DXP ENTERPRISES INC 10-K

ITEM 8. Financial Statements and Supplementary Data TABLE OF CONTENTS Page Report of Independent Registered Public Accounting Firm ( PricewaterhouseCoopers LLP , Houston, Texas PCAOB ID: 238 45 Report of Independent Registered Public Accounting Firm ( McConnell & Jones LLP , Houston, Texas PCAOB ID: 869 47 Report of Independent Registered Public Accounting Firm ( Moss Adams LLP , Houston, Texas , PCAOB ID: 659 ) 50 Consolidated Statements of Operations and Comprehensive Income 50 Consolidated Balance Sheets 51 Consolidated Statements of Cash Flows 52 Consolidated Statements of Equity 53 Notes to Consolidated Financial Statements 54 43 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of DXP Enterprises, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and its subsidiaries (the “Company”) as of December 31, 2022, and the related consolidated statements of operations and comprehensive income (loss), of equity and of cash flows for the year then ended, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date as the Company did not design and maintain (i) an effective control environment due to a lack of a sufficient complement of resources with an appropriate level of accounting knowledge, experience and training to appropriately analyze, record and disclose accounting matters timely and accurately, and an appropriate level of knowledge and experience to establish effective processes and controls, (ii) effective controls over the timely clearing of discrepancies arising from the three-way-match process of matching purchase orders, invoices, and item receipts, (iii) effective controls over the completeness, occurrence, cut-off, accuracy and presentation and disclosure of revenue, and (iv) 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. 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 material weaknesses referred to above are described in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 44 Table of Contents Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Sullivan Environmental Technologies, Inc. (Sullivan), Cisco Air Systems, Inc. (Cisco), Drydon Equipment, Inc. (Drydon), and Burlingame Engineers, Inc. (Burlingame) from its 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. We have also excluded Sullivan, Cisco, Drydon, and Burlingame from our audit of internal control over financial reporting. Sullivan, Cisco, Drydon, and Burlingame are wholly-owned subsidiaries whose total assets and total sales excluded from management’s assessment and our audit of internal control over financial reporting collectively represent approximately 3% and 3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition - Estimated Costs to Complete Contracts - Innovative Pumping Solutions Segment As described in Note 2 to the consolidated financial statements, revenue recognized under the percentage-of-completion method was $213.3 million for the year ended December 31, 2022. As disclosed by management, a substantial portion of the Innovative Pumping Solutions segment sales are made pursuant to contracts to fabricate tangible assets to customer specifications that can range from three to eighteen months or more. The Company accounts 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, the Company recognizes 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 requires management to estimate the 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 items such as cost of materials, labor productivity and cost, and overhead. 45 Table of Contents The principal considerations for our determination that performing procedures relating to the estimated costs to complete contracts used in revenue recognition for the Innovative Pumping Solutions segment is a critical audit matter are (i) the significant judgment by management when determining the estimated costs to complete the contracts and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating the significant assumption related to the estimated cost of materials. As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified related to this matter. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating and testing management’s process for determining the estimated costs to complete the contracts for a sample of contracts, which included evaluating the reasonableness of the significant assumption used by management related to the estimated cost of materials. Evaluating management's ability to reasonably estimate costs to complete contracts involved (i) obtaining and inspecting executed purchase orders and agreements, (ii) evaluating the reasonableness of the significant assumption related to estimated cost of materials by considering customer specifications and associated vendor quotes, and (iii) performing a comparison of the originally estimated and actual costs incurred on similar completed contracts. /s/ PricewaterhouseCoopers LLP Houston, Texas April 17, 2023 We have served as the Company’s auditor since 2022. 46 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of DXP Enterprises, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet of DXP Enterprises, Inc. and subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statements of operations and comprehensive income, equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, because of the effects of the material weaknesses described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinion The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment in Item 9A: a. The Company did not design and maintain effective internal controls to ensure that aged items recorded in the un-invoiced inventory accounts payable are monitored, addressed and cleared in a timely manner. b. The Company did not design and maintain effective management review controls to ensure the proper application of generally accepted accounting principles (ASC 606, Revenue from Contracts with Customers ) related to the percentage-of-completion method, an input method as defined by ASC 606, of recognizing revenue from contracts with customers. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. 47 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition – Revenue Recognized Over Time As discussed in Note 2 and Note 7 to the consolidated financial statements, the Company recognizes revenue from contracts with customers in its Innovative Pumping Solutions segment under the percentage-of-completion method, an input method as defined by ASC 606. For these transactions, revenue is recognized over time based on cost incurred to date as a percentage of total estimated cost. We identified revenue recognized over time as a critical audit matter based on the manual and subjective nature of the Company determining estimated costs to complete, as well as insufficient internal policies, procedures, and software. Evaluating revenue recognized over time under the percentage-of-completion method required extensive audit effort and a high degree of auditor judgment. The primary procedures we performed to address this critical audit matter included: a. Understanding the design and effectiveness of internal controls around management’s review of the schedule of contracts and related contract progress; b. Testing the calculation of revenue recognized over time through an examination of billings, cash collections, costs incurred, and other related components; c. Sampling contracts with customers, including confirming contract and progress details with project managers; and, d. Evaluating management’s expected costs to be incurred on projects for reasonableness by performing a retrospective analysis. /s/ McConnell & Jones LLP We served as the Company’s auditor in 2021. Houston, Texas April 5, 2022 48 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of DXP Enterprises, Inc. Opinion on the Financial Statements We have audited the consolidated statements of operations and comprehensive income (loss), equity, and cash flows of DXP Enterprises, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion. /s/Moss Adams LLP Houston, Texas March 18, 2021, except for the effects of the correction of errors previously disclosed in the restated December 31, 2020 financial statements, as to which the date is October 21, 2021. We served as the Company’s auditor from 2017 to 2021. 49 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) Years Ended December 31, 2022 2021 2020 Sales $ 1,480,832 $ 1,113,921 $ 1,005,266 Cost of sales 1,058,794 785,415 728,070 Gross profit 422,038 328,506 277,196 Selling, general and administrative expense 324,286 288,649 244,981 Impairment and other charges — — 59,883 Income (loss) from operating 97,752 39,857 ( 27,668 ) Other expense (income), net 2,716 ( 414 ) 74 Interest expense 29,135 21,089 20,571 Income (loss) before income taxes 65,901 19,182 ( 48,313 ) Provision for income tax expense (benefit) 17,799 3,431 ( 18,696 ) Net income (loss) 48,102 15,751 ( 29,617 ) Net loss attributable to noncontrolling interest ( 53 ) ( 745 ) ( 348 ) Net income (loss) attributable to DXP Enterprises, Inc. 48,155 16,496 ( 29,269 ) Preferred stock dividend 90 90 90 Net income (loss) attributable to common shareholders 48,065 16,406 ( 29,359 ) Net income (loss) 48,102 15,751 ( 29,617 ) Cumulative translation adjustment, net of income taxes ( 2,393 ) 747 2,337 Comprehensive income (loss) $ 45,709 $ 16,498 $ ( 27,280 ) Earnings (loss) per share (Note 13) Basic $ 2.58 $ 0.87 $ ( 1.65 ) Diluted $ 2.47 $ 0.83 $ ( 1.65 ) Weighted average common shares outstanding: Basic 18,631 18,949 17,748 Diluted 19,471 19,789 17,748 The accompanying notes are an integral part of these consolidated financial statements. 50 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2022 December 31, 2021 ASSETS Current assets: Cash $ 46,026 $ 48,989 Restricted cash 91 91 Accounts receivable, net of allowances for doubtful accounts of $ 7,610 and $ 7,759 320,880 218,137 Inventories 101,392 100,894 Costs and estimated profits in excess of billings 23,588 17,193 Prepaid expenses and other current assets 21,644 9,522 Federal income taxes receivable 2,493 9,748 Total current assets $ 516,114 $ 404,574 Property and equipment, net 45,964 51,880 Goodwill 333,759 296,541 Identified Intangibles, net 79,585 79,205 Operating lease ROU assets 57,402 57,221 Other long-term assets 4,456 4,806 Total assets $ 1,037,280 $ 894,227 LIABILITIES AND EQUITY Current liabilities: Current maturities of long-term debt $ 4,369 $ 3,300 Trade accounts payable 100,784 77,842 Accrued wages and benefits 26,260 23,006 Customer advances 20,128 12,924 Billings in excess of costs and estimated profits 10,411 3,581 Short-term operating lease liabilities 18,083 18,203 Other current liabilities 32,866 42,206 Total current liabilities $ 212,901 $ 181,062 Long-term debt, net of current maturities and unamortized debt issuance costs 409,205 315,397 Long-term operating lease liabilities 40,189 39,922 Other long-term liabilities 4,701 3,603 Deferred income taxes 4,892 7,516 Total long-term liabilities $ 458,987 $ 366,438 Total liabilities $ 671,888 $ 547,500 Commitments and Contingencies ( Note 18 ) Shareholders' Equity: Series A preferred stock, $ 1.00 par value; 1,000,000 shares authorized 1 1 Series B convertible preferred stock, $ 1.00 par value; 1,000,000 shares authorized 15 15 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 17,690,069 and 18,580,364 outstanding 345 195 Additional paid-in capital 213,937 206,772 Retained earnings 250,549 202,484 Accumulated other comprehensive loss ( 31,675 ) ( 29,282 ) Treasury stock, at cost 2,435,352 and 1,184,648 shares ( 67,780 ) ( 33,511 ) Total DXP Enterprises, Inc. equity $ 365,392 $ 346,674 Noncontrolling interest — 53 Total equity $ 365,392 $ 346,727 Total liabilities and equity $ 1,037,280 $ 894,227 The accompanying notes are an integral part of these consolidated financial statements. 51 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 48,102 $ 15,751 $ ( 29,617 ) Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation 9,585 9,946 10,396 Impairment and other charges — — 59,883 Amortization of intangible assets and deferred financing costs 20,757 18,755 14,162 Bad debt expense 659 67 1,194 Payment of contingent consideration liability in excess of acquisition-date fair value ( 781 ) ( 45 ) ( 136 ) Fair value adjustment on contingent consideration 2,311 504 ( 395 ) Loss on extinguishment and modification of debt — — 2,288 Gain on sale of property and equipment — ( 282 ) — Stock compensation expense 1,850 1,823 3,532 Deferred income taxes ( 7,541 ) 6,140 ( 14,732 ) Loss on sale of interest in VIE 1,193 — — Changes in operating assets and liabilities, and other: Change in accounts receivable, net ( 93,940 ) ( 43,736 ) 44,884 Accounts payable and accrued expenses 35,965 27,004 ( 15,345 ) Inventories 2,072 ( 5,290 ) 22,414 Other ( 14,338 ) 6,452 11,122 Net cash provided by operating activities $ 5,894 $ 37,089 $ 109,650 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 4,916 ) ( 5,999 ) ( 6,672 ) Proceeds from the sale of property and equipment — 1,669 123 Acquisition of businesses, net of cash acquired ( 48,506 ) ( 64,693 ) ( 115,247 ) Net cash used in investing activities $ ( 53,422 ) $ ( 69,023 ) $ ( 121,796 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities 827,152 — — Payments on revolving credit facilities ( 827,152 ) — — Proceeds from debt 105,000 — 330,000 Principal debt payments ( 3,567 ) ( 3,300 ) ( 244,375 ) Debt issuance costs ( 8,398 ) — ( 7,268 ) Issuance of Common Stock- shares sold in public market — — 1,142 Purchase of treasury stock ( 47,872 ) ( 33,511 ) — Payment for contingent consideration liability ( 469 ) ( 955 ) ( 1,864 ) Preferred dividends paid ( 90 ) ( 90 ) ( 90 ) Payment for employee taxes withheld from stock awards ( 292 ) ( 637 ) ( 139 ) Net cash provided by (used in) financing activities $ 44,312 $ ( 38,493 ) $ 77,406 Effect of foreign currency on cash 253 88 ( 168 ) Net Change In Cash $ ( 2,963 ) $ ( 70,339 ) $ 65,092 Cash and restricted cash at Beginning of Year 49,080 119,419 54,327 Cash and restricted cash at End of Year $ 46,117 $ 49,080 $ 119,419 The accompanying notes are an integral part of these consolidated financial statements. DXP ENTERPRISES, INC. AND SUBSIDIARIES (CONTINUED) CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2022 2021 2020 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 25,321 $ 19,531 $ 13,321 Cash paid for income taxes 26,179 6,120 6,277 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Shares issued for acquisitions (Note 1 7 ) 5,757 13,524 29,366 Share repurchase agreement ( Note 15) $ — $ 13,603 $ — 52 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (in thousands, except share amounts) Series A preferred Stock Series B preferred Stock Common Stock Paid-in Capital Retained earnings Treasury stock Non controlling interest Accum Other Comp (Loss) Total equity Balance at December 31, 2019 $ 1 $ 15 $ 174 $ 157,886 $ 215,664 $ — $ 1,146 $ ( 32,366 ) $ 342,520 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 3,532 — — — — 3,532 Tax related items for share based awards — — — ( 139 ) — — — — ( 139 ) Issuance of shares of common stock-Acquisition — — 15 29,351 — — — — 29,366 Issuance of shares of Common stock-Shares sold in public market — — — 1,142 — — — — 1,142 Cumulative translation adjustment — — — 296 ( 227 ) — — 2,337 2,406 Net loss — — — — ( 29,269 ) — ( 348 ) — ( 29,617 ) Balance at December 31, 2020 $ 1 $ 15 $ 189 $ 192,068 $ 186,078 $ — $ 798 $ ( 30,029 ) $ 349,120 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 1,767 — — — — 1,767 Stock compensation expense — — — 56 — — — — 56 Tax related items for share based awards — — — ( 637 ) — — — — ( 637 ) Issuance of shares of common stock — — 6 13,518 — — — — 13,524 Cumulative translation adjustment — — — — — — — 747 747 Purchase of treasury stock — — — — — ( 33,511 ) — — — Net income (loss) — — — — 16,496 — ( 745 ) — 15,751 Balance at December 31, 2021 $ 1 $ 15 $ 195 $ 206,772 $ 202,484 $ ( 33,511 ) $ 53 $ ( 29,282 ) $ 346,727 Dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 1,850 — — — — 1,850 Tax related items for share based awards — — — ( 292 ) — — — — ( 292 ) Issuance of shares of common stock — — 150 5,607 — — — — 5,757 Cumulative translation adjustment — — — — — — — ( 2,393 ) ( 2,393 ) Purchase of treasury stock — — — — — ( 34,269 ) — — ( 34,269 ) Noncontrolling interest — — — — — — — — — Net income (loss) — — — — 48,155 — ( 53 ) — 48,102 Balance at December 31, 2022 $ 1 $ 15 $ 345 $ 213,937 $ 250,549 $ ( 67,780 ) $ — $ ( 31,675 ) $ 365,392 The accompanying notes are an integral part of these consolidated financial statements. 53 Table of Contents DXP ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY DXP Enterprises, Inc. together with its subsidiaries (collectively “DXP,” “Company,” “us,” “we,” or “our”) was incorporated in Texas on July 26, 1996. The Company and its subsidiaries are engaged in the business of distributing maintenance, repair and operating (MRO) products, and service to customers serving a variety of end markets. Additionally, the Company 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 22 - 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 US GAAP. The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries. The Company was the primary beneficiary of a VIE in which it owned 47.5 % of the VIE's equity. The Company consolidated the VIE within its financial statements. In November 2022, the Company sold its interest in the VIE and ceased the consolidation of the VIE within the Company's financial statements. The losses associated with the VIE that occurred prior to the deconsolidation are included in the consolidated statements of operations and comprehensive income and loss. These losses were $ 0.2 million, $ 0.9 million and $ 0.6 million for the years ended December 31, 2022, 2021 and 2020, respectively. All intercompany accounts and transactions have been eliminated in consolidation. Business Combinations We allocate the total purchase price of a business combination to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date, with the excess purchase price recorded as goodwill. For material acquisitions, we engage third-party valuation specialists to assist us in determining the fair value of the assets acquired and liabilities assumed, including goodwill, based on recognized business valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate in the reporting period in which the adjustment amounts are determined based on facts and circumstances that existed as of the acquisition date, as applicable. An income, market, or cost valuation method may be utilized to estimate the fair value of the assets acquired or liabilities assumed in a business combination. We expense acquisition-related costs as incurred in connection with each business combination. Foreign Currency The financial statements of the Company’s Canadian subsidiaries are measured using local currencies as their functional currencies. Assets and liabilities are translated into U.S. dollars at current exchange rates, while income and expenses are translated at average exchange rates. Translation gains and losses are reported in other comprehensive income (loss). Gains and losses on transactions denominated in foreign currency are reported in the consolidated statements of operations and comprehensive income (loss). Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates. 54 Table of Contents Cash The Company places its cash with institutions with high credit quality. However, at certain times, such cash may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not historically experienced any losses when in excess of these limits. Receivables and Credit Risk Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms. The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the United States and Canada. The Company believes no significant concentration of credit risk exists. The Company evaluates the creditworthiness of its customers' financial positions and monitors accounts on a regular basis. Provisions to the allowance for doubtful accounts are made monthly and adjustments are made periodically based upon management’s best estimate of the collectability of such accounts under the current expected credit losses model. The Company writes-off uncollectible trade accounts receivable when the accounts are determined to be uncollectible. No customer represents more than 10% of consolidated sales. Changes in this allowance for 2022, 2021 and 2020 are as follows ( in thousands ): Years Ended December 31, 2022 2021 2020 Balance at beginning of year $ 7,759 $ 8,628 $ 8,929 Charged to costs and expenses 659 67 1,194 Charged to other accounts (1) ( 38 ) 12 21 Deductions (2) ( 770 ) ( 948 ) ( 1,516 ) Balance at end of year $ 7,610 $ 7,759 $ 8,628 (1) Primarily due to translation adjustments (2) Uncollectible accounts written off, net of recoveries Inventories Inventories consist principally of equipment purchased for resale or finished goods and are priced at lower of cost or net realizable value, cost being primarily determined using the weighted average cost method. The Company regularly reviews inventory to evaluate continued demand and records provisions for the difference between cost and net realizable value arising from excess and obsolete items on hand. Provisions are provided against inventories for estimated excess and obsolescence based upon the aging of the inventories and market trends and are applied as a reduction in cost of the associated inventory. Property and Equipment Property and equipment are recorded on a historical cost basis. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs of depreciable assets are charged against earnings as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and gains or losses are credited or charged to earnings. The principal estimated useful lives used in determining depreciation are as follows: Buildings 20 - 39 years Building improvements 10 - 20 years Furniture, fixtures and equipment 3 - 20 years Leasehold improvements Shorter of estimated useful life or related lease term Impairment of Goodwill and Other Intangible Assets The Company tests goodwill for impairment on an annual basis in the fourth quarter and when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company assigns the carrying value of these intangible assets to its reporting units and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the component is a business and discrete information is prepared and reviewed regularly by segment management. 55 Table of Contents The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a quantitative test for that reporting unit. Should the reporting unit's carrying amount exceed the fair value, then an impairment charge for the excess would be recognized. The impairment charge is limited to the amount of goodwill allocated to the reporting unit and goodwill will not be reduced below zero. The Company performed qualitative tests and determined no impairment of goodwill was required in 2022 and 2021. For the twelve months ended December 31, 2020, goodwill was evaluated for impairment at the reporting unit level resulting in a $ 36.4 million goodwill impairment which was included in impairment charges in the consolidated statement of operations. Impairment of Long-Lived Assets, Excluding Goodwill The Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. No impairment of long-lived assets was required in 2022 and 2021. For the twelve months ended December 31, 2020, long-lived assets were evaluated for impairment resulting in a $ 4.8 million long-lived assets impairment which was included in impairment charges in the consolidated statement of operations. 56 Table of Contents Revenue Recognition The Company primarily provides purchased products distributed through its branch of local Service Centers and or provides services through its local branch network and recognizes revenue at a point in time when control of the product or service performed transfers to the customer, typically upon shipment or completion from a DXP facility or directly from a supplier. Revenue is measured at the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, and any taxes collected from customers that will be remitted to governmental authorities. The Service Centers segment primarily provides a wide range of maintenance, repair and operating (MRO) products, equipment and integrated services, including logistics capabilities, to industrial customers. The Supply Chain Services segment also provides a wide range of MRO products as well as manages all or part of various customers' supply chain, including warehouse and inventory management services. Revenue is recognized upon the completion of our performance obligation(s) under the sales agreement. The majority of the Service Centers and Supply Chain Services segment revenues originate from the satisfaction of a single performance obligation--the delivery of products. Revenues are recognized when an agreement is in place, the performance obligations under the contract have been satisfied, and the price or consideration to be received is fixed and allocated to the performance obligation(s) in the contract. We believe our performance obligation has been satisfied when title passes to the customer or services have been rendered under the contract. Revenues are recorded net of sales taxes. The Company reserves for potential customer returns based upon historical levels. The Company also assembles, kits, fabricates and assembles custom-made pump packages, remanufactures pumps, and manufactures branded private label pumps substantially within our Innovative Pumping Solutions segment. For binding agreements to assemble, fabricate and direct tangible assets to customer specifications, the Company recognizes revenues over time when the customer is able to direct the use of and obtain substantially all of the benefits of the work performed. This occurs when the products have no alternative use for us and we have a right to payment for the work completed to date plus a reasonable profit margin. Contracts include cancellation provisions that require the customer to reimburse us for costs incurred through the date of cancellation. We recognize revenue for these contracts using the percentage of completion method, an "input method" as defined by ASC 606, "Revenue from Contracts with Customers". Under this method, 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 requires the Company to estimate the 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 estimated cost of materials, labor productivity and cost, and overhead. Percentage of completion revenues were $ 213.3 million for the twelve months ended December 31, 2022. Additionally, revenue in the fourth quarter included an out-of-period adjustment that increased revenue by $ 21.2 million, of which $ 10.6 million relates to the year ended December 31, 2021. The impact of this out-of-period adjustment was an increase to income before income taxes of $5.6 million and $3.0 million for the fourth quarter in 2022 and the year-ended December 31, 2022, respectively. We evaluated the impact of this error on our previously issued financial statements, assessing both quantitatively and qualitatively, and concluded the error was not material to any of our prior period or the current period financial statements. Shipping and Handling Costs The Company classifies shipping and handling charges billed to customers as sales. Shipping and handling charges paid to others are classified as a component of cost of sales. Self-insured Insurance and Medical Claims We generally retain up to $ 100,000 of risk for each claim for workers compensation, general liability, automobile, and property loss. We accrue for the estimated loss on the self-insured portion of these claims. The accrual is adjusted quarterly based upon reported claims information. The actual cost could deviate from the recorded estimate. We generally retain up to $ 175,000 of risk on each medical claim for our employees and their dependents with the exception of less than 0.05 % of employees where a higher risk is retained. We accrue for the estimated outstanding balance of unpaid medical claims for our employees and their dependents. The accrual is adjusted monthly based on recent claims experience. The actual claims could deviate from recent claims experience and could be materially different from the accrual. The accrual for these claims at December 31, 2022 and 2021 was approximately $ 2.9 million and $ 2.8 million, respectively. 57 Table of Contents Cost of Sales and Selling, General and Administrative Expense Cost of sales includes product and product related costs, inbound freight charges, internal transfer costs, and depreciation. Selling, general and administrative expense includes purchasing and receiving costs, inspection costs, warehousing costs, depreciation, and amortization. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established to reduce deferred income tax assets to the amounts expected to be realized under a more likely than not criterion. Accounting for Uncertainty in Income Taxes A position taken or expected to be taken in a tax return is recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examination by tax authorities for years prior to 2016. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. Comprehensive Income (Loss) Comprehensive income (loss) includes net income and foreign currency translation adjustments. The Company’s other comprehensive (loss) income is from translating foreign subsidiaries to the reporting currency. NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS 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 Financial Accounting Standards Board ("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. 58 Table of Contents NOTE 4 - LEASES We lease office space, warehouses, land, automobiles, office, and manufacturing equipment. All of our leases are classified as operating leases. Our leases have remaining lease terms within 1 month to 9 years, some of which include options to extend the leases for up to 14 years. The exercise of lease renewal options is at our sole discretion. Our lease agreements do not include options to purchase the leased property. Lease costs recognized in Selling, general, and administrative expense was $ 24.5 million and $ 24.2 million for the years ended December 31, 2022 and 2021, respectively. Supplemental cash flow information related to leases was as follows (in thousands) : Twelve Months Ended December 31, 2022 Twelve Months Ended December 31, 2021 Lease Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 20,584 $ 20,142 Right-of-use assets obtained in exchange for lease liabilities Operating leases $ 22,917 $ 24,735 Supplemental balance sheet information related to leases was as follows (in thousand) : Lease Classification December 31, 2022 December 31, 2021 Assets Operating Operating lease right-of-use assets $ 57,402 $ 57,221 Liabilities Current operating Short-term operating lease liabilities 18,083 18,203 Non-current operating Long-term operating lease liabilities 40,189 39,922 Total operating lease liabilities $ 58,272 $ 58,125 As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Maturities of lease liabilities are as follows (in thousands) : Year Ending December 31, Operating leases (*) 2023 $ 21,400 2024 15,841 2025 11,559 2026 8,096 2027 4,454 Thereafter 4,740 Total lease payments 66,090 Less: imputed interest 7,818 Present value of lease liabilities $ 58,272 (*) Operating lease payments exclude $ 0.2 million and $ 0.5 million of minimum lease payments for leases signed but not yet commenced as of December 31, 2022 and December 31, 2021, respectively. 59 Table of Contents Rental expense for operating leases was $ 24.5 million, $ 24.2 million and $ 23.4 million for the years ended December, 2022, 2021 and 2020, respectively. Lease term and discount rate Twelve Months Ended December 31, 2022 Twelve Months Ended December 31, 2021 Weighted average remaining lease term (years) Operating lease 4.10 4.53 Weighted average discount rate Operating lease 6.5 % 6.5 % For the twelve months ended December 31, 2022, the Company incurred approximately $ 1.9 million in lease expenses to entities controlled by the Company's Chief Executive Officer, David Little and family. NOTE 5 - FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Authoritative guidance for financial assets and liabilities measured on a recurring basis applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Fair value, as defined in the authoritative guidance, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative guidance affects the fair value measurement of an investment with quoted market prices in an active market for identical instruments, which must be classified in one of the following categories: Level 1 Inputs Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 Inputs Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means. Level 3 Inputs Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include management's 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. 60 Table of Contents As of December 31, 2022, we recorded liabilities in other current and long-term liabilities for contingent consideration associated with the acquisitions of PMI, Burlingame, Drydon, Cisco and Sullivan of $ 1.2 million, $ 0.5 million, $ 2.8 million, $ 4.7 million and $ 1.0 million, respectively. See further discussion at Note 17 - Business Acquisitions . For the Company's assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein and gains or losses recognized during the twelve months ended December 31, 2022: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Contingent Liability for Accrued Consideration (in thousands) *Balance at December 31, 2021 $ 905 Acquisitions and settlements: Acquisitions ( Note 17 ) 8,200 Settlements ( 1,250 ) Total remeasurement adjustments: Changes in fair value recorded in other (income) expense, net 2,311 *Balance at December 31, 2022 $ 10,166 The amount of total (gains) or losses for the year included in earnings or changes to net assets, attributable to changes in unrealized (gains) or losses relating to assets or liabilities still held at December 31, 2022. 2,311 *Amounts included in other current liabilities were $ 5.5 million and $ 0.5 million for the periods ending December 31, 2022 and December 31, 2021, respectively. Amounts included in long-term liabilities were $ 4.7 million and $ 0.4 million for the periods ending December 31, 2022 and December 31, 2021, respectively. Quantitative Information about Level 3 Fair Value Measurements The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows: (in thousands, unaudited) Fair Value at December 31, 2022 Valuation Technique Significant Unobservable Inputs Contingent consideration: (PMI, Burlingame, Drydon, Cisco and Sullivan acquisitions) $ 10,166 Discounted cash flow and weighted probability of possible payments 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 acquisitions 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 7.8 %. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly (lower) higher fair value measurement. The maximum amount of contingent consideration payable under these arrangements is $ 10.3 million. Other financial instruments not measured at fair value on the Company's consolidated balance sheets at December 31, 2022 but which require disclosure of their fair values include: cash, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit and term loan debt under our syndicated credit agreement facility ( Note 10 ). The Company believes that the estimated fair value of such instruments at December 31, 2022 and December 31, 2021 approximates their carrying value as reported on the consolidated balance sheets. 61 Table of Contents NOTE 6 - INVENTORIES The carrying values of inventories are as follows ( in thousands ): December 31, 2022 December 31, 2021 Finished goods $ 82,906 $ 80,329 Work in process 18,486 20,565 Inventories $ 101,392 $ 100,894 NOTE 7 – CONTRACT ASSETS AND LIABILITIES Under our customized pump production contracts in our IPS segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms, upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. Our contract assets are presented as “Cost and estimated profits in excess of billings” on our Consolidated Balance Sheets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities that are presented as “Billings in excess of costs and estimated profits” on our Consolidated Balance Sheets. Costs and estimated profits on uncompleted contracts and related amounts billed for 2022 and 2021 are as follows ( in thousands ): December 31, 2022 2021 Costs incurred on uncompleted contracts $ 70,329 $ 41,329 Estimated profits, thereon 23,274 17,143 Total 93,603 58,472 Less: billings to date 80,421 44,859 Net $ 13,182 $ 13,613 Such amounts were included in the accompanying Consolidated Balance Sheets for 2022 and 2021 under the following captions ( in thousands ): December 31, 2022 2021 Costs and estimated profits in excess of billings $ 23,588 $ 17,193 Billings in excess of costs and estimated profits ( 10,411 ) ( 3,581 ) Translation Adjustment 5 1 Net $ 13,182 $ 13,613 During the twelve months ended December 31, 2022, $ 3.6 million of the balances that were previously classified as contract liabilities at the beginning of the period were recognized into revenues. Contract assets and liability changes were primarily due to normal activity and timing differences between our performance and customer payments. 62 Table of Contents NOTE 8 - PROPERTY AND EQUIPMENT The carrying values of property and equipment are as follows ( in thousands ): December 31, 2022 December 31, 2021 Land $ 2,023 $ 2,023 Buildings and leasehold improvements 27,642 28,267 Furniture, fixtures and equipment 109,052 114,020 Less – Accumulated depreciation ( 92,753 ) ( 92,430 ) Total Property and Equipment $ 45,964 $ 51,880 Depreciation expense was $ 9.6 million, $ 9.9 million, and $ 10.4 million for the years ended December 31, 2022, 2021, and 2020, respectively. Capital expenditures by segment are included in Note 22 - Segment Reporting . NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2022 ( in thousands ): Goodwill Other Intangible Assets Total Balances as of December 31, 2021 $ 296,541 $ 79,205 $ 375,746 Translation adjustment ( 1,290 ) ( 136 ) ( 1,426 ) Acquisitions 38,508 19,430 57,938 Amortization — ( 18,915 ) ( 18,915 ) Balances as of December 31, 2022 $ 333,759 $ 79,584 $ 413,343 The following table presents the changes in the carrying amount of goodwill and other intangible assets during the year ended December 31, 2021 ( in thousands ): Goodwill Other Intangible Assets Total Balances as of December 31, 2020 $ 249,751 $ 80,088 $ 329,839 Translation adjustment 51 55 106 Acquisitions 46,739 16,259 62,998 Amortization — ( 17,197 ) ( 17,197 ) Balances as of December 31, 2021 $ 296,541 $ 79,205 $ 375,746 The following table presents the goodwill balance by reportable segment as of December 31, 2022 and 2021 (in thousands) : As of December 31, 2022 2021 Service Centers $ 269,106 $ 239,371 Innovative Pumping Solutions 47,514 40,031 Supply Chain Services 17,139 17,139 Total $ 333,759 $ 296,541 Gross carrying amounts as well as accumulated amortization are partially affected by the fluctuation of foreign currency rates. Other intangible assets are amortized according to estimated economic benefits over their estimated useful lives. 63 Table of Contents Amortization expense is recognized according to estimated economic benefits and was $ 18.9 million, $ 17.2 million, and $ 12.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows (in thousands) : 2023 $ 18,262 2024 15,403 2025 13,941 2026 11,328 2027 9,777 Thereafter 10,873 Total $ 79,584 The weighted average remaining estimated life for customer relationships and non-compete agreements are 6.1 and 3.6 years, respectively. NOTE 10 – LONG-TERM DEBT Long-term debt consisted of the following ( in thousands ): December 31, 2022 December 31, 2021 Carrying Value (1) Fair Value Carrying Value (1) Fair Value ABL Revolver $ — — $ — — Term Loan B 428,133 411,008 326,700 325,883 Total Debt 428,133 411,008 326,700 325,883 Less: Current maturities ( 4,369 ) ( 4,194 ) ( 3,300 ) ( 3,292 ) Total Long-term Debt $ 423,764 $ 406,814 $ 323,400 $ 322,591 (1) Carrying value amount does not include unamortized debt issuance costs of $ 14.6 million and $ 8.0 million for years ended December 31, 2022 and December 31, 2021 respectively. 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. During the twelve months ended December 31, 2022, the amount available to be borrowed under our credit facility increased to $ 132.4 million compared to $ 131.7 million at December 31, 2021 primarily as a result of outstanding letters of credit. As of December 31, 2022, there were no amounts outstanding under the ABL Revolver. Subject to the conditions set forth in the ABL Credit Agreement, the ABL Revolver may be increased in increments of $ 10.0 million up to an aggregate of $ 50.0 million. 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 facility not in use at any given time. The unused line fee was 0.375 % at December 31, 2022. The interest rate for the ABL Revolver was 7.8 % at December 31, 2022. 64 Table of Contents 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 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 (i.) 25 % if our total leverage ratio is no more than 3.00 to 1.00 and (ii.) 0 % if our total leverage ratio is no more than 2.50 to 1.00. The interest rate for the Term Loan was 10.0 % as of December 31, 2022. Financial Covenants: 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 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 Revolver falls below a threshold set forth in the ABL Credit Agreement. As of December 31, 2022, the Company's consolidated Fixed Charge Coverage Ratio was 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 $ 150 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: Fiscal Quarter Secured Leverage Ratio December 31, 2022 5.00 :1:00 March 31, 2023 5.00 :1:00 June 30, 2023 and each Fiscal Quarter thereafter 4.75 :1:00 EBITDA as defined under the Term Loan B Agreement for financial covenant purposes means, without duplication, for any period of determination, the sum of, consolidated net income during such period; plus to the extent deducted from consolidated net income in such period: (i) income tax expense, (ii) franchise tax expense, (iii) 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. 65 Table of Contents Interest on Borrowings The interest rates on our borrowings outstanding at December 31, 2022 and 2021, including the amortization of debt issuance costs, are as follows: December 31, 2022 2021 ABL Revolver 7.75 % 1.85 % Term Loan B 9.95 % 5.75 % Weighted average interest rate 9.95 % 5.75 % The Company was in compliance with all financial covenants as of December 31, 2022. Amendment of Previously Existing Credit Agreement As set forth above, on November 22, 2022, the Company amended and supplemented its previously existing Tern Loan Agreement with the Term Loan Amendment. The Term Loan Amendment provides for $ 105 million in new Incremental Term Loan Commitments (as defined in the Term Loan Agreement). The existing and new borrowings under the Term Loan Agreement mature on December 23, 2027 and are priced at Term SOFR plus an applicable margin of 5.25 percent. Deferred financing costs of $ 7.9 million were associated with modified and new debt and will be amortized to interest expense using the interest method over the life of the term loan. In connection with the Term Loan Amendment we expensed third-party fees of $ 2.0 million, which was included in interest expense during 2022. As of December 31, 2022, the maturities of long-term debt for the next five years and thereafter were as follows ( in thousands ): Year $ Amount 2023 $ 4,369 2024 4,369 2025 4,369 2026 4,369 Thereafter 410,657 Total $ 428,133 NOTE 11 - INCOME TAXES The components of income (loss) before income taxes are as follows ( in thousands ): Years Ended December 31, 2022 2021 2020 Domestic $ 59,736 $ 9,897 $ ( 33,239 ) Foreign 6,165 9,285 ( 15,074 ) Total income before taxes $ 65,901 $ 19,182 $ ( 48,313 ) 66 Table of Contents The provision for income taxes consisted of the following ( in thousands ): Years Ended December 31, 2022 2021 2020 Current - Federal $ 18,591 $ ( 5,243 ) $ ( 6,348 ) State 4,501 ( 522 ) ( 240 ) Foreign 2,248 3,056 2,624 Total current $ 25,340 $ ( 2,709 ) $ ( 3,964 ) Deferred - Federal ( 5,875 ) 5,016 ( 10,567 ) State ( 1,083 ) 1,810 ( 3,126 ) Foreign ( 583 ) ( 686 ) ( 1,039 ) Total deferred $ ( 7,541 ) $ 6,140 $ ( 14,732 ) Total current and deferred taxes $ 17,799 $ 3,431 $ ( 18,696 ) The difference between income taxes computed at the statutory income tax rate and the provision for income taxes is as follows ( in thousands ): Years Ended December 31, 2022 2021 2020 Income taxes computed at federal statutory rate $ 13,839 $ 4,028 $ ( 10,146 ) State income taxes, net of federal benefit 2,701 1,017 ( 2,625 ) Foreign taxes 122 186 ( 493 ) Nondeductible expenses 1,158 353 5,617 Enacted rate changes 240 318 670 Research and development tax credit ( 250 ) ( 1,036 ) ( 16,879 ) Foreign tax credit — — — Valuation allowance ( 1 ) 1 16 Tax reform deferred tax remeasurement — ( 2,587 ) — Deferred tax liability true up — ( 62 ) ( 551 ) Uncertain tax positions 271 871 5,057 Other ( 281 ) 342 638 Total income tax expense (benefit) $ 17,799 $ 3,431 $ ( 18,696 ) 67 Table of Contents Deferred tax liabilities and assets were comprised of the following (in thousands): December 31, 2022 2021 Deferred tax assets: Allowance for doubtful accounts $ 1,570 $ 1,554 Inventory 4,585 4,747 Federal general business credit carryforward — 4,237 Texas research and development tax credit carryforward 2,329 2,679 Louisiana research and development tax credit carryforward 10 239 Foreign tax credit carryforward 64 64 Charitable Contribution Carryforward — 531 Net operating loss carryforward 1,201 786 Capital loss carryforward 4 4 Deferred compensation — 152 Accruals 6,190 7,005 Business interest expense carryforward — 389 ROU asset 219 226 Research expenses 16,945 — Other — — Total deferred tax assets 33,117 22,613 Less valuation allowance ( 4 ) ( 4 ) Total deferred tax asset, net of valuation allowance 33,113 22,609 Deferred tax liabilities: Goodwill ( 18,439 ) ( 13,474 ) Intangibles ( 9,553 ) ( 6,813 ) Property and equipment ( 8,542 ) ( 8,117 ) Unremitted foreign earnings ( 421 ) ( 421 ) Method changes ( 225 ) ( 465 ) Other ( 825 ) ( 835 ) Net deferred tax liability $ ( 4,892 ) $ ( 7,516 ) The Company records a valuation allowance when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. If the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. As of December 31, 2022, the valuation allowance primarily relates to federal and foreign capital loss carryforwards. The following summarizes changes in the balance of valuation allowances on deferred tax assets (in thousands): Years Ended December 31, 2022 2021 2020 Balance at January 1 $ ( 4 ) $ ( 12,813 ) $ ( 12,363 ) Changes due to federal and foreign capital loss carryforwards — 12,809 ( 450 ) Balance at December 31 $ ( 4 ) $ ( 4 ) $ ( 12,813 ) 68 Table of Contents Tax carryforwards available for use on future income tax returns, prior to valuation allowance, at December 31, 2022, are as follows (in thousands): Domestic Foreign Expiration Net operating loss - foreign $ — $ 460 2034 - 2041 Net operating loss - federal 742 — 2036 - 2040 Capital loss carryforward - foreign — 4 Indefinite Capital loss carryforward - federal — — 2021 Foreign tax credits 64 — 2023 - 2025 Federal general business tax credits — — 2026 - 2030 Texas research and development tax credits 2,330 — 2037 - 2040 Louisiana research and development tax credits $ 10 $ — 2024 - 2025 Changes in the balance of unrecognized tax benefits excluding interest and penalties on uncertain tax positions are as follows (in thousands): Assets (Liabilities) 2022 2021 2020 Balance at January 1, $ ( 6,316 ) $ ( 5,057 ) $ — Increases related to prior year tax positions — ( 687 ) ( 5,057 ) Decreases related to prior year tax positions 614 — — Increases related to current year tax positions ( 216 ) ( 572 ) — Balance at December 31, $ ( 5,918 ) $ ( 6,316 ) $ ( 5,057 ) As of December 31, 2022, the Company had recorded a total tax benefit of $ 23.3 million related to federal and state research and development tax credits. This benefit is partially offset by $ 5.9 million uncertain tax position due to the uncertainty related to the realizability of the federal research and development tax credits. To the extent penalties and interest would be assessed on any underpayment of income tax, such accrued amounts are classified as a component of income tax provision (benefit) in the consolidated financial statements consistent with Company's policy. For the year ended December 31, 2022, the Company recorded $ 0.1 million tax expense for interest and penalties related to uncertain tax positions. The Company is subject to taxation in the United States, various states, and foreign jurisdictions. The Company has significant operations in the United States and Canada and to a lesser extent in various other international jurisdictions. Tax years that remain subject to examination vary by legal entity but are generally open in the United States for the tax years ended after 2016 and outside the United States for the tax years ended after 2015. NOTE 12 - SHARE-BASED COMPENSATION Restricted Stock We issued equity-based awards from the 2016 Omnibus Plan. 2016 Omnibus Incentive Plan On June 19, 2019, our shareholders approved an amendment to the DXP Enterprises, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”) to increase the number of shares that can be issued under the 2016 Plan from 500,000 shares to a total of 1,000,000 shares, which represents an increase of 500,000 shares (the “Amendment”), which authorized grants of restricted stock awards, restricted stock units (“RSUs”), performance awards, options, investment rights, and cash-based awards. This plan authorizes the issuance of up to 1,000,000 shares of our common stock. 69 Table of Contents Under the 2016 Plan approved by our shareholders, directors, consultants and employees may be awarded shares of the Company's common stock. The shares of restricted stock awards granted to employees that are outstanding as of December 31, 2022 vest in accordance with one of the following vesting schedules: 100 % one year after the grant date; 50 % each year for two years after the grant; 33.3 % each year for three years after the grant date; 20 % each year for five years after the grant date; or 10 % each year for ten years after the date of grant. The shares of restricted stock awards granted to non-employee directors of the Company vest one year after the grant date. The fair value of restricted stock awards is measured based upon the closing prices of the Company's common stock on the grant dates and is recognized as compensation expense over the vesting period of the awards. Once restricted stock vests, new shares of the Company’s common stock are issued. At December 31, 2022, 454,732 shares were available for future grant. Changes in restricted stock awards for the twelve months ended December 31, 2022 are as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2021 112,044 $ 31.72 Granted 113,077 $ 27.48 Forfeited ( 8,785 ) $ 31.96 Vested ( 58,569 ) $ 31.79 Non-vested at December 31, 2022 157,767 $ 28.64 Changes in restricted stock awards for the twelve months ended December 31, 2021 are as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2020 166,976 $ 32.53 Granted 53,668 $ 30.95 Forfeited — $ — Vested ( 108,600 ) $ 32.59 Non-vested at December 31, 2021 112,044 $ 31.72 Changes in restricted stock awards for the twelve months ended December 31, 2020 are as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2019 144,250 $ 32.71 Granted 100,299 $ 30.91 Forfeited ( 16,794 ) $ 28.61 Vested ( 60,779 ) $ 31.33 Non-vested at December 31, 2020 166,976 $ 32.53 Compensation expense, associated with restricted stock awards, recognized in the years ended December 31, 2022, December 31, 2021 and December 31, 2020 was $ 1.9 million, $ 1.8 million, and $ 3.5 million, respectively. Related income tax benefits recognized in earnings in the years ended December 31, 2022, December 31, 2021 and December 31, 2020 were approximately $ 0.5 million, $ 0.5 million and $ 0.9 million, respectively. Unrecognized compensation expense under the 2016 Plan at December 31, 2022, December 31, 2021 and December 31, 2020 was $ 3.1 million, $ 2.1 million and $ 2.2 million, respectively. As of December 31, 2022, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 1.6 years. NOTE 13 - EARNINGS PER SHARE DATA Basic earnings per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings per share is computed including the impacts of all potentially dilutive securities. 70 Table of Contents The following table sets forth the computation of basic and diluted earnings per share for the periods indicated ( in thousands, except per share data ): December 31, 2022 2021 2020 Basic: Weighted average shares outstanding 18,631 18,949 17,748 Net income (loss) attributable to DXP Enterprises, Inc. $ 48,155 $ 16,496 $ ( 29,269 ) Convertible preferred stock dividend ( 90 ) ( 90 ) ( 90 ) Net income (loss) attributable to common shareholders $ 48,065 $ 16,406 $ ( 29,359 ) Per share amount $ 2.58 $ 0.87 $ ( 1.65 ) Diluted: Weighted average shares outstanding 18,631 18,949 17,748 Assumed conversion of convertible preferred stock 840 840 — Total dilutive shares 19,471 19,789 17,748 Net income (loss) attributable to common shareholders $ 48,065 $ 16,406 $ ( 29,359 ) Convertible preferred stock dividend 90 90 — Net income (loss) attributable to DXP Enterprises, Inc. $ 48,155 $ 16,496 $ ( 29,359 ) Per share amount $ 2.47 $ 0.83 $ ( 1.65 ) Basic earnings per share have been computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period and excludes dilutive securities. Diluted earnings per share reflects the potential dilution that could occur if the preferred stock was converted into common stock. Restricted stock is considered a participating security and is included in the computation of basic earnings per share as if vested. The preferred stock is convertible into 840,000 shares of common stock. For the twelve months ended December 31, 2020, we excluded from the diluted EPS calculation 840,000 convertible preferred shares since the effect would have been antidilutive. NOTE 14 – CAPITAL STOCK The Company has Series A and Series B preferred stock of 1,222 shares and 15,000 shares outstanding as of December 31, 2022, 2021 and 2020, respectively. The preferred stock did not have any activity during 2022, 2021 and 2020. Series A Preferred Stock The holders of Series A preferred stock are entitled to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of common stock, and are not entitled to any dividends or distributions other than in the event of a liquidation of the Company, in which case the holders of the Series A preferred stock are entitled to $ 100 liquidation preference per share. Series B Preferred Stock Each share of the Series B convertible preferred stock is convertible into 56 shares of common stock and a monthly dividend per share of $ .50 . The holders of the Series B convertible stock are entitled to a $ 100 liquidation preference per share after payment of the distributions to the holders of the Series A preferred stock and to one-tenth of a vote per share on all matters presented to a vote of shareholders generally, voting as a class with the holders of the common stock. 71 Table of Contents The activity related to outstanding common stock and common stock held in treasury was as follows: December 31, 2022 2021 2020 Common Stock: Quantity (in thousands) Balance, beginning of period 18,468 19,041 17,460 Issuance of shares for compensation net of withholding 47 85 54 Issuance of common stock related to equity distribution agreements — — 46 Issuance of common stock related to purchase of businesses 267 527 1,481 Purchase of shares held in treasury ( 1,251 ) ( 1,185 ) — Balance, end of period 17,531 18,468 19,041 NOTE 15 - SHARE REPURCHASE On May 12, 2021, the Company announced that its Board of Directors authorized a share repurchase program (the “program”) under which up to $ 85.0 million worth or 1.5 million shares of its outstanding common stock may be acquired in the open market or through privately negotiated agreements over the next 24 months at the discretion of management. The Company completed the program in December 2022. 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 over the next 24 months. During the twelve months ended December 31, 2022 the Company repurchased 1.3 million shares for approximately $ 35.2 million compared to 1.2 million shares for approximately $ 33.5 million for the twelve months ended December 31, 2021. 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. Pursuant to the terms of the share repurchase agreement, The Company agreed to pay the shareholders for the repurchased shares 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. Twelve Months Ended December 31, 2022 2021 2020 (in millions, except per share data) Total number of shares purchased 1.3 1.2 — Amount paid $ 35.2 33.5 — Average price paid per share $ 28.17 28.28 — NOTE 16 - SALES OF COMMON STOCK On May 11, 2020, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with BMO Capital Markets Corp. (the “Distribution Agent”) pursuant to which the Company may offer and sell shares of the Company’s common stock, par value $ 0.01 per share, having an aggregate offering amount of up to $ 37,500,000 from time to time through the Distribution Agent. Sales, if any, of the Company’s common stock pursuant to the Equity Distribution Agreement will be made in “at the market offerings” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. During the twelve months ended December 31, 2020, the Company issued and sold 46,000 shares of common stock under the Equity Distribution Agreement, with net proceeds totaling approximately $ 1.1 million, after deducting the Distribution Agent’s commission of approximately $ 26 thousand. There were no sale of the Company's common stock in 2022 and 2021. NOTE 17 - BUSINESS ACQUISITIONS The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into new and attractive markets. The Company has completed a number of acquisitions and the purchases of the acquired businesses have resulted in the recognition of goodwill and other intangible assets in the Company’s Consolidated Financial Statements. 72 Table of Contents The Company makes an initial allocation of the purchase price at the date of acquisition based upon its estimate of the fair value of the acquired assets and assumed liabilities. The Company obtains the information used for the purchase price allocation during due diligence and through other sources. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized. Final determination of the fair values may result in further adjustments. The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company. The Company from time-to-time engages third-party valuation specialists who review the Company’s critical assumptions and calculations of the fair value of acquired intangible assets in connection with significant acquisitions. Only facts and circumstances that existed as of the acquisition date are considered for subsequent adjustment. The Company is continuing to evaluate certain pre-acquisition contingencies associated with certain of its 2022 acquisitions. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required. Each acquisition has been accounted for as a business combination under ASC 805, “Business Combinations.” 2022 Acquisitions On September 1, 2022, the Company completed the acquisition of Sullivan Environmental Technologies, Inc. ("Sullivan"). Sullivan is a leading distributor for the municipal and industrial water and wastewater treatment industries in the states of Ohio, Kentucky, and Indiana. Sullivan is included within our IPS business segment. Total consideration for the transaction was approximately $ 6.5 million, funded with a mixture of cash on hand of $ 4.6 million, the Company's stock valued at approximately $ 0.9 million and potential contingent consideration of $ 1.0 million. For the twelve months ended December 31, 2022, Sullivan contributed sales of $ 1.0 million and operating income of $ 275 thousand. Goodwill for the transaction totaled approximately $ 2.5 million. On May 2, 2022, the Company completed the acquisition of Cisco Air Systems Inc. ("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. Cisco is included within our SC business segment. The Company engaged third-party valuation specialists to review the Company's critical assumptions such as: anticipated revenues, anticipated cost, discount rates, probability of earn-out payments, and calculations of the fair value of acquired intangible assets and goodwill in connection with the Cisco acquisition. Total consideration for the transaction was approximately $ 52.3 million, funded with a mixture of cash on hand of $ 43.4 million, the Company's common stock valued at approximately $ 4.4 million, and potential contingent consideration of $ 4.5 million. For the twelve months ended December 31, 2022, Cisco contributed sales of $ 32.1 million and operating income of $ 6.5 million. Goodwill for the transaction totaled approximately $ 30.5 million. On March 1, 2022, the Company completed the acquisition of Drydon Equipment Inc. ("Drydon"), 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 and an issuance of DXP's common stock. The Company paid approximately $ 7.9 million, funded with a mixture of cash on hand of $ 4.9 million, the Company's common stock valued at approximately $ 441 thousand and contingent consideration of $ 2.6 million. A majority of Drydon's sales are project-based work. As a result, Drydon has been included in the IPS business segment. For the twelve months ended December 31, 2022, Drydon contributed sales of $ 5.6 million and operating income of $ 1.1 million. Goodwill for the transaction totaled approximately $ 5.3 million. On March 1, 2022, the Company completed the acquisition of certain assets of Burlingame Engineers Inc. ("Burlingame"), a provider of water and wastewater equipment in the industrial and municipal sectors. Burlingame is included within our SC business segment. The Company paid approximately $ 1.1 million in cash, the Company's common stock and contingent consideration. For the twelve months ended December 31, 2022, Burlingame contributed sales of $ 2.9 million and operating income of $ 604 thousand. Goodwill for the transaction totaled approximately $ 0.5 million. 2021 Acquisitions O n April 30, 2021, the Company completed the acquisition of Carter & Verplanck, LLC ("CVI"), a distributor of products and services exclusively focused on serving the water and wastewater markets. The acquisition of CVI was funded with cash on hand and an issuance of the Company's common stock. The Company paid approximately $ 49.7 million in cash and stock. A majority of CVI's sales are project-based work. As a result, CVI has been included in the IPS segment. Goodwill for the transaction totaled approximately $ 38.3 million. On July 1, 2021, the Company completed the acquisition of Process Machinery, Inc. ("PMI"), a leading distributor of pumps, mechanical seals, tank, filters and related process equipment that focuses on serving the chemical, power, pulp & paper, mining, metals and food processing industries. PMI is included within our SC business segment. The Company paid approximately $ 9.6 million in cash, stock and contingent consideration. Goodwill for the transaction totaled approximately $ 5.3 million. 73 Table of Contents On September 20, 2021, the Company completed the acquisition of Premier Water LLC ("Premier"). Premier is a leading distributor and provider of products and services exclusively focused on serving the water and wastewater treatment markets primarily in North and South Carolina. Premier is included within our IPS business segment. The Company paid approximately $ 5.8 million in cash and stock. Goodwill for the transaction totaled approximately $ 1.4 million. Pro Forma Financial Results (unaudited) The following represents the pro forma unaudited revenue and net income as if each of the 2022 acquisitions had been included in the consolidated results of the Company for the full year periods ending December 31, 2022 and 2021, respectively. In addition, the pro forma results also assume that all of the 2021 acquisitions had been consummated as of January 1, 2020. The pro forma information is not necessarily indicative of future results: Fiscal Year Ending December 31, 2022 2021 ($ in thousands) Revenue $ 1,499,119 1,174,387 Net income $ 50,983 25,807 Preliminary Purchase Price Allocation and Consideration The following tables summarize the estimated fair values of the assets acquired and liabilities assumed at the acquisition date for the 2022 acquisitions, as well as the fair value of the consideration transferred: Acquisitions Cisco Recognized as of Acquisition Date Measurement Period Adjustments (1) Cisco Recognized as of Acquisition Date (As Adjusted) All Other Total Cash $ 4,352 $ — $ 4,352 $ 743 $ 5,095 Accounts receivable 5,173 — 5,173 5,952 11,125 Other receivables — — — 52 52 Inventory 3,032 — 3,032 37 3,069 Other current assets 472 ( 339 ) 133 4 137 Non-compete agreements 878 ( 1 ) 877 504 1,381 Customer relationships 10,730 6,070 16,800 1,249 18,049 Property and equipment 1,187 — 1,187 127 1,314 Operating lease ROU asset 2,168 — 2,168 — 2,168 Other assets — — — 2 2 Assets acquired $ 27,992 $ 5,730 $ 33,722 $ 8,670 $ 42,392 Short-term operating lease liability ( 463 ) — ( 463 ) — ( 463 ) Current liabilities assumed ( 5,208 ) — ( 5,208 ) ( 1,069 ) ( 6,277 ) Long-term operating lease liability ( 1,705 ) — ( 1,705 ) — ( 1,705 ) Deferred tax liability ( 2,897 ) ( 1,612 ) ( 4,509 ) ( 389 ) ( 4,898 ) Net assets acquired $ 17,719 $ 4,118 $ 21,837 $ 7,212 $ 29,049 Total Consideration 52,184 147 52,331 15,556 67,887 Goodwill $ 34,465 $ ( 3,971 ) $ 30,494 $ 8,344 $ 38,838 (1) The measurement period adjustments primarily related to the final valuation of intangible assets related to the acquisition of Cisco. 74 Table of Contents Of the $ 19.4 million of acquired intangible assets, $ 1.4 million was provisionally assigned to non-compete agreements that are subject to amortization over 5 years, consistent with the terms of the agreements. In addition, $ 18.0 million was assigned to customer relationships and will be amortized over a period of 8 years. The goodwill total of $ 38.8 million is attributable primarily to expected synergies and the assembled workforce of each entity. In aggregate, the acquisition-date fair value of the consideration transferred for the four businesses acquired in 2022 totaled $ 67.9 million, which consisted of the following: Purchase Price Consideration (in millions) Total Consideration Cash payments $ 53.9 Fair value of stock issued 5.8 Contingent consideration 8.2 Total consideration $ 67.9 The fair value of the approximately 267,248 common shares issued was determined based on the closing market price of the Company’s common shares on the respective acquisition date, adjusted for holding restrictions following consummation. The Company recognized $ 0.6 million of acquisition related costs that were expensed in the current period. These costs are included in the consolidated income statement in Selling, General and Administrative costs. The Company also recognized an immaterial amount in costs associated with issuing the shares issued as consideration in the business combination. Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity. As third-party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed and working capital reviews are concluded. Adjustments may be made to the fair value of assets acquired and in some cases, total purchase price through the end of each measurement period; generally one year following the applicable acquisition date. Various adjustments to the fair value of assets acquired and in some cases total purchase price, have been made to certain business combinations since the respective dates of acquisition. During the twelve months ended December 31, 2022, we recorded measurement-period adjustments that decreased goodwill by approximately $ 4.0 million, primarily for changes in intangible assets acquired and deferred tax liability. The impact of these adjustments to the consolidated statement of operations were immaterial. Goodwill recognized in connection with these acquisitions was attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Goodwill related to asset acquisitions is currently deductible for income tax purposes. Goodwill related to stock acquisitions is capitalized to the stock basis of the acquisition for income tax purposes and is deductible upon disposition of the stock. Contingent Consideration The acquisitions of Burlingame, Drydon, Cisco and Sullivan included a contingent consideration arrangement that requires additional consideration to be paid based on the achievement of annual EBITDA targets over a one to three year period. The range of undiscounted amounts the Company may be required to pay under the contingent consideration agreement is between zero and $ 10.3 million. The combined fair value of the contingent consideration recognized on each acquisition date of $ 8.2 million was estimated by using a weighted probability of possible payments. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 7.8 %. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets. The fair value measurement includes earnings forecasts which are a Level 3 measurement as discussed in Note 5 - Fair Value of Financial Assets and Liabilities . The fair value of the contingent consideration is reviewed quarterly over the earn-out period to compare actual earnings before interest, taxes, depreciation and amortization ("EBITDA") achieved to the estimated EBITDA used in our forecasts. NOTE 18 - COMMITMENTS AND CONTINGENCIES From time to time, the Company is a party to various legal proceedings arising in the ordinary course of business. While the Company 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 its consolidated financial position, cash flows, or results of operations. 75 Table of Contents NOTE 19 - EMPLOYEE BENEFIT PLANS The Company offers a 401(k) plan which is eligible to substantially all employees in the United States. For the year ended December 31, 2022, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $ 2.8 million, $ 1.7 million, and $ 0.7 million to the 401(k) plan in the years ended December 31, 2022, 2021, and 2020, respectively. In March 2020, the Company suspended the employee match program which was reinstated in January 2021. NOTE 20 - OTHER COMPREHENSIVE INCOME Other comprehensive income generally represents all changes in shareholders’ equity during the period, except those resulting from investments by, or distributions to, shareholders. During 2012 and 2013, the Company acquired four entities that operate in Canada. These Canadian entities maintain financial data in Canadian dollars. Upon consolidation, the Company translates the financial data from these foreign subsidiaries into U.S. dollars and records cumulative translation adjustments in other comprehensive income. The Company recorded $( 2.4 ) million, $ 0.7 million and $ 2.3 million in translation adjustments, net of tax, in other comprehensive income during the years ended December 31, 2022, 2021 and 2020, respectively. NOTE 21 - REVENUE The Company’s disaggregated revenue represents our business of selling MROP products and services to a variety of end markets based upon our geography and our reportable business segments - Service Centers, Innovative Pumping Solutions and Supply Chain Services. Each of our geographic and reportable business segments are impacted and influenced by varying factors, including the macroeconomic environment, maintenance and capital spending and commodity prices and exploration and production activity. As such, we believe this information is important in depicting the nature, timing and uncertainty of our contracts with customers. The following Geographical Information and Note 22 - Segment Reporting present our revenue disaggregated by source. Geographical Information Revenues are presented in geographic area based on location of the facility shipping products or providing services. The Company’s revenues by geographical location are as follows (in millions) : Years Ended December 31, 2022 2021 2020 Revenues United States $ 1,402 $ 1,031 $ 931 Canada 79 83 74 Total $ 1,481 $ 1,114 $ 1,005 76 Table of Contents NOTE 22 – SEGMENT REPORTING The Company has three operating segments - Service Centers, Innovative Pumping Solutions and Supply Chain Services. These business or operating segments were determined primarily on the distribution channels of the products and services offered as and the nature of the customer markets and the primary driver of the customers spend. Business segments are defined components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker directs the allocation of resources to operating or business segments based on various metrics of each respective segment. The allocation of resources across the operating segments is dependent upon, among other factors, the operating segments's historical or future expected operating margins; the operating segments's historical or future expected returns on capital; outlook within a specific market; opportunities to grow profitability; new products, services or new customer accounts; confidence in management; and competitive landscape and intensity. The Company’s reportable business segments are: Service Centers, Innovative Pumping Solutions and Supply Chain Services. The Service Centers segment is engaged in providing maintenance, MRO products and equipment, including logistics capabilities, to industrial customers. The Service Centers segment provides a wide range of MRO products in the rotating equipment, bearing, power transmission, hose, fluid power, metal working, fastener, industrial supply, safety products and safety services categories. The Innovative Pumping Solutions segment fabricates and assembles custom-made pump packages, remanufactures pumps and manufactures branded private label pumps. The Supply Chain Services segment provides a wide range of MRO products and manages all or part of a customer's supply chain, including warehouse and inventory management. The high degree of integration of the Company’s operations necessitates the use of a substantial number of allocations and apportionments in the determination of business segment information. Sales are shown net of intersegment eliminations. The following table sets out financial information related to the Company’s segments ( in thousands ): Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2022 Total Revenue $ 1,009,356 $ 231,102 $ 240,374 $ 1,480,832 Operating income for reportable segments, excluding adjustments 127,174 30,037 19,530 176,741 Identifiable assets at year end 746,548 144,352 90,480 981,380 Capital expenditures 1,419 2,506 43 3,968 Depreciation 3,038 4,549 144 7,731 Amortization 12,294 6,621 — 18,915 Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2021 Total Revenue $ 816,496 $ 139,591 $ 157,834 $ 1,113,921 Operating income for reportable segments, excluding adjustments 98,931 12,070 11,963 122,964 Identifiable assets at year end 642,184 134,374 44,684 821,242 Capital expenditures 999 2,574 25 3,598 Depreciation 3,475 4,270 389 8,134 Amortization 11,107 6,090 — 17,197 77 Table of Contents Years Ended December 31, Service Centers Innovative Pumping Solutions Supply Chain Services Total 2020 Total Revenue $ 662,617 $ 187,991 $ 154,658 $ 1,005,266 Operating income for reportable segments, excluding adjustments 71,834 16,882 12,804 101,520 Identifiable assets at year end 564,921 130,505 56,721 752,147 Capital expenditures 1,254 4,457 — 5,711 Depreciation 3,299 4,441 387 8,127 Amortization 6,989 5,298 — 12,287 Years Ended December 31, 2022 2021 2020 Operating income for reportable segments, excluding adjustments $ 176,741 $ 122,964 $ 101,520 Adjustments for: Amortization of intangibles 18,915 17,197 12,287 Impairment and other charges — — 59,883 Corporate and other expense, net 60,074 65,910 57,018 Total operating income $ 97,752 $ 39,857 $ ( 27,668 ) Interest expense 29,135 21,089 20,571 Other expenses (income), net 2,716 ( 414 ) 74 Income before income taxes $ 65,901 $ 19,182 $ ( 48,313 ) The Company had capital expenditures at corporate of $ 0.7 million, $ 2.4 million, and $ 1.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company had identifiable assets at corporate of $ 56.8 million, $ 85.0 million, and $ 114.1 million as of December 31, 2022, 2021, and 2020, respectively. Corporate depreciation was $ 1.9 million, $ 1.8 million, and $ 2.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. NOTE 23 – RELATED PARTIES DISCLOSURES The Board uses policies and procedures, to be applied by the Audit Committee of the Board, for review, approval or ratification of any transactions with related persons. Those policies and procedures will apply to any proposed transactions in which the Company is a participant, the amount involved exceeds $ 120,000 and any director, executive officer or significant shareholder or any immediate family member of such a person has a direct or material indirect interest. Any related party transaction will be reviewed by the Audit Committee of the Board of Directors to determine, among other things, the benefits of any transaction to the Company, the availability of other sources of comparable products or services and whether the terms of the proposed transaction are comparable to those provided to unrelated third parties. For the year ended December 31, 2022, the Company incurred approximately $ 1.9 million in lease expenses to entities controlled by the Company’s Chief Executive Officer, David Little. 78 Table of Contents ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.