the coverage limits that we maintain could have a material adverse effect on our
financial condition and results of operations. The premiums for insurance have increased significantly over the past three years. This trend
could continue. Additionally, we are partially self-insured for our group health plan, worker’s compensation, auto liability and general liability
insurance. The cost of claims for the group health plan has increased over the past three years. This trend is expected to continue.
Government Regulation and Environmental Matters
We are subject to various laws and regulations relating to our business and operations, and various health and safety regulations as established by
the Occupational Safety and Health Administration.
Certain of our operations are subject to federal, state and local laws and regulations controlling the discharge of materials into or otherwise
relating to the protection of the environment. Although we believe that we have adequate procedures to comply with applicable discharge and
other environmental laws, the risks of accidental contamination or injury from the discharge of controlled or hazardous materials and chemicals
cannot be eliminated completely. In the event of such a discharge, we could be held liable for any damages that result, and any such liability
could have a material adverse effect on us. We are not currently aware of any situation or condition that we believe is likely to have a material
adverse effect on our results of operations or financial condition.
Employees
At December 31, 2010, DXP had 1,772 full-time employees. We believe that our relationship with our employees is good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), are available free of
charge through our Internet website ( www.dxpe.com ) as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
ITEM 1A. Risk Factors
The following is a discussion of significant risk factors relevant to DXP’s business that could adversely affect its business, financial condition or
results of operations.
The trading price of our common stock may be volatile.
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this
and other periodic reports, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be
comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating
performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions,
such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock. In
the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation.
We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our
management's attention from other business concerns, which could seriously harm our business.
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Our future results will be impacted by our ability to implement our internal growth strategy.
Our future results will depend in part on our success in implementing our internal growth strategy, which includes expanding our existing
geographic areas, selling additional products to existing customers and adding new customers. Our ability to implement this strategy will depend
on our success in selling more products and services to existing customers, acquiring new customers, hiring qualified sales persons, and
marketing integrated forms of supply management such as those being pursued by us through our SmartSource SM program. Although we intend
to increase sales and product offerings to existing customers, there can be no assurance that we will be successful in these efforts.
Risks Associated With Acquisition Strategy
Our future results will depend in part on our ability to successfully implement our acquisition strategy. We may not be able to consummate
acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price. This strategy includes taking
advantage of a consolidation trend in the industry and effecting acquisitions of businesses with complementary or desirable new product lines,
strategic distribution locations, attractive customer bases or manufacturer relationships. Promising acquisitions are difficult to identify and
complete for a number of reasons, including high valuations, competition among prospective buyers, the need for regulatory (including antitrust)
approvals and the availability of affordable funding in the capital markets. In addition, competition for acquisitions in our business areas is
significant and may result in higher purchase prices. Changes in accounting or regulatory requirements or instability in the credit markets could
also adversely impact our ability to consummate acquisitions. In addition, acquisitions involve a number of special risks, including possible
adverse effects on our operating results, diversion of management’s attention, failure to retain key personnel of the acquired business, risks
associated with unanticipated events or liabilities, and expenses associated with obsolete inventory of an acquired business, some or all of which
could have a material adverse effect on our business, financial condition and results of operations. Our ability to grow at or above our historic
rates depends in part upon our ability to identify and successfully acquire and integrate companies and businesses at appropriate prices and
realize anticipated cost savings.
Risks Related to Acquisition Financing
We may need to finance acquisitions by using shares of Common Stock for a portion or all of the consideration to be paid. In the event that the
Common Stock does not maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept Common Stock
as part of the consideration for the sale of their businesses, we may be required to use more of our cash resources, if available, to maintain our
acquisition program. These cash resources may include borrowings under our credit agreement or equity or debt financings. . Our current credit
agreement with our bank lenders contains certain restrictions that could adversely affect our ability to implement and finance potential
acquisitions. Such restrictions include a provision prohibiting us from merging or consolidating with, or acquiring all or a substantial part of the
properties or capital stock of, any other entity without the prior written consent of the lenders. There can be no assurance that we will be able to
obtain the lender’s consent to any of our proposed acquisitions. If we do not have sufficient cash resources, our growth could be limited unless
we are able to obtain additional capital through debt or equity financings.
Ability to Comply with Financial Covenants of Credit Facility
Our credit facility requires the Company to comply with certain specified covenants, restrictions, financial ratios and other financial and
operating tests. The Company’s ability to comply with any of the foregoing restrictions will depend on its future performance, which will be
subject to prevailing economic conditions and other factors, including factors beyond the Company’s control. A failure to comply with any of
these obligations could result in an event of default under the credit facility, which could permit acceleration of the Company’s indebtedness
under the credit facility. The Company from time to time has been unable to comply with some of the financial covenants contained in the credit
facility (relating to, among other things, the maintenance of prescribed financial ratios) and has, when necessary, obtained waivers or
amendments to the covenants from its lenders. Although the Company expects to be able to comply with the covenants, including the financial
covenants, of the credit facility, there can be no assurance that in the future the Company will be able to do so or, if is not able to do so, that its
lenders will be willing to waive such compliance or further amend such covenants.
11
Goodwill and intangible assets recorded as a result of our acquisitions could become impaired.
Goodwill represents the difference between the purchase price of acquired companies and the related fair values of net assets acquired. We test
goodwill for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. As of
December 31, 2010, our combined goodwill and intangible assets amounted to $86.3 million, net of accumulated amortization. To the extent we
do not generate sufficient cash flows to recover the net amount of any investments in goodwill and other intangible assets recorded, the
investment could be considered impaired and subject to write-off. We expect to record further goodwill and other intangible assets as a result of
future acquisitions we may complete. Future amortization of such other intangible assets or impairments, if any, of goodwill or intangible assets
would adversely affect our results of operations in any given period.
Our business has substantial competition that could adversely affect our results.
Our business is highly competitive. We compete with a variety of industrial supply distributors, some of which may have greater financial and
other resources than us. Although many of our traditional distribution competitors are small enterprises selling to customers in a limited
geographic area, we also compete with larger distributors that provide integrated supply programs such as those offered through outsourcing
services similar to those that are offered by our SCS segment. Some of these large distributors may be able to supply their products in a more
timely and cost-efficient manner than us. Our competitors include catalog suppliers, large warehouse stores and, to a lesser extent, certain
manufacturers. Competitive pressures could adversely affect DXP’s sales and profitability.
The loss of or the failure to attract and retain key personnel could adversely impact our results of operations.
We will continue to be dependent to a significant extent upon the efforts and ability of David R. Little, our Chairman of the Board, President and
Chief Executive Officer. The loss of the services of Mr. Little or any other executive officer of our Company could have a material adverse
effect on our financial condition and results of operations. In addition, our ability to grow successfully will be dependent upon our ability to
attract and retain qualified management and technical and operational personnel. The failure to attract and retain such persons could materially
adversely affect our financial condition and results of operations.
The loss of any key supplier could adversely affect DXP’s sales and profitability.
We have distribution rights for certain product lines and depend on these distribution rights for a substantial portion of our business. Many of
these distribution rights are pursuant to contracts that are subject to cancellation upon little or no prior notice. Although we believe that we could
obtain alternate distribution rights in the event of such a cancellation, the termination or limitation by any key supplier of its relationship with the
Company could result in a temporary disruption of our business and, in turn, could adversely affect our results of operations and financial
condition.
A slowdown in the economy could negatively impact DXP’s sales growth.
Economic and industry trends affect DXP’s business. Demand for our products is subject to economic trends affecting our customers and the
industries in which they compete in particular. Many of these industries, such as the oil and gas industry, are subject to volatility while others,
such as the petrochemical industry, are cyclical and materially affected by changes in the economy. As a result, demand for our products could
be adversely impacted by changes in the markets of our customers.
12
Interruptions in the proper functioning of our information systems could disrupt operations and cause increases in costs and/or decreases in
revenues.
The proper functioning of DXP’s information systems is critical to the successful operation of our business. Although DXP’s information
systems are protected through physical and software safeguards and remote processing capabilities exist, our information systems are still
vulnerable to natural disasters, power losses, telecommunication failures and other problems. If critical information systems fail or are otherwise
unavailable, DXP’s ability to procure products to sell, process and ship customer orders, identify business opportunities, maintain proper levels
of inventories, collect accounts receivable and pay accounts payable and expenses could be adversely affected.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
We own our headquarters facility in Houston, Texas, which has approximately 48,000 square feet of office space. The Service Centers segment
owns or leases 112 facilities located in Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New
Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia, Wyoming
and Sonora, Mexico. The Supply Chain Services segment operates supply chain installations in 52 of our customers’ facilities in Alabama,
Arkansas, Arizona, California, Florida, Georgia, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nebraska, New
Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and Wisconsin. The
Innovative Pumping Solutions segment operates out of 6 facilities located in Texas, Louisiana and Nebraska. Our owned facilities range from
5,000 square feet to 65,000 square feet in size. We lease facilities for terms generally ranging from one to thirteen years. The leased facilities
range from 1,500 square feet to 170,000 square feet in size. The leases provide for periodic specified rental payments and certain leases are
renewable at our option. We believe that our facilities are suitable and adequate for the needs of our existing business. We believe that if the
leases for any of our facilities were not renewed, other suitable facilities could be leased with no material adverse effect on our business,
financial condition or results of operations. One of the facilities owned by us is pledged to secure our indebtedness.
ITEM 3. Legal Proceedings
On July 22, 2004, DXP and Ameron International Corporation, DXP’s vendor of fiberglass reinforced pipe, were sued in the Twenty-Fourth
Judicial District Court, Parish of Jefferson, State of Louisiana by BP America Production Company regarding the failure of Bondstrand PSX JFC
pipe, a recently introduced type of fiberglass reinforced pipe which had been installed on four energy production platforms. BP American
Production Company alleges negligence, breach of contract, breach of warranty and that damages exceed $20 million. DXP believes the failures
were caused by the failure of the pipe itself and not by work performed by DXP. We intend to vigorously defend these claims. Our insurance
carrier has agreed, under a reservation of rights to deny coverage, to provide a defense against these claims. The maximum amount of our
insurance coverage, if any, is $6 million. Under certain circumstances, our insurance may not cover this claim. DXP currently believes that this
claim is without merit.
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of its business. The Company believes that
the outcome of any of these various proceedings will not have a material adverse effect on its business, financial condition or results of
operations.
ITEM 4. (Reserved)
13
ITEM 5.
Issuer Purchases of Equity Securities
Market for the Registrant's Common Equity, Related Stockholder Matters and
Our common stock trades on The NASDAQ Global Market under the stock symbol "DXPE".
PART II
The following table sets forth on a per share basis the high and low sales prices for our common stock as reported by NASDAQ for the periods
indicated.
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 15.84
$ 16.40
$ 12.44
$ 13.36
$ 13.59
$ 17.98
$ 21.59
$ 24.76
$ 8.47
$ 9.52
$ 9.21
$ 10.48
$ 10.75
$ 11.25
$ 14.84
$ 17.61
On March 11, 2011, we had approximately 521 holders of record for outstanding shares of our common stock. This number does not include
shareholders for whom shares are held in “nominee” or “street name”.
We anticipate that future earnings will be retained to finance the continuing development of our business. In addition, our bank credit facility
prohibits us from declaring or paying any cash dividends or other distributions on our capital stock except for the monthly $0.50 per share
dividend on our Series B convertible preferred stock, which amounts to $90,000 in the aggregate per year. Accordingly, we do not anticipate
paying cash dividends on our common stock in the foreseeable future. The payment of any future dividends will be at the discretion of our Board
of Directors and will depend upon, among other things, future earnings, the success of our business activities, regulatory and capital
requirements, lenders, and general financial and business conditions.
Stock Performance
The following performance graph compares the performance of DXP Common Stock to the NASDAQ Industrial Index and the NASDAQ
Composite (US). The graph assumes that the value of the investment in DXP Common Stock and in each index was $100 at December 31, 2005
and that all dividends were reinvested.
14
Investors are cautioned against drawing conclusions from the data contained in the graph as past results are not necessarily indicative of future
performance.
Equity Compensation Table
The following table provides information regarding shares covered by the Company’s equity compensation plans as of December 31, 2010:
Number
of Shares
to be issued
on exercise of
outstanding
options
Weighted
average
exercise price
of outstanding
options
Non-vested
restricted
shares
outstanding
Weighted
average
grant price
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
Plan category
Equity compensation plans
approved by shareholders
Equity compensation plans not
N/A
approved by shareholders
Total
N/A
(1) Represents shares of common stock authorized for issuance under the 2005 Restricted Stock Plan.
N/A
180,056
N/A
$16.15
N/A
N/A
180,056
$16.15
N/A
N/A
165,389 (1)
N/A
165,389 (1)
15
ITEM 6. Selected Financial Data
The selected historical consolidated financial data set forth below for each of the years in the five-year period ended December 31, 2010 has
been derived from our audited consolidated financial statements. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Report.
2006
Restated (1)
Years Ended December 31,
2008
Restated (1)
(in thousands, except per share amounts)
2007
Restated (1)
2009 (2)
2010
Consolidated Statement of Earnings Data:
Sales
Gross Profit
Operating income (loss)
Income (loss) before income taxes
Net income (loss)
Per share amounts
Basic earnings (loss) per common share
Common shares outstanding
Diluted earnings (loss) per share
Common and common equivalent shares
outstanding
$ 279,820 $ 444,547 $ 736,883
206,988
48,191
42,284
25,887
125,692
31,892
28,897
17,347
78,622
20,678
19,404
11,922
$ 1.17 $ 1.46 $ 1.99
12,945
$ 1.04 $ 1.35 $ 1.87
11,811
10,127
$ 583,226 $ 656,202
188,395
37,091
32,132
19,381
151,414
(49,332)
(54,482)
(42,412)
$ (3.24) $ 1.40
13,821
$ (3.24) $ 1.32
13,117
11,450
12,860
13,869
13,117
14,821
(1)
Basic and diluted earnings per share amounts have been restated due to adoption in the first
quarter of 2009 of authoritative guidance which requires awards of unvested restricted stock to be
treated as if outstanding in the calculation of earnings per share.
(2)
The goodwill and other intangibles impairment charge and the Precision inventory
impairment charge in 2009 reduced operating income by $66.8 million and increased basic and diluted
loss per share by $3.82.
Consolidated Balance Sheet Data
Total assets
Long-term debt obligations
Shareholders’ equity
As of December 31,
2008
2006
2007
$ 118,811 $ 288,170 $ 397,856
154,591
130,188
101,989
102,713
35,174
36,920
2009
$ 270,927
102,916
90,213
2010
$ 320,624
103,621
124,120
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes contained
elsewhere in this Report.
General Overview
Our products and services are marketed in at least 42 states in the United States and Sonora, Mexico to over 40,000 customers that are engaged
in a variety of industries, many of which may be countercyclical to each other. Demand for our products generally is subject to changes in the
United States and global economy and economic trends affecting our customers and the industries in which they compete in particular. Certain
of these industries, such as the oil and gas industry, are subject to volatility while others, such as the petrochemical industry and the construction
industry, are cyclical and materially affected by changes in the United States and global economy. As a r esult, we may experience changes in
demand within particular markets, segments and product categories as changes occur in our customers' respective markets.
16
During 2006 the general economy and the oil and gas exploration and production business continued to be positive. Our employee headcount
increased by 45% as a result of four acquisitions and hiring additional personnel to support increased sales. The majority of the 2006 sales
increase came from a broad-based increase in sales of pumps, bearings, safety products and industrial supplies to customers engaged in oilfield
service, oil and gas production, mining, electricity generation and petrochemical processing. Sales by the four businesses acquired in 2006
accounted for $11.8 million of the $94.5 million 2006 sales increase.
During 2007 the general economy and the oil and gas exploration and production business continued to be positive. During 2007 our headcount
increased by 112% primarily as a result of three acquisitions. Sales by the three businesses acquired in 2007 accounted for $92.3 million of the
$164.7 million sales increase. The 2007 sales increase, excluding sales of businesses acquired in 2007, resulted from a broad based increase in
sales by our service centers, innovative pumping solution locations and supply chain locations.
During 2008 the general economy weakened. However, the oil and gas exploration and production business continued to be positive during the
first half of 2008, before declining during the second half of 2008. During 2008 our headcount increased by 18% primarily as a result of three
acquisitions. Sales by the three businesses acquired in 2008 accounted for $33.4 million of the $292.3 million 2008 sales increase. The 2008
sales increase, excluding sales of businesses acquired in 2008, resulted from a broad-based increase in sales by our service centers, innovative
pumping solution locations and supply chain locations.
During 2009 the general economy and the oil and gas exploration and production business declined significantly. During 2009 our headcount
decreased by approximately 10% as a result of actions taken to reduce operating costs. Sales for 2009 declined by 21% from 2008. Sales by
businesses acquired during 2008, on a same store sales basis, accounted for $36.1 million of 2010 sales. Excluding these sales by acquired
businesses, sales declined by 26% from 2008. The 2009 sales decline is primarily due to a broad-based decline in the sales of pumps, bearings,
safety products and industrial supplies in connection with a broad-based decline in the U.S. economy. This economic decline led to the
impairment of goodwill and other intangibles. During the fourth quarter of 2009 the Company recognized an impairment charge of $53.0
million for goodwill and other intangibles and an impairment charge of $13.8 million to reduce the valuation of inventory acquired in the
acquisition of Precision. The impairment charges did not result in any cash expenditures, did not adversely affect compliance with covenants
under our credit facility, and did not affect our cash position or cash flows from operating activities.
During 2010 the general economy and the oil and gas exploration and production business improved. Our employee headcount increased by
approximately 7% as a result of two acquisitions. Excluding the employees at the two acquired businesses headcount declined by approximately
1%, primarily as a result of consolidating back office functions. Sales by Quadna, acquired April 1, 2010 and D&F, acquired December 1,
2010, accounted for $43.6 million of 2010 sales. Excluding Quadna and D&F sales, sales for 2010 increased 5.0%.
Our sales growth strategy in recent years has focused on internal growth and acquisitions. Key elements of our sales strategy include leveraging
existing customer relationships by cross-selling new products, expanding product offerings to new and existing customers, and increasing
business-to-business solutions using system agreements and supply chain solutions for our integrated supply customers. We will continue to
review opportunities to grow through the acquisition of distributors and other businesses that would expand our geographic breadth and/or add
additional products and services. Our results will depend on our success in executing our internal growth strategy and, to the extent we complete
any acquisitions, our ability to integrate such acquisitions effectively.
Our strategies to increase productivity include consolidated purchasing programs, centralizing product distribution centers, and customer service
and inside sales functions, converting selected locations from full warehouse and customer service operations to service centers, and using
information technology to increase employee productivity.
17
Results of Operations
Years Ended December 31,
2008
Restated (1) %
2009 (2)
%
2010
%
100.0
71.9
28.1
21.6
(in millions, except percentages and per share amounts)
$ 736.9
529.9
207.0
158.8
Sales
Cost of sales
Gross profit
Selling, general & administrative expense
Goodwill and other intangibles impairment
Operating income (loss)
Interest expense
Other income
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
(1)
2009 of authoritative guidance which requires awards of unvested restricted stock to be treated as if outstanding
in the calculation of earnings per share.
(2)
2009 reduced operating income by $66.8 million and increased basic and diluted loss per share by $3.82.
$ 656.2
467.8
188.4
151.3
-
37.1
5.2
(0.2)
32.1
12.7
$ 19.4
$ 583.2
431.8
151.4
147.8
53.0
(49.3)
5.2
(0.1)
(54.5)
(12.1)
$(42.4)
The goodwill and other intangibles impairment charge and the Precision inventory impairment charge in
Basic and diluted earnings per share amounts have been restated due to adoption in the first quarter of
100.0
74.0
26.0
25.3
9.1
(8.5)
0.9
-
(9.3)
(2.1)
(7.3%)
48.2
6.1
(0.2)
42.3
16.4
$ 25.9
100.0
71.3
28.7
23.1
-
5.7
0.8
-
4.9
2.0
3.0
6.5
0.8
-
5.7
2.2
3.5%
$(3.24)
$(3.24)
$ 1.40
$ 1.32
$ 1.99
$ 1.87
DXP management has modified how it manages and evaluates the segments of our business. DXP is now organized into three business
segments: Service Centers, Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). The Service Centers are engaged in
providing maintenance, repair and operating products, equipment and services, including logistics capabilities, to industrial customers. The
Service Centers provide a wide range of MRO products in the rotating equipment, bearing, power transmission equipment, fastener, industrial
supplies and safety product categories. The IPS segment fabricates and assembles custom-made engineered pump packages. The SCS segment
manages all or part of customer’s supply chain, including inventory. The 2009 and 2008 segment information has been restated to conform with
the 2010 composition of reportable segments.
Year Ended December 31, 2010 compared to Year Ended December 31, 2009
SALES. Sales for the year ended December 31, 2010 increased $73.0 million, or 12.5%, to approximately $656.2 million from $583.2 million in
2009. Sales by Quadna, acquired April 1, 2010 and D&F, acquired December 1, 2010, accounted for $43.6 million of 2010 sales. Excluding
Quadna and D&F sales, sales for 2010 increased 5.0%. Sales for the Service Centers segment increased $61.7 million, or 15.8%. Excluding
Quadna and D&F Service Centers sales of $26.2 million, Service Centers segment sales for 2010 increased 9.1% from 2009. This sales increase
is primarily due to improvement in the industrial portion of the U.S. economy. Sales for the SCS segment decreased by $9.8 million, or 7.2%,
from 2009. The sales decrease by SCS resulted from sales to customers in 2009 which subsequently terminated supply agreements, exceeding
sales to customers which had been added since 2009. Sales for the IPS segment increased by $21.1 million, or 37.8%, for 2010 when compared
to 2009. Excluding Quadna IPS sales of $17.4 million for 2010, IPS sales increased 6.6% from 2009. The sales increase resulted from the
improvement in the economy and the associated increase in capital spending by our customers.
GROSS PROFIT. Gross profit as a percentage of sales increased to approximately 28.7% for 2010 from 26.0% for 2009. This increase is
primarily the result of the $13.8 million charge in the fourth quarter of 2009 to reduce the value of inventory acquired with the acquisition of
Precision on September 10, 2007. Excluding this $13.8 million charge, gross profit as a percentage of sales for 2009 would have been
28.3%. The increase in gross profit as a percentage of sales in 2010 from this 28.3% for 2009 is primarily the result of improvement in the U.S.
economy.
18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense for 2010 increased by
approximately $3.5 million, or 2.4%, when compared to 2009. Selling, general and administrative expense for Quadna and D&F for 2010 was
$7.6 million. As a percentage of revenue, the 2010 expense decreased to 23.1%, from 25.3% for 2009. This decrease is primarily the result of
sales increasing 12.5% and expenses increasing only 2.4%.
OPERATING INCOME. Excluding the effect of the $13.8 million inventory impairment charge and the $53.0 million goodwill and other
intangible impairment charges recorded in 2009, operating income for 2010 increased 112% compared to 2009. Operating income for the
Service Centers segment increased $26.2 million. Excluding the effect of the $12.8 million of inventory impairment charges recorded by the
Service Centers segment during 2009, operating income for the Service Centers segment increased 35.9% as a result of the 15.8% increase in
sales combined with the effect of cost reduction measures implemented during 2009 and 2010. Operating income for the SCS segment increased
28.3%. Excluding the $1.0 million of inventory impairment charges recorded by the SCS segment during 2009, operating income for the SCS
segment increased by 8.7%, primarily as a result of the reduced administrative costs for this segment. Operating income for the IPS segment
increased 37.5% as a result of the 37.8% increase in sales.
INTEREST EXPENSE. Interest expense for 2010 decreased by 0.7% from 2009. On March 15, 2010 we amended our credit facility. This
amendment significantly increased the interest rates and commitment fees applicable at various leverage ratios from levels in effect before
March 15, 2010. The amendment increased the cost of funds borrowed under our credit facility by approximately 200 basis points beginning on
March 16, 2010. This increase in interest rates was offset by the effect of lower average debt outstanding during 2010 compared to 2009.
INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 35% due to state income taxes and non-deductible
expenses. Our effective tax rate for 2010 of 39.7% increased from 22.2% for 2009. The 2009 tax rate was unusually low primarily as a result of
the non-deductible goodwill and other intangibles impairment charge for PFI, LLC recorded in 2009.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
SALES. Sales for the year ended December 31, 2009 decreased $153.7 million, or 20.9%, to approximately $583.2 million from $736.9 million
in 2008. Sales for the Service Centers segment decreased $79.1 million, or 16.8%, to $391.1 million for the year ended December 31, 2009, from
$470.2 million for 2008. Sales by businesses acquired in 2008, on a same store sales basis, accounted for $36.1 million of 2009 sales. Excluding
these sales by the acquired businesses, sales for the Service Centers segment decreased 24.5%. This sales decrease is primarily due to a broad-
based decrease in sales of pumps, bearings, safety products and industrial supplies in connection with a broad-based decline in the U. S.
economy. Sales for the Supply Chain Services segment decreased by $29.6 million, or 17.8%, to $136.2 million for the year ended December 31,
2009 from $165.8 million for 2008, resulting from the decline in the U. S. economy. Sales for the Innovative Pumping Solutions segment
decreased by $45.0 million, or 44.6%, to $55.9 million for the year ended December 31, 2009 from $100.9 million for 2008 due to the decline in
the U.S. economy.
GROSS PROFIT. Gross profit as a percentage of sales decreased by approximately 2.1% for 2009, to 26.0% from 28.1% for 2008. This
decrease is the result of the $13.8 million charge in 2009 to reduce the value of inventory acquired in connection with the acquisition of
Precision on September 10, 2007.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense for 2009 decreased by approximately $11.0
million to $147.8 million from $158.8 million for 2008. Selling, general and administrative expense associated with the three businesses
acquired in 2008, on a same store basis, accounted for $11.2 million of the 2009 expense. On a same store basis, selling, general and
administrative expense decreased approximately $22.2 million. This decrease primarily resulted from reduced salaries, incentive compensation,
employee benefits and travel expenses compared to 2008. As a percentage of sales, the 2009 expense increased by approximately 3.8%, to
25.3% for 2009 from 21.6% for 2008. This increase is primarily the result of sales decreasing more than selling, general and administrative
expenses decreased combined with the effect of accruing $1.8 million of future rent and related expenses associated with locations closed during
2009.
19
GOODWILL AND OTHER INTANGIBLES IMPAIRMENT. During the fourth quarter of 2009, the Company performed the annual goodwill
impairment test based on current and expected market conditions, including reduced operating results. As a result of this test, the Company
determined that goodwill and other intangibles associated with the Service Centers segment reporting units were impaired as of December 31,
2009. Accordingly, the Company recognized an impairment charge of $53.0 million for goodwill and other intangibles.
OPERATING INCOME (LOSS). Operating loss for 2009 was $49.3 million compared to $48.2 million of income for 2008 as a result of a
$55.6 million decrease in gross profit and the $53.0 million impairment charge, partially offset by an $11.0 million decrease in selling, general
and administrative expense. Operating income for the Service Centers segment was $24.4 million for 2009 compared to $68.0 million for 2008,
primarily as a result of decreased gross profit as a result of decreased sales and the $12.8 million inventory impairment charge recorded in the
Service Centers segment during 2009. Excluding the $1.0 million inventory impairment charge recorded in the SCS segment during 2009,
operating income for the Supply Chain Services segment increased 21.2%, to $6.5 million for 2009, from $5.4 million for 2008, primarily as a
result of increased gross profit. Operating income for the Innovative Pumping Solutions segment decreased 37.2%, to $7.5 million for 2009,
from $12.0 million for 2008 as a result of decreased gross profit due to decreased sales.
INTEREST EXPENSE. Interest expense for 2009 decreased by 14.4% from 2008. This decrease primarily resulted from decreased market
interest rates.
OTHER INCOME. Other income for 2009 decreased to $0.1 million from $0.2 million for 2008 as a result of reduced interest income.
INCOME TAXES. Our provision for income taxes differed from the U. S. statutory rate of 35% due to state income taxes and non-deductible
expenses. Our effective tax rate for 2009 decreased to 22.2% from 38.8% for 2008 primarily as a result of the non-deductible impairment charge
for PFI, LLC goodwill and other intangibles recorded in 2009.
Pro Forma Results
The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2009 and 2010,
assuming the acquisition of businesses completed in 2010 were consummated as of January 1 of each year follows:
Years Ended
December 31,
2009
2010
(Unaudited)
In Thousands,
except for per share data
Net Sales
Net (loss) income
Per Share Data
Basic Earnings
Diluted Earnings
$ 653,175
$(39,967)
$689,675
$ 20,843
$(3.04)
$(3.04)
$1.50
$1.42
20
Liquidity and Capital Resources
General Overview
As a distributor of MRO products and services, we require significant amounts of working capital to fund inventories and accounts receivable.
Additional cash is required for capital items such as information technology and warehouse equipment. We also require cash to pay our lease
obligations and to service our debt.
We generated approximately $23.9 million of cash in operating activities in 2010 as compared to generating $51.6 million in 2009. This change
between the two years was primarily attributable to the $24.1 million decrease in accounts receivable and the $32.7 million reduction in
inventories in 2009 compared to a $14.5 million increase in accounts receivable and a $2.0 million decrease in inventories in 2010.
During 2010 we paid $18.2 million of cash related to the purchase of two businesses during 2010 and $0.2 million related to businesses acquired
before 2009 compared to paying $0.5 million during 2009 related to acquisitions completed prior to 2009.
We purchased approximately $1.2 million of capital assets during 2010 compared to $1.6 million for 2009. Capital expenditures during 2010
and 2009 were related primarily to computer equipment, computer software, production equipment, inventory handling equipment, safety rental
equipment and building improvements. Capital expenditures for 2011 are expected to be in the range of the 2008, 2009 and 2010 amounts.
At December 31, 2010, our total long-term debt, including the current portion, was $114.6 million compared to total capitalization (total long-
term debt plus shareholders’ equity) of $238.7 million. Approximately $109.8 million of this outstanding debt bears interest at various floating
rates. Therefore, as an example, a 200 basis point increase in interest rates would increase our annual interest expense by approximately $2.2
million.
Our normal trade terms for our customers require payment within 30 days of invoice date. In response to competition and customer demands we
will offer extended terms to selected customers with good credit history. Customers that are financially strong tend to request extended terms
more often than customers that are not financially strong. Many of our customers, including companies listed in the Fortune 500, do not pay us
within stated terms for a variety of reasons, including a general business philosophy to pay vendors as late as possible.
During 2010, the amount available to be borrowed under our credit facility increased from $37.3 million at December 31, 2009, to $50.0 million
at December 31, 2010. The increase in availability is primarily the result of the effect of increased accounts receivable. Our total long-term debt
decreased $1.0 million during 2010. Management believes that the liquidity of our balance sheet at December 31, 2010, provides us with the
ability to meet our working capital needs, scheduled principal payments, capital expenditures and Series B convertible preferred stock dividend
payments during 2011.
Credit Facility
On August 28, 2008, DXP entered into a credit agreement with Wells Fargo Bank, National Association, as lead arranger and administrative
agent for the lenders (the “Facility). The March 15, 2010 amendment to the Facility significantly increased the interest rates and commitment
fees applicable at various leverage ratios from levels in effect before March 15, 2010. The Facility consists of a $50 million term loan and a
revolving credit facility that provides a $150 million line of credit to the Company. The term loan requires principal payments of $2.5 million per
quarter. The Facility matures on August 11, 2013. The Facility contains financial covenants defining various financial measures and levels of
these measures with which the Company must comply. Covenant compliance is assessed as of each quarter end and certain month ends for the
asset test. The asset test is defined under the Facility as the sum of 85% of the Company’s net accounts receivable, 60% of net inventory and
50% of the net book value of non-real-estate property and equipment. The Company’s borrowing and letter of credit capacity under the
revolving credit portion of the Facility at any given time is $150 million less borrowing under the revolving credit portion of the Facility and
letters of credit outstanding, subject to the asset test described above.
21
On December 31, 2010, the LIBOR-based rate on the revolving credit portion of the Facility was LIBOR plus 2.75%, the prime-based rate on the
revolving credit portion of the Facility was the prime rate plus 1.75%, the commitment fee was 0.375%, the LIBOR-based rate for the term loan
was LIBOR plus 3.25% and the prime-based rate for the term loan was the prime rate plus 2.25%. At December 31, 2010, $103.5 million was
borrowed under the Facility at a weighted average interest rate of approximately 3.2% under the LIBOR options. The revolving credit portion of
the Facility provides the option of interest at LIBOR plus a margin ranging from 2.25% to 4.00% or at the prime rate plus a margin of 1.25% to
3.00%. Commitment fees of 0.25% to 0.625% per annum are payable on the portion of the Facility capacity not in use for borrowings or letters
of credit at any given time. The term loan portion of the Facility provides the option of interest at LIBOR plus a margin ranging from 2.75% to
4.50% or at the prime rate plus a margin of 1.75% to 3.50%. Borrowings under the Facility are secured by all of the Company’s accounts
receivable, inventory, general intangibles and non-real-estate property and equipment. At December 31, 2010, we had $50.0 million available
for borrowing and letters of credit under the Facility.
The Facility’s principal financial covenants include:
Fixed Charge Coverage Ratios – The Facility requires that the Fixed Charge Coverage Ratio for the 12-month period ending on the last day of
each quarter through December 31, 2010 be not less than 1.25 to 1.0, stepping up to 1.50 to 1.0 for each quarter ending on or after March 31,
2011, with “Fixed Charge Coverage Ratio” defined as the ratio of (a) EBITDA (as defined below) for the 12 months ending on such date, minus
cash taxes and minus capital expenditures for such period (excluding acquisitions) to (b) the aggregate of interest expense paid in cash,
scheduled principal payments in respect of long-term debt and current portion of capital leases for such 12-month period, determined in each
case on a consolidated basis for DXP and its subsidiaries.
Leverage Ratios - The Facility requires that the Company’s Leverage Ratio, determined at the end of each fiscal quarter, not exceed 4.00 to 1.00
as of December 31, 2010, 3.50 to 1.00 as of March 31, 2011 and 3.25 to 1.0 as of the last day of each fiscal quarter thereafter. The Leverage
Ratio is defined as the outstanding Indebtedness divided by EBITDA for the 12 months then ended. At December 31, 2010, the Company’s
Leverage Ratio was 2.26 to 1.00. The Facility requires that the Company’s Senior Leverage Ratio, determined at the end of each fiscal quarter,
not exceed 3.25 to 1.0 as of December 31, 2010, 3.00 to 1.00 as of March 31, 2011 and 2.75 to 1.0 as of the last day of each fiscal quarter
thereafter. The Senior Leverage Ratio is defined as the outstanding Indebtedness, minus the aggregate amount of all Subordinated Debt, divided
by EBITDA for the 12 months then ended. At December 31, 2010, the Company’s Senior Leverage Ratio was 2.20 to 1.00. Indebtedness is
defined under the Facility for financial covenant purposes as: (a) all obligations of DXP for borrowed money including but not limited to senior
bank debt, senior notes and subordinated debt; (b) capital leases; (c) issued and outstanding letters of credit; and (d) contingent obligations for
funded indebtedness. Subordinated Debt is defined under the Facility for financial covenant purposes as Indebtedness which has been
subordinated on terms and conditions satisfactory to the Lenders.
22
The following are computations of the Leverage Ratio and the Senior Leverage Ratio as of December 31, 2010 (in thousands, except for ratios):
For the Year ended December 31, 2010
Income before taxes
Interest expense
Depreciation and amortization
Stock compensation expense
Pro forma acquisition EBITDA
EBITDA of divestiture
Reduction of closed location accrual
(A) Defined EBITDA
As of December 31, 2010
Total long-term debt
Letters of credit outstanding
Less: Subordinated Debt
Defined Indebtedness
Senior
Leverage
Ratio
Leverage
Ratio
$32,132
5,208
9,568
973
3,723
13
(555)
$51,062
$32,132
5,208
9,568
973
3,723
13
(555)
$51,062
$114,551
933
(2,900)
$114,551
933
-
$112,584 (B) $115,484 (C)
Senior Leverage Ratio (B)/(A)
Leverage Ratio (C)/(A)
2.20
2.26
EBITDA as defined under the Facility for financial covenant purposes means, without duplication, for any period the consolidated net income
(excluding any extraordinary gains or losses) of DXP plus, to the extent deducted in calculating consolidated net income, depreciation,
amortization, other non-cash items and non-recurring items (including, without limitation, impairment charges, asset write-offs and accruals in
respect of closed locations), interest expense and tax expense for taxes based on income and minus, to the extent added in calculating
consolidated net income, any non-cash items and non-recurring items; provided that, if DXP acquires the equity interests or assets of any person
during such period under circumstances permitted under the Facility, EBITDA shall be adjusted to give pro forma effect to such acquisition
assuming that such transaction had occurred on the first day of such period and provided further that, if DXP divests the equity interests or assets
of any person during such period under circumstances permitted under the Facility, EBITDA shall be adjusted to give pro forma effect to such
divestiture assuming that such transaction had occurred on the first day of such period. Add-backs allowed pursuant to Article 11, Regulation S-
X, of the Securities Act of 1933, as amended, will also be included in the calculation of EBITDA.
Performance Metrics
December 31,
2010
2009
Increase
(Decrease)
Days of sales outstanding (in days)
Inventory turns
Results for businesses acquired in 2010 were annualized to compute these
performance metrics.
50.1
5.9
57.5
6.2
7.4
.3
23
Accounts receivable days of sales outstanding were 57.5 at December 31, 2010 compared to 50.1 days at December 31, 2009. The increase
resulted primarily from a change in customer mix which resulted in slower collection of accounts receivable. Annualized inventory turns were
6.2 times at December 31, 2010 compared to 5.9 times at December 31, 2009. The increase in inventory turns resulted from the improvement in
the U. S. economy.
Funding Commitments
We believe our cash generated from operations and available under our Facility will meet our normal working capital needs during the next
twelve months. However, we may require additional debt or equity financing to fund potential acquisitions. Such additional financings may
include additional bank debt or the public or private sale of debt or equity securities. In connection with any such financing, we may issue
securities that substantially dilute the interests of our shareholders. We may not be able to obtain additional financing on acceptable terms, if at
all.
Borrowings
December 31,
2010
2009
(in thousands)
Increase
(Decrease)
Current portion of long-term debt
Long-term debt, less current portion
Total long-term debt
Amount available (1)
(1) Represents amount available to be borrowed under the Facility at the indicated date.
(2) The funds used to reduce debt were obtained from operations.
(3) The $12.7 million increase in the amount available is primarily a result of the effect of
increased accounts receivable on the loan covenant ratios.
$ 12,595 $ (1,665)
102,916 705
$ 115,511 $ (960) (2)
$ 37,276 $ 12,744 (3)
$ 10,930
103,621
$ 114,551
$ 50,020
Contractual Obligations
The impact that our contractual obligations as of December 31, 2010 are expected to have on our liquidity and cash flow in future periods is as
follows (in thousands):
Long-term debt, including current portion (1)
Operating lease obligations
Estimated interest payments (2)
Total
Total
$ 114,551
38,521
834
$ 153,906
Payments Due by Period
1–3 Years
Less than 1
Year
$ 10,930 $101,301
14,697
408
$ 21,658 $116,406
10,471
257
3-5
Years
$ 2,320
6,401
169
$ 8,890
More than 5
Years
-
6,952
-
$ 6,952
(1) Amounts represent the expected cash payments of our long-term debt and do not include any fair value
adjustment.
(2) Assumes interest rates in effect at December 31, 2010. Assumes debt is paid on maturity date and not
replaced. Does not include interest on the revolving line of credit as borrowings under the Facility
fluctuate. The amounts of interest incurred for borrowings under the revolving lines of credit were
$4,900,000, $4,700,000, and $4,900,000 for 2008, 2009 and 2010, respectively. Management anticipates an
increased level of interest payments on the Facility in 2011 as a result of expected increased interest rates.
24
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities ("SPE's"), which would have been established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2010, we were
not involved in any unconsolidated SPE transactions.
Indemnification
In the ordinary course of business, DXP enters into contractual arrangements under which DXP may agree to indemnify customers from any
losses incurred relating to the services we perform. Such indemnification obligations may not be subject to maximum loss clauses. Historically,
payments made related to these indemnities have been immaterial.
Discussion of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us
to make estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The significant estimates made by us in the accompanying financial statements relate to reserves for
accounts receivable collectability, inventory valuations, valuation of intangibles, impairment analysis, income taxes, self-insured liability claims
and self-insured medical claims. Actual results could differ from those estimates. Management periodically re-evaluates these estimates as
events and circumstances change. Together with the effects of the matters discussed above, these factors may significantly impact the
Company’s results of operations from period-to-period.
Critical accounting 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. Below is a discussion of what we believe are our critical accounting policies. Also, see Note 1 of the Notes to the
Consolidated Financial Statements.
Revenue Recognition
For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues using the percentage of
completion method. For other sales, the Company recognizes revenues when an agreement is in place, the price is fixed, title for product passes
to the customer or services have been provided and collectability is reasonably assured. Revenues are recorded net of sales taxes. Revenues
recognized include product sales and billings for freight and handling charges.
Allowance for Doubtful Accounts
Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based
upon the expected collectability of all such accounts. Write-offs could be materially different from the reserve provided if economic conditions
change or actual results deviate from historical trends.
Inventory
Inventory consists principally of finished goods and is priced at lower of cost or market, cost being determined using the first-in, first-out (FIFO)
method. Reserves are provided against inventory for estimated obsolescence based upon the aging of the inventory and market trends. Actual
obsolescence could be materially different from the reserve if economic conditions or market trends change significantly.
25
Self-insured Insurance and Medical Claims
We generally retain up to $100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue
for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The
actual cost could deviate from the recorded estimate.
We generally retain up to $200,000 of risk on each medical claim for our employees and their dependents. We accrue for the estimated
outstanding balance of unpaid medical claims for our employees and their dependents. The accrual is adjusted monthly based on recent claims
experience. The actual claims could deviate from recent claims experience and be materially different from the reserve.
The accrual for these claims at December 31, 2010 and 2009 was approximately $1.8 million and $1.3 million, respectively.
Impairment of Long-Lived Assets and Goodwill
Goodwill represents a significant portion of our total assets. We review goodwill for impairment annually during our fourth quarter or more
frequently if certain impairment indicators arise under the provisions of authoritative guidance. We review goodwill at the reporting unit level,
which is one level below an operating segment. We review the carrying value of the net assets of each reporting unit to the net present value of
estimated discounted future cash flows of the reporting unit. If the carrying value exceeds the net present value of estimated discounted future
cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple
assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could
result in goodwill impairment that could materially adversely impact our financial position or results of operations. Goodwill of $84.9 million
was primarily recorded in connection with the 15 acquisitions completed since 2004. Approximately $16.0 million was included in our
Innovative Pumping Solutions segment and $68.9 million was included in the two reporting units for our Service Centers segment which are
DXP and PFI. Assets, liabilities, deferred taxes and goodwill for each reporting unit were determined using the balance sheets maintained for
each reporting unit.
When estimating fair values of a reporting unit for our goodwill impairment test, we use an income approach which incorporates management’s
views. The income approach provides an estimated fair value based on each reporting unit’s anticipated cash flows that are discounted using a
weighted average cost of capital rate. The primary assumptions used in the income approach were estimated cash flows and weighted average
cost of capital. Estimated cash flows were primarily based on projected revenues, operating costs and capital expenditures and are discounted
based on comparable industry average rates for weighted average cost of capital. We utilized discount rates based on weighted average cost of
capital ranging from 11.0% to 14.5% when we estimated fair values of our reporting units as of December 31, 2010. To ensure the
reasonableness of the estimated fair values of our reporting units, we performed a reconciliation of our total market capitalization to the total
estimated fair value of all our reporting units. The assumptions used in estimating fair values of reporting units and performing the goodwill
impairment test are inherently uncertain and required management judgment. The assumptions and methodologies used for valuing goodwill in
the current year are consistent with those used in the prior year.
During 2010 the U.S. and global economies stabilized and oil and natural gas prices increased, which led to improvements in our sales, margins
and cash flows. Our sales and profitability improved throughout the year. We considered the impact of these changes in the economic and
business climate as we performed our annual impairment assessment of goodwill as of December 31, 2010.
Our goodwill impairment analysis led us to conclude that there was not an impairment of goodwill during 2010. If we increased our discount
rates by 10%, or decreased our expected growth rates by 10% when estimating the fair values of our reporting units, there would not have been
an impairment of goodwill in 2010.
26
Long-lived assets, including property, plant and equipment and amortizable intangible assets also comprise a significant portion of our total
assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that
impairment may exist under authoritative guidance. When management believes impairment indicators may exist, projections of the
undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If the
projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-
lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We
test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced
by assumptions and estimates that are subject to change as additional information becomes available. We concluded DXP did not have an
impairment of long-lived assets during 2010.
Purchase Accounting
The Company estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values,
and liabilities when allocating the purchase price of an acquisition.
Cost of Sales and Selling, General and Administrative Expense
Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs and depreciation. Selling, general and
administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation and amortization. DXP’s
gross margins may not be comparable to those of other entities, since some entities include all of the costs related to their distribution network in
cost of sales and others like DXP exclude a portion of these costs from gross margin, including the costs in a line item, such as selling, general
and administrative expense.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the
differences are expected to reverse. Valuation allowances are established to reduce deferred income tax assets to the amounts expected to be
realized.
Stock-Based Compensation
No future grants will be made under the Company’s existing stock option plans. The Company currently uses restricted stock for share-based
compensation programs. Compensation expense recognized for share-based compensation programs in the years ended December 31, 2008,
2009 and 2010 was $930,000, $1,555,000 and $973,000, respectively. Unrecognized compensation expense under the Restricted Stock Plan was
$2,601,000 and $2,423,000, respectively, at December 31, 2009 and 2010. As of December 31, 2010, the weighted average period over which
the unrecognized compensation expense is expected to be recognized is 27.6 months.
Recent Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for discussion of recent accounting pronouncements.
Inflation
We do not believe the effects of inflation have any material adverse effect on our results of operations or financial condition. We attempt to
minimize inflationary trends by passing manufacturer price increases on to the customer whenever practicable.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Our market risk results primarily from volatility in interest rates. Our exposure to interest rate risk relates primarily to our debt portfolio. Using
floating interest rate debt outstanding at December 31, 2010, a 100 basis point increase in interest rates would increase our annual interest
expense by approximately $1.1 million.
27
The table below provides information about the Company’s market sensitive financial instruments and constitutes a forward-looking statement.
Principal Amount By Expected Maturity
(in thousands, except percentages)
2014
2013
2012
2015 Thereafter
2011
Total
Fair Value
Fixed Rate Long- term
Debt
Average Interest Rate 5.44%
Floating Rate
Long-term Debt
Average Interest Rate
(1)
Total Maturities
3.47%
$ 300 $ 306 $ 1,830 $ 193 $ 2,127
5.00%
6.12%
5.00%
5.46%
- $ 4,756
-
$ 4,756
$10,630 $10,000 $89,165
-
-
- $109,795
$109,795
-
3.21%
$10,930 $10,306 $90,995 $ 193 $ 2,127
3.52%
-
-
- $114,551
$114,551
(1) Assumes floating interest rates in effect at December 31, 2010.
ITEM 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
Reports of Independent Registered Public Accounting Firm
Management Report on Internal Controls
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
29
31
32
33
34
35
36
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
To the Board of Directors and Shareholders of
DXP Enterprises, Inc., and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of DXP Enterprises, Inc. and Subsidiaries as of December 31, 2009 and 2010,
and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of DXP Enterprises, Inc., and Subsidiaries at December 31, 2009 and 2010, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We were engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of DXP Enterprises, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our
report dated March 16, 2011, expressed an unqualified opinion on the effectiveness of internal control over financial reporting.
Hein & Associates LLP
Houston, Texas
March 16, 2011
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders of
DXP Enterprises, Inc.
Houston, Texas
We were engaged to audit DXP Enterprises, Inc.’s (the “Company”) internal control over financial reporting based upon criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The
Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of DXP Enterprises, Inc. as of December 31, 2009 and 2010, and the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the years in the three year period ended December 31, 2010. Our report thereon dated March 16, 2011
expressed an unqualified opinion.
Hein & Associates LLP
Houston, Texas
March 16, 2011
30
MANAGEMENT’S REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company has assessed the effectiveness of its internal control over financial reporting as of December 31, 2010 based on criteria established
by Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO
Framework”). The Company’s management is responsible for establishing and maintaining adequate internal controls over financial
reporting. The Company’s independent registered public accountants that audited the Company’s financial statements as of December 31, 2010,
have issued an attestation report on the Company’s internal control over financial reporting, which appears on page 30.
Internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal
financial officers, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with policies or procedures may deteriorate.
The Company’s assessment of the effectiveness of its internal control over financial reporting included testing and evaluating the design and
operating effectiveness of its internal controls with the participation of its principal executive and principal financial officers. In management’s
opinion, the Company has maintained effective internal control over financial reporting as of December 31, 2010, based on criteria established in
the COSO Framework.
/s/ David R. Little
David R. Little Mac McConnell
Chairman of the Board and Senior Vice President/Finance and
Chief Executive Officer Chief Financial Officer
/s/ Mac McConnell
31
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
ASSETS
Current assets:
Cash
Trade accounts receivable, net of allowances for doubtful accounts
of $3,006 in 2009 and $3,540 in 2010
Inventories, net
Prepaid expenses and other current assets
Federal income tax receivable
Deferred income taxes
Total current assets
Property and equipment, net
Goodwill
Other intangibles, net of accumulated amortization of $13,779 in 2009
and $19,603 in 2010
Non-current deferred income taxes
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
Trade accounts payable
Accrued wages and benefits
Customer advances
Other accrued liabilities
Total current liabilities
Long-term debt, less current portion
Commitments and contingencies (Note 10)
Shareholders’ equity:
Series A preferred stock, 1/10 th vote per share; $1.00 par value;
liquidation preference of $100 per share ($112 at December 31, 2010);
1,000,000 shares authorized; 1,122 shares issued and outstanding
Series B convertible preferred stock, 1/10 th vote per share; $1.00
par value; $100 stated value; liquidation preference of $100 per
share ($1,500 at December 31, 2010); 1,000,000 shares authorized;
15,000 shares issued and outstanding
Common stock, $0.01 par value, 100,000,000 shares authorized;
12,935,201 and 14,079,608 shares issued and outstanding, respectively.
Paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2009
2010
$ 2,344
$ 770
77,066
72,581
3,533
235
7,833
163,592
16,955
60,542
99,781
75,887
2,550
402
5,919
185,309
14,917
84,942
25,727
3,289
822
$ 270,927
32,236
2,289
931
$ 320,624
$ 12,595
51,185
6,633
1,008
6,377
77,798
102,916
$ 10,930
55,019
11,826
10,271
4,837
92,883
103,621
1
15
1
15
129
58,037
32,057
(26)
90,213
$ 270,927
140
72,616
51,348
-
124,120
$ 320,624
The accompanying notes are an integral part of these consolidated financial statements.
32
DXP ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Years Ended December 31,
2009
2008
2010
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Goodwill and other intangibles impairment
Operating income (loss)
Other income
Interest expense
Income (loss) before provision for income taxes
Provision (benefit) for income taxes
Net income (loss)
Preferred stock dividend
Net income (loss) attributable to common shareholders
$ 736,883
529,895
206,988
158,797
-
48,191
223
(6,130)
42,284
16,397
25,887
(90)
$ 25,797
$ 583,226 $ 656,202
467,807
188,395
151,304
-
37,091
249
(5,208)
32,132
12,751
19,381
(90)
$ (42,502) $ 19,291
431,812
151,414
147,795
52,951
(49,332)
95
(5,245)
(54,482)
(12,070)
(42,412)
(90)
Per share and share amounts
Basic earnings (loss) per common share –
restated (Note 2)
Common shares outstanding – restated (Note 2)
Diluted earnings (loss) per share – restated (Note 2)
Common and common equivalent shares
Outstanding – restated (Note 2)
$ 1.99
12,945
$ 1.87
$ (3.24) $ 1.40
13,821
$ (3.24) $ 1.32
13,117
13,869
13,117
14,821
The accompanying notes are an integral part of these consolidated financial statements.
33
DXP ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2008, 2009 and 2010
(in Thousands, Except Share Amounts)
Series A
Preferred
Stock
Series B
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
BALANCES AT
DECEMBER 31, 2007
Dividends paid
Compensation expense
for restricted stock
Exercise of stock options and
vesting of restricted stock for
219,160 of common stock
Net loss on interest rate swap
for comprehensive income
Net Income
BALANCES AT
DECEMBER 31, 2008
Dividends paid
Compensation expense
for restricted stock
Net gain on interest rate swap
for comprehensive income
Exercise of stock options and
vesting of restricted stock for
71,897 shares of common
stock
Net loss
BALANCES AT
DECEMBER 31, 2009
Dividends paid
Compensation expense
for restricted stock
Net gain on interest rate swap
for comprehensive income
Issuance of 498,730 shares in
connection with acquisitions
Issuance of 493,791 shares
upon
conversion of notes to
common stock
Exercise of stock options and
vesting of restricted stock for
149,886 shares of common
stock
Net income
BALANCES AT
DECEMBER 31, 2010
$ 1
-
$ 15
-
$ 126
-
$54,634
-
$48,762
(90)
$(825)
-
$ -
-
$102,713
(90)
-
-
-
-
-
-
-
-
-
2
-
-
930
642
-
-
-
-
-
25,887
$ 1
-
$ 15
-
$ 128
-
$56,206
-
$74,559
(90)
-
-
-
-
-
-
-
1,555
-
1
-
276
-
-
(42,412)
$ 1
-
$ 15
-
$ 129
-
$58,037
-
$32,057
(90)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
973
-
5
7,061
5
6,206
-
-
-
-
1
-
339
-
-
19,381
-
825
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(721)
-
$(721)
930
1,469
(721)
25,887
$130,188
(90)
1,555
695
695
-
-
277
(42,412)
$(26)
-
$90,213
(90)
-
26
-
-
-
-
973
26
7,066
6,211
340
19,381
$ 1
$ 15
$ 140
$72,616
$51,348
$ -
$ -
$124,120
The accompanying notes are an integral part of these consolidated financial statements.
34
DXP ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities – net of acquisitions
Goodwill and other intangible impairment
Precision inventory impairment
Depreciation
Amortization
Deferred income taxes
Stock-based compensation expense
Tax benefit related to exercise of stock options and
vesting of restricted stock
Gain on sale of property and equipment
Changes in operating assets and liabilities, net of assets
and liabilities acquired in business combinations:
Trade accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued expenses
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Purchase of businesses, net of cash acquired
Proceeds from the sale of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt
Principal payments on revolving line of credit,
long-term debt and notes payable
Dividends paid in cash
Proceeds from exercise of stock options
Tax benefit related to exercise of stock options and
vesting of restricted stock
Net cash provided by (used in) financing activities
INCREASE (DECREASE) IN CASH
CASH AT BEGINNING OF YEAR
CASH AT END OF YEAR
SUPPLEMENTAL DISCLOSURES:
Cash paid for --
Interest
Income taxes
Cash income tax refunds
2008
Years Ended December 31
2009
2010
$ 25,887
$ (42,412)
$ 19,381
-
-
4,629
6,363
143
930
(1,362)
(116)
(10,876)
(11,161)
366
3,655
18,458
(5,134)
(73,943)
158
(78,919)
52,951
13,800
4,260
7,216
(16,678)
1,555
(266)
-
24,125
32,716
(1,665)
(24,027)
51,575
(1,593)
(491)
16
(2,068)
-
-
3,744
5,824
2,914
973
(215)
(188)
(14,528)
2,028
1,165
2,810
23,908
(1,184)
(18,394)
1,428
(18,150)
165,466
133,716
141,216
(104,662)
(90)
105
(186,763)
(90)
10
(148,798)
(90)
125
1,362
62,181
1,720
3,978
$ 5,698
266
(52,861)
(3,354)
5,698
$ 2,344
215
(7,332)
(1,574)
2,344
$ 770
$ 6,207
$ 9,263
$ -
$ 5,338
$ 15,053
$ 73
$ 5,240
$ 8,342
$ 250
Purchase of businesses excludes $20 million of common stock, notes and convertible notes issued in connection with
acquisitions during 2010. Proceeds from debt exclude $6.3 million of convertible notes issued in connection with an
acquisition in 2010 and converted to common stock in 2010.
The accompanying notes are an integral part of these consolidated financial statements.
35
DXP ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
DXP Enterprises, Inc., a Texas corporation, was incorporated on July 26, 1996, to be the successor to SEPCO Industries, Inc., DXP Enterprises,
Inc. and its subsidiaries (“DXP” or the “Company”) is engaged in the business of distributing maintenance, repair and operating products,
equipment and service to industrial customers. The Company is organized into three business segments: Service Centers, Supply Chain
Services (“SCS”) and Innovative Pumping Solutions (“IPS”). See Note 14 for discussion of the business segments.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Receivables and Credit Risk
Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within
30 days of the invoice date. However, these payment terms are extended in select cases and many customers do not pay within stated trade
terms.
The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Midwestern, Southeastern and
Southwestern regions of the United States. The Company believes no significant concentration of credit risk exists. The Company evaluates the
creditworthiness of its customers' financial positions and monitors accounts on a regular basis, but generally does not require
collateral. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances
warrant) based upon management’s best estimate of the collectability of all such accounts. The Company writes-off uncollectible trade accounts
receivable when the accounts are determined to be uncollectible. No customer represents more than 10% of consolidated sales.
Inventories
Inventories consist principally of finished goods and are priced at lower of cost or market, cost being determined using the first-in, first-out
(“FIFO”) method. Reserves are provided against inventories for estimated obsolescence based upon the aging of the inventories and market
trends.
Property and Equipment
Assets are carried on the basis of cost. Provisions for depreciation are computed at rates considered to be sufficient to amortize the costs of assets
over their expected useful lives. Depreciation of property and equipment is computed using the straight-line method. Maintenance and repairs of
depreciable assets are charged against earnings as incurred. Additions and improvements are capitalized. When properties are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to
earnings.
The principal estimated useful lives used in determining depreciation are as follows:
Buildings 20 – 39 years
Building improvements 10 – 20 years
Furniture, fixtures and equipment 3 – 10 years
Leasehold improvements over the shorter of the estimated useful life or the term of the related lease
36
Cash and Cash Equivalents
The Company’s presentation of cash includes cash equivalents. Cash equivalents are defined as short-term investments with maturity dates of 90
days or less at time of purchase.
Fair Value of Financial Instruments
A summary of the carrying and the fair value of financial instruments, excluding derivatives, at December 31, 2009 and 2010 is as follows (in
thousands):
Cash
Long-term debt, including current portion
$2,344
115,511
Carrying
Value
Fair
Value
$2,344
115,511
Carrying
Value
$770
114,551
Fair
Value
$770
114,551
2009
2010
The carrying value of the long-term debt approximates fair value based upon the current rates and terms available to the Company for
instruments with similar remaining maturities. The carrying amounts of accounts receivable and accounts payable approximate their fair values
due to the short-term maturities of these instruments.
Stock-Based Compensation
The Company uses restricted stock for share-based compensation programs. No future grants will be made under the Company’s stock option
plans. See Note 9 – Shareholders’ Equity for additional information on stock-based compensation.
Revenue Recognition
For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues using the percentage of
completion method. The extent of completion is measured as cost incurred divided by the total estimated cost. At December 31, 2009 and 2010,
$0.1 million and $2.8 million, respectively, of unbilled costs and estimated earnings are included in accounts receivable. For other sales, the
Company recognizes revenues when an agreement is in place, the price is fixed, title for product passes to the customer or services have been
provided and collectability is reasonably assured. Revenues are recorded net of sales taxes.
The Company reserves for potential customer returns based upon the historical level of returns.
Shipping and Handling Costs
The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified
as a component of cost of sales.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and
assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by the
Company in the accompanying financial statements relate to the valuation of intangibles, impairment analysis, reserves for accounts receivable
collectability, inventory valuations, income taxes and self-insured medical and liability claims. Actual results could differ from those estimates
and such differences could be material.
37
Self Insured Insurance and Medical Claims
We generally retain up to $100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue
for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The
actual cost could deviate from the recorded estimate.
We generally retain up to $200,000 of risk on each medical claim for our employees and their dependents. We accrue for the estimated
outstanding balance of unpaid medical claims for our employees and their dependents. The accrual is adjusted monthly based on recent claims
experience. The actual claims could deviate from recent claims experience and be materially different from the reserve.
The accrual for these claims at December 31, 2010 and 2009 was approximately $1.8 million and $1.3 million, respectively.
Impairment of Long-Lived Assets and Goodwill
Goodwill represents a significant portion of our total assets. We review goodwill for impairment annually during our fourth quarter or more
frequently if certain impairment indicators arise under the provisions of authoritative guidance. We review goodwill at the reporting unit level,
which is one level below an operating segment. We review the carrying value of the net assets of each reporting unit to the net present value of
estimated discounted future cash flows of the reporting unit. If the carrying value exceeds the net present value of estimated discounted future
cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated. The fair value calculation includes multiple
assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could
result in goodwill impairment that could materially adversely impact our financial position or results of operations. Goodwill of $84.9 million
was primarily recorded in connection with the 15 acquisitions completed since 2004. Approximately $16.0 million was included in our
Innovative Pumping Solutions segment and $68.9 million was included in the two reporting units for our Service Centers segment which are
DXP and PFI. Assets, liabilities, deferred taxes and goodwill for each reporting unit were determined using the balance sheets maintained for
each reporting unit.
When estimating fair values of a reporting unit for our goodwill impairment test, we use an income approach which incorporates management’s
views. The income approach provides an estimated fair value based on each reporting unit’s anticipated cash flows that are discounted using a
weighted average cost of capital rate. The primary assumptions used in the income approach were estimated cash flows and weighted average
cost of capital. Estimated cash flows were primarily based on projected revenues, operating costs and capital expenditures and are discounted
based on comparable industry average rates for weighted average cost of capital. We utilized discount rates based on weighted average cost of
capital ranging from 11.0% to 14.5% when we estimated fair values of our reporting units as of December 31, 2010. To ensure the
reasonableness of the estimated fair values of our reporting units, we performed a reconciliation of our total market capitalization to the total
estimated fair value of all our reporting units. The assumptions used in estimating fair values of reporting units and performing the goodwill
impairment test are inherently uncertain and required management judgment. The assumptions and methodologies used for valuing goodwill in
the current year are consistent with those used in the prior year.
During 2010 the U.S. and global economies stabilized and oil and natural gas prices increased, which led to improvements in our sales, margins
and cash flows. Our sales and profitability improved throughout the year. We considered the impact of these changes in the economic and
business climate as we performed our annual impairment assessment of goodwill as of December 31, 2010.
Our goodwill impairment analysis led us to conclude that there was not an impairment of goodwill during 2010. If we increased our discount
rates by 10%, or decreased our expected growth rates by 10% when estimating the fair values of our reporting units, there would not have been
an impairment of goodwill in 2010.
Long-lived assets, including property, plant and equipment and amortizable intangible assets also comprise a significant portion of our total
assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that
impairment may exist under authoritative guidance. When management believes impairment indicators may exist, projections of the
undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use are prepared. If
38
the projections indicate that the carrying values of the long-lived assets are not recoverable, we reduce the carrying values to fair value. For long-
lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We
test for impairment of long-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced
by assumptions and estimates that are subject to change as additional information becomes available. We concluded DXP did not have an
impairment of long-lived assets during 2010.
Goodwill and Other Intangible Assets
The $2.5 million adjustment to increase goodwill during 2009 primarily results from a $0.9 million reduction in the value of acquired inventories
for Rocky Mtn. Supply, Inc. and a $1.2 million reduction in acquired fixed assets for PFI, LLC, both of which were acquired in 2008. The $24.2
million increase in goodwill and the $12.3 million increase in other intangibles acquired during 2010 results from recording the goodwill and
other intangibles associated with the acquisitions of the assets of Quadna, Inc. (“Quadna”) and D&F Distributors, Inc. (“D&F”). The $0.2
million increase in goodwill for payment of earn out relates to contingent purchase price for the 2008 acquisition of Falcon Pump. Other
intangible assets are generally amortized on a straight line basis over the useful lives of the assets. Approximately $69.0 million of goodwill and
$23.8 million of other intangible assets pertain to the Service Centers segment. Approximately $16.0 million of goodwill and $3.3 million of
other intangible assets pertain to the IPS segment. Approximately $5.1 million of other intangible assets pertain to the SCS segment.
The changes in the carrying amount of goodwill and other intangibles for 2009 and 2010 are as follows (in thousands):
Balance as of December 31, 2008
Adjustments to prior year estimates
Amortization
Impairment
Balance as of December 31, 2009
Payment of earn out
Acquired during the year
Amortization
Balance as of December 31, 2010
Total
$ 143,945
2,491
(7,216)
(52,951)
$ 86,269
200
36,533
(5,824)
$117,178
Goodwill
$ 98,718
2,491
-
(40,667)
$ 60,542
200
24,200
-
$ 84,942
Other
Intangibles
$ 45,227
-
(7,216)
(12,284)
$ 25,727
-
12,333
(5,824)
$ 32,236
The changes in the carrying amount of goodwill by segment for 2009 and 2010 are as follows (in thousands):
Balance as of December 31, 2008
Adjustments to prior year estimates
Impairment
Balance as of December 31, 2009
Payment of earn out
Acquired during the year
Balance as of December 31, 2010
Total
$ 98,718
2,491
(40,667)
$ 60,542
200
24,200
$ 84,942
Service
Centers
$ 72,667
2,491
(23,058)
$ 52,100
200
16,662
$ 68,962
SCS
$ 17,609
-
(17,609)
-
-
-
-
IPS
$ 8,442
-
-
$ 8,442
-
$ 7,538
$ 15,980
39
A summary of amortizable other intangible assets follows (in thousands):
Vendor agreements
Customer relationships
Non-compete agreements
Total
As of December 31, 2009
Gross
Carrying
Amount
$ 2,496
35,390
1,620
$ 39,506
Accumulated
Amortization
$ (706)
(11,908)
(1,165)
$ (13,779)
As of December 31, 2010
Gross
Carrying
Amount
Accumulated
Amortization
$ (831)
(17,237)
(1,535)
$ (19,603)
$ 2,496
47,363
1,980
$ 51,839
The estimated future annual amortization of intangible assets for each of the next five years follows (in thousands):
2011 $ 6,410
2012 $ 6,277
2013 $ 5,557
2014 $ 5,296
2015 $ 3,755
The weighted average useful lives of acquired intangibles related to vendor agreements, customer relationships, and non-compete agreements are
20 years, 7.7 years and 4.1 years, respectively. The weighted average useful life of amortizable intangible assets in total is 8.2 years.
Of the $117.2 million net balance of goodwill and other intangibles at December 31, 2010, $102.9 million is expected to be deductible for tax
purposes.
Purchase Accounting
DXP estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values, and
liabilities when allocating the purchase price of an acquisition.
Cost of Sales and Selling, General and Administrative Expense
Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs and depreciation. Selling, general and
administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation and amortization. DXP’s
gross margins may not be comparable to those of other entities, since some entities include all of the costs related to their distribution network in
cost of sales and others like DXP exclude a portion of these costs from gross margin, including the costs in a line item, such as selling, general
and administrative expense.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability
computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation
allowances are established to reduce deferred income tax assets to the amounts expected to be realized.
Comprehensive Income
Comprehensive income includes net income, foreign currency translation adjustments, unrecognized gains (losses) on postretirement and other
employment-related plans, changes in fair value of certain derivatives, and unrealized gains and losses on certain investments in debt and equity
securities. The Company’s other comprehensive (loss) income is comprised exclusively of changes in the value of an interest rate swap.
40
Accounting for Uncertainty in Income Taxes
In July 2006, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which requires that a position taken or expected
to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent)
that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of
benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company and its subsidiaries file income tax
returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U. S. federal, state and local
tax examination by tax authorities for years prior to 2003. The Company’s policy is to recognize interest related to unrecognized tax benefits as
interest expense and penalties as operating expenses. Accrued interest is insignificant and there are no penalties accrued at December 31,
2010. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its
accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of
tax law applied to the facts of each matter.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In September 2006, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value
measurements. This authoritative guidance does not require any new fair value measurements; rather, it applies under other accounting
pronouncements that require or permit fair value measurements. The provisions of this authoritative guidance are to be applied prospectively as
of the beginning of the fiscal year in which this is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment
to the opening balance of retained earnings. The provisions of this authoritative guidance are effective for the fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued authoritative guidance which delayed the effective date of this authoritative guidance to
fiscal years beginning after November 15, 2008 and interim periods within those years for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized at fair value in the financial statements on a recurring basis (at least annually). See Note 12 “Fair Value of
Financial Assets and Liabilities” for additional information on the adoption of this authoritative guidance.
In December 2007, the FASB issued authoritative guidance which requires the acquiring entity in a business combination to measure the
identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. In addition, immediate expense recognition is required for transaction
costs. This authoritative guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and adoption is
prospective only.
In March 2008, the FASB issued authoritative guidance which amends and expands the disclosure requirements of previous authoritative
guidance to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged
items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. This authoritative guidance also
requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. This authoritative guidance is
effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. As this pronouncement is only
disclosure-related, it did not have an impact on DXP’s financial position and results of operations.
In April 2008, the FASB issued authoritative guidance which amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset. This authoritative guidance requires expanded disclosure related
to the determination of useful lives for intangible assets and should be applied to all intangible assets recognized as of, and subsequent to
December 31, 2008. The impact of this authoritative guidance will depend on the size and nature of acquisitions completed by the Company.
41
In June 2008, the FASB issued authoritative guidance which provides that unvested share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share using the two-class method. The authoritative guidance is effective for fiscal years beginning after December 15, 2008 on a
retrospective basis and was adopted by the Company in the first quarter of 2009. The Company has granted awards of restricted stock that
contain non-forfeitable rights to dividends which are considered participating securities under this authoritative guidance. Because these awards
are participating securities under the authoritative guidance, the Company is required to include these instruments in the calculation of earnings
per share using the two-class method. The adoption of the authoritative guidance reduced basic and diluted earnings per share by $0.02 for
2008. Basic earnings per share, diluted earnings per share, weighted average common shares outstanding and weighted average common and
common equivalent shares outstanding for 2008 have been restated.
In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure of events that occur
after the balance sheet date but before the financial statements are issued or are available to be issued. The authoritative guidance provides
guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The Company adopted the authoritative guidance during the second quarter of 2009, and
its application had no impact on the Company’s consolidated condensed financial statements. The Company evaluated subsequent events
through the date this report was filed with the SEC.
In October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards impact the
determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units for accounting
purposes. Additionally, these new standards modify the manner in which the arrangement consideration is allocated across the separately
identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are required to
be adopted in the first quarter of 2011. DXP does not expect these new standards to significantly impact our consolidated financial statements.
3. ACQUISITIONS
All of the Company’s acquisitions have been accounted for using the purchase method of accounting. Revenues and expenses of the acquired
businesses have been included in the accompanying consolidated financial statements beginning on their respective dates of acquisition. The
allocation of purchase price to the acquired assets and liabilities is based on estimates of fair market value and may be prospectively revised if
and when additional information the Company is awaiting concerning certain asset and liability valuations is obtained, provided that such
information is received no later than one year after the date of acquisition. Any contingent purchase price on acquisitions completed before
January 1, 2009 will increase goodwill when paid.
On January 31, 2008, DXP completed the acquisition of the business of Rocky Mtn. Supply. DXP acquired this business to expand DXP’s
presence in the Colorado area. DXP paid $3.9 million in cash and $0.7 million in seller notes. The seller notes bear interest at prime minus
1.75%.
On August 28, 2008, DXP completed the acquisition of PFI, LLC. DXP acquired this business to strengthen DXP’s expertise in the distribution
of fasteners. DXP paid $66.4 million in cash for this business. The cash was funded by utilizing a new credit facility.
On December 1, 2008, DXP completed the acquisition of the business of Falcon Pump. DXP acquired this business to strengthen DXP’s pump
offering in the Rocky Mountain area. DXP paid $3.1 million in cash, $0.8 million in seller notes and $0.2 million in payments in 2010 which
were contingent upon future earnings of the acquired business. The seller notes bear interest at ninety day LIBOR plus 0.75%.
During 2009 the initial purchase price allocation for the 2008 acquisitions was adjusted to allocate $2.5 million of purchase price to
goodwill. These increases in goodwill primarily related to reducing the value of inventories and fixed assets for the 2008 acquisitions. During
2009 the Company recognized an impairment charge of $53.0 million for goodwill and other intangibles associated with the Service Centers and
SCS segments. During 2010 the Company paid $0.2 million in contingent purchase price related to the acquisition of Falcon Pump.
42
On April 1, 2010, DXP acquired substantially all the assets of Quadna, Inc. (“Quadna”). The purchase price of approximately $25.0 million (net
of $3.0 million of acquired cash) consisted of $11 million paid in cash, $10 million in the form of convertible promissory notes bearing interest
at a rate of 10% and approximately $4.0 million in the form of 343,337 shares of DXP common stock. On April 9, 2010, $4.5 million principal
amount of the convertible promissory notes, along with accrued interest, were converted into 376,417 shares of DXP’s common stock. On
August 18, 2010, $3.7 million of the convertible promissory notes were paid off using funds obtained from DXP’s credit facility and $1.8
million of the convertible promissory notes were converted to 117,374 shares of DXP common stock. The $11 million cash portion of the
purchase price was funded by borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in
the Western U.S. Goodwill of $18.8 million was recognized for this acquisition and is calculated as the excess of the consideration transferred
over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually
identified and separately recognized. It specifically includes the expected synergies and other benefits that we believe will result from
combining the operations of Quadna with the operations of DXP and any intangible assets that do not qualify for separate recognition such as the
assembled workforce.
On November 30, 2010, DXP acquired substantially all of the assets of D&F Distributors, Inc. (“D&F”). The purchase price of $13.4 million
consisted of approximately $7.4 million paid in cash, approximately $2.9 million in the form of promissory notes bearing interest at a rate of 5%,
and approximately $3.1 million in the form of 155,393 shares of DXP common stock. The cash portion of the purchase price was funded by
borrowings under DXP’s existing credit facility. DXP completed this acquisition to expand its pump business in Indiana, Kentucky, Tennessee
and Ohio. Goodwill of $5.4 million was recognized for this acquisition and is calculated as the excess of the consideration transferred over the
net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and
separately recognized. It specifically includes the expected synergies and other benefits that we believe will result from combining the
operations of D&F with the operations of DXP and any intangible assets that do not qualify for separate recognition such as the assembled
workforce.
The value assigned to the non-compete agreements and customer relationships for Quadna and D&F were determined by discounting the
estimated cash flows associated with non-compete agreements and customer relationships as of the date the acquisition was consummated. The
estimated cash flows were based on estimated revenues net of operating expenses and net of capital charges for assets that contribute to the
projected cash flow from these assets. The projected revenues and operating expenses were estimated based on management estimates. Net
capital charges for assets that contribute to projected cash flow were based on the estimated fair value of those assets. Discount rates of 17.0% to
17.2% were deemed appropriate for valuing these assets and were based on the risks associated with the respective cash flows taking into
consideration the acquired company’s weighted average cost of capital.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed during 2010 in connection with the
acquisitions described above (in thousands):
Cash
Accounts Receivable
Inventory
Property and equipment
Goodwill and intangibles
Other assets
Assets acquired
Current liabilities assumed
Non-current liabilities assumed
Net assets acquired
$ 3,035
8,421
6,319
837
36,533
202
55,347
(13,947)
-
$ 41,400
43
The pro forma unaudited results of operations for the Company on a consolidated basis for the years ended December 31, 2009 and 2010,
assuming the acquisition of businesses completed in 2010 were consummated as of January 1 of each year follows:
Years Ended
December 31,
2009
2010
(Unaudited)
In Thousands, except for per
share data
Net Sales
Net (loss) inome
Per share data
Basic Earnings
Diluted Earnings
$ 653,175
$(39,967)
$689,675
$ 20,843
$(3.04)
$(3.04)
$1.50
$1.42
4. PRECISION INVENTORY IMPAIRMENT IN 2009
During 2009 the Company determined that the value of inventory acquired in connection with the acquisition of Precision on September 10,
2007, was overstated by $13.8 million because the inventory was obsolete, expired, old and/or slow moving. The $13.8 million charge to reduce
the value of this inventory is included in cost of sales for 2009.
5. INVENTORIES:
The carrying values of inventories are as follows:
Finished
goods
Work in
process
Inventories
6. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
2009
$ 72,270
311
$ 72,581
December 31,
(in Thousands)
2010
$ 73,421
2,466
$ 75,887
December 31,
2009
2010
(in Thousands)
$ 1,775
7,672
22,325
31,772
(14,817)
$16,955
$ 1,652
7,508
23,700
32,860
(17,943)
$ 14,917
Land
Buildings and leasehold improvements
Furniture, fixtures and equipment
Less – Accumulated depreciation and amortization
44
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
Line of credit
Term loan, payable in quarterly installments of $2.5 million through
August 2013
Unsecured notes payable to individuals, at variable rates (1.0% to 1.75%
at December 31,
2010) payable in monthly and quarterly installments through November
2011
Unsecured subordinated notes payable in quarterly installments at 5%
through November 2015
Mortgage loan payable to financial institution, 6.25% collateralized by
real estate,
payable in monthly installments through January 2013
Other notes
Less: Current portion
December 31,
2009
2010
(in Thousands)
$ 75,000
$ 83,664
35,500
25,500
3,027
630
-
2,900
1,956
28
115,511
(12,595)
$102,916
1,857
-
114,551
(10,930)
$ 103,621
On August 28, 2008, DXP entered into a credit agreement with Wells Fargo Bank, National Association, as lead arranger and administrative
agent for the lenders (the “Facility). The March 15, 2010 amendment to the Facility significantly increased the interest rates and commitment
fees applicable at various leverage ratios from levels in effect before March 15, 2010. The Facility consists of a $50 million term loan and a
revolving credit facility that provides a $150 million line of credit to the Company. The term loan requires principal payments of $2.5 million per
quarter. The Facility matures on August 11, 2013. The Facility contains financial covenants defining various financial measures and levels of
these measures with which the Company must comply. Covenant compliance is assessed as of each quarter end and certain month ends for the
asset test. The asset test is defined under the Facility as the sum of 85% of the Company’s net accounts receivable, 60% of net inventory and
50% of the net book value of non-real-estate property and equipment. The Company’s borrowing and letter of credit capacity under the
revolving credit portion of the Facility at any given time is $150 million less borrowing under the revolving credit portion of the Facility and
letters of credit outstanding, subject to the asset test described above.
On December 31, 2010, the LIBOR-based rate on the revolving credit portion of the Facility was LIBOR plus 2.75%, the prime-based rate on the
revolving credit portion of the Facility was the prime rate plus 1.75%, the commitment fee was 0.375%, the LIBOR-based rate for the term loan
was LIBOR plus 3.25% and the prime-based rate for the term loan was the prime rate plus 2.25%. At December 31, 2010, $103.5 million was
borrowed under the Facility at a weighted average interest rate of approximately 3.2% under the LIBOR options. The revolving credit portion of
the Facility provides the option of interest at LIBOR plus a margin ranging from 2.25% to 4.00% or at the prime rate plus a margin of 1.25% to
3.00%. Commitment fees of 0.25% to 0.625% per annum are payable on the portion of the Facility capacity not in use for borrowings or letters
of credit at any given time. The term loan portion of the Facility provides the option of interest at LIBOR plus a margin ranging from 2.75% to
4.50% or at the prime rate plus a margin of 1.75% to 3.50%. Borrowings under the Facility are secured by all of the Company’s accounts
receivable, inventory, general intangibles and non-real-estate property and equipment. At December 31, 2010, we had $50.0 million available
for borrowing and letters of credit under the Facility.
The Facility’s principal financial covenants include:
Fixed Charge Coverage Ratios – The Facility requires that the Fixed Charge Coverage Ratio for the 12-month period ending on the last day of
each quarter through December 31, 2010 be not less than 1.25 to 1.0, stepping up to 1.50 to 1.0 for each quarter ending on or after March 31,
2011, with “Fixed Charge Coverage Ratio” defined as the ratio of (a) EBITDA (as defined below) for the 12 months ending on such date, minus
cash taxes and minus capital expenditures for such period (excluding acquisitions) to (b) the aggregate of interest expense paid in cash,
scheduled principal payments in respect of long-term debt and current portion of capital leases for such 12-month period, determined in each
case on a consolidated basis for DXP and its subsidiaries.
45
Leverage Ratios - The Facility requires that the Company’s Leverage Ratio, determined at the end of each fiscal quarter, not exceed 4.00 to 1.00
as of December 31, 2010, 3.50 to 1.00 as of March 31, 2011 and 3.25 to 1.0 as of the last day of each fiscal quarter thereafter. The Leverage
Ratio is defined as the outstanding Indebtedness divided by EBITDA for the 12 months then ended. At December 31, 2010, the Company’s
Leverage Ratio was 2.26 to 1.00. The Facility requires that the Company’s Senior Leverage Ratio, determined at the end of each fiscal quarter,
not exceed 3.25 to 1.0 as of December 31, 2010, 3.00 to 1.00 as of March 31, 2011 and 2.75 to 1.0 as of the last day of each fiscal quarter
thereafter. The Senior Leverage Ratio is defined as the outstanding Indebtedness, minus the aggregate amount of all Subordinated Debt, divided
by EBITDA for the 12 months then ended. At December 31, 2010, the Company’s Senior Leverage Ratio was 2.20 to 1.00. Indebtedness is
defined under the Facility for financial covenant purposes as: (a) all obligations of DXP for borrowed money including but not limited to senior
bank debt, senior notes and subordinated debt; (b) capital leases; (c) issued and outstanding letters of credit; and (d) contingent obligations for
funded indebtedness. Subordinated Debt is defined under the Facility for financial covenant purposes as Indebtedness which has been
subordinated on terms and conditions satisfactory to the Lenders.
The following are computations of the Leverage Ratio and the Senior Leverage Ratio as of December 31, 2010 (in thousands, except for ratios):
For the Year ended December 31, 2010
Senior
Leverage Ratio
Leverage Ratio
Income before taxes
Interest expense
Depreciation and amortization
Stock compensation expense
Pro forma acquisition EBITDA
EBITDA of divestiture
Reduction of closed location accrual
(A) Defined EBITDA
As of December 31, 2010
Total long-term debt
Letters of credit outstanding
Less: Subordinated Debt
Defined Indebtedness
Senior Leverage Ratio (B)/(A)
Leverage Ratio (C)/(A)
$32,132
5,208
9,568
973
3,723
13
(555)
$51,062
$32,132
5,208
9,568
973
3,723
13
(555)
$51,062
$114,551
933
(2,900)
$112,584 (B)
$114,551
933
-
$115,484 (C)
2.20
2.26
EBITDA as defined under the Facility for financial covenant purposes means, without duplication, for any period the consolidated net income
(excluding any extraordinary gains or losses) of DXP plus, to the extent deducted in calculating consolidated net income, depreciation,
amortization, other non-cash items and non-recurring items (including, without limitation, impairment charges, asset write-offs and accruals in
respect of closed locations), interest expense and tax expense for taxes based on income and minus, to the extent added in calculating
consolidated net income, any non-cash items and non-recurring items; provided that, if DXP acquires the equity interests or assets of any person
during such period under circumstances permitted under the Facility, EBITDA shall be adjusted to give pro forma effect to such acquisition
assuming that such transaction had occurred on the first day of such period and provided further that, if DXP divests the equity interests or assets
of any person during such period under circumstances permitted under the Facility, EBITDA shall be adjusted to give pro forma effect to such
divestiture assuming that such transaction had occurred on the first day of such period. Add-backs allowed pursuant to Article 11, Regulation S-
X, of the Securities Act of 1933, as amended, will also be included in the calculation of EBITDA.
46
The Facility prohibits the payment of cash dividends on the Company’s common stock.
The maturities of long-term debt for the next five years and thereafter are as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
$ 10,930
10,306
90,995
193
2,127
-
8. INCOME TAXES:
The provision for income taxes consists of the following:
2008
Years Ended December 31,
2009
(in Thousands)
2010
Current -
Federal
State
Deferred
$ 14,605
1,649
16,254
143
$ 16,397
$ 3,849
759
4,608
(16,678)
$(12,070)
$ 7,952
1,885
9,837
2,914
$12,751
The difference between income taxes computed at the federal statutory income tax rate (35%) and the provision for income taxes is as follows:
Income taxes computed at federal statutory rate
State income taxes, net of federal benefit
Nondeductible impairment expense
Other
2010
2008
Years Ended December 31,
2009
(in Thousands)
$(19,069)
492
6,852
(345)
$(12,070)
$ 14,799
1,072
-
526
$ 16,397
$ 11,246
1,225
-
280
$ 12,751
The net current and noncurrent components of deferred income tax balances are as follows:
December 31,
2009
2010
(in Thousands)
$ 7,833
3,289
-
$ 11,122
$ 5,919
2,289
-
$ 8,208
Net current assets
Net non-current assets
Net non-current liabilities
Net assets (liabilities)
47
Deferred tax liabilities and assets were comprised of the following:
Deferred tax assets:
Goodwill
Allowance for doubtful accounts
Inventories
Accruals
Interest rate swap
Other
Total deferred tax assets
Less valuation allowance
Total deferred
allowance
Deferred tax liabilities
Intangibles
Property and equipment
Other
Net deferred tax asset (liability)
tax assets, net of valuation
December 31,
2009
2010
(in Thousands)
$ 5,778
1,052
5,686
936
16
280
13,748
-
13,748
(1,028)
(1,499)
(99)
$11,122
$ 4,871
1,230
3,615
740
-
180
10,636
-
10,636
(907)
(1,421)
(100)
$ 8,208
9. SHAREHOLDERS' EQUITY:
On September 30, 2008, DXP paid a two for one common stock dividend. DXP’s financial statements have been restated to reflect the effect of
this common stock dividend on all periods presented.
Series A and B Preferred Stock
The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally,
voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation
of the Company, in which case the holders of the Series A preferred stock are entitled to a $100 liquidation preference per share. Each share of
the Series B convertible preferred stock is convertible into 28 shares of common stock and a monthly dividend per share of $.50. The holders of
the Series B convertible stock are also entitled to a $100 liquidation preference per share after payment of the distributions to the holders of the
Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with
the holders of the common stock.
Restricted Stock
Under a restricted stock plan approved by DXP’s shareholders in July 2005 (the “Restricted Stock Plan”), directors, consultants and employees
may be awarded shares of DXP’s common stock. The shares of restricted stock granted to employees as of December 31, 2010, vest 20% each
year for five years after the date of grant, 33.3% each year for three years after the grant date or 10% each year for ten years after the grant
date. The shares of restricted stock granted to non-employee directors of DXP vest 100% one year after the grant date. The Restricted Stock
Plan provides for a grant to each non-employee director of DXP, consisting of the number of whole shares calculated by dividing $75,000 by the
closing price of the common stock on the July 1 of the award year. The fair value of restricted stock awards is measured based upon the closing
prices of DXP’s common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards.
48
The following table provides certain information regarding the shares authorized, granted and available for future grant under the Restricted
Stock Plan at December 31, 2010:
Number of shares authorized for grants
Number of shares granted
Number of shares forfeited
Number of shares available for future grants
Weighted-average grant price of granted shares
600,000
494,662
60,051
165,389
$15.39
Changes in non-vested restricted stock for 2008, 2009 and 2010 were as follows:
Non-vested at December 31, 2007
Granted
Vested
Non-vested at December 31, 2008
Granted
Forfeited
Vested
Non-vested at December 31, 2009
Granted
Forfeited
Vested
Non-vested at December 31, 2010
Number
Of Shares
212,452
57,506
(54,708)
215,250
94,859
(22,764)
(63,897)
223,448
93,781
(37,287)
(99,886)
180,056
Weighted
Average
Grant Price
$16.81
$13.21
$16.60
$15.91
$13.96
$13.15
$16.17
$15.29
$15.92
$17.08
$12.32
$16.15
Compensation expense recognized for restricted stock in the years ended December 31, 2008, 2009 and 2010 was $930,000, $1,555,000 and
$973,000, respectively. Related income tax benefits recognized in earnings were approximately $372,000, $622,000 and $389,000 in 2008,
2009 and 2010, respectively. Unrecognized compensation expense under the Restricted Stock Plan was $2,601,000 and $2,423,000,
respectively, at December 31, 2009 and 2010. As of December 31, 2010, the weighted average period over which the unrecognized
compensation expense is expected to be recognized is 27.6 months.
Stock Options
The DXP Enterprises, Inc. 1999 Employee Stock Option Plan, the DXP Enterprises, Inc. Long-Term Incentive Plan and the DXP Enterprises,
Inc. Director Stock Option Plan authorized the grant of options to purchase 1,800,000, 660,000 and 400,000 shares of the Company’s common
stock, respectively. In accordance with these stock option plans that were approved by the Company’s shareholders, options were granted to key
personnel for the purchase of shares of the Company’s common stock at prices not less than the fair market value of the shares on the dates of
grant. Most options could be exercised not earlier than 12 months nor later than 10 years from the date of grant. No future grants will be made
under these stock option plans. Activity during 2008, 2009 and 2010 with respect to the stock options follows:
Shares
222,452
(164,452)
58,000
Options Price
Per Share
$0.50 - $3.36
$0.50 - $0.68
$1.25 - $3.36
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
$1.07
$0.64
$2.33
$ 4,953,000
$ 3,511,000
$ 712,000
(8,000)
50,000
$1.25
$1.25 - $3.36
$1.25
$2.50
$ 85,000
$ 529,000
(50,000)
-
$1.25 - $3.36
-
$2.50
-
$ 489,000
-
at
at
at
exercisable
Outstanding at December 31, 2007
Exercised
Outstanding
and
December 31, 2008
Exercised
Outstanding
and
December 31, 2009
Exercised
Outstanding
and
December 31, 2010
exercisable
exercisable
Cash received from stock options exercised during 2008, 2009 and 2010 was $105,000, $10,000 and $125,000, respectively. The weighted
average remaining contractual life was 4.5 years and 4.0 years at December 31, 2008 and 2009, respectively.
Certain Equity Related Transactions
During 2008, 2009 and 2010, employees and directors of DXP exercised non-qualified stock options. DXP received a tax deduction for the
amount of the difference between the exercise price and the fair market value of the shares recognized as income by the individuals exercising
the options. The after tax benefit of the tax deduction is accounted for as an increase in paid-in capital.
Earnings Per Share
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 years ended December 31, 2008, 2009 and 2010.
Basic:
Basic weighted average shares outstanding
Net income (loss)
Convertible preferred stock dividend
Net income (loss) attributable to common shareholders
Per share amount
2010
2009
2008
(in Thousands, except per share amounts)
12,945
$25,887
(90)
$25,797
$1.99
13,117
$(42,412)
(90)
$(42,502)
$(3.24)
13,821
$ 19,381
(90)
$ 19,291
$1.40
Diluted:
Basic weighted average shares outstanding
Net effect of dilutive stock options based on the treasury
stock method
Assumed conversion of convertible notes
Assumed conversion of convertible preferred stock
Total common and common equivalent shares outstanding
Net income (loss) attributable to common shareholders
Interest on convertible notes, net of income taxes
Convertible preferred stock dividend
Net income (loss) for diluted earnings per share
Per share amount
12,945
13,117
13,821
84
-
840
13,869
$25,797
-
90
$25,887
$1.87
-
-
-
13,117
$(42,502)
-
-
$(42,502)
$(3.24)
7
153
840
14,821
19,291
142
90
$ 19,523
$1.32
49
10. COMMITMENTS AND CONTINGENCIES:
The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of
December 31, 2010, for non-cancelable leases are as follows (in thousands):
2011
2012
2013
2014
2015
2016
Thereafter
$10,471
8,367
6,330
4,786
1,615
1,243
5,710
Rental expense for operating leases was $10,351,000, $12,201,000 and $12,495,000 for the years ended December 31, 2008, 2009 and 2010
respectively.
In 2004, DXP and DXP’s vendor of fiberglass reinforced pipe were sued in Louisiana by a major energy company regarding the failure of
Bondstrand PSX JFC pipe, a recently introduced type of fiberglass reinforced pipe which had been installed on four energy production
platforms. Plaintiff alleges negligence, breach of contract, warranty and that damages exceed $20 million. DXP believes the failures were
caused by the failure of the pipe itself and not by work performed by DXP. DXP intends to vigorously defend these claims. DXP’s insurance
carrier has agreed, under a reservation of rights to deny coverage, to provide a defense against these claims. The maximum amount of our
insurance coverage, if any, is $6 million. Under certain circumstance, our insurance may not cover this claim. DXP currently believes that this
claim is without merit.
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 or results of operations.
11. EMPLOYEE BENEFIT PLANS:
The Company offers a 401(K) plan which is eligible to substantially all employees. During 2008, part of 2009 and part of 2010, the Company
elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. During 2009 the Company stopped matching
employee contributions. During 2010 the Company resumed matching of employee contributions. The Company contributed $1,450,000,
$823,000 and $540,000 to the 401(K) plan in the years ended December 31, 2008, 2009 and 2010, respectively.
12. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Effective January 1, 2008, we adopted authoritative guidance for financial assets and liabilities measured on a recurring basis. This authoritative
guidance applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in
the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The authoritative guidance affects the fair value measurement of an interest rate swap to which the
Company was a party, which must be classified in one of the following categories:
Level 1 Inputs
These inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs
These 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.
50
Level 3 Inputs
These 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.
The following presents the changes in Level 3 liabilities for 2008, 2009, and 2010 (in thousands):
Fair value at January 1,
Realized and unrealized gains
included in other
comprehensive income
Fair value at December 31,
(losses)
2008
$ - $ ( 1,202) $ ( 42)
2009
2010
(1,202)
1,160
42
$ (1,202) $ ( 42) $ -
To hedge a portion of our floating rate debt, as of January 10, 2008, DXP entered into an interest rate swap agreement with the lead bank of the
Facility. Through January 11, 2011, this interest rate swap effectively fixed the interest rate on $40 million of floating rate LIBOR borrowings
under the Facility at one-month LIBOR of 3.68% plus the margin in effect under the Facility. Amounts paid or received in connection with the
swap were included in interest expense. This swap was designated as a cash flow hedging instrument. Changes in the fair value of the swap are
included in other comprehensive income. See Note 13 “Other Comprehensive Income” for gain and (loss), net of income taxes, on the interest
rate swap.
The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. In 2009,
the Company recorded a charge of $53.0 million related to the impairment of goodwill and other tangibles at the Service Centers, SCS and PFI
reporting units.
The fair market value of these reporting units was determined using the income approach and Level 3 inputs, which required management to
make estimates about future cash flows. Management estimated the amount and timing of future cash flows based on its experience and
knowledge of the business environment in which the reporting units operate. The Company was not required to measure any other significant
non-financial assets and liabilities at fair value.
13. OTHER COMPREHENSIVE INCOME
Other comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments
by, or distributions to, shareholders. The Company had other comprehensive income related to changes in interest rates in connection with an
interest rate swap. At December 31, 2008, 2009 and 2010, the accumulated derivative loss, net of income tax was $721,000, $26,000, and zero,
respectively. Other comprehensive income (loss) for the years ending December 31, 2008, 2009 and 2010 was $25,166,000, $(41,717,000) and
$19,407,000, respectively.
14. SEGMENT DATA:
The Service Centers segment is engaged in providing maintenance, repair and operating products, equipment and 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 equipment, fastener, industrial supplies and safety product categories. The Innovative Pumping Solutions segment fabricates
and assembles custom-made engineered pump packages. The Supply Chain Services segment manages all or part of customers’ supply chains,
including inventory. The 2009 and 2008 segment information has been restated to conform with the 2010 composition of reportable segments.
51
The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the
determination of business segment information. Sales are shown net of intersegment eliminations.
Financial information relating to the Company’s segments is as follows (in thousands):
2010
Sales
Operating income for reportable segments
Identifiable assets at year end
Capital expenditures
Depreciation
Amortization
Interest expense
2009
Sales
Operating income for reportable segments
Identifiable assets at year end
Capital expenditures
Depreciation
Amortization
Interest expense
2008
Sales
Operating income for reportable segments
Identifiable assets at year end
Capital expenditures
Depreciation
Amortization
Interest expense
Service
Centers
Innovative
Pumping
Solutions
Supply
Chain
Services
$452,719
50,549
234,773
1,075
2,987
4,055
4,115
$391,060
24,398
199,937
1,475
3,458
5,683
3,890
$470,171
67,995
250,149
4,313
3,185
4,830
4,099
$ 77,024
10,335
40,038
17
368
604
700
$ 55,913
7,519
22,604
29
348
338
831
$100,884
11,963
49,956
720
344
338
1,410
$126,459
7,120
45,813
92
389
1,165
393
$136,253
5,548
48,386
89
454
1,195
524
$165,828
5,402
97,751
101
1,100
1,195
621
Total
$656,202
68,004
320,624
1,184
3,744
5,824
5,208
$583,226
37,465
270,927
1,593
4,260
7,216
5,245
$ 736,883
85,360
397,856
5,134
4,629
6,363
6,130
Operating income for reportable segments
Adjustment for:
Amortization of intangibles
Impairment of goodwill and other intangibles
Corporate and other expense, net
Total operating income (loss)
Interest expense, net
Other expenses (income), net
Income (loss) before income taxes
52
Years Ended December 31,
2009
$ 37,465
2008
$ 85,360
2010
$ 68,004
6,363
-
30,806
48,191
6,130
(223)
$ 42,284
7,216
52,951
26,630
(49,332)
5,245
(95)
$(54,482)
5,824
-
25,089
37,091
5,208
(249)
$ 32,132
15. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Summarized quarterly financial information for the years ended December 31, 2008, 2009 and 2010 is as follows:
2008
Sales
Gross profit
Net income
Earnings per share – basic (Restated) – Note 2
Earnings per share – diluted (Restated) – Note 2
2009
Sales
Gross profit
Goodwill and other intangibles impairment
Net income (loss)
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
2010
Sales
Gross profit
Net income
Earnings per share - basic
Earnings per share - diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 168.5
45.9
5.4
0.42
0.39
$ 157.6
46.1
-
3.2
0.24
0.23
$ 147.0
42.0
3.6
0.27
0.26
$ 187.8
51.9
6.4
0.49
0.46
$ 144.4
41.4
-
2.2
0.16
0.15
$ 167.3
47.9
4.6
0.33
0.31
$ 186.9
52.3
7.0
0.54
0.51
$ 143.4
40.8
-
2.7
0.20
0.19
$ 172.2
48.9
5.3
0.38
0.36
$ 193.6
56.9
7.0
0.54
0.51
$ 137.8
23.1
(53.0)
(50.5)
(3.84)
(3.84)
$ 169.7
49.6
5.9
0.41
0.39
The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each quarter’s computation
is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and the
dilutive effects of the stock options and restricted stock in each quarter.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
DXP carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness as of December 31, 2010, of the design and operation of DXP’s disclosure controls and procedures
pursuant to Exchange Act Rules 13a-15 and 15d-15. Disclosure controls and procedures are the controls and other procedures of DXP that are
designed to ensure that information required to be disclosed by DXP in the reports that it files or submits under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the U.S.
Securities and Exchange Commission (the “Commission”). Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by DXP in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that DXP’s disclosure controls
and procedures were effective as of the end of the period covered by this Report.
53
Internal Control Over Financial Reporting
(A) Management’s Annual Report on Internal Control Over Financial Reporting
Management’s report on the Company’s internal control over financial reporting is included on page 31 of this Report under the
heading Management’s Annual Report on Internal Control Over Financial Reporting.
(B) Changes in Internal Control over Financial Reporting
None
ITEM 9B. Other Information
None.
54
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item will be included in our Definitive Proxy statement for the 2011 Annual Meeting of Shareholders that we
will file with the SEC within 120 days of the end of the fiscal year to which this Report relates (the “Proxy Statement”) and is hereby
incorporated by reference thereto.
ITEM 11. Executive Compensation
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
ITEM 14. Principal Auditor Fees and Services.
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
55
ITEM 15. Exhibits, Financial Statement Schedules.
(a) Documents included in this report:
1.
Financial Statements (included under Item 8):
PART IV
DXP Enterprises, Inc. and Subsidiaries:
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Management Report on Internal Controls
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
29
31
32
33
34
35
36
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not significant or is included in the Consolidated Financial
Statements or notes thereto or is not applicable.
3. Exhibits:
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission.
Exhibit
No. Description
3.1
3.2
4.1
Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on
Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).
Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4 (Reg. No. 333-10021), filed
with the Commission on August 12, 1996).
Form of Common Stock certificate (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8
(Reg. No. 333-61953), filed with the Commission on August 20, 1998).
4.2
See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of security holders.
4.3
See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of security holders.
4.4
Form of Senior Debt Indenture of DXP Enterprises, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Registration
Statement on Form S-3 (Reg. No. 333-166582), filed with the SEC on May 6, 2010).
56
4.5
Form of Subordinated Debt Indenture of DXP Enterprises, Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Registration
Statement on Form S-3 (Reg. No. 333-166582), filed with the SEC on May 6, 2010).
+10.1 DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1999, filed with the Commission on August 16, 1999).
+10.2 DXP Enterprises, Inc. 1999 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999), filed with the Commission on August 16, 1999.
+10.3 DXP Enterprises, Inc. Long Term Incentive Plan, as amended (incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-61953), filed with the Commission on August 20, 1998).
+10.4 Amendment Number One to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit
10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Commission on March
11, 2004).
+10.5 Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R. Little (incorporated by
reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the
Commission on March 11, 2004).
+10.6 Employment Agreement dated effective as of June 1, 2004, between DXP Enterprises, Inc. and Mac McConnell (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with
the Commission on May 6, 2004).
+10.7 Amendment Number One to DXP Enterprises, Inc. 1999 Employee Stock Option Plan (incorporated by reference to Exhibit 10.10 to
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Commission on March 30,
2005).
+10.8 Summary Description of Director Fees (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, filed with the Commission on March 30, 2005).
+10.9 Summary Description of Executive Officer Cash Bonus Plan (incorporated by reference to Exhibit 10.12 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Commission on March 30, 2005).
+10.10 Amendment Number Two to DXP Enterprises, Inc. Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit
10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Commission on
March 30, 2005).
+10.11 DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2005, (filed with the Commission on March 10, 2006).
+10.12 Amendment Number One to Employment Agreement dated effective as of January 1, 2004, between DXP Enterprises, Inc. and David R.
Little (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on July 26,
2006).
+10.13 Amendment No. One to DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K, filed with the Commission on July 26, 2006).
57
10.14 Stock Purchase Agreement among DXP Enterprises, Inc., as Purchaser, Precision Industries, Inc., and the selling stockholders dated
August 19, 2007, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission
on August 21, 2007).
10.15 Asset Purchase Agreement among DXP Enterprises, Inc., as Purchaser, Lone Wolf Rental, LLC, Indian Fire and Safety, Inc., and the
other parties named therein dated October 18, 2007, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed with the Commission on October 22, 2007).
10.16 Stock Purchase Agreement among DXP Enterprises, Inc., as Purchaser, Vertex Corporate Holdings, Inc., the stockholders of Vertex
Corporate Holdings, Inc. and Watermill-Vertex Enterprises, LLC, dated August 28, 2008, (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K, filed with the Commission on August 29, 2008).
10.17 Credit Agreement among DXP Enterprises, Inc., as Borrower, and Bank of America, N.A., as Syndication Agent, and Wells Fargo
Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party thereto dated August 28,
2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Commission on August
29, 2008 and the Company’s Current Report on Form 8-K/A, filed with the Commission on September 23, 2010).
10.18 Amendment Number Two to Employment Agreement dated effective January 1, 2004 between DXP Enterprises, Inc. and David R.
Little (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 22,
2010).
10.19 Exhibits and schedules to the Credit Agreement among DXP Enterprises, Inc., as Borrower, and Bank of America, N.A., as Syndication
Agent, and Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party
thereto, dated August 28, 2008 (incorporated by reference to Amendment Number Two to the Company’s Current Report on Form 8-
K/A, filed with the Commission on September 23, 2010).
10.20 Amendment Number One to Credit Agreement among DXP Enterprises, Inc., as Borrower, and Bank of America, N.A., as Syndication
Agent, and Wells Fargo Bank, National Association, as Lead Arranger and Administrative Agent for the Lenders and the Lenders party
thereto, dated August 28, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the
Commission on March 16, 2010).
10.21 Asset Purchase Agreement, dated as of April 1, 2010, whereby DXP Enterprises, Inc. acquired the assets of Quadna, Inc. (incorporated
herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission
on April 5, 2010).
10.22 Asset Purchase Agreement, dated as of November 22, 2010, whereby DXP Enterprises, Inc. acquired the assets of D&F Distributors,
Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on November 23, 2010).
18.1
Letter of Independent Registered Public Accounting Firm Regarding Change in Accounting Principle (incorporated by reference to
Exhibit 18.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, filed with the
Commission on May 12, 2008.)
*21.1 Subsidiaries of the Company.
*23.1 Consent of Hein & Associates LLP, Independent Registered Public Accounting Firm.
*31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.
58
*31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.
*32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, as amended.
*32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, as amended.
Exhibits designated by the symbol * are filed with this Annual Report on Form 10-K. All exhibits not so designated are incorporated by
reference to a prior filing with the Commission as indicated.
+ Indicates a management contract or compensation plan or arrangement.
The Company undertakes to furnish to any shareholder so requesting a copy of any of the exhibits to this Report on upon payment to the
Company of the reasonable costs incurred by the Company in furnishing any such exhibit.
59
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S
REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
DXP Enterprises, Inc. and Subsidiaries
Houston, Texas
We have audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial statements of DXP Enterprises, Inc. and Subsidiaries included in this Form 10-K and have issued our report thereon dated March 16,
2011. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement
schedule listed in Item 15 herein (Schedule II-Valuation and Qualifying Accounts) is the responsibility of the Company’s management and is
presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial
statements. The financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects with the financial data required to be set forth therein in relation to the basic financial
statements taken as a whole.
Hein & Associates, LLP
Houston, Texas
March 16, 2011
Description
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
DXP ENTERPRISES, INC.
Years Ended December 31, 2010, 2009 and 2008
(in thousands)
Charged to
Cost and
Expenses
Balance at
Beginning
of Year
Other
Accounts
Charged to
Deductions
Balance
At End
of Year
Year ended December 31, 2010
Deducted from assets accounts
Allowance for doubtful accounts
Valuation allowance for deferred
tax assets
Year ended December 31, 2009
Deducted from assets accounts
Allowance for doubtful accounts
Valuation allowance for deferred
tax assets
Year ended December 31, 2008
Deducted from assets accounts
Allowance for doubtful accounts
Valuation allowance for deferred
tax assets
$ 3,006
$ 679
$ -
$ 145 (1)
$3,540
$ -
$ -
$ -
$ -
-
$ 3,494
$ 675
$ -
$1,163 (1)
$3,006
$ 16
$ -
$ -
$ (16) (2)
-
$ 2,131
$ 1,424
$ 157 (3)
$ 218 (1)
$ 3,494
$ 33
$ -
$ -
$ 17 (2)
16
(1) Uncollectible accounts written off, net of recoveries.
(2) Reduction results from expiration or use of state net operating loss carryforwards.
(3) Reserve for receivables of acquired businesses.
60
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
DXP ENTERPRISES, INC. (Registrant)
By: /s/ DAVID R. LITTLE
David R. Little
Chairman of the Board,
President and Chief Executive Officer
Dated: March 16, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
NAME
TITLE
DATE
/s/David R. Little
David R. Little
/s/Mac McConnell
Mac McConnell
/s/Cletus Davis
Cletus Davis
/s/Timothy P. Halter
Timothy P. Halter
/s/Kenneth H. Miller
Kenneth H. Miller
Chairman of the Board, President
Chief Executive Officer and Director
(Principal Executive Officer)
March 16, 2011
Senior Vice President/Finance and
March 16, 2011
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 16, 2011
March 16, 2011
March 16, 2011
Director
Director
Director
61
Exhibit 21.1
SEPCO Industries, Inc., a Texas Corporation
DXP Acquisition, Inc., a Nevada corporation (doing business as Strategic Supply, Inc.)
SUBSIDIARIES OF THE COMPANY
PMI Operating Company, Ltd., a Texas limited partnership
PMI Investment, LLC, a Delaware limited liability corporation
Pump – PMI LLC, a Texas limited liability corporation
R. A. Mueller, Inc. an Ohio corporation
Precision Industries, Inc., a Nebraska corporation
Vertex Corporate Holdings, Inc., a Delaware corporation
Pawtucket Holdings, Inc., a Delaware corporation
PFI, LLC, a Rhode Island limited liability company
DXP Energy Services, LLC, a Texas limited liability corporation
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation of our report dated March 16, 2011 relating to our audit of the consolidated financial statements, the
financial statement schedule and internal control over financial reporting included in this Annual Report on Form 10-K, into the Company’s
previously filed registration statements on Form S-8 (File Nos. 333-134606, 333-123698, 333-61953, 333-92875 and 333-92877) and Form S-3
(File No. 333-134603).
Hein & Associates LLP
Houston, Texas
March 16, 2011
Exhibit 31.1
I, David R. Little, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of DXP Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 16, 2011
/s/ David R. Little
David R. Little
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Mac McConnell, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of DXP Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 16, 2011
/s/ Mac McConnell
Mac McConnell
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.
Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, as amended, the undersigned officer of DXP
Enterprises, Inc. (the “Company”) hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the
“Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (15
U.S.C. 78m or 78o(d)), and that the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 16, 2011
/s/David R. Little
David R. Little
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a
separate disclosure document.
Exhibit 32.2
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
Pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, as amended, the undersigned officer of DXP
Enterprises, Inc. (the “Company”) hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the
“Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (15
U.S.C. 78m or 78o(d)), and that the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: March 16, 2011
/s/Mac McConnell
Mac McConnell
Senior Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a
separate disclosure document.