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 44 Consolidated Statements of Operations and Comprehensive Income 46 Consolidated Balance Sheets 47 Consolidated Statements of Cash Flows 48 Consolidated Statements of Equity 49 Notes to Consolidated Financial Statements 50 41 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 sheets of DXP Enterprises, Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive income, of equity and of cash flows for the years 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for the years 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, 2023, 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 related to the Company not designing and maintaining (i) an effective control environment due to a lack of a sufficient complement of resources with an appropriate level of Company knowledge and experience to establish effective processes and controls, and (ii) effective controls over the completeness, occurrence, cut-off, accuracy and presentation and disclosure of revenue. 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 2023 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 audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits 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 audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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. 42 Table of Contents 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 Recognized Over Time - Estimated Costs to Complete Open Contracts As described in Note 2 to the consolidated financial statements, revenue recognized under the percentage-of-completion method was $311 million for the year ended December 31, 2023. As disclosed by management, the Company has 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. 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. The principal considerations for our determination that performing procedures relating to the estimated costs to complete open contracts used in revenue recognition is a critical audit matter are (i) the significant judgment by management when developing the estimated costs to complete the open contracts, and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating management’s 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 evaluating and determining the nature and extent of audit procedures performed and evidence obtained that are responsive to the material weakness identified. These procedures also included, among others, evaluating and testing management’s process for developing the estimated costs to complete the open contracts for a sample of open contracts, and evaluating management’s ability to reasonably estimate costs to complete open contracts. Evaluating management's ability to reasonably estimate costs to complete open 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 March 11, 2024 We have served as the Company’s auditor since 2022. 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 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. 44 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 6 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 45 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share amounts) Twelve Months Ended December 31, 2023 2022 2021 Sales $ 1,678,600 $ 1,480,832 $ 1,113,921 Cost of sales 1,173,309 1,058,794 785,415 Gross profit 505,291 422,038 328,506 Selling, general and administrative expenses 366,569 324,286 288,649 Income from operations 138,722 97,752 39,857 Other (income) expense, net ( 1,355 ) 2,716 ( 414 ) Interest expense 53,146 29,135 21,089 Income before income taxes 86,931 65,901 19,182 Provision for income tax expense 18,119 17,799 3,431 Net income 68,812 48,102 15,751 Net loss attributable to noncontrolling interest — ( 53 ) ( 745 ) Net income attributable to DXP Enterprises, Inc. 68,812 48,155 16,496 Preferred stock dividend 90 90 90 Net income attributable to common shareholders $ 68,722 $ 48,065 $ 16,406 Net income $ 68,812 $ 48,102 $ 15,751 Foreign currency translation adjustments 435 ( 2,393 ) 747 Comprehensive income $ 69,247 $ 45,709 $ 16,498 Earnings per share (Note 1 2 ) : Basic $ 4.07 $ 2.58 $ 0.87 Diluted $ 3.89 $ 2.47 $ 0.83 Weighted average common shares outstanding: Basic 16,870 18,631 18,949 Diluted 17,710 19,471 19,789 The accompanying notes are an integral part of these consolidated financial statements. 46 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, 2023 December 31, 2022 ASSETS Current assets: Cash $ 173,120 $ 46,026 Restricted cash 91 91 Accounts receivable, net of allowance of $ 5,584 and $ 7,610 , respectively 311,171 320,880 Inventories 103,805 101,392 Costs and estimated profits in excess of billings 42,323 23,588 Prepaid expenses and other current assets 18,044 24,137 Total current assets 648,554 516,114 Property and equipment, net 61,618 45,964 Goodwill 343,991 333,759 Other intangible assets, net 63,895 79,585 Operating lease right of use assets, net 48,729 57,402 Other long-term assets 10,649 4,456 Total assets $ 1,177,436 $ 1,037,280 LIABILITIES AND EQUITY Current liabilities: Current maturities of debt $ 5,500 $ 4,369 Trade accounts payable 96,469 92,805 Accrued wages and benefits 36,238 26,260 Customer advances 12,160 20,128 Billings in excess of costs and estimated profits 9,506 10,411 Short-term operating lease liabilities 15,438 18,083 Other current liabilities 48,854 40,845 Total current liabilities 224,165 212,901 Long-term debt, net of unamortized debt issuance costs and discounts 520,697 409,205 Long-term operating lease liabilities 34,336 40,189 Other long-term liabilities 17,359 9,593 Total long-term liabilities 572,392 458,987 Total liabilities 796,557 671,888 Commitments and Contingencies ( Note 1 7 ) 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; 16,177,237 and 17,690,069 outstanding, respectively 345 345 Additional paid-in capital 216,482 213,937 Retained earnings 319,271 250,549 Accumulated other comprehensive loss ( 31,240 ) ( 31,675 ) Treasury stock, at cost 4,141,989 and 2,435,352 shares, respectively ( 123,995 ) ( 67,780 ) Total DXP Enterprises, Inc. equity 380,879 365,392 Total liabilities and equity $ 1,177,436 $ 1,037,280 The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Twelve Months Ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 68,812 $ 48,102 $ 15,751 Reconciliation of net income to net cash provided by operating activities: Depreciation 8,423 9,585 9,946 Amortization of intangible assets and fixed assets 21,682 18,915 17,197 Amortization of deferred financing costs 2,991 1,842 1,558 (Recovery of) provision for credit losses ( 885 ) 659 67 Payment of contingent consideration liability in excess of acquisition-date fair value ( 160 ) ( 781 ) ( 45 ) Fair value adjustment on contingent consideration 1,738 2,311 504 Loss on debt extinguishment 1,201 — — Gain on sale of property and equipment — — ( 282 ) Restricted stock compensation expense 3,072 1,850 1,823 Deferred income taxes ( 9,059 ) ( 7,541 ) 6,140 Loss on sale of interest in VIE — 1,193 — Changes in operating assets and liabilities, and other: Accounts receivable, net 13,293 ( 93,940 ) ( 43,736 ) Cost and estimated profits in excess of billings ( 18,720 ) ( 6,429 ) 3,991 Inventories ( 2,026 ) 2,072 ( 5,290 ) Prepaid expenses and other assets 9,666 ( 11,865 ) 649 Accounts payable and accrued expenses 10,604 35,965 27,004 Billings in excess of costs and estimated profits ( 916 ) 6,858 ( 772 ) Other long-term liabilities ( 3,494 ) ( 2,902 ) 2,584 Net cash provided by operating activities $ 106,222 $ 5,894 $ 37,089 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 12,263 ) ( 4,916 ) ( 5,999 ) Proceeds from the sale of property and equipment — — 1,669 Acquisition of businesses, net of cash acquired ( 10,384 ) ( 48,506 ) ( 64,693 ) Net cash used in investing activities $ ( 22,647 ) $ ( 53,422 ) $ ( 69,023 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on asset-backed credit facility 7,870 827,152 — Repayments on asset-backed credit facility ( 7,870 ) ( 827,152 ) — Proceeds from debt 550,000 105,000 — Principal debt payments ( 429,508 ) ( 3,567 ) ( 3,300 ) Debt issuance costs ( 12,061 ) ( 8,398 ) — Shares repurchased held in treasury ( 56,215 ) ( 47,872 ) ( 33,511 ) Payment for acquisition contingent consideration liability ( 5,673 ) ( 469 ) ( 955 ) Preferred dividends paid ( 90 ) ( 90 ) ( 90 ) Payment for employee taxes withheld from stock awards ( 527 ) ( 292 ) ( 637 ) Principal repayments on finance lease obligations ( 2,347 ) — — Net cash provided by (used in) financing activities $ 43,579 $ 44,312 $ ( 38,493 ) Effect of foreign currency on cash ( 60 ) 253 88 Net change in cash and restricted cash 127,094 ( 2,963 ) ( 70,339 ) Cash and restricted cash at beginning of year 46,117 49,080 119,419 Cash and restricted cash at end of year $ 173,211 $ 46,117 $ 49,080 Supplemental cash flow information ( Note 1 5 ) The accompanying notes are an integral part of these consolidated financial statements. 48 Table of Contents DXP ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (in thousands) Series A preferred Stock Series B convertible preferred Stock Common Stock Paid-in Capital Retained earnings Treasury stock Non controlling interest Accum Other Comp Loss Total equity Balance at December 31, 2020 $ 1 $ 15 $ 189 $ 192,068 $ 186,078 $ — $ 798 $ ( 30,029 ) $ 349,120 Preferred dividends paid — — — — ( 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 Currency translation adjustment — — — — — — — 747 747 Repurchases of shares — — — — — ( 33,511 ) — — ( 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 Preferred 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 Currency translation adjustment — — — — — — — ( 2,393 ) ( 2,393 ) Repurchases of shares — — — — — ( 34,269 ) — — ( 34,269 ) 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 Preferred dividends paid — — — — ( 90 ) — — — ( 90 ) Compensation expense for restricted stock — — — 3,072 — — — — 3,072 Tax related items for share based awards — — — ( 527 ) — — — — ( 527 ) Currency translation adjustment — — — — — — — 435 435 Repurchases of shares — — — — — ( 56,215 ) — — ( 56,215 ) Net income — — — — 68,812 — — — 68,812 Balance at December 31, 2023 $ 1 $ 15 $ 345 $ 216,482 $ 319,271 $ ( 123,995 ) $ — $ ( 31,240 ) $ 380,879 The accompanying notes are an integral part of these consolidated financial statements. 49 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”), Innovative Pumping Solutions (“IPS”), and Supply Chain Services (“SCS”). See Note 2 0 - Segment Reporting for discussion of the business segments. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING AND BUSINESS POLICIES Basis of Presentation The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). 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. These losses were $ 0.2 million and $ 0.9 million for the years ended December 31, 2022 and 2021, respectively. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications were made to the prior year’s consolidated financial statements to conform to the current year presentation. Such reclassifications did not have a material effect on our consolidated statements of operations and comprehensive income, balance sheets, cash flows or equity. 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. Generally, we use an income valuation method to estimate the fair value of the assets acquired or liabilities assumed in a business combination. However, a market or cost valuation method may be utilized. 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). 50 Table of Contents Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates. Cash The Company places its cash with institutions with high credit quality. However, at certain times, such cash may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not historically experienced any losses when in excess of these limits. Receivables and Credit Risk Trade receivables consist primarily of uncollateralized customer obligations due under normal trade terms, which usually require payment within 30 days of the invoice date. However, these payment terms are extended in select cases and customers may not pay within stated trade terms. The Company has trade receivables from a diversified customer base located primarily in the Rocky Mountain, Northeastern, Midwestern, Southeastern and Southwestern regions of the U.S. 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 2023 and 2022 are as follows ( in thousands ): 2023 2022 Beginning balance, January 1 $ 7,610 $ 7,759 (Recoveries) Charges to expense ( 885 ) 659 Foreign currency translation 13 ( 38 ) Write-offs ( 1,154 ) ( 770 ) Ending balance, December 31 $ 5,584 $ 7,610 Inventories Inventories are made up of equipment purchased for resale, and materials utilized in the fabrication of industrial and wastewater equipment stated at lower of cost and net realizable value, primarily determined using the weighted average cost method. The Company regularly reviews inventory and records provisions for the difference between cost and net realizable value arising from excess and obsolete items on hand based upon the aging of the inventories, market trends, and continued demand. The carrying values of inventories are as follows ( in thousands ): December 31, 2023 2022 Finished goods $ 94,031 $ 82,906 Work in process 9,774 18,486 Inventories $ 103,805 $ 101,392 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. 51 Table of Contents 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 on October 1st and when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company assigns the carrying value of these intangible assets to its reporting units and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a "component") if the component is a business and discrete information is prepared and reviewed regularly by segment management. The Company’s goodwill impairment assessment first permits evaluating qualitative factors to determine if a reporting unit's carrying value would more likely than not exceed its fair value. If the Company concludes, based on the qualitative assessment, that a reporting unit's carrying value would more likely than not exceed its fair value, the Company would perform a quantitative test for that reporting unit. Should the reporting unit's carrying amount exceed the fair value, then an impairment charge for the excess would be recognized. The impairment charge is limited to the amount of goodwill allocated to the reporting unit and goodwill will not be reduced below zero. The Company performed qualitative tests and determined no impairment of goodwill was required for the years ended December 31, 2023, 2022 and 2021. 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 for the years ended December 31, 2023, 2022 and 2021. Revenue Recognition The Company primarily provides purchased products distributed through its branch of local Service Centers and 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. 52 Table of Contents The Company also assembles, kits, and fabricates 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 $ 311.0 million and $ 213.3 million for the years ended December 31, 2023 and December 31, 2022. 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. 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 2015. 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 Comprehensive income includes net income and foreign currency translation adjustments. The Company’s other comprehensive income is from translating foreign subsidiaries to the reporting currency. NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements In October 2021, the Financial Accounting Standards Board ("FASB") issued 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. From time to time the Company does acquire businesses that perform project-based work and therefore include Contract Assets and Liabilities. The adoption of this new guidance had no impact on our consolidated financial statements. 53 Table of Contents Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Accounting Standards Board ("FASB") issued new guidance that modifies the disclosure and presentation requirements of reportable segments. The new guidance requires the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit and loss. In addition, the new guidance enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. The update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are evaluating the impact of adopting this new guidance on our consolidated financial statement disclosures. All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations. NOTE 4 - LEASES We lease office space, warehouses, land, automobiles, office, and manufacturing equipment. Some of our leases include one or more renewal options to extend the lease term, which can be exercised at our sole discretion. Our lease agreements may include options to purchase the leased property. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Additionally, we do not have any material lessor or sub-leasing arrangements. The following table presents components of lease cost (in thousands) : Twelve Months Ended December 31, 2023 2022 2021 Operating lease costs $ 21,575 $ 24,371 $ 23,921 Finance lease costs: Amortization of assets 3,451 — — Interest on lease liabilities 595 — — Total finance lease costs 4,046 $ — $ — Total operating and finance lease costs $ 25,621 $ 24,371 $ 23,921 The following table presents supplemental cash flow information related to leases (in thousands) : Twelve Months Ended December 31, 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows - operating leases $ 21,823 $ 20,584 $ 20,142 Operating cash flows - finance leases 595 — — Financing cash flows - finance leases $ 2,347 $ — $ — 54 Table of Contents The following table presents the consolidated balance sheet location of assets and liabilities related to operating and finance leases (in thousands) : December 31, Balance Sheet Location 2023 2022 Operating Operating lease right-of-use assets $ 48,729 $ 57,402 Finance Property and equipment, net 11,720 — Total lease assets $ 60,449 $ 57,402 Current operating Short-term operating lease liabilities 15,438 18,083 Non-current operating Long-term operating lease liabilities 34,336 40,189 Current finance Other current liabilities 3,329 — Non-current finance Other long-term liabilities 8,575 — Total lease liabilities $ 61,678 $ 58,272 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. As of December 31, 2023 maturities of lease liabilities are as follows (in thousands) : Finance Operating 2024 $ 4,059 $ 18,177 2025 3,998 13,691 2026 3,437 10,218 2027 1,826 6,870 2028 108 3,690 Thereafter — 4,168 Total future lease payments 13,428 56,814 Less: imputed interest 1,524 7,040 Total lease liability balance $ 11,904 $ 49,774 The following table presents weighted average remaining lease terms and discount rates: December 31, 2023 2022 Weighted-average remaining lease term - operating leases 4.1 years 4.1 years Weighted-average remaining lease term - finance leases 3.5 years — Weighted average discount rate - operating leases 6.8 % 6.5 % Weighted-average discount rate - finance leases 7.5 % — % For the twelve months ended December 31, 2023, the Company incurred approximately $ 1.8 million in lease expenses to entities controlled by the Company's Chief Executive Officer 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: 55 Table of Contents Level 1 Inputs Level 1 inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 Inputs Level 2 inputs are other than quoted prices that are observable for an asset or liability. These inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means. Level 3 Inputs Level 3 inputs are unobservable inputs for the asset or liability which require the Company's own assumptions. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include 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 consideration are measured during each reporting period and reflected in our results of operations. As of December 31, 2023, we recorded liabilities in other current and long-term liabilities for contingent consideration associated with the acquisitions of Drydon, Cisco, Sullivan, Florida Valve, Riordan, and Alliance of $ 1.9 million, $ 2.4 million, $ 1.0 million, $ 0.3 million, $ 2.9 million and $ 0.2 million, respectively. See further discussion at Note 1 6 - 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, 2023 ( in thousands ): Contingent Consideration *Balance at December 31, 2022 $ 10,166 Acquisitions and settlements: Acquisitions ( Note 1 6) 2,682 Settlements ( 5,833 ) Total remeasurement adjustments: Changes in fair value recorded in other (income) expense, net 1,738 *Balance at December 31, 2023 $ 8,753 *Amounts included in other current liabilities were $ 5.4 million and $ 5.5 million for the periods ending December 31, 2023 and December 31, 2022, respectively. Amounts included in long-term liabilities were $ 3.4 million and $ 4.7 million for the periods ending December 31, 2023 and December 31, 2022, respectively. 56 Table of Contents Quantitative Information about Level 3 Fair Value Measurements The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration liabilities designated as Level 3 are as follows: Contingent consideration ( in thousands, unaudited ) Fair Value at December 31, 2023 Valuation Technique Significant Unobservable Inputs Drydon, Cisco, Sullivan, Florida Valve, Riordan and Alliance acquisitions $ 8,753 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 11.0 %. 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, 2023 but which require disclosure of their fair values include: cash, restricted cash, trade accounts receivable, trade accounts payable and accrued expenses, accrued payroll and related benefits, and the revolving line of credit under our syndicated credit agreement facility. The Company believes that the estimated fair value of such instruments at December 31, 2023 and December 31, 2022 approximates their carrying value as reported on the consolidated balance sheets due to the relative short maturity of these instruments. NOTE 6 – CONTRACT ASSETS AND LIABILITIES Under our customized pump production contracts, 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 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 were as follows ( in thousands ): December 31, 2023 2022 Costs incurred on uncompleted contracts $ 92,363 $ 70,329 Estimated profits, thereon 37,379 23,274 Total costs and estimated profits on uncompleted contracts 129,742 93,603 Less: billings to date 96,928 80,421 Total $ 32,814 $ 13,182 Such amounts were included in the accompanying Consolidated Balance Sheets for 2023 and 2022 under the following captions ( in thousands ): December 31, 2023 2022 Costs and estimated profits in excess of billings $ 42,323 $ 23,588 Billings in excess of costs and estimated profits ( 9,506 ) ( 10,411 ) Translation Adjustment ( 3 ) 5 Net contract assets $ 32,814 $ 13,182 During the twelve months ended December 31, 2023, $ 10.4 million of the balances that were previously classified as contract liabilities at the beginning of the period were recognized into revenues. 57 Table of Contents NOTE 7 - PROPERTY AND EQUIPMENT, NET The carrying values of property and equipment, net are as follows ( in thousands ): December 31, 2023 2022 Land $ 2,023 $ 2,023 Buildings and leasehold improvements 29,840 27,642 Furniture, fixtures and equipment 113,945 109,052 Finance lease right-of-use assets 15,171 — Less – Accumulated depreciation ( 99,361 ) ( 92,753 ) Total Property and Equipment, net $ 61,618 $ 45,964 Depreciation expense was $ 8.4 million, $ 9.6 million, and $ 9.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. Capital expenditures by segment are included in Note 2 0 - Segment Reporting . NOTE 8 - 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, 2023 ( in thousands ): Goodwill Other Intangible Assets, Net Total Balances as of December 31, 2022 $ 333,759 $ 79,584 $ 413,343 Translation adjustment 464 15 479 Acquisitions 9,768 2,527 12,295 Amortization — ( 18,231 ) ( 18,231 ) Balances as of December 31, 2023 $ 343,991 $ 63,895 $ 407,886 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, Net 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 goodwill balance by reportable segment as of December 31, 2023 and 2022 (in thousands) : December 31, 2023 2022 Service Centers $ 270,865 $ 269,106 Innovative Pumping Solutions 55,987 47,514 Supply Chain Services 17,139 17,139 Total $ 343,991 $ 333,759 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. 58 Table of Contents Amortization expense is recognized according to estimated economic benefits and was $ 18.2 million, $ 18.9 million, and $ 17.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. The estimated future annual amortization of intangible assets for each of the next five years and thereafter are as follows (in thousands) : Amount 2024 $ 16,120 2025 14,356 2026 11,721 2027 10,141 2028 8,535 Thereafter 3,022 Total $ 63,895 The weighted average remaining estimated life for customer relationships and non-compete agreements are 5.28 and 2.96 years, respectively. NOTE 9 – LONG-TERM DEBT Long-term debt consisted of the following ( in thousands ): December 31, 2023 2022 ABL Revolver $ — $ — Senior Secured Term Loan B due December 23, 2027 (1) — 428,133 Senior Secured Term Loan B due October 13, 2030 (2) 548,625 — Total debt 548,625 428,133 Less: current maturities ( 5,500 ) ( 4,369 ) Total long-term debt 543,125 423,764 Unamortized discount and debt issuance costs 22,428 14,559 Long-term debt, net of unamortized discount and debt issuance costs $ 520,697 $ 409,205 (1) As of December 31, 2022 the fair value of the Term Loan B due December 23, 2027 was $ 411.0 million (2) As of December 31, 2023 the fair value of the Term Loan B due October 13, 2030 was $ 554.1 million Senior Secured Term Loan B: On October 13, 2023, the Company entered into an amendment on its existing Senior Secured Term Loan B (the "Term Loan Amendment"), which provides for, among other things, an additional $ 125 million in new incremental commitments. The Term Loan Amendment refinanced the existing Senior Term Loan B and replaced it with a new Senior Secured Term Loan B with total borrowings of $ 550.0 million. The new Senior Secured Term Loan B amortizes in equal quarterly installments of 0.25 %, with the remaining balance being payable on October 13, 2030, when the facility matures. Deferred financing costs associated with the Additional Term Loan Amendment were $ 11.7 million which were amortized to interest expense using the interest method during 2023. In connection with the Additional Term Loan Amendment the Company expensed third-party fees of $ 0.8 million and recognized a $ 1.2 million loss on debt extinguishment, which were included in interest expense during 2023. Quarterly interest payments accrue on outstanding borrowings under the new Senior Secured Term Loan B at a rate equal to Term SOFR (with a floor of 1.00 %) plus 4.75 %, or base rate plus 3.75 %. The new Senior Secured Term Loan B is guaranteed by each of the Company’s direct and indirect material wholly owned subsidiaries, other than any of the Company’s Canadian subsidiaries and certain other excluded subsidiaries. As of December 31, 2023 there was $ 548.6 million outstanding under the Senior Secured Term Loan B. The interest rate for the Senior Secured Term Loan B was 10.44 % and 9.95 % as of December 31, 2023 and December 31, 2022, respectively. 59 Table of Contents 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"). 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 matures on July 19, 2027. Interest accrues on outstanding borrowings at a rate equal to SOFR 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 payable on the unused portion of the facility range from 0.25 % to 0.375 % per annum. At December 31, 2023 the unused line fee was 0.375 % and there were no amounts outstanding under the ABL Revolver. As of December 31, 2023, the borrowing availability under our credit facility was $ 132.1 million compared to $ 132.4 million at December 31, 2022, primarily as a result of outstanding letters of credit. The interest rate for the ABL Revolver was 8.75 % and 7.75 % as of December 31, 2023 and December 31, 2022, respectively. 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, 2023, the Company's Fixed Charge Coverage Ratio was 2.69 to 1.00. 60 Table of Contents 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 $ 200 million ) as of such day to EBITDA, beginning with the fiscal quarter ending December 31, 2023, is either equal to or less than as indicated in the table below: Fiscal Quarter Secured Leverage Ratio December 31, 2023 5.75 :1.00 March 31, 2024 5.75 :1.00 June 30, 2024 5.50 :1.00 September 30, 2024 5.50 :1.00 December 31, 2024 5.50 :1.00 March 31, 2025 5.25 :1.00 June 30, 2025 5.25 :1.00 September 30, 2025 5.25 :1.00 December 31, 2025 5.00 :1.00 March 31, 2026 5.00 :1.00 June 30, 2026 and thereafter 4.75 :1.00 As of December 31, 2023, the Company’s Secured Leverage Ratio was 2.10 to 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. The Company was in compliance with all financial covenants as of December 31, 2023. As of December 31, 2023, the maturities of long-term debt for the next five years and thereafter were as follows ( in thousands ): Amount 2024 $ 5,500 2025 5,500 2026 5,500 2027 5,500 2028 5,500 Thereafter 521,125 Total $ 548,625 NOTE 10 - INCOME TAXES The components of income before income taxes are as follows ( in thousands ): Years Ended December 31, 2023 2022 2021 Domestic $ 79,785 $ 59,736 $ 9,897 Foreign 7,146 6,165 9,285 Total income before taxes $ 86,931 $ 65,901 $ 19,182 61 Table of Contents The provision for income taxes consisted of the following ( in thousands ): Years Ended December 31, 2023 2022 2021 Current - Federal $ 22,514 $ 18,591 $ ( 5,243 ) State 2,620 4,501 ( 522 ) Foreign 2,044 2,248 3,056 Total current 27,178 25,340 ( 2,709 ) Deferred - Federal ( 7,679 ) ( 5,875 ) 5,016 State ( 1,133 ) ( 1,083 ) 1,810 Foreign ( 247 ) ( 583 ) ( 686 ) Total deferred ( 9,059 ) ( 7,541 ) 6,140 Total current and deferred taxes $ 18,119 $ 17,799 $ 3,431 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, 2023 2022 2021 Income taxes computed at federal statutory rate $ 18,255 $ 13,839 $ 4,028 State income taxes, net of federal benefit 1,669 2,701 1,017 Foreign taxes 144 122 186 Nondeductible expenses 2,670 1,158 353 Enacted rate changes ( 58 ) 240 318 Research and development tax credit ( 4,811 ) ( 250 ) ( 1,036 ) Valuation allowance 274 ( 1 ) 1 Tax reform deferred tax remeasurement — — ( 2,587 ) Uncertain tax positions ( 33 ) 271 871 Other 9 ( 281 ) 280 Total income tax expense $ 18,119 $ 17,799 $ 3,431 62 Table of Contents Deferred tax liabilities and assets were comprised of the following (in thousands) : December 31, 2023 2022 Deferred tax assets: Allowance for doubtful accounts $ 879 $ 1,570 Inventory 3,371 4,585 Texas research and development tax credit carryforward 2,239 2,329 Louisiana research and development tax credit carryforward 10 10 Foreign tax credit carryforward 64 64 Net operating loss carryforward 1,328 1,201 Capital loss carryforward 4 4 Accruals 8,190 6,190 ROU asset 220 219 Research expenses 23,822 16,945 Total deferred tax assets 40,127 33,117 Less valuation allowance ( 278 ) ( 4 ) Total deferred tax asset, net of valuation allowance 39,849 33,113 Deferred tax liabilities: Goodwill ( 18,476 ) ( 18,439 ) Intangibles ( 8,363 ) ( 9,553 ) Property and equipment ( 7,885 ) ( 8,542 ) Deferred compensation ( 215 ) — Unremitted foreign earnings ( 421 ) ( 421 ) Method changes ( 342 ) ( 225 ) Other ( 643 ) ( 825 ) Total deferred tax liability $ ( 36,345 ) $ ( 38,005 ) Net deferred tax asset (liability) $ 3,504 3504000 $ ( 4,892 ) 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, 2023, the valuation allowance primarily relates to state operating loss and foreign capital loss carryforwards. The following summarizes changes in the balance of valuation allowances on deferred tax assets (in thousands) : 2023 2022 2021 Balance at January 1 $ ( 4 ) $ ( 4 ) $ ( 12,813 ) Changes due to state operating loss and foreign capital loss carryforwards ( 274 ) — 12,809 Balance at December 31 $ ( 278 ) $ ( 4 ) $ ( 4 ) 63 Table of Contents Expected tax benefit on carryforwards available for use on future income tax returns, prior to valuation allowance, at December 31, 2023, are as follows (in thousands) : Domestic Foreign Expiration Net operating loss - foreign $ — $ 491 2034-2042 Net operating loss - federal 562 — 2036-2042 Net operating loss - state 338 — Indefinite Capital loss carryforward - foreign — 4 Indefinite Foreign tax credits 64 — 2023,2025 Texas research and development tax credits 2,239 — 2037-2042 Louisiana research and development tax credits $ 10 $ — 2024-2026 Changes in the balance of unrecognized tax benefits excluding interest and penalties on uncertain tax positions are as follows (in thousands) : Assets (Liabilities) 2023 2022 2021 Balance at January 1, $ ( 5,918 ) $ ( 6,316 ) $ ( 5,057 ) Increases related to prior year tax positions — — ( 687 ) Decreases related to prior year tax positions 1,475 614 — Increases related to current year tax positions ( 1,312 ) ( 216 ) ( 572 ) Balance at December 31, $ ( 5,755 ) $ ( 5,918 ) $ ( 6,316 ) As of December 31, 2023, the Company had recorded a total tax benefit of $ 28.1 million related to federal and state research and development tax credits. This benefit is partially offset by $ 5.6 million uncertain tax position due to the uncertainty related to the realizability of the federal research and development tax credits. The Company is also recording a $ 0.1 million uncertain tax position related to non-deductible auto expense compensation. 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 the Company's policy. For the year ended December 31, 2023, the Company recorded $ 0.2 million tax expense for interest and penalties related to uncertain tax positions. The Company is subject to taxation in the U.S., various states, and foreign jurisdictions. The Company has significant operations in the U.S. 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 closed in the U.S. for the tax years prior to 2015 and outside the U.S. for the tax years ended prior to 2018. There is a 4 year statute of limitations for Canadian returns based on the date tax assessment is received, not filing date. Tax assessments are typically received within weeks of filing date. NOTE 11 - SHARE-BASED COMPENSATION Restricted Stock We issued equity-based awards from the 2016 Omnibus Plan. 2016 Omnibus Incentive Plan On June 16, 2023, 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 1,000,000 shares to a total of 1,250,000 shares, which represents an increase of 250,000 shares (the “Amendment”), which authorized grants of restricted stock awards, restricted stock units, performance awards, options, investment rights, and cash-based awards. 64 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, 2023 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, 2023, 489,178 shares were available for future grant. Changes in restricted stock awards for the twelve months ended December 31, 2023 are as follows: Number of Shares Weighted Average Grant Price Non-vested at December 31, 2022 157,767 $ 28.64 Granted 215,554 $ 27.36 Forfeited — $ — Vested ( 68,884 ) $ 29.23 Non-vested at December 31, 2023 304,437 $ 27.60 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 Compensation expense, associated with restricted stock awards, recognized in the years ended December 31, 2023, December 31, 2022 and December 31, 2021 was $ 3.1 million, $ 1.9 million, and $ 1.8 million, respectively. Related income tax benefits recognized in earnings in the years ended December 31, 2023, December 31, 2022 and December 31, 2021 were approximately $ 0.8 million, $ 0.5 million and $ 0.5 million, respectively. The aggregate grant-date fair value of vested shares for the years ended December 31, 2023, December 31, 2022 and December 31, 2021 was $ 2.0 million, $ 1.9 million and $ 3.5 million, respectively. Unrecognized compensation expense under the 2016 Plan at December 31, 2023, December 31, 2022 and December 31, 2021 was $ 5.9 million, $ 3.1 million and $ 2.1 million, respectively. As of December 31, 2023, the weighted average period over which the unrecognized compensation expense is expected to be recognized is 2.8 years. NOTE 12 - 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. 65 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, 2023 2022 2021 Basic earnings per share: Weighted average shares outstanding 16,870 18,631 18,949 Net income attributable to DXP Enterprises, Inc. $ 68,812 $ 48,155 $ 16,496 Series B convertible preferred stock dividend ( 90 ) ( 90 ) ( 90 ) Net income attributable to common shareholders 68,722 48,065 16,406 Per share amount $ 4.07 $ 2.58 $ 0.87 Diluted earnings per share: Weighted average shares outstanding 16,870 18,631 18,949 Assumed conversion of convertible preferred stock 840 840 840 Total dilutive shares 17,710 19,471 19,789 Net income attributable to common shareholders $ 68,722 $ 48,065 $ 16,406 Series B convertible preferred stock dividend 90 90 90 Net income attributable to DXP Enterprises, Inc. 68,812 48,155 16,496 Per share amount $ 3.89 $ 2.47 $ 0.83 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. NOTE 13 – 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, 2023, 2022 and 2021, respectively. The preferred stock did not have any activity during 2023, 2022 and 2021. 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 Convertible 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. 66 Table of Contents The activity related to outstanding common stock and common stock held in treasury was as follows ( in thousands ): 2023 2022 2021 Balance, beginning of period 17,531 18,468 19,041 Issuance of shares for compensation net of withholding 47 47 85 Issuance of common stock related to equity distribution agreements — — — Issuance of common stock related to purchase of businesses — 267 527 Purchase of shares held in treasury ( 1,707 ) ( 1,251 ) ( 1,185 ) Balance, end of period 15,871 17,531 18,468 NOTE 14 - SHARE REPURCHASE 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. The following table represents total number of shares purchased, the amount paid, and the average price paid per share under share repurchase programs authorized by our Board of Directors: Twelve Months Ended December 31, 2023 2022 2021 (in millions, except per share data) Total number of shares purchased 1.7 1.3 1.2 Amount paid $ 54.7 35.2 33.5 Average price paid per share $ 32.06 28.17 28.28 NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION Twelve Months Ended December 31, 2023 2022 2021 Supplemental disclosures of cash flow information Cash paid for interest $ 48,954 $ 25,321 $ 19,531 Cash paid for income taxes 21,839 26,179 6,120 Cash paid for finance lease liability 2,347 — — Non-cash investing and financing activities Shares issued for acquisition — 5,757 13,524 Assets obtained in exchange for finance lease obligations $ 15,171 $ — $ — NOTE 16 - 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. 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. 67 Table of Contents 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 2023 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.” 2023 Acquisitions On November 1, 2023, the Company completed the acquisition of Alliance Pump & Mechanical Service, Inc. (“Alliance”). Alliance is a leading municipal and industrial pump sales, service, and repair business. Alliance is included within our SC business segment. Total consideration for the transaction was approximately $ 1.7 million, funded with a mixture of cash on hand of $ 1.5 million and contingent consideration of $ 0.2 million. Goodwill for the transaction totaled approximately $ 1.3 million. On May 1, 2023, the Company completed the acquisition of Florida Valve & Equipment, LLC and Environmental MD, Inc. (collectively, “Florida Valve EMD”), a leading provider of valve and related products and services for the municipal water markets in the state of Florida. Florida Valve EMD is included within our IPS business segment. Total consideration for the transaction was approximately $ 3.3 million, funded with a mixture of cash on hand of $ 3.0 million and contingent consideration of $ 0.3 million. Goodwill for the transaction totaled approximately $ 2.4 million. On May 1, 2023, the Company completed the acquisition of Riordan Materials Corporation (“Riordan”), a leading provider of products for water treatment, wastewater treatment, odor control, solids handling, pumping and bio solid processes in the states of Maryland, New Jersey, Pennsylvania, Delaware and Virginia. Riordan is included within our IPS business segment. Total consideration for the transaction was approximately $ 8.4 million, funded with a mixture of cash on hand of $ 6.2 million and contingent consideration of $ 2.2 million. Goodwill for the transaction totaled approximately $ 6.1 million 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 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 common stock valued at approximately $ 0.9 million and contingent consideration of $ 1.0 million. 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. Total consideration for the transaction was approximately $ 52.3 million, funded with a mixture of cash on hand of $ 32 million, the Company's common stock valued at approximately $ 4.4 million, approximately $ 11 million on the ABL and contingent consideration of $ 4.5 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. Drydon is included within our IPS business segment. 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 $ 0.4 million and contingent consideration of $ 2.6 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 including cash, the Company's common stock and contingent consideration. Goodwill for the transaction totaled approximately $ 0.5 million. Pro forma results of operations information have not been presented, as the effect of the recent acquisitions is not material. The operating results of Riordan, Florida Valve EMD and Alliance are included within the Company's consolidated statements of operations were not material for the twelve months ended December 31, 2023. Pursuant to U.S. GAAP, costs incurred to complete the acquisitions as well as costs incurred to integrate into the Company’s operations are expensed as incurred. Transaction-related costs incurred, which are included within selling, general, and administrative expenses in the consolidated statements of operations, were $ 0.6 million for the twelve months ended December 31, 2023. 68 Table of Contents 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 2023 acquisitions, as well as the fair value of the consideration transferred: Amount Recognized as of Acquisition Date Cash $ 353 Accounts receivable 2,335 Inventory 355 Other current assets 178 Non-compete agreements 628 Customer relationships 1,899 Property and equipment 41 Operating lease ROU asset 256 Other assets 7 Assets acquired 6,052 Short-term operating lease liability ( 106 ) Current liabilities assumed ( 1,442 ) Long-term operating lease liability ( 150 ) Deferred tax liability ( 679 ) Long-term liabilities assumed ( 24 ) Net assets acquired 3,651 Total Consideration 13,419 Goodwill $ 9,768 Of the $ 2.5 million of acquired intangible assets, $ 0.6 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, $ 1.9 million was assigned to customer relationships and will be amortized over a period of 8 years. The goodwill total of $ 9.8 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 three businesses acquired in 2023 totaled $ 13.4 million, which consisted of the following: Purchase Price Consideration (in millions) Total Consideration Cash payments $ 10.7 Contingent consideration 2.7 Total consideration $ 13.4 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. 69 Table of Contents Contingent Consideration The acquisitions of Florida Valve, Riordan and Alliance 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 $ 4.6 million. The combined fair value of the contingent consideration recognized on each acquisition date of $ 2.7 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 11.0 %. 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 changes in the fair value of the contingent consideration are measured during each reporting period and reflected in our results of operations. 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 17 - 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. NOTE 18 - EMPLOYEE BENEFIT PLANS The Company offers a 401(k) plan which is eligible to substantially all employees in the U.S. For the year ended December 31, 2023, the Company elected to match employee contributions at a rate of 50 percent of up to 4 percent of salary deferral. The Company contributed $ 5.5 million, $ 2.8 million, and $ 1.7 million to the 401(k) plan in the years ended December 31, 2023, 2022, and 2021, respectively. NOTE 19 - REVENUE The Company disaggregates revenue based upon our geography and our reportable 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 2 0 - 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, 2023 2022 2021 Revenues United States $ 1,602 $ 1,402 $ 1,031 Canada 75 79 83 Other 2 — — Total $ 1,679 $ 1,481 $ 1,114 70 Table of Contents NOTE 20 – SEGMENT REPORTING The Company has three operating and reportable segments - 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. 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 (“CODM”) in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Executive Officer. The Company's CODM directs the allocation of resources to operating or business segments based on revenue, operating income, and capital expenditures of each respective segment. The allocation of resources across the operating segments is dependent upon, among other factors, the operating segments' historical or future expected operating margins; the operating segments' 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 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 2023 Total Revenue $ 1,145,082 $ 273,150 $ 260,368 $ 1,678,600 Operating income for reportable segments, excluding adjustments 163,877 44,260 21,524 229,661 Identifiable assets at year end 697,438 226,621 62,610 986,669 Capital expenditures 8,837 1,786 — 10,623 Depreciation 2,705 3,726 27 6,458 Amortization 12,266 5,965 — 18,231 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 71 Table of Contents 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 Years Ended December 31, 2023 2022 2021 Operating income for reportable segments, excluding adjustments $ 229,661 $ 176,741 $ 122,964 Adjustments for: Amortization of intangibles 18,231 18,915 17,197 Corporate and other expense, net 72,708 60,074 65,910 Total operating income $ 138,722 $ 97,752 $ 39,857 Interest expense 53,146 29,135 21,089 Other expenses (income), net ( 1,355 ) 2,716 ( 414 ) Income before income taxes $ 86,931 $ 65,901 $ 19,182 The Company had capital expenditures at corporate of $ 1.6 million, $ 0.7 million, and $ 2.4 million for the years ended December 31, 2023, 2022, and 2021, respectively. The Company had identifiable assets at corporate of $ 190.8 million, $ 56.8 million, and $ 85.0 million as of December 31, 2023, 2022, and 2021, respectively. Corporate depreciation was $ 2.0 million, $ 1.9 million, and $ 1.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. NOTE 21 – 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, 2023, the Company incurred approximately $ 1.8 million in lease expenses to entities controlled by the Company’s Chief Executive Officer. NOTE 22 - SUBSEQUENT EVENTS On January 1, 2024 the Company completed the acquisition of Hennesy Mechanical Sales LLC (“Hennesy”). Hennesy is a leading manufacturer's representative in the municipal water and wastewater treatment market and provides industrial pump sales, service and repair in Arizona, New Mexico and West Texas. The preliminary purchase price allocation is not complete as of the date of this financial issuance and will be an ongoing process for up to one year subsequent to the closing date of the transaction. On February 1, 2024 the Company completed the acquisition of Kappe Associates, Inc. (“Kappe”). Kappe is headquartered in Frederick, Maryland and operates out of three locations servicing Maryland, the District of Columbia, Delaware, Virginia, Pennsylvania, Southern New Jersey, and West Virginia. Kappe is a leading distributor and manufacturers’ representative of pumps, controls and process equipment focused on serving the water and wastewater industry. The preliminary purchase price allocation is not complete as of the date of this financial issuance and will be an ongoing process for up to one year subsequent to the closing date of the transaction. 72 Table of Contents On March 1, 2024 the Company completed the acquisition of Pro-Seal, Inc. (“Pro-Seal”). Pro-Seal is a leading distributor of pumping systems, fluid sealing and related seal support systems, industrial pumping equipment and services as well as lubricants in Michigan and Alaska. The preliminary purchase price allocation is not complete as of the date of this financial issuance and will be an ongoing process for up to one year subsequent to the closing date of the transaction. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.