DXP ENTERPRISES INC 10-Q

ITEM 1: FINANCIAL STATEMENTS DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share amounts) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Sales $ 367,812 $ 285,691 $ 687,223 $ 531,278 Cost of sales 263,550 200,413 488,076 374,370 Gross profit 104,262 85,278 199,147 156,908 Selling, general and administrative expenses 78,342 70,432 151,667 135,829 Income from operations 25,920 14,846 47,480 21,079 Other (income) expense 839 ( 105 ) 1,377 ( 535 ) Interest expense 5,615 5,337 10,777 10,580 Income before income taxes 19,466 9,614 35,326 11,034 Provision for income taxes 4,973 1,684 8,305 2,945 Net income 14,493 7,930 27,021 8,089 Net income (loss) attributable to noncontrolling interest 60 ( 189 ) ( 53 ) ( 401 ) Net income attributable to DXP Enterprises, Inc. 14,433 8,119 27,074 8,490 Preferred stock dividend 22 22 45 45 Net income attributable to common shareholders $ 14,411 $ 8,097 $ 27,029 $ 8,445 Net income $ 14,493 $ 7,930 $ 27,021 $ 8,089 Currency translation adjustments ( 3,591 ) 1,689 ( 1,922 ) 3,180 Comprehensive income $ 10,902 $ 9,619 $ 25,099 $ 11,269 Earnings per share (Note 10) : Basic $ 0.77 $ 0.42 $ 1.45 $ 0.44 Diluted $ 0.74 $ 0.41 $ 1.39 $ 0.42 Weighted average common shares outstanding : Basic 18,766 19,291 18,651 19,239 Diluted 19,606 20,131 19,491 20,079 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited) June 30, 2022 December 31, 2021 ASSETS Current assets: Cash $ 20,574 $ 48,989 Restricted cash 91 91 Accounts Receivable, net of allowance of $ 7,571 and $ 7,759 273,310 218,137 Inventories 119,694 100,894 Costs and estimated profits in excess of billings 25,655 17,193 Prepaid expenses and other current assets 13,645 9,522 Income taxes receivable 316 9,748 Total current assets 453,285 404,574 Property and equipment, net 49,974 51,880 Goodwill 335,899 296,541 Other intangible assets, net 83,131 79,205 Operating lease ROU assets 57,912 57,221 Other long-term assets 3,823 4,806 Total assets $ 984,024 $ 894,227 LIABILITIES AND EQUITY Current liabilities: Current maturities of debt $ 32,424 $ 3,300 Trade accounts payable 103,641 77,842 Accrued wages and benefits 28,749 23,006 Customer advances 17,465 12,924 Billings in excess of costs and estimated profits 2,076 3,581 Federal income taxes payable 1,423 — Short-term operating lease liabilities 18,582 18,203 Other current liabilities 33,332 42,206 Total current liabilities 237,692 181,062 Long-term debt, net of unamortized debt issuance costs 314,663 315,397 Long-term operating lease liabilities 40,166 39,922 Other long-term liabilities 3,893 3,603 Deferred income taxes liability 12,024 7,516 Total long-term liabilities 370,746 366,438 Total liabilities 608,438 547,500 Commitments and contingencies ( Note 11 ) Shareholders' equity: Series A and B preferred stock, $ 1.00 par value each; 1,000,000 shares authorized each 16 16 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 18,840,101 and 18,580,364 outstanding 197 195 Additional paid-in capital 212,087 206,772 Retained earnings 229,514 202,484 Accumulated other comprehensive loss ( 31,204 ) ( 29,282 ) Treasury stock, at cost 1,243,525 shares at June 30, 2022 ( 35,024 ) ( 33,511 ) Total DXP Enterprises, Inc. equity 375,586 346,674 Noncontrolling interest — 53 Total equity 375,586 346,727 Total liabilities and equity $ 984,024 $ 894,227 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 27,021 8,089 Reconciliation of net income to net cash provided by operating activities: Depreciation 5,006 5,132 Amortization of intangible assets 8,826 8,452 Gain on sale of property and equipment — ( 246 ) Provision for credit losses 314 ( 637 ) Payment of contingent consideration liability in excess of acquisition-date fair value — ( 145 ) Fair value adjustment on contingent consideration 1,689 — Amortization of debt issuance costs 916 854 Restricted stock compensation expense 863 840 Deferred income taxes 1,610 1,068 Net change in operating assets and liabilities ( 40,559 ) ( 7,201 ) Net cash provided by operating activities $ 5,686 $ 16,206 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 1,848 ) ( 1,526 ) Proceeds from the sale of property and equipment — 1,297 Acquisition of business, net of cash acquired ( 44,117 ) ( 44,435 ) Net cash used in investing activities $ ( 45,965 ) $ ( 44,664 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities 235,969 — Payments on revolving credit facilities ( 206,845 ) — Principal debt payments ( 1,650 ) ( 1,650 ) Payment for contingent consideration liability up to acquisition-date fair value — ( 955 ) Preferred Stock dividends paid ( 45 ) ( 45 ) Purchase of treasury stock ( 15,116 ) ( 8,769 ) Payment for employee taxes withheld from stock awards ( 290 ) ( 585 ) Net cash provided by (used in) financing activities $ 12,023 $ ( 12,004 ) Effect of foreign currency on cash ( 159 ) 303 Net change in cash and restricted cash ( 28,415 ) ( 40,159 ) Cash and restricted cash at beginning of period 49,080 119,419 Cash and restricted cash at end of period $ 20,665 $ 79,260 Supplemental schedule of non-cash investing and financing activities: Shares issued for acquisitions (Note 13) $ 4,744 $ 8,859 Share repurchase agreement $ — $ 20,405 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 DXP ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (in thousands) (unaudited) Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Treasury stock Non controlling interest Accum other comp loss Total equity Balance at March 31, 2021 $ 1 $ 15 $ 189 $ 191,931 $ 186,426 $ — $ 586 $ ( 28,538 ) $ 350,610 Preferred dividends paid — — — — ( 22 ) — — — ( 22 ) Restricted stock compensation expense — — — 460 — — — — 460 Tax related items for share based awards — — — ( 69 ) — — — — ( 69 ) Issuance of common stock — — 5 11,240 — — — — 11,245 Currency translation adjustment — — — — — — — 1,689 1,689 Purchase of treasury stock — — — — — ( 29,174 ) — — ( 29,174 ) Net income — — — — 8,119 — ( 189 ) — 7,930 Balance at June 30, 2021 $ 1 $ 15 $ 194 $ 203,562 $ 194,523 $ ( 29,174 ) $ 397 $ ( 26,849 ) $ 342,669 Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Treasury stock Non controlling interest Accum other comp loss Total equity Balance at December 31, 2020 $ 1 $ 15 $ 189 $ 192,068 $ 186,078 $ — $ 798 $ ( 30,029 ) $ 349,120 Preferred dividends paid — — — — ( 45 ) — — — ( 45 ) Restricted stock compensation expense — — — 839 — — — — 839 Tax related items for share based awards — — — ( 585 ) — — — — ( 585 ) Issuance of common stock — — 5 11,240 — — — — 11,245 Currency translation adjustment — — — — — — — 3,180 3,180 Purchase of treasury stock — — — — — ( 29,174 ) — — ( 29,174 ) Net income — — — — 8,490 — ( 401 ) — 8,089 Balance at June 30, 2021 $ 1 $ 15 $ 194 $ 203,562 $ 194,523 $ ( 29,174 ) $ 397 $ ( 26,849 ) $ 342,669 Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Treasury stock Non controlling interest Accum other comp loss Total equity Balance at March 31, 2022 $ 1 $ 15 $ 195 $ 207,510 $ 215,103 $ ( 35,024 ) $ ( 60 ) $ ( 27,613 ) $ 360,127 Preferred dividends paid — — — — ( 22 ) — — — ( 22 ) Restricted stock compensation expense — — — 493 — — — — 493 Tax related items for share based awards — — — ( 131 ) — — — — ( 131 ) Issuance of shares of common stock — — 2 4,215 — — — — 4,217 Currency translation adjustment — — — — — — — ( 3,591 ) ( 3,591 ) Purchase of treasury stock — — — — — — — — — Net income — — — — 14,433 — 60 — 14,493 Balance at June 30, 2022 $ 1 $ 15 $ 197 $ 212,087 $ 229,514 $ ( 35,024 ) $ — $ ( 31,204 ) $ 375,586 Series A preferred stock Series B preferred stock Common stock Paid-in capital Retained earnings Treasury stock Non controlling interest Accum other comp loss Total equity Balance at December 31, 2021 $ 1 $ 15 $ 195 $ 206,772 $ 202,484 $ ( 33,511 ) $ 53 $ ( 29,282 ) $ 346,727 Preferred dividends paid — — — — ( 44 ) — — — ( 44 ) Restricted stock compensation expense — — — 863 — — — — 863 Tax related items for share based awards — — — ( 290 ) — — — — ( 290 ) Issuance of shares of common stock — — 2 4,742 — — — — 4,744 Currency translation adjustment — — — — — — — ( 1,922 ) ( 1,922 ) Purchase of treasury stock — — — — — ( 1,513 ) — — ( 1,513 ) Net income — — — — 27,074 — ( 53 ) — 27,021 Balance at June 30, 2022 $ 1 $ 15 $ 197 $ 212,087 $ 229,514 $ ( 35,024 ) $ — $ ( 31,204 ) $ 375,586 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 6 DXP ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED 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 services to a variety of end markets and industrial customers. Additionally, DXP provides integrated, custom pump skid packages, pump remanufacturing and manufactures branded private label pumps to energy and industrial customers. The Company is organized into three business segments: Service Centers ("SC"), Supply Chain Services ("SCS") and Innovative Pumping Solutions ("IPS"). See Note 12 - Segment 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 unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its variable interest entity ("VIE"). The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021. For a more complete discussion of our significant accounting policies and business practices, refer to the consolidated Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 5, 2022. The results of operations for the six months ended June 30, 2022 are not necessarily indicative of results expected for the full fiscal year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary for the fair statement of the Company's financial position, results of operations and cash flows for the interim periods presented. All inter-company accounts and transactions have been eliminated upon consolidation. NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements On April 1, 2022 we adopted Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, along with its subsequently issued guidance, which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. The provisions of this update are applicable to us through December 31, 2022. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures. Accounting Pronouncements Not Yet Adopted 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. 7 NOTE 4 - REVISION During the first quarter of 2022, we identified errors in the translation of the goodwill associated with our investment in our Canadian subsidiaries. We determined that we were not appropriately translating Canadian goodwill in consolidation since acquiring these businesses in 2012 and 2013. The failure to translate these balances resulted in an overstatement of US dollar-based goodwill for several years. We assessed the materiality of the errors on prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality , codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the errors were not material to our prior period consolidated financial statements and therefore, amendments of previously filed consolidated financial statements are not required. In accordance with ASC 250, we have corrected the errors by revising the unaudited condensed consolidated financial statements presented herein. Prior periods not presented herein will be revised, as applicable, in future filings. The impacts of the revisions on the periods presented herein are provided in the following tables. Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 As previously As previously Reported Adjustments Revised Reported Adjustments Revised CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Currency translation adjustments $ 1,327 $ 362 $ 1,689 $ 2,604 $ 576 $ 3,180 Total comprehensive income $ 9,257 $ 362 $ 9,619 $ 10,693 $ 576 $ 11,269 As previously Reported Adjustments Revised BALANCE SHEET (AT DECEMBER 31, 2021): Goodwill $ 308,506 $ ( 11,965 ) $ 296,541 Total Assets $ 906,192 $ ( 11,965 ) $ 894,227 Accumulated other comprehensive loss $ ( 17,317 ) $ ( 11,965 ) $ ( 29,282 ) Total Equity $ 358,692 $ ( 11,965 ) $ 346,727 Total Liabilities & Equity $ 906,192 $ ( 11,965 ) $ 894,227 Accumulated Other Comprehensive Loss As previously Reported Adjustments Revised CONDENSED CONSOLIDATED STATEMENTS OF EQUITY Balance at March 31, 2021 $ ( 16,736 ) $ ( 11,802 ) $ ( 28,538 ) Currency translation adjustment 1,327 362 1,689 Balance at June 30, 2021 $ ( 15,409 ) $ ( 11,440 ) $ ( 26,849 ) Balance at December 31, 2020 $ ( 18,013 ) $ ( 12,016 ) $ ( 30,029 ) Currency translation adjustment 2,604 576 3,180 Balance at June 30, 2021 $ ( 15,409 ) $ ( 11,440 ) $ ( 26,849 ) 8 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: Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities. 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 are unobservable inputs for an 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 June 30, 2022, we recorded liabilities in other current and long-term liabilities for contingent consideration associated with the acquisitions of Process Machinery, Inc. ("PMI"), Burlingame Engineers, Inc. ("Burlingame"), Drydon Equipment, Inc. ("Drydon") and Cisco Air Systems, Inc. ("Cisco") of $ 2.4 million, $ 0.2 million, $ 2.7 million and $ 4.5 million, respectively. See further discussion at Note 13 - 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 six months ended June 30, 2022: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Contingent Liability for Accrued Consideration (in thousands) Beginning balance at December 31, 2021 $ 905 Acquisitions and settlements Acquisitions (Note 13) 7,173 Settlements — Total remeasurement adjustments: Changes in fair value recorded in other (income) expense, net 1,689 *Ending Balance at June 30, 2022 $ 9,767 The amount of total losses included in earnings or changes to net assets, attributable to changes in unrealized losses relating to liabilities still held at June 30, 2022. $ 1,689 * Included in other current and long-term liabilities 9 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 June 30, 2022 Valuation Technique Significant Unobservable Inputs Contingent consideration: (PMI,Burlingame,Drydon and Cisco acquisitions) $ 9,767 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, Burlingame, Drydon and Cisco 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 unaudited condensed consolidated balance sheets at June 30, 2022 and 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 9 ). Due to the short-term nature of these aforementioned securities, the Company believes that the estimated fair value of such instruments at June 30, 2022 and December 31, 2021 approximates their carrying value as reported on the unaudited condensed consolidated balance sheets. NOTE 6 – INVENTORIES The carrying values of inventories are as follows ( in thousands ): June 30, 2022 December 31, 2021 Finished goods $ 88,307 $ 80,329 Work in process 31,387 20,565 Inventories $ 119,694 $ 100,894 NOTE 7 – CONTRACT ASSETS AND LIABILITIES Under our customized pump production and long-term water and wastewater project 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 unaudited condensed 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 unaudited condensed consolidated balance sheets. Costs and estimated profits on uncompleted contracts and related amounts billed were as follows ( in thousands ): June 30, 2022 December 31, 2021 Costs incurred on uncompleted contracts $ 64,501 $ 41,329 Estimated profits, thereon 20,502 17,143 Total 85,003 58,472 Less: billings to date 61,422 44,859 Net $ 23,581 $ 13,613 10 Such amounts were included in the accompanying unaudited condensed consolidated balance sheets for June 30, 2022 and December 31, 2021 under the following captions ( in thousands ): June 30, 2022 December 31, 2021 Costs and estimated profits in excess of billings $ 25,655 $ 17,193 Billings in excess of costs and estimated profits ( 2,076 ) ( 3,581 ) Translation adjustment 2 1 Net $ 23,581 $ 13,613 During the six months ended June 30, 2022, $ 3.5 million of the balances that were previously classified as contract liabilities at the beginning of the period were recognized in revenues. Contract asset and liability changes were primarily due to normal activity and timing differences between our performance and customer payments. NOTE 8 – INCOME TAXES Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Our effective tax rate from continuing operations was a tax expense of 25.5 percent for the three months ended June 30, 2022 compared to a tax expense of 17.4 percent for the three months ended June 30, 2021. Compared to the U.S. statutory rate for the three months ended June 30, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the three months ended June 30, 2021, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions for research and development tax credits and was partially offset by research and development tax credits and other tax credits. Our effective tax rate from continuing operations was a tax expense of 23.5 percent for the six months ended June 30, 2022 compared to a tax expense of 26.7 percent for the six months ended June 30, 2021. Compared to the U.S. statutory rate for the six months ended June 30, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, and uncertain tax positions recorded for research and development tax credits and was partially offset by research and development tax credits and other tax credits. Compared to the U.S. statutory rate for the six months ended June 30, 2021, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses and uncertain tax positions for research and development tax credits and was partially offset by research and development tax credits and other tax credits. To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts would be classified as a component of income tax provision (benefit) in the financial statements consistent with the Company’s policy. NOTE 9 – LONG-TERM DEBT The components of the Company's long-term debt consisted of the following ( in thousands ): June 30, 2022 December 31, 2021 Carrying Value (1) Fair Value Carrying Value (1) Fair Value ABL Revolver $ 29,124 $ 29,124 $ — $ — Term Loan B 325,050 316,924 326,700 325,883 Total long-term debt 354,174 346,048 326,700 325,883 Less: current portion ( 32,424 ) ( 32,342 ) ( 3,300 ) ( 3,292 ) Long-term debt less current maturities $ 321,750 $ 313,706 $ 323,400 $ 322,591 (1) Carrying value amounts do not include unamortized debt issuance costs of $ 7.1 million and $ 8.0 million for June 30, 2022 and December 31, 2021, respectively . Credit Agreements On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") that provided for a $ 135.0 million asset-backed revolving line of credit (the "ABL Revolver"), a $ 50.0 million increase above the $ 85.0 million original revolver. The Increase Agreement amends and supplements that certain Loan and Security Agreement, dated as of August 29, 11 2017. As of June 30, 2022, the Company had $ 29.1 million outstanding under the ABL Revolver and $ 103.0 million of borrowing capacity, net of the impact of outstanding letters of credit. 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 fair value measurements used by the Company are considered Level 2 inputs, as defined in the fair value hierarchy. The fair value estimates were based on quoted prices for identical or similar securities. The Company was in compliance with all financial covenants under the ABL Revolver and Term Loan B Agreements as of June 30, 2022. NOTE 10 - 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 ): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Basic: Weighted average shares outstanding 18,766 19,291 18,651 19,239 Net income attributable to DXP Enterprises, Inc. $ 14,433 $ 8,119 $ 27,074 $ 8,490 Convertible preferred stock dividend 22 22 45 45 Net income attributable to common shareholders $ 14,411 $ 8,097 $ 27,029 $ 8,445 Per share amount $ 0.77 $ 0.42 $ 1.45 $ 0.44 Diluted: Weighted average shares outstanding 18,766 19,291 18,651 19,239 Assumed conversion of convertible preferred stock 840 840 840 840 Total dilutive shares 19,606 20,131 19,491 20,079 Net income attributable to common shareholders $ 14,411 $ 8,097 $ 27,029 $ 8,445 Convertible preferred stock dividend 22 23 45 45 Net income attributable to DXP Enterprises, Inc. $ 14,433 $ 8,120 $ 27,074 $ 8,490 Per share amount $ 0.74 $ 0.41 $ 1.39 $ 0.42 NOTE 11 - COMMITMENTS AND CONTINGENCIES 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 or estimate the financial impact of these disputes, 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 12 - SEGMENT 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 MRO products, equipment and integrated services, 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, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, re-manufactures pumps, manufactures branded private label pumps and provides products and process lines for the water and wastewater treatment industries. 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. 12 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 inter-segment eliminations. The following table sets out financial information related to the Company's segments excluding amortization ( in thousands ): Three Months Ended June 30, 2022 2021 SC IPS SCS Total SC a IPS SCS Total Product sales 1 $ 232,851 $ — $ 52,975 $ 285,826 $ 198,030 $ — $ 35,068 $ 233,098 Inventory services 2 — — 5,951 5,951 — — 4,263 4,263 Staffing services 3 18,247 — — 18,247 11,603 — — 11,603 Pump production and delivery 4 — 57,788 — 57,788 — 36,727 — 36,727 Total Revenue $ 251,098 $ 57,788 $ 58,926 $ 367,812 $ 209,633 $ 36,727 $ 39,331 $ 285,691 Income from operations 5 $ 32,368 $ 8,726 $ 4,958 $ 46,052 $ 26,300 $ 4,803 $ 3,488 $ 34,591 Six Months Ended June 30, 2022 2021 SC IPS SCS Total SC a IPS SCS Total Product sales 1 $ 438,220 $ — $ 95,365 $ 533,585 $ 371,685 $ — $ 66,845 $ 438,530 Inventory services 2 — — 11,118 11,118 — — 8,459 $ 8,459 Staffing services 3 31,674 — — 31,674 24,317 — — $ 24,317 Pump production 4 — 110,846 — 110,846 — 59,972 — $ 59,972 Total Revenue $ 469,894 $ 110,846 $ 106,483 $ 687,223 $ 396,002 $ 59,972 $ 75,304 $ 531,278 Income from operations 5 $ 59,719 $ 15,795 $ 8,978 $ 84,492 $ 48,437 $ 5,751 $ 5,810 $ 59,998 1 Product sales that are recognized at a point in time. 2 Inventory management services that are recognized over the contract life. 3 Staffing services that are invoiced on a day-rate basis. 4 Custom pump production and delivery is recognized over time. 5 Income from operations excludes amortization of intangibles and corporate expenses. a During Q2 2022, we identified an error related to service revenue which resulted in a reclassification between product sales and service revenue. We assessed the materiality of the error on prior period financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements. We concluded that the error was not material to our prior period consolidated financial statements and therefore, amendments of previously filed consolidated financial statements are not required. In accordance with ASC 250, we have corrected the error by revising the consolidated financial statements presented herein. Prior periods not presented herein will be revised, as applicable, in future filings. 13 The following table presents reconciliations of operating income for reportable segments to the consolidated income before taxes ( in thousands ): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating income for reportable segments $ 46,052 $ 34,591 $ 84,492 $ 59,998 Adjustment for: Amortization of intangible assets 4,591 4,306 8,826 8,452 Corporate expenses 15,541 15,439 28,186 30,467 Income from operations $ 25,920 $ 14,846 47,480 21,079 Interest expense 5,615 5,337 10,777 10,580 Other (income) expense, net 839 ( 105 ) 1,377 ( 535 ) Income before income taxes $ 19,466 $ 9,614 $ 35,326 $ 11,034 14 NOTE 13 - BUSINESS ACQUISITIONS On May 2, 2022, the Company completed the acquisition of Cisco. Cisco is a leading distributor of air compressors and related products and services focused on serving the food and beverage, transportation and general industrial markets in the Northern California and Nevada territories. Total consideration for the transaction was approximately $ 52.2 million, funded with a mixture of cash on hand of $ 32 million, DXP stock valued at approximately $ 4 million and a draw down of approximately $ 11 million on the ABL and future consideration of $ 4.5 million. For the six months ended June 30, 2022, Cisco contributed sales of $ 8.2 million and net income of $ 1.6 million. Goodwill for the transaction totaled approximately $ 34.5 million. On March 1, 2022, the Company completed the acquisition of Drydon Equipment, Inc., a distributor and manufacturers’ representative of pumps, valves, controls and process equipment focused on serving the water and wastewater industry in the Midwest. The acquisition of Drydon was funded with cash on hand as well as issuing DXP's common stock. The Company paid approximately $ 7.9 million in cash, stock and future consideration. A majority of Drydon's sales are project-based work under the percentage-of-completion accounting model. As a result, Drydon has been included in the IPS segment. For the six months ended June 30, 2022, Drydon contributed sales of $ 2.7 million and net income of $ 0.7 million. Goodwill for the transaction totaled approximately $ 4.9 million. On March 1, 2022, the Company completed the acquisition of certain assets of Burlingame Engineers, Inc., a provider of water and wastewater equipment in the industrial and municipal sectors. The Company paid approximately $ 1.1 million in cash, stock and future consideration. For the six months ended June 30, 2022, Burlingame contributed sales of $ 0.9 million and net income of $ 70 thousand. Goodwill for the transaction totaled approximately $ 0.6 million. The following represents the pro forma unaudited revenue and earnings as if Cisco, Drydon and Burlingame had been included in the consolidated results of the Company for the six months ended June 30, 2022 and 2021, respectively: Six Months Ended June 30, 2022 2021 (in thousands/unaudited) Revenue $ 703,040 $ 555,052 Net income $ 29,286 $ 11,302 In aggregate, the acquisition-date fair value of the consideration transferred for the three businesses totaled $ 61.2 million, which consisted of the following: Purchase Price Consideration (in millions) Total Consideration Cash payments $ 49.3 Fair value of stock issued 4.7 Future consideration 7.2 Total purchase price consideration $ 61.2 The fair value of the 230,699 common shares issued was determined based on the closing market price of the Company’s common shares on the acquisition date, adjusted for holding restrictions following consummation. 15 The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date: Acquisitions (In thousands) Cisco All Other Total Cash $ 4,352 $ 517 $ 4,869 Accounts receivable 5,173 2,698 7,871 Other receivables — 56 56 Inventory 3,032 37 3,069 Other current assets 472 — 472 Non-compete agreements 878 229 1,107 Customer relationships 10,730 964 11,694 Property and equipment 1,187 124 1,311 Operating lease ROU asset 2,168 — 2,168 Other assets — 2 2 Assets acquired $ 27,992 $ 4,627 $ 32,619 Short-term operating lease liability ( 463 ) — ( 463 ) Current liabilities assumed ( 5,208 ) ( 1,061 ) ( 6,269 ) Long-term operating lease liability ( 1,705 ) — ( 1,705 ) Deferred tax liability ( 2,897 ) — ( 2,897 ) Net assets acquired $ 17,719 $ 3,566 $ 21,285 Total Consideration 52,184 9,049 61,233 Goodwill $ 34,465 $ 5,483 $ 39,948 Of the $ 12.8 million of acquired intangible assets, $ 1.1 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years, coincident with the terms of the agreements. In addition, $ 11.7 million was assigned to customer relationships, and will be amortized over a period of 8 years. The goodwill total of approximately $ 39.9 million is attributable primarily to expected synergies and the assembled workforce of each entity and is generally not deductible for tax purposes. The fair value of accounts receivables acquired is $ 7.9 million, which approximated book value. The Company recognized less than $ 300,000 of acquisition related costs that were expensed in the current period. These costs are included in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income 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. 16 NOTE 14 - 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 six months ended June 30, 2022, the Company repurchased 58.9 thousand shares of common stock for $ 1.5 million at an average price of $ 25.66 per share. 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 quarterly installments beginning on June 15, 2021 which are presented within the purchase of treasury stock in the cash flow statement. There are no installment payments outstanding. Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2022 2022 Total number of shares purchased — 58.9 Amount paid $ — $ 1,511 Average price paid per share $ — $ 25.66 NOTE 15 - SUBSEQUENT EVENT On July 19, 2022 the Company entered into an Amended and Restated Loan and Security Agreement (the “ABL Credit Agreement”) that provided for a $ 135.0 million asset-backed revolving line of credit (the "ABL Revolver"). The ABL Credit Agreement amends and restates the Loan and Security Agreement dated as of August 29, 2017. Subject to the conditions set forth in the ABL Credit Agreement, the ABL Revolver may be increased by up to an aggregate of $ 50.0 million, in minimum increments of $ 10.0 million. The ABL Revolver matures on July 19, 2027. 17