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.
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") 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 15 "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 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, 2017.
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 28, 2018. The results of operations for the three and six months ended June 30, 2018 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, 2017 and June 30, 2018, condensed consolidated statements of operations and comprehensive operations for the three and six months ended June 30, 2018 and June 30, 2017, and condensed consolidated statements of cash flows for the six months ended June 30, 2018 and June 30, 2017. All such adjustments represent normal recurring items.
All intercompany accounts and transactions have been eliminated upon consolidation.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
Compensation - Stock Compensation.
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Consolidated Financial Statements.
Intangibles-Goodwill and Other.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
This ASU is to simplify how an entity is required to test goodwill for impairment. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The Company adopted this ASU early on December 31, 2017. T
he Company's annual tests of goodwill for impairment, including qualitative assessments of all of its reporting units' goodwill, determined a quantitative impairment test was not necessary. Therefore the adoption of this standard did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
Business Combinations.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The effective date of this ASU is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Consolidated Financial Statements. As discussed in
Note 14 "Business Acquisitions
", the Company acquired Application Specialties, Inc. in January 2018. Application Specialties, Inc. met the definition of a business under the new guidance and goodwill was recorded.
Statement of Cash Flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The effective date of the amendment to the standard is for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Consolidated Financial Statements.
Financial Instruments.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities
. This change to the financial instrument model primarily affects the accounting for equity investments, financial liabilities under fair value options and the presentation and disclosure requirements for financial instruments. The effective date for the standard is for fiscal years and interim periods within those years beginning after December 15, 2017. Certain provisions of the new guidance can be adopted early.
The Company adopted this ASU as of January 1, 2018, and it did not have a material impact on the Company's Financial Statements.
Revenue
Recognition.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which provides guidance on revenue recognition. The core principal of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance requires entities to apply a five-step method to (1) identify the contract(s) with customers, (2) identify the performance obligation(s) in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligation(s) in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This pronouncement, as amended by ASU 2015-14, was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
The Company has evaluated the provisions of the new standard and assessed its impact on financial statements, information systems, business processes and financial statement disclosures. We engaged a third party consultant to assist us in assessing our contracts with customers, processes and controls required to address the impact that ASU No. 2014-09 would have on our business. The Company elected the modified retrospective method and adopted the new revenue guidance effective January 1, 2018, with no impact to the opening retained earnings.
The analysis of contracts with customers under the new revenue recognition standard was consistent with the Company's current revenue recognition model, whereby revenue is recognized primarily on the date products are shipped to the customer. The ASU also requires expanded qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, significant judgments and accounting policy.
The adoption of the new standard did not have a material impact on the Company's Consolidated Financial Statements. See Note 4 – Revenue Recognition.
Accounting Pronouncements Not Yet Adopted
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.
NOTE 4 – REVENUE RECOGNITION
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016, and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. The core principle of this new revenue recognition guidance is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance defines a five-step process to achieve this core principle. The new guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance provides for two transition methods, a full retrospective approach and a modified retrospective approach.
On January 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method with no impact to the opening retained earnings
and determined there were no changes required to its reported revenues as a result of the adoption. The Company has enhanced its disclosures of revenue to comply with the new guidance.
Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC Topic 605, "Revenue Recognition."
Overview
The Company's primary source of revenue is the sale of products, and service to energy and industrial customers. The Company is organized into three business segments: Service Centers, Supply Chain Services and Innovative Pumping Solutions.
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. Revenue is recognized upon the completion of our performance obligation(s) under the sales agreement. The majority of the Service Centers segment revenue originates 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 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 three to eighteen months.
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. Like the Service Centers segment above, revenue for the Supply Chain Services segment is recognized upon the completion of performance obligations. Revenues are recognized when an agreement or contract is in place and the price is fixed followed by execution of our performance obligations. We generally consider the satisfaction of our performance obligation has occurred when title for product passes to the customer or services have been rendered. Revenues are recorded net of sales taxes.
See
Note 15 "Segment Reporting"
for disaggregation of revenue by reporting segments. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories:
Level 1 Inputs
Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs
Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 Inputs
Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include managements assumptions about the likelihood of payment based on the established benchmarks and discount rates based on an internal rate of return analysis. The fair value measurement includes inputs that are Level 3 measurement as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured each reporting period and reflected in our results of operations. As of June 30, 2018, we recorded a $4 million liability for contingent consideration associated with the acquisition of ASI in other current and long-term liabilities. See further discussion at
Note 14
"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 six months ended June 30, 2018:
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
Contingent Liability for Accrued Consideration
|
|
|
|
(in thousands)
|
|
|
|
|
|
Beginning balance at January 1, 2018
|
|
$
|
-
|
|
Acquisitions and settlements
|
|
|
|
|
Acquisition of ASI (Note 14)
|
|
|
4,214
|
|
Settlements
|
|
|
-
|
|
Total remeasurement adjustments:
|
|
|
|
|
(Gains) or losses recorded against goodwill
|
|
|
(208
|
)
|
|
|
|
|
|
Ending balance at June 30, 2018*
|
|
$
|
4,006
|
|
|
|
|
|
|
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.
|
|
$
|
-
|
|
|
|
|
|
|
* 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 June 30, 2018
|
|
Valuation Technique
|
Significant Unobservable
Inputs
|
Contingent consideration:
(ASI acquisition)
|
|
$
|
4,006
|
|
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 7.6%. 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 sheet at June 30, 2018 but which require disclosure of their fair values include: cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility. The Company believes that the estimated fair value of such instruments at June 30, 2018 and December 31, 2017 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
):
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
98,960
|
|
|
$
|
79,820
|
|
Work in process
|
|
|
11,807
|
|
|
|
11,593
|
|
Inventories
|
|
$
|
110,767
|
|
|
$
|
91,413
|
|
NOTE 7 – 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
):
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
53,626
|
|
|
$
|
37,899
|
|
Estimated profits, thereon
|
|
|
6,504
|
|
|
|
2,665
|
|
Total
|
|
|
60,130
|
|
|
|
40,564
|
|
Less: billings to date
|
|
|
25,265
|
|
|
|
17,881
|
|
Net
|
|
$
|
34,865
|
|
|
$
|
22,683
|
|
Such amounts were included in the accompanying Condensed Consolidated Balance Sheets for 2018 and 2017 under the following captions (
in thousands
):
|
|
June 30,
2018
|
|
|
December 31, 2017
|
|
Costs and estimated profits in excess
of billings
|
|
$
|
37,943
|
|
|
$
|
26,915
|
|
Billings in excess of costs and estimated
profits
|
|
|
(3,075
|
)
|
|
|
(4,249
|
)
|
Translation adjustment
|
|
|
(3
|
)
|
|
|
17
|
|
Net
|
|
$
|
34,865
|
|
|
$
|
22,683
|
|
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 six months ended June 30, 2018 (
in thousands
):
|
|
Goodwill
|
|
|
Other
Intangible Assets
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
187,591
|
|
|
$
|
78,525
|
|
|
$
|
266,116
|
|
Acquired during the period
|
|
|
6,442
|
|
|
|
6,185
|
|
|
|
12,627
|
|
Translation adjustment
|
|
|
-
|
|
|
|
(551
|
)
|
|
|
(551
|
)
|
Amortization
|
|
|
-
|
|
|
|
(8,477
|
)
|
|
|
(8,477
|
)
|
Balance as of June 30, 2018
|
|
$
|
194,033
|
|
|
$
|
75,682
|
|
|
$
|
269,715
|
|
The following table presents the goodwill balance by reportable segment as of June 30, 2018 and December 31, 2017
(in thousands)
:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Service Centers
|
|
$
|
160,914
|
|
|
$
|
154,473
|
|
Innovative Pumping Solutions
|
|
|
15,980
|
|
|
|
15,980
|
|
Supply Chain Services
|
|
|
17,139
|
|
|
|
17,138
|
|
Total
|
|
$
|
194,033
|
|
|
$
|
187,591
|
|
The following table presents a summary of amortizable other intangible assets (
in thousands
):
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Carrying Amount, net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Carrying Amount, net
|
|
Customer relationships
|
|
$
|
168,255
|
|
|
$
|
(92,767
|
)
|
|
|
75,488
|
|
|
|
162,200
|
|
|
|
(83,806
|
)
|
|
|
78,394
|
|
Non-compete agreements
|
|
|
784
|
|
|
|
(590
|
)
|
|
|
194
|
|
|
|
949
|
|
|
|
(818
|
)
|
|
|
131
|
|
Total
|
|
$
|
169,039
|
|
|
$
|
(93,357
|
)
|
|
$
|
75,682
|
|
|
$
|
163,149
|
|
|
$
|
(84,624
|
)
|
|
$
|
78,525
|
|
Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according to estimated economic benefits over their estimated useful lives.
NOTE 9 – INCOME TAXES
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Cuts and Jobs Act contains several tax law changes that will impact the Company in the current and future periods. The Company is applying the guidance in Staff Accounting Bulletin ("SAB") 118 issued by the Securities and Exchange Commission when accounting for the enactment-date effects of the Tax Cuts and Jobs 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. At June 30, 2018, the Company has not completed our accounting for all of the tax effects of the Tax Cuts and Jobs Act; however, in certain cases, as described below, the Company has made a reasonable estimate of other effects. The Company will continue to refine our calculations as additional analysis is completed.
The Company originally remeasured our U.S. net deferred tax liabilities and recorded a provisional $1.3 million benefit and a corresponding provisional decrease in the U.S. net deferred tax liability relating to the reduction in the U.S. federal corporate income tax rate to 21% from 35%. We are still in the process of analyzing Tax Cuts and Jobs Act's impact as permitted under SAB 118. The largest impact to the Company being the remeasurement of deferred taxes due to the U.S. statutory tax rate change. The mandatory repatriation and resulting toll charge on accumulated foreign earnings and profits has limited impact on the Company as unremitted earnings from non-US jurisdictions is minimal. The Company is provisional in its approach and assertion that there is no financial statement impact related to mandatory repatriation as of June 30, 2018. We will continue to monitor tax reform, as we anticipate additional guidance from the Internal Revenue Service will become more available throughout 2018.
Our effective tax rate from continuing operations was a tax expense of 25.21% for the six months ended June 30, 2018 compared to a tax expense of 36.81% for the six months ended June 30, 2017. Compared to the U.S. statutory rate for the six months ended June 30, 2018, the effective tax rate was increased by state taxes, foreign taxes, and nondeductible expenses and partially offset by research and development tax credits. Compared to the U.S. statutory rate for the six months ended June 30, 2017, the effective tax rate was increased by state taxes and nondeductible expenses and partially offset by lower income tax rates on income earned in foreign jurisdictions, domestic production activities deduction, and research and development credits.
NOTE 10 – LONG-TERM DEBT
The components of the Company's long-term debt consisted of the following (
in thousands
):
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying Value*
|
|
|
Fair Value
|
|
|
Carrying Value*
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABL Revolver
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Term Loan B
|
|
|
248,125
|
|
|
|
249,519
|
|
|
|
249,375
|
|
|
|
251,869
|
|
Promissory note due January 2021
|
|
|
2,284
|
|
|
|
2,284
|
|
|
|
2,722
|
|
|
|
2,722
|
|
Total long-term debt
|
|
|
250,409
|
|
|
|
251,803
|
|
|
|
252,097
|
|
|
|
254,591
|
|
Less: current portion
|
|
|
(3,394
|
)
|
|
|
(3,408
|
)
|
|
|
(3,381
|
)
|
|
|
(3,406
|
)
|
Long-term debt less current maturities
|
|
$
|
247,015
|
|
|
$
|
248,395
|
|
|
$
|
248,716
|
|
|
$
|
251,185
|
|
*Carrying value amounts do not include unamortized debt issuance costs of $9.1M and $10.1 for June 30, 2018 and December 31, 2017, respectively
.
The fair value measurements used by the Company are considered Level 2 inputs, as defined in the fair value hierarchy. The fair value estimates were based on quoted prices for identical or similar securities.
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%. The Repricing Amendment also includes a "soft call" prepayment penalty of 1.0% for a period of six months commencing with the date of the Repricing Amendment for certain prepayments, refinancing, and amendments.
The Company accounted for the Repricing Amendment as a modification of debt. Approximately, $60,000 of prior deferred debt issuance cost were accelerated and recorded as additional interest expense in the condensed consolidated statements of operations and comprehensive operations, 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 condensed consolidated statements of operations and comprehensive operations.
As of June 30, 2018, the Company had no amount outstanding under the ABL Revolver and had $80.0 million of borrowing capacity, including the impact of letters of credit.
Interest on Borrowings
The interest rates on our borrowings outstanding at June 30, 2018 and December 31, 2017, including the amortization of debt issuance costs, were as follows:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
ABL Revolver
|
|
|
3.8
|
%
|
|
|
2.9
|
%
|
Term Loan B
|
|
|
6.8
|
%
|
|
|
7.1
|
%
|
Promissory Note
|
|
|
2.9
|
%
|
|
|
2.9
|
%
|
Weighted average interest rate
|
|
|
6.8
|
%
|
|
|
7.0
|
%
|
The Company was in compliance with all financial covenants under the August 2017 Credit Agreement as of June 30, 2018.
NOTE 11 - STOCK-BASED COMPENSATION
Restricted Stock
Under the equity incentive plans approved by our shareholders, directors, consultants and employees may be awarded shares of DXP's common stock. The shares of restricted stock and restricted stock units granted to employees and that are outstanding as of June 30, 2018 vest (or have forfeiture restrictions that lapse) in accordance with one of the following vesting schedules: 100% one year after date of grant; 33.3% each year for three years after date of grant; 20% each year for five years after date of grant; or 10% each year for ten years after date of grant. The shares of restricted stock granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock awards is measured based upon the closing prices of DXP's common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Shares of our common stock are issued and outstanding upon the grant of awards of restricted stock. Once restricted stock units vest, new shares of the Company's stock are issued. At June 30, 2018, 279,149 shares were available for future grant.
Changes in restricted stock for the six months ended June 30, 2018 were as follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Grant Price
|
|
Non-vested at December 31, 2017
|
|
|
77,901
|
|
|
$
|
30.36
|
|
Granted
|
|
|
124,474
|
|
|
$
|
31.54
|
|
Forfeited
|
|
|
(2,400
|
)
|
|
$
|
46.68
|
|
Vested
|
|
|
(12,699
|
)
|
|
$
|
49.67
|
|
Non-vested at June 30, 2018
|
|
|
187,276
|
|
|
$
|
29.63
|
|
Compensation expense, associated with restricted stock, recognized in the six months ended June 30, 2018 and 2017 was $1.0 million, respectively. Related income tax benefits recognized in earnings for the six months ended June 30, 2018 and 2017 were approximately $0.4
million. Unrecognized compensation expense under the Restricted Stock Plan at June 30, 2018 and December 31, 2017 was $4.4 million and $1.6 million, respectively. As of June 30, 2018, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 28.2 months.
NOTE 12 - EARNINGS PER SHARE DATA
Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities.
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,558
|
|
|
|
17,404
|
|
|
|
17,538
|
|
|
|
17,406
|
|
Net income attributable to DXP Enterprises, Inc.
|
|
$
|
11,562
|
|
|
$
|
4,135
|
|
|
$
|
16,113
|
|
|
$
|
7,268
|
|
Convertible preferred stock dividend
|
|
|
22
|
|
|
|
22
|
|
|
|
45
|
|
|
|
45
|
|
Net income attributable to common shareholders
|
|
$
|
11,540
|
|
|
$
|
4,113
|
|
|
$
|
16,068
|
|
|
$
|
7,223
|
|
Per share amount
|
|
$
|
0.66
|
|
|
$
|
0.24
|
|
|
$
|
0.92
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,558
|
|
|
|
17,404
|
|
|
|
17,538
|
|
|
|
17,406
|
|
Assumed conversion of convertible
preferred stock
|
|
|
840
|
|
|
|
840
|
|
|
|
840
|
|
|
|
840
|
|
Total dilutive shares
|
|
|
18,398
|
|
|
|
18,244
|
|
|
|
18,378
|
|
|
|
18,246
|
|
Net income attributable to
common shareholders
|
|
$
|
11,540
|
|
|
$
|
4,113
|
|
|
$
|
16,068
|
|
|
$
|
7,223
|
|
Convertible preferred stock dividend
|
|
|
22
|
|
|
|
22
|
|
|
|
45
|
|
|
|
45
|
|
Net income attributable to DXP Enterprises, Inc. for diluted
earnings per share
|
|
$
|
11,562
|
|
|
$
|
4,135
|
|
|
$
|
16,113
|
|
|
$
|
7,268
|
|
Per share amount
|
|
$
|
0.63
|
|
|
$
|
0.23
|
|
|
$
|
0.88
|
|
|
$
|
0.40
|
|
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 the aggregate, a material adverse effect on DXP's consolidated financial position, cash flows, or results of operations.
NOTE 14 – 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 $4.0 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 will provide the Company's metal working division with new geographic territory and enhance DXP's end market mix. For the six months ended June 30, 2018, ASI contributed sales of $23.0 million and earnings before taxes of approximately $2.6 million.
As part of our purchase agreement, we may pay up to an additional $4.6 million of contingent consideration over the next 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 $4.0 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. 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 June 30, 2018 approximately $1.4 million of the actual cash due toward the contingent consideration earned is recorded in current liabilities. We may pay up to an additional $3.2 million over the remaining earn-out period based on the achievement of certain EBITDA benchmarks. The estimated fair value of the contingent consideration is recorded at the present value of $4.0 million at June 30, 2018. Changes in the estimated fair value of the contingent earn-out consideration, up to the total contractual amount, are reflected in our results of operations in the periods in which they are identified. Changes in the fair value of the contingent consideration may materially impact and cause volatility in our future operating results. Changes in our estimates for the contingent consideration are discussed in Note 5 to our condensed 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:
Purchase Price Consideration
|
|
Total Consideration
|
|
|
|
(Dollars in thousands)
|
|
Cash payments
|
|
$
|
10,792
|
|
Fair value of stock issued
|
|
|
894
|
|
Present value of estimated fair value of contingent earn-out consideration
|
|
|
4,006
|
|
Total purchase price consideration
|
|
$
|
15,692
|
|
NOTE 15 - 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
):
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
SC
|
|
|
IPS
|
|
|
SCS
|
|
|
Total
|
|
|
SC
|
|
|
IPS
|
|
|
SCS
|
|
|
Total
|
|
Sales
|
|
$
|
193,576
|
|
|
$
|
74,257
|
|
|
$
|
43,394
|
|
|
$
|
311,227
|
|
|
$
|
164,749
|
|
|
$
|
44,470
|
|
|
$
|
41,479
|
|
|
$
|
250,698
|
|
Amortization
|
|
|
2,310
|
|
|
|
1,538
|
|
|
|
271
|
|
|
|
4,119
|
|
|
|
2,227
|
|
|
|
1,793
|
|
|
|
271
|
|
|
|
4,291
|
|
Income (loss) from operations
|
|
|
19,623
|
|
|
|
7,418
|
|
|
|
3,984
|
|
|
|
31,025
|
|
|
|
16,190
|
|
|
|
(38
|
)
|
|
|
3,447
|
|
|
|
19,599
|
|
Income from operations,
excluding amortization
|
|
$
|
21,933
|
|
|
$
|
8,956
|
|
|
$
|
4,255
|
|
|
$
|
35,144
|
|
|
$
|
18,417
|
|
|
$
|
1,755
|
|
|
$
|
3,718
|
|
|
$
|
23,890
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
SC
|
|
|
IPS
|
|
|
SCS
|
|
|
Total
|
|
|
SC
|
|
|
IPS
|
|
|
SCS
|
|
|
Total
|
|
Sales
|
|
$
|
368,937
|
|
|
$
|
141,899
|
|
|
$
|
86,327
|
|
|
$
|
597,163
|
|
|
$
|
313,461
|
|
|
$
|
93,528
|
|
|
$
|
82,236
|
|
|
$
|
489,225
|
|
Amortization
|
|
|
4,770
|
|
|
|
3,165
|
|
|
|
542
|
|
|
|
8,477
|
|
|
|
4,477
|
|
|
|
3,588
|
|
|
|
542
|
|
|
|
8,607
|
|
Income from operations
|
|
|
32,992
|
|
|
|
12,173
|
|
|
|
7,767
|
|
|
|
52,932
|
|
|
|
27,281
|
|
|
|
1,676
|
|
|
|
7,234
|
|
|
|
36,191
|
|
Income from operations,
excluding amortization
|
|
$
|
37,762
|
|
|
$
|
15,338
|
|
|
$
|
8,309
|
|
|
$
|
61,409
|
|
|
$
|
31,758
|
|
|
$
|
5,264
|
|
|
$
|
7,776
|
|
|
$
|
44,798
|
|
The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes (
in thousands
):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Operating income for reportable segments
|
|
$
|
35,144
|
|
|
$
|
23,890
|
|
|
$
|
61,409
|
|
|
$
|
44,798
|
|
Adjustment for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
4,119
|
|
|
|
4,291
|
|
|
|
8,477
|
|
|
|
8,607
|
|
Corporate expenses
|
|
|
10,965
|
|
|
|
9,342
|
|
|
|
21,723
|
|
|
|
17,698
|
|
Income from operations
|
|
|
20,060
|
|
|
|
10,257
|
|
|
|
31,209
|
|
|
|
18,493
|
|
Interest expense
|
|
|
6,137
|
|
|
|
3,992
|
|
|
|
11,178
|
|
|
|
7,645
|
|
Other (income) expense, net
|
|
|
(1,416
|
)
|
|
|
57
|
|
|
|
(1,438
|
)
|
|
|
(171
|
)
|
Income before income taxes
|
|
$
|
15,339
|
|
|
$
|
6,208
|
|
|
$
|
21,469
|
|
|
$
|
11,019
|
|
NOTE 16 - SUBSEQUENT EVENTS
We have evaluated subsequent events through the date the interim Condensed Consolidated Financial Statements were issued. There were no subsequent events that required recognition or disclosure unless elsewhere identified in this report.