What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-04-05 compared with 2021-03-18 · 230 added, 280 removed, 857 unchanged (37% of the section changed)

Financial Statements and Supplementary Data

Reports of Independent Registered Public Accounting Firm 43

Reports of Independent Registered Public Accounting Firm ( McConnell & Jones LLP , Houston, Texas

Reports of Independent Registered Public Accounting Firm ( Moss Adams LLP , Houston, Texas ,

Consolidated Statements of Operations and Comprehensive Income 47

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

DXP Enterprises, Inc.

To the Board of Directors and Shareholders 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 have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc.

and subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statements of operations and comprehensive income, equity, and cash flows for the year then ended, 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, 2021, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

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, 2021, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, because of the effects of the material weaknesses described 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, 2021, based on criteria established in established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinion

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.

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 audit.

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.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit 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.

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 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.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinions.

A material weakness is a control 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 prevented or detected on a timely basis.

The following material weaknesses have been identified and included in management’s assessment in Item 9A:

The Company did not design and maintain effective internal controls to ensure that aged items recorded in the un-invoiced inventory accounts payable are monitored, addressed and cleared in a timely manner.

The Company did not design and maintain effective management review controls to ensure the proper application of generally accepted accounting principles (ASC 606, Revenue from Contracts with Customers ) related to the percentage-of-completion method, an input method as defined by ASC 606, of recognizing revenue from contracts with customers.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

Definition and Limitations of Internal Control Over Financial Reporting

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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 critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was 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 4 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 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:

• 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.

• 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.

• 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.

• 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 17 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:

• 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.

• 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.

• Involving our valuation specialists to assist with our evaluation of the valuation model and certain significant assumptions.

Income Taxes - Uncertain Tax Positions

As discussed in Note 12 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.

Revenue Recognition – Revenue Recognized Over Time

As discussed in Note 2 and Note 7 to the consolidated financial statements, the Company recognizes revenue from contracts with customers in its Innovative Pumping Solutions segment under the percentage-of-completion method, an input method as defined by ASC 606.

For these transactions, revenue is recognized over time based on cost incurred to date as a percentage of total estimated cost.

We identified revenue recognized over time as a critical audit matter based on the manual and subjective nature of the Company determining estimated costs to complete, as well as insufficient internal policies, procedures, and software.

Evaluating revenue recognized over time under the percentage-of-completion method required extensive audit effort and a high degree of auditor judgment.

The primary procedures we performed to address this critical audit matter included:

• 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.

• 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.

• 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.

• Evaluating the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments.

Understanding the design and effectiveness of internal controls around management’s review of the schedule of contracts and related contract progress;

Testing the calculation of revenue recognized over time through an examination of billings, cash collections, costs incurred, and other related components;

Sampling contracts with customers, including confirming contract and progress details with project managers;

Evaluating management’s expected costs to be incurred on projects for reasonableness by performing a retrospective analysis.

/s/ McConnell & Jones LLP

We have served as the Company’s auditor since 2021.

Houston, Texas

April 5, 2022

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

DXP Enterprises, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc.

and subsidiaries (the “Company”) as of December 31, 2020, the related consolidated statements of operations and comprehensive income (loss), equity, and cash flows for the years ended December 31, 2020 and 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

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 the consolidated results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

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.

Our audits 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.

We believe that our audits provide a reasonable basis for our opinion.

/s/Moss Adams LLP

Houston, Texas

March 18, 2021

We have served as the Company’s auditor since 2017.

March 18, 2021, except for the effects of the correction of errors previously disclosed in the restated December 31, 2020 financial statements, as to which the date is October 21, 2021.

We served as the Company’s auditor from 2017 to 2021.

DXP ENTERPRISES, INC.

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Income (loss) from operating $ 39,857 $ ( 27,668 ) $ 67,412

Other expense (income), net 74 ( 45 ) ( 1,192 )

Other (income) expense, net ( 414 ) 74 ( 45 )

Interest expense 21,089 20,571 19,498

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Accumulated other comprehensive loss ( 17,317 ) ( 18,013 )

Treasury stock, at cost 1,184,648 shares at December 31, 2021

Total DXP Enterprises, Inc.

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Proceeds from the sale of property and equipment 1,669 123 35

Acquisition of businesses ( 115,247 ) — ( 10,811 )

Acquisition of businesses, net of cash acquired ( 64,693 ) ( 115,247 ) —

Net cash used in investing activities $ ( 69,023 ) $ ( 121,796 ) $ ( 22,085 )

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Issuance of Common Stock- shares sold in public market — 1,142 —

Purchase of treasury stock ( 33,511 ) — —

Payment for contingent consideration liability ( 955 ) ( 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 ( 637 ) ( 139 ) ( 267 )

Net cash provided by (used in) financing activities $ 77,406 $ ( 6,092 ) $ ( 2,921 )

Net cash (used in) provided by financing activities $ ( 38,493 ) $ 77,406 $ ( 6,092 )

Effect of foreign currency on cash 88 ( 168 ) 679

Net Change In Cash $ ( 70,339 ) $ 65,092 $ 13,808

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 $ 117,444 $ 54,327 $ 40,519

Cash and restricted cash at Beginning of Year 119,419 54,327 40,519

Cash and restricted cash at End of Year $ 49,080 $ 119,419 $ 54,327

SUPPLEMENTAL CASH FLOW INFORMATION:

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Tax related items for share based awards — — — ( 267 ) — — — — ( 267 )

Issuance of shares of common stock — — — 894 — — — — 894

Non-controlling interest holder contributions, net of tax benefits — — — — — — 950 — 950

Cumulative translation adjustment — — — — — — — ( 687 ) ( 687 )

Net income — — — — 37,025 — ( 260 ) — 36,765

Balances at December 31, 2018 $ 1 $ 15 $ 174 $ 156,190 $ 169,735 $ — $ 1,406 $ ( 19,267 ) $ 308,254

Balance at December 31, 2019 $ 1 $ 15 $ 174 $ 157,886 $ 215,664 $ — $ 1,146 $ ( 19,954 ) $ 354,932

Dividends paid — — — — ( 90 ) — — — ( 90 )

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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 — — — 296 ( 227 ) — — 1,941 2,010

Net income — — — — 36,035 — ( 260 ) — 35,775

Balances at December 31, 2019 $ 1 $ 15 $ 174 $ 157,886 $ 205,680 $ — $ 1,146 $ ( 19,954 ) $ 344,948

Net loss — — — — ( 29,269 ) — ( 348 ) — ( 29,617 )

Balance at December 31, 2020 $ 1 $ 15 $ 189 $ 192,068 $ 186,078 $ — $ 798 $ ( 18,013 ) $ 361,136

Dividends paid — — — — ( 90 ) — — — ( 90 )

Compensation expense for restricted stock — — — 1,767 — — — — 1,767

Stock compensation expense 56 56

Tax related items for share based awards — — — ( 637 ) — — — — ( 637 )

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

Issuance of shares of common stock — — 6 13,518 — — — — 13,524

Cumulative translation adjustment — — — — — — — 696 696

Net loss — — — — ( 28,726 ) — ( 348 ) — ( 29,074 )

Balances at December 31, 2020 $ 1 $ 15 $ 189 $ 192,068 $ 176,637 $ — $ 798 $ ( 21,842 ) $ 347,866

Purchase of treasury stock — — — — — ( 33,511 ) — ( 33,511 )

Net income — — — — 16,496 — ( 745 ) — 15,751

Balance at December 31, 2021 $ 1 $ 15 $ 195 $ 206,772 $ 202,484 $ ( 33,511 ) $ 53 $ ( 17,317 ) $ 358,692

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

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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.

and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to customers serving a variety of end markets.

Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers.

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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

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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 places its cash with institutions with high credit quality.

However, at certain times, such cash 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.

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(1) Primarily due to translation adjustments

(2) Includes allowance for doubtful accounts from acquisitions and divestiture

(2) Uncollectible accounts written off, net of recoveries

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Property and Equipment

Property and equipment are carried on the basis of cost.

Property and equipment are recorded on a historical cost basis.

Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives.

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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.

Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be

The principal estimated useful lives used in determining depreciation are as follows:

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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 4 - Im pairments and other charges ).

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.

No impairment of goodwill was required in 2021 and 2019.

Impairment of Long-Lived Assets, Excluding Goodwill

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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 4 - Impairments and other charges ).

For the twelve months ended December 31, 2020, long-lived assets were 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.

No impairment of long-lived assets was required in 2021 and 2019.

Revenue Recognition

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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.

We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by ASC 606, "Revenue from Contracts with Customers".

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.

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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.

The Supply Chain Services segment also provides a wide range of MRO products as well as manages all or part of various customers' supply chain, including warehouse and inventory management services.

Revenue is recognized upon the completion of our performance obligation(s) under the sales agreement.

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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.

The Company’s other comprehensive (loss) income is from translating foreign subsidiaries to the reporting currency.

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Intangibles-Goodwill and Other .

In August 2018, the FASB issued ASU No.

2018-15, Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract based on a consensus of the FASB’s Emerging Issues Task Force (EITF) that requires implementation costs incurred by customers in cloud computing arrangements (CCAs) to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40, “Intangibles-Goodwill and Other-Internal-Use Software”.

The ASU does not affect the accounting by cloud service providers, other software vendors or customers’ accounting for software licensing arrangements.

The ASU requires companies to recognize deferred implementation costs to expense over the ‘term of the hosting arrangement’.

Under the ASU, the term of the hosting arrangement comprises the non-cancellable period of the CCA plus any optional renewal periods that are

reasonably certain to be exercised by the customer or for which exercise of the option is controlled by the vendor.

The Company adopted the standard effective January 1, 2020.

The standard did not have an impact on our results of operations.

Fair Value Measurement.

In August 2018, the FASB issued ASU 2018-13:

Fair Value Measurement:

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project.

Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

The Company adopted the standard effective January 1, 2020.

The standard did not have an impact on our results of operations.

Measurement of Credit Losses on Financial Instruments .

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, as later modified by ASUs 2018-19, 2019-04, 2019-05, 2019-11 and 2020-02.

This ASU requires estimating all expected credit losses for certain types of financial instruments, including trade receivables and contract assets, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

The Company adopted this ASU effective January 1, 2020 which resulted in an immaterial impact to beginning retained earnings.

While the adoption of this ASU did not have a material impact on the Company's financial statements, it required changes to the Company’s process of estimating expected credit losses on trade receivables and contract assets.

The Company carries its accounts receivable at their face amounts less an allowance for expected credit losses.

The Company establishes an allowance for expected credit losses to present the net amount of accounts receivable expected to be collected.

On a regular basis, the Company evaluates its accounts receivable and contract assets and establishes the allowance for expected credit losses based on a combination of specific customer circumstances (including slow pays and bankruptcies), as well as history of write-offs and collections, current credit conditions and micro and macro-economic forecasts.

Accounting Pronouncements Not Yet Adopted

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The Company is currently evaluating the potential impact of this ASU on the financial statements.

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

ASU 2021-08 will require an acquirer to recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers .

For the Company, ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The ASU should be applied prospectively to business combinations occurring on or after the effective date.

Early adoption of ASU 2021-08 is permitted, including in an interim period.

The Company expects the new Standard to have an impact for future acquisitions.

From time to time the Company does acquire businesses that perform project-based work and therefore include Contract Assets and Liabilities.

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

NOTE 4 – 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.

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.

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

detailed in the table below:

(in thousands) Twelve Months Ended December 31, 2020

Long-lived asset impairments

Goodwill impairments

Inventory and work-in-progress costs

Total impairment and other charges

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 4 - LEASES

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Short-term lease expense SG&A expenses (*)

$ 374 $ 1,087

Other operating lease cost SG&A expenses (*)

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Present value of lease liabilities $ 58,125

(*) 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.

(*) Operating lease payments exclude $ 0.5 million and $ 2.8 millions of legally binding minimum lease payments for leases signed but not yet commenced, as of December 31, 2021 and December 31, 2020, respectively.

Lease term and discount rate Twelve Months Ended December 31, 2021 Twelve Months Ended December 31, 2020

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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.

As of December 31, 2021, we recorded a $ 0.9 million liability for contingent consideration associated with the acquisition of PMI in other current and long-term liabilities.

See further discussion at Note 17 - Business Acquisitions .

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(in thousands)

Beginning balance at December 31, 2019 $ 2,705

Balance at December 31, 2020 $ 1,100

Acquisitions and settlements

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Changes in fair value recorded in other (income) expense, net 504

Ending balance at December 31, 2020 $ 1,100

Ending balance at Balance at December 31, 2021 $ 905

The amount of total (gains) or losses for the year included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at year-end.

* Included in other current liabilities

* Included in other current and long-term liabilities

Quantitative Information about Level 3 Fair Value Measurements

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Contingent consideration:

(ASI acquisition) $ 1,100 Discounted cash flow Annualized EBITDA and probability of achievement

(PMI acquisition) $ 905 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.

As presented in the table above, the significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisition of PMI are annualized EBITDA forecasts developed by the Company's management and the probability of achievement of those EBITDA results.

The discount rate used in the calculation was 7.6 %.

increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement.

Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement.

Other financial instruments not measured at fair value on the Company's consolidated balance sheets at December 31, 2021 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 11 ).

cash, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility ( Note 10 ).

The Company believes that the estimated fair value of such instruments at December 31, 2021 and December 31, 2020 approximates their carrying value as reported on the consolidated balance sheets.

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Inventories $ 100,894 $ 97,071

NOTE 8 – COSTS AND ESTIMATED PROFITS ON UNCOMPLETED CONTRACTS

NOTE 7 – CONTRACT ASSETS AND LIABILITIES

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.

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Acquisitions 46,739 16,259 62,998

Impairment ( 36,435 ) — ( 36,435 )

Amortization — ( 17,197 ) ( 17,197 )

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Translation adjustment — ( 4 ) ( 4 )

Acquisitions 104,150 39,797 143,947

Impairment ( 36,435 ) — ( 36,435 )

Amortization — ( 12,287 ) ( 12,287 )

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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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As of December 31, 2021, the Company’s consolidated Secured Leverage Ratio was 3.71 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

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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

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.

For existing lenders who participated in the new term loans as part of the new loan 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.

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Inventory 4,747 7,072

Research and development credit carryforward 8,407 1,361

Federal general business credit carryforward 4,237 8,408

Texas research and development tax credit carryforward 2,679 —

Louisiana research and development tax credit carryforward 239 —

Foreign tax credit carryforward 64 64

Charitable Contribution Carryforward 531 —

Net operating loss carryforward 786 802

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Accruals 7,005 5,690

Business interest expense carryforward 389 —

Investment in partnerships ( 188 ) 319

Other ( 29 ) 312

Total deferred tax assets $ 22,170 $ 37,804

Less valuation allowance ( 4 ) ( 12,813 )

Total deferred tax asset, net of valuation deferred tax liabilities :

$ 24,991 $ 11,725

Total deferred tax asset, net of valuation allowance $ 22,166 $ 24,991

Deferred tax liabilities:

Goodwill ( 13,474 ) ( 8,570 )

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Unremitted foreign earnings ( 421 ) ( 421 )

Deferred compensation — ( 317 )

Method changes ( 465 ) ( 754 )

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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.

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, 2021, the valuation allowance primarily relates to federal and foreign capital loss carryforwards.

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Foreign tax credits 64 — 2023, 2025

Federal research and development tax credits 4,467 — 2026 - 2030

Federal general business tax credits 4,237 — 2026 - 2030

Texas research and development tax credits 2,679 — 2037 - 2040

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Per share amount $ 0.83 $ ( 1.65 ) $ 2.01

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.

Basic earnings per share have been computed by dividing net income (loss) attributable to common shareholders 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.

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, 2021, we excluded from the diluted EPS calculation 840,000 convertible preferred shares, respectively, since the effect would have been antidilutive.

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Issuance of common stock related to purchase of businesses 527 1,481 —

Purchase of shares held in treasury ( 1,185 ) — —

Balance, end of period 18,468 19,041 17,460

There were no t any treasury shares outstanding for the years ended 2020, 2019 and 2018.

NOTE 15 - SHARE REPURCHASE

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, the Company repurchased 1.2 million shares of common stock for $ 33.5 million at an average price of $ 28.28 per share.

In connection with share repurchases we recorded $ 5 thousand in commission fees in 2021 included in additional paid-in capital.

Total consideration paid to repurchase the shares was recorded in shareholders’ equity as treasury shares.

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

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

Twelve Months Ended December 31,

2021 2020 2019

(in millions, except per share data)

Total number of shares purchased 1.2 — —

Amount paid $ 33.5 — —

Average price paid per share $ 28.28 — —

NOTE 16 - SALES OF COMMON STOCK

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(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.

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 17 - BUSINESS ACQUISITIONS

The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into a new and attractive markets.

The Company has completed a number of acquisitions and the purchases of the acquired businesses have resulted in the recognition of goodwill and other intangible assets in the Company’s Consolidated Financial Statements.

The Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities.

The Company obtains the information used for the purchase price allocation during due diligence and through other sources.

In the months after closing, as the Company obtains additional information about the acquired assets and liabilities and learns more about the newly acquired business, it is able to refine the estimates of fair value and more accurately allocate the purchase price.

The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company.

The Company from time-to-time engages third-party valuation specialists who review the Company’s critical assumptions and calculations of the fair value of acquired intangible assets in connection with significant acquisitions.

Only facts and circumstances that existed as of the acquisition date are considered for subsequent adjustment.

The Company is continuing to evaluate certain pre-acquisition contingencies associated with certain of its 2021 acquisitions.

The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.

Each acquisition has been accounted for as a business combination under ASC 805, “Business Combinations.”

2021 Acquisitions

O n April 30, 2021, the Company completed the acquisition of Carter & Verplanck, LLC (“CVI”), a distributor of products and services exclusively focused on serving the water and wastewater markets.

The acquisition of CVI was funded with cash on hand as well as issuing DXP's common stock.

The Company paid approximately $ 49.7 million in cash and stock.

A majority of CVI's sales are project-based work under the percentage-of-completion accounting model.

As a result, CVI has been included in the IPS segment.

For the year ended December 31, 2021, CVI contributed sales of $ 17.9 million and net income of $ 2.5 million.

On July 1, 2021, the Company completed the acquisition of Process Machinery, Inc.

(“PMI”), a leading distributor of pumps, mechanical seals, tank, filters and related process equipment that focuses on serving the chemical, power, pulp & paper, mining, metals and food processing industries.

The Company paid approximately $ 9.6 million in cash, stock and future consideration (see below).

For the year ended December 31, 2021, PMI contributed sales of $ 5.2 million and net income of $ 0.7 million.

On September 20, 2021, the Company completed the acquisition of Premier Water LLC (“Premier”).

Premier is a leading distributor and provider of products and services exclusively focused on serving the water and wastewater treatment markets primarily in North and South Carolina.

The Company paid approximately $ 5.8 million in cash and stock.

For the year ended December 31, 2021, Premier contributed sales of $ 0.5 million and net loss of $ 162 thousand.

2020 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.

The Company paid approximately $ 64.7 million in cash and stock.

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 $ 38.3 million in cash and stock.

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 millions was paid at closing, and $ 13.4 million has been accrued as of December 31, 2020 as true-up consideration.

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.

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 $ 4.5 million in cash and stock.

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.

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.

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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.

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;

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 tables below summarize the total consideration transferred to acquire these companies and in aggregate the amount of identified assets acquired and liabilities assumed at the acquisition dates.

For the 2021 acquisitions, 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 ( 2.9 )%, respectively, of the Company’s consolidated results for the year ended December 31, 2020.

Pro Forma Financial Results (unaudited)

The following represents the pro forma unaudited revenue and net income as if each of the 2021 acquisitions had been included in the consolidated results of the Company for the full year periods ending December 31, 2021 and 2020, respectively.

In addition, the pro forma results also assume that all of the 2020 acquisitions had been consummated as of January 1, 2020.

The pro forma information is not necessarily indicative of future results:

Fiscal Year Ending December 31,

($ in thousands)

$ 1,121,723 $ 1,164,631

$ 17,542 $ ( 9,660 )

Purchase Price Allocation and Consideration

The following tables summarize the estimated fair values of the assets acquired and liabilities assumed at the acquisition date for the 2021 acquisitions, as well as the fair value of the consideration transferred:

($ in thousands) 2021

Accounts receivable 6,781

Other current assets 5,166

Property and equipment 268

Non-compete agreements 1,041

Customer relationships 15,218

Goodwill 45,749

Other assets 7

Assets acquired $ 75,522

Current liabilities assumed ( 10,431 )

Net assets acquired $ 65,091

Of the $ 62.0 million of acquired intangible assets, $ 1.0 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years, consistent with the terms of the agreements.

In addition, $ 15.2 million was assigned to customer relationships, and will be amortized over a period of 8 years.

The goodwill total of $ 45.7 million is attributable primarily to expected synergies and the assembled workforce of each entity.

The fair value of accounts receivables acquired is $ 6.8 million, which approximated book value.

In aggregate, the acquisition-date fair value of the consideration transferred for the three businesses acquired in 2021 totaled $ 65.1 million, which consisted of the following:

Purchase Price Consideration (in millions) Total Consideration

Cash payments $ 53.7

Fair value of stock issued 11.1

Future consideration 0.3

Total consideration $ 65.1

The fair value of the approximately 434,000 common shares issued was determined based on the closing market price of the Company’s common shares on the respective acquisition date, adjusted for holding restrictions following consummation.

The fair values of the assets acquired and liabilities assumed for the 2020 acquisitions, as well as the fair value of the consideration transferred were as follows:

Purchase Price Consideration (in thousands) Total Consideration

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Fair value of stock issued ( 1,480,909 shares)

Total consideration transferred $ 144,614

Future consideration * 13,428

Total consideration $ 158,042

Accounts Receivable 20,646

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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,

(in thousands/unaudited)

Revenue $ 1,129,610 $ 1,423,805

Net income (loss) $ ( 15,148 ) $ 41,219

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 $ 90.7 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.

*The future consideration was paid in July 2022.

The Company recognized less than $ 300,000 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.

The Company also recognized an immaterial amount in costs associated with issuing the shares issued as consideration in the business combination.

Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity.

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.

As third-party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year following the applicable acquisition date.

Various insignificant adjustments to the fair value of assets acquired, and in some cases total purchase price, have been made to certain business combinations since the respective dates of acquisition.

During twelve months ended December 31, 2021, we recorded measurement-period adjustments that increased goodwill by approximately $ 1.4 million, primarily for changes in the fair value of current assets.

The impact of these adjustments to the consolidated statement of operations were immaterial.

Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions.

Goodwill related to asset acquisitions is currently deductible for income tax purposes.

Goodwill related to stock acquisitions is capitalized to the stock basis of the acquisition for income tax purposes and is deductible upon disposition of the stock.

Contingent Consideration

The acquisition of PMI included a contingent consideration arrangement that requires additional consideration to be paid based on the achievement of annual gross revenue targets over a two-year period.

The range of undiscounted amounts the Company may be required to pay under the contingent consideration agreement is between zero and $ 2.5 million.

The fair value of the contingent consideration recognized on the acquisition date of $ 0.3 million was estimated by applying the income approach using discounted cash flows.

That measure is based on significant Level 3 inputs not observable in the market.

The significant assumption includes a discount rate of 7.6 %.

Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.

The fair value measurement includes earnings forecasts which are a Level 3 measurement as discussed in Note 5 - 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 6 - Fair Value of Financial Assets and Liabilities to our consolidated financial statements.

NOTE 18 - COMMITMENTS AND CONTINGENCIES

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The Company contributed $ 1.7 million, $ 0.7 million, and $ 1.7 million to the 401(k) plan in the years ended December 31, 2021, 2020, and 2019, 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.

In March 2020, the Company suspended the employee match program which was reinstated in January 2021.

NOTE 20 - OTHER COMPREHENSIVE INCOME

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Total $ 1,114 $ 1,005 $ 1,265

(1) Other includes Mexico and Dubai.

As of December 31,

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Total $ 52 $ 57

(1) Other includes Dubai.

NOTE 22 - 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 ):

Quarter Second

Quarter Third

Quarter Fourth

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 )

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

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

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 22 – RELATED PARTIES DISCLOSURES

3 unchanged sentences

For the year ended December 31, 2021, the Company paid approximately $ 2.3 million in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little.

NOTE 23 - SUBSEQUENT EVENTS

On March 2, 2022, we acquired Drydon Equipment, Inc.

(“Drydon”) and Burglingame Engineers ("Burlingame”).

Drydon is a leading distributor and manufacturers’ representative of pumps, valves, controls and process equipment focused on serving the water and wastewater industry in the Midwest.

Burlingame is a leading California provider of water and wastewater equipment in the industrial and municipal sectors.

The combined purchase price of $ 6.1 million was funded with cash from the balance sheet and common stock as consideration.

The acquisitions were accounted for as business combinations under ASC 805, “Business Combinations.” During the measurement period, we expect to receive additional detailed information to complete the purchase price allocation.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data