What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-04-05 compared with 2021-03-18 · 97 added, 133 removed, 417 unchanged (36% of the section changed)

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DXP's products are marketed in the United States, Canada and Dubai to customers that are engaged in a variety of industries, many of which may be counter cyclical to each other.

Demand for our products generally is subject to changes in the United States and Canada, and global and macro-economic trends affecting our customers and the industries in which they compete in particular.

Demand for our products generally is subject to changes in the United States and Canada, and global and macro-economic trends affecting our customers and the industries in which they compete.

Certain of these industries, such as the oil and gas industry, are subject to volatility driven by a variety of factors, while others, such as the petrochemical industry and the construction industry, are cyclical and materially affected by changes in the United States and global economy.

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CURRENT MARKET CONDITIONS AND OUTLOOK

In December 2019, the novel SARS-CoV-2 virus and associated COVID 19 disease (“COVID-19”) were reported in China, and in March 2020 the World Health Organization declared a pandemic.

The pandemic had a significant impact on our business during 2020.

The marketplace broadly, and the Company specifically, throughout the year operated with certain modifications to balance re-opening with employee and customer safety.

However, most of the markets in which we operate began to normalize during the second half of 2020.

This improved the outlook of the manufacturing and construction customers that support our traditional branch and onsite business.

Although the rate of improvement remains gradual and the overall activity level remains below pre-pandemic levels, DXP saw a modest improvement from monthly lows experienced in July.

Consistent with broader social trends, we took steps to safeguard the health of our employees.

This included closing branch and corporate facilities to outside personnel, enabled through technology, significant work from home capabilities for many employees, and where employees remained in the workplace, created space between work areas, provided ample personal protective equipment and cleaning supplies, and instituting formal policies for mitigation in the event of cases of illness.

Due to these precautions, our operations continued to function effectively, including internal controls over financial reporting.

As restrictions ease and the roll out of various vaccines continue, we will actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, suppliers, and shareholders.

While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that it is important to share where the Company stands today, how our response to the COVID-19 pandemic has progressed, and how our operations and financial condition may change as the fight against COVID-19 progresses.

COVID-19 Pandemic Impact

During the twelve months ended December 31, 2020, the widely publicized and discussed coronavirus (COVID-19) outbreak rapidly spread across the world, driving a sharp erosion in demand for crude oil and other products and services, as whole economies ordered curtailed activity.

In response to declining demand for crude oil, members of the Organization of the Petroleum Exporting Countries and other producing countries (OPEC+), including Russia, met in early March to discuss additional production cuts to help stabilize prices.

The group failed to reach an agreement, and production was instead increased into the already oversupplied market, decimating oil prices and rapidly filling worldwide oil storage facilities.

OPEC+ eventually reached an agreement in April 2020 to reduce production, which had a muted effect on oil prices due to the belief that the cuts were significantly less than the demand destruction caused by COVID-19.

As a result, companies across the oil and gas industry responded with severe capital spending budget cuts, cost cuts, personnel layoffs, facility closures and bankruptcy filings.

We made a number of mitigation decisions and took proactive steps in response to the issues presented by the COVID-19 pandemic and ongoing uncertainties related to the oil and gas industry.

We moved forward with our plans to increase our ABL revolver facility from $85 million to $135 million.

In addition, we reduced certain discretionary expenditures and suspended the Company’s matching contributions to retirement plans.

Some of these measures may have an adverse impact on our businesses, but we believe we took the necessary steps to stabilize the business in unprecedented times.

Throughout the COVID-19 pandemic crisis, we continued to operate our business despite the challenges that arose from closing offices and operating our branch locations.

Our use of technology and third party conferencing platforms enabled our office employees to work from home, performing their job functions with little to no loss of productivity.

We required our employees to work from home as a result of governmental isolation orders and, in many cases, in advance of those orders for the health and safety of our employees.

For the most part, our warehouses and regional distribution centers remained open.

various isolation orders by national, state, provincial and local governments, we were exempted as an “essential” business as the products we sell are necessary for the maintenance and functioning of many industries including energy infrastructure.

We took measures to safeguard the health and welfare of our employees, including social distancing measures while at work, certain screening, providing personal protection equipment such as gloves, face masks and hand sanitizer and sterilizing cleaning services at Company facilities.

As various governmental restrictions continue to be lifted or phased out, we will review our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact.

As a distribution business, we continue to closely monitor the ability of our suppliers and transportation providers to continue the functioning of our supply chain.

We have not experienced significant delays by transportation providers or significant delays in our supply chains.

Our inventory position for most products has allowed us to continue supply to most customers with little interruption.

In those instances where there was interruption, we worked with our customers to discuss the impact of the delay.

We will continue to monitor the situation and have ongoing dialogue with our vendors and customers regarding the status of impacted orders.

Management expects industry activity levels and spending by customers to remain volatile in the near term, but we do expect some increased activity as the nation and the world become vaccinated and the oil and gas demand destruction from COVID-19 begins to subside.

DXP remains committed to streamlining operations and improving organizational efficiencies while continuing to focus on delivering the products and services that remain in the Company’s backlog.

We believe this strategy has further advanced the Company’s competitive position, regardless of the market environment.

We continue to monitor the COVID-19 pandemic and its impact on macroeconomic and local economic conditions and the businesses and markets we serve.

While we are currently able to operate in all of our locations, there is no guarantee that other events or a resurgence of the COVID-19 pandemic or variants will not occur.

For example, in the event of a surge in levels of COVID-19 infections in certain states or localities, those impacted locations may respond by reinstating shut-downs or shelter-in-place mandates.

We have implemented and continue to implement procedures and processes as required or recommended by governmental and medical authorities to ensure the continued safety of our employees, customers and community partners.

While the ongoing recovery from the COVID-19 pandemic fluctuated throughout the year, it has been accompanied by a resurgence in demand as

industries return to regular operations, which continues to disrupt supply chains, transportation efficiency, product and labor availability.

Our businesses and locations have remained functional as we are an essential business partner for our customers to remain operational.

The Company continues to monitor and refine its product assortment and inventory availability and remains committed to serving customers and supporting our employees.

As the pandemic continues to impact global markets and the needs of customers, our employees, suppliers and the communities we serve change, the Company’s efforts and business strategy will evolve accordingly.

However, we are not able to predict whether our customers will continue to operate at their current or historical levels, and such decreases in their operations would have a negative impact on our business.

We are also unable to predict how long the COVID-19 pandemic will last and the impact of the pandemic on future demand for our products and services.

For additional discussion of the potential impact of the COVID-19 pandemic on our business, see “Consolidated Results of Operations” under Item 7.

Management Discussion and Analysis of Financial Condition and Results of Operations and " Item 1A.

Risk Factor s” included in this Annual Report.

Economic Indices

DXP monitors several economic indices that have been key indicators for industrial and oil & gas economic activity in the United States.

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** Averages for the years indicated.

During 2019, the growth rate of the general economy improved from 2018 while the rig count decreased, but remained higher than 2016 peaks.

During 2021, the growth rate of the general economy improved from 2020 as well as the rig count.

Sales for the year ended December 31, 2021 increased $108.7 million, or 10.8%, to approximately $1.1 billion from $1.0 billion for the prior corresponding period.

The majority of the 2019 sales increase is the result of increased sales of pumps, bearings, industrial supplies, metal working and safety services to customers engaged in oilfield service, oil and gas exploration and production, mining, manufacturing and petrochemical processing.

The majority of the 2021 sales increase is the result of increased sales due to acquisitions and the related sales of rotating equipment air compressors.

During 2020, the growth rate of the general economy declined from 2019 as well as the rig count.

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Year Ended December 31, 2021 compared to Year Ended December 31, 2020

Sales for the year ended December 31, 2020 decreased $261.9 million, or 20.7%, to approximately $1.0 billion from $1.3 billion for the year ended December 31, 2019.

Sales from businesses acquired accounted for $19.6 million of the sales for the twelve months ended December 31, 2020.

Excluding the 2020 sales of the business acquired, sales for the year decreased by $281.5 million, or 22.2% from the prior year's corresponding period.

This sales decrease is the result of a decrease in sales in our SC, IPS and SCS segments of $99.6 million, $115.7 million and $46.6 million, respectively.

The fluctuations in sales is further explained in our business segment discussions below.

Sales for the year ended December 31, 2021 increased $108.7 million, or 10.8%, to approximately $1.1 billion from $1.0 billion for the year ended December 31, 2020.

This sales increase is the result of an increase in sales in our SC and SCS segments of $153.9 million and $3.2 million, respectively.

This was partially offset by a decrease in sales in our IPS segment of $48.4 million.

Sales from businesses recently acquired accounted for $147.5 million of the sales for the twelve months ended December 31, 2021.

Excluding the 2020 and 2021 sales of businesses acquired, sales for the year decreased by $19.2 million, or 2.0% from the prior year's corresponding period.

The fluctuations in sales are further explained in our business segment discussions below.

Years Ended December 31

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Service Centers Segment.

Sales for the Service Centers segment decreased by $99.6 million, or 13.1% for the year ended December 31, 2020, compared to the year ended December 31, 2019.

Excluding $19.6 million of 2020 Service Centers segment sales from businesses acquired, Service Centers segment sales decreased $119.2 million, or 15.6% from the prior year's corresponding period.

This sales decrease is primarily the result of decreased sales of metal working, safety supply products and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic.

We expect that this level of sales to the oil and gas industry will likely continue to decline if U.S.

crude oil production remains at levels experienced during the year.

Sales for the Service Centers segment increased by $153.9 million, or 23.2% for the year ended December 31, 2021, compared to the year ended December 31, 2020.

Excluding $129.1 million of 2021 Service Centers segment sales from businesses acquired, Service Centers segment sales increased $44.4 million, or 6.9% from the prior year's corresponding period.

This sales increase is primarily the result of increased sales of rotating equipment, metal working, and bearings and power transmission products to customers engaged in a variety of markets .

Innovative Pumping Solutions Segment.

Sales for the IPS segment decreased by $48.4 million, or 25.7% for the year ended December 31, 2021, compared to the year ended December 31, 2020.

Excluding $18.4 million of 2021 IPS segment sales from businesses acquired, IPS segment sales decreased $66.8 million, or 35.5% from the prior year's corresponding period.

This decrease was primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S.

crude oil production due to low crude prices and the negative economic impacts of COVID-19.

With a prolonged economic recession related to COVID-19, we will likely experience a further decline in overall segment sales.

Supply Chain Services Segment.

Sales for the SCS segment decreased by $46.6 million, or 23.2%, for the year ended December 31, 2020, compared to the year ended December 31, 2019.

The decline in sales is primarily related to decreased sales to customers in the aerospace and oil and gas industries due to the economic impacts of the COVID-19 pandemic.

Sales for the SCS segment increased by $3.2 million, or 2.1%, for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The improvement in sales is primarily related to increased sales to customers in the aerospace and oil and gas industries.

GROSS PROFIT.

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Excluding the impact of the businesses acquired, gross profit as a percentage of sales increased by approximately 185 basis points.

The increase in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 79 basis point increase in the gross profit percentage in our IPS segment and a 164 basis point increase in the gross profit percentage in our SCS segment partially offset by a 40 basis point decrease in the gross profit percentage in our SC segment.

The increase in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 435 basis point increase in the gross profit percentage in our IPS segment, a 154 basis point increase in the gross profit percentage in our SC segment and a 2 basis point increase in the gross profit percentage in our SCS segment.

Service Centers Segment.

The gross profit percentage for the Service Centers decreased approximately 40 basis points and approximately 41 basis points, adjusting for the businesses acquired, from the prior year's corresponding period.

This was primarily the result of decreased sales of metal working, safety services and bearings to customers engaged in the OEM oil and gas markets in connection with decreased capital spending by oil and gas producers as well as the negative economic impacts of the COVID-19 pandemic.

The gross profit percentage for the Service Centers increased approximately 142 basis points and approximately 154 basis points, excluding the impact for the businesses acquired, from the prior year's corresponding period.

This was primarily the result of increased sales of rotating equipment and bearings and power transmission products to customers engaged in non-oil and gas markets.

Innovative Pumping Solutions Segment.

The 2021 gross profit percentage for the IPS segment increased approximately 463 basis points from the prior year's corresponding period.

The decrease in gross profit is primarily the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S.

crude oil production due to low crude prices and the economic impacts of COVID-19.

The increase in gross profit percentage is primarily due to a mix shift (higher margin international work and domestic water and wastewater projects) as well as the shipment of negative gross profit percentage work completed in 2020.

Gross profit dollars decreased $5.8 million, primarily as a result of significantly reduced capital expenditure budgets by our customers associated with the negative economic impacts of the COVID-19 pandemic.

Supply Chain Services Segment.

Gross profit as a percentage of sales increased approximately 2 basis points for the year ended December 31, 2021, compared to the prior year's corresponding period.

This was primarily as a result of costs associated with new customer implementation in 2019 with no comparable activity in 2020.

This improvement is primarily the result of an increase in sales discussed above.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A").

SG&A for the year ended December 31, 2020 decreased by approximately $34.8 million, or 12.4%, to $246.3 million from $281.1 million for prior year's corresponding period.

SG&A for the year ended December 31, 2021 increased by approximately $43.7 million, or 17.8%, to $288.6 million from $245.0 million for prior year's corresponding period.

SG&A expense from businesses acquired accounted for $26.8 million.

Excluding expenses from businesses acquired, SG&A for the twelve months ended December 31, 2020 decreased by $39.7 million, or 14.1 percent.

The overall decrease in SG&A is the result of decreased payroll, incentive compensation and related taxes and 401(k) expenses as a result of decreased business activity and cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets.

IMPAIRMENT AND OTHER CHARGES.

Due to circumstances discussed above, during twelve months ended December 31, 2020, we evaluated our goodwill, certain long-lived assets and other assets for impairment and recoverability.

Based on the results, we recorded the following impairment and other charges:

Service Centers segment.

In 2020, we recorded $1.8 million of noncash impairment charges related primarily to certain long-lived assets that were not recoverable and $20.5 million of non-cash impairment charges related to goodwill associated with our operations in Canada.

Innovative Pumping Solutions segment.

In 2020, we recorded $21.7 million of non-cash impairment charges related to certain inactive assets and inventory and a $16.0 million non-cash impairment charge related to goodwill.

For additional information on our impairment charges, see Note 4 - Impairments and Other Charges of the Notes to Consolidated Financial Statements in this Annual Report.

Excluding expenses from businesses acquired in 2020 and 2021, SG&A for the twelve months ended December 31, 2021 increased by $21.7 million, or 9.1%.

The overall increase in SG&A is the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity in 2021 compared to cost reduction actions associated with COVID-19 and depressed demand in oil and gas markets in the prior year.

OPERATING INCOME.

Operating income for the year ended December 31, 2020 decreased by $93.0 million, or 140.6%, to a loss of $26.9 million from income of $66.1 million in the prior year's corresponding period.

This decrease in operating income is primarily related to the decrease in sales discussed above and the impact of impairment and other charges.

Operating income for the year ended December 31, 2021 increased by $67.5 million to $39.9 million from an operating loss of $27.7 million in the prior year's corresponding period.

This increase in operating income is primarily related to an impairment and other charges of $59.9 million in 2020 with no comparable activity in 2021.

INTEREST EXPENSE.

Interest expense for year ended December 31, 2020 increased by $1.1 million, or 5.5%, from the prior year's corresponding period primarily due to refinancing costs incurred in connection with the modification and extinguishment of debt, partially offset by lower LIBOR rates and a reduction in the principal balance through voluntary pay-downs until the Company's refinancing in December.

Interest expense for year ended December 31, 2021 increased by $0.5 million, or 2.5%, from the prior year's corresponding period primarily due to a higher principal balance for the twelve months ended December 31, 2021 compared to the prior year's corresponding period as a result of the Company entering into a new term loan in December 2020 .

INCOME TAXES.

Our effective tax rate was a tax benefit of 38.8% for the year ended December 31, 2020 compared to a tax expense of 23.2% for the year ended December 31, 2019.

Our effective tax rate was a tax expense of 17.9% for the year ended December 31, 2021 compared to a tax benefit of 38.7% for the year ended December 31, 2020.

Compared to the U.S.

statutory rate for the year ended December 31, 2021, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and a reserve for uncertain tax positions.

This was partially offset by research and development tax credits, other tax credits, and a tax benefit from a net operating loss carryback claim due to the CARES Act.

The Company reported a loss before income taxes for the year ended December 31, 2020.

As a result, items that ordinarily increase or decrease the tax rate will have the opposite effect.

statutory rate for the year ended December 31, 2020, the effective tax rate was increased by state taxes, foreign taxes, research and development tax credits and other tax credits.

This was partially offset by nondeductible expenses and reserve for uncertain tax positions.

As a result, items that ordinarily increase or decrease the tax rate had the opposite effect.

Compared to the U.S.

statutory rate for the year ended December 31, 2019, the effective tax rate was increased by state taxes, foreign taxes, and non-deductible expenses and partially offset by research and development tax credits and other tax credits.

statutory rate for the year ended December 31, 2020, the effective tax rate was increased by state taxes, foreign taxes, research and development tax credits and other tax credits.

This was partially offset by nondeductible expenses and a reserve for uncertain tax positions.

Year Ended December 31, 2020 compared to Year Ended December 31, 2019

For the full year 2020 to 2019 comparative discussion, see Item 7:

Management's Discussion and Analysis of Financial Condition and Results of Operations in DXP’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

We do not believe the effects of inflation have any material adverse effect on our results of operations or financial condition.

We attempt to minimize inflationary trends by passing manufacturer price increases on to the customer whenever practicable.

The rate of inflation, as measured by changes in the producer price index, affects different commodities, the cost of products purchased and ultimately the pricing of our different products and product classes to our customers.

Our pricing related to inflation did not have a measurable impact on our sales revenue for the year.

Historically, price changes from suppliers have been consistent with inflation and have not had a material impact on the results of our operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations in DXP’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2020.

Non-GAAP Financial Measures and Reconciliations

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GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained absent these disclosures.

Organic Sales is defined as net sales excluding, when they occur, the impact of acquisitions and divestitures.

Organic Sales is defined as net sales excluding the impact of acquisitions and divestitures for the respective periods.

Organic Sales is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

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Sales per Business Day assists management and investors in evaluating the Company's historical performance.

Free Cash Flow is defined cash provided by operations less net purchase of property and equipment.

Free Cash Flow is defined as cash provided by operations less net purchases of property and equipment.

We believe Free Cash Flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to fund acquisitions, make investments, repay debt obligations, repurchase company shares, and for certain other activities.

EBITDA is defined as the sum of consolidated net income in such period, plus to the extent deducted from consolidated net income:

(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;

in addition to these adjustments, we exclude, when they occur, the impacts of impairment losses and losses/(gains) on the sale of a business.

(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;

in addition to these adjustments, we exclude, when they occur, the impacts of impairment losses and losses/(gains) on the sale of a

EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

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General Overview

As of December 31, 2020, we had cash and cash equivalents of $117.4 million and bank and other borrowings of $320.4 million.

As of December 31, 2021, we had cash of $49.1 million and bank and other borrowings of $326.7 million.

We have a $135 million asset-based loan facility that is due to mature in August 2022, under which we had no borrowings outstanding as of December 31, 2021 and a Term Loan B with $326.7 million in borrowings.

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The Company generated $37.1 million of cash in operating activities during the year ended December 31, 2021 compared to generating $109.7 million of cash during the prior year's corresponding period.

The $66.4 million increase in the amount of cash generated between the two periods was primarily driven by the collections of receivables associated with trade accounts receivables and decreased inventory purchases.

The $72.6 million decrease in the amount of cash generated between the two periods was primarily due to increased business activity and beginning the process of rebuilding inventory levels in 2021.

The Company generally builds cash during down cycles as the replenishment of inventory slows, project work narrows and the use of operating cash flows to fund these activities subsides.

Investing Activities

For the year ended December 31, 2021, net cash used in investing activities was $69.0 million compared to $121.8 million in the corresponding period in 2020.

This increase was primarily driven by acquisitions during the year of $115.2 million.

For the twelve months ended December 31, 2020, purchases of property and equipment decreased to approximately $6.7 million compared to $22.1 million in 2019 primarily due to leasehold improvements and software upgrades in 2019 with no comparable activity in 2020.

The maintenance capital expenditures for 2021 are expected to be within the range of $4 million to $10 million.

This decrease of $52.8 million was primarily driven by a reduction in total purchase price paid for acquisitions during 2021 of $64.7 million compared to $115.2 million for acquisitions in 2020.

Financing Activities

For the year ended December 31, 2020, net cash generated in financing activities was $77.4 million, compared to net cash used in financing activities of $6.1 million for the corresponding period in 2019.

The activity in the period was primarily attributed to the Company refinancing our Term Loan raising $330 million partially offset by the extinguishment of our previous term loan and higher principal repayments of debt in 2019.

For the year ended December 31, 2021, net cash used in financing activities was $38.5 million, compared to net cash generated in financing activities of $77.4 million for the corresponding period in 2020.

For the year ended December 31, 2021, the Company repurchased approximately $33.5 million in outstanding shares.

The net inflow of cash from financing activities in 2020 benefited from the refinancing of our Term Loan raising $330 million, offset by the repayment of the original Term Loan for $244 million.

On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $85.0 million or 1.5 million shares of its outstanding common stock may be acquired in the open market over the next 24 months at the discretion of management.

During the twelve months ended December 31, 2021 we purchased 1.2 million shares for approximately $33.5 million.

Such consideration was funded with existing cash balances and an agreement to pay sellers over four equal installments beginning on June 15, 2021.

The two remaining installments of $13.6 million were included in other current liabilities as of December 31, 2021.

On December 23, 2020, DXP entered into a new seven year, $330 million Senior Secured Term Loan (the “Term Loan Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan.

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On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") which provides 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.

During the twelve months ended December 31, 2021, the amount available to be borrowed under our credit facility decreased to $131.7 million compared to $131.9 million at December 31, 2020.

We believe this is adequate funding to support working capital needs within the business.

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Free Cash Flow should not be considered in isolation or as an alternative to net cash provided by operating activities.

Free Cash Flow reconciles to the most directly comparable GAAP financial measure of cash flows from operations as follows:

The following table sets forth the reconciliation of Free Cash Flow to the most comparable GAAP financial measure

( in thousands ):

Years Ended December 31,

Free Cash Flow reconciles to the most directly comparable GAAP financial measure of cash flows from operations.

The following table sets forth the reconciliation of Net cash provided by operating activities to Free Cash Flow:

(in thousands) Years Ended December 31,

2021 2020 2019

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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.

During the twelve months ended December 31, 2021, the amount available to be borrowed under our credit facility decreased to $131.7 million compared to $131.9 million at December 31, 2020 primarily as a result of outstanding letters of credit.

As of December 31, 2021, there were no amounts of ABL Loans outstanding under the ABL Revolver.

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March 31, 2023 5.00:1.00

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

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Assumes debt is paid on maturity date and not replaced.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPE's"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of December 31, 2020, we were not involved in any unconsolidated SPE transactions.

The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments, that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Indemnification

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Historically, payments made related to these indemnities have been immaterial.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

The Consolidated Financial Statements of DXPE are prepared in accordance with United States generally accepted accounting principles (“US GAAP”), which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.

DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

The Consolidated Financial Statements of DXP are prepared in accordance with United States generally accepted accounting principles (“US GAAP”), which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.

Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources.

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The Company evaluates the creditworthiness of its customers' financial positions and monitors accounts on a regular basis, but generally does not require collateral.

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.

Provisions to the allowance for doubtful accounts (or allowance for credit losses) 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.

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The primary factors used to quantify the allowance are customer delinquency, bankruptcy, and the Company’s estimate of its ability to collect outstanding receivables based on the number of days a receivable has been outstanding.

Many of the Company’s customers operate in the energy industry.

A fair amount of the Company’s customers operate in the energy industry.

The cyclical nature of the industry may affect customers’ operating performance and cash flows, which could impact the Company’s ability to collect on these obligations.

The Company continues to monitor the economic climate in which its customers operate and the aging of its accounts receivable.

The allowance for doubtful accounts is based on the aging of accounts and an individual assessment of each invoice.

Additionally, the overall allowance is adjusted accordingly based upon historical experience and economic factors that impact our business and customers.

At December 31, 2020, the allowance was approximately 5.0% of the gross accounts receivable remaining unchanged from a year earlier.

The allowance for doubtful accounts is based on the aging of accounts under the aging schedule method, and an individual assessment of each invoice.

Under this method, a historical credit loss rate is determined by age bucket or how long a receivable has been outstanding.

The historical loss rates for each respective age bucket are then adjusted for current conditions using reasonable and supportable data points.

The overall allowance is adjusted accordingly based upon historical experience and economic factors that impact our business and customers.

At December 31, 2021, the allowance was approximately 3.4% of the gross accounts receivable.

While credit losses have historically been within expectations and the provisions established, should actual write-offs differ from estimates, revisions to the allowance would be required.

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These types of analyses contain uncertainties as they require management to make assumptions and to apply judgments regarding industry economic factors and the profitability of future business strategies.

The Company’s policy is to conduct impairment testing based on current business strategies, taking into consideration current industry and economic

conditions, as well as the Company’s future expectations.

The Company’s policy is to conduct impairment testing based on current business strategies, taking into consideration current industry and economic conditions, as well as the Company’s future expectations.

Key assumptions used in the discounted cash flow valuation model include, among others, discount rates, growth rates, cash flow projections and terminal value rates.

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Management uses industry considerations and Company-specific historical and projected results to develop cash flow projections for each reporting unit.

Additionally, as part of the market multiples approach, the Company utilizes market data from publicly traded entities whose businesses operate in industries comparable to the Company’s reporting units, adjusted for certain factors that increase comparability.

Additionally, as part of the market multiples approach, the Company utilizes market data

from publicly traded entities whose businesses operate in industries comparable to the Company’s reporting units, adjusted for certain factors that increase comparability.

The Company cannot predict the occurrence of events or circumstances that could adversely affect the fair value of goodwill.

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If actual results are not consistent with the Company’s current estimates and assumptions, impairment of goodwill could be required.

During the third quarter of 2020, the Company’s market capitalization and overall 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.

During the third quarter of 2020, the Company’s market capitalization and overall sales declined significantly driven by then 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 had 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.

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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 impairments and other charges in the consolidated statement of operations.

As the world and the economy began to reopen during 2021, the lifting of mandates and the dissemination of vaccines eased the impacts of the pandemic.

In light of these improvements, we performed an assessment of our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value at December 31, 2021, and therefore no impairment of goodwill was recorded for 2021.

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 recovered modestly, WTI oil spot prices averaged approximately $41 per barrel during the third quarter of 2020, which was approximately 28% less than the average price per barrel during 2019.

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 and required a 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.

Significant assumptions inherent in the valuation methodologies for goodwill impairment calculations included, but were 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.

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.

As described above, no impairment of goodwill was recorded for 2021.

In 2020, 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 those 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.

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.

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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.

The easing of restrictions and the distribution of vaccines contributed to significant improvements in 2021.

As a result, no impairment of goodwill was recorded for 2021.

Other Impairments and methodology

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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 detailed in the table below (in thousands) .

As a result, the Company recorded the following additional impairment and other charges for the twelve months ended December 31, 2020 as detailed in the table below (in thousands) .

Twelve months ended December 31, 2020

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Revenues are estimated based upon the original contract price, with consideration being given to exercised contract options, change orders and in some cases projected customer requirements.

Contract costs may be incurred over a period of several months, and the estimation of these costs requires significant judgment based upon the acquired knowledge and experience of program managers, engineers, and finance professionals.

Contract costs may be incurred over a period of several months, and the estimation of these costs requires significant judgment based upon the acquired knowledge and experience of program

managers, engineers, and finance professionals.

Estimated costs are based primarily on anticipated purchase contract terms, historical performance trends, business base and other economic projections.

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We typically engage an independent valuation firm to assist in estimating the fair value of goodwill and other intangible assets.

We do not expect that there will be material change in the future estimates or assumptions we use to complete the purchase price allocation and estimate the fair values of acquired assets and liabilities for the acquisitions completed in fiscal 2020.

However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.

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In making that assessment, we consider the nature of the deferred tax assets and related statutory limits on utilization, recent operating results, future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies.

If, based upon available evidence, recovery of the full amount of the deferred tax assets is not likely, we provide a valuation allowance on

amounts not likely to be realized.

If, based upon available evidence, recovery of the full amount of the deferred tax assets is not likely, we provide a valuation allowance on amounts not likely to be realized.

Changes in valuation allowances are included in our tax provision in the period of change.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis