NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
DXP Enterprises, Inc. together with its subsidiaries (collectively “DXP,” “Company,” “us,” “we,” or “our”) was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to energy and industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into
three
business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). See
Note 19 - Segment and Geographical Reporting
for discussion of the business segments.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES
Basis of Presentation
The Company’s financial statements are prepared in accordance with 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, 2018
, the total assets of the VIE were approximately
$5.4 million
including approximately
$4.5 million
of fixed assets. DXP is the primary customer of the VIE. Consolidation of the VIE decreased cost of sales by approximately
$0.7 million
for the year ended
December 31, 2018
and increased cost of sales by approximately
$0.6 million
for the year ended
December 31, 2017
, respectively. The Company recognized a related income tax benefit of
$46 thousand
and
$0.2 million
related to the VIE for the years ended
December 31, 2018
and
December 31, 2017
, respectively. As of
December 31, 2018
, 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 the consolidated statements of operations and comprehensive 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.
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
2018
,
2017
and
2016
were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance at beginning of year
|
9,015
|
|
|
8,160
|
|
|
9,364
|
|
|
Charged to costs and expenses
|
2,368
|
|
|
3,367
|
|
|
180
|
|
|
Charged to other accounts
|
(86
|
)
|
(2)
|
22
|
|
(3)
|
(17
|
)
|
(2)
|
Deductions
|
(1,171
|
)
|
(1)
|
(2,534
|
)
|
(1)
|
(1,367
|
)
|
(1)
|
Balance at end of year
|
$
|
10,126
|
|
|
$
|
9,015
|
|
|
$
|
8,160
|
|
|
(1)
Uncollectible accounts written off, net of recoveries
(2)
Includes allowance for doubtful accounts from acquisitions and divestiture
(3)
Primarily due to translation adjustments
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.
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
|
20-39 years
|
Building improvements
|
10-20 years
|
Furniture, fixtures and equipment
|
3-20 years
|
Leasehold improvements
|
Shorter of estimated useful life or related lease term
|
Impairment of Goodwill and Other 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.
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 quantitative test for that reporting unit. Should the reporting unit's carrying amount exceed the fair value, then an impairment charge for the excess would be recognized. The impairment charge is limited to the amount of goodwill allocated to the reporting unit, and goodwill will not be reduced below zero.
Impairment of Long-Lived Assets, Excluding Goodwill
The Company tests long-lived assets or asset groups for recoverability 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 2018, 2017 and 2016.
Revenue Recognition
The Company fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed. This typically occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin. Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by the new standard. Under this method, revenues are recognized as costs 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. The typical time span of these contracts is approximately
one
to
two
years.
The Service Centers segment provides a wide range of maintenance, repair and operating (MRO) products, equipment and integrated services, including logistics capabilities, to industrial customers. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management services. Revenue is recognized upon the completion of our performance obligation(s) under the sales agreement. The majority of the Service Centers and Supply Chain Services segment revenues originate from the satisfaction of a single performance obligation, the delivery of products. Revenues are recognized when an agreement is in place, the performance obligations under the contract have been identified, and the price or consideration to be received is fixed and allocated to the performance obligation(s) in the contract. We believe our performance obligation has been satisfied when title passes to the customer or services have been rendered under the contract. 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, 2018 and 2017 was approximately
$2.3 million
and
$2.7 million
, respectively.
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.
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.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and foreign currency translation adjustments. 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 year ended December 31, 2016.
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.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
Compensation - Stock Compensation.
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 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 adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Consolidated Financial Statements.
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 adopted this ASU early on December 31, 2017. The Company's annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units' goodwill, determined a quantitative impairment test was not necessary. Therefore the adoption of this standard did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
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. The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Consolidated Financial Statements. As discussed in
Note 15 - Business Acquisitions
, the Company acquired Application Specialties, Inc. in January 2018. Application Specialties, Inc. met the definition of a business under the new guidance and goodwill was recorded.
Statement of Cash Flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Consolidated Financial Statements.
Financial Instruments.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities.
This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.
Revenue Recognition.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement, as amended by ASU 2015-14, was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
The Company elected the modified retrospective method and adopted the new revenue guidance effective January 1, 2018, with no impact to the opening retained earnings.
Our accounting for contracts with customers under the new revenue recognition standard was consistent with the Company's previous revenue recognition model, whereby revenue is recognized primarily on the date products are shipped to the customer. The ASU also requires expanded qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, significant judgments and accounting policy.
The adoption of the new standard did not have a material impact on the Company's Consolidated Financial Statements. See
Note 4 - Revenue Recognition
.
Accounting Pronouncements Not Yet Adopted
Intangibles-Goodwill and Other.
In August 2018, the FASB issued ASU No. 2018-15,
Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
based on a consensus of the FASB’s Emerging Issues Task Force (EITF) that requires implementation costs incurred by customers in cloud computing arrangements (CCAs) to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40, “Intangibles-Goodwill and Other-Internal-Use Software”. The ASU does not affect the accounting by cloud service providers, other software vendors or customers’ accounting for software licensing arrangements. The ASU will require companies to recognize
deferred implementation costs to expense over the ‘term of the hosting arrangement’. Under the ASU, the term of the hosting arrangement comprises the noncancellable period of the CCA plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which exercise of the option is controlled by the vendor. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, and we will continue to assess the standard and make a determination later.
Fair Value Measurement.
In August 2018, the FASB issued ASU 2018-13:
Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the disclosure requirements. The new standard will not have an impact on our results of operations, but it will significantly modify our disclosures around fair value measurements.
Financial Instruments – Credit Losses.
In June 2016, the FASB issued ASU 2016-13:
Financial Instruments – Credit Losses,
which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect, if any, that the guidance will have on the Company's Consolidated Financial Statements and related disclosures.
Leases.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)
as modified by subsequently issued ASUs 2018-01, 2018-10, 2018-11 and 2018-20. The update requires organizations that lease assets ("lessees") to recognize the assets and liabilities for 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 was permitted.
In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements (Topic 842). ASU 2018-11 provides additional relief in the comparative reporting requirements for initial adoption of ASC 842. Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 provides an additional transition method to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date (such as January 1, 2019, for calendar year-end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.
The Company will adopt the standard effective January 1, 2019. We have elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and we have elected to apply the following practical expedients and accounting policy elections.
We have elected a package of transition expedients that allows us to forgo reassessing certain conclusions reached under ASC 840 which must be elected together. All expedients in this package are applied together for all leases that commenced before the effective date, January 1, 2019, of ASC 842. As a result, in transitioning to ASC 842, for existing leases, we will continue to use judgments made under ASC 840 related to embedded leases, lease classification and accounting for initial direct costs.
In addition, we have chosen, as an accounting policy election by class of underlying asset, not to separate nonlease components from the associated lease component for three of our leased asset classes: Vehicles, Office Equipment and Manufacturing Equipment. As a result, for classes of Vehicles, Office Equipment and Manufacturing Equipment, we will account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
For short-term leases as defined under ASC 842, we have elected short-term lease exception pursuant to ASC 842 to two classes of our assets to which the right of use relates: Buildings and Office Equipment. We will not recognize a lease liability or right of use asset on our consolidated balance sheets for Buildings and Office Equipment with an original lease term of twelve months or less. Instead, we will recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred and will disclose in the notes to the consolidated financial statements its short-term lease expense.
The new standard did have a material impact on our consolidated balance sheets related to recording right-of-use assets and the corresponding lease liabilities for our inventory of operating leases. In January 2019, we recorded a ROU Asset and total lease obligations liability of approximately
$68 million
, each, with an offset to Retained Earnings as a Cumulative Effect Adjustment. We do not expect the new standard to have a material impact on our consolidated statements of operations and cash flows.
NOTE 4 - REVENUE RECOGNTION
In May 2014, the FASB issued ASU 2014-9,
Revenue from Contracts with Customers
, and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-8, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The core principle of this new revenue recognition guidance is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance defines a five-step process to achieve this core principle. The new guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance provided for two transition methods, a full retrospective approach and a modified retrospective approach.
On January 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method with no impact to opening retained earnings and determined there were no changes required to its reported revenue amounts for prior periods as a result of the adoption. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while comparative prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods. The Company has enhanced its disclosures of revenue to comply with the new guidance.
Overview
The Company's primary source of revenue is the sale of products, and service to energy and industrial customers. The Company is organized into
three
business segments: Service Centers, Supply Chain Services and Innovative Pumping Solutions.
Revenues are recognized when a contract is in place, the performance obligations under the contract have been identified, and the price or consideration to be received is fixed and allocated to the performance obligation(s) in the contract. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. The Company recognizes revenue upon the satisfaction of our performance obligation(s) under its contracts. The timing of revenue recognition varies for the revenue streams described in more detail below. In general, the timing of revenue recognition includes recognition of revenue over time as services are being performed as well as recognition of revenue at a point in time, for delivery of products. Revenues are recorded net of sales taxes. The revenue streams described below cross reporting segments in some instances, but the categories presented have similar products, customer class and timing of cash flows and revenue recognition.
Inventory management services
The Supply Chain Services segment is engaged in providing a wide variety of inventory management services including Service Teams, Sales Engineers, Customer Service Support, Service Center Support and performance Reporting and Communication. These services represent a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer over the contract period, and therefore qualify as a single (combined) performance obligation that is satisfied over time. The customer simultaneously receives and consumes the benefits of our services as they are provided by us. Revenue associated with Inventory Management Services is recognized over the service period.
The transaction price for the inventory management services do not include any consideration that is variable in nature. Accordingly, the transaction price is based on the amount the Company has a right to invoice the customer under the terms of the contract and on the company’s estimate of the standalone sales price for these services at the initiation of the contract. The standalone sales price is established based on the anticipated cost of performing these services, plus the Company’s anticipated profit margin for inventory management services.
Product Sales
The majority of the Service Centers segment and the Supply Chain Services segment revenue originates from the satisfaction of a single performance obligation, the delivery of products. The IPS segment also sells its customers certain products and supplies, however, most of its revenue is generated through pump manufacturing and fabrication described below. We often establish product and service agreements with clients. However, these product and service agreements do not specify the individual goods or services that will ultimately be purchased by the customer. Rather, the product and service agreement establishes an agreement to stand-
ready to provide future products and services when they are ordered and therefore is not a contract for revenue recognition purposes under ASC 606. The memorandum of understanding, purchase order or invoice, which lists the goods or services to be provided and the corresponding payment amounts, is the contract under which revenue is recognized.
The Company accounts for all shipping and handling services as fulfillment services in accordance with ASC 606; accordingly, shipping and handling activities is combined with the product deliverable rather than being accounted for as a distinct performance obligation within the terms of the agreement.
The product sales are generally offered to our customers on a cost plus a fixed mark-up percentage basis which varies based on the category of the item being sold. The transaction price for product sales does not include any consideration that is variable in nature. Accordingly, the transaction price is based on the amount the Company has a right to invoice the customer under the terms of the contract. The Company recognizes revenues associated with product sales upon satisfaction of a single performance obligation, delivery, in accordance with the shipping terms, at the contract price, net of sales taxes.
Customized pump production
The Company fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions (IPS) segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed. This typically occurs when the products have no alternative use for us and we have an enforceable right to payment for the work completed to date plus a reasonable profit margin. Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue over time for these contracts using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations, an "input method" as defined by the new standard. 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. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control of goods and services to customers. If at any time expected costs exceed the value of the contract, the loss is recognized immediately in the period it is identified. The typical time span of these contracts is approximately
three
to
eighteen
months.
Staffing services
Within the Service Centers segment, the Company also provides certain customers with safety personnel who are deployed to customer locations to provide emergency response services. The staffing services is a single performance obligation from which clients are able to benefit independently and is billed to the client on a day-rate basis. As our customer simultaneously receives and consumes the benefit as the service is provided, revenue from staffing services is recognized over time as the service is performed based on the day-rate specified in the contract. The transaction price for staffing does not include any variable consideration.
The following table presents our revenue disaggregated by major category and segment for the years ended December 31, 2018, 2017 and 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Service Centers
|
|
Innovative Pumping Solutions
|
|
Supply Chain Services
|
|
Total
|
2018
|
|
|
|
|
|
|
|
Product sales (recognized at a point in time)
|
685,309
|
|
|
—
|
|
|
160,770
|
|
|
$
|
846,079
|
|
Inventory management services (recognized over contract life)
|
—
|
|
|
—
|
|
|
13,686
|
|
|
13,686
|
|
Staffing services (day-rate basis)
|
64,735
|
|
|
—
|
|
|
—
|
|
|
64,735
|
|
Customized pump production (recognized over time)
|
—
|
|
|
291,697
|
|
|
—
|
|
|
291,697
|
|
Total revenue
|
$
|
750,044
|
|
|
$
|
291,697
|
|
|
$
|
174,456
|
|
|
$
|
1,216,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Product sales (recognized at a point in time)
|
575,328
|
|
|
—
|
|
|
147,927
|
|
|
$
|
723,255
|
|
Inventory management services (recognized over contract life)
|
0
|
|
—
|
|
|
13,550
|
|
|
13,550
|
|
Staffing services (day-rate basis)
|
65,947
|
|
|
—
|
|
|
—
|
|
|
65,947
|
|
Customized pump production (recognized over time)
|
—
|
|
|
204,030
|
|
|
—
|
|
|
204,030
|
|
Total revenue
|
$
|
641,275
|
|
|
$
|
204,030
|
|
|
$
|
161,477
|
|
|
$
|
1,006,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Product sales (recognized at a point in time)
|
565,157
|
|
|
—
|
|
|
140,019
|
|
|
$
|
705,176
|
|
Inventory management services (recognized over contract life)
|
—
|
|
|
—
|
|
|
13,942
|
|
|
13,942
|
|
Staffing services (day-rate basis)
|
55,850
|
|
|
—
|
|
|
—
|
|
|
55,850
|
|
Customized pump production (recognized over time)
|
—
|
|
|
187,124
|
|
|
—
|
|
|
187,124
|
|
Total revenue
|
$
|
621,007
|
|
|
$
|
187,124
|
|
|
$
|
153,961
|
|
|
$
|
962,092
|
|
Contract Assets and Liabilities
Under our customized pump production contracts in our IPS segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “cost and estimated profits in excess of billings” on our Condsolidated Balance Sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our Consolidated Balance Sheets. See
Note 7 - Costs and Estimated Profits on Uncompleted Contracts
.
During the twelve months ended December 31, 2018,
$21.3 million
of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments.
Practical expedients and elections
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expense.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less and contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. We do not assess whether a contract has a significant financing component if at contract inception, the period between when we transfer a promised good to a customer and when the customer pays is expected to be one year or less.
See
Note 19 - Segment and Geographical Reporting
for disaggregation of revenue by reporting segments. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories:
Level 1 Inputs
Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs
Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 Inputs
Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include managements assumptions about the likelihood of payment based on the established benchmarks and discount rates based on an internal rate of return analysis. The fair value measurement includes inputs that are Level 3 measurement as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured each reporting period and reflected in our results of operations.
As of
December 31, 2018
, we recorded a
$4.3 million
liability for contingent consideration associated with the acquisition of ASI in other current and long-term liabilities. See further discussion at
Note 15 - Business Acquisitions
.
For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the twelve months ended
December 31, 2018
:
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
Contingent Liability for Accrued Consideration
|
|
(in thousands)
|
Beginning balance at January 1, 2018
|
—
|
|
Acquisitions and settlements
|
|
Acquisition of ASI (Note 15)
|
4,006
|
|
Settlements
|
—
|
|
Total remeasurement adjustments:
|
|
Changes in fair value recorded in profit and loss
|
313
|
|
Ending balance at December 31, 2018
|
$
|
4,319
|
|
|
|
The amount of total (gains) or losses for the year included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at year-end.
|
313
|
|
|
|
|
* Included in other current and long-term liabilities
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows:
|
|
|
|
|
|
|
(in thousands, unaudited)
|
Fair Value at
December 31, 2018
|
Valuation Technique
|
Significant Unobservable Inputs
|
Contingent consideration: (ASI acquisition)
|
$
|
4,319
|
|
Discounted cash flow
|
Annualized EBITDA and probability of achievement
|
Sensitivity to Changes in Significant Unobservable Inputs
As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of ASI are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results. The discount rate used in the calculation was
7.3%
. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement.
Other financial instruments not measured at fair value on the Company's consolidated balance sheets at
December 31, 2018
but which require disclosure of their fair values include: cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility. The Company believes that the estimated fair value of such instruments at
December 31, 2018
and
December 31, 2017
approximates their carrying value as reported on the consolidated balance sheets.
NOTE 6 - INVENTORIES
The carrying values of inventories were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Finished goods
|
$
|
110,182
|
|
|
$
|
92,694
|
|
Work in process
|
17,344
|
|
|
11,593
|
|
Obsolescence reserve
|
(12,696
|
)
|
|
(12,874
|
)
|
Inventories
|
$
|
114,830
|
|
|
$
|
91,413
|
|
NOTE 7 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
Costs and estimated profits in excess of billings 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
2018
and
2017
were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Costs incurred on uncompleted contracts
|
$
|
53,595
|
|
|
$
|
37,899
|
|
Estimated earnings, thereon
|
6,847
|
|
|
2,665
|
|
Total
|
$
|
60,442
|
|
|
$
|
40,564
|
|
Less: billings to date
|
38,662
|
|
|
17,881
|
|
Net
|
$
|
21,780
|
|
|
$
|
22,683
|
|
Such amounts were included in the accompanying consolidated balance sheets for
2018
and
2017
under the following captions (
in thousands
):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Costs and estimated profits in excess of billings
|
$
|
32,514
|
|
|
$
|
26,915
|
|
Billings in excess of costs and estimated profits
|
(10,696
|
)
|
|
(4,249
|
)
|
Translation Adjustment
|
(38
|
)
|
|
17
|
|
Net
|
$
|
21,780
|
|
|
$
|
22,683
|
|
NOTE 8 - PROPERTY AND EQUIPMENT
The carrying values of property and equipment were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Land
|
$
|
1,960
|
|
|
$
|
2,346
|
|
Buildings and leasehold improvements
|
15,051
|
|
|
16,724
|
|
Furniture, fixtures and equipment
|
100,449
|
|
|
94,475
|
|
Less – Accumulated depreciation
|
(66,130
|
)
|
|
(60,208
|
)
|
Total Property and Equipment
|
$
|
51,330
|
|
|
$
|
53,337
|
|
Depreciation expense was
$9.6 million
,
$10.5 million
, and
$11.9 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. Capital expenditures by segment are included in
Note 19 - Segment and Geographical Reporting
.
NOTE 9 - 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, 2018
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Other
Intangible
Assets
|
|
Total
|
Balances as of December 31, 2017
|
$
|
187,591
|
|
|
$
|
78,525
|
|
|
$
|
266,116
|
|
Translation adjustment
|
—
|
|
|
(917
|
)
|
|
(917
|
)
|
Acquisition of ASI
|
6,461
|
|
|
6,185
|
|
|
12,646
|
|
Amortization
|
—
|
|
|
(16,586
|
)
|
|
(16,586
|
)
|
Balances as of December 31, 2018
|
$
|
194,052
|
|
|
$
|
67,207
|
|
|
$
|
261,259
|
|
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
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Other
Intangible
Assets
|
|
Total
|
Balances as of December 31, 2016
|
$
|
187,591
|
|
|
$
|
94,831
|
|
|
$
|
282,422
|
|
Translation adjustment
|
—
|
|
|
960
|
|
|
960
|
|
Amortization
|
—
|
|
|
(17,266
|
)
|
|
(17,266
|
)
|
Balances as of December 31, 2017
|
$
|
187,591
|
|
|
$
|
78,525
|
|
|
$
|
266,116
|
|
The following table presents the goodwill balance by reportable segment as of
December 31, 2018
and
2017
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Service Centers
|
$
|
160,934
|
|
|
$
|
154,473
|
|
Innovative Pumping Solutions
|
15,980
|
|
|
15,980
|
|
Supply Chain Services
|
17,138
|
|
|
17,138
|
|
Total
|
$
|
194,052
|
|
|
$
|
187,591
|
|
The following table presents a summary of amortization of other intangible assets (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Amount,
net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Amount,
net
|
Customer relationships
|
$
|
168,255
|
|
|
$
|
(101,200
|
)
|
|
$
|
67,055
|
|
|
$
|
162,200
|
|
|
$
|
(83,806
|
)
|
|
$
|
78,394
|
|
Non-compete agreements
|
784
|
|
|
(632
|
)
|
|
152
|
|
|
949
|
|
|
(818
|
)
|
|
131
|
|
Total
|
$
|
169,039
|
|
|
$
|
(101,832
|
)
|
|
$
|
67,207
|
|
|
$
|
163,149
|
|
|
$
|
(84,624
|
)
|
|
$
|
78,525
|
|
Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according 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
$16.6 million
,
$17.3 million
, and
$18.1 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows
(in thousands)
:
|
|
|
|
|
2019
|
$
|
15,479
|
|
2020
|
12,674
|
|
2021
|
10,792
|
|
2022
|
10,091
|
|
2023
|
8,665
|
|
Thereafter
|
9,506
|
|
Total
|
$
|
67,207
|
|
The weighted average remaining estimated life for customer relationships and non-compete agreements are
5.5 years
and
3.2 years
, respectively.
NOTE 10 – LONG-TERM DEBT
Long-term debt consisted of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Carrying Value
(1)
|
|
Fair Value
|
|
Carrying Value
(1)
|
|
Fair Value
|
ABL Revolver
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Term Loan B
|
246,875
|
|
|
245,949
|
|
|
249,375
|
|
|
251,869
|
|
Promissory note payable
(2)
|
1,841
|
|
|
1,841
|
|
|
2,722
|
|
|
2,722
|
|
Total Debt
|
248,716
|
|
|
247,790
|
|
|
252,097
|
|
|
254,591
|
|
Less: Current maturities
|
(3,407
|
)
|
|
(3,398
|
)
|
|
(3,381
|
)
|
|
(3,406
|
)
|
Total Long-term Debt
|
$
|
245,309
|
|
|
$
|
244,392
|
|
|
$
|
248,716
|
|
|
$
|
251,185
|
|
(1)
Carrying value amount do not include unamortized debt issuance costs of
$8.3 million
and
$10.1 million
for year ended
December 31, 2018
and
December 31, 2017
.
(2)
Note payable in monthly installments at
2.9%
through January 2021, collateralized by equipment.
August 2017 Credit Agreements
On August 29, 2017, the Company entered into
two
credit agreements (the "August 2017 Credit Agreements") that provided for an
$85.0 million
asset-backed revolving line of credit (the "ABL Revolver") and a
$250.0 million
senior secured term loan B (the "Term Loan B"). Under the ABL Revolver, the Company may request
$10.0 million
incremental revolving loan commitments in an additional aggregate amount not to exceed
$50.0 million
, subject to pro forma compliance with certain net secured leverage ratio tests.
The applicable rate for the ABL Revolver is LIBOR plus a margin ranging from
1.25%
to
1.75%
per annum. The applicable rate for the Term Loan B was LIBOR plus
5.50%
subject to a LIBOR floor of
1.00%
. The maturity date of the ABL Revolver is
August 29, 2022
and the maturity date of the Term Loan B is
August 29, 2023
.
On June 25, 2018, the Company entered into Amendment No. 1 (the "Repricing Amendment") to the Senior Secured Term Loan B Agreement. The Repricing Amendment, among other things, reduced the applicable rate for the term loans to LIBOR plus
4.75%
(subject to a LIBOR floor of
1.00%
) from LIBOR plus
5.50%
for the Eurodollar Rate Loans and reduced the base rate plus a margin of
3.75%
for the Base Rate Loans from
4.50%
. The Repricing Amendment also includes a "soft call" prepayment penalty of
1.0%
for a period of
six
months commencing with the date of the Repricing Amendment for certain prepayments, refinancing, and amendments.
The Company accounted for the Repricing Amendment as a modification of debt. Approximately,
$60,000
of prior deferred debt issuance costs were accelerated and recorded as additional interest expense in the consolidated statements of operations and comprehensive income, attributable to prior syndicate lenders who reduced or eliminated their positions during the amendment process. The Company also incurred
$0.9 million
of third party fees in connection with the Repricing Amendment, which was also recorded as additional interest expense in the consolidated statements of operations and comprehensive income.
As of
December 31, 2018
, the Company had
no
amount outstanding under the ABL Revolver and had
$79.3 million
of borrowing capacity, including the impact of letters of credit.
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, 2018
and
2017
was
$8.3 million
and
$10.1 million
, respectively. In connection with the repricing amendment of the Term Loan B and extinguishment of the previously existing credit facility we recorded a
$0.1 million
and
$0.6 million
write-off of debt issuance costs, which was included in interest expense during
2018
and
2017
.
Interest on Borrowings
The interest rates on our borrowings outstanding at
December 31, 2018
and
2017
, including the amortization of debt issuance costs, were as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
ABL Revolver
|
4.0
|
%
|
|
2.9
|
%
|
Term Loan B
|
7.3
|
%
|
|
7.1
|
%
|
Promissory Note
|
2.9
|
%
|
|
2.9
|
%
|
Weighted average interest rate
|
7.2
|
%
|
|
7.0
|
%
|
The Company was in compliance with all financial covenants under the August 2017 Credit Agreements as of
December 31, 2018
.
NOTE 11 - INCOME TAXES
The components of income before income taxes were as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Domestic
|
$
|
46,270
|
|
|
$
|
13,183
|
|
|
$
|
11,079
|
|
Foreign
|
2,436
|
|
|
3,709
|
|
|
(1,405
|
)
|
Total income before taxes
|
$
|
48,706
|
|
|
$
|
16,892
|
|
|
$
|
9,674
|
|
The provision for income taxes consisted of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Current -
|
|
|
|
|
|
Federal
|
$
|
7,295
|
|
|
$
|
1,400
|
|
|
$
|
(902
|
)
|
State
|
2,257
|
|
|
698
|
|
|
136
|
|
Foreign
|
2,629
|
|
|
2,092
|
|
|
602
|
|
|
12,181
|
|
|
4,190
|
|
|
(164
|
)
|
Deferred -
|
|
|
|
|
|
|
|
|
Federal
|
2,389
|
|
|
686
|
|
|
4,174
|
|
State
|
123
|
|
|
(464
|
)
|
|
120
|
|
Foreign
|
(1,508
|
)
|
|
(4,049
|
)
|
|
(1,607
|
)
|
|
1,004
|
|
|
(3,827
|
)
|
|
2,687
|
|
|
$
|
13,185
|
|
|
$
|
363
|
|
|
$
|
2,523
|
|
The difference between income taxes computed at the statutory income tax rate and the provision for income taxes is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Income taxes computed at federal statutory rate
|
$
|
10,228
|
|
|
$
|
5,912
|
|
|
$
|
3,386
|
|
State income taxes, net of federal benefit
|
1,880
|
|
|
152
|
|
|
166
|
|
Foreign imputed interest
|
160
|
|
|
255
|
|
|
140
|
|
Meals and entertainment
|
346
|
|
|
422
|
|
|
361
|
|
Gain on sale of Vertex
|
—
|
|
|
—
|
|
|
(1,971
|
)
|
Domestic production activity deduction
|
—
|
|
|
(98
|
)
|
|
—
|
|
Research and development tax credit
|
(480
|
)
|
|
(641
|
)
|
|
(886
|
)
|
Foreign tax credit
|
(346
|
)
|
|
—
|
|
|
(383
|
)
|
Valuation allowance
|
—
|
|
|
(791
|
)
|
|
—
|
|
Tax reform deferred tax remeasurement
|
81
|
|
|
(1,294
|
)
|
|
—
|
|
Canadian acquisition deferred tax liability true up
|
—
|
|
|
(2,180
|
)
|
|
—
|
|
Foreign rate difference
|
150
|
|
|
(297
|
)
|
|
112
|
|
Other
|
1,166
|
|
|
(1,077
|
)
|
|
1,598
|
|
|
$
|
13,185
|
|
|
$
|
363
|
|
|
$
|
2,523
|
|
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 did not take effect until January 1, 2018. The Act is a comprehensive tax reform legislation that contains significant changes to corporate taxation, of which the reduction in the corporate tax rate from
35%
to
21%
and the imposition of Global Intangible Low - Taxable Income ("GILTI") had the most impact to the Company. The Company analyzed other provisions of The Act such as limitation on business interest expense, limitation on net operating losses to 80% of taxable income each year, limitation on officer compensation, mandatory repatriation and transition tax, Base Erosion & Anti–Abuse Tax ("BEAT"), and Foreign–Derived Intangible Income Deduction ("FDII") and determined these provisions to have minimal to no impact on the Company.
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. The net deferred tax liability remeasurement analysis was completed as of December 31, 2018, impacting the Company's provision for income taxes less than
$0.1 million
.
As of December 31, 2018, the Company has completed its accounting for the income tax effects of The Act. The Act subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. Pursuant to FASB Staff Q&A, Topic 740, No. 5 Accounting for Global Intangible Low-Taxed Income, the Company has adopted an accounting policy to recognize the tax effects of GILTI in the year tax is incurred. The Company recorded a GILTI inclusion of
$2.3 million
, which is partially offset with GILTI foreign tax credits, resulting in a net liability of
$0.1 million
as of December 31, 2018.
Deferred tax liabilities and assets were comprised of the following (
in thousands
):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Goodwill
|
$
|
—
|
|
|
$
|
2,668
|
|
Allowance for doubtful accounts
|
1,948
|
|
|
1,707
|
|
Inventories
|
2,944
|
|
|
2,365
|
|
Accruals
|
576
|
|
|
—
|
|
Research and development credit carryforward
|
775
|
|
|
1,115
|
|
Foreign tax credit carryforward
|
64
|
|
|
64
|
|
Charitable contribution carryforward
|
—
|
|
|
559
|
|
Net operating loss carryforward
|
610
|
|
|
136
|
|
Capital loss carryforward
|
12,564
|
|
|
12,225
|
|
Deferred compensation
|
538
|
|
|
475
|
|
Other accruals
|
—
|
|
|
266
|
|
Other
|
137
|
|
|
65
|
|
Total deferred tax assets
|
20,156
|
|
|
21,645
|
|
Less valuation allowance
|
(12,564
|
)
|
|
(12,220
|
)
|
Total deferred tax asset, net of valuation deferred tax liabilities :
|
7,592
|
|
|
9,425
|
|
Goodwill
|
(1,053
|
)
|
|
—
|
|
Intangibles
|
(7,820
|
)
|
|
(8,695
|
)
|
Accruals
|
—
|
|
|
(61
|
)
|
Property and equipment
|
(6,807
|
)
|
|
(6,860
|
)
|
Unremitted foreign earnings
|
(421
|
)
|
|
(354
|
)
|
Cumulative translation adjustment
|
—
|
|
|
(67
|
)
|
Other
|
(124
|
)
|
|
(457
|
)
|
Net deferred tax liability
|
$
|
(8,633
|
)
|
|
$
|
(7,069
|
)
|
The Company records a valuation allowance when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. If the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. At
December 31, 2018
, the Company had
$51.3 million
of capital loss carryforward, which will expire in 2021. The Company has recorded a valuation allowance for all of this carryforward amount. The valuation allowance represents a provision for uncertainty as to the realization of the tax benefits of these carryforwards.
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 year ended December 31, 2016.
To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts are classified as a component of income tax provision (benefit) in the consolidated financial statements consistent with the Company’s policy. For the year ended December 31, 2018, the Company recorded
$0.2 million
tax expense for interest and penalties related to uncertain tax positions.
The Company is subject to taxation in the United States, various states, and foreign jurisdictions. The Company has significant operations in the United States and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally open in the United States for the tax years ending after 2012 and outside the United States for the tax years ending after 2010.
NOTE 12 - SHARE-BASED COMPENSATION
Restricted Stock
We issued equity-based awards from the 2016 Omnibus Plan.
2016 Omnibus Incentive Plan
On June 20, 2016, our shareholders approved the 2016 Omnibus Incentive Plan (“2016 Omnibus Plan”), which authorized grants of restricted stock awards, restricted stock units (“RSUs”), performance awards, options, investment rights, and cash-based awards. This plan authorizes the issuance of up to
500,000
shares of our common stock.
Under the 2016 Omnibus Plan approved by our shareholders, directors, consultants and employees may be awarded shares of DXP’s common stock. The shares of restricted stock awards granted to employees that are outstanding as of
December 31, 2018
vest in accordance with one of the following vesting schedules:
100%
one year after the grant date;
50%
each year for two years after the grant;
33.3%
each year for three years after the grant date;
20%
each year for five years after the grant date; or
10%
each year for ten years after the date of grant. The shares of restricted stock awards 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, 2018
,
272,210
shares were available for future grant.
Changes in restricted stock awards for the twelve months ended
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Price
|
Non-vested at December 31, 2017
|
77,901
|
|
|
$
|
30.36
|
|
Granted
|
131,413
|
|
|
$
|
31.92
|
|
Forfeited
|
(2,400
|
)
|
|
$
|
46.68
|
|
Vested
|
(37,621
|
)
|
|
$
|
31.68
|
|
Non-vested at December 31, 2018
|
169,293
|
|
|
$
|
31.05
|
|
Changes in restricted stock awards for the twelve months ended
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Price
|
Non-vested at December 31, 2016
|
143,380
|
|
|
$
|
26.76
|
|
Granted
|
18,672
|
|
|
$
|
34.07
|
|
Forfeited
|
(298
|
)
|
|
$
|
59.60
|
|
Vested
|
(83,853
|
)
|
|
$
|
24.92
|
|
Non-vested at December 31, 2017
|
77,901
|
|
|
$
|
30.36
|
|
Changes in restricted stock awards for the twelve months ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Price
|
Non-vested at December 31, 2015
|
137,507
|
|
|
$
|
54.58
|
|
Granted
|
108,553
|
|
|
$
|
17.07
|
|
Forfeited
|
(39,000
|
)
|
|
$
|
65.41
|
|
Vested
|
(63,680
|
)
|
|
$
|
46.65
|
|
Non-vested at December 31, 2016
|
143,380
|
|
|
$
|
26.76
|
|
Compensation expense, associated with restricted stock awards, recognized in the years ended
December 31, 2018
,
December 31, 2017
and
December 31, 2016
was
$2.1 million
,
$1.7 million
, and
$2.0 million
, respectively. Related income tax benefits recognized in earnings in the years ended
December 31, 2018
,
December 31, 2017
and
December 31, 2016
were approximately
$0.5 million
,
$0.7 million
and
$0.8 million
, respectively. Unrecognized compensation expense under the DXP Enterprises, Inc. 2016 Omnibus Plan at
December 31, 2018
,
December 31, 2017
and
December 31, 2016
was
$3.6 million
,
$1.6 million
and
$2.7 million
, respectively. As of
December 31, 2018
, the weighted average period over which the unrecognized compensation expense is expected to be recognized is
20.6
months.
NOTE 13 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (
in thousands, except per share data
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Basic:
|
|
|
|
|
|
Weighted average shares outstanding
|
17,553
|
|
|
17,400
|
|
|
15,042
|
|
|
|
|
|
|
|
Net income attributable to DXP Enterprises, Inc.
|
$
|
35,632
|
|
|
$
|
16,888
|
|
|
$
|
7,702
|
|
Convertible preferred stock dividend
|
(90
|
)
|
|
(90
|
)
|
|
(90
|
)
|
Net income attributable to common shareholders
|
$
|
35,542
|
|
|
$
|
16,798
|
|
|
$
|
7,612
|
|
Per share amount
|
$
|
2.02
|
|
|
$
|
0.97
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
Weighted average shares outstanding
|
17,553
|
|
|
17,400
|
|
|
15,042
|
|
Assumed conversion of convertible preferred stock
|
840
|
|
|
840
|
|
|
840
|
|
Total dilutive shares
|
18,393
|
|
|
18,240
|
|
|
15,882
|
|
Net income attributable to common shareholders
|
$
|
35,542
|
|
|
$
|
16,798
|
|
|
$
|
7,612
|
|
Convertible preferred stock dividend
|
90
|
|
|
90
|
|
|
90
|
|
Net income attributable to DXP Enterprises, Inc.
|
$
|
35,632
|
|
|
$
|
16,888
|
|
|
$
|
7,702
|
|
Per share amount
|
$
|
1.94
|
|
|
$
|
0.93
|
|
|
$
|
0.49
|
|
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.The Preferred Stock is convertible into
840,000
shares of common stock.
NOTE 14 – CAPITAL STOCK
The Company has Series A and Series B preferred stock of
1,122
shares and
15,000
shares outstanding as of
December 31, 2018
,
2017
and
2016
, respectively. The preferred stock did not have any activity during
2018
,
2017
and
2016
.
Series A Preferred Stock
The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to
$100
liquidation preference per share.
Series B Preferred Stock
Each share of the Series B convertible preferred stock is convertible into
56
shares of common stock and a monthly dividend per share of
$.50
. The holders of the Series B convertible stock are entitled to a
$100
liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock.
The activity related to outstanding common stock and common stock held in treasury was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Common Stock:
|
Quantity (in thousands)
|
Balance, beginning of period
|
17,316
|
|
|
17,197
|
|
|
14,390
|
|
Issuance of shares for compensation net of withholding
|
85
|
|
|
119
|
|
|
84
|
|
Issuance of common stock related to equity distribution agreements
|
—
|
|
|
—
|
|
|
2,723
|
|
Balance, end of period
|
17,401
|
|
|
17,316
|
|
|
17,197
|
|
There were
no
t any treasury shares outstanding for the years ended 2018, 2017 and 2016.
NOTE 15 - BUSINESS ACQUISITIONS
On January 1, 2018, the Company completed the acquisition of Application Specialties, Inc. ("ASI"), a distributor of cutting tools, abrasives, coolants and machine shop supplies. The Company paid approximately
$11.7 million
in cash and stock. The purchase price also includes approximately
$4.6 million
in contingent consideration. The purchase was financed with
$10.8 million
of cash on hand as well as issuing
$0.9 million
of the Company's common stock. ASI provides the Company's metal working division with new geographic territory and enhances DXP's end market mix. For the twelve months
December 31, 2018
, ASI contributed sales of
$47.5 million
and earnings before taxes of approximately
$5.0 million
.
As part of our purchase agreement, we may pay up to an additional
$4.6 million
of contingent consideration over
three
years based on the achievement of certain earnings benchmarks established for calendar years 2018, 2019 and 2020. The purchase price includes the estimated fair value of the contingent consideration recorded at the present value of approximately
$4.3 million
. The estimated fair value of the contingent consideration was determined using a probability-weighted discounted cash flow model. We determined the fair value of the contingent consideration obligations by calculating the probability-weighted payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return analysis using the probability-weighted cash flows. The fair value measurement includes earnings forecasts which are a Level 3 measurement as discussed in
Note 5 - Fair Value of Financial Assets and Liabilities
. The fair value of the contingent consideration is reviewed quarterly over the earn-out period to compare actual earnings before interest, taxes, depreciation and amortization ("EBITDA") achieved to the estimated EBITDA used in our forecasts.
As of
December 31, 2018
, approximately
$1.5 million
of the actual cash due toward the contingent consideration earned is recorded in current liabilities. We may pay up to an additional
$2.8 million
over the remaining earn-out period based on the achievement of certain EBITDA benchmarks. The estimated fair value of the contingent consideration is recorded at the present value of
$4.3 million
at
December 31, 2018
. Changes in the estimated fair value of the contingent earn-out consideration, up to the total contractual amount, are reflected in our results of operations in the periods in which they are identified. Changes in the fair value of the contingent consideration may materially impact and cause volatility in our future operating results. Changes in our estimates for the contingent consideration are discussed in
Note 5 - Fair Value of Financial Assets and Liabilities
to our consolidated financial statements.
The total acquisition consideration is equal to the sum of all cash payments, the fair value of stock issued, and the present value of any contingent consideration. The following table summarizes the total acquisition consideration for the ASI Purchase at closing (in thousands):
|
|
|
|
|
Purchase Price Consideration
|
Total Consideration
|
Cash payments
|
$
|
10,811
|
|
Fair value of stock issued
|
894
|
|
Present value of estimated fair value of contingent earn-out consideration
|
4,006
|
|
Total purchase price consideration
|
$
|
15,711
|
|
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed during 2018 in connection with the ASI acquisition described above (in thousands):
|
|
|
|
|
|
Total
|
Cash
|
$
|
—
|
|
Accounts Receivable,net
|
6,142
|
|
Inventory
|
2,729
|
|
Other Current Assets
|
18
|
|
Property and equipment
|
216
|
|
Goodwill and intangibles
|
$
|
11,856
|
|
Assets acquired
|
$
|
20,961
|
|
Current liabilities assumed
|
$
|
(5,175
|
)
|
Non-current liabilities assumed
|
(75
|
)
|
Net assets acquired
|
$
|
15,711
|
|
NOTE 16 - COMMITMENTS AND CONTINGENCIES
The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of
December, 2018
, for non-cancelable leases are as follows (
in thousands
):
|
|
|
|
|
2019
|
$
|
22,096
|
|
2020
|
18,555
|
|
2021
|
15,270
|
|
2022
|
11,452
|
|
2023
|
6,927
|
|
Thereafter
|
11,022
|
|
Total
|
$
|
85,322
|
|
Rental expense for operating leases was
$18.5 million
,
$27.7 million
and
$27.6 million
for the years ended
December, 2018
,
2017
and
2016
, 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 17 - 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, 2018
, the Company elected to match employee contributions at a rate of
50 percent
of up to
4 percent
of salary deferral. The Company contributed
$1.8 million
,
$0.2 million
, and
$0.4 million
to the 401(k) plan in the years ended
December 31, 2018
,
2017
, and
2016
, 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 18 - 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
$0.2 million
,
$(1.2) million
, and
$(7.7) million
in translation adjustments, net of tax, in other comprehensive income during the years ended
December 31, 2018
,
2017
and
2016
, 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 year ended December 31, 2016.
NOTE 19 – 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 provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management.
The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations.
The following table sets out financial information related to the Company’s segments (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Service Centers
|
|
Innovative Pumping Solutions
|
|
Supply Chain Services
|
|
Total
|
2018
|
|
|
|
|
|
|
|
Sales
|
$
|
750,044
|
|
|
$
|
291,697
|
|
|
$
|
174,456
|
|
|
$
|
1,216,197
|
|
Operating income for reportable segments, excluding amortization
|
80,718
|
|
|
33,943
|
|
|
16,204
|
|
|
130,865
|
|
Identifiable assets at year end
|
402,944
|
|
|
188,765
|
|
|
53,517
|
|
|
645,226
|
|
Capital expenditures
|
1,655
|
|
|
6,800
|
|
|
296
|
|
|
8,751
|
|
Proceeds from sale of fixed assets
|
3
|
|
|
9
|
|
|
—
|
|
|
12
|
|
Depreciation
|
3,974
|
|
|
4,064
|
|
|
49
|
|
|
8,087
|
|
Amortization
|
9,272
|
|
|
6,237
|
|
|
1,077
|
|
|
16,586
|
|
Interest expense
|
$
|
11,178
|
|
|
$
|
7,351
|
|
|
$
|
2,408
|
|
|
$
|
20,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Service Centers
|
|
Innovative Pumping Solutions
|
|
Supply Chain Services
|
|
Total
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
641,275
|
|
|
$
|
204,030
|
|
|
$
|
161,477
|
|
|
$
|
1,006,782
|
|
Operating income for reportable segments, excluding amortization
|
63,250
|
|
|
11,423
|
|
|
15,451
|
|
|
90,124
|
|
Identifiable assets at year end
|
385,744
|
|
|
172,538
|
|
|
59,942
|
|
|
618,224
|
|
Capital expenditures
|
1,076
|
|
|
1,488
|
|
|
82
|
|
|
2,646
|
|
Depreciation
|
5,162
|
|
|
4,198
|
|
|
103
|
|
|
9,463
|
|
Amortization
|
8,989
|
|
|
7,194
|
|
|
1,083
|
|
|
17,266
|
|
Interest expense
|
$
|
9,712
|
|
|
$
|
5,352
|
|
|
$
|
1,990
|
|
|
$
|
17,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Service Centers
|
|
Innovative Pumping Solutions
|
|
Supply Chain Services
|
|
Total
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
621,007
|
|
|
$
|
187,124
|
|
|
$
|
153,961
|
|
|
$
|
962,092
|
|
Operating income for reportable segments, excluding amortization
|
47,634
|
|
|
9,867
|
|
|
15,449
|
|
|
72,950
|
|
Identifiable assets at year end
|
370,261
|
|
|
175,198
|
|
|
44,796
|
|
|
590,255
|
|
Capital expenditures
|
447
|
|
|
3,827
|
|
|
129
|
|
|
4,403
|
|
Proceeds from sale of fixed assets
|
1,038
|
|
|
168
|
|
|
—
|
|
|
1,206
|
|
Depreciation
|
6,520
|
|
|
3,834
|
|
|
126
|
|
|
10,480
|
|
Amortization
|
9,152
|
|
|
7,826
|
|
|
1,083
|
|
|
18,061
|
|
Interest expense
|
$
|
9,290
|
|
|
$
|
4,422
|
|
|
$
|
1,852
|
|
|
$
|
15,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Operating income for reportable segments, excluding amortization
|
$
|
130,865
|
|
|
$
|
90,124
|
|
|
$
|
72,950
|
|
Adjustments for:
|
|
|
|
|
|
Amortization of intangibles
|
16,586
|
|
|
17,266
|
|
|
18,061
|
|
Corporate and other expense, net
|
45,828
|
|
|
39,368
|
|
|
35,557
|
|
Total operating income
|
68,451
|
|
|
33,490
|
|
|
19,332
|
|
Interest expense
|
20,937
|
|
|
17,054
|
|
|
15,564
|
|
Other expenses (income), net
|
(1,192
|
)
|
|
(456
|
)
|
|
(5,906
|
)
|
Income (loss) before income taxes
|
$
|
48,706
|
|
|
$
|
16,892
|
|
|
$
|
9,674
|
|
The Company had capital expenditures at Corporate of
$0.6 million
,
$0.2 million
, and
$0.5 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. The Company had identifiable assets at Corporate of
$54.7 million
,
$19.4 million
, and
$18.3 million
as of
December 31, 2018
,
2017
, and
2016
, respectively. Corporate depreciation was
$1.5 million
,
$1.8 million
, and
$1.4 million
for the years ended
December 31, 2018
,
2017
, and
2016
, 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 millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenues
|
|
|
|
|
|
United States
|
$
|
1,110
|
|
|
$
|
903
|
|
|
$
|
874
|
|
Canada
|
106
|
|
|
104
|
|
|
88
|
|
Other
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
1,216
|
|
|
$
|
1,007
|
|
|
$
|
962
|
|
(1)
Other includes Mexico and Dubai.
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Property and Equipment, net
|
|
|
|
United States
|
$
|
41
|
|
|
$
|
43
|
|
Canada
|
10
|
|
|
10
|
|
Other
(1)
|
—
|
|
|
—
|
|
Total
|
$
|
51
|
|
|
$
|
53
|
|
(1)
Other includes Mexico and Dubai.
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (unaudited)
Summarized quarterly financial information for the years ended
December 31, 2018
,
2017
and
2016
is as follows (
in millions, except per share data
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2018
|
|
|
|
|
|
|
|
Sales
|
$
|
285.9
|
|
|
$
|
311.2
|
|
|
$
|
308.0
|
|
|
$
|
311.0
|
|
Gross profit
|
76.4
|
|
|
85.1
|
|
|
84.1
|
|
|
86.6
|
|
Net income
|
4.5
|
|
|
11.6
|
|
|
8.4
|
|
|
11.1
|
|
Net income attributable to DXP Enterprises, Inc.
|
4.6
|
|
|
11.6
|
|
|
8.4
|
|
|
11.1
|
|
Earnings per share - basic
|
0.26
|
|
|
0.66
|
|
|
0.48
|
|
|
0.63
|
|
Earnings per share - diluted
|
$
|
0.25
|
|
|
$
|
0.63
|
|
|
$
|
0.46
|
|
|
$
|
0.60
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
238.5
|
|
|
$
|
250.7
|
|
|
$
|
251.9
|
|
|
$
|
265.7
|
|
Gross profit
|
64.5
|
|
|
68.9
|
|
|
67.0
|
|
|
71.2
|
|
Net income
|
3.1
|
|
|
4.1
|
|
|
3.0
|
|
|
6.6
|
|
Net income attributable to DXP Enterprises, Inc.
|
3.0
|
|
|
4.0
|
|
|
2.9
|
|
|
6.6
|
|
Earnings per share - basic
|
0.18
|
|
|
0.24
|
|
|
0.17
|
|
|
0.38
|
|
Earnings per share - diluted
|
$
|
0.17
|
|
|
$
|
0.23
|
|
|
$
|
0.16
|
|
|
$
|
0.37
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
253.6
|
|
|
$
|
256.2
|
|
|
$
|
230.0
|
|
|
$
|
222.3
|
|
Gross profit
|
68.8
|
|
|
71.6
|
|
|
63.8
|
|
|
60.6
|
|
Net income (loss)
|
(5.2
|
)
|
|
5.1
|
|
|
0.1
|
|
|
7.1
|
|
Net income (loss) attributable to DXP Enterprises, Inc.
|
(5.1
|
)
|
|
5.1
|
|
|
0.2
|
|
|
7.4
|
|
Earnings (loss) per share - basic
|
(0.36
|
)
|
|
0.36
|
|
|
0.02
|
|
|
0.44
|
|
Earnings (loss) per share - diluted
|
$
|
(0.36
|
)
|
|
$
|
0.34
|
|
|
$
|
0.02
|
|
|
$
|
0.42
|
|
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 21 – RELATED PARTIES DISCLOSURES
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, 2018
, the Company paid approximately
$1.4 million
in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little.