DXP ENTERPRISES INC 10-K

ITEM 8. Financial Statements and Supplementary Data TABLE OF CONTENTS Page Reports of Independent Registered Public Accounting Firm ( McConnell & Jones LLP , Houston, Texas PCAOB ID: 869 43 Reports of Independent Registered Public Accounting Firm ( Moss Adams LLP , Houston, Texas , PCAOB ID: 659 ) 47 Consolidated Statements of Operations and Comprehensive Income 47 Consolidated Balance Sheets 48 Consolidated Statements of Cash Flows 49 Consolidated Statements of Equity 50 Notes to Consolidated Financial Statements 51 42 Table of Contents Report of Independent Registered Public Accounting Firm 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 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, 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 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 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. 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 that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in 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 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. 43 Table of Contents 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: a. 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. b. 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 A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit 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. 44 Table of Contents 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: a. Understanding the design and effectiveness of internal controls around management’s review of the schedule of contracts and related contract progress; b. Testing the calculation of revenue recognized over time through an examination of billings, cash collections, costs incurred, and other related components; c. Sampling contracts with customers, including confirming contract and progress details with project managers; and, d. 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 45 Table of Contents 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. 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. 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. 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. We believe that our audits provide a reasonable basis for our opinion. /s/Moss Adams LLP Houston, Texas 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. 46 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) Years Ended December 31, 2021 2020 2019 Sales $ 1,113,921 $ 1,005,266 $ 1,264,851 Cost of sales 785,415 728,070 915,062 Gross profit $ 328,506 $ 277,196 $ 349,789 Selling, general and administrative expense 288,649 244,981 282,377 Impairment and other charges — 59,883 — Income (loss) from operating $ 39,857 $ ( 27,668 ) $ 67,412 Other (income) expense, net ( 414 ) 74 ( 45 ) Interest expense 21,089 20,571 19,498 Income (loss) before income taxes $ 19,182 $ ( 48,313 ) $ 47,959 Provision for income taxes (benefit) 3,431 ( 18,696 ) 11,194 Net income (loss) $ 15,751 $ ( 29,617 ) $ 36,765 Net loss attributable to noncontrolling interest ( 745 ) ( 348 ) ( 260 ) Net income (loss) attributable to DXP Enterprises, Inc. $ 16,496 $ ( 29,269 ) $ 37,025 Preferred stock dividend 90 90 90 Net income (loss) attributable to common shareholders $ 16,406 $ ( 29,359 ) $ 36,935 Net income (loss) $ 15,751 $ ( 29,617 ) $ 36,765 Cumulative translation adjustment, net of income taxes 696 1,941 ( 687 ) Comprehensive income (loss) $ 16,447 $ ( 27,676 ) $ 36,078 Earnings (loss) per share (Note 13) Basic $ 0.87 $ ( 1.65 ) $ 2.10 Diluted $ 0.83 $ ( 1.65 ) $ 2.01 Weighted average common shares outstanding: Basic 18,949 17,748 17,592 Diluted 19,789 17,748 18,432 The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2021 December 31, 2020 ASSETS Current assets: Cash $ 48,989 $ 119,328 Restricted cash 91 91 Accounts receivable, net of allowances for doubtful accounts of $ 7,759 and $ 8,628 218,137 166,941 Inventories 100,894 97,071 Costs and estimated profits in excess of billings 17,193 18,459 Prepaid expenses and other current assets 9,522 4,548 Federal income taxes receivable 9,748 2,987 Total current assets $ 404,574 $ 409,425 Property and equipment, net 51,880 56,899 Goodwill 308,506 261,767 Identified Intangibles, net 79,205 80,088 Operating lease ROU assets 57,221 55,188 Other long-term assets 4,806 4,764 Total assets $ 906,192 $ 868,131 LIABILITIES AND EQUITY Current liabilities: Current maturities of long-term debt $ 3,300 $ 3,300 Trade accounts payable 77,842 64,849 Accrued wages and benefits 23,006 20,621 Customer advances 12,924 3,688 Billings in excess of costs and estimated profits 3,581 4,061 Short-term operating lease liabilities 18,203 15,891 Other current liabilities 42,206 34,729 Total current liabilities $ 181,062 $ 147,139 Long-term debt, net of current maturities and unamortized debt issuance costs 315,397 317,139 Long-term operating lease liabilities 39,922 38,010 Other long-term liabilities 3,603 2,930 Deferred income taxes 7,516 1,777 Total long-term liabilities $ 366,438 $ 359,856 Total liabilities $ 547,500 $ 506,995 Commitments and Contingencies ( Note 18 ) Shareholders' Equity: Series A preferred stock, $ 1.00 par value; 1,000,000 shares authorized 1 1 Series B convertible preferred stock, $ 1.00 par value; 1,000,000 shares authorized 15 15 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 18,580,364 and 19,208,067 outstanding 195 189 Additional paid-in capital 206,772 192,068 Retained earnings 202,484 186,078 Accumulated other comprehensive loss ( 17,317 ) ( 18,013 ) Treasury stock, at cost 1,184,648 shares at December 31, 2021 ( 33,511 ) — Total DXP Enterprises, Inc. equity $ 358,639 $ 360,338 Noncontrolling interest 53 798 Total equity $ 358,692 $ 361,136 Total liabilities and equity $ 906,192 $ 868,131 The accompanying notes are an integral part of these consolidated financial statements. 48 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) attributable to DXP Enterprises, Inc. $ 16,496 $ ( 29,269 ) $ 37,025 Less: net loss attributable to non-controlling interest ( 745 ) ( 348 ) ( 260 ) Net income (loss) $ 15,751 $ ( 29,617 ) $ 36,765 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation 9,946 10,396 10,100 Impairment and other charges — 59,883 — Amortization of intangible assets 17,197 12,287 15,074 Bad debt expense 67 1,194 139 Payment of contingent consideration liability in excess of acquisition-date fair value ( 45 ) ( 136 ) ( 106 ) Amortization of debt issuance costs 1,558 1,875 1,875 Fair value adjustment on contingent consideration 504 ( 395 ) 54 Loss on extinguishment and modification of debt — 2,288 — Gain on sale of property and equipment ( 282 ) — ( 9 ) Stock compensation expense 1,823 3,532 1,963 Deferred income taxes 6,140 ( 14,732 ) 840 Changes in operating assets and liabilities Trade accounts receivable ( 43,736 ) 44,884 7,898 Costs and estimated profits in excess of billings 3,991 14,009 92 Inventories ( 5,290 ) 22,414 ( 13,910 ) Prepaid expenses and other assets 649 13,782 5,110 Accounts payable and accrued expenses 27,004 ( 15,345 ) ( 19,003 ) Billings in excess of costs & estimated profits ( 772 ) ( 7,816 ) 1,142 Other long-term liabilities 2,584 ( 8,853 ) ( 6,718 ) Net cash provided by operating activities $ 37,089 $ 109,650 $ 41,306 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 5,999 ) ( 6,672 ) ( 22,120 ) Proceeds from the sale of property and equipment 1,669 123 35 Acquisition of businesses, net of cash acquired ( 64,693 ) ( 115,247 ) — Net cash used in investing activities $ ( 69,023 ) $ ( 121,796 ) $ ( 22,085 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt — 330,000 — Principal debt payments ( 3,300 ) ( 244,375 ) ( 4,341 ) Debt issuance costs — ( 7,268 ) — 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 ) Preferred dividends paid ( 90 ) ( 90 ) ( 90 ) Payment for employee taxes withheld from stock awards ( 637 ) ( 139 ) ( 267 ) 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 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: Cash paid for interest $ 19,531 $ 13,321 $ 17,623 Cash paid for income taxes $ 6,120 $ 6,277 $ 13,318 The accompanying notes are an integral part of these consolidated financial statements. 49 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (in thousands, except share amounts) Series A preferred Stock Series B preferred Stock Common Stock Paid-in Capital Retained earnings Treasury stock Non controlling interest Accum Other Comp (Loss) Total equity Balances at December 31, 2018 $ 1 $ 15 $ 174 $ 156,190 $ 178,729 $ — $ 1,406 $ ( 19,267 ) $ 317,248 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 1,963 — — — — 1,963 Tax related items for share based awards — — — ( 267 ) — — — — ( 267 ) Cumulative translation adjustment — — — — — — — ( 687 ) ( 687 ) Net income — — — — 37,025 — ( 260 ) — 36,765 Balance at December 31, 2019 $ 1 $ 15 $ 174 $ 157,886 $ 215,664 $ — $ 1,146 $ ( 19,954 ) $ 354,932 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 3,532 — — — — 3,532 Tax related items for share based awards — — — ( 139 ) — — — — ( 139 ) Issuance of shares of common stock-Acquisition — — 15 29,351 — — — — 29,366 Issuance of shares of Common stock-Shares sold in public market — — — 1,142 — — — — 1,142 Cumulative translation adjustment — — — 296 ( 227 ) — — 1,941 2,010 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 — — 6 13,518 — — — — 13,524 Cumulative translation adjustment — — — — — — — 696 696 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. 50 Table of Contents DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY DXP Enterprises, Inc. together with its subsidiaries (collectively “DXP,” “Company,” “us,” “we,” or “our”) was incorporated in Texas on July 26, 1996. DXP Enterprises, Inc. and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to 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. The Company is organized into three business segments: Service Centers (“SC”), Supply Chain Services (“SCS”) and Innovative Pumping Solutions (“IPS”). See Note 21 - Segment and Geographical Reporting for discussion of the business segments. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES Basis of Presentation The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity (“VIE”). DXP is the primary beneficiary of a VIE in which DXP owns 47.5 % of the equity. DXP consolidates the financial statements of the VIE with the financial statements of DXP. As of December 31, 2021, the total assets of the VIE were approximately $ 3.5 million including approximately $ 2.8 million of fixed assets. DXP is the primary customer of the VIE. Consolidation of the VIE increased cost of sales by approximately $ 1.8 million for the year ended December 31, 2021 and decreased cost of sales by approximately $ 0.8 million for the year ended December 31, 2020, respectively. The Company recognized a related income tax benefit of $ 150 thousand and $ 116 thousand related to the VIE for the years ended December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021, the owners of the 52.5 % of the equity not owned by DXP included employees of DXP. All significant intercompany accounts and transactions have been eliminated in consolidation. Foreign Currency The financial statements of the Company’s Canadian subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive income (loss). Gains and losses on transactions denominated in foreign currency are reported in the consolidated statements of operations and comprehensive income (loss). Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates. Cash 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. Receivables and Credit Risk Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms. 51 Table of Contents The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the United States and Canada. The Company believes no significant concentration of credit risk exists. The Company evaluates the creditworthiness of its customers' financial positions and monitors accounts on a regular basis. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically (as circumstances warrant) based upon management’s best estimate of the collectability of such accounts under the current expected credit losses model. The Company writes-off uncollectible trade accounts receivable when the accounts are determined to be uncollectible. No customer represents more than 10% of consolidated sales. Changes in this allowance for 2021, 2020 and 2019 were as follows ( in thousands ): Years Ended December 31, 2021 2020 2019 Balance at beginning of year $ 8,628 $ 8,929 $ 10,126 Charged to costs and expenses 67 1,194 139 Charged to other accounts 12 (1) 21 (1) 79 (1) Deductions ( 948 ) (2) ( 1,516 ) (2) ( 1,415 ) (2) Balance at end of year $ 7,759 $ 8,628 $ 8,929 (1) Primarily due to translation adjustments (2) Uncollectible accounts written off, net of recoveries Inventories Inventories consist principally of equipment purchased for resale or finished goods and are priced at net realizable value, cost being primarily determined using the weighted average cost method. The Company regularly reviews inventory to evaluate continued demand and records provisions for the difference between cost and net realizable value arising from excess and obsolete items on hand. Provisions are provided against inventories for estimated excess and obsolescence based upon the aging of the inventories and market trends and are applied as a reduction in cost of the associated inventory. Property and Equipment Property and equipment are recorded on a historical cost basis. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings. 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 recoverable. The principal estimated useful lives used in determining depreciation are as follows: Buildings 20 - 39 years Building improvements 10 - 20 years Furniture, fixtures and equipment 3 - 20 years Leasehold improvements Shorter of estimated useful life or related lease term Impairment of Goodwill and Other Intangible Assets The Company tests goodwill and other indefinite lived intangible assets for impairment on an annual basis in the fourth quarter and when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company assigns the carrying value of these intangible assets to its "reporting units" and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the component is a business and discrete information is prepared and reviewed regularly by segment management. The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a quantitative test for that reporting unit. Should the reporting unit's carrying amount exceed the fair value, then an impairment charge for the excess would be recognized. The impairment charge is limited to the amount of goodwill allocated to the reporting unit, and goodwill will not be reduced below zero. For the twelve months ended December 31, 2020, goodwill was 52 Table of Contents 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 The Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. For the twelve months ended December 31, 2020, long-lived assets 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 The Company fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps within our Innovative Pumping Solutions segment. For binding agreements to fabricate tangible assets to customer specifications, the Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed. This typically occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin. Contracts generally include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by 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. If at any time expected costs exceed the value of the contract, the loss is recognized immediately. The typical time span of these contracts is approximately one to two years. The Service Centers segment provides a wide range of maintenance, repair and operating (MRO) products, equipment and integrated services, including logistics capabilities, to industrial customers. The Supply Chain Services segment 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. The majority of the Service Centers and Supply Chain Services segment revenues originate from the satisfaction of a single performance obligation, the delivery of products. Revenues are recognized when an agreement is in place, the performance obligations under the contract have been identified, and the price or consideration to be received is fixed and allocated to the performance obligation(s) in the contract. We believe our performance obligation has been satisfied when title passes to the customer or services have been rendered under the contract. Revenues are recorded net of sales taxes. The Company reserves for potential customer returns based upon the historical level of returns. Shipping and Handling Costs The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified as a component of cost of sales. 53 Table of Contents Self-insured Insurance and Medical Claims We generally retain up to $ 100,000 of risk for each claim for workers compensation, general liability, automobile and property loss. We accrue for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The actual cost could deviate from the recorded estimate. We generally retain up to $ 175,000 of risk on each medical claim for our employees and their dependents with the exception of less than 0.05 % of employees where a higher risk is retained. We accrue for the estimated outstanding balance of unpaid medical claims for our employees and their dependents. The accrual is adjusted monthly based on recent claims experience. The actual claims could deviate from recent claims experience and be materially different from the reserve. The accrual for these claims at December 31, 2021 and 2020 was approximately $ 2.8 million and $ 2.6 million, respectively. Cost of Sales and Selling, General and Administrative Expense Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs and depreciation. Selling, general and administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation and amortization. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established to reduce deferred income tax assets to the amounts expected to be realized under a more likely than not criterion. Accounting for Uncertainty in Income Taxes A position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examination by tax authorities for years prior to 2018. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Comprehensive Income (Loss) Comprehensive income (loss) includes net income and foreign currency translation adjustments. The Company’s other comprehensive (loss) income is from translating foreign subsidiaries to the reporting currency. NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS Accounting Pronouncements Not Yet Adopted In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-Bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of this ASU on the financial statements. 54 Table of Contents 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 - LEASES We lease office space, warehouses, land, automobiles, and office and manufacturing equipment. All of our leases are classified as operating leases. Our leases have remaining lease terms of 1 month to 9 years, some of which include options to extend the leases for up to 14 years. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not include options to purchase the leased property. The Company adopted the provisions of ASC 842, "Leases" effective January 1, 2019. We elected to apply the current period transition approach as introduced by ASU 2018-11 for our transition at January 1, 2019 and we elected to apply the following practical expedients and accounting policy decisions. In January 2019, we recorded a ROU Asset and total lease liability obligations of $ 72.7 million and $ 72.4 million, respectively. The new standard did not have a material impact on our consolidated statements of operations and had no impact on cash flows. The lease expenses were as follows (in thousands) : Twelve Months Ended December 31, 2021 Twelve Months Ended December 31, 2020 Lease cost Classification Short-term lease expense SG&A expenses (*) $ 244 $ 374 Other operating lease cost SG&A expenses (*) 23,921 22,983 Total operating lease cost $ 24,165 $ 23,357 (*) Manufacturing equipment and some vehicle rental expenses are included in the cost of sales. Supplemental cash flow information related to leases was as follows (in thousands) : Twelve Months Ended December 31, 2021 Twelve Months Ended December 31, 2020 Lease Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 20,142 $ 18,250 Right-of-use assets obtained in exchange for lease liabilities Operating leases $ 24,735 $ 5,639 55 Table of Contents Supplemental balance sheet information related to leases was as follows (in thousand) : Lease Classification December 31, 2021 December 31, 2020 Assets Operating Operating lease right-of-use assets $ 57,221 $ 55,188 Liabilities Current operating Short-term operating lease liabilities 18,203 15,891 Non-current operating Long-term operating lease liabilities 39,922 38,010 Total operating lease liabilities $ 58,125 $ 53,901 Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments for lease commenced on or after January 1, 2019. We used our incremental borrowing rate as of the transition date of January 1, 2019 for operating leases that commenced prior to transition. Maturities of lease liabilities were as follows (in thousands) : Year Ending December 31, Operating leases (*) 2022 $ 21,189 2023 15,325 2024 10,172 2025 7,152 2026 4,491 Thereafter 8,515 Total lease payments $ 66,844 Less: imputed interest 8,719 Present value of lease liabilities $ 58,125 (*) 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 Weighted average remaining lease term (years) Operating lease 4.53 4.29 Weighted average discount rate Operating lease 6.5 % 7.2 % For the twelve months 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 and family. NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories: 56 Table of Contents Level 1 Inputs Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 Inputs Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means. Level 3 Inputs Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include managements assumptions about the likelihood of payment based on the established benchmarks and discount rates based on an internal rate of return analysis. The fair value measurement includes inputs that are Level 3 inputs as discussed above, as they are not observable in the market. Should actual results increase or decrease as compared to the assumptions used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration are measured each reporting period and reflected in our results of operations. As of December 31, 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 . For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein, and gains or losses recognized during the twelve months ended December 31, 2021: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Contingent Liability for Accrued Consideration (in thousands) Balance at December 31, 2020 $ 1,100 Acquisitions and settlements Acquisitions ( Note 17 ) 301 Settlements ( 1,000 ) Total remeasurement adjustments: Changes in fair value recorded in other (income) expense, net 504 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. 504 * Included in other current and long-term liabilities 57 Table of Contents Quantitative Information about Level 3 Fair Value Measurements The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows: (in thousands, unaudited) Fair Value at December 31, 2021 Valuation Technique Significant Unobservable Inputs Contingent consideration: (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 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 %. 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, 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. NOTE 6 - INVENTORIES The carrying values of inventories were as follows ( in thousands ): December 31, 2021 December 31, 2020 Finished goods $ 96,781 $ 105,527 Work in process 20,565 17,021 Obsolescence reserve ( 16,452 ) ( 25,477 ) Inventories $ 100,894 $ 97,071 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. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “Cost and estimated profits in excess of billings” on our Consolidated Balance Sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our Consolidated Balance Sheets. Costs and estimated profits on uncompleted contracts and related amounts billed for 2021 and 2020 were as follows ( in thousands ): December 31, 2021 2020 Costs incurred on uncompleted contracts $ 41,329 $ 36,969 Estimated profits, thereon 17,143 6,711 Total $ 58,472 $ 43,680 Less: billings to date 44,859 29,315 Net $ 13,613 $ 14,365 58 Table of Contents Such amounts were included in the accompanying Consolidated Balance Sheets for 2021 and 2020 under the following captions ( in thousands ): December 31, 2021 2020 Costs and estimated profits in excess of billings $ 17,193 $ 18,459 Billings in excess of costs and estimated profits ( 3,581 ) ( 4,061 ) Translation Adjustment 1 ( 33 ) Net $ 13,613 $ 14,365 During the twelve months ended December 31, 2021, $ 4.0 million of the balances that were previously classified as contract liabilities at the beginning of the period shipped. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments. NOTE 8 - PROPERTY AND EQUIPMENT The carrying values of property and equipment were as follows ( in thousands ): December 31, 2021 December 31, 2020 Land $ 2,023 $ 2,558 Buildings and leasehold improvements 28,267 22,952 Furniture, fixtures and equipment 114,020 110,159 Less – Accumulated depreciation ( 92,430 ) ( 78,770 ) Total Property and Equipment $ 51,880 $ 56,899 Depreciation expense was $ 9.9 million, $ 10.4 million, and $ 10.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. Capital expenditures by segment are included in Note 2 1 - Segment and Geographical Reporting . NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2021 ( in thousands ): Goodwill Other Intangible Assets Total Balances as of December 31, 2020 $ 261,767 $ 80,088 $ 341,855 Translation adjustment — 55 55 Acquisitions 46,739 16,259 62,998 Amortization — ( 17,197 ) ( 17,197 ) Balances as of December 31, 2021 $ 308,506 $ 79,205 $ 387,711 The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2020 ( in thousands ): Goodwill Other Intangible Assets Total Balances as of December 31, 2019 $ 194,052 $ 52,582 $ 246,634 Translation adjustment — ( 4 ) ( 4 ) Acquisitions 104,150 39,797 143,947 Impairment ( 36,435 ) — ( 36,435 ) Amortization — ( 12,287 ) ( 12,287 ) Balances as of December 31, 2020 $ 261,767 $ 80,088 $ 341,855 59 Table of Contents The following table presents the goodwill balance by reportable segment as of December 31, 2021 and 2020 (in thousands) : As of December 31, 2021 2020 Service Centers $ 251,336 $ 244,628 Innovative Pumping Solutions 40,031 — Supply Chain Services 17,139 17,139 Total $ 308,506 $ 261,767 The following table presents a summary of other intangible assets ( in thousands ): As of December 31, 2021 As of December 31, 2020 Gross Carrying Amount Accumulated Amortization Carrying Amount, net Gross Carrying Amount Accumulated Amortization Carrying Amount, net Customer relationships $ 208,966 $ ( 132,555 ) $ 76,411 $ 193,747 $ ( 116,028 ) $ 77,719 Non-compete agreements 3,657 ( 863 ) 2,794 2,617 ( 248 ) 2,369 Total $ 212,623 $ ( 133,418 ) $ 79,205 $ 196,364 $ ( 116,276 ) $ 80,088 Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according to estimated economic benefits over their estimated useful lives. Customer relationships are amortized over their estimated useful lives. Amortization expense is recognized according to estimated economic benefits and was $ 17.2 million, $ 12.3 million, and $ 15.1 million for the years ended December 31, 2021, 2020, and 2019, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows (in thousands) : 2022 $ 16,917 2023 14,951 2024 12,681 2025 11,125 2026 8,824 Thereafter 14,707 Total $ 79,205 The weighted average remaining estimated life for customer relationships and non-compete agreements are 6.6 years and 4.1 years, respectively. 60 Table of Contents NOTE 10 – LONG-TERM DEBT Long-term debt consisted of the following ( in thousands ): December 31, 2021 December 31, 2020 Carrying Value (1) Fair Value Carrying Value (1) Fair Value ABL Revolver $ — — $ — — Term Loan B 326,700 325,883 330,000 325,875 Total Debt 326,700 325,883 330,000 325,875 Less: Current maturities ( 3,300 ) ( 3,292 ) ( 3,300 ) ( 3,259 ) Total Long-term Debt $ 323,400 $ 322,591 $ 326,700 $ 322,616 (1) Carrying value amount do not include unamortized debt issuance costs of $ 8.0 million and $ 9.6 million for year ended December 31, 2021 and December 31, 2020 respectively. Asset-Based Loan Facility: On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $ 135 million asset-backed revolving line of credit (the "ABL Revolver") a $ 50 million increase from the $ 85.0 million available under the original revolver. During the twelve months ended December 31, 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. The Company's consolidated Fixed Charge Coverage Ratio was 2.74 to 1.00 as of December 31, 2021. DXP was in compliance with all such covenants that were in effect on such date under the ABL Revolver as of December 31, 2021. The ABL Credit Agreement may be increased in increments of $ 10.0 million up to an aggregate of $ 50.0 million. The facility will mature on August 29, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25 % to 1.75 % per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25 % to 0.75 % per annum, in each case, based upon the average daily excess availability under the facility for the most recently completed calendar quarter. Fees ranging from 0.25 % to 0.375 % per annum are payable on the portion of the facility not in use at any given time. The unused line fee was 0.375 % at December 31, 2021. The interest rate for the ABL facility was 1.9 % at December 31, 2021. Term Loan B: On December 23, 2020, DXP entered into a new seven year , $ 330 million Senior Secured Term Loan B (the “Term Loan B Agreement”), which replaced DXP’s previously existing Senior Secured Term Loan. The Term Loan B Agreement provides for a new $ 330 million term loan (the “Term Loan”) that amortizes in equal quarterly installments of 0.25 % with the balance payable in December 2027, when the facility matures. Subject to securing additional lender commitments, the Term Loan B Agreement allows for incremental increases in facility size up to an aggregate of $ 52.5 million, plus an additional amount such that DXP’s Secured Leverage Ratio (as defined in the Term Loan B Agreement) would not exceed 3.75 to 1.00. Interest accrues on the Term Loan at a rate equal to the base rate plus a margin of 3.75 % for the Base Rate Loans (as defined in the Term Loan B Agreement), or LIBOR plus a margin of 4.75 % for the Eurodollar Rate Loans (as defined in the Term Loan B Agreement). We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50 % of excess cash flow, if our total leverage ratio is no more than 3.00 to 1.00 and greater than 2.50 to 1:00, reducing to 25 %, if our total leverage ratio is no more than 2.50 to 1.00. The interest rate for the Term Loan was 5.75 % as of December 31, 2021. 61 Table of Contents Financial Covenants: DXP’s principal financial covenants under the ABL Credit Agreement and Term Loan B Agreement include: Fixed Charge Coverage Ratio – The Fixed Charge Coverage Ratio under the ABL Credit Agreement is defined as the ratio for the most recently completed four-fiscal quarter period, of (a) EBITDA minus capital expenditures (excluding those financed or funded with debt (other than the ABL Loans), (ii) the portion thereof funded with the net proceeds from asset dispositions of equipment or real property which DXP is permitted to reinvest pursuant to the Term Loan and the portion thereof funded with the net proceeds of casualty insurance or condemnation awards in respect of any equipment and real estate which DXP is not required to use to prepay the ABL Loans pursuant to the Term Loan B Agreement or with the proceeds of casualty insurance or condemnation awards in respect of any other property) minus cash taxes paid (net of cash tax refunds received during such period), to (b) fixed charges. The Company is restricted from allowing its fixed charge coverage ratio be less than 1.00 to 1.00 during a compliance period, which is triggered when the availability under the ABL facility falls below a threshold set forth in the ABL Credit Agreement. As of December 31, 2021, the Company's consolidated Fixed Charge Coverage Ratio was 2.74 to 1.00. Secured Leverage Ratio – The Term Loan B Agreement requires that the Company’s Secured Leverage Ratio, defined as the ratio, as of the last day of any fiscal quarter of consolidated secured debt (net of unrestricted cash, not to exceed $ 150 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2021, is either equal to or less than as indicated in the table below: Fiscal Quarter Secured Leverage Ratio December 31, 2021 5.50 :1:00 March 31, 2022 5.25 :1:00 June 30, 2022 5.25 :1:00 September 30, 2022 5.25 :1:00 December 31, 2022 5.00 :1:00 March 31, 2023 5.00 :1:00 June 30, 2023 and each Fiscal Quarter thereafter 4.75 :1:00 EBITDA as defined under the Term Loan B Agreement for financial covenant purposes means, without duplication, for any period of determination, the sum of, consolidated net income during such period; plus to the extent deducted from consolidated net income in such period: (i) income tax expense, (ii) franchise tax expense, (iii) consolidated interest expense, (iv) amortization and depreciation during such period, (v) all non-cash charges and adjustments, and (vi) non-recurring cash expenses related to the Term Loan, provided , that if the Company acquires or disposes of any property during such period (other than under certain exceptions specified in the Term Loan B Agreement, including the sale of inventory in the ordinary course of business, then EBITDA shall be calculated, after giving pro forma effect to such acquisition or disposition, as if such acquisition or disposition had occurred on the first day of such period. As of December 31, 2021, the Company’s consolidated Secured Leverage Ratio was 3.71 to 1.00. Interest on Borrowings The interest rates on our borrowings outstanding at December 31, 2021 and 2020, including the amortization of debt issuance costs, were as follows: December 31, 2021 2020 ABL Revolver 1.85 % 1.90 % Term Loan B 5.75 % 5.75 % Weighted average interest rate 5.75 % 5.75 % The Company was in compliance with all financial covenants as of December 31, 2021. 62 Table of Contents Extinguishment and modification of Previously Existing Credit Agreement As set forth above, on December 23, 2020, the Company terminated its previously existing credit agreement and replaced it with a new Term Loan and Security Agreement. The terminated agreement was under the previous Term Loan and Security Agreement dated as of August 29, 2017, by and among the Company, as borrower, and Goldman Sachs Bank USA, as issuing lender and administrative agent for other lenders (the “Original Credit Agreement”). This Original Credit Agreement was subsequently amended on June 25, 2018 (the “Original Term Loan Agreement”). The refinancing of the term loan involved multiple lenders who were considered members of a loan syndicate. In determining whether the refinancing was to be accounted for as a debt extinguishment or modification, we considered whether the lenders remained the same or changed and whether the change in debt terms was substantial. The debt terms would be considered substantially different if the present value of the cash inflows and outflows of the new term loans, including all principal increases and lender fees on the refinancing date, was at least 10 % different from the present value of the remaining cash inflows and outflows of the original term loans, or the 10 % Test. We performed a separate 10 % Test for each individual lender participating in the loan syndication. For existing lenders who participated in the new term loans as part of the new loan syndicate, the refinancing was accounted for as a modification as the change in debt terms was determined to not be substantial using the 10 % Test. Deferred financing costs of $ 3.0 million and an original issue discount of $ 4.1 million were associated with modified and new debt and will be amortized to interest expense using the interest method over the life of the term loans. In connection with the original lenders considered an extinguishment of the previously existing Term Loan and Security Agreement we recorded a $ 5.4 million write-off of debt issuance costs and third-party fees, which was included in interest expense during 2020. As of December 31, 2021, the maturities of long-term debt for the next five years and thereafter were as follows ( in thousands ): Year $ Amount 2022 $ 3,300 2023 3,300 2024 3,300 2025 3,300 2026 3,300 Thereafter 310,200 Total $ 326,700 NOTE 11 - INCOME TAXES The components of income (loss) before income taxes were as follows ( in thousands ): Years Ended December 31, 2021 2020 2019 Domestic $ 9,897 $ ( 33,239 ) $ 42,257 Foreign 9,285 ( 15,074 ) 5,702 Total income before taxes $ 19,182 $ ( 48,313 ) $ 47,959 63 Table of Contents The provision for income taxes consisted of the following ( in thousands ): Years Ended December 31, 2021 2020 2019 Current - Federal $ ( 5,243 ) $ ( 6,348 ) $ 5,396 State ( 522 ) ( 240 ) 1,976 Foreign 3,056 2,624 2,982 Total current $ ( 2,709 ) $ ( 3,964 ) $ 10,354 Deferred - Federal 5,016 ( 10,567 ) 2,372 State 1,810 ( 3,126 ) ( 249 ) Foreign ( 686 ) ( 1,039 ) ( 1,283 ) Total deferred $ 6,140 $ ( 14,732 ) $ 840 Total current and deferred taxes $ 3,431 $ ( 18,696 ) $ 11,194 The difference between income taxes computed at the statutory income tax rate and the provision for income taxes is as follows ( in thousands ): Years Ended December 31, 2021 2020 2019 Income taxes computed at federal statutory rate $ 4,028 $ ( 10,146 ) $ 10,029 State income taxes, net of federal benefit 1,017 ( 2,625 ) 1,331 Foreign taxes 186 ( 493 ) 311 Nondeductible expenses 353 5,617 1,108 Enacted rate changes 318 670 — Research and development tax credit ( 1,036 ) ( 16,879 ) ( 2,324 ) Foreign tax credit — — ( 57 ) Valuation allowance 1 16 ( 5 ) Tax reform deferred tax remeasurement ( 2,587 ) — — Deferred tax liability true up ( 62 ) ( 551 ) 1,065 Uncertain tax positions 871 5,057 665 Other 342 638 ( 929 ) Total income tax expense (benefit) $ 3,431 $ ( 18,696 ) $ 11,194 64 Table of Contents Deferred tax liabilities and assets were comprised of the following ( in thousands ): December 31, 2021 2020 Deferred tax assets: Allowance for doubtful accounts $ 1,554 $ 1,784 Inventory 4,747 7,072 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 Capital loss carryforward 4 12,813 Deferred compensation 152 540 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 allowance $ 22,166 $ 24,991 Deferred tax liabilities: Goodwill ( 13,474 ) ( 8,570 ) Intangibles ( 6,813 ) ( 8,512 ) Property and equipment ( 8,117 ) ( 7,569 ) ROU asset and liability 226 ( 323 ) Unremitted foreign earnings ( 421 ) ( 421 ) Method changes ( 465 ) ( 754 ) Other ( 618 ) ( 619 ) Net deferred tax liability $ ( 7,516 ) $ ( 1,777 ) The Company records a valuation allowance when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. If the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. At December 31, 2021, the valuation allowance primarily relates to federal and foreign capital loss carryforwards. The following summarizes changes in the balance of valuation allowances on deferred tax assets (in thousands): Years Ended December 31, 2021 2020 2019 Balance at January 1 $ ( 12,813 ) $ ( 12,363 ) $ ( 12,564 ) Changes due to federal and foreign capital loss carryforwards 12,809 ( 450 ) 201 Balance at December 31 $ ( 4 ) $ ( 12,813 ) $ ( 12,363 ) 65 Table of Contents Tax carryforwards available for use on future income tax returns, prior to valuation allowance, at December 31, 2021, were as follows (in thousands): Domestic Foreign Expiration Net operating loss - foreign $ — $ 453 2034 - 2041 Net operating loss - federal 332 — 2036 - 2040 Capital loss carryforward - foreign — 4 Indefinite Capital loss carryforward - federal — — 2021 Foreign tax credits 64 — 2023, 2025 Federal general business tax credits 4,237 — 2026 - 2030 Texas research and development tax credits 2,679 — 2037 - 2040 Louisiana research and development tax credits 239 — 2024 - 2025 Changes in the balance of unrecognized tax benefits excluding interest and penalties on uncertain tax positions were as follows (in thousands): Assets (Liabilities) 2021 2020 2019 Balance at January 1 $ ( 5,057 ) $ — $ — Increases related to prior year tax positions ( 687 ) ( 5,057 ) — Decreases related to prior year tax positions — — — Increases related to current year tax positions ( 572 ) — — Settlements — — — Lapse of statute of limitations — — — Balance at December 31 $ ( 6,316 ) $ ( 5,057 ) $ — As of December 31, 2021, the Company had recorded a total tax benefit of $ 25.0 million related to federal and state research and development tax credits. This benefit is partially offset by $ 6.3 million uncertain tax position due to the uncertainty related to the realizability of the federal research and development tax credits. To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts are classified as a component of income tax provision (benefit) in the consolidated financial statements consistent with Company's policy. For the year ended December 31, 2021, the Company did no t record any tax expense for interest and penalties related to uncertain tax positions. The Company is subject to taxation in the United States, various states, and foreign jurisdictions. The Company has significant operations in the United States and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally open in the United States for the tax years ended after 2016 and outside the United States for the tax years ended after 2013. NOTE 12 - SHARE-BASED COMPENSATION Restricted Stock We issued equity-based awards from the 2016 Omnibus Plan. 2016 Omnibus Incentive Plan On June 19, 2019, our shareholders approved an amendment to the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) to increase the number of shares that can be issued under the 2016 Plan from 500,000 shares to a total of 1,000,000 shares, which represents an increase of 500,000 shares (the “Amendment”), which authorized grants of restricted stock awards, restricted stock units (“RSUs”), performance awards, options, investment rights, and cash-based awards. This plan authorizes the issuance of up to 1,000,000 shares of our common stock. 66 Table of Contents Under the 2016 Omnibus Plan approved by our shareholders, directors, consultants and employees may be awarded shares of DXP’s common stock. The shares of restricted stock awards granted to employees that are outstanding as of December 31, 2021 vest in accordance with one of the following vesting schedules: 100 % one year after the grant date; 50 % each year for two years after the grant; 33.3 % each year for three years after the grant date; 20 % each year for five years after the grant date; or 10 % each year for ten years after the date of grant. The shares of restricted stock awards granted to non-employee directors of DXP vest one year after the grant date. The fair value of restricted stock awards is measured based upon the closing prices of DXP’s common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Once restricted stock vests, new shares of the Company’s stock are issued. At December 31, 2021, 559,024 shares were available for future grant. Changes in restricted stock awards for the twelve months ended December 31, 2021 were as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2020 166,976 $ 32.53 Granted 53,668 $ 30.95 Forfeited — $ — Vested ( 108,600 ) $ 32.59 Non-vested at December 31, 2021 112,044 $ 31.72 Changes in restricted stock awards for the twelve months ended December 31, 2020 were as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2019 144,250 $ 32.71 Granted 100,299 $ 30.91 Forfeited ( 16,794 ) $ 28.61 Vested ( 60,779 ) $ 31.33 Non-vested at December 31, 2020 166,976 $ 32.53 Changes in restricted stock awards for the twelve months ended December 31, 2019 were as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2018 169,293 $ 31.05 Granted 46,885 $ 35.60 Forfeited ( 5,720 ) $ 32.35 Vested ( 66,208 ) $ 27.75 Non-vested at December 31, 2019 144,250 $ 32.71 Compensation expense, associated with restricted stock awards, recognized in the years ended December 31, 2021, December 31, 2020 and December 31, 2019 was $ 1.8 million, $ 3.5 million, and $ 2.0 million, respectively. Related income tax benefits recognized in earnings in the years ended December 31, 2021, December 31, 2020 and December 31, 2019 were approximately $ 0.5 million, $ 0.9 million and $ 0.5 million, respectively. Unrecognized compensation expense under the DXP Enterprises, Inc. 2016 Omnibus Plan at December 31, 2021, December 31, 2020 and December 31, 2019 was $ 2.1 million, $ 2.2 million and $ 3.0 million, respectively. As of December 31, 2021, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 1.2 years. 67 Table of Contents NOTE 13 - EARNINGS PER SHARE DATA Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities. The following table sets forth the computation of basic and diluted earnings per share for the periods indicated ( in thousands, except per share data ): December 31, 2021 2020 2019 Basic: Weighted average shares outstanding 18,949 17,748 17,592 Net income (loss) attributable to DXP Enterprises, Inc. $ 16,496 $ ( 29,269 ) $ 37,025 Convertible preferred stock dividend ( 90 ) ( 90 ) ( 90 ) Net income (loss) attributable to common shareholders $ 16,406 $ ( 29,359 ) $ 36,935 Per share amount $ 0.87 $ ( 1.65 ) $ 2.10 Diluted: Weighted average shares outstanding 18,949 17,748 17,592 Assumed conversion of convertible preferred stock 840 — 840 Total dilutive shares 19,789 17,748 18,432 Net income (loss) attributable to common shareholders $ 16,406 $ ( 29,359 ) $ 36,935 Convertible preferred stock dividend 90 — 90 Net income (loss) attributable to DXP Enterprises, Inc. $ 16,496 $ ( 29,359 ) $ 37,025 Per share amount $ 0.83 $ ( 1.65 ) $ 2.01 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. 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. 68 Table of Contents NOTE 14 – CAPITAL STOCK The Company has Series A and Series B preferred stock of 1,122 shares and 15,000 shares outstanding as of December 31, 2021, 2020 and 2019, respectively. The preferred stock did not have any activity during 2021, 2020 and 2019. Series A Preferred Stock The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to $ 100 liquidation preference per share. Series B Preferred Stock Each share of the Series B convertible preferred stock is convertible into 56 shares of common stock and a monthly dividend per share of $ .50 . The holders of the Series B convertible stock are entitled to a $ 100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock. The activity related to outstanding common stock and common stock held in treasury was as follows: December 31, 2021 2020 2019 Common Stock: Quantity (in thousands) Balance, beginning of period 19,041 17,460 17,401 Issuance of shares for compensation net of withholding 85 54 59 Issuance of common stock related to equity distribution agreements — 46 — 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 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 On May 11, 2020, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with BMO Capital Markets Corp. (the “Distribution Agent”) pursuant to which the Company may offer and sell shares of the Company’s common stock, par value $ 0.01 per share, having an aggregate offering amount of up to $ 37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company’s common stock pursuant to the Equity Distribution 69 Table of Contents 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. At closing, the Company paid approximately $ 64.7 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including but not limited to working capital adjustments. On December 31, 2020, the Company completed the acquisition of APO Pumps & Compressors (“APO”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water / wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $ 53.0 million in cash and stock, following normal transaction adjustments, for example working capital true-ups, customary for a transaction of this size and nature. Approximately, $ 38.3 millions was paid at closing, and $ 13.4 million has been accrued as of December 31, 2020 as true-up consideration. 70 Table of Contents On December 31, 2020, the Company completed the acquisition of Pumping Solutions, Inc. (“Pumping Solutions”), a distributor of industrial and commercial pumps and process equipment focused on serving multiple end markets including the water / wastewater, chemical, food & beverage, and general industrial markets. The Company paid approximately $ 21.0 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, for example working capital true-ups. On December 31, 2020, the Company completed the acquisition of Corporate Equipment Company (“CEC”), a distributor of industrial and commercial pumps and air compressors focused on serving multiple end markets including the water / wastewater, steel, food & beverage, and general industrial markets. The Company paid approximately $ 3.3 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups. On February 1, 2020, the Company completed the acquisition of substantially all of the assets of Turbo Machinery Repair (“Turbo”), a pump and industrial equipment repair, maintenance, machining and labor services company. The Company paid approximately $ 3.2 million in cash, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups, . On January 1, 2020, the Company completed the acquisition of Pumping Systems, Inc. (“PSI”), a distributor of pumps, systems and related services. The PSI acquisition was funded with a mixture of cash on hand as well as issuing DXP's common stock. The PSI acquisition was funded with a mixture of cash on hand as well as issuing DXP's common stock. The Company paid approximately $ 13.0 million in cash and stock, subject to normal transaction adjustments, customary for a transaction of this size and nature, including working capital true-ups. The 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. 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, 2021 2020 ($ in thousands) Revenue $ 1,121,723 $ 1,164,631 Net income $ 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: 71 Table of Contents ($ in thousands) 2021 Cash $ 1,292 Accounts receivable 6,781 Inventory — 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: 72 Table of Contents Purchase Price Consideration (in thousands) Total Consideration Cash payments $ 115,247 Fair value of stock issued ( 1,480,909 shares) 29,367 Future consideration * 13,428 Total consideration $ 158,042 Cash $ 1 Accounts Receivable 20,646 Inventory 7,085 Other Current Assets 190 Property and equipment 1,811 Non-compete agreements 2,332 Customer relationships 37,465 Goodwill 105,555 Other assets 96 Assets acquired $ 175,181 Current liabilities assumed ( 10,437 ) Deferred tax liability ( 6,702 ) Net assets acquired $ 158,042 *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 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. 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. 73 Table of Contents NOTE 18 - COMMITMENTS AND CONTINGENCIES The Company leases equipment, automobiles and office facilities under various operating leases. The future minimum rental commitments as of December 31, 2021, for non-cancelable leases are as follows ( in thousands ): 2022 $ 21,189 2023 15,325 2024 10,172 2025 7,152 2026 4,491 Thereafter 8,515 Total $ 66,844 Rental expense for operating leases was $ 24.2 million, $ 23.4 million and $ 25.0 million for the years ended December, 2021, 2020 and 2019, respectively. From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While DXP is unable to predict the outcome of these lawsuits, it believes that the ultimate resolution will not have, either individually or in the aggregate, a material adverse effect on DXP’s consolidated financial position, cash flows, or results of operations. NOTE 19 - EMPLOYEE BENEFIT PLANS The Company offers a 401(k) plan which is eligible to substantially all employees in the United States. For the year ended December 31, 2021, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. 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 the employee match program which was reinstated in January 2021. NOTE 20 - OTHER COMPREHENSIVE INCOME Other comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments by, or distributions to, shareholders. During 2012 and 2013, the Company acquired four entities that operate in Canada. These Canadian entities maintain financial data in Canadian dollars. Upon consolidation, the Company translates the financial data from these foreign subsidiaries into U.S. dollars and records cumulative translation adjustments in other comprehensive income. The Company recorded $ 0.7 million, $ 1.9 million and $( 0.7 ) million in translation adjustments, net of tax, in other comprehensive income during the years ended December 31, 2021, 2020 and 2019, respectively. NOTE 21 – SEGMENT AND GEOGRAPHICAL REPORTING The Company’s reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, MRO products and equipment, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, fastener, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management. The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. The following table sets out financial information related to the Company’s segments ( in thousands ): 74 Table of Contents Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2021 Product sales (recognized at a point in time) $ 715,111 $ — $ 140,424 $ 855,535 Inventory management services (recognized over contract life) — — 17,410 17,410 Staffing services (day-rate basis) 101,385 — — 101,385 Customized pump production (recognized over time) — $ 139,591 — 139,591 Total Revenue $ 816,496 $ 139,591 $ 157,834 $ 1,113,921 Operating income for reportable segments, excluding adjustments 98,931 12,070 11,963 122,964 Identifiable assets at year end 642,184 134,374 44,684 821,242 Capital expenditures 999 2,574 25 3,598 Proceeds from sale of fixed assets — — — — Depreciation 3,475 4,270 389 8,134 Amortization 11,107 6,090 — 17,197 Interest expense $ 12,407 $ 7,270 $ 1,412 $ 21,089 Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2020 Product sales (recognized at a point in time) $ 595,314 $ — $ 138,653 $ 733,967 Inventory management services (recognized over contract life) — — 16,005 16,005 Staffing services (day-rate basis) 67,303 — — 67,303 Customized pump production (recognized over time) — 187,991 — 187,991 Total Revenue $ 662,617 $ 187,991 $ 154,658 $ 1,005,266 Operating income for reportable segments, excluding adjustments 71,834 16,882 12,804 101,520 Identifiable assets at year end 564,921 130,505 56,721 752,147 Capital expenditures 1,254 4,457 — 5,711 Proceeds from sale of fixed assets — — — — Depreciation 3,299 4,441 387 8,127 Amortization 6,989 5,298 — 12,287 Interest expense $ 11,506 $ 7,360 $ 1,705 $ 20,571 Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2019 Product sales (recognized at a point in time) $ 701,404 $ — $ 184,767 $ 886,171 Inventory management services (recognized over contract life) — — 16,511 16,511 Staffing services (day-rate basis) 58,514 — — 58,514 Customized pump production (recognized over time) — 303,655 — 303,655 Total Revenue $ 759,918 $ 303,655 $ 201,278 $ 1,264,851 Operating income for reportable segments, excluding adjustments 85,442 30,699 15,267 131,408 Identifiable assets at year end 463,531 212,015 56,714 732,260 Capital expenditures 2,333 9,347 922 12,602 Depreciation 3,517 4,602 285 8,404 Amortization 8,230 5,855 989 15,074 Interest expense 10,786 6,747 1,965 19,498 75 Table of Contents Years Ended December 31, 2021 2020 2019 Operating income for reportable segments, excluding adjustments $ 122,964 $ 101,520 $ 131,408 Adjustments for: Amortization of intangibles 17,197 12,287 15,074 Impairment and other charges — 59,883 — Corporate and other expense, net 65,910 57,018 48,922 Total operating income $ 39,857 $ ( 27,668 ) $ 67,412 Interest expense 21,089 20,571 19,498 Other expenses (income), net ( 414 ) 74 ( 45 ) Income before income taxes $ 19,182 $ ( 48,313 ) $ 47,959 The Company had capital expenditures at Corporate of $ 2.4 million, $ 1.0 million, and $ 9.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. The Company had identifiable assets at Corporate of $ 85.0 million, $ 114.1 million, and $ 56.8 million as of December 31, 2021, 2020, and 2019, respectively. Corporate depreciation was $ 1.8 million, $ 2.3 million, and $ 1.7 million for the years ended December 31, 2021, 2020, and 2019, respectively. Geographical Information Revenues are presented in geographic area based on location of the facility shipping products or providing services. Long-lived assets are based on physical locations and are comprised of the net book value of property. The Company’s revenues and property and equipment by geographical location are as follows (in millions) : Years Ended December 31, 2021 2020 2019 Revenues United States $ 1,031 $ 931 $ 1,163 Canada 83 74 102 Total $ 1,114 $ 1,005 $ 1,265 As of December 31, 2021 2020 Property and Equipment, net United States $ 48 $ 52 Canada 4 5 Total $ 52 $ 57 NOTE 22 – RELATED PARTIES DISCLOSURES The Board uses policies and procedures, to be applied by the Audit Committee of the Board, for review, approval or ratification of any transactions with related persons. Those policies and procedures will apply to any proposed transactions in which DXP is a participant, the amount involved exceeds $ 120,000 and any director, executive officer or significant shareholder or any immediate family member of such a person has a direct or material indirect interest. Any related party transaction will be reviewed by the Audit Committee of the Board of Directors to determine, among other things, the benefits of any transaction to DXP, the availability of other sources of comparable products or services and whether the terms of the proposed transaction are comparable to those provided to unrelated third parties. For the year ended December 31, 2021, the Company paid approximately $ 2.3 million in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little. 76 Table of Contents 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. 77 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.