The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
DXP ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
DXP Enterprises, Inc. together with its subsidiaries (collectively "DXP," "Company," "us," "we," or "our") are engaged in the business of distributing maintenance, repair, and operating (MRO) products and services to industrial customers. Additionally, DXP provides integrated custom pump skid packages, pump remanufacturing, and manufactures branded private label pumps to industrial customers. The Company is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS"), and Innovative Pumping Solutions ("IPS"). See Note 14 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 condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE").
The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2016.
For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated annual report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of results expected for the full fiscal year.
In the opinion of management, these condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated balance sheets as of December 31, 2016 and September 30, 2017 (unaudited), condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2017 and September 30, 2016 (unaudited), and condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and September 30, 2016 (unaudited). All such adjustments represent normal recurring items.
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 September 30, 2017, the total assets of the VIE were approximately $5.4 million including approximately $4.9 million of property and equipment compared to $5.2 million of total assets and $5.2 million of property and equipment at December 31, 2016. DXP is the primary customer of the VIE. For the three months ended September 30, 2017 and 2016, consolidation of the VIE increased cost of sales by approximately $0.3 million and $0.2 million, respectively and increased SG&A by approximately $0.3 million and $58 thousand, respectively. For the nine months ended September 30, 2017 and 2016, consolidation of the VIE increased cost of sales by approximately $0.7 million and $0.8 million, respectively and increased SG&A by approximately $0.8 million and $0.2 million, respectively. The Company recognized a related income tax benefit of $33 thousand and $50 thousand, respectively, related to the VIE for the three months ended September 30, 2017 and 2016 and $219 thousand and $130 thousand, respectively, for the nine months ended September 30, 2017 and 2016. At September 30, 2017, the owners of 52.5% of the equity not owned by DXP included a former executive officer and other employees of DXP.
Equity investments in which we exercise significant influence, but do not control and are not the primary beneficiary, are accounted for using the equity method of accounting. During the first quarter of 2016, DXP invested $4.0 million in a related party equity method investment
.
During the third and fourth quarters of 2016, the investment was reduced to zero by $4.0 million of distributions received from the entity. As of September 30, 2017, a $0.2 million receivable related to the return DXP earned on this investment is included in other current assets.
All intercompany accounts and transactions have been eliminated upon consolidation.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Standards Effective in 2017 or Earlier
Accounting Changes and Error Corrections.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-03 ("ASU 2017-03"), Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This update adds language to the SEC Staff Guidance in relation to ASU 2014-09, ASU 2016-02, and ASU 2016-13. This ASU 2017-03 provides the SEC Staff view that a registrant should consider additional quantitative and qualitative disclosures related to the previously mentioned ASUs in connection with the status and impact of their adoption. This guidance, which was effective immediately, did not have a material impact on our Condensed Consolidated Financial Statements.
Compensation – Stock Compensation.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The update aims to simplify aspects of accounting for share-based payment award transactions, including (a) income tax consequences, (b) classification of awards as either equity or liabilities, and (c) classification on the statement of cash flows. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted the ASU January 1, 2017 and it had the following impact on t
he Company's Condensed Consolidated Financial Statements
:
Topic
|
Method of Adoption
|
Impact on Consolidated Financial Statements
|
Recognize all excess tax benefits and tax deficiencies as income tax benefit or expense
|
Prospective
|
The Company recognized $0.2 million and $0.3 million of excess tax benefit in income taxes in the three and nine months ended September 30, 2017, respectively, decreasing the effective tax rate for each period.
|
Excess tax benefits and deficiencies on the statement of cash flows are classified as an operating activity
|
Prospective
|
The Company recognized $0.3 million of excess tax benefit in the nine months ended September 30, 2017 as an operating activity. Prior to the adoption of the ASU 2016-09, the excess tax expense in the nine months ended September 30, 2016 was $0.6 million recognized as a financing activity.
|
Employee taxes paid when an employer withholds shares for tax-withholding purposes on the statement of cash flows are classified as financing activity
|
Retrospective
|
The Company reclassified $0.2 million of employee taxes paid from cash flows from operating activities to cash flows from financing on the Consolidated Statements of Cash Flows in the nine months ended September 30, 2016.
|
Accounting for forfeitures and tax withholding elections
|
Prospective
|
The Company has not changed its accounting policy for forfeitures. There is no significant impact on Consolidated Financial Statements.
|
Income Taxes.
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes.
The update requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. The update simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within. The Company adopted this ASU January 1, 2017 and
reclassified $9.5 million of current deferred income tax assets from current assets to non-current deferred income tax liabilities on the Condensed Consolidated Balance Sheet as of December 31, 2016.
Inventory.
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330), Simplifying the Measurement of Inventory.
The amendments in ASU 2015-11 clarify the subsequent measurement of inventory requiring an entity to subsequently measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. This ASU applies only to inventory that is measured using the first-in, first-out (FIFO) or average cost method. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in ASU 2015-11 should be applied prospectively and are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this ASU January 1, 2017 and it did not have a material impact on the Company's Condensed Consolidated Financial Statements.
Statement of Cash Flows.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230)
,
Classification of Restricted Cash
. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amounts should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 should be applied retrospectively and are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted this ASU September 30, 2017 and
classified $3.6 million of cash to restricted cash. This cash deposit was required as collateral for letters of credit outstanding under our previously existing credit facility.;
Standards Effective in 2018 or Later
Compensation - Stock Compensation.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently assessing the impact, if any, that this ASU will have upon adoption.
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's goodwill impairment testing for the fiscal period beginning January 1, 2020, will follow the provisions of this ASU. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
Business Combinations.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company's Consolidated Financial Statements.
Statement of Cash Flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company's Consolidated
Financial Statements.
Financial Instruments – Credit Losses.
In June 2016, the FASB issued ASU 2016-13:
Financial Instruments – Credit Losses,
which replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses. The amended guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the effect, if any, that the guidance will have on the Company's Consolidated Financial Statements and related disclosures
.
Leases.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The update requires organizations that lease assets ("lessees") to recognize the assets and liabilities for the rights and obligations created by leases with terms of more than 12 months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains dependent on its
classification as a finance or operating lease. The criteria for determining whether a lease is a finance or operating lease has not been significantly changed by this ASU. The ASU also requires additional disclosure of the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its Consolidated Financial Statements.
Financial Instruments.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities
. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early. The Company is evaluating the impact of this ASU.
Revenue
Recognition.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement, as amended by ASU 2015-14, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
The Company has evaluated the provisions of the new standard and is in the process of assessing its impact on financial statements, information systems, business processes and financial statement disclosures. We have engaged third party consultants to assist us in assessing our contracts with customers, processes and controls required to address the impact that ASU No. 2014-09 will have on our business. The Company believes that our current plan will enable us to implement our new procedures and controls; and assess the cumulative effect of applying ASU No. 2014-09 at the date of initial application. Based on our overall assessment performed to date, the standard is not expected to have a material impact on the Company's Consolidated Financial Statements.
NOTE 4 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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.
NOTE 5 – INVENTORIES, NET
The carrying values of inventories are as follows (
in thousands
):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Finished goods
|
|
$
|
75,213
|
|
|
$
|
74,269
|
|
Work in progress
|
|
|
12,507
|
|
|
|
9,430
|
|
Inventories, net
|
|
$
|
87,720
|
|
|
$
|
83,699
|
|
NOTE 6 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS
Costs and estimated profits in excess of billings on uncompleted contracts arise in the consolidated balance sheets when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract.
Costs and estimated profits on uncompleted contracts and related amounts billed were as follows (
in thousands
):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
31,584
|
|
|
$
|
25,214
|
|
Estimated profits, thereon
|
|
|
3,097
|
|
|
|
6,274
|
|
Total
|
|
|
34,681
|
|
|
|
31,488
|
|
Less: billings to date
|
|
|
13,530
|
|
|
|
15,864
|
|
Net
|
|
$
|
21,151
|
|
|
$
|
15,624
|
|
Such amounts were included in the accompanying condensed consolidated balance sheets for 2017 and 2016 under the following captions (
in thousands
):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Costs and estimated profits in excess
of billings on uncompleted contracts
|
|
$
|
24,191
|
|
|
$
|
18,421
|
|
Billings in excess of costs and estimated
profits on uncompleted contracts
|
|
|
(3,032
|
)
|
|
|
(2,813
|
)
|
Translation adjustment
|
|
|
(8
|
)
|
|
|
16
|
|
Net
|
|
$
|
21,151
|
|
|
$
|
15,624
|
|
NOTE 7 - PROPERTY AND EQUIPMENT, NET
The carrying values of property and equipment are as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,345
|
|
|
$
|
2,346
|
|
Buildings and leasehold improvements
|
|
|
16,668
|
|
|
|
16,259
|
|
Furniture, fixtures and equipment
|
|
|
96,337
|
|
|
|
94,784
|
|
Less – Accumulated depreciation
|
|
|
(59,647
|
)
|
|
|
(52,582
|
)
|
Total property and equipment, net
|
|
$
|
55,703
|
|
|
$
|
60,807
|
|
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the changes in the carrying amount of goodwill and other intangible assets during the nine months ended September 30, 2017 (
in thousands
):
|
|
Goodwill
|
|
|
Other
Intangible Assets
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
$
|
187,591
|
|
|
$
|
94,831
|
|
|
$
|
282,422
|
|
Translation adjustment
|
|
|
-
|
|
|
|
1,157
|
|
|
|
1,157
|
|
Amortization
|
|
|
-
|
|
|
|
(12,943
|
)
|
|
|
(12,943
|
)
|
Balance as of September 30, 2017
|
|
$
|
187,591
|
|
|
$
|
83,045
|
|
|
$
|
270,636
|
|
The following table presents the goodwill balance by reportable segment
(in thousands)
:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Service Centers
|
|
$
|
154,473
|
|
|
$
|
154,473
|
|
Innovative Pumping Solutions
|
|
|
15,980
|
|
|
|
15,980
|
|
Supply Chain Services
|
|
|
17,138
|
|
|
|
17,138
|
|
Total
|
|
$
|
187,591
|
|
|
$
|
187,591
|
|
The following table presents a summary of amortizable other intangible assets (
in thousands
):
|
|
As of September 30, 2017
|
|
|
As of December 31, 2016
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Carrying Amount, net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Carrying Amount, net
|
|
Customer relationships
|
|
$
|
162,201
|
|
|
$
|
(79,315
|
)
|
|
$
|
82,886
|
|
|
$
|
163,022
|
|
|
$
|
(68,446
|
)
|
|
$
|
94,576
|
|
Non-compete agreements
|
|
|
949
|
|
|
|
(790
|
)
|
|
|
159
|
|
|
|
1,836
|
|
|
|
(1,581
|
)
|
|
|
255
|
|
Total
|
|
$
|
163,150
|
|
|
$
|
(80,105
|
)
|
|
$
|
83,045
|
|
|
$
|
164,858
|
|
|
$
|
(70,027
|
)
|
|
$
|
94,831
|
|
Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according to estimated economic benefits over their estimated useful lives.
NOTE 9 – LONG-TERM DEBT
Long-term debt consisted of the following (
in thousands
):
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
ABL Revolver
|
|
$
|
-
|
|
|
$
|
-
|
|
Term Loan B
|
|
|
250,000
|
|
|
|
-
|
|
Line of credit
|
|
|
-
|
|
|
|
147,600
|
|
Term loan
|
|
|
-
|
|
|
|
74,500
|
|
Promissory note payable in monthly installments at 2.9% through
January 2021, collateralized by equipment
|
|
|
2,938
|
|
|
|
3,577
|
|
Less unamortized debt issuance costs
|
|
|
(10,531
|
)
|
|
|
(992
|
)
|
|
|
|
242,407
|
|
|
|
224,685
|
|
Less: Current portion
|
|
|
(3,365
|
)
|
|
|
(51,354
|
)
|
Long-term debt less current maturities
|
|
$
|
239,042
|
|
|
$
|
173,331
|
|
Senior Secured Term Loan B:
On August 29, 2017, DXP entered into a six year Senior Secured Term Loan B (the "Term Loan") with an original principal amount of $250 million which amortizes in equal quarterly installments of 0.25% with the balance payable in August 2023, when the facility matures. Subject to securing additional lender commitments, the Term Loan allows for incremental increases in facility size up to an aggregate of $30 million, in minimum increments of $10 million, plus an additional amount such that DXP's secured leverage ratio (as defined under the Term Loan) would not exceed 3.60 to 1.00. We are required to repay the Term Loan in connection with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total leverage ratio is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00. In addition, the Term Loan contains a number of customary restrictive covenants.
The interest rate for the Term Loan was 6.7 % as of September 30, 2017.
The Term Loan B Agreement requires that the company's Secured Leverage Ratio, defined as the ratio, as of the last day of any fiscal quarter of consolidated secured debt (net of restricted cash, not to exceed $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2017, is either equal to or less than as indicated in the table below:
Fiscal Quarter
|
Secured Leverage Ratio
|
December 31, 2017
|
5.75:1.00
|
March 31, 2018
|
5.75:1.00
|
June 30, 2018
|
5.50:1.00
|
September 30, 2018
|
5.50:1.00
|
December 31, 2018
|
5.25:1.00
|
March 31, 2019
|
5.25:1.00
|
June 30, 2019
|
5.00:1.00
|
September 30, 2019
|
5.00:1.00
|
December 31, 2019
|
4.75:1.00
|
March 31, 2020
|
4.75:1.00
|
June 30, 2020 and each Fiscal Quarter thereafter
|
4.50:1.00
|
As of September 30, 2017, the company's consolidated Secured Leverage Ratio was 3.61 to 1.00.
The Term Loan is guaranteed by each of the Company's direct and indirect material wholly owned subsidiaries, other than any of the Company's Canadian subsidiaries and certain other excluded subsidiaries.
The Term Loan is secured by substantially all of the assets of the Company.
ABL Facility
On August 29, 2017, DXP also entered into a five year, $85 million Asset Based Loan and Security Agreement (the "ABL Credit Agreement"). The ABL Credit Agreement provides for asset-based revolving loans in an aggregate principal amount of up to $85.0 million (the "ABL Loans"). The ABL Loans may be increased, in increments of $10.0 million, up to an aggregate of $50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average daily excess availability under the facility for the most recently completed calendar quarter. Fees ranging from 0.25% to 0.375% per annum are payable on the portion of the facility not in use at any given time.
The obligations of the Borrowers are guaranteed by the Company and its direct and indirect material wholly-owned subsidiaries other than certain excluded subsidiaries.
The ABL Credit Agreement contains a financial covenant restricting the Company from allowing its fixed charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under ABL Facility falls below a threshold set forth in the ABL Credit Agreement.
The ABL Loan is secured by substantially all of the assets of the Company.
Termination of Previously Existing Credit Facility
As set forth above, on August 29, 2017, the Company terminated its previously existing credit agreement and facility and replaced it with the Term Loan and the ABL Credit Agreement. The terminated facility was under the Amended and Restated Credit Agreement, dated as of January 2, 2014, by and among the Company, as borrower, and Wells Fargo Bank, National Association, as issuing lender and administrative agent for other lenders (the "Original Credit Agreement"). This Original Credit Agreement was subsequently amended five times by the First Amendment to Restated Credit Agreement dated as of August 6, 2015, Second Amendment to Restated Credit Agreement dated as of September 30, 2015, Third Amendment to Restated Credit Agreement dated as of May 12, 2016, Fourth Amendment to Restated Credit Agreement dated as of August 15, 2016, and Fifth Amendment to Amended and Restated Credit Agreement dated as of November 28, 2016. A description of the material terms of these terminated agreements can be found in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017.
NOTE 10 – INCOME TAXES
Our effective tax rate from continuing operations was a tax benefit of 67.8% for the three months ended September 30, 2017 compared to a tax expense of 78.5% for the three months ended September 30, 2016. Compared to the U.S. statutory rate for the three months ended September 30, 2017, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreased by lower income tax rates on income earned in foreign jurisdictions, the change in valuation allowance recorded against deferred tax assets, and research and development tax credits. Compared to the U.S. statutory rate for the three months ended September 30, 2016, the effective tax rate was increased by state taxes and nondeductible expenses.
Our effective tax rate from continuing operations was a tax expense of 22.6% for the nine months ended September 30, 2017 compared to a tax expense of 95.8% for the nine months ended September 30, 2016. Compared to the U.S. statutory rate for the nine months ended September 30, 2017, the effective tax rate was increased by state taxes and nondeductible expenses. The effective tax rate was decreased by lower income tax rates on income earned in foreign jurisdictions, the change in valuation allowance recorded against deferred tax assets, and research and development tax credits. Compared to the U.S. statutory rate for the nine months ended September 30, 2016, the effective tax rate was increased by state taxes and nondeductible expenses.
NOTE 11 - STOCK-BASED COMPENSATION
Restricted Stock
Under the restricted stock plans approved by our shareholders, directors, consultants and employees were awarded shares of DXP's common stock. The shares of restricted stock granted to employees and that are outstanding as of September 30, 2017 vest in accordance with one of the following vesting schedules: 100% one year after date of grant; 33.3% each year for three years after the date of grant; 20% each year for five years after the grant date; or 10% each year for ten years after the grant date. The shares of restricted stock granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock awards was 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 September 30, 2017, 401,223 shares were available for future grants.
Changes in restricted stock for the nine months ended September 30, 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
|
|
|
(79,853
|
)
|
|
$
|
25.14
|
|
Non-vested at September 30, 2017
|
|
|
81,901
|
|
|
$
|
29.88
|
|
Compensation expense, associated with restricted stock, recognized in the nine months ended September 30, 2017 and 2016 was $1.4 million and $1.9 million, respectively. Related income tax benefits recognized in earnings for the nine months ended September 30, 2017 and 2016 were approximately $0.6
million and $0.6 million, respectively. Unrecognized compensation expense under the Restricted Stock Plan at September 30, 2017 and December 31, 2016 was $1.9 million and $2.7 million, respectively. As of September 30, 2017, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 17.4 months.
NOTE 12 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (
in thousands, except per share data
):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,394
|
|
|
|
14,600
|
|
|
|
17,402
|
|
|
|
14,529
|
|
Net income attributable to DXP Enterprises, Inc.
|
|
$
|
2,966
|
|
|
$
|
263
|
|
|
$
|
10,234
|
|
|
$
|
321
|
|
Convertible preferred stock dividend
|
|
|
23
|
|
|
|
23
|
|
|
|
68
|
|
|
|
68
|
|
Net income attributable to common shareholders
|
|
$
|
2,943
|
|
|
$
|
240
|
|
|
$
|
10,166
|
|
|
$
|
253
|
|
Per share amount
|
|
$
|
0.17
|
|
|
$
|
0.02
|
|
|
$
|
0.58
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,394
|
|
|
|
14,600
|
|
|
|
17,402
|
|
|
|
14,529
|
|
Assumed conversion of convertible
preferred stock
|
|
|
840
|
|
|
|
840
|
|
|
|
840
|
|
|
|
840
|
|
Total dilutive shares
|
|
|
18,234
|
|
|
|
15,440
|
|
|
|
18,242
|
|
|
|
15,369
|
|
Net income attributable to
common shareholders
|
|
$
|
2,943
|
|
|
$
|
240
|
|
|
$
|
10,166
|
|
|
$
|
253
|
|
Convertible preferred stock dividend
|
|
|
23
|
|
|
|
23
|
|
|
|
68
|
|
|
|
68
|
|
Net income attributable to DXP Enterprises, Inc. for diluted
earnings per share
|
|
$
|
2,966
|
|
|
$
|
263
|
|
|
$
|
10,234
|
|
|
$
|
321
|
|
Per share amount
|
|
$
|
0.16
|
|
|
$
|
0.02
|
|
|
$
|
0.56
|
|
|
$
|
0.02
|
|
NOTE 13 - COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.
NOTE 14 - SEGMENT REPORTING
The Company's reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, MRO products, equipment and integrated services, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, 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
):