What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2023-04-17 compared with 2022-04-05 · 66 added, 41 removed, 113 unchanged (49% of the section changed)

1 unchanged sentence

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), which have been designed to provide reasonable assurance that such controls and procedures will meet their objectives, as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were not effective as of December 31, 2021 as a result of the material weaknesses in our internal control over financial reporting discussed below.

Based on an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), which have been designed to provide reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The Company’s Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were not effective as of December 31, 2022, as a result of the material weaknesses in our internal control over financial reporting detailed below.

Notwithstanding our material weaknesses, we have concluded that the financial statements and other financial information included in this Form 10-K fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

DXP Enterprises, Inc.’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f).

DXP Enterprises, Inc.’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting has inherent limitations.

Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.

3 unchanged sentences

Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

We have excluded Sullivan Environmental Technologies, Inc ("Sullivan"), Cisco Air Systems, Inc.

("Cisco"), Drydon Equipment, Inc.

("Drydon"), and Burlingame Engineers, Inc.

("Burlingame") from our assessment of internal control over financial reporting as of December 31, 2022 because they were acquired by the Company in purchase business combinations during 2022.

The total assets and total sales of these wholly-owned subsidiaries collectively represent approximately 3 percent, respectively for each, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal Control - Integrated Framework (2013).

Because the previously disclosed material weakness around inadequate internal controls that ensure timely clearing of aged accounts payables arising from three-way match exceptions for items ordered through purchase orders had not been fully remediated, we concluded that our internal control over financial reporting was not effective as of December 31, 2021.

In addition to the previously identified material weakness, we determined that a material weakness in our internal control over financial reporting existed as of December 31, 2021 in that we did not maintain effective internal controls related to accounting for complex revenue contracts.

Specifically, we did not properly assess the progress toward completion around long-lived project and manufacturing contracts.

The management review controls designed to assess the proper application of generally accepted accounting principles failed to detect errors in the application of the percentage-of-completion method.

During the year ended December 31, 2021 the Company acquired three insignificant businesses with a combined purchase price of approximately $65 million.

Since the Company has not yet fully incorporated the internal controls and procedures of these entities into the Company’s internal control over financial reporting, management excluded them from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021.

In aggregate, the targets constituted approximately 7% of the Company’s total assets as of December 31, 2021 and accounted for approximately 13% of the Company’s total revenues for the year then ended.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, has been audited by McConnell Jones LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

REMEDIATION OF MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As of December 31, 2021, the Company has remediated the previously reported material weaknesses in its internal control over financial reporting related to business combination accounting and journal entry approvals.

The remediation for business combinations was accomplished by updating policies that require coordination across functions to evaluate all agreements, valuations and the transfer of consideration.

The Company’s controls around journal entry approvals were modified to require senior management approval for all significant, manual journal entries.

The Company has completed the documentation, implementation and testing of the effectiveness of the design and operation of the remediation actions described above and, as of December 31, 2021, has concluded that the steps taken have remediated the material weaknesses.

With respect to the previously identified material weakness associated with aged accounts payable balances, the Company continues to enhance controls and monitoring of discrepancies identified during the three-way-match process for purchase orders and invoices.

We continue to develop automation solutions to prevent aged unreconciled items from accumulating in accounts payable.

Our automated accounts payable system continues to improve and limit the number of discrepancies that occur daily.

We will continue to enhance the controls and processes around these items throughout the coming year.

In response to the identified material weaknesses around revenue recognition, our management, with the oversight of the Audit Committee of the Board of Directors, has begun to update and standardize our revenue recognition processes and controls with respect to percentage-of-completion, and intends to continue to update our revenue recognition processes and controls and to implement additional control procedures, including retaining a third-party business and accounting advisory firm to assist us in improving our internal processes in connection with revenue recognition.

The remediation efforts are intended both to address the identified material weaknesses and to enhance our overall financial control environment.

The material weaknesses will not be considered remediated until our management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective.

We will monitor the effectiveness of our remediation plan and will refine said remediation plan as appropriated.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Aside from the changes described above under our remediation efforts, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Based on this evaluation, management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2022 as a result of the material weaknesses detailed below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

• The Company did not design and maintain an effective control environment commensurate with its financial reporting requirements.

Specifically, the Company lacked a sufficient complement of resources with (i) an appropriate level of accounting knowledge, experience and training to appropriately analyze, record and disclose accounting matters timely and accurately, and (ii) an appropriate level of knowledge and experience to establish effective processes and controls.

This material weakness contributed to the following additional material weaknesses:

• The Company did not design and maintain effective controls over the timely clearing of discrepancies arising from the three-way-match process of matching purchase orders, invoices, and item receipts.

Specifically, controls were not designed appropriately to ensure that aged items were properly cleared from the sub-ledger and ultimately accounts payable.

This material weakness resulted in a restatement of previously reported results related to periods including and prior to December 31, 2020, as previously reported in our Form 10-K for the year ended December 31, 2021.

Additionally, this material weakness could result in a misstatement of accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

• The Company did not design and maintain effective controls over the completeness, occurrence, cut-off, accuracy and presentation and disclosure of revenue.

Specifically, for revenue recognized under the percentage-of-completion input method, controls were not designed and maintained to ensure accuracy of the costs-to-date, estimates of the cost-to-complete and the determination of revenue recognized for certain project-based contracts.

Additionally, within the Company's product sales and service revenue streams, controls were not designed and maintained to ensure the accuracy of the price and quantity, including the approval of credit memos, the existence of a customer contract, and appropriate cut-off during the revenue recognition process.

This material weakness resulted in immaterial audit adjustments related to revenue and related contract assets and liabilities during the years ended December 31, 2021 and 2022, and out-of-period adjustments related to revenue during the year ended December 31, 2022.

• The Company did not design and maintain effective controls to ensure appropriate segregation of duties and adequately review user access to transactions within business processes relevant to significant accounts and disclosures within the general ledger system across the Company.

Specifically, the Company did not design and maintain effective controls over user roles and segregation of duties for functional access to transactions.

As a result, there was a lack of segregation of duties within the Company's financial reporting function, specifically within the accounts payable, revenue, and journal entry processes.

This material weakness did not result in adjustments to the consolidated financial statements.

However, this material weakness could result in a material misstatement to the accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited our Consolidated Financial Statements as of December 31, 2022 and for the year then ended and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 as stated in their reported which appears in Item 8 of this Form 10-K.

REMEDIATION PLAN

Management is committed to the remediation of the material weaknesses described above, as well as the continued improvement of our internal control over financial reporting.

Our planned remediation efforts related to the above identified material weaknesses include, but are not limited to:

• engaging external resources to assist with remediation efforts and internal control execution, as well as to provide additional training to existing personnel;

• hiring additional and retaining key internal resources with the appropriate knowledge and technical expertise to effectively operate financial close and reporting processes and controls over complex technical accounting matters;

• reviewing existing systems and capabilities to determine their adequacy for operations, accounting and IT;

• implementing improved accounting, operations and IT policies, procedures and control activities for key processes and systems which impact our financial reporting;

• performing additional training to ensure a clear understanding of risk assessment, controls and monitoring activities related to processes and systems related to financial reporting.

We began implementing certain of these measures in the second quarter of 2022 and continued to develop remediation plans and implemented additional measures throughout 2022.

These measures included:

• hiring a new Director of Accounts Payable and designing and implementing new processes to ensure that the Company does not have any untimely balances in accounts payable;

• designing and implementing processes and controls to ensure that the costs-to-date and estimates of the cost-to-complete for certain project-based contracts were improved and supported by automated processes and reporting.

While the Company has begun to implement the remediation steps detailed above, the Company has further steps to consider before remediation is complete.

Material weaknesses cannot be considered fully remediated until the improved controls have been in place and operate for a sufficient period of time.

We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters we identify.

See the section titled “Risk Factors"—we identified material weaknesses in our internal control over financial reporting.

If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and stock price.

Changes in Internal Control Over Financial Reporting

Little /s/ Kent Yee

Little Kent Yee

President and Chief Executive Officer

(Principal Executive Officer) Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the three months ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other Information

60 unchanged sentences

000-21513:171191516) filed with the Commission on November 9, 2017.

10.9 Amended and Restated Loan and Security Agreement, dated as of July 19, 2022, by and among the Company and the other persons party thereto, as borrowers, the other persons party thereto from time to time, as guarantors, Bank of America, N.A., as agent, certain financial institutions, as lenders, Bank of America, N.A., as sole lead arranger and sole bookrunner, and Bank of Montreal, Chicago Branch, as documentation agent.

(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.

221103189) filed with the Commission on July 25, 2022).

10.10 Increase Agreement, dated as of March 17, 2020, by and among the Company, certain of the Company’s US subsidiaries, as borrowers, certain of the Company’s Canadian subsidiaries, as borrowers, the incremental lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.

5 unchanged sentences

201423473) filed with the Commission on December 30, 2020).

10.13 Amendment No.

1 and Joinder Agreement to Term Loan and Security Agreement, dated as of November 22, 2022, among the Company, certain subsidiaries of the Company, as guarantors, the incremental lenders party thereto and Goldman Sachs Bank USA, as agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No.

221432621) filed with the Commission on November 29, 2022).

10.14 First Amendment to Amended and Restated Loan and Security Agreement, dated as of November 22, 2022, among the Company, certain of the Company’s US subsidiaries, a borrowers, certain of the Company’s Canadian Subsidiaries, as borrowers, the lenders party thereto and Bank of America, N.A., as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No.

221432621) filed with the Commission on November 29, 2022).

*21.1 Subsidiaries of the Company.

*22.1 Subsidiary Guarantors of Guaranteed Securities.

*23.1 Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.

*23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

*23.2 Consent of McConnell & Jones LLP, Independent Registered Public Accounting Firm.

*31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.

*23.3 Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.

*31.1 Certification of Principal Executive Officer Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.

to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.

*31.2 Certification of Principal Financial Officer Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act, as amended.

24 unchanged sentences

(Principal Executive Officer)

/s/Kent Yee Senior Vice President/Finance and April 5, 2022

Kent Yee Chief Financial Officer and Secretary

(Principal Financial Officer)

/s/Gene Padgett Senior Vice President/Finance, April 5, 2022

Gene Padgett Chief Accounting Officer

(Principal Accounting Officer)

/s/Kent Yee Senior Vice President Corporate Development April 17, 2023

Kent Yee Chief Financial Officer, Secretary and Director

(Principal Financial Officer and Principal Accounting Officer)

/s/Timothy P.

3 unchanged sentences

Joseph Mannes

/s/Karen Hoffman Director April 17, 2023

Karen Hoffman

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 9A. Controls and Procedures