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, 2019, the total assets of the VIE were approximately $4.6 million including approximately $4.0 million of fixed assets. DXP is the primary customer of the VIE. Consolidation of the VIE decreased cost of sales by approximately $0.4 million for the year ended December 31, 2019 and decreased cost of sales by approximately $0.7 million for the year ended December 31, 2018, respectively. The Company recognized a related income tax benefit of $83 thousand and $46 thousand related to the VIE for the years ended December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019, 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 2019, 2018 and 2017 were as follows (in thousands):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Balance at beginning of year
|
$
|
10,126
|
|
|
$
|
9,015
|
|
|
$
|
8,160
|
|
|
|
Charged to costs and expenses
|
139
|
|
|
2,368
|
|
|
3,367
|
|
|
|
Charged to other accounts
|
79
|
|
(3)
|
(86
|
)
|
(2)
|
22
|
|
(3)
|
|
Deductions
|
(1,415
|
)
|
(1)
|
(1,171
|
)
|
(1)
|
(2,534
|
)
|
(1)
|
|
Balance at end of year
|
$
|
8,929
|
|
|
$
|
10,126
|
|
|
$
|
9,015
|
|
|
(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 equipment purchased for resale or finished goods and are priced at net realizable value, cost being primarily determined using the weighted average cost method. Provisions are provided against inventories for estimated excess and 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:
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Buildings
|
20-39 years
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|
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 2019, 2018 and 2017.
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, 2019 and 2018 was approximately $2.5 million and $2.3 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 2013. 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.
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
Leases. In February 2016, the Financial Accounting Standards Board's ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) as modified by subsequently issued ASUs 2018-01, 2018-10, 2018-11 and 2018-20. The Company adopted 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 several of the practical expedients in conjunction with accounting policy elections. See Note 4 - Leases for further discussion.
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 non-cancellable period of the CCA plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which exercise of the option is controlled by the vendor. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We will adopt the new standard beginning January 1, 2020. We do not anticipate that the new standard will have a material impact on our results of operations.
Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13: Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The 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 ("CECL"). The update is intended to provide financial statement users with more useful information about expected credit losses.
We do not currently hold most of the financial instruments contemplated by the new standard, with the exception of trade receivables and contract assets associated with custom built pump packages. CECL will become the single model to measure impairment on financial assets measured at amortized cost, which include trade receivables and contract assets under ASC 606. Therefore, consistent with other types of financial assets measured at amortized cost, estimates of expected credit losses on trade receivables and contract assets over their contractual life will be required to be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts.
Currently, our reserve methodology for trade receivables is based on matrices in which historical loss percentages are applied to respective aging categories. CECL will require us to use a forward-looking methodology that incorporates lifetime expected credit losses. While our current reserving matrices may still be used under CECL, historical loss data will need to be combined with reasonable and supportable forecasts of future losses to determine estimated credit losses. The most visible impact of CECL will therefore be that receivables and contract assets that are either current or not yet due, which today do not generally have a reserve, will have an allowance for expected credit losses.
The CECL model does not prescribe a specific methodology for developing a reasonable and supportable forecast, nor the duration of the period that losses can be forecast, nor the precision required to support the estimate. As a result, the determination of the reasonable and supportable forecast period is a judgment to be made in estimating the overall expected credit loss. Although the CECL model requires entities to perform this new evaluation for trade receivables and contract assets, we generally do not expect to see a significant change in the impairment losses recognized on our trade receivables or contract assets given their short-term nature. We will adopt the standard on January 1, 2020, with a cumulative-effect adjustment to retained earnings. Based upon our current assessment, the adjustment will be less than $3 million to our allowance for doubtful accounts and the company does not expect the adoption of the standard to have a material impact on the consolidated statement of operations and cash flows.
NOTE 4 - LEASES
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which was 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 of 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 was not 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 was 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 provided 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 provided 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 adopted the standard effective January 1, 2019. We elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and we elected to apply the following practical expedients and accounting policy decisions.
We elected a package of transition expedients that allowed us to forgo reassessing certain conclusions reached under ASC 840 which must be elected together. All expedients in this package were 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 as of 1/1/2019, we continued to use judgments made under ASC 840 related to embedded leases, lease classification and accounting for initial direct costs. We generally have four classes of leased assets : Real Estate related properties (such as office space, warehouses, distribution centers and land), Automobiles, Office Equipment and Manufacturing Equipment and do not utilize finance leases.
In addition, we have chosen, as an accounting policy election by class of underlying asset, not to separate nonlease components from the associated lease for all of our leased asset classes, except for Real Estate related leases. As a result, for classes of Automobiles, Office Equipment and Manufacturing Equipment, we account for each separate lease component and the nonlease components associated with that lease as a single lease component.
For short-term leases as defined under ASC 842, we elected the short-term lease exception pursuant to ASC 842 to all classes of our leased assets. We do not recognize a lease liability or a right of use asset on our consolidated balance sheets for our leased assets with an original lease term of twelve months or less. Instead, we 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 disclose in the notes to the consolidated financial statements our short-term lease expense.
The new standard did have a material impact on our consolidated balance sheets related to recording right-of-use (ROU) assets and the corresponding lease liabilities for our inventory of operating leases. In January 2019, we recorded a ROU Asset and total lease liability obligations of $72.7 million and $72.4 million, respectively. The new standard did not have a material impact on our consolidated statements of operations and had no impact on cash flows.
We lease office space, warehouses, land, automobiles, and office and manufacturing equipment. All of our leases are classified as operating leases.
Our leases have remaining lease terms of 1 month to 11 years, some of which include options to extend the leases for up to 14 years. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not include options to purchase the leased property.
The lease expenses were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2019
|
|
Lease cost
|
|
Classification
|
|
|
|
Short-term lease expense
|
|
SG&A expenses(*)
|
|
$
|
1,087
|
|
|
Other operating lease cost
|
|
SG&A expenses(*)
|
|
23,911
|
|
|
Total operating lease cost
|
|
|
|
$
|
24,998
|
|
|
(*) Manufacturing equipment and some vehicle rental expenses are included in the cost of sales.
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Supplemental cash flow information related to leases was as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2019
|
|
Lease
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
19,020
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
|
|
Operating leases
|
|
$
|
12,608
|
|
Supplemental balance sheet information related to leases was as follows (in thousand):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
Classification
|
|
December 31, 2019
|
|
Impact of ASC 842 Transition
|
|
Assets
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease right-of-use assets
|
|
$
|
66,191
|
|
|
$
|
72,679
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current operating
|
|
Short-term operating lease liabilities
|
|
17,603
|
|
|
18,762
|
|
|
Non-current operating
|
|
Long-term operating lease liabilities
|
|
48,605
|
|
|
53,654
|
|
|
Total operating lease liabilities
|
|
|
|
$
|
66,208
|
|
|
$
|
72,416
|
|
Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments for lease commenced on or after January 1, 2019. We used our incremental borrowing rate as of the transition date of January 1, 2019 for operating leases that commenced prior to transition.
Maturities of lease liabilities were as follows (in thousands):
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|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Operating leases (*)
|
|
2020
|
|
$
|
21,641
|
|
|
2021
|
|
18,455
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|
|
2022
|
|
14,198
|
|
|
2023
|
|
8,926
|
|
|
2024
|
|
4,573
|
|
|
Thereafter
|
|
10,301
|
|
|
Total lease payments
|
|
$
|
78,094
|
|
|
Less: imputed interest
|
|
11,886
|
|
|
Present value of lease liabilities
|
|
$
|
66,208
|
|
(*) Operating lease payments exclude $1.1 million of legally binding minimum lease payments for leases signed but not yet commenced.
Contractual obligations related to operating leases as of December 31, 2018, under ASC 840 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period (in thousands)
|
|
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
|
Total
|
|
Operating lease obligations
|
|
$
|
22,096
|
|
|
$
|
33,825
|
|
|
$
|
18,379
|
|
|
$
|
11,022
|
|
|
$
|
85,322
|
|
|
|
|
|
|
|
|
Lease term and discount rate
|
|
Twelve Months Ended December 31, 2019
|
|
Weighted average remaining lease term (years)
|
|
|
|
Operating lease
|
|
4.74
|
|
Weighted average discount rate
|
|
|
|
Operating lease
|
|
7.3%
|
For the twelve months ended December 31, 2019, the Company paid approximately $2.2 million in lease expenses to entities controlled by the Company's Chief Executive Officer, David Little and family.
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 inputs as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumptions used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured each reporting period and reflected in our results of operations.
As of December 31, 2019, we recorded a $2.7 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, 2019:
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
Contingent Liability for Accrued Consideration
|
|
|
(in thousands)
|
|
|
Beginning balance at December 31, 2018
|
$
|
4,319
|
|
|
Acquisitions and settlements
|
|
|
Acquisitions (Note 15)
|
—
|
|
|
Settlements
|
(1,500
|
)
|
|
Total remeasurement adjustments:
|
|
|
Changes in fair value recorded in other (income) expense, net
|
(114
|
)
|
|
Ending balance at December 31, 2019
|
$
|
2,705
|
|
|
|
|
|
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.
|
(114
|
)
|
|
|
|
|
|
* 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, 2019
|
Valuation Technique
|
Significant Unobservable Inputs
|
|
Contingent consideration: (ASI acquisition)
|
$
|
2,705
|
|
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 7.5%. 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, 2019 but which require disclosure of their fair values include: cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility (Note 10). The Company believes that the estimated fair value of such instruments at December 31, 2019 and December 31, 2018 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, 2019
|
|
December 31, 2018
|
|
Finished goods
|
$
|
122,510
|
|
|
$
|
110,182
|
|
|
Work in process
|
19,721
|
|
|
17,344
|
|
|
Obsolescence reserve
|
(12,867
|
)
|
|
(12,696
|
)
|
|
Inventories
|
$
|
129,364
|
|
|
$
|
114,830
|
|
NOTE 7 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
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 Consolidated Balance Sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our Consolidated Balance Sheets.
Costs and estimated profits on uncompleted contracts and related amounts billed for 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Costs incurred on uncompleted contracts
|
$
|
51,017
|
|
|
$
|
53,595
|
|
|
Estimated profits, thereon
|
10,771
|
|
|
6,847
|
|
|
Total
|
$
|
61,788
|
|
|
$
|
60,442
|
|
|
Less: billings to date
|
41,223
|
|
|
38,662
|
|
|
Net
|
$
|
20,565
|
|
|
$
|
21,780
|
|
Such amounts were included in the accompanying Consolidated Balance Sheets for 2019 and 2018 under the following captions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Costs and estimated profits in excess of billings
|
$
|
32,455
|
|
|
$
|
32,514
|
|
|
Billings in excess of costs and estimated profits
|
(11,871
|
)
|
|
(10,696
|
)
|
|
Translation Adjustment
|
(19
|
)
|
|
(38
|
)
|
|
Net
|
$
|
20,565
|
|
|
$
|
21,780
|
|
During the twelve months ended December 31, 2019, $10.5 million of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments.
NOTE 8 - PROPERTY AND EQUIPMENT
The carrying values of property and equipment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Land
|
$
|
1,960
|
|
|
$
|
1,960
|
|
|
Buildings and leasehold improvements
|
15,445
|
|
|
15,051
|
|
|
Furniture, fixtures and equipment
|
119,865
|
|
|
100,449
|
|
|
Less – Accumulated depreciation
|
(73,567
|
)
|
|
(66,130
|
)
|
|
Total Property and Equipment
|
$
|
63,703
|
|
|
$
|
51,330
|
|
Depreciation expense was $10.1 million, $9.6 million, and $10.5 million for the years ended December 31, 2019, 2018, and 2017, 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, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Other
Intangible
Assets
|
|
Total
|
|
Balances as of December 31, 2018
|
$
|
194,052
|
|
|
$
|
67,207
|
|
|
$
|
261,259
|
|
|
Translation adjustment
|
—
|
|
|
449
|
|
|
449
|
|
|
Amortization
|
—
|
|
|
(15,074
|
)
|
|
(15,074
|
)
|
|
Balances as of December 31, 2019
|
$
|
194,052
|
|
|
$
|
52,582
|
|
|
$
|
246,634
|
|
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 goodwill balance by reportable segment as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
Service Centers
|
$
|
160,934
|
|
|
$
|
160,934
|
|
|
Innovative Pumping Solutions
|
15,980
|
|
|
15,980
|
|
|
Supply Chain Services
|
17,138
|
|
|
17,138
|
|
|
Total
|
$
|
194,052
|
|
|
$
|
194,052
|
|
The following table presents a summary of amortization of other intangible assets ( in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Amount,
net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Amount,
net
|
|
Customer relationships
|
$
|
156,282
|
|
|
$
|
(103,796
|
)
|
|
$
|
52,486
|
|
|
$
|
168,255
|
|
|
$
|
(101,200
|
)
|
|
$
|
67,055
|
|
|
Non-compete agreements
|
285
|
|
|
(189
|
)
|
|
96
|
|
|
784
|
|
|
(632
|
)
|
|
152
|
|
|
Total
|
$
|
156,567
|
|
|
$
|
(103,985
|
)
|
|
$
|
52,582
|
|
|
$
|
169,039
|
|
|
$
|
(101,832
|
)
|
|
$
|
67,207
|
|
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 $15.1 million, $16.6 million, and $17.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
2020
|
$
|
11,611
|
|
|
2021
|
9,287
|
|
|
2022
|
7,974
|
|
|
2023
|
6,508
|
|
|
2024
|
4,886
|
|
|
Thereafter
|
12,316
|
|
|
Total
|
$
|
52,582
|
|
The weighted average remaining estimated life for customer relationships and non-compete agreements are 7.33 and 2.58, respectively.
NOTE 10 – LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Carrying Value(1)
|
|
Fair Value
|
|
Carrying Value(1)
|
|
Fair Value
|
|
ABL Revolver
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Term Loan B
|
244,375
|
|
|
244,375
|
|
|
246,875
|
|
|
245,949
|
|
|
Promissory note payable(2)
|
—
|
|
|
—
|
|
|
1,841
|
|
|
1,841
|
|
|
Total Debt
|
244,375
|
|
|
244,375
|
|
|
248,716
|
|
|
247,790
|
|
|
Less: Current maturities
|
(2,500
|
)
|
|
(2,500
|
)
|
|
(3,407
|
)
|
|
(3,398
|
)
|
|
Total Long-term Debt
|
$
|
241,875
|
|
|
$
|
241,875
|
|
|
$
|
245,309
|
|
|
$
|
244,392
|
|
(1) Carrying value amount do not include unamortized debt issuance costs of $6.5 million and $8.3 million for year ended December 31, 2019 and December 31, 2018 respectively.
(2) Note payable in monthly installments at 2.9% through January 2021, collateralized by equipment. In August 2019, the Company
made a cash payment of $1.3 million to repay the remaining balance of the outstanding promissory note payable.
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 included 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, 2019, the Company had no amount outstanding under the ABL Revolver and had $81.6 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 our 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 our revolving line of credit are amortized over the term of the arrangement. The total unamortized debt issuance costs reported on the consolidated balance sheets as of December 31, 2019 and 2018 was $6.5 million and $8.3 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, 2019 and 2018, including the amortization of debt issuance costs, were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
ABL Revolver
|
3.5
|
%
|
|
4.0
|
%
|
|
Term Loan B
|
6.5
|
%
|
|
7.3
|
%
|
|
Promissory Note
|
—
|
%
|
|
2.9
|
%
|
|
Weighted average interest rate
|
6.5
|
%
|
|
7.2
|
%
|
The Company was in compliance with all financial covenants under the August 2017 Credit Agreements as of December 31, 2019.
NOTE 11 - INCOME TAXES
The components of income before income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Domestic
|
$
|
41,184
|
|
|
$
|
46,270
|
|
|
$
|
13,183
|
|
|
Foreign
|
5,485
|
|
|
2,436
|
|
|
3,709
|
|
|
Total income before taxes
|
$
|
46,669
|
|
|
$
|
48,706
|
|
|
$
|
16,892
|
|
The provision for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Current -
|
|
|
|
|
|
|
Federal
|
$
|
4,940
|
|
|
$
|
7,295
|
|
|
$
|
1,400
|
|
|
State
|
1,862
|
|
|
2,257
|
|
|
698
|
|
|
Foreign
|
2,982
|
|
|
2,629
|
|
|
2,092
|
|
|
Total current
|
$
|
9,784
|
|
|
$
|
12,181
|
|
|
$
|
4,190
|
|
|
Deferred -
|
|
|
|
|
|
|
|
|
|
Federal
|
2,618
|
|
|
2,389
|
|
|
686
|
|
|
State
|
(224
|
)
|
|
123
|
|
|
(464
|
)
|
|
Foreign
|
(1,284
|
)
|
|
(1,508
|
)
|
|
(4,049
|
)
|
|
Total deferred
|
$
|
1,110
|
|
|
$
|
1,004
|
|
|
$
|
(3,827
|
)
|
|
Total current and deferred taxes
|
$
|
10,894
|
|
|
$
|
13,185
|
|
|
$
|
363
|
|
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,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Income taxes computed at federal statutory rate
|
$
|
9,801
|
|
|
$
|
10,228
|
|
|
$
|
5,912
|
|
|
State income taxes, net of federal benefit
|
1,294
|
|
|
1,880
|
|
|
152
|
|
|
Foreign taxes
|
311
|
|
|
150
|
|
|
(1,077
|
)
|
|
Nondeductible expenses
|
1,108
|
|
|
954
|
|
|
642
|
|
|
Domestic production activity deduction
|
—
|
|
|
—
|
|
|
(98
|
)
|
|
Research and development tax credit
|
(2,324
|
)
|
|
(480
|
)
|
|
(641
|
)
|
|
Foreign tax credit
|
(57
|
)
|
|
(346
|
)
|
|
—
|
|
|
Valuation allowance
|
(5
|
)
|
|
—
|
|
|
(791
|
)
|
|
Tax reform deferred tax remeasurement
|
—
|
|
|
81
|
|
|
(1,294
|
)
|
|
Deferred tax liability true up
|
1,065
|
|
|
—
|
|
|
(2,180
|
)
|
|
Uncertain tax positions
|
665
|
|
|
172
|
|
|
—
|
|
|
Other
|
(964
|
)
|
|
546
|
|
|
(262
|
)
|
|
Total current and deferred taxes
|
$
|
10,894
|
|
|
$
|
13,185
|
|
|
$
|
363
|
|
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 35.0% to 21.0% 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 Staff Accounting Bulletin No. 18 (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.
For the year ended December 31, 2019, the effective tax rate was impacted by state taxes, foreign taxes, nondeductible expenses, research and development tax credits, and foreign tax credits.
Deferred tax liabilities and assets were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
Allowance for doubtful accounts
|
$
|
1,657
|
|
|
$
|
1,948
|
|
|
Inventories
|
3,254
|
|
|
2,944
|
|
|
Research and development credit carryforward
|
1,361
|
|
|
775
|
|
|
Foreign tax credit carryforward
|
64
|
|
|
64
|
|
|
Net operating loss carryforward
|
812
|
|
|
610
|
|
|
Capital loss carryforward
|
12,363
|
|
|
12,564
|
|
|
Deferred compensation
|
—
|
|
|
538
|
|
|
Accruals
|
4,077
|
|
|
576
|
|
|
Investment in partnerships
|
500
|
|
|
—
|
|
|
Other
|
—
|
|
|
137
|
|
|
Total deferred tax assets
|
$
|
24,088
|
|
|
$
|
20,156
|
|
|
Less valuation allowance
|
(12,363
|
)
|
|
(12,564
|
)
|
|
Total deferred tax asset, net of valuation deferred tax liabilities :
|
$
|
11,725
|
|
|
$
|
7,592
|
|
|
Goodwill
|
(8,459
|
)
|
|
(1,053
|
)
|
|
Intangibles
|
(2,051
|
)
|
|
(7,820
|
)
|
|
Property and equipment
|
(8,319
|
)
|
|
(6,807
|
)
|
|
Unremitted foreign earnings
|
(421
|
)
|
|
(421
|
)
|
|
Deferred compensation
|
(317
|
)
|
|
—
|
|
|
Method changes
|
(1,961
|
)
|
|
—
|
|
|
Other
|
(69
|
)
|
|
(124
|
)
|
|
Net deferred tax liability
|
$
|
(9,872
|
)
|
|
$
|
(8,633
|
)
|
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, 2019, the Company had $51.1 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.
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, 2019, the Company recorded $0.7 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 2011.
NOTE 12 - SHARE-BASED COMPENSATION
Restricted Stock
We issued equity-based awards from the 2016 Omnibus Plan.
2016 Omnibus Incentive Plan
On June 19, 2019, our shareholders approved an amendment to the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) to increase the number of shares that can be issued under the 2016 Plan from 500,000 shares to a total of 1,000,000 shares, which represents an increase of 500,000 shares (the “Amendment”), 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 1,000,000 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, 2019 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, 2019, 697,797 shares were available for future grant.
Changes in restricted stock awards for the twelve months ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Price
|
|
Non-vested at December 31, 2018
|
169,293
|
|
|
$
|
31.05
|
|
|
Granted
|
46,885
|
|
|
$
|
35.60
|
|
|
Forfeited
|
(5,720
|
)
|
|
$
|
32.35
|
|
|
Vested
|
(66,208
|
)
|
|
$
|
27.75
|
|
|
Non-vested at December 31, 2019
|
144,250
|
|
|
$
|
32.71
|
|
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
|
|
Compensation expense, associated with restricted stock awards, recognized in the years ended December 31, 2019, December 31, 2018 and December 31, 2017 was $2.0 million, $2.1 million, and $1.7 million, respectively. Related income tax benefits recognized
in earnings in the years ended December 31, 2019, December 31, 2018 and December 31, 2017 were approximately $0.5 million, $0.5 million and $0.7 million, respectively. Unrecognized compensation expense under the DXP Enterprises, Inc. 2016 Omnibus Plan at December 31, 2019, December 31, 2018 and December 31, 2017 was $3.0 million, $3.6 million and $1.6 million, respectively. As of December 31, 2019, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 22.7 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,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
Weighted average shares outstanding
|
17,592
|
|
|
17,553
|
|
|
17,400
|
|
|
|
|
|
|
|
|
|
Net income attributable to DXP Enterprises, Inc.
|
$
|
36,035
|
|
|
$
|
35,632
|
|
|
$
|
16,888
|
|
|
Convertible preferred stock dividend
|
(90
|
)
|
|
(90
|
)
|
|
(90
|
)
|
|
Net income attributable to common shareholders
|
$
|
35,945
|
|
|
$
|
35,542
|
|
|
$
|
16,798
|
|
|
Per share amount
|
$
|
2.04
|
|
|
$
|
2.02
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
Weighted average shares outstanding
|
17,592
|
|
|
17,553
|
|
|
17,400
|
|
|
Assumed conversion of convertible preferred stock
|
840
|
|
|
840
|
|
|
840
|
|
|
Total dilutive shares
|
18,432
|
|
|
18,393
|
|
|
18,240
|
|
|
Net income attributable to common shareholders
|
$
|
35,945
|
|
|
$
|
35,542
|
|
|
$
|
16,798
|
|
|
Convertible preferred stock dividend
|
90
|
|
|
90
|
|
|
90
|
|
|
Net income attributable to DXP Enterprises, Inc.
|
$
|
36,035
|
|
|
$
|
35,632
|
|
|
$
|
16,888
|
|
|
Per share amount
|
$
|
1.96
|
|
|
$
|
1.94
|
|
|
$
|
0.93
|
|
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, 2019, 2018 and 2017, respectively. The preferred stock did not have any activity during 2019, 2018 and 2017.
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,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Common Stock:
|
Quantity (in thousands)
|
|
Balance, beginning of period
|
17,401
|
|
|
17,316
|
|
|
17,197
|
|
|
Issuance of shares for compensation net of withholding
|
59
|
|
|
85
|
|
|
119
|
|
|
Issuance of common stock related to equity distribution agreements
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance, end of period
|
17,460
|
|
|
17,401
|
|
|
17,316
|
|
There were not any treasury shares outstanding for the years ended 2019, 2018 and 2017.
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, 2019, ASI contributed sales of $51.1 million and earnings before taxes of approximately $3.8 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 $2.7 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, 2019, 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 $1.6 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 $2.7 million at December 31, 2019. 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, 2019, for non-cancelable leases are as follows (in thousands):
|
|
|
|
|
|
|
|
2020
|
$
|
21,641
|
|
|
2021
|
18,455
|
|
|
2022
|
14,198
|
|
|
2023
|
8,926
|
|
|
2024
|
4,573
|
|
|
Thereafter
|
10,301
|
|
|
Total
|
$
|
78,094
|
|
Rental expense for operating leases was $25.0 million, $18.5 million and $27.7 million for the years ended December, 2019, 2018 and 2017, 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, 2019, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $1.7 million, $1.8 million, and $0.2 million to the 401(k) plan in the years ended December 31,
2019, 2018, and 2017, respectively. 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 $(0.7) million, $0.2 million, and $(1.2) million in translation adjustments, net of tax, in other comprehensive income during the years ended December 31, 2019, 2018 and 2017, respectively.
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
|
|
2019
|
|
|
|
|
|
|
|
|
Product sales (recognized at a point in time)
|
$
|
703,742
|
|
|
$
|
—
|
|
|
$
|
184,767
|
|
|
$
|
888,509
|
|
|
Inventory management services (recognized over contract life)
|
—
|
|
|
—
|
|
|
16,511
|
|
|
16,511
|
|
|
Staffing services (day-rate basis)
|
58,514
|
|
|
—
|
|
|
—
|
|
|
58,514
|
|
|
Customized pump production (recognized over time)
|
—
|
|
|
$
|
303,655
|
|
|
—
|
|
|
303,655
|
|
|
Total Revenue
|
$
|
762,256
|
|
|
$
|
303,655
|
|
|
$
|
201,278
|
|
|
$
|
1,267,189
|
|
|
Operating income for reportable segments, excluding amortization
|
86,778
|
|
|
28,895
|
|
|
14,445
|
|
|
130,118
|
|
|
Identifiable assets at year end
|
462,663
|
|
|
212,015
|
|
|
56,714
|
|
|
731,392
|
|
|
Capital expenditures
|
2,333
|
|
|
9,347
|
|
|
922
|
|
|
12,602
|
|
|
Proceeds from sale of fixed assets
|
35
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
Depreciation
|
3,517
|
|
|
4,602
|
|
|
285
|
|
|
8,404
|
|
|
Amortization
|
8,230
|
|
|
5,855
|
|
|
989
|
|
|
15,074
|
|
|
Interest expense
|
$
|
10,786
|
|
|
$
|
6,747
|
|
|
$
|
1,965
|
|
|
$
|
19,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales (recognized at a point in time)
|
$
|
575,328
|
|
|
$
|
—
|
|
|
$
|
147,927
|
|
|
$
|
723,255
|
|
|
Inventory management services (recognized over contract life)
|
—
|
|
|
—
|
|
|
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
|
|
|
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,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Operating income for reportable segments, excluding amortization
|
$
|
130,118
|
|
|
$
|
130,865
|
|
|
$
|
90,124
|
|
|
Adjustments for:
|
|
|
|
|
|
|
Amortization of intangibles
|
15,074
|
|
|
16,586
|
|
|
17,266
|
|
|
Corporate and other expense, net
|
48,922
|
|
|
45,828
|
|
|
39,368
|
|
|
Total operating income
|
$
|
66,122
|
|
|
$
|
68,451
|
|
|
$
|
33,490
|
|
|
Interest expense
|
19,498
|
|
|
20,937
|
|
|
17,054
|
|
|
Other expenses (income), net
|
(45
|
)
|
|
(1,192
|
)
|
|
(456
|
)
|
|
Income before income taxes
|
$
|
46,669
|
|
|
$
|
48,706
|
|
|
$
|
16,892
|
|
The Company had capital expenditures at Corporate of $9.5 million, $0.6 million, and $0.2 million for the years ended December 31, 2019, 2018, and 2017, respectively. The Company had identifiable assets at Corporate of $56.8 million, $54.7 million, and $19.4 million as of December 31, 2019, 2018, and 2017, respectively. Corporate depreciation was $1.7 million, $1.5 million, and $1.8 million for the years ended December 31, 2019, 2018, and 2017, 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,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
United States
|
$
|
1,165
|
|
|
$
|
1,110
|
|
|
$
|
903
|
|
|
Canada
|
102
|
|
|
106
|
|
|
104
|
|
|
Other(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,267
|
|
|
$
|
1,216
|
|
|
$
|
1,007
|
|
(1) Other includes Mexico and Dubai.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
Property and Equipment, net
|
|
|
|
|
United States
|
$
|
56
|
|
|
$
|
41
|
|
|
Canada
|
8
|
|
|
10
|
|
|
Other(1)
|
—
|
|
|
—
|
|
|
Total
|
$
|
64
|
|
|
$
|
51
|
|
(1) Other includes Dubai.
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (unaudited)
Summarized quarterly financial information for the years ended December 31, 2019, 2018 and 2017 is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
2019
|
|
|
|
|
|
|
|
|
Sales
|
$
|
311.2
|
|
|
$
|
333.3
|
|
|
$
|
327.2
|
|
|
$
|
295.5
|
|
|
Gross profit
|
84.2
|
|
|
92.0
|
|
|
92.7
|
|
|
78.3
|
|
|
Net income
|
7.3
|
|
|
13.4
|
|
|
13.2
|
|
|
2.1
|
|
|
Net income attributable to DXP Enterprises, Inc.
|
7.3
|
|
|
13.4
|
|
|
13.1
|
|
|
2.2
|
|
|
Earnings per share - basic
|
0.41
|
|
|
0.76
|
|
|
0.74
|
|
|
0.12
|
|
|
Earnings per share - diluted
|
$
|
0.40
|
|
|
$
|
0.73
|
|
|
$
|
0.71
|
|
|
$
|
0.12
|
|
|
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
|
|
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, 2019, the Company paid approximately $ 2.2 million in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little.
NOTE 22 - SUBSEQUENT EVENTS
Subsequent to the fourth quarter of fiscal 2019, the Company completed the acquisition of two companies, Turbo Machinery Repair ("Turbo") and Pumping Systems, Inc. ("PSI"). Combined, the Company paid $16.3 million consisting of $14.3 million in cash and $2.0 million in DXP common stock.
On January 31, 2020, the Company completed the acquisition of Turbo, a pump and industrial equipment repair, maintenance, machining and labor services company. Turbo was funded with cash on hand.
On January 2, 2020, the Company completed the acquisition of PSI, a distributor of pumps, systems and related services. The PSI acquisition was funded with cash on hand as well as issuing DXP's common stock.