dxpe-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


[			☒			]			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2022


[			☐			]			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to

Commission file number 0-21513

DXP Enterprises, Inc.

(Exact name of registrant as specified in its charter)


Texas						76-0509661
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

5301 Hollister, Houston, Texas 77040

(Address of principal executive offices, including zip code)

(713) 996-4700


(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of Each Class	Trading Symbol	Name of Exchange on which Registered
Common Stock par value $0.01	DXPE	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [☐] Emerging growth company [☐]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [☐] No [X]

Number of shares of registrant's Common Stock outstanding as of April 30, 2022: 18,642,621 par value $0.01 per share.

DXP ENTERPRISES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

DESCRIPTION


Item		Page
PART I: FINANCIAL INFORMATION
	ITEM 1. Financial Statements	3
	a) Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income	3
	b) Unaudited Condensed Consolidated Balance Sheets	4
	c) Unaudited Condensed Consolidated Statements of Cash Flows	5
	d) Unaudited Condensed Consolidated Statements of Equity	6
	e) Notes to Unaudited Condensed Consolidated Financial Statements	7
	ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	21
	ITEM 4. Controls and Procedures	22

PART II: OTHER INFORMATION		23
	ITEM 1. Legal Proceedings	23
	ITEM 1A. Risk Factors	23
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
	ITEM 3. Default upon Senior Securities	23
	ITEM 4. Mine Safety Disclosures	23
	ITEM 5. Other Information	24
	ITEM 6. Exhibits	25
	Signatures	26

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share amounts) (unaudited)


	Three Months Ended March 31,
	2022		2021

Sales	$	319,411	$	245,587
Cost of sales	224,527		173,957
Gross profit	94,884		71,630
Selling, general and administrative expenses	73,325		65,397
Income from operations	21,559		6,233
Other (income) expense	536		(430)
Interest expense	5,162		5,243
Income before income taxes	15,861		1,420
Provision for income taxes	3,332		1,261
Net income	12,529		159
Net loss attributable to noncontrolling interest	(113)		(212)
Net income attributable to DXP Enterprises, Inc.	12,642		371
Preferred stock dividend	23		23
Net income attributable to common shareholders	$	12,619	$	348

Net income	$	12,529	$	159
Currency translation adjustments	1,669		1,491
Comprehensive income	$	14,198	$	1,650

Earnings per share (Note 10) :
Basic	$	0.68	$	0.02
Diluted	$	0.65	$	0.02
Weighted average common shares outstanding :
Basic	18,534		19,186
Diluted	19,374		20,026

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data) (unaudited)



	March 31, 2022		December 31, 2021
ASSETS
Current assets:
Cash	$	36,559	$	48,989
Restricted cash	91		91
Accounts Receivable, net of allowance of $7,176 and $7,759	228,213		218,137
Inventories	111,862		100,894
Costs and estimated profits in excess of billings	20,504		17,193
Prepaid expenses and other current assets	14,317		9,522
Federal income taxes receivable	1,019		9,748
Total current assets	412,565		404,574
Property and equipment, net	50,269		51,880
Goodwill	301,563		296,541
Other intangible assets, net	77,005		79,205
Operating lease ROU assets	56,267		57,221
Other long-term assets	4,646		4,806
Total assets	$	902,315	$	894,227
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,300	$	3,300
Trade accounts payable	81,450		77,842
Accrued wages and benefits	23,515		23,006
Customer advances	13,498		12,924
Billings in excess of costs and estimated profits	5,328		3,581
Federal income taxes payable	104		—
Short-term operating lease liabilities	18,093		18,203
Other current liabilities	32,692		42,206
Total current liabilities	177,980		181,062
Long-term debt, net of unamortized debt issuance costs	315,030		315,397
Long-term operating lease liabilities	39,045		39,922
Other long-term liabilities	2,206		3,603
Deferred income taxes	7,927		7,516
Total long-term liabilities	364,208		366,438
Total liabilities	542,188		547,500
Commitments and contingencies (Note 11)
Shareholders' equity:
Series A and B preferred stock, $1.00 par value each; 1,000,000 shares authorized each	16		16
Common stock, $0.01 par value, 100,000,000 shares authorized; 18,633,271 and 18,580,364 outstanding	195		195
Additional paid-in capital	207,510		206,772
Retained earnings	215,103		202,484
Accumulated other comprehensive loss	(27,613)		(29,282)
Treasury stock, at cost 1,243,535 shares at March 31, 2022	(35,024)		(33,511)
Total DXP Enterprises, Inc. equity	360,187		346,674
Noncontrolling interest	(60)		53
Total equity	360,127		346,727
Total liabilities and equity	$	902,315	$	894,227

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (unaudited)


	Three Months Ended March 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	12,529		159
Reconciliation of net income to net cash provided (used in) by operating activities:
Depreciation	2,517		2,480
Amortization of intangible assets	4,235		4,146
Gain on sale of property and equipment	—		(246)
Provision for credit losses	(147)		(682)
Fair value adjustment on contingent consideration	531		—
Amortization of debt issuance costs	458		427
Restricted stock compensation expense	370		380
Deferred income taxes	411		580
Net change in operating assets and liabilities	(18,224)		1,333
Net cash provided by operating activities	$	2,680	$	8,577

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(740)		(680)
Proceeds from the sale of property and equipment	—		1,297
Acquisition of business, net of cash acquired	(5,316)		—
Net cash (used in) provided by investing activities	$	(6,056)	$	617

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal debt payments	(825)		(825)
Preferred Stock dividends paid	(23)		(23)
Purchase of treasury stock	(8,315)		—
Payment for employee taxes withheld from stock awards	(159)		(517)
Net cash used in financing activities	$	(9,322)	$	(1,365)
Effect of foreign currency on cash	268		204
Net change in cash and restricted cash	(12,430)		8,033
Cash and restricted cash at beginning of period	49,080		119,419
Cash and restricted cash at end of period	$	36,650	$	127,452

Supplemental schedule of non-cash investing and financing activities:
Shares issued for acquisitions (Note 13)	$	527	$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DXP ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands) (unaudited)


	Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital		Retained earnings		Treasury stock		Non controlling interest		Accum other comp loss		Total equity
Balance at December 31, 2020	$	1	$	15	$	189	$	192,068	$	186,078	$	—	$	798	$	(30,029)	$	349,120
Preferred dividends paid	—		—		—		—		(23)		—		—		—		(23)
Restricted stock compensation expense	—		—		—		380		—		—		—		—		380
Tax related items for share based awards	—		—		—		(517)		—		—		—		—		(517)
Currency translation adjustment	—		—		—		—		—		—		—		1,491		1,491
Net income	—		—		—		—		371		—		(212)		—		159
Balance at March 31, 2021	$	1	$	15	$	189	$	191,931	$	186,426	$	—	$	586	$	(28,538)	$	350,610


	Series A preferred stock		Series B preferred stock		Common stock		Paid-in capital		Retained earnings		Treasury stock		Non controlling interest		Accum other comp loss		Total equity
Balance at December 31, 2021	$	1	$	15	$	195	$	206,772	$	202,484	$	(33,511)	$	53	$	(29,282)	$	346,727
Preferred dividends paid	—		—		—		—		(23)		—		—		—		(23)
Restricted stock compensation expense	—		—		—		370		—		—		—		—		370
Tax related items for share based awards	—		—		—		(159)		—		—		—		—		(159)
Issuance of shares of common stock	—		—		—		527		—		—		—		—		527
Currency translation adjustment	—		—		—		—		—		—		—		1,669		1,669
Purchase of treasury stock	—		—		—		—		—		(1,513)		—		—		(1,513)
Net income	—		—		—		—		12,642		—		(113)		—		12,529
Balance at March 31, 2022	$	1	$	15	$	195	$	207,510	$	215,103	$	(35,024)	$	(60)	$	(27,613)	$	360,127

The accompanying notes are an integral part of these unaudited 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") 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 a variety of end markets 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 12 - Segment 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 generally accepted accounting principles in the United States of America ("US GAAP"). The accompanying unaudited 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, 2021. 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 April 5, 2022. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of results expected for the full fiscal year. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2022 and March 31, 2021, condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, condensed consolidated statements of cash flows for the three months ended March 31, 2022 and March 31, 2021, and condensed consolidated statements of equity for the three months ended March 31, 2022 and March 31, 2021. All such adjustments represent normal recurring items.

All inter-company accounts and transactions have been eliminated upon consolidation.

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-Bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company evaluated the impact of this ASU and it does not expect a material impact on the Consolidated Financial Statements.

In October 2021, the FASB issued Accounting Standards Update (ASU) 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to address diversity in practice on how an acquirer should recognize and measure revenue contracts acquired in a business combination. ASU 2021-08 will require an acquirer to recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.

For the Company, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The ASU should be applied prospectively to business combinations occurring on or after the effective date. Early adoption of ASU 2021-08 is permitted, including in an interim period. The Company expects the new Standard to have an impact for future acquisitions. From time to time the Company does acquire businesses that perform project-based work and therefore include Contract Assets and Liabilities.

All other new accounting pronouncements that have been issued, but not yet effective, are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.

NOTE 4 - REVISION

During the first quarter of 2022, we identified errors in the translation of the goodwill associated with our investment in our Canadian subsidiaries. We determined that we were not appropriately translating Canadian goodwill in consolidation since acquiring these businesses in 2012 and 2013. The failure to translate these balances resulted in an overstatement of US dollar-based goodwill for several years.

We assessed the materiality of the errors on prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the errors were not material to our prior period consolidated financial statements and therefore, amendments of previously filed consolidated financial statements are not required. In accordance with ASC 250, we have corrected the errors by revising the consolidated financial statements presented herein. Prior periods not presented herein will be revised, as applicable, in future filings.

The impacts of the revisions on the periods presented herein are provided in the following tables.


	Three Months Ended March 31, 2021
	As previously
	Reported		Adjustments		Revised
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Currency translation adjustments	$	1,277	$	214	$	1,491
Total comprehensive income	$	1,436	$	214	$	1,650



	As previously
	Reported		Adjustments		Revised
BALANCE SHEET (AT DECEMBER 31, 2021):
Goodwill	$	308,506	$	(11,965)	$	296,541
Total Assets	$	906,192	$	(11,965)	$	894,227

Cumulative Translation Adjustment	$	(17,317)	$	(11,965)	$	(29,282)
Equity	$	358,692	$	(11,965)	$	346,727
Total Liabilities & Equity	$	906,192	$	(11,965)	$	894,227


	Accumulated Other Comprehensive Loss
	As previously
	Reported		Adjustments		Revised
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Balance at December 31, 2020	$	(18,013)	$	(12,016)	$	(30,029)
Currency translation adjustment	$	1,277	$	214	$	1,491
Balance at March 31, 2021	$	(16,736)	$	(11,802)	$	(28,538)

Balance at December 31, 2021	$	(17,317)	$	(11,965)	$	(29,282)

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 come from quoted prices (unadjusted) in active markets for identical assets or liabilities.

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 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 March 31, 2022, we recorded liabilities in other current and long-term liabilities for contingent consideration associated with the acquisition of PMI, Burlingame and Drydon of $1.4 million, $0.1 million and $2.6 million, respectively. See further discussion at Note 13 - 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 three months ended March 31, 2022:


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Contingent Liability for Accrued Consideration
	(in thousands)
Beginning balance at December 31, 2021	$	905
Acquisitions and settlements
Acquisitions (Note 1 3 )	2,689
Settlements	—
Total remeasurement adjustments:
Changes in fair value recorded in other (income) expense, net	531
*Ending Balance at March 31, 2022	$	4,125

The amount of total (gains) or losses for the quarter included in earnings or changes to net assets, attributable to changes in unrealized losses relating to liabilities still held at March 31, 2022.	$	531

* Included in other current 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 March 31, 2022		Valuation Technique	Significant Unobservable Inputs
Contingent consideration: (PMI, Burlingame and Drydon acquisitions)	$	4,125	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 PMI, Burlingame and Drydon 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 7.6%. 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 unaudited condensed consolidated balance sheets at March 31, 2022 and December 31, 2021, but which require disclosure of their fair values include: cash, 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 9). Due to the short-term nature of these aforementioned securities, the Company believes that the estimated fair value of such instruments at March 31, 2022 and December 31, 2021 approximates their carrying value as reported on the unaudited condensed consolidated balance sheets.

NOTE 6 – INVENTORIES

The carrying values of inventories are as follows (in thousands):


	March 31, 2022	December 31, 2021
Finished goods

SEC Form 10-Q filed by DXP Enterprises Inc.