DXP Enterprises, Inc. (NASDAQ:DXPE) Q1 2022 Results Conference Call May 10, 2022 11:30 AM ET Company Participants Kent Yee - Chief Financial Officer David Little - Chairman & Chief Executive Officer Conference Call Participants Cole Couzens - Stephens Operator Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to DXP Enterprises 2022 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any backgroun ...

PART I: FINANCIAL INFORMATION [ITEM 1. Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements) This section provides the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and equity, along with comprehensive explanatory notes [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income](index=3&type=section&id=a)%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) Condensed Consolidated Statements of Operations and Comprehensive Income (Three Months Ended March 31, in thousands, except per share) | Metric (in thousands, except per share) | 2022 | 2021 | | :-------------------------------------- | :-------- | :------ | | Sales | $319,411 | $245,587| | Gross profit | $94,884 | $71,630 | | Income from operations | $21,559 | $6,233 | | Income before income taxes | $15,861 | $1,420 | | Net income | $12,529 | $159 | | Net income attributable to DXP | $12,642 | $371 | | Basic Earnings per share | $0.68 | $0.02 | | Diluted Earnings per share | $0.65 | $0.02 | | Comprehensive income | $14,198 | $1,650 | [Unaudited Condensed Consolidated Balance Sheets](index=4&type=section&id=b)%20Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (as of, in thousands) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------ | :------------- | :---------------- | | Total current assets | $412,565 | $404,574 | | Total assets | $902,315 | $894,227 | | Total current liabilities | $177,980 | $181,062 | | Total long-term liabilities | $364,208 | $366,438 | | Total liabilities | $542,188 | $547,500 | | Total DXP Enterprises, Inc. equity | $360,187 | $346,674 | | Total equity | $360,127 | $346,727 | [Unaudited Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=c)%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, in thousands) | Cash Flow Activity (in thousands) | 2022 | 2021 | | :-------------------------------- | :-------- | :------ | | Net cash from operating activities| $2,680 | $8,577 | | Net cash (used in) investing activities | $(6,056) | $617 | | Net cash used in financing activities | $(9,322) | $(1,365)| | Net change in cash and restricted cash | $(12,430) | $8,033 | | Cash and restricted cash at end of period | $36,650 | $127,452| [Unaudited Condensed Consolidated Statements of Equity](index=6&type=section&id=d)%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Equity) Condensed Consolidated Statements of Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Balance at Mar 31, 2022 | | :----------------------------------- | :---------------------- | :---------------------- | | Total equity | $346,727 | $360,127 | | Net income | | $12,529 | | Currency translation adjustment | | $1,669 | | Purchase of treasury stock | | $(1,513) | [Notes to Unaudited Condensed Consolidated Financial Statements](index=7&type=section&id=e)%20Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [NOTE 1 - THE COMPANY](index=7&type=section&id=NOTE%201%20-%20THE%20COMPANY) This note describes DXP Enterprises, Inc.'s business as a distributor of MRO products and services, and a fabricator of pump solutions, operating through three segments - DXP Enterprises, Inc. distributes maintenance, repair, and operating (MRO) products and services, and provides integrated pump skid packages, pump remanufacturing, and private label pumps to industrial and energy customers[19](index=19&type=chunk) - The Company operates through three business segments: Service Centers (SC), Supply Chain Services (SCS), and Innovative Pumping Solutions (IPS)[19](index=19&type=chunk) [NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES](index=7&type=section&id=NOTE%202%20-%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20AND%20BUSINESS%20POLICIES) This note outlines the basis of financial statement preparation, adhering to US GAAP, and references the annual report for comprehensive policy details - The financial statements are prepared in accordance with US GAAP and include wholly-owned subsidiaries and a variable interest entity (VIE)[20](index=20&type=chunk) - These unaudited condensed consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021[20](index=20&type=chunk) [NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS](index=7&type=section&id=NOTE%203%20-%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) This note discusses the expected impact of recent accounting pronouncements, including ASU 2020-04 and ASU 2021-08, on the Company's financial statements - ASU 2020-04 (Reference Rate Reform) is not expected to have a material impact on the Consolidated Financial Statements[22](index=22&type=chunk) - ASU 2021-08 (Business Combinations - Contract Assets and Liabilities) will be effective for fiscal years beginning after December 15, 2022, and is expected to impact future acquisitions involving project-based work[23](index=23&type=chunk)[24](index=24&type=chunk) [NOTE 4 - REVISION](index=8&type=section&id=NOTE%204%20-%20REVISION) This note details the correction of an immaterial error in goodwill translation for Canadian subsidiaries, leading to revisions in prior period financial statements - Errors were identified in the translation of goodwill for Canadian subsidiaries, resulting in an overstatement of US dollar-based goodwill in prior years[27](index=27&type=chunk) - The errors were deemed immaterial to prior period consolidated financial statements, and corrections were made by revising the financial statements presented in this report[28](index=28&type=chunk) Impacts of Revisions on Financial Statements (as of December 31, 2021, in thousands) | Metric (in thousands) | As previously Reported | Adjustments | Revised | | :------------------------------ | :--------------------- | :---------- | :-------- | | 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 | [NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES](index=9&type=section&id=NOTE%205%20-%20FAIR%20VALUE%20OF%20FINANCIAL%20ASSETS%20AND%20LIABILITIES) This note explains the classification of financial assets and liabilities into fair value hierarchy levels and details the measurement of contingent consideration from acquisitions - The Company classifies financial assets and liabilities into Level 1, 2, or 3 based on the observability of inputs used in fair value measurement[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) - Contingent consideration from acquisitions (PMI, Burlingame, Drydon) is measured using Level 3 unobservable inputs, totaling **$4.125 million** as of March 31, 2022[37](index=37&type=chunk)[38](index=38&type=chunk)[40](index=40&type=chunk) [NOTE 6 – INVENTORIES](index=10&type=section&id=NOTE%206%20%E2%80%93%20INVENTORIES) This note provides a breakdown of the Company's inventory balances, categorized into finished goods and work in process, as of the reporting dates Inventories (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :---------------- | :------------- | :---------------- | | Finished goods | $83,655 | $80,329 | | Work in process | $28,207 | $20,565 | | Total Inventories | $111,862 | $100,894 | [NOTE 7 – CONTRACT ASSETS AND LIABILITIES](index=10&type=section&id=NOTE%207%20%E2%80%93%20CONTRACT%20ASSETS%20AND%20LIABILITIES) This note defines contract assets and liabilities, explaining their origin from timing differences between revenue recognition and customer billing or advances - Contract assets ('Costs and estimated profits in excess of billings') arise when billing occurs subsequent to revenue recognition, primarily in the IPS segment[43](index=43&type=chunk) - Contract liabilities ('Billings in excess of costs and estimated profits') occur when customer advances or deposits are received before revenue recognition[43](index=43&type=chunk) Net Contract Assets and Liabilities (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------------- | :------------- | :---------------- | | Costs and estimated profits in excess of billings | $20,504 | $17,193 | | Billings in excess of costs and estimated profits | $(5,328) | $(3,581) | | Net | $15,167 | $13,613 | [NOTE 8 – INCOME TAXES](index=11&type=section&id=NOTE%208%20%E2%80%93%20INCOME%20TAXES) This note details the effective tax rate and the factors influencing it, including state and foreign taxes, non-deductible expenses, and R&D tax credits - The effective tax rate from continuing operations was **21.0%** for the three months ended March 31, 2022, a significant decrease from **90.9%** in the prior year period[47](index=47&type=chunk) - Factors influencing the effective tax rate include state and foreign taxes, nondeductible expenses, uncertain tax positions, and research and development tax credits[47](index=47&type=chunk) [NOTE 9 – LONG-TERM DEBT](index=11&type=section&id=NOTE%209%20%E2%80%93%20LONG-TERM%20DEBT) This note provides details on the Company's long-term debt, including Term Loan B and ABL Revolver, and confirms compliance with financial covenants Long-Term Debt (in thousands) | Debt Type | March 31, 2022 (Carrying Value) | December 31, 2021 (Carrying Value) | | :-------------- | :------------------------------ | :--------------------------------- | | Term Loan B | $325,875 | $326,700 | | ABL Revolver | $0 | $0 | | Total long-term debt | $325,875 | $326,700 | - As of March 31, 2022, the Company had **$132.2 million** of borrowing capacity under its **$135.0 million** ABL Revolver, with no outstanding amounts[49](index=49&type=chunk) - The Company was in compliance with all financial covenants under the ABL Revolver and Term Loan B Agreements as of March 31, 2022, and December 31, 2021[52](index=52&type=chunk) [NOTE 10 - EARNINGS PER SHARE DATA](index=12&type=section&id=NOTE%2010%20-%20EARNINGS%20PER%20SHARE%20DATA) This note presents the basic and diluted earnings per share data for the three months ended March 31, for both current and prior year periods Earnings Per Share (Three Months Ended March 31) | EPS Type | 2022 | 2021 | | :------- | :---- | :---- | | Basic | $0.68 | $0.02 | | Diluted | $0.65 | $0.02 | [NOTE 11 - COMMITMENTS AND CONTINGENCIES](index=12&type=section&id=NOTE%2011%20-%20COMMITMENTS%20AND%20CONTINGENCIES) This note addresses the Company's involvement in legal proceedings, stating that their resolution is not expected to materially impact financial results - The Company is involved in various legal proceedings in the ordinary course of business, but the ultimate resolution is not expected to have a material adverse effect on its financial position, cash flows, or results of operations[54](index=54&type=chunk) [NOTE 12 - SEGMENT REPORTING](index=12&type=section&id=NOTE%2012%20-%20SEGMENT%20REPORTING) This note provides financial information by the Company's three reportable segments: Service Centers, Innovative Pumping Solutions, and Supply Chain Services - The Company's three reportable segments are Service Centers (MRO products and services), Innovative Pumping Solutions (custom pump packages, remanufacturing, private label pumps), and Supply Chain Services (MRO products and supply chain management)[55](index=55&type=chunk) Total Revenue by Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | | :------------------------------- | :-------- | :-------- | | Service Centers (SC) | $218,797 | $186,369 | | Innovative Pumping Solutions (IPS) | $53,058 | $23,245 | | Supply Chain Services (SCS) | $47,556 | $35,973 | | Total Revenue | $319,411 | $245,587 | Income from Operations by Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | | :------------------------------- | :-------- | :-------- | | Service Centers (SC) | $27,351 | $22,137 | | Innovative Pumping Solutions (IPS) | $7,069 | $947 | | Supply Chain Services (SCS) | $4,020 | $2,323 | | Total Operating Income for segments | $38,440 | $25,407 | [NOTE 13 - BUSINESS ACQUISITIONS](index=14&type=section&id=NOTE%2013%20-%20BUSINESS%20ACQUISITIONS) This note details the acquisitions of Drydon Equipment, Inc. and Burlingame Engineers, Inc., including the consideration transferred and the resulting goodwill - On March 1, 2022, DXP acquired Drydon Equipment, Inc. and certain assets of Burlingame Engineers, Inc., both serving the water and wastewater industry[60](index=60&type=chunk)[61](index=61&type=chunk) - The total acquisition-date fair value of consideration transferred for both businesses was **$9.0 million**, consisting of cash, stock, and future consideration[62](index=62&type=chunk) - Goodwill for these transactions totaled approximately **$4.7 million**, primarily attributable to expected synergies and the assembled workforce[63](index=63&type=chunk)[64](index=64&type=chunk) [NOTE 14 - SHARE REPURCHASE](index=15&type=section&id=NOTE%2014%20-%20SHARE%20REPURCHASE) This note outlines the Board-authorized share repurchase program and details the share repurchase activity during the first quarter of 2022 - The Board authorized a share repurchase program in May 2021 for up to **$85.0 million** or **1.5 million shares**[68](index=68&type=chunk) Share Repurchase Activity (Three Months Ended March 31, 2022) | Metric | Value | | :---------------------- | :-------- | | Total shares purchased | 58.9 thousand | | Amount paid | $1,511 thousand | | Average price per share | $25.66 | [NOTE 15 - SUBSEQUENT EVENT](index=15&type=section&id=NOTE%2015%20-%20SUBSEQUENT%20EVENT) This note reports the acquisition of Cisco Air Systems, Inc. on May 3, 2022, and its funding sources - On May 3, 2022, the Company acquired Cisco Air Systems, Inc. for approximately **$45 million**, funded by cash, DXP stock, and a draw on the ABL[70](index=70&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section offers management's analysis of the Company's financial performance, market conditions, operational results, liquidity, and capital resources for the three months ended March 31, 2022 [DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS](index=16&type=section&id=DISCLOSURE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section highlights that the report contains forward-looking statements subject to various risks, including the COVID-19 pandemic, geopolitical conflicts, and supply chain issues - The report contains forward-looking statements regarding future performance, profitability, cash flow, liquidity, and growth, subject to various risks and uncertainties[74](index=74&type=chunk) - Key risk factors include the impact of the COVID-19 pandemic, the Ukrainian/Russia conflict, commodity prices (especially oil and gas), supply chain issues, and the ability to integrate acquisitions[74](index=74&type=chunk) [CURRENT MARKET CONDITIONS AND OUTLOOK](index=16&type=section&id=CURRENT%20MARKET%20CONDITIONS%20AND%20OUTLOOK) This section describes DXP's market position as an MRO distributor and pump fabricator, and discusses the impact of global economic factors on its segments - DXP is a business-to-business distributor of MRO products and services, and a fabricator of custom pump packages, primarily in North America[75](index=75&type=chunk) - The Company has no direct exposure to the Ukrainian-Russia conflict but is monitoring its broader impact on the global economy, including inflation, supply chains, and energy prices[76](index=76&type=chunk) - Significant inflationary pressures on commodity and labor markets due to economic recovery and supply chain issues are generally passed on to customers[77](index=77&type=chunk)[79](index=79&type=chunk) - The Service Centers and Supply Chain Services segments expect continued improvement correlated with industrial production, with Q1 2022 sales up **19.8%** over Q1 2021[83](index=83&type=chunk) - The Innovative Pumping Solutions segment saw a **128.3%** sales increase in Q1 2022, benefiting from increased capital spending by oil and gas producers and recent acquisitions[84](index=84&type=chunk) [RESULTS OF OPERATIONS](index=18&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the Company's financial performance, including sales, gross profit, operating income, and effective tax rate, for the three months ended March 31, 2022 Sales by Business Segment (Three Months Ended March 31, in thousands) | Segment | 2022 | 2021 | Change | Change % | | :------------------------------- | :-------- | :-------- | :-------- | :-------- | | Service Centers | $218,797 | $186,369 | $32,428 | 17.4 % | | Innovative Pumping Solutions | $53,058 | $23,245 | $29,813 | 128.3 % | | Supply Chain Services | $47,556 | $35,973 | $11,583 | 32.2 % | | Total DXP Sales | $319,411 | $245,587 | $73,824 | 30.1 % | - Overall sales increased by **$73.8 million** (**30.1%**) to **$319.4 million** for the three months ended March 31, 2022, with **$13.1 million** from acquired businesses[86](index=86&type=chunk) - Gross profit as a percentage of sales increased to **29.7%** in Q1 2022 from **29.2%** in Q1 2021, primarily due to increased project activity in the IPS segment[92](index=92&type=chunk) - Selling, General and Administrative (SG&A) expenses increased by **$7.9 million** (**12.1%**) to **$73.3 million**, with **$2.2 million** from acquisitions, driven by increased payroll and incentive compensation[96](index=96&type=chunk) - Operating income significantly increased by **$15.3 million** to **$21.6 million**, reflecting increased business activity across all segments[97](index=97&type=chunk) - The effective tax rate was **21.0%** for Q1 2022, compared to **90.9%** for Q1 2021, influenced by state/foreign taxes, non-deductible expenses, and R&D tax credits[99](index=99&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=20&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section assesses the Company's liquidity, including cash balances and credit facility availability, and analyzes cash flow activities from operations, investing, and financing - As of March 31, 2022, the Company had **$36.7 million** in cash and restricted cash, and **$132.2 million** in credit facility availability under its ABL Revolver[100](index=100&type=chunk) - Net cash provided by operating activities decreased to **$2.7 million** in Q1 2022 from **$8.6 million** in Q1 2021, primarily due to increased project work activity[102](index=102&type=chunk)[103](index=103&type=chunk) - Net cash used in investing activities was **$6.1 million** in Q1 2022, compared to **$0.6 million** generated in Q1 2021, mainly due to the Drydon and Burlingame acquisitions[102](index=102&type=chunk)[104](index=104&type=chunk) - Net cash used in financing activities increased to **$9.3 million** in Q1 2022 from **$1.4 million** in Q1 2021, driven by share repurchase installment payments and new share purchases[102](index=102&type=chunk)[105](index=105&type=chunk) - The Company expects to fund future acquisitions primarily with cash flows from operations and borrowings, potentially including new debt or equity issuances[109](index=109&type=chunk)[110](index=110&type=chunk) [DISCUSSION OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES](index=21&type=section&id=DISCUSSION%20OF%20SIGNIFICANT%20ACCOUNTING%20AND%20BUSINESS%20POLICIES) This section directs readers to the 2021 Annual Report on Form 10-K for a comprehensive discussion of the Company's significant accounting policies - The unaudited condensed financial statements are prepared in accordance with US GAAP and should be read in conjunction with the 2021 Annual Report on Form 10-K for a complete discussion of accounting policies[112](index=112&type=chunk) [RECENT ACCOUNTING PRONOUNCEMENTS](index=21&type=section&id=RECENT%20ACCOUNTING%20PRONOUNCEMENTS) This section refers to Note 3 of the Condensed Consolidated Financial Statements for information on recent accounting pronouncements - Information regarding recent accounting pronouncements is provided in Note 3 to the Condensed Consolidated Financial Statements[113](index=113&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures about Market Risk](index=21&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section confirms no material changes to the Company's quantitative and qualitative market risk disclosures since the 2021 Annual Report on Form 10-K - There have been no material changes to the Company's market risk exposures since December 31, 2021[114](index=114&type=chunk) [ITEM 4. Controls and Procedures](index=22&type=section&id=ITEM%204.%20Controls%20and%20Procedures) This section evaluates the effectiveness of disclosure controls and procedures, identifying material weaknesses in internal control over financial reporting and outlining remediation efforts [Effectiveness of Disclosure Controls and Procedures](index=22&type=section&id=Effectiveness%20of%20Disclosure%20Controls%20and%20Procedures) This section concludes that the Company's disclosure controls were ineffective as of March 31, 2022, due to identified material weaknesses - The Company's disclosure controls and procedures were not effective as of March 31, 2022, due to identified material weaknesses in internal control over financial reporting[116](index=116&type=chunk) - Despite the material weaknesses, management concluded that the condensed consolidated financial statements are fairly stated in all material respects[117](index=117&type=chunk) [Material Weaknesses in Internal Control Over Financial Reporting](index=22&type=section&id=Material%20Weaknesses%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section identifies material weaknesses related to ineffective controls over unvouchered purchase order receipts and the application of percentage-of-completion accounting - A material weakness was identified related to ineffective controls over the timely clearing of discrepancies from the three-way-match process for unvouchered purchase order receipts[118](index=118&type=chunk) - Another material weakness was identified concerning the application of percentage-of-completion (POC) accounting, specifically regarding the completeness, accuracy, and occurrence of revenue recognition for project-based contracts[119](index=119&type=chunk) [REMEDIATION PLAN FOR MATERIAL WEAKNESSES](index=22&type=section&id=REMEDIATION%20PLAN%20FOR%20MATERIAL%20WEAKNESSES) This section outlines the Company's remediation plan, including process changes for unmatched items and a comprehensive plan for the POC accounting weakness - The Company has implemented process changes to limit the accumulation of unmatched items and is developing a comprehensive remediation plan for the POC accounting material weakness, expected to extend through fiscal year 2022[120](index=120&type=chunk) [Changes in Internal Control Over Financial Reporting](index=22&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section confirms that no other material changes in internal control over financial reporting were identified beyond the disclosed material weaknesses - Except for the material weaknesses described, no other changes in internal control over financial reporting were identified that materially affected or are reasonably likely to materially affect internal control over financial reporting[121](index=121&type=chunk) PART II: OTHER INFORMATION [ITEM 1. Legal Proceedings](index=23&type=section&id=ITEM%201.%20Legal%20Proceedings) This section confirms the Company's involvement in ordinary course legal proceedings, which are not expected to materially impact its financial position or results - Legal proceedings are not expected to have a material adverse effect on DXP's financial position, cash flows, or results of operations[125](index=125&type=chunk) [ITEM 1A. Risk Factors](index=23&type=section&id=ITEM%201A.%20Risk%20Factors) This section reports no material changes to the risk factors previously disclosed in the Company's 2021 Annual Report on Form 10-K - No material changes to the risk factors have occurred since the 2021 Annual Report on Form 10-K[126](index=126&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=23&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the issuance of unregistered equity securities for acquisitions and summarizes common stock repurchase activities during Q1 2022 [Recent Sales of Unregistered Securities](index=23&type=section&id=Recent%20Sales%20of%20Unregistered%20Securities) This section reports the issuance of unregistered common shares as consideration for the Drydon and Burlingame acquisitions on March 1, 2022 - DXP issued **18,263** unregistered common shares for the acquisition of Drydon and **3,581** unregistered common shares for the acquisition of Burlingame on March 1, 2022[127](index=127&type=chunk)[128](index=128&type=chunk) [Issuer Purchases of Equity Securities](index=23&type=section&id=Issuer%20Purchases%20of%20Equity%20Securities) This section summarizes the Company's common stock repurchase activities during the first quarter of 2022 and the remaining authorization under the program Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------- | :------------------------------- | :--------------------------- | | Jan 1 - Jan 31 | 58,927 | $25.66 | | Feb 1 - Feb 28 | 842 | $29.27 | | Mar 1 - Mar 31 | 4,646 | $28.30 | | Total (Q1 2022) | 64,415 | | - As of March 31, 2022, **$49.982 million** or **256 thousand shares** remained available under the **$85.0 million** Share Repurchase Program[130](index=130&type=chunk) [ITEM 3. Default upon Senior Securities](index=23&type=section&id=ITEM%203.%20Default%20upon%20Senior%20Securities) This section confirms that no defaults upon senior securities occurred during the reporting period - There were no defaults upon senior securities[131](index=131&type=chunk) [ITEM 4. Mine Safety Disclosures](index=23&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This section confirms that no mine safety disclosures are required for the reporting period - There are no mine safety disclosures[132](index=132&type=chunk) [ITEM 5. Other Information](index=24&type=section&id=ITEM%205.%20Other%20Information) This section indicates that no other information requires disclosure - No other information is reported[134](index=134&type=chunk) [ITEM 6. Exhibits](index=25&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, agreements, certifications, and iXBRL financial information - The exhibits include Restated Articles of Incorporation, Bylaws, Indemnification Agreements, Subsidiary Guarantors, and certifications from the CEO and CFO[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) - Financial information for the quarter ended March 31, 2022, is provided in Inline eXtensible Business Reporting Language (iXBRL) format[139](index=139&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2021 or ☐ 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 | --- | --- | |------------------ ...

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 September 30, 2021 or [ ☐ ] 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 | --- | |------- ...

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 June 30, 2021 or [ ☐ ] 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 | --- | |------------ ...

Financial Data and Key Metrics Changes - Total sales for Q1 2021 increased sequentially by 5.6% to $245.6 million, with average daily sales rising from $3.8 million in Q4 to $3.9 million in Q1 [27][28] - Gross profit margins improved to 29.2%, reflecting a 152 basis point increase over Q4 [21][33] - Adjusted EBITDA for Q1 was $13.9 million, with EBITDA margins at 5.7% [39] Business Line Data and Key Metrics Changes - Service Centers experienced a sequential sales growth of 15.6%, while Supply Chain Services grew by 0.5% [27] - Innovative Pumping Solutions (IPS) saw a decline in operating income margins by 332 basis points, primarily due to higher SG&A costs [36] - Acquisitions contributed $28.4 million in sales during the quarter, enhancing overall performance [27][14] Market Data and Key Metrics Changes - Industrial end-markets, which constitute 67% of the business, showed positive upward movement, with the ISM PMI manufacturing index rising from 58.7% in January to 64% in March [8][9] - Oil and gas, making up 33% of the business, showed mixed recovery signs, particularly in international markets [11][12] Company Strategy and Development Direction - The company aims to grow all markets with a balanced end-market exposure, focusing on food and beverage, water and wastewater, and chemicals [17] - The acquisition strategy is a key component for growth, with recent acquisitions expected to contribute positively to future performance [44][45] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in returning to pre-pandemic growth levels, highlighting strong free cash flow generation and market condition improvements [6][7][23] - The company is cautious about the oil and gas sector, noting that capital budgets are expected to remain flat to slightly down domestically, while international projects show more promise [12][54] Other Important Information - The company generated $11.2 million in free cash flow during Q1, supporting ongoing acquisition efforts [15][42] - Total debt outstanding was $329.2 million, reflecting a refinancing of Term Loan B, which provides additional flexibility [43] Q&A Session Summary Question: How did April look and what are the segment trends? - Management noted a strong exit rate for March with early estimates for April showing $4.6 million in sales per business day, indicating positive momentum [49][50] Question: What are the dynamics of cost inflation in the supply chain? - Management acknowledged seeing price increases and delivery issues, indicating potential inflationary pressures but noted that they can pass on costs to customers [56][57] Question: How will SG&A costs be managed as revenue increases? - Management indicated that they retained talent during the pandemic and expect to leverage this as revenue grows, targeting an EBITDA margin of around 8% [64][65] Question: What does the acquisition pipeline look like? - Management confirmed a robust acquisition pipeline with high visibility on upcoming deals, particularly in water and wastewater and food and beverage sectors [66][70]

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, 2021 or [ ☐ ] 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 | --- | |----------- ...

PART I [Business](index=5&type=section&id=Item%201.%20Business) DXP Enterprises distributes MRO products and services through its Service Centers, Supply Chain Services, and Innovative Pumping Solutions segments [Company and Industry Overview](index=5&type=section&id=Company%20and%20Industry%20Overview) DXP's sales grew to $1.0 billion in 2020 by capitalizing on industry trends like consolidation and demand for integrated services - DXP's total sales increased from **$125 million** in 1996 to **$1.0 billion** in 2020, operating from 168 locations across the U.S., Canada, and Dubai as of December 31, 2020[17](index=17&type=chunk) - The company identifies three primary trends in the industrial supply industry: **industry consolidation, customized integrated service, and single-source distribution**[19](index=19&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk) [Business Segments](index=7&type=section&id=Business%20Segments) The company operates through three segments, with Service Centers contributing the majority of sales in 2020 2020 Sales and Operations by Business Segment | Segment | 2020 Sales (millions) | % of Sales | Key End-Markets | Locations | | :--- | :--- | :--- | :--- | :--- | | SC | $662.6 | 65.9% | Oil & Gas, Food & Beverage, General Industrial, Chemical, Transportation, Aerospace | 154 service centers | | IPS | $188.0 | 18.7% | Oil & Gas, Mining, Petrochemical, & Utilities | 10 fabrication facilities | | SCS | $154.7 | 15.4% | Food & Beverage, Transportation, Oil & Gas, General Industrial & Chemical | 79 customer facilities' sites | - The Service Centers (SC) segment provides MRO products and services from 154 service centers and 4 distribution centers, serving industries like oil and gas, food and beverage, and petrochemicals[27](index=27&type=chunk)[28](index=28&type=chunk) - The Innovative Pumping Solutions (IPS) segment provides integrated, custom pump skid packages and its backlog was **$46.6 million** at December 31, 2020, a significant decrease from **$101.1 million** at the end of 2019[32](index=32&type=chunk)[38](index=38&type=chunk) - The Supply Chain Services (SCS) segment manages customer procurement and inventory through long-term contracts, operating at 79 customer facilities as of year-end 2020[40](index=40&type=chunk)[44](index=44&type=chunk) [Products and Recent Acquisitions](index=9&type=section&id=Products%20and%20Recent%20Acquisitions) DXP offers a broad product range and pursues a growth strategy centered on acquisitions, completing six in 2020 - DXP's five key product categories are: rotating equipment, bearings & power transmission, industrial supplies, metal working, and safety products & services[46](index=46&type=chunk) - On December 31, 2020, DXP completed four acquisitions: **TEC for ~$64.7M, APO for ~$38.3M, Pumping Solutions for ~$21.0M, and CEC for ~$4.5M**, all paid in cash and stock[54](index=54&type=chunk)[55](index=55&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk) - Earlier in 2020, DXP acquired **Turbo Machinery Repair for ~$3.2M** in cash and **Pumping Systems, Inc. for ~$13.0M** in cash and stock[59](index=59&type=chunk) [Human Capital and Executive Officers](index=12&type=section&id=Human%20Capital%20and%20Executive%20Officers) The company employed 2,550 people as of year-end 2020 and focused on safety and talent development while operating as an essential business Employee Headcount by Segment (as of Dec 31, 2020) | Business Segment | Employees | | :--- | :--- | | Service Centers | 1,605 | | Innovative Pumping Solutions | 327 | | Supply Chain Services | 347 | | Corporate | 271 | | **Total Employees** | **2,550** | - DXP's human capital strategy emphasizes talent development, employee safety (with a goal of zero accidents), a decentralized entrepreneurial culture, and competitive benefits[69](index=69&type=chunk)[70](index=70&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) - During the COVID-19 pandemic, DXP operated as an **"essential" business**, implementing work-from-home policies for office staff and safety measures for warehouse and distribution center employees[78](index=78&type=chunk) [Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks related to business operations, market conditions, credit access, and legal compliance - **Business and Operations Risks:** Competition, potential cancellation of distribution authorizations by manufacturers, reliance on key personnel and suppliers, challenges in executing acquisition strategy, and cybersecurity breaches[92](index=92&type=chunk) - **Market and Economy Risks:** The COVID-19 pandemic has caused supply chain disruptions, decreased customer demand, and lower oil prices, while the business is also sensitive to economic slowdowns and energy industry downturns[93](index=93&type=chunk)[118](index=118&type=chunk)[124](index=124&type=chunk) - **Credit and Capital Risks:** Inability to refinance debt on favorable terms, failure to comply with financial covenants in credit facilities, and potential difficulties in accessing acquisition financing[94](index=94&type=chunk) - **Legal and Regulatory Risks:** Potential for significant product liability and warranty claims, shareholder litigation due to stock price volatility, and risks associated with foreign operations and environmental regulations[95](index=95&type=chunk)[141](index=141&type=chunk)[145](index=145&type=chunk) [Properties](index=21&type=section&id=Item%202.%20Properties) DXP operated from 168 facilities as of year-end 2020, the majority of which are leased - The company operates **168 facilities**, including 154 service centers, 4 distribution centers, and 10 fabrication facilities[151](index=151&type=chunk) - The majority of facilities are leased, with **only seven being owned** by the company, and leased facilities range in size from approximately 570 to 105,000 square feet[151](index=151&type=chunk)[153](index=153&type=chunk) [Legal Proceedings](index=22&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings not expected to have a material adverse effect - DXP is party to various legal proceedings from the ordinary course of business but **does not expect them to have a material adverse effect** on its financials[154](index=154&type=chunk) PART II [Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities](index=23&type=section&id=Item%205.%20Market%20for%20the%20Registrant's%20Common%20Equity%2C%20Related%20Shareholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under 'DXPE', and it does not anticipate paying dividends - The company's common stock trades on the NASDAQ under the ticker **DXPE**[158](index=158&type=chunk) - DXP **does not anticipate paying cash dividends** on its common stock in the foreseeable future[159](index=159&type=chunk) - Unregistered shares were issued as part of the consideration for the acquisitions of TEC, APO, Pumping Solutions, CEC, and PSI in 2020[164](index=164&type=chunk)[165](index=165&type=chunk) [Selected Financial Data](index=25&type=section&id=Item%206.%20Selected%20Financial%20Data) A five-year financial summary shows a significant decline in 2020, with sales of $1.005 billion and a net loss of $29.1 million Five-Year Selected Financial Data (in thousands, except per share amounts) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales | $1,005,266 | $1,267,189 | $1,216,197 | $1,006,782 | $962,092 | | Gross Profit | $279,269 | $347,224 | $332,208 | $271,581 | $264,802 | | Operating Income (Loss) | $(26,870) | $66,122 | $68,451 | $33,490 | $19,332 | | Net Income (Loss) | $(29,074) | $35,775 | $35,521 | $16,529 | $7,151 | | Diluted EPS (Loss) | $(1.62) | $1.96 | $1.94 | $0.93 | $0.49 | | Total Assets | $851,861 | $788,220 | $699,962 | $639,083 | $602,052 | | Total Debt | $330,000 | $244,375 | $245,309 | $248,716 | $174,323 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the 20.7% sales decline and net loss in 2020 to the pandemic and energy sector downturn [Current Market Conditions and Outlook](index=26&type=section&id=Current%20Market%20Conditions%20and%20Outlook) The COVID-19 pandemic drove a sharp drop in demand, prompting cost reductions and an increased ABL facility - The COVID-19 pandemic and a related oil price collapse drove a sharp erosion in demand, and in response, the company took mitigation steps including cost cuts and increasing its ABL revolver from **$85 million to $135 million**[178](index=178&type=chunk)[179](index=179&type=chunk) - DXP was exempted as an **"essential" business** under various government orders, allowing warehouses and distribution centers to remain open with enhanced safety protocols[182](index=182&type=chunk) Key Economic Indicators (2020 vs. 2019) | Indicator | 2020 Average | 2019 Average | | :--- | :--- | :--- | | U.S. Active Drilling Rigs | 436 | 944 | | West Texas Intermediate (WTI) Oil Price | $39.16 | $56.98 | | Purchasing Managers Index (PMI) | 52.5 | 51.3 | [Consolidated Results of Operations (2020 vs. 2019)](index=29&type=section&id=Consolidated%20Results%20of%20Operations%20(2020%20vs.%202019)) Sales decreased 20.7% to $1.0 billion in 2020, resulting in a net loss of $28.9 million driven by impairment charges Sales by Business Segment (2020 vs. 2019, in thousands) | Segment | 2020 | 2019 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Service Centers | $662,617 | $762,256 | $(99,639) | (13.1)% | | Innovative Pumping Solutions | $187,991 | $303,655 | $(115,664) | (38.1)% | | Supply Chain Services | $154,658 | $201,278 | $(46,620) | (23.2)% | | **Total DXP Sales** | **$1,005,266** | **$1,267,189** | **$(261,923)** | **(20.7)%** | - Gross profit margin **increased by 38 basis points to 27.8%**, primarily due to improved margins in the IPS and SCS segments[199](index=199&type=chunk) - The company recorded **$59.9 million in impairment and other charges** in 2020, with none in 2019, including goodwill and asset write-downs for the Canadian SC and IPS segments[204](index=204&type=chunk)[205](index=205&type=chunk) - Selling, General & Administrative (SG&A) expenses **decreased by 12.4% to $246.3 million**, reflecting cost reduction actions[203](index=203&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) Cash from operations increased to $107.7 million, and the company refinanced its debt with a new $330 million term loan Summary of Cash Flows (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $107,675 | $41,306 | | Net cash used in investing activities | $(121,796) | $(22,085) | | Net cash provided by (used in) financing activities | $77,406 | $(6,092) | - **Free Cash Flow** (a non-GAAP measure) was **$101.1 million** in 2020, a substantial increase from $19.2 million in 2019[238](index=238&type=chunk)[240](index=240&type=chunk) - In December 2020, DXP entered into a new seven-year, **$330 million Senior Secured Term Loan B**, replacing its previous term loan[235](index=235&type=chunk)[245](index=245&type=chunk) - The company increased its asset-based loan (ABL) facility from **$85 million to $135 million** and had **$131.9 million available** at year-end[237](index=237&type=chunk)[253](index=253&type=chunk) [Critical Accounting Policies](index=39&type=section&id=Critical%20Accounting%20Policies) Key accounting policies requiring significant judgment include goodwill impairment, revenue recognition, and acquisition accounting - **Receivables and Credit Risk:** The allowance for doubtful accounts is based on aging, customer-specific situations, and economic factors, with a notable concentration of customers in the energy industry[263](index=263&type=chunk)[265](index=265&type=chunk) - **Impairment of Goodwill and Long-Lived Assets:** Annual impairment tests require significant management judgment, and triggering events in 2020 led to a **$36.4 million goodwill impairment**[267](index=267&type=chunk)[269](index=269&type=chunk)[274](index=274&type=chunk) - **Revenue Recognition:** For the IPS segment, revenue on long-term contracts is recognized over time using the **percentage-of-completion (cost-to-cost) method**, which requires extensive estimation[281](index=281&type=chunk) - **Purchase Accounting:** Fair value of assets and liabilities from acquisitions is estimated using valuation techniques, including for contingent consideration, which involves significant judgment about future performance[285](index=285&type=chunk)[286](index=286&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=45&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risks are interest rate volatility on its variable-rate debt and foreign currency fluctuations - A hypothetical **100 basis point increase** in average short-term interest rates would increase annual interest expense by an estimated **$3.3 million** before tax[293](index=293&type=chunk) - The company is exposed to foreign currency risk from its Canadian operations; an average **10% devaluation of the Canadian dollar** in 2020 would have resulted in an estimated **$0.4 million net loss** on the translation of local currency earnings[294](index=294&type=chunk) [Financial Statements and Supplementary Data](index=47&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the audited consolidated financial statements and the independent auditor's unqualified opinion [Report of Independent Registered Public Accounting Firm](index=48&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent auditor issued an unqualified opinion on the financial statements and internal controls - The auditor issued an **unqualified opinion** on both the financial statements and the effectiveness of internal control over financial reporting[303](index=303&type=chunk) - Critical Audit Matters identified were: 1. Goodwill and Other Intangibles Impairment Assessment, due to significant judgments in estimating fair value 2. Valuation of Acquired Intangible Assets from the TEC and APO acquisitions 3. Accounting for Uncertain Tax Positions, specifically related to Federal Research & Development Credits[311](index=311&type=chunk)[318](index=318&type=chunk)[323](index=323&type=chunk) [Consolidated Financial Statements](index=52&type=section&id=Consolidated%20Financial%20Statements) The financial statements reflect a net loss of $29.1 million in 2020, with increased assets and debt due to acquisitions and refinancing Consolidated Statement of Operations Highlights (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Sales | $1,005,266 | $1,267,189 | | Gross Profit | $279,269 | $347,224 | | Impairment and other charges | $59,883 | $0 | | Operating Income (Loss) | $(26,870) | $66,122 | | Net Income (Loss) | $(29,074) | $35,775 | Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash | $117,353 | $54,203 | | Total Current Assets | $406,583 | $408,481 | | Goodwill | $248,339 | $194,052 | | Total Assets | $851,861 | $788,220 | | Total Debt (Current & Long-term) | $320,439 | $237,919 | | Total Liabilities | $503,995 | $443,272 | | Total Equity | $347,866 | $344,948 | Consolidated Statement of Cash Flows Highlights (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Cash from Operating Activities | $107,675 | $41,306 | | Cash used in Investing Activities | $(121,796) | $(22,085) | | Cash from Financing Activities | $77,406 | $(6,092) | | Net Change in Cash | $63,117 | $13,808 | [Notes to Consolidated Financial Statements](index=57&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Key disclosures include a $59.9 million impairment charge, details of six acquisitions, and a major debt refinancing - **Note 4 - Impairments:** The company recorded **$59.9 million in impairment and other charges** in 2020, consisting of $36.4 million for goodwill, $4.8 million for long-lived assets, and $18.7 million for inventory, primarily due to the oil price collapse and COVID-19 impact[382](index=382&type=chunk)[389](index=389&type=chunk) - **Note 11 - Long-Term Debt:** In December 2020, DXP entered into a new seven-year, **$330 million Senior Secured Term Loan B**, replacing its previous facility, with an interest rate of 5.75% at year-end[427](index=427&type=chunk)[429](index=429&type=chunk)[433](index=433&type=chunk) - **Note 17 - Business Acquisitions:** DXP completed six acquisitions in 2020 for total consideration of **$144.6 million** ($115.2 million in cash and $29.4 million in stock), adding **$90.7 million in goodwill**[462](index=462&type=chunk)[463](index=463&type=chunk)[464](index=464&type=chunk)[472](index=472&type=chunk)[477](index=477&type=chunk) 2020 Segment Performance (in thousands) | Segment | Revenue | Operating Income* | | :--- | :--- | :--- | | Service Centers | $662,617 | $70,385 | | Innovative Pumping Solutions | $187,991 | $18,715 | | Supply Chain Services | $154,658 | $13,218 | | **Total** | **$1,005,266** | **$102,318** | *Operating income for reportable segments, before corporate expenses and other adjustments.* [Controls and Procedures](index=85&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management and the independent auditor concluded that the company's disclosure controls and internal controls were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of December 31, 2020[509](index=509&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2020, a conclusion audited and affirmed by Moss Adams LLP[512](index=512&type=chunk)[513](index=513&type=chunk) PART III [Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters](index=87&type=section&id=Items%2010-14) Required information for Items 10-14 is incorporated by reference from the company's 2021 proxy statement - Information for Items 10, 11, 12, 13, and 14 is **incorporated by reference** from the forthcoming 2021 Proxy Statement[519](index=519&type=chunk)[520](index=520&type=chunk)[521](index=521&type=chunk)[522](index=522&type=chunk)[524](index=524&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=87&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K[526](index=526&type=chunk)[527](index=527&type=chunk) - Exhibits filed include the CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and Inline XBRL data files[533](index=533&type=chunk)[534](index=534&type=chunk)[535](index=535&type=chunk)

Financial Data and Key Metrics Changes - DXP's Q4 sales increased 5.7% sequentially to $232.7 million, reflecting improvements from trough levels in Q3 [31] - Total sales for fiscal 2020 were $1 billion, down 20.7% compared to fiscal 2019 [31] - Average daily sales for Q4 were $3.8 million, down from $4.8 million in Q4 2019 [32] - DXP generated $101 million in free cash flow for fiscal 2020 [45] - Adjusted EBITDA for fiscal 2020 was $59.5 million, with adjusted EBITDA margins at 5.9% [41] Business Line Data and Key Metrics Changes - Service centers experienced a 13.1% year-over-year decline, while supply chain services declined 23.2%, and innovative pumping solutions (IPS) declined 38.1% [33] - IPS and supply chain services saw sequential sales growth of 62.8% and 7.1%, respectively, in Q4 [31][27] - Gross margins improved to 27.8%, a 40 basis point increase over 2019, with IPS gross margins improving by 79 basis points year-over-year [21][37] Market Data and Key Metrics Changes - Key end markets driving sales performance included food and beverage, mining, municipal, and specialty chemicals [33] - The oil and gas market is showing signs of improvement, but capital budgets remain cut back, indicating a slow recovery [51] Company Strategy and Development Direction - DXP aims to diversify its exposure to oil and gas to about 20% while focusing on stable markets such as water and wastewater, food and beverage, and alternate energies [53][55] - The company plans to continue its acquisition strategy to enhance market share and capabilities in key geographic regions [47] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the potential for recovery in the oil and gas sector as COVID-19 vaccines are deployed [51][26] - The company remains cautious about the pace of recovery, noting that visibility and uncertainty persist in the current macro environment [26] Other Important Information - DXP completed six acquisitions in 2020, enhancing its market position and capabilities [28] - The company successfully refinanced its term loan B, providing additional financial flexibility [46] Q&A Session Summary Question: Insights on oil and gas market recovery - Management noted that while oil prices have improved, capital budgets are still cut back, leading to a slower recovery pace [51] Question: Future market exposure and M&A strategy - Management aims to reduce oil and gas exposure to about 20% while continuing to pursue acquisitions that enhance market diversity [53] Question: Current sales trends and cost expectations - Sales per business day showed slight fluctuations, with expectations for a significant uptick in March [57] - Q1 typically has higher SG&A costs due to various factors, but management is optimistic about maintaining gross margin trends [58]

Part I: Financial Information [Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) The company reported a significant net loss in Q3 and first nine months of 2020, driven by sales decline and a $48.4 million impairment charge, despite increased operating cash flow [Statements of Operations and Comprehensive Income](index=4&type=section&id=a)%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) DXP reported a net loss of **$34.8 million** in Q3 2020 and **$27.0 million** for the nine months, driven by a **32.7% sales decrease** and a **$48.4 million impairment charge** Q3 and Nine Months 2020 vs 2019 Performance (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | **Sales** | $220,193 | $327,178 | $772,577 | $971,721 | | **Gross Profit** | $61,301 | $92,704 | $214,982 | $268,891 | | **Impairment & Other Charges** | $48,401 | $0 | $48,401 | $0 | | **Income (Loss) from Operations** | ($40,846) | $21,717 | ($23,178) | $59,380 | | **Net Income (Loss)** | ($34,775) | $13,150 | ($27,047) | $33,687 | | **Diluted EPS** | ($1.95) | $0.71 | ($1.52) | $1.84 | [Balance Sheets](index=5&type=section&id=b)%20Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to **$736.7 million** as of Sep 30, 2020, primarily due to a **$27.7 million goodwill reduction**, while cash increased to **$97.3 million** Balance Sheet Comparison (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Cash** | $97,287 | $54,203 | | **Goodwill** | $166,375 | $194,052 | | **Total Assets** | $736,718 | $788,220 | | **Total Liabilities** | $413,164 | $443,272 | | **Total Equity** | $323,554 | $344,948 | [Statements of Cash Flows](index=6&type=section&id=c)%20Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly increased to **$92.2 million** for the first nine months of 2020, driven by working capital management Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | **Net Cash from Operating Activities** | $92,240 | $7,485 | | **Net Cash used in Investing Activities** | ($20,525) | ($14,212) | | **Net Cash used in Financing Activities** | ($27,942) | ($5,444) | | **Net Change in Cash** | $43,052 | ($11,958) | [Notes to Financial Statements](index=7&type=section&id=e)%20Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail the **$48.4 million impairment charge** due to COVID-19 and oil price collapse, segment performance, debt structure, and recent acquisitions, including increased ABL revolver capacity - The company performed an interim goodwill impairment test during Q3 2020 due to a significant decline in its market capitalization, driven by the collapse of oil prices and the COVID-19 pandemic[30](index=30&type=chunk) Impairment and Other Charges - Q3 2020 (in thousands) | Charge Type | Amount | | :--- | :--- | | Long-lived asset impairments | $4,775 | | Goodwill impairments | $36,435 | | Inventory and work-in-progress costs | $7,191 | | **Total** | **$48,401** | - Goodwill impairment of **$36.4 million** was recorded, with **$16.0 million** for the Innovative Pumping Solutions unit and **$20.5 million** for the Canadian reporting unit[31](index=31&type=chunk)[34](index=34&type=chunk)[35](index=35&type=chunk) - In March 2020, the company increased its asset-backed revolving line of credit (ABL Revolver) by **$50 million** to a total of **$135 million**. As of September 30, 2020, borrowing capacity was **$114.3 million**[59](index=59&type=chunk) - The company completed two acquisitions in early 2020: Pumping Systems, Inc. ("PSI") and Turbo Machinery Repair ("Turbo") for a total consideration of **$16.2 million** in cash and stock[73](index=73&type=chunk)[74](index=74&type=chunk)[75](index=75&type=chunk) [Management's Discussion and Analysis (MD&A)](index=18&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the **32.7% Q3 sales decline** to COVID-19 and oil price collapse, implementing cost cuts and enhancing liquidity, while generating strong operating cash flow despite net loss [Current Market Conditions and Outlook](index=19&type=section&id=Current%20Market%20Conditions%20and%20Outlook) The business faced significant impacts from COVID-19 and oil price declines, leading to capital spending cuts, with DXP implementing mitigation efforts and maintaining an essential business status - The COVID-19 outbreak drove a sharp erosion in demand for crude oil, and a failure by OPEC+ to agree on production cuts in March decimated oil prices, leading to severe capital spending budget cuts by customers[84](index=84&type=chunk) - Mitigation efforts include increasing the ABL revolver to **$135 million**, reducing discretionary expenditures, and suspending the company's matching contributions to retirement plans[85](index=85&type=chunk) - DXP has been exempted as an 'essential' business under various government orders, allowing warehouses and regional distribution centers to remain open with enhanced safety measures[86](index=86&type=chunk) [Results of Operations](index=21&type=section&id=Results%20of%20Operations) Q3 2020 sales fell **32.7%** to **$220.2 million**, with Innovative Pumping Solutions down **73.4%**, leading to a **$40.8 million operating loss** due to sales decline and a **$48.4 million impairment charge** Sales by Business Segment - Q3 2020 vs Q3 2019 (in thousands) | Segment | Q3 2020 | Q3 2019 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Service Centers | $164,900 | $193,727 | ($28,827) | (14.9)% | | Innovative Pumping Solutions | $21,876 | $82,169 | ($60,293) | (73.4)% | | Supply Chain Services | $33,417 | $51,282 | ($17,865) | (34.8)% | | **Total DXP Sales** | **$220,193** | **$327,178** | **($106,985)** | **(32.7)%** | - The sales decrease in the Service Centers segment was primarily due to reduced demand for metal working, safety supply products, and bearings from customers in the OEM oil and gas markets[93](index=93&type=chunk) - Selling, General & Administrative (SG&A) expenses decreased by **$17.2 million (24.3%)** due to lower payroll, incentive compensation, and other cost reduction actions[100](index=100&type=chunk) - Operating income decreased by **$62.6 million** to a loss of **$40.8 million**, primarily due to the decline in sales and the **$48.4 million impairment charge**[104](index=104&type=chunk) [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) As of Sep 30, 2020, the company maintained strong liquidity with **$97.4 million** cash and **$114.3 million** ABL facility availability, with operating cash flow reaching **$92.2 million** for the nine months - As of September 30, 2020, the company had cash and cash equivalents of **$97.4 million** and credit facility availability of **$114.3 million**[123](index=123&type=chunk) Net Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Operating Activities | $92,240 | $7,485 | | Investing Activities | ($20,525) | ($14,212) | | Financing Activities | ($27,942) | ($5,444) | - The **$84.8 million** year-over-year increase in cash from operations was primarily driven by collections of trade accounts receivables and decreased inventory purchases[127](index=127&type=chunk) - In May 2020, the company entered into an "at the market" equity distribution agreement to sell up to **$37.5 million** in common stock, raising net proceeds of approximately **$1.1 million** during the nine-month period[130](index=130&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=28&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's exposures to market risk have not materially changed since December 31, 2019 - The company's exposures to market risk have not changed materially since December 31, 2019[140](index=140&type=chunk) [Controls and Procedures](index=28&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[142](index=142&type=chunk) - There were no changes in internal control over financial reporting during the nine months ended September 30, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[143](index=143&type=chunk) Part II: Other Information [Legal Proceedings](index=29&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is involved in various legal proceedings but believes their resolution will not materially adversely affect its financial position, cash flows, or operations - While unable to predict the outcome of various legal proceedings, DXP believes the ultimate resolution will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations[147](index=147&type=chunk) [Risk Factors](index=29&type=section&id=ITEM%201A.%20Risk%20Factors) Key risks include business disruptions from the COVID-19 pandemic, a cyber-attack in August 2020, vulnerability to sustained low oil prices, and potential loss of key personnel - The COVID-19 pandemic has caused and could continue to cause supply chain disruptions, decreased customer demand, and lower oil prices, negatively impacting the business[150](index=150&type=chunk)[151](index=151&type=chunk) - The company's computer network was the target of a cyber-attack in August 2020. While the costs to remedy were not material, it highlights the vulnerability to such threats[149](index=149&type=chunk) - A significant portion of revenue depends on expenditures in the oil and gas industry; sustained low oil prices could continue to adversely affect revenues[157](index=157&type=chunk) - The unexpected loss of the executive management team or other key employees, with risk heightened by the COVID-19 pandemic, could adversely impact the company[153](index=153&type=chunk)[155](index=155&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=30&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) In Q3 2020, the company repurchased common stock shares solely to satisfy tax withholding obligations for employee equity awards, not as part of a public program - In Q3 2020, the company withheld **1,202 shares** of common stock, at an average price of **$19.14**, to satisfy tax withholding obligations for employee equity awards[159](index=159&type=chunk) [Default upon Senior Securities](index=30&type=section&id=ITEM%203.%20Default%20upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - None[161](index=161&type=chunk) [Mine Safety Disclosures](index=30&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) The company reported no mine safety disclosures for the period - None[162](index=162&type=chunk) [Other Information](index=30&type=section&id=ITEM%205.%20Other%20Information) The company reported no other information for the period - None[164](index=164&type=chunk) [Exhibits](index=31&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, CEO and CFO certifications, and financial data in iXBRL format - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002[167](index=167&type=chunk)[168](index=168&type=chunk) - Financial statements and notes were submitted in Inline eXtensible Business Reporting Language (iXBRL) format[169](index=169&type=chunk)