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Item 7. Management’s Discussion and Analysis

2023-04-17 compared with 2022-04-05 · 133 added, 149 removed, 365 unchanged (44% of the section changed)

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General Overview

DXP Enterprises, Inc.

is a leading North American distributor of technical products and services.

The Company is a leading North American distributor of technical products and services.

Our comprehensive knowledge, specialized services and leading brands serve MRO, OEM and capital equipment end users in virtually all industrial markets through our multi-channel capabilities that provide choice, convenience, expertise, timely response and an overall ease of doing business.

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

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

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

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CURRENT MARKET CONDITIONS AND OUTLOOK

COVID-19 Pandemic Impact

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

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

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

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

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

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

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

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

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

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

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

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

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

Risk Factor s” included in this Annual Report.

Economic Indices

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

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

These include the Industrial Production (IP) and Manufacturing Capacity Utilization (MCU) indices published by the Federal Reserve Board and the Purchasing Managers Index (PMI) published by the Institute for Supply Management (ISM).

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* The information contained in this table has been obtained from third party publicly available sources.

DXP also monitors various oil & gas indicators including active drilling rigs, gross U.S.

The Company also monitors various oil & gas indicators including active drilling rigs, gross U.S.

domestic production and the West Texas Intermediate ("WTI") price of oil.

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Active Drilling Rigs**

U.S 475 436 944

Canada 176 131 90

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** Averages for the years indicated.

During 2022, the growth rate of the general economy improved, as the macro economy and business cycle began to normalize relative to the pandemic related years of 2020 and 2021.

Sales for the year ended December 31, 2022 increased $366.9 million, or 32.9%, to approximately $1.5 billion from $1.1 billion for the prior corresponding period.

Customer demand was generally healthy throughout fiscal 2022, resulting in industry expected volume growth, complemented by meaningful pricing actions taken by the Company's vendors which ultimately, get passed on to customers.

As such, the majority of the 2022 sales increase is the result of increases in price with volume as well as the contribution from acquisitions and the related sales of rotating equipment and air compressors.

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

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

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

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

Sales for the year ended December 31, 2020 decreased $259.6 million, or 20.5%, to approximately $1.0 billion from $1.3 billion for the prior corresponding period.

The majority of the 2020 sales decrease is the result of a decrease in the capital spending by oil and gas producers and related businesses stemming from a decrease in U.S.

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

The majority of the 2021 sales increase was primarily due to acquisitions and the related sales of rotating equipment air compressors.

Our sales growth strategy in recent years has focused on internal growth and acquisitions.

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Sales for the year ended December 31, 2022 increased $366.9 million, or 32.9%, to approximately $1.5 billion from $1.1 billion for the year ended December 31, 2021.

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

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

This sales increase is the result of an increase in sales in our SC, IPS and SCS segments of $192.9 million, $91.5 million and $82.5 million, respectively.

Sales from businesses recently acquired accounted for $41.5 million of the sales for the twelve months ended December 31, 2022.

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

Excluding the 2022 sales of from businesses acquired, sales for the year increased by $325.4 million, or 29.2% from the prior year's corresponding period.

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

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Supply Chain Services 240,374 157,834 82,540 52.3 %

Total DXP Sales $ 1,113,921 $ 1,005,266 $ 108,655 10.8 %

Total Sales $ 1,480,832 $ 1,113,921 $ 366,911 32.9 %

Service Centers Segment.

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Excluding $35.0 million of 2022 Service Centers segment sales from businesses acquired, Service Centers segment sales increased $157.9 million, or 19.3% from the prior year's corresponding period.

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

This sales increase is primarily the result of increased sales of rotating equipment and bearings product lines to customers engaged in operating and maintenance services in the general industrial, diversified chemical, and oil and gas markets in connection with increased capital spending by oil and gas producers.

Innovative Pumping Solutions Segment.

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

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

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

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

Sales for the IPS segment increased by $91.5 million, or 65.6% for the year ended December 31, 2022, compared to the year ended December 31, 2021.

Excluding $6.6 million of 2022 IPS segment sales from businesses acquired, IPS segment sales increased $85.0 million, or 60.9% from the prior year's corresponding period.

This increase was primarily the result of an increase in the capital spending by oil and gas producers and related businesses.

Supply Chain Services Segment.

Sales for the SCS segment increased by $82.5 million, or 52.3%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

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

The improvement in sales is primarily related to the addition of a new customer in the diversified chemicals market, as well as sales increases in the medical technology, food and beverage and oil and gas markets.

GROSS PROFIT.

Gross profit as a percentage of sales for the year ended December 31, 2021 increased by approximately 192 basis points from the prior year's corresponding period.

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

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

Gross profit as a percentage of sales for the year ended December 31, 2022 decreased by approximately 99 basis points from the prior year's corresponding period.

Excluding the impact of the businesses acquired, gross profit as a percentage of sales decreased by approximately 137 basis points.

The decrease in the gross profit percentage excluding the businesses acquired is primarily the result of an approximate 133 basis point decrease in the gross profit percentage in our IPS segment, a 54 basis point decrease in the gross profit percentage in our SC segment and a 366 basis point decrease in the gross profit percentage in our SCS segment.

Service Centers Segment.

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

The gross profit percentage for the Service Centers decreased approximately 21 basis points and approximately 54 basis points, excluding the impact for the businesses acquired, from the prior year's corresponding period.

This was primarily as a result of product mix.

Gross profit for the SC segment, excluding businesses acquired, increased $42.9 million, or 17.2 percent, during the twelve months ended December 31, 2022 compared to the prior year’s corresponding period.

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

Innovative Pumping Solutions Segment.

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

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

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

The 2022 gross profit percentage for the IPS segment decreased approximately 66 basis points from the prior year's corresponding period.

Adjusting for the businesses acquired, gross profit as a percentage of sales decreased approximately 133 basis points from the prior year's corresponding period.

The decrease in gross profit percentage as a percentage of sales is primarily due to a mix shift (lower margin oil and gas work versus domestic water and wastewater projects).

Gross profit for the IPS segment, excluding businesses acquired, increased $22.5 million, primarily as a result of an increase in the capital spending by oil and gas producers and related businesses.

Supply Chain Services Segment.

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

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

Gross profit dollars for the twelve months ended December 31, 2022 increased $10.9 million or, 28.9 percent, compared to the prior year's corresponding period due to the addition of a new customer during the current year.

As a percentage of sales, or gross margins, for the twelve months ended December 31, 2022 decreased approximately 366 basis points, compared to the prior year's corresponding period, due to the addition of the same customer and the profitability of this contract.

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

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

SG&A for the year ended December 31, 2022 increased by approximately $35.6 million, or 12.3%, to $324.3 million from $288.6 million for the prior year's corresponding period.

SG&A expense from businesses acquired accounted for $8.9 million.

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

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

Excluding expenses from businesses acquired, SG&A for the twelve months ended December 31, 2022 increased by $26.8 million, or 9.3% from the prior year's corresponding period.

The increase in SG&A excluding businesses acquired is primarily the result of increased payroll, incentive compensation and related taxes and 401(k) expenses as a result of increased business activity associated with recovery from the negative economic impacts of the COVID-19 pandemic.

OPERATING INCOME.

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

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

Operating income for the year ended December 31, 2022 increased by $57.9 million to $97.8 million from $39.9 million in the prior year's corresponding period.

This increase in operating income is primarily related to the aforementioned increased business activity across all segments.

INTEREST EXPENSE.

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

Interest expense for the year ended December 31, 2022 increased $8.0 million compared to the prior year's corresponding period, primarily due to the Company borrowing an additional $105.0 million on its Term Loan B during the fourth quarter of 2022 as well as incurring higher than average interest rates during the year due to changes in the macro-economic environment and the associated increasing interest rate policy by the U.S.

Federal Reserve Bank.

Both of the Company's facilities are subject to a variable interest rate for the twelve months ended December 31, 2022.

INCOME TAXES.

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

Our effective tax rate from continuing operations was 27.0 percent for the twelve months ended December 31, 2022, compared to 17.9 percent for the twelve months ended December 31, 2021.

Compared to the U.S.

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

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

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

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

statutory rate for the twelve months ended December 31, 2022, the effective tax rate was increased by state taxes, foreign taxes, nondeductible expenses, return to provision adjustments, 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 year ended December 31, 2020, the effective tax rate was increased by state taxes, foreign taxes, research and development tax credits and other tax credits.

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

statutory rate for the twelve months ended December 31, 2021, the effective tax rate was decreased by research and development tax credits and other tax credits and foreign tax credits, and was partially offset by state taxes, nondeductible expenses, and uncertain tax positions for research and development tax credits.

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

For the full year 2021 to 2020 comparative discussion, see Item 7:

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

Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 incorporated by reference in this Annual Report on Form 10-K.

Non-GAAP Financial Measures and Reconciliations

In an effort to provide investors with additional information regarding our results of operations as determined by GAAP, we disclose non-GAAP financial measures.

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

In an effort to provide investors with additional information regarding our results of operations as determined by accounting principles generally accepted in the United States of America ("U.S.

GAAP"), we disclose non-GAAP financial measures.

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S.

Our primary non-GAAP financial measures are organic sales (Organic Sales), sales per business day ("Sales per Business Day"), free cash flow ("Free Cash Flow"), earnings before interest, taxes, depreciation and amortization ("EBITDA") and adjusted EBITDA ("Adjusted EBITDA").

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These measures are not substitutes for their comparable U.S.

GAAP financial measures, such as net sales, net income/(loss), diluted earnings per common share (“EPS”), or other measures prescribed by U.S.

GAAP, and there are limitations to using non-GAAP financial measures.

GAAP financial measures.

Management uses these non-GAAP financial measures to assist in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect our underlying operations.

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

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

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

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

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

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

From time to time, due to accounting guidance and rules, the Company incurs non-cash, unique or one-time items.

From time to time, the Company incurs non-cash, unique or one-time items.

As such, the Company will add these items back to determine an Adjusted EBITDA.

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We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results.

A reconciliation of the non-GAAP financial measures, to its most comparable GAAP financial measure is included below.

A reconciliation of the non-GAAP financial measures, to its most comparable U.S.

GAAP financial measure is included below.

The following table sets forth the reconciliation of net sales to organic net sales (in millions) :

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Total Sales 32.9 % $ (105) — 48.7 %

The sales per business day were as follows (in thousands) :

The Sales per Business Day are as follows (in thousands) :

Years Ended December 31,

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For further discussion regarding free cash flow as a management metric see the "Liquidity and Capital Resources - Free Cash Flow" below.

The following table sets forth the reconciliation of EBITDA and Adjusted EBITDA to the most comparable GAAP financial measure (in thousands) :

The following table sets forth the reconciliation of EBITDA and Adjusted EBITDA to the most comparable U.

GAAP financial measure (in thousands) :

Year Ended December 31,

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NCI loss before tax (1)

Loss associated with sale of interest in VIE (2)

Impairment and other charges — — 59,883

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(1) NCI represents non-controlling interest

(2) The loss associated with the sale of our interest in our VIE is included in other income and expense on our consolidated statement of operations for the year ended December 31, 2022.

Liquidity and Capital Resources

General Overview

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

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

As of December 31, 2022, we had cash and restricted cash of $46.1 million and credit facility availability of $132.4 million.

We have a $135.0 million asset backed revolving line of credit (the "ABL Revolver"), partially offset by letters of credit of $2.6 million, that were due to mature in August 2022.

The Company also has a Term Loan B with $428.1 million in borrowings as of December 31, 2022.

On July 19, 2022, the Company amended and extended the ABL Revolver.

The ABL Revolver matures on July 19, 2027, under which we had no borrowings outstanding as of December 31, 2022 .

Our primary source of capital is cash flow from operations, supplemented as necessary by Company shares, bank borrowings or other sources of debt.

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The Company generated $5.9 million of cash in operating activities during the year ended December 31, 2022 compared to generating $37.1 million of cash during the prior year's corresponding period.

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

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

The $31.2 million decrease in the amount of cash generated between the two periods was primarily driven by the increase in accounts receivable, inventory, deferred income taxes and project work activity as a result of increased business activity.

Cash is generally used to fund project costs ahead of actual billings and collection.

Investing Activities

For the year ended December 31, 2022, net cash used in investing activities was $53.4 million compared to $69.0 million in the corresponding period in 2021.

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

This decrease of $15.6 million was primarily driven by a reduction in the total purchase price paid for acquisitions during 2022 of $48.5 million compared to $64.7 million for acquisitions in 2021.

Financing Activities

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

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

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

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

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

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

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

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

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 price of up to $37.5 million from time to time through the Distribution Agent.

Sales of the Company’s common stock pursuant to the Equity Distribution Agreement are 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 thousand shares of common stock under the Equity Distribution Agreement, with net proceeds totaling approximately $1.1 million less Agent’s commission.

On March 17, 2020, the Company entered into an Increase Agreement (the "Increase Agreement") which provides for a $135 million asset-backed revolving line of credit (the "ABL Revolver"), a $50 million increase from the $85.0 million available under the original revolver.

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

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

For the year ended December 31, 2022, net cash generated in financing activities was $44.3 million, compared to net cash used in financing activities of $38.5 million for the corresponding period in 2021.

For the year ended December 31, 2022, the Company repurchased approximately $47.9 million worth of outstanding shares compared to $33.5 million worth of outstanding shares for the year ended December 31, 2021.

The net inflow of cash from financing activities in 2022 benefited from borrowing an additional $105.0 million on our Term Loan B.

Debt issuance costs associated with the amendment of our Term Loan B and ABL Revolver was $8.4 million for the year ended December 31, 2021.

During the twelve months ended December 31, 2022 we repurchased 1.3 million shares of the Company's common stock for approximately $35.2 million compared to 1.2 million shares of the Company's stock for approximately $33.5 million for the twelve months ended December 31, 2021.

On December 15, 2022, the Company announced a new share repurchase program pursuant to which we may repurchase up to $85.0 million worth, or 2.8 million shares of the Company's outstanding common stock in the open market or through privately negotiated transactions over the next 24 months.

On November 22, 2022, the Company entered into an amendment on its existing $330 million Senior Secured Term Loan (the "Term Loan Amendment"), borrowing an additional $105.0 million on the $330 million Senior Secured Term Loan (the “Term Loan Agreement”) which matures on December 23, 2027.

$105.0 million that was added to the $330 million Senior Secured Term Loan (the “Term Loan Agreement”) which matures on December 23, 2027.

There was $428.1 million outstanding as of December 31, 2022.

On June 15, 2021, the Company entered into a negotiated share repurchase agreement to repurchase certain shares of its common stock from certain of its shareholders agreeing to pay sellers over four equal quarterly installments, which are presented within the purchase of treasury stock in the cash flow statement.

During the twelve months ended December 31, 2022, there were two installment payments totaling $13.6 million.

There are no further installment payments outstanding as of December 31, 2022.

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 worth or 1.5 million shares of its outstanding common stock may be acquired in the open

market or through privately negotiated transactions over the next 24 months at the discretion of management.

The Company completed the $85.0 million program in December 2022.

We believe the Company has adequate funding to support its working capital needs within the business.

At December 31, 2022, our total long-term debt, including the current portion, less principal repayments, was $428.1 million, or 54.0% of total capitalization (total long-term debt including current portion plus shareholders’ equity) of $793.5 million.

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Free Cash Flow

Our Free Cash Flow, which is calculated as cash provided by operations less net purchase of property and equipment, was $1.0 million, $32.8 million and $103.1 million for years 2022, 2021 and 2020, respectively.

Free Cash Flow is not a measure of liquidity under generally accepted accounting principles in the United States, and may not be defined and calculated by other companies in the same manner.

Free Cash Flow is not a measure of liquidity under U.S.

GAAP, and may not be defined and calculated by other companies in the same manner.

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

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

Free Cash Flow reconciles to the most directly comparable U.S.

GAAP financial measure of cash flows from operations.

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

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Free Cash Flow $ 978 $ 32,759 $ 103,101

ABL Facility and Senior Secured Term Loan B

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.

ABL Revolver and Senior Secured Term Loan B

ABL Revolver:

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.

The ABL Revolver matures on July 19, 2027.

Total borrowing capacity under the ABL Revolver was $132.4 million, net of the impact of outstanding letters of credit $2.6 million.

As of December 31, 2022, there were no amounts outstanding under the ABL Revolver.

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 ABL Revolver will mature on July 19, 2027.

Interest shall accrue on outstanding borrowings at a rate equal to SOFR 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 ABL Revolver for the most recently completed calendar quarter.

Fees ranging from 0.25% to 0.375% per annum will be payable on the portion of the ABL Revolver not in use at any given time.

The unused line fee was 0.375% at December 31, 2022.

The interest rate for the ABL facility was 1.9% at December 31, 2021.

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 $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).

The interest rate for the ABL Revolver was 7.8% at December 31, 2022.

Senior Secured Term Loan B:

On November 22, 2022, the Company entered into an amendment on its existing $330 million Senior Secured Term Loan (the "Term Loan Amendment"), borrowing an additional $105.0 million that was added to the existing $330 million Senior Secured Term Loan (the “Term Loan Agreement”).

There was $428.1 million outstanding under the Term Loan Agreement, as amended as of December 31, 2022.

The Term Loan Amendment amends and supplements the Term Loan Agreement, dated as of December 23, 2020 and provides for, among other things, $105 million in new incremental commitments.

The Term Loan Agreement and Term Loan Amendment 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 Agreement allows for incremental increases in facility size up to an aggregate of $85.0 million, plus an additional amount such that the Company's Secured Leverage Ratio (as defined in the Term Loan Agreement) would not exceed 3.75 to 1.00.

Interest accrues on the Term Loan at a rate equal to SOFR plus a margin of 5.25% for the SOFR Loans (as defined in the Term Loan Amendment).

We are required to repay the Term Loan with certain asset sales and insurance proceeds, certain debt proceeds and 50% of excess cash flow, reducing to 25%, if our total leverage ratio is no more than 3.00 to 1.00 and 0%, if our total leverage ratio is no more than 2.50 to 1.00.

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Financial Covenants:

DXP’s principal financial covenants under the ABL Credit Agreement and Term Loan B Agreement include:

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.

The Company'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 the Company 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 the Company 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 Revolver falls below a threshold set forth in the ABL Credit Agreement.

As of December 31, 2022, the Company was in compliance with this covenant with a consolidated Fixed Charge Coverage Ratio of 3.59 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 $30 million) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2022, is either equal to or less than as indicated in the table below:

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March 31, 2023 5.00:1.00

June 30, 2022 5.25:1.00

September 30, 2022 5.25:1.00

December 31, 2022 5.00:1.00

March 31, 2023 5.00:1.00

June 30, 2023 and each Fiscal Quarter thereafter 4.75:1.00

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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.

(i) income tax expense, (ii) franchise tax expense, (iii) 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, 2022, the Company’s consolidated Secured Leverage Ratio was 2.83 to 1.00.

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Long-term debt 423,764 323,400 100,364

Total long-term debt 326,700 330,000 (3,300)

Total debt $ 428,133 $ 326,700 $ 101,433

We believe our cash generated from operations will meet our normal working capital needs during the next twelve months.

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Indemnification

In the ordinary course of business, DXP enters into contractual arrangements under which DXP may agree to indemnify customers from any losses incurred relating to the services we perform.

In the ordinary course of business, the Company enters into contractual arrangements under which the Company may agree to indemnify customers from any losses incurred relating to the services we perform.

Such indemnification obligations may not be subject to maximum loss clauses.

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DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

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

The Consolidated Financial Statements of the Company are prepared in accordance with US GAAP, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities.

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

Management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the Board of Directors of DXP.

Management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the Company's Board of Directors.

Management believes that the accounting estimates employed and the resulting amounts are reasonable;

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

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

The Company has customers that operate in the energy industry.

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

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

Impairment of Goodwill, Other Indefinite Intangible Assets and Long-Lived 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 .

Impairment of Goodwill, Other Intangible Assets, and Long-Lived Assets

The Company tests goodwill and other 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.

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

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

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

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

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

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

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

In light of these improvements, we performed an assessment of our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value and therefore no impairment of goodwill was recorded for 2022 and 2021.

Innovative Pumping Solutions

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Even with more favorable assumptions, the results of these sensitivity analyses led the Company to record a non-cash impairment charge of $16.0 million for goodwill during the twelve months ended December 31, 2020.

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

As described above, no impairment of goodwill was recorded for 2022 and 2021.

In 2020, as a result of the reductions in capital spending for oil and gas producers and processors and the economic repercussions from the COVID-19 pandemic, we determined those events constituted a triggering event that required us to review the recoverability of our long-lived assets and perform an interim goodwill impairment assessment as of July 31, 2020.

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

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

As a result, no impairment of goodwill was recorded for 2022 and 2021.

Other Impairments and methodology

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Revenue Recognition

In our Innovative Pumping Solutions segment, we make a substantial portion of our sales to customers pursuant to long-term contracts to fabricate tangible assets to customer specifications that can range from three to eighteen months or more.

We account for these long-term contracts under the percentage-of-completion method of accounting, which is an input method as defined by ASC 606, Revenue Recognition .

In our Innovative Pumping Solutions segment, a substantial portion of our sales to customers are pursuant to contracts to assemble, fabricate and or deliver tangible assets to customer specifications that can range from three to eighteen months or more.

We account for these contracts under the percentage-of-completion method of accounting, which is an input method as defined by ASC 606, Revenue Recognition.

Under this method, we recognize sales and profit based upon the cost-to-cost method, in which sales and profit are recorded based upon the ratio of costs incurred to estimated total costs to complete the asset.

The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion and, in some cases, includes estimates of recoveries asserted against the customer for changes in specifications (change orders).

Due to the size, length of time and nature of many of our contracts, the estimation of total contract costs and revenues through completion is complicated and subject to many variables relative to the outcome of future events over a period of several months.

We are required to make numerous assumptions and estimates relating to items such as expected engineering requirements, complexity of design and related development costs, product performance, availability and cost of materials, labor productivity and cost, overhead, manufacturing efficiencies and the achievement of contract milestones, including product deliveries, technical requirements, or schedule.

The percentage-of-completion method of accounting requires the Company to estimate the project costs at completion.

We are required to make assumptions relating to items such as cost of materials, labor productivity and cost, and overhead.

Management performs detailed quarterly reviews of all of our open contracts.

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If at any time management determines that in the case of a particular contract total costs will exceed total contract revenue, we record a provision for the entire anticipated contract loss at that time.

Due to the significance of judgment in the estimation process described above, it is likely that materially different profit margins and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

The percentage-of-completion method requires that we estimate future revenues and costs over the life of a contract.

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

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

managers, engineers, and finance professionals.

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

The complexity of certain designs as well as technical risks and uncertainty as to the future availability of materials and labor resources could affect the company's ability to accurately estimate future contract costs.

Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones or product specifications.

Management continues to monitor and update program cost estimates quarterly for all open contracts.

A significant change in an estimate on several of these contracts could have a material effect on our financial position and results of operations.

The percentage-of-completion method requires that we estimate project costs at completion.

Revenues are estimated based upon the original contract price and change orders.

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

Estimated costs are based primarily on purchase contract terms and assumptions relating to terms such as estimated cost of materials, labor productivity and cost, and overhead.

The uncertainty as to the future availability of materials and labor resources could affect the Company's ability to accurately estimate future contract costs.

Management continues to monitor and update project cost estimates quarterly for all open contracts.

A significant change in an estimate on several projects could have a material effect on our financial position and results of operations.

Purchase Accounting

DXP estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values, intangibles and liabilities when allocating the purchase price of an acquisition.

The Company estimates the fair value of assets, including property, machinery and equipment and their related useful lives and salvage values, intangibles and liabilities when allocating the purchase price of an acquisition.

The fair value estimates are developed using the best information available.

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

We do not expect that there will be material change in the future estimates or assumptions we use to complete the purchase price allocation and estimate the fair values of acquired assets and liabilities for the acquisitions completed in fiscal years 2021 and 2020.

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

Some of our acquisitions may include as additional compensation, contingent consideration.

Some of our acquisitions may include additional compensation such as contingent consideration.

Contingent consideration is a financial liability recorded at fair value upon acquisition.

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These estimates are subject to change in the future, particularly if earnings of a particular subsidiary are significantly higher or lower than expected, or if management takes operational or tax planning actions that could impact the future taxable earnings of a subsidiary.

Accounting for Uncertainty in Income Taxes

In the normal course of business, we are audited by federal, state and foreign tax authorities, and are periodically challenged regarding the amount of taxes due.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis