DXP ENTERPRISES INC 10-K/A

ITEM 8. Financial Statements and Supplementary Data TABLE OF CONTENTS Page Reports of Independent Registered Public Accounting Firm 45 Consolidated Statements of Operations and Comprehensive Income 49 Consolidated Balance Sheets 50 Consolidated Statements of Cash Flows 51 Consolidated Statements of Equity 52 Notes to Consolidated Financial Statements 53 43 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of DXP Enterprises, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of DXP Enterprises, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Restatement of Previously Issued Financial Statements and Management’s Report on Internal Control Over Financial Reporting As discussed in Note 4, the Company has restated its consolidated financial statements to correct errors. Management and we previously concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020. However, management has subsequently determined that the material weaknesses, identified below, in internal control over financial reporting existed as of that date. Accordingly, management’s report has been restated and our opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be 44 Table of Contents prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment in Item 9A: a. The Company did not design and maintain effective internal controls to ensure that aged items recorded in the uninvoiced inventory accounts payable are monitored, addressed and cleared in a timely manner. b. The Company did not design and maintain effective management review controls to ensure that large manual journal entries are evaluated by persons possessing the necessary authority and competence to determine the proper accounting conclusion. c. The Company did not design and maintain effective internal controls to ensure that the terms of purchase agreements, including any side agreements, are properly evaluated at the time of the acquisition to identify, measure, and recognize acquisition consideration, and to evaluate whether the related disclosures are complete and accurate. We considered the material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 31, 2020, and our opinion on such consolidated financial statements was not affected. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill and Other Intangibles Impairment Assessment As discussed in Note 5 to the consolidated financial statements, the Company’s evaluation of goodwill and other intangible assets for impairment involves the determination of reporting units and comparison of the fair value of each reporting unit to its carrying value. The Company identified four reporting units, DXP Core-Service Centers, DXP Core-Innovative Pumping Solutions, DXP Canada, and DXP Core Supply Chain Services. The identification of reporting units involves consideration of components of the operating segments and whether or not there is discrete financial information available that is regularly reviewed by management. Additionally, the Company considers whether or not it is reasonable to aggregate any of the identified components that have similar economic characteristics. The Company estimates the fair value of its reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. The estimation of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future revenue growth rates, operating margins, and discount rates. The reporting units’ revenue growth rates and operating margins are sensitive to changes in customer demand. The determination of the fair value using the market approach requires management to make significant judgments related to performance-metric market multiples applied to the reporting unit’s prior and expected operating performance. The Company performed their annual impairment test as of September 30, 2020. The Company concluded that the carrying values of DXP Core-Innovative Pumping Solutions and DXP Canada reporting units exceeded their fair values and, therefore, an impairment was recognized in the amount of $16 million and $20.5 million, respectively, during the year ended December 45 Table of Contents 31, 2020. As of December 31, 2020, after recording the impairments, goodwill for the DXP Core-Innovative Pumping Solutions and DXP Canada reporting units was $0 and $32.3 million, respectively. We identified the Company’s determination of reporting units and evaluation of goodwill and other intangibles impairment for the reporting units as a critical audit matter due to the significant judgments made by management to identify and aggregate reporting units and estimate the fair value of each reporting unit. A high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, was required when performing audit procedures to evaluate management’s estimates and assumptions related to the identification of reporting units; revenue growth rates and operating margins; the selection of reporting unit performance-metric market multiples and discount rates; and the reconciliation of the reporting units estimated fair value to the Company’s market capitalization. The primary procedures we performed to address this critical audit matter included: a. Testing the effectiveness of controls over management’s determination of reporting units and goodwill and other intangibles impairment evaluation, including those over the determination of the fair value of the reporting units, including controls related to management’s revenue forecasts, selection of the discount rates, selection of performance-metric market multiples, and market capitalization reconciliation. a. Evaluating management’s identification of reporting units, including consideration of components of its operating segments, the availability of discrete financial information for each that is regularly reviewed by management, and the suitability of aggregation of components. i. Evaluating management’s forecasts by comparing the forecasts to historical results, including management’s forecasting accuracy and internal communications to management and the Board of Directors. i. Involving our valuation specialists to assist with our evaluation of the valuation model including discount rates, performance-metric multiples, and other significant assumptions. Valuation of Acquired Intangible Assets - Total Equipment Company and APO Pumps and Compressors, LLC As discussed in Note 18 to the consolidated financial statements, on December 31, 2020 the Company completed its acquisitions of Total Equipment Company (“TEC”) and APO Pumps and Compressors, LLC (“APO”) for total consideration of $103 million (the “Transactions”). The Transactions are accounted for as business combinations and the Company preliminarily allocated $26.7 million of the purchase price to the fair value of the acquired customer relationship intangible assets. We identified the valuation of acquired intangible assets for TEC and APO as a critical audit matter. Auditing management's preliminary allocation of purchase price for its acquisitions of TEC and APO involved especially subjective and complex judgements due to the significant estimation required in determining the fair value of customer relationship intangible assets. The significant estimation was primarily due to the complexity of the valuation models used to measure that fair value as well as the sensitivity of the respective fair values to the underlying significant assumptions. The significant assumptions used to estimate the fair value of the customer relationship intangible assets and subsequent amortization expense included discount rates, customer attrition rates and economic lives. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The primary procedures we performed to address this critical audit matter included: a. Obtaining an understanding of the Company’s acquisition process and evaluating the design and operating effectiveness of controls as it related to the Company’s valuation process and methodology for acquired intangible assets. This included testing controls over the Company’s estimation process supporting the recognition and measurement of intangible assets, as well as controls over management’s judgments and evaluation of underlying assumptions regarding their valuation. a. Evaluating the Company's valuation model, the method and significant assumptions used and tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. a. Involving our valuation specialists to assist with our evaluation of the valuation model and certain significant assumptions. 46 Table of Contents I ncome Taxes - Uncertain Tax Positions As discussed in Note 13 to the consolidated financial statements, during the year ended December 31, 2020, the Company recognized federal and state tax benefits for Federal Research & Development Credits (“R&D Credits”) related to tax years 2016 to 2020 of $16.9 million which is partially offset by $5.1 million recorded as a reduction due to the uncertainty related to the realizability of the tax credits. Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior year audit settlements. To account for uncertainty in income taxes, the Company evaluates the likelihood of a tax position based on the technical merits of the position, performs a subsequent measurement related to the maximum benefit and degree of likelihood, and determines the benefits to be recognized in the financial statements, if any. We determined the estimates relating to determination of uncertain tax provisions as a critical audit matter. Given the complexity and the subjective nature of the use of R&D Credits, evaluating management’s estimates relating to their determination of uncertain tax positions requires extensive audit effort and a high degree of auditor judgment, including involvement of our income tax specialists. The primary procedures we performed to address this critical audit matter included: a. Evaluating the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions related to R&D Credits. a. Reading and evaluating management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists which detail the basis of the uncertain tax position. a. Testing the reasonableness of management’s judgments regarding the future resolution of the uncertain tax position, including an evaluation of the technical merits of the uncertain tax position. a. Evaluating the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments. /s/ Moss Adams LLP Houston, Texas March 19, 2021, except for the effects of the restatement discussed in Note 4 to the consolidated financial statements and the matters discussed in Management’s Report on Internal Control over Financial Reporting, as to which the date is October 21, 2021 We have served as the Company’s auditor since 2017. 47 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) Years Ended December 31, 2020 2019 2018 (Restated) (Restated) (Restated) Sales $ 1,005,266 $ 1,264,851 $ 1,218,709 Cost of sales 728,070 915,062 882,866 Gross profit $ 277,196 $ 349,789 $ 335,843 Selling, general and administrative expense 244,981 282,377 263,757 Impairment and other charges 59,883 — — Income (loss) from operating $ ( 27,668 ) $ 67,412 $ 72,086 Other expense (income), net 74 ( 45 ) ( 1,192 ) Interest expense 20,571 19,498 20,937 Income (loss) before income taxes $ ( 48,313 ) $ 47,959 $ 52,341 Provision for income taxes (benefit) ( 18,696 ) 11,194 14,107 Net income (loss) $ ( 29,617 ) $ 36,765 $ 38,234 Net loss attributable to noncontrolling interest ( 348 ) ( 260 ) ( 111 ) Net income (loss) attributable to DXP Enterprises, Inc. $ ( 29,269 ) $ 37,025 $ 38,345 Preferred stock dividend 90 90 90 Net income (loss) attributable to common shareholders $ ( 29,359 ) $ 36,935 $ 38,255 Net income (loss) $ ( 29,617 ) $ 36,765 $ 38,234 Cumulative translation adjustment, net of income taxes 1,941 ( 687 ) 224 Comprehensive income (loss) $ ( 27,676 ) $ 36,078 $ 38,458 Earnings (loss) per share (Note 15) Basic $ ( 1.65 ) $ 2.10 $ 2.18 Diluted $ ( 1.65 ) $ 2.01 $ 2.08 Weighted average common shares outstanding: Basic 17,748 17,592 17,553 Diluted 17,748 18,432 18,393 The accompanying notes are an integral part of these consolidated financial statements. 48 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2020 December 31, 2019 (Restated) (Restated) ASSETS Current assets: Cash $ 119,328 $ 54,203 Restricted cash 91 124 Accounts receivable, net of allowances for doubtful accounts of $ 8,628 and $ 8,929 166,941 188,774 Inventories 97,071 129,570 Costs and estimated profits in excess of billings 18,459 32,455 Prepaid expenses and other current assets 4,548 4,223 Federal income taxes receivable 2,987 — Total current assets $ 409,425 $ 409,349 Property and equipment, net 56,899 63,703 Goodwill 261,767 194,052 Identified Intangibles, net 80,088 52,582 Operating lease ROU assets 55,188 66,191 Other long-term assets 4,764 3,211 Total assets $ 868,131 $ 789,088 LIABILITIES AND EQUITY Current liabilities: Current maturities of long-term debt $ 3,300 $ 2,500 Trade accounts payable 64,849 63,676 Accrued wages and benefits 20,621 23,412 Federal income taxes payable — 2,101 Customer advances 3,688 3,408 Billings in excess of costs and estimated profits 4,061 11,871 Short-term operating lease liabilities 15,891 17,603 Other current liabilities 34,729 14,754 Total current liabilities $ 147,139 $ 139,325 Long-term debt, net of current maturities and unamortized debt issuance costs 317,139 235,419 Long-term operating lease liabilities 38,010 48,605 Other long-term liabilities 2,930 1,205 Deferred income taxes 1,777 9,602 Total long-term liabilities $ 359,856 $ 294,831 Total liabilities $ 506,995 $ 434,156 Commitments and Contingencies ( Note 19 ) Shareholders' Equity: Series A preferred stock, $ 1.00 par value; 1,000,000 shares authorized 1 1 Series B convertible preferred stock, $ 1.00 par value; 1,000,000 shares authorized 15 15 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 19,208,067 and 17,604,092 outstanding 189 174 Additional paid-in capital 192,068 157,886 Retained earnings 186,078 215,664 Accumulated other comprehensive loss ( 18,013 ) ( 19,954 ) Total DXP Enterprises, Inc. equity $ 360,338 $ 353,786 Noncontrolling interest 798 1,146 Total equity $ 361,136 $ 354,932 Total liabilities and equity $ 868,131 $ 789,088 The accompanying notes are an integral part of these consolidated financial statements. 49 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2020 2019 2018 (Restated) (Restated) (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) attributable to DXP Enterprises, Inc. $ ( 29,269 ) $ 37,025 $ 38,345 Less: net loss attributable to non-controlling interest ( 348 ) ( 260 ) ( 111 ) Net income (loss) $ ( 29,617 ) $ 36,765 $ 38,234 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation 10,396 10,100 9,578 Impairment and other charges 59,883 — — Amortization of intangible assets 12,287 15,074 16,586 Bad debt expense 1,194 139 2,368 Payment of contingent consideration liability in excess of acquisition-date fair value ( 136 ) ( 106 ) — Amortization of debt issuance costs 1,875 1,875 1,743 Fair value adjustment on contingent consideration ( 395 ) 54 313 Loss on extinguishment and modification of debt 2,288 — 60 Gain on sale of property and equipment — ( 9 ) ( 1,330 ) Stock compensation expense 3,532 1,963 2,549 Deferred income taxes ( 14,732 ) 840 1,004 Changes in operating assets and liabilities Trade accounts receivable 44,884 7,898 ( 24,999 ) Costs and estimated profits in excess of billings 14,009 92 ( 5,640 ) Inventories 22,414 ( 13,910 ) ( 21,363 ) Prepaid expenses and other assets 13,782 5,110 187 Accounts payable and accrued expenses ( 15,345 ) ( 19,003 ) 7,418 Billings in excess of costs & estimated profits ( 7,816 ) 1,142 6,522 Other long-term liabilities ( 8,853 ) ( 6,718 ) 2,610 Net cash provided by operating activities $ 109,650 $ 41,306 $ 35,840 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 6,672 ) ( 22,120 ) ( 9,323 ) Proceeds from the sale of property and equipment 123 35 2,558 Acquisition of businesses, net of cash acquired ( 115,247 ) — ( 10,811 ) Net cash used in investing activities $ ( 121,796 ) $ ( 22,085 ) $ ( 17,576 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt 330,000 — — Principal debt payments ( 244,375 ) ( 4,341 ) ( 3,381 ) Debt issuance costs ( 7,268 ) — ( 60 ) Issuance of Common Stock- shares sold in public market 1,142 — — Payment for contingent consideration liability ( 1,864 ) ( 1,394 ) — Non-controlling interest holder contributions (distributions), net of tax benefits — — 950 Preferred dividends paid ( 90 ) ( 90 ) ( 90 ) Payment for employee taxes withheld from stock awards ( 139 ) ( 267 ) ( 340 ) Net cash provided by (used in) financing activities $ 77,406 $ ( 6,092 ) $ ( 2,921 ) Effect of foreign currency on cash ( 168 ) 679 ( 403 ) Net Change In Cash $ 65,092 $ 13,808 $ 14,940 Cash, cash equivalents and restricted cash at Beginning of Year 54,327 40,519 25,579 Cash, cash equivalents and restricted cash at End of Year $ 119,419 $ 54,327 $ 40,519 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 13,321 $ 17,623 $ 19,134 Cash paid for income taxes $ 6,277 $ 13,318 $ 8,301 The accompanying notes are an integral part of these consolidated financial statements. 50 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (in thousands, except share amounts) Series A preferred Stock Series B preferred Stock Common Stock Paid-in Capital Retained earnings Treasury stock Non controlling interest Accum Other Comp (Loss) Total equity Balance, December 31, 2017 (Restated) $ 1 $ 15 $ 174 $ 153,087 $ 140,474 $ — $ 567 $ ( 19,491 ) $ 274,827 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 2,549 — — — — 2,549 Tax related items for share based awards — — — ( 340 ) — — — — ( 340 ) Issuance of shares of common stock — — — 894 — — — — 894 Non-controlling interest holder contributions, net of tax benefits — — — — — — 950 — 950 Cumulative translation adjustment — — — — — — — 224 224 Net income (As restated) — — — — 38,345 — ( 111 ) — 38,234 Balances at December 31, 2018 (Restated) $ 1 $ 15 $ 174 $ 156,190 $ 178,729 $ — $ 1,406 $ ( 19,267 ) $ 317,248 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 1,963 — — — — 1,963 Tax related items for share based awards — — — ( 267 ) — — — — ( 267 ) Cumulative translation adjustment — — — — — — — ( 687 ) ( 687 ) Net income (As restated) — — — — 37,025 — ( 260 ) — 36,765 Balances at December 31, 2019 (Restated) $ 1 $ 15 $ 174 $ 157,886 $ 215,664 $ — $ 1,146 $ ( 19,954 ) $ 354,932 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 3,532 — — — — 3,532 Tax related items for share based awards — — — ( 139 ) — — — — ( 139 ) Issuance of shares of common stock-Acquisition — — 15 29,351 — — — — 29,366 Issuance of shares of common stock-Shares sold in public market — — — 1,142 — — — — 1,142 Cumulative translation adjustment (As restated) — — — 296 ( 227 ) — — 1,941 2,010 Net loss (As restated) — — — — ( 29,269 ) — ( 348 ) — ( 29,617 ) Balances at December 31, 2020 (Restated) $ 1 $ 15 $ 189 $ 192,068 $ 186,078 $ — $ 798 $ ( 18,013 ) $ 361,136 The accompanying notes are an integral part of these consolidated financial statements. 51 Table of Contents DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY DXP Enterprises, Inc. together with its subsidiaries (collectively “DXP,” “Company,” “us,” “we,” or “our”) was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to energy and industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). See Note 22 - Segment and Geographical Reporting for discussion of the business segments. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES Basis of Presentation The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity (“VIE”). DXP is the primary beneficiary of a VIE in which DXP owns 47.5 % of the equity. DXP consolidates the financial statements of the VIE with the financial statements of DXP. As of December 31, 2020, the total assets of the VIE were approximately $ 4.8 million including approximately $ 3.4 million of fixed assets. DXP is the primary customer of the VIE. Consolidation of the VIE increased cost of sales by approximately $ 0.8 million for the year ended December 31, 2020 and decreased cost of sales by approximately $ 0.4 million for the year ended December 31, 2019, respectively. The Company recognized a related income tax benefit of $ 116 thousand and $ 83 thousand related to the VIE for the years ended December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020, the owners of the 52.5 % of the equity not owned by DXP included employees of DXP. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation; none affected net income. Foreign Currency The financial statements of the Company’s Canadian subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive income (loss). Gains and losses on transactions denominated in foreign currency are reported in the consolidated statements of operations and comprehensive income (loss). Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates. Cash and Cash Equivalents The Company’s presentation of cash includes cash equivalents. Cash equivalents are defined as short-term investments with maturity dates of 90 days or less at time of purchase. The Company places its cash and cash equivalents with institutions with high credit quality. However, at certain times, such cash and cash equivalents may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not historically experienced any losses when in excess of these limits. 52 Table of Contents Receivables and Credit Risk Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms. The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the United States and Canada. The Company believes no significant concentration of credit risk exists. The Company evaluates the creditworthiness of its customers' financial positions and monitors accounts on a regular basis. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon management’s best estimate of the collectability of such accounts under the current expected credit losses model. The Company writes-off uncollectible trade accounts receivable when the accounts are determined to be uncollectible. No customer represents more than 10% of consolidated sales. Changes in this allowance for 2020, 2019 and 2018 were as follows ( in thousands ): Years Ended December 31, 2020 2019 2018 Balance at beginning of year $ 8,929 $ 10,126 $ 9,015 Charged to costs and expenses 1,194 139 2,368 Charged to other accounts 21 (1) 79 (1) ( 86 ) (2) Deductions ( 1,516 ) (3) ( 1,415 ) (3) ( 1,171 ) (3) Balance at end of year $ 8,628 $ 8,929 $ 10,126 (1) Primarily due to translation adjustments (2) Includes allowance for doubtful accounts from acquisitions and divestiture (3) Uncollectible accounts written off, net of recoveries Inventories Inventories consist principally of equipment purchased for resale or finished goods and are priced at net realizable value, cost being primarily determined using the weighted average cost method. The Company regularly reviews inventory to evaluate continued demand and records provisions for the difference between cost and net realizable value arising from excess and obsolete items on hand. Provisions are provided against inventories for estimated excess and obsolescence based upon the aging of the inventories and market trends and are applied as a reduction in cost of the associated inventory. Property and Equipment Property and equipment are carried on the basis of cost. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings. The principal estimated useful lives used in determining depreciation are as follows: Buildings 20 - 39 years Building improvements 10 - 20 years Furniture, fixtures and equipment 3 - 20 years Leasehold improvements Shorter of estimated useful life or related lease term Impairment of Goodwill and Other Intangible Assets The Company tests goodwill and other indefinite lived intangible assets for impairment on an annual basis in the fourth quarter and when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company assigns the carrying value of these intangible assets to its "reporting units" and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the component is a business and discrete information is prepared and reviewed regularly by segment management. 53 Table of Contents The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a quantitative test for that reporting unit. Should the reporting unit's carrying amount exceed the fair value, then an impairment charge for the excess would be recognized. The impairment charge is limited to the amount of goodwill allocated to the reporting unit, and goodwill will not be reduced below zero. For the twelve months ended December 31, 2020, goodwill was evaluated for impairment at the reporting unit level resulting in a $ 36.4 million goodwill impairment which was included in impairment charges in the consolidated statement of operations (see Note 5- Impairments and other charges ). Impairment of Long-Lived Assets, Excluding Goodwill The Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. For the twelve months ended December 31, 2020, long-lived assets was evaluated for impairment at the reporting unit level resulting in a $ 4.8 million long-lived assets impairment which was included in impairment charges in the consolidated statement of operations (see Note 5 - Impairments and other charges ). Revenue Recognition The Company fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed. This typically occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin. Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by the new standard. Under this method, revenues are recognized as costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. The typical time span of these contracts is approximately one to two years. The Service Centers segment provides a wide range of maintenance, repair and operating (MRO) products, equipment and integrated services, including logistics capabilities, to industrial customers. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management services. Revenue is recognized upon the completion of our performance obligation(s) under the sales agreement. The majority of the Service Centers and Supply Chain Services segment revenues originate from the satisfaction of a single performance obligation, the delivery of products. Revenues are recognized when an agreement is in place, the performance obligations under the contract have been identified, and the price or consideration to be received is fixed and allocated to the performance obligation(s) in the contract. We believe our performance obligation has been satisfied when title passes to the customer or services have been rendered under the contract. Revenues are recorded net of sales taxes. The Company reserves for potential customer returns based upon the historical level of returns. Shipping and Handling Costs The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified as a component of cost of sales. 54 Table of Contents Self-insured Insurance and Medical Claims We generally retain up to $ 100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The actual cost could deviate from the recorded estimate. We generally retain up to $ 175,000 of risk on each medical claim for our employees and their dependents with the exception of less than 0.05 % of employees where a higher risk is retained. We accrue for the estimated outstanding balance of unpaid medical claims for our employees and their dependents. The accrual is adjusted monthly based on recent claims experience. The actual claims could deviate from recent claims experience and be materially different from the reserve. The accrual for these claims at December 31, 2020 and 2019 was approximately $ 2.6 million and $ 2.5 million, respectively. Cost of Sales and Selling, General and Administrative Expense Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs and depreciation. Selling, general and administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation and amortization. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established to reduce deferred income tax assets to the amounts expected to be realized under a more likely than not criterion. Accounting for Uncertainty in Income Taxes A position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examination by tax authorities for years prior to 2014. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Comprehensive Income (Loss) Comprehensive income (loss) includes net income and foreign currency translation adjustments. The Company’s other comprehensive (loss) income is comprised of changes in the market value of an investment with quoted market prices in an active market for identical instruments and translation adjustments from translating foreign subsidiaries to the reporting currency. NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS Accounting Pronouncements Not Yet Adopted In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on the financial statements. All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations. 55 Table of Contents NOTE 4 – RESTATEMENT The Company has restated its consolidated balance sheet at December 31, 2020 and 2019, and consolidated statements of earnings, cash flows, and comprehensive income and retained earnings for the years ended December 31, 2020, 2019 and 2018. The restatement also affected periods prior to 2018. The impact of the restatement on such prior periods was reflected as an adjustment to retained earnings as of January 1, 2018. In addition, the restatement impacts the first, second and third quarters of 2020. The restated amounts for these quarters and the comparable interim periods in 2019 and 2018 are presented in “Note 23. Selected Quarterly Financial Data (Unaudited),” below. The restatement corrects errors resulting from the failure to timely clear aged payables resulting from the Company's three-way match process discrepancies and the recognition of true-up consideration in business combination accounting, as well as, certain additional errors that the Company has determined to be immaterial, both individually and in aggregate. Set forth below are the restatement adjustments included in the restatement of the previously issued financial statements for the years ended December 31, 2020, 2019 and 2018, each of which is an “error” within the meaning of ASC Topic 250: Accounting Changes and Error Corrections The following table presents the impact of the restatement adjustments described below on net income and comprehensive income for the years ended December 31, 2020, 2019 and 2018 and retained earnings as of January 1, 2018: Retained Earnings Year Ended December 31, as of 2020 2019 2018 Jan.1, 2018 As reported Net Income (As reported) $ ( 29,074 ) $ 35,775 $ 35,521 $ 134,193 Unvouchered Purchase Orders ( 1,874 ) 3,737 2,411 7,818 Landed cost inventory adjustment ( 1,366 ) 623 525 218 Obsolete inventory reserve adjustments 1,160 ( 1,160 ) — — Direct shipment cut off adjustment 7 ( 635 ) 699 390 Cut-off for credit card payment accruals 581 ( 581 ) — — Sales tax payable accruals 694 ( 694 ) — — Provision for income taxes 255 ( 300 ) ( 922 ) ( 2,145 ) Net Net Income (Restated) $ ( 29,617 ) $ 36,765 $ 38,234 $ 140,474 Cumulative translation adjustment, net of taxes 1,941 ( 687 ) 224 Comprehensive income (loss) as restated $ ( 27,676 ) $ 36,078 $ 38,458 Adjustments to Net Sales and Related Adjustments to Cost of Products Sold Unvouchered Purchase Orders The Company determined it had aged unvouchered purchase orders included in trade accounts payable. After lengthy investigation and research, DXP determined that these balances were not valid legal obligations to vendors and will not be invoiced or paid. As a result, the Company wrote off the aged balances that no longer represented legal obligations, resulting in a net reduction in accounts payable. Landed cost inventory adjustment The Company determined that cost mark-ups for landed costs for certain inventory items related to our private label pumps had not been properly relieved upon the sale of these items. Slow moving and obsolete inventory reserve The Company determined it had not appropriately adjusted its inventory reserve on an item-by-item basis for items that moved from obsolete to slow moving or vice versa. Direct shipment cut off adjustment Direct shipment orders placed near period end may not be properly reflected in the correct period. The Company adjusted sales and cost of goods sold for items recorded in the incorrect period, as well as accounts receivable and payable. Other Adjustments to Earnings from Continuing Operations Before Non-Controlling Interest and Income Taxes Cut-off for credit card payment accruals In January 2020, the Company recorded its monthly payment for its P-Card credit card program, however, the charges were incurred in December 2019. This adjustment reflects the accrual in the correct period, resulting in a shift in other current liabilities between periods. Sales tax payable accruals The Company increased other current liabilities for its accrual for state sales tax obligations stemming from open audits. 56 Table of Contents Adjustments to Provision for Income Taxes The adjustments reflected for the provision for income taxes are the tax consequences of the above listed corrections. Balance sheet adjustments related to purchase accounting and consolidation On December 31, 2020, DXP closed on the acquisition of four businesses. The owners of two of the targets were eligible for true-up consideration based upon the closing financial results of calendar year 2020. This true-up consideration was paid in July 2021; however, the amount of true-up consideration was deemed to have been accrued as of the closing of the acquisitions. Therefore, this adjustment resulted in an accrual for the true-up consideration and an increase in goodwill of $ 13.4 million. As described above, the unvouchered purchase order discrepancies resulted in a reduction of accounts payable in the amount of $ 10.2 million as of December 31, 2018, a further reduction of $ 13.9 million as of December 31, 2019 and a net decrease of $ 12.2 million as of December 31, 2020. During the consolidation of the four acquisitions closed on December 31, 2020, the Company improperly reflected the cash on hand at the targets as an increase in cumulative translation adjustment and other comprehensive income for approximately $ 2 million. This reclassification adjustment properly records the increase in cash and cash equivalents upon closing. In addition, cumulative translation adjustment was also reduced by $ 1.8 million as the a result of a reclassification associated with trade accounts receivable. The following table presents the impact of the restatement adjustments on the Company’s previously reported 2020, 2019 and 2018 results on a condensed basis: For the Year Ended December 31, 2020 2019 2018 As Reported As Restated As Reported As Restated As Reported As Restated STATEMENT(S) OF INCOME Sales $ 1,005,266 $ 1,005,266 $ 1,267,189 $ 1,264,851 $ 1,216,197 $ 1,218,709 Cost of sales 725,997 728,070 919,965 915,062 883,989 882,866 Gross profit 279,269 277,196 347,224 349,789 332,208 335,843 Selling, general and administrative costs 246,256 244,981 281,102 282,377 263,757 263,757 Income (loss) before income taxes ( 47,515 ) ( 48,313 ) 46,669 47,959 48,706 52,341 Provision (benefit) for income taxes ( 18,441 ) ( 18,696 ) 10,894 11,194 13,185 14,107 Net (loss) income attributable to common shareholders $ ( 28,816 ) $ ( 29,359 ) $ 35,945 $ 36,935 $ 35,542 $ 38,255 Basic earnings (loss) per share $ ( 1.62 ) $ ( 1.65 ) $ 2.04 $ 2.10 $ 2.02 $ 2.18 Diluted earnings (loss) per share $ ( 1.62 ) $ ( 1.65 ) $ 1.96 $ 2.01 $ 1.94 $ 2.08 57 Table of Contents As of December 31, 2020 2019 2018 As Reported As Restated As Reported As Restated As Reported As Restated BALANCE SHEET: Cash and cash equivalents $ 117,444 $ 119,419 $ 54,327 $ 54,327 $ 40,519 $ 40,519 Accounts Receivable 163,429 166,941 187,116 188,774 191,829 195,825 Inventory 97,071 97,071 129,364 129,570 114,830 115,573 Federal income taxes receivable 5,632 2,987 996 — 960 — Goodwill 248,339 261,767 194,052 194,052 194,052 194,052 Total Assets 851,861 868,131 788,220 789,088 699,962 703,741 Accounts Payable 75,744 64,849 76,438 63,676 87,407 80,085 Other current liabilities 20,834 34,729 12,939 14,754 17,269 17,774 Federal income taxes payable — — — 2,101 — 1,602 Deferred Taxes 1,777 1,777 9,872 9,602 8,633 8,633 Total Liabilities $ 503,995 $ 506,995 $ 443,272 $ 434,156 $ 391,708 $ 386,493 Accumulated Other Comprehensive Income ( 21,842 ) ( 18,013 ) ( 19,954 ) ( 19,954 ) ( 19,267 ) ( 19,267 ) Retained Earnings 176,637 186,078 205,680 215,664 169,735 178,729 Equity 347,866 361,136 344,948 354,932 308,254 317,248 Total Liabilities & Equity $ 851,861 $ 868,131 $ 788,220 $ 789,088 $ 699,962 $ 703,741 58 Table of Contents Years ended December 31, 2020 2019 2018 As Reported As Restated As Reported As Restated As Reported As Restated CONSOLIDATED STATEMENTS OF CASH FLOWS: CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 29,074 ) $ ( 29,617 ) $ 35,775 $ 36,765 $ 35,521 $ 38,234 Reconciliation of net income (loss) to net cash provided by operating activities: Deferred income taxes ( 14,771 ) ( 14,732 ) 1,110 840 $ 1,004 $ 1,004 Changes in operating assets and liabilities Trade accounts receivable 42,909 44,884 5,560 7,898 ( 22,487 ) ( 24,999 ) Inventories 22,208 22,414 ( 14,447 ) ( 13,910 ) ( 20,838 ) ( 21,363 ) Prepaid expenses and other assets 13,053 13,782 5,110 5,110 188 187 Accounts payable and accrued expenses ( 14,897 ) ( 15,345 ) ( 15,408 ) ( 19,003 ) 7,093 7,418 Other long-term liabilities ( 8,870 ) ( 8,853 ) ( 6,718 ) ( 6,718 ) 2,610 2,610 Net cash provided by operating activities $ 107,675 $ 109,650 $ 41,306 $ 41,306 $ 35,840 35,840 59 Table of Contents NOTE 5 – IMPAIRMENTS AND OTHER CHARGES The Company tests goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating that it might be impaired. During the third quarter of 2020, the Company’s market capitalization and sales declined significantly driven by current macroeconomic and geopolitical conditions including the collapse of oil prices caused by both surplus production and supply as well as the decrease in demand caused by the COVID-19 pandemic. In addition, the uncertainty related to oil demand continued to have a significant impact on the investment and operating plans of many of our customers. Based on these events, the Company concluded that it was more likely than not that the fair values of certain of its reporting units were less than their carrying values. Therefore, the Company performed an interim goodwill impairment test. For the twelve months ended December 31, 2020, goodwill was evaluated for impairment at the reporting unit level. The Company had four goodwill reporting units: Service Centers, Innovative Pumping Solutions, Canada and Supply Chain Services. The Company determined the fair values of two reporting units with goodwill were below their carrying values, resulting in a $ 36.4 million goodwill impairment, which was included in impairment charges in the consolidated statement of operations. Innovative Pumping Solutions The oil and gas industry experienced unprecedented disruption during 2020 as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and subsequent mitigation efforts. This disruption created a substantial surplus of oil and a decline in oil prices. West Texas Intermediate (WTI) oil spot prices decreased sharply during the first quarter of 2020 from a high of $ 63 per barrel in early January of 2020 to approximately $ 21 per barrel by the end of the first quarter of 2020. Although oil prices have recovered modestly, WTI oil spot prices averaged approximately $ 41 per barrel during the third quarter of 2020, which is approximately 28 % less than the average price per barrel during 2019. The U.S. average rig count continued to decline in the third quarter of 2020, dropping 35 % compared to the second quarter of 2020. These factors, along with the continued impact of COVID-19, constituted a triggering event in the third quarter and required an interim goodwill impairment analysis for our manufacturing reporting unit. With the adverse economic impacts discussed above and the uncertainty surrounding the COVID-19 pandemic, the results of the impairment test indicated that the carrying amount of the manufacturing reporting unit exceeded the estimated fair value of the reporting unit, and a full impairment of its remaining goodwill was required. Significant assumptions inherent in the valuation methodologies for goodwill impairment calculations include, but are not limited to, prospective financial information, growth rates, discount rates, inflationary factors, and the cost of capital. To evaluate the sensitivity of the fair value calculations for the reporting unit, the Company applied a hypothetical 100 bps reduction in the weighted average cost of capital, and separately, increased the revenue projections by 10 percent, holding other factors steady. Even with more favorable assumptions, the results of these sensitivity analyses led the Company to record a non-cash impairment charge of $ 16.0 million for goodwill during the twelve months ended December 31, 2020. Canada As a result of the reductions in capital spending for oil and gas producers and processors and the economic repercussions from the COVID-19 pandemic, we determined these events constituted a triggering event that required us to review the recoverability of our long-lived assets and perform an interim goodwill impairment assessment as of July 31, 2020. Our review resulted in the recording of impairments and other charges during the third quarter of 2020. As a result of our goodwill impairment assessments, we determined that the fair value of our Canadian reporting unit was lower than its net book value and, therefore, resulted in a partial goodwill impairment. The enterprise value of the Canadian reporting unit at July 31, 2020 was less than its carrying value by approximately 40 percent. This resulted in a partial goodwill impairment of $ 20.5 million for Canada. Per the impairment test and respective sensitivity analyses, it was noted that a decrease of approximately 480 basis points in the pre-tax discount rate and an approximately 150 basis points increase in our revenue long-term growth rate projections would cause the Canada business enterprise value to increase to the level of its carrying value and thus avoid a full impairment. Other Impairments and methodology The negative market indicators described above were triggering events that indicated that certain of the Company’s long-lived intangible and tangible assets and additional inventory items may also have been impaired. Recoverability testing indicated that certain long-lived assets and inventory were indeed impaired. The estimated fair value of these assets was determined to be below their carrying value. As a result, the Company recorded the following additional impairment and other charges as 60 Table of Contents detailed in the table below: (in thousands) Twelve Months Ended December 31, 2020 Long-lived asset impairments $ 4,775 Goodwill impairments 36,435 Inventory and work-in-progress costs 18,673 Total impairment and other charges $ 59,883 The Company determined the fair value of both long-lived assets and goodwill primarily using the discounted cash flow method and in the case of goodwill, a multiples-based market approach for comparable companies. Given the current volatile market environment and inherent complexities it presents, the Company utilized third-party valuation advisors to assist us with these valuations. These analyses included significant judgment, including management’s short-term and long-term forecast of operating performance, discount rates based on the weighted average cost of capital, as derived from peers, revenue growth rates, profitability margins, capital expenditures, the timing of future cash flows based on an eventual recovery of the oil and gas industry, and in the case of long-lived assets, the remaining useful life and service potential of the asset, all of which were classified as Level 3 inputs under the fair value hierarchy. These impairment assessments incorporate inherent uncertainties, including supply and demand for the Company’s products and services and future market conditions, which are difficult to predict in volatile economic environments. The discount rates utilized to value the reporting units were in a range from 14.8 percent to 16.4 percent. Given the dynamic nature of the COVID-19 pandemic and related market conditions, we cannot reasonably estimate the period that these events will persist or the full extent of the impact they will have on our business. If market conditions continue to deteriorate, including crude oil prices further declining or remaining at low levels for a sustained period, we may record further asset impairments, which may include an impairment of the carrying value of our goodwill associated with other reporting units. For inventory and work-in-progress we evaluated the recoverability based upon their net realizable value, factoring in the costs to complete work-in-progress and the salability of inventory items primarily tied to oil and gas. The net realizable value was derived from quotes for similar items and recent transactions. NOTE 6 - LEASES We lease office space, warehouses, land, automobiles, and office and manufacturing equipment. All of our leases are classified as operating leases. Our leases have remaining lease terms of 1 month to 10 years, some of which include options to extend the leases for up to 14 years. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not include options to purchase the leased property. The Company adopted the provisions of ASC 842, "Leases" effective January 1, 2019. We elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and we elected to apply the following practical expedients and accounting policy decisions. In January 2019, we recorded a ROU Asset and total lease liability obligations of $ 72.7 million and $ 72.4 million, respectively. The new standard did not have a material impact on our consolidated statements of operations and had no impact on cash flows. The lease expenses were as follows (in thousands) : Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019 Lease cost Classification Short-term lease expense SG&A expenses (*) $ 374 $ 1,087 Other operating lease cost SG&A expenses (*) 22,983 23,911 Total operating lease cost $ 23,357 $ 24,998 (*) Manufacturing equipment and some vehicle rental expenses are included in the cost of sales. 61 Table of Contents Supplemental cash flow information related to leases was as follows (in thousands) : Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019 Lease Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 18,250 $ 19,020 Right-of-use assets obtained in exchange for lease liabilities Operating leases $ 5,639 $ 12,608 Supplemental balance sheet information related to leases was as follows (in thousand) : Lease Classification December 31, 2020 December 31, 2019 Assets Operating Operating lease right-of-use assets $ 55,188 $ 66,191 Liabilities Current operating Short-term operating lease liabilities 15,891 17,603 Non-current operating Long-term operating lease liabilities 38,010 48,605 Total operating lease liabilities $ 53,901 $ 66,208 62 Table of Contents Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments for lease commenced on or after January 1, 2019. We used our incremental borrowing rate as of the transition date of January 1, 2019 for operating leases that commenced prior to transition. Maturities of lease liabilities were as follows (in thousands) : Year Ending December 31, Operating leases (*) 2021 $ 19,183 2022 15,990 2023 10,571 2024 6,084 2025 3,924 Thereafter 7,271 Total lease payments $ 63,023 Less: imputed interest 9,122 Present value of lease liabilities $ 53,901 (*) Operating lease payments exclude $ 2.8 million and $ 1.1 million of legally binding minimum lease payments for leases signed but not yet commenced, as of December 31, 2020 and December 31, 2019, respectively. Lease term and discount rate Twelve Months Ended December 31, 2020 Twelve Months Ended December 31, 2019 Weighted average remaining lease term (years) Operating lease 4.29 4.74 Weighted average discount rate Operating lease 7.2 % 7.3 % For the twelve months ended December 31, 2020, the Company paid approximately $ 3.1 million in lease expenses to entities controlled by the Company's Chief Executive Officer, David Little and family. NOTE 7 - 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. 63 Table of Contents Level 3 Inputs Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include managements assumptions about the likelihood of payment based on the established benchmarks and discount rates based on an internal rate of return analysis. The fair value measurement includes inputs that are Level 3 inputs as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumptions used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured each reporting period and reflected in our results of operations. As of December 31, 2020, we recorded a $ 1.1 million liability for contingent consideration associated with the acquisition of ASI in other current liabilities. See further discussion at Note 18 - Business Acquisitions . For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the twelve months ended December 31, 2020: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Contingent Liability for Accrued Consideration (in thousands) Beginning balance at December 31, 2019 $ 2,705 Acquisitions and settlements Acquisitions ( Note 18 ) — Settlements ( 2,000 ) Total remeasurement adjustments: Changes in fair value recorded in other (income) expense, net 395 Ending balance at December 31, 2020 $ 1,100 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. 395 * Included in other current liabilities Quantitative Information about Level 3 Fair Value Measurements The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows: (in thousands, unaudited) Fair Value at December 31, 2020 Valuation Technique Significant Unobservable Inputs Contingent consideration: (ASI acquisition) $ 1,100 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 7.9 %. Significant 64 Table of Contents increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement. Other financial instruments not measured at fair value on the Company's consolidated balance sheets at December 31, 2020 but which require disclosure of their fair values include: cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility ( Note 12 ). The Company believes that the estimated fair value of such instruments at December 31, 2020 and December 31, 2019 approximates their carrying value as reported on the consolidated balance sheets. NOTE 8 - INVENTORIES The carrying values of inventories (as restated) were as follows ( in thousands ): December 31, 2020 December 31, 2019 (Restated) (Restated) Finished goods $ 105,527 $ 122,716 Work in process 17,021 19,721 Obsolescence reserve ( 25,477 ) ( 12,867 ) Inventories $ 97,071 $ 129,570 NOTE 9 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS Under our customized pump production contracts in our IPS segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “Cost and estimated profits in excess of billings” on our Consolidated Balance Sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our Consolidated Balance Sheets. Costs and estimated profits on uncompleted contracts and related amounts billed for 2020 and 2019 were as follows ( in thousands ): December 31, 2020 2019 Costs incurred on uncompleted contracts $ 36,969 $ 51,017 Estimated profits, thereon 6,711 10,771 Total $ 43,680 $ 61,788 Less: billings to date 29,315 41,223 Net $ 14,365 $ 20,565 Such amounts were included in the accompanying Consolidated Balance Sheets for 2020 and 2019 under the following captions ( in thousands ): December 31, 2020 2019 Costs and estimated profits in excess of billings $ 18,459 $ 32,455 Billings in excess of costs and estimated profits ( 4,061 ) ( 11,871 ) Translation Adjustment ( 33 ) ( 19 ) Net $ 14,365 $ 20,565 During the twelve months ended December 31, 2020, $ 11.9 million of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments. 65 Table of Contents NOTE 10 - PROPERTY AND EQUIPMENT The carrying values of property and equipment were as follows ( in thousands ): December 31, 2020 December 31, 2019 Land $ 2,558 $ 1,960 Buildings and leasehold improvements 22,952 15,445 Furniture, fixtures and equipment 110,159 119,865 Less – Accumulated depreciation ( 78,770 ) ( 73,567 ) Total Property and Equipment $ 56,899 $ 63,703 Depreciation expense was $ 10.4 million, $ 10.1 million, and $ 9.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Capital expenditures by segment are included in Note 22 - Segment and Geographical Reporting . NOTE 11 - GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2020 ( in thousands ): Goodwill Other Intangible Assets Total Balances as of December 31, 2019 $ 194,052 $ 52,582 $ 246,634 Translation adjustment — ( 4 ) ( 4 ) Acquisitions (restated) 104,150 39,797 143,947 Impairment ( 36,435 ) — ( 36,435 ) Amortization — ( 12,287 ) ( 12,287 ) Balances as of December 31, 2020 $ 261,767 $ 80,088 $ 341,855 The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2019 ( in thousands ): Goodwill Other Intangible Assets Total Balances as of December 31, 2018 $ 194,052 $ 67,207 $ 261,259 Translation adjustment — 449 449 Amortization — ( 15,074 ) ( 15,074 ) Balances as of December 31, 2019 $ 194,052 $ 52,582 $ 246,634 The following table presents the goodwill balance by reportable segment as of December 31, 2020 and 2019 (in thousands) : As of December 31, 2020 2019 Service Centers $ 244,628 $ 160,934 Innovative Pumping Solutions — 15,980 Supply Chain Services 17,139 17,138 Total $ 261,767 $ 194,052 66 Table of Contents The following table presents a summary of other intangible assets ( in thousands ): As of December 31, 2020 As of December 31, 2019 Gross Carrying Amount Accumulated Amortization Carrying Amount, net Gross Carrying Amount Accumulated Amortization Carrying Amount, net Customer relationships $ 193,747 $ ( 116,028 ) $ 77,719 $ 156,282 $ ( 103,796 ) $ 52,486 Non-compete agreements 2,617 ( 248 ) 2,369 285 ( 189 ) 96 Total $ 196,364 $ ( 116,276 ) $ 80,088 $ 156,567 $ ( 103,985 ) $ 52,582 Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according to estimated economic benefits over their estimated useful lives. Customer relationships are amortized over their estimated useful lives. Amortization expense is recognized according to estimated economic benefits and was $ 12.3 million, $ 15.1 million, and $ 16.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows (in thousands) : 2021 $ 15,564 2022 14,223 2023 12,504 2024 10,426 2025 9,023 Thereafter 18,348 Total $ 80,088 The weighted average remaining estimated life for customer relationships and non-compete agreements are 7.3 years and 4.9 years, respectively. NOTE 12 – LONG-TERM DEBT Long-term debt consisted of the following ( in thousands ): December 31, 2020 December 31, 2019 Carrying Value (1) Fair Value Carrying Value (1) Fair Value ABL Revolver $ — — $ — — Term Loan B 330,000 325,875 244,375 244,375 Total Debt 330,000 325,875 244,375 244,375 Less: Current maturities ( 3,300 ) ( 3,259 ) ( 2,500 ) ( 2,500 ) Total Long-term Debt $ 326,700 $ 322,616 $ 241,875 $ 241,875 (1) Carrying value amount do not include unamortized debt issuance costs of $ 9.6 million and $ 6.5 million for year ended December 31, 2020 and December 31, 2019 respectively. Asset-Based Loan Facility: On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $ 135 million asset-backed revolving line of credit (the "ABL Revolver") a $ 50 million increase from the $ 85.0 million available under the original revolver. During the twelve months ended December 31, 2020, the amount available to be borrowed under our credit facility increased to $ 131.9 million compared to $ 81.6 million at December 31, 2019 primarily as a result of the above mentioned Increase Agreement offset by outstanding letters of credit. 67 Table of Contents As of December 31, 2020, there were no amounts of ABL Loans outstanding under the ABL Revolver. The Company's consolidated Fixed Charge Coverage Ratio was 3.40 to 1.00 as of December 31, 2020. DXP was in compliance with all such covenants that were in effect on such date under the ABL Revolver as of December 31, 2020. The ABL Credit Agreement may be increased in increments of $ 10.0 million up to an aggregate of $ 50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25 % to 1.75 % per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25 % to 0.75 % per annum, in each case, based upon the average daily excess availability under the facility for the most recently completed calendar quarter. Fees ranging from 0.25 % to 0.375 % per annum are payable on the portion of the facility not in use at any given time. The unused line fee was 0.375 % at December 31, 2020. The interest rate for the ABL facility was 1.9 % at December 31, 2020. Term Loan B: On December 23, 2020, DXP entered into a new seven year , $ 330 million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan. The Term Loan B Agreement provides for a new $ 330 million term loan (the “Term Loan”) that amortizes in equal quarterly installments of 0.25 % with the balance payable in December 2027, when the facility matures. Subject to securing additional lender commitments, the Term Loan B Agreement allows for incremental increases in facility size up to an aggregate of $ 52.5 million, plus an additional amount such that DXP’s Secured Leverage Ratio (as defined in the Term Loan B Agreement) would not exceed 3.75 to 1.00. Interest accrues on the Term Loan at a rate equal to the base rate plus a margin of 3.75 % for the Base Rate Loans (as defined in the Term Loan B Agreement), or LIBOR plus a margin of 4.75 % for the Eurodollar Rate Loans (as defined in the Term Loan B Agreement). We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50 % of excess cash flow, if our total leverage ratio is no more than 3.00 to 1.00 and greater than 2.50 to 1:00, reducing to 25 %, if our total leverage ratio is no more than 2.50 to 1.00. The interest rate for the Term Loan was 5.75 % as of December 31, 2020. Financial Covenants: DXP’s principal financial covenants under the ABL Credit Agreement and Term Loan B Agreement include: Fixed Charge Coverage Ratio – The Fixed Charge Coverage Ratio under the ABL Credit Agreement is defined as the ratio for the most recently completed four-fiscal quarter period, of (a) EBITDA minus capital expenditures (excluding those financed or funded with debt (other than the ABL Loans), (ii) the portion thereof funded with the net proceeds from asset dispositions of equipment or real property which DXP is permitted to reinvest pursuant to the Term Loan and the portion thereof funded with the net proceeds of casualty insurance or condemnation awards in respect of any equipment and real estate which DXP is not required to use to prepay the ABL Loans pursuant to the Term Loan B Agreement or with the proceeds of casualty insurance or condemnation awards in respect of any other property) minus cash taxes paid (net of cash tax refunds received during such period), to (b) fixed charges. The Company is restricted from allowing its fixed charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under the ABL facility falls below a threshold set forth in the ABL Credit Agreement. As of December 31, 2020, the Company's consolidated Fixed Charge Coverage Ratio was 3.40 to 1.00. Secured Leverage Ratio – The Term Loan B Agreement requires that the Company’s Secured Leverage Ratio, defined as the ratio, as of the last day of any fiscal quarter of consolidated secured debt (net of unrestricted cash, not to exceed $ 150 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2020, is either equal to or less than as indicated in the table below: 68 Table of Contents Fiscal Quarter Secured Leverage Ratio December 31, 2020 5.75 :1:00 March 31, 2021 5.75 :1:00 June 30, 2021 5.75 :1:00 September 30, 2021 5.50 :1:00 December 31, 2021 5.50 :1:00 March 31, 2022 5.25 :1:00 June 30, 2022 5.25 :1:00 September 30, 2022 5.25 :1:00 December 31, 2022 5.00 :1:00 March 31, 2023 5.00 :1:00 June 30, 2023 and each Fiscal Quarter thereafter 4.75 :1:00 EBITDA as defined under the Term Loan B Agreement for financial covenant purposes means, without duplication, for any period of determination, the sum of, consolidated net income during such period; plus to the extent deducted from consolidated net income in such period: (i) income tax expense, (ii) franchise tax expense, (iii) consolidated interest expense, (iv) amortization and depreciation during such period, (v) all non-cash charges and adjustments, and (vi) non-recurring cash expenses related to the Term Loan, provided , that if the Company acquires or disposes of any property during such period (other than under certain exceptions specified in the Term Loan B Agreement, including the sale of inventory in the ordinary course of business, then EBITDA shall be calculated, after giving pro forma effect to such acquisition or disposition, as if such acquisition or disposition had occurred on the first day of such period. As of December 31, 2020, the Company’s consolidated Secured Leverage Ratio was 3.25 to 1.00. In connection with the extinguishment of the previously existing term loan agreement we recorded a $ 2.3 million write-off of debt issuance costs, which was included in interest expense during 2020. Interest on Borrowings The interest rates on our borrowings outstanding at December 31, 2020 and 2019, including the amortization of debt issuance costs, were as follows: December 31, 2020 2019 ABL Revolver 1.9 % 3.5 % Term Loan B 5.75 % 6.5 % Weighted average interest rate 5.75 % 6.5 % The Company was in compliance with all financial covenants as of December 31, 2020. Extinguishment and modification of Previously Existing Credit Agreement As set forth above, on December 23, 2020, the Company terminated its previously existing credit agreement and replaced it with a new Term Loan and Security Agreement. The terminated agreement was under the previous Term Loan and Security Agreement dated as of August 29, 2017, by and among the Company, as borrower, and Goldman Sachs Bank USA, as issuing lender and administrative agent for other lenders (the “Original Credit Agreement”). This Original Credit Agreement was subsequently amended on June 25, 2018 (the “Original Term Loan Agreement”). The refinancing of the term loan involved multiple lenders who were considered members of a loan syndicate. In determining whether the refinancing was to be accounted for as a debt extinguishment or modification, we considered whether the lenders remained the same or changed and whether the change in debt terms was substantial. The debt terms would be considered substantially different if the present value of the cash inflows and outflows of the new term loans, including all principal increases and lender fees on the refinancing date, was at least 10 % different from the present value of the remaining cash inflows and outflows of the original term loans, or the 10 % Test. We performed a separate 10 % Test for each individual lender participating in the loan syndication. For existing lenders who participated in the new term loans as part of the new loan 69 Table of Contents syndicate, the refinancing was accounted for as a modification as the change in debt terms was determined to not be substantial using the 10 % Test. Deferred financing costs of $ 3.0 million and an original issue discount of $ 4.1 million were associated with modified and new debt and will be amortized to interest expense using the interest method over the life of the term loans. In connection with the original lenders considered an extinguishment of the previously existing Term Loan and Security Agreement we recorded a $ 5.4 million write-off of debt issuance costs and third-party fees, which was included in interest expense during 2020. As of December 31, 2020, the maturities of long-term debt for the next five years and thereafter were as follows ( in thousands ): Year $ Amount 2021 $ 3,300 2022 3,300 2023 3,300 2024 3,300 2025 3,300 Thereafter 313,500 Total $ 330,000 NOTE 13 - INCOME TAXES The components of income (loss) before income taxes were as follows (as restated) ( in thousands ): Years Ended December 31, 2020 2019 2018 (Restated) (Restated) (Restated) Domestic $ ( 33,239 ) $ 42,257 $ 49,905 Foreign ( 15,074 ) 5,702 2,436 Total income before taxes $ ( 48,313 ) $ 47,959 $ 52,341 The provision for income taxes consisted of the following (as restated) ( in thousands ): Years Ended December 31, 2020 2019 2018 (Restated) (Restated) (Restated) Current - Federal $ ( 6,348 ) $ 5,396 $ 8,058 State ( 240 ) 1,976 2,416 Foreign 2,624 2,982 2,629 Total current $ ( 3,964 ) $ 10,354 $ 13,103 Deferred - Federal ( 10,567 ) 2,372 2,389 State ( 3,126 ) ( 249 ) 123 Foreign ( 1,039 ) ( 1,283 ) ( 1,508 ) Total deferred $ ( 14,732 ) $ 840 $ 1,004 Total current and deferred taxes $ ( 18,696 ) $ 11,194 $ 14,107 70 Table of Contents The difference between income taxes computed at the statutory income tax rate and the provision for income taxes is as follows (as restated) ( in thousands ): Years Ended December 31, 2020 2019 2018 (Restated) (Restated) (Restated) Income taxes computed at federal statutory rate $ ( 10,146 ) $ 10,029 $ 10,992 State income taxes, net of federal benefit ( 2,625 ) 1,331 2,010 Foreign taxes ( 493 ) 311 150 Nondeductible expenses 5,617 1,108 506 Enacted rate changes 670 — — Research and development tax credit ( 16,879 ) ( 2,324 ) ( 480 ) Foreign tax credit — ( 57 ) ( 346 ) Valuation allowance 16 ( 5 ) — Tax reform deferred tax remeasurement — — 81 Deferred tax liability true up ( 551 ) 1,065 — Uncertain tax positions 5,057 665 172 Other 638 ( 929 ) 1,022 Total income tax expense (benefit) $ ( 18,696 ) $ 11,194 $ 14,107 Deferred tax liabilities and assets were comprised of the following ( in thousands ): December 31, 2020 2019 Deferred tax assets: (Restated) Allowance for doubtful accounts $ 1,784 $ 1,657 Inventory 7,072 3,526 Research and development credit carryforward 8,408 1,360 Foreign tax credit carryforward 64 64 Net operating loss carryforward 802 812 Capital loss carryforward 12,813 12,363 Deferred compensation 540 — Accruals 5,690 4,077 Investment in partnerships 319 500 Other 312 — Total deferred tax assets $ 37,804 $ 24,359 Less valuation allowance ( 12,813 ) ( 12,363 ) Total deferred tax asset, net of valuation deferred tax liabilities : $ 24,991 $ 11,996 Goodwill ( 8,570 ) ( 8,459 ) Intangibles ( 8,512 ) ( 2,051 ) Property and equipment ( 7,569 ) ( 8,319 ) ROU asset and liability ( 323 ) — Unremitted foreign earnings ( 421 ) ( 421 ) Deferred compensation — ( 317 ) Method changes ( 754 ) ( 1,961 ) Other ( 619 ) ( 70 ) Net deferred tax liability $ ( 1,777 ) $ ( 9,602 ) 71 Table of Contents The Company records a valuation allowance when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. If the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. At December 31, 2020, the valuation allowance primarily relates to federal and foreign capital loss carryforwards. The following summarizes changes in the balance of valuation allowances on deferred tax assets (in thousands): Years Ended December 31, 2020 2019 2018 Balance at January 1 $ ( 12,363 ) $ ( 12,564 ) $ ( 12,220 ) Changes due to federal and foreign capital loss carryforwards ( 450 ) 201 ( 344 ) Balance at December 31 $ ( 12,813 ) $ ( 12,363 ) $ ( 12,564 ) Tax carryforwards available for use on future income tax returns, prior to valuation allowance, at December 31, 2020, were as follows (in thousands): Domestic Foreign Expiration Net operating loss - foreign $ — $ 414 2034 - 2040 Net operating loss - federal 388 — 2036 - 2040 Capital loss carryforward - foreign — 4 Indefinite Capital loss carryforward - federal 12,809 — 2021 Foreign tax credits 64 — 2023, 2025 Federal research and development tax credits 4,467 — 2026 - 2030 Texas research and development tax credits 3,702 — 2037 - 2040 Louisiana research and development tax credits 239 — 2024 - 2025 Changes in the balance of unrecognized tax benefits excluding interest and penalties on uncertain tax positions were as follows (in thousands): Assets (Liabilities) 2020 2019 2018 Balance at January 1 $ — $ — $ — Increases related to prior year tax positions ( 5,057 ) — — Decreases related to prior year tax positions — — — Increases related to current year tax positions — — — Settlements — — — Lapse of statute of limitations — — — Balance at December 31 $ ( 5,057 ) $ — $ — As of December 31, 2020, the Company had recorded a total tax benefit of $ 16.9 million related to federal and state research and development tax credits. This benefit is partially offset by $ 5.1 million uncertain tax position due to the uncertainty related to the realizability of the federal research and development tax credits. To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts are classified as a component of income tax provision (benefit) in the consolidated financial statements consistent with Company's policy. For the year ended December 31, 2020, the Company did no t record any tax expense for interest and penalties related to uncertain tax positions. 72 Table of Contents The Company is subject to taxation in the United States, various states, and foreign jurisdictions. The Company has significant operations in the United States and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally open in the United States for the tax years ended after 2012 and outside the United States for the tax years ended after 2012. NOTE 14 - SHARE-BASED COMPENSATION Restricted Stock We issued equity-based awards from the 2016 Omnibus Plan. 2016 Omnibus Incentive Plan On June 19, 2019, our shareholders approved an amendment to the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) to increase the number of shares that can be issued under the 2016 Plan from 500,000 shares to a total of 1,000,000 shares, which represents an increase of 500,000 shares (the “Amendment”), which authorized grants of restricted stock awards, restricted stock units (“RSUs”), performance awards, options, investment rights, and cash-based awards. This plan authorizes the issuance of up to 1,000,000 shares of our common stock. Under the 2016 Omnibus Plan approved by our shareholders, directors, consultants and employees may be awarded shares of DXP’s common stock. The shares of restricted stock awards granted to employees that are outstanding as of December 31, 2020 vest in accordance with one of the following vesting schedules: 100 % one year after the grant date; 50 % each year for two years after the grant; 33.3 % each year for three years after the grant date; 20 % each year for five years after the grant date; or 10 % each year for ten years after the date of grant. The shares of restricted stock awards granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock awards is measured based upon the closing prices of DXP’s common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Once restricted stock vests, new shares of the Company’s stock are issued. At December 31, 2020, 612,692 shares were available for future grant. Changes in restricted stock awards for the twelve months ended December 31, 2020 were as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2019 144,250 $ 32.71 Granted 100,299 $ 30.91 Forfeited ( 16,794 ) $ 28.61 Vested ( 60,779 ) $ 31.33 Non-vested at December 31, 2020 166,976 $ 32.53 Changes in restricted stock awards for the twelve months ended December 31, 2019 were as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2018 169,293 $ 31.05 Granted 46,885 $ 35.60 Forfeited ( 5,720 ) $ 32.35 Vested ( 66,208 ) $ 27.75 Non-vested at December 31, 2019 144,250 $ 32.71 73 Table of Contents Changes in restricted stock awards for the twelve months ended December 31, 2018 were as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2017 77,901 $ 30.36 Granted 131,413 $ 31.92 Forfeited ( 2,400 ) $ 46.68 Vested ( 37,621 ) $ 31.68 Non-vested at December 31, 2018 169,293 $ 31.05 Compensation expense, associated with restricted stock awards, recognized in the years ended December 31, 2020, December 31, 2019 and December 31, 2018 was $ 3.5 million, $ 2.0 million, and $ 2.1 million, respectively. Related income tax benefits recognized in earnings in the years ended December 31, 2020, December 31, 2019 and December 31, 2018 were approximately $ 0.9 million, $ 0.5 million and $ 0.5 million, respectively. Unrecognized compensation expense under the DXP Enterprises, Inc. 2016 Omnibus Plan at December 31, 2020, December 31, 2019 and December 31, 2018 was $ 2.2 million, $ 3.0 million and $ 3.6 million, respectively. As of December 31, 2020, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 1.5 years. NOTE 15 - EARNINGS PER SHARE DATA Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated ( in thousands, except per share data ): December 31, 2020 2019 2018 (Restated) (Restated) (Restated) Basic: Weighted average shares outstanding 17,748 17,592 17,553 Net income (loss) attributable to DXP Enterprises, Inc. $ ( 29,269 ) $ 37,025 $ 38,345 Convertible preferred stock dividend ( 90 ) ( 90 ) ( 90 ) Net income (loss) attributable to common shareholders $ ( 29,359 ) $ 36,935 $ 38,255 Per share amount $ ( 1.65 ) $ 2.10 $ 2.18 Diluted: Weighted average shares outstanding 17,748 17,592 17,553 Assumed conversion of convertible preferred stock — 840 840 Total dilutive shares 17,748 18,432 18,393 Net income (loss) attributable to common shareholders $ ( 29,359 ) $ 36,935 $ 38,255 Convertible preferred stock dividend — 90 90 Net income (loss) attributable to DXP Enterprises, Inc. $ ( 29,359 ) $ 37,025 $ 38,345 Per share amount $ ( 1.65 ) $ 2.01 $ 2.08 Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding during the period and excludes dilutive securities. Diluted earnings per share reflects the potential dilution that could occur if the preferred stock was converted into common stock. Restricted stock is considered a participating security and is included in the computation of basic earnings per share as if vested.The preferred stock is convertible into 840,000 shares of common stock. For the twelve months ended December 31, 2020, we excluded from the diluted EPS calculation 840,000 convertible preferred shares, respectively, since the effect would have been antidilutive. 74 Table of Contents NOTE 16 – CAPITAL STOCK The Company has Series A and Series B preferred stock of 1,122 shares and 15,000 shares outstanding as of December 31, 2020, 2019 and 2018, respectively. The preferred stock did not have any activity during 2020, 2019 and 2018. Series A Preferred Stock The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to $ 100 liquidation preference per share. Series B Preferred Stock Each share of the Series B convertible preferred stock is convertible into 56 shares of common stock and a monthly dividend per share of $ .50 . The holders of the Series B convertible stock are entitled to a $ 100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock. The activity related to outstanding common stock and common stock held in treasury was as follows: December 31, 2020 2019 2018 Common Stock: Quantity (in thousands) Balance, beginning of period 17,460 17,401 17,316 Issuance of shares for compensation net of withholding 54 59 85 Issuance of common stock related to equity distribution agreements 46 — — Issuance of common stock related to purchase of businesses 1,481 — — Balance, end of period 19,041 17,460 17,401 There were no t any treasury shares outstanding for the years ended 2020, 2019 and 2018. NOTE 17 - SALES OF COMMON STOCK On May 11, 2020, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with BMO Capital Markets Corp. (the “Distribution Agent”) pursuant to which the Company may offer and sell shares of the Company’s common stock, par value $ 0.01 per share, having an aggregate offering amount of up to $ 37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company’s common stock pursuant to the Equity Distribution Agreement will be made in “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. During the twelve months ended December 31, 2020, the Company issued and sold 46,000 shares of common stock under the Equity Distribution Agreement, with net proceeds totaling approximately $ 1.1 million, after deducting the Distribution Agent’s commission of approximately $ 26 thousand. NOTE 18 - BUSINESS ACQUISITIONS On December 31, 2020, the Company completed the acquisition of Total Equipment Company, Inc. (“TEC”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including steel, chemicals, water / wastewater, oil & gas and general industrial markets. At closing, the Company paid approximately $ 64.7 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including but not limited to working capital adjustments. On December 31, 2020, the Company completed the acquisition of APO Pumps & Compressors (“APO”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water / wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $ 53.0 million in cash and stock, following normal transaction adjustments, for example working capital true-ups, customary for a transaction of this size and nature. Approximately, $ 38.3 million was paid at closing, and $ 13.4 million has been accrued as of December 31, 2020 as true-up consideration. 75 Table of Contents On December 31, 2020, the Company completed the acquisition of Pumping Solutions, Inc. (“Pumping Solutions”), a distributor of industrial and commercial pumps and process equipment focused on serving multiple end markets including the water / wastewater, chemical, food & beverage, and general industrial markets. The Company paid approximately $ 21.0 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, for example working capital true-ups. On December 31, 2020, the Company completed the acquisition of Corporate Equipment Company (“CEC”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water / wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $ 3.3 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups. On February 1, 2020, the Company completed the acquisition of substantially all of the assets of Turbo Machinery Repair (“Turbo”), a pump and industrial equipment repair, maintenance, machining and labor services company. The Company paid approximately $ 3.2 million in cash, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups, . On January 1, 2020, the Company completed the acquisition of Pumping Systems, Inc. (“PSI”), a distributor of pumps, systems and related services. The PSI acquisition was funded with a mixture of cash on hand as well as issuing DXP's common stock. The PSI acquisition was funded with a mixture of cash on hand as well as issuing DXP's common stock. The Company paid approximately $ 13.0 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups. The following table summarizes the total consideration for 2020 transferred to acquire these companies and in aggregate the amount of identified assets acquired and liabilities assumed at the acquisition dates. The Company is in the process of finalizing third-party valuations of certain intangible assets; thus, the provisional measurements of intangible assets, goodwill and deferred income tax liabilities are subject to change. In addition, the company continues to finalize inventory, ROU Assets and Liabilities as well as other assets acquired. As described above, the acquisitions of Pumping Systems Inc and Turbo Machinery Repair closed in January and February 2020, respectively. Since their acquisition, they have contributed approximately $ 19.6 million in revenue and $ 0.8 million in net income for the year ended December 31, 2020. None of these acquisitions were individually material. Two of these acquisitions, PSI and Turbo, contributed revenue and net income (loss) which comprised approximately 1.9 % and ( 2.8 )%, respectively, of the Company’s consolidated results for the year ended December 31, 2020. 76 Table of Contents Purchase Price Consideration (in thousands) Total Consideration Cash payments $ 115,247 Fair value of stock issued ( 1,480,909 shares) 29,367 Future consideration 13,428 Total consideration $ 158,042 Cash $ 1 Accounts Receivable 20,204 Inventory 8,567 Other Current Assets 190 Property and equipment 1,811 Non-compete agreements 2,332 Customer relationships 37,465 Goodwill 104,150 Other assets 696 Assets acquired $ 175,416 Current liabilities assumed ( 10,674 ) Deferred tax liability ( 6,700 ) Net assets acquired $ 158,042 The following represents the pro forma unaudited revenue and earnings as if each of the six 2020 acquisitions had been included in the consolidated results of the Company for the full years ending December 31, 2020 and 2019, respectively: Years Ended December 31, 2020 2019 (in thousands/unaudited) Revenue $ 1,129,610 $ 1,421,467 Net income (loss) $ ( 15,296 ) $ 42,209 Individual pro forma results for each acquisition are not disclosed, as individually these acquisitions would not have a material impact on the Company's financial statements. The fair value of the 1,480,909 common shares issued was determined based on the closing market price of the Company’s common shares on the acquisition date, adjusted for holding restrictions following consummation. Of the $ 39.8 million of acquired intangible assets, $ 2.3 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years, coincident with the term of these arrangements. In addition, $ 37.5 million was provisionally assigned to customer relationships, and will be amortized over a period of 8 years. As noted earlier, the fair value of the acquired identifiable intangible assets is provisional pending completion of the final valuations for these assets. The $ 104.1 million of goodwill was assigned to the Service Centers segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of the acquirees. None of the goodwill is expected to be deductible for income tax purposes. As of December 31, 2020, the Company recognized additional goodwill of $ 463 thousand resulting from the acquisition of PSI and no additional goodwill for the acquisition Turbo which both closed in the First Quarter of 2020. The fair value of accounts receivables acquired is $ 20.2 million, with the gross contractual amounts of $ 21.1 million. The Company expects $ 0.9 million to be uncollectible. The Company recognized $ 172 thousand of acquisition related costs that were expensed in the current period. These costs are included in the consolidated income statement in Selling, General and Administrative costs. The Company also incurred and recognized an immaterial amount in costs associated with issuing the shares as additional consideration in the acquisitions. Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity. 77 Table of Contents Previous acquisition 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 included approximately $ 4.6 million in contingent consideration. The purchase was financed with $ 10.8 million of cash on hand as well as issuing $ 0.9 million of the Company's common stock. ASI provides the Company's metal working division with new geographic territory and enhances DXP's end market mix. As part of our purchase agreement, we were obligated to pay up to an additional $ 4.6 million of contingent consideration over three years based on the achievement of certain earnings benchmarks established for calendar years 2018, 2019 and 2020. The purchase price included the estimated fair value of the contingent consideration recorded at the present value of approximately $ 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 7 - Fair Value of Financial Assets and Liabilities . The fair value of the contingent consideration is reviewed quarterly over the earn-out period to compare actual earnings before interest, taxes, depreciation and amortization ("EBITDA") achieved to the estimated EBITDA used in our forecasts. As of December 31, 2020, $ 1.1 million of the actual cash due toward the contingent consideration earned is recorded in current liabilities. The estimated fair value of the contingent consideration is recorded at the present value of $ 1.1 million at December 31, 2020. 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 7 - Fair Value of Financial Assets and Liabilities to our consolidated financial statements. NOTE 19 - COMMITMENTS AND CONTINGENCIES The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of December, 2020, for non-cancelable leases are as follows ( in thousands ): 2021 $ 19,183 2022 15,990 2023 10,571 2024 6,084 2025 3,924 Thereafter 7,271 Total $ 63,023 Rental expense for operating leases was $ 23.4 million, $ 25.0 million and $ 18.5 million for the years ended December, 2020, 2019 and 2018, respectively. From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP’s consolidated financial position, cash flows, or results of operations. NOTE 20 - EMPLOYEE BENEFIT PLANS The Company offers a 401(k) plan which is eligible to substantially all employees in the United States. For the year ended December 31, 2020, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $ 0.7 million, $ 1.7 million, and $ 1.8 million to the 401(k) plan in the years ended December 31, 2020, 2019, and 2018, respectively. In March 2020 the Company suspended indefinitely the employee match program. The Company contributed $ 0.7 million in the first quarter of 2020 to the 401(k) plan. No other contributions were made during the remainder of 2020. 78 Table of Contents NOTE 21 - OTHER COMPREHENSIVE INCOME Other comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments by, or distributions to, shareholders. During 2012 and 2013, the Company acquired four entities that operate in Canada. These Canadian entities maintain financial data in Canadian dollars. Upon consolidation, the Company translates the financial data from these foreign subsidiaries into U.S. dollars and records cumulative translation adjustments in other comprehensive income. The Company recorded $ 1.9 million, $( 0.7 ) million, and $ 0.2 million in translation adjustments, net of tax, in other comprehensive income during the years ended December 31, 2020, 2019 and 2018, respectively. NOTE 22 – SEGMENT AND GEOGRAPHICAL REPORTING The Company’s reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, MRO products and equipment, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, fastener, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management. The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. The following table sets out financial information related to the Company’s segments ( in thousands ): Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2020 (Restated) Product sales (recognized at a point in time) $ 595,314 $ — $ 138,653 $ 733,967 Inventory management services (recognized over contract life) — — 16,005 16,005 Staffing services (day-rate basis) 67,303 — — 67,303 Customized pump production (recognized over time) — $ 187,991 — 187,991 Total Revenue $ 662,617 $ 187,991 $ 154,658 $ 1,005,266 Operating income for reportable segments, excluding adjustments 71,834 16,882 12,804 101,520 Identifiable assets at year end 564,921 130,505 56,721 752,147 Capital expenditures 1,254 4,457 — 5,711 Proceeds from sale of fixed assets — — — — Depreciation 3,299 4,441 387 8,127 Amortization 6,989 5,298 — 12,287 Interest expense $ 11,506 $ 7,360 $ 1,705 $ 20,571 79 Table of Contents Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2019 (Restated) Product sales (recognized at a point in time) $ 701,404 $ — $ 184,767 $ 886,171 Inventory management services (recognized over contract life) — — 16,511 16,511 Staffing services (day-rate basis) 58,514 — — 58,514 Customized pump production (recognized over time) — 303,655 — 303,655 Total Revenue $ 759,918 $ 303,655 $ 201,278 $ 1,264,851 Operating income for reportable segments, excluding adjustments 85,442 30,699 15,267 131,408 Identifiable assets at year end 463,531 212,015 56,714 732,260 Capital expenditures 2,333 9,347 922 12,602 Proceeds from sale of fixed assets 35 — — 35 Depreciation 3,517 4,602 285 8,404 Amortization 8,230 5,855 989 15,074 Interest expense $ 10,786 $ 6,747 $ 1,965 $ 19,498 Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2018 (Restated) Product sales (recognized at a point in time) $ 687,821 $ — $ 160,770 $ 848,591 Inventory management services (recognized over contract life) — — 13,686 13,686 Staffing services (day-rate basis) 64,735 — — 64,735 Customized pump production (recognized over time) — 291,697 — 291,697 Total Revenue $ 752,556 $ 291,697 $ 174,456 $ 1,218,709 Operating income for reportable segments, excluding adjustments 82,650 34,977 16,874 134,501 Identifiable assets at year end 404,026 188,765 53,517 646,308 Capital expenditures 1,655 6,800 296 8,751 Depreciation 3,974 4,064 49 8,087 Amortization 9,272 6,237 1,077 16,586 Interest expense 11,178 7,351 2,408 20,937 Years Ended December 31, 2020 2019 2018 (Restated) (Restated) (Restated) Operating income for reportable segments, excluding adjustments $ 101,520 $ 131,408 $ 134,501 Adjustments for: Amortization of intangibles 12,287 15,074 16,586 Impairment and other charges 59,883 — — Corporate and other expense, net 57,018 48,922 45,829 Total operating income $ ( 27,668 ) $ 67,412 $ 72,086 Interest expense 20,571 19,498 20,937 Other expenses (income), net 74 ( 45 ) ( 1,192 ) Income before income taxes $ ( 48,313 ) $ 47,959 $ 52,341 The Company had capital expenditures at Corporate of $ 1.0 million, $ 9.5 million, and $ 0.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. The Company had identifiable assets at Corporate of $ 114.1 million, $ 56.8 80 Table of Contents million, and $ 54.7 million as of December 31, 2020, 2019, and 2018, respectively. Corporate depreciation was $ 2.3 million, $ 1.7 million, and $ 1.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Geographical Information Revenues are presented in geographic area based on location of the facility shipping products or providing services. Long-lived assets are based on physical locations and are comprised of the net book value of property. The Company’s revenues and property and equipment by geographical location are as follows (in millions) : Years Ended December 31, 2020 2019 2018 Revenues United States $ 931 $ 1,163 $ 1,113 Canada 74 102 106 Other (1) — — — Total $ 1,005 $ 1,265 $ 1,219 (1) Other includes Mexico and Dubai. As of December 31, 2020 2019 Property and Equipment, net United States $ 52 $ 56 Canada 5 8 Other (1) — — Total $ 57 $ 64 (1) Other includes Dubai. 81 Table of Contents NOTE 23 - QUARTERLY FINANCIAL INFORMATION (unaudited) Summarized quarterly financial information for the years ended December 31, 2020, 2019 and 2018 is as follows ( in millions, except per share data ): As reported : First Quarter Second Quarter Third Quarter Fourth Quarter 2020 Sales $ 301.0 $ 251.4 $ 220.2 $ 232.7 Gross profit 84.0 70.0 61.3 64.3 Net income 5.7 2.1 ( 34.7 ) ( 2.0 ) Net income attributable to DXP Enterprises, Inc. 5.7 2.1 ( 34.7 ) ( 1.9 ) Earnings per share - basic 0.31 0.12 ( 1.95 ) ( 0.11 ) Earnings per share - diluted $ 0.31 $ 0.12 $ ( 1.95 ) $ ( 0.11 ) 2019 Sales $ 311.2 $ 333.3 $ 327.2 $ 295.5 Gross profit 84.2 92.0 92.7 78.3 Net income 7.3 13.4 13.2 2.1 Net income attributable to DXP Enterprises, Inc. 7.3 13.4 13.1 2.2 Earnings per share - basic 0.41 0.76 0.74 0.12 Earnings per share - diluted $ 0.40 $ 0.73 $ 0.71 $ 0.12 2018 Sales $ 285.9 $ 311.2 $ 308.0 $ 311.0 Gross profit 76.4 85.1 84.1 86.6 Net income 4.5 11.6 8.4 11.1 Net income attributable to DXP Enterprises, Inc. 4.6 11.6 8.4 11.1 Earnings per share - basic 0.26 0.66 0.48 0.63 Earnings per share - diluted $ 0.25 $ 0.63 $ 0.46 $ 0.60 82 Table of Contents As restated : First Quarter Second Quarter Third Quarter Fourth Quarter 2020 Sales $ 301.0 $ 251.4 $ 220.2 $ 232.7 Gross profit 83.1 70.1 61.4 62.6 Net income 6.0 2.4 ( 34.8 ) ( 3.2 ) Net income attributable to DXP Enterprises, Inc. 6.0 2.4 ( 34.7 ) ( 3.0 ) Earnings per share - basic 0.34 0.14 ( 1.95 ) ( 0.18 ) Earnings per share - diluted $ 0.32 $ 0.13 $ ( 1.95 ) $ ( 0.18 ) 2019 Sales $ 311.2 $ 333.3 $ 327.2 $ 293.2 Gross profit 86.0 92.8 93.5 77.5 Net income 7.6 14.0 13.8 1.3 Net income attributable to DXP Enterprises, Inc. 7.7 14.0 13.7 1.6 Earnings per share - basic 0.44 0.80 0.78 0.09 Earnings per share - diluted $ 0.42 $ 0.76 $ 0.74 $ 0.08 2018 Sales $ 285.9 $ 311.2 $ 308.0 $ 313.6 Gross profit 77.4 85.6 84.7 88.2 Net income 5.2 11.9 8.8 12.3 Net income attributable to DXP Enterprises, Inc. 5.2 11.9 8.8 12.4 Earnings per share - basic 0.30 0.68 0.50 0.70 Earnings per share - diluted $ 0.29 $ 0.65 $ 0.48 $ 0.67 The sum of the individual quarterly earnings per share amounts may not agree with year-to-date earnings per share as each quarter’s computation is based on the weighted average number of shares outstanding during the quarter, the weighted average stock price during the quarter and the dilutive effects of the stock options and restricted stock in each quarter. NOTE 24 – RELATED PARTIES DISCLOSURES The Board uses policies and procedures, to be applied by the Audit Committee of the Board, for review, approval or ratification of any transactions with related persons. Those policies and procedures will apply to any proposed transactions in which DXP is a participant, the amount involved exceeds $ 120,000 and any director, executive officer or significant shareholder or any immediate family member of such a person has a direct or material indirect interest. Any related party transaction will be reviewed by the Audit Committee of the Board of Directors to determine, among other things, the benefits of any transaction to DXP, the availability of other sources of comparable products or services and whether the terms of the proposed transaction are comparable to those provided to unrelated third parties. For the year ended December 31, 2020, the Company paid approximately $ 3.1 million in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little. 83 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.