UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended
December 31, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition
period from to
or
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)
76-0509661
(I.R.S. Employer Identification Number)
7272 Pinemont, Houston, Texas
(Address of principal executive offices)
77040
(Zip Code)
(713) 996-4700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
NASdAQ
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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 ☒
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 ☒ 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 ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Emerging growth company ☐
Accelerated filer ☒
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Aggregate market value of the registrant's Common Stock held by non-affiliates of registrant as of June 30, 2017: $536,658,521
Number of shares of registrant's Common Stock outstanding as of March 21, 2018: 17,358,186.
dOCumENTS INCORPORATEd bY REFERENCE
Portions of the definitive proxy statement for the annual meeting of shareholders to be held in 2018 are incorporated by reference into Part III hereof.
2
TAblE OF CONTENTS
dESCRIPTION
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
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 Accounting Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
Item
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
16.
Page
4
13
18
18
19
19
19
21
22
40
41
73
73
77
77
77
77
77
77
78
81
81
dISClOSuRE REgARdINg FORWARd-lOOKINg STATEmENTS
This
Annual
Report
on
Form
10-K
(this
“Report”)
contains
statements
that
constitute
“forward-looking
statements”
within
the
meaning
of
the
Private
Securities
Litigation
Reform
Act
of
1995,
as
amended.
Such
statements
can
be
identified
by
the
use
of
forward-looking
terminology
such
as
“believes”,
“expects”,
“may”,
“might”,
“estimates”,
“will”,
“should”,
“could”,
“plans”,
or
“anticipates”,
or
the
negative
thereof,
other
variations
thereon,
or
comparable
terminology,
or
by
discussions
of
strategy.
Any
such
forward-looking
statements
are
not
guarantees
of
future
performance
and
may
involve
significant
risks
and
uncertainties,
and
actual
results
may
vary
materially
from
those
discussed
in
the
forward-looking
statements
as
a
result
of
various
factors.
These
factors
include
the
effectiveness
of
management’s
strategies
and
decisions,
our
ability
to
implement
our
internal
growth
and
acquisition
growth
strategies,
general
economic
and
business
conditions
specific
to
our
primary
customers,
changes
in
government
regulations,
our
ability
to
effectively
integrate
businesses
we
may
acquire,
our
success
in
remediating
our
internal
control
weaknesses,
new
or
modified
statutory
or
regulatory
requirements,
availability
of
materials
and
labor,
inability
to
obtain
or
delay
in
obtaining
government
or
third-party
approvals
and
permits,
non-performance
by
third
parties
of
their
contractual
obligations,
unforeseen
hazards
such
as
weather
conditions,
acts
or
war
or
terrorist
acts
and
the
governmental
or
military
response
thereto,
cyber-attacks
adversely
affecting
our
operations,
other
geological,
operating
and
economic
considerations
and
declining
prices
and
market
conditions,
including
reduced
oil
and
gas
prices
and
supply
or
demand
for
maintenance,
repair
and
operating
products,
equipment
and
service,
and
our
ability
to
obtain
financing
on
favorable
terms
or
amend
our
credit
facilities
as
needed.
This
Report
identifies
other
factors
that
could
cause
such
differences.
We
cannot
assure
that
these
are
all
of
the
factors
that
could
cause
actual
results
to
vary
materially
from
the
forward-looking
statements.
Factors
that
could
cause
or
contribute
to
such
differences
include,
but
are
not
limited
to,
those
discussed
in
"Risk
Factors",
and
elsewhere
in
this
Report.
We
assume
no
obligation
and
do
not
intend
to
update
these
forward-looking
statements.
Unless
the
context
otherwise
requires,
references
in
this
Report
to
the
"Company",
"DXP",
“we”
or
“our”
shall
mean
DXP
Enterprises,
Inc.,
a
Texas
corporation,
together
with
its
subsidiaries.
3
Table
of
Contents
ITEm 1. Business
Company Overview
PART I
DXP was incorporated in Texas in 1996 to be the successor to SEPCO Industries, Inc., 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 energy and industrial
customers. The Company is organized into three business segments: Service Centers, Supply Chain Services and Innovative Pumping Solutions. Sales, operating
income, and other financial information for 2015, 2016 and 2017, and identifiable assets at the close of such years for our business segments are presented in Note
18 of the Notes to Consolidated Financial Statements “financial statements” in Item 8 of this Report.
Our total sales have increased from $125 million in 1996 to $1.0 billion in 2017 through a combination of internal growth and business acquisitions. At December
31, 2017 we operated from 176 locations in thirty-four states in the U.S., nine provinces in Canada, Dubai and one state in Mexico, serving more than 50,000
customers engaged in a variety of industrial end markets. We have grown sales and profitability by adding additional products, services, locations 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 such information should not be considered part of this Report.
Industry Overview
The industrial distribution market is highly fragmented. Based on 2016 sales as reported by Industrial Distribution magazine, we were the 19 th 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, as 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.
Customized
Integrated
Service.
As industrial customers focus on their core manufacturing or other production competencies, they increasingly
demand 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 product distributors are
expanding their product coverage to eliminate second-tier distributors and become a “one stop source”.
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Table
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We believe we have increased our competitive advantage through our traditional fabrication of integrated system pump packages and integrated supply programs,
which are designed to address our customers’ 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 our specific lines of products and product categories to offering a fully integrated supply package in
which we assume procurement and management functions, which can include 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
The Company is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). Our
segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives and
provide a framework for timely and rational allocation of resources within our businesses. The following table sets forth DXP’s sales recognition by business
segments as of December 31, 2017. See Results of Operations under Item 7, “Management Discussion and Analysis of Financial Condition and Results of
Operations” for further information on our segments’ financial results.
Segment
2017 Sales
( in
thousands
)
% of Sales
SC
$ 641,275
63.7 %
SCS
$ 161,477
16.0 %
IPS
$ 204,030
20.3 %
Service Centers
End-markets
locations
Employees
Oil & Gas, Food & Beverage,
General Industrial, Chemical
& Petrochemical,
Transportation
Oil & Gas
Food & Beverage,
Mining & Transportation
Oil & Gas
Mining
Utilities
161 service centers
4 distribution centers
1,463
67 customer facilities
11 fabrication facilities
271
555
The Service Centers are engaged in providing MRO products, equipment and integrated services, including technical expertise and logistics capabilities, to energy
and 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 manufacturers. As a first-tier distributor, we are able to reduce our customers' costs and
improve efficiencies in the supply chain. We offer a wide range of industrial MRO products, equipment and integrated services through a continuum of customized
and efficient MRO solutions. We also provide services such as field safety supervision, in-house and field repair and predictive maintenance.
A majority of our Service Center segment sales are derived from customer purchase orders for products. Sales are directly solicited from customers by our sales
force. DXP Service Centers are stocked and staffed with knowledgeable sales associates and backed by a centralized customer service team of experienced
industry professionals. At December 31, 2017, our Service Centers’ products and services were distributed from 161 service centers and 4 distribution centers.
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Table
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DXP Service Centers provide a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, industrial
supply and safety product and service 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, agriculture and pulp and paper.
The Service Centers segment’s long-lived assets are located in the United States, Canada, Dubai and Mexico. Approximately 12.5% of the Service Centers
segment’s revenues were in Canada and the remainder was virtually all in the U.S. Our foreign operations are subject to certain unique risks, which are more fully
disclosed in Item 1A “Risk Factors,” “Risks Associated with Conducting Business in Foreign Countries.”
At December 31, 2017, the Service Centers segment had approximately 1,463 employees, all of whom were full-time.
Supply Chain Services
DXP’s Supply Chain Services (SCS) segment manages all or part of its customers’ supply chains, including procurement and inventory management. The SCS
segment enters into long-term contracts with its customers that can be cancelled on little or no notice under certain circumstances. The SCS segment provides fully
outsourced MRO solutions for sourcing MRO products including, but not limited to, the following: inventory optimization and management; store room
management; transaction consolidation and control; vendor oversight and procurement cost optimization; productivity improvement services; and customized
reporting. 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 MRO products 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 MRO products 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 customers’ businesses and
industries have allowed us to design standardized programs that are flexible enough to be fully adaptable to address our customers’ unique MRO products supply
chain challenges. These standardized programs include:
· SmartAgreement, a planned, pro-active MRO products procurement solution for MRO categories leveraging DXP’s local Service Centers.
· SmartBuy, DXP’s on-site or centralized MRO procurement solution.
· SmartSource SM , DXP’s on-site procurement and storeroom management by DXP personnel.
· SmartStore, DXP’s customized e-Catalog solution.
· SmartVend, DXP’s industrial dispensing solution, which allows for inventory-level optimization, user accountability and item usage reduction by an initial
20-40%.
· SmartServ, 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 listed above 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.
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Table
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At December 31, 2017, the Supply Chain Services segment operated supply chain installations in 67 of our customers’ facilities.
Virtually all of the SCS segment’s long-lived assets are in the U.S. Approximately 1.4% of the SCS segment’s 2017 revenues were recognized in Canada and
98.6% were in the U.S.
At December 31, 2017, the Supply Chain Services segment had approximately 271 employees, all of whom were full-time.
Innovative Pumping Solutions
DXP’s Innovative Pumping Solutions® (IPS) segment provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private
label pumps to meet the capital equipment needs of our global customer base. Our IPS segment provides a single source for engineering, systems design and
fabrication for unique customer specifications.
Our sales of integrated pump packages, remanufactured pumps or branded private label pumps are generally derived from customer purchase orders containing the
customers’ unique specifications. Sales are directly solicited from customers by our dedicated sales force.
DXP’s engineering staff can design a complete custom pump package to meet our customers’ project specifications. Drafting programs such as Solidworks® and
AutoCAD® allow our engineering team to verify the design and layout of packages with our customers prior to the start of fabrication. Finite Elemental Analysis
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.
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 manufacturer certified personnel. Pump packages require MRO products and original equipment
manufacturers’ (OEM) equipment such as pumps, motors, valves, and consumable products, such as welding supplies. DXP leverages its MRO product inventories
and breadth of authorized products to lower the total cost and maintain the quality of our pump packages.
DXP’s fabrication facilities provide convenient technical support and pump repair services. The facilities contain state of the art equipment to provide the technical
expertise our customers require including, but not limited to, the following:
Structural welding
Pipe welding
Custom skid assembly
Custom coatings
·
·
·
·
· Hydrostatic pressure testing
· Mechanical string testing
Examples of our innovative pump packages include, but are not limited to:
· Diesel and electric driven firewater packages
·
·
·
·
Pipeline booster packages
Potable water packages
Pigging pump packages
Lease Automatic Custody Transfer (LACT) charge units
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Chemical injection pump packages wash down units
Seawater lift pump packages
Jockey pump packages
Condensate pump packages
Cooling water packages
Seawater/produced water injection packages
·
·
·
·
·
·
· Variety of packages to meet customer required industry specifications such as API, ANSI and NFPA
At December 31, 2017, the Innovative Pumping Solutions segment operated out of 11 facilities, 9 of which are located in the United States and two in Canada.
Approximately 6.4% of the IPS segment’s long-lived assets are located in Canada and the remainder were located in the U.S. Approximately 8.2% of the IPS
segment’s 2017 revenues were recognized in Canada and 91.8% were in the U.S.
At December 31, 2017, the IPS segment had approximately 555 employees, all of whom were full-time.
Total backlog, representing firm orders for the IPS segment products that have been received and entered into our production systems, was $104.1 million and
$68.8 million at December 31, 2017 and 2016, respectively.
Products
Most industrial customers currently purchase their MRO products 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 SKUs and provide customers with access to more than
1,000,000 items. Given our breadth of product and our industrial distribution customers’ focus around specific product categories, we have become customer
driven experts in five key product categories. As such, our three business segments are supported by the following five key product categories: rotating equipment;
bearings & power transmission; industrial supplies; metal working; 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 products include a full line of centrifugal pumps for transfer and process service applications, such as
petrochemicals, refining and crude oil production; rotary gear 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 disposal of produced water and crude oil
pipeline service; and air-operated diaphragm pumps. We also provide a large variety of pump accessories.
·
·
bearings & Power Transmission . Our bearing products include several types of mounted and un-mounted 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, fasteners,
hand tools, janitorial products, pneumatic tools, welding supplies and welding equipment.
· metal Working . Our metal working products include a broad range of cutting tools, abrasives, coolants, gauges, industrial tools and machine shop
supplies.
·
Safety Products & Services . We sell a broad range of safety products including eye and face protection, first aid, hand protection, hazardous
material handling, instrumentation and respiratory protection products. Additionally, we provide safety services including hydrogen sulfide (H 2 S)
gas protection and safety, specialized and standby fire protection, safety supervision, training, monitoring, equipment rental and consulting. Our
safety services include safety supervision, medic services, safety audits, instrument repair and calibration, training, monitoring, equipment rental and
consulting.
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We acquire our products through numerous OEMs. We are authorized to distribute certain manufacturers' products only in specific geographic areas. All of our
oral or written distribution authorizations are subject to cancellation by the manufacturer, some upon little or no notice. For the last three fiscal years, no
manufacturer provided products that accounted for 10% or more of our revenues.
Over 90% of our business relates to sales of products. Service revenues are less than 10% of sales.
The Company has operations in the United States of America, Canada, Dubai, and Mexico. Information regarding financial data by geographic areas is set forth in
Note 18 of the Notes to Consolidated Financial Statements.
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 34 acquisitions across our three business segments. Below is a summary of recent acquisitions since the beginning of 2013.
On April 16, 2013, DXP acquired all of the stock of National Process Equipment Inc. (“NatPro”) through its wholly owned subsidiary, DXP Canada Enterprises
Ltd. DXP acquired this business to expand DXP’s geographic presence in Canada and strengthen DXP’s pump, integrated system packaging and related equipment
offering. The $40.1 million purchase price was financed with $36.6 million of borrowings under our then-existing credit facility and 52,542 shares of DXP
common stock. Additionally, the purchase agreement included an earn-out provision, which stated that former owners of NatPro may earn CDN $6.0 million based
on achievement of an earnings target during the first year of DXP’s ownership. The fair value of the earn-out recorded at the acquisition date was $2.8 million. As
of December 31, 2013 the $2.8 million accrued liability associated with this earn-out provision was reversed and included in 2013 operating income. See Note 8 of
the financial statements regarding the 2014 impairment of NatPro assets.
On May 17, 2013, DXP acquired substantially all of the assets of Tucker Tool Company, Inc. (“Tucker Tool”). DXP acquired this business to expand DXP's
geographic presence in the northern U.S. and strengthen DXP's industrial cutting tools offering. DXP paid approximately $5.0 million for Tucker Tool which was
borrowed under our then-existing credit facility.
On July 1, 2013, DXP acquired all of the stock of Alaska Pump & Supply, Inc. (APS). DXP acquired this business to expand DXP's geographic presence in
Alaska. DXP paid approximately $13.0 million for APS which was borrowed under our then-existing credit facility.
On July 31, 2013, DXP acquired substantially all of the assets of Tool-Tech Industrial Machine & Supply, Inc. (“Tool-Tech”). DXP acquired this business to
enhance our metal working product offering in the southwest region of the United States. DXP paid approximately $7.2 million for Tool-Tech which was borrowed
under our then-existing credit facility.
On January 2, 2014, the Company acquired all of the equity securities and units of B27, LLC (“B27”). DXP acquired this business to expand DXP’s pump
packaging offering . The total transaction value was approximately $304.9 million, including working capital payments and excluding approximately $1.0 million
in transaction costs. The purchase price was financed with borrowings under our then-existing credit facility and approximately $4.0 million (36,000 shares) of
DXP common stock. See Note 8 of the Notes to Consolidated Financial Statements regarding the 2014 and 2015 impairments of B27 goodwill. After the
acquisition of B27, there was a working capital dispute between the Company and the sellers. During the third quarter of 2015, an accounting expert issued his
report on the working capital dispute between DXP and the sellers of B27. The report required DXP to pay the sellers of B27 an additional $11.3 million. Because
the time period to allow adjustments of purchase accounting had expired, $7.3 million of the payment was expensed. The remaining $4.0 million of the required
payment represented tax refunds, which the Company collected as of the end of 2016.
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On May 1, 2014, the Company completed the acquisition of all of the equity interests of Machinery Tooling and Supply, LLC (MT&S) to expand DXP’s cutting
tools offering in the North Central region of the United States. DXP paid approximately $14.7 million for MT&S, which was borrowed under our then-existing
credit facility.
On April 1, 2015, the Company completed the acquisition of all of the equity interests of Tool Supply, Inc. (“TSI”) to expand DXP’s cutting tools offering in the
Northwest region of the United States. DXP paid approximately $5.0 million for TSI, which was borrowed under our then-existing credit Facility.
On September 1, 2015, the Company completed the acquisition of all of the equity interests of Cortech Engineering, LLC (“Cortech”) to expand DXP’s rotating
equipment offering to the Western seaboard. DXP paid approximately $14.9 million for Cortech. The purchase was financed with borrowings under our then-
existing credit facility as well as $4.4 million (148.8 thousand shares) of DXP common stock.
On January 1, 2018, the Company completed the acquisition of Application Specialties, Inc. (“ASI”), a distributor of cutting tools, abrasives, coolants and machine
shop supplies. DXP paid approximately $11.5 million for ASI. The purchase was financed with $10.6 million of cash on hand as well as issuing $0.9 million of
DXP’s common stock.
disposition
On October 3, 2016, the Company sold Vertex Corporate Holdings, Inc. for approximately $31 million in cash. The sale is a non-core business divestiture for
DXP, and the proceeds were primarily used to pay down debt obligations.
Competition
Our business is highly competitive. In the Service Centers segment we compete with a variety of industrial supply distributors, some of which may have greater
financial and other resources than we do. Some 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 variety of products and services as broad as our
offerings. Further, while certain catalog distributors provide product offerings as broad as ours, these competitors do not offer the product application, technical
expertise 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 expertise, responsiveness and price in all of our segments.
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 $250,000
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 decreased over
the past three years in connection with the decline in revenues, payroll and vehicles since 2014. This trend would be expected to reverse with an increase in
revenues. 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.
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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 including those established by the
Occupational Safety and Health Administration and Canadian Occupational Health and Safety.
Certain of our operations are subject to federal, state and local laws and regulations as well as provincial 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, such laws and regulations could result
in costs to remediate releases of regulated substances into the environment or costs to remediate sites to which we sent regulated substances for disposal. In some
cases, these laws can impose strict liability for the entire cost of clean-up on any responsible party without regard to negligence or fault and impose liability on us
for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them. New laws have
been enacted and regulations are being adopted by various regulatory agencies on a continuing basis and the costs of compliance with these new laws can only be
broadly appraised until their implementation becomes more defined.
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, 2017, DXP had approximately 2,511employees, all of whom were full-time.
background of Executive Officers
The following is a list of DXP’s executive officers, their age, positions, and a description of each officer’s business experience as of March 28, 2018. All of our
executive officers hold office at the pleasure of DXP’s Board of Directors.
NAmE
David R. Little
Kent Yee
Mac McConnell
David C. Vinson
John J. Jeffery
Todd Hamlin
Chris Gregory
POSITION
Chairman of the Board, President and Chief Executive Officer
Senior Vice President/Chief Financial Officer
Senior Vice President/Finance, Chief Accounting Officer and Secretary*
Senior Vice President/Innovative Pumping Solutions
Senior Vice President/Supply Chain Services
Senior Vice President/Service Centers
Senior Vice President/Information Technology
AgE
66
42
64
67
50
46
43
* As previously disclosed, on March 16, 2018, Mac McConnell notified the Company of his intention to retire from his role with the Company effective March 31,
2018. The Company is in the process of conducting a search for a new Chief Accounting Officer.
David
R.
Little
. Mr. Little has served as Chairman of the Board, President and Chief Executive Officer of DXP since its organization in 1996 and also has held
these positions with SEPCO Industries, Inc., predecessor to the Company (“SEPCO”), since he acquired a controlling interest in SEPCO in 1986. Mr. Little has
been employed by SEPCO since 1975 in various capacities, including Staff Accountant, Controller, Vice President/Finance and President. Mr. Little gives our
Board insight and in-depth knowledge of our industry and our specific operations and strategies. He also provides leadership skills and knowledge of our local
community and business environment, which he has gained through his long career with DXP and its predecessor companies.
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Kent
Yee
. Mr. Yee was appointed Senior Vice President/Chief Financial Officer in June 2017. Currently, Mr. Yee is responsible for acquisitions, finance,
accounting and human resources of DXP. From March 2011 to June 2017, Mr. Yee served as Senior Vice President Corporate Development and led DXP's
mergers and acquisitions, business integration and internal strategic project activities. During March 2011, Mr. Yee joined DXP from Stephens Inc.'s Industrial
Distribution and Services team where he served in various positions and most recently as Vice President from August 2005 to February 2011. Prior to Stephens,
Mr. Yee was a member of The Home Depot’s Strategic Business Development Group with a primary focus on acquisition activity for HD Supply. Mr. Yee was
also an Associate in the Global Syndicated Finance Group at JPMorgan Chase. He has executed over 43 transactions including more than $1.4 billion in M&A and
$3.4 billion in financing transactions primarily for change of control deals and numerous industrial and distribution acquisition and sale assignments. He holds a
Bachelors of Arts in Urban Planning from Morehouse College and an MBA from Harvard University Graduate School of Business.
Mac
McConnell.
Mr. McConnell transitioned from Senior Vice President/Finance and Chief Financial Officer to Senior Vice President/Finance and Chief
Accounting Officer in June 2017. From September 2000 to June 2017, Mr. McConnell served as Senior Vice President/Finance and Chief Financial Officer. From
February 1998 until September 2000, Mr. McConnell served as Senior Vice President, Chief Financial Officer and a director of Transportation Components, Inc., a
NYSE-listed distributor of truck parts. From December 1992 to February 1998, he served as Chief Financial Officer of Sterling Electronics Corporation, a NYSE-
listed electronics parts distributor, which was acquired by Marshall Industries, Inc. in 1998. From 1990 to 1992, Mr. McConnell was Vice President-Finance of
Interpak Holdings, Inc., a publicly-traded company involved in packaging and warehousing thermoplastic resins. From 1976 to 1990, he served in various
capacities, including as a partner, with Ernst & Young LLP.
David
C.
Vinson.
Mr. Vinson was elected Senior Vice President/Innovative Pumping Solutions in January 2006. He served as Senior Vice President/Operations of
DXP from October 2000 to December 2005. From 1996 until October 2000, Mr. Vinson served as Vice President/Traffic, Logistics and Inventory. Mr. Vinson has
served in various capacities with DXP since his employment in 1981.
John
J.
Jeffery
. Mr. Jeffery serves as Senior Vice President of Supply Chain Services, Marketing and Information Technology. He oversees the strategic direction
for the Supply Chain Services business unit while leveraging both Marketing and Information Technology to drive innovative business development initiatives for
organizational growth and visibility. He began his career with T.L. Walker, which was later acquired by DXP in 1991. During his tenure with DXP, Mr. Jeffery has
served in various significant capacities including branch, area, regional and national sales management as well as sales, marketing and Service Center vice
president roles. He holds a Bachelor of Science in Industrial Distribution from Texas A&M University and is also a graduate of the Executive Business Program at
Rice University.
Todd
Hamlin.
Mr. Hamlin was elected Senior Vice President of DXP Service Centers in June of 2010. Mr. Hamlin joined the Company in 1995. From February
2006 until June 2010 he served as Regional Vice President of the Gulf Coast Region. Prior to serving as Regional Vice President of the Gulf Coast Region he
served in various capacities, including application engineer, product specialist and sales representative. From April 2005 through February 2006, Mr. Hamlin
worked as a sales manager for the UPS Supply Chain Services division of United Parcel Service, Inc. He holds a Bachelor’s of Science in Industrial Distribution
from Texas A&M University and a Master in Distribution from Texas A&M University. Mr. Hamlin serves on the Advisory Board for Texas A&M’s Master in
Distribution degree program. In 2014, Mr. Hamlin was elected to the Bearing Specialists Association’s Board of Directors.
Chris
Gregory
. Mr. Gregory was elected Senior Vice President and Chief Information Officer in March of 2018. Mr. Gregory joined the Company in August
2006. From December 2014 until January 2018 he served as Vice President of IT Strategic Solutions. Prior to serving as Vice President of IT Strategic Solutions he
served in various roles, including application developer, database manager as well as leading the business intelligence and application development departments.
He holds a Bachelor of Business Administration and Computer Information Systems from the University of Houston and an MBA from The University of Texas at
Austin, McCombs School of Business.
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All officers of DXP hold office until the regular meeting of the board of directors following the Annual Meeting of Shareholders or until their respective successors
are duly elected and qualified or their earlier resignation or removal.
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.
Additionally, we make the following available free of charge through our Internet website ir.dxpe.com :
-
-
-
-
-
DXP Code of Ethics for Senior Financial Officers;
DXP Code of Conduct;
Compensation Committee Charter;
Nominating and Governance Committee Charter; and
Audit Committee Charter
ITEm 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. Investing in DXP involves risk. In deciding whether to invest in DXP, you should
carefully consider the risk factors below as well as those matters referenced in the foregoing pages under “Disclosure Regarding Forward-Looking Statements” and
other information included and incorporated by reference into this Report and other reports and materials filed by us with the Securities and Exchange
Commission. Any of these risk factors could have a significant or material adverse effect on our businesses, results of operations, financial condition or liquidity.
They could also cause significant fluctuations and volatility in the trading price of our securities. Readers should not consider any descriptions of these factors to be
a complete set of all potential risks that could affect DXP. Further, many of these risks are interrelated and could occur under similar business and economic
conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effects of others. Such a combination could materially increase
the severity of the impact of these risks on our results of operations, liquidity and financial condition.
Decreased
capital
expenditures
in
the
energy
industry
can
adversely
impact
our
customers’
demand
for
our
products
and
services.
A significant portion of our revenue depends upon the level of capital and operating expenditures in the oil and natural gas industry, including capital expenditures
in connection with the upstream, midstream, and downstream phases in the energy industry. Therefore, a significant decline in oil or natural gas prices could lead
to a decrease in our customers’ capital and other expenditures and could adversely affect our revenues.
Demand
for
our
products
could
decrease
if
the
manufacturers
of
those
products
sell
them
directly
to
end
users.
Typically, MRO products have been purchased through distributors and not directly from the manufacturers of those products. If customers were to purchase our
products directly from manufacturers, or if manufacturers sought to increase their efforts to sell directly to end users, we could experience a significant decrease in
sales and earnings.
Changes
in
our
customer
and
product
mix,
or
adverse
changes
to
the
cost
of
goods
we
sell,
could
cause
our
gross
margin
percentage
to
fluctuate
or
decrease,
and
we
may
not
be
able
to
maintain
historical
margins.
Changes in our customer mix have resulted from geographic expansion, daily selling activities within current geographic markets, and targeted selling activities to
new customers. Changes in our product mix have resulted from marketing activities to existing customers and needs communicated to us from existing and
prospective customers. There can be no assurance that we will be able to maintain our historical gross margins. In addition, we may also be subject to price
increases from vendors that we may not be able to pass along to our customers.
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A
deterioration
in
the
oil
and
gas
sector
or
other
circumstances
may
negatively
impact
our
business
and
results
of
operations
and
thus
hinder
our
ability
to
comply
with
financial
covenants
under
our
credit
facilities,
including
the
Secured
Leverage
Ratio
and
Fixed
Charge
Coverage
Ratio
financial
covenants.
A deterioration of the oil and gas sector or other circumstances that reduce our earnings may hinder our ability to comply with certain financial covenants under
our credit facilities. Specifically, compliance with the Secured Leverage Ratio and Fixed Charge Coverage Ratio covenants depend on our ability to maintain net
income and prevent losses. In the future we may not be able to comply with the covenants and, if we are not able to do so, our lenders may not be willing to waive
such non-compliance or amend such covenants. If we are unable to comply with our financial covenants or obtain a waiver or amendment of those covenants or
obtain alternative financing, our business and financial condition would be adversely affected.
We
rely
upon
third-party
transportation
providers
for
our
merchandise
shipments
and
are
subject
to
increased
shipping
costs
as
well
as
the
potential
inability
of
our
third-party
transportation
providers
to
deliver
products
on
a
timely
basis.
We rely upon independent third-party transportation providers for our merchandise shipments, including shipments to and from all of our service centers. Our
utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, labor availability, labor strikes and inclement weather,
which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use,
we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. In
addition, we may not be able to obtain favorable terms as we have with our current third-party transportation providers.
Adverse
weather
events
or
natural
disasters
could
negatively
disrupt
our
operations.
Certain areas in which we operate are susceptible to adverse weather conditions or natural disasters, such as hurricanes, tornadoes, floods and earthquakes. These
events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. Additionally, we may
experience communication disruptions with our customers, vendors and employees.
We cannot predict whether or to what extent damage caused by these events will affect our operations or the economies in regions where we operate. These
adverse events could result in disruption of our purchasing or distribution capabilities, interruption of our business that exceeds our insurance coverage, our
inability to collect from customers and increased operating costs. Our business or results of operations may be adversely affected by these and other negative
effects of these events.
The
loss
of
or
the
failure
to
attract
and
retain
key
personnel
could
adversely
impact
our
results
of
operations.
The loss of the services of any of the executive officers of the 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. 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.
If
we
do
not
successfully
remediate
our
internal
controls
weaknesses,
our
financial
statements
may
not
be
accurate
and
the
trading
price
of
our
stock
could
be
negatively
impacted.
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As discussed in Item 9A, “Managements Report on Internal Controls Over Financial Reporting,” we had material weaknesses in our internal controls during 2017.
If we fail to successfully remediate those weaknesses, our financial statements may not be accurate and the trading price of our stock could be negatively impacted
We
are
subject
to
various
government
regulations.
We are subject to laws and regulations in every jurisdiction where we operate. Compliance with laws and regulations increases our cost of doing business. We are
subject to a variety of laws and regulations, including without limitation import and export requirements, the Foreign Corrupt Practices Act, tax laws (including
U.S. taxes on our foreign subsidiaries), data privacy requirements, labor laws and anti-competition regulations. We are also subject to audits and inquiries in the
ordinary course of business. Changes to the legal and regulatory environments could increase the cost of doing business, and such costs may increase in the future
as a result of changes in these laws and regulations or in their interpretation. Our employees, contractors or agents may violate laws and regulations despite our
attempts to implement policies and procedures to comply with such laws and regulations. Any such violations could individually or in the aggregate materially
adversely affect our financial condition or results of operations.
We
are
subject
to
environmental,
health
and
safety
laws
and
regulations.
We are subject to federal, state, local, foreign and provincial environmental, health and safety laws and regulations. Fines and penalties may be imposed for non-
compliance with applicable environmental, health and safety requirements and the failure to have or to comply with the terms and conditions of required permits.
The failure by us to comply with applicable environmental, health and safety requirements could result in fines, penalties, enforcement actions, third party claims
for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders requiring corrective
measures.
A
general
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. We traditionally do not enter into long-term contracts with our customers which increases the likelihood that economic downturns would affect our
business.
Risks
Associated
With
Conducting
Business
in
Foreign
Countries
We conduct a meaningful amount of business outside of the United States of America. We could be adversely affected by economic, legal, political and regulatory
developments in countries that we conduct business in. We have meaningful operations in Canada in which the functional currency is denominated in Canadian
dollars. As the value of currencies in foreign countries in which we have operations increases or decreases related to the U.S. dollar, the sales, expenses, profits,
losses assets and liabilities of our foreign operations, as reported in our Consolidated Financial Statements, increase or decrease, accordingly.
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 adversely affect 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. We may not be successful in efforts to increase sales and product offerings to existing customers.
Consolidation in our industry could heighten the impacts of competition on our business and results of operations discussed above. The fact that we do not
traditionally enter into long-term contracts with our suppliers or customers may provide opportunities for our competitors.
We
are
subject
to
personal
injury
and
product
liability
claims
involving
allegedly
defective
products.
A variety of products we distribute are used in potentially hazardous applications that can result in personal injury and product liability claims. A catastrophic
occurrence at a location where the products we distribute are used may result in us being named as a defendant in lawsuits asserting potentially large claims and
applicable law may render us liable for damages without regard to negligence or fault.
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 stock price. This strategy includes taking advantage of a consolidation trend in the industry
and effecting acquisitions of businesses with complementary or desirable 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, difficulties in integrating
operations, technologies, services and personnel of acquired companies, potential loss of customers of acquired companies, preserving business relationships of the
acquired companies, 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 existing credit agreements or equity or debt financings. Our current credit agreements with lenders contain certain restrictions that could
adversely affect our ability to implement and finance potential acquisitions. Such restrictions include provisions which limit our ability to merge or consolidate
with, or acquire all or a substantial part of the properties or capital stock of, other entities without the prior written consent of the lenders. There can be no
assurance that we will be able to obtain the lenders’ 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.
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Ability
to
Comply
with
Financial
Covenants
of
Credit
Facilities
Our credit facilities require 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 facilities, which could permit acceleration of the Company’s indebtedness under the credit facilities. The Company from time to time has been unable to
comply with some of the financial covenants contained in previous credit facilities (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. In the future the Company may not be able to comply with the
covenants or, if is not able to do so, that its lenders will be willing to waive such non-compliance or amend such covenants.
Ability
to
Refinance
We may not be able to refinance existing debt or the terms of any refinancing may not be as favorable as the terms of our existing debt. If principal payments due
upon default or at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital, our cash flow may not be
sufficient to repay all maturing debt in years when significant payments come due.
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. Goodwill and intangibles represent a
significant amount of our total assets. As of December 31, 2017, our combined goodwill and intangible assets amounted to $266.1 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 which would directly impact earnings. We expect to record additional goodwill and other
intangible assets as a result of future business acquisitions. 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. See Note 8 of the Notes to Consolidated Financial Statements regarding the 2015
impairments of B27 goodwill.
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.
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. Our information systems are vulnerable to natural
disasters, power losses, telecommunication failures and other problems despite the protection of our information systems through physical and software safeguards
and remote processing capabilities. 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.
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Risks
Associated
with
Insurance
In the ordinary course of business we at times may become the subject of various claims, lawsuits or administrative proceedings seeking damages or other
remedies concerning our commercial operations, the products we distribute, employees and other matters, including potential claims by individuals alleging
exposure to hazardous materials as a result of the products we distribute or our operations. Some of these claims may relate to the activities of businesses that we
have acquired, even though these activities may have occurred prior to acquisition. The products we distribute are subject to inherent risks that could result in
personal injury, property damage, pollution, death or loss of production.
We maintain insurance to cover potential losses, and we are subject to various deductibles and caps under our insurance. It is possible, however, that judgments
could be rendered against us in cases in which we would be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for such
matters. Even a partially uninsured claim, if successful and of significant size, could have a material adverse effect on our business, results of operations and
financial condition. Furthermore, we may not be able to continue to obtain insurance on commercially reasonable terms in the future, and we may incur losses from
interruption of our business that exceed our insurance coverage. In cases where we maintain insurance coverage, our insurers may raise various objections and
exceptions to coverage which could make uncertain the timing and amount of any possible insurance recovery.
Risks
Associated
with
Cyber-Security
Through our sales channels and electronic communications with customers generally, we collect and maintain confidential information that customers provide to
us in order to purchase products or services. We also acquire and retain information about suppliers and employees in the normal course of business. Computer
hackers may attempt to penetrate our information systems or our vendors' information systems and, if successful, misappropriate confidential customer, supplier,
employee or other business information. In addition, one of our employees, contractors or other third party may attempt to circumvent security measures in order
to obtain such information or inadvertently cause a breach involving such information. Loss of information could expose us to claims from customers, suppliers,
financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our financial condition
and results of operations. We may not be able to adequately insure against cyber risks.
ITEm 1b. Unresolved Staff Comments
None.
ITEm 2. Properties
We own 8 of our facilities, including our headquarters facility in Houston, Texas, which has approximately 48,000 square feet of office space. The remainder of
our facilities are leased. At December 31, 2017, we had approximately 176 facilities which contained 161 services centers, 4 distribution centers and 11 fabrication
facilities.
At December 31, 2017, the Service Centers segment operated out of 161 service center facilities. Of these facilities, 125 were located in the U.S. in 34 states, 34
were located in 9 Canadian provinces, one was located in Sonora, Mexico and one was located in Dubai. All of the distribution centers were located in the U.S.,
specifically in Montana, Nebraska, and Texas. At December 31, 2017, the Innovative Pumping Solutions segment operated out of 11 fabrication facilities located
in 4 states in the U.S. and two provinces in Canada. At December 31, 2017, the Supply Chain Services segment operated supply chain installations in 67 of our
customers’ facilities in 25 U.S. states.
At December 31, 2017, our owned facilities ranged from 5,000 square feet to 48,000 square feet in size. We leased facilities for terms generally ranging from one
to fifteen years. The leased facilities ranged from approximately 570 square feet to 105,000 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.
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ITEm 3. Legal Proceedings
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of
these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP’s business,
consolidated financial position, cash flows, or results of operations.
ITEm 4. Mine Safety Disclosures
Not applicable.
ITEm 5. Market for the Registrant's Common Equity, Related Shareholder Matters and I ssuer Purchases of Equity Securities
Our common stock trades on The NASDAQ Global Select Market under the stock symbol "DXPE".
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:
PART II
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
low
32.44 $
35.62 $
41.67 $
39.94 $
37.88 $
30.69 $
22.94 $
21.91 $
25.01
25.35
32.80
29.54
19.75
15.07
12.78
13.31
$
$
$
$
$
$
$
$
On March 21, 2018, we had approximately registered 381 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 credit facilities limit our ability to declare or pay cash dividends or other distributions on our capital stock. 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’s common stock to the NASDAQ Industrial Index and the NASDAQ Composite (US). The
graph assumes that the value of the investment in DXP’s common stock and in each index was $100 at December 31, 2012 and that all dividends were reinvested.
Investors are cautioned against drawing conclusions from the data contained in the graph below as past results are not necessarily indicative of future performance.
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Equity Compensation Table
The following table provides information regarding shares covered by the Company’s equity compensation plans as of December 31, 2017:
Number
of Securities
to be issued
upon 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
N/A
N/A
N/A
N/A
N/A
N/A
77,901 $
N/A
77,901 $
30.36
N/A
30.36
401,223(1)
N/A
401,223(1)
Plan category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
(1) Represents shares of common stock authorized for issuance under the 2016 Omnibus Incentive Plan.
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unregistered Shares
DXP issued 148,769 unregistered shares of DXP’s common stock as part of the consideration for the September 1, 2015 acquisition of Cortech. The unregistered
shares were issued to the sellers of Cortech.
DXP issued 30,305 unregistered shares of DXP’s common stock as part of the consideration for the January 1, 2018 acquisition of ASI. The unregistered shares
were issued ot the sellers of ASI.
We relied on Section 4(a)(2) of the Securities Exchange Act as a basis for exemption from registration. All issuances were as a result of private negotiation, and
not pursuant to public solicitation. In addition, we believe the shares were issued to “accredited investors” as defined by Rule 501 of the Securities Act.
Recent Sales of Common Stock
On August 19, 2016, the Company filed with the Securities and Exchange Commission a Form S-3 Registration Statement, commonly referred to as a “shelf
registration,” which was effective August 26, 2016, whereby the Company registered shares of common stock and which shall have an aggregate offering price of
up to $100 million.
In September 2016, pursuant to this registration statement, the Company issued 238,858 shares of common stock at a weighted average price of $26.38 per share
under the related Equity Distribution Agreement. The distribution agents received $0.1 million aggregate commissions on such sales. Net proceeds were
approximately $6.0 million. These proceeds were used to pay down debt obligations.
On October 31, 2016, the Company closed on the sale of 2,484,000 shares of stock for total net proceeds of $46.2 million after expenses. These proceeds were used
to pay down debt obligations.
Repurchases of Common Stock
During 2017, 2016 and 2015 the Company withheld 30,500, 12,507 and 20,440 shares, respectively, to satisfy tax withholding obligations in connection with
vesting of employee equity awards.
On December 17, 2014, DXP publicly announced an authorization from the Board of Directors that allowed DXP from time to time to purchase up to 400,000
shares of DXP's common stock over 24 months. Purchases could be made in open market or in privately negotiated transactions. DXP purchased 191,420 shares
for $8.9 million under this authorization through December 31, 2015. No shares were purchased during 2016. The authorization expired on December 16, 2016.
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, 2017 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.
Consolidated Statement of Earnings data:
Sales
Gross Profit
Impairment expense
B27 settlement
Operating income (loss)
Income (loss) before income taxes
Net income (loss)
Net (loss) attributable to noncontrolling interest
Net income (loss) attributable to DXP Enterprises, Inc.
Per share amounts
Basic earnings (loss) per common share (3)
Common shares outstanding (3)
Diluted earnings (loss) per share (3)
Common and common equivalent shares
Outstanding (3)
2017
2016
Years Ended december 31,
2014 (1)
2015 (2)
2013
( in
thousands,
except
per
share
amounts
)
$
1,006,782 $
271,581
-
-
33,490
16,892
16,529
(359)
16,888
962,092 $
264,802
-
-
19,332
9,674
7,151
(551)
7,702
1,247,043 $
351,986
68,735
7,348
(27,916)
(38,920)
(39,070)
(534)
(38,536)
1,499,662 $
432,840
117,569
-
(12,628)
(25,556)
(45,238)
-
(45,328)
0.97
17,400
0.93
0.51 $
15,042
0.49 $
(2.68) $
14,423
(2.68) $
(3.10) $
14,639
(3.10) $
1,241,510
372,345
-
-
100,924
94,717
60,237
-
60,237
4.17
14,439
3.94
18,240
15,882
14,423
14,639
15,279
(1)The impairment expense in 2014, further discussed in Note 8 of the Notes to Consolidated Financial Statements, reduced operating income by $117.6 million,
increased the net loss by $102.0 million, and increased basic and diluted loss per share by $6.97.
(2) The impairment expense in 2015, further discussed in Note 8 of the Notes to Consolidated Financial Statements, reduced operating income by $68.7 million,
increased the net loss by $58.4 million, and increased basic and diluted loss per share by $4.05.
(3) See Note 12 of the Notes to Consolidated Financial Statements for the calculation of basic and diluted earnings per share.
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Consolidated Balance Sheet Data:
2017
2016
2015
2014
2013
Total assets
Long-term debt obligations
Shareholders’ equity
$
639,083 $
248,716
268,546
602,052 $
174,323
252,549
683,980 $
300,726
198,870
841,632 $
372,908
242,952
636,615
168,372
296,250
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
within
Item
8,
Financial
Statements
and
Supplementary
Data
and
the
other
financial
information
found
elsewhere
in
this
Report.
Management’s
Discussion
and
Analysis
uses
forward-looking
statements
that
involve
certain
risks
and
uncertainties
as
described
previously
in
our
Disclosure
Regarding
Forward-Looking
Statements
and
Item
1A.
Risk
Factors.
general Overview
Our products are marketed in the United States, Canada, Dubai and Mexico to over 50,000 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 Canada, and global and micro-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 driven by a variety of factors, 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 result, we may experience changes in demand within particular markets, segments and product categories as
changes occur in our customers' respective markets.
During 2013, the growth rate of the general economy slowed from 2012 and sales of metal working and bearing and power transmission products to manufacturers
of oil field equipment declined. Our employee headcount increased by 13.8% primarily as a result of multiple acquisitions. Sales for the year ended December 31,
2013 increased $144.4 million, or 13.2%, to $1.2 billion from $1.1 billion in 2012. Sales by businesses acquired in 2013 accounted for $63.7 million of 2013 sales.
Sales by businesses acquired in 2012 accounted for $75.9 million of 2013 sales, on a same store sales basis. Excluding 2013 sales of $139.6 million by businesses
acquired in 2012 and 2013, on a same store sales basis, sales increased $4.8 million, or 0.4%, from 2012.
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During 2014, the growth rate of the general economy increased slightly from 2013. However, oil prices declined significantly during the second half of 2014. Our
employee headcount increased 15.5% primarily as a result of the two acquisitions completed during the year. Sales for the year ended December 31, 2014
increased $258.2 million, or 20.8%, to approximately $1,499.7 million from $1,241.5 million in 2013. Sales by businesses acquired in 2014 accounted for $176.4
million of 2014 sales. Sales by businesses acquired in 2013 accounted for $35.1 million of the 2014 increase, on a same store sales basis. Excluding 2014 sales of
$211.5 million by businesses acquired in 2014 and 2013, on a same store sales basis, sales increased by $46.7 million, or 3.8%, from 2013. This sales increase is
primarily the result of increased sales by the Service Centers segment of $22.1 million, IPS segment of $8.1 million, and SCS segment of $16.5 million, on a same
store sales basis. The majority of these 2014 sales increases came from a broad based increase in sales of pumps, bearings, industrial supplies, metal working and
safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2015, the growth rate of the general economy was flat with 2014. However, the growth rate of the industrial economy slowed. Oil prices significantly
declined during the year, falling approximately 35%. Our employee headcount decreased 12.7%, despite two acquisitions, primarily as a result of headcount
reductions stemming from reduced capital spending by oil and gas producers. Sales for the year ended December 31, 2015 decreased $252.6 million, or 16.9%, to
approximately $1,247.0 million from $1,499.7 million in 2014. Sales by businesses acquired in 2014 and 2015 reduced the decline by $14.5 million and $9.1
million, respectively. Excluding 2015 sales of $23.6 million by businesses acquired in 2014 and 2015, on a same store sales basis, sales decreased by $276.2
million, or 18.4%, from 2014. This sales decrease is primarily the result of decreased sales by the Service Centers segment of $184.6 million and IPS segment of
$93.3 million, which were partially offset by increased sales by the Supply Chain Services segment of $1.7 million, on a same store sales basis. The majority of
these 2015 sales decreases resulted from declines in sales of rotating equipment, bearings, metal working products, industrial supplies and safety products and
services to customers engaged in oil and gas production, mining and manufacturing. The sales declines were primarily the result of reduced capital spending by oil
and gas producers.
During 2016, the growth rate of the general economy remained flat with 2015 and the rig count declined significantly during the first half of 2016, increased during
the second half, but remained significantly below 2014 peaks. The energy market for our products remained depressed. We reduced our employee headcount
24.1% due to the continued reduction of spending by the oil and gas producers. Sales for the year ended December 31, 2016 decreased $285.0 million, or 22.9%, to
approximately $962.1 million from $1,247.0 million in 2015. Sales by businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by a business
sold in 2016 accounted for a decline of $7.1 million on a same store basis. Excluding 2016 sales of $15.1 million by businesses acquired in 2015; and 2015 sales
of $7.1 million of the business divestiture in 2016, on a same store sales basis, sales decreased by $292.9 million, or 23.6%, from 2015. This sales decrease is the
result of decreased sales by the Service Centers segment of $213.5 million, the IPS segment of $67.7 million and the Supply Chain Services segment of $11.7
million, on a same store sales basis. The majority of the 2016 sales decline is the result of a decrease in sales of pumps, bearings, industrial supplies, metal
working and safety products to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.
During 2017, the growth rate of the general economy improved from 2016 and the rig count increased, but remained significantly below 2014 peaks. The energy
market for our products improved. Sales for the year ended December 31, 2017 increased $44.7 million, or 4.6%, to approximately $1.0 billion from $962.1
million for the prior corresponding period. Sales from a business sold in 2016 accounted for $22.7 million of 2016 sales. Excluding the 2016 sales of the sold
business, on a same store sales basis, sales for 2017 increased by $67.4 million, or 7.2% from the prior corresponding period. This same store sales increase is the
result of sales increases in our Service Centers, IPS and SCS segments of $42.9 million, $16.9 million and $7.5 million respectively. The majority of the 2017 sales
increase is the result of increased sales of pumps, bearings, industrial supplies, metal working and safety services to customers engaged in oilfield service, oil and
gas exploration and production, mining, manufacturing and petrochemical processing.
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 reach 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.
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Our strategies to increase productivity include consolidated purchasing programs, centralizing product distribution, customer service and inside sales functions, and
using information technology to increase employee productivity.
Results of Operations
Years Ended december 31,
2017
%
2016
%
2015
%
( in
millions,
except
percentages
and
per
share
amounts
)
$
Sales
Cost of sales
Gross profit
Selling, general & administrative expense
Impairment expense
B27 settlement
Operating income (loss)
Interest expense
Other expense (income)
Income (loss)before income taxes
Provision for income taxes
Net income (loss)
Net
(loss) attributable to noncontrolling
interest
income (loss) attributable to DXP
Net
Enterprises, Inc.
Per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
$
1,006.8
735.2
271.6
238.1
-
-
33.5
17.1
(0.5)
16.9
0.4
16.5
(0.4)
16.9
0.97
0.93
100.0 $
73.0
27.0
23.7
-
-
3.3
1.7
-
1.6
-
1.7
962.1
697.3
264.8
245.5
-
-
19.3
15.5
(5.9)
9.7
2.5
7.2
100.0 $
72.5
27.5
25.5
-
-
2.0
1.6
(0.6)
1.0
0.3
0.7
1,247.0
895.1
351.9
303.8
68.7
7.3
(27.9)
10.9
0.1
(38.9)
0.1
(39.0)
-
(0.5)
-
(0.5)
1.7 $
7.7
0.8 $
(38.5)
$
$
0.51
0.49
$
$
(2.68)
(2.68)
100.0
71.8
28.2
24.4
5.5
0.6
(2.2)
0.9
-
(3.1)
-
(3.1)
-
(3.1)
DXP is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). The Service
Centers are engaged in providing maintenance, repair and operating (“MRO”) products and equipment, including technical expertise and logistics capabilities, to
industrial customers with the ability to provide same day delivery. The Service Centers provide a wide range of MRO products and expertise in the rotating
equipment, bearing, power transmission, hose, fluid power, metal working, industrial supply and safety product and service categories. The SCS segment manages
all or part of our customers’ MRO products supply chain, including warehouse and inventory management. The IPS segment fabricates and assembles integrated
pump system packages custom made to customer specifications, remanufactures pumps and manufactures branded private label pumps.
24
Table
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Results of operations for the Service Centers segment are as follows:
2017
%
2016
%
2015
%
(in
millions,
except
percentages
and
per
share
amounts)
Sales
Cost of sales
Gross profit
Selling, general & administrative expense
Impairment expense
income
Operating
(loss),
excluding
amortization
Operating income, excluding impairment and
amortization
$
$
$
641.3
451.2
190.1
126.9
-
100.0 $
70.3
29.7
19.8
-
621.0
437.6
183.4
135.8
-
100.0 $
70.5
29.5
21.9
-
826.6
575.0
251.6
173.4
15.8
63.2
9.9 $
47.6
7.6 $
62.4
63.2
9.9 $
47.6
7.6 $
78.2
Results of operations for the IPS segment are as follows:
2017
%
2015
(in
millions,
except
percentages
and
per
share
amounts)
2016
%
Sales
Cost of sales
Gross profit
Selling, general & administrative expense
Impairment expense
income
Operating
(loss),
excluding
amortization
Operating income excluding impairment and
amortization
$
$
$
204.0
160.2
43.8
32.4
-
100.0 $
78.5
21.5
15.9
-
11.4
5.6 $
11.4
5.6 $
187.1
142.5
44.6
34.7
-
9.9
9.9
100.0 $
76.2
23.8
18.5
-
254.8
191.6
63.2
41.6
52.9
5.3 $
(31.3)
(12.3)
5.3 $
21.6
8.5
Results of operations for the SCS segment are as follows:
2017
%
2016
%
2015
%
Sales
Cost of sales
Gross profit
Selling, general & administrative expense
Operating
income
(loss),
excluding
$
161.5
123.8
37.7
22.2
(in
millions,
except
percentages
and
per
share
amounts
100.0 $
76.7
23.3
13.7
100.0 $
76.1
23.9
13.9
154.0
117.1
36.9
21.5
165.6
128.4
37.2
23.0
100.0
77.5
22.5
13.9
amortization
$
15.5
9.6 $
15.4
10.0 $
14.2
8.6
25
100.0
69.6
30.4
21.0
1.9
7.5
9.5
100.0
75.2
24.8
16.3
20.8
%
Table
of
Contents
Year Ended december 31, 2017 compared to Year Ended december 31, 2016
SALES. Sales for the year ended December 31, 2017 increased $44.7 million, or 4.6%, to approximately $1.0 billion from $962.1 million for the year ended
December 31, 2016. Sales from a business sold in 2016 accounted for $22.7 million of 2016 sales. Excluding the 2016 sales of the sold business, on a same store
sales basis, sales for 2017 increased by $67.4 million, or 7.2% from 2016. This same store sales increase is the result of an increase in our Service Centers, IPS and
SCS segments of $42.9 million, $16.9 million and $7.5 million respectively. These fluctuations in the sales in our segments are further explained in segment
discussions below.
GROSS PROFIT. Gross profit as a percentage of sales for the year ended December 31, 2017 decreased by approximately 55 basis points from the year ended
December 31, 2016. On a same store sales basis, gross profit as a percentage of sales decreased by approximately 25 basis points. The overall decrease in the profit
percentage, on a same store sales basis, is the result of an approximate 235 basis point decrease in the gross profit percentage in our IPS segment and an
approximate 61 basis point decrease in gross profit percentage in our Supply Chain Services segment partially offset by an approximate 51 basis point increase in
the gross profit percentage in our Service Centers segment. These fluctuations are explained in the segment discussions below.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense (SG&A) for the year ended December 31, 2017 decreased by
approximately $7.4 million, or 3.0%, to $238.1 million from $245.5 million for the year ended December 31, 2016. SG&A from a business that was sold accounted
for $6.1 million of the decrease. Excluding the 2016 SG&A from the business that was sold in 2016, on a same store sales basis, SG&A decreased by $1.3 million,
or 1.0%. The overall decline in SG&A, on a same store sales basis, is the result of decreased payroll, related taxes and 401(k) expenses due to headcount and salary
reductions and other cost reduction measures primarily implemented near the end of the first quarter of 2016. Additionally, amortization expense declined by $0.8
million, on a same store sales basis. As a percentage of sales, the 2017 expense decreased approximately 183 basis points to 23.7% from 25.5% for 2016, on a
same store sales basis.
OPERATING INCOME. Operating income for the year ended December 31, 2017 increased $14.2 million, to $33.5 million, from $19.3 million in the year ended
December 31, 2016. The operating income from the business sold in 2016 reduced the overall increase during 2017 in operating income in the amount of $2.9
million. Excluding the operating income from the business sold, on a same store sales basis, operating income increased $17.1 million, or 103.8% from 2016. This
increase in operating income is primarily related to the increase in gross profit and decrease in SG&A discussed above.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2017 increased 9.6% from the year ended December 31, 2016 primarily as a result of
increased interest rates under our credit facilities.
INCOME TAXES. Our effective tax rate from continuing operations was a tax expense of 2.2% for the year ended December 31, 2017 compared to a tax expense
of 26.1% for the year ended December 31, 2016. Compared to the U.S. statutory rate for the year ended December 31, 2017, the effective tax rate was increased by
state taxes and nondeductible expenses. The effective tax rate decreased because of the remeasurement of our net deferred income tax liabilities, lower income tax
rates on income earned in foreign jurisdictions, the change in valuation allowance recorded against deferred tax assets, the reduction of tax rates used to establish
deferred tax liabilities related to intangibles for customer relationships acquired in Canada in 2012 and 2013, research and development tax credits and domestic
production activity deduction. Compared to the U.S. statutory rate for the year ended December 31, 2016, the effective tax rate was increased by state taxes and
nondeductible expenses. The effective tax rate decreased by the book gain on the sale of Vertex, lower income tax rates on income earned in foreign jurisdictions,
research and development credits, and foreign tax credits.
SERVICE CENTERS SEGMENT. Sales for the Service Centers segment increased by $20.3 million, or 3.3% for the year ended December 31, 2017 compared to
the year ended December 31, 2016. Excluding $22.7 million of the 2016 Service Centers segment sales from a business sold in 2016, Service Centers segment
sales for 2017 increased $42.9 million, or 7.2% from the year ended December 31, 2016, on a same store sales basis. This sales increase is primarily the result of
increased sales of safety services and rotating equipment to customers engaged in the upstream, midstream or downstream oil and gas markets or manufacturing
equipment for the upstream, midstream or downstream oil and gas markets in connection with increased capital spending by oil and gas producers and related
businesses during 2017 compared to 2016. As a percentage of sales, the 2017 gross profit percentage for the Service Centers increased approximately 12 basis
points but increased approximately 51 basis points on a same store sales basis, from 2016. This increase in the gross profit percentage is primarily the result of
improved margins on sales of rotating equipment, bearings and industrial supplies. Operating income for the Service Centers segment increased $18.5 million, or
41.4% on a same store sales basis. The increase in operating income is primarily the result of the reduced SG&A combined with increased gross profit.
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INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for the IPS segment increased by $16.9 million, or 9.0% for the year ended December 31, 2017
compared to the year ended December 31, 2016. This increase is primarily the result of increased capital spending by oil and gas producers and related businesses
during 2017 compared to 2016. As a percentage of sales, 2017 gross profit percentage for the IPS segment decreased approximately 235 basis points from 2016
primarily as a result competitive pricing pressures and a reduced level of large, complex, high margin orders in 2017. Additionally, gross profit margins for
individual orders for the IPS segment can fluctuate significantly because each order is for a unique package built to customer specifications and subject to varying
competition. Operating income for the IPS segment increased $1.6 million, or 15.8%, primarily as a result of the $16.9 million increase in sales discussed above
and a decrease of $2.3 million in SG&A.
SUPPLY CHAIN SERVICES SEGMENT. Sales for the SCS segment increased by $7.5 million, or 4.9%, for the year ended December 31, 2017 compared to the
year ended December 31, 2016. The increase in sales is primarily related to increased sales to customers in the oil and gas industries. We suspect customers in the
oilfield services and oilfield equipment manufacturing industries purchased more from DXP because of the increase in capital spending by oil and gas companies
operating in the U.S and Canada. Gross profit as a percentage of sales decreased approximately 61 basis points in 2017 compared to 2016 primarily as a result of
increased sales of lower margin products to oil and gas related customers. Operating income for 2017 was flat compared to 2016 for the SCS segment because
gross profit increased $0.8 million, which was partially offset by an increase of $0.8 million in SG&A.
Year Ended december 31, 2016 compared to Year Ended december 31, 2015
SALES. Sales for the year ended December 31, 2016 decreased $285.0 million, or 22.9%, to approximately $962.1 million from $1,247.0 million in 2015. Sales by
businesses acquired in 2015 accounted for $15.1 million of 2016 sales. Sales by a business sold in 2016 accounted for a decline of $7.1 million of sales on a same
store basis. Excluding 2016 sales of $15.1 million by businesses acquired in 2015 and 2015 sales of $7.1 million of the business sold in 2016, on a same store sales
basis, sales decreased by $292.9 million, or 23.6%, from 2015. This sales decline is the result of decreased sales by all three segments including $213.5 million in
Service Centers, $67.7 million in IPS and $11.7 million in SCS, on a same store sales basis. These decreases are explained in the segment discussions below.
GROSS PROFIT. Gross profit as a percentage of sales decreased approximately 70 basis points to 27.5% for 2016 compared to 28.2% for 2015. On a same store
sales basis, gross profit as a percentage of sales decreased by approximately 60 basis points. This decline is primarily the result of an approximate 100 basis point
decline in the 2016 gross profit percentage for our IPS segment and an approximate 80 basis point decline in our Service Centers segment, which was partially
offset by an increase of approximately 145 basis points for the SCS segment. Gross profit as a percentage of sales for each segment are explained below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative (or “SG&A”) expense for 2016 decreased by approximately
$58.3 million, or 19.21%, when compared to 2015. Selling, general and administrative expense by businesses acquired in 2015 was $5.2 million on a same store
basis. The 2015 SG&A expense for the 2016 business divestiture was $2.1 million on a same store sales basis. Excluding 2016 expenses of $5.2 million by
businesses acquired in 2015 and 2015 expenses of $2.1 million for the 2016 business divestiture, on a same store sales basis, selling, general and administrative
expenses decreased by $61.4 million, or 20.4%. The decline in SG&A, on a same store sales basis, is partially the result of a $39.0 million decrease in payroll,
variable compensation, payroll taxes and 401(k) expense due to headcount reductions. Amortization expense for 2016 decreased by $2.6 million compared to 2015.
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OPERATING INCOME. Operating income for 2016 decreased approximately $28.8 million, or 59.9%, from $48.2 million to $19.3 million, compared to 2015,
excluding the 2015 impairment expense and B27 settlement,. Businesses acquired in 2015 increased the decline by $0.6 million, on a same store sales basis, and
the business divested reduced the decline by $1.2 million. Excluding operating income from businesses acquired and divested, the B27 settlement and impairment
expense, operating income decreased $27.1 million or 57.6%. This decrease in operating income, on a same store sales basis, is primarily related to the decreased
gross profit which is partially offset by the decline in SG&A discussed above.
INTEREST EXPENSE. Interest expense for 2016 increased by $4.6 million, or 42.4%, from 2015 primarily due to an increase in our interest rates.
INCOME TAXES. Our 2016 provision for income taxes, which is at an effective rate of 26.1%, differed from the U.S. statutory rate of 35% primarily due to the
effect of the book gain, but tax loss, recognized on the sale of Vertex during 2016. Our effective tax rate for 2016 of 62.4%, after excluding the effect of the sale of
Vertex, increased from 27.7% for the prior corresponding period, before the effect of the mostly non-deductible impairment of goodwill and B27 settlement,
primarily as a result of reduced research and development and foreign tax credits, reduced domestic production activity deductions and prior year provision to
return adjustments. During 2009, DXP wrote off $38.2 million of goodwill and intangibles in connection with an impairment which substantially reduced the book
basis of Vertex, but not the tax basis.
SERVICE CENTERS SEGMENT. Sales for the Service Centers decreased $205.6 million, or 24.9%, in 2016 compared to 2015. Sales by businesses acquired in
2015 accounted for $15.1 million of 2016 sales. Sales by the 2016 business divestiture accounted for a decline of $7.1 million on a same store basis. Excluding
2016 sales of $15.1 million by businesses acquired in 2015 and $7.1 million of 2015 sales for the 2016 divested business, on a same stores sales basis, Service
Centers’ sales decreased $213.5 million, or 26.1%, on a same stores sales basis, from the prior corresponding period. The majority of the 2016 sales decrease is the
result of decreased sales of rotating equipment, bearings, metal working products, industrial supplies and safety products and services to customers engaged in the
upstream oil and gas market or manufacturing equipment for the upstream oil and gas market. If crude oil and natural gas prices were to return to, or go below the
prices experienced during the first nine months of 2016, this level of sales to the upstream oil and gas industry would be expected to continue, or decline, during
2017. Gross profit as a percentage of sales, on a same store sales basis, declined approximately 80 basis points in 2016 compared to 2015 as a result of declines in
the gross profit percentages for sales of pumps, safety services and metal working products due to competitive pressures. Excluding year-to-date Service Centers
segment operating income from acquired businesses of $0.4 million and $1.2 million of 2015 income for the business divestiture, Service Centers segment
operating income for 2016 decreased by $29.7 million, or 38.6%, primarily as a result of the decline in sales discussed above and the percentage decrease in sales
exceeding the percentage decrease in SG&A.
SUPPLY CHAIN SERVICES SEGMENT. Sales for Supply Chain Services decreased by $11.7 million, or 7.0%, in 2016 compared to 2015. None of the 2015
acquisitions or the 2016 divestiture contributed sales to this segment. The decrease is primarily related to decreased sales to customers engaged in the oilfield
services and oilfield manufacturing industries. We suspect customers in the oilfield services and oilfield equipment manufacturing industries purchased less from
DXP because of the decline in the number of drilling rigs operating in the U.S and Canada. Gross profit as a percentage of sales increased approximately 145 basis
points in 2016 compared to the prior corresponding period as a result of decreased sales of lower margin products to oil and gas and trucking related customers.
Operating income for the SCS segment increased $1.2 million, or 8.7%, primarily as a result of the 145 basis point increase in gross profit as a percentage of sales
combined with a 7.0% reduction in SG&A.
INNOVATIVE PUMPING SOLUTIONS SEGMENT. Sales for Innovative Pumping Solutions decreased by $67.7 million, or 26.6%, in 2016 compared to 2015.
The sales decrease primarily resulted from a significant decline in capital spending by our oil and gas producers and related businesses stemming from the decline
in the price of oil. If crude oil and natural gas prices were to return to, or go below prices experienced during the first nine months of 2016, this level of sales to the
upstream and mid-stream oil and gas industry would be expected to continue, or decline, during 2017. Gross profit as a percentage of sales declined
approximately100 basis points in 2016 compared to 2015 primarily as a result of competitive pressures resulting in lower margin jobs and $3.7 million of
unabsorbed manufacturing overhead related to the start-up of manufacturing our ANSI pumps. Additionally, gross profit margins for individual orders for the IPS
segment can fluctuate significantly because each order is for a unique package built to customer specifications and subject to varying competition. Operating
income decreased $11.7 million, or 54.3%, primarily as a result of the 26.6% decline in sales and approximate 100 basis point decline in the gross profit percentage
discussed above.
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Pro Forma Results
The pro forma unaudited results of operations for the Company on a consolidated basis for the twelve months ended December 31, 2017 and 2016, assuming the
divestiture of a business completed in 2016 (previously discussed in Item 1, Business
) was consummated as of January 1, 2016 are as follows ( in
millions,
except
per
share
amounts
):
Years Ended
december 31,
2017
2016
Net sales
Net income attributable to DXP Enterprises, Inc.
Per share data
Basic earnings
Diluted earnings
$
$
$
$
1,006.8 $
16.9 $
0.97 $
0.93 $
939.4
5.5
0.36
0.35
The pro forma unaudited results of operations for the Company on a consolidated basis for the twelve months ended December 31, 2016 and 2015, assuming the
acquisition of businesses completed in 2015 and divestiture of a business completed in 2016 (previously discussed in Item 1, Business
) were consummated as of
January 1, 2015 are as follows ( in
millions,
except
per
share
amounts
.
Years Ended
december 31,
2016
2015
Net sales
Net income (loss) attributable to DXP Enterprises, Inc.
Per share data
Basic earnings (loss)
Diluted earnings (loss)
$
$
$
$
939.4 $
5.5 $
0.36 $
0.35 $
1,228.9
(40.7)
(2.83)
(2.83)
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, warehouse equipment, metal working equipment and capital expenditures for our safety products and
services category. We also require cash to pay our lease obligations and to service our debt.
We generated approximately $12.5 million of cash in operating activities in 2017 as compared to generating $48.2 million in 2016. The decrease between the two
periods was primarily driven by a $20.5 million increase in accounts receivable in 2017 compared to a $12.1 million reduction in 2016. The increase in accounts
receivable resulted from the $43.3 million increase in sales for the fourth quarter ended December 31, 2017 compared to the fourth quarter ended December 31,
2016. Sales for the fourth quarter of 2016 declined $56.4 million compared to sales for the fourth quarter of 2015.
We purchased approximately $2.8 million of capital assets during 2017 compared to $4.9 million for 2016. Capital expenditures during 2017 were primarily
related to building improvements, manufacturing equipment, and patterns. Capital expenditures for 2018 are expected to be within the range of capital expenditures
during 2017 and 2016.
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At December 31, 2017, our total long-term debt, including the current portion, less principal repayments and less unamortized debt issuance fees, was $242.0
million, or 47.4% of total capitalization (total long-term debt including current portion plus shareholders’ equity) of $510.6 million. Approximately $249.4 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 $5.0 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 2017, the amount available to be borrowed under our credit facilities increased from $37.3 million at December 31, 2016, to $82.0 million at December 31,
2017. This increase in availability is primarily a result of the Company terminating its previously existing credit facility and replacing it with the ABL Credit
Agreement and Term Loan, as discussed further below.
Senior
Secured
Term
Loan
B
and
ABL
Facility
On August 29, 2017, DXP entered into a five year, $85 million Asset Based Loan and Security Agreement (the “ABL Credit Agreement”) and a six-year, $250
million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing credit facility.
The ABL Credit Agreement provides for asset-based revolving loans in an aggregate principal amount of up to $85.0 million (the “ABL Loans”). The ABL Credit
Agreement may be increased in increments of $10.0 million up to an aggregate of $50.0 million. The facility will mature on August 29, 2022. Interest accrues on
outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime
rate or Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average daily excess availability under the facility
for the most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum are payable on the portion of the facility not in use at any given
time. The unused line fee was 0.375% at December 31, 2017.
The interest rate for the ABL facility was 2.9% at December 31, 2017.
The Term Loan B Agreement provides for a $250 million term loan (the “Term Loan”) that amortizes in equal quarterly installments of 0.25% with the balance
payable in August 2023, when the facility matures. Subject to securing additional lender commitments, the Term Loan B Agreement allows for incremental
increases in facility size up to an aggregate of $30 million, plus an additional amount such that DXP’s Secured Leverage Ratio (as defined in the Term Loan B
Agreement) would not exceed 3.60 to 1.00. Interest accrues on the Term Loan at a rate equal to the base rate plus a margin of 4.5% for the Base Rate Loans (as
defined in the Term Loan B Agreement), or LIBOR plus a margin of 5.5% for the Eurodollar Rate Loans (as defined in the Term Loan B Agreement). We are
required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total
leverage ratio is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00.
The interest rate for the Term Loan was 7.1% as of December 31, 2017.
DXP’s principal financial covenants under the ABL Credit Agreement and Term Loan B Agreement include:
Fixed Charge Coverage Ratio – The Fixed Charge Coverage Ratio under the ABL Credit Agreement is defined as the ratio for the most recently completed four-
fiscal quarter period, of (a) EBITDA minus capital expenditures (excluding those financed or funded with debt (other than the ABL Loans), (ii) the portion thereof
funded with the net proceeds from asset dispositions of equipment or real property which DXP is permitted to reinvest pursuant to the Term Loan and the portion
thereof funded with the net proceeds of casualty insurance or condemnation awards in respect of any equipment and real estate which DXP is not required to use to
prepay the ABL Loans pursuant to the Term Loan B Agreement or with the proceeds of casualty insurance or condemnation awards in respect of any other
property) minus cash taxes paid (net of cash tax refunds received during such period), to (b) fixed charges. The Company is restricted from allowing its fixed
charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under the ABL facility falls below a threshold
set forth in the ABL Credit Agreement.
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As of December 31, 2017, the Company's consolidated Fixed Charge Coverage Ratio was 3.67 to 1.00.
Secured Leverage Ratio – The Term Loan B Agreement requires that the Company’s Secured Leverage Ratio, defined as the ratio, as of the last day of any fiscal
quarter of consolidated secured debt (net of unrestricted cash, not to exceed $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending
December 31, 2017, is either equal to or less than as indicated in the table below:
Fiscal Quarter
December 31, 2017
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
March 31, 2020
June 30, 2020 and each Fiscal Quarter
thereafter
Secured leverage Ratio
5.75:1.00
5.75:1.00
5.50:1.00
5.50:1.00
5.25:1.00
5.25:1.00
5.00:1.00
5.00:1.00
4.75:1.00
4.75:1.00
4.50:1.00
EBITDA as defined under the Term Loan B Agreement for financial covenant purposes means, without duplication, for any period of determination, the sum of,
consolidated net income during such period; plus
to the extent deducted from consolidated net income in such period: (i) income tax expense, (ii) franchise tax
expense, (iii) consolidated interest expense, (iv) amortization and depreciation during such period, (v) all non-cash charges and adjustments, and (vi) non-recurring
cash expenses related to the Term Loan, provided , that if the Company acquires or disposes of any property during such period (other than under certain
exceptions specified in the Term Loan B Agreement, including the sale of inventory in the ordinary course of business, then EBITDA shall be calculated, after
giving pro forma effect to such acquisition or disposition, as if such acquisition or disposition had occurred on the first day of such period.
As of December 31, 2017, the Company’s consolidated Secured Leverage Ratio was 3.59 to 1.00.
The ABL Loans and the Term Loan are secured by substantially all of the assets of the Company.
Borrowings (in thousands):
Current portion of long-term debt
Long-term debt, less debt issuance costs
Total long-term debt
Amount available (1)
december 31,
2017
december 31,
2016
Increase
(decrease)
$
$
$
3,381 $
238,643
242,024 $
82,007 $
51,354 $
173,331
224,685 $
37,347 $
(47,973)
65,312
17,339
44,660
(1) Represents the amount available to be borrowed at the indicated date under the most restrictive covenant of the credit facility in effect at the indicated date. The
increase in the amount available to be borrowed is primarily the result of the Company terminating its previously existing credit facility and replacing it with the
Term Loan B Agreement and the ABL Credit Agreement.
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Performance Metrics (in days):
Three months Ended
december 31,
2017
2016
Increase
(decrease)
Days of sales outstanding
Inventory turns
60.7
8.4
65.0
7.7
(4.3)
0.7
Accounts receivable days of sales outstanding were 60.7 days at December 31, 2017 compared to 65.0 days at December 31, 2016. The 4.3 days decrease was
primarily due to more timely payment times in connection with an improved economy. Inventory turns increased primarily due to stronger sales for the three
months ended December 31, 2017 compared to sales for the three months ended December 31, 2016.
Three months Ended
december 31,
2016
2015
Increase
(decrease)
Days of sales outstanding
Inventory turns
65.0
7.7
56.9
7.7
8.1
-
Accounts receivable days of sales outstanding were 65.0 days at December 31, 2016 compared to 56.9 days at December 31, 2015. The 8.1 days increase was
primarily due to slower payment times by oil and gas customers. Inventory turns remained flat at December 31, 2016 compared to December 31, 2015.
Funding
Commitments
We believe our cash generated from operations will meet our normal working capital needs during the next twelve months. However, we may require additional
debt outside of our credit facilities or equity financing to fund potential acquisitions. Such additional financings may include additional bank debt or the public or
private sale of debt or equity securities. In connection with any such financing, we may issue securities that substantially dilute the interests of our shareholders.
Repurchases
of
Common
Stock
On December 17, 2014, DXP publicly announced an authorization from the Board of Directors that allowed DXP from time to time to purchase up to 400,000
shares of DXP's common stock over 24 months. Purchases could be made in open market or in privately negotiated transactions. DXP purchased 191,420 shares
for $8.9 million under this authorization through December 31, 2015. No shares were purchased during 2016. The authorization expired on December 16, 2016.
Contractual
Obligations
The impact that our contractual obligations as of December 31, 2017 are expected to have on our liquidity and cash flow in future periods is as follows ( in
thousands
):
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Long-term debt, including current portion (1)
Operating lease obligations
Estimated interest payments (2)
Total
Payments due by Period
less than 1
Year
1–3 Years
3-5
Years
more than
5 Years
$
$
3,381 $
19,419
17,607
40,407 $
6,841 $
26,494
34,611
67,946 $
5,000 $
16,072
33,870
54,942 $
236,875 $
3,441
8,382
248,698 $
Total
252,097
65,426
94,470
411,993
(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, 2017. Assumes debt is paid on maturity date and not replaced.
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, 2017, we were not involved in any unconsolidated SPE transactions.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments, that have, or
are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of
operations, liquidity, capital expenditures or capital resources that are material to investors.
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
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.
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“USGAAP”). The
accompanying Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity (“VIE”).
Variable
Interest
Entity
(VIE)
DXP is the primary beneficiary of a VIE in which DXP owns 47.5% of the equity. DXP consolidates the financial statements of the VIE with the financial
statements of DXP. As of December 31, 2017, the total assets of the VIE were approximately $5.2 million including approximately $4.5 million of fixed assets.
DXP is the primary customer of the VIE. Consolidation of the VIE increased cost of sales by approximately $0.6 million and $1.3 million for the twelve months
ended December 31, 2017 and 2016, respectively. The Company recognized a related income tax benefit of $0.2 million and $0.3 million related to the VIE for the
years ended December 31, 2017 and 2016, respectively. At December 31, 2017, the owners of the 52.5% of the equity not owned by DXP included employees of
DXP.
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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 customers may not pay within stated trade terms.
The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and
Southwestern regions of the United States, and Canada. 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 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.
Uncertainties require the Company to make frequent judgments and estimates regarding a customer’s ability to pay amounts due in order to assess and quantify an
appropriate allowance for doubtful accounts. The primary factors used to quantify the allowance are customer delinquency, bankruptcy, and the Company’s
estimate of its ability to collect outstanding receivables based on the number of days a receivable has been outstanding.
The majority of the Company’s customers operate in the energy industry. The cyclical nature of the industry may affect customers’ operating performance and cash
flows, which could impact the Company’s ability to collect on these obligations.
The Company continues to monitor the economic climate in which its customers operate and the aging of its accounts receivable. The allowance for doubtful
accounts is based on the aging of accounts and an individual assessment of each invoice. At December 31, 2017, the allowance was 5.1% of the gross accounts
receivable, compared to an allowance of 5.2% a year earlier. While credit losses have historically been within expectations and the provisions established, should
actual write-offs differ from estimates, revisions to the allowance would be required.
Impairment
of
Goodwill
and
Other
Indefinite
Intangible
Assets
The Company tests goodwill and other indefinite lived intangible assets for impairment on an annual basis in the fourth quarter and when events or changes in
circumstances indicate that the carrying amount may not be recoverable . The Company assigns the carrying value of these intangible assets to its "reporting units"
and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the
component is a business and discrete information is prepared and reviewed regularly by segment management. As of December 31, 2017 DXP Core Service
Centers (“Core SC”), DXP Core IPS, and DXP Core Supply Chain Services (“Core SCS”) had goodwill.
The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than
not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its
fair value, the Company would perform a two-step quantitative test for that reporting unit. When a quantitative assessment is performed, the first step is to identify
a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a
reporting unit’s goodwill exceeds its estimated fair value. For 2017 and 2016, the Company’s annual tests of goodwill for impairment, including qualitative
assessments of all of its reporting units of goodwill, determined that a quantitative impairment was not necessary.
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The Company determines fair value using widely accepted valuation techniques, including discounted cash flows and market multiples analyses, and through use
of independent fixed asset valuation firms, as appropriate. These types of analyses contain uncertainties as they require management to make assumptions and to
apply judgments regarding industry economic factors and the profitability of future business strategies. The Company’s policy is to conduct impairment testing
based on current business strategies, taking into consideration current industry and economic conditions, as well as the Company’s future expectations. Key
assumptions used in the discounted cash flow valuation model include, among others, discount rates, growth rates, cash flow projections and terminal value rates.
Discount rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are
determined using a weighted average cost of capital (“WACC”). The WACC considers market an industry data, as well as Company-specific risk factors for each
reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would
expect to receive for investing in a similar business. Management uses industry considerations and Company-specific historical and projected results to develop
cash flow projections for each reporting unit. Additionally, as part of the market multiples approach, the Company utilizes market data from publicly traded entities
whose businesses operate in industries comparable to the Company’s reporting units, adjusted for certain factors that increase comparability.
The Company cannot predict the occurrence of events or circumstances that could adversely affect the fair value of goodwill. Such events may include, but are not
limited to, deterioration of the economic environment, increase in the Company’s weighted average cost of capital, material negative changes in relationships with
significant customers, reductions in valuations of other public companies in the Company’s industry, or strategic decisions made in response to economic and
competitive conditions. If actual results are not consistent with the Company’s current estimates and assumptions, impairment of goodwill could be required.
During the third quarter of 2015, the price of DXP’s common stock and the price of crude oil declined over 40% and over 20%, respectively. The decline in oil
prices reduced spending by our customers and reduced our revenue expectations. This sustained decline in crude oil prices, reduced capital spending by customers
and reduced revenue expectations were determined to be a triggering event during the third quarter of 2015. This triggering event required us to perform testing for
possible goodwill impairment in two of our reporting units, and our step one testing indicated there was an impairment in the B27 IPS and B27 SC reporting units.
No triggering event was identified in our other reporting units during the third quarter. Accounting Standards Codification 350 Intangibles
–
Goodwill
and
Other
(“ASC 350”) step two of the goodwill impairment testing for the reporting units was performed preliminarily during the third quarter of 2015. Our preliminary
analysis concluded that $48.0 million of our B27 IPS reporting unit’s goodwill and $9.8 of our B27 SC reporting unit’s goodwill was impaired. The remaining
goodwill for the B27 IPS and B27 SC reporting units at September 30, 2015 was $4.9 million and $10.3 million, respectively. The third quarter of 2015 ASC 350
step two testing was completed in the fourth quarter of 2015 without any adjustment to the amount recorded in the third quarter of 2015.
As of October 1, 2015, DXP performed a qualitative assessment (“Step 0”) to determine whether DXP was required to proceed to ASC 350 step one of the
impairment analysis for any of its reporting units. It is the position of DXP that the factors taken into the Step 0 analysis failed to meet the more likely than not
criteria that the fair value of any of our reporting units had fallen below its carrying value as of October 1, 2015.
During the fourth quarter of 2015, the price of DXP’s common stock and the price of crude oil declined over 16% and over 18%, respectively. Actual earnings
before interest, taxes, depreciation and amortization (“EBITDA”) for the fourth quarter of 2015 for the Core SCS and Core SC reporting units exceeded the
EBITDA amounts in the October 1, 2015 Step 0 analysis. Therefore, evidence of a fourth quarter triggering event for these two reporting units does not exist.
Additionally, the fair value of each of these reporting units is substantially in excess of each reporting units carrying value as of October 1, 2015. Actual EBITDA
for the fourth quarter of 2015 for the Core IPS reporting unit was below the EBITDA amount in the October 1, 2015 Step 0 analysis. Therefore, DXP updated the
2016 through 2020 forecasts for the Core IPS reporting unit. The forecasted EBITDA for 2016 through 2020 in the updated forecast declined less than $1 million
from the October 1, 2015 forecast. The effect of this decline was more than offset by a $12 million reduction in the carrying value of the Core IPS reporting unit at
December 31, 2015 from the October 1, 2015 value. Therefore, evidence of a triggering event for this reporting unit does not exist. Additionally, the fair value of
this reporting unit is substantially in excess of its carrying value as of October 1, 2015.
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Actual EBITDA for the fourth quarter of 2015 for the B27 IPS and B27 SC reporting units were below the EBITDA amounts in the October 1, 2015 Step 0
analysis. Therefore, DXP updated the 2016 through 2020 forecasts for the B27 IPS and B27 SC reporting units. The forecasted EBITDA for 2016 through 2020 in
the updated forecasts declined significantly from the October 1, 2015 forecast. The declines in the forecasted EBITDA for these two reporting units were
determined to be a triggering event during the fourth quarter of 2015. This triggering event required us to perform testing for possible goodwill impairment in these
two reporting units, and our ASC 350 step one testing indicated there may be an impairment in our B27 IPS and B27 SC reporting units. ASC 350 step two testing
for reporting units was performed during the fourth quarter of 2015. Our analysis concluded that $4.9 million of our B27 IPS reporting unit’s goodwill was
impaired, and $5.0 million of our B27 SC reporting unit’s goodwill was impaired. The remaining goodwill for the B27 IPS and B27 SC reporting units at
December 31, 2015 was zero and $5.3 million, respectively.
Impairment
of
Long-Lived
Assets,
Excluding
Goodwill
The Company tests long-lived assets or asset groups for recoverability on an annual basis and when events or changes in circumstances indicate that their carrying
amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset;
significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the
acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated
with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash
flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds fair value. No impairment was recorded for property and equipment and intangible assets with indefinite
or determinable lives during 2017, 2016 and 2015.
Revenue
Recognition
For binding, long-term agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues using the percentage of completion
method. Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of the relationship between costs
incurred and total estimated costs at completion. Changes in estimated profitability may periodically result in revisions to revenue and expenses and are recognized
in the period such revisions become probable. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. Revenues of
approximately $40.6 million, $31.5 million, and $47.5 million were recognized on contracts in process for the years ended December 31, 2017, 2016, and 2015,
respectively. The typical time span of these contracts is approximately one to two years.
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. Reserves for customer returns were $0.3 and $0.2 million at
December 31, 2017 and 2016, respectively.
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 $175,000 of risk on each medical claim for our employees and their dependents with the exception of less than 0.05% of employees
where a higher risk is retained. 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, 2017 and 2016 was approximately $2.7 million and $3.1 million, respectively.
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Purchase
Accounting
DXP estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values, intangibles and liabilities
when allocating the purchase price of an acquisition. The fair value estimates are developed using the best information available. Third party valuation specialists
assist in valuing the Company’s significant acquisitions. Our purchase price allocation methodology contains uncertainties because it requires management to make
assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based
upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including the income approach and the market
approach. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry
economic factors and business strategies. We typically engage an independent valuation firm to assist in estimating the fair value of goodwill and other intangible
assets. We do not expect that there will be material change in the future estimates or assumptions we use to complete the purchase price allocation and estimate the
fair values of acquired assets and liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains
that could be material. DXP did not complete any acquisitions during 2017 or 2016.
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 under a more likely than not criterion.
Accounting
for
Uncertainty
in
Income
Taxes
A position taken or expected to be taken in a tax return is 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 2012. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. 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.
RECENT ACCOuNTINg PRONOuNCEmENTS
Standards Effective in 2017 or Earlier
Accounting
Changes
and
Error
Corrections.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”)
No. 2017-03 ("ASU 2017-03"), Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323):
Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This update adds language
to the SEC Staff Guidance in relation to ASU 2014-09, ASU 2016-02, and ASU 2016-13. This ASU 2017-03 provides the SEC Staff view that a registrant should
consider additional quantitative and qualitative disclosures related to the previously mentioned ASUs in connection with the status and impact of their adoption.
This guidance, which was effective immediately, did not have a material impact on our Condensed Consolidated Financial Statements.
Compensation
–
Stock
Compensation.
In March 2016, the FASB issued ASU No. 2016-09, Compensation
–
Stock
Compensation
(Topic
718):
Improvements
to
Employee
Share-Based
Payment
Accounting.
The update aims to simplify aspects of accounting for share-based payment award transactions, including (a) income
tax consequences, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. This pronouncement is effective
for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted the
ASU January 1, 2017 and it had the following impact on t he Company’s Condensed Consolidated Financial Statements :
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Topic
Method of Adoption
Impact on Consolidated Financial Statements
Recognize all excess tax benefits and tax deficiencies as income
tax benefit or expense
Prospective
Excess tax benefits and deficiencies on the statement of cash
flows are classified as an operating activity
Prospective
Employee taxes paid when an employer withholds shares for tax-
withholding purposes on the statement of cash flows are
classified as a financing activity
Retrospective
Accounting for forfeitures and tax withholding elections
Prospective
The Company recognized $0.1 million of excess tax benefit in
income taxes for the year ended December 31, 2017, decreasing the
effective tax rate for the year.
The Company recognized $0.1 million of excess tax benefit for the
year ended December 31, 2017 as an operating activity. Prior to the
adoption of the ASU 2016-09, the excess tax expense for the year
ended December 31, 2016 of $0.6 million was recognized as a
financing activity. The excess tax expense for the year ended
December 31, 2015 was zero.
The Company reclassified $0.2 million and $0.8 million of
employee taxes paid from cash flows from operating activities to
cash flows from financing activities on the Consolidated Statements
of Cash Flows for the year ended December 31, 2016 and December
31, 2015.
The Company has not changed its accounting policy for forfeitures.
There is no significant
on Consolidated Financial
Statements.
impact
Income
Taxes.
In November 2015, the FASB issued ASU No. 2015-17, Income
Taxes
(Topic
740),
Balance
Sheet
Classification
of
Deferred
Taxes.
The update
requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. The update simplifies the current guidance, which requires
entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. This pronouncement is effective for financial
statements issued for annual periods beginning after December 15, 2016, and interim periods within. The Company adopted this ASU January 1, 2017 and
reclassified $9.5 million of current deferred income tax assets from current assets to non-current deferred income tax liabilities on the Condensed Consolidated
Balance Sheet as of December 31, 2016.
Inventory.
In July 2015, the FASB issued ASU No. 2015-11, Inventory
(Topic
330),
Simplifying
the
Measurement
of
Inventory.
The amendments in ASU 2015-11
clarify the subsequent measurement of inventory requiring an entity to subsequently measure inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. This ASU
applies only to inventory that is measured using the first-in, first-out (FIFO) or average cost method. Subsequent measurement is unchanged for inventory
measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in ASU 2015-11 should be applied prospectively and are effective for
financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this ASU
January 1, 2017 and it did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Statement
of
Cash
Flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement
of
Cash
Flows
(Topic
230)
, Classification
of
Restricted
Cash
. The
amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. The amounts should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 should be applied retrospectively
and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company
early adopted this ASU September 30, 2017 and classified $3.5 million of cash to restricted cash on the Condensed Consolidated Balance Sheet as of December 31,
2017. This cash deposit was required as collateral for letters of credit outstanding under our previously existing credit facility.
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Standards Effective in 2018 or later
Compensation
-
Stock
Compensation.
In May 2017, the FASB issued ASU 2017-09, Compensation
-
Stock
Compensation
(Topic
718):
Scope
of
Modification
Accounting.
This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required
to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the
same immediately before and after the modification. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU should be applied prospectively to an award
modified on or after the adoption date. The Company is currently assessing the impact, if any, that this ASU will have upon adoption.
Intangibles-Goodwill
and
Other.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill
and
Other
(Topic
350):
Simplifying
the
Test
for
Goodwill
Impairment.
This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years. The Company early adopted this ASU December 31, 2017. T he
Company’s annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units goodwill, determined a quantitative impairment
test was not necessary.
Business
Combinations.
In January 2017, the FASB issued ASU 2017-01, Business
Combinations
(Topic
805):
Clarifying
the
Definition
of
a
Business.
This ASU
clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and
consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU
is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Statement
of
Cash
Flows.
In August 2016, the FASB issued ASU 2016-15, Statement
of
Cash
Flows
-
Classification
of
Certain
Cash
Receipts
and
Cash
Payments.
This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the
standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material
impact on the Company's Consolidated Financial Statements.
Financial
Instruments
–
Credit
Losses.
In June 2016, the FASB issued ASU 2016-13: Financial
Instruments
–
Credit
Losses,
which replaces the incurred loss
impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users
with more useful information about expected credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early
adoption permitted. We are currently evaluating the effect, if any, that the guidance will have on the Company’s Consolidated Financial Statements and related
disclosures .
Leases.
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic
842).
The update requires organizations that lease assets (“lessees”) to recognize the
assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement and presentation of
expenses and cash flows arising from a lease by a lessee remains dependent on its classification as a finance or operating lease. The criteria for determining
whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing,
and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This pronouncement is effective for financial statements
issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is
currently assessing the impact that this standard will have on its Consolidated Financial Statements.
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Financial
Instruments.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments:
Recognition
and
Measurement
of
Financial
Assets
and
Financial
Liabilities
. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and
the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years
beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company is evaluating the impact of this ASU.
Revenue
Recognition.
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic
606),
which provides guidance on
revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to
apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction
price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance
obligation. This pronouncement, as amended by ASU 2015-14, is effective for fiscal years, and interim periods within those years, beginning after December 15,
2017.
The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business
processes and financial statement disclosures. We have engaged third party consultants to assist us in assessing our contracts with customers, processes and
controls required to address the impact that ASU No. 2014-09 will have on our business. The Company believes that our current plan will enable us to implement
our new procedures and controls; and assess the cumulative effect of applying ASU No. 2014-09 at the date of initial application. Based on our overall assessment
performed to date, the standard is not expected to have a material impact on the Company’s Consolidated Financial Statements.
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, 2017, a 100 basis point increase in interest rates would increase our annual interest expense by approximately $2.5 million.
Also see “Risk Factors,” included in Item 1A of this Report for additional risk factors associated with our business.
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)
2018
2019
2020
2021
2022
There-
after
Total
$
Fixed Rate Long- term Debt
Fixed Interest Rate
Floating Rate Long-term Debt $
Average Interest Rate (1)
Total Maturities
$
$
881
2.9%
$
7.1%
$
3,381
2,500
$
905
2.9%
$
7.1%
$
3,405
2,500
2,500
$
936
2.9%
$
7.1%
$
3,436
$
-
-
2,500
$
7.1%
$
2,500
(1) Assumes weighted average floating interest rates in effect at December 31, 2017.
40
$
-
-
2,500
$
7.1%
$
2,500
$
-
-
236,875
$
7.1%
$
236,875
2,722 $
-
249,375 $
-
252,097 $
Fair
Value
2,722
-
249,375
-
252,097
Table
of
Contents
ITEm 8. Financial Statements and Supplementary Data
TAblE OF CONTENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
41
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42
47
48
49
50
51
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Contents
To the Shareholders and the Board of Directors of
DXP Enterprises, Inc.
Opinion on the Financial Statements
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and subsidiaries (the “Company”) as of December
31,
2017,
the related
consolidated
statements of income (loss) and comprehensive income (loss), equity and cash flows for the year ended December
31,
2017
, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2017, and the consolidated results of its operations and its cash flows for the year ended
December
31,
2017
,
in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) , the Company’s internal
control over financial reporting as of December
31,
2017
, based on criteria established in Internal
Control
-
Integrated
Framework
(2013)
issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 27, 2018 expressed an adverse opinion on the Company’s
internal control over financial reporting due to material weaknesses.
Basis for Opinion
These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to
assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audit also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated
financial statements. We believe that our audit provides a reasonable basis for our opinion.
Houston,
TX
March 28, 2018
We have served as the Company’s auditor since 2017.
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Contents
To the Board of Directors and Shareholders
DXP Enterprises, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and subsidiaries (collectively, the “Company”) as of December 31, 2016,
and the related consolidated statements of income (loss) and comprehensive income (loss), shareholders' equity and cash flows for the year ended December 31,
2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DXP Enterprises, Inc. and
subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016, in conformity with U.S.
generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2016, based on criteria established in Internal
Control
—
Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. Our report dated March 31, 2017 expressed an opinion that the Company had not maintained effective
internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control
—
Integrated
Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.
/s/ Hein & Associates LLP
Houston, Texas
March 31, 2017
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Table
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Contents
Board of Directors and Shareholders
DXP Enterprises, Inc. and Subsidiaries
REPORT OF INdEPENdENT REgISTEREd PublIC ACCOuNTINg FIRm
We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. (a Texas corporation) and subsidiaries (the “Company”) as of December
31, 2015 (not represented herein), and the related consolidated statements of income (loss) and comprehensive income (loss), shareholders’ equity, and cash flows
for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DXP Enterprises, Inc. and
subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year ended December 31, 2015 in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Houston, Texas
February 29, 2016
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Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
DXP Enterprises, Inc.
Opinion on Internal Control over Financial Reporting
We have audited DXP Enterprises, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December
31,
2017
, based on criteria
established in Internal
Control
-
Integrated
Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In
our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31,
2017
, based on criteria established in Internal
Control
-
Integrated
Framework
(2013)
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) , the consolidated
balance
sheet
of
DXP
Enterprises,
Inc.
and
subsidiaries
as
of
December
31,
2017,
the
related
consolidated
statements of income (loss) and comprehensive income
(loss), equity and cash flows for the year ended December
31,
2017
, and the related notes (collectively referred to as the “consolidated
financial statements”) and
our report dated March 27, 2017 expressed an unqualified opinion on those consolidated
financial statements .
Basis for Opinion
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, included in the accompanying Management
Report
on
Internal
Control
over
Financial
Reporting
included
in
Item
9A
. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB . Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material
weaknesses have been identified and included in management’s assessment in Item 9A:
Ineffective
control
environment
and
monitoring
to
support
the
financial
reporting
process.
The Company’s control environment did not sufficiently promote effective internal control over financial reporting; specifically, the following factors relating to
the control environment:
The Company did not maintain effective management review controls over the monitoring and review of certain accounts, thus we were not able properly
conclude these account reconciliations and analyses were performed at an appropriate level of detail.
The Company did not effectively design, document nor monitor (review, evaluate and assess) the key internal control activities that provide the
accounting information contained in the Company’s financial statements.
Ineffective
Information
Technology
General
Controls
(“ITGC”).
The Company did not maintain effective ITGC, which are required to support automated controls and information technology (“IT”) functionality; therefore,
automated controls and IT functionality were deemed ineffective for the same period under audit.
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We considered the material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial
statements as of and for the year ended December
31,
2017
, and our opinion on such consolidated financial statements was not affected.
Definition and Limitations 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 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
the policies or procedures may deteriorate.
Houston,
TX
March 28, 2018
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dXP ENTERPRISES, INC. ANd SubSIdIARIES
CONSOlIdATEd bAlANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
Current assets:
Cash
Restricted Cash
Trade accounts receivable, net of allowances for doubtful accounts of $9,015 in 2017 and $8,160 in 2016
Inventories
Costs and estimated profits in excess of billings on
uncompleted contracts
Prepaid expenses and other current assets
Federal income taxes recoverable
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net of accumulated amortization of $84,624 in 2017 and $70,027 in 2016
Other long-term assets
Total assets
lIAbIlITIES ANd EQuITY
Current liabilities:
Current maturities of long-term debt
Trade accounts payable
Accrued wages and benefits
Customer advances
Billings in excess of costs and estimated profits on uncompleted contracts
Other current liabilities
Total current liabilities
Long-term debt, less current maturities and unamortized debt issuance costs
Deferred income taxes
Total long-term liabilities
Commitments and Contingencies (Note 15)
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, 2017 and 2016); 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, 2017 and 2016); 1,000,000 shares authorized; 15,000
shares issued and outstanding
Common stock, $0.01 par value, 100,000,000 shares authorized; 17,315,573 in 2017 and 17,197,380 in 2016 shares
issued
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total DXP Enterprises, Inc. equity
Noncontrolling interest
Total equity
Total liabilities and equity
december 31, 2017 december 31, 2016
$
$
$
$
22,047 $
3,532
167,272
91,413
26,915
5,296
1,440
317,915
53,337
187,591
78,525
1,715
639,083 $
3,381 $
80,303
18,483
2,189
4,249
16,220
124,825
238,643
7,069
245,712
1
15
174
153,087
134,193
(19,491)
267,979
567
268,546
639,083 $
1,590
-
148,919
83,699
18,421
2,138
2,558
257,325
60,807
187,591
94,831
1,498
602,052
51,354
78,698
16,962
2,441
2,813
14,391
166,659
173,331
9,513
182,844
1
15
173
152,313
117,395
(18,274)
251,623
926
252,549
602,052
The accompanying notes are an integral part of these consolidated financial statements.
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dXP ENTERPRISES, INC. ANd SubSIdIARIES
CONSOlIdATEd STATEmENTS OF INCOmE (lOSS)
ANd COmPREHENSIVE INCOmE (lOSS)
(in thousands, except per share amounts)
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Impairment expense
B27 settlement
Operating income (loss)
Other expense (income), net
Interest expense
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Net loss attributable to noncontrolling interest
Net income (loss) attributable to DXP Enterprises, Inc.
Preferred stock dividend
Net income (loss) attributable to common shareholders
Net income (loss)
Cumulative translation adjustment, net of income taxes
Comprehensive income (loss)
Basic earnings (loss) per share
Weighted average common shares outstanding
Diluted earnings (loss) per share
Weighted average common shares and common equivalent shares outstanding
Years Ended december 31,
2016
2017
2015
1,006,782 $
735,201
271,581
238,091
-
-
33,490
(456)
17,054
16,892
363
16,529
(359)
16,888
90
16,798 $
16,529 $
(1,217)
15,312 $
962,092 $
697,290
264,802
245,470
-
-
19,332
(5,906)
15,564
9,674
2,523
7,151
(551)
7,702
90
7,612 $
7,151 $
(7,658)
(507) $
0.97 $
0.51 $
17,400
15,042
0.93 $
0.49 $
18,240
15,882
1,247,043
895,057
351,986
303,819
68,735
7,348
(27,916)
72
10,932
(38,920)
150
(39,070)
(534)
(38,536)
90
(38,626)
(39,070)
(4,916)
(43,986)
(2.68)
14,423
(2.68)
14,423
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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dXP ENTERPRISES, INC.
CONSOlIdATEd STATEmENTS OF EQuITY
Years Ended december 31, 2017, 2016 and 2015
(in thousands, except share amounts)
Series A
Preferred
Stock
Series b
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Non-
Control
Interest
Accum.
Other
Comp.
Income Total Equity
bAlANCES AT
January 1, 2015
$
1 $
15 $
146 $ 115,605 $ 148,409 $ (15,524) $
- $
(5,700) $
242,952
Dividends paid
Compensation expense for
restricted stock
Tax related items for share
based awards
Issuance of 148,769 treasury
shares in connection with an
acquisition
Acquisition of 191,420 shares
of treasury stock
Issuance of 57,401 treasury
shares upon vesting of
restricted stock
Noncontrolling interest holder
contributions, net of tax
benefits
Cumulative translation
adjustment
Net loss
bAlANCES AT
dECEmbER 31, 2015
Dividends paid
Compensation expense for
restricted stock
Tax related items for share
based awards
Issuance of 2,722,858 shares
of Common stock
Issuance of 264,297 treasury
shares
Noncontrolling interest holder
contributions, net of tax
benefits
Cumulative translation
adjustment
Net income (loss)
bAlANCES AT
dECEmbER 31, 2016
Dividends paid
Compensation expense for
restricted stock
Tax related items for share
based awards
Issuance of shares of Common
stock
Cumulative translation
adjustment
Net income (loss)
bAlANCES AT
dECEmbER 31, 2017
-
-
-
-
-
-
-
-
-
-
-
-
(90)
-
2,973
-
(815)
-
-
-
-
-
-
(4,825)
-
9,223
-
-
-
(8,908)
-
-
-
-
-
-
(90)
-
2,973
-
(815)
-
4,398
-
(8,908)
-
-
-
(2,632)
-
2,632
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,346
-
2,346
-
(38,536)
-
-
-
(534)
(4,916)
-
(4,916)
(39,070)
$
1 $
15 $
146 $ 110,306 $ 109,783 $ (12,577) $
1,812 $ (10,616) $ 198,870
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
1 $
-
15 $
-
-
-
-
-
-
-
-
-
-
-
-
-
(90)
-
3,580
-
(858)
27
51,862
-
-
-
-
-
-
-
-
(12,577)
-
12,577
-
-
-
-
-
-
(90)
-
3,580
-
(858)
-
51,889
-
-
-
-
(335)
-
(335)
-
-
-
-
-
-
-
7,702
173 $ 152,313 $ 117,395 $
(90)
-
-
-
1,708
-
(933)
(1)
1
-
-
-
-
-
16,888
-
-
-
-
-
- $
-
-
-
-
-
-
-
(551)
(7,658)
-
(7,658)
7,151
926 $ (18,274) $ 252,549
(90)
-
-
-
-
-
-
1,708
-
(933)
-
-
-
(359)
(1,217)
-
(1,217)
16,529
$
1 $
15 $
174 $ 153,087 $ 134,193 $
- $
567 $ (19,491) $ 268,546
The accompanying notes are an integral part of these consolidated financial statements.
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dXP ENTERPRISES, INC. ANd SubSIdIARIES
CONSOlIdATEd STATEmENTS OF CASH FlOWS
(in thousands)
CASH FlOWS FROm OPERATINg ACTIVITIES:
Net income (loss) attributable to DXP Enterprises, Inc.
Less net loss attributable to noncontrolling interest
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$
Depreciation
Amortization of intangible assets
Impairment of goodwill
Bad debt expense
Amortization of debt issuance costs
Write off of debt issuance costs
Gain on sale of subsidiary
Stock compensation expense
Tax loss related to vesting of restricted stock
Deferred income taxes
Changes in operating assets and liabilities, net of assets and liabilities acquired in business acquisitions:
Trade accounts receivable
Costs and estimated profits in excess of billings on uncompleted contracts
Inventories
Prepaid expenses and other assets
Accounts payable and accrued expenses
Billings in excess of costs & estimated profits on uncompleted contracts
Net cash provided by operating activities
CASH FlOWS FROm INVESTINg ACTIVITIES:
Purchase of property and equipment
Proceeds from the sale of fixed assets
Proceeds from sale of subsidiary
Acquisitions of businesses, net of cash acquired (1)
Net cash provided by (used in) investing activities
CASH FlOWS FROm FINANCINg ACTIVITIES:
Proceeds from debt
Principal payments on revolving line of credit and other long-term debt
Debt issuance costs
Noncontrolling interest holder contributions (distributions), net of tax benefits
Preferred dividends paid
Purchase of treasury stock
Proceeds from issuance of common shares, net
Payment for employee taxes withheld from stock awards
Tax (loss) related to vesting of restricted stock
Net cash provided by (used in) financing activities
EFFECT OF FOREIGN CURRENCY ON CASH
(DECREASE) INCREASE IN CASH
CASH AT BEGINNING OF YEAR
CASH AT ENd OF YEAR
SuPPlEmENTAl CASH FlOW INFORmATION:
Cash paid for Interest
Cash paid for Income Taxes
$
$
$
Years Ended
december 31,
2016
2017
2015
16,888 $
(359)
16,529
10,520
17,266
-
3,416
1,548
578
-
1,708
-
(3,827)
(20,539)
(8,419)
(7,544)
(3,287)
3,189
1,406
12,544
(2,811)
-
-
-
(2,811)
728,822
(702,402)
(11,208)
-
(90)
-
-
(934)
-
14,188
68
23,989
1,590
25,579 $
7,702 $
(551)
7,151
11,933
18,061
-
180
1,856
-
(5,635)
3,580
619
2,687
12,080
3,457
5,453
620
(8,595)
(5,203)
48,244
(4,868)
1,206
31,476
-
27,814
517,689
(643,568)
(801)
(335)
(90)
-
51,889
(238)
(619)
(76,073)
(88)
(103)
1,693
1,590 $
(38,536)
(534)
(39,070)
12,622
20,621
68,735
2,014
1,211
-
-
2,973
-
(9,024)
71,261
(2,047)
12,724
159
(42,862)
(513)
98,804
(13,992)
-
-
(15,501)
(29,493)
393,551
(453,480)
(543)
2,346
(90)
(8,908)
-
(815)
-
(67,939)
274
1,646
47
1,693
15,205 $
714 $
13,708 $
4,780 $
9,721
13,792
(1) Purchases of businesses in 2015 exclude $4.4 million in common stock issued in connection with an acquisition.
The accompanying notes are an integral part of these consolidated financial statements.
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NOTE 1 - THE COmPANY
dXP ENTERPRISES INC. ANd SubSIdIARIES
NOTES TO CONSOlIdATEd FINANCIAl STATEmENTS
DXP Enterprises, Inc. together with its subsidiaries (collectively “DXP,” “Company,” “us,” “we,” or “our”) was incorporated in Texas on July 26, 1996. DXP
Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to energy and
industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to
energy and industrial customers. The Company is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative
Pumping Solutions (“IPS”). See Note 18 for discussion of the business segments.
NOTE 2 - SummARY OF SIgNIFICANT ACCOuNTINg ANd buSINESS POlICIES
Basis
of
Presentation
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The
accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity (“VIE”).
DXP is the primary beneficiary of a VIE in which DXP owns 47.5% of the equity. DXP consolidates the financial statements of the VIE with the financial
statements of DXP. As of December 31, 2017, the total assets of the VIE were approximately $5.2 million including approximately $4.5 million of fixed assets.
DXP is the primary customer of the VIE. Consolidation of the VIE increased cost of sales by approximately $0.6 million and $1.3 million for the twelve months
ended December 31, 2017 and 2016, respectively. The Company recognized a related income tax benefit of $0.2 million and $0.3 million related to the VIE for the
years ended December 31, 2017 and 2016, respectively. At December 31, 2017, the owners of the 52.5% of the equity not owned by DXP included employees of
DXP.
All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the
current year presentation; none affected net income.
Foreign
Currency
The financial statements of the Company’s Canadian subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are
translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported
in other comprehensive income (loss). Gains and losses on transactions denominated in foreign currency are reported in consolidated statements of income (loss).
Use
of
Estimates
The preparation of financial statements in conformity with US GAAP requires management 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. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been
included. Actual results could differ from those estimates.
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. The Company places its cash and cash equivalents with institutions with high credit quality. However, at certain times, such cash and cash
equivalents may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not historically experienced any losses when
in excess of these limits.
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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 customers may not pay within stated trade terms.
The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and
Southwestern regions of the United States, and Canada. 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. 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 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.
Changes in this allowance for 2017, 2016 and 2015 were as follows ( in
thousands
):
Balance at beginning of year
Charged to costs and expenses
Charged to other accounts
Deductions
Balance at end of year
( 1) Uncollectible accounts written off, net of recoveries
(2) Includes allowance for doubtful accounts from acquisitions and divestiture
(3) Primarily due to translation adjustments
Fair
Value
of
Financial
Instruments
Years Ended december 31,
2016
2015
2017
$
$
$
8,160
3,367
223
(2,534) 1
$
9,015
$
9,364
180
(17) 2
(1,367) 1
$
8,160
8,713
2,014
1,2552
(2,618) 1
9,364
The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. US GAAP establishes
a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. US GAAP prioritizes the
inputs into three levels that may be used to measure fair value:
Level
1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level
2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for
similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less
active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market
data.
Level
3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value
of the assets or liabilities.
See Note 4 for further information regarding the Company’s financial instruments.
Inventories
Inventories consist principally of finished goods and are priced at net realizable value , cost being determined using the first-in, first-out (“FIFO”) method.
Provisions are provided against inventories for estimated obsolescence based upon the aging of the inventories and market trends and are applied as a reduction in
cost of associated inventory.
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Property
and
Equipment
Property and equipment are carried on the basis of cost. Depreciation of property and equipment is computed using the straight-line method over their estimated
useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. 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
Building improvements
Furniture, fixtures and equipment
Leasehold improvements
Impairment
of
Goodwill
and
Other
Intangible
Assets
20-39 years
10-20 years
3-20 years
Shorter of estimated useful life or related lease term
The Company tests goodwill and other indefinite lived intangible assets for impairment on an annual basis in the fourth quarter and when events or changes in
circumstances indicate that the carrying amount may not be recoverable . The Company assigns the carrying value of these intangible assets to its "reporting units"
and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the
component is a business and discrete information is prepared and reviewed regularly by segment management.
The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than
not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its
fair value, the Company would perform a two-step quantitative test for that reporting unit. When a quantitative assessment is performed, the first step is to identify
a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a
reporting unit’s goodwill exceeds its estimated fair value. During the third and fourth quarter of 2015, DXP performed interim impairment tests using a quantitative
approach and recognized goodwill impairments of $57.8 million and $9.8 million, respectively. No impairment of goodwill was required in 2017 and 2016.
Impairment
of
Long-Lived
Assets,
Excluding
Goodwill
The Company tests long-lived assets or asset groups for recoverability on an annual basis and when events or changes in circumstances indicate that their carrying
amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset;
significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the
acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated
with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash
flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds fair value. No impairment of long-lived assets excluding goodwill, was required in 2017, 2016 and 2015.
Share-based
Compensation
The Company uses restricted stock for share-based compensation programs. The Company measures compensation cost with respect to equity instruments granted
as stock-based payments to employees based upon the estimated fair value of the equity instruments at the date of the grant. The cost as measured is recognized as
expense over the period which an employee is required to provide services in exchange for the award.
Revenue
Recognition
For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues using the percentage of completion method.
Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred
and total estimated costs at completion. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. Revenues of
approximately $40.6 million, $31.5 million, and $47.5 million were recognized on contracts in process for the years ended December 31, 2017, 2016, and 2015,
respectively. The typical time span of these contracts is approximately one to two years.
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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, which is generally upon delivery to the customer. 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.
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 $175,000 of risk on each medical claim for our employees and their dependents with the exception of less than 0.05% of employees
where a higher risk is retained. 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, 2017 and 2016 was approximately $2.7 million and $3.1 million, respectively.
Purchase
Accounting
DXP estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values, intangibles and liabilities
when allocating the purchase price of an acquisition. The fair value estimates are developed using the best information available.
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.
Debt
Issuance
Cost
Amortization
Fees paid to DXP’s lenders to secure a firm commitment on a term loan and revolving line of credit are presented as a direct deduction from the carrying amount of
the debt liability. For the term loan, fees paid by DXP are amortized over the life of the loan as additional interest. Fees paid to secure a firm commitment from our
lender on a revolving line of credit are amortized on a straight-line basis over the entire term of the arrangement. The total unamortized debt issuance costs
reported on the consolidated balance sheets as of December 31, 2017 and 2016 was $10.1 million and $1.0 million, respectively. In connection with the
extinguishment of the previously existing credit facility we recorded a $0.6 million write-off of debt issuance costs, which was included in interest expense during
the third quarter of 2017.
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 under a more likely than not criterion.
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Accounting
for
Uncertainty
in
Income
Taxes
A position taken or expected to be taken in a tax return is 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 2012. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. 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
Comprehensive
Income
(Loss)
Comprehensive income (loss) includes net income, foreign currency translation adjustments and unrealized gains and losses on certain investments in debt and
equity securities. The Company’s other comprehensive (loss) income is comprised of changes in the market value of an investment with quoted market prices in an
active market for identical instruments and translation adjustments from translating foreign subsidiaries to the reporting currency. Comprehensive income for the
year ended December 31, 2016 was reduced by an $8.6 million charge recorded during the fourth quarter of 2016 to correct errors which accumulated during 2013,
2014 and 2015 due to the Company improperly recognizing an $8.6 million deferred tax asset on unrealized foreign currency losses not expected to be realized
within one year. We assessed the materiality of this misstatement and concluded the misstatement was not material to the results of operations or financial
condition for the years ended December 31, 2016 and 2015.
Out-of-Period
Items
Deferred tax liabilities related to intangibles for customer relationships acquired in Canada during 2012 and 2013 were reduced by $2.2 million during the fourth
quarter of 2017 to correct the tax rate used to establish the deferred tax liabilities at the dates of acquisition. The Company evaluated the misstatement of each
period since these acquisitions were completed and concluded the effects were immaterial.
During the first quarter of 2015, we identified a $2.5 million ($1.6 million net of tax) overstatement of an accrual at December 31, 2014, which overstated 2014
selling, general and administrative expense. We recorded an out-of-period adjustment to correct this overstatement in the quarter ended March 31, 2015. During the
fourth quarter of 2015, we realized $1.5 million of net tax benefits related to events which occurred in earlier years. These out-of-period items reduced the 2015 net
loss by $3.1 million and 2015 basic and diluted net loss per share by $0.21. We assessed the materiality of this overstatement and concluded the overstatement was
not material to the results of operations or financial condition for the year ended December 31, 2015.
NOTE 3 - RECENT ACCOuNTINg PRONOuNCEmENTS
Standards Effective in 2017 or Earlier
Accounting
Changes
and
Error
Corrections.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”)
No. 2017-03 ("ASU 2017-03"), Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323):
Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This update adds language
to the SEC Staff Guidance in relation to ASU 2014-09, ASU 2016-02, and ASU 2016-13. This ASU 2017-03 provides the SEC Staff view that a registrant should
consider additional quantitative and qualitative disclosures related to the previously mentioned ASUs in connection with the status and impact of their adoption.
This guidance, which was effective immediately, did not have a material impact on our Condensed Consolidated Financial Statements.
Compensation
–
Stock
Compensation.
In March 2016, the FASB issued ASU No. 2016-09, Compensation
–
Stock
Compensation
(Topic
718):
Improvements
to
Employee
Share-Based
Payment
Accounting.
The update aims to simplify aspects of accounting for share-based payment award transactions, including (a) income
tax consequences, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. This pronouncement is effective
for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted the
ASU January 1, 2017 and it had the following impact on t he Company’s Condensed Consolidated Financial Statements :
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Topic
Method of Adoption
Impact on Consolidated Financial Statements
Recognize all excess tax benefits and tax deficiencies as
income tax benefit or expense
Prospective
Excess tax benefits and deficiencies on the statement of
cash flows are classified as an operating activity
Prospective
Employee taxes paid when an employer withholds shares
for tax-withholding purposes on the statement of cash flows
are classified as financing activity
Retrospective
Accounting for forfeitures and tax withholding elections
Prospective
The Company recognized $0.1 million of excess tax benefit
in income taxes for the year ended December 31, 2017,
decreasing the effective tax rate for the year.
The Company recognized $0.1 million of excess tax benefit
for the year ended December 31, 2017 as an operating
activity. Prior to the adoption of the ASU 2016-09, the
excess tax expense for the year ended December 31, 2016 of
$0.6 million was recognized as a financing activity. The
excess tax expense for the year ended December 31, 2015
was zero.
The Company reclassified $0.2 million and $0.8 million of
employee taxes paid from cash flows from operating
activities to cash flows from financing activities on the
Consolidated Statements of Cash Flows for the years ended
December 31, 2016 and December 31, 2015.
The Company has not changed its accounting policy for
forfeitures. There is no significant impact on Consolidated
Financial Statements.
Income
Taxes.
In November 2015, the FASB issued ASU No. 2015-17, Income
Taxes
(Topic
740),
Balance
Sheet
Classification
of
Deferred
Taxes.
The update
requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. The update simplifies the current guidance, which requires
entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. This pronouncement is effective for financial
statements issued for annual periods beginning after December 15, 2016, and interim periods within. The Company adopted this ASU January 1, 2017 and
reclassified $9.5 million of current deferred income tax assets from current assets to non-current deferred income tax liabilities on the Condensed Consolidated
Balance Sheet as of December 31, 2016.
Inventory.
In July 2015, the FASB issued ASU No. 2015-11, Inventory
(Topic
330),
Simplifying
the
Measurement
of
Inventory.
The amendments in ASU 2015-11
clarify the subsequent measurement of inventory requiring an entity to subsequently measure inventory at the lower of cost and net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. This ASU
applies only to inventory that is measured using the first-in, first-out (FIFO) or average cost method. Subsequent measurement is unchanged for inventory
measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in ASU 2015-11 should be applied prospectively and are effective for
financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this ASU
January 1, 2017 and it did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Statement
of
Cash
Flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement
of
Cash
Flows
(Topic
230)
, Classification
of
Restricted
Cash
. The
amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. The amounts should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 should be applied retrospectively
and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company
early adopted this ASU September 30, 2017 and classified $3.5 million of cash to restricted cash on the Condensed Consolidated Balance Sheet as of December 31,
2017. This cash deposit was required as collateral for letters of credit outstanding under our previously existing credit facility.
Standards Effective in 2018 or later
Compensation
-
Stock
Compensation.
In May 2017, the FASB issued ASU 2017-09, Compensation
-
Stock
Compensation
(Topic
718):
Scope
of
Modification
Accounting.
This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required
to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the
same immediately before and after the modification. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU should be applied prospectively to an award
modified on or after the adoption date. The Company is currently assessing the impact, if any, that this ASU will have upon adoption.
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Intangibles-Goodwill
and
Other.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill
and
Other
(Topic
350):
Simplifying
the
Test
for
Goodwill
Impairment.
This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years. The Company early adopted this ASU December 31, 2017. T he
Company’s annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units goodwill, determined a quantitative impairment
test was not necessary.
Business
Combinations.
In January 2017, the FASB issued ASU 2017-01, Business
Combinations
(Topic
805):
Clarifying
the
Definition
of
a
Business.
This ASU
clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and
consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU
is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Statement
of
Cash
Flows.
In August 2016, the FASB issued ASU 2016-15, Statement
of
Cash
Flows
-
Classification
of
Certain
Cash
Receipts
and
Cash
Payments.
This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the
standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material
impact on the Company's Consolidated Financial Statements.
Financial
Instruments
–
Credit
Losses.
In June 2016, the FASB issued ASU 2016-13: Financial
Instruments
–
Credit
Losses,
which replaces the incurred loss
impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users
with more useful information about expected credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early
adoption permitted. We are currently evaluating the effect, if any, that the guidance will have on the Company’s Consolidated Financial Statements and related
disclosures .
Leases.
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic
842).
The update requires organizations that lease assets (“lessees”) to recognize the
assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement and presentation of
expenses and cash flows arising from a lease by a lessee remains dependent on its classification as a finance or operating lease. The criteria for determining
whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing,
and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This pronouncement is effective for financial statements
issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is
currently assessing the impact that this standard will have on its Consolidated Financial Statements.
Financial
Instruments.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments:
Recognition
and
Measurement
of
Financial
Assets
and
Financial
Liabilities
. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and
the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years
beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company is evaluating the impact of this ASU.
Revenue
Recognition.
In May 2014, the FASB issued ASU No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic
606),
which provides guidance on
revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to
apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction
price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance
obligation. This pronouncement, as amended by ASU 2015-14, is effective for fiscal years, and interim periods within those years, beginning after December 15,
2017.
The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business
processes and financial statement disclosures. We have engaged third party consultants to assist us in assessing our contracts with customers, processes and
controls required to address the impact that ASU No. 2014-09 will have on our business. The Company has elected the modified retrospective method and will
adopt the new revenue guidance effective January 1, 2018, with an expected immaterial impact to the opening retained earnings.
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The analysis of contracts with customers under the new revenue recognition standard was consistent with the Company’s current revenue recognition model,
whereby revenue is recognized primarily on the date products are shipped to the customer. The ASU also requires expanded qualitative and quantitative disclosures
about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, significant judgments and accounting policy.
Based on our overall assessment performed to date, the adoption of the new standard is not expected to have an ongoing material impact on the Company’s
Consolidated Financial Statements.
NOTE 4 - FAIR VAluE OF FINANCIAl ASSETS ANd lIAbIlITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being
measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
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.
During the third and fourth quarters of 2015, in connection with interim tests for impairment, DXP recorded impairment charges of $57.8 million and $9.8 million,
respectively, in order to reflect the implied fair values of goodwill, which is a non-recurring fair value adjustment. The fair values of goodwill used in the
impairment calculations were estimated based on discounted estimated future cash flows with the discount rates of 10.0% to 11.5%. The measurements utilized to
determine the implied fair value of goodwill represent significant unobservable inputs (Level 3) in accordance with the fair value hierarchy.
NOTE 5 - INVENTORIES
The carrying values of inventories were as follows ( in
thousands
):
Finished goods
Work in process
Inventories
december 31,
2017
december 31,
2016
$
$
79,820 $
11,593
91,413 $
74,269
9,430
83,699
NOTE 6 – COSTS ANd ESTImATEd PROFITS ON uNCOmPlETEd CONTRACTS
Costs and estimated profits in excess of billings on uncompleted contracts arise in the consolidated balance sheets when revenues have been recognized but the
amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including
achievement of certain milestones, completion of specified units, or completion of a contract.
Costs and estimated profits on uncompleted contracts and related amounts billed for 2017 and 2016 were as follows ( in
thousands
):
Costs incurred on uncompleted contracts
Estimated earnings, thereon
Total
Less: billings to date
Net
december 31,
2017
2016
$
$
37,899 $
2,665
40,564
17,881
22,683 $
25,214
6,274
31,488
15,864
15,624
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Such amounts were included in the accompanying Consolidated Balance Sheets for 2017 and 2016 under the following captions ( in
thousands
):
Costs and estimated profits in excess of billings on uncompleted contracts
Billings in excess of costs and estimated profits on uncompleted contracts
Translation Adjustment
Net
NOTE 7 - PROPERTY ANd EQuIPmENT
The carrying values of property and equipment were as follows ( in
thousands
):
Land
Buildings and leasehold improvements
Furniture, fixtures and equipment
Less – Accumulated depreciation
Total Property and Equipment
december 31,
2017
2016
$
$
26,915 $
(4,249)
17
22,683 $
18,421
(2,813)
16
15,624
december 31,
2017
december 31,
2016
$
$
2,346 $
16,724
94,475
(60,208)
53,337 $
2,346
16,259
94,784
(52,582)
60,807
Depreciation expense was $10.5 million, $11.9 million, and $12.6 million for the years ended December 31, 2017, 2016, and 2015, respectively. Capital
expenditures by segment are included in Note 18 .
NOTE 8 - gOOdWIll ANd OTHER INTANgIblE ASSETS
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2017 ( in
thousands
):
Balances as of December 31, 2016
Translation adjustment
Amortization
Balances as of December 31, 2017
goodwill
Other
Intangible
Assets
Total
$
$
187,591 $
-
-
187,591 $
94,831 $
960
(17,266)
78,525 $
282,422
960
(17,266)
266,116
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2016 ( in
thousands
):
Balances as of December 31, 2015
Sale of subsidiary
Purchase accounting adjustment
Translation adjustment
Amortization
Balances as of December 31, 2016
goodwill
$
$
197,362 $
(9,620)
(151)
-
-
187,591 $
Other
Intangible
Assets
112,297 $
-
-
595
(18,061)
94,831 $
Total
309,659
(9,620)
(151)
595
(18,061)
282,422
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The following table presents goodwill balance by reportable segment as of December 31, 2017 and 2016 (in
thousands)
:
Service Centers
Innovative Pumping Solutions
Supply Chain Services
Total
As of december 31,
2017
2016
$
$
154,473 $
15,980
17,138
187,591 $
154,473
15,980
17,138
187,591
During the third quarter of 2015, the price of DXP’s common stock and the price of crude oil declined over 40% and over 20%, respectively. This decline in oil
prices reduced spending by our customers and reduced our revenue expectations. This sustained decline in crude oil prices, reduced capital spending by customers
and reduced revenue expectations were determined to be a triggering event during the third quarter of 2015. This triggering event required us to perform testing for
possible goodwill impairment in two of our reporting units, and our step one testing indicated there was an impairment in the B27 IPS and B27 SC reporting units.
No triggering event was identified in our other reporting units during the third quarter. ASC 350 step two of the goodwill impairment testing for the reporting units
was performed preliminarily during the third quarter of 2015. Our preliminary analysis concluded that $48.0 million of our B27 IPS reporting unit’s goodwill and
$9.8 million of our B27 SC reporting unit’s goodwill was impaired. The remaining goodwill for the B27 IPS and B27 SC reporting units at September 30, 2015
was $4.9 million and $10.3 million, respectively. The September 30, 2015 ASC 350 step two testing was completed in the fourth quarter of 2015 without any
adjustment to the amount recorded in the third quarter of 2015. Fair value was based on expected future cash flow using Level 3 inputs under Account Standards
Codification 820 Fair
Value
Measurements
(“ASC 820”). The cash flows are those expected to be generated by market participants, discounted at a rate of return
market participants would expect. Approximately 60% of the goodwill associated with the B27 acquisition is not deductible for tax purposes. Accordingly, the
financial statement tax benefit is calculated for only 40% of the goodwill impairment. The pretax impairment impacted DXP’s effective tax rate for 2015. For the
year ended December 31, 2014, accumulated impairment for the B27 IPS and B27 SC reporting units was $95.1 million and $10.2 million, respectively. After
recording the third quarter impairment loss, accumulated impairment expenses for the B27 IPS and B27 SC reporting units were $143.1 million and $20.0 million,
respectively, at September 30, 2015.
DXP recorded $1.1 million of impairment expense in the third quarter of 2015 to write off an acquired intangible asset related to an ITT Goulds distribution
agreement, which was terminated by ITT Goulds during 2015. The remaining intangible asset value of vendor distribution agreements for the year ended
December 31, 2015 was zero. None of the impairment is expected to be deductible for tax purposes.
During the fourth quarter of 2015, the price of DXP’s common stock and the price of crude oil declined over 16% and over 18%, respectively. This decline in oil
prices reduced spending by our customers during the fourth quarter and resulted in fourth quarter actual earnings for the B27 IPS and B27 SC reporting units
declining significantly from the forecasts used in the impairment analysis at the end of the third quarter of 2015. The declines in forecasted earnings for these two
reporting units were determined to be a triggering event during the fourth quarter of 2015. This triggering event required us to perform testing for possible goodwill
impairment in these two reporting units, and our step one testing indicated there may be an impairment in the B27 IPS and B27 SC reporting units. No triggering
event was identified in our other reporting units during the fourth quarter. ASC 350 step two of the goodwill impairment testing for the reporting units was
performed during the fourth quarter of 2015. Our analysis concluded that $4.9 million of our B27 IPS reporting unit’s goodwill and $5.0 million of our B27 SC
reporting unit’s goodwill was impaired. Fair value was based on expected future cash flow using Level 3 inputs under ASC 820. The cash flows are those expected
to be generated by market participants, discounted at a rate of return market participants would expect. The remaining goodwill for the B27 IPS and B27 SC
reporting units at December 31, 2015 was zero and $5.3 million, respectively. Approximately 60% of the goodwill associated with the B27 acquisition is not
deductible for tax purposes. Accordingly, the financial statement tax benefit is calculated for only 40% of the goodwill impairment. The pretax impairment
impacted DXP’s effective tax rate for 2015. After recording the fourth quarter impairment loss, accumulated impairment for the B27 IPS and B27 SC reporting
units were $148.0 million and $25.0 million, respectively, for the year ended December 31, 2015. As none of the Company’s other reporting units recorded
impairment losses in 2015, accumulated impairment for these units remained at $12.3 million.
The impairment losses during the year ended December 31, 2015 are included in the “impairment expense” line item on the consolidated statements of income
(loss).
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The following table presents a summary of amortizable other intangible assets ( in
thousands
):
Customer relationships
Non-compete agreements
Total
As of december 31, 2017
As of december 31, 2016
gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount,
net
gross
Carrying
Amount
Accumulated
Amortization
Carrying
Amount,
net
$
$
162,200 $
949
163,149 $
(83,806) $
(818)
(84,624) $
78,394 $
131
78,525 $
163,022 $
1,836
164,858 $
(68,446) $
(1,581)
(70,027) $
94,576
255
94,831
Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are
amortized according to estimated economic benefits over their estimated useful lives .
Customer relationships are amortized over their estimated useful lives. Amortization expense is recognized according to estimated economic benefits and was
$17.3 million, $18.1 million, and $20.6 million for the years ended December 31, 2017, 2016, and 2015, respectively. The estimated future annual amortization of
intangible assets for each of the next five years and thereafter are as follows (in
thousands)
:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
15,615
14,170
10,292
8,911
7,264
22,273
78,525
The weighted average remaining estimated life for customer relationships and non-compete agreements are 8.3 years and 1.8 years, respectively.
NOTE 9 – lONg-TERm dEbT
Long-term debt consisted of the following ( in
thousands
):
ABL Revolver
Term Loan B
Line of credit
Term loan
Promissory note payable in monthly installments at 2.9% through January 2021, collateralized by
equipment
Less unamortized debt issuance costs
Total Debt
Less: Current maturities
Total Long-term Debt
Abl Facility
december 31,
2017
2016
$
$
- $
249,375
-
-
2,722
(10,073)
242,024
(3,381)
238,643 $
-
-
147,600
74,500
3,577
(992)
224,685
(51,354)
173,331
On August 29, 2017, DXP entered into a five year, $85 million Asset Based Loan and Security Agreement (the “ABL Credit Agreement”). The ABL Credit
Agreement provides for asset-based revolving loans in an aggregate principal amount of up to $85.0 million (the “ABL Loans”). The ABL Loans may be
increased, in increments of $10.0 million, up to an aggregate of $50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding
borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime rate or
Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average daily excess availability under the facility for the
most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum are payable on the portion of the facility not in use at any given time.
The interest rate for the ABL facility was 2.9% at December 31, 2017. The unused line fee was 0.375% at December 31, 2017.
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The obligations of the Borrowers are guaranteed by the Company and its direct and indirect material wholly-owned subsidiaries other than certain excluded
subsidiaries.
The ABL Credit Agreement contains a financial covenant restricting the Company from allowing its Fixed Charge Coverage Ratio be less than 1.00 to 1.00 during
a compliance period, which is triggered when the availability under ABL facility falls below a threshold set forth in the ABL Credit Agreement. As of December
31, 2017, the Company's consolidated Fixed Charge Coverage Ratio was 3.67 to 1.00.
The ABL Loan is secured by substantially all of the assets of the Company.
Senior Secured Term loan b:
On August 29, 2017, DXP entered into a six year Senior Secured Term Loan B (the “Term Loan”) with an original principal amount of $250 million which
amortizes in equal quarterly installments of 0.25% with the balance payable in August 2023, when the facility matures. Subject to securing additional lender
commitments, the Term Loan allows for incremental increases in facility size up to an aggregate of $30 million, in minimum increments of $10 million, plus an
additional amount such that DXP’s Secured Leverage Ratio (as defined under the Term Loan) would not exceed 3.60 to 1.00. We are required to repay the Term
Loan in connection with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total leverage ratio
is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00. In addition, the Term Loan contains a number of customary restrictive
covenants. The interest rate for the Term Loan was 7.1 % as of December 31, 2017.
The Term Loan requires that the company’s Secured Leverage Ratio, defined as the ratio, as of the last day of any fiscal quarter of consolidated secured debt (net
of restricted cash, not to exceed $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2017, is either equal to or less than
as indicated in the table below:
Fiscal Quarter
December 31, 2017
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
March 31, 2020
June 30, 2020 and each Fiscal Quarter
thereafter
Secured leverage Ratio
5.75:1.00
5.75:1.00
5.50:1.00
5.50:1.00
5.25:1.00
5.25:1.00
5.00:1.00
5.00:1.00
4.75:1.00
4.75:1.00
4.50:1.00
As of December 31, 2017, the Company's consolidated Secured Leverage Ratio was 3.59 to 1.00.
The Term Loan is guaranteed by each of the Company’s direct and indirect material wholly owned subsidiaries, other than any of the Company’s Canadian
subsidiaries and certain other excluded subsidiaries.
The Term Loan is secured by substantially all of the assets of the Company.
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Extinguishment of Previously Existing Credit Facility
As set forth above, on August 29, 2017, the Company terminated its previously existing credit agreement and facility and replaced it with the Term Loan and the
ABL Credit Agreement. The terminated facility was under the Amended and Restated Credit Agreement, dated as of January 2, 2014, by and among the Company,
as borrower, and Wells Fargo Bank, National Association, as issuing lender and administrative agent for other lenders (the “Original Credit Agreement”). This
Original Credit Agreement was subsequently amended five times by the First Amendment to Restated Credit Agreement dated as of August 6, 2015, Second
Amendment to Restated Credit Agreement dated as of September 30, 2015, Third Amendment to Restated Credit Agreement dated as of May 12, 2016, Fourth
Amendment to Restated Credit Agreement dated as of August 15, 2016, and Fifth Amendment to Amended and Restated Credit Agreement dated as of November
28, 2016. A description of the material terms of these terminated agreements can be found in the Company’s most recent Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 31, 2017. In connection with the extinguishment of the previously existing Credit Facility we recorded a $0.6
million write-off of debt issuance costs, which was included in interest expense during the third quarter of 2017.
As of December 31, 2017, the maturities of long-term debt for the next five years and thereafter were as follows ( in
thousands
):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
3,381
3,405
3,436
2,500
2,500
236,875
252,097
NOTE 10 - INCOmE TAXES
The components of income before income taxes were as follows ( in
thousands
):
Years Ended december 31,
2016
2015
2017
Domestic
Foreign
Total income before taxes
$
$
13,183 $
3,709
16,892 $
11,079 $
(1,405)
9,674 $
(42,179)
3,259
(38,920)
The provision for income taxes consisted of the following ( in
thousands
):
Current -
Federal
State
Foreign
Deferred -
Federal
State
Foreign
Years Ended december 31,
2016
2015
2017
$
$
1,400 $
698
2,092
4,190
686
(464)
(4,049)
(3,827)
363 $
5,182
1,499
2,493
9,174
(7,090)
-
(1,934)
(9,024)
150
(902) $
136
602
(164)
4,174
120
(1,607)
2,687
2,523 $
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The difference between income taxes computed at the federal statutory income tax rate (35%) and the provision for income taxes is as follows ( in
thousands
):
Income taxes computed at federal statutory rate
State income taxes, net of federal benefit
Non-tax deductible impairment expense computed at federal statutory
$
rate
Foreign adjustment
Meals and entertainment
Gain on sale of Vertex
Domestic Production Activity Deduction
Research and development tax credit
Foreign tax credit
Valuation Allowance
Tax Reform Deferred Tax Remeasurement
Canadian Acquisition Deferred Tax Liability True Up
Foreign rate difference
Other
$
Years Ended december 31,
2016
2015
2017
5,912 $
152
-
255
422
-
(98)
(641)
-
(791)
(1,294)
(2,180)
(297)
(1,077)
363 $
3,386 $
166
-
140
361
(1,971)
-
(886)
(383)
-
-
-
112
1,598
2,523 $
(13,622)
974
15,765
689
620
-
(1,143)
(1,730)
(921)
-
-
-
(261)
(221)
150
Deferred tax liabilities and assets were comprised of the following ( in
thousands
):
Deferred tax assets:
Goodwill
Allowance for doubtful accounts
Inventories
Accruals
Research and development credit carryforward
Foreign Tax Credit Carryforward
Charitable Contribution Carryforward
Net operating loss carryforward
Capital loss carryforward
Deferred Compensation
Other Accruals
Other
Total deferred tax assets
Less valuation allowance
Total deferred tax asset, net of valuation Deferred tax liabilities :
Intangibles
Property and equipment
Unremitted foreign earnings
Cumulative translation adjustment
Other
Net deferred tax liability
december 31,
2017
2016
2,668 $
1,707
2,365
(61)
1,115
64
559
136
12,225
475
266
65
21,584
(12,220)
9,364
(8,695)
(6,860)
(354)
(67)
(457)
(7,069) $
$
$
64
4,029
2,469
3,944
97
886
64
138
760
18,903
1,881
-
107
33,278
(19,633)
13,645
(10,042)
(12,762)
(354)
-
-
(9,513)
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Contents
At December 31, 2017, the Company had $51.4 million of capital loss carryforward, which will expire in 2021. The Company has recorded a valuation allowance
for nearly all of this carryforward amount. The valuation allowance represents a provision for uncertainty as to the realization of the tax benefits of these
carryforwards and the deferred tax assets that may not be realized.
On December 22, 2017, the Tax Cuts and Jobs Act (“The Act”) was enacted into law. The majority of the provisions signed into law in 2017 do not take effect
until January 1, 2018. The Act is a comprehensive tax reform legislation that contains significant changes to corporate taxation. Provisions on the enacted law
include a permanent reduction of the corporate income tax rate from 35% to 21%, imposing a mandatory one-time tax on un-repatriated accumulated earnings of
foreign subsidiaries, a partial limitation on the deductibility of business interest expense, a limitation on net operating losses to 80% of taxable income each year, a
shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a partial territorial system (along with rules that create a new U.S.
minimum tax on earnings of foreign subsidiaries), and other related provisions to maintain the U.S. tax base.
In accordance with SAB 118 issued by the Securities and Exchange Commission on December 22, 2017, companies are allowed a one year measurement period to
complete the accounting related to The Act. Specifically, SAB 118 permits companies to record a provisional amount which can be remeasured during the
measurement period due to obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enacted date. As a result,
we remeasured our net deferred income tax liabilities by a provisional $1.3 million benefit and a corresponding provisional decrease in the net deferred tax liability
as of December 31, 2017. We are still in the process of analyzing The Act's impact as permitted under SAB 118. The largest impact to the Company being the
remeasurement of deferred taxes due to the U.S. statutory tax rate change. The mandatory repatriation and resulting toll charge on accumulated foreign earnings
and profits has limited impact on the Company as unremitted earnings from non-US jurisdictions is minimal. The Company is provisional in its approach and
assertion that there is no financial statement impact as of December 31, 2017.
Deferred tax liabilities related to intangibles for customer relationships acquired in Canada during 2012 and 2013 were reduced by $2.2 million during the fourth
quarter of 2017 to correct the tax rate used to establish the deferred tax liabilities at the dates of acquisition. The Company evaluated the misstatement of each
period since these acquisitions were completed and concluded the effects were immaterial.
Total deferred tax assets at December 31, 2016 were reduced by an $8.6 million charge recorded during the fourth quarter of 2016 to correct errors of $1.3 million,
$2.7 million and $4.6 million which were recorded during 2013, 2014 and 2015, respectively, due to the Company improperly recognizing a deferred tax asset
related to cumulative translation adjustment losses. The Company evaluated the misstatement of each period and concluded the effects were immaterial.
Therefore, the Company decided to correct the accumulated $8.6 million error in the fourth quarter of 2016. We assessed the materiality of this misstatement and
concluded the misstatement was not material to the results of operations or financial condition for the years ended December 31, 2017, 2016 and 2015.
NOTE 11 - SHARE-bASEd COmPENSATION
Restricted
Stock
Under the restricted stock plans approved by our shareholders, directors, consultants and employees may be awarded shares of DXP’s common stock. The shares
of restricted stock granted to employees and that are outstanding as of December 31, 2017 vest in accordance with one of the following vesting schedules: 100%
one year after date of grant; 33.3% each year for three years after date of grant; 20% each year for five years after date of grant; or 10% each year for ten years
after date of grant. The shares of restricted stock granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock
awards is measured based upon the closing prices of DXP’s common stock on the grant dates and is recognized as compensation expense over the vesting period of
the awards. Once restricted stock vests, new shares of the Company’s stock are issued. At December 31, 2017, 401,223 shares were available for future grant.
Changes in restricted stock for the twelve months ended December 31, 2017 were as follows:
Non-vested at December 31, 2016
Granted
Forfeited
Vested
Non-vested at December 31, 2017
Number of
Shares
Weighted Average
Grant Price
143,380 $
18,672 $
(298) $
(83,853) $
77,901 $
26.76
34.07
59.60
24.92
30.36
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Changes in restricted stock for the twelve months ended December 31, 2016 were as follows:
Non-vested at December 31, 2015
Granted
Forfeited
Vested
Non-vested at December 31, 2016
Number of
Shares
Weighted Average
Grant Price
137,507 $
108,553 $
(39,000) $
(63,680) $
143,380 $
54.58
17.07
65.41
46.65
26.76
Changes in restricted stock for the twelve months ended December 31, 2015 were as follows:
Non-vested at December 31, 2014
Granted
Forfeited
Vested
Non-vested at December 31, 2015
Number of
Shares
Weighted Average
Grant Price
179,942 $
35,821 $
(20,855) $
(57,401) $
137,507 $
52.71
40.95
41.34
44.99
54.58
Compensation expense, associated with restricted stock, recognized in the years ended December 31, 2017, 2016 and 2015 was $1.7 million, $2.0 million, and $3.0
million, respectively. Related income tax benefits recognized in earnings in the years ended December 31, 2017, 2016 and 2015 were approximately $0.7 million,
$0.8 million and $1.2 million, respectively. Unrecognized compensation expense under the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan at December 31,
2017, December 31, 2016 and December 31, 2015 was $1.6 million, $2.7 million and $4.9 million, respectively. As of December 31, 2017, the weighted average
period over which the unrecognized compensation expense is expected to be recognized is 15.2 months.
NOTE 12 - EARNINgS PER SHARE dATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed
including the impacts of all potentially dilutive securities. For the year ended December 31, 2015, we excluded the potential dilution of convertible preferred stock,
which could be converted into 840,000 shares because they would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated ( in
thousands,
except
per
share
data
):
Basic:
Weighted average shares outstanding
Net income (loss) attributable to DXP Enterprises, Inc.
Convertible preferred stock dividend
Net income (loss) attributable to common shareholders
Per share amount
Diluted:
Weighted average shares outstanding
Assumed conversion of convertible preferred stock
Total dilutive shares
Net income (loss) attributable to common shareholders
Convertible preferred stock dividend
Net income (loss) attributable to DXP Enterprises, Inc. for diluted earnings per share
Per share amount
66
december 31,
2017
2016
2015
17,400
15,042
14,423
$
$
$
$
$
$
16,888 $
(90)
16,798 $
0.97 $
17,400
840
18,240
16,798 $
90
16,888 $
0.93 $
7,702 $
(90)
7,612 $
0.51 $
15,042
840
15,882
7,612 $
90
7,702 $
0.49 $
(38,536)
(90)
(38,626)
(2.68)
14,423
-
14,423
(38,626)
-
(38,626)
(2.68)
Table
of
Contents
Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding during the period and
excludes dilutive securities. Diluted earnings per share reflects the potential dilution that could occur if the preferred stock was converted into common stock.
Restricted stock is considered a participating security and is included in the computation of basic earnings per share as if vested. Because holders of Preferred
Stock do not participate in losses, the loss was not allocated to Preferred Stock for fiscal year 2015. The Preferred Stock is convertible into 840,000 shares of
common stock.
NOTE 13 – CAPITAl STOCK
The Company has Series A and Series B preferred stock of 1,122 shares and 15,000 shares outstanding as of year-end 2017, 2016 and 2015, respectively. The
preferred stock did not have any activity during 2017, 2016 and 2015. The activity related to outstanding common stock and common stock held in treasury was as
follows:
Common Stock:
Balance, beginning of period
Issuance of shares for compensation net of withholding
Issuance of common stock related to equity distribution agreements
Balance, end of period
Treasury Shares:
Balance, beginning of period
Issuance of treasury shares for acquisition
Purchase of treasury shares
Issuance of treasury shares upon vesting of restricted shares net of withholding
Balance, end of period
NOTE 14 - buSINESS ACQuISITIONS
2017
december 31,
2016
Quantity (in thousands)
14,390
84
2,723
17,197
17,197
119
-
17,316
2017
december 31,
2016
Quantity (in thousands)
264
-
-
-
-
-
(264)
-
-
-
2015
14,375
15
-
14,390
2015
280
(149)
191
(58)
264
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 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. Goodwill 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 our acquisitions with the operations of DXP and any intangible assets that do not qualify for separate recognition such as the
assembled workforce.
On April 1, 2015, the Company completed the acquisition of all of the equity interests of Tool Supply, Inc. (“TSI”) to expand DXP’s cutting tools offering in the
Northwest region of the United States. DXP paid approximately $5.0 million for TSI, which was borrowed under the Company’s credit facility in effect at the date
of acquisition. Estimated goodwill of $2.9 million and intangible assets of $2.0 were recognized for this acquisition. All of the estimated goodwill is included in the
Service Centers segment. None of the estimated goodwill or intangible assets are expected to be tax deductible.
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On September 1, 2015, the Company completed the acquisition of all of the equity interests of Cortech Engineering, LLC (“Cortech”) to expand DXP’s rotating
equipment offering to the Western seaboard. DXP paid approximately $14.9 million for Cortech. The purchase was financed with borrowings under the
Company’s credit facility in effect at the date of acquisition, as well as by issuing $4.4 million (148.8 thousand shares) of DXP common stock. Estimated
intangible assets of $5.2 were recognized for this acquisition. In the first quarter of 2016, DXP adjusted the deferred tax liability associated with the acquisition by
$151 thousand, which resulted in an adjusted goodwill balance of $8.7 million. All of the estimated goodwill is included in the Service Centers segment.
Approximately $4.5 million of the goodwill and intangible assets are not deductible for tax purposes.
The value assigned to the non-compete agreements and customer relationships for business acquisitions 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.
For the twelve months ended December 31, 2016, businesses acquired during 2015 contributed sales of $25.2 million and earnings (loss) before taxes of
approximately $(0.3) million.
The pro forma unaudited results of operations for the Company on a consolidated basis for the twelve months ended December 31, 2017 and 2016, assuming the
divestiture of a business completed in 2016 were consummated as of January 1, 2016 are as follows ( in
millions,
except
per
share
amounts
):
Net sales
Net income attributable to DXP
Enterprises, Inc.
Per share data
Basic earnings
Diluted earnings
$
$
$
$
Years Ended
december 31,
2017
2016
1,006.8 $
939.4
16.9 $
0.97 $
0.93 $
5.5
0.36
0.35
The pro forma unaudited results of operations for the Company on a consolidated basis for the twelve months ended December 31, 2016 and 2015, assuming the
acquisition of businesses completed in 2015 and divestiture of a business completed in 2016 (previously discussed in Item 1, Business
) was consummated as of
January 1, 2015 are as follows ( in
millions,
except
per
share
amounts
.
Years Ended
december 31,
2016
2015
Net sales
Net income (loss) attributable to DXP Enterprises, Inc.
Per share data
Basic earnings (loss)
Diluted earnings (loss)
$
$
$
$
939.4 $
5.5 $
0.36 $
0.35 $
1,228.9
(40.7)
(2.83)
(2.83)
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NOTE 15 - COmmITmENTS ANd CONTINgENCIES
The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of December 31,
2017, for non-cancelable leases are as follows ( in
thousands
):
2018
2019
2020
2021
2022
Thereafter
$
19,419
15,002
11,492
9,435
6,637
3,441
Rental expense for operating leases was $27.7 million, $27.6 million and $32.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of
these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP’s consolidated
financial position, cash flows, or results of operations.
NOTE 16 - EmPlOYEE bENEFIT PlANS
The Company offers a 401(k) plan which is eligible to substantially all employees in the United States. For the year ended December 31, 2015 as well as the first
quarter of 2016, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $0.2
million, $0.4 million, and $2.6 million to the 401(k) plan in the years ended December 31, 2017, 2016, and 2015, respectively. In 2016 the Company suspended
indefinitely the employee match program. The Company contributed $0.4 million in the first quarter of 2016 to the 401(k ) plan. No other contributions were
made during the remainder of 2016. The Company reinstated the employee match program in October 2017 contributing $0.2 million to the 401(k) plan for 2017.
NOTE 17 - 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.
During 2012 and 2013, the Company acquired four entities that operate in Canada. These Canadian entities maintain financial data in Canadian dollars. Upon
consolidation, the Company translates the financial data from these foreign subsidiaries into U.S. dollars and records cumulative translation adjustments in other
comprehensive income. The Company recorded $(1.2) million, $(7.7) million and ($4.9) million in translation adjustments, net of tax, in other comprehensive
income during the years ended December 31, 2017, 2016 and 2015, respectively. Comprehensive income for the year ended December 31, 2016 was reduced by an
$8.6 million charge recorded during the fourth quarter of 2016 to correct errors which accumulated during 2013, 2014 and 2015 due to the Company improperly
recognizing an $8.6 million deferred tax asset on unrealized foreign currency losses not expected to be realized within one year. We assessed the materiality of this
misstatement and concluded the misstatement was not material to the results of operations or financial condition for the years ended December 31, 2016 and 2015.
NOTE 18 – SEgmENT ANd gEOgRAPHICAl REPORTINg
The Company’s reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is
engaged in providing maintenance, MRO products and equipment, including logistics capabilities, to industrial customers. The Service Centers segment provides a
wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, fastener, industrial supply, safety products
and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, remanufactures pumps and
manufactures branded private label pumps. The Supply Chain Services segment manages all or part of a customer's MRO products supply chain, including
warehouse and inventory management.
The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the determination of
business segment information. Sales are shown net of intersegment eliminations.
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Business
Segmented
Financial
Information
The following table sets out financial information relating the Company’s segments ( in
thousands
):
Years Ended
december 31,
2017
Sales
Operating income for reportable segments, excluding amortization
Identifiable assets at year end
Capital expenditures
Depreciation
Amortization
Interest expense
2016
Sales
Operating income for reportable segments, excluding impairment expense
Identifiable assets at year end
Capital expenditures
Proceeds from sale of fixed assets
Depreciation
Amortization
Interest expense
2015
Sales
Operating income for reportable segments, excluding impairment expense
Identifiable assets at year end
Capital expenditures
Depreciation
Amortization
Interest expense
Impairment expense by segment
Service
Centers
Innovative
Pumping
Solutions
Supply
Chain
Services
641,275 $
63,250
385,744
1,076
5,162
8,989
9,712
621,007 $
47,634
370,261
447
(1,038)
6,520
9,152
9,290
826,588 $
78,170
451,333
3,185
7,734
10,334
2,967
15,842
204,030 $
11,423
172,538
1,488
4,198
7,194
5,352
187,124 $
9,867
175,198
3,827
(168)
3,834
7,826
4,422
254,829 $
21,584
159,365
8,383
2,930
8,406
6,881
52,893
161,477 $
15,451
59,942
82
103
1,083
1,990
153,961 $
15,449
44,796
129
-
126
1,083
1,852
165,626 $
14,213
50,012
604
227
1,881
1,084
-
Total
1,006,782
90,124
618,224
2,646
9,463
17,266
17,054
962,092
72,950
590,255
4,403
(1,206)
10,480
18,061
15,564
1,247,043
113,967
660,710
12,172
10,891
20,621
10,932
68,735
$
$
$
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Operating income for reportable segments, excluding impairment
expense
Adjustments for:
B27 settlement
Impairment expense
Amortization of intangibles
Corporate and other expense, net
Total operating income (loss)
Interest expense
Other expenses (income), net
Income (loss) before income taxes
Years Ended december 31,
2017
2016
2015
$
90,124 $
72,950 $
113,967
-
-
17,266
39,368
33,490
17,054
(456)
16,892 $
-
-
18,061
35,557
19,332
15,564
(5,906)
9,674 $
7,348
68,735
20,621
45,179
(27,916)
10,932
72
(38,920)
$
The Company had capital expenditures at Corporate of $0.2 million, $0.5 million, and $1.8 million for the years ended December 31, 2017, 2016, and 2015,
respectively. The Company had identifiable assets at Corporate of $19.4 million, $18.3 million, and $23.3 million as of December 31, 2017, 2016, and 2015,
respectively. Corporate depreciation was $1.8 million, $1.4 million, and $1.7 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Geographical
Information
Revenues are presented in geographic area based on location of the facility shipping products or providing services. Long-lived assets are based on physical
locations and are comprised of the net book value of property.
The Company’s revenues and property and equipment by geographical location are as follows (in
thousands)
:
Revenues
United States
Canada
Total
Property
and
Equipment,
net
United States
Canada
Total
Years Ended december 31,
2016
2015
2017
$
$
902,636 $
104,146
1,006,782 $
873,926 $
88,166
962,092 $
1,119,210
127,833
1,247,043
As of december 31,
2017
2016
$
$
42,683 $
10,654
53,337 $
48,635
12,172
60,807
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NOTE 19 - QuARTERlY FINANCIAl INFORmATION (unaudited)
Summarized quarterly financial information for the years ended December 31, 2017, 2016 and 2015 is as follows ( in
millions,
except
per
share
data
):
2017
Sales
Gross profit
Net income (loss)
Net income (loss) attributable to DXP Enterprises, Inc.
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
2016
Sales
Gross profit
Net income (loss)
Net income (loss) attributable to DXP Enterprises, Inc.
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
2015
Sales
Gross profit
Impairment expense
Net income (loss)
Net income (loss) attributable to DXP Enterprises, Inc.
Earnings (loss) per share - basic
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
238.5 $
64.5
3.1
3.0
0.18 $
0.17 $
253.6 $
68.8
(5.2)
(5.1)
(0.36) $
(0.36) $
341.6 $
98.1
-
9.7
9.7
0.67 $
250.7 $
68.9
4.1
4.0
0.24 $
0.23 $
256.2 $
71.6
5.1
5.1
0.36 $
0.34 $
323.7 $
91.3
-
7.2
7.2
0.50 $
251.9 $
67.0
3.0
2.9
0.17 $
0.16 $
230.0 $
63.8
0.1
0.2
0.02 $
0.02 $
303.1 $
85.7
58.9
(52.7)
(52.4)
(3.64) $
265.7
71.2
6.6
6.6
0.38
0.37
222.3
60.6
7.1
7.4
0.44
0.42
278.6
76.9
9.8
(3.2)
(3.0)
(0.20)
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.
NOTE 20 – RElATEd PARTIES
The Board uses policies and procedures, to be applied by the Audit Committee of the Board, for review, approval or ratification of any transactions with related
persons. Those policies and procedures will apply to any proposed transactions in which DXP is a participant, the amount involved exceeds $120,000 and any
director, executive officer or significant shareholder or any immediate family member of such a person has a direct or material indirect interest. Any related party
transaction will be reviewed by the Audit Committee of the Board of Directors to determine, among other things, the benefits of any transaction to DXP, the
availability of other sources of comparable products or services and whether the terms of the proposed transaction are comparable to those provided to unrelated
third parties.
For the year ended December 31, 2017, the Company paid approximately $1.4 million in lease expenses to entities controlled by the Company’s Chief Executive
Officer, David Little, $1.2 million in lease expenses to an entity in which a retired senior vice president holds a minority interest, and $0.3 million in lease expenses
to an entity in which a retired senior vice president holds an interest, and the children of David Little hold a majority interest. The Company employs six people
who work for David Little, and Mr. Little reimbursed the Company for the cost. Total cost to Mr. Little for the year ended December 31, 2017 for payroll, related
payroll expenses, vehicles, fuel and supplies was $0.4 million. The Company employs two sons and two sons-in-laws of executives. Total wages and other
compensation for 2017 was approximately $1.3 million for the four employees.
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NOTE 21 – SubSEQuENT EVENTS
On January 1, 2018, the Company completed the acquisition of Application Specialties, Inc. (“ASI”), a distributor of cutting tools, abrasives, coolants and machine
shop supplies. DXP paid approximately $11.5 million for ASI. The purchase was financed with $10.6 million of cash on hand as well as issuing $0.9 million of
DXP common stock.
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, 2017, of the design and operation of DXP’s disclosure controls and procedures pursuant to Exchange Act Rules
13a-15e and 15d-15e. 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, (the “Exchange Act”) 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 Exchange Act, 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 not effective as of the end
of the period covered by this Report due to material weaknesses in internal control over financial reporting as further discussed below.
mANAgEmENT’S REPORT ON INTERNAl CONTROl OVER FINANCIAl REPORTINg
DXP Enterprises, Inc.’s management is responsible for establishing and maintaining adequate internal control over financial reporting. DXP Enterprises, Inc.’s
internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this
risk.
Management has used the 2013 framework set forth in the report entitled “Internal Control – Integrated Framework” published by the Committee of Sponsoring
Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has
concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2017 due to material weaknesses in internal control
over financial reporting as further discussed below. Management’s remediation plans are also discussed below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
We had material weaknesses in our control environment and monitoring to support the financial reporting process.
The Company’s control environment did not sufficiently promote effective internal control over financial reporting; specifically, the following factors relating to
the control environment:
Management did not maintain effective management review controls over the monitoring and review of certain accounts.
Management did not effectively design, document nor monitor (review, evaluate and assess) the key internal control activities that provide the accounting
information contained in the Company’s financial statements.
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We had material weaknesses related to information technology general controls (“ITGC”). We did not maintain effective ITGC, which are required to support
automated controls and information technology (“IT”) functionality; therefore, automated controls and IT functionality were ineffective.
Remediation Plans
During the second quarter of 2018 we will engage third party accounting consultants to assist us with our efforts to maintain adequate and effective internal control
over financial reporting, to implement measures designed to improve our financial closing process and enhance certain internal controls, processes and procedures,
including ITGC. Specifically, the Company will undertake the following steps to remediate the deficiencies underlying these material weaknesses:
·
·
In connection with the remediation of the material weakness in our control activities, we will enhance our policies relating to the design, documentation,
review, monitoring and approval of management review controls and other key internal control activities that provide the accounting information
contained in our financial statements.
To enhance our information technology controls, we will implement systems and processes in order to create an effective segregation of duties, restrict
user access to applications and improve output controls.
We are committed to maintaining a strong internal control environment, and believe that these remediation efforts represent significant improvements in our
control environment. The identified material weaknesses in internal control will not be considered fully remediated until the internal controls over these areas have
been in operation for a sufficient period of time for our management to conclude that the material weakness has been fully remediated. The Company will continue
its efforts to implement and test the new controls in order to make this final determination.
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Remediated Material Weakness
As of the filing of this Annual Report on Form 10-K, our management has completed the implementation of our remediation efforts related to the material
weakness over the accounting for income taxes which included the following:
Engaged third party professionals and hired an experienced tax director to strengthen tax accounting review procedures in the United States and Canada.
·
· Developed and implemented enhanced policies and procedures relating to tax account reconciliations and analysis.
·
Implemented close procedures at interim periods to allow for more timely and increased oversight by our management of the calculation and reporting of
certain tax balances.
Reassessed the design of our tax review controls to identify areas where enhanced precision will help detect and prevent material misstatements.
·
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Changes in Internal Control over Financial Reporting
Except as described above, there are no changes in our internal control over financial reporting that occurred during the year ended December 31, 2017 that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Moss Adams LLP, the independent registered public
accounting firm, which also has audited the Company’s Consolidated Financial Statements included in this Annual Report on Form 10-K.
/s/ David R. Little
David R. Little
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Kent Yee
Kent Yee
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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ITEm 9b. Other Information
None.
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 2018 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 and Related Stockholder Matters
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 Accounting Fees and Services.
The information required by this item will be included in the Proxy Statement and is hereby incorporated by reference.
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ITEm 15. Exhibits, Financial Statement Schedules.
(a) documents included in this Report:
PART IV
1.
2.
3.
Financial Statements – See Part II, Item 8 of this Report.
Financial Statement Schedules - All other schedules have been omitted since the required information is not applicable or significant or is included in
the Consolidated Financial Statements or notes thereto.
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
4.2
4.3
4.4
4.5
+10.1
+10.2
+10.3
+10.4
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, as amended on July 27, 2011.
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).
See Exhibit 3.1 for provisions of the Company's Restated Articles of Incorporation, as amended, defining the rights of security holders.
See Exhibit 3.2 for provisions of the Company's Bylaws defining the rights of security holders.
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 Commission on May 6, 2010).
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).
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 (File No. 000-21513:04663259) for the fiscal year ended December 31, 2003, filed with
the Commission on March 11, 2004).
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 (File No. 000-21513:04783822) for the quarterly period ended March 31, 2004, filed with the
Commission on May 6, 2004).
DXP Enterprises, Inc. 2005 Restricted Stock Plan (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K (File No.
000-21513:06677037) for the fiscal year ended December 31, 2005, (filed with the Commission on March 10, 2006).
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 (File No. 000-21513:06979954), filed with the Commission
on July 26, 2006).
+10.5
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 (File No. 000-21513:06979954), filed with the Commission on July 26, 2006).
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10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
16.1
16.2
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 (File No. 000-21513:09846339) filed with the Commission on May 22,
2009).
Amendment Number One to Employment Agreement dated effective June 1, 2004 between DXP Enterprises, Inc. and Mac McConnell (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 000-21513:11823072) filed with the Commission on May 9,
2011).
Amendment Two to David Little Equity Incentive Program effective May 1, 2013 (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K (File No. 000-21513:11823072) filed with the Commission on May 3, 2013).
Purchase Agreement, dated as of December 9, 2013, whereby DXP Enterprises, Inc. agreed to acquire all of the equity securities and units of B27, LLC
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K filed with the Commission on December 10, 2013).
DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2016 (File No. 000-21513:161832364) filed with the Commission on August 15, 2016).
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2016 (File No. 000-21513:161832364) filed with the Commission on August 15, 2016).
Term Loan and Security Agreement Dated as of August 29, 2017 by and among DXP Enterprises, Inc., Borrower and the Other Persons Party hereto
from time to time, as Guarantors, and Goldman Sachs Bank USA, as Administrative Agent and Certain Financial Institutions, as Lenders (incorporated
by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 000-
21513:171191516) filed with the Commission on November 9, 2017).
Loan and Security Agreement Dated as of August 29, 2017 by and among DXP Enterprises, Inc., Pump-PMI, LLC, PMI Operating Company, LTD.,
PMI Investment, LLC, Integrated Flow Solutions, LLC, DXP Holdings, Inc., Best Holding, LLC, Best Equipment Service & Sales Company, LLC,
B27 Holdings Corp., B27, LLC, B27 Resources, Inc. and Pumpworks 610, LLC as US Borrowers, DXP Canada Enterprises, LTD., Industrial
Paramedic Services, LTD., HSE Integrated LTD., and National Process Equipment Inc., as Canadian Borrowers and the Other Persons Party hereto
from time to time, as Guarantors, and Bank of America, N.A., as agent and Certain Financial Institutions as Lenders, Bank of America, N.A. as Sole
Lead Arranger and Sole Bookrunner and BMO Capital Markets Corp., as Documentation Agent (incorporated by reference to Exhibit 10.2 to
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 000-21513:171191516) filed with the
Commission on November 9, 2017).
Letter of Grant Thornton LLP to the SEC dated May 24, 2016 (incorporated by reference to Exhibit 16.1 to Registrant’s current report on Form 8-K
(File No. 000-21513:161671171) filed with the Commission on May 24, 2016).
Letter of Hein & Associates LLP to the SEC dated November 17, 2017 (incorporated by reference to Exhibit 16.1 to Registrant’s current report on
Form 8-K (File No. 000-21513:171210595) filed with the Commission on November 17, 2017).
*21.1
Subsidiaries of the Company.
*23.1
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.
*23.2
Consent of Hein and Associates LLP, Independent Registered Public Accounting Firm.
*23.3
Consent of Grant Thornton 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.
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*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
*32.2
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.
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.
101
Interactive Data Files
Exhibits designated by the symbol * are filed with this Report. 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.
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ITEm 16. Form 10-K Summary.
None.
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 28, 2018
Each person whose signature appears below appoints David R. Little, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-
K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, with full power and
authority to said attorney-in-fact and agent to do and perform each and every act whatsoever that is necessary, appropriate or advisable in connection with any or
all of the above-described matters and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent or his substitute, may lawfully do or cause to be done by virtue thereof.
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/Kent Yee
Kent Yee
/s/Mac McConnell
Mac McConnell
/s/Cletus Davis
Cletus Davis
/s/Timothy P. Halter
Timothy P. Halter
/s/David Patton
David Patton
Chairman of the Board, President
Chief Executive Officer and Director
(Principal Executive Officer)
Senior Vice President/Finance and
Chief Financial Officer
(Principal Financial Officer)
Senior Vice President/Finance,
Chief Accounting Officer and Secretary
(Principal Accounting Officer)
Director
Director
Director
81
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
Exhibit 21.1
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
DXP Canada Enterprises, Ltd., a British Columbia Corporation
HSE Integrated, Ltd, an Alberta Corporation
Industrial Paramedic Services, Ltd., an Alberta Corporation
DXP Holdings, Inc., a Texas corporation
National Process Equipment, Inc. , an Alberta Corporation
Best Equipment Service and Sales Company, LLC, a Delaware limited liability corporation
Integrated Flow Solutions, LLC, a Delaware limited liability corporation
B27, LLC, a Delaware limited liability corporation
Best Holdings, LLC, a Delaware limited liability corporation
Application Specialties, Inc., a Washington corporation
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement s
(Forms S-8 No. 333-134606, 333-123698, 333-92875, 333-92877 and 333-213226,
and Forms S-3 No. 333-134603, 333-188907, and 333-213227) of our reports dated March 27, 2018, relating to the consolidated financial statements of DXP
Enterprises, Inc. and the effectiveness of internal control over financial reporting of DXP Enterprises, Inc. (which report expresses an adverse opinion), appearing
in this Annual Report (Form 10-K) for the year ended December 31, 2017.
/s/ Moss Adams LLP
Houston, Texas
March 28, 2018
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We have issued our report dated February 29, 2016 with respect to the consolidated financial statements of DXP Enterprises, Inc. as of December 31, 2015 and for
the year then ended, included in this Annual Report of DXP Enterprises, Inc. on Form 10-K for the year ended December 31, 2017. We consent to the
incorporation by reference of said report in the Registration Statements of DXP Enterprises, Inc. on Forms S-3 (File No. 333-134603, File No. 333-188907, and
File No. 333-213227) and on Forms S-8 (File No. 333-134606, File No. 333-123698, File No. 333-92875, File No. 333-92877, and File No. 333-213226).
Hein & Associates LLP
Houston, Texas
March 28, 2018
Exhibit 23.3
CONSENT OF INdEPENdENT REgISTEREd PublIC ACCOuNTINg FIRm
We have issued our report dated February 29, 2016 with respect to the consolidated financial statements of DXP Enterprises, Inc. for the year ended December 31,
2015, included in this Annual Report of DXP Enterprises, Inc. on Form 10-K for the year ended December 31, 2017. We consent to the incorporation by reference
of said report in the Registration Statements of DXP Enterprises, Inc. on Forms S-8 (File No. 333-134606, File No. 333-123698, File No. 333-92875, File No. 333-
92877, and File No. 333-213226) and on Forms S-3 (File No. 333-134603, File No. 333-188907, and File No. 333-213227).
/s/ GRANT THORNTON LLP
Houston, Texas
March 28, 2018
Exhibit 31.1
I, David R. Little, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of DXP Enterprises, Inc.;
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;
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;
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 28, 2018
/s/ David R. Little
David R. Little
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Kent Yee, 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 28, 2018
/s/ Kent Yee
Kent Yee
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, 2017 (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 28, 2018
/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, 2017 (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 28, 2018
/s/Kent Yee
Kent Yee
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.